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



 
                        MONETARY POLICY AND THE

                          STATE OF THE ECONOMY

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


                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 24, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-102




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 24, 2010............................................     1
Appendix:
    February 24, 2010............................................    63

                               WITNESSES
                      Wednesday, February 24, 2010

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

                                APPENDIX

Prepared statements:
    Carson, Hon. Andre...........................................    64
    Foster, Hon. Bill............................................    65
    Paul, Hon. Ron...............................................    67
    Watt, Hon. Melvin............................................    68
    Bernanke, Hon. Ben S.........................................    71

              Additional Material Submitted for the Record

Green, Hon. Al:
    Final Vote Results for Roll Call 681 on H.R. 1424............    83
Bernanke, Hon. Ben S.:
    Monetary Policy Report to the Congress, dated February 24, 
      2010.......................................................    87


                        MONETARY POLICY AND THE

                          STATE OF THE ECONOMY

                              ----------                              


                      Wednesday, February 24, 2010

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Maloney, Gutierrez, Velazquez, Watt, Sherman, Meeks, Moore of 
Kansas, Hinojosa, Clay, Baca, Lynch, Miller of North Carolina, 
Scott, Green, Cleaver, Bean, Klein, Wilson, Perlmutter, 
Donnelly, Foster, Carson, Minnick, Adler, Kosmas, Grayson, 
Himes, Peters; Bachus, Castle, Royce, Paul, Manzullo, Biggert, 
Miller of California, Capito, Hensarling, Garrett, Neugebauer, 
McHenry, Campbell, Putnam, Bachmann, Marchant, McCotter, 
McCarthy of California, Posey, Jenkins, Lee, Paulsen, and 
Lance.
    The Chairman. This is the semi-annual hearing held pursuant 
to the Humphrey-Hawkins Act. I should note that Mr. Hawkins is 
represented here in the fact that his successor in Congress is 
our colleague from Los Angeles, Ms. Waters. We are in the 
direct Humphrey-Hawkins' succession here.
    This is the semi-annual hearing. As people know, the 
Chairman of the Federal Reserve testifies before both the House 
and the Senate. He goes first here. Tomorrow, he goes to the 
Senate.
    This is one of those occasions when we can act first and 
have confidence that the Senate will in fact act second. We 
cannot always make that assumption, unfortunately, but we can 
in this case, because all they have to do is sit there and 
listen.
    We will begin. Under the rules of the committee, each side 
will have 8 minutes. We want to move quickly. We have divided 
up the time according to each side's decision. We will begin, 
and I will yield 2\1/2\ minutes to my colleague from Illinois, 
Mr. Foster, to begin the statements.
    Mr. Foster. Thank you, Mr. Chairman. As a scientist, I have 
always found that numbers are more illuminating than ideology 
and talking points, so on the chart that I believe will be 
displayed on the monitors in a moment, I have plotted some 
interesting numbers that I downloaded from the Flow of Funds 
Report that the Federal Reserve Web site updates each quarter.
    It shows that from July 2007 to March 2009, roughly the 
last year-and-a-half of the previous Administration, the net 
worth of households in the United States dropped by $17.5 
trillion.
    Our economy is suffering from the aftermath of the largest 
destruction of wealth in human history.
    Under Democratic leadership, since the passage of the 
stimulus and other important initiatives, this trend has been 
reversed. Our economy is now stabilized and household net worth 
has increased by more than $5 trillion.
    The $17.5 trillion of wealth destroyed in the last months 
of the previous Administration is so large that it is hard to 
get your arms around. Just how large is $17.5 trillion: $17.5 
trillion is more than 1.5 times the entire U.S. national debt; 
$17.5 trillion is more than 1 year of the U.S. GDP, which is 
roughly $14 trillion; $17.5 trillion is more than $57,000 for 
every man, woman, and child in the United States; and finally, 
$17.5 trillion is about 200 times larger than the anticipated 
losses in Fannie Mae and Freddie Mac.
    Let's talk for a moment about the return on investment of 
the stimulus. When the dust settles, the total cost to 
taxpayers of the stimulus, TARP, and the other emergency 
interventions in our economy will be roughly $1 trillion.
    In response, household wealth has rebounded by $5 trillion. 
I'm a businessman as well as a scientist and it seems to me 
that an investment of roughly $1 trillion that generates an 
increase in wealth of $5 trillion represents a pretty good 
return on investment.
    If I could have the next slide, let's talk about job loss 
and unemployment. A year ago, over 700,000 jobs were being lost 
every month and the job losses were increasing by 100,000 more 
jobs lost each additional month. The economy was spiraling 
toward another great Depression.
    After the passage of the stimulus and the other emergency 
measures to rescue our economy, job losses started decreasing 
promptly and job growth is said to turn positive by 2010.
    Unfortunately, job recovery always takes longer than people 
would like. Most downturns take 1 to 2 years, if you look at 
them in the stock market, and 2 to 3 years if you look at 
unemployment. That is just the way it is.
    It is very difficult for a reasonable person to look at 
this data and conclude that Democratic policies have not been 
effective at dealing with job loss.
    Finally, how did we get here?
    The Chairman. The gentleman's time has expired.
    Mr. Watt. Mr. Chairman, might I yield him some of my time?
    The Chairman. Yes, does the gentleman want to yield 30 
seconds?
    Mr. Watt. Yes, so he can finish. It is such a powerful 
statement he is making.
    The Chairman. I thank the gentleman from North Carolina.
    Mr. Foster. Finally, I would just like to make one last 
comment on how did we get here. It is important to understand 
that the $17.5 trillion of destruction of household wealth that 
our country just experienced was not the result of a normal 
business cycle. It was the result of an ideologically driven 
deregulation of the financial markets.
    Most importantly, it will happen again if we do not 
understand and acknowledge what happened and take steps to 
prevent it from recurring.
    Thank you. I yield back.
    The Chairman. I thank the gentleman from North Carolina. 
The gentleman from North Carolina will have 2 minutes and 10 
seconds.
    The gentleman from Texas is now recognized, the ranking 
member of the Subcommittee on Domestic and International 
Monetary Policy, for 3 minutes.
    Dr. Paul. Thank you, Mr. Chairman. Welcome, Chairman 
Bernanke.
    I am interested in the suggestion that Mr. Volcker has made 
recently about curtailing some of the investment banking risk 
they are taking. In many ways, I think he brings up a very 
important subject and touches on it, but I think it is much 
bigger than what he has addressed.
    Back when we repealed Glass-Steagall, I voted against this, 
even though as a free market person, I endorse the concept that 
banks ought to be allowed to do commercial and investment 
banking.
    The real culprit, of course, is the insurance, the 
guarantee behind this, and the system of money that we have.
    In a free market, of course, the insurance would not be 
guaranteed by the taxpayers or by the Federal Reserve creating 
more money. The FDIC is an encouragement of moral hazard as 
well.
    I think the Congress contributes to this by pushing loans 
on individuals who do not qualify, and I think the Congress has 
some responsibility there, too.
    I also think there has been a moral hazard caused by the 
tradition of a line of credit to Fannie Mae and Freddie Mac and 
this expectation of artificially low interest rates helped form 
the housing bubble, but also the concept still persists, even 
though it has been talked about, that it is too-big-to-fail. It 
exists and nobody is going to walk away.
    There is always this guarantee that the government will be 
there along with the Federal Reserve, the Treasury, and the 
taxpayers to bail out anybody that looks like it is going to 
shake it up.
    It does not matter that the bad debt and the burden is 
dumped on the American taxpayer and on the value of the dollar, 
but it is still there. ``Too-big-to-fail'' creates a tremendous 
moral hazard.
    Of course, the real moral hazard over the many decades has 
been the deception put into the markets by the Federal Reserve 
creating artificially low interest rates, pretending there has 
been savings, pretending there is actually capital out there, 
and this is what causes the financial bubbles, and this is the 
moral hazard because people believe something that is not true, 
and it leads to the problems we have today because it is 
unsustainable.
    It works for a while, but eventually, we have to pay the 
price. The moral hazard catches up with us and then we see the 
disintegration of the system that we have artificially created.
    We are in a situation coming up soon, even though we have 
been already in a financial crisis, we are going to see this 
get much worse and we are going to have to address this subject 
of the monetary system and whether we want to have a system 
that does not guarantee that we will always bail out all the 
banks and dump these bad debts on the people, and that it is 
filled with moral hazard, the whole system is.
    When that time comes, I hope we come to our senses and 
decide that the free market works pretty well. It gets rid of 
these problems much sooner and much smoother than when it 
becomes politicized that some firms get bailed out and others 
get punished. It is an endless battle.
    Hopefully, we will see the light and do a better job in the 
future.
    The Chairman. The gentleman from North Carolina is now 
recognized for 2 minutes and 10 seconds.
    Mr. Watt. Thank you, Mr. Chairman.
    Over the last two breaks in August of last year and the 
President's break this year, Mr. Meeks, as chairman of the 
International Monetary Policy Subcommittee, and myself as 
chairman of the Domestic Monetary Policy Subcommittee have 
traveled and met with Central Bank governors, finance ministers 
and leaders in Tunisia, Rwanda, Zimbabwe, Senegal, Nigeria, 
Ethiopia, Botswana, and The Gambia, to try to figure out what 
impact this economic downturn is having on African countries.
    Today, we get a chance to hear the impact it is having on 
our own domestic economy and what we can do to try to address 
that impact.
    Against that backdrop, the question I would really like to 
have addressed today is what tools the Fed has in its tool kit 
to reverse the trends and spur job growth in the 12th District 
of North Carolina and elsewhere in America.
    I asked a similar question last year at the Humphrey-
Hawkins' hearing, and at that time, Chairman Bernanke vowed to 
take strong and aggressive action to halt the economic slide 
and improve job growth.
    One year later, unemployment has gotten worse, although 
there are small signs of recovery.
    Today, I hope to hear specifics on the Fed's plan to spur 
job growth and meet the other half of this dual mandate, 
fostering maximum sustainable employment.
    If there are things Congress can and should do to help, we 
should be ready to assist with that agenda.
    With that, Mr. Chairman, I yield back and I will submit the 
rest of my statement for the record.
    The Chairman. There are a couple of 1-minute statements. 
The gentleman from Florida, Mr. Posey, and if she is ready 
next, the gentlewoman from Kansas, Ms. Jenkins.
    The gentleman from Florida is recognized for 1 minute for 
the Minority.
    Mr. Posey. Thank you, Mr. Chairman.
    Chairman Bernanke, the Fed's decision to raise the discount 
rate can be interpreted that the Federal Reserve will raise the 
Federal fund's rate in the months ahead, which would suggest 
economic recovery is under way, yet the road ahead seems 
difficult.
    The 2010 Economic Report of the President states ``It will 
take a prolonged and robust GDP--I think they meant GOP--
expansion to eliminate the jobs' deficit that has opened up 
over the course of the recession.''
    A question specifically is what are you looking for, and 
once again, what is the plan? I do not see how recovery can be 
defined without reducing unemployment and expanding GDP. It 
would also be helpful to know how optimistic the Fed is for GDP 
expansion in light of some of the job-killing policies coming 
out of Washington.
    For example, I recently learned the President's budget 
would kill our human space exploration program and send our 
high-skilled jobs to Russia.
    Thank you, Mr. Chairman.
    The Chairman. The gentlewoman from Kansas for 1 minute.
    Ms. Jenkins. Thank you, Mr. Chairman.
    Over the past 18 months, the Fed has taken extraordinary 
steps to address the financial downturn. Last year, Chairman 
Bernanke spoke about the importance of reducing our deficit 
spending and making a real commitment to fiscal discipline.
    Today, the deficit exceeds 10 percent of GDP and as 
evidenced by the Administration's budget proposal, they are not 
making such a commitment.
    Since joining this committee, my priority has been to 
protect the taxpayers by ending bailouts and preventing future 
taxpayer-funded bailouts.
    I have concerns about TARP, and I am interested to hear how 
the Chairman intends to pull back on the increased liquidity 
without further disrupting our markets.
    I am also interested to learn if he believes a true 
economic recovery can occur with continued excessive deficits.
    I yield back the remainder of my time.
    The Chairman. The gentleman from New York will now be 
recognized for 1 minute, and then we will get to the gentlemen 
from Minnesota and New Jersey.
    Mr. Lee. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you for coming before the 
committee today. I know there will be a number of important 
issues that you will be raising over the course of your 
testimony, but I wanted to highlight just a few specific ones 
that I hope you can address during your discussion.
    It is important for us to hear your thoughts on the 
significant level of spending that is currently going on in 
this Congress.
    As you know, we just raised the debt ceiling by another 
$1.9 trillion, and whether you believe Fannie Mae/Freddie Mac, 
that exposure, should be factored into the debt ceiling that we 
currently live by.
    I am also increasingly concerned with discussions by rating 
firms in which the AAA rating that this country currently 
enjoys is in jeopardy and when and if do you think that will be 
downgraded.
    We simply cannot ignore what we are doing in terms of 
spending in this country and the impact it may have on us.
    I look forward to you replying to those through your 
testimony.
    The Chairman. I now recognize myself. I am told I have 2 
minutes and 50 seconds.
    I want to begin by responding to that last point. The 
notion that America will never not pay its debts is without any 
foundation. I frankly regard it as very irresponsible for 
anyone here to suggest there could ever be any such failure.
    Inviting the rating agencies without any fact or basis 
whatever to raise our interest rates would be a mistake. The 
rating agencies have done enough damage. I do not doubt for one 
second that this Congress will fully fund any obligations we 
have internationally.
    Secondly, I did want to respond on bailouts. I understand 
the nostalgia some of my Republican friends have for the past 
Administration, which is when the bailouts happened.
    Every single activity of the Federal Government that is now 
going forward that is called a ``bailout'' was begun by the 
Bush Administration, in most cases, for very good reasons, but 
by the Bush Administration and its high economic officials, in 
some cases in conjunction with Congress, in other cases, on 
their own, without any congressional input, like Bear Stearns 
and the first part of AIG.
    I am not aware of any bailouts that were initiated since 
President Obama took over in this Administration.
    Next, I want to talk about jobs. One of my Republican 
colleagues likes to ask, where are the jobs? I guess they all 
do. They tend to talk from the same notes.
    I do not know where they are. Maybe they are in Crawford. 
Here is the figure that we have on pages 18 and 19 of the 
Monetary Report. Non-farm private payroll employment fell 
725,000 jobs per month on average from January to April 2009. I 
know it is the Republican view that everything bad in America 
started on January 21, 2009 and before that, everything was 
wonderful.
    No rational individual claims that the Obama Administration 
is responsible for things that happened in January, February, 
and April of this year.
    By November to January, 2009 and 2010, for which the Obama 
Administration can get some responsibility, and after the 
Economic Recovery bill was passed, we averaged a loss of 20,000 
jobs per month. That means we got a positive swing of 700,000 
jobs. Unfortunately, it is not the most important swing, which 
is to a plus.
    What that means is by these figures in the Federal Reserve, 
for the first 3 months of 2009, we lost 2.1-something million 
jobs, and in the last 3 months--November, December, January--we 
lost 60,000 jobs.
    The answer is 2.1 million jobs disappeared and have not yet 
come back because of the economy that the Obama Administration 
inherited.
    I do note that the Chairman twice notes the positive impact 
of the stimulus on the economy. There are a number of things, 
but both in his statements and in the Monetary Report, as he 
lists the reasons why the economy has gotten better, the 
stimulus is twice mentioned.
    It is possible to debate what was the best way to do the 
stimulus. Some people like to exaggerate the extent to which it 
was spending, including some tax deduction--I think not too 
effective tax deduction, but no sensible human being can deny 
the stimulus had a positive effect. The question is, going 
forward, can we improve on that positive effect.
    Now I recognize the gentleman from Minnesota for 1 minute.
    Mr. Paulsen. Thank you, Mr. Chairman, for being here this 
morning as well. I have two issues of particular concern and 
hopefully, you will be able to address them.
    The first is the lack of available credit for the small 
business community and the fear that if the Fed raises interest 
rates in the near term, it will further erode credit 
opportunities for small business and exacerbate that problem.
    I would like to hear about the potential of the Fed Reserve 
increasing rates in the near future and ensuring that credit 
for small businesses is going to be available for job growth.
    Second, the issue of the explosion of the deficit and the 
debt, and the warning signals are getting louder that our 
fiscal situation is putting increasing pressure on our bond 
rating.
    I would like your opinion on the long-term impact of not 
addressing our debt as it relates to our bond rating, but more 
importantly, the impact it would have on our global 
competitiveness.
    Thank you and I do look forward to your testimony.
    The Chairman. The gentleman from New Jersey for the final 
minute.
    Mr. Lance. Thank you for coming back to our committee, 
Chairman Bernanke.
    Last week, like most of our colleagues, I was back home as 
part of the President's Day District work period. As I traveled 
throughout New Jersey's 7th Congressional District in northern 
and central New Jersey, I was speaking with constituents and 
meeting with small businesses, and I heard a common refrain, 
people are deeply concerned about the state of the United 
States' economy.
    Most New Jerseyans believe we are still mired in a deep 
recession and they are extremely concerned about job prospects 
and income worries.
    These concerns, which I believe exist across the Nation, 
will likely lead to curbed consumer spending for some time to 
come.
    I hope, sir, in your testimony to the committee this 
morning, you will address this issue and what the Fed intends 
to do moving forward to boost consumer confidence, which after 
all, constitutes 70 percent of our economic activity.
    Thank you, Mr. Chairman.
    The Chairman. Thank you. That concludes the opening 
statements. I thank all the members for adhering to the time 
limits.
    Mr. Chairman, we will not hold you to the 5 minutes. I 
think the economy probably deserves a 3 or 4 extra minutes this 
morning, so you take whatever time you think is necessary to 
tell us how you are going to fix everything.

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

    Mr. Bernanke. Thank you, Mr. Chairman. I will try not to 
abuse that.
    Chairman Frank, Ranking Member Bachus, and other members of 
the committee, I am pleased to present the Federal Reserve's 
semi-annual Monetary Policy Report to the Congress.
    I will begin today with some comments on the outlook for 
the economy and for monetary policy, then touch briefly on 
several other important issues.
    Although the recession officially began more than 2 years 
ago, U.S. economic activity contracted particularly sharply 
following the intensification of the global financial crisis in 
the fall of 2008. Concerted efforts by the Federal Reserve, the 
Treasury Department, and other U.S. authorities to stabilize 
the financial system, together with highly stimulative monetary 
and fiscal policies, helped arrest the decline and are 
supporting a nascent economic recovery. Indeed, the U.S. 
economy expanded at about a 4 percent annual rate during the 
second half of last year. A significant portion of that growth, 
however, can be attributed to the progress that firms have made 
in working down unwanted inventories of unsold goods, which 
have left them more willing to increase production. As the 
impetus provided by the inventory cycle is temporary, and as 
the fiscal support for economic growth will likely diminish 
later this year, a sustained recovery will depend on continued 
growth in private-sector final demand for goods and services.
    Private-sector final demand does seem to be growing at a 
moderate pace, buoyed in part by a general improvement in 
financial conditions. In particular, consumer spending has 
recently picked up, reflecting gains in real disposable income 
and household wealth and tentative signs of stabilization in 
the labor market. Business investment in equipment and software 
has risen significantly. And international trade--supported by 
a recovery in the economies of many of our trading partners--is 
rebounding from its deep contraction of a year ago. However, 
starts of single-family homes, which rose notably this past 
spring, have recently been roughly flat, and commercial 
construction is declining sharply, reflecting poor fundamentals 
and continued difficulty in obtaining financing.
    The job market has been hit especially hard by the 
recession, as employers reacted to sharp sales declines and 
concerns about credit availability by deeply cutting their 
workforces in late 2008 and in 2009. Some recent indicators 
suggest that the deterioration in the labor market is abating: 
Job losses have slowed considerably, and the number of full-
time jobs in manufacturing rose modestly in January. Initial 
claims for unemployment insurance have continued to trend 
lower, and the temporary services industry, often considered a 
bellwether for the employment outlook, has been expanding 
steadily since October. Notwithstanding these positive signs, 
the job market remains quite weak, with the unemployment rate 
near 10 percent and job openings scarce. Of particular concern 
because of its long-term implications for worker's skills and 
wages, is the increasing incidence of long-term unemployment; 
indeed, more than 40 percent of the unemployed have been out of 
work for 6 months or more, nearly double the share of a year 
ago.
    Increases in energy prices resulted in a pick-up in 
consumer price inflation in the second half of last year, but 
oil prices have flattened out over recent months, and most 
indicators suggest that inflation likely will be subdued for 
some time. Slack in labor and product markets has reduced wage 
and price pressures in most markets, and sharp increases in 
productivity have further reduced producers' unit labor costs. 
The cost of shelter, which receives a heavy weight in consumer 
price indexes, is rising very slowly, reflecting high vacancy 
rates. In addition, according to most measures, longer-term 
inflation expectations have remained relatively stable.
    The improvement in financial markets that began last spring 
continues. Conditions in short-term funding markets have 
returned to near pre-crisis levels. Many (mostly larger) firms 
have been able to issue corporate bonds or new equity and do 
not seem to be hampered by a lack of credit. In contrast, bank 
lending continues to contract, reflecting both tightened 
lending standards and weak demand for credit amid uncertain 
economic prospects.
    In conjunction with the January meeting of the Federal Open 
Market Committee, Board members and Reserve Bank presidents 
prepared projections for economic growth, unemployment, and 
inflation for the years 2010 through 2012 and over the longer 
run. The contours of these forecasts are broadly similar to 
those I reported to the Congress last July. FOMC participants 
continue to anticipate a moderate pace of economic recovery, 
with economic growth of roughly 3 to 3\1/2\ percent in 2010 and 
3\1/2\ to 4\1/2\ percent in 2011. Consistent with moderate 
economic growth, participants expect the unemployment rate to 
decline only slowly, to a range of roughly 6\1/2\ to 7\1/2\ 
percent by the end of 2012, still well above their estimate of 
the long-run sustainable rate of about 5 percent. Inflation is 
expected to remain subdued, with consumer prices rising at 
rates between 1 and 2 percent in 2010 through 2012. In the 
longer term, inflation is expected to be between 1\3/4\ and 2 
percent, the range that most FOMC participants judge to be 
consistent with the Federal Reserve's dual mandate of price 
stability and maximum employment.
    Over the past year, the Federal Reserve has employed a wide 
array of tools to promote economic recovery and preserve price 
stability. The target for the Federal funds rate has been 
maintained at a historically low range of 0 to \1/4\ percent 
since December 2008. The FOMC continues to anticipate that 
economic conditions--including low rates of resource 
utilization, subdued inflation trends, and stable inflation 
expectations--are likely to warrant exceptionally low levels of 
the Federal funds rate for an extended period.
    To provide support to mortgage lending and housing markets 
and to improve overall conditions in private credit markets, 
the Federal Reserve is in the process of purchasing $1.25 
trillion of agency mortgage-backed securities and about $175 
billion of agency debt. We have been gradually slowing the pace 
of these purchases in order to promote a smooth transition in 
markets and anticipate that these transactions will be 
completed by the end of March. The FOMC will continue to 
evaluate its purchases of securities in light of the evolving 
economic outlook and conditions in financial markets.
    In response to the substantial improvements in the 
functioning of most financial markets, the Federal Reserve is 
winding down the special liquidity facilities created during 
the crisis. On February 1st, a number of these facilities, 
including credit facilities for primary dealers, lending 
programs intended to help stabilize money market mutual funds 
and the commercial paper market, and temporary liquidity swap 
lines with foreign central banks, were all allowed to expire. 
The only remaining lending program for multiple borrowers 
created under the Federal Reserve's emergency authorities, the 
Term Asset-Backed Securities Loan Facility or TALF, is 
scheduled to close on March 31st for loans backed by all types 
of collateral except newly issued commercial mortgage-backed 
securities (CMBS) and on June 30th, for loans backed by newly 
issued CMBS.
    In addition to closing its special facilities, the Federal 
Reserve is normalizing its lending to commercial banks through 
the discount window. The final auction of discount-window funds 
to depositories for the Term Auction Facility, which was 
created in the early stages of the crisis to improve the 
liquidity of the banking system, will occur on March 8th. Last 
week, we announced that the maximum term of discount window 
loans, which was increased to as much as 90 days during the 
crisis, would be returned to overnight for most banks, as it 
was before the crisis erupted in August 2007. To discourage 
banks from relying on the discount window rather than private 
funding markets for short-term credit, last week we also 
increased the discount rate by 25 basis points, raising the 
spread between the discount rate and the top of the target 
range for the Federal funds rate to 50 basis points. These 
changes, like the closure of most of the special lending 
facilities earlier this month, are in response to the improved 
functioning of financial markets, which has reduced the need 
for extraordinary assistance from the Federal Reserve. These 
adjustments are not expected to lead to tighter financial 
conditions for households and businesses and should not be 
interpreted as signaling any change in the outlook for monetary 
policy, which remains about the same as it was at the time of 
the January meeting of the FOMC.
    Although the Federal funds rate is likely to remain 
exceptionally low for an extended period, as the expansion 
matures, the Federal Reserve will at some point need to begin 
to tighten monetary conditions to prevent the development of 
inflationary pressures. Notwithstanding the substantial 
increase in the size of its balance sheet associated with its 
purchases of Treasury and agency securities, we are confident 
that we have the tools we need to firm the stance of monetary 
policy at the appropriate time.
    Most importantly, in October 2008, the Congress gave 
statutory authority to the Federal Reserve to pay interest on 
banks' holdings of reserve balances at Federal Reserve banks. 
By increasing the interest rate on reserves, the Federal 
Reserve will be able to put significant upward pressure on all 
short-term interest rates. Actual and prospective increases in 
short-term interest rates will be reflected in longer-term 
interest rates and in financial conditions more generally.
    The Federal Reserve has also been developing a number of 
additional tools to reduce the large quantity of reserves held 
by the banking system, which will improve the Federal Reserve's 
control of financial conditions by leading to a tighter 
relationship between the interest rate paid on reserves and 
other short-term interest rates. Notably, our operational 
capacity for conducting reverse repurchase agreements, a tool 
that the Federal Reserve has historically used to absorb 
reserves from the banking system, is being expanded so that 
such transactions can be used to absorb large quantities of 
reserves. The Federal Reserve is also currently refining plans 
for a term deposit facility that could convert a portion of 
depository institutions' holdings reserve balances into 
deposits that are less liquid and cannot be used to meet 
reserve requirements. In addition, the FOMC has the option of 
redeeming or selling securities as a means of reducing 
outstanding bank reserves and applying monetary restraint. Of 
course, the sequencing of steps and the combination of tools 
that the Federal Reserve uses as it exits from its currently 
very accommodative policy stance will depend on economic and 
financial developments. I have provided more discussion of 
these options and possible sequencing in a recent testimony.
    The Federal Reserve is committed to ensuring that the 
Congress and the public have all the information needed to 
understand our decisions and to be assured of the integrity of 
our operations. Indeed, on matters related to the conduct of 
monetary policy, the Federal Reserve is already one of the most 
transparent central banks in the world, providing detailed 
records and explanations of its decisions. Over the past year, 
the Federal Reserve also took a number of steps to enhance the 
transparency of its special credit and liquidity facilities, 
including the provision of regular extensive reports to the 
Congress and the public; we have worked closely with the 
Government Accountability Office (GAO), the Office of the 
Special Inspector General for the Troubled Asset Relief Program 
(SIG TARP), the Congress, and private-sector auditors on a 
range of matters relating to these facilities.
    While the emergency credit and liquidity facilities were 
important tools for implementing monetary policy during the 
crisis, we understand that the unusual nature of those 
facilities creates a special obligation to assure the Congress 
and the public of the integrity of their operation. 
Accordingly, we would welcome a review by the GAO of the 
Federal Reserve's management of all facilities created under 
emergency authorities. In particular, we would support 
legislation authorizing the GAO to audit the operational 
integrity, collateral policies, use of third-party contractors, 
accounting, financial reporting, and internal controls of these 
special credit and liquidity facilities. The Federal Reserve 
will, of course, cooperate fully and actively in all reviews. 
We are also prepared to support legislation that would require 
the release of the identities of the firms that participated in 
each special facility after an appropriate delay. It is 
important that the release occur after a lag that is 
sufficiently long that investors will not view an institution's 
use of one of the facilities as a possible indication of 
ongoing financial problems, thereby undermining market 
confidence in the institution or discourage use of any future 
facility that might become necessary to protect the U.S. 
economy.
    Looking ahead, we will continue to work with the Congress 
in identifying approaches for enhancing the Federal Reserve's 
transparency that are consistent with our statutory objectives 
of fostering maximum employment and price stability. In 
particular, it is vital that the conduct of monetary policy 
continue to be insulated from short-term political pressures so 
that the FOMC can make policy decisions in the longer-term 
economic interests of the American people. Moreover, the 
confidentiality of discount window lending to individual 
depository institutions must be maintained so that the Federal 
Reserve continues to have effective ways to provide liquidity 
to depository institutions under circumstances where other 
sources of funding are not available. The Federal Reserve's 
ability to inject liquidity into the financial system is 
critical for preserving financial stability and for supporting 
depositories' key role in meeting the ongoing credit needs of 
firms and households.
    Strengthening our financial regulatory system is essential 
for the long-term economic stability of the Nation. Among the 
lessons of the crisis are the crucial importance of 
macroprudential regulation--that is, regulation and supervision 
aimed at addressing risks to the financial system as a whole--
and the need for effective consolidated supervision of every 
financial institution that is so large or interconnected that 
its failure could threaten the functioning of the entire 
financial system.
    The Federal Reserve strongly supports the Congress' ongoing 
efforts to achieve comprehensive financial reform. In the 
meantime, to strengthen the Federal Reserve's oversight of 
banking organizations, we have been conducting an intensive 
self-examination of our regulatory and supervisory 
responsibilities and have been actively implementing 
improvements. For example, the Federal Reserve has been playing 
a key role in international efforts to toughen capital and 
liquidity requirements for financial institutions, particularly 
systemically critical firms, and we have been taking the lead 
in ensuring that compensation structures at banking 
organizations provide appropriate incentives without 
encouraging excessive risk-taking.
    The Federal Reserve is also making fundamental changes in 
its supervision of large, complex bank holding companies, both 
to improve the effectiveness of consolidated supervision and to 
incorporate a macroprudential prospective that goes beyond the 
traditional focus on safety and soundness of individual 
institutions. We are overhauling our supervisory framework and 
procedures to improve coordination within our own supervisory 
staff and with other supervisory agencies and to facilitate 
more-integrative assessments of risks within each holding 
company and across groups of companies.
    Last spring, the Federal Reserve led the successful 
Supervisory Capital Assessment Program, popularly known as the 
``bank stress test.'' An important lesson of that program was 
that combining on-site bank examinations with a suite of 
quantitative and analytical tools can greatly improve 
comparability of the results and better identify potential 
risks. In that spirit, the Federal Reserve is also in the 
process of developing an enhanced quantitative surveillance 
program for large bank holding companies. Supervisory 
information will be combined with firm-level, market-based 
indicators and aggregate economic data to provide a more 
complete picture of the risks facing these institutions and the 
broader financial system. Making use of the Federal Reserve's 
unparalleled breath of expertise, this program will apply a 
multidisciplinary approach that involves economists, 
specialists in particular financial markets, payment systems 
experts, and other professionals, as well as bank supervisors.
    The recent crisis has also underscored the extent to which 
direct involvement in the oversight of banks and bank holding 
companies contributes to the Federal Reserve's effectiveness in 
carrying out its responsibilities as a central bank, including 
the making of monetary policy and the management of the 
discount window. Most important, as the crisis has once again 
demonstrated, the Federal Reserve's ability to identify and 
address diverse and hard-to-predict threats to financial 
stability depends critically on the information, expertise, and 
powers that it has by virtue of being both a bank supervisor 
and a central bank.
    The Federal Reserve continues to demonstrate its commitment 
to strengthening consumer protections in the financial services 
arena. Since the time of the previous Monetary Policy Report in 
July, the Federal Reserve has proposed a comprehensive overhaul 
of the regulations governing consumer mortgage transactions, 
and we are collaborating with the Department of Housing and 
Urban Development to assess how we might further increase 
transparency in the mortgage process. We have issued rules 
implementing enhanced consumer protections for credit card 
accounts and private student loans as well as new rules to 
ensure that consumers have meaningful opportunities to avoid 
overdraft fees. In addition, the Federal Reserve has 
implemented an expanded consumer compliance supervision program 
for nonbank subsidiaries of bank holding companies and foreign 
banking organizations.
    More generally, the Federal Reserve is committed to doing 
all that can be done to ensure that our economy is never again 
devastated by a financial collapse. We look forward to working 
with the Congress to develop effective and comprehensive reform 
of the financial regulatory framework.
    Thank you, Mr. Chairman.
    [The prepared statement of Chairman Bernanke can be found 
on page 71 of the appendix.]
    The Chairman. Mr. Chairman, one of my colleagues, it may 
have been Mr. Paulsen or Mr. Lee, raised a question of lending 
to small business. I was pleased to note on page 13 of the 
Monetary Report, you cite the Federal financial regulatory 
agency, Conference of State Bank Supervisors' statement telling 
the regulators in the field not to overdo it. That does not 
mean you think they are, but it does mean you recognize there 
is a problem. We call it the ``mixed message problem'' that we 
have.
    I am not going to take too much time now, but I would note 
we have a hearing on Friday on that subject, which had been 
previously scheduled and snowed out. It is an all-day hearing 
on regulation. Governor Duke will be testifying. We appreciate 
your doing it. It is very important.
    We are getting everybody in the same room, the banks who 
say the regulators are being too tough on us, the regulators 
who say the problem is there is not any demand, and the 
borrowers who say the banks will not lend to us.
    We thought it was important to get everybody in the same 
room. It is an all-day hearing in corroboration with our 
colleagues on the Small Business Committee chaired by my 
colleague, Ms. Velazquez.
    I appreciate your mentioning that. We will be getting into 
that.
    I want to talk now about the central question of 
employment. Getting people back to work is important, socially 
most of all, but also for the overall economy.
    I was pleased to see you note on a couple of occasions, if 
you have a debate, you debate history, but it is part of a 
debate over policy as to whether or not an economic stimulus 
should take place.
    We do have a deficit. When we do stimulative things, it 
does in the short term add to the deficit, I would note, both 
by expenditures and by tax cuts.
    People have taken to talking about the total stimulus 
numbers as if it was all expenditures. About 30 percent of it 
was tax-cutting. People may or may not think that worked well.
    I was struck to note that in your statement, you say 
``Concerted efforts to stabilize the financial system together 
with highly stimulative monetary and fiscal policy,'' and in 
the report in the very first paragraph, ``The U.S. economy 
turned up in the second half supported by an improvement in 
financial conditions, stimulus from monetary and fiscal 
policies,'' and then again on page 8, ``A development that 
helped rebuild household wealth and household income was lifted 
by provisions in the fiscal stimulus package.''
    These are three references to the extent to which the 
stimulus package which this Congress adopted aided in reducing 
unemployment and in stimulating the economy.
    That has become controversial because you have to do it 
again. Am I accurate in interpreting your comments as saying 
the stimulus, without saying it was the best possible way to do 
it, but the fact that the stimulus was adopted did contribute 
to the improvement we are seeing in economic activity?
    Mr. Bernanke. Yes, Mr. Chairman. I think most economists 
would agree that the stimulus has created jobs relative to 
where the baseline would have been in the absence of the 
stimulus. Of course, we do not know what that alternative would 
have been, and therefore, it is very difficult to--
    The Chairman. We do know one alternative, which was to do 
nothing, because if people say the major thing was the deficit, 
there was nothing you could have done that would have been a 
short-term stimulative that would not have added to the 
deficit, whether it was tax reduction or something else.
    I know there are people who argue that if you do tax 
reduction, it means more revenue. I do remember your 
predecessor, Mr. Greenspan, asked by one of my Republican 
colleagues if it was not true that if you cut taxes, you could 
raise revenue overall, and he said that was theoretically 
possible but it had not happened in his lifetime. I do not 
think it has happened since then either.
    This is important. I say that for this reason: We should 
have a thoughtful debate about what to do next. When we are 
bogged down in a debate about whether we should have done 
anything, it is not very helpful. I appreciate your comments on 
that.
    Let me ask, at this point going forward, and I understand 
your primary responsibility is monetary policy, should we say 
that concerns for not increasing the deficit is so important 
that nothing further should be done that would have a fiscally 
stimulative effect?
    Mr. Bernanke. Mr. Chairman, you know, that is really the 
congressional tradeoff that has to be made. Obviously, 
unemployment is the biggest problem we have, and if the Federal 
Reserve and the Congress can address that issue, we need to 
find ways to address that issue, but there are difficult 
tradeoffs.
    The Chairman. I appreciate that. I think we are aided by 
the fact that inflation is not now or in the near term seeming 
to be a problem.
    The last point I would make if you could comment, we hear 
this threat that the rating agencies might reduce our debt 
rating because of the deficit. Do you think there is any 
realistic prospect of America defaulting on its debt in the 
foreseeable future?
    Mr. Bernanke. Not unless Congress decides not to pay, which 
I do not anticipate. No, I do not anticipate any such problem. 
I do not anticipate any downgrade. Of course, there are real 
long-term budget problems that need to be addressed.
    The Chairman. I agree with that. If you can get enough risk 
premium on treasuries, buy them.
    Now, the gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman. Chairman Bernanke, I 
think Chairman Frank mentioned the deficit in passing and the 
debt, and that is what I want to ask you about. Really, to me, 
that is the elephant in the room.
    Our debt is going to double in the next 5 years, triple in 
the next 10 years, and is fueled by historic deficits.
    I heard this morning on TV that we have in many cases 
across the United States this year, children and even adults 
who are kind of walking out on the thin ice, and they walk out 
maybe day after day, and they get some comfort that nothing 
happens. Thin ice is dangerous. I submit that this type of 
budget path is dangerous and the deficits we are running are 
dangerous.
    I would ask you, number one, I do not believe our present 
budget path is sustainable, so my first question to you is, is 
our budget path sustainable, and second, is there a need for 
what I would consider an urgent need for the Congress--you said 
it was up to the Congress to come up with a concrete plan to 
change that budget path, and do you believe there is an urgency 
in that?
    Mr. Bernanke. Congressman, as to sustainability, you are 
talking about the medium-term structural deficit that remains 
even after the economy is returned close to more normal levels 
of activity, estimates of the structural deficit range from 4 
percent by the OMB to up to 7 percent of GDP in some scenarios 
run by the CBO.
    Those numbers are above a sustainable level. I think in 
order to maintain a stable ratio of debt to GDP, you need to 
have a deficit that is 2\1/2\ to 3 percent, at the most.
    I think yes, under current projections, we have a deficit 
and a debt that will continue to grow, interest rate costs will 
continue to grow.
    I do think it is very important that we begin to look at 
the path, the projectory of the deficit as it goes forward, and 
there could be a bonus there to the extent that we can achieve 
creditable plans to reduce medium- to long-term deficits, we 
will actually have more flexibility in the short term if we 
want to take other kinds of actions.
    Mr. Bachus. The current budget path is not sustainable, is 
it?
    Mr. Bernanke. Given the numbers that the CBO and the OMB 
have projected, that is right.
    Mr. Bachus. It may be upon us sooner than we think, is that 
a good analogy that I have used, of walking on thin ice?
    Mr. Bernanke. Yes, sir. That is true. It is not necessarily 
just a long-term issue because it is possible that bond markets 
will become worried about sustainability and we may find 
ourselves facing higher interest rates even today, given that 
concern.
    Mr. Bachus. Is it critical that we have a long-term plan 
and we have it now?
    Mr. Bernanke. Yes, I think it is very important. I realize 
it is extremely difficult. I do not underestimate in any way 
how difficult it is. It is also difficult to address issues 
which are still a few years away. I understand that as well.
    It would be very helpful even to the current recovery to 
markets' confidence if there were a sustainable creditable plan 
for a fiscal exit, if you will.
    Mr. Bachus. If we do not address them now, I am not sure we 
can address them in an effective way 2 or 3 years from now or 4 
or 5 years from now.
    Mr. Bernanke. It will become increasingly difficult because 
the cuts you will need to make will be even sharper or the tax 
increases even sharper.
    Mr. Bachus. I very much appreciate your testimony. I do 
believe you have addressed many of the concerns. I am happy 
that you mentioned the legislation that we passed in a 
bipartisan way has been an important tool. Thank you.
    The Chairman. The gentleman from North Carolina.
    Mr. Watt. Thank you. I wanted to welcome you back to the 
committee. In response to a question that Chairman Frank asked, 
you made it clear that you do not want to meddle too much in 
what the Congress does on these things, and I am not going to 
ask you to stray over there.
    I am more interested in what I perceive to be as reading 
between the lines of what you said, that you think the Fed 
itself has used all the tools that are available to the Federal 
Reserve to help facilitate job creation, actually probably more 
than would normally be done to facilitate job creation and 
create maximum sustainable employment since you do not really 
have a lot of concerns about the other part of the dual 
mandate, which is price stability.
    Am I reading that correctly or are there other specific 
things that the Fed tool kit might allow the Fed to do to 
create the environment for more job creation?
    Mr. Bernanke. I think one set of tools that we have that we 
continue to work on as regulators is to try to get credit 
flowing again. We know that small business lending is closely 
tied to job creation. We know there are problems with bank 
lending to small businesses.
    I do not know if you want me to take your time to go 
through some of these things, but we are collecting more 
information. We are doing more consulting. We are trying to 
train our examiners. We are trying to do everything we can to 
make sure that creditworthy small businesses can get credit and 
banks would be willing to take a second look at small 
businesses to make sure they have access to credit.
    Mr. Watt. I presume that will be the subject of testimony 
by folks at the Friday hearing primarily, so I will not ask you 
to elaborate more on that in this context.
    What other kinds of things in your tool kit might be 
considered or actually I guess maybe the question I should be 
asking is, are the short-term consequences of anything you 
might use in your tool kit, the short-term benefits, worth the 
long-term consequences, or do you think the Fed really has done 
everything it should be doing other than trying to facilitate 
credit, as you just mentioned, in terms of monetary policy, the 
emergency steps you have taken?
    Are there other things you could prudently do, I guess is 
the question, to facilitate job creation?
    Mr. Bernanke. As you point out, we have extremely 
accommodative monetary policy with very low interest rates and 
also large purchases of securities to expand our balance sheet. 
That is a very accommodative supporting recovery, supporting 
job creation.
    The FOMC is going to have to continue to evaluate whether 
additional stimulus would be necessary, depending on how the 
economy evolves. We will continue to look at that.
    Mr. Watt. You are kind of in the same posture that we are 
in on the other side, your policies are creating some stresses 
on your own balance sheet that over time might have some 
consequences and you have to get out of it, and what you are 
saying is we need to be looking at those long-term consequences 
of more debt and more deficits so that we have an exit strategy 
to get back to a more normal kind of fiscal policy at the same 
time you are getting back to a more normal monetary policy.
    Am I misstating that?
    Mr. Bernanke. Not at all. One of the greatest challenges of 
the extraordinary policies that we have both taken is at some 
point, we want to return to a more normal stance, and finding a 
way out that is creditable and understandable and clear is very 
important for confidence.
    Mr. Watt. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Texas, Mr. Paul.
    Dr. Paul. I thank you, Mr. Chairman. The Federal Reserve 
Transparency Act, which has passed the House already, is 
something that the Federal Reserve obviously has been opposed 
to, and one of the reasons they are opposed to it, as I 
understand it, is it would politicize monetary policy, which is 
not what the bill actually does.
    The other reason they give is that if Congress had any 
subtle influence, they would inflate more than the Federal 
Reserve might want to. It is sort of ironic, the Federal 
Reserve kept interest rates too low for too long and the 
consensus now in the financial community is that is true, 
interest rates are still down at 1 percent, hardly could the 
Congress influence the Federal Reserve in a negative way by 
causing them to inflate even more.
    There has been a cozy political relationship between 
Congress and the Federal Reserve, although the Congress has 
been derelict in their responsibilities to perform oversight.
    When it comes to debt, the Fed is there. They can monetize 
the debt and keep interest rates low. The Congress can keep 
spending and get re-elected. They do not have to raise taxes so 
the Fed can act as a taxing authority. You print the money, 
dilute the value of the money. Prices go up and price inflation 
is a tax.
    When people pay a lot more for their medical care than they 
used to, they ought to think about the inflationary tax.
    Also, the Fed accommodates the Congress by liquidating 
debt, by debasement of the currency, the real value of the 
money goes down, the real debt actually goes down.
    In many ways, the Congress and the Fed do have a pretty 
cozy political relationship.
    I would like to get to more specifics on the transparency 
bill because it has been reported in the past that during the 
1980's, the Fed actually facilitated a $5.5 billion loan to 
Saddam Hussein, who then bought weapons from our military 
industrial complex, and also that is when he invested in a 
nuclear reactor.
    A lot of cash was passed through and a lot of people 
supposed it was passed through the Federal Reserve when there 
was a provisional government after the 2003 invasion. That 
money was not appropriated by the Congress, as the Constitution 
said.
    Also, there have been reports that the cash used in the 
Watergate scandal came through the Federal Reserve. When 
investigators back in those years tried to find out, they were 
always stonewalled, and we could not get the information.
    My question is, you object to this idea that I would say 
give us 6 months, after 6 months, we could find out what we are 
doing, but what about giving you 10 years?
    Would you grant that the American people deserve to know 
whether the Federal Reserve has been involved in this, and what 
kind of shenanigans they are involved in with foreign countries 
and foreign central banks, and find out possibly you are 
working now to bail out Greece, for all we know.
    Would you grant that after 10 or 15 years, the American 
people deserve to know? It seems if the Fed was not involved 
with this at all, it would be to your advantage to say no, we 
do not do stuff like that. Why could we not open the books up 
10 years back and find out the truth of these matters?
    Mr. Bernanke. Congressman, the specific allegations you 
have made, I think, are absolutely bizarre, and I have 
absolutely no knowledge of anything remotely like what you just 
described.
    As far as the 10 years, after 5 years, we produce complete 
transcripts of every word said in the FOMC meetings. You have 
every word in front of you.
    Dr. Paul. Can we get the results of every agreement, every 
loan made, every single thing to foreign governments?
    Mr. Bernanke. Yes, sir.
    Dr. Paul. There has been a lot of information, when this 
came out in the early years, they did have an effort and the 
Federal Reserve never participated in this. It is easily 
covered up.
    I think eventually, because the system is not viable and 
that it is this cozy relationship, that we will get to the 
point where something will have to be done about this financial 
system, so as long as we continue to do this, this cover up, 
and quite frankly, I do not believe that the real effort to 
facilitate some of these things that have been done in the past 
would become available to us because it is in the interest of 
the Federal Reserve to make sure that the people do not know.
    Right now, today, is it quite possible, have you talked 
with any international groups about possibly participating in a 
bailout of Greece?
    Mr. Bernanke. I have not.
    Dr. Paul. The Federal Reserve under the law is capable of 
doing this. Is it not correct that the Fed can buy debt of 
other nations, and under the Monetary Control Act of 1980, is 
that not permissible?
    Mr. Bernanke. Yes, that is true, but we have no plans 
whatsoever to be involved in any foreign bailouts or anything 
of that sort.
    Dr. Paul. If they did, it certainly would be to our 
advantage to know about it. I yield back.
    The Chairman. The gentleman's time has expired. I recognize 
the gentleman from Pennsylvania.
    This committee will look into the allegations that under 
Presidents Reagan and Nixon, the Federal Reserve was engaging 
in those activities, and the gentleman said during the 1980's, 
the Federal Reserve lent money to Saddam Hussein and during 
Watergate, they did this, and I agree we should look into what 
might have happened under those two Presidencies.
    The gentleman from Pennsylvania.
    Mr. Kanjorski. Thank you, Mr. Chairman. Mr. Chairman, I am 
not going to take all of my time, because I know we have the 
interest of the other committee members.
    I am particularly interested in some of the communications 
we have had recently on the commercial real estate problem. 
Could you give us your assessment of what that potential 
problem is today and where it can grow and if there is any 
actions we in the Congress should take in anticipation of 
getting a second hit in the economy?
    Mr. Bernanke. Congressman, it remains probably the biggest 
credit issue that we still have. Yesterday, Chairman Bair 
talked about a big increase in the number of problem banks, a 
great number of those banks are in trouble because of their 
commercial real estate positions, both because the 
fundamentals, shopping center vacancies, things of that sort, 
have been worsening, and because of problems in financing, 
there are a lot of troubled commercial real estate properties, 
and they are causing problems for a lot of banks, particularly 
small- to medium-sized banks.
    We are watching that very carefully. The Fed has done a 
couple of things here. We have issued with the other agencies 
guidance on commercial real estate, which gives a number of 
ways of helping.
    For example, instructing banks to try to restructure 
troubled commercial real estate loans and making the point that 
commercial real estate loans should not be marked down just 
because the collateral value has declined. That depends on the 
income from the property, not the collateral value.
    We have also had this TALF program, which has been trying 
to restart the CMBS, commercial mortgage-backed securities 
market, with limited success in quantities, but we have brought 
down the spreads and the financing situation is a bit better.
    We are seeing a few rays of light in this area, but it does 
remain a very difficult category of credit, particularly for 
the small- and medium-sized banks in our country.
    Mr. Kanjorski. Is there anything that you would suggest 
that the Congress get involved with or this committee now in 
anticipation of any problems that may occur?
    Mr. Bernanke. I do not have a specific suggestion. I would 
be happy to think about that.
    Mr. Kanjorski. Thank you, Mr. Chairman. I yield back my 
time.
    The Chairman. The gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman. Mr. Chairman, 
congratulations on your reappointment.
    I want to go back to page nine of your testimony where you 
said that the Federal Reserve has been playing a key role in 
international efforts to tighten capital and liquidity 
requirements for financial institutions, particularly 
systemically critical firms.
    Can you give me an idea of who you think the international 
systemically risky firms are?
    Mr. Bernanke. One of the issues that we will have to 
address, for example, if the regulators agree there should be 
additional capital on systemically risky firms, then the 
question will be how to identify those firms.
    Presumably, we will look at things like their size, their 
complexity, their interconnectedness, and the kinds of services 
they provide to the financial system.
    We have not addressed that question. We do not have a list 
or anything like that. It is also possible we might want to do 
it in kind of a gradated way so that the bigger and more 
complex the firm, the more capital it needs to hold, as 
protection for the system, so we do not have the ``too-big-to-
fail'' problem that Congressman Paul was talking about.
    Mr. Neugebauer. I also heard you say you are now going back 
internally and looking within your organization as to what are 
the things we missed, what should we have been looking at, and 
moving forward.
    I think one of the questions--I hear almost all of your 
former colleagues keep using the word ``capital,'' and I truly 
believe if you want to regulate the financial entities, capital 
is the primary way to do that.
    Looking forward, what is going to be the appropriate 
leverage level that we should allow our large financial 
institutions to have so they will have a shock absorber moving 
forward? Some of these entities were leveraged, 30, 40, big 
numbers.
    As the Federal Reserve Chairman, primary regulator for many 
of these entities, what is the appropriate leverage?
    Mr. Bernanke. Congressman, everybody agrees with what you 
just said, which is more capital is needed. The Federal Reserve 
representing the United States has been working with other 
countries, the Basel Committee and in other contexts, to try to 
develop new standards.
    We have implemented a few of them. For example, for market 
trading. At this point, we have not completed the whole process 
of developing higher, more stringent capital standards for 
large firms.
    A proposal has been put forward which is now being tested. 
Banks are being asked to evaluate how much capital they would 
have to hold under these more stringent standards, so we can 
get a sense of what the implications would be for the leverage 
ratio.
    I do not know that number yet. We are trying to figure out 
what will be safe. It would depend on the composition of the 
assets the bank has. The riskier the assets, the more capital 
you should have.
    We are working to try by the end of 2010 to have a very 
concrete proposal that each country would then have to decide 
whether to adopt or not.
    Mr. Neugebauer. You would agree the standards we had before 
evidently did not work?
    Mr. Bernanke. Clearly, they did not. I would add the 
liquidity issue also, that during the crisis, many banks were 
technically well-capitalized, but they did not have enough cash 
on hand to meet the run that was coming on them. Higher 
liquidity is also a part of this.
    Mr. Neugebauer. One of the concerns I have is in some of 
these entities, I have seen some deleveraging, but I have not 
seen a lot of deleveraging.
    I am wondering if it is not better sooner rather than later 
for the Fed to develop these guidelines and standards and start 
asking the entities that you are regulating to start ponying up 
either more capital or deleveraging their balance sheets 
because certainly the American taxpayers do not want another 
round of this.
    Do you have a time line in mind where we could anticipate 
hearing that the Fed is taking action to increase the capital 
standards or setting some new capital standards?
    Mr. Bernanke. As I said, I think around the end of the year 
we will have some formal standards, but we have been very much 
involved in pushing banks to raise more capital.
    That was one of the outcomes of the stress test we did last 
spring, that U.S. banks raised a very substantial amount of 
capital, and that has been very helpful in restoring confidence 
for the banking system.
    Mr. Neugebauer. Are you concerned about what is going on in 
the European Union right now with Greece and some of the other 
countries within the Euro, their levels of debt, are those 
countries going to have to step in and back them up, and the 
implications of what the disruption within the European Union 
might impact the United States?
    Mr. Bernanke. There are very serious challenges there 
involving not only fiscal issues but competitiveness issues 
because of the single exchange rate.
    We have talked to the European Union leaders. They are 
obviously very focused on getting this problem solved. They are 
working closely with Greece, which has proposed a substantial 
fiscal consolidation.
    We are keeping an eye on it. The Europeans, of course, it 
is most relevant to them and they are most exposed to those 
problems. They are very focused on trying to get them under 
control.
    The Chairman. The gentlewoman from California.
    Ms. Waters. Thank you very much. I would like to thank 
Chairman Bernanke for being here today.
    Starting with your discussion on page four, ``In addition 
to closing its special facilities, the Federal Reserve is 
normalizing its lending to commercial banks through the 
discount window,'' and you go on to talk about your new Federal 
funds rate and discussion about why you have done this, and 
encouraging banks to go to the private market for investments.
    You say further in this discussion that these adjustments 
are not expected to lead to higher financial conditions for 
households and businesses. The last thing I heard before I came 
here this morning was a prediction by some of the analysts on 
television that in about one month, we can expect there will be 
an increase in interest rates on mortgages and home loans.
    Everybody that I talked to really believes that this change 
that you have made in the Federal funds rate is what is going 
to trigger that. Is that true? Did you give any thought to 
this? How can you guarantee that it will not?
    Mr. Bernanke. Congresswoman, it is not the Federal funds 
rate, it was the discount rate, the rate at which we lend on a 
special overnight basis to banks, we cut that very low because 
of the financial crisis.
    We wanted to make sure that banks had access to lots of 
liquidity in case there was a run on the banks. Now that there 
is easy access to private markets, they do not need that kind 
of help any more, so we have just slightly reduced the subsidy 
we are giving to banks.
    It has nothing to do with the Federal funds rate or the 
overall stance of monetary policy. It has to do with 
normalizing our extraordinary support for the banks and the 
financial markets.
    We do not anticipate that action having any implications--
    Ms. Waters. Let's be clear. The change that you have made, 
no matter how slight it is, at the discount rate, will increase 
the amount they have to pay for their loans, the banks; is that 
right?
    Mr. Bernanke. It is a very small amount in terms of the 
amount they borrow.
    Ms. Waters. I understand that. What I am trying to 
understand is, is there a connection between the increase in 
the amount of money they have to pay and household interest 
rates?
    Mr. Bernanke. I do not think there is any material--
    Ms. Waters. Can you assure us that will not happen?
    Mr. Bernanke. I think it is extremely unlikely, and if it 
were to happen, we would look at it. I do not think there is 
any connection.
    Ms. Waters. What I am worried about is you still have a lot 
of mortgages out there, adjustable rate mortgages, with 3 
percent margins on them. If in fact this is going to trigger an 
increase, we are going to have more foreclosures because the 
interest rates are going to be higher. That is what I am 
worried about.
    The predictions are that we have not seen the end to these 
foreclosures, that with the loans that were extended, people 
are going to be more at risk. I do not want to see the interest 
rate increase on these adjustable rate mortgages.
    Mr. Bernanke. There is no linkage between adjustable rate 
mortgages and the discount rate. It is linked to the Federal 
funds rate, which we have said we anticipate will be at an 
unusually low level for an extended period.
    Ms. Waters. I want to be clear for this committee that the 
actions you have taken have no connection to the possibility of 
an increase in the household interest rates, we do not have to 
worry about that; is that right?
    Mr. Bernanke. The reason we took the action was again to 
reduce the subsidy that we are giving to a small number of 
banks--
    Ms. Waters. When you reduce the subsidy, that means they 
have to pay more money; is that right?
    Mr. Bernanke. I do not think there will be any effect on 
consumers.
    Ms. Waters. I beg your pardon?
    Mr. Bernanke. I do not expect any effect whatsoever on 
consumers.
    Ms. Waters. You do not expect them to pass on that cost to 
the consumers?
    Mr. Bernanke. No, because it is very small, and I do not 
think it will affect it.
    Ms. Waters. Let me just ask, you talked about the 10 
percent unemployment rate. That does not really reflect what is 
happening in poor rural communities and African-American 
communities and in Latino communities where the unemployment 
rates are up as high as 16.9 percent in African-American 
communities and even higher in some of these poor rural 
communities.
    When you describe this jobless recovery, I think it would 
be important to talk about these communities that are not 
represented by the 10 percent description that you give.
    What do you have to say about that and is there anything 
you can recommend that we could do to deal with this problem?
    Mr. Bernanke. You are absolutely right that minority 
communities in particular have much higher unemployment rates 
than the overall average, and that is a terrible problem.
    Monetary policy cannot really do much about those 
distinctions. I think those are issues that Congress needs to 
address if you are inclined to do so.
    I can only agree with you that it has not only short-term 
implications in terms of family income and so on, as I talked 
about in my testimony, it has long-term implications for 
skills, for workforce attachment, for wages and employability.
    It is a very long-term problem. I can only agree with you 
100 percent that it needs to be addressed.
    The Chairman. The gentlewoman from West Virginia.
    Mrs. Capito. Thank you, Mr. Chairman. Welcome, Mr. 
Chairman, back to our committee, and congratulations on your 
reappointment.
    The Chairman. Will the gentlewoman suspend for a minute?
    Mrs. Capito. Yes, I will.
    The Chairman. Someone has his or her microphone on and we 
are getting these rumbling noises. Would members please make 
sure to shut their mikes off unless they are speaking? 
Sometimes, they pick up these noises. Thank you.
    The gentlewoman has 5 minutes, she can start from scratch.
    Mrs. Capito. Thank you. On page three of your testimony, 
you talk about contrasting larger lending institutions with 
smaller lending institutions, and you say bank lending 
continues to contract, reflecting both tightened lending 
standards and weak demand for credit and uncertain economic 
prospects.
    My question is that I have heard from our community bankers 
that they have the capital to lend but they are getting 
conflicting messages from regulators.
    How can we ensure prudent lending and capital levels while 
working with these institutions but to expand on the question, 
too, they have the capital to lend, but creditworthy customers 
are not the ones coming in the door looking for expansion of 
their business because they lack confidence in where the 
economy is now, where we will be a year from now.
    That is my first question. Thank you.
    Mr. Bernanke. Well, there are two separate issues there. 
It's true that because the economy is weak that some borrowers 
are not in the market for credit and that's one of the reasons 
why bank lending is down.
    The other issue, though, which I think you began with is 
that in situations where there is a creditworthy borrower who 
would like credit, we want to make sure that they get credit 
and we have been very focused on that issue.
    Mrs. Capito. But haven't had the results that--
    Mr. Bernanke. Well, we have been working on it very hard. 
We have, for example, increased substantially our information-
gathering so that we can make an assessment of how many loans 
are turned down, what is the rate of loss on small loans versus 
large loans.
    We added questions to the National Federation of 
Independent Businesses Survey asking small firms about their 
experience with borrowing and so on. So we are trying very 
hard.
    We have also our reserve banks around the country currently 
having a series of summit meetings with community leaders, 
development organizations, small business lenders, and small 
companies to try to figure out what the problems are. So we are 
actively going out and learning about the situation the best we 
can.
    It's very difficult because there will be some cases where 
tighter standards are justified because of the weakness of the 
economy and the weakness of the borrower's condition. We just 
want to make sure that when there is a creditworthy borrower 
that they can obtain credit.
    Mrs. Capito. Well, thank you for addressing that. I think 
it's extremely important in the smaller communities, more rural 
communities and States of that nature.
    My second question is a completely different question. We 
have lost four million jobs and--but over the longer span of 
time we have picked up four million jobs, government jobs, and 
when I went on the recovery.gov Web site to see where jobs were 
created or retained according to that site, in my 2nd 
Congressional District the largest zip code was the State 
capitol, implying and reasonably so, that these were State jobs 
that are being retained or created.
    My question is in a larger sense what do you--how do you 
feel this will impact our economy if this trend continues, and 
for me it's a source of concern because it seems like our 
private sector manufacturing jobs, as they move down, our 
government jobs obviously to me that says it's more government, 
more government spending, more government obligations.
    Mr. Bernanke. Well, actually, we have lost somewhere in the 
vicinity of seven to eight million jobs on net, including 
government jobs, since the beginning of the recession. So 
obviously the total employment is very significantly down.
    Some of those government jobs are bureaucrats. You're 
thinking of those kinds of jobs, but two of the industries that 
have actually added jobs during the recession are health and 
education and many teachers are technically government 
employees. So some of that may be showing up from those 
particular areas which are growing very quickly.
    But certainly, as a general proposition, we want the 
private sector to be healthy and to be supporting the overall 
economy and we don't want to create too much overhead of 
government jobs that are not productive in some direct sense.
    Mrs. Capito. Thank you.
    The Chairman. The gentlewoman from New York, the Chair of 
the Joint Economic Committee.
    Mrs. Maloney. Thank you. Thank you so much, Mr. Chairman. 
Thank you very much, Mr. Chairman, and congratulations on your 
renomination, and I believe we have been very fortunate to have 
at the helm during this financial crisis a scholar, a professor 
who has dedicated his life work primarily to studying the Great 
Depression, writing about it, and I believe the Fed came 
forward with many creative unconventional responses to help us 
move out of this crisis.
    I also want to thank you for your leadership on many 
consumer issues that are important to this committee and to 
this Congress. The CARD Act, the Credit Cardholders' Rule that 
helps consumers, will put billions back into consumers' hands 
and the rule that came from the Fed was incredibly helpful in 
putting a clear logic forward and helping us win passage in 
this House, also the rule on overdraft is very welcomed and 
very important to consumers.
    In the Credit Card Bill of Rights, one of the items that 
will be enacted in August 22nd is the Federal Reserve's 
reaction and analysis about charges that may be too onerous and 
how you would make them fair, and could you comment on what 
your work is in that area, when you intend to have that ready 
for us to see, and how you intend to approach this challenge?
    Mr. Bernanke. We anticipate having those rules out very 
shortly, in a few weeks, and you will be able to give us your 
views on them at that time.
    We wanted to be sure to get them out in time so that the 
law would go into effect as Congress dictated and so there will 
be no delay in the implementation of these rules, even though 
they have been a couple of weeks later than we expected in 
getting them out.
    So we are working to have a comprehensive set of rules that 
will give a set of criteria, in particular if someone's 
interest rate has been raised for some reason because they're 
perceived as being a greater risk and 6 months later the 
condition has been corrected, we are looking at the rules under 
which the interest rate ought to be returned to the normal or 
the previous level. That's one of the issues that we're 
considering.
    But we anticipate having those out very shortly and we 
don't expect any delay in the implementation.
    Mrs. Maloney. As we dig our way out of this recession and 
we are definitely trending in the right direction, the month 
that President Obama took office, the last month that the 
former President was in the office, we lost well over 770,000 
jobs. This past month, under President Obama, we lost 18,000 
jobs. We're definitely trending in the right direction.
    The Fed is now looking at ways to really move back to a 
normal economy and some people--one article I was reading last 
night felt that you should invest more in Treasury notes as 
opposed to other actions that you're taking.
    Could you comment on the steps you're taking to really move 
our financial institutions and our total economy into the 
proper functioning expanding economically and other ways to 
help the people of America?
    Mr. Bernanke. Yes. We have two broad sets of policies, 
roughly speaking. One was a set of special facilities, lending 
facilities that were intended to stabilize our financial system 
which obviously was extremely disrupted by the crisis. Those 
facilities have been quite successful. They have helped 
stabilize the money market mutual funds, commercial paper 
market, the repo market, many other important financial 
markets.
    With the improvement and stabilization of those markets, we 
have been shutting those down. So many of them were shut down 
on February 1st and this was a question Congresswoman Waters 
asked about the discount rate and so on. So we believe that, as 
those financial markets are normalizing, we can begin to reduce 
that source of support.
    The other approach, the other policy, set of policies we 
have is monetary policies intended to support the recovery 
which includes the low interest rates and the purchases of 
mortgage-backed securities and treasuries. Those remain at a 
very accommodative level.
    It is true that we will stop buying new mortgage-backed 
securities at the end of this quarter, but we will continue to 
hold one and a quarter trillion dollars of agency mortgage-
backed securities and that taking that off the market itself 
will keep mortgage rates below what they otherwise would be.
    So we believe that there will still be stimulus coming from 
our holdings of those securities as well as our low interest 
rates. So we think the economy as opposed to the money markets, 
for example, still requires support for recovery.
    Mrs. Maloney. Well, we are trending in the right direction. 
My time is up.
    Thank you for your public service.
    Mr. Bernanke. Thank you.
    The Chairman. The gentleman from California, Mr. McCarthy.
    Mr. McCarthy of California. Thank you, Mr. Chairman. Mr. 
Chairman, I believe across this country, everywhere you go, 
jobs is Number 1. You have referred to that and also to the 
deficit.
    I want to follow up on both those topics, but I want to go 
back to what my colleague from West Virginia was talking about, 
four million more jobs in government than in manufacturing. You 
talked about that, but you cannot sustain that if the taxpayers 
are paying for that and the lack of manufacturing, how you 
would be able to grow.
    You talked in your testimony here of unemployment being at 
10 percent. In my State, it is higher. In my congressional 
district, it's higher. Throughout the Central Valley in 
California, there are some places at 40 percent unemployment.
    But even a stronger telling in there, you said 40 percent 
of the unemployed have been out of work 6 months or more, 
nearly double from a year ago. Now you did say these government 
jobs, there are some bureaucrats, but there's--the growth was 
in education and in healthcare, but there has to be some 
commonsense because if you go down the road here, the Federal 
Government, there are more than 100,000 people who work there 
who make more than $100,000. The money is probably better used 
inside the classroom.
    But I'm trying to find where there are some ways that we 
can create jobs quickly with low cost, rolling back regulation, 
but you said in your testimony here, you talked about the 
international, that the international was recovering--if I 
state it right within there, you say, ``International trade 
supported by the recovery in the economies of many of our 
trading partners is rebounding from its deep contraction of a 
year ago.''
    Now there are three trade agreements that are sitting here, 
Panama, Colombia, and South Korea. The President has said that 
if you increase U.S. exports by 1 percent, it would create over 
250,000 jobs and hence change the jobs we are creating from 
government to others.
    Do you agree that 1 percent, and they say with these three 
trade agreements it would give you that 1 percent, would it 
create 250,000 new jobs?
    Mr. Bernanke. I don't know that number. I would have to 
look at that number, but certainly opening up trade creates 
opportunities for us to export and that ought to create jobs. 
I'm quite sure it would.
    Mr. McCarthy of California. And it would not cost anything 
more but it would create jobs that weren't government-related?
    Mr. Bernanke. It ought to improve the division of labor 
between our different countries. Each country can be more 
productive, should raise our standard of living, and I expect 
would create jobs, as well.
    Mr. McCarthy of California. If I could just touch base on 
what our ranking member talked about earlier because we have 
had many discussions with you and your past profession, the 
study of former countries and some of their downfalls.
    The national debt and the budget deficit, you have told us 
time and time again that you cannot sustain a budget deficit 
over 2\1/2\ to 3 percent of GDP, and you stated that earlier 
and I wrote down a few words that you refreshed. You said if we 
were able to get a fiscal exit from this, it would actually 
help the current recovery, is that correct?
    Mr. Bernanke. Yes.
    Mr. McCarthy of California. Looking at the current budget 
that is proposed, does that reflect the commitment of changing 
the growth curve of our budget deficit or our national debt?
    Mr. Bernanke. Well, as I said earlier, the projections of 4 
to 7 percent deficits from 2013 to 2020 and increasing after 
that, I think everyone would agree, including the President, 
that is not sustainable and that we need to address those 
numbers and get them down in the out-years.
    Mr. McCarthy of California. I heard you say that, and I'm 
trying to say here as a Member of Congress looking at a budget 
today, hearing your words that you have told us time and time 
again and every economist says it, that you cannot sustain 
this, watching our national debt of GDP go up almost to the 
highest level outside of World War II, especially at the end of 
this decade to be 77 percent.
    What do we do today? Your quote earlier said, ``would help 
the current recovery if we were able to sustain that.'' So 
looking at the current budget, does it give us the change 
needed in any shape or form?
    Mr. Bernanke. Well, it's not sufficient to look at this 
year's budget, if that's what you mean. I mean, you have to 
look at the next 10 years and--
    Mr. McCarthy of California. Yes. But we're sitting in a 
place where we vote where we look today. We all see 10 years 
and where it's going. We all realize that this is putting us in 
a place that gives us great hardship. So our actions have to be 
now and your comment says it helps the current recovery if we 
take action, as well.
    So the current budget that I see does not give us that, and 
I'm asking you, do you see it as helping us in this fiscal 
crisis or does it expand the deficit further?
    Mr. Bernanke. I think it would be helpful for the current 
situation if the Congress and the Administration could provide 
a plan which shows how the deficit will fall to this 2\1/2\ and 
3 percent level, at least, over the next 10 years. I don't know 
exactly which programs, what taxes, what changes you would 
make, that's certainly up to Congress, but even a strong effort 
would be probably good for confidence.
    Mr. McCarthy of California. It would be good for the future 
but even be good for the recovery. I'm not asking you to pick 
departments.
    Mr. Bernanke. It would increase confidence, lower expected 
tax rates, and lower real interest rates.
    The Chairman. The gentleman's time has expired.
    Mr. McCarthy of California. I thank you, Mr. Chairman.
    The Chairman. And we're trying to be fairly strict on the 
time because we have a vote coming up and I understand that 
Chairman Bernanke needs to be--we have assured him that he'll 
be out by 2 o'clock.
    So the gentleman from Illinois is recognized.
    Mr. Manzullo. Thank you. Congratulations on your re-
election, Mr. Chairman. You got reappointed, but you had to get 
elected, just like we do. It was a vote count.
    Chairman Bernanke, the FDIC reported yesterday that bank 
lending in 2009 fell by 7.5 percent or $587 billion, $587 
billion, and the Wall Street Journal, its headline today said 
it was epic, the decline. There's a chart behind.
    Why is bank lending falling so dramatically? It has fallen, 
I believe, because we're forced to hold greater capital 
reserves, given the rising default rates on commercial real 
estate.
    Up on the committee room TV now is a chart from the most 
recent Congressional Oversight Panel report which shows the 
value of delinquencies on CRE loans has increased 700 percent 
since the first quarter of 2007. You'll notice from the chart 
behind you, Mr. Chairman, that if the trend continues, the rate 
of CRE loans will soon be literally off that chart.
    The dramatic increase in delinquencies to me is really 
approaching a tsunami, threatening our local communities and 
banking system. It's estimated to peak between 2011-2012 with 
over $300 billion in CRE debt expected to mature each year. As 
you know, the CRE market is huge. It's $3.5 trillion of the 
total debt. It's about $1.7 trillion held by banks and thrifts. 
Much of this debt is held by community banks across the country 
that have survived the first part of the tsunami, the mortgage 
default crisis, but now are being threatened by this one.
    The FDIC yesterday informed us that they're adding 450 
banks to the Troubled Bank List, more than doubling the number 
from the start of 2009. Many are small lending institutions 
that have invested in their communities for decades.
    Chairman Bernanke, I just held a hearing January 21st on 
the epidemic of bank failures focusing on the failure and 
seizure of a great Chicago community institution, Park National 
Bank. I would rather not have more hearings in the coming year 
on the autopsies of what have been rather good banks.
    I want to focus on how we can help these good banks and how 
we're getting back to lending. So how much do you think of the 
coming tsunami of these loans, $1.7 trillion held by our local 
banks, loan defaults are going to harm our communities and 
local banks, and what have you done about it and what future 
plans do you intend to make about it?
    Mr. Bernanke. Well, it is a serious problem and as I 
mentioned earlier, the commercial real estate losses, loan 
problems are probably the biggest threat at this point to our 
smaller and regional banks and, as you point out, if those 
banks have their capital depleted or if they go out of 
business, that's going to affect the supply of credit and so 
that affects our economy, as well. So that's a very important 
problem.
    I think, from the Federal Reserve's point of view, there 
are basically two kinds of things we can do. First of all, we 
can support the economy and as the economy strengthens, that 
makes people go shopping in shopping malls or willing to--new 
employment fills up office buildings and so on and that helps 
solve that problem and so obviously we're trying to support the 
recovery.
    The other thing we can do is to try to work directly in the 
market for CRE and we have done some things along those lines. 
We have had this program called the TALF which has been 
successful in getting the interest rates on commercial 
mortgage-backed securities down somewhat, reduced those 
spreads.
    We have issued guidance on commercial real estate loans 
where we are trying to work with banks so that they can 
restructure troubled loans so they can continue to be 
performing, perhaps at a reduced level, but continue to be 
providing income. So we're looking for those kinds of 
solutions.
    Those supervisory approaches and monetary policy 
approaches, those are our two main tools.
    Mr. Manzullo. Your program that you mentioned is going to 
end in June. Are you going to renew the program?
    Mr. Bernanke. In June. Well, we will be evaluating the 
situation. There is progress being made in those markets. As I 
said, the spreads have come down quite a bit and some deals are 
being done outside of the Federal Reserve's program.
    Mr. Manzullo. I appreciate all that you're doing with the 
regulators, but, you know, the Park National Bank that we 
referred to really lost its shirt with Fannie and Freddie. The 
Federal Reserve and everybody said buy it, we're going to give 
you extra credit if you do it, and they did and now they're out 
of business because they followed the recommendations of many 
of our government financial regulatory institutions.
    So I really think that we shouldn't underestimate the 
coming tsunami of this debt in commercial real estate. I hope 
that the actions that we take are going to fill those office 
buildings, but I would like to have more discussion with you 
about other steps that I think we take, other than hoping that 
what we're doing is going to fill those office buildings.
    Mr. Bernanke. We're following it very closely.
    Mr. Manzullo. Thank you.
    The Chairman. The gentleman's time has expired. The 
gentleman from Delaware, Mr. Castle, is recognized.
    Mr. Castle. Thank you, Mr. Chairman. Chairman Bernanke, 
like many others here, probably all of us, I'm very concerned 
about the job situation in the United States and we can argue 
politically whether the Stimulus Program has worked well or 
not.
    Mr. Zandi, an economist, yesterday indicated that the jobs 
that were created were probably to some degree temporary in 
that we funded governments so they could keep on employees for 
a period of time and various capital projects that will expire 
at some point or another. So we still have a continuing 
problem, and I have had a couple of job fairs in my State and I 
have been surprised both at the number of people who have come 
out for that and the backgrounds of some of these people. It's 
not the usual unemployed, it's people with college degrees, 
even graduate degrees, who are unemployed at this point.
    I see that the lending by banking institutions has fallen 
by some 7.5 percent in 2009, and my question to you is, is 
there anything that you as the head of the Fed or the Fed 
itself or us as Members of Congress could be doing to help with 
the employment circumstance?
    My further question is what is happening in this whole bank 
lending? I mean, we have put a lot of--we, being both the TARP 
Program and the Federal Reserve, have put a lot of money into 
banking institutions, primarily larger banking institutions, 
and the theory was that they're the ones who are going to lend 
to the other commercial banks who would then lend to the 
business people on main streets throughout America and that 
somehow seems to have not connected.
    The lending is down for a lot of the reasons you're talking 
about, the commercial real estate issues and various aspects 
like that which I understand, but what is it that we could do 
to make sure that the lending does pick up so that jobs can be 
created and, perhaps as an economist beyond even the Federal 
Reserve, what else should we be doing differently or 
considering doing in terms of helping with employment, by we 
meaning Congress and the Federal Reserve?
    Mr. Bernanke. Just to comment quickly on the TARP money, 
there were two objectives of the TARP money. One was to 
stabilize the banks and the second was to give them capital on 
which to base their lending. Unfortunately, the politics was 
very bad, as you know, and the public and the Congress have 
stigmatized that money and the banks therefore have done the 
best they can to pay it back as quickly as possible and so 
basically all the big banks have paid back their TARP money now 
and so it's no longer available to provide support for credit. 
So that's unfortunate.
    Another thing I would just like to mention is that 
ironically, one of the reasons that we lost so many jobs is 
that American firms were incredibly efficient in reducing their 
costs in the depths of the crisis. Many other countries were 
not as effective at cutting costs and what we found here is 
that we have had enormous increases of productivity, which 
bodes well for the long-run, but obviously in the short-run, 
means that there have been more job losses than otherwise would 
have been the case.
    It's partly for that reason that it's hard to judge how 
quickly jobs are going to come back. It may be that firms have 
already cut to the bone and they cannot get any further 
reductions in their costs and as growth comes back, as we're 
seeing, they'll be forced to bring back workers more quickly 
than we now anticipate. So that's something to be looking for.
    From the Fed's point of view, I have already mentioned that 
our jobs program consists of support of monetary policy and our 
supervisory policies to try to get credit flowing. From 
Congress' point of view, there are a range of possible fiscal 
actions. Again, I hesitate to try to recommend specific ones, 
but I'm sure you know the menu of things that you could do 
which could create jobs.
    But, you know, unfortunately, there's no silver bullet 
here.
    Mr. Castle. Well, I realize there's no silver bullet. I 
just would hope that the Fed would continue to monitor very 
carefully the banking institutions--
    Mr. Bernanke. Of course.
    Mr. Castle. --and what they're doing with the money they 
get and either return of capital on the repayment of loans or 
the issuance of lending out to other banks.
    Let me ask a different question. Have Fannie Mae and 
Freddie Mac served their purpose? They are very expensive to 
this government at this point and the business of packaging 
mortgages and being able to sell them off could be done perhaps 
differently than that and, you know, this goes back--maybe this 
is a question I should have asked 10 years ago, I suppose.
    But the bottom line is that should we be looking at some 
different way of dealing with the financing of mortgage 
structures in this country or do you still believe that they 
serve that basic purpose and we should leave them intact, even 
if they have the problems they seem to have?
    Mr. Bernanke. The Federal Reserve, I think, was one of the 
more vocal commenters on Fannie and Freddie for many years and 
we were very concerned about their stability and whether they 
had enough capital to support those large portfolios they had 
and it turned out they didn't and we're paying the cost of that 
right now.
    I think we would be very cautious about supporting a return 
to the existing structure where you have this potential 
conflict between private shareholders and the public 
objectives.
    I think there are alternatives and I provided some of them 
in a speech I gave a year-and-a-half ago and would be happy to 
provide you, which would be a more stable long-term solution, 
including either a privatization approach with government 
guarantees or a public utility approach. Those are two options 
that you could consider.
    The Chairman. Time has expired. We were going to have a 
hearing on March 2nd on that very subject. I had to postpone it 
because there was a major hearing on the fishing industry in my 
district and I had to fish or cut bait, so I'm going fishing, 
but also it turned out we had originally thought that would be 
a day in which there had been votes the day before. It is a day 
in which there are not votes until that evening and members 
expressed a lot of interest in it.
    We will, on the next available hearing day, have a full 
hearing on exactly that topic and so, Mr. Chairman, we will be 
looking for an elaboration of those views, but we had the 
hearing set for March 2nd on precisely the topic the gentleman 
asked, not just Fannie and Freddie Mac but its interaction with 
the FHA and Ginnie Mae and the Federal Home Loan Bank and all 
of the various strains of housing financing. So we'll get the 
rest of that answer within 10 days at the latest.
    The gentlewoman from New York, the Chair of the Small 
Business Committee, who will be co-presiding on Friday on a 
hearing on this recurring important topic of how do we get 
loans flowing to small businesses which she's been focused on, 
the gentlewoman from New York.
    Ms. Velazquez. Thank you, Mr. Chairman. Chairman Bernanke, 
you know, you quite well said that economic recovery is tied to 
jobs creation and we all know that job creators in our country 
are small businesses, and if you talk to any member in this 
panel sitting here, they will tell you that each one of us know 
some creditworthy borrowers who can't access lending and and we 
know that we have put together all these tools to incentivize 
lending and we see today's Wall Street Journal with that title 
about lending, the sharpest decline since 1942.
    And I know that your answer to me is going to be, well, 
that is not under my purview, but if we have tried all these 
tools and are not producing the success in terms of easing or 
getting credit flowing again for small businesses, even the 
loan guaranty by SBA, we have seen 50,000 less loans this year 
compared to last year and we increased the loan guaranty from 
75 to 90, we reduced the fees paid by borrowers and lenders.
    So my question to you is, do you think that there is a 
time, given this economic crisis, for the Federal Government to 
play a more aggressive role in direct lending in a temporary 
basis?
    Mr. Bernanke. First, let me just say that this is a Federal 
Reserve concern because we are bank regulators and I won't go 
through the list again, but we are trying to get more 
information to try to make sure that the creditworthy borrowers 
are able to get credit and we consider it very important.
    Indeed, one of the reasons that we value our bank 
supervisory role is because it provides us with that 
information and gives us that ability to understand what's 
happening in that very important market.
    In terms of policy, I think there are a number of things 
that can be done. You mentioned the SBA. There's a proposal to 
provide capital to small banks that make small business loans.
    Ms. Velazquez. That would be TARP money that has been 
stigmatized by Congress and by the people in this country. So 
if it didn't work before, for example, when the secondary 
market was--we tried to unlock the secondary market by creating 
under Treasury small business lending facility and it didn't 
work, they didn't make one loan, if it didn't work then, why do 
you think it's going to work now?
    Mr. Bernanke. You may be right. But I do know that the 
proposal is to try to put some distance between the TARP 
Program and this alternative program, but whether that works or 
not, I don't know.
    But there certainly are some things that you could look at 
and we will continue to look at it from the perspective of 
supervision.
    Ms. Velazquez. Okay. Mr. Chairman, you mentioned your 
concern about real estate losses, and my question to you is if 
your--the Central Bank is currently in the process of winding 
down the TALF Facility and without the TALF, what will the Fed 
do in the event that instability returns in the CRE or small 
business markets?
    Mr. Bernanke. Well, the purpose of the TALF was not really 
to solve the whole CRE problem. Its purpose was to try to get 
the commercial mortgage-backed securities market going again.
    I guess it's a little bit of an overstatement to say that 
it's going again, but we are getting some deals there and the 
spreads have come in and so that issue has been somewhat 
reduced in terms of the concern.
    I think the real concern at this point is that the 
fundamentals for hotels and office buildings and malls and so 
on are quite weak and that's why the loans are going bad and 
really the only solution there is, first, to strengthen the 
economy overall and, second, to help banks deal with those 
problems, work them out.
    Ms. Velazquez. Mr. Chairman, today it has been reported 
that 25 percent of all mortgage borrowers were underwater, 11 
million families in this country.
    What is the Fed doing to encourage stability in the housing 
sector that is so tied to economic recovery in the long term?
    Mr. Bernanke. Well, this is a little bit out of our 
ballpark, but we did work with Congress and the Treasury in 
developing the HOPE for Homeowners Program, for example, which 
has really not met expectations at this point. The structure of 
that program was to give principal reductions, principal 
forgiveness. So the main program right now, the HHM Program, is 
about affordability as opposed to principal reductions.
    So right now, there's not a major program. I think the 
Treasury's Mortgage Program is considering some pilot programs 
that would include principal reductions.
    The Chairman. Mr. Chairman, I'm going to have to--because 
you didn't have a lot of time, we would like the rest of that 
answer in writing. That's a topic to which we will be 
returning--
    Mr. Bernanke. Okay.
    The Chairman. --and if you want to elaborate in writing on 
that, we will ask you to do that.
    Mr. Bernanke. All right.
    The Chairman. The gentleman from California, Mr. Royce, is 
now recognized.
    Mr. Royce. Thank you, Mr. Chairman, and, Mr. Bernanke, I 
watched and listened with interest to the opening statements 
here and let me explain one thing.
    Since January of 2007, since every spending bill originates 
in the House, since January of 2007, we have had Democratic 
majorities in the House and in the Senate and I was a critic, 
as you might recall, of Republican spending in 2005 and in 
2006, but since 2007, it has been explosive and because every 
spending bill originates in the House, I think there is some 
confusion on the part of the public in terms of where the 
spending comes from, how it originates.
    To me, when I first reviewed the Administration proposal, 
something that struck me was the fact that at no point anywhere 
in the future does the Administration expect our Nation to have 
a balanced budget. As we look forward on this graph, at no 
point, according to its own numbers and presuming an economic 
recovery, do they expect this to change.
    As a matter of fact, the deficits are expected to spike 
dramatically in 2020. It goes up dramatically in this budget, 
and I think the failure to operate within our means is plunging 
our Nation deeper and deeper into debt, something which you see 
when we talk about the interest expense quadrupling to $840 
billion by 2020. It's going to be the fourth largest budget 
item.
    So as you said, Chairman Bernanke, budget deficits, when 
you're speaking about of this magnitude, as far as the eye can 
see are simply unsustainable. I think that eventually it occurs 
to those of us who have been a part of this process that the 
window to address this problem before it spirals out of control 
is closing very quickly.
    I'm afraid there is a lack of urgency here and here's what 
I wanted to ask you. First, would you agree that this plan put 
forward by the Administration is not sustainable and, second, 
would you concur that in the past, the Federal Reserve has 
stepped forward, has tried to give direction to Congress very 
forcefully?
    And I remember with respect to Fannie Mae and Freddie Mac, 
the warnings that came from the Fed where Congress was told you 
are risking a systemic collapse of the financial system if you 
don't do something about the overleveraging, the arbitrage 
that's going on there, the 100:1 leverage, the fact that you 
have put mandates, Congress has put mandates on these 
institutions to buy subprime and Alt-A loans. This is a 
systemic risk.
    Now Congress ignored that, but the fact that you forcefully 
did that did at least alert a lot of people who otherwise 
wouldn't have been aware of it.
    What can you do now in your capacity in order to call it--
and this is my second question--in order to call attention to 
the severity of this? I say this because Mr. Hoenig with the 
Kansas City Fed recently said that, ``the most dire of the 
three options is for the Fed simply to print more money,'' in 
this speech he gave knocking on the Fed's door. That threatens 
hyperinflation. So what can be done to really get this point 
across?
    Thank you, Chairman Bernanke.
    Mr. Bernanke. Well, first, let me say that we're not going 
to be monetizing the debt, but I think everyone understands the 
basic arithmetic here, that if deficits go on at 3, 4, and 5 
percent of GDP and that picture, if you extend it beyond 2020, 
would probably get worse because entitlement spending, aging 
society and so on, that you'll get increasing interest payments 
and it will spiral out of control and the CBO will give you the 
same results.
    Again, it's very easy for me to say this because I don't 
have to grapple with these difficult problems, but it is very, 
very important for Congress and the Administration to come to 
some kind of program, some kind of plan that will credibly show 
how the United States Government is going to bring itself back 
to a sustainable position.
    Mr. Royce. And this plan is not it, I take it?
    Mr. Bernanke. Assuming that those numbers are appropriate, 
I mean the forecasts are very difficult to make, but assuming 
they're appropriate, no, it's not.
    Mr. Royce. The CBO numbers, as you've said earlier, it just 
is not going to pencil out.
    Mr. Bernanke. That's right, and so it's a very difficult 
challenge, but it's not something that's 10 years away because 
it affects the markets today and the longer you wait, the 
harder it's going to be to change--
    Mr. Royce. Can you take the message on the road?
    The Chairman. We don't have time for another question. We 
have votes. I think we can get two more in, and I now recognize 
the gentleman from California for 5 minutes, and then there 
will be one other, and then we can go vote. The members who 
want to vote obviously can go vote now.
    The gentleman from California.
    Mr. Sherman. The gentleman from California, Mr. McCarthy, 
talks about trade agreements and I would agree with him that if 
we had genuine free trade that might produce jobs, but so far 
our trade agreements have given us malignantly-unbalanced trade 
and I don't think that helps our job situation.
    Chairman Bernanke, I'm going to lay out a few reasons that 
have been put forward why you might want an easier monetary 
policy, both short-term and long-term, and get your response.
    The first of these is that monetary easing short term can 
help stimulate the economy at zero increase to our national 
debt and in fact reduces our debt because it reduces our 
borrowing costs whereas we in Congress are considering fiscal 
stimulus which, of course, does increase the national debt.
    The second is that there is a stickiness in cutting certain 
nominal payments, particularly wages, and so if we had a modest 
3, 4, even 5 percent inflation rate, that in effect solves that 
problem or allows for the solution of that problem without 
cutting a nominal amount.
    The third is that your predecessor used to come to Congress 
and say that the CPI was overstating the inflation rate. So if 
you're targeting for 2 percent inflation rate as measured by 
the CPI, you were really targeting for a 1 percent inflation 
rate, as he thought it ought to be calculated.
    And then, finally, you have the recent IMF economist report 
saying that central bankers ought to aim for a higher inflation 
rate so that in bad times they had more monetary tools. When 
you start with low interest rate and low inflation and then you 
try to stimulate the economy, you can't go below zero.
    So the first question is, are you currently pedal to the 
metal? I see the statements coming out that talk about 
increasing the discount rate and those very statements can have 
a slight effect, more than a slight effect of reducing monetary 
easing, taking your--the accelerators--I realize a lot of talk 
about accelerators in the other room here, but easing up on the 
accelerator a bit and then your discussion here of the clear 
statement you're not going to monetize the debt also is a 
little less than absolute pedal to the metal.
    So short term, are you or should you be pedal to the metal? 
Longer term, should we be aiming for a somewhat higher 
inflation rate, given the report of the IMF?
    Mr. Bernanke. Well, we were clear that the higher discount 
rate was not intended to tighten monetary policy and, in fact, 
if you look at the market, there is no expectation. It did not 
engender any expected increase in monetary tightness. So that 
was successful in that regard.
    We do have a very stimulative monetary policy, as you know. 
We will continue to evaluate that. It's a committee decision. 
Certainly, if the recovery begins to falter, we'll have to look 
at that very seriously.
    With respect to the inflation rate, I understand the 
argument and it's not without its appeal, but it carries 
certain risks obviously. If the Federal Reserve says we're 
going to raise inflation to 4 percent, how do we know that 
later it won't go to 5 or 6 or 7 percent?
    Mr. Sherman. Well--
    Mr. Bernanke. It took a long time to get inflation down to 
2 percent.
    Mr. Sherman. Mr. Chairman, I'm going to try to squeeze in 
one more question. Obviously, if you say two, that's a slippery 
step toward four. If you say four, that's a slippery slope 
toward six.
    The second is the role of the credit unions. We're in a 
circumstance where we have taken taxpayer money and injected it 
into the capital of the banks, but as a matter of the Federal 
Government, we have prohibited--the Federal Government has 
prohibited credit unions from raising alternative capital in 
the private market, not taxpayer money.
    We are begging the banks to make loans, particularly under 
$250,000. The credit unions are beginning for the right to make 
loans of under $250,000 and not count it against their limit on 
business lending. They're telling me that they could make 
another $10 billion in small business loans, create 100,000 
jobs, at no cost to the Federal Treasury at all, and with high 
capital standards and even higher capital standards if we let 
them raise alternative capital.
    Should we be relying more on credit unions, giving them 
these tools to get us out of this recession, not that this one 
thing would get us out?
    Mr. Bernanke. Well, as you know, credit unions are tax-
favored because they have certain restrictions on their 
activities and the banks would complain obviously that if 
they're allowed to do everything banks can do, why are they 
tax-favored? So I think that's the trade-off that Congress has 
to --
    The Chairman. The gentleman's time has expired. There's 
only time for the witness. If members are going to ask 
complicated questions with 10 or 15 seconds, don't expect a lot 
of back and forth.
    Does the witness wish to complete his answer?
    Mr. Bernanke. No.
    The Chairman. It's not a mandate.
    Mr. Bernanke. This is the issue about the tax treatment of 
credit unions.
    The Chairman. The gentleman from Illinois, Mr. Manzullo, 
will be our last witness. We will break. We will come back very 
promptly. The Chairman has agreed to stay till 2 o'clock. We 
can get some more questions in.
    The gentleman from Illinois.
    Mr. Manzullo. Thank you, Mr. Chairman. Chairman Bernanke, 
the district I represent has somewhere between 1,500 and 2,000 
factories, it's highly industrialized, and the Institute for 
Supply Management is up now, above 50, for the 6th month, 7th 
month in a row.
    As I talk to my manufacturers, it's the same choke point. I 
talk to the regulators. They say that the regulatory standards 
have not been tightened. I talk to the banks. The banks say 
they can't lend because of the regulators.
    If we want to create jobs, as stated in NAM's new study 
with the Milken Institute, John Ingram, the president of NAM, 
said, ``The new report makes a powerful case that manufacturing 
can lead the U.S. into a renewed era of growth. It's critical 
that we accelerate our economic recovery and create jobs for 
the benefit of manufacturers.''
    I have manufacturers that are ready, willing, and able to 
hire employees. They have orders, substantial orders. They 
can't get capital in order to make their new product, and in 
some cases, the buyers are going overseas to buy the product.
    We have a choke point in credit. It's a super, super, super 
crisis. These are existing borrowers. They are people with 
very, very low debt to equity ratio. They are prime borrowers, 
many in the food processing industry, which has seen an uptick 
in this economy, begging for credit, and they come to me and 
ask, why has the government created more and more programs out 
there when all we need is a simple operating loan or equipment 
loan as we had before?
    What is the answer? What can I tell them, besides we have 
been invited to come out to our district and talk to them 
personally and individually and perhaps help the banks out?
    Mr. Bernanke. Well, part of the issue here is, of course, 
there is more than one regulator and next time, please ask who 
the regulator is. If it's the Federal Reserve, I would like to 
hear from you and I'll be happy to talk to you about it.
    We at the Federal Reserve understand that, and we should 
all understand, we don't want banks to make bad loans. If a 
borrower is not financially able to manage the loan, we don't 
want to make that loan, but you're talking about situations 
where you say the borrower is creditworthy. In that situation, 
we want the bank to make the loan.
    I have answered a number of questions about steps we have 
taken to gather more information, to have meetings and to train 
our examiners to focus on this exact point. So we are very, 
very focused on trying to keep that in balance.
    Mr. Manzullo. I know you are, Mr. Chairman. The problem is 
that it's simply not getting through and it's not your fault, 
and I don't think it's the fault of the regulators there either 
because everybody is skittish because of the economy, but the 
problem is we're at the beginning of a real recovery, not make-
up jobs for the dumb Stimulus Bill, not creating government 
jobs, but the creation of real jobs of people in manufacturing 
going back to work and exporting and many of these are highly-
paid union jobs. They just can't get the money and they're 
creditworthy.
    It doesn't make sense for us to have all this debt, all 
these programs, people ready to go, they're creditworthy, but 
they can't get the money in order to make the product to create 
the jobs.
    Mr. Bernanke. I would be happy to hear more details and try 
to figure out what's going on because we are working very hard 
to make sure that's not the case in banks that we supervise.
    Mr. Manzullo. Is it possible, Mr. Chairman, that you could 
meet personally with some of these people?
    Mr. Bernanke. Certainly.
    Mr. Manzullo. I'll take you up on that. Thank you, sir.
    The Chairman. The committee will be in recess. I intend to 
come back as soon as I can. It's the third vote. It shouldn't 
be too long. Any member who wants to ask questions, if they're 
here, we'll call on them.
    [recess]
    The Chairman. The committee will reconvene, and the 
gentleman from New York, Mr. Meeks, will be the next 
questioner. And the committee will be in order. Someone please 
shut the door. The gentleman from New York.
    Mr. Meeks. Thank you, Mr. Chairman. It is good to see you, 
Chairman Bernanke, and congratulations on your reappointment, 
and thank you for your service.
    My question--and I'm trying to focus more around real 
estate and the housing industry, I know some of which you deal 
with and some of which you do not based upon some of the 
questions, but it is to me--most Americans, it is their largest 
investment that they will ever make--is in their home.
    And in listening to some of your testimony earlier, and I 
know that by, I guess, March 31st, you are scheduled to end the 
Fed's program to buy more mortgage-backed securities from 
Fannie Mae and Freddie Mac-backed debt, and I guess there is 
pressure to tighten up. And the last time the tightening took 
place, I think it was about 33 months ago, after the recession 
began and foreclosure rates were 4 times lower than they 
currently are. And there are signs, from what you are saying 
now, of growth.
    But my first question is, is it a little premature to 
consider tightening today because--will that kill the incipient 
housing recovery by tightening today and then hurting the 
housing market?
    Mr. Bernanke. We will still continue to hold $1.25 trillion 
of mortgage-backed securities, plus additional agency debt, and 
we think that is going to continue to keep mortgage rates down. 
There are a lot of differences of view about how much mortgage 
rates might go up after the end of this program. So far, we 
haven't seen much, so I think we need to look and see if there 
is a big reaction, if it does affect the housing market. It may 
not be a significant reaction, so we are going to continue to 
watch that.
    Mr. Meeks. We have seen that, for example, also--and I 
think especially in California, to a degree in New York also, 
and other places--I have talked quite frankly to some friends 
of mine.
    But in California where they have no recourse laws, we find 
that where banks are unwilling to write down the principal--and 
I know you talked about the HOPE program and writing down, but 
it seems now banks are not willing to write down principal. A 
lot of it was simply walking away. And then that is causing a 
difficulty on the banks and especially the small and community 
banks, and thus we heard about banks that may be closing as a 
result, especially the smaller community banks.
    So I was wondering if there are any steps that the 
government, the Federal Government, can take or the Fed can 
take to help banks--or to encourage banks, I should say, to 
write down principal on homes that are now underwater, which is 
to me one of the biggest drags on the economy overall also.
    Mr. Bernanke. We found in our research that the combination 
of being underwater and then having loss of income due to loss 
of a job and so on--those two things are very high predictors 
of default. So right now, the main programs for mortgage 
restructuring are the Treasury's programs under the TARP, the 
so-called HAMP program, which is an affordability program. My 
understanding is that they are going to be looking at 
alternative pilot programs that will take different approaches. 
And of course we also have the HOPE for Homeowners, which has 
the principal write-down element.
    So I think this is really an area for Congress, but clearly 
there is a lot of interest in the Administration and Congress 
to reduce the number of foreclosures, which remains very, very 
high.
    Mr. Meeks. Yes, because what is happening is a lot of 
individuals that I know, homeowners in my district who are 
struggling to pay their mortgage, they are actually paying it, 
but they are underwater. And then they go back to the banks to 
have it refinanced and try--but then they are so far 
underwater, nobody will give them a loan, so now they are 
nervous and some of them have interest rates that can reset 
high and they won't be able to afford them.
    And then we get back in--just as you talk about moving in 
the right direction, then we get back into a foreclosure 
problem where more and more people are going into foreclosure. 
And I think that if we could do something earlier on to prevent 
that, that would be, I think, a smarter way to go.
    Mr. Bernanke. Well last year, in part because of our 
program of buying MBS and bringing mortgage rates down, there 
were millions and millions of refinances, which got people into 
better shape. And I believe that Fannie and Freddie will 
refinance some people who are underwater if they meet other 
criteria.
    The Chairman. The gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman, and thank you for 
being here, Chairman Bernanke.
    You have heard it several times today, but small businesses 
can't get credit, and obviously they need it. And I understand 
you are not the only regulator, but one of the issues which I 
would appreciate your view on is that the community banks are 
being asked to reassess commercial real estate loans, devalue 
then because of FASB's mark-to-market accounting rules, and 
subsequently can't get the credit. Even though these are 
performing loans; they are not in any problem.
    But the result is that commercial loans are being called 
in, lines of credit are being cut off, and creditworthy small 
businesses can't get credit. Do we need to reassess, expand, 
and--or do something with FASB's accounting rules again? 
Regulators' implemented implementation doesn't seem to make 
much sense.
    Mr. Bernanke. Congresswoman, we and the other regulators 
just recently issued a guidance for banks on commercial real 
estate which explains how to restructure a loan which is in 
trouble, makes the point that a loan which is paying, but has a 
reduced collateral value should not be considered impaired 
under most circumstances. And it has been well regarded because 
the guidance provided a number of concrete examples about how 
to deal with troubled loans. So we have made a very concerted 
effort, I think a well-regarded effort, to help banks deal with 
the CRE problems.
    Now if the loans are bad, then clearly there is going to 
have to be some write-down.
    Mrs. Biggert. This is where the loans are performing. The 
customer is paying the loan off, but they say ``Well, in the 
next year, it probably won't be good, so you should revalue it 
now.'' This has happened in my community. And then on top of 
having the FDIC coming in with this assessment in December, 
they can't work with it with the capital that--
    Mr. Bernanke. Again, we are not requiring banks to write 
down loans just because the collateral value has declined.
    Mrs. Biggert. Okay. Then you said in response to Mr. 
Castle's question, there is a memo of things Congress can do 
for job creation, and my constituents need jobs. Can you give 
me three examples of the menu that you talked about?
    Mr. Bernanke. Well, I think Members would disagree, but 
just to give you three examples, you could provide funding for 
State and local or infrastructure type spending, which would 
have some job impact. Other Members might prefer tax cuts for 
corporations to make them more competitive. A third possibility 
would be to adopt one of these programs to try to encourage 
small banks to make small business loans, like the one that the 
Treasury has proposed. So those are three very different types 
of programs, and I know different Members have different 
preferences, but there are many different things that you could 
consider.
    Mrs. Biggert. Okay. And one of them might be trade 
agreements?
    Mr. Bernanke. Of course, details matter, but I think in 
general, open trade creates a lot of opportunities and there 
certainly are a lot of firms in the United States that rely 
heavily on exports. And indeed, manufacturing has been leading 
the recovery so far, and part of that is because they have been 
able to take advantage of export markets.
    Mrs. Biggert. Then lastly, when implementing the so-called 
Volcker Rule that has been recently proposed by the 
Administration which would seek to limit, or in some cases 
eliminate, proprietary trading at financial institutions, would 
this reduce liquidity, would it add to the volatility in the 
capital markets, or is it a good thing?
    Mr. Bernanke. First of all, we all agree that we don't want 
banks to take excessive risks when they have a safety net from 
the government. So the question is, then, how do you control 
those risks?
    The Volcker Rule might be appropriate. You have to be 
careful that you don't inadvertently prevent good hedging, 
which actually reduces risks, or that you don't prevent market 
making, which is good for liquidity. One possibility is that--
if you were to go in this direction would be to give some 
discretion to the supervisors to decide whether a set of 
activities is so risky or complex that the firm doesn't have 
the risk management capacity or the managerial capacity to deal 
with it and then give the supervisors the authority to ban that 
activity. So there might be ways to do it using supervisors.
    The Chairman. The gentlewoman's time has expired.
    Mrs. Biggert. Thank you.
    The Chairman. I recognize the gentleman from Kansas and ask 
for 10 seconds to say that the amendment to the House bill 
embodies precisely the approach that the Chairman just 
recommended with regard to proprietary trading, and it is in 
our bill.
    The gentleman from Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman.
    And Mr. Chairman, the economist Mark Zandi testified 
yesterday that policy uncertainty is playing a role in the 
business community's lack of confidence.
    It will be 2 years next month since the financial crisis 
started in full with the failure of Bear Stearns, and 
Republicans and Democrats have been in agreement of the key 
principles of financial reg reform, including increased 
consumer and investor protections, strong oversight of 
derivatives and executive compensation, new dissolution of 
authority to safely unwind the next AIG while protecting tax 
payers, stricter capital and leverage standards, and a 
financial reg structure that monitors systemic risk. The House 
recently passed a strong bill that accomplished all of these 
principles, in my judgment, that the Senate is now considering. 
And we need to eventually reform housing finance after 
considering the best ideas and the ways to do that.
    Mr. Chairman, will uncertainty increase or decrease in the 
business community if Congress delays these important reforms, 
or should Congress enact these reforms into law this year, now, 
so businesses know what the rules of the road will be? Won't 
that encourage investment and hiring in your judgment?
    Mr. Bernanke. Clearly, Congress has to take the time it 
needs to deliberate, but I agree with your basic premise that 
if there is excessive delay, it will create uncertainty about 
what the regulations are going to be, how much capital will be 
required, and so on, and that makes banks more reluctant to 
lend, for example.
    Mr. Moore of Kansas. Thank you, and one last thing. My 
colleague from Illinois, Mrs. Biggert, just asked you a 
question about commercial real estate, and I want just a little 
different, I think, than her question. I am concerned about the 
commercial real estate market--I think all of us are--and what 
impact that is going to have on the economic recovery.
    The Congressional Oversight Panel for TARP issued a report 
this month expressing concern that a wave of commercial real 
estate loan losses over the next 4 years could jeopardize the 
stability of many banks, especially community banks, which I 
think really are not responsible for what we have seen in this 
whole situation. In the report, they say, ``A significant wave 
of commercial mortgage defaults would trigger economic damage 
that could touch the lives of nearly every American.''
    Mr. Chairman, I heard your response to Mrs. Biggert. Is 
there anything else that you can suggest or that Congress 
should look at to minimize the negative impacts of the 
commercial real estate crisis?
    Mr. Bernanke. I think one thing that would help would be 
just the general improvement in the economy, and that is one 
reason why the Federal Reserve has been using accommodative 
policies. And some of the ideas you have just raised about 
reducing uncertainty and trying to stimulate growth, those are 
the kinds of things that would lead back to having people go to 
the mall or having people be employed and housed in an office 
building. So that is one, obviously, direct way. I don't have 
another good suggestion for you, but I would be happy to talk 
to you about it.
    Mr. Moore of Kansas. Thank you so much, Mr. Chairman. I 
yield back my time.
    The Chairman. The gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you.
    Chairman Bernanke, I want to follow up on a question that 
one of my colleagues had that I am not sure I heard a precise 
answer to. I think the question was a variant of, what is the 
level of desirable or necessary leverage within the banking 
system on a macroeconomic level to hopefully ensure we don't 
repeat what we have just been through?
    Clearly, there are those within Congress who believe in 
artificial limits to the size of financial institutions, who 
believe that Federal regulators should have power to prohibit 
certain credit offerings. But some of us believe that hopefully 
out there is a proper application of risk-based application of 
capital and liquidity standards that would hopefully, perhaps, 
lead to a more prudent leveraging within our economy.
    But the question is, from your perspective, on a 
macroeconomic level, what is the amount of leverage the system 
can handle a cyclical downturn?
    Mr. Bernanke. That is not an easy question to answer.
    Mr. Hensarling. That is why I asked you.
    Mr. Bernanke. It is not a single number, because as you 
mentioned in your question, first of all, it is risk-weighted. 
It depends on the mix of assets. As you know, we currently have 
the 8 percent requirement under Basel II. I think we want to, 
first of all, increase the risk weights so that there is more 
protection against risky assets, number one. Second, we want to 
make sure the capital is of higher quality that is more common 
equity and less subordinated debt instruments, for example. And 
third--
    Mr. Hensarling. Mr. Chairman, if I could. I understand 
that, but does the question defy an answer? Is it possible to 
quantify on a macroeconomic basis?
    Mr. Bernanke. I'm sorry. It is certainly possible, but we 
are currently engaged in a very elaborate process with the 
Basel committee and other colleagues around the world to try 
and determine that number. We don't have a single number yet 
that we can give you.
    Mr. Hensarling. And Mr. Chairman, when might we expect that 
number from on high?
    Mr. Bernanke. The objective is to have it by the end of 
this year.
    Mr. Hensarling. Thank you. Mr. Chairman, you answered 
several questions. Clearly, you believe, as do many others, 
that the Nation is on an unsustainable fiscal path, and I think 
you have described quite eloquently, as have other prominent 
economists, the dire consequences associated with that.
    I don't think I quite have the lyrics right, but I'm 
reminded of a country and western song that says something 
along the lines of, everybody wants to go to heaven, they just 
don't want to go now. So we have so many people who claim they 
want to do something about this problem, but with one exception 
offered by Congressman Ryan of Wisconsin, I haven't seen any 
plans put on the table.
    Taking default off the table, because it is totally 
unacceptable, assuming for the moment we do not achieve any 
level of spending discipline we haven't been able to achieve in 
previous decades, I'm under the impression we cannot grow our 
way out. I don't have the number at my fingertips. I think I 
have seen at least some studies suggesting we would have to 
have double digit economic growth for the next 3 decades to 
grow our way out. Can we grow our way out of this problem?
    Mr. Bernanke. I don't think so, not in the medium term.
    Mr. Hensarling. Okay. If we can't grow our way out, you 
have said repeatedly you do not intend to monetize the debt, 
although there are a number of people within our economy who 
think you are already doing that. We will leave that subject to 
a different time and place.
    That unfortunately leaves, under my hypothetical, tax 
increases. I have seen studies that show that if we only try to 
solve this problem on the tax side, that number one, just over 
the next 10 years of the President's budget window, we would 
have to increase income taxes roughly 60 percent. Have you seen 
similar studies? Has the Fed researched this?
    Mr. Bernanke. That sounds like the right order of 
magnitude.
    Mr. Hensarling. Okay, and my children, who are young, 
according to a CBO analysis, we would see tax brackets go--10 
would have to go to the 25 percent bracket, 25 to 63, 35 
percent bracket to 88. It is fairly dire. So have you modeled 
what would happen to the economy if we indeed had tax increases 
of this magnitude?
    Mr. Bernanke. I don't know the exact numbers, as I said, 
and obviously forecasting is difficult, so I don't want to put 
too much weight on any single number. But I think you and I 
would agree, I think most people would agree, that a big 
increase in marginal tax rates is going to be counterproductive 
from a growth perspective.
    Mr. Hensarling. I hope I can slip this in, in the seconds I 
have left. Recently Alan Meltzer wrote an op-ed in the Wall 
Street Journal, and my guess is that you are familiar with it, 
that asked the question how much one might have to pay on the 
interest on the bank reserves. I'm not sure you have--I haven't 
seen you answer that question publicly and I want to give you 
that opportunity.
    Mr. Bernanke. We think--
    The Chairman. We are into the deficit now, so if you can 
give a brief answer, otherwise it will have to be in writing.
    Mr. Bernanke. We think that the interest rate we pay on 
reserves will bring along with it the Federal funds rate within 
tens of basis points. Not a tremendous difference.
    Mr. Hensarling. Thank you, Mr. Chairman.
    The Chairman. You can elaborate in writing.
    The gentleman from Texas, Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman. Chairman Bernanke, 
welcome, and thank you for coming to visit with us and give us 
an update.
    I represent the 15th Congressional District of Texas, and I 
refer to it as deep south Texas. We are along the Texas-Mexico 
border, and our county is about 750,000 people and it has the 
highest concentration of--about 89 percent Hispanics. Hidalgo 
County is one of the poorest.
    I'm going to preface my question by saying our area was 
plagued by a double digit unemployment for about 35 years 
before I came to Congress. And to give you an idea, in December 
of 1990, the unemployment rate was much higher than Detroit, 
Michigan, is today. It was 29 percent. In January of 1996, when 
I came to Congress, it was 24 percent. The unemployment rate 
dropped over the 14 years that I have been in Congress. In 
April 2008, it was 6 percent. So even though we have seen an 
improvement, and today even though it is 11 percent, it is very 
close to the national average.
    So what do we do to try to bring it back down to 6 percent 
when the banks tell me--the community banks and the large banks 
say that they are lending money, but there is no proof that 
there is because so many businesses have closed, so many signs 
for rent, buildings that are now empty and spaces that are 
empty? Then we get the credit banks representatives coming to 
visit me and say that they want us to support their mission 
statement to expand it so that they can lend money to small and 
medium-sized businesses. And I'm torn between supporting that 
idea.
    I heard the President say just recently that there was 
going to be $20 billion from the TARP money being repaid to us 
in Federal Government available to make money available to the 
small and medium businesses. Tell me, what is the answer for 
regions like mine, very poor, very large, and that we can't 
seem to have access to capital?
    Mr. Bernanke. I know you are asking the questions, but I 
would like to hear some time how you got the unemployment rate 
down the way you described it.
    Again, I think if I'm not mistaken, the Treasury is 
proposing to provide capital to CDFIs, Community Development 
Financial Institutions, which are banks or other institutions, 
which make more than 60 percent of their loans to low- and 
moderate-income communities. I think that is a very 
constructive thing to do. So that is the kind of vehicle that 
could bring capital into a lower-income community using TARP 
money, essentially.
    Mr. Hinojosa. Would you support the idea that our chairman 
of the Small Business Committee, Nydia Velazquez, has proposed, 
and that is that there be more direct loans instead of being 
bank loans through the Small Business Administration?
    Mr. Bernanke. I think that is really up for Congress to 
decide. I think you need to investigate. Her view, she said 
earlier today, was that going through the banks would not work 
because they wouldn't take the TARP money. Whether that is true 
or not, I don't know. So I'm sorry, I don't have a 
recommendation, and I think Congress is going to have to look 
at those two options.
    Mr. Hinojosa. One of the sectors that helped us bring the 
unemployment down was the housing, the construction of both 
retail businesses and residential. What is your projection for 
things to turn around for that sector so that they can help us 
bring that unemployment back down to the 6 percent that I have 
a goal to do?
    Mr. Bernanke. Unfortunately, the construction was probably 
overinflated for a period, and now it is quite weak. I wouldn't 
conjecture to see a big return of construction, either of 
residential or commercial, for some time. We still have a lot 
of unsold homes, for example, a lot of high vacancy rates, and 
also high vacancy rates in commercial real estate, so there is 
not, at this point, a lot of demand for new construction.
    Mr. Hinojosa. My last question--
    The Chairman. No, your time has expired, I'm sorry.
    Mr. Hinojosa. Thank you Mr. Chairman.
    The Chairman. The gentleman from North Carolina.
    Mr. McHenry. That is on how that affects--
    Mr. Bernanke. The different mechanisms to the extent that 
the fiscal thrust is expansionary, it creates some additional 
growth that would potentially affect Federal Reserve policy, 
except we are at the zero bounds, so we are not responding too 
much there.
    One risk that I have described is that if there is a long-
term loss of confidence in the long-term capacity of the 
government to balance its affairs, that could raise interest 
rates today, which would have a drag effect on the economy.
    Another possibility, which I think is relatively unlikely, 
but is certainly possible, is that if there is a loss of 
confidence again in the government's ability to achieve fiscal 
stability, that the dollar could decline, which would have 
potentially inflationary impact on the economy.
    There are a number of different channels through which 
large deficits or unsustainable deficits could affect the 
current economy.
    Mr. McHenry. I have heard various economists say that a 
deficit of 3 percent of GDP over the long time is sustainable 
and anything beyond that is unsustainable. Is that fairly 
accurate?
    Mr. Bernanke. That is roughly right. The idea here is if 
you have a growing economy, you can run deficits and still 
maintain a flat ratio of debt to GDP, which is a sustainable 
situation.
    Normally, that would involve having what is called a 
primary deficit, that is deficit excluding interest payments 
from about zero. Normally, that would involve about 2.5 percent 
to 3 percent of a total deficit, including interest payments.
    Mr. McHenry. Beyond that, it could have a destabilizing 
effect on the dollar and obviously interest rates on top of 
that?
    Mr. Bernanke. If protracted. I mean for one year, it does 
not necessarily have a big impact. If it looks to be going on 
indefinitely, certainly.
    Mr. McHenry. In terms of liquidity in the system right now, 
are we still facing deflationary pressures? Is that a part of 
your consideration in the months ahead?
    Mr. Bernanke. Right now, we do not see deflation as an 
imminent risk, and neither do the financial markets, which seem 
to have inflation expectations of around 2 percent or a little 
higher. There are scenarios in which they would become more of 
a concern. Right now, we do not see that as an imminent risk.
    Mr. McHenry. In terms of tax rates and financial regulatory 
policies and those larger issues, could we see a scenario where 
between high corporate and personal income taxes that we have 
an outflow of capital to lower tax regimes around the world, is 
this a concern for our long-term growth, price stability, and 
full employment?
    Mr. Bernanke. Certainly. In some sense, the cost of large 
deficits is that tax rates in the future are likely to be 
somewhat higher. As I was talking to Mr. Hensarling, that can 
be bad for growth in lots of different ways.
    One possibility is that it makes the country uncompetitive, 
relative to other countries in terms of their tax costs of 
production, although there are exchange rates and other factors 
that would affect that.
    Clearly, very high tax rates tend to make a country less 
productive.
    Mr. McHenry. Over a 25- to 50-year horizon, you said over 
the medium term, we cannot grow our way out of this structural 
budget deficit, to Mr. Hensarling's point, over the long term, 
is that going to be possible or is it going to require a period 
of spending?
    Mr. Bernanke. Nobody really knows for sure, I want to 
emphasize. We are an aging society. The fraction of the 
population that is working is going to be going down for a long 
time, and at the same time, the number of people who are going 
to be requiring Medicare and other types of assistance is going 
to be rising.
    Barring very sharp changes in our growth rate in 
productivity, I do not think that would be very likely; no.
    Mr. McHenry. Thank you.
    The Chairman. The gentleman from Texas. Let me say we will 
be able to accommodate all the members here now. The gentleman 
from Texas.
    Mr. Green. Thank you, Mr. Chairman. I thank Chairman 
Bernanke for appearing and congratulations again on your being 
reappointed.
    Chairman Bernanke, I would like to make a comment, and I 
may want you to say a word, but I am not sure that I do until I 
finish. Sometimes, I have to wait until I finish to know what I 
am going to say.
    When we talk about the TARP, we sometimes confuse it with 
let's just use the terms that the public can relate to, the 
bank bailout, we sometimes confuse it with a stimulus. The bank 
bailout was an initiative proposed under the Bush 
Administration. My belief is that the President himself 
supported this initiative and in fact made public comments in 
support of it.
    When it was finally passed, because it did not pass on the 
first vote, but when it passed on its second vote, it was a 
bipartisan passage. It was supported by 91 Republicans.
    I think sometimes this is lost in the translation, that 91 
Republicans supported it. As a matter of fact, we had about 10 
Republicans, friends of mine, and this is not to demean them, I 
just want to get the facts straight, 10 friends of mine who sit 
on this very committee supported it. This is not in any way 
demeaning, just to have it as a statement of fact.
    What I would like to do, Mr. Chairman, with your consent 
and permission and without any objection, is submit the final 
vote results, the roll call vote, if you will, on this piece of 
legislation. May I submit this for the record?
    The Chairman. So ordered, without objection.
    Mr. Green. Thank you very much. A simple ``yes'' or ``no'' 
will suffice. Is what I stated correct saving the vote count, I 
do not expect you to know this, but the fact that it was a 
bipartisan effort and the TARP is separate and apart from what 
we call the ``stimulus?''
    Mr. Bernanke. Yes.
    Mr. Green. Thank you. With reference to trade, I think we 
do ourselves a disservice when we discredit legitimate 
positions that are made by what we call ``the other side.'' I 
think there is some good in trade.
    In fact, I believe we ought to have trade. ``Free trade'' 
is a term of art. ``Fair trade'' is a term of art. The question 
becomes for some how will the trade impact not only the exports 
from our country but also imports in that sometimes jobs will 
occur in countries wherein you can get workers for pennies a 
day, whereas in this country, it is going to cost you dollars 
per day to get a worker, and there seems to be the notion that 
this can influence where the businesses will locate jobs and 
hence, by locating them in places where they have pennies per 
day, they are in fact in a sense taking the jobs from this 
country, from the United States.
    That is the concern. I think we have to try to find a 
balance that accommodates everyone when it comes to this 
concern. I respect the fact that we can import and export and 
these exports will create jobs here in this country.
    Is this a fair statement to say there is a balance we have 
to try to strike?
    Mr. Bernanke. The point that you are making, which is 
correct, is that trade does not necessarily benefit everybody. 
It might make some people better off, and in particular, people 
with low skills who are competing implicitly with low-skilled 
workers around the world might be made worse off.
    Some people have attributed some part, perhaps not a large 
part, but some part of increased inequality to increasing 
trade. That is a concern.
    I think most economists would say the right solution is not 
to block trade because trade creates a lot of wealth, but 
rather to find other ways to help low-income people, low-
skilled people acquire skills or otherwise make themselves 
better off.
    Mr. Green. Would you agree that one of the things that we 
might do is try to help those countries where they have people 
working for pennies per day that may not have labor standards 
that people of goodwill would agree with? We might also try to 
influence what they do if we trade with them.
    It would not cause me as a person, a human being, to feel 
good about an effort that would cause persons to work for 
pennies a day and allow me to benefit when they are working 
under conditions that are less than tolerable by my standards.
    Mr. Bernanke. It is a very hard question. Certainly, you 
want to have humane conditions. Low income is a fact of life in 
poor countries and sometimes trade is an opportunity to better 
yourself.
    Mr. Green. I agree. We have a balancing test with this as 
well. I see that my time is up. I did not get to the real 
question I had for you, but I will get to you next time. Thank 
you, Mr. Chairman.
    The Chairman. The gentleman from Minnesota, and as he 
begins, I would ask the gentleman from Idaho to come and assume 
the Chair so I can go talk about fishing and we will be able to 
take the last three members.
    I thank the Chairman for his indulgence and I also want to 
thank the members. I think it has been a thoughtful and civil 
hearing, which I appreciate being able to do.
    Mr. Paulsen. Thank you, Mr. Chairman. Chairman Bernanke, we 
have had a lot of discussion earlier and I was gone for part of 
it, I know we discussed mostly about the deficit, the national 
debt and the effect of long-term borrowing in terms of the 
Federal Reserve's policies.
    Let me ask this, some have made claims that taking steps to 
put our fiscal house in order, to right ourselves right now, 
could itself be stimulative in some effect.
    What impact would implementing policies that are more 
focused on the long term have on the short-term dynamic, if we 
just thought more about the long term going forward thinking as 
opposed to dealing with the short-term challenges that we do 
face right now with our economy?
    Mr. Bernanke. It is possible that a persuasive, creditable 
long-term plan for fiscal balance would be stimulative today by 
lowering interest rates and perhaps increasing investment 
because people would not be worried about high taxes, for 
example.
    It is certainly possible a good plan would actually pay off 
in the present, not just in the future.
    Mr. Paulsen. Let me ask you this, does the large budget 
deficit right now, does it really impair the Fed's ability to 
either stabilize prices or ensure long-term growth?
    Mr. Bernanke. No, I do not think so. I think we do have to 
recognize, I want to be clear, given the depth of the 
recession, the fact that revenues have fallen from the normal 
19 percent of GDP to 15 percent, given the payments to the 
unemployed and so on that are obviously important during a deep 
recession, it is not surprising that we have a deficit this 
year. I do not think any reasonable policy could eliminate that 
deficit this year.
    The answer to your question is no, I do not think so, but 
clearly, a long-term unsustainable policy would have bad 
consequences.
    Mr. Paulsen. How does the large Federal balance sheet that 
you opened up a little bit with your testimony and talked about 
a little earlier impede your ability to set interest rates?
    Mr. Bernanke. Are you talking about the Federal Reserve's 
balance sheet?
    Mr. Paulsen. Correct.
    Mr. Bernanke. If we had no other tools, it would create a 
problem because with so many reserves in the system, such a 
large supply of reserves, you would not be able to raise the 
Federal funds rate, which is the price of reserves.
    However, as I described in my testimony, we have a number 
of tools, including interest on reserves and various ways of 
draining reserves that will allow us to raise interest rates at 
the appropriate time, notwithstanding the fact that we have the 
large balance sheet.
    Mr. Paulsen. How long do you think it will be before the 
Federal funds rate becomes the benchmark again for overnight 
lending, and how tested are these tools that you have to employ 
or you plan on employing in the near future, I guess?
    Mr. Bernanke. None of them have been completely tested. We 
have not been in this situation before. On the other hand, we 
have a belts-and-suspenders kind of situation here. We think 
the interest rate on reserves by itself could be used to 
tighten policy and there are good economic reasons to think so. 
Beyond that, we have these additional tools that would allow us 
to drain reserves, just to make doubly sure.
    In fact, beyond that, although we do not anticipate selling 
any of the assets on our balance sheet in the near term, if we 
absolutely had to, that would be another way to reduce the size 
of the balance sheet.
    Mr. Paulsen. Okay. Thank you, Mr. Chairman.
    Mr. Minnick. [presiding] The Chair recognizes the gentleman 
from North Carolina for 5 minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. My 
questions are also about how to encourage lending. I am sure as 
a scholar of the Great Depression, you know the Reconstruction 
Finance Corporation did not start out with a direct lending 
program.
    They only resorted to that when they could not persuade 
banks to lend, when they tried to lend to banks for the banks 
to lend in turn, that did not work. They tried to buy preferred 
stock in banks so banks could have additional capital. That did 
not work.
    It was only then that the Reconstruction Finance 
Corporation began direct lending, and 20 years later, when the 
program was ratcheted down, it had turned a slight profit. It 
does appear it is possible to lend even in a bad economy with 
proper underwriting.
    I am sure I am in a distinct minority in this committee in 
thinking that it was probably a mistake to--we were probably 
better off having mark-to-market rules for accounting, that it 
is better to know what is on a bank's books, to have an 
accurate idea of the assets and of the liabilities.
    I was also skeptical a year ago about the stress test, that 
would be seen as a rigorous test, a real measure of the 
sovereignty of banks. I have been surprised at the amount of 
capital that has gone into those 19 banks.
    A couple of questions. To what extent was that the result 
of investors getting confidence to cause the stress test, 
because they did feel reassured their books were accurate, and 
to what extent was that because investors became convinced that 
the government was not going to allow any of those 19 
institutions to fail, that they were too-big-to-fail?
    Second, with respect to community and regional banks, it 
does not appear that capital is flowing into community and 
regional banks in the same way they flowed into those 19 bigger 
banks.
    Do you agree it is important they have additional capital? 
Are they trying to acquire it? Is that because of the 
skepticism about what is really on their books? Do they have 
accurate books or are their books being cooked somewhat?
    To what extent because they are too small to fail and 
investors know they may in fact lose their entire investment in 
a way they cannot possibly lose their entire investment at the 
bigger banks?
    Mr. Bernanke. It is my belief, first of all, on the stress 
test, I think that the revelation of information, the fact that 
the government showed what the underlying evaluations were and 
what the potential credit risks were, that cleared up a lot of 
the uncertainty in the market and that is why so much capital 
flowed in.
    I think the alternative that it was a ``too-big-to-fail'' 
issue would not work because there was not really a change in 
that respect, and in any case, when a ``too-big-to-fail'' 
institution comes under stress, the shareholders can definitely 
lose money, as they did in many of these big banks.
    I do think the stress test was quite successful in that 
respect in providing this information to the markets.
    I think it is hard to distinguish two explanations for why 
the regional banks have raised less, some of them have raised 
some capital. Part of the problem is they are in fact--regional 
banks and smaller banks--more exposed to commercial real 
estate, which right now is the more stressful area, so 
therefore, it is not a question of information, but a question 
of the fact that some of those banks are facing that highly 
stressed situation.
    Surely, we are advising and supporting capital raises, 
particularly of common equity, by banks of all sizes, and some 
of the 19 banks were in fact big regionals, and some of them 
have been able to raise capital and pay back.
    Mr. Miller of North Carolina. Is there a confidence among 
investors that the books of the regional and community banks 
are accurate, that their assets are properly valued?
    Mr. Bernanke. I have not heard anything to the contrary. I 
guess you would have to ask the investors.
    To respond to your earlier point, I think mark-to-market 
can be very useful in terms of information, but I think for 
banks, which have long-term loans on their books, often it is 
very difficult, because there is no liquid market, it is very 
difficult to get an accurate price of what a long-term loan 
might be worth, and even a large commercial real estate loan 
might be very hard to price accurately.
    For capital and regulatory purposes, I think you do need to 
look at the hold to maturity prices as well as the mark-to-
market prices.
    Mr. Miller of North Carolina. I will yield back the little 
bit of time I have left.
    Mr. Minnick. The gentleman from New Jersey, Mr. Lance, for 
5 minutes.
    Mr. Lance. Thank you very much, Mr. Chairman. Good 
afternoon to you, Chairman Bernanke.
    Was the Federal Reserve consulted before the Administration 
announced its proposal about $100 billion in taxes on banks 
across the country?
    Mr. Bernanke. I think there were some technical 
discussions. You are talking about the financial responsibility 
fee?
    Mr. Lance. Yes. What are your views, Mr. Chairman, on the 
imposition of that amount of money on banks across America?
    Mr. Bernanke. I think in terms of whether or not to impose 
a tax on the banks, that is obviously a fiscal matter, and 
Congress has to decide about that. I do think it is important 
that it be imposed in a way that it does not have unintended 
consequences.
    One issue which has arisen is that imposing the tax on non-
deposit liabilities could have some negative consequences for 
the repo market, as an example.
    If you want to impose the tax and many do, you just want to 
be sure to do it in a way that does not create unintended 
consequences.
    Mr. Lance. My point of view is that the tax should not be 
imposed because the banks by and large have paid back their 
TARP funds with interest, and those that are still outstanding, 
General Motors and AIG, would not be liable, as I understand 
it.
    I have a concern that it would lead to even less lending 
than is now the case. Does the Federal Reserve Board have a 
position on that aspect of what might occur as a result of 
imposition of these taxes?
    Mr. Bernanke. You are correct that the large banks have 
paid back the TARP, and in fact, I think it is important to say 
that the financial part of the TARP, even including AIG, is not 
that far in the red at this point. I think there is a very good 
chance the taxpayers are going to come out whole in this entire 
process, which is an important thing to recognize.
    Mr. Lance. Yes. The rhetoric of the President when 
announcing this was in direct relationship to the fact that 
funds were used for TARP and they are being paid back. I just 
have the greatest concerns that this would mean less lending 
than would otherwise be the case.
    Mr. Bernanke. I believe one reason for the proposal is the 
law requires that the President make a proposal on how to 
recoup the TARP money, and the TARP technically does include 
not only the auto losses, but the mortgage modification program 
as well.
    Mr. Lance. Thank you, Mr. Chairman. Another area you note 
in your testimony, that more than half of the fourth quarter 
GDP growth was due to restocking of inventories. I do not think 
that can continue without demand for goods of those 
inventories.
    In my opening remarks, I talked about consumer confidence 
and the report others have cited. Today's figures with a lack 
of consumer confidence, what do you believe might be the most 
effective way the Federal Reserve moving forward could instill 
even greater consumer confidence in such a large percentage of 
our economy?
    Mr. Bernanke. I think the confidence issues, particularly 
the number we saw yesterday, are tied pretty strongly to the 
labor market situation.
    Mr. Lance. Yes.
    Mr. Bernanke. All the things we have talked about from the 
monetary policy side, lending, from whatever actions Congress 
wants to take on the employment side, I think those are the 
issues that will create stabilization in the labor market, and 
that in turn is one of the keys to consumer confidence.
    Mr. Lance. I thank you. A statement, not a question, Mr. 
Chairman. I think consumer confidence is at the heart of 
restoring the economy, getting more people working in America 
since it is such a large percentage of the overall economy, and 
I am deeply concerned about any bank tax as suggested by the 
President's proposal because I think it would lead to less 
lending by banks and what we need in this country is more 
lending, not less.
    Thank you. I yield back the balance of my time.
    Mr. Minnick. The Chair recognizes the gentleman from 
Illinois, Mr. Foster, for 5 minutes.
    Mr. Foster. Thank you. In this week's Economists magazine, 
there was an interesting article on Canada and the situation 
they are in, where they are seeing an incipient housing bubble 
re-emerge.
    They have kept interest rates very low for the same reasons 
we are doing, to try to restart industrial and business 
spending, and because if this persists for a long time, some of 
that money is going to leak out and could make a housing 
bubble.
    China is also facing similar problems where they have 
responded, as has Canada, by actually increasing the amount of 
money you have to put down on a real estate investment, an 
investment, as opposed to one you live in.
    I was wondering do you have contingency planning? Are there 
tools available that you are thinking of in case you keep 
interest rates low for an extended period of time, and all of a 
sudden, in regions of the United States, this starts to show up 
as a local or national real estate bubble?
    Mr. Bernanke. We are monitoring that very carefully. It is 
obviously very difficult to know if there is a bubble, 
particularly in the early stages. Our best assessment right now 
is there is not any obvious level in U.S. economy. If there was 
a bubble, then the response probably would depend on which 
asset it was, what part of the economy it was.
    My view is that in the longer term, when possible, you want 
to address those kinds of systemic risks through regulation and 
supervision rather than through monetary policy, but if there 
were not appropriate tools, and you are right, there are some 
countries where they can vary the loan to value ratio as a 
policy tool, which I think--
    Mr. Foster. It is a very valuable handle that we have not 
used in this country yet and maybe we should look abroad and 
think about using that.
    Mr. Bernanke. Given that we do not have that tool, we would 
have to see what tools we did have.
    Mr. Foster. Do you feel that you do not have that tool? You 
have had the ability to set nationwide mortgage origination 
standards since the early 1990's, is my understanding. The 
question is if you just said okay, everyone, 5 percent down, 8 
percent down.
    Mr. Bernanke. Our standards are based on a finding of 
unfair and deceptive practices.
    Mr. Foster. You feel you need additional authority, 
legislative authority?
    Mr. Bernanke. I think so, particularly if you wanted to 
make a rapid change, because these processes take a long time, 
rulemakings and so on.
    Mr. Foster. As you know, I am an enthusiast for actually 
looking into this as a way of stabilizing our economy against 
future, especially real estate, bubbles.
    We had some testimony from our snow-canceled hearing by a 
gentleman called Richard Koo from Nomura Securities Institute, 
and he talked about what he called a ``balance sheet 
recession.''
    He said there was a qualitative difference between normal 
business circumstances where businesses respond to a lower 
interest rate by actually expanding operations, and a situation 
where after the bursting of a bubble that was fueled by 
deficits and so on, that you behave differently.
    If you are terrified you are insolvent, then a lower 
interest rate does not interest you, except in helping you pay 
off your debt faster.
    I was wondering if you think that is a valid point of view 
and really if there is an element to that.
    He made the comparison also of Japan 15 years ago and the 
United States today. I was wondering if you would comment on 
that.
    Mr. Bernanke. I think there is some validity. I think that 
is an interesting perspective. In fact, my own research when I 
was an academic addressed some of those issues as well.
    It does not mean that monetary policy, for example, is 
impotent because, for example, lower interest rates can improve 
balance sheets by lowering interest costs or raising asset 
values. It is a different mechanism through which monetary 
policy has its effects and through which the business cycle 
operates.
    Mr. Foster. Finally, if you are paying interest rates on 
reserves, does that have a big effect on the profitability of 
the Fed? In case no one else has thanked you, I want to thank 
you for the $50 billion and some you returned to the Treasury. 
Maybe what we need actually are more Federal reserves, and not 
fewer, if we could replicate you.
    Mr. Bernanke. It would reduce the profitability a little 
bit because we would have a higher cost of funds, but since we 
are making 4 percent-plus on the MBS, we still have quite a bit 
of margin there. It would still be a positive cash flow.
    Mr. Foster. Thank you very much. I yield back.
    Mr. Minnick. The Chair recognizes the gentlewoman from 
Minnesota for 5 minutes.
    Mrs. Bachmann. Thank you. I appreciate that, Mr. Chairman, 
and thank you so much also for coming, Mr. Chairman.
    One thing that constituents have continued to ask me about 
is if we are any closer to an audit of the Federal Reserve and 
knowing what the overnight loans are, the collateral 
requirements, who is getting the loans, and are we any closer. 
I get that question asked almost everywhere I go, where are we 
at in terms of auditing the Fed.
    Mr. Paul had a bill-- where are we at with that, and what 
is the response of the Federal Reserve?
    Mr. Bernanke. In my testimony today, in my written 
testimony, I made a proposal that we would be glad to support 
complete audits of all the emergency facilities and all aspects 
of those facilities with disclosures of the names of the 
borrowers with an appropriate delay. All of that, we are very 
supportive of.
    Our concern with Mr. Paul's bill and similar bills is that 
the word ``audit'' is not just a financial term, it is also a 
policy evaluation term. As written, his bill will allow the 
Congress to ask the GAO to come in and essentially determine 
whether they thought the Federal Reserve had made a mistake in 
its interest rate policy or not.
    We think that would be inconsistent with the very important 
principle that Congress should not be managing monetary policy, 
that the Federal Reserve should be independent in making its 
monetary policy decisions.
    We think that would actually have very bad effects on 
markets.
    Mrs. Bachmann. Would the American people be able to know 
what overnight loans are made, who they are made to, what the 
collateralization is, would we have that information?
    Mr. Bernanke. We are happy to provide some information on 
that.
    Mrs. Bachmann. Define ``some.''
    Mr. Bernanke. There are two classes of loans. There are a 
whole bunch of programs that were established under emergency 
authorities. These are now being shut down. We essentially are 
offering full transparency on all those programs, including the 
names of the borrowers.
    There is another program which is pretty small in size, but 
is very important, called a ``discount window.'' The discount 
window, we think it is very important to keep the names of the 
borrowers confidential, and the reason is the banks will only 
come to the discount window in a period of crisis or panic, and 
if they believe their names will be revealed, that would indeed 
intensify the crisis or panic, and therefore, the whole purpose 
of the discount window, to try to eliminate financial panics, 
would be severely damaged. We are concerned about that.
    Mrs. Bachmann. Mr. Chairman, was the discount window open 
to private investment banks prior to March 2008?
    Mr. Bernanke. The loans to investment banks were made 
through an emergency facility and we are opening that.
    Mrs. Bachmann. Was the first time that was opened by the 
Federal Reserve, the Federal Reserve's discount window, was 
that in March of 2008 or had the Federal Reserve opened that up 
prior to that time?
    Mr. Bernanke. The discount window is for banks only. The 
lending we did to investment banks, we did through an emergency 
facility, which was opened in March 2008, and which we are 
offering now complete transparency on.
    Mrs. Bachmann. You are saying there are two discount 
windows?
    Mr. Bernanke. One of them was an emergency one, which has 
already been shut down.
    Mrs. Bachmann. The other discount window that is available 
to banks, that is obviously open, that information, you are 
saying, we could not have access to?
    Mr. Bernanke. I am concerned that public release of the 
names of the borrowers would in fact severely damage the 
function of the discount window, which is to allow liquidity to 
be put into the system during a period of financial panic.
    Mrs. Bachmann. Another question that I wondered if you 
could address would be on the GSEs, with Freddie and Fannie, 
and it appears we may have an attending risk up to $5 trillion. 
Those are some figures we are hearing, that we are looking at 
potentially $400 billion directly, but we may have exposure up 
to $5 trillion.
    What are we doing really to limit that risk? It does not 
seem there has been any appreciable reform of the GSEs, Freddie 
and Fannie, and it seems like if anything, we are making that 
situation worse by raising the levels of loans that people can 
have access to.
    What are we doing to protect taxpayer risks?
    Mr. Bernanke. The Federal Reserve for a very long time 
warned the Congress about the risks of Fannie and Freddie, that 
we believed they did not have enough capital for their 
portfolios, and in fact, that has turned out to be the case.
    The government's exposure is a couple of billion dollars, 
which obviously is a large amount of money.
    Mrs. Bachmann. You hold toxic assets on your books now, 
right?
    Mr. Bernanke. Very little.
    Mrs. Bachmann. What amount is that?
    Mr. Bernanke. About 4 or 5 percent of our balance sheet, 
about $100 billion.
    Mrs. Bachmann. About $100 billion?
    Mr. Minnick. The gentlewoman's time has expired.
    Mrs. Bachmann. Mr. Chairman, thank you.
    Mr. Minnick. The Chair recognizes the gentleman from 
Colorado, Mr. Perlmutter.
    Mr. Perlmutter. Thank you. Mr. Chairman, thank you again 
for appearing. Thank you for the stamina, because you and I are 
generally the last guys in the room.
    I do want to thank you for being a pretty steady hand 
during a very difficult time, and the way I would describe it 
is we had a heart attack, this economy, this financial system 
had a heart attack in September 2008.
    There were a lot of consequences, but we are convalescing 
now, or we went through a heck of a storm, it is still kind of 
raining, but not nearly as hard as it was.
    I would like to first turn your attention to your slide 
number 27, and if we could pull up the other slide on 
unemployment, job loss.
    You are looking at your 27 as well as Mr. Foster's slide on 
job loss. Do you see that?
    In your 27, it is more pronounced because the scale is a 
little different than what he has. Just a sharp drop and then a 
sharp rise. The loss of unemployment changes dramatically 
beginning in early 2009. To what do you attribute that?
    Mr. Bernanke. As you pointed out, in the fall of 2008, the 
world economy essentially had a heart attack and the firms 
started dropping employees very quickly. There was a sharp 
contraction of global trade, a sharp contraction of global 
economic activity. We had minus 6 percent growth in the fourth 
quarter of 2008 and the first quarter of 2009.
    Through a variety of policies, including I would give a lot 
of credit to Federal Reserve policy, but of course, you can 
consider me biased, the economy stabilized in the second 
quarter, and has been growing since then. It was the 
stabilization--this is the change. This is the number of 
losses.
    When the economy stabilizes, then losses begin to shrink 
very dramatically. That is what we have seen. We have not yet, 
of course, seen any actual increases in employment.
    Mr. Perlmutter. Just looking at the glass-half-full for a 
second, we were in free fall in terms of jobs. We were just 
losing jobs at a rate we had not seen. I am not sure we have 
ever seen job loss at that rate, including in the 1930's. We 
have reversed that. I would credit monetary policy, the Federal 
Reserve, also fiscal policy as coming out of this Congress.
    My friends on the other side of the aisle, for a while, 
they were picking on where are the jobs. Well, we have a graph 
to show they are coming back, which is up there on the wall as 
well as your slide 27.
    Now they have moved onto the next thing, which is the debt. 
We are not out of the woods yet on jobs, are we, sir?
    Mr. Bernanke. No.
    Mr. Perlmutter. Part of our debt problem is there was a 
contraction in the revenues stream to the United States of 
America.
    Mr. Bernanke. That is right.
    Mr. Perlmutter. I was kind of listening to a couple of 
their points. Mr. Hensarling gave us the words from his song, 
everybody wants to go to heaven, they just do not want to go 
now. It reminded me of sort of the corollary of that is, John 
Kaines, who said we are all dead in the long run.
    We have to take care of today and today is jobs. We have to 
put people back to work. I think there has been a complimentary 
set of policies that are trying to reverse that job loss and to 
move people into jobs.
    My question to you is, how are we getting credit, the 
smaller banks, community banks, so we can get it to small 
businesses? That is the big complaint I hear. I think that is 
where we will get the next surge or we will get a surge of 
employment, if we can get small businesses really running 
strong again. How do we do that?
    Mr. Bernanke. On the first point, I am not advocating and I 
do not think anyone is advocating trying to balance the budget 
this year or next year. Obviously, there has been a big drop in 
revenues, a lot of extra expenses.
    The issue is trying to have an exit strategy, try to find 
some years down the road a sustainable fiscal path that will 
give confidence that we can in fact exit from this 
extraordinary situation.
    I have talked, as you know, a good bit about getting 
lending going again and talking about supervisory efforts that 
we are doing.
    I think it is worth noting that there was a poll this 
morning the NFIB put out and asked small firms what their most 
important problem is. We got an answer which we have seen 
before which is only 8 percent said credit was their most 
important problem. The majority of them think weak demand, the 
weak economy, is the most important problem.
    This is not a complete answer to your question, but I do 
think as we get the economy moving again and strengthening, 
that is going to make banks more willing to lend and it is 
going to bring good borrowers to the banks to get credit.
    I think just strengthening the economy is going to be a big 
help. It is important for us as supervisors, and I have 
mentioned, for example, the various new efforts we are making 
to get feedback, to get data, to do analyses, to try to make 
sure our examiners are taking a balanced perspective and are 
not blocking loans to good creditworthy borrowers. We do not 
want to make loans to borrowers who cannot pay back, but we do 
want to make loans to those who are creditworthy. That is an 
important objective we can continue to work on.
    Mr. Perlmutter. Thank you.
    Mr. Minnick. The gentleman's time has expired. The Chair 
recognizes the gentleman from New Jersey, Mr. Garrett, for 5 
minutes.
    Mr. Garrett. Perhaps your last questioner for the day. 
Thank you for being here. Thank you for staying so long. I 
appreciate the chance to ask you a couple of questions.
    The Fed is talking about pulling back on the purchase of 
mortgage-backed securities. Some experts when they hear that 
suggest if that does happen, that one of the consequences of 
that might be that interest rates will go up some degree. How 
much, is the question.
    If that were to occur, the question then is, what happens 
to Fannie, Freddie, and the GSEs? Some speculate that if they 
go up a significant amount or a certain amount, that could have 
a devastating impact upon their losses at the end of the day.
    My first question to you is, considering all that, would it 
be prudent then for the GSEs today to try to as quickly as 
possible start to shrink down the size of their portfolio, and 
if so, then what sort of time frame would be necessary in light 
of what you project on potentials for interest rates going up?
    Mr. Bernanke. First, we are interested to see what the 
effect is going to be on mortgage rates. So far, the evidence 
suggests it will be a modest effect, which would not have a big 
impact. If you are talking about interest rate risks for the 
GSEs, I do believe they are mostly hedged by holding treasuries 
and other securities.
    I do not know how much a modest increase in mortgage rates 
would affect their balance sheet. I do not think it would be 
catastrophic in any case.
    As you know, the arrangements under which Fannie and 
Freddie were put under conservatorship involved a gradual 
reduction over time.
    Mr. Garrett. Pretty slow.
    Mr. Bernanke. Pretty slow, in their portfolios. I was asked 
earlier about what is the right long-term solution for Fannie 
and Freddie. That obviously needs to be worked out. Many 
possible outcomes would involve not having a substantial 
portfolio, so there would have to be a transition into that.
    Mr. Garrett. Working that out, Secretary Geithner is over 
at the Budget Committee, and that is where we were earlier 
today, we have a chart over there that shows how much taxpayer 
money has gone out the window, so to speak, on all the 
programs, and programs you folks have been working on actually 
pale in comparison if you saw the red lines we see over at 
Fannie and Freddie, with the $200 billion and the $400 billion, 
whether or not you put them on budget or not.
    We have a blueprint, if you will, from the Administration, 
as to where we should go on the regulatory reform. We do not 
have any blueprint for this.
    What sort of time frame should we try to come up with for 
some solution on this? By the next 6 months, 9 months? A year?
    Mr. Bernanke. I hope so. Chairman Frank said earlier that 
he had scheduled a March 2nd hearing on the issue. Whether it 
has been changed, I am not sure. Clearly, you need to be 
talking about it.
    Mr. Garrett. I know we have an election year. Before the 
election, I would hope to have this resolved. Is that where you 
would like to come from on this, if you could?
    Mr. Bernanke. The sooner you get some clarity about what 
the ultimate objective is, the better. Of course, you do not 
necessarily have to get there by the end of the year. It is 
going to take some time to make a transition.
    Mr. Garrett. At least get the plan in place so there is 
certainty.
    Mr. Bernanke. Right.
    Mr. Garrett. Let me change the subject, with regard to 
bonds and the Fed issuing bonds. I know there was new authority 
to the Fed at the end of last year for you to pay interest in 
reserves, and there was talk about the Fed actually issuing 
bonds. Then there was a proposal as far as you were creating 
something called a ``term deposit facility.''
    If I understand it correctly, that would allow a 6-month 
period of time for the short-term bonds, which is very similar 
to just regular short-term bond issuance, with the main 
difference that unlike a bond, the term deposit cannot be 
traded on the marketplace; right?
    First of all, do you have authority to do that?
    Mr. Bernanke. Yes, because it comes under our authority to 
pay interest on reserves. We cannot sell those deposits to 
anybody, only to banks who have reserves with us. It is not an 
open thing; you and I could not purchase them.
    Mr. Garrett. Do you see that in any way coming up to the 
edge as far as the authority, as far as the Fed being able to 
issue bonds as skirting the spirit of the law as to what the 
Fed should be doing when it comes to issuing bonds?
    Mr. Bernanke. No. Congress very appropriately gave us the 
authority to pay interest on reserves and this is what this 
would be, only the reserves would be in these accounts. I do 
not see any issue with it.
    I would add, this does not answer your question, but I 
would add that every central bank in the world, major central 
bank, has these kinds of authorities, and they are very 
important for managing short-term interest rates in a period 
like the present.
    Mr. Garrett. Going back to the beginning part of the 
question, the initial discussion, at least by some, as far as 
having the authority to issue bonds that would be just widely 
circulated or sold in the marketplace--
    Mr. Bernanke. So-called Fed bills.
    Mr. Garrett. Where are you with regard to that?
    Mr. Bernanke. We are not proposing that now.
    Mr. Garrett. Okay. Thank you.
    Mr. Minnick. If the Chairman has just a few more moments, I 
would like to ask a couple of questions.
    During the Reagan Administration and dealing with the 
problem of commercial bank lending, which we are going to have 
a hearing on as the chairman said on Friday, in dealing with a 
similar situation, the Reagan Administration adopted a policy 
they called ``forbearance,'' which was a temporary reduction in 
the capital requirements at the discretion of regulators in 
order to permit banks that were scraping against the very 
minimum capital levels in the appropriate circumstance to 
continue to lend.
    Do you have an opinion as to the efficacy and 
appropriateness of that kind of a policy, and if you think it 
has merit, is it something we should consider in the present 
circumstance?
    Mr. Bernanke. There are general ideas about setting up a 
system that would allow capital requirements to vary over the 
business cycle, during weak periods, that you could run down 
some capital, for example.
    Those so-called countercyclical capital requirements, and 
those are being discussed. They might be actually a useful 
innovation.
    There is quite a bit of danger, I think, with the 
forbearance idea because if you begin to allow capital to fall 
arbitrarily, according to short-run objectives, you might find 
yourself with the government having to pay a lot of money to 
bail out banks that have failed because they did not have 
enough capital.
    It is a very delicate issue. I think you are better off if 
you are going to go that way having a system in place that 
allows for circumscribed variation over the business cycle and 
the amount of capital the banks have to hold. A buffer during 
the good times, they can run it down during the bad times.
    Mr. Minnick. Some variability, depending on the cycle. 
Would you leave the discretion to institute that variability 
with the bank regulators or would you provide some legislative 
side bars?
    Mr. Bernanke. I think the legislation is probably already 
adequate. It gives the authority to the regulators to set 
capital standards. I think the regulators could do it through a 
rulemaking process.
    You used the word ``discretion.'' Again, I would not create 
a system where the regulators could arbitrarily say at any 
given time you can reduce your capital. I think there ought to 
be a set of rules that explain exactly how that would happen 
over time.
    Mr. Minnick. Is implementing such a process that wearing 
your hat as a bank regulator you have seriously contemplated or 
would contemplate in this circumstance?
    Mr. Bernanke. Yes. That is being considered in 
international forums and there are examples around the world, 
like in Spain, where systems like that seem to have been 
helpful during the crisis.
    Mr. Minnick. Looking at the other side of financial 
institutions, balance sheets, one of the complaints I am 
certain we are going to hear on Friday from commercial banks is 
that the bank examiners are valuating assets based on the last 
distressed sale and those values are substantially below 
current market replacement costs, even discounted for the time 
anticipated to sell.
    Do you think there would be merit in providing guidance by 
regulators that you could use replacement value discounted to 
sale as an appropriate valuation for purposes of bank examiner 
examinations?
    Mr. Bernanke. There is guidance to appraisers in general. I 
suspect that the principle would be to use true comparables, 
which would involve not just distressed sales, but other 
properties as well. I think the main principle would be not to 
focus on distressed sales as representative of the value of a 
property.
    Mr. Minnick. Thank you, Mr. Chairman. The gentleman from 
California has just arrived. We are going to declare him the 
last speaker and get you out by 2:00 as promised.
    The Chair recognizes the gentleman from California, Mr. 
Campbell, for 5 minutes.
    Mr. Campbell. Thank you. Thank you, Chairman Bernanke. I am 
last and perhaps least as well.
    Two questions. One is the public sector, governments at all 
levels, currently represent, I believe, about 36 percent of 
GDP, which is a high since World War II. Governments at all 
levels are in some trouble. One could say they are 
overleveraged.
    You spoke earlier about the unsustainability of the current 
debt at the Federal level. My home State of California is 
obviously in deep fiscal trouble and has been for a long time, 
and so are many States and local communities.
    I have a concern about the public sector kind of being in a 
position that the private sector was in a few years ago, as 
being overleveraged, overextended, too much debt, too much 
spending, and actually the public sector being one of the drags 
and problems on the economy in the near future.
    Your thoughts on that?
    Mr. Bernanke. We have talked in this hearing quite a bit 
about debt and deficits. I do believe it is very important. It 
is probably inevitable to have large deficits in the middle of 
a deep recession, given the loss of revenues and so on.
    It is very important to develop a creditable plan for 
restoring deficits to a sustainable level in the medium term, 
which I would define to be 3 or 4 years out, and that would 
mean getting deficits down to something on the order of 3 
percent or below, to maintain a stable ratio of debt to GDP.
    That is very important to maintain confidence in the debt 
of the sovereign. Some countries around the world are having 
some difficulty with that right now. We certainly want to make 
sure that in the future some time, we will not be put into a 
situation where our interest payments are so large that it is 
very difficult for us to make those payments.
    Mr. Campbell. Right, and State and local governments have 
similar problems. They either have to raise taxes, reduce what 
they are doing, or both as well.
    Mr. Bernanke. That is right.
    Mr. Campbell. One more and final question for you is about 
Fannie Mae and Freddie Mac. If interest rates were to go up 
broadly, let's say by not 25 basis points, but 200 basis points 
or something like that, what is the impact?
    Are they not carrying a lot of interest rate risk and what 
is the impact on their bottom line and since they are now 
taxpayer-owned entities, government-owned entities, what 
problems do we face there?
    Mr. Bernanke. Mr. Garrett had a similar question. I think I 
would recommend that you talk directly to the regulator of 
Fannie and Freddie, but my understanding is they have hedged a 
good bit of that risk so that they would not be deeply hurt if 
there was a change in interest rates.
    To get an exact answer, you really ought to talk to Mr. 
DeMarco, who is the acting regulator.
    Mr. Campbell. Okay. Thank you, and thank you for 
everything. I yield back my time.
    Mr. Minnick. The Chair would like to thank Chairman 
Bernanke for his professionalism, for his time, and for the 
expertise with which you are carrying out your duties in this 
very important time for the country. We appreciate you being 
here.
    The Chair also notes that some members may have additional 
questions which they may wish to submit in writing. Without 
objection, the hearing record will remain open for 30 days for 
members to submit questions to this witness and to place his 
responses in the record.
    The hearing is adjourned.
    [Whereupon, at 1:53 p.m., the hearing was adjourned.]


                            A P P E N D I X



                           February 24, 2010
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