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






          STATE OF THE ECONOMY: VIEW FROM THE FEDERAL RESERVE

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

              HEARING HELD IN WASHINGTON, DC, JUNE 9, 2010

                               __________

                           Serial No. 111-26

                               __________

           Printed for the use of the Committee on the Budget


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                        COMMITTEE ON THE BUDGET

             JOHN M. SPRATT, Jr., South Carolina, Chairman
ALLYSON Y. SCHWARTZ, Pennsylvania    PAUL RYAN, Wisconsin,
MARCY KAPTUR, Ohio                     Ranking Minority Member
XAVIER BECERRA, California           JEB HENSARLING, Texas
LLOYD DOGGETT, Texas                 SCOTT GARRETT, New Jersey
EARL BLUMENAUER, Oregon              MARIO DIAZ-BALART, Florida
MARION BERRY, Arkansas               MICHAEL K. SIMPSON, Idaho
ALLEN BOYD, Florida                  PATRICK T. McHENRY, North Carolina
JAMES P. McGOVERN, Massachusetts     CONNIE MACK, Florida
NIKI TSONGAS, Massachusetts          JOHN CAMPBELL, California
BOB ETHERIDGE, North Carolina        JIM JORDAN, Ohio
BETTY McCOLLUM, Minnesota            DEVIN NUNES, California
JOHN A. YARMUTH, Kentucky            ROBERT B. ADERHOLT, Alabama
ROBERT E. ANDREWS, New Jersey        CYNTHIA M. LUMMIS, Wyoming
ROSA L. DeLAURO, Connecticut,        STEVE AUSTRIA, Ohio
CHET EDWARDS, Texas                  GREGG HARPER, Mississippi
ROBERT C. ``BOBBY'' SCOTT, Virginia  CHARLES K. DJOU, Hawaii
JAMES R. LANGEVIN, Rhode Island
RICK LARSEN, Washington
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin
GERALD E. CONNOLLY, Virginia
KURT SCHRADER, Oregon
DENNIS MOORE, Kansas

                           Professional Staff

            Thomas S. Kahn, Staff Director and Chief Counsel
                 Austin Smythe, Minority Staff Director














                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, June 9, 2010.....................     1

    Hon. John M. Spratt, Jr., Chairman, Committee on the Budget..     1
        Prepared statement of....................................     2
    Hon. Paul Ryan, Ranking Minority Member, Committee on the 
      Budget.....................................................     3
    Hon. Ben S. Bernanke, Chairman, Board of Governors of the 
      Federal Reserve System.....................................     5
        Prepared statement of....................................     8
        Responses to questions submitted for the record..........    58
    Hon. Marcy Kaptur, a Representative in Congress from the 
      State of Ohio:
        Study, dated April 16, 2010, by the Congressional 
          Research Service.......................................    36
        Pew Financial Reform Project briefing paper: ``The Cost 
          of the Financial Crisis: The Impact of the September 
          2008 Economic Collapse''...............................    39
        Questions for the record.................................    58
    Hon. Robert B. Aderholt, a Representative in Congress from 
      the State of Alabama, questions for the record.............    57

 
                       STATE OF THE ECONOMY: VIEW
                        FROM THE FEDERAL RESERVE

                              ----------                              


                        WEDNESDAY, JUNE 9, 2010

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:10 a.m. in room 
210, Cannon House Office Building, Hon. John Spratt [chairman 
of the committee] presiding.
    Present: Representatives Spratt, Schwartz, Kaptur, Doggett, 
Tsongas, Etheridge, McCollum, Yarmuth, DeLauro, Edwards, Scott, 
Langevin, Bishop, Connolly, Schrader, Moore, Ryan, Hensarling, 
Garrett, Diaz-Balart, Simpson, Jordan, Aderholt, Lummis, 
Austria, and Djou.
    Chairman Spratt. We meet today to discuss the progress of 
the economic recovery and the challenges that still lie ahead 
of us. We are pleased, as I said, to have as our witness today 
the Chairman of the Federal Reserve system, Dr. Ben Bernanke.
    When the 111th Congress began and the current 
administration took office, the economy was shrinking, 
contracting at an annualized rate of minus 5.4 percent. One 
year and a half later, the economy is experiencing its third 
straight quarter of economic growth, including 5.6 percent 
growth in the fourth quarter of 2009 and 3 percent growth in 
the first quarter of 2010. We have a chart to illustrate that.
    A year and a half ago, the economy was losing jobs, 
hemorrhaging jobs. In the month of January 2009, we lost 
779,000 jobs in one month alone. Now employers have added 
nearly a million jobs between January and May of this year. We 
have a chart that shows the job growth over the last span of 
time.
    The ultimate strength of our economy lies in the private 
sector of course, but the actions taken by this Congress and by 
the administration have also played a significant role. For 
example, in the judgment of CBO, the Recovery Act, which we 
passed in July and February of 2009, has contributed 
significantly to the economic turnaround, raising real GDP by 
1.7 to 4.2 percentage points in the fourth quarter of 2010 and 
increasing employment by between 1.2 million and 2.8 million 
jobs.
    Meanwhile, the Treasury Department, the Federal Reserve, 
and the FDIC have engaged in unprecedented and coordinated 
efforts to stabilize banks and the financial system by 
injecting liquidity, capital, securing people's savings and 
requiring banks to raise still more capital.
    While we as Democrats have been focused on the economic 
recovery, we have also been aware of the need to restore fiscal 
responsibility. We want to see the economy and the budget 
recover ``pari passu,'' step by step.
    Unlike the previous administration, which inherited a $5.6 
trillion surplus over 10 years and turned it into large 
deficits, the current administration was handed a $1.3 trillion 
deficit for 2010 alone and an $8 trillion deficit over the next 
10 years.
    While the recession and recovery efforts have taken an 
unavoidable toll on the budget in the short run, we are focused 
on bringing the deficit down as the economy recovers. We passed 
statutory PAYGO, requiring that new mandatory spending on 
revenue reductions be paid for. The President has established a 
bipartisan commission now at work to make recommendations to 
bring the deficit down to a sustainable level by 2015. The 
President has also proposed to freeze nonsecurity discretionary 
spending for 3 years.
    Last month I introduced a bill to add to our fiscal tool 
box, an additional tool called expedited rescission which 
allows the President to sign a bill into law but at the same 
time recommend to us in the Congress the elimination of some 
items in the bill that have a budgetary cost.
    We will continue to pursue these and other steps towards 
fiscal responsibility so that over the medium and long term we 
put the Nation on a fiscal path that will provide a foundation 
for a strong economy in the future. At the same time, the key 
concern in the short term remains the economic outlook.
    As we continue to work on additional legislation to address 
the situation, we are fortunate to have Chairman Bernanke here 
to present his testimony and respond to our questions. Most 
fundamentally at a time when too many Americans continue to 
feel the effects of this recession and wonder when relief is 
going to come, we would like to hear Dr. Bernanke's view of how 
the recovery is progressing and what steps we can take, what 
constructive steps the government can take, to maximize the 
return of sustained economic strength.
    Before we turn to Chairman Bernanke's testimony, I would 
like to extend a warm welcome to the newest member of the 
Budget Committee, Congressman Charles Djou from Hawaii. Welcome 
aboard. We are glad to have you on the committee. You were 
sworn in last month as the newest member of the House and we 
welcome him to Congress and in particular to the Budget 
Committee.
    Before Dr. Bernanke's testimony, let me also turn to the 
ranking member, Mr. Ryan, for any statement he may care to make 
for an opening purpose. Mr. Ryan.
    [The statement of Mr. Spratt follows:]

       Prepared Statement of Hon. John M. Spratt, Jr., Chairman,
                        Committee on the Budget

    We convene today to discuss the progress of the economic recovery 
and the challenges that lie ahead. We are pleased to have as our 
witness the Chairman of the Board of Governors of the Federal Reserve 
System.
    This economic crisis has profoundly affected the lives of so many 
Americans, and the task of restoring the strength of our economy and 
putting in place a foundation for enduring prosperity has been and 
remains at the top of the priority list for Congress and the 
Administration.
    While everyone agrees that more progress must be made, there 
clearly has been some noticeable improvement from where things stood a 
year and a half ago. When the 111th Congress began and the current 
Administration took office, the economy was shrinking at a 5.4 percent 
annualized rate; a year and a half later, the economy has experienced 
its third straight quarter of economic growth--including 5.6 percent 
growth in the fourth quarter of 2009 and 3.0 percent growth in the 
first quarter of 2010. A year and a half ago, the economy was 
hemorrhaging jobs--losing 779,000 jobs in January 2009 alone. Now, 
employers have added nearly 1 million jobs through between January and 
May of this year.
    The ultimate strength of our economy lies in the private sector--
our businesses and workers--but the actions taken by this Congress and 
this Administration have also played an important role. For example, in 
the judgment of the nonpartisan Congressional Budget Office, the 
Recovery Act passed in February 2009 has contributed significantly to 
the economic turnaround, raising real GDP by 1.7 to 4.2 percentage 
points in the first quarter of 2010, and increasing employment by 
between 1.2 million and 2.8 million jobs. Meanwhile, the Treasury 
Department, the Federal Reserve, and the FDIC have engaged in 
unprecedented and coordinated efforts to stabilize banks and the 
financial system by injecting liquidity, securing people's savings, and 
requiring banks to raise more capital.
    While Democrats have been focused on economic recovery, we have 
also been cognizant of the need to restore fiscal responsibility. 
Unlike the previous Administration, which inherited a $5.6 trillion 
ten-year surplus and turned it into large deficits, the current 
Administration was handed a $1.3 trillion deficit for 2010 and an $8 
trillion ten-year deficit. While the recession and recovery efforts 
take an unavoidable toll on the budget in the short run, we are focused 
on bringing the deficit down as the economy recovers.
    We have passed statutory Pay-As-You-Go rule into law--to require 
that new mandatory spending or revenue reductions be paid for. We have 
passed a health care reform bill that reduces the deficit. The 
President has established a bipartisan commission--which is now hard at 
work--to make recommendations to bring the deficit down to a 
sustainable level by 2015. The President has proposed to freeze non-
security discretionary spending for three years. Last month I 
introduced a bill to add to our fiscal toolbox an additional tool 
called ``expedited rescission,'' which allows the President to sign a 
bill into law but at the same time recommend that Congress eliminate 
some items included in the bill that have a budgetary cost.
    We will continue to pursue these and other steps toward fiscal 
responsibility so that over the medium and long term, we put the nation 
on a fiscal path that will provide the foundation for a strong economy 
in the future. At the same time, the key concern in the short term 
remains the economic outlook. As we continue to work on additional 
legislation to address the economic situation, we are fortunate to have 
Chairman Bernanke here to present his testimony and answer our 
questions.
    Most fundamentally, at a time when too many Americans continue to 
feel the lingering effects of the recession, we would like to hear your 
view of how the recovery is progressing, and what constructive steps 
can be taken to maximize the return of sustained economic strength.
    Before we turn to Chairman Bernanke's testimony, I would first like 
to extend a warm welcome to the newest member of the Budget Committee, 
Congressman Charles Djou from Hawaii. He was sworn in last month as the 
newest Member of the House of Representatives, and we welcome him to 
the Congress and to our Committee.
    Before the witness's testimony, let me also turn to the Ranking 
Member, Mr. Ryan, for any statement that he may wish to make.

    Mr. Ryan. Thank you, Mr. Chairman. And thank you for 
opening this hearing. I too want to start off by welcoming our 
newest member, Congressman Charles Djou of Hawaii. We look 
forward to working with you to tackle our fiscal and economic 
challenges. And it is exciting to see you and your family here 
and being sworn into Congress. And we are really looking 
forward to working with you. Welcome to the Nation's capital.
    And welcome to you, Chairman Bernanke. It is appropriate 
you are coming here before our committee today to talk about 
the state of the economy because the health of the U.S. and 
global economy is increasingly intertwined with the budget and 
our fiscal issues that we deal with here in this committee.
    Over the past few months we have watched as a sovereign 
debt crisis in Europe has boiled into a real troubling problem. 
We are seeing that the continent's economic recovery is being 
threatened and we see even global financial stability in 
general is being threatened. In some ways, we are seeing a 
replay of a similar dynamic which impaired global financial 
markets in 2008. The fear then was the systemic exposure to bad 
mortgage-related assets, but the fear now is driven by exposure 
to sovereign credit and the possibility of a debt-induced 
economic slump.
    Ominously, interbank lending rates, like LIBOR, are on the 
rise and credit spreads have widened as investors have become 
much more risk averse. Volatility is up and the stock market is 
down. What we are watching in real-time is the rough justice of 
the marketplace and the severe economic turmoil that can be 
inflicted on profligate countries mired in debt. At the moment, 
the U.S. is at the periphery of the European debt crisis and 
has even reaped some short-term benefits like lower long-term 
interest rates as a result of the renewed global flight to 
safety.
    But Americans are left to wonder. Could we one day find 
ourselves at the epicenter of such a crisis? Could a European 
style debt crisis one day happen right here in the United 
States? The answer is undoubtedly yes. And the sad truth is 
that inaction by policymakers to change our fiscal course is 
hastening this day of reckoning.
    A brief look at the budget numbers shows that our current 
fiscal situation and its trajectory going forward is very dire. 
The budget deficit this year stands at $1.5 trillion, or just 
over 10 percent of GDP. Under the President's budget, the 
budget we are living under right now, the CBO tells us that the 
level of U.S. debt will triple by the end of the decade, 
meaning that in just a few short years, the U.S. is poised to 
join that group of troubled countries whose public debt absorbs 
a large and growing share of their economic output. A fiscal 
crisis in the U.S. is no longer an economic hypothetical but a 
clear and present risk to our economy, to society's most 
vulnerable citizens, and America's standing in the world.
    As the example of Greece has shown, market forces and 
investor sentiment do not offer countries the luxury of time 
and delayed promises to get their fiscal house in order. Empty 
rhetoric is no substitute for results. Foreigners now own 
roughly half of the U.S. publicly held debt and their 
willingness to fund our borrowing at record low interest rates 
will not continue forever. The size of our current and future 
funding needs makes us quite vulnerable to a shift in market 
sentiment and higher than expected interest rates. The 
reemergence of the bond vigilantes and exposure to the rough 
justice of the marketplace would certainly make our bad fiscal 
situation even worse.
    The main point here is the need for policymakers to 
reassure credit markets that the U.S. is engaged in charting a 
clear course back to sustainable deficit and debt levels soon. 
It is clear to me that this means reining in government 
spending, not simply ramping up taxes. In particular, we need 
to reform our entitlement programs, which threaten to grow 
themselves right into extinction, collapse our safety net, 
overwhelm the entire Federal budget and sink the economy in the 
process. The budding sovereign debt problems in other parts of 
the world provide us with a great cautionary tale that it is 
always best to take action to shore up budget deficits before 
market forces demand it.
    So what has this Congress and administration done to 
respond? Two new entitlement programs and no budget. The 
majority's failure to even offer a budget and its commitment to 
continue spending money we don't have, creating brand new 
entitlements and plunging our Nation deeper into debt tells me, 
and tells the bond markets more importantly, that Washington 
still doesn't recognize the severity of our fiscal and economic 
challenges.
    I look forward to your testimony today, Chairman Bernanke, 
and remain hopeful that policymakers will heed your warnings 
and chart a sustainable course to avert the next crisis. Thank 
you.
    Chairman Spratt. Now, before turning to the Chairman for 
his comments, let me ask unanimous consent that all members be 
allowed to submit an opening statement for the record at this 
point. Without objection, so ordered.
    Dr. Bernanke, we welcome you before the committee. You have 
filed your testimony. We will make it part of the record. You 
can summarize it as you see fit. But you are the only witness 
today and we encourage you to take your time in responding and 
elaborating on the questions presented to you.
    Thank you again for coming. The floor is yours.

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

    Mr. Bernanke. Chairman Spratt, Ranking Member Ryan and 
other members of the committee, I am pleased to have this 
opportunity to offer my views on current economic and financial 
conditions and on issues pertaining to the Federal budget.
    The recovery and economic activity that began in the second 
half of last year has continued at a moderate pace so far this 
year. Moreover, the economy, supported by stimulative monetary 
policy and a concerted effort of policymakers to stabilize the 
financial system, appears to be on track to continue to expand 
through this year and next. The latest economic projections of 
Federal Reserve Governors and Reserve Bank presidents, which 
were made near the end of April, anticipate that real gross 
domestic product will grow in the neighborhood of 3-\1/2\ 
percent over the course of 2010 as a whole and at a somewhat 
faster pace next year. If this pace of growth were to be 
realized, it would probably be associated with only a slow 
reduction in the unemployment rate over time. In this 
environment, inflation is likely to remain subdued.
    Although the support to economic growth and fiscal policy 
is likely to diminish in the coming year, the incoming data 
suggests that gains in private final demand will sustain the 
recovery in economic activity. Real consumer spending has risen 
at an annual rate of nearly 3\1/2\ percent so far this year, 
with particular strength in the highly cyclical category or 
durable goods. Consumer spending is likely to increase at a 
moderate pace going forward, supported by a gradual pickup in 
employment and income, greater consumer confidence, and some 
improvement in credit conditions.
    In the business sector, real outlays for equipment and 
software posted another solid gain in the first quarter and the 
increases were more broadly based than in late 2009. The 
available indicators point to continued strength in the second 
quarter. Looking forward, investment in new equipment and 
software is expected to be supported by healthy corporate 
balance sheets, relatively low cost of financing of new 
projects, increased confidence in the durability of the 
recovery, and the need of many businesses to replace aging 
equipment and expand capacity as sales prospects brighten. More 
generally, U.S. manufacturing output, which has benefited from 
strong export demand, rose at an annual rate of 9 percent over 
the first 4 months of this year.
    At the same time, significant restraints on the pace of the 
recovery remain. In the housing market, sales and construction 
have been temporarily boosted lately by the home buyer tax 
credit. But looking through these temporary movements, 
underlying housing activity appears to have firmed only a 
little since mid-2009, with activity being weighed down in part 
by a large inventory of distressed or vacant and existing 
houses and by the difficulties of many builders in obtaining 
credit. Spending on nonresidential buildings also is being held 
back by high vacancy rates, low property prices, and strained 
credit conditions. Meanwhile, pressures on State and local 
budgets, though tempered somewhat by ongoing Federal support, 
have led these governments to make further cuts in employment 
and construction spending.
    As you know, the labor market was hit particularly hard by 
the recession, but we have begun to see some modest improvement 
recently in employment, hours of work, and labor income. 
Payroll employment rose by 431,000 in May, but that figure 
importantly reflected an increase of 411,000 in hiring for the 
decennial consensus. Private payroll employment has risen an 
average of 140,000 per month for the past 3 months and 
expectations of both businesses and households about hiring 
prospects have improved since the beginning of the year. In all 
likelihood, however, a significant amount of time will be 
required to restore the nearly 8\1/2\ million jobs that were 
lost over 2008 and 2009.
    On the inflation front, recent data continue to show a 
subdued rate of increases in consumer prices. For the 3 months 
ending in April, the price index for personal consumption 
expenditures rose at an annual rate of just \1/2\ percent, as 
energy prices declined and the index excluding food and energy 
rose at an annual rate of about 1 percent. Over the past 2 
years, overall consumer prices have fluctuated in response to 
large swings in energy and food prices. But aside from these 
volatile components, a moderation in inflation has been clear 
and broadly based over this period. To date, long-run inflation 
expectations have been stable, with most survey-based measures 
remaining within the narrow range that have prevailed for the 
past few years. Measures based on nominal index Treasury yields 
have decreased somewhat of late, but at least part of these 
declines reflect market responses to changes in the financial 
situation in Europe, to which I now turn.
    Since late last year, market concerns have mounted over the 
ability of Greece and a number of other euro-area countries to 
manage their sizeable budget deficits and high levels of public 
debt. By early May, financial strains had increased 
significantly as investors focused on several interrelated 
issues, including whether the fiscally stronger euro-area 
governments would provide financial support to the weakest 
members, the extent to which euro-area growth would be slowed 
by efforts of fiscal consolidation, and the extent of exposure 
of major European financial institutions to vulnerable 
countries.
    U.S. financial markets have been roiled in recent weeks by 
these developments, which have triggered a reduction in demand 
for risky assets. Broad equity market indexes have declined and 
implied volatility has risen considerably. Treasury yields have 
fallen as much as 50 basis points since late April, primarily 
as a result of safe-haven flows that boosted the demand for 
Treasury securities. Corporate spreads have widened over the 
same period and some issuance of corporate bonds have been 
postponed, especially by speculative grade issuers.
    In response to these concerns, European leaders have put in 
place a number of strong measures. Countries under stress have 
committed to address their fiscal problems. A major assistance 
package has been established jointly by the European Union and 
the International Monetary Fund for Greece. To backstop near-
term financing needs of its members more generally, the EU has 
established a European financial stabilization mechanism with 
up to 500 billion euros in funding, which could be used in 
tandem with significant bilateral support from the IMF. EU 
leaders are also discussing proposals to tighten surveillance 
of members' fiscal performance and improve the design of the 
EU's fiscal support mechanisms.
    In addition, to address strains in European financial 
markets, the European Central Bank has begun purchasing debt 
securities in markets that it sees as malfunctioning. It has 
resumed auctions of 3 and 6-month loans of euros in unlimited 
quantities to borrowers with appropriate collateral. To help 
ease strains in U.S. dollar funding markets, the Federal 
Reserve has reestablished temporary U.S. dollar liquidity swap 
lines with the ECB and other major central banks. To date, 
drawings under these swap lines remain quite limited and far 
below their peaks reached at the height of the financial crisis 
in late 2008, but they are nevertheless providing an important 
backstop for the functioning of dollar funding markets. More 
generally, our ongoing international cooperation sends an 
important signal to global financial markets that we will take 
the actions necessary to ensure stability and continued 
economic recovery.
    The actions taken by European leaders represent a firm 
commitment to resolve the prevailing stresses and restore 
market confidence and stability. If markets continue to 
stabilize, then the effects of the crisis on economic growth in 
the United States seem likely to be modest. Although the recent 
fall in equity prices and weaker economic prospects in Europe 
will leave some imprint on the U.S. economy, offsetting factors 
include declines in interest rates and Treasury bonds and home 
mortgages, as well as lower prices for oil and some other 
globally traded commodities. The Federal Reserve will remain 
highly attentive to developments abroad and to their potential 
effects on the U.S. economy.
    Ongoing developments in Europe point to the importance of 
maintaining sound government finances. In many ways, the United 
States enjoys a uniquely favored position. Our economy is 
large, diversified, and flexible; our financial markets are 
deep and liquid; and as I have mentioned, in the midst of 
financial turmoil, global investors have viewed Treasury 
securities as a safe haven. Nevertheless, history makes clear 
that failure to achieve fiscal sustainability will over time 
sap the Nation's economic vitality, reduce our living 
standards, and greatly increase the risk of economic and 
financial instability.
    Our Nation's fiscal position has deteriorated appreciably 
since the onset of the financial crisis and the recession. The 
exceptional increase in the deficit has in large part reflected 
the effects of the weak economy on tax revenues and spending, 
along with the necessary policy actions taken to ease the 
recession and steady financial markets. As the economy and 
financial markets continue to recover and as the actions taken 
to provide economic stimulus and promote financial stability 
are phased out, the budget deficit should narrow over the next 
few years.
    Even after economic and financial conditions have returned 
to normal, however, in the absence of further policy actions, 
the Federal budget appears to be on an unsustainable path. A 
variety of projections that extrapolate current policies and 
make plausible assumptions about the future evolution of the 
economy show a structural budget gap that is both large 
relative to the size of the economy and increasing over time.
    Among the primary forces putting upward pressure on the 
deficit is the aging of the U.S. population, as the number of 
people expected to be working and paying taxes into various 
programs is rising more slowly than the number of people 
projected to receive benefits. Notably this year, about 5 
individuals are between the ages of 20 and 64 for each person 
age 65 or older. By the time most of the baby boomers have 
retired in 2030, this ratio is projected to have declined to 
around 3. In addition, government expenditures in health care 
for both retirees and non-retirees have continued to rise 
rapidly as increases in the cost of care have exceeded 
increases in incomes. To avoid sharp disruptive shifts in 
spending programs and tax policies in the future and to retain 
the confidence of the public in the markets, we should be 
planning now how we will be meeting these looming budgetary 
challenges.
    Achieving long-term fiscal sustainability will be 
difficult, but unless we as a nation make a strong commitment 
to fiscal responsibility in the longer run, we will have 
neither financial stability nor healthy economic growth. Thank 
you, Mr. Chairman. I am happy to take your questions.
    [The prepared statement of Ben Bernanke follows:]

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

    Chairman Spratt, Ranking Member Ryan, and other members of the 
Committee, I am pleased to have this opportunity to offer my views on 
current economic and financial conditions and on issues pertaining to 
the federal budget.
                          the economic outlook
    The recovery in economic activity that began in the second half of 
last year has continued at a moderate pace so far this year. Moreover, 
the economy--supported by stimulative monetary policy and the concerted 
efforts of policymakers to stabilize the financial system--appears to 
be on track to continue to expand through this year and next. The 
latest economic projections of Federal Reserve Governors and Reserve 
Bank presidents, which were made near the end of April, anticipate that 
real gross domestic product (GDP) will grow in the neighborhood of 3\1/
2\ percent over the course of 2010 as a whole and at a somewhat faster 
pace next year.\1\ This pace of growth, were it to be realized, would 
probably be associated with only a slow reduction in the unemployment 
rate over time. In this environment, inflation is likely to remain 
subdued.
---------------------------------------------------------------------------
    \1\ See ``Summary of Economic Projections,'' an addendum to the 
April Federal Open Market Committee minutes, available at Board of 
Governors of the Federal Reserve System (2010), ``Minutes of the 
Federal Open Market Committee, April 27-28, 2010,'' press release, May 
19, www.federalreserve.gov/newsevents/press/monetary/20100519a.htm.
---------------------------------------------------------------------------
    Although the support to economic growth from fiscal policy is 
likely to diminish in the coming year, the incoming data suggest that 
gains in private final demand will sustain the recovery in economic 
activity. Real consumer spending has risen at an annual rate of nearly 
3\1/2\ percent so far this year, with particular strength in the highly 
cyclical category of durable goods. Consumer spending is likely to 
increase at a moderate pace going forward, supported by a gradual 
pickup in employment and income, greater consumer confidence, and some 
improvement in credit conditions.
    In the business sector, real outlays for equipment and software 
posted another solid gain in the first quarter, and the increases were 
more broadly based than in late 2009; the available indicators point to 
continued strength in the second quarter. Looking forward, investment 
in new equipment and software is expected to be supported by healthy 
corporate balance sheets, relatively low costs of financing of new 
projects, increased confidence in the durability of the recovery, and 
the need of many businesses to replace aging equipment and expand 
capacity as sales prospects brighten. More generally, U.S. 
manufacturing output, which has benefited from strong export demand, 
rose at an annual rate of 9 percent over the first four months of the 
year.
    At the same time, significant restraints on the pace of the 
recovery remain. In the housing market, sales and construction have 
been temporarily boosted lately by the homebuyer tax credit. But 
looking through these temporary movements, underlying housing activity 
appears to have firmed only a little since mid-2009, with activity 
being weighed down, in part, by a large inventory of distressed or 
vacant existing houses and by the difficulties of many builders in 
obtaining credit. Spending on nonresidential buildings also is being 
held back by high vacancy rates, low property prices, and strained 
credit conditions. Meanwhile, pressures on state and local budgets, 
though tempered somewhat by ongoing federal support, have led these 
governments to make further cuts in employment and construction 
spending.
    As you know, the labor market was hit particularly hard by the 
recession, but we have begun to see some modest improvement recently in 
employment, hours of work, and labor income. Payroll employment rose by 
431,000 in May, but that figure importantly reflected an increase of 
411,000 in hiring for the decennial census. Private payroll employment 
has risen an average of 140,000 per month for the past three months, 
and expectations of both businesses and households about hiring 
prospects have improved since the beginning of the year. In all 
likelihood, however, a significant amount of time will be required to 
restore the nearly 8\1/2\ million jobs that were lost over 2008 and 
2009.
    On the inflation front, recent data continue to show a subdued rate 
of increase in consumer prices. For the three months ended in April, 
the price index for personal consumption expenditures rose at an annual 
rate of just \1/2\ percent, as energy prices declined and the index 
excluding food and energy rose at an annual rate of about 1 percent. 
Over the past two years, overall consumer prices have fluctuated in 
response to large swings in energy and food prices. But aside from 
these volatile components, a moderation in inflation has been clear and 
broadly based over this period. To date, long-run inflation 
expectations have been stable, with most survey-based measures 
remaining within the narrow ranges that have prevailed for the past few 
years. Measures based on nominal and indexed Treasury yields have 
decreased somewhat of late, but at least part of these declines reflect 
market responses to changes in the financial situation in Europe, to 
which I now turn.
                         developments in europe
    Since late last year, market concerns have mounted over the ability 
of Greece and a number of other euro-area countries to manage their 
sizable budget deficits and high levels of public debt. By early May, 
financial strains had increased significantly as investors focused on 
several interrelated issues, including whether the fiscally stronger 
euro-area governments would provide financial support to the weakest 
members, the extent to which euro-area growth would be slowed by 
efforts at fiscal consolidation, and the extent of exposure of major 
European financial institutions to vulnerable countries.
    U.S. financial markets have been roiled in recent weeks by these 
developments, which have triggered a reduction in demand for risky 
assets: Broad equity market indexes have declined, and implied 
volatility has risen considerably. Treasury yields have fallen as much 
as 50 basis points since late April, primarily as a result of safe-
haven flows that boosted the demand for Treasury securities. Corporate 
spreads have widened over the same period, and some issuance of 
corporate bonds has been postponed, especially by speculative-grade 
issuers.
    In response to these concerns, European leaders have put in place a 
number of strong measures. Countries under stress have committed to 
address their fiscal problems. A major assistance package has been 
established jointly by the European Union (EU) and the International 
Monetary Fund (IMF) for Greece. To backstop near-term financing needs 
of its members more generally, the EU has established a European 
Financial Stabilization Mechanism with up to 500 billion euros in 
funding, which could be used in tandem with significant bilateral 
support from the IMF. EU leaders are also discussing proposals to 
tighten surveillance of members' fiscal performance and improve the 
design of the EU's fiscal support mechanisms.
    In addition, to address strains in European financial markets, the 
European Central Bank (ECB) has begun purchasing debt securities in 
markets that it sees as malfunctioning, and has resumed auctions of 
three- and six-month loans of euros in unlimited quantities to 
borrowers with appropriate collateral. To help ease strains in U.S. 
dollar funding markets, the Federal Reserve has reestablished temporary 
U.S. dollar liquidity swap lines with the ECB and other major central 
banks. To date, drawings under these swap lines remain quite limited 
and far below their peaks reached at the height of the financial crisis 
in late 2008, but they are nevertheless providing an important backstop 
for the functioning of dollar funding markets. More generally, our 
ongoing international cooperation sends an important signal to global 
financial markets that we will take the actions necessary to ensure 
stability and continued economic recovery.
    The actions taken by European leaders represent a firm commitment 
to resolve the prevailing stresses and restore market confidence and 
stability. If markets continue to stabilize, then the effects of the 
crisis on economic growth in the United States seem likely to be 
modest. Although the recent fall in equity prices and weaker economic 
prospects in Europe will leave some imprint on the U.S. economy, 
offsetting factors include declines in interest rates on Treasury bonds 
and home mortgages as well as lower prices for oil and some other 
globally traded commodities. The Federal Reserve will remain highly 
attentive to developments abroad and to their potential effects on the 
U.S. economy.
                         fiscal sustainability
    Ongoing developments in Europe point to the importance of 
maintaining sound government finances. In many ways, the United States 
enjoys a uniquely favored position. Our economy is large, diversified, 
and flexible; our financial markets are deep and liquid; and, as I have 
mentioned, in the midst of financial turmoil, global investors have 
viewed Treasury securities as a safe haven. Nevertheless, history makes 
clear that failure to achieve fiscal sustainability will, over time, 
sap the nation's economic vitality, reduce our living standards, and 
greatly increase the risk of economic and financial instability.
    Our nation's fiscal position has deteriorated appreciably since the 
onset of the financial crisis and the recession. The exceptional 
increase in the deficit has in large part reflected the effects of the 
weak economy on tax revenues and spending, along with the necessary 
policy actions taken to ease the recession and steady financial 
markets. As the economy and financial markets continue to recover, and 
as the actions taken to provide economic stimulus and promote financial 
stability are phased out, the budget deficit should narrow over the 
next few years.
    Even after economic and financial conditions have returned to 
normal, however, in the absence of further policy actions, the federal 
budget appears to be on an unsustainable path. A variety of projections 
that extrapolate current policies and make plausible assumptions about 
the future evolution of the economy show a structural budget gap that 
is both large relative to the size of the economy and increasing over 
time.
    Among the primary forces putting upward pressure on the deficit is 
the aging of the U.S. population, as the number of persons expected to 
be working and paying taxes into various programs is rising more slowly 
than the number of persons projected to receive benefits. Notably, this 
year about 5 individuals are between the ages of 20 and 64 for each 
person aged 65 or older. By the time most of the baby boomers have 
retired in 2030, this ratio is projected to have declined to around 3. 
In addition, government expenditures on health care for both retirees 
and non-retirees have continued to rise rapidly as increases in the 
costs of care have exceeded increases in incomes. To avoid sharp, 
disruptive shifts in spending programs and tax policies in the future, 
and to retain the confidence of the public and the markets, we should 
be planning now how we will meet these looming budgetary challenges.
    Achieving long-term fiscal sustainability will be difficult. But 
unless we as a nation make a strong commitment to fiscal 
responsibility, in the longer run, we will have neither financial 
stability nor healthy economic growth.

    Chairman Spratt. Thank you. We have just come through the 
worst recession since the Great Depression, and we seem to have 
turned the corner. Looking back, if we had not taken the 
extraordinary steps that we took, starting with the TARP 
solicitation by the Bush administration, the Recovery Act by 
the Obama administration and many other fiscal and monetary 
steps in between, where would we be now? Do you think that 
those steps have been vindicated by events?
    Mr. Bernanke. Yes, Mr. Chairman, I do. We and other 
countries around the world took strenuous measures in the fall 
of 2008 to avert the collapse of the global financial system 
and to restore appropriate functioning to global financial 
markets. It took a while for that to work, but currently 
financial markets are in much better shape obviously than they 
were a year and a half ago. Monetary and fiscal policy have 
been quite supportive and also added to growth. So we see at 
this point a moderate recovery, not as fast as we would like, 
but certainly we have averted what I think would have been, 
absent those interventions, an extraordinarily severe downturn 
and perhaps a great depression.
    Chairman Spratt. Could you have dealt with that problem 
with monetary policy alone? With the countercyclical efforts 
that we took, would monetary policy by itself have been 
sufficient?
    Mr. Bernanke. Sufficient depends on your comparison of cost 
and benefits. But I think that the fiscal policy, based on what 
we know about previous episodes of fiscal policy and the 
analysis we have been able to do, that it did increase growth 
and add to job creation.
    Chairman Spratt. You seem to acknowledge in your testimony 
that we have turned the corner. It appears that we have, 
pulling out of the recession, back on a path to growth. But you 
also will see a need for accommodative monetary policy for some 
months to come. Does that indicate that you are concerned about 
a double dip, about the possibility of a relapse?
    Mr. Bernanke. Mr. Chairman, forecasting is very difficult 
and I can make no promises in any particular direction. But it 
appears to us that the recovery has made an important 
transition from being supported primarily by inventory dynamics 
and by fiscal policy toward recovery being led now more by 
private final demand, including consumer spending. That is 
encouraging in terms of the sustainability. So our current most 
likely outlook is that the economy will continue to recover at 
a moderate pace. Of course a double dip can never be entirely 
ruled out, of course. But right now our expectation is that the 
economy will continue to grow at around a 3 to 4 percent pace 
this year.
    Chairman Spratt. If I open the mics up--and we will before 
the hearing is over--to each member, each member here could 
give you some anecdotal accounts, some compelling accounts of a 
creditworthy constituent who has not been able to find credit. 
What have we got to do to get credit moving and flowing in this 
country again? Because the growth rate depends critically, I 
think, on having adequate capital in the form of borrowable 
money.
    Mr. Bernanke. Mr. Chairman, that is also a top priority for 
the Federal Reserve. Our stabilization, our work with the 
financial markets has restored something close to normal 
functioning in the public capital markets, the securities 
markets. So larger firms who have access to the commercial 
paper market, the corporate bond market, the equity market have 
been able to raise funding as needed. And in addition, they 
have pretty liquid balance sheets. Problems still remain for 
smaller firms that are dependent on banks because banks, 
although they have stabilized, are continuing to be very 
conservative in their lending policies.
    The Federal Reserve, I would be happy to talk about this in 
quite a bit of detail if time permits. But very briefly, the 
Federal Reserve has been working very closely with the banks 
and with the examiners and with small business--I was just at a 
conference on this last week in Detroit--trying to make sure 
that the banks are able to lend to all creditworthy borrowers 
and they are not being excessively conservative or denying good 
borrowers access to credit.
    Chairman Spratt. Are you satisfied that that message is 
getting down to the regulators and the examiners in particular?
    Mr. Bernanke. I am never satisfied. I am sure that there 
are examples that we could point to where that is not 
happening. But we have made a very substantial effort in terms 
of training, in terms of conference calls, in terms of repeated 
exhortation to our examiners that it is very important to work 
with the banks to make sure that creditworthy borrowers are not 
turned away.
    The banks themselves have undertaken a number of steps. For 
example, a number of banks have undertaken so-called second-
look programs where loans that have been denied in the first 
round application are given a second look to see if perhaps 
there might be other circumstances that might justify the loan.
    Chairman Spratt. Until recently, the Fed was buying 
mortgages in the secondary market, creating a market itself. 
You have stopped doing that now. What is the role of Freddie 
Mac and Fannie Mae as we go forward with the recovery?
    Mr. Bernanke. Mr. Chairman, currently we are kind of in a 
transition period. As you know, Freddie and Fannie are in 
conservatorship. They are playing a very important role at the 
moment in providing a source of securitization for home 
mortgages. The private label mortgage backed security market is 
pretty much nonfunctional. Going forward, though, we need to 
get to a more sustainable situation. And I would be happy to 
talk about alternative models of reform. But I think everybody 
agrees that the current situation, the status quo, is not a 
sustainable one. We are going to need to reform those 
institutions going forward.
    Chairman Spratt. One final question. As you look back and 
bring your view up until recently, we have seen catastrophe 
after catastrophe occur that was not really fully appreciated 
or fully foreseen at that period in time, the euro is a good 
example, the failure of major institutions in 2008 and 2009 is 
another good example. Are the Fed and then the other monetary 
authorities, financial institution authorities in the Federal 
Government, do you think that you need a better distant early 
warning system, something that would give you a better lead 
time in recognition of events, incipient events that are about 
to turn critical?
    Mr. Bernanke. There are multiple dimensions about how to 
address this, and the financial regulatory reform legislation 
attempts to look at all the components. First, we need to have 
a better oversight of the system and more macro prudential or 
systemic approach to regulation that will allow us to identify 
gaps and problems before they lead to a crisis. That is part of 
the philosophy underlying the creation of a Systemic Risk 
Council and giving the Federal Reserve consolidated supervision 
over large, systemically critical firms.
    Secondly, we need to make the system more resilient so that 
when crises occur it will be more stable. We are doing that 
through a wide variety of mechanisms, including increased 
capital requirements, increased liquidity requirements, efforts 
to make derivatives trading more transparent and the like.
    And thirdly, if a crisis does occur, we need the tools to 
manage it. And there, very importantly, Congress has been 
working on alternative mechanisms for safely winding down, 
putting in receivership a large systemically critical firm so 
that it can fail without bringing down the rest of the system.
    So those are three dimensions of our response I think we 
are making progress towards. We will never eliminate financial 
crises, but we need to make sure that they are much less 
frequent, that they are less virulent and they have less effect 
on the economy.
    Chairman Spratt. Thank you very much.
    Mr. Ryan.
    Mr. Ryan. Thank you, Chairman. It is good to have you back. 
Sovereign CDS spreads have driven back upwards in recent weeks. 
Some countries' bond yields, I think Spain and Italy, reached 
fresh highs this week. And the European funding markets are 
still pretty tight. In your opinion, is the ECB doing 
everything it needs to do from a policy action standpoint to 
stem this crisis? How do you gauge the risk of contagion with 
this crisis spilling over? And what is the endgame if 
conditions get worse?
    Mr. Bernanke. This is a joint effort of a number of 
European authorities, including the European Union, the 
European Commission, and the ECB. It is a complicated problem 
because there are a number of countries that have difficult 
fiscal situations. The concern is that those countries cannot 
manage their fiscal positions on their own and that there might 
potentially be contagion to other countries or potentially to 
the banking system.
    So those are the concerns that are being faced. I am 
encouraged by the response of the Europeans. Although they lack 
the central fiscal authority that the United States has, they 
have understood the importance of cooperation and they have put 
together some very substantial programs including, as you know, 
a 500 billion euro stabilization mechanism that will stand 
behind countries on the periphery that need assistance in 
meeting their fiscal obligations, together with the IMF also 
providing substantial bilateral assistance. The goals of those 
programs--and they are quite substantial--will be to make sure 
that these countries are able to meet their obligations and to 
achieve fiscal sustainability.
    I think the markets remain uncertain about whether these 
measures will be successful. That is why you are still seeing a 
lot of volatility in the markets. What I can assure you of is 
that the European leadership is fully committed to addressing 
this problem, preserving the euro zone and preserving the 
European Union. And they are working, I think, very 
aggressively right now to try to establish some effective 
solutions.
    Mr. Ryan. Let us go over the monetary policy and global 
currency policy. The ECB is essentially engaged in quantitative 
easing. I know that they would argue that that is not per se 
their policy objective, but their objective is obviously 
liquidity for sovereign credit markets. The Federal Reserve has 
been engaged in a similar process lately. So we have now two 
reserve currencies engaged in a quantitative easing, the spirit 
of a quantitative easing policy. Gold hit an all-time high 
yesterday, which I think most people would view as a vote of no 
confidence against fiat currencies. I am interested in what 
does that price signal tell you and what is your view on the 
long-term repercussions with respect to weak currency policies?
    I suppose one could argue that we don't have a weak dollar 
because everybody else is so much weaker. But with this kind of 
quantitative easing policy in place, we have sort of removed 
one of the firewalls that have separated our monetary and 
fiscal policy and that has probably changed investor 
impressions looking into the future with respect to the 
stability and strength of our currency. What is your view on 
that?
    Mr. Bernanke. The signal that gold is sending is in some 
ways very different from what other asset prices are sending. 
For example, the spread between nominal and inflation index 
bonds, the breakeven remains quite low, suggests that markets 
expect about 2 percent inflation over the next 10 years. Other 
commodity prices have fallen quite severely, including oil 
prices and food prices. So gold is out there doing something 
different from the rest of the commodity group. I don't fully 
understand the movements in the gold price, but I do think that 
there is a great deal of uncertainty and anxiety in financial 
markets right now and some people believe that holding gold 
will be a hedge against the fact that they view many other 
investments as being risky and hard to predict at this point.
    Mr. Ryan. I think most people would agree that we don't 
have an inflation problem right now at our doorstep, that you 
could actually make an argument for disinflation or deflation 
as being potentially a risk. I am curious as to what do you 
look at to gauge inflation? It looks like you are really on 
this output gap model. You are using tip spreads, you are using 
consumer surveys. What leading indicators do you look at to 
inform your view on the future possibility of inflation? And 
how much do you put stock in those leading indicators?
    Mr. Bernanke. Well, you pointed to a number of them. 
Certainly we look at resource utilization and price and wage 
pressure, which is very low right now. With the increases in 
productivity we are seeing, unit labor costs are actually 
declining. So firms are finding that their labor costs are 
actually falling rather than rising. Inflationary expectations 
are very, very important. And we take some comfort from the 
fact that as measured through a variety of mechanisms they have 
been quite stable. And we look broadly at the economy, at 
commodity prices and a variety of other indicators to see what 
markets are anticipating. So it is a very eclectic process.
    I guess what I would like to say is that even though we 
have indeed expanded our balance sheet, as you know and 
understand, I have given some testimonies in the last few 
months where I have laid out in some detail how we can exit 
from those extraordinary policies as needed, when needed 
without leaving any monetary or inflationary bias in the 
system. So we are comfortable that we have those tools.
    Mr. Ryan. And the new tool you have is the ability to pay 
interests on reserves. My concern with this tool--and I just 
want to get your take on this--is we are talking about a credit 
crunch that our constituents are facing right now, especially 
if you are talking about rolling over the vintage of commercial 
real estate paper and the fact that people can't get their 
loans from their community banks. So there is a credit crunch 
right now. When you go in and charge interest on reserves to 
mop up the money supply once the velocity starts moving, it 
seems to me that you are just going to precipitate another 
credit crunch on top in order to mop up inflation. What is to 
make us think that we are not going to have tighter credit when 
the time comes around for your policy actions to be reversed?
    Mr. Bernanke. Congressman, it is exactly the same situation 
under any monetary policy tightening. When the Federal Reserve 
thinks that the economy is growing at more than a sustainable 
pace, it begins to raise interest rates precisely to reduce the 
demand for credit and to give an alternative to loans. So it is 
just the same as in any monetary----
    Mr. Ryan. So we are looking at a tight credit period for 
quite some time it seems to me.
    Mr. Bernanke. Well, except that the pace and degree of our 
tightening will depend on what we see is necessary to get the 
economy on a sustainable growth path.
    Mr. Ryan. Let us get to the growth, and this will be my 
last question. If my numbers are correct, the economy needs to 
create 250,000 jobs per month every month for 5 years straight 
if we want to get back to pre-recession unemployment levels. It 
is an incredible amount of job creation that is necessary. We 
can't keep taking the census every year. That is once every 10 
years. So as the inevitable pullback on the spending occurs, 
the government spending occurs, and hopefully the kind of 
hiring of government workers does not keep on its pace because 
that involves other liabilities. Do you have confidence that 
the private sector will pick up the slack in employment to get 
unemployment going down fast? Three to 3\1/2\ percent growth 
doesn't strike me as sufficient enough to get back to these 
kinds of lower unemployment levels that we have enjoyed in this 
country. What is your view on that?
    Mr. Bernanke. Congressman, as I said in my testimony, I do 
think that private final demand, including exports but also 
consumer spending and investment, is taking the baton from 
fiscal policy and inventory accumulation to provide some source 
of growth. So in that respect, as we all would like to see, the 
private sector is beginning to take over this recovery. But at 
the same time, there is not much evidence at this point that 
the recovery will be robust enough, will be V-shaped enough if 
you will, to get us back to historically normal levels of 
unemployment in a short period of time. So that is the downside 
and the disappointment with this recovery.
    Mr. Ryan. Is hitting the economy with higher tax rates on 
capital and income, especially for small businesses, going to 
help us get that growth up to where we need to go next year?
    Mr. Bernanke. We certainly want to get small businesses 
healthy and hiring as much as possible. We work, for example, 
very hard on credit for small businesses and they are an 
important source of job creation.
    Chairman Spratt. Before going to Ms. Schwartz, we have been 
informed by the Chairman's staff that you have a plane to catch 
at 12:30. So I am going to ride the 5-minute space pretty 
tightly.
    Ms. Schwartz.
    Ms. Schwartz. Thank you very much. Thank you, Mr. Chairman, 
for your--I do want to follow up on, I think, some of the 
questions that have been asked and you have elaborated, and 
particularly Mr. Ryan's last set of questions about business 
growth, small business growth. We do see, many of us, as the 
answer, both in the short-term and the long-term, as growing 
jobs in the private sector. And particularly we have focused on 
the job growth in a small business. And we have taken a number 
of actions that we feel are making a difference. If you want to 
comment on some of them. And I wanted to ask you specifically 
about lending, for you to elaborate a bit more on small 
business lending. We have done investment tax credits, 
biotherapeutics, we may do them for biofuels as a way to 
incentivize small businesses that don't have assets to be able 
to take regular tax credits, can do investment tax credits.
    We have extended bonus depreciation for small businesses, 
making capital investments. We have increased the cashflow for 
small business by providing a 5-year operating loss carryback. 
We have actually cut capital gains taxes for investments for 
small business, stocks would be extended, small business 
expensing. We have actually created tax credits for small 
businesses to provide health benefits.
    And the President has a new initiative on exports, which 
you referenced very briefly on the importance--I will say it is 
the importance of expanding our export opportunities, 
particularly for small business. We tend not to think about the 
opportunities for small businesses to increase their outreach 
to the markets in the world and to be able to sell their 
products around the world. And there is an initiative the 
President has directly endorsed to double that export number. 
It is actually really quite small, unlike many other countries.
    We are looking in the future in two areas to expand these 
investment tax credits as one way to help innovative new 
businesses, small businesses that have a hard time accessing 
capital.
    And I wanted to know what you think of that. Because many 
of us do believe that the new technology businesses, some of 
them in the energy sector, some of them in the health sector, 
but more broadly are really a great growth area for the United 
States. We have always been on the cutting edge of innovation 
and technology.
    And so I would ask you to comment on the actions we have 
taken, whether you think we should be continuing those, how 
much they have made a difference and will make a difference in 
expanding growth, small business growth in particular and we 
hope jobs. And secondly to expand on small business lending. We 
all hear it. We continue to hear it.
    Our concern, as you pointed out, was making sure whether 
banks, which is where small businesses go for this lending, are 
acting too conservatively. They get mixed messages a bit from 
the regulators to say--and we agree that they have to make sure 
they have enough capital themselves. But they have got to get 
some dollars out the door. We are looking this week at small 
business lending legislation that would actually encourage 
banks through some Federal dollars to get those dollars out the 
door to small businesses.
    And again I would highlight the interests we have in growth 
areas. Manufacturing, but particularly innovative entrepreneurs 
who are out there, want to take these steps and have a hard 
time accessing small business lending. Do you want to comment? 
I know you try not to comment on legislation, but the access to 
capital, what the Federal Government can do to encourage banks 
to do this. And again, more that we might be doing or that you 
might be able to do to encourage small business growth as one 
of the ways out of this difficult economy that I believe we 
have stabilized but really has a long way to go to create those 
jobs that we all want to see happen.
    Mr. Bernanke. You just gave a very good description. Small 
business is very important for job creation, particularly in a 
cyclical upturn. And I would say that in fact as we think about 
small business, we should also keep in mind startup businesses 
because they also provide a lot of job creation. So this is a 
very important part. It is our concern that too slow of a 
response on the small business side is one of the reasons why 
job creation is not as quick as we would like it to be. And I 
think it is important to try to remove the barriers and 
impediments for small business to expand.
    You talked about tax policy, you and Mr. Ryan. I agree that 
we want to make tax policy as small business friendly as 
possible, to provide the right incentives, to give them the 
opportunities to invest and hire. Beyond that, though, I think 
for them to do that, first they need demand, they need sales. 
So we need to keep the economy growing, and the Federal Reserve 
is doing its part by maintaining a supportive monetary policy. 
But we also need to make sure they get credit. And I agree that 
that is very important as well. I am glad the Congress is 
exploring these different programs for making credit available. 
I think it is very useful to do that. Again from our own 
perspective, we have put bank lending and bank credit at the 
very top of our priority list and we have increased our 
information gathering, we have increased our consultation, we 
have increased our training of examiners. Basically we would 
like to know--if your constituents are telling you I have been 
turned down unfairly, we would like to hear about it. We have a 
hotline. We have a Website. Banks who have problems should talk 
to the directors of supervision at their local reserve bank. So 
we do want to know about it, and we will respond to it. But I 
certainly agree with your sentiments of what you said and we 
want to do everything we can to get small businesses----
    Ms. Schwartz. We look forward to--but I would like to 
follow up on the issue of startups. I think it is very hard for 
them to actually get a bank to lend to a new entrepreneur, a 
new company that is just starting up, the kind of dollars they 
might need to get through that first year or so, and how you 
assess that risk. So we have to follow up with you, and thank 
you for your positive comments.
    Chairman Spratt. Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. Good morning, 
Chairman Bernanke. As you well know, Chairman Spratt, Ranking 
Member Ryan and myself serve on the President's Fiscal 
Responsibility Commission. You testified at our first meeting. 
At our second meeting, we received testimony from Dr. Carmen 
Reinhart at the University of Maryland, who presented, I 
believe, the most exhaustive study of debt crises that I am 
aware of, covering 44 nations over 200 years. She has come 
across with the conclusion to her study that when nations have 
a debt-to-GDP ratio of 90 percent that they will actually lose 
economic growth. Her study says, I believe the mean was 1 
percentage point. So if your economic growth is averaging 3 
percent, it would fall by a third to 2 percent. I think her 
study also showed that in the U.S., that in our Nation's 
history we actually have received negative economic growth at 
those points where debt to GDP has reached 90 percent. By a 
back of the envelope calculation, gross debt in the U.S. to GDP 
is now 89 percent. I know debt held by the public, I believe, 
is closer to 60 percent.
    My question is are you familiar with the professor's study? 
Are you familiar with her conclusions? Do you agree or 
disagree?
    Mr. Bernanke. I am familiar with her study, and I would say 
that her book with Ken Rogoff on debt crisis and financial 
crisis is an extraordinary piece of work that includes analyses 
of, as you say, dozens of crises. On this particular issue, I 
agree with the general point that as debt increases, interest 
rates increase. That tends to make investments more costly, tax 
rates go up.
    Mr. Hensarling. I am sorry, since time is limited. 
Specifically gross debt to GDP of 90 percent where essentially 
we are at that tipping point now, do you believe that the U.S. 
is at a tipping point with respect to its debt?
    Mr. Bernanke. I don't think there is anything magic about 
90 percent. However, I do think that if we were to go out as, 
say, the CBO's alternative scenario projects, then debt and 
interest payments are going to get explosive in 10 or 15 years. 
So I think we are close to a situation where we need to be 
paying very close attention to our fiscal sustainability.
    Mr. Hensarling. In your testimony, you speak about the 
European leaders, I think in your written testimony. Quote-
unquote, European leaders have put in place a number of strong 
measures, countries under stress have committed to address 
their fiscal problems. I think it was yesterday, perhaps the 
day before, the new Prime Minister of the U.K. said the state 
of Britain's finances were, quote, even worse than we thought 
and warned of, quote, painful and unavoidable cuts. Germany's 
Chancellor Merkel was quoted as saying Germany faces, quote, 
serious difficult times. They announced a rather sizeable group 
of spending cuts to deal with their spending crisis, which she 
said were necessary for the future of our country.
    When I look at Germany's deficit-to-GDP ratio, the U.K.'s 
deficit-to-GDP ratio, it seems to be comparable to our own. 
When I look at their debt-to-GDP ratio, of Germany and the 
U.K., again it appears to be comparable to our own in dealing 
with gross debt.
    I am just curious, do you appear to be complimenting the 
European leaders for taking strong stands, yet do you see 
similar strong stands being taken by this particular Congress 
to rein in the debt?
    Mr. Bernanke. Well, countries have different amounts of 
fiscal capacity, if you will. Countries like Greece, which are 
clearly being shut out from the market because of their debt 
and deficit ratios, need immediate and sharp changes in their 
position. The United States, as I said in my remarks, is 
favored in that we are a safe-haven currency, we are a large 
diversified economy, and we have a long record of paying our 
debts, paying our interest. So we have a little more breathing 
space potentially, but I don't know exactly how much we have. 
And what I am just trying to say--I don't think I am 
disagreeing with you--is that we need a program for returning 
our trajectory of fiscal policy to a sustainable path.
    Mr. Hensarling. Chairman Bernanke, my seconds are ticking 
away. Real quickly. Hopefully it is a yes or no question. I 
thought I have heard you testify before that not only is it 
important to the long-term sustainability that we have a 
program to deal with our debt, but it is actually important to 
economic growth today to send a signal that we have a plan in 
place. Did I understand you correctly? Is it important to have 
a plan today?
    Mr. Bernanke. You did. A plan in place will help keep 
interest rates down and help growth be stronger in the near 
term.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Chairman Spratt. Thank you.
    Mr. Doggett.
    Mr. Doggett. Thank you for your testimony, Mr. Chairman. 
There is a report out today, as you know, that the Federal 
Reserve, 6 months into a compensation study of the country's 28 
largest banks, has found that many of the bonus and incentive 
programs that economists say contributed to the worst financial 
crisis since the Depression remain in place. If the remainder 
of your study confirms that to be true, will the Fed do 
anything about it? Will it act this year rather than letting 
another year slip by? And what are some of the policy 
alternatives you have to deal with these compensation practices 
by our largest banks?
    Mr. Bernanke. Absolutely we are going to respond. We did a 
series of surveys and questionnaires to try to understand what 
the pay practices were and whether they were consistent with 
safe and sound banking and good incentive structures. As the 
report says, we found that many banks have not modified their 
practices from what they were before the crisis. We anticipate 
an interagency guidance on this matter within the next few 
weeks. So we will be putting out a set of criteria and a set of 
expectations very shortly, and we will be pushing the banks to 
move as quickly as possible to restructure their compensation 
packages so that they will not be engendering excessive risk 
taking. We will be doing that very quickly. We hope to have a 
public report about this near the end of this year or early 
next year. But I want to assure you that the actions we will be 
taking will not wait for the report. We will be immediately 
working with the banks, and we have been working with the banks 
already to get them to modify their compensation practices.
    Mr. Doggett. You believe we will see real genuine change in 
compensation practices from before this downturn to now, that 
people will be able to tell the difference?
    Mr. Bernanke. The structure of the compensation practices 
needs to change so that there is not an incentive to take 
excessive risks. Packages where the trader gets all the upside 
and none of the downside, that is the kind of thing we are 
trying to get rid of.
    Mr. Doggett. What do you believe would be the best estimate 
of the dollar cost to the taxpayers of TARP?
    Mr. Bernanke. Well, the direct cost for financial 
institutions, including AIG, I would say at this point it is 
not very large. Except for AIG, every other major institution 
has repaid with interest and dividends. And AIG I believe will 
repay. So the financial institution part, the direct cost is, I 
think, really quite small and may in the end be, in fact, a 
profit. That doesn't include some of the other uses to which 
TARP was put, such as the automakers support and the 
foreclosure program. The Treasury has provided numbers on 
those. I think they have an overall cost of about $110 billion 
for the program.
    Mr. Doggett. Mr. Chairman, Ms. Schwartz made reference to 
the Small Business Lending Fund Act, which as you know is 
pending here in the House. Without getting into all the details 
of the legislation, do you believe that we need to take more 
action to assure the flow of credit to small businesses? Are 
the efforts that you have described that are underway at the 
Fed sufficient?
    Mr. Bernanke. Well, I think both the Fed and the Congress 
and the administration ought to be looking for new ways to get 
credit flowing because that--to my mind, that is one of the 
dangers to the recovery, that job creation and small business 
growth will not be sufficient to sustain the momentum. So I 
would ask you to put this on your priority list.
    Mr. Doggett. Thank you. One of the areas that we have had 
some controversy over in the past is the concept of auditing 
the Fed. You made your views clear on that. The Senate narrowed 
significantly the audit provision that the House overwhelmingly 
passed. If something the same or similar to the Senate measure 
is adopted, how do you see that audit working?
    Mr. Bernanke. The Senate measure opens up all of our 
financial transactions, all of our financial controls, all of 
our financially related activities and therefore ensures that 
the taxpayers' money is as it is but you will be able to see 
that the taxpayers' money is well protected and well used. And 
that I have been saying from the very beginning, that we are 
absolutely comfortable with that and we are quite satisfied 
that we have an agreement to do that. We will cooperate in 
every possible way. We are already working with the GAO on AIG, 
for example. We will make sure that all this information is 
available to the public, that much of it already is. But 
whatever isn't will be put out.
    The concern I had about the House version of the bill was 
that it also included an audit of monetary policy, which 
essentially involves Congress asking the GAO to evaluate the 
Fed's monetary policy decisions, which in my view is 
inconsistent with the independence of the Fed to make monetary 
policy decisions and would be disruptive to confidence in the 
Fed on the part of the markets and the public.
    So I would strongly urge you to retain the 1979 exemption 
for monetary policy from GAO audits, which is not a financial 
audit, but a policy review. We are perfectly fine with prying 
open our books on all dimensions to the Congress to assure you 
that we are using the taxpayers' money appropriately.
    Mr. Doggett. Thank you.
    Chairman Spratt. Mr. Garrett.
    Mr. Garrett. Thank you, Mr. Chairman. And I thank the 
Chairman. If I can have Chart 3 real quick just to reply to the 
chairman's opening remark. I will just speak on the political 
side of it. If you look at the grey, at 2004, 2005, 2006, 2007, 
memory serves that the President at that time would have been 
George Bush and for the first 3 years of that I guess the 
Republicans were in charge of the House. In the fourth year, 
2007, is when the Democrats took it. But you are an economist. 
Can you tell us for year over year for the grey area there, for 
the first four bars, which way was the deficit going at that 
period of time, up or down?
    Mr. Bernanke. Well, of course you understand that the 
deficit jumped tremendously in 2009.
    Mr. Garrett. No, no, no. I just need to know the period of 
time from 2004, 2005, 2006 and 2007, year after year, the trend 
was up or down.
    Mr. Bernanke. I can see from the figure that you are 
showing me that it was down.
    Mr. Garrett. Thank you. So what we saw then during the time 
that President Bush was in office and the Republicans were in 
charge of the deficit, the deficit was going down. In 2007 I 
think Chairman Spratt took over the gavel here. In 2008, 
President Obama came into the White House. What is the trend 
then, speaking as an economist, where the deficits are going; 
is that up or down?
    Mr. Bernanke. We had a financial crisis and a recession 
that led to a big increase in the deficit, no question about 
it.
    Mr. Garrett. Thank you. Anyway, back to some of the 
points--I think that is clear. Back to the points that the 
gentleman from Texas made, and you made this also in Financial 
Services, that we need a plan now on one of the areas we talked 
about over there, the GSEs--and you are nodding your head yes?
    Mr. Bernanke. Yes.
    Mr. Garrett. We need a plan now to add what, certainty to 
the marketplace as far as where we are going to go in that area 
for the GSEs, and secondly, I will put it in one question, will 
that also mean to add certainty to the marketplace that we need 
a plan now as far as a budget as well for the economy going 
forward? For both GSEs and the budget, is that something 
essential in order to provide certainty to the marketplace?
    Mr. Bernanke. I think you want clarity on both those issues 
as soon as you practically can. Clearly one of the concerns 
that many businesses have is policy uncertainty about what is 
happening in Washington. And to the extent that we can provide 
clarity, that is certainly a good thing.
    Mr. Garrett. And by not providing that clarity in either 
one of those areas--because you are familiar with the financial 
service bill that is in the Senate right now has not a word 
really on the GSEs. And as you are familiar with this committee 
right now, we are in a point in time for the first time in 
almost 40 years that we haven't seen a budget out of there, 
without that certainty what would be your prognostication going 
forward if we don't have that certainty?
    Mr. Bernanke. I will repeat what I said, that those are 
very important issues and I hope Congress will move 
expeditiously to provide clarity.
    Mr. Garrett. And actually I will just add a little tail to 
that. So besides the budget and the GSEs, some of the other 
areas--I guess business is telling me they don't see certainty 
in basic tax policy and regulation and in also spending as well 
as far as--we could put up a chart here on where spending is 
going. How did those three factors play into either lack of 
certainty in the marketplaces or certainty in the marketplaces? 
Taxes, regulation, and spending.
    Mr. Bernanke. I hear the same thing that--uncertainty about 
the economy and about policy is a deterrent to expansion. My 
particular bailiwick is financial regulation, and I think it is 
important for us to try to clarify as quickly as possible, 
Congress and the regulators, what is going to be expected of 
banks, for example, in the future. And we want to do a good 
job. We want to turn out good legislation and good regulation, 
but we should try to clarify as soon as possible in order to 
avoid any retarding effects on investment and expansion.
    Mr. Garrett. I appreciate that.
    Can you just clarify something for me also just on a side 
note here? I assume and I thought I heard a rumor to this 
effect--maybe it is out there already--has the Fed done a study 
internally or otherwise just to look at itself and to look at 
what have you learned over the last year and a half or so with 
regard to the whole financial crisis and the way you have 
worked and everybody else worked? Are they doing a study? Have 
they done a study?
    Mr. Bernanke. We have done a series of papers. We have done 
one on monetary policy, which was made public. We have done a 
number of papers on supervision practice, and they have been 
guiding us to a revamping of our supervisory structure. So we 
have been doing a number of different----
    Mr. Garrett. And as you know, we are about to move ahead on 
financial service reform in the next day, week, or something 
like that. Are all of those reports and studies that you have 
done available? And if so, can we have a copy of those so we 
know before we go into this and pass a law what you have 
learned?
    Mr. Bernanke. I will have to take an inventory of what we 
have. But what we have worked on is not so much the regulatory 
structure but our own supervisory execution of those rules. So 
that would be what we have looked at.
    Mr. Garrett. That might be beneficial to us. Could we have 
copies of that?
    Mr. Bernanke. We will see what we have. We will work with 
you.
    Mr. Garrett. If you do have something, is it possible to 
get a copy of it?
    Mr. Bernanke. Yes.
    Mr. Garrett. There you go. And I have used up all my time.
    Thank you, Mr. Chairman.
    Chairman Spratt. Mr. Yarmuth.
    Mr. Andrews of New Jersey.
    Mr. Bishop of New York.
    Mr. Bishop. I am here, Mr. Chairman.
    Thank you, Mr. Chairman for being here. Just, Mr. Garrett 
raised some questions that suggested that the explosion of the 
deficit has to do with Democratic policies. My understanding is 
that the CBO has conducted a study in which they have indicated 
that they believe that our long-term debt over the next 10 
years, we are looking at an $8 trillion debt, and they have 
assessed that $5 trillion of that results from essentially two 
decisions: The 2001 and the 2003 tax cuts put on the national 
credit card, and the massive expansion of the Medicare part D 
program, again put on the national credit card. Are you 
familiar with that assessment from CBO? And if so, what is your 
take on it?
    Mr. Bernanke. Well, CBO does these baseline projections 
under current policy, and I am sure that the 2001, 2003 tax 
cuts and the part D would be important contributors to their 
projection of deficits over the next 10 years.
    Mr. Bishop. Is there any argument that can be made that the 
2001 and the 2003 tax cuts were stimulative, given the meltdown 
that we have had in the economy over the last several years?
    Mr. Bernanke. Well, I think they were stimulative to some 
extent. Remember, we had a recession in 2001, and we had some 
recovery from that. The meltdown we had was a financial crisis 
which was somewhat unrelated to some of these fiscal issues.
    Mr. Bishop. Let me go quickly to the Recovery Act. You 
indicated, I think in response to a question from Mr. Spratt, 
that government interventions averted a more severe recession, 
if not a second-grade depression. Do you include the Recovery 
Act in your tabulation of government interventions?
    Mr. Bernanke. I believe the Recovery Act did create growth 
and jobs. It is very difficult to know exactly how much. But 
based on our analysis and past experience, I think it did 
contribute to the recovery.
    Mr. Bishop. And the Recovery Act was essentially--I am 
round-numbering it--$500 billion of spending, $300 billion of 
tax cuts. Has there been any assessment that you have put 
credence in that assesses which pieces of the Recovery Act were 
perhaps more impactful than others?
    Mr. Bernanke. I don't know of any studies of this 
particular episode. So I guess the answer is, no, I don't.
    Mr. Bishop. Let me ask it this way: When we had the 
Recovery Act on the floor in the House, the Republican 
alternative was a Recovery Act that consisted entirely of tax 
cuts; if I remember correctly, about $550 billion worth of tax 
cuts. You said before that predictions are difficult.
    But what would have been the impact, or can you assess what 
the impact would have been, had we had only a Recovery Act that 
consisted of tax cuts? What, for example, what implications 
would that have had for the States? About $200 billion of our 
Recovery Act was direct assistance to States so that States 
would be able to maintain a level of services. So can you 
assess where we would be relative to the States and relative to 
employment if our only response had been tax cuts?
    Mr. Bernanke. I think you are asking me something that I 
can't do without more analysis. Tax cuts have incentive 
effects. They have spending effects. But as you point out, they 
would not have covered some of the State and local budgetary 
issues that you are referring to. I am sorry, I don't know how 
to answer that question.
    Mr. Bishop. I understand.
    Mr. Chairman, thank you. I yield back.
    Chairman Spratt. Mr. Simpson.
    Mr. Simpson. Thank you, Mr. Chairman.
    And thank you for being here today, Chairman. The economy 
seems to react to almost everything you say. Sometimes it 
reacts to things Congress does or fails to do. You said earlier 
that we need a plan to deal with our--or at least a plan to 
deal with our long-term financial debt as important to current 
economic conditions. Is that correct?
    Mr. Bernanke. Yes.
    Mr. Simpson. Does Congress's inability to even be able to 
pass a budget for this current year and, therefore, our 
inability to do our appropriations bills for this current year 
have a negative impact on our economy would you say? And if so, 
to what degree?
    Mr. Bernanke. Well, it is important for us to persuade the 
markets that we have the political will and the ability to 
address our long-term debt and deficit problems. So what you 
are saying is, you know, inability to pass a budget could be a 
negative in that respect.
    I have to say, in all honesty, that so far, we are not 
seeing it in the markets. The interest rates remain quite low.
    But certainly one of the things that the markets will 
assess is the political ability of the Congress to work 
together to develop a longer-term budget plan that will bring 
us back to sustainability.
    Mr. Simpson. In terms of tax policy, you said it needs to 
be small-business friendly. Obviously, small businesses create 
a majority of the new jobs in this country. Does it need to be 
consumer-friendly also? And the reason I ask that is, is this a 
time to let taxes increase or to increase tax rates on anybody 
in our economy? And we have heard a lot about all the tax rates 
that we have decreased for small business and investment income 
and other types of things. What about increasing tax rates on 
consumers?
    Mr. Bernanke. I am trying to avoid, as you can see, trying 
to avoid getting into the detailed debates on specific 
measures.
    Mr. Simpson. In general.
    Mr. Bernanke. In general, I think right now we have a 
broadly stimulative fiscal policy which at the moment is 
helping, is needed, that includes lower taxes and probably 
higher spending as well.
    But I think in order for that to be sustainable, we need to 
have a plan in the medium term to bring us back down to a 
stable trajectory. And that is what is critical. As long as we 
have the confidence of the markets that we will be able to exit 
from this situation with a sustainable fiscal program, then I 
think we will be okay.
    If the markets take the conclusion from our actions that we 
are unable to do that, then we face some risk that interest 
rates will go up, and markets will be unconvinced.
    Mr. Simpson. Do markets care in this long-term fiscal plan 
to bring us back into some sort of balance, how much of it is 
based on fiscal restraint or spending restraint by Congress and 
how much of it would be a tax increase?
    Mr. Bernanke. I think it depends on the detailed structure 
of exactly what the spending and tax is. Again, I am trying to 
avoid taking sides on this because it is really up to Congress 
to make those decisions.
    Mr. Simpson. Clearly, we need your expertise on it.
    Mr. Bernanke. Well, there are plenty of people that have 
that kind of expertise, including the Congressional Budget 
Office and others. But the point is that we need to find some 
combination of reforms, taxes, spending, however you want to 
put it together, that is going to assure markets that deficits 
will be kept under control over the medium and long term.
    Mr. Simpson. One last question. The Chairman mentioned, are 
we looking at a double dip in the economy? I continue to hear 
concern about the commercial real estate market and that it is 
going to hit. It is going to be worse than the home mortgage 
market that drove us into the first recession. Are you 
concerned about that? And what are we doing about it?
    Mr. Bernanke. Well, we are concerned about it. Clearly, it 
is a very weak point in the economy. For many banks, 
particularly smaller- and medium-sized banks, it is a problem.
    We have done a number of things. The Federal Reserve worked 
with the Treasury to develop a program to try to restart the 
commercial mortgage-backed security market. Beyond that, we 
have issued guidance to banks and commercial real estate, and 
we are trying to work with them to restructure commercial real 
estate loans and to find ways to manage troubled loans. So we 
are doing the best we can with the banks and with the markets.
    There seems to be, I would say, a few glimmers of hope in 
this area. There is some stabilization of price in some 
markets, for example, but it does remain a very serious 
concern, and we are watching it very carefully.
    Mr. Simpson. Thank you.
    Thank you, Mr. Chairman.
    Chairman Spratt. Mr. Schrader.
    Mr. Schrader. Thank you, Mr. Chairman.
    Can we go back to Mr. Garrett's graph from earlier? Is that 
possible?
    Mr. Bernanke, it is my understanding that, during the 
Clinton years, we had a $5-plus trillion surplus; and under the 
Bush years, we went to a deficit. Is that an accurate 
statement?
    Mr. Bernanke. In terms of CBO projections, that is right.
    Mr. Schrader. On this graph here, as you can see, beyond 
2007, we already start to see the uptick of the Bush 
administration policies and the deficit. In the 2009 bar, which 
is colorfully colored red in this case, how much of that 2009 
bar is a result of the economic downturn in the Bush policies?
    Mr. Bernanke. A lot of the increase in the last couple of 
years and also some of the size of the deficit next year as 
well is a function of the financial crisis and the recession, 
absolutely.
    What this picture doesn't completely capture is that in the 
medium term, the dominant factors will be the entitlement 
programs, Medicare, Medicaid, Social Security. Those will be 
the biggest cost factors in the medium term. This reflects the 
short-term movement in terms of the recession mostly.
    Mr. Schrader. So of little value for long-term projection?
    Mr. Bernanke. Well, the recession component ought to go 
away, but we do need to deal with the structural component, the 
longer-term component.
    Mr. Schrader. You talk in your testimony that GDP is going 
to grow about 3.5 percent from 2010. That is a pleasant change 
from the 6 percent downturns that we were seeing at the end of 
2008 and early 2009 that came out of the Bush administration. 
You talk about a faster pace next year. What is that faster 
pace you are anticipating?
    Mr. Bernanke. There is a lot of uncertainty, but we are 
looking at sort of something around 3.5 to 4 percent next year.
    Mr. Schrader. You also talk about the fiscal policy effects 
are going to diminish, obviously, as we withdraw the fiscal 
stimulus money that has been put into the system and kept out 
us of the depression. You talked about incoming data suggesting 
gains in private final demand. What incoming data are you 
looking at to project that?
    Mr. Bernanke. There are three areas where private final 
demand is relatively strong. The consumer has been pretty 
strong, which is a very important component. It is a big 
component, obviously. Equipment and software investment by 
firms, not construction but equipment, and exports have been 
strong. Those are the main components. The others are 
relatively weak.
    Mr. Schrader. You also talked about manufacturing output, 
which has very well skyrocketed to 9 percent over the first 4 
months. Is something like that sustainable? Where are we going 
to go in the future with U.S. manufacturing?
    Mr. Bernanke. Well, it is not sustainable indefinitely but 
manufacturing has rebounded very quickly, and was leading the 
economy out of the recession, which often happens. But in part, 
it is because manufacturing is trade-intensive, and as global 
trade has rebounded, manufacturing has taken advantage of that.
    Mr. Schrader. Right now, there seems to be an impending 
crisis in the States in their budgets. We certainly are very 
mindful, as you have heard in the discussion today about our 
own fiscal situation here at the national government. But our 
States are potentially facing huge budget crises. I don't 
care--almost all the States--not all but almost all. What 
affect would massive public employee layoffs of teachers, 
police officers, and firefighters have on the recovery?
    Mr. Bernanke. Well, just in the same way that fiscal 
spending affects activity, the decline in those services would 
be reflected in slower growth presumably.
    Mr. Schrader. So the recovery would be prolonged and 
deeper?
    Mr. Bernanke. Well, directly we see that those jobs would 
be lost and those services would be lost.
    Mr. Schrader. Do you see any indication--based on your 
testimony, the Treasury yields are still pretty low and it 
seems to be a safe haven. Any indication in the near future 
that the U.S. Treasuries won't still be the preferred currency 
of the world going forward here?
    Mr. Bernanke. No. The dollar is still the dominant reserve 
currency, and U.S. Treasuries, obviously, are very attractive, 
as you can see from the increase in their prices during the 
recent turmoil. So the U.S. dollar has been a safe haven 
currency where investors have gone when they have been 
concerned about other currencies in other economies.
    Mr. Schrader. Thank you very much.
    I yield back.
    Chairman Spratt. Mr. Jordan.
    Mr. Jordan. Thank you, Mr. Chairman.
    Dr. Bernanke, I appreciate you being with us today. On page 
1 of your testimony, you offer a fairly optimistic projection 
of what you think is likely to happen in the near term and into 
next year.
    You talk about expand through this year and next, and you 
talk about a 3.5 percent increase over the course of the rest 
of this year and a somewhat faster pace next year.
    But there was a column earlier this week in the Journal by 
Art Laffer, who obviously comes from a particular school of 
economic thought, and he talks about the tax increases that are 
coming. We know they are going to happen. The top marginal rate 
is going to go up. The dividends rate is going to go up. The 
capital gains tax rate is going to go up. And the fundamental 
principle in economics is that government policies change 
people's behavior, and they have an impact.
    I think about my home State of Ohio. We have a pretty high 
marginal tax rate, income tax rate. People leave because of 
that. Think of States like California with their tax rate. And 
you also, I think in the very first questions from the 
chairman, talked about the potential or the concern that is 
still out there about a double-dip recession.
    So talk to me about those tax increases that we know are 
going to happen--I mean, the administration and this Congress 
have been very plain about that; they are going to raise those 
taxes--what impact that may have on the growth that you are 
expecting to continue through the remainder of this year and 
into next year.
    Mr. Bernanke. Well the timing is critical. We have a 
recovery underway now. So, in the very near term, increased 
taxes, cuts in spending that are too large would be a negative, 
would be a drag on the recovery.
    At the same time, as Mr. Ryan and others have pointed out, 
we need to convince markets that in the medium and longer term, 
we have a sustainable fiscal path. So the ideal strategy in my 
view is to provide soon a plan for balancing our budget or at 
least bringing deficits down over the medium and longer term.
    Now, again, I am not going to try to adjudicate for 
Congress exactly how that should be done. But I would say that, 
in the short term, that you should, as you look at fiscal 
issues, you should take into account the recovery and the 
strength of the recovery.
    Mr. Jordan. Well, let me pick up where you were about a 
plan in place. I would just point out that--and last year I 
offered on behalf of the Republican Study Committee the only 
balanced budget in Congress. We introduced it again 2 weeks 
ago. And frankly, I would invite you to take a look at that. We 
will get you a copy. We will give you the analysis of it, to 
look at that, the 10-year plan that actually reaches balance in 
the 9th and 10th year, does not impose tax increases. We think 
those are the right things. We think it strikes that balance 
you were just talking about. So I would ask you to take a look 
at that.
    Let me just do one last question if I could. On page 5 of 
your testimony, you talk about the sustainability and how 
important it is and that if we don't get a plan in place or a 
path to sustainability, it will sap our Nation's economic 
vitality, greatly increase the risk of economic and financial 
instability. As the head of the Fed and speaking to this 
committee, speaking to the American people, in practical terms, 
if we don't get a plan, what does it mean to families across 
this country, what does it mean to the small business 
community? In real terms, how would you describe where we are 
headed if in fact we don't begin to turn this thing around, if 
we don't begin to get some common sense and make the tough 
decisions you have alluded to earlier in your answers? What it 
means in real terms to families and small business owners and 
taxpayers across this country, what it means for the Nation. 
And I will yield back.
    Mr. Bernanke. One of the main channels would be if 
confidence was lost in our long-term fiscal stability, we would 
see our interest rates go up quite a bit, as we have already 
seen in Greece and other countries. And that would affect, of 
course, the consumers' ability to buy houses and automobiles, 
et cetera. It would slow our economy. By reducing the value of 
government bonds, it would put pressure on the balance sheets 
of financial institutions. So it would cause a lot of stress on 
the economy. And in the worst case, it would cause financial 
instability like we are seeing, you know, to some extent in 
Greece.
    So if you want a strong economy, you need to have capital 
investment. You need to have consumers' ability to buy houses 
and automobiles and so on. And the high interest rates that 
would make it even more difficult to balance the budget--
because interest payments are a part of the deficit.
    Mr. Jordan. Interest rates are, I believe, within 2 years, 
we are on a path to pay $1 billion a day just in interest on 
the debt. That is how out of control it is getting.
    Mr. Bernanke. But our interest rates now are very low.
    Mr. Jordan. I understand that.
    Mr. Bernanke. So the concern would be that they would go 
higher, and then it would be much more difficult and disruptive 
to make the cuts and to make the changes you would have to make 
in the budget to meet the fiscal goals at that point with 
interest rates much higher.
    Chairman Spratt. Mr. Etheridge.
    Mr. Etheridge. Thank you, Mr. Chairman. Thank you for the 
hearing.
    Mr. Chairman, thank you for being here. Thank you for your 
service.
    Mr. Bernanke. Thank you.
    Mr. Etheridge. I was here and I remember in 2008 when 
Congress didn't step up to the plate when we were requested to 
do so when the credit markets froze around the world and the 
stock market fell over 500 points in just a matter of minutes. 
And over the weekend, sounder heads prevailed, listened to good 
advice, and at least started back on the road. Not only were we 
punished, but a lot of folks in this country had money in 
401(k)s and a host of other place. Some saw their life savings 
sink, and some lost them totally.
    So thank you for your hard work and your efforts. And the 
economic collapse that was almost created by 8 years of not 
paying attention, squandering the surplus, and we just averted 
disaster, and I appreciate all those who did the work.
    Your testimony notes and the economists on both sides of 
the political spectrums have pretty much agreed, I think, that 
thanks to the Recovery Act--and you testified to this earlier--
we are starting to see signs of economic growth. You indicated 
earlier, some have indicated some of that growth may have been 
directly related, and in some States, depending on where they 
are, they say that as much as 2 percent loss in GDP in those 
areas.
    Last week, I attended a school groundbreaking in Sanford, 
North Carolina. It was made possible from the recovery funds. 
And I think those are smart investments, not only to put people 
to work but lay the groundwork for long-term economic growth.
    However, as you have indicated and testified, the recovery 
is still not on as sound footing as we would like for it to be. 
And my State of North Carolina still faces some tough times. 
Teachers, Medicaid funds that aren't funded. And those who take 
a pretty tough stance in saying, we ought not to do it. We 
shouldn't do it, because if we do it, there are those who will 
vote against it, who will go home and campaign against people 
who do what they consider the responsible thing and keep this 
economy moving forward, just for political purposes.
    But my question for you, that we need to keep our eye on 
the ball, battling the fear, and my fear is that not only will 
children get hurt if we don't do the right thing, but economic 
recovery in the long run will pay a healthy price. In your 
view, what would be the effect on the recovery if we pull back 
too soon and do not provide the kind of aid that States may 
need at a very critical moment? And I think we are at that 
tender point right now. I would be interested in your thoughts 
on that.
    Mr. Bernanke. Let me first say that, in terms of any fiscal 
package, again, I don't want to adjudicate specific parts of 
it. And Congress needs to decide which components they want to 
support and which ones they think will be most effective.
    But in terms of the time frame, right now I don't think is 
the time, this very moment is not the time to radically reduce 
our spending or raise our taxes because the economy is still in 
a recovery mode and needs that support.
    However, the risk, of course, of ongoing deficits is the 
potential loss of confidence in the markets, and the way to 
reassure the markets is by creating a plausible plan for a 
medium-term stability in the fiscal situation. We, obviously, 
can't run deficits at 10 percent of GDP forever.
    Mr. Etheridge. And we put in PAYGO, as the chairman touched 
on earlier, to get that point.
    You have outlined some of the Fed's action. And this may 
not be something you can deal with, but I think it is important 
to say at this meeting, because I have talked to a lot of 
community and small bankers, a lot of small business people, 
and a lot of developers who are really frustrated. They are 
frustrated because they see a need, they can do something; but 
because of certain regulations, they are being told that 
whatever the value of that real estate they had, if it was 
$500,000, it is now $300,000. And in many of them, they are 
cashing it in.
    And I really fear if we aren't very cautious in what we do, 
we are going to wind up with a few large builders in this 
country, a few much bigger--more big banks, fewer community 
banks and fewer people to get involved in the local Lions Club, 
Boy Scouts and Girl Scouts and things that make America what 
America is. And as you sit with others, I hope you will remind 
them that it is these people. We have to make sure we get 
credit to our small business people in America. And that is not 
flowing yet, I don't think, in a way it needs to.
    Mr. Bernanke. I absolutely agree. I think there are some 
signs of progress, but it is still a tough situation. The Fed 
is a regulator as well as a monetary policymaker. We are 
working with our colleagues to do all we can to make sure that 
banks are making good loans.
    Mr. Etheridge. Thank you, sir.
    Thank you, Mr. Chairman.
    Chairman Spratt. Mr. Djou, we welcome you to the committee 
again. I am pleased to recognize you for up to 5 minutes.
    Mr. Djou. Dr. Bernanke, a few quick questions.
    My apologies. A freshman mistake here.
    Dr. Bernanke, a few very quick questions here. First off, 
you begin in your testimony that the economy is showing modest 
signs of economic growth. I think we are all happy about that.
    My question to you is, is that, given these signs of modest 
economic growth, do you believe that there is a need--is it 
wise to do additional fiscal stimulus to help the economy 
along? Or do you believe that the economy right now does not 
need further fiscal stimulus on the fiscal side?
    Mr. Bernanke. I will turn it back to you this way: If you 
decided to do more fiscal stimulus, and I know there are some 
moderate-sized bills being contemplated, it would be very 
helpful to combine that with--again, I am reiterating this 
point, but again I think it is very important--with a plan for 
the fiscal exit strategy.
    The Federal Reserve has a strategy for exiting from our 
monetary policy. The United States Government fiscal 
authorities have to have a strategy for exiting from your 
fiscal policy.
    So you will have a more effective set of policies if you 
combine any expansions of further fiscal support with other 
measures that reassure markets that, in fact, our deficits will 
be controlled in the medium term.
    Mr. Djou. And do you right now see any exit strategy, 
fiscal exit strategy in the United States Congress?
    Mr. Bernanke. Well, we have the debt commission that Mr. 
Ryan is on and Mr. Spratt, and I hope that they will come up 
with some good recommendations. But right now, there is not 
anything on the table at this point.
    Mr. Djou. The second series of questions, Dr. Bernanke. And 
it is, I have been frustrated and disappointed that there have 
been a number of free trade agreements languishing in Congress. 
Do you believe that were the Congress to pass free trade or an 
expansion of free trade, it would help the economy?
    Mr. Bernanke. Yes, I do. I think we need to be a part of 
the globalized economy. I think trade is an important source of 
demand for our goods and also a source of materials and imports 
as well. So I think that, generally speaking, we ought to push 
forward on the Doha Round and on the free trade agreements that 
we are looking at.
    Mr. Djou. Finally, Dr. Bernanke, just sort of the last set 
of questions. You testified that the Federal budget, quote, 
appears to be on an unsustainable path. How will we know when 
it is on a sustainable path? What triggers, what earmarks, 
benchmarks would you guide the Congress on to know that we are 
on a sustainable path? Is there an amount that the budget 
deficit you think we should be looking at, a percentage of GDP 
to where the deficit should be at?
    Mr. Bernanke. One simple rule of thumb is that the primary 
deficit, which is the deficit excluding interest payments, 
should be about in balance. If that is true or, to put another 
way, that the deficit equals interest payments, so in practice, 
that might be at a 2 percent of GDP type deficit. If that is 
true, then arithmetically, with some other assumptions, it 
turns out that the ratio of the debt outstanding to the GDP 
remains constant. So I think keeping our debt relative to our 
income constant or declining would be a good indicator of 
sustainable policy.
    Mr. Djou. And to follow up on that, for this coming fiscal 
year, what number would that be for the budget deficit?
    Mr. Bernanke. Well, I don't think that there is any way 
that this deficit in this next year is going to be brought down 
to 2 percent, 2 or 3 percent. And, as I have been emphasizing, 
this is really a medium-term objective. We still have some 
time, but we need to get a plan in place as soon as we can.
    Mr. Djou. So what is the dollar amount, if the budget 
deficit is 2 percent of GDP?
    Mr. Bernanke. Well, right now, that would be about $300 
billion.
    Mr. Djou. Thank you, Mr. Chairman.
    Chairman Spratt. Mr. Edwards.
    Mr. Edwards. Dr. Bernanke, given your serious concerns 
about long-term structural deficits, critics might say that you 
are inconsistent in saying that you supported TARP and that the 
stimulus bill had positive effects. What would be your answer 
to those critics?
    Mr. Bernanke. My answer is that deficits are sometimes 
necessary. They are necessary in wartime. They are necessary in 
deep recessions, and this was the case where monetary policy 
was, you know, pushed very, very far. And I believe that the 
TARP--I realize it is very unpopular, but I do believe that it 
was very important in stabilizing our financial system. And 
indeed, the money has come back for the most part. So for those 
emergency purposes, I think the deficits were necessary. That 
being said----
    Mr. Edwards. And the TARP and the stimulus were necessary 
in your opinion?
    Mr. Bernanke. I believe they were very helpful, yes. TARP 
in particular prevented a breakdown of the global financial 
markets, the global financial system. But that being said, you 
know, we can't have an emergency every year. We have to 
maintain a more stable situation over the longer term.
    Mr. Edwards. I understand. But I think, just to clarify, 
you just said that without TARP, we could have had a breakdown 
in the world financial system, is that correct?
    Mr. Bernanke. I think without a doubt we would have.
    Mr. Edwards. Okay. So, in effect, you think TARP, the 
passage of TARP was consistent with the principle fiscal 
responsibility?
    Mr. Bernanke. I do because in the absence of TARP, we would 
have had a much deeper recession, and the losses of tax revenue 
and the other costs would have far outweighed the actual costs 
of the TARP.
    Mr. Edwards. So what you are saying then is, without TARP, 
we could have actually had larger deficits and a greater 
national debt than we have today?
    Mr. Bernanke. We almost certainly would have.
    Mr. Edwards. And there is at least a probability we could 
have had a second Great Depression?
    Mr. Bernanke. I think so, yes.
    Mr. Edwards. Okay. Also before we make decisions about the 
future, we need to be sure we understand what happened in the 
past.
    Could someone bring up Mr. Garrett's chart, please?
    Now this chart doesn't talk about 2003, 2002, 2001. Do I 
understand, when President Bush came into office, that the gray 
deficit areas during his administration were actually projected 
to be a total of $4 trillion to $5 trillion in surpluses, is 
that correct, when President Bush walked into office?
    Mr. Bernanke. The 10-year projections were something like 
that.
    Mr. Edwards. Okay. And then, when we go to 2009, it looks 
like to me about a $1.4 trillion deficit in 2009, the first 
year of the Obama administration. Am I not correct in 
understanding that $1.3 trillion of that was projected before 
President Obama was sworn into office? So about 93 percent of 
that first red column for 2009 was projected before President 
Obama signed a single bill into law, is that about correct?
    Mr. Bernanke. As of when, as of 2009?
    Mr. Edwards. As of the--while President Bush was still in 
office, weren't there projections for 2009 to be a $1.3 
trillion deficit?
    Mr. Bernanke. I don't remember the exact number. But 
clearly, most of that deficit was the result of the recession 
and the financial crisis, which in late 2008, we already knew 
about it.
    Mr. Edwards. Right. And I think CBO projected a $1.3 
trillion deficit before President Obama was sworn into office.
    Let me ask you, Dr. Orszag, the director of OMB, has said 
that the 2001 and 2003 tax cuts and the Medicare prescription 
drug bill, all unpaid for and passed by Republicans on a 
virtually partisan basis will, have added $6 trillion to the 
national debt over the next decade. Do you have any figures 
that would substantially differ from Dr. Orszag's testimony on 
how those three bills added to the national debt?
    Mr. Bernanke. I don't have any figures, but I know that 
they calculate on a baseline basis, but you know those numbers 
would be pretty big I think.
    Mr. Edwards. Okay. As we go forward, would making permanent 
all of the Bush 2001 and 2003 tax cuts reduce the national debt 
or increase the national debt?
    Mr. Bernanke. If you did absolutely nothing else, it would 
increase it because it might make the economy grow faster but 
probably not fast enough to make up the revenue loss.
    Mr. Edwards. So in and of themselves, extending those tax 
cuts and making them permanent would increase the national 
debt, is that correct?
    Mr. Bernanke. Yes, it would. But there is also the trade-
off. You have to ask yourself whether there are other options 
that might be more effective at reducing the deficit at less 
cost.
    Mr. Edwards. I understand. I understand the timing of the 
changes in tax law is important. But in your opinion, do tax 
cuts pay for themselves? Some people say you can balance the 
budget by just cutting taxes more. In your opinion, do tax cuts 
pay for themselves?
    Mr. Bernanke. In general, say income tax cuts, the actual 
revenue loss is less than the static estimate because there is 
some positive response in the economy. But in general, I don't 
think most economists would agree that they completely pay for 
themselves, no.
    Mr. Edwards. Okay. Thank you.
    Chairman Spratt. The $1.2 trillion estimate of the surplus 
deficit for 2009 was a number supplied by CBO in its outlook of 
the budget and the economy for 2009, 2010, 5 years to come.
    Mr. Austria of Ohio.
    Mr. Austria. Thank you, Mr. Chairman.
    And Dr. Bernanke, thank you for being here today and 
sharing your thoughts on the economy and the financial markets. 
And certainly I appreciate you sharing your thoughts about 
needing a system that is more resilient and having a plan in 
place for stabilization. And I appreciate the Federal Reserve 
being cautious about the U.S. economic outlook.
    Although you have also noted that there has been some 
recovery and it looks as though there might be modest recovery 
over the next couple of years, but I think there is also a 
growing risk out there that the economy could be dampened or 
even undercut by the ripple effects of the debt crisis in 
Europe right now, what is happening in Europe.
    And also, when you combine that with the concerns that I am 
hearing out there, from our small businesses, the concerns 
about getting the necessary financing, the necessary credit to 
continue their operations and wanting to expand their 
operations and businesses, the concerns about the consistently 
high rates of unemployment that we have right now and 
underemployment and the lack of private jobs that are being 
created right now that I believe are the long-term sustainable 
jobs that will turn this economy around.
    When you combine that with the massive government spending 
and debt, all those being a major threat to sustainable growth, 
I wanted to get your views on the spending and debt control, on 
the uncertainty that is bringing to our economy right now and 
the direction that you think that we are moving and whether or 
not--you know, I think there is a fundamental difference here 
on the types of jobs that are being created with all this, 
government jobs versus the private sector jobs.
    Mr. Bernanke. Well, first of all you did a good job of 
identifying some of the risks to the recovery: Financial market 
risks, small business credit, and unemployment. Those are some 
of the things that I have highlighted in speeches and 
discussions. As I have indicated, I think, once again, that we 
need to think about our fiscal path, our fiscal plan as a 
trajectory, not as a single year-by-year deficit. It is not 
realistic, I think, to--or even advisable to try to balance the 
budget this year because that would be too wrenching a change, 
and the economy is still in weak condition, and I don't think 
that would be possible or advisable.
    However, in order to maintain the confidence of the markets 
and to keep interest rates low, which is very useful for the 
whole economy and for the recovery, it is also very important 
to try to provide reassurance through some mechanism that 
Congress is seriously contemplating measures that will bring us 
back to sustainability over the medium term. I realize that is 
a difficult thing to do and it is difficult to be credible. But 
Congress is very creative on these types of matters and I hope 
that you will be looking at ways to find the path back to 
sustainability over the next few years.
    Mr. Austria. And if we can bring up a figure. I am looking 
at chart number one. I believe that is the chart on the Tidal 
Wave of Debt right there. This chart right here. I wanted to 
get your opinion as far as the debt crisis that we are seeing 
across Europe right now. You know, how this could occur in the 
U.S. if we don't change the way we are going right now. You 
know, there are projections right now that payments are 
projected to reach 20 percent of the tax revenue or higher by 
2020, as far as our payments continue to grow. And when you 
look at this chart, I wanted to get your thoughts on that.
    Mr. Bernanke. Well, this chart just illustrates graphically 
what I have been saying, which is when the red line is sloping 
upwards so sharply, that is just a graphical way of saying that 
it is not sustainable. You want a situation where that gray-red 
line is sort of flat or going down instead of rising.
    Mr. Austria. And let me go back now in combining this debt 
with what I am hearing from our small businesses out there who 
are struggling right now. As far as bringing more certainty to 
the markets, as far as creating jobs within the private sector, 
do you believe, when we continue to spend the way we are, 
continuing to grow government, at that--at some point--at what 
point do we start to create the jobs in the private sector? I 
guess is my question.
    Mr. Bernanke. Well, as I said, I think at this point--I 
mean putting aside the Census, I think the private sector is 
starting to come back. We are starting to see growth for 
consumers for example and that will drive private sector job 
creation. We anticipate private sector job creation between 
150,000, 250,000 jobs, something like that going forward, not 
enough to get back all the jobs that we have lost but is still 
significant. So I think you know we are on a path of moderate 
recovery, but we want to have as much resolution of uncertainty 
as possible to encourage businesses to expand and to hire.
    Chairman Spratt. Ms. Kaptur.
    Ms. Kaptur. Thank you, Mr. Chairman. Got to get the 
equipment to work.
    Welcome. Thank you for the work you are doing. Thank you 
for the efforts that the Cleveland Fed is making. Ohio is in 
more than a recession. When you have 40 to 60 percent of home 
loans under water, the future is very, very troubled.
    Therefore, I have two requests for data for the record and 
two small questions. The first request for data is, can you 
please ask the economists on your staff to supply our committee 
with an estimate of the total direct and indirect real costs to 
our economy through mid-2010 of the financial bailout as well 
as tax dollars that may be at risk into the future?
    In order to help give them bookends for that effort, we 
will provide to the record a study done by the Congressional 
Research Service in that regard where a figure is given of 
$14.4 trillion, and the Pew Financial Reform Project has 
indicated that U.S. households lost on average $5,800 in income 
due to reduced economic growth due to the financial crisis 
through the end of 2009 and that the cost to the Federal 
Government, due to interventions to mitigate the financial 
crisis, amounted to over $2,000 on average for each U.S. 
household. The Pew study shows that home values have fallen 
about $30,300 per household; stock values, about $66,000 on 
average. We know what the job loss has been, and that is not 
getting much better in my part of the country.
    So I wanted to submit these for the record. You know, you 
have terrific economists over there, and I think if you could 
tell us the cost of this, it would be very helpful to those of 
us in the positions that we hold.
    [The information follows:]

    
    
                   The Cost of the Financial Crisis:
           The Impact of the September 2008 Economic Collapse

                          By Phillip Swagel\1\

    The United States pulled back from a financial market meltdown and 
economic collapse in late 2008 and early 2009--but just barely. Not 
until we came to the edge of catastrophe were decisive actions taken to 
address problems that had been building in financial markets for years. 
By then it was too late to avert a severe recession accompanied by 
massive job losses, skyrocketing unemployment, lower wages, and a 
growing number of American families at risk of foreclosure and poverty.
---------------------------------------------------------------------------
    \1\ Phillip L. Swagel is visiting professor at the McDonough School 
of Business at Georgetown University, and director of the school's 
Center for Financial Institutions, Policy, and Governance. This paper 
was prepared for, and initial results were presented at, the March 18, 
2010 public event, ``Financial Reform: Too Important to Fail,'' 
sponsored by the Pew Financial Reform Project.
---------------------------------------------------------------------------
    This paper quantifies the economic and budgetary costs resulting 
from the acute stage of the financial crisis reached in September 2008. 
This is important on its own, but it can be seen as well as giving a 
rough indication of the potential value of reforms that would help 
avoid a future crisis.
    On a budgetary level, the cost of the stage of the crisis reached 
in mid-September 2008 is the net cost to taxpayers of the policies used 
to stem the crisis. This includes the programs undertaken as part of 
the
    Troubled Assets Relief Program (TARP), as well as steps taken by 
the Federal Reserve and the Federal Deposit Insurance Corporation 
(FDIC) to guarantee bank liabilities. Actions to support Bear Stearns 
and the two government-sponsored entities, Fannie Mae and Freddie Mac, 
were taken before the worst part of the crisis, but their costs 
continued past September and are considered by many to be part of the 
fiscal costs of the crisis.
    The costs of the crisis to society, however, go beyond the direct 
fiscal impacts to include the effect on incomes, wages, and job 
creation for the U.S. economy as a whole. The crisis reduced U.S. 
economic growth and caused a weaker job market and other undesirable 
outcomes. A key challenge in quantifying such a macroeconomic view of 
the costs of the financial crisis is to identify the particular effects 
of the crisis and to separate those impacts from other developments.
    The broadest perspective would look at the overall changes in the 
economy from the start of the crisis to the end, and perhaps even 
include an estimate of the long-run future impacts. Implicit in such a 
calculation would be a decision to include both the effects of the 
crisis itself and any offsetting impacts from policy responses such as 
easier monetary policy or fiscal stimulus. A broad accounting of the 
costs of the crisis could also include the decline in government 
revenues resulting from the crisis, enactment of policies such as the 
2008 and 2009 stimulus packages, as well as the impacts of regulatory 
changes that came about in the wake of the crisis. Under such a view, 
the financial crisis had large and long-lasting impacts on the U.S. 
economy. The Organisation for Economic Co-operation and Development 
(OECD), for example, estimates that the financial crisis will lead to a 
2.4 percent reduction in long-term U.S. GDP, anticipating that both the 
reduction in employment and the increased cost of capital resulting 
from the crisis will last far into the future.\2\
---------------------------------------------------------------------------
    \2\ OECD, 2010. Going for Growth, Chapter 1, Box 1.1, pp. 18-19, 
March.
---------------------------------------------------------------------------
    The approach taken in this paper is narrower: to distinguish and 
quantify costs incurred so far that are directly related to the crisis 
and, in particular, to focus on the impact of events from the collapse 
of Lehman Brothers in the middle of September 2008 through the end of 
2009. This is the period in which the grinding slowdown associated with 
the credit disruption that began in August 2007 turned into a sharp 
downturn. This approach produces smaller estimates for the cost of the 
crisis than the broad view, because the calculations quantify the costs 
of the acute phase of the crisis between September 2008 and the end of 
2009, and not the overall impact of events both preceding and following 
that time period. Both approaches are valuable, and this paper is best 
seen as a complement to the literature on the overall cost of financial 
crises. This distinction is revisited in the conclusion.
    The results in this paper complement economic research by Reinhart 
and Rogoff (2009) that assesses the broad overall costs of banking 
crises across countries.\3\ Reinhart and Rogoff find that deep economic 
downturns ``invariably'' follow in the wake of crises; they quantify 
the average impact across countries on output, asset prices, the labor 
market, and government finances. Their results are also discussed 
below.
---------------------------------------------------------------------------
    \3\ Carmen M. Reinhart and Kenneth S. Rogoff, 2009. ``The Aftermath 
of Financial Crises,'' American Economic Review, vol. 99(2), pages 466-
72, May.
---------------------------------------------------------------------------
    The cost of the crisis as measured here includes both the fiscal 
cost and the effects on economic measures such as output, employment, 
wages, and wealth. The difficulty in quantifying these economic impacts 
is to isolate the effects of the most acute stage of the crisis--the 
severe downturn in consumer and business spending that took place 
following the failure of Lehman Brothers in September 2008. The U.S. 
economy was already moving sideways in the first half of 2008 and most 
forecasters expected slow growth to continue for the balance of the 
year and into 2009. But the events of the fall and the plunge in 
economic activity that resulted were unexpected.
    This paper isolates the impact of the acute phase of the crisis by 
comparing the Congressional Budget Office (CBO) economic forecast made 
in September 2008, just before the crisis, with actual outcomes. The 
approach is to compute the difference between the decline in GDP in 
late 2008 and 2009 and the forecast published by CBO in its ``Budget 
and Economic Outlook: An Update,'' published on September 9, 2008--the 
Tuesday before Lehman filed for bankruptcy on Monday, September 15. The 
difference between actual GDP in the five quarters from October 2008 to 
December 2009 and the CBO forecast made just on the cusp of the crisis 
is taken as the unexpected impact of the crisis on GDP. This GDP impact 
is then used to calculate the impact of the crisis on other measures, 
including jobs, wages, and the number of foreclosures. The accuracy of 
CBO economic forecasts is similar to that of the Blue Chip 
consensus.\4\
---------------------------------------------------------------------------
    \4\ Congressional Budget Office, 2006. ``CBO's Economic Forecasting 
Record,'' November 2006.
---------------------------------------------------------------------------
    While this approach works to isolate the impacts of events from 
September 2008 forward, it is necessarily imprecise because it is 
impossible to know a) how accurate the CBO forecast would have been 
absent the crisis; b) whether the relationships between growth and 
other economic variables such as employment changed during the crisis; 
and c) the impact of other events from September 2008 forward that are 
not related to the crisis. Moreover, the calculations in the paper 
start with the fourth quarter of 2008 and thus do not attribute to the 
crisis any output or jobs that were lost in the two weeks of September 
immediately following the collapse of Lehman Brothers (these are still 
counted and appear in the charts below, but not as part of the cost of 
the post-Lehman crisis). The results in the paper should thus be taken 
as providing a rough approximation of the impact of the crisis. This is 
hugely meaningful, however, with American families suffering thousands 
of dollars of losses in incomes and wages and enormous declines in the 
value of their assets, including both financial assets, such as stock 
holdings, and real estate properties, such as family homes. These 
losses run into the trillions of dollars and on average come to a 
decline of nearly $66,000 per household in the value of stock holdings 
and a loss of more than $30,000 per household in the value of real 
estate wealth (though the inequality in wealth holdings means that the 
losses will vary considerably across families). These impacts on 
incomes, jobs, and wealth are all very real effects of the crisis.
    Finally, the paper looks briefly at broader impacts on society, 
notably the effect of the crisis in boosting foreclosures and potential 
impacts on human factors such as poverty.
          direct costs to taxpayers of financial interventions
    A host of government interventions were aimed at stabilizing banks 
and other financial sector firms, ranging from loans from the Federal 
Reserve to the outright injection of public capital into banks through 
the Treasury's Troubled Assets Relief Program (TARP). The direct 
budgetary cost of the crisis is taken to equal the expected net losses 
of these programs. The fiscal impact of the crisis considered here does 
not include the lower revenues and increased government spending that 
followed the crisis. Instead, the focus is on the costs of 
interventions undertaken in direct response to the acute phase of the 
crisis that began in September 2008, notably the cost of the TARP and 
related programs to guarantee bank liabilities put into effect by the 
Federal Reserve (Fed) and the Federal Deposit Insurance Corporation 
(FDIC). These costs are tallied in Tables 1 and 2, below. These cost 
estimates are from the January 2010 CBO estimate of TARP commitments 
and expected losses, and the February 2010 estimate by the 
Congressional Oversight Panel of the Fed's commitment to several 
programs run jointly by the Treasury and the Fed (the table provides 
references to the sources). The TARP authority was part of the 
Emergency Economic Stabilization Act of 2008 (EESA) enacted on October 
3, 2008; this was used by the Treasury Department for a variety of 
purposes, including capital injections into banks, guarantees for 
assets of certain banks, foreclosure relief, support for the AIG 
insurance company, and subsidies to prevent foreclosures.
    CBO estimates that $500 billion of the $700 billion capacity of the 
TARP will end up being used or committed, with programs now in 
existence having a $73 billion net cost to taxpayers. As shown in Table 
1, the TARP was used to support a range of activities, including the 
purchase of stakes in banks under the capital purchase program (CPP); 
special assistance to Citigroup, Bank of America, and AIG; support to 
automotive industry firms; support for programs to boost securitization 
of new lending through the Term Asset-Backed Securities Loan Facility 
(TALF) run jointly with the Fed; the Public-Private Investment 
Partnerships (PPIP) to deal with illiquid ``legacy'' assets such as 
subprime mortgage-backed securities; and the Home Affordable Program 
aimed at reducing the number of foreclosures. TARP assistance to banks 
on the whole is projected to generate a $7 billion profit for taxpayers 
(even though some banks that received TARP funds have failed or stopped 
paying dividends to the Treasury). Other programs, notably aid to auto 
firms, AIG, and homeowners at risk of foreclosure, are projected to 
result in substantial losses of TARP funds, with an overall net cost of 
$73 billion. As part of the Congressional budget process, the CBO 
estimates as well that there could be future uses and losses involving 
TARP resources, but they would not be directly related to the crisis of 
September 2008.
    In addition, the Federal Reserve lent $248 billion as part of TARP-
related programs to support AIG and to foster securitization through 
the TALF. These Fed loans are generally well-secured--indeed, Fed 
lending related to AIG is now over-collateralized (the TARP having 
replaced the Fed in the risky aspect of the AIG transaction)--but it is 
possible in principle that there could be future losses and thus 
further costs.
                   table 1: direct costs of the tarp
                              ($ billions)


    Sources: Congressional Budget Office, ``The Budget and Economic 
Outlook: Fiscal Years 2010 to 2020,'' January 2010, Box 1-2, pp. 12-13, 
and TARP Congressional Oversight Panel ``February Oversight Report,'' 
February 10, 2010, pp. 176-177. Treasury commitments and costs or 
profits are from the Congressional Budget Office; Federal Reserve 
commitments as of December 31, 2009 are from the Congressional 
Oversight Panel February 2010 report.

     The $68 billion reported by the Congressional Oversight 
Panel represents the amount of AIG-lending extended by the Federal 
Reserve, but not the net cost of this lending. The Federal Reserve Bank 
of New York reports that the outstanding balance of Federal Reserve 
lending related to AIG as of September 30, 2009 totaled $36.7 billion 
with a fair market value of $39.7 billion for the collateral behind the 
lending, implying that the lending is overcollateralized on a mark-to-
market basis. In effect, resources from the TARP replaced part of the 
initial Fed lending to AIG, leaving the TARP with losses and the Fed's 
remaining loans over-collateralized.

    Table 2 also shows certain direct budgetary costs related to the 
crisis that commenced before September 2008, notably Federal Reserve 
lending related to the collapse of Bear Stearns in March 2008, and cost 
to the Treasury of support for the two housing-related GSEs, Fannie Mae 
and Freddie Mac. These are not directly the result of the September 
2008 stage of the crisis, but are shown since they are closely related 
to those financial market events. The financial rescue of Fannie Mae 
and Freddie Mac cost taxpayers $91 billion in fiscal year 2009 (October 
2008 to September 2009), according to the Congressional Budget Office, 
and CBO forecasts a total cost to taxpayers of $157 billion through 
2015 (these figures are from Table 3-3 in the CBO January 2010 Budget 
and Economic Outlook). These costs are related to the broader financial 
crisis, since the activities of the two firms underpinned parts of the 
housing market that were at the root of the crisis. There is a sense, 
however, that these costs were the result of losses that largely 
predated the events of September 2008--namely losses on mortgages 
guaranteed by the two firms, and losses on subprime mortgage-backed 
securities they purchased prior to the failure of Lehman Brothers. 
While the costs grew as a result of the September 2008 crisis and the 
subsequent economic collapse, it is likely that much of the losses were 
built into these firms' balance sheets before September 2008. As shown 
in Table 2, Fed lending related to Bear Stearns involves a loss of $3 
billion on a mark-to-market basis--this is the net of the $29 billion 
in non-recourse lending from the Fed minus the estimated value of the 
collateral behind those loans as of September 30, 2009 (the most recent 
date for which estimates are available).
       table 2: other financial commitments related to the crisis
                              ($ billions)


    Sources: FDIC: TARP Congressional Oversight Panel ``February 
Oversight Report,'' February 10, 2010, pp. 176-177. FDIC Temporary Loan 
Guarantee Program is the amount of senior bank debt covered by FDIC 
guarantees. Federal Reserve purchases are from www.federalreserve.gov/
monetarypolicy. These figures are total (gross) amounts of liabilities 
guaranteed by the FDIC and assets purchased by the Federal Reserve; 
they do not provide the net cost or gain to taxpayers. The FDIC and 
Federal Reserve programs are all likely to make positive returns. 
Treasury costs for GSEs are from Congressional Budget Office, ``The 
Budget and Economic Outlook: Fiscal Years 2010 to 2020,'' January 2010, 
Box 3-3, p. 52.

     The Federal Reserve Bank of New York reports a fair market 
value of $26.1 billion for the collateral behind the $29.2 billion loan 
balance related to Bear Stearns as of September 30, 2009, implying a $3 
billion loss on a mark-to-market basis.

    Other monetary policy actions undertaken by the Federal Reserve in 
the fall of 2008, such as programs to support commercial paper markets 
and money market mutual funds, are not included in this tally. These 
might well have positive budgetary impacts as the Fed collects interest 
and fees from users of these liquidity facilities. Similarly, the 
stimulus packages enacted in early 2008 and early 2009 were both 
arguably brought about because of the impact of the financial crisis on 
the economy, but these did not directly address financial sector issues 
and are not included here.
    In sum, the direct budget costs from efforts to stabilize the 
financial system following the events of mid-September 2008 are 
meaningful--with net costs of $73 billion and hundreds of billions of 
public dollars deployed or otherwise put at risk of loss. These 
figures, however, are only a modest part of the cost of the financial 
crisis. The larger impacts are those that affected the private sector 
as a result of the significant decline in economic activity that 
followed the crisis. These are tallied by calculating the impact of the 
September 2008 financial crisis on output, employment, wages, and 
wealth.
         economic costs: lost wages, incomes, jobs, and wealth
    The U.S. economy was already slowing in the first half of 2008, as 
the slide in housing prices that began in 2006 and the tightening of 
credit markets from 2007 both weighed on growth. High oil prices added 
another headwind in 2008. The economy entered a recession in December 
2007; while this was not yet announced when the crisis became acute in 
mid-September 2008, it was clear that growth would remain subdued even 
under the best of circumstances while the U.S. economy worked through 
the challenges of housing, credit, and energy markets. Even so, the 
financial crisis in September 2008 clearly exacerbated the pre-existing 
economic slowdown, turning a mild downturn into a deep recession. In 
effect, the events of September and October 2008 were a severe negative 
shock to American confidence in the economy, and in the ability of our 
government and our political system to deal with the crisis. All at 
once, families and businesses across the United States looked at the 
crisis and stopped spending--even those who had not yet been directly 
affected by the mounting credit disruption that started in August 2007 
put a hold on their plans. Families stopped spending, while firms 
stopped hiring and paused investment projects. As a result, the economy 
plunged, with GDP falling by 5.4 percent and 6.4 percent (at annual 
rates) in the last quarter of 2008 and the first quarter of 2009--the 
worst six months for economic growth since 1958.
    Assessing the economic costs associated with the acute phase of the 
crisis in September 2008 requires separating the impacts of the events 
of fall 2008 from the pre-existing economic weakness. While this is not 
possible to do with precision, one practical approach is to take as a 
baseline the GDP growth forecast published by the CBO on September 9, 
2008--just before the crisis. The difference between actual GDP, and 
the CBO forecast for GDP in the balance of 2008 and over all of 2009, 
is then taken to reflect the ``surprise'' impact of the crisis. This is 
an imperfect measure since there is no reason to expect the CBO 
forecast to have been completely accurate had it not been for 
subsequent events such as the collapse of Lehman.
    With these caveats in mind, the September 2008 CBO forecast remains 
plausible as a guide for what would have happened absent the financial 
crisis of September 2008. The CBO forecast 1.5 percent real GDP growth 
in 2008 as a whole, followed by 1.1 percent growth in 2009. With the 
first half of the year already recorded, 1.5 percent growth for the 
year as a whole implies that CBO expected GDP to decline at a 0.25 
percent annual rate in the second half of 2008.\5\ That is, CBO 
expected growth to be weak and even slightly negative in the latter 
part of 2008 but then pick up in 2009--indeed, the CBO forecast implies 
quite strong growth by the end of 2009.
---------------------------------------------------------------------------
    \5\ GDP data for 2008 have been revised since the CBO forecast was 
made; the implied negative GDP growth of 0.25 percent at an annual rate 
is computed using the GDP data that were available to the CBO in 
September 2008.
---------------------------------------------------------------------------
    Figure 1 plots actual real GDP against GDP as implied by the CBO 
forecast from September 2008 and the CBO's calculation of potential 
GDP--the level of GDP that would be consistent with full utilization of 
resources.\6\ As shown on the chart, GDP plunged at the end of 2008 and 
into early 2009, falling by 5.4 percent and 6.4 percent in the last 
quarter of 2008 and the first quarter of 2009, against CBO expectations 
of a nearly flat profile for output over this period. The difference 
between the CBO forecast and the actual outcome for GDP comes to a 
total of $648 billion in 2009 dollars for the five quarters from the 
beginning of October 2008 to the end of December 2009, equal to an 
average of $5,800 in lost income for each of the roughly 111 million 
U.S. households.
---------------------------------------------------------------------------
    \6\ The CBO forecast uses the growth rates in the September 2008 
CBO forecast, adjusting the past levels of GDP for subsequent revisions 
to GDP data that were known prior to September 2008.
---------------------------------------------------------------------------
         figure 1: impact of the crisis on economy-wide output


    Note: GDP as plotted in the chart is in billions of 2005 (real) 
dollars at a seasonally adjusted annual rate. The dollar figures in the 
boxes, however, are translated into 2009 dollars.

    The hit to GDP was matched as well across the economy, with 
declines in jobs, wages, and wealth. The next step is to translate the 
unexpected GDP decline into an impact on the labor market. To calculate 
the impact on employment, a statistical relationship is estimated 
between percent job growth in a quarter and real GDP growth over the 
past year. The four-quarter change in output is used to capture the 
fact that the job market is typically a lagging indicator, responding 
after some delay to an improving or slowing overall economy. The 
relationship is estimated as a linear regression for quarterly data 
from 2000 to 2007, capturing a complete business cycle. This regression 
provides an empirical relationship between GDP growth and job growth--
an analogue of what economists term ``Okun's Law.'' The estimated 
regression is not a structural model, but an empirical relationship 
that can be used to back out employment under different GDP growth 
scenarios. The GDP figures corresponding to the CBO forecast are then 
used to simulate the level of employment that would have occurred with 
the CBO forecast made before the September 2008 crisis.
    Figure 2 shows the impact of the acute stage of the crisis on 
employment: 5.5 million jobs were lost in the five quarters through the 
end of 2009 as a result of slower GDP growth compared to what would 
have been the case under the CBO forecast made in September 2008. Slow 
growth in the first three quarters of 2008 had left employment 1.8 
million jobs lower than potential, and the CBO forecast for continued 
weak growth in the rest of 2008 and 2009 would have meant job losses 
until the last quarter of 2009, but at a much more moderate pace than 
actually occurred. Under the CBO forecast, employment by the end of 
2009 would have been 4.0 million lower than with growth at potential, 
but the additional negative shock to GDP from the crisis knocked off 
another 5.5 million jobs, leaving employment at the end of 2009 9.5 
million jobs lower than the potential of the U.S. economy.
              figure 2: impact of the crisis on employment


    Note: Employment in thousands.

    Figure 3 shows that the GDP hit and job losses correspond to lost 
wages for American families--a total of $360 billion of lost wages in 
the five quarters from October 2008 through December 2009 as a result 
of slower growth following September 2008. This equals $3,250 on 
average per U.S. household. Wage losses are calculated by taking actual 
wages with the lower growth and adding back both the wages for the jobs 
that would have existed with stronger growth and the increased wages 
per job for all jobs had growth not plunged in the fall and dragged 
down average wages. The additional wage growth per job is calculated 
using the trend wage growth before the crisis.
                figure 3: impact of the crisis on wages


    Note: Wages in billions of 2009 dollars.

    The value of families' real estate holdings declined sharply over 
the crisis as well, with a loss of $5.9 trillion from mid-2007 to March 
2009, or a loss of $3.4 trillion from mid-2008 to March 2009. These 
correspond to wealth losses of more than $52,900 per household in the 
longer period, or $30,300 per household for the shorter one. The modest 
rebound in the housing market in the latter part of 2009 has meant that 
the wealth loss from mid-2008 through the end of 2009 is $1.6 trillion, 
or $14,200 per household. Unlike the economic variables of output, 
employment, and wages, the wealth measures are not adjusted for the 
unexpected impact of the events of September 2008. This is because 
market-based measures of asset values in principle should already 
reflect the expectation of slower growth from the perspective of mid-
2008. The unexpected plunge in the economy in late 2008 and into 2009 
would not be reflected in asset values, however, making these valid 
measures of the impact of the acute stage of the crisis on household 
wealth.
    Figure 4 shows that the financial crisis exacted an immense toll on 
household wealth. The value of families' equity holdings fell by $10.9 
trillion from the middle of 2007 to the end of March 2009--the longest 
period of decline in the value of stock holdings. This equals a loss of 
$97,000 per household. Looking at the decline in the value of stock 
holdings only from the middle of 2008 to the end of March 2009 gives a 
loss of $7.4 trillion, or about $66,200 per household. The measure of 
stock market wealth includes both stocks owned directly by families and 
indirectly through ownership of shares of mutual funds. Data on wealth 
holdings are from the Federal Reserve's Flow of Funds database and are 
available quarterly. The wealth declines are thus measured starting 
from the end of June 2008 since the next quarterly value is for the end 
of September of that year and thus after the acute stage of the crisis 
had already begun. Stocks have rebounded over 2009, with the value of 
household equity holdings at the end of the year back to the same level 
as at the end of June 2008.
           figure 4: impact of the crisis on household wealth


    Note: in billions of dollars.

    Table 3 summarizes the economic impacts of the acute stage of the 
crisis that began in September 2008. By all measures, the acute phase 
of the financial crisis had a severe impact on the U.S. economy, with 
massive losses of incomes, jobs, wages, and wealth.
           table 3: economic and fiscal impacts of the crisis


                   the human dimension of the crisis
    Beyond dollars and cents, the financial crisis had substantial 
negative impacts on American families both at present and, likely, for 
decades to come as the hardships faced by children translate into 
changed lives into the future. The poverty rate, for example, increased 
from 9.8 percent in 2007 to 10.3 percent in 2008, meaning that an 
additional 395,000 families fell into poverty. There is not a simple 
relationship between economic growth and poverty, and poverty data are 
not yet available for 2009, but the weaker growth that resulted 
following the events of September 2008 surely sent thousands of 
additional families into poverty. And the crisis will have attendant 
consequences for other economic outcomes including the future prospects 
for employment and wage growth of those facing long spells of 
unemployment.
    While it is not possible to count all of the ways in which the 
crisis affects the United States, a glimpse of the human cost of the 
crisis can be seen in the number of additional foreclosures started as 
a result of the severe economic downturn that began in September 2008. 
Millions of foreclosures were already likely even before the acute part 
of the crisis--the legacy of the housing bubble of these years was that 
too many American families got into homes that they did not have the 
financial wherewithal to afford. For other families, however, a lost 
job as a result of the severe recession translated into a foreclosure, 
and this can be estimated using a similar methodology as for the 
economic variables above.
          figure 5: impact of the crisis on foreclosure starts


    With the economy projected to remain weak in the second half of 
2008 and into early 2009, and with many people deeply underwater with 
mortgages far greater than the value of their homes, there would still 
have been millions of foreclosure proceedings started. But the weaker 
economy following the acute phase of the crisis worsened the problem, 
layering the impact of an even weaker economy on top of the already 
difficult situations faced by many American families on the downside of 
the housing bubble.
                               conclusion
    The financial crisis of 2007 to 2010 has had a massive impact on 
the United States. Millions of American families suffered losses of 
jobs, incomes, and homes--and the effects of these losses will play out 
on society for generations to come. This paper quantifies some of these 
impacts, focusing on the aftermath of September 2008 and attempting to 
isolate the effects of the crisis from other developments. The result 
was hundreds of billions of dollars of lost output and lower wages, 
millions of lost jobs, trillions of dollars of lost wealth, and 
hundreds of thousands of additional foreclosures.
    An alternative perspective would be to look at the overall impacts 
of the crisis from start to finish. This would be a broad view but a 
less well defined calculation: one could calculate economic impacts, 
for example, from the start of the housing bubble or from its peak. Or 
one could seek to exclude the offsetting impact of monetary and fiscal 
policy measures taken in response to the crisis and attempt to isolate 
the impact of the crisis alone.
    These are different (and difficult) calculations to make, but some 
evidence can be garnered on the broader impacts of the crisis from 
start to finish. The International Monetary Fund, for example, 
estimates that U.S. banks will take total writedowns of just over $1 
trillion on loans and asset losses from 2007 to 2010, including $654 
billion of losses on loans and $371 billion of losses on securitized 
assets such as mortgage-backed securities.
    The policy response to the crisis has involved massive fiscal 
costs, with U.S. public debt up substantially due to lower revenues and 
higher spending in response to the crisis, and this increase is 
forecast to continue under current law over the years to come. The 
declines in output and asset values and increases in U.S. public debt 
mirror the experience of other countries. As discussed by Reinhart and 
Rogoff (2009), banking crises across countries lead to an average 
decline in output of 9 percent, a 7 percentage point increase in the 
unemployment rate, 50 percent decline in equity prices, 35 percent drop 
in real home prices, and an average 86 percent increase in public debt.
    Figure 1 of this analysis provides evidence connecting the results 
of this paper to this broader literature. One measure of the overall 
economic impact of the crisis is the output gap between actual and 
potential GDP. In 2008 and 2009 combined, this gap comes to $1.2 
trillion, or $10,500 per household. This is a loss of nearly 5 percent 
of potential GDP in total over the two years--less than the 9 percent 
average loss across countries found by Reinhart and Rogoff, but the 
costs of the crisis calculated in this paper cover only part of the 
crisis and only through the end of 2009. As shown in Figure 1, GDP 
looks to remain below potential for years into the future, implying 
higher overall costs of the crisis.
    The financial crisis of the past several years has had a massive 
economic cost for the United States--trillions of dollars of wealth and 
output foregone, millions of jobs lost, and many hundreds of thousands 
of families suffering hardship. These costs demonstrate the importance 
of taking steps to avoid future crises, and the value of reforms that 
help achieve this goal.

    Mr. Bernanke. So the cost of the policy response itself is 
pretty small, actually, because we are getting paid back the 
TARP money.
    The cost of the recession and the financial crisis is very 
large. And I don't know, we can try to estimate that. But 
certainly it would have been much larger if we hadn't taken 
actions to prevent the collapse.
    Ms. Kaptur. Yes. But I think we need to get the bookends, 
how big this thing really is and also what is at risk into the 
future.
    And that leads me to my second question in terms of the 
contracts that the Fed has signed with BlackRock. Could you 
provide for the record an update on the value of the contracts 
that the Fed has signed with them, the purpose of those 
contracts, and the results produced to date? That is just a 
request for information.
    Mr. Bernanke. Okay.
    Ms. Kaptur. Thank you.
    Number three, how can you use your power--and this goes to 
the housing issue--how can you use your power as the Fed to get 
these megabanks and the servicers that they have hired to the 
table to do housing workouts to avoid the ghost towns and ghost 
neighborhoods that we are getting across this country? There is 
a real stop-up in the system, a real blockage. Even though, for 
example, home values have lost 30 percent of value, that isn't 
booked on the books of the banks. And you can't get a 
negotiation at the local level because there is nothing 
requiring the servicers to come to the stable. And there is a 
contractual relationship due to the subprime bonded nature of 
the instrument.
    We need the Fed to take a look at this since you deal in 
the bond markets, and you deal with these companies anyway. We 
need to get people to the table. And with the number of 
underwater loans, this isn't going to get any better.
    Across the country--I was talking to Dennis Cardoza 
yesterday, from California. He and I are in the same boat, and 
his boat is actually sinking faster than ours. And we really 
need somebody to hold these servicers accountable. Is there 
some way you can use your power to do that? That is question 
one.
    And then, question two, since the crisis began, the 
megabanks actually have a larger share of assets in the market 
than they did at the beginning, and the big investment banks 
that are very important to the Fed and the way you operate 
particularly up there in New York. And they had about a third 
of the assets of the country prior to the crisis. They now have 
nearly two-thirds.
    In the meanwhile, institutions in places like I represent 
are paying huge FDIC fees, up from maybe $20,000 5 years ago up 
to $70,000 last year, this year $700,000. The reason that 
lending is constricted at the local level is because these 
large institutions are really holding so much of the power, and 
we don't have a really balanced financial system. So they are 
not making the small business loans. So my question is, what 
role can you play as the Fed in restoring prudent lending and 
broad competition across our financial system?
    So question one relates to getting the servicers to the 
table, working with the megabanks. And number two, what can you 
do to help restore lending across this country through a 
competitive financial marketplace?
    Mr. Bernanke. Well, on the first, we have been working hard 
to support the Treasury's efforts to do HAMP renegotiations 
between borrowers and lenders. And we have made clear to the 
banks that they should participate and cooperate in those 
programs.
    Ms. Kaptur. With all due respect, Mr. Chairman, it is the 
servicers who aren't showing up, and it is a voluntary program. 
It is not working.
    Mr. Bernanke. Well, as supervisors, we can strongly 
encourage them to participate, but I think it is up to Congress 
to make it mandatory. We don't have the power to make it 
mandatory.
    But certainly, we think it is good practice, it is good for 
the banks to get these things resolved. To have these loans in 
limbo is not good for the banks either. They need to get them 
resolved and stabilized as quickly as possible. So I think that 
there is a common interest here, and we are very interested in 
that point.
    And the Cleveland Fed and other Feds also are very 
interested in neighborhood stabilization, which is a related 
issue. When you have a lot of foreclosures in a particular 
area, you have a breakdown in public order or in tax revenues 
and property values. So that is another issue where we have 
been very much involved.
    But, again, I think the government's primary tool for this 
has been through the Treasury, and we have tried to support 
them both analytically and through our supervisory function.
    On competition, actually, right now, I agree with you 100 
percent that small banks are critical. We work with small banks 
all the time, and we were very concerned when the Senate was 
contemplating taking us out of the small bank supervision 
business because we find that those connections and that input 
we get from them and the interaction we have with them very, 
very important for our regulatory and monetary policies. So we 
are supporting them in every way we can.
    I think, actually, what is happening now in many cases is 
that the large banks are pulling back because of, you know, a 
shortage of capital or because of conservatism, and it is the 
small community banks in many cases that are healthy, didn't 
have subprime mortgages and are coming forward and making the 
loans. So they are providing a very important service right 
now, and we certainly encourage that.
    Ms. Kaptur. Mr. Chairman, I know my time is up, but these 
fees on these smaller institutions are killing lending at the 
local level. Maybe you could take a look at that with Sheila 
Baird over at the FDIC.
    Mr. Moore. Thank you, Mr. Chairman.
    Since this economic situation started back in 2008, we have 
seen in our country a significant rise in defaults on home 
mortgages. At the same time, the absence of the home buyers' 
tax credit will, I am afraid and I believe, lead to a decrease 
in demand. It would seem these happenings will cause housing 
prices to drop even more significantly in the future. What is 
the appropriate response of the Fed in such a scenario? What 
can the Fed do to address this situation, if anything?
    Mr. Bernanke. Well, the main thing we are doing, of course, 
is that we have purchased a large amount of mortgage-backed 
securities guaranteed by the government-sponsored enterprises. 
And right now, the 30-year mortgage rate is about 4.8 percent, 
so that is clearly going to make it accessible. Affordability 
right now in terms of house prices and interest rates is about 
the best it has been for a very long time.
    You are right that the large amount of vacant and 
foreclosed properties is a major drag, particularly in some 
areas of the country. And I agree with Ms. Kaptur on this issue 
that we need to work with the Treasury and with the banks to do 
what we can to get these resolved as quickly as possible, 
whether it is through renegotiation of the mortgage, whether it 
is through a short sale or however it is done to get people 
situated and allow those houses to be turned over in the 
marketplace. So we are working to try to manage that situation. 
But that is clearly a big overhang for the housing market.
    Mr. Moore. That is my question. I appreciate your answer, 
Mr. Chairman. Thank you.
    Chairman Spratt. The chair now recognizes Mrs. Lummis. I 
beg your pardon for moving ahead of you. You have the floor for 
5 minutes.
    Mrs. Lummis. Thank you, Mr. Chairman.
    Dr. Bernanke, I want to explore our entitlement programs 
with you for a little bit. We know, from visiting with Treasury 
Secretary Geithner, that Medicare is essentially bankrupt. We 
know that Social Security, when we get to the 2030s, will be 
taking in enough money only to pay out three-fourths of the 
benefits it pays out now if we do nothing.
    So to help this committee dispel the persistent and 
dangerous myth that our entitlement programs are sustainable as 
currently structured, can you describe the fiscal and economic 
consequences of doing nothing on entitlements and simply 
allowing Social Security and Medicare to run their course?
    And could you please put figure one back up? That was the 
one on the Tidal Wave of Debt. Because I am concerned about the 
effect of doing nothing with our entitlement programs on this 
very tidal wave.
    Mr. Bernanke. Well, you are correct that the entitlement 
programs are not self-funded. They are unfunded liabilities to 
a significant extent at this point. They are the biggest single 
component of spending going forward.
    Now there are various ways to address this. You can 
restructure entitlement programs. You can cut other things. But 
at some point, you need to address the overall budgetary 
situation.
    If you don't, you will get a picture like this one where 
interest rates are rising, interest payments are rising because 
the debt outstanding is growing exponentially. And at that 
point, things will come apart.
    A famous economist once said, anything that can't go on 
forever will eventually stop. And this will stop, but it might 
stop in a very unpleasant way in terms of sharp cuts, a 
financial crisis, high interest rates that stop growth, 
continued borrowing from abroad.
    So, clearly, we need to get control of this over the medium 
term, and we certainly are going to have to look at 
entitlements because that is a very big part of the obligations 
of the Federal Government going forward.
    Mrs. Lummis. The only plan that I have seen that addresses 
entitlements and spending comprehensively is Ranking Member 
Ryan's plan that can be read on americanroadmap.org. Are you 
aware of any other plan to comprehensively address both 
entitlements and nonentitlement spending?
    Mr. Bernanke. I think Brookings and a few others have 
provided programs, but they are pretty rare. I agree with that.
    Mrs. Lummis. You mentioned that we need to be careful in 
the short term about upsetting the apple cart. But we need to 
address these in the medium and long term. What to you is a 
good definition of medium to long term?
    Mr. Bernanke. Well, it depends to some extent on the rate 
of recovery of the economy. The more quickly it recovers, the 
sooner the medium term will come, in some sense.
    But right now, the various estimates of the CBO and the OMB 
under different scenarios show a structural deficit from say 
2013 to 2020 of between 4 and 7 percent of GDP, which is not 
sustainable. So I would say medium term is 3 to 5 years out in 
the future, and of course, the situation gets much more 
difficult beyond, say, 2020 when the entitlement spending 
becomes even greater.
    Mrs. Lummis. I am aware that Mr. Ryan's plan has been 
scored by CBO and that it does not actually balance the budget 
until the second half of this century. That is how gentle a 
landing it is. And that is based on our current economic 
situation. So it would balance the budget earlier if there were 
a more robust economic recovery.
    Does that number scare you as being too abrupt an effort to 
recover our economy and balance the budget?
    Mr. Bernanke. I am not familiar with the exact trajectory 
there, but I think we need to show that, within a few years, we 
are going to go clearly to a path where the debt-to-GDP ratio 
remains more or less stable. In other words, that line in that 
picture is flat or going down rather than rising, and as long 
as that can be persuasively shown to the public and to the 
markets, I think that would be a very important step.
    Mr. Ryan. Would the gentlelady yield for just a brief 
moment?
    Mrs. Lummis. Yes.
    Mr. Ryan. Are you guys saying this is all about trajectory 
and confidence that this trajectory will be put in place?
    Mr. Bernanke. That is what I am saying.
    Mr. Ryan. That is what we are trying to achieve.
    Mr. Bernanke. Yes.
    Mrs. Lummis. Thank you, Mr. Chairman. Thank you, Mr. 
Bernanke.
    Chairman Spratt. Mr. Langevin.
    Mr. Langevin. Thank you, Mr. Chairman. Chairman Bernanke, 
thank you for being here today and the hard work you are doing. 
When you testified in front of this committee a year ago almost 
to the day, the economy was still in decline, gross domestic 
product decreased by over 6 percent and we were shedding about 
500,000 jobs a month. I know we have talked about this again 
here this morning several times. Today our economy is growing 
at an estimated rate of about 3 percent, adding almost 300,000 
jobs in April. That is a significant turnaround. However, in 
places like my home State in Rhode Island, which continues to 
have one of the highest unemployment rates in the country--a 
12.5 percent rate right now--finding jobs really continues to 
be a top concern for me, for my constituents. And the other 
issue is the Federal deficit. I know these have been constant 
themes here this morning. So my question is that to both on 
small business job creation--and I do want to adjust the 
deficit. Small businesses are a key economic driver, 
particularly in Rhode Island, which we have about 97 or 98 
percent of our businesses in Rhode Island are small businesses. 
Can you give us again an update on the current state of lending 
to small businesses? In particular, can you also give us an 
updated status report on the term asset backed lending 
facility, or TALF, as it relates to small business lending? And 
in your estimation, do small businesses now have access to the 
credit that they need to begin expanding and adding jobs? And 
in really going forward, what do you believe the most effective 
ways the Federal Government can spur small business growth and 
speed job creation? How do we really jump-start job creation in 
small businesses, which is the backbone of our economy, 
particularly in Rhode Island?
    The other thing I would like you to get to--as I mentioned 
before, the deficit and our mounting Federal debt is another 
large concern for all of us, especially given the recent 
volatility in the European markets. Do you believe that our 
economy is stable enough to enact immediate deficit reduction 
measures? If not, what are the risks of a double-dip recession? 
And then finally, what are the most effective ways to enact 
appropriate deficit reduction so that we don't put our economic 
recovery at risk?
    Mr. Bernanke. So the credit situation for small businesses 
remains very tough, very tight. I think there are some 
indications of modest improvement. For example, our survey of 
loan officers suggests that they are no longer tightening the 
terms on which they offer loans to small businesses. And the 
rate at which small loans is declining is at least leveling off 
to some extent. So things are getting a little better. Another 
indicator is that--part of the reason it is getting a little 
better is maybe that right now businesses are not coming to the 
banks in many cases for loans because they don't have the 
demand for their product. If you ask small businesses in the 
surveys, most of them point to a lack of demand as the most 
important problem and then credit is down the list somewhere. 
And I think our concern is that as the economy grows and these 
businesses want to grow, that they will run into constraints.
    So to answer your question, I think although there seems to 
be some signs of improvement--and I heard some of this last 
week in Michigan when I was talking to suppliers to the auto 
industry--some signs of improvement, it is still obviously very 
tight for small business. Our TALF program, I think, was very 
helpful in getting the securitization market for small business 
loans going again. That program is now over because we are 
trying to exit from those extraordinary measures. But the 
secondary market has seemed to have revived. In addition, the 
Treasury is purchasing SBA loans. But SBA is only one 
particular--is only one part of the source of credit for small 
business and that is why, as I have emphasized today, the Fed 
has been working very aggressively with banks to make sure that 
small businesses that are creditworthy are not turned away. I 
am sure we are not successful in all cases, but we understand 
the importance of this to recovery in this economy.
    On the deficits, again as I said to Mr. Ryan, I think it is 
really a question of trajectory. A very sharp consolidation of 
fiscal policy this year would not be a good idea I think, given 
the fragility of the recovery at this point, but maintaining a 
strong recovery and keeping interest rates low would be 
assisted by a commitment by Congress to bring the deficit to a 
sustainable level and the debt to a relatively flat level to 
GDP over the medium term.
    Chairman Spratt. Ms. DeLauro.
    Ms. DeLauro. Thank you very much, Mr. Chairman. Dr. 
Bernanke, welcome. Thank you.
    As expressed here and in other forums, the concern about 
the adverse effect of a growing deficit and debt in the coming 
years and its long-term effect on our economy, I worry that 
there is a great deal of confusion about what the concerns 
imply about policy choices now and over the next few years. For 
instance, the concerns about the economic deficits and debt led 
some House Members to demand that the fiscal relief for the 
States in the form of a temporary extension of the increase in 
the Federal matching rate for Medicaid be dropped from the jobs 
bill the House passed before the recent break. You commented in 
your testimony about the shortfall in State budgets. Additional 
layoffs--and you mentioned something a little earlier on this--
additional layoffs, and there appear to be substantial layoffs 
coming, particularly in education and that will follow with 
health care workers, probably with police and fire. And States 
are required to balance these budgets. What that means in terms 
of those layoffs if we do not extend additional FMAP funding 
for States, will that be a drag on the economy and slow 
recovery? I know you shy away from, as you should, talking 
about specific programs, but we are at an economic crisis at 
the moment here. We have to connect dots between Federal 
Government and State government with what is happening. What is 
your sense of this policy with regard to assistance with States 
at this juncture? At this juncture, not forever. At this 
juncture.
    Mr. Bernanke. Well, I am going to disappoint you to some 
extent because again I don't want to tell Congress which 
specific programs to undertake.
    Ms. DeLauro. I understand.
    Mr. Bernanke. But to the extent that you decide to 
undertake short-term spending programs, whether it is to help 
the unemployed or to provide training or to help State and 
local governments or to provide infrastructure, those are the 
kinds of choices that you are looking at. To the extent you do 
that, it will be more effective and safer to do that on a twin-
track basis where on the other track you are also thinking 
about the longer term. That is my message.
    Ms. DeLauro. I understand that. The environment here today, 
which is one of concern, that we do not seem to be looking at--
and this leads me to a following question, Dr. Orszag said in 
the paper the other day that there was no tradeoff between 
deficit reduction and job creation. Given what you have said, I 
am assuming that you have the same view on that, we are dealing 
with a 2-track program here. But Congress is becoming 
increasingly concerned that there is a tradeoff and that 
policies such as extending the unemployment benefits, doing 
something about an FMAP program are increasingly--we are not 
moving in that direction. That the only track is deficit 
reduction. So that my point to you is do you agree that there 
is no tradeoff, that both are the right goal? Do you think we 
can create jobs and show that in the long term we are serious 
about deficit reduction?
    Mr. Bernanke. Yes, but you have do both. That is my point.
    Ms. DeLauro. Right. But we are in an environment in this 
institution, Dr. Bernanke, that says that it is one track, it 
is deficit reduction, it is not job creation or the measures 
one needs to deal with short-term economic recovery. I don't 
know if you are fearful--and I would ask you the question--that 
the current climate in the Congress, in both the House and the 
Senate, is the one track. And my question to you is, is that 
the appropriate direction to take? What kind of repercussions 
would result with that effort and saying to the States or 
saying to this effort on job creation, we can't do that now? 
What does that do overall to the recovery?
    Mr. Bernanke. I think that in the short term fiscal policy 
needs to take into account the fact that the recovery is still 
pretty fragile and may need some more assistance. Now, the risk 
there is if you do only that short-term type of activity, it 
may cause markets to worry that you are not serious and 
interest rates could go up and you would have that problem. I 
think we are in full agreement here.
    Ms. DeLauro. We are in full agreement. What I am making the 
point is that we are in a climate, in an environment in the 
Congress that is one track. And my view--and I will just 
express my view--is that is not where the future economic 
recovery lies. I sense in your view it is the same and that we 
are on the same track. Deficit reduction clearly is something 
that we have to focus on. Thank you.
    Chairman Spratt. Ms. DeLauro, take yes for an answer and 
let us move on to the next question. Mr. Connolly. And this 
will be the last series of questions.
    Mr. Connolly. Thank you, Mr. Chairman. Dr. Bernanke, 
welcome. And I am sorry I am the last questioner. The stimulus 
that was passed by this Congress last year, was it necessary 
and did it work?
    Mr. Bernanke. I think it was helpful. I think it did create 
some jobs, it did create some growth. Whether it could have 
been done better, I don't know. But it was helpful. It did 
create some jobs. But again it has added--and again I am fine 
with the fact that it added to the deficit, but we need to take 
into account that long-term implication as we view fiscal 
policy going forward.
    Mr. Connolly. Let us go back to when we passed the 
stimulus. Was it useful or necessary to the economic recovery 
or could we have just gotten by without it?
    Mr. Bernanke. Sir, I don't want to buy into the entire 
package and all the aspects of it, the composition, the size, 
all of those things. But I do believe the fiscal policy was 
useful, it did help the economy recover and it helped create 
jobs.
    Mr. Connolly. Useful. Was stimulus necessary or not a 
little over a year ago? You will be one of the few economists I 
know of who thinks otherwise if the answer isn't yes.
    Mr. Bernanke. Again, I don't know what would have happened 
in the absence. I think it did add to jobs. It did help growth. 
And clearly we needed that help because the economy was in a 
very weak condition a year ago.
    Mr. Connolly. Thank you. You mentioned the deficit 
commission, Dr. Bernanke. I have heard members of this 
committee on the other side of the aisle say that they are all 
for addressing the deficits so long as it never involves any 
new revenue sources.
    Can we, in fact, change the trajectory we are on in terms 
of deficit growth if we only address the spending side and 
don't address the revenue side?
    Mr. Bernanke. I think I would urge everybody to approach 
this with an open mind and be willing to look at all 
alternatives. Now, in the end, people have their own views and 
their own decisions to make. But I would think that we don't 
want to be carving off all possibilities before we get to----
    Mr. Connolly. I guess I am asking you a different question. 
I agree with you that everyone should keep an open mind. But I 
am telling you they don't have an open mind. They have publicly 
expressed that they do not favor--they are all for deficit 
reduction, as long as anything having to do with revenue is off 
the table.
    Can we get to serious deficit reduction, change that 
trajectory you talked about, if we eliminate half of the legacy 
programs?
    Mr. Bernanke. Well, theoretically you could if you cut 
enough, but it would be very difficult to do that.
    Mr. Connolly. Is there enough spending to be cut?
    Mr. Bernanke. Of course.
    Mr. Connolly. National defense, homeland security?
    Mr. Bernanke. That is your judgment, that is the Congress' 
judgment. That is not my judgment.
    Mr. Connolly. It must be nice to be an economist. Your 
predecessor opined after the inauguration of President Bush 
that he did not think that the proposed tax cuts at that time 
would necessarily have a deleterious effect on the situation of 
the deficit and that it could have a stimulative effect on the 
economy. Was he right or wrong in that opinion, 
retrospectively?
    Mr. Bernanke. I think it probably did strengthen the 
economy but it probably also raised the deficit.
    Mr. Connolly. You think it strengthened the economy.
    Mr. Bernanke. In the sense--remember we were in 2001, we 
were in a recession and it was supportive of the recovery, I 
believe. However, it did add to the deficit.
    Mr. Connolly. But it didn't seem to have a sustained and 
positive impact on the economy if you look at what happened in 
2007, 6 short years later, did it?
    Mr. Bernanke. That is certainly true. But the financial 
crisis, I think, was a somewhat separate set of factors that 
hit the economy.
    Mr. Connolly. You are referring to the economic decline 
after 9/11 in 2001?
    Mr. Bernanke. There was a recession that began before--it 
came after the drop in the tech bubble, the dot-com bubble. 
March 2001, the recession began.
    Mr. Connolly. My final question, because my time is up and 
so is yours. Taxes. There was a study released a few weeks ago 
that showed that the cumulative aggregate tax burden, State, 
local and Federal, on the average household in America is now 
at its lowest point since 1950 when Harry Truman was in the 
White House. Is that your understanding as well?
    Mr. Bernanke. That may be true, but I think it is at least 
in part due to the fact that we are in a deep recession. So 
people's incomes are down and so the amount of taxes they pay 
are less than usual. I am not sure that is true about each 
individual tax in terms of rates and so on.
    Mr. Connolly. Were taxes cut as part of the stimulus bill 
last year?
    Mr. Bernanke. Yes.
    Mr. Connolly. Thank you. I yield back, Mr. Chairman. Thank 
you, Dr. Bernanke.
    Chairman Spratt. The gentleman yields back. Mr. Chairman, 
thank you very, very much for finding the time to testify and 
for your full and forthright answers.
    Those members who did not have an opportunity to submit 
questions may submit questions for the record if there is no 
objection. There is none. So ordered.
    Thank you once again for coming. We very much appreciate 
your testimony and your service to our country.
    [Questions submitted and their responses follow:]

        Questions Submitted for the Record to Chairman Bernanke

Congressman Aderholt
    1. On April 1, the Federal Reserve began requiring escrow accounts 
to be established for first-lien higher-priced mortgage loans. Many 
community banks protested this requirement since they do not have the 
resources to create these escrow accounts. Since the rule went into 
effect, many community banks, including one in my district, have 
stopped offering these mortgages. Is the Federal Reserve reviewing this 
policy and how it affects community banks? Do you foresee the Federal 
Reserve exempting community banks from this regulation in the near 
future?
    2. I hear stories from community bankers in my district about 
overzealous regulators going so far as to demand changes on individual 
$8,000 car loans. Do you believe that some of this over regulation 
could hinder our economic recovery more than help it? Will increased 
regulations in the financial reform legislation in Congress decrease 
the availability of credit to consumers, especially from small banks?
    3. During the hearing, you stated that some banks are taking second 
looks at loan applications to ensure consumers get the credit they 
deserve. In discussion with small bankers in my district, I have 
learned that many community banks are taking second, third and fourth 
looks. While it is good that they are reviewing these applications, it 
is slowing down access to credit. The fact is that many of these banks 
are afraid to lend money. What is the Federal Reserve doing to give 
community banks more confidence in lending and free up credit for 
consumers?
Congresswoman Kaptur
    1. Mr. Chairman, what role, if any, should the Federal Reserve 
System play in working to solve the housing crisis continues to ravage 
our nation's communities?
    2. Mr. Chairman, the Treasury is pouring money into Fannie and 
Freddie, keeping it afloat to support the current structure of housing 
finance. What should be done to stop us from dumping money into Fannie 
and Freddie to cover the losses of bad paper dumped into both 
institutions by big banks at profits and to return our housing finance 
system to a prudent lending, sound system that supports homeownership 
and affordable housing?
    3. Mr. Chairman, in the House bill on financial regulatory reform, 
we created the Consumer Financial Protection Agency. In the Senate 
bill, a bureau was created within the Federal Reserve System, 
underneath the Board of Governors. The conference is using the Senate 
bill as the base bill for discussion. Therefore, Mr. Chairman, do you 
feel that the Federal Reserve should have any responsibility for 
consumer protection? Do you feel that this fits in with the roles of 
the Federal Reserve System, which is to formulate the nation's monetary 
policy, supervise and regulate banks, and provide a variety of 
financial services to depository financial institutions and the federal 
government? Please including any related information to support your 
responses.

      Responses to Mr. Aderholt's Questions From Chairman Bernanke

    1. On April 1, the Federal Reserve began requiring escrow accounts 
to be established for first-lien higher-priced mortgage loans. Many 
community banks protested this requirement since they do not have the 
resources to create these escrow accounts. Since the rule went into 
effect, many community banks, including one in my district, have 
stopped offering these mortgages. Is the Federal Reserve reviewing this 
policy and how it affects community banks? Do you foresee the Federal 
Reserve exempting community banks from this regulation in the near 
future?

    As you note, the Board's rules for higher-priced mortgage loans 
require that creditors establish escrow accounts for taxes and 
insurance. The Board issued these rules in July 2008 using its 
authority under the Home Ownership and Equity Protection Act to 
prohibit unfair practices in connection with mortgage loans. Compliance 
with the rule did not become mandatory until this year because the 
Board recognized that some lenders would need time to develop the 
capacity to escrow.
    As background, the Board adopted the escrow requirement to address 
specific concerns. The Board found that lenders generally did not 
establish escrow accounts for consumers with higher-priced loans. The 
Board was concerned that when there is no escrow account, lenders might 
disclose a monthly payment that includes only principal and interest. 
As a result, consumers might mistakenly base their borrowing decision 
on an unrealistically low assessment of their total mortgage-related 
obligations. The Board was also concerned that consumers not 
experienced at handling taxes and insurance on their own might fail to 
pay those items on a timely basis.
    Nonetheless, we do appreciate the concerns you have raised about 
the cost of establishing escrow accounts, and whether the cost may be 
prohibitive for lenders that make a small number of loans and hold them 
in portfolio. In fact, community banks also have raised these concerns 
with the Board directly during the past several months. As a result, we 
have been discussing with their representatives the potential impact of 
the escrow rule. Please be assured that the Board is monitoring 
implementation of the new escrow rule by small lending institutions and 
the availability of credit in the communities they serve. If it is 
determined that the costs of the rule outweigh the benefits, we will 
explore alternatives that do not adversely affect consumer protection.

    2. I hear stories from community bankers in my district about 
overzealous regulators going so far as to demand changes on individual 
$8,000 car loans. Do you believe that some of this over regulation 
could hinder our economic recovery more than help it? Will increased 
regulations in the financial reform legislation in Congress decrease 
the availability of credit to consumers, especially from small banks?

    In retrospect, loan underwriting standards became too loose during 
the run up to the recent financial crisis. Accordingly, some tightening 
of underwriting standards from the practices that prevailed just a few 
years ago was needed. However, as your question suggests, there is a 
risk that over-correction by banks and supervisors could unnecessarily 
constrain credit. To address this risk, the Federal Reserve and the 
other banking agencies have repeatedly instructed their examiners to 
take a measured and balanced approach to reviews of banking 
organizations and to encourage efforts by these institutions to work 
constructively with existing borrowers that are experiencing financial 
difficulties. Examples of such guidance include the November 12, 2008 
Interagency Statement on Meeting the Needs of Creditworthy Borrowers 
and an October 30, 2009 interagency statement designed to encourage 
prudent workouts of commercial real estate loans and facilitate a 
balanced approach by field staff to evaluating commercial real estate 
credits (SR 09-7). More recently, on February 5, the Federal Reserve 
and other regulatory agencies issued a joint statement on lending to 
creditworthy small businesses. This statement is intended to help to 
ensure that supervisory policies and actions are not inadvertently 
limiting access to credit. If bankers in your district believe that 
Federal Reserve examiners have taken an inappropriately strict approach 
on a supervisory matter, they should discuss their views with bank 
supervision management at their local Reserve Bank or raise their 
specific concerns with the Federal Reserve's ombudsman (see details on 
the Board's website at http://www.federalreserve.gov/aboutthefed/
ombudsman.htm).
    Regulation imposes costs on small banks and can affect their 
capacity and willingness to lend. However, on balance, it is likely 
that the benefits of implementing reforms to prevent a future financial 
crisis outweigh the costs of these changes. Indeed, a repeat of the 
recent crisis in all likelihood would be far more costly to community 
banks and consumers seeking credit than the costs of the proposed 
financial reform package.

    3. During the hearing, you stated that some banks are taking second 
looks at loan applications to ensure consumers get the credit they 
deserve. In discussion with small bankers in my district, I have 
learned that many community banks are taking second, third and fourth 
looks. While it is good that they are reviewing these applications, it 
is slowing down access to credit. The fact is that many of these banks 
are afraid to lend money. What is the Federal Reserve doing to give 
community banks more confidence in lending and free up credit for 
consumers?

    As discussed above, the Federal Reserve has developed guidance for 
its examiners to ensure that they are taking a measured approach to 
evaluating lending activities at small banks. In addition, the Federal 
Reserve has supplemented these issuances with training programs for 
examiners and outreach to the banking industry to underscore the 
importance of the guidance and ensure its full implementation. Also, in 
an effort to better understand small business lending trends, the 
Federal Reserve System this month is completing a series of more than 
40 meetings across the country to gather information that will help the 
Federal Reserve and others better respond to the credit needs of small 
businesses. As part of this series, the Federal Reserve Bank of Atlanta 
hosted five small business roundtable discussions at locations across 
its district during the spring and summer. Emerging themes, best 
practices, and common challenges identified by the meeting series were 
discussed and shared at a conference held at the Federal Reserve Board 
in Washington in early July.

       Responses to Ms. Kaptur's Questions From Chairman Bernanke



    [Whereupon, at 12:20 p.m., the committee was adjourned.]

                                  
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