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




 
                        MONETARY POLICY AND THE
                      STATE OF THE ECONOMY, PART I

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 22, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-147



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 22, 2010................................................     1
Appendix:
    July 22, 2010................................................    47

                               WITNESSES
                        Thursday, July 22, 2010

Bernanke, Hon. Ben S., Chairman, Board of Governors of the 
  Federal Reserve System.........................................     6

                                APPENDIX

Prepared statements:
    Paul, Hon. Ron...............................................    48
    Bernanke, Hon. Ben S.........................................    49

              Additional Material Submitted for the Record

Bernanke, Hon. Ben S.:
    ``Addressing the Financing Needs of Small Businesses,'' dated 
      July 21, 2010..............................................    58
    ``Monetary Policy Report to the Congress,'' dated July 21, 
      2010.......................................................    78
    Written responses to questions submitted by Representative 
      Foster.....................................................   128


                        MONETARY POLICY AND THE
                      STATE OF THE ECONOMY, PART I

                              ----------                              


                        Thursday, July 22, 2010

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 9:32 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Waters, Maloney, 
Gutierrez, Watt, Meeks, Moore of Kansas, Clay, McCarthy of New 
York, Baca, Miller of North Carolina, Scott, Green, Cleaver, 
Bean, Moore of Wisconsin, Klein, Perlmutter, Donnelly, Foster, 
Minnick, Adler, Driehaus, Peters, Maffei; Bachus, Castle, 
Royce, Paul, Biggert, Hensarling, Garrett, Neugebauer, Price, 
McHenry, Putnam, Marchant, McCotter, Posey, Jenkins, Lee, 
Paulsen, and Lance.
    The Chairman. The hearing will come to order.
    Let me just say before we start, I have a list on the 
Democratic side of Members who did not get to ask questions of 
the Chairman in February. And I will begin, in seniority order, 
with those who did not get a chance to ask, and then we will go 
to others.
    We will be having a continuation of this hearing at 1:30, 
with comments from other economists about the economy.
    And, with that, I will begin the 5 minutes.
    It is very important that we get the views of the Chairman 
of the Federal Reserve, whom, we should note, is an important 
point of continuity in economic policy. And, as has been the 
case with previous Federal Reserve Chairs, for people who 
lament that there is not more bipartisanship, etc., Mr. 
Bernanke is in the tradition of Chairs of the Federal Reserve--
certainly his predecessor--who bridge Administrations. And the 
Administrations have had very different views in a number of 
areas. Mr. Bernanke was a very high-ranking policy official in 
the Bush Administration, and he has continued and, in fact, 
been reappointed in the Obama Administration, obviously.
    The question now is, how do we pursue policies that will 
allow us to continue the progress that has recently clearly 
been made in the economy, but in the most recent period, the 
last couple of months, has slowed down and hasn't been as 
vigorous as we would like?
    I think there is a fairly general agreement that the 
American economy began to recover slowly in 2009 from a long 
and deep recession and a financial crisis. That is what 
confronted the Obama Administration when it took office. GDP 
growth turned positive in the latter half of the year 2009. 
Financial markets normalized. Major credit markets began to 
function smoothly after an extended period of paralysis and 
turmoil.
    For most of 2010, economists have said a moderate recovery 
was well under way. But there is a growing risk that this could 
be stunted or undercut by the effects of a new crisis.
    Clearly, I think those are the facts. The President 
inherits a very severe recession, worse than he had realized, 
than many had realized. The efforts taken in both the fiscal 
and monetary areas, in my judgment, with great cooperation, 
begin to work. In the latter half of 2009, as I said, we began 
to get growth. That is after the economic recovery bill was 
passed and after other things happened. The financial markets 
became more normal. The credit markets started to function 
smoothly after the worst disruption in a very long time. And, 
in 2010, things are going well. We had significant job creation 
in the spring of 2010.
    And then things began, not to go backwards--we are not into 
a double dip, by any means--but the rate of recovery from that 
deep recession has slowed down. So the question is twofold: 
Why? And what can we do about it? Obviously, you can't decide 
what to do about it until you decide on why.
    One explanation I have heard from some of my colleagues is 
that tax increases have been the problem. One of the things 
that I think ought to be very clear is that, from January of 
2009, when the Obama Administration took office, and including 
in the economic recovery bill, taxes in America have been 
lowered by over $200 billion. The economic recovery bill itself 
included significant tax reductions. And I am netting out now 
the refundable credits. I am not talking about those. I am 
talking about actual reductions. We had the home-buyer tax 
credit. So there has clearly been a significant reduction, in 
the hundreds of billions, in the amount of taxes collected.
    We were, as I said, according to what I think is a general 
agreement, we began to turn around in 2009, and in 2010, a 
moderate recovery was under way. It was beginning to produce 
job growth that was beginning to bite into the unemployment. 
And then it slowed down, and the question is, why?
    One thing is clear to me from the chronology: that there is 
at least a coincidence in time between this hesitation--not a 
drop, but a slower rate of growth than we were hoping, and the 
crisis in Europe. And we know that the world has become very 
interconnected economically. The crisis that began with Greece 
and that spread, to great concerns in Europe, clearly is of the 
time period that precedes a slowdown here.
    And that, of course, is very much a difficult issue for us, 
because I think there is a very good argument that the progress 
I have been describing, beginning in 2009, in the latter half, 
and then into a recovery in 2010, was, to some extent, slowed 
down by exogenous factors--debt crises in Europe.
    I do believe that the Administration and the Chairman of 
the Federal Reserve played a major role here with his 
colleagues in trying to help Europe cope with that, not out of 
a sense purely of compassion, but out of a sense of enlightened 
self-interest. And I think it is clear that the European crisis 
was beginning to have negative effects on us, and it was 
therefore a good idea--and I differ with some of my Republicans 
colleagues there who were critical of this intervention.
    So that is the question I want to address today: What 
caused us to lose some steam, not to go backwards? And what can 
we do to overcome that?
    The gentleman from Alabama is now recognized for 5 minutes.
    Mr. Bachus. Thank you, Mr. Chairman.
    Mr. Chairman, today's hearing comes a day after the signing 
of the most far-reaching government intervention into America's 
financial system in nearly a century. But it also comes at a 
precarious time for Americans. The economic recovery is anemic, 
at best. Recent data from private economists and the Fed show 
we are in an extended period of weak recovery and with some 
risk of a worse prospect, and that is a double-dip recession.
    I would disagree with you on the causes of this continued 
economic downturn. I believe the spendthrift anti-business and 
anti-job economic policies of this Administration and of the 
Democrat-controlled Congress have not delivered on the 
extravagant promises we heard from the President when he signed 
the stimulus bill, but that the staggering amount of money that 
we are spending on government programs is jeopardizing both our 
short- and long-term economic future. It is simply pushing the 
risk further out into the future, to the detriment of not only 
confidence in our economy today but a bleaker economic future 
for our children and grandchildren.
    Rather than growth, we have an unacceptably high 
unemployment rate that is likely to rise further as the census 
winds down. We have created jobs, but those jobs are in 
Washington, not in the private sector. And as Chairman Bernanke 
said yesterday, we need job creation in the private sector.
    Yet, we are facing the expiration of significant tax cuts, 
which, I think, Chairman Frank, you would agree will contract 
the economy. The last thing you want to do during a slow 
economic period is to raise taxes. But we have not addressed 
that.
    Rather than a housing recovery--and that is despite a 
number of government intervention programs--we have had a brief 
tax-incentivized rise in sales that has now stalled. And 
recently, we have had our 16th month in a row of foreclosure 
filings that total more than 300,000 a month.
    Rather than the healthy economy that President Obama, 
Speaker Pelosi, and Leader Reid promised, we have a fiscal 
outlook that is downright alarming.
    Chairman Frank mentioned tax cuts. What he didn't mention 
is that we are spending money we don't have and we have to 
borrow. Rather than Ronald Reagan's ``shining city on the 
hill,'' we are in a debt ditch. And we have a national debt 
that--the average child born today, before they graduate from 
elementary school, they will be in a country that faces a worse 
debt situation than Greece faces today.
    Rather than economic incentives, this Congress has 
responded with policies that have largely paralyzed 
investments, by large businesses as well as small businesses. 
And I think particularly small businesses are paralyzed by the 
Democrat policies that create even more uncertainty and prevent 
them from investing in growing and hiring new employees. That 
is true with ``Obamacare.'' It is true with our energy 
policies. And it will prove true with some of the provisions in 
our financial regulatory bill, particularly those that were 
passed over our protest.
    This Administration and the Majority in the Congress have 
told the American people that this steroid-enhanced spending 
would solve our economic problems. Well, it hasn't. They said 
if the United States spent hundreds of billions of dollars, 
millions of jobs would be created and businesses would grow. 
Even Christina Romer, the President's economic advisor, says 
this isn't true.
    So far, the only real growth we have witnessed is in our 
debt and our deficits, and in a size that is already bloating 
Washington bureaucracy. The 2,300-page regulatory bill, the 
Frank-Dodd bill that the President signed yesterday, mandates 
hundreds of new Federal regulations and injects massive new 
uncertainty in an already-fragile economy and will only 
accelerate these damaging trends.
    If you take time to listen to the American people--
    The Chairman. The gentleman's time has expired.
    Mr. Bachus. --they are concerned about the debt and job 
creation, not the need for more government spending.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from North Carolina, the 
chairman of the Subcommittee on Domestic Monetary Policy, is 
recognized for 3 minutes.
    Mr. Watt. Thank you, Mr. Chairman.
    And welcome back, Chairman Bernanke.
    I want to build on both what the chairman and the ranking 
member have said, but I want to do it is a much, much more 
focused way, I think. Because while I am aware that half of the 
Fed's real mandate is combating inflation and fostering stable 
prices, my real concern today is about the other half of the 
dual mandate. I am very concerned about unacceptably high 
unemployment.
    So my focus is, what specifically can the Fed due to 
curtail high unemployment? And what would you suggest that we, 
as elected officials, do to accomplish this objective? And I 
will also be pursuing that with this afternoon's panel.
    Many experts say that the U.S. economy needs to add more 
than 125,000 jobs per month just to keep up with population 
growth and 250,000 jobs per month to begin actually reducing 
the unemployment rate. Recent job growth has fallen well short 
of these numbers, and in many districts many people have simply 
given up looking for work and are no longer counted in 
unemployment statistics. And that is certainly true in my 
congressional district.
    So I would like to hear specifically about the various 
tools in the Fed toolbox to reduce unemployment. In what order 
or sequence should these tools be used? What are the costs and 
benefits of specific programs or activities to combat high 
unemployment?
    At the last several Humphrey-Hawkins hearings, we have 
consistently questioned the Fed about how it plans to address 
high unemployment and job growth throughout the United States. 
And at these hearings, Chairman Bernanke has vowed to take 
``strong and aggressive actions to halt the economic slide and 
improve the job growth.''
    Although there is some job growth, it is not nearly enough. 
Today, I hope to hear the details on specific things that we 
can do to spur job growth.
    And, with that, Mr. Chairman, that is the single focus of 
my inquiries today: jobs, jobs, jobs, jobs, jobs. And I guess 
it covers all of those things that the chairman and the ranking 
member have talked about. But that is my single focus today, 
Mr. Chairman.
    I yield back.
    The Chairman. The gentleman from Texas, the ranking member 
of the Domestic Monetary Policy Subcommittee, is now recognized 
for 3 minutes.
    Dr. Paul. I thank the chairman.
    I welcome Chairman Bernanke to our hearing.
    Yesterday, Mr. Bernanke, you said that the economic outlook 
remains unusually uncertain. And a lot of people would 
certainly agree with you on that. And, yet, the free-market 
economists don't find it unusual. They find it was predictable; 
they expected it. And they are also making predictions that 
current policies are not going to solve our problem.
    We have had 2 years at a chance to take care of this with 
the usual fiscal and monetary answers. And in the course of 
these past 2 years, we spent $3.7 trillion. In that period of 
time, the real GDP essentially hasn't moved, and unemployment 
is a disaster. Yesterday, you even mentioned we lost 8.5 
million jobs, and the real rate, of course, is much higher. 
Free-market economists say it is over 22 percent. And even the 
BLS says it is at least 16 when you count everybody.
    But so far, we don't see any good signs of anything 
happening. But of this $3.7 trillion we spent, it is 
interesting to note that it is almost identical to the number 
that our national debt went up. And I guess it shouldn't be too 
surprising. So we pumped in $3.7 trillion, and that is both 
fiscal and monetary, and we end up with more unemployment. And 
the most anybody can say is, ``If we hadn't done that, we would 
have lost even more jobs.'' And I think that is a pretty weak 
answer for the policies that we have today.
    But just putting a pencil to this, it is interesting to 
note that, if we had taken this $3.7 trillion and put that to 
these 8.5 million people who lost their jobs, you could have 
given them $435,000 per individual. I would think that is not a 
good result, and it is a gross misallocation of resources. So 
the more we pump in, the more we bail out, the more the 
unemployment goes up. Today's statistics weren't very helpful.
    So something is wrong with this type of stimulus. And it 
just behooves me to wonder, which way are we going? When are we 
going to stop and think that maybe we are not on the right 
course? We can look at more current statistics in the last 
month or 2 and say, ``Oh, everything is on its way up.'' But, 
quite frankly, if you have been unemployed, and unemployment is 
getting worse, they are not waiting for a double-dip; they have 
been in one big dip. And the fact that there are a few 
statistics that show that there has been a bump in the 
financial markets, it really doesn't reassure the people.
    So, I am looking for the day that we look at the 
fundamentals, looking at our monetary policy, looking at our 
fiscal policy, and just wondering, how did we get in this mess?
    And someday, I would also like to suggest that the people 
who were right on this for the past 10 years--knew about the 
bubble, warned about the bubble, said this was coming--I don't 
even know why we just don't talk to them and say, how were you 
guys right, and what have we been doing wrong?
    I yield back.
    The Chairman. The Chairman is now recognized to give his 
statement.
    And, Mr. Chairman, please do not feel constrained by the 5 
minutes. You are the only witness, and we have nothing else to 
do this morning, so you take what time you need.

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

    Mr. Bernanke. Thank you.
    Chairman Frank, Representative Bachus, and members of the 
committee, I am pleased to present the Federal Reserve's 
semiannual ``Monetary Policy Report to the Congress.''
    The economic expansion that began in the middle of last 
year is proceeding at a moderate pace, supported by stimulative 
monetary and fiscal policies. Although fiscal policy and 
inventory restocking will likely be providing less impetus to 
the recovery than they have in recent quarters, rising demand 
from households and businesses should help sustain growth.
    In particular, real consumer spending appears to have 
expanded at about a 2.5 percent annual rate in the first half 
of this year, with purchases of durable goods increasing 
especially rapidly. However, the housing market remains weak, 
with the overhang of vacant or foreclosed houses weighing on 
home prices and construction.
    An important drag on household spending is the slow 
recovery in the labor market and the attendant uncertainty 
about job prospects. After 2 years of job losses, private 
payrolls expanded at an average of about $100,000 per month 
during the first half of this year, a pace insufficient to 
reduce the unemployment rate materially. In all likelihood, a 
significant amount of time will be required to restore the 
nearly 8.5 million jobs that were lost over 2008 and 2009.
    Moreover, nearly half of the unemployed have been out of 
work for more than 6 months. Long-term unemployment not only 
imposes exceptional near-term hardships on workers and their 
families, it also erodes skills and may have long-lasting 
effects on workers' employment and earnings prospects.
    In the business sector, investment in equipment and 
software appears to have increased rapidly in the first half of 
the year, in part reflecting capital outlays that had been 
deferred during the downturn and the need of many businesses to 
replace aging equipment.
    In contrast, spending on nonresidential structures, weighed 
down by high vacancy rates and tight credit, has continued to 
contract, though some indicators suggest the rate of decline 
may be slowing.
    Both U.S. exports and U.S. imports have been expanding, 
reflecting growth in the local economy and the recovery of 
world trade. Stronger exports have, in turn, helped foster 
growth in the U.S. manufacturing sector.
    Inflation has remained low. The Price Index for Personal 
Consumption Expenditures appears to have risen at an annual 
rate of less than 1 percent in the first half of the year. 
Although overall inflation has fluctuated, partly reflecting 
changes in energy prices, by a number of measures underlying 
inflation has trended down over the past 2 years. The slack in 
labor and product markets has damped wage and price pressures, 
and rapid increases in productivity have further reduced 
producers' unit labor costs.
    My colleagues on the Federal Open Market Committee and I 
expect continued moderate growth, a gradual decline in the 
unemployment rate, and subdued inflation over the next several 
years.
    In conjunction with the June FOMC meeting, Board members 
and Reserve Bank presidents prepared forecasts of economic 
growth, unemployment, and inflation for the years 2010 through 
2012 and over the longer run. The forecasts are qualitatively 
similar to those we released in February and May, although 
progress in reducing unemployment is now expected to be 
somewhat slower than we previously projected and near-term 
inflation now looks likely to be a little lower.
    Most FOMC participants expect real GDP growth of 3 to 3.5 
percent in 2010 and roughly 3.5 to 4.5 percent in 2011 and 
2012. The unemployment rate is expected to decline to between 7 
and 7.5 percent by the end of 2012.
    Most participants viewed uncertainty about the outlook for 
growth and unemployment as greater than normal, and the 
majority saw the risk to growth as weighted to the downside. 
Most participants projected that inflation will average only 
about 1 percent in 2010 and that it will remain low during 2011 
and 2012, with the risk to the inflation outlook being roughly 
balanced.
    One factor underlying the committee's somewhat weaker 
outlook is that financial conditions, though much improved 
since the depth of the financial crisis, have become somewhat 
less supportive of economic growth in recent months.
    Notably, concerns about the ability of Greece and a number 
of other euro-area countries to manage their sizable budget 
deficits and high levels of public debt spurred a broad-based 
withdrawal from risk-taking in global financial markets in the 
spring, resulting in lower stock prices and wider risk spreads 
in the United States.
    In response to these fiscal pressures, European leaders put 
in place a number of strong measures, including an assistance 
package for Greece and 500 billion euros of funding to backstop 
the near-term financing needs of euro-area countries.
    To help ease strains in U.S. dollar funding markets, the 
Federal Reserve reestablished temporary dollar liquidity swap 
lines with the ECB and several other major central banks. To 
date, drawings under the swap lines have been limited, but we 
believe that the existence of these lines has increased 
confidence in dollar funding markets, helping to maintain 
credit availability in our own financial system.
    Like financial conditions generally, the state of the U.S. 
banking system has also improved significantly since the worst 
of the crisis. Loss rates on most types of loans seem to be 
peaking, and, in the aggregate, bank capital ratios have risen 
to new highs.
    However, many banks continue to have a large volume of 
troubled loans on their books, and bank lending standards 
remain tight. With credit demand weak and with banks writing 
down problem credits, bank loans outstanding have continued to 
contract. Small businesses, which depend importantly on bank 
credit, have been particularly hard-hit.
    At the Federal Reserve, we have been working to facilitate 
the flow of funds to creditworthy small businesses. Along with 
the other supervisory agencies, we issued guidance to banks and 
examiners, emphasizing that lenders should do all that they can 
to meet the needs of creditworthy borrowers, including small 
businesses.
    We have also conducted extensive training programs for our 
bank examiners, with the message that lending to viable small 
businesses is good for the safety and soundness of our banking 
system as well as for our economy.
    We continue to seek feedback from both banks and potential 
borrowers about credit conditions. For example, over the past 6 
months, we have convened more than 40 meetings around the 
country of lenders, small-business representatives, bank 
examiners, government officials, and other stakeholders to 
exchange ideas about the challenges faced by small businesses, 
particularly in obtaining credit.
    A capstone conference on addressing the credit needs of 
small businesses was held at the Board of Governors in 
Washington last week. This testimony includes as an addendum a 
summary of the findings of this effort and possible next steps.
    The Federal Reserve's response to the financial crisis and 
the recession has involved several components.
    First, in response to the periods of intense illiquidity 
and dysfunction in financial markets that characterized the 
crisis, the Federal Reserve undertook a range of measures and 
set up emergency programs designed to provide liquidity to 
financial institutions and markets in the form of fully 
secured, mostly short-term loans. Over time, these programs 
helped to stem the panic and to restore normal functioning in a 
number of key financial markets, supporting the flow of credit 
to the economy.
    As financial markets stabilized, the Federal Reserve shut 
down most of these programs during the first half of this year 
and took steps to normalize the terms on which it lends to 
depository institutions. The only such programs currently open 
to provide new liquidity are the recently reestablished dollar 
liquidity swap lines with major central banks that I noted 
earlier.
    Importantly, our broad-based programs achieved their 
intended purposes with no loss to the taxpayers. All of the 
loans extended to the multi-borrower facilities that have come 
due have been repaid in full, with interest. In addition, the 
Board does not expect the Federal Reserve to incur a net loss 
on any of the secured loans provided during the crisis to help 
prevent the disorderly failure of systemically significant 
financial institutions.
    A second major component of the Federal Reserve's response 
to the financial crisis and recession has involved both 
standard and less conventional forms of monetary policy.
    Over the course of the crisis, the FOMC aggressively 
reduced its target for the Federal funds rate to a range of 
zero to one-fourth percent, which has been maintained since the 
end of 2008. And, as indicated in the statement released after 
the June meeting, the FOMC continues to anticipate that 
economic conditions, including low rates of resource 
utilization, subdued inflation trends, and stable inflation 
expectations, are likely to warrant exceptionally low levels of 
the Federal funds rate for an extended period.
    In addition to the very low Federal funds rate, the FOMC 
has provided monetary policy stimulus through large-scale 
purchases of longer-term Treasury debt, Federal agency debt, 
and agency mortgage-backed securities. A range of evidence 
suggests that these purchases helped improve conditions in 
mortgage markets and other private credit markets and put 
downward pressure on longer-term private borrowing rates and 
spreads.
    Compared with the period just before the financial crisis, 
the system's portfolio of domestic securities has increased 
from about $800 billion to about $2 trillion and has shifted 
from consisting of 100 percent Treasury securities to having 
almost two-thirds of its investments in agency-related 
securities. In addition, the average maturity of the Treasury 
portfolio nearly doubled, from 3.5 years to almost 7 years.
    The FOMC plans to return the system's portfolio to a more 
normal size and composition over the longer term. And the 
committee has been discussing alternative approaches to 
accomplish that objective.
    One approach is for the committee to adjust its 
reinvestment policy--that is, its policy for handling 
repayments of principal on the securities--to gradually 
normalize the portfolio over time. Currently, repayments of 
principal from agency debt and MBS are not being reinvested, 
allowing the holdings of those securities to run off as the 
repayments are received. By contrast, the proceeds from 
maturing Treasury securities are being reinvested in new issues 
of Treasury securities with similar maturities.
    At some point, the committee may want to shift its 
reinvestment of the proceeds from maturing Treasury securities 
to shorter-term issues, so as to gradually reduce the average 
maturity of our Treasury holdings toward pre-crisis levels 
while leaving the aggregate value of those holdings unchanged. 
At this juncture, however, no decision to change reinvestment 
policy has been made.
    A second way to normalize the size and composition of the 
Federal Reserve's security portfolio would be to sell some 
holdings of agency debt in MBS. Selling agency securities, 
rather than simply letting them run off, would shrink the 
portfolio and return it to a composition of all Treasury 
securities more quickly.
    FOMC participants broadly agree that sales of agency-
related securities should eventually be used as part of a 
strategy to normalize the portfolio. Such sales will be 
implemented in accordance with a framework communicated well in 
advance and will be conducted at a gradual pace.
    Because changes in the size and composition of the 
portfolio could affect financial conditions, however, any 
decisions regarding the commencement or pace of asset sales 
will be made in light of the committee's evaluation of the 
outlook for employment and inflation.
    As I noted earlier, the FOMC continues to anticipate that 
economic conditions are likely to warrant exceptionally low 
levels of the Federal funds rate for an extended period. At 
some point, however, the committee will need to begin to remove 
monetary policy accommodation to prevent the buildup of 
inflationary pressures. When that time comes, the Federal 
Reserve will act to increase short-term interest rates by 
raising the interest rate it pays on reserve balances that 
depository institutions hold at Federal Reserve banks.
    To tighten the linkage between the interest rate paid on 
reserves and other short-term market interest rates, the 
Federal Reserve may also drain reserves from the banking 
system. Two tools for draining reserves from the system are 
being developed and tested and will be ready when needed. 
First, the Federal Reserve is putting in place the capacity to 
conduct large, reverse repurchase agreements with an expanded 
set of counterparties. Second, the Federal Reserve has tested a 
term deposit facility, under which instruments similar to the 
certificates of deposit that banks offer their customers will 
be auctioned to depository institutions.
    Of course, even as the Federal Reserve continues prudent 
planning for the ultimate withdrawal of extraordinary monetary 
policy accommodation, we also recognize that the economic 
outlook remains unusually uncertain. We will continue to 
carefully assess ongoing financial and economic developments, 
and we remain prepared to take further policy actions, as 
needed, to foster a return to full utilization of our Nation's 
productive potential in a context of price stability.
    Last week, the Congress passed landmark legislation to 
reform the financial system and financial regulation, and the 
President signed the bill into law yesterday. That legislation 
represents significant progress toward reducing the likelihood 
of future financial crises and strengthening the capacity of 
financial regulators to respond to risks that may emerge. 
Importantly, the legislation encourages an approach to 
supervision designed to foster the stability of the financial 
system as a whole, as well as the safety and soundness of 
individual institutions.
    Within the Federal Reserve, we have already taken steps to 
strengthen our analysis and supervision of the financial system 
and systemically important financial firms in ways consistent 
with the new legislation.
    In particular, making full use of the Federal Reserve's 
broad expertise in economics, financial markets, payment 
systems, and bank supervision, we have significantly changed 
our supervisory framework to improve our consolidated 
supervision of large complex bank holding companies. And we are 
enhancing the tools we use to monitor the financial sector and 
to identify potential systemic risks.
    In addition, the briefings prepared for meetings of the 
FOMC are now providing increased coverage and analysis of 
potential risk to the financial system, thus supporting the 
Federal Reserve's ability to make effective monetary policy and 
to enhance financial stability.
    Much work remains to be done, both to implement through 
regulation the extensive provisions of the new legislation and 
to develop the macroprudential approach called for by the 
Congress. However, I believe that the legislation, together 
with stronger regulatory standards for bank capital and 
liquidity now being developed, will place our financial system 
on a sounder foundation and minimize the risk of a repetition 
of the devastating events of the past 3 years.
    Thank you. I would be pleased to respond to your questions.
    [The prepared statement of Chairman Bernanke can be found 
on page 49 of the appendix.]
    The Chairman. Thank you, Mr. Chairman. We will be working 
closely with you in the implementation of the legislation just 
signed. There is a series of important decisions to be made, 
and we expect to be working closely with you.
    I want to return now to the central theme, I think, which 
is: Why are we now seeing a slowing down of the rate of 
recovery? Not any kind of reversal.
    And, again, there were two explanations. One we heard from 
my colleague, the ranking member, which is--and I have heard 
this from other Republicans--the problem was that we spent too 
much. They used to say we taxed too much. But the fact is, 
taxes are inarguably down since the Obama Administration began. 
Rates have been reduced in a number of ways. But the argument 
is, well, it was big spending. And people blamed, to some 
extent, the recovery.
    But here is the problem: I think the following statement is 
absolutely clear. The economy began to slowly recover in 2009 
from a long and deep recession and financial crisis. GDP growth 
turned positive in the latter half of the year after the 
passage of the economic recovery bill. Financial markets 
normalized, major credit markets began to function after an 
extended period of paralysis and turmoil before 2009.
    For most of 2010--we are now talking well over a year, to 
some extent, after the recovery bill passes--economists have 
said a moderate recovery was well under way. Here is the key: 
There is a growing risk that this budding recovery could be 
stunted or even cut by the effects of a ``new crisis.''
    The recovery bill could hardly be a new crisis in the 
middle of 2010. The policies that had been adopted couldn't 
have been part of a new crisis.
    The relevance of this is that I have just read verbatim 
from a report issued by the Republican members of the Budget 
Committee on May 27th of this year. It is the Republican 
members of the Budget Committee, under the signature of Mr. 
Ryan, who said, ``For most of 2010, economists have said a 
moderate recovery was well under way, but there is a growing 
risk from the effects of a new crisis.''
    And, again, I don't think the recovery bill passed in the 
spring of 2009 was a ``new crisis'' in late May of 2010. So we 
have agreement that the policies were being productive. And it 
is hard to believe what was said here by the Republican caucus 
of the Budget Committee and argue that.
    And there is an alternative explanation, unfortunately, 
that is both chronologically and I think analytically sound, 
and that is the European crisis.
    I read from your own report, Mr. Bernanke--and I don't mean 
to challenge you on this, but on page 1, you say, ``Largely 
because of uncertainty about the implications of developments 
abroad, the participants in the Open Market Committee indicated 
greater concern about the downside risk to the economic outlook 
than they had at the time of the April meeting.''
    You and the Republican Budget Committee caucus, on this 
issue at least, seem to be in agreement. In the May meeting, or 
the early June meeting, you saw this problem. You attributed 
it, according to this report, to the problems that were going 
on elsewhere.
    Let me turn to page 2: ``Domestic financial conditions 
generally showed improvement through the first quarter of 2010, 
but the fiscal strains in Europe and the uncertainty they 
engendered subsequently weighed on financial markets. As a 
result, foreign and domestic equity prices fell,'' etc., etc.
    And then finally, on page 3: ``In late April and early 
May''--you and the Republican Budget Committee are remarkably 
in sync on this analysis of the situation, up until now--
concerns about the effects of fiscal pressures in a number of 
European countries led to increases in credit spreads on many 
U.S. corporate bonds, declines in broad equity price indexes, 
and a renewal of strains in some funding markets.''
    So the point is very clear. The Republican Budget Committee 
statement is that, in the months after the adoption of the 
recovery bill, the extraordinary efforts that were quite 
responsibly done, I think, by the Fed, the other policies of 
this Congress and this Administration, here is what they--they 
didn't say it is causal, but here is the chronology: We began 
to slowly recover. Growth turned positive in the latter half of 
the year, 2009, after these things had happened. And then, by 
2010, for most of 2010--this is written in late May, this thing 
I am quoting from--things were getting better. And then there 
was a new crisis.
    So one argument is that the new crisis was apparently the 
recovery bill, which, having been passed in the spring of 2009, 
suddenly occurred to people in May of 2010. They hadn't noticed 
it. I don't know what they were doing. But that occurred to 
them. I don't think anyone would think that was a new crisis.
    Frankly, I think we have a burst of honesty here on the 
part of my Republican colleagues, which they may regret, and I 
don't see any reason that they should, in which they say it was 
a new crisis. They acknowledge that the consequence, or at 
least--forget the consequence--the aftermath, the chronological 
following of these policies were things were getting better and 
better and better, and then a new crisis hit. And I think that 
you correctly say here that the new crisis were these exogenous 
effects in Europe.
    My time has expired. The gentleman from Alabama is 
recognized for 5 minutes.
    Mr. Bachus. Thank you, Mr. Chairman.
    And I appreciate your answers to the chairman's questions.
    Mr. Bernanke. Thank you.
    The Chairman. If the gentleman would yield, it is in the 
book.
    Mr. Bachus. Oh, okay. Thank you.
    The American Economic Review, which was just published, has 
an article by Christina Romer and her husband, David Romer. Of 
course, she is the chief economic advisor to the President. She 
says, ``Tax increases are highly contractionary. Tax cuts have 
large and persistent positive output effects.''
    Would you agree with that?
    Mr. Bernanke. I know the paper. I think it is a very 
interesting paper. I would have to say, in fairness, that there 
is a lot of uncertainty about the effects of fiscal actions. 
But I would agree with the general proposition, that tax cuts 
have short-term aggregate demand effects, and they can be 
beneficial to growth if they are well-structured in the longer 
term.
    Mr. Bachus. What about the tax cuts that are due to expire 
at the end of this year? Should they be continued?
    Mr. Bernanke. There are a lot of different issues involved 
there, Congressman Bachus, but--
    Mr. Bachus. How about the income tax increases that will 
occur if we don't extend the--
    Mr. Bernanke. As I said, there are a number of different 
issues there. There are considerations of efficiency and growth 
and the relationship between the incentives generated by that, 
which I know is debated and will continue to be debated. But 
there are also issues of both short-term stimulus and long-term 
budget stability.
    In the short term, I would believe that we ought to 
maintain a reasonable degree of fiscal support, stimulus for 
the economy. There are many ways to do that. This is one way; 
there are other ways, as well.
    In the longer term, I think we need to be taking steps to 
reassure the American people and the markets that our fiscal 
situation is going to be well-controlled. That means that if 
you extend the tax cuts, you need to find other ways to offset 
them.
    Mr. Bachus. You have to raise taxes or cut spending or a 
combination. Is that correct?
    Mr. Bernanke. The arithmetic is very clear. To get the 
deficit down, you have to have either more revenues, less 
spending, or both.
    Mr. Bachus. Do you think our approach ought to be cutting 
spending, that it would result in immediate more confidence in 
the economy?
    Mr. Bernanke. I think all options need to be on the table. 
We need to look at all the programs for their merits, both in 
terms of their short-term stimulative effects and also in terms 
of how well they would support growth in the long term.
    Mr. Bachus. Should we increase taxes, as the Democrats are 
now talking about a VAT tax?
    Mr. Bernanke. Again, the broader issue is that I believe we 
should maintain our stimulus in the short term, and we need to 
take steps to improve our fiscal situation in the longer term. 
There are many ways to do that. As you know, I am reluctant to 
take positions on specific tax and spending measures. I am sure 
you can understand my position on that.
    Mr. Bachus. Right. Sure.
    Mr. Bernanke. But my broad view is that we need to think 
both about the short term and the long term, about both 
stimulus and growth, and that all of these measures have 
implications for each of those--
    Mr. Bachus. Okay. Let's talk about the short term. In 
February, I asked you, is the current budget path sustainable, 
and you said, no, it is not. Or, actually, I said, ``So the 
current budget path is not sustainable, is it?'' You said, 
``Given the numbers at CBO and OMB, that is right.''
    Mr. Bernanke. That is correct.
    Mr. Bachus. It is actually worse today than it was then, is 
it not?
    Mr. Bernanke. I believe so, yes.
    Mr. Bachus. And you urged the Congress in pretty clear 
terms, in answer to my follow-up questions, that we should come 
up with a credible, immediate plan for a sustainable fiscal 
exit. Is that correct?
    Mr. Bernanke. I think it is very important to try to 
demonstrate that we are committed to a medium-term 
consolidation and stabilization of our fiscal situation.
    Mr. Bachus. And you also said it would become increasingly 
difficult if we postpone that because the cuts you will need to 
make will be even sharper and the tax increases will be even 
greater.
    Mr. Bernanke. That is right.
    Mr. Bachus. So I would like to note for the record that we 
have done absolutely nothing in that regard. I think you would 
agree.
    Mr. Bernanke. Yes.
    Mr. Bachus. Thank you.
    The Chairman. The gentleman from North Carolina.
    I would just take 10 seconds to say that I feel like I am 
in ``The Wizard of Oz'' road show here, because the straw is 
falling over me when my colleague said that the Democrats are 
talking about a VAT tax. This is a phantom of their 
imagination. There is no proposal for it. There is no support 
for it. And it is just a straw man they are waving around.
    The gentleman from North--
    Mr. Bachus. Let me say this. Thank you, Mr. Chairman.
    The Chairman. The gentleman from North Carolina is 
recognized.
    Mr. Bachus. Let me take 10 seconds to say I appreciate 
that--
    The Chairman. No, we won't just talk without being 
recognized. If the gentleman asks unanimous consent for 10 
seconds--
    Mr. Bachus. I ask unanimous consent for 10 seconds.
    The Chairman. Without objection, it is so ordered.
    Mr. Bachus. Let me say that I appreciate your assurance 
that we are not considering a VAT tax. Thank you.
    The Chairman. You are welcome.
    The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman.
    Chairman Bernanke, on page 2 of your summary that you gave, 
you say inflation has remained low, and underlying inflation 
has even trended down. So that is the one half of this dual 
mandate that I mentioned in my opening statement. I want to go 
back to the other half.
    Further down on that same page, you say that there is going 
to be a gradual decline in the unemployment rate. And now you 
are expecting, as opposed to in February and May, that reducing 
unemployment is now expected to be somewhat slower than 
previously projected.
    And then you mentioned some things that you have done to 
combat that on page 3, to deal with the Greece situation and to 
facilitate lending. And then you talk about the things that you 
have done to directly respond to the stimulus on page 4 and 5 
of your testimony.
    I guess what I am trying to get to now is a more directed 
focus on the unemployment situation. And to kind of go back to 
the questions that I raised in my opening statement: What are 
the additional tools that the Fed has in its toolbox to reduce 
unemployment? What are you doing to use those tools? And what 
suggestions do you have as to what we ought to be doing in the 
short term to reduce unemployment? Or is there anything we can 
do in the short term to reduce unemployment?
    Now, I am well aware of what Mr. Bachus has had to say 
about the longer-term consequences. But most of my folks are 
struggling right now, today, unemployed in the short term, and 
most of my constituents will worry about the longer term the 
year after next and the year after that and further down the 
road. They want a job right now.
    And what I am trying to figure out is what we can do to 
stimulate job creation, if anything--what you are doing and 
what you suggest we do. Those are my two questions.
    Mr. Bernanke. Thank you.
    Let me just say first that I entirely agree with you that 
the labor market situation is unsatisfactory; that it is 
incredibly important that we get the unemployment rate down and 
get people back to work. It is important not just for their 
sake but for the future of our economy, because people who are 
out of work for a long time lose skills and become less 
connected to the labor market. So I absolutely agree with your 
priorities on that.
    I think it is worth mentioning very briefly, just to be 
clear, that to address this issue, the Federal Reserve has been 
extremely aggressive. And we have brought our interest rate 
down close to zero. We have committed to an extended period. We 
have taken extraordinary actions to stabilize financial 
markets. And we have purchased $1.5 trillion of securities--
    Mr. Watt. And I acknowledged all of that. So what I want to 
know, going forward, is what can we do?
    Mr. Bernanke. Yes, I am coming to that.
    And that has indeed eased financial conditions quite 
considerably, where mortgage rates are about 4.5 percent, 
corporate bond rates are very low, etc., Treasury yields, and 
so on.
    Now, as I said in my remarks, ``We remain prepared to take 
further policy actions, as needed, to foster a return to full 
utilization of our Nation's productive potential in a context 
of price stability.'' We are ready, and we will act if the 
economy does not continue to improve, if we don't see the kind 
of improvements in the labor market that we are hoping for and 
expecting.
    Now, what can we do? We have certainly utilized our 
principal tools, our most obvious conventional tools anyway, 
and so we would have to step into new areas. I do believe that 
there are things we could do, and we are considering all 
options. Those include our communication, communicating to the 
public our intentions about future policy ease or future policy 
action, perhaps in a context of some conditionality or a 
framework that will help clarify our willingness to maintain 
policy support for the economy. We can lower the interest rate 
we pay on excess reserves, which is currently only a quarter of 
a percent, but does have a bit of scope to be lowered. And we 
can do things to expand our balance sheet further to buy 
additional securities.
    Now, the effectiveness of these actions would depend in 
part on financial conditions. If financial conditions become 
more stressed, as would happen presumably if the economy began 
to weaken, I think those steps would be more effective, 
relatively speaking. But--
    The Chairman. All right.
    Mr. Bernanke. --we are certainly going to continue to look 
at those--
    The Chairman. I have made up to my colleague for the time I 
intruded, but the expanded time has now expired.
    The gentleman from Texas, Mr. Paul.
    Dr. Paul. I thank the chairman.
    The chairman mentioned a little while ago about my emphasis 
on spending, and I want to just clarify something. I am not 
opposed to spending; I am just opposed to government spending. 
I want the people to spend. I want them to spend a lot more 
money.
    But, in the past, I have often approached economics and 
monetary policy from a constitutional viewpoint. And, quite 
frankly, I don't get very far on that. So I don't want to push 
that, which is disappointing. And a lot of times, I mention the 
business cycle, coming from a free-market perspective, 
indicating that low interest rates will encourage malinvestment 
and cause financial bubbles. And I haven't gotten very far on 
that.
    But today, I want to approach it slightly differently, from 
a moral viewpoint, and see if there is any concern of yours in 
this regard.
    Back in 2002, you gave a speech, and you said that the 
people know that inflation erodes the real value of government 
debt, and therefore that is in the interest of the government. 
And I can understand this, because the real debt goes down if 
you can erode the value of the money.
    But, to me, there is a moral component to this, because you 
are depreciating the currency, you are devaluating the 
currency. And I always thought that the purpose of government 
would be to protect the value of the currency, and that people 
do suffer from this. So, to me, I think that it is not fair 
because the people, the holders of debt, are cheated in many 
ways.
    But also there is a moral component, too, when you fix and 
manipulate interest rates, that those who save--that old-
fashioned idea that people should save and put money in the 
bank and they have their CDs and they feel responsible, they 
want to take care of themselves and their elderly and they have 
CDs--all of a sudden, they get 1 or 2 percent, where the market 
would say they are getting 6 or 7 or 8 percent. That, to me, 
means that they are being cheated, as well.
    And, also, you have emphasized and you have always had a 
concern about deflation. I think of deflation more of being a 
monetary phenomenon than prices going down, but your definition 
is, as prices drop, you are having deflation. And you don't 
like that. And you have made attempts to distinguish different 
reasons for prices going down.
    But, generally speaking, prices going down is helpful. This 
helps poor people. Why shouldn't we welcome prices going down 
so that people can compete and go in and buy things, rather 
than protecting profits or the businessman or high labor costs 
or whatever? The market is supposed to protect the consumers. 
So, to me, I see there is a moral component to that.
    Could you comment on these remarks?
    Mr. Bernanke. Certainly. And I think you raise some good 
points.
    On protecting the bondholder, half of the Federal Reserve's 
mandate is price stability. And inflation is very low. And so, 
people holding bonds are making real returns. That is, nominal 
interest rates are above inflation. And that is one of the 
reasons to try and maintain stable prices, which is what we are 
doing.
    With respect to fluctuations in interest rates, nominal 
interest rates are not determined by the market alone, because 
you need to have some kind of monitoring system. Now, of 
course, that could be a gold standard. There are many different 
ways to structure your monetary system. Our current system is a 
central bank-oriented system, as you know. And the variations 
in nominal interest rates reflect the monetary policy that we 
take. But what I am trying to argue here is that, no matter 
what kind of system you have, there is going to be some policy 
component to interest rates, not just a free-market component.
    On deflation, there had been periods where deflation has 
not been harmful. In the 19th Century, there are some examples 
where high productivity brought down prices, and that was good. 
But, remember, if prices are falling, wages may also be 
falling. And the real question is, what is happening to wages 
relative to prices?
    In the 1930's, obviously a case where a very sharp 
deflation was counterproductive and helped cause deep--
    Dr. Paul. Right. And I might respond also, the point you 
make about the latter part of the 19th Century, when it was 
beneficial, we were also on a gold standard, too. And maybe 
that should make a strong point.
    A very quick question. Is there a point where you might 
say, ``Maybe my theories are wrong and I have to change my 
course?'' Or will you pursue this for 5 more years or 10 more 
years? What would it take to make you reassess your basic 
fundamental premise?
    Mr. Bernanke. Pursue what? I believe that it is not 
practical to go to a gold standard. I think we have to stay 
with a central bank. But certainly we are modifying our views 
on the financial system and on monetary policy, reflecting what 
has happened in the last few years. And I certainly believe, as 
Keynes once said, when the facts change, I change my mind.
    Dr. Paul. But there is nothing that would come across and 
say this system is failing; that if we don't get the economy 
moving, maybe just spending and inflating and increasing the 
balance sheet doesn't work.
    What if the unemployment rate, even according to government 
statistics, goes up to 20 percent and we are worse off 2 years 
from now? Wouldn't you say, maybe we have messed up?
    The Chairman. The gentleman's time has expired.
    Next on the list of people who haven't asked questions is 
the gentlewoman from New York, Ms. McCarthy.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman.
    Mr. Bernanke, I am going to actually put my questions into 
written form to send to you.
    With that, I yield the balance of my time to the chairman.
    The Chairman. I thank the gentlewoman.
    And I would now like to pursue the point I was making, Mr. 
Bernanke. You note that, as of April, there was a more 
optimistic view and that it became, not a negative one or a 
pessimistic one, but an uncertain one.
    In the monetary report, I cited three passages where you 
cite the events in Europe that began with the Greek debt 
crisis. And I should note that you do note here that, in a 
coordinated way, with our participation, there has been a 
somewhat effective response to that crisis. It hasn't gone 
away, but at least you dealt with the short-term effects, while 
the longer-term effects need to be dealt with.
    But do you agree--or, let me just ask you: What role did 
the crisis that began with the Greek debt crisis and roiled 
much of Europe and the euro zone, what effect did it have on 
what is going on in the economy here and on your estimates of 
that?
    Mr. Bernanke. It certainly did have some negative effect. 
The increased financial concerns led to declines in the stock 
market, increased credit spreads, and was one of the reasons 
why we marked down our outlook for the U.S. economy. That is 
absolutely right.
    First, I think that situation is improving and confidence 
has been coming back, in part because of the Federal Reserve's 
support for the dollar funding markets. There have been a few 
other things we have seen in the data, such as weakness in the 
housing market after the end of the tax credit. And, of course, 
the labor market has been disappointing in the last couple of 
months.
    But, again, our baseline scenario is that, as the effects 
of the European financial crisis pass, that we will continue to 
see moderate growth in the economy.
    The Chairman. That is encouraging, because I did read a 
passage which said essentially that things are going well. 
Again, let us remember the Republican Budget Committee 
conclusion. Things began to turn around in the latter half of 
2009 after the passage of the Recovery Act, after other 
interventionist policies; that the credit markets stabilized; 
the financial institutions turned to normal. By 2010, a 
moderate recovery was under way, and then we hit a kind of a 
glitch in April and May not in a negative sense, but in a 
slowdown. You are telling us now that you think--one major 
contributor to that was the European crisis, which now appears 
to be dealt with at least in a way that would reduce its 
negative effects. Has that been an accurate way to put it?
    Mr. Bernanke. That is correct.
    The Chairman. Are there other causes? You gave some indicia 
of the slowdown in the housing market, the job market clearly 
not being as good in May and June as it was in March and April. 
But are there other causes in addition to the European--are 
there other policies or other factors that you think might have 
contributed to the slowdown?
    Mr. Bernanke. It is very difficult to forecast exactly what 
growth is going to be, but the broad contour of recovery in the 
labor market has been pretty much what we have been saying it 
would be since the last time I was here.
    The Chairman. So the one sort of exogenous event that 
intruded on that was the European debt crisis?
    Mr. Bernanke. That is right. Although, as I said, some of 
the data had been a bit disappointing, we so far don't have any 
basis to radically change our basic outlook.
    The Chairman. The other is that in the passage I read, it 
said, for most of 2010, economists have said a moderate 
recovery is under way. There is a growing risk that this 
budding recovery could be stunted or even undercut by the 
effects of a new crisis.
    Other than the European situation--this was written in May, 
about the time of that--is there another crisis that you 
foresee that could be stunting our growth, realistically?
    Mr. Bernanke. I am not aware of any specific threat, no.
    The Chairman. I thank you.
    I now recognize the gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. Thank you.
    And thank you, Mr. Chairman, for being here today.
    When you look back at the crisis, some people blame the 
Fed. They say that the unprecedented low interest rates led to 
excessive speculation and leverage, and that the crisis was 
precipitated by that. Others have looked at what the Fed and 
the Treasury have done to bring the liquidity crisis under 
control. And I would say that probably there is agreement that 
the liquidity crisis has been abated. Then there are those who 
say that we are right back now with a Fed that has very low 
interest rates. We have seen unprecedented actions by the 
Federal Government, spending at levels that are unprecedented, 
and with fairly muted results.
    I noticed that in your remarks, you said there was a 2 
percent increase in sales. When I talk to retailers and other 
people, the increase in sales has come at very discounted 
prices and very small margins in order to move some of the 
inventory.
    Some folks say that one of the reasons that the market has 
not returned is because the life support system is still in 
place, and it has created a huge amount of uncertainty in the 
marketplace. In fact, when I talk to businesses large and small 
across the country, they say, we just really don't know what to 
do in this environment. We see uncertainty about the tax 
structure, uncertainty about the cost of energy, uncertainty 
about really what you are going to do and what the Federal 
Government is going to do.
    So the question that I have is, what is the Chairman to do? 
In other words, we have thrown money at this problem. We have 
had unprecedented actions on the Fed. You have interest rates 
at zero. Some of my colleagues are calling to throw another wad 
of money at this problem. But quite honestly, unemployment is--
we have lost 2.5 million jobs since the stimulus program. We 
have an unprecedented number of people out of work. At what 
point in time do we say maybe the marketplace just has to work 
itself through this, and that the Fed and the Federal 
Government need to just kind of be still for a while and let 
normal market forces come into play?
    Markets are designed for cleansing. They award efficiency, 
and they punish inefficiency. But we have stepped in and let 
the government start picking winners and losers, and, in 
effect, abated what would be normal market forces. And I think 
there are many of us who are frustrated with that process and 
wonder what is the--in fact, one of the questions that just 
popped up on my Facebook page was when is the government going 
to stop all of this nonsense and really let the market forces 
work themselves through?
    Mr. Bernanke. Speaking for the Fed, we are not interfering 
with market forces. We are just trying to provide some support 
through accommodative financial conditions to give the private 
sector the opportunity to invest and grow, and that is where 
growth is going to come from.
    More generally, certainly both the Fed, the Treasury, the 
Congress, and everyone should try to focus on growth-oriented 
policies. It is important to take steps, including control the 
fiscal deficit, that will support longer-term growth, which 
will increase confidence in the present, and to do what we can 
to reduce uncertainty about policies and about the economy.
    So, for example, the Federal Reserve is engaged in 
negotiating new capital standards for our banking system, and I 
think it is very important for us to get clarity on that as 
soon as possible so the banks can plan and feel free and 
comfortable going back to lending. So I agree that trying to 
reduce uncertainty is a useful thing.
    Mr. Neugebauer. One of the things, Mr. Chairman, that I 
hear, and when you look at, I think, even some of the charts 
that come from the Fed, is that bank lending to individuals and 
companies is going down; and when you look at the assets on a 
lot of the balance sheets of banks, the holding of Federal 
securities is actually up. And one of the things that I believe 
is happening today is there is an arbitrage today of, I think, 
banks being able to borrow at a very, very low interest rate 
and basically reinvest that money in treasuries or mortgage-
backed securities issued by Fannie and Freddie. So there is 
really not a lot of incentive to bring new capital to the 
marketplace.
    Mr. Bernanke. I don't think that is true. We are actually 
very careful to tell the banks not to do that, because it is 
actually a risky thing to do. If you are taking very short-term 
money and investing in longer-term securities, it is true that 
you can make some money in the short term, but you are always 
risking capital losses, which could be quite dangerous. So we 
pay a good bit of attention to the interest rate risk that is 
assumed by the banking system.
    I think the reason banks aren't lending is either because 
lending requires capital, and they aren't sure about how much 
capital they have or will need, or because they feel that 
either the risks in the economy or the lack of creditworthy 
borrowers is constraining their opportunities to make good 
loans. But as the economy improves, I am sure they will return 
to the credit markets.
    The Chairman. The gentleman from Missouri Mr. Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Chairman Bernanke, the question I have is somewhat 
parochial, but what do you think will happen to all the 
consumer call centers? We have the Comptroller with a call 
center in Houston. The Fed, has a call center in the Kansas 
City Fed office. And my assumption is there will be another 
call center for the new Consumer Financial Protection Bureau. 
Don't you think that all of the call centers ought to be 
combined and moved to Kansas City?
    Mr. Bernanke. Are you talking about consumer complaint call 
centers?
    Mr. Cleaver. Yes. We have two now. You have one. The 
Comptroller has one.
    Mr. Bernanke. I will have to look into that for you. I 
imagine that with the new Bureau, that the Bureau will take 
primary responsibility for consumer complaints. But on this 
issue, I would be happy to look into it for you.
    Mr. Cleaver. All right.
    The other question, I introduced earlier this year H.R. 
4178 with support from all of the members on this committee, 
bipartisan support. And the purpose of that legislation was to 
authorize the establishment of qualified tuition programs 
currently called 529s. In Missouri--and I am sure it is the 
same around the country--most persons who had invested in their 
children's education lost up to 50 percent of their investment, 
so a lot of kids who were going to go off to college next month 
are going to be in trouble. And the way I would want this to 
operate is to be operated as bank products and not as 
securities.
    And my question is, in such towns as these, do you think 
allowing a 529 savings delivery mechanism in addition to the 
current one would be an appropriate way to allow consumers to 
choose to level risk, their own risk, as they are trying to 
prepare for their children's college education?
    Mr. Bernanke. Improving access to the 529 programs and 
giving consumers some flexibility in how they want to invest 
their money seems like a sensible idea. The only concern I 
would raise, and it probably is not enough to overturn your 
point, is that the more that these programs are utilized, the 
States and localities lose tax revenue. But again, that is a 
decision they have made about presumably supporting these 
college accounts. So I think given that you have those 
accounts, giving people flexibility about how to hold their 
assets seems like a reasonable idea.
    Mr. Cleaver. Okay. I have no further questions, Mr. 
Chairman. I yield back the balance of my time.
    The Chairman. The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    Chairman Bernanke, the last session that we had with the 
Congress, you had made mention of these deficits in the 
outyears. And I think your argument was trillion-dollar 
deficits going forward that aren't addressed leave us in a 
position where economically it is unsustainable.
    The question that I would have is your counterpart in 
Europe, the head of the central bank in Europe, has been 
advancing a notion that private firms, their spending and 
saving decisions, take government action into account; and 
therefore, efforts to cut excessive debt will then increase 
private spending by reducing that uncertainty that is out 
there.
    The reason I think it becomes such an important question is 
because we now know for the first time that among nonfinancial 
firms in the United States, there is $2 trillion worth of 
basically hoarding going on, money just sitting there, maybe 
because of uncertainty or for what other reason. And at the 
same time, we have these historically unprecedented debt levels 
as we look forward.
    And I was going to ask you if you think there is some 
justification to that argument. What he was advancing was this 
thought that if we could deal with this debt and reduce this 
uncertainty, then capital would be brought back into play. 
Capital would go to the highest and best use. There would be 
more job creation; that this itself would be a signal which 
would then translate into economic activity that would get 
people back to work, and that looming debt and the failure to 
address it, short term and long term, was part of the problem 
that our economy has faced today. Could I ask you about your 
thoughts on that?
    Mr. Bernanke. Of course.
    I think that the deficits that we have for 2010 were 
necessary and reflected the need to support the economy and 
support the financial system in this crisis. It is not even 
feasible to really rein in the current deficit, and I wouldn't 
recommend it. But I think on the broader principle that your 
concern is related to the medium term to the next 10 years, the 
next 20 years, that anything we can do to show the public, the 
corporations and the markets that we are serious about bringing 
our unsustainable debt trajectory under control, I believe that 
would be positive. It would contribute to confidence. It would 
be helpful conceivably, but in the short run.
    But again, I think we have to keep in mind that fiscal 
policy should be thought of as a trajectory, as a long-term 
problem and not just the current year. So we are looking for 
long-term solutions.
    Mr. Royce. Right. And that brings me to my second question, 
which is, to what degree do you think that these firms, these 
nonfinancial firms that are hoarding cash, to what extent do 
you think that is because they see that skyrocketing debt out 
there, they see the future out there, and at the same time, 
they have this expectation, apparently, of future tax 
increases?
    And the element of this that I am interested in is that 
projected are these increases in public spending. We have had 
for agency budgets, for department budgets double-digit 
increases in governmental spending. And to the extent that 
continues to go up--we know there is some adjustment out there 
in the market. For example, census workers. We see that the 
market discounts for that, and they look at the employment 
numbers, and they automatically deduct that, and then there is 
that concern. So to what extent is that a factor? To what 
extent to you think firms are hoarding because of the 
skyrocketing debt?
    Mr. Bernanke. We certainly hear a lot from firms in our 
gathering anecdotes and so on that uncertainty in general is a 
constraint on their activities, on their expansion. They cite 
the fiscal deficit, but they also cite policy uncertainty. They 
also cite economic uncertainty, because we don't know exactly 
where the economy is going to be. It is very hard, frankly, to 
know how big those effects are.
    Mr. Royce. But let me ask you this: Canada, in 1993, had a 
similar deficit to GDP. They had a severe problem. They went 
through a severe cost-cutting eventually in the public sector 
as the way to sort out their finances, and in 3 years, they 
converted that deficit into a surplus. Their economy grew 41 
percent as a result.
    The Chairman. I am afraid there won't be time for an answer 
because the time has expired.
    Let me just announce, on our side, I am going to go to the 
two remaining Members who haven't asked questions, Ms. Moore 
and Ms. Bean. Actually I have it backwards; Ms. Bean and then 
Ms. Moore. And we will begin with those who--oh, I am sorry. It 
was Mr. Scott's turn. I apologize. Mr. Scott, then Ms. Bean, 
Ms. Moore, and then we will go, given who is here, to the 
Members who did ask questions the last time.
    So, Mr. Scott is now recognized.
    Mr. Scott. Thank you, Mr. Chairman.
    Welcome, Mr. Chairman. It is good to have you back.
    I want to talk and focus on unemployment and jobs. I have 
always been a bit concerned that we have not moved as 
aggressively, as passionately on the unemployment, on the jobs 
situation during this downturn as we have on Wall Street and 
bailing out these companies.
    You have a dual mandate, making sure we have stable prices, 
moderate interest rates, but maximum employment. And I have not 
seen the aggressiveness on the part of the Fed to respond to 
that part of its mandate on maximum employment. So I would like 
for you to just explain step by step what the Fed is doing in 
terms of jobs, in terms of unemployment, and why cannot we have 
massive injections into various parts of our economy where the 
need is greatest?
    Let me just share with you the latest statistics as broken 
down: Adult men, unemployment 9.9 percent; Asian Americans, 7.7 
percent; Whites, 8.6 percent; and African Americans, 15.4 
percent. And you have this kind of disparity. It appears to me 
that there needs to be a sense of urgency to apply some 
remedies in the area of greatest need.
    My other point is that during the Depression, when 
President Roosevelt responded to this, he understood that in 
order to create the jobs, we have to get money flowing into 
that area to the people who are most likely going to spend it. 
So it seems to me that the answer to the crisis in unemployment 
is to get money into that area where it is needed the greatest, 
where, in turn, they are going to send it right back into the 
economy, which would produce other jobs.
    I know the American people see a very definitive move to 
respond to this phase of the crisis of our economic downturn, 
jobs and unemployment, that even come close to matching. Just 
rapid concern. Secretary Paulson, our Secretary of the 
Treasury, came in here with a piece of paper, a paragraph: Give 
us $750 billion right now. Let us get it up to Wall Street. And 
but by the grace of God, most of us, some of us, jumped on 
that. But we kind of slowed it down. Where is that energy? 
Where is that urgency to get jobs for the American people?
    Mr. Bernanke. First, Congressman, I absolutely agree with 
you that unemployment is the most important problem we have 
right now, and we take the dual mandate extremely seriously. I 
would respectfully disagree that we haven't been doing anything 
or have not been urgent. We have pushed monetary stimulation to 
the highest point in American history. We have zero interest 
rates. We have tripled our balance sheet. We have taken very 
strong steps.
    Mr. Scott. Mr. Chairman, may I just ask you if you could 
explain what you just said, monetary, and how that relates to 
creating jobs?
    Mr. Bernanke. It relates to what the Federal Reserve can 
do, which is to try to make financial conditions more conducive 
to growth and investment. So Americans are seeing 4.5 percent 
mortgage rates instead of 6.5 percent. We have helped other 
interest rates go down. We have supported growth in that 
respect. Those are the things that monetary policy can do.
    You referred to FDR and putting money into projects and so 
on. That is fiscal policy, and that is Congress' prerogative. 
The Federal Reserve simply doesn't have the tools or the 
ability to do that. What we can do is make financial conditions 
as supportive of growth as we can, and we are certainly 
interested in doing that.
    Mr. Scott. Where do we need to improve in terms of what the 
Fed is doing? What more can the Fed do? It is clear whatever we 
are doing is not enough. We almost have to create 125,000 jobs 
every month just to sustain the rate with the growing 
population. We have to create 250,000 jobs every month just to 
even keep the decline. And if you go back to December 2007, we 
have 8 million less jobs than we do today. So I am just simply 
saying--
    The Chairman. The gentleman's time has expired.
    The gentleman from Delaware, Mr. Castle.
    Mr. Castle. Thank you, Chairman Frank.
    Chairman Bernanke, let me start with this: With respect to 
the Stimulus Act, the recovery bill, whatever one wishes to 
call it, obviously jobs were saved, jobs were created by that 
to some degree. The jobs saved are primarily, in my judgment, a 
lot of the governmental jobs in which State and local 
governments received funding and saved teachers or whatever it 
may be. The jobs created were, in many instances, patchwork-
type things, like fixing up highways or whatever it may be.
    Have you or has anybody that you know of studied the 
bottom-line aspect of those jobs today? Most of that happened 
last year at some point or another. And it is my belief that a 
lot of those jobs were just saved temporarily or were created 
on a temporary basis, and they are not a continuation as far as 
our overall structure of the economy is concerned and our need 
for economic recovery beyond the immediate stimulative effect. 
Or maybe the argument is it was just to be a stimulative 
effect, and nobody would argue that it would create jobs on a 
permanent basis.
    Mr. Bernanke. As you know, it is intrinsically very 
difficult to get an exact count--
    Mr. Castle. I know that.
    Mr. Bernanke. --because we don't know what would have 
happened in the absence of the program. So economists use 
models and other ways in trying to estimate what the effect has 
been.
    The CBO gave a very broad range of estimates, between 1 
million and 3.5 million jobs, which is a very wide range. But 
it encompasses what most private sector economists have 
estimated, and it encompasses what the Federal Reserve has 
estimated, which is somewhere in the middle of that range. So 
there has been some job creation, but we will know over time as 
we are able to do more studies and look back at the data in 
terms of how the economy evolved.
    In terms of the breakdown between government and private, I 
don't have that at hand. Certainly, a significant part of that 
job creation was in the private sector because of indirect 
effects, spending and the like. And as far as jobs in the 
government are concerned, of course many of those jobs are 
providing essential services, like education and so on. So I 
wouldn't completely discount those jobs by any means.
    But you raise a good point, which is that it is very 
difficult to know how big the effect was, and certainly we 
would like to have a more precise estimate to judge whether 
additional policies would be useful.
    Mr. Castle. And my point is really the permanency of it. It 
seems to me a lot of this was temporary, and maybe it had some 
stimulative effect there, but I question if that money has 
actually produced jobs that are still in existence today. You 
don't need to respond to that, but that is the point.
    Let me go on to another subject. We haven't had a lot of 
discussion about housing here today. Housing is still in the 
doldrums, I hear at home and I read about around the rest of 
the country. And I am concerned about Fannie Mae and Freddie 
Mac and their future and where they are going. There has been 
huge indebtedness with respect to that. I have heard arguments 
that before they were created and banks held their own loans, 
etc., they didn't have these kinds of problems.
    I just don't quite know where we are going. Do you have any 
thoughts about--and we didn't do this in the recent financial 
regulation legislation we had. The statement was that we will 
do this afterwards. Do you have any thoughts about the need and 
how to address these mortgage giants that do have a dominant 
effect in our housing industry?
    Mr. Bernanke. Yes. I think it was almost 2 years ago I gave 
a speech on the subject and laid out some options. I would be 
happy to send that to you.
    I agree it is very important to address this current 
situation that is not sustainable. Basically, the two broad 
approaches would be to break up and privatize the companies, 
perhaps supported by a government insurance program for their 
mortgages that they would pay for. The alternative would be to 
make them more like government utilities and have them just 
provide services under full government control rather than 
having shareholders the way Ginnie Mae does.
    So those are the two broad options. We are sort of half-
fowl, half-horse at this point. You need to go one direction or 
the other. But clearly, this is something we need to take on 
pretty soon.
    I guess I would take this opportunity to add that this was 
an area where the Federal Reserve for many years warned of 
problems and insufficient capital, and clearly that problem did 
come to pass in the crisis.
    Mr. Castle. Yes, unfortunately.
    My time is going to run out, but I may submit a question in 
writing about the interest rates on the debt, which concern me 
in terms of potential increases in the future. I will submit 
that in writing. Thank you, Mr. Chairman.
    The Chairman. The gentlewoman from Illinois, Ms. Bean.
    Ms. Bean. Thank you, Mr. Chairman.
    Thank you, Chairman Bernanke, for being before us here 
today. It is always an honor to have you here, to hear from you 
directly about not only past policy from the Federal Reserve, 
but to get an informed perspective on your direction taking us 
forward as that informs what we do in terms of congressional 
action.
    I guess in follow-up to what--actually, before I follow up 
on what Congressman Castle said, my first question is relative 
to access to credit. In the addendum which you provided, there 
seemed to be some support for what the Senate is considering 
that we passed in terms of the Small Business Lending Fund that 
could inject $30 billion of capital to community banks based on 
the level of lending they do, and the discount rate would 
adjust accordingly. Do you have any thoughts about how 
important that might be? And also maybe specifically, they are 
also considering a 504 amendment to the SBA program that would 
address the commercial real estate market, number one.
    The second thing is, given economic conditions and that we 
did move not only following your own Federal actions, but 
congressional actions, in the economy from one where we had 
800,000 jobs being lost per month, GDP was at a negative six 
quarter over quarter, a year later--now a year and a half 
later, we have created a half-million private sector jobs over 
the last 6 months. GDP is now at 3 percent, but there was a 12-
point shift in the following year following the Recovery Act. 
So there is some--we don't know, was it all your policies, 
congressional policies, obviously some combination thereof? And 
as we move forward, we want to look at the multiplier effect of 
what worked best, to do more of that, and on what did we not 
get a good return on those congressional investments?
    So had there been no Federal intervention, either your 
policy or ours, given the modeling that you use, where would 
GDP be today had we not acted in concert from what your 
modeling shows? And given that is not the reality, which is, I 
think, a good thing for our economy, what are those things you 
would suggest we do more of?
    And my last question, and I do want to give you an 
opportunity to speak, is a concern about wages. You talked 
about depressed wages. And certainly over the last decade, 
there has been a decoupling of GDP growth without wage growth. 
And I want to know how concerned you are about that, given that 
consumer spending really drives our economy, and that lack of 
disposable income limits it. What is your concern, and what do 
you think the causes are? Is that global competition? Is that 
health care costs that, even though salaries are increasing, 
but premiums are going up in terms of the employee portion, 
people have less to take home? What are your thoughts on those 
things?
    Thank you.
    Mr. Bernanke. Thank you.
    As you noted, we had a lot of meetings with people on small 
business credit access, and there was a lot of support for more 
action from the government in this area. There was a lot of 
support for the capital to small banks, who do make a lot of 
the loans to small businesses, and there was a lot of support 
for further extensions or enhancements to the SBA's 
authorities.
    I would just make the general point that small businesses 
create a lot of the gross jobs in our economy. It is very 
difficult for them to expand in our current circumstances. And 
even more so than the existing small businesses, we are 
particularly short of funding for startups and new firms and 
growing firms.
    You asked about what we should be doing. I think this is 
one area that would be very important to look at, as we are 
doing at the Federal Reserve with our supervisory policies and 
the like.
    You asked about modeling. First, in terms of the fiscal 
policy, I answered a similar question just a moment ago. Most 
economists, most modeling exercises suggest that the fiscal 
efforts created an additional 1 to 3 million jobs relative to 
where we would have been absent that. And in my own view--and I 
think it has been supported by others as well--is that the 
monetary policy actions, which got down interest rates and 
helped stabilize the financial system, were also very important 
in turning the economy around.
    There is still a lot to be done. I mentioned small 
business. I have mentioned in previous responses 
rationalization of both the short-term and long-term fiscal 
situation. I think unemployment is a major area. This is an 
area for Congress. But one of the key issues is the fact that 
the long-term unemployed lose their skills, or their skills 
become irrelevant to the new economy. Thinking about effective 
ways to work with the private sector or with universities, 
junior colleges, and the like to enhance skills, I think, would 
be very important.
    And that ties directly to your last question about wages. 
Wage share of GDP has not dropped all that significantly. What 
has happened is that wages have become more unequal. We all 
know the difference between big bonuses on Wall Street and 
wages that people get working in a retail store. And there I 
think that one very important component has to be improving our 
education.
    The Chairman. The gentlewoman's time has expired.
    Ms. Bean. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. And I would say 
for your benefit and for your comments, when you said that no 
one on your side of the aisle was considering a VAT tax, The 
Hill reported October 9th of last year, ``A new value-added tax 
is on the table to help the United States address its fiscal 
liabilities, House Speaker Nancy Pelosi said Monday night.'' So 
either the Speaker is nobody, or she has retracted her 
statement. I can't find any retraction. If you have, I would 
encourage you to set the record straight and submit that 
retraction to our committee.
    Chairman Bernanke, welcome to you. I have a few quotes I 
would like to read you and have you react to them. The first 
quote comes from the CEO of Verizon, the head of the Business 
Roundtable, which represents, as you know, big employers in our 
Nation: ``By reaching into virtually every sector of economic 
life, government is injecting uncertainty into the marketplace 
and making it harder to raise capital and create new 
business.''
    Bill Dunkelberg, chief economist at the NFIB, who 
represents small employers in America: ``It is not just 
expectations on the tax rates per se, but just the cost of 
carrying labor under the health care bill, the promise and 
heavy discussion on a VAT, the deficits scare us to death. 
Everything that Congress seems to be thinking about is not 
helpful for small business.''
    Tom Donohue, president of the Chamber of Commerce that 
represents both big and small employers: ``Look at the tax 
costs in the health care bill and the tax costs in the capital 
markets bill, and they add up to hundreds of billions of 
dollars. It is a fundamental uncertainty that is holding 
businesses back.''
    Next, one of the most often cited economists by my 
Democratic colleagues, Dr. Mark Zandi, chief economist at 
Moody's, as reported in Bloomberg said, ``Companies have been 
holding back on hiring. Banks aren't sure how much extra 
capital regulators will require them to set aside. Power 
companies are waiting to see if government caps carbon 
emissions, and human resource departments are still parsing the 
impact of the 10-year health care overhaul Congress passed in 
March.''
    My last quote and my first question: ``Uncertainty is seen 
to retard investment independently of considerations of risk or 
expected return. Introduction of uncertainty can be associated 
with slack investment, resolution of uncertainty with an 
investment boom.'' Do you know who wrote those words? And, yes, 
it is a trick question.
    Mr. Bernanke. I am sure it was I who wrote those words. My 
1979 Ph.D. thesis was on uncertainty and investment. Maybe it 
wasn't me. I don't know.
    Mr. Hensarling. My research said 1980, but that is a very 
good memory, Mr. Chairman. Do you agree or disagree with 
yourself?
    Mr. Bernanke. First of all, I think that was an excellent 
thesis. And the notion that firms making long-term commitments, 
whether it is to employment or to capacity expansion or new 
business lines, obviously are concerned about the environment 
and about uncertainty.
    Mr. Hensarling. Do you believe it is a significant 
impediment to job growth today?
    Mr. Bernanke. This may sound like a dodge, but I can't 
really quantify it. I hear a lot from businesses. But if you 
look at the facts, it is mixed. What you see is that firms are 
holding a lot of cash. That is true. It is also true they are 
not hiring very much. On the other hand, their investment in 
equipment and software has been pretty robust, so there are 
mixed signals there.
    I am sure there is some effect there, and I think it is 
important. We don't need to measure the effect to take the 
lesson that whatever we can do to reduce uncertainty--
    Mr. Hensarling. Mr. Chairman, if I could, one Member's 
opinion--and certainly in speaking anywhere from Fortune 500 
CEOs all the way down to small business people in the Fifth 
District of Texas, when you speak that the Federal Reserve is 
prepared to perform other policy actions, frankly, whether you 
quit paying interest on bank reserves, whether you go from 
tripling your balance sheet to quadrupling it, quintupling it, 
you can set up negative real interest rates at the discount 
window, you can print money, and you can throw it out of 
airplanes, but this is not a challenge of monetary policy, Mr. 
Chairman. The problem is here with the United States Congress 
and the United States President.
    Now, I can't go back and relitigate legislation that I 
disagree with, but I would hope that we could work together to 
try to render out some of the uncertainty that has been created 
that I believe the Federal Reserve itself says that public 
companies are sitting on almost $2 trillion of cash and cash 
equivalents, sitting on the sidelines, sitting in the stands, 
and not being in the playing field to create jobs.
    The Chairman. The gentleman's time has expired.
    The gentleman from Missouri, Mr. Clay, is now recognized. 
Then, it will be the gentlewoman from Wisconsin.
    Mr. Clay. Thank you, Mr. Chairman.
    And thank you, Chairman Bernanke, for being with us today.
    Based on how important consumer spending and consumer 
confidence is to the economy, what political ideology do you 
believe would work to stimulate the economy, such as tax cuts 
to stimulate the economy versus job creation and spending 
efforts, such as the American Reinvestment and Recovery Act? Do 
you have suggestions for a private sector stimulus program?
    Mr. Bernanke. I have a general comment which I have already 
elucidated a bit and a more specific one. In general, I think 
that maintaining the current level of fiscal support is 
important because the economy is still quite weak. At the same 
time, in the medium and longer term, we have an unsustainable 
fiscal trajectory, and we need to address that in order to 
maintain the confidence in the markets. So it is a two-pronged 
element as far as overall fiscal policy is concerned.
    Now, the fact that we are in a mode of stimulus now doesn't 
mean that what we do doesn't matter, that the particular choice 
of tax cuts or spending programs is irrelevant. You still want 
to look at every program and try to judge how effective it is 
and will it provide support for long-run growth. And some of 
the areas I have talked about have been training for workers 
and for the unemployed, support for small businesses. These are 
areas that would be productive, but it is up to Congress to 
look very carefully at not only what you are in principle 
trying to address, but make sure that those programs are 
effective and well-designed.
    Mr. Clay. Chairman Bernanke, the House of Representatives 
passed H.R. 4380, the U.S. Manufacturing Enhancement Act of 
2010, yesterday. What effects to the U.S. economy do you expect 
if this legislation becomes law?
    Mr. Bernanke. I haven't had a chance to view those 
implications.
    Mr. Clay. On another subject, the Federal Reserve will soon 
take up the responsibility of the Federal Consumer Protection 
Board. How do you envision you all coming on line as far as 
being the protector for the American consumer, and how quickly 
do you think that will be up and running?
    Mr. Bernanke. Congressman, to be clear, although the new 
Bureau will be housed in the Federal Reserve and be budgetarily 
supported by the Federal Reserve, it will be completely 
independent of me, of the Board, and of the Federal Reserve. It 
will be acting as a separate agency.
    We have two immediate concerns. One is during the 
transition period to continue to protect consumers and take 
actions necessary to make sure that financial products are fair 
and well explained. And our other responsibility is to work 
with the Treasury through the transition, moving our capacity, 
moving employees and so on to the new Bureau. But where we are 
going here is from a situation where the Fed was writing these 
rules to one where within 6 months or a year, the independent 
Bureau will be responsible, not the Federal Reserve.
    Mr. Clay. So you don't envision any interaction between--
    Mr. Bernanke. Oh, sorry. We will have substantial 
interaction in various contexts. For example, through the 
Financial Oversight Council, the Stability Oversight Council is 
one way. And bilaterally, I hope that we will work effectively 
with this bureau to make sure that we are cooperating. And the 
Fed will retain the ability to do examinations of consumer 
compliance for smaller institutions. We will retain consumer 
affairs and community affairs departments that will try to 
reach out and understand what is going on with consumers.
    So we have a lot to talk about, and we will want to work 
with them, but again, the principle rulewriting authorities 
will be transferred to this new Bureau.
    Mr. Clay. And it is kind of uncharted waters, wouldn't you 
say, as far as this new responsibility of the Consumer 
Protection Board and really putting front and center consumer 
protections for Americans?
    Mr. Bernanke. Obviously, the goal of the Congress was to 
create an effective protector of consumers.
    Mr. Clay. Thank you very much.
    The Chairman. The gentleman from New Jersey.
    Mr. Garrett. Just to preface my remarks, if you would 
consider New Jersey for your next call center as well. I would 
just like to be in the running with the other Members.
    Mr. Bernanke. Any particular district, sir?
    Mr. Garrett. We are open. If I heard you correctly to 
Randy's comment that the Fed is not actively involved in 
interfering with the free market?
    Mr. Bernanke. Uncategorically. But the basic idea of 
monetary policy is to provide broadly supportive financial 
conditions and to allow investment decisions and the like to be 
made by the free market.
    Mr. Garrett. Because when you go out and you purchase $1 
trillion worth of widgets, you are involving yourself with the 
free market because you are affecting the price of those 
widgets for everybody else.
    Mr. Bernanke. We didn't buy any widgets.
    Mr. Garrett. You didn't buy any widgets, but you bought 
over $1 trillion worth of GSE debt. So you are affecting that 
market to a substantial effect.
    And to that point, normally under normal circumstances on 
the Fed's balance sheet, what you have on there is--normally 
treasuries that are on there, secure treasuries, or if you had 
anything else that are on there, I assume you would have some 
sort of a repurchase agreement for those securities that are on 
your balance sheet. Now, of course, around two-thirds that are 
in there are GSE debt, right?
    Mr. Bernanke. Correct.
    Mr. Garrett. So right now, those are guaranteed. Whether 
they are a sovereign debt or not, we still don't know. But they 
are guaranteed by the U.S. Government. But they are only 
guaranteed until when; 2012, right? After that, Congress, in 
its wisdom, may make another decision on that. And at that 
point in time, you may be holding on your balance sheet, two-
thirds of your balance sheet, something that is not guaranteed 
by the Federal Government.
    First of all, do you have a repurchase agreement on those 
with anyone?
    Mr. Bernanke. I don't know what you mean by ``repurchase 
agreement.'' We own those securities.
    Mr. Garrett. We own those securities, right. There is no 
repurchase agreement outside. You own them. So after 2012, if 
they are no longer guaranteed, is it fair to say that you may 
at that point in time actually engage in fiscal policy because 
you basically are creating money at that time--and I know you 
would agree that it would be an unconstitutional role for the 
Fed to engage in fiscal policy. So where will you be at 2012 if 
they have to take a haircut on those because they are no longer 
guaranteed?
    Mr. Bernanke. First, from the government's perspective, the 
Federal Reserve would lose money, which the Treasury would 
gain. There would be no net change to the overall position of 
the U.S. Government.
    Secondly, the Federal Reserve Act explicitly gives--
    Mr. Garrett. How would we gain? How does the Treasury gain?
    Mr. Bernanke. If there is a bad mortgage, and it requires 
$10 to make it good, if the Treasury refuses to do that, then 
the Fed loses $10. So one way or the other, the government is 
going to lose $10.
    But I will just say two things. One is that I think--
    Mr. Garrett. But if you didn't purchase them in the first 
place, then it would just be a total--then what would have 
occurred? It would not have been the creation of that $10. Now 
that you purchased them, you have--in essence, and we don't 
back them up, you will have created that additional $10.
    Mr. Bernanke. I hope that doesn't happen because I think it 
is very important for financial stability and confidence that 
we--
    Mr. Garrett. Let us have a hypothetical that it does 
happen.
    Mr. Bernanke. Then the Fed would lose money there. But let 
me just point out that we did not invoke any emergency or 
unusual powers to buy those agencies. It is explicitly in the 
Federal Reserve Act that we can buy treasuries or agency 
securities. So we did not do anything unusual there.
    Mr. Garrett. Normally when you--and what status were they 
when you bought them? Were they in conservatorship at that 
point?
    Mr. Bernanke. Yes.
    Mr. Garrett. Is it your normal practice for the Fed to buy 
agency securities when they are in conservatorship? Was that 
ever done before?
    Mr. Bernanke. It has never been in conservatorship before.
    Mr. Garrett. There you go. So the normal practice was not 
what was followed here. It just seems to me that we may have 
gone down a different road than we have ever gone down in U.S. 
history, where the Federal Reserve has engaged in buying a 
security that is not Treasury, that is not guaranteed by the 
full faith and credit of the United States for its lifetime, 
nor is there any repurchase agreement from any other entity 
that you have a trade with that agreement with, and that the 
Fed, in essence, could have basically created money at that 
point if the Federal Government does not guarantee them. At 
least, that could be the situation we find ourselves in in 
2012, if we find ourselves not guaranteeing them; is that 
correct?
    Mr. Bernanke. Again, we were able to do that under the law 
with no extraordinary circumstances. And I will add, just for 
your interest, that the Federal Reserve is extremely 
constrained in this respect compared to other central banks. 
Other central banks can buy corporate bonds and a variety of 
other things, which we don't do, of course.
    The Chairman. The gentleman's time has expired.
    The gentlewoman from Wisconsin is recognized for 5 minutes. 
We are going to have some votes. The Chairman is here until 
12:30. There are only two votes. So Members will please come 
back if they want to ask questions.
    Ms. Moore of Wisconsin. Thank you very much, Mr. Chairman.
    I am particularly appreciative of your efforts to renew 
lending to small businesses. So I was rather interested in your 
testimony about the 40 meetings that you have had around the 
country and the capstone conference and addressing the credit 
needs of small businesses. You indicate in your testimony that 
you have issued guidance to supervisory agencies and to bank 
examiners emphasizing that banks should do all that they can to 
meet the creditworthy borrowers. But they have indicated to me, 
and, indeed, in your addendum to this testimony, that they feel 
that a lot of the bank examiners and supervisory agencies are 
arbitrary and even capricious in their requirements for their 
lending.
    What sort of powers or authority exist within the guidance, 
the so-called guidance, that you have given them, for them to 
be less arbitrary in their standards?
    Mr. Bernanke. The guidance is very clear about the need to 
balance appropriate prudence with making sure that creditworthy 
borrowers can access credit. And we have tried to make the 
guidance as clear as possible by giving a whole bunch of 
examples of different situations and how the examiner ought to 
treat that situation. The examiners are employees, and we have 
done numerous training sessions to make sure that they are 
doing what they are supposed to be doing. And I hope that they 
are. What we have been trying to do now is get as much feedback 
as possible, and that is part of what those 40 meetings we did 
were about. We have also done additional things, like do 
surveys of the banks and the like.
    Ms. Moore of Wisconsin. I understand. Now, I know that part 
of lending is very subjective, so there is character, there is 
history. And so some of our banks, small banks, that do 
business in relatively low-income communities feel that they 
are particularly hard-pressed to make these loans. And I am 
just wondering if the guidance includes those standard kinds of 
subjective evaluations.
    Mr. Bernanke. The standards apply to all banks. Several 
things we learned from our meetings; first of all, that the SBA 
has been very constructive in supporting small business 
lending. And, of course, they have the ability to guarantee 
loans, particularly those in low- and moderate-income 
communities.
    The other area in which I would recommend further 
discussion is the CDFIs, the Community Development Financial 
Institutions, which are particularly good at finding 
creditworthy opportunities in low- and moderate-income 
communities, and they have worked effectively with banks to 
make good loans. And we had quite a bit of input from CDFIs and 
from banks in our--
    Ms. Moore of Wisconsin. Thank you, Mr. Bernanke.
    I also wanted to follow up on a line of questioning that 
was raised by Mr. Royce and others on the other side regarding 
the couple trillion dollars of hoarding on the part of 
financial institutions. You indicate in your testimony that 
eventually you will have to withdraw extraordinary monetary 
policy accommodations, and interest rates will, of course, have 
to rise from your like zero interest rates now.
    So I just wanted the opportunity while you are here today 
to sort of--first of all, have these institutions said that 
they are concerned about making investments because they are 
concerned about the cost of money, and that perhaps being one 
of the chief culprits in the hoarding? What is it that you can 
do or that we could do to sort of shake some of this money 
loose?
    Mr. Bernanke. The hoarding that was referred to was not 
financial institutions, but other types--
    Ms. Moore of Wisconsin. Right, not financial institutions. 
But I am sort of using that and sort of asking you to speculate 
whether or not your withdrawal of the monetary policy 
accommodations might, in fact, be--there was a suggestion that 
you are going to have to do it. Might that be a cause of some 
of the hoarding in financial and nonfinancial institutions? And 
what can we do to reassure folks, sort of deflate the fear of 
inflation?
    Mr. Bernanke. We will do that at the time when the economy 
is recovering and inflation is becoming an issue on the radar 
screen. Right now, we have talked about maintaining our 
accommodation for an extended period.
    The Chairman. The gentleman's time has expired.
    Ms. Moore of Wisconsin. It was yellow when you gaveled.
    The Chairman. No, it was getting red.
    The gentlewoman has 3 more seconds.
    Ms. Moore of Wisconsin. So, in other words--was important.
    The Chairman. The time has expired. The gentleman from 
Florida.
    Ms. Moore of Wisconsin. Thank you for my time, sir.
    Mr. Putnam. Thank you, Mr. Chairman.
    I would love to take up the concern on small business 
lending as well. There has been a debate raging for some time 
now about whether it is a matter of an absence of 
creditworthiness or overly aggressive and overreactionary bank 
examiners that were tightening credit to small businesses. It 
would appear to me, based on your testimony on page 4 and the 
addendum, that there is at least a tacit admission on the Fed's 
part that it was overly aggressive bank examiners that were 
implicitly and explicitly contracting small business credit. Do 
you have a comment on that?
    Mr. Bernanke. There is a natural tendency for examiners to 
be conservative because they don't want to be held responsible 
if a bank were to fail. But it has been the point of view of 
the Federal Reserve not just in this crisis, but going back to 
the 1990's and previous periods that it is important to take a 
balanced approach. We have heard, as you have heard, complaints 
from banks that examiners were too unreasonable or too tough, 
and we just want to be sure that we do everything we can to 
make sure there is a balanced approach being taken.
    Mr. Putnam. It was reported today that, as a result of the 
recently passed Wall Street reforms, the asset-backed 
securities markets have effectively seized up, for lack of a 
better term; that uncertainty over the liability provisions 
concerning the rating agencies have frozen that marketplace. 
Can you comment on that and address what impact that may have 
in terms of the ripple effect throughout the economy and credit 
and liquidity markets?
    Mr. Bernanke. The issue, as I understand it, is that 
because of the liability exposure, that credit rating agencies 
have declined to have their ratings attached to ABS issuance, 
which has had some effect on the salability of the ABS. This is 
an SEC issue, and I think it is important for the SEC, and I 
would be happy to work with them in any way that they see fit 
to try to find alternative solutions to address this problem. 
But it is an issue that needs to be looked at, because, as I 
understand it, it does inhibit somewhat the sale of ABS.
    Mr. Putnam. That inhibition, as you call it, which has 
resulted at least in an impaired efficient market. There is a 
precedent where the Fed implemented the TALF facility when the 
asset--when the ABS market froze up earlier. Can you envision a 
scenario where that may be required again as a result of this 
legislation?
    Mr. Bernanke. I think it would be better to find some kind 
of solution that works so that investors can get the 
information they need when they buy the ABS. I don't think the 
Fed's intervention would be very useful on that.
    Mr. Putnam. And then finally, Mr. Chairman, given the 
accommodative position that you have taken, that the Fed has 
taken, in an effort to continue to maintain low rates and other 
tools at your disposal, given that we are at zero or near zero 
rates, if there were an EU issue, some type of sovereign 
default or perceived sovereign default, that spread the 
contagion to American markets, as we have seen in the 
volatility of the past several months, that led to a true 
double-dip recession, what tools remain at your disposal in 
that eventuality of a double dip? What tools remain in your kit 
to address that situation?
    Mr. Bernanke. First, if there is contagion in markets, we 
would want to see which markets and what the nature of the 
problem was. And we could conceivably--although I don't think 
this is going to be likely or necessary--reintroduce some of 
the programs that were used to end the panic and restore normal 
functioning in those markets.
    With respect to the broader economy, as I was discussing 
with Congressman Watt and others, although we have lowered 
interest rates close to zero, as you note, and expanded our 
balance sheet, I think there are additional steps we could 
take, and we are evaluating those possibilities in the 
contingency that we would need them. And those include our 
communication about our policy, our framework, which may 
increase confidence in our willingness to support the economy. 
It includes reductions in the IOER, interest on excess 
reserves, and the steps we could take to expand our balance 
sheet further.
    The Chairman. Let me announce we are going to get to a vote 
soon. Mr. Peters, Mr. Maffei, Mr. Marchant, Mr. Klein, and Mr. 
Donnelly, who have a right on our side to ask questions and 
have been here, I intend to make sure they can ask questions. 
We will break when we have to vote. We will come back, and I 
think we can finish that. I don't intend to recognize any 
Democrats other than the four who have been here. If there is 
another Republican who comes up, and I am asked to do that, we 
can work that out. But I hope we would honor the commitment of 
those who have already been here.
    We will now proceed with Mr. Klein.
    Mr. Klein. Thank you, Mr. Chairman.
    And, Mr. Chairman, thank you for being here. Obviously, 
this is a very important time for us to continue these 
discussions, and we know that the Federal Reserve plays an 
important role in helping our monetary policy.
    I want to just reinforce for all the comments that have 
been said about small business lending and the reaction that 
they are getting from a lot of banks locally, and we again need 
to get the Federal Reserve and the FDIC to get this 
straightened out, because a year and a half of conversations 
with Sheila Bair and a lot of others with good intentions of 
saying the right things here in Washington are still not 
translating in many ways to local communities where small 
businesses, which are the lifeblood of our community, are 
having difficult times with small business loans--I don't mean 
SBA loans, but just general small business loans--of getting 
those accomplished.
    An area that I want to have some conversation with you, 
though, is there is a continuing discussion, since many of us 
believe that in order to have a competitive banking system, 
that you have lots of choices. And there has been a big concern 
about consolidation of the largest banks through acquisition 
and a lot of other things, and that the role of smaller banks 
and regional banks--and that the policies over the last number 
of years have squeezed smaller banks because of access to 
either no interest or very low interest for larger banks, and 
smaller banks are not getting access to that.
    We tried through the House to take some money and put it 
aside and incentivize small business lending through smaller 
banks. Can you give us some specific ideas of what we can do to 
help the competition or the availability of credit and cash to 
banks so they can have more availability to make lending 
available to small businesses?
    Mr. Bernanke. First, on the competition issue, the Federal 
Reserve is charged with making sure the competition is adequate 
whenever we approve a merger. And our approach has been to look 
at local banking areas and to make sure that retail customers 
have plenty of choices in terms of their local banking 
services, or that small businesses have adequate choices in 
terms of their borrowing.
    So we do pay attention to that, and the financial reform 
bill includes additional restraints on the share of total 
liabilities that any large firm can have. So there are some 
things in place to address the competition issues. And, indeed, 
I think during this crisis, it has been quite interesting that 
where a number of the larger banks, because of their various 
problems, have pulled back to some extent, particularly in 
smaller communities, small banks have stepped up and made more 
loans.
    Mr. Klein. If they have a balance sheet available to them.
    Mr. Bernanke. Absolutely.
    Mr. Klein. That is where the necessity of giving them at 
least equal access to low-interest cash to make loans.
    Mr. Bernanke. We had an attempted policy, the TARP policy, 
which did put capital into banks of all sizes. That has been a 
stigmatized policy. It has not been effective because of that 
reason.
    In terms of funding from the Federal Reserve, we loan to 
all banks, directly or indirectly, at the same interest rate. 
So the low-cost funds that are available to large banks are 
also available to smaller banks.
    I think that from Congress' point of view, there are some 
individual programs that could be done, and those include some 
of the things that you are talking about now to encourage small 
business lending, for example.
    The other thing I am sure you hear is that small banks 
complain all the time about regulatory burden. And there are 
some elements of the financial reform bill, but just more 
broadly, I think it is important to recognize that small banks 
find it much more difficult to comply with complex regulations, 
and, where possible, we need to simplify or reduce those 
burdens for smaller banks.
    Mr. Klein. I agree. I am not here to say we want banks of 
any size to be making anything other than prudent loans. 
Obviously, there were pendulum swings here. Now it has become 
very difficult. But over and over, I just keep hearing from 
business people and from banks that $200,000 loans, $100,000 
loans, million-dollars loans, are just hard to come by.
    By the way, there are large banks, and I can just speak for 
south Florida, that are saying, no, if you don't do this, this, 
and this, they are not going to lend to you. And there are very 
few choices out there.
    So I believe very strongly in the vibrancy of large, 
medium, regional, small opportunities, and it has not played 
out that way in an effective way. So we need more initiative, 
more activity, more suggestions. If you can take it upon 
yourself to talk to Congress and the public--I appreciate the 
small business meetings around the country, but, again, we are 
just not seeing the necessary reaction.
    Mr. Bernanke. We will continue to do that. But I would just 
point out that a lot of what you were just describing in many 
cases is the bank's own decision about what kind of loans they 
want to make and not the examiners constraining them.
    Mr. Klein. I acknowledge that. But, again, there is a lot 
of difficulty. The human factor; who wants to be the examiner 
to be the last one to sign off on the next bank who fails? I 
get that. Again, I think there is way too much of that one 
side. I think we need to come back to the middle, and a strong 
message needs to be delivered. Thank you.
    The Chairman. The gentleman from Texas.
    Mr. Marchant. Thank you, Mr. Chairman.
    Mr. Bernanke, earlier in your testimony you testified that 
as the mortgage-backed securities or agency-backed securities 
mature and are being paid off, you are not reinvesting in 
similar. But as the treasuries are rolling off, you are 
reinvesting those, and you are reinvesting them in similar 
maturities. What would you say the weighted average maturity of 
your security portfolio is?
    Mr. Bernanke. The treasuries are about 7 years weighted 
average maturity, and the agency debt I am not precisely sure, 
but I think it is around 4 years.
    Mr. Marchant. So under this current policy, unless you make 
a decision to do otherwise, within 4 years, the agency debt 
will have rolled off the books.
    Mr. Bernanke. Not entirely, because it is distributed over 
a range. Some is shorter, some is longer. But there would be 
substantial reductions over the next 4 or 5 years even if we 
don't sell anything.
    Mr. Marchant. And so with interest rates at historical 
lows--I think last week was the 2-year or 5-year hit its lowest 
rate ever? But almost every day, some of the securities are 
hitting their lowest rate ever, and there is a tremendous 
amount of demand for those treasuries. What would be the effect 
of the Federal Reserve not replacing the treasuries that are 
rolling off the books?
    Mr. Bernanke. It would probably have a modest effect in 
terms of increasing the yields on treasuries.
    Mr. Marchant. So it would have the effect of raising the 
yields on treasuries because you are applying some buying 
pressure.
    Mr. Bernanke. Exactly.
    Mr. Marchant. And at this time, that is an acceptable 
policy to put any pressure whatsoever?
    Mr. Bernanke. As we have discussed, we believe that the 
economy continues to need monetary policy support, and this is 
one measure that we have to keep overall rates low and to 
provide support for the recovery. In addition, the amount of 
treasuries that we currently hold is more or less identical to 
what we held before the crisis, and so there is no real need in 
terms of the long-term normalization of our portfolio to reduce 
that significantly.
    Mr. Marchant. When you began this policy, the 10-year rate 
was near 4 or has been above 4. It is now--I think yesterday 
got down to 2.86. Is that the range, generally speaking, where 
you feel like the Fed needs to be in those instruments?
    Mr. Bernanke. We don't have a target interest rate. Much of 
what has happened to the yield is not really related to the 
Fed, at least not directly to our purchases. It is related to 
things like expectations of inflation, of growth. And the 
demand for treasuries is a safe haven, which has been increased 
with the European crisis and the like. So a lot of factors 
affect the yield. We don't have a particular target, but all 
else being equal, a lower yield tends to be somewhat supportive 
of recovery.
    Mr. Marchant. One last question. On page 7--and I think 
what was reported widely yesterday in the newspapers, out of 
this entire paper, was the phrase that ``we also recognize that 
the economic outlook remains unusually uncertain.'' Is there 
some distinction in the word ``unusually'' versus the last 
report that you gave?
    Mr. Bernanke. I don't know. As I report in my testimony, we 
have a quarterly survey of our members of the committee, the 
FOMC, asking them for their forecast, but also asking them 
whether they think the amount of uncertainty in their forecast 
is higher or lower than usual. And a majority of the 
respondents said that they thought uncertainty was higher than 
usual. And I was responding to that observation. It certainly 
is an unusual time, and many factors are at work, including 
factors in financial markets. And so forecasting is perhaps a 
bit more difficult than it would be under average 
circumstances.
    Mr. Marchant. Thank you very much.
    The Chairman. The gentleman from Indiana.
    We will break after his questions, and we will then return. 
We will have Mrs. Biggert, Mr. Peters, and Mr. Maffei.
    The gentleman from Indiana.
    Mr. Donnelly. Thank you, Mr. Chairman.
    Mr. Chairman, thank you for being here.
    One of the business people in my district had a line of 
credit, pretty significant, and they came to him and said, we 
have to cut you in half. So at the end of this year, we need 
you to be at this point. And he had--business is going fine, 
things are going well. They said, out of prudence on their 
side.
    Now, what he had in his plans was continued expansion, 
continued growth. He spent the following year laying people 
off, selling off pieces in order to get to that point. I have 
talked to him a number of times, and he said, I have lost faith 
in everything you are trying to do because of the fact that I 
have a good business that is working well, and instead of--you 
say you want to create jobs, and instead of creating jobs, what 
we have done is forced him to lay people off--or I shouldn't 
say what we have done, but what has happened because of the 
credit line reduction.
    And so, how do we restore the faith of that business 
person? What do you say to him, Mr. Chairman?
    Mr. Bernanke. In terms of the specific case, it would be 
important to know more. It could just be that the bank 
disagreed with his assessment.
    Mr. Donnelly. No, I understand that. But this is a common 
complaint of the small business community.
    Mr. Bernanke. It is a common complaint. Again, I think it 
is because banks have tightened their standards. And part of 
that was appropriate because some of the lending before the 
crisis was not well managed. And the general weakness of the 
economy and decline in collateral values and so on makes some 
borrowers who were previously good risks no longer such good 
risks. And that is why banks have become tighter in their 
lending.
    That being said, as I have emphasized today, it is very 
important that if a borrower is truly creditworthy, that they 
get access to credit. And the best thing I can do and the 
Federal Reserve can do is make sure that Federal Reserve 
examiners are only one of a number of agencies that look at 
banks, but also make sure our examiners are taking an 
appropriately balanced position, which is on the one hand we 
want banks to be prudent and make good loans, but, on the other 
hand, excessive conservatism, restriction is not constructive.
    So if the customer's bank is telling him or her that 
examiners, or particularly Federal Reserve examiners, are the 
problem, we would like to hear about that, either from the 
borrower or the bank itself, who could be in touch with the 
Federal Reserve through the local district or the Board.
    Mr. Donnelly. Because what we want to do is obviously--I 
know how hard the efforts are being made to get this squared 
away. We want to impart that to the business community, to this 
fellow, that, hey, your faith that you should have is 
justified, that we are working on this, that the examiners are 
getting squared away. And I know you have put them through 
almost, for want of a better way to put it, examiner boot camp 
as to what you are looking for, what you are not looking for. 
How do you expect that to work out over the next year?
    Mr. Bernanke. We have gone beyond the point of issuing 
guidance and doing training to try and get feedback and 
evaluation. We have done baseline studies of several hundred 
banks in terms of how they deal with troubled commercial real 
estate properties. And we looked at how they acted and what 
their procedures were prior to guidance we put out. Now, we can 
go back and survey them subsequent to our guidance, our 
training, and see if there has been a change in their behavior. 
If there hasn't, we want to understand why.
    So we are doing our best now to get feedback; get feedback, 
try to adjust, see how that works. Again, we have an ombudsman 
at the Board of Governors, and every Reserve Bank has people 
who are there to talk to banks or borrowers, and I hope that 
they will get back in touch with us.
    Mr. Donnelly. Where do you expect us to be 6 months from 
now in terms of small business lending, if one of our small 
businesses are saying, Mr. Chairman, what am I going to be 
looking at 6 months from now?
    Mr. Bernanke. I think there are hopeful signs. We survey 
banks about their standards, and they have stopped tightening 
standards for small businesses, and we are beginning to see 
some little bit of improvement. So we are turning around. I 
think it is going to be better. It is still tight, but it is 
not getting worse, and that is the first step towards 
improvement.
    The Chairman. The committee is now in recess, and we will 
come back, and there are at least three Members who have a 
right to question. We will go until 12:30. I will ask the 
Chairman to stay. But there are only two votes, and we should 
be back in 20 minutes or less.
    [recess]
    The Chairman. Questions will resume. The questioning will 
begin with the gentlewoman from Illinois, Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman. And thank you, Mr. 
Chairman, for being here and waiting for our voting, those 
pesky votes.
    It seems like the Federal spending and our deficit, it is a 
vicious circle. The consumer can't get credit. The small 
businesses can't get credit. The bankers have the uncertainty; 
they are afraid there will be more assessments. And the 
regulators are going to be put into regulation. So it just 
seems like there is just a circle, and who is going to break 
out of it and kind of start the ball rolling so that we are 
going to able to get back on track.
    We had an Oversight and Investigations Subcommittee hearing 
in May, and we heard from a number of witnesses who said--it 
was pretty scary. It was on debt. They said that we have maybe 
1, probably 2 years at most, to get our fiscal house in order, 
or we could end up at the tipping point, which means we 
probably could be like Greece. Could you give us the top maybe 
three recommendations as to how we can change that? How we can 
cut spending and move and get out of this circle and start the 
ball rolling again?
    Mr. Bernanke. Congresswoman, I really can't pick specific 
programs or tax programs to recommend. As you know, there is a 
commission which is supposed to report later this year, and I 
know they are working hard to come up with some suggestions.
    You do have really three timeframes. In the very short 
term, I think that although the deficit is very high, that it 
is probably necessary to support the current recovery. But in 
the immediate term, say, from 2013 to 2020, the deficit-to-GDP 
ratio, depending on whose estimate you look at, is between 4 
and 7 percent. That is too high. We need to get it down to 2 to 
3 percent. And that is what the Commission has been charged 
with.
    In the longer term, I think we are inevitably going to have 
to look at entitlements, because there some large unfunded 
liabilities there, and we need to continue to find ways to 
continue to provide the services and meet promises we have made 
to Americans, but to find ways to do it without breaking the 
bank.
    So, there are really three time periods to look at. But the 
specific choices, obviously, are up to Congress, and you have 
to look at a lot of criteria to do that.
    Mrs. Biggert. Do you agree that we only have a couple of 
years really to turn this around?
    Mr. Bernanke. I don't think anybody has any objective basis 
for saying how long we have. I think the question is what 
signal are we sending to the markets in particular. If the 
markets become convinced tomorrow that the United States 
doesn't have the political will or ability to address these 
problems at some point, then that could be the tipping point. 
Alternatively, if we are making steady progress and showing we 
are committed to it, we could have quite a bit of time. But it 
is important to begin to address these things soon because, for 
no other reason, to give people adequate warning if you are 
going to make any changes in programs.
    Mrs. Biggert. At this same subcommittee hearing, I asked 
the GAO to supply to our committee their analysis of Fannie Mae 
and Freddie Mac's use of leverage, since this is what this was 
on, and earlier this month, we did receive the report. I would 
like to ask that this report be submitted into the record.
    The Chairman. Without objection, it is so ordered.
    Mrs. Biggert. And I think we just gave your staff a copy of 
this. But there is something in here that is troubling, and it 
is the ratio of the total on-balance sheet assets to equity for 
both these enterprises generally have exceeded 20 to 1, and 
reaching a high of 44 to 1 for Fannie Mae and then 34 to 1 for 
Freddie Mac. And then, they looked at the measure increased 
steadily for Freddie Mac and slightly for Fannie Mae before the 
recent crisis. This was at the end of 2007, they were at 68 to 
1 for Fannie Mae and 81 to 1 for Freddie Mac. This was adjusted 
for off balance.
    If you would take a look and get back to me, I would 
appreciate it.
    The Chairman. The gentleman from Michigan, Mr. Peters. 
Then, we will go to, according to the list I have, Mr. McHenry, 
Mr. Maffei, and that will probably be it for the morning. We 
gave the Chairman until 12:30.
    Mr. Peters?
    Mr. Peters. Thank you, Mr. Chairman.
    Thank you, Chairman Bernanke, for being here today. I 
appreciate your testimony.
    I reviewed some of the media accounts of your testimony 
yesterday, and I was particularly struck by a headline in the 
Washington Post which says: ``Bernanke Says Fed Would Act If 
Necessary To Boost Economy.''
    I can tell you that I represent a district in the State of 
Michigan, and we believe that the economy definitely needs to 
be boosted, given the fact we have consistent, persistent, very 
high unemployment, currently over 13 percent. I believe that we 
need to be taking action and need to continue to be focused on 
that.
    And I understand in your testimony that you were 
reviewing--and I heard today about three different options that 
are available to you to continue to be easing to get more money 
into the system. But I want to focus on one in particular, and 
that is the reducing interest payments on reserves. As I 
understand it, this is a fairly new policy from 2008 that 
allowed the Federal Reserve, as a result of congressional 
action, to pay reserves, particularly on excess reserves, which 
is different, and that policy option, I think, is intriguing in 
the fact that, to me, it seems like an outstanding option for 
us to use now. First, it certainly has a stimulative effect in 
the short run. It provides, in my mind, incentives to banks to 
lend as opposed to keep those reserves at the Fed; get them out 
and lend and invest in the private sector. This is certainly 
going to help our economy grow.
    Second, I think it also helps us deal with our medium- and 
long-term deficit issues. According to statistics released by 
the Federal Reserve on July 15, 2010, depository institutions 
had just over $1 trillion in excess reserves. This means right 
now we are paying about $2.5 billion in interest payments. And 
dropping that rate to zero, given the fact that money would go 
back to the Treasury for deficit reduction, seems to me would 
immediately result in about $2.5 billion for deficit reduction. 
And it also likely, if those assets move into treasuries--
instead of being in reserves, buying treasuries to be in safe, 
secure assets--that trillion dollars will also drive interest 
rates down further and also could reduce the expense that the 
Treasury has to finance the current deficit that we have right 
now.
    Now, as far as I am aware, there are a few things that will 
both stimulate growth and reduce the Federal deficit. It seems 
to be a pretty good combination. Why wouldn't the Federal 
Reserve--why are you not acting to reduce these excess reserves 
to zero right now?
    Mr. Bernanke. I will answer your question, but let me first 
point out for everyone that we are paying one-fourth of 1 
percent. So it is obviously a very, very low rate of interest.
    Mr. Peters. On a lot of money, though.
    Mr. Bernanke. A lot of money, that is correct.
    The rationale for not going all the way to zero has been 
that we want the short-term money markets like the Federal 
funds market to continue to function in a reasonable way, 
because if rates go to zero, there will be no incentive for 
buying and selling Federal funds overnight money in the banking 
system. And if that market shuts down, people don't operate in 
that market, it will be more difficult to manage short-term 
interest rates when the Federal Reserve begins to tighten 
policy at some point in the future. So there is really a 
technical reason having to do with market function that has 
motivated the 25 basis point interest on reserves.
    That being said, it would have a bit of effect on monetary 
policy conditions, and we are certainly considering that as one 
option.
    Mr. Peters. You are saying reducing it to zero would shut 
down the money markets. Why is it still an option if that is 
the case? What would change in the future that you would say, 
well, now we would eliminate the interest on these excess 
reserves? You didn't pay interest on reserves in the past. So 
this is a new policy.
    Mr. Bernanke. We didn't pay interest on the reserves in the 
past because we have so many reserves in the system, without 
this particular provision of interest on reserves, the market 
rate would be essentially zero. In the past, we didn't have to 
pay interest on reserves to get the rate above zero because we 
didn't have an excess supply of reserves. We could control the 
amount of reserves in the system. So in the past, we have never 
seen interest rates this low before.
    One of the concerns about going all the way literally to 
zero is it would affect the functioning of this market. Now, 
again, that is one of the reasons we are looking into this with 
some care. But, again, I take your point. It certainly is an 
option, and it would have a small benefit for the Treasury as 
well.
    Mr. Peters. You give three options. This was one of the 
three. How would you rank those three options? I realize you 
are still evaluating. How would you prioritize them?
    Mr. Bernanke. It is difficult to do that because it depends 
a lot on the details. The balance sheet options could involve 
something like just not letting the mortgage-backed securities 
run off anymore versus actually buying new securities. Those 
different options involve many specific choices.
    The Chairman. The time has expired.
    Mr. Chairman, can we get 5 more minutes out of you? In that 
case, I am going to recognize the gentleman from North Carolina 
for 7 minutes, because he is going to share his time with the 
gentleman from Georgia. And then, the last 5 minutes will go to 
the gentleman from New York.
    So the gentleman from North Carolina is now recognized for 
7 minutes, and he will be able to yield some time to the 
gentleman from Georgia.
    Mr. McHenry. Thank you, Mr. Chairman.
    And thank you, Chairman Bernanke, for your testimony and 
for your additional time as well.
    As the ranking member began this discussion today, and a 
discussion of the tax rates going up at the end of this year, 
2001 and 2003 tax cuts expiring, and to that extent, I wanted 
to ask you about a recent piece in the Wall Street Journal by 
Art Laffer that suggests that businesses aware of the impending 
tax increases would be completely rational if they acted ``to 
shift production and income out of next year into this year, to 
the extent possible.'' As a result, he suggested that ``income 
this year has already been inflated above where it otherwise 
should be, and next year, 2011, income will be lower than it 
otherwise should be.''
    Do you agree or disagree with this--with Dr. Laffer?
    Mr. Bernanke. We are talking about income tax, right? Not 
corporate taxes. But for income taxes, there would be some 
incentives to try to move not necessarily the activity, but at 
least the income, when you get paid, from next year to this 
year. That is right.
    Mr. McHenry. Do you think that effect will have an adverse 
impact on economic growth?
    Mr. Bernanke. It could involve a little bit of, as you say, 
some income shifting from next year to this year. I don't know 
how much it would fundamentally affect underlying growth. The 
broader issues are the change in tax rates long term and the 
effects on the deficit.
    Mr. McHenry. So in the short term, it could impact economic 
activity.
    Mr. Bernanke. I didn't read this column, but the argument 
that you could make is that if people really expect the rates 
to go up at the end of this year, then some of the income you 
are seeing this year is actually a little bit of an artificial 
boost created by the shifting of income from next year to this 
year. I think the lesson that might be there is that we 
shouldn't take completely seriously the reports of increased 
profits and production this year.
    Mr. McHenry. Okay. In terms of economic uncertainty, with 
ramifications of fiscal policy on this side--and I understand 
that there are two sides to the house, and you only want to 
comment on the side that you are in charge of in terms of 
fiscal monetary easing--but does the fiscal policy of this 
Congress, or Congress, period, impact your assessments of 
economic growth going forward?
    Mr. Bernanke. You are referring to uncertainty issues, and 
I think those are real. There are a number of sources of those, 
including both economic, political, and other sources. The 
long-term fiscal stability does have very significant 
consequences. It depends a lot on how bond market investors 
anticipate what the Congress will eventually do. Right now, 
apparently there is pretty good confidence in the U.S. 
Government in the sense that yields are pretty low. It is 
possible, though, that at some point in the future--it could be 
soon--that there will be a loss of confidence in the will and 
ability of Congress to manage its medium-term fiscal deficits, 
in which case you could see yields going up, which would be a 
negative for recovery and growth.
    And so at some point, there will be a cost to growth from 
excessive deficits. Whether it is near term or long term, it is 
hard to tell, but it is an issue that needs to be addressed.
    Mr. McHenry. Thank you.
    With that, I yield the balance of my time to my colleague 
from Georgia.
    Mr. Price. Mr. Chairman, thanks again for your testimony 
and visiting us today.
    I want to follow up on the uncertainty as it relates to 
small business, the tax rates for small business. One of the 
items that you have at your disposal, as you mention, is 
communication. I assume that communication is to provide some 
certainty to markets and to investors and the economic system. 
Would it not be helpful as well to have Congress provide some 
certainty of communication to the American people and to the 
economic system?
    Mr. Bernanke. The Federal Reserve tries to provide as much 
clarity as possible. One of the reasons we can't be perfectly 
clear is because the economy is hard to predict.
    Mr. Price. What about certainty in communication from 
Congress?
    Mr. Bernanke. I was going to say that it is difficult to 
provide perfect certainty, but anything that can be done to 
create more clarity about policy goals, objectives, and plans 
is certainly going to be helpful.
    Mr. Price. The uncertainty that is currently out there in 
the business world about what Congress is going to do with 
corporate tax rates, with individual rates as it relates to 
small business and Subchapter S corporations, is a challenge 
for job creation; is it not?
    Mr. Bernanke. Uncertainty is a negative for investment and 
job creation. As I said earlier, I don't know how big the 
effect is. But the lesson we take from that, and again, 
speaking in the context as a regulator, it is important to try 
to achieve clarity as quickly as you can.
    Mr. Price. The Dodd-Frank bill that was adopted and signed 
into law yesterday expands significantly the resolution 
authority that you have. I wonder if you might--and the 
solution that we put on the table would have ended bailouts. We 
believe that the American people are sick and tired of 
bailouts, the intervention of the Federal Government. And the 
Dodd-Frank bill persists in actually codifying bailouts.
    So I wonder if you might be able to tell us, with the 
resolution authority that is now defined, how much would it 
have cost the taxpayer for Lehman to be bailed out?
    Mr. Bernanke. First of all, we are all sick and tired of 
bailouts, and the Federal Reserve, I think, particularly so. 
The objective of the legislation--and, by the way, it is the 
FDIC and not the Fed that would lead the resolution of a large, 
systemically critical financial firm--is to wind it down in a 
way that is not damaging to the broader financial system and to 
the economy.
    Mr. Price. How much would it have cost?
    Mr. Bernanke. The way the law is structured, it shouldn't 
cost anything, because the FDIC can borrow money from the 
Treasury temporarily. But the law requires that all money be 
eventually paid by the financial firms.
    Mr. Price. And if it is unable to do that, the taxpayer is 
on the hook for--
    Mr. Bernanke. Again, I believe that it would be no cost.
    Mr. Price. The balance.
    Mr. Bernanke. I believe there would be no cost.
    The Chairman. The gentleman's time has expired.
    The gentleman from New York, Mr. Maffei, will be our last 
questioner.
    Mr. Maffei. Thank you, Mr. Chairman.
    Chairman Bernanke, if one looks, as you have in your 
testimony--one looks at the basic U.S. economy, we do see some 
recovery, recovery slower than any of us would like, but I 
think we do see some recovery. The first quarter GDP was 
estimated to increase 2.7 percent. Not as much we want, but 
still 2.7 percent. And that follows a 6.6 percent in the 
second--I am sorry, 5.6 in the quarter before that. And we have 
seen at least three quarters corporate profits before tax 
increased $137 billion in the fourth quarter of 2009, and over 
$215 billion in the first quarter of 2010. We are seeing some 
downtick in the unemployment rate, again, slower than we would 
like.
    In the meantime, though, we seem to have everyone telling 
us that the economy is in horrible shape. And certainly 
Republicans, even in the questioning to you today, listed all 
sorts of reasons why we might have a double dip, and asked you 
to be prepared for that kind of double dip. We see the cable 
news outlets and talk radio--talk radio in particular--talking 
about how bad the economy is, recommending that we buy gold. We 
see the financial papers talk about deflation. And even you, 
you look so down here in this picture published by Roll Call. 
Clearly, we need to get you a vacation or something.
    My question is, is there any good news out there, or are we 
right to be this depressed?
    Mr. Bernanke. Certainly, there is a lot to be concerned 
about, including a very high rate of unemployment, but there 
are some positive signs. Clearly, we have made a huge amount of 
progress since the depth of the financial crisis in terms of 
stabilizing financial markets and getting the banking system 
back on its feet, which in turn is helping the economy recover.
    We had a very sharp recession at the end of 2008, beginning 
of 2009. Since the middle of last year, the economy has been 
growing. And the Federal Reserve expects a moderate recovery to 
go forward, with declining unemployment. Inflation is very low. 
Productivity gains are very strong. Profits are up, as you 
point out. So there certainly are some positive steps.
    Our recovery, though it is not nearly as strong as we would 
like, is stronger than many other industrial countries around 
the world. That being said, we can hardly be satisfied when the 
unemployment rate is over 9 percent. And I think that is the 
main source of the concern.
    Mr. Maffei. I completely agree. When we did look at the 
revision of the last quarter, it came from consumer consumption 
and business spending, which were not as high. Is it possible 
that to a certain extent, the sluggishness of this recovery is 
becoming a bit of a self-fulfilling prophecy?
    In 1996, Chairman Alan Greenspan warned of irrational 
exuberance. Is it possible that we are in irrational pessimism; 
that, yes, things are not as good as they need to be, we need 
to keep doing better, but that continuing to sort of trash the 
economy, if you will, or downplay the fact that we are in some 
modest recovery is becoming the self-fulfilling prophecy 
itself?
    Mr. Bernanke. There is a bit of that. The consumer 
sentiment numbers are derived in part from the questions asking 
people, have you seen news about the economy on television; and 
they say, yes, bad news I have seen in the media. And that in 
turn is used to interpret consumer buyer decisions and the 
like.
    So, yes, I think there is some self-fulfilling prophecy 
element to business cycles in general, but clearly the best way 
to overcome that is to get the fundamentals strong, and then 
people will begin to see improvements, and their views will 
improve as well.
    Mr. Maffei. And maybe, we will smile a little bit more.
    Mr. Bernanke. The media don't always choose the most 
flattering pictures.
    Mr. Maffei. I never understand, because when you move even 
a little bit, they take lots of pictures of you.
    So, that is my question. Certainly seeing you in person, 
you look a lot more chipper than this.
    Mr. Bernanke. Thank you.
    Mr. Maffei. Thank you for your work, Mr. Chairman.
    Thank you. I yield back.
    The Chairman. The hearing is concluded.
    Mr. Chairman, I thank you very much for your willingness to 
listen and your forthrightness in dealing with the committee. 
The hearing is now recessed, and we will reconvene the second 
part of this hearing at 1:30 to second-guess the Chairman.
    [Whereupon, at 12:36 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             July 22, 2010


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