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


                                                        S. Hrg. 111-583
 
                          THE ECONOMIC OUTLOOK 

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 14, 2010

                               __________

          Printed for the use of the Joint Economic Committee

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

57-057 PDF                       WASHINGTON : 2010 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
Washington, DC 20402-0001 























                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

HOUSE OF REPRESENTATIVES             SENATE
Carolyn B. Maloney, New York, Chair  Charles E. Schumer, New York, Vice 
Maurice D. Hinchey, New York             Chairman
Baron P. Hill, Indiana               Jeff Bingaman, New Mexico
Loretta Sanchez, California          Amy Klobuchar, Minnesota
Elijah E. Cummings, Maryland         Robert P. Casey, Jr., Pennsylvania
Vic Snyder, Arkansas                 Jim Webb, Virginia
Kevin Brady, Texas                   Mark R. Warner, Virginia
Ron Paul, Texas                      Sam Brownback, Kansas, Ranking 
Michael C. Burgess, M.D., Texas          Minority
John Campbell, California            Jim DeMint, South Carolina
                                     James E. Risch, Idaho
                                     Robert F. Bennett, Utah

                    Andrea Camp, Executive Director
               Jeff Schlagenhauf, Minority Staff Director

















                            C O N T E N T S

                              ----------                              

                                Members

Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New 
  York...........................................................     1
Hon. Kevin Brady, U.S. Representative from Texas.................     3
Hon. Sam Brownback, Ranking Minority, a U.S. Senator from Kansas.     4

                               Witnesses

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

                       Submissions for the Record

Prepared statement of Representative Carolyn B. Maloney, Chair...    48
Prepared statement of Representative Kevin Brady.................    49
Prepared statement of Senator Sam Brownback......................    50
Prepared statement of Chairman Ben S. Bernanke...................    51
Prepared statement of Representative Elijah E. Cummings..........    54
Letter from Representative Elijah E. Cummings Dated April 21, 
  2010, Transmitting Questions to Chairman Ben S. Bernanke.......    56
Letter from Chairman Ben S. Bernanke Dated May 27, 2010, 
  Transmitting Responses to Representative Elijah E. Cummings....    62
Letter from Senator Robert P. Casey, Jr., Dated April 21, 2010, 
  Transmitting Questions to Chairman Ben S. Bernanke.............    68
Letter from Chairman Ben S. Bernanke Dated May 27, 2010, 
  Transmitting Responses to Senator Robert P. Casey, Jr..........    69


                          THE ECONOMIC OUTLOOK

                              ----------                              


                       WEDNESDAY, APRIL 14, 2010

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:00 a.m. in Room 
106 of the Dirksen Senate Office Building, The Honorable 
Carolyn B. Maloney (Chair) presiding.
    Representatives present: Maloney, Hinchey, Sanchez, 
Cummings, Snyder, Brady, Paul, and Burgess.
    Senators present: Schumer, Klobuchar, Casey, Brownback, and 
Risch.
    Staff present: Andrea Camp, Gail Cohen, Colleen Healy, 
Jessica Knowles, Andrew Wilson, Rachel Greszler, Lydia 
Mashburn, Jane McCullough, Jeff Schlagenhauf, Ted Boll, and 
Robert O'Quinn.

OPENING STATEMENT OF THE HONORABLE CAROLYN B. MALONEY, CHAIR, A 
               U.S. REPRESENTATIVE FROM NEW YORK

    Chair Maloney. The Committee will come to order. In order 
to have time for questions, I am limiting opening statements to 
the Ranking Member, Senator Brownback, for five minutes, and 
the Vice Chair and Mr. Brady for three minutes. And I would 
also like to ask for unanimous consent to accept written 
statements of Members into the record.
    America is on a path toward economic recovery. A large part 
of the credit for this turnaround is due not only to President 
Barack Obama but also to Ben Bernanke, the Chairman of the 
Federal Reserve, a respected scholar on the Great Depression.
    Under this guidance the Fed took creative and effective 
actions to inject liquidity into our financial system, which 
saved our nation from economic catastrophe.
    I am confident that you will continue to steer monetary 
policy at the Fed carefully through the next set of obstacles, 
balancing the creation of robust economic growth with the 
prevention of inflation.
    Our hearing today on the economic outlook is timely for 
many reasons. Just this week, the committee of economists 
responsible for dating the end of the recession announced that 
the recovery is still too fragile to announce that the 
recession is over. But there are indications that we are indeed 
well on our way to economic recovery.
    After four straight quarters of negative growth, the 
economy grew during the last two quarters of 2009. There is a 
consensus that when the latest GDP numbers are announced on 
April 30th, we will see that our economy continued to expand 
during the first quarter of 2010.
    The most recent employment report showed that 162,000 jobs 
were created in March, with three-fourths of those jobs in the 
private sector.
    Manufacturing employment was up for three straight months.
    The stock market is at its highest in almost 15 months.
    Temporary help, a leading indicator of the health of the 
labor market, has added 313,000 jobs since October of 2009.
    Sales of cars and light trucks were up in March.
    And many surveys of the economy are optimistic about growth 
in both the service and manufacturing sectors.
    These improvements in our economy are proof that actions 
taken by Congress, the Fed, and the Administration have started 
to have a positive impact.
    In the last year, Congress enacted policies that supported 
struggling families and encouraged job creation. The Recovery 
Act provided tax relief for 95 percent of American families and 
created jobs while investing in clean energy, infrastructure, 
and education.
    Last year we extended the $8,000 first-time homebuyers' 
credit that will spur construction jobs. We extended a host of 
safety net programs that will help struggling families weather 
the economic storm.
    We extended the net operating loss carry-back provision 
that will help small businesses hire new employees. And we are 
boosting funding for small business loans via the Small 
Business Administration.
    We passed the HIRE Act to give tax breaks to businesses 
that hire unemployed workers. Without these measures, the depth 
of the contraction would have been much deeper and far longer.
    Although the recent estimates of the cost of the bailout of 
the financial system are much lower than initially expected, 
the true cost of the financial system failure in terms of lost 
employment and pain to working families is immeasurable.
    Much of the budget deficit over the next 10 years should be 
attributed to the financial crisis. Economists have estimated 
that the budget deficit has increased by $3.1 trillion due to 
the decline in tax revenues from the long line of workers who 
have lost their jobs.
    While we have come far in stabilizing the financial system, 
we would like to hear your thoughts on various reform proposals 
that have been introduced and are being considered before 
Congress to make sure that financial institutions do not take 
on excessive risk and have appropriate capital requirements.
    We also look forward to hearing your take on upcoming 
challenges, including the recovery of the housing market. One 
important factor in the housing market's current recovery is 
the low mortgage interest rates that were sustained by the 
Fed's purchases of mortgage-backed securities and Fannie and 
Freddie debt. Now that the Fed has completed those purchases, 
we would like to hear your assessment of the housing market and 
the impact of the Fed's exit on mortgage rates.
    On another note, I am grateful for your leadership in 
ushering in new rules to prevent unfair or deceptive practices 
with respect to credit card accounts and the rules the Fed put 
in place to curb excessive overdraft fees.
    We thank you for your testimony today, Chairman Bernanke, 
and look forward to working with you as the Committee continues 
to focus on helping our economy recover and expand.
    [The prepared statement of Representative Maloney appears 
in the Submissions for the Record on page 48.]
    Chair Maloney. Thank you, and the Chair recognizes Mr. 
Brady.

    OPENING STATEMENT OF THE HONORABLE KEVIN BRADY, A U.S. 
                   REPRESENTATIVE FROM TEXAS

    Representative Brady. Thank you, Madam Chairman. I am 
pleased to join in welcoming Chairman Bernanke before the 
Committee.
    The Federal Reserve's injection of $1.3 trillion of 
liquidity in the fall of 2008 quelled the panic in financial 
markets. Although I disagree with the Fed's participation in 
the ``bailouts'' of AIG and Bear Stearns because these 
institutions were insolvent, the Fed's timely actions as lender 
of last resort to solvent but illiquid financial institutions 
and markets prevented the financial panic from becoming a 
depression.
    During the spring of 2009 the ``stress test'' and 
subsequent capital increases by large banks restored confidence 
in financial institutions and markets. Largely because of these 
decisive actions, the U.S. economy is now beginning to recover.
    However, the recovery will continue to be subpar as 
businesses delay critical hiring and investment decisions due 
to the uncertainty generated by President Obama and 
Congressional Democrats to increase taxes, raise energy prices, 
enact job-killing regulations, and generate a dangerous level 
of federal debt.
    Despite recent guidance from Washington to bank examiners 
about commercial mortgage loans, I am concerned that bank 
examiners are exacerbating real estate problems through their 
inflexibility.
    Pressed by regulators, community and regional banks are not 
renewing performing commercial mortgage loans even though their 
underlying cash flow can easily service the debt.
    That said, I would like to share with you my concerns about 
monetary policy going forward. We are in danger of repeating 
the mistakes that produced stagflation in the 1970s. Because of 
the lag time between monetary policy decisions and their 
effects, the Federal Reserve must act to prevent inflation well 
before the public perceives that prices are rising.
    Yet there are voices demanding that the Federal Reserve 
delay action. Recently economist Lawrence Ball advocated 
keeping the federal funds rate extraordinarily low even as 
prices rise to reduce the unemployment rate, notwithstanding 
the fact that the so-called Phillips Curve trade-off between 
inflation and unemployment had been thoroughly discredited 
three decades ago.
    Price stability contributes to economic growth, and only 
the Federal Reserve can maintain price stability. My concern is 
that Administration officials may press the Federal Reserve to 
delay raising interest rates and unwinding the expansion of its 
balance sheet to cover for the Obama Administration's anti-
growth policies.
    Taxes, especially on small businesses and investment, are 
about to soar as the 2001 and 2003 rate reductions expire and 
$569 billion of new taxes to fund the President's new health 
care plan are implemented. Additional costs are lurking in the 
form of regulations to control greenhouse gas emissions and 
complex cap and trade legislation.
    Despite these tax increases, the CBO projects that higher 
spending under the President's budget would create deficits of 
$9.8 trillion over the next 10 fiscal years, spiking publicly 
held federal debt to 90 percent of GDP by 2020. Unless Congress 
controls federal spending, these deficits will crowd out 
private investment and slow our economic growth.
    Chairman Bernanke, I urge you to resist any attempts to 
delay raising interest rates in order to offset these anti-
growth policies.
    Regarding financial services legislation, I am concerned 
about weakening the Fed's independence, institutionalizing too-
big-to-fail, and perpetuating the status of Fannie and Freddie 
as zombie banks.
    Making the President of the Federal Reserve Bank of New 
York a political appointee and stripping the supervision of 
smaller banks and their holding companies from the Fed would 
weaken the regional Reserve Banks and undermine the Fed's 
independence.
    Moreover, diverting the Fed's profits from the Treasury to 
pay for the Consumer Financial Protection Bureau would set a 
dangerous precedent that would open the floodgates for other 
off-budget federal spending.
    The perverse incentives arising from the presumption of 
government backing caused large financial institutions, 
especially Fannie and Freddie, to take excessive risks and 
inflate a huge bubble in the housing market.
    Instead of ending too-big-to-fail, the Senate bill would 
establish a permanent bailout fund for large financial 
institutions that may exacerbate this problem by identifying 
who the government regards as too big to fail.
    Incredibly, the Senate bill does not provide for final 
resolution of Fannie and Freddie, despite costing taxpayers 
$128 billion so far with no prospect for any recovery. Like 
walking zombies, Fannie and Freddie with their explicit 
government backing are frightening most private capital away 
from re-entering housing finance.
    We have a lot of challenges before us, Chairman Bernanke, 
and I look forward to your testimony.
    [The prepared statement of Representative Brady appears in 
the Submissions for the Record on page 49.]
    Chair Maloney. Thank you.
    Senator Brownback.

   OPENING STATEMENT OF THE HONORABLE SAM BROWNBACK, RANKING 
              MINORITY, A U.S. SENATOR FROM KANSAS

    Senator Brownback. Thank you very much, Madam Chairman. I 
appreciate it.
    Chairman Bernanke, welcome. It's good to have you here. I 
would ask that my full statement be put into the record as if 
presented.
    Mr. Chairman, I really do look forward to your testimony 
today. It seems like to me that we have some giant issues. You 
are used to dealing with large problems and we continue to have 
them.
    It strikes me that the fiscal policy in the country is one 
that just must be commented on with its impact and its 
possibilities and problems down the road.
    I get very concerned about the very real prospect of a 
government bubble being created. We have come through the dot-
com bubble, the housing bubble, and I am very concerned about 
us having a government bubble. And how is it that we can ease 
through this period of time, which is something I am certain 
you and the staff at the Federal Reserve must be talking a 
great deal about.
    One of the issues I would hope you would consider moving 
forward is the makeup of the FOMC Committee on Monetary Policy. 
A lot of us from all over the country are impacted by monetary 
policy. The Federal Reserve in New York has a permanent seat on 
that. Is that truly reflective of the diversity of views across 
the country? That is one of the issues I have been looking at 
and researching: should that committee be broadened out on its 
representation of Federal Bank chairmen on the FOMC Committee. 
And it is something that we will be presenting.
    Several of us in the Congress have joined on to a bill to 
press on China to allow its exchange rate to float. A number of 
us feel that artificially holding down the exchange rate has 
had a major impact on the U.S. economy. It does not reflect 
current economic realities and adds to the permanent feel of 
the imbalance between us and China on trade.
    And one of the things that should happen when you have a 
trade imbalance is the currencies should be adjusting to 
reflect that, under basic economic theory, and yet the Chinese 
Government doesn't allow that to happen.
    That has a big impact on the prices of goods coming into 
this country. It has a big impact on us exporting to China. It 
has a big impact on other countries around China that are 
exporters, as well. And it seems to a number of us that if the 
Chinese are not going to allow this float to take place, that 
we should be forcing this through trade policy, through the 
possibility of sanctions. This would be something I am sure you 
probably do not want to be dragged into, but it is going to be 
something that will probably land on your doorsteps as well.
    Those are the big issues. Plus, I would hope in looking at 
interest rates down the road that it seems to me it shows 
strength in our economy if we are able to start saying we 
should allow these interest rates to move up a little bit; that 
we think the recovery is moving forward; that we are getting to 
a stabilized point; that it would show some strength and 
resiliency if you allow those interest rates to start edging 
upward.
    That is something that obviously is on your plate, and you 
guys have to decide, but looking at it as an outside observer 
it seems like we might be at a point at which that would be a 
wise move, and one that would show strength, and get maybe some 
of the fear out of what may happen in the future.
    It seems like we think things are moving forward--and 
they're starting to--and we want to get away from this 
government bubble, fiscal and monetary policy, and start to 
ease off the pressure on that in a slow and prudent fashion.
    Madam Chairman, I thank you for the hearing and I look 
forward very much to your testimony, Chairman Bernanke.
    [The prepared statement of Senator Brownback appears in the 
Submissions for the Record on page 50.]
    Chair Maloney. Thank you very much. We expect Senator 
Schumer to join us. He has a conflict with his committee work. 
When he comes, we will recognize him.
    I would now like to introduce Chairman Bernanke. Dr. Ben 
Bernanke began a second term as Chairman of the Board of 
Governors of the Federal Reserve System on February 1, 2010. 
Dr. Bernanke also serves as Chairman of the Federal Open Market 
Committee, the System's principal monetary policy-making body.
    He originally took office as Chairman on February 1, 2006, 
when he also began a 14-year term as a member of the Board. Dr. 
Bernanke was Chairman of the President's Council of Economic 
Advisers from June 2005 to January of 2006.
    Prior to beginning public service, Dr. Bernanke was the 
Class of 1926 Professor of Economics and Public Affairs at 
Princeton University. Dr. Bernanke had been a Professor of 
Economics and Public Affairs at Princeton since 1985.
    Welcome. We look forward to your testimony.

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

    Chairman Bernanke. Thank you, Madam Chair.
    Chair Maloney, Vice Chairman Schumer, Ranking Members 
Brownback and Brady, and other Members of the Committee, I am 
pleased to be here today to discuss economic and financial 
developments. I would also like to make a few remarks on the 
fiscal situation.
    Supported by stimulative monetary and fiscal policies and 
the concerted efforts of policymakers to stabilize the 
financial system, a recovery in economic activity appears to 
have begun in the second half of last year.
    An important impetus to the expansion was firms' success in 
working down the excess inventories that had built up during 
the contraction, which left companies more willing to expand 
production.
    Indeed, the boost from the slower drawdown in inventories 
accounted for the majority of the sharp rise in real gross 
domestic product in the fourth quarter of last year, during 
which read GDP increased at an annual rate of 5.6 percent.
    With inventories now much better aligned with final sales, 
however, and with support from fiscal policy set to diminish in 
the coming year, further economic expansion will depend on 
continued growth in private final demand.
    On balance, the incoming data suggest that growth in 
private final demand will be sufficient to promote a moderate 
economic recovery in coming quarters. Consumer spending 
continued to increase in the first two months of this year, and 
has now risen at an annual rate of about 2\1/2\ percent in real 
terms since the middle of 2009.
    In particular, after slowing in January and February, sales 
of new light motor vehicles bounced back in March as 
manufacturers offered a new round of incentives. Going forward, 
consumer spending should be aided by a gradual pickup in jobs 
and earnings, the recovery in household wealth from recent 
lows, and some improvement in credit availability.
    In the business sector, capital spending on equipment and 
software appears to have increased at a solid pace again in the 
first quarter. U.S. manufacturing output, which is benefitting 
from stronger export demand as well as the inventory adjustment 
I noted earlier, rose at an annual rate of 8 percent during the 
8 months ending in February. Also, as I will discuss further in 
a moment, financial conditions continue to strengthen, thus 
reducing an important headwind for the economy.
    To be sure, significant restraints on the pace of the 
recovery remain, including weakness in both residential and 
nonresidential construction and the poor fiscal condition of 
many state and local governments.
    Sales of new and existing homes dropped back in January and 
February, and the pace of new single-family housing starts has 
changed little since the middle of last year.
    Outlays for nonresidential construction continue to 
contract amid rising vacancy rates, falling property prices, 
and difficulties in obtaining financing. Pressures on state and 
local budgets, though tempered by ongoing federal support, have 
led to continuing declines in employment and construction 
spending by state and local governments.
    As you know, the labor market was particularly hard hit by 
the Recession. Recently we have seen some encouraging signs 
that layoffs are slowing and that employment has turned up.
    Manufacturing employment increased for a third month in 
March, and the number of temporary jobs--often a precursor of 
more permanent employment--has been rising since last October.
    New claims for unemployment insurance continue on a 
generally downward trend. However, if the pace of recovery is 
moderate, as I expect, a significant amount of time will be 
required to restore the 8\1/2\ million jobs that were lost 
during the past two years.
    I am particularly concerned about the fact that in March 44 
percent of the unemployed had been without a job for 6 months 
or more. Long periods without work erode individuals' skills 
and hurt future employment prospects.
    Younger workers may be particularly adversely affected if a 
weak labor market prevents them from finding a first job or 
from gaining important work experience.
    On the inflation front, recent data continue to show a 
subdued rate of increase in consumer prices. For the three 
months ended in February, prices for personal consumption 
expenditures rose at an annual rate of 1\1/4\ percent despite a 
further steep run-up in energy prices.
    Core inflation, which excludes prices of food and energy, 
slowed to an annual rate of \1/2\ percent. The moderation in 
inflation has been broadly based, affecting most categories of 
goods and services with the principal exception of some 
globally traded commodities and materials, including crude oil.
    Long-run inflation expectations appear stable. For example, 
expected inflation over the next 5 to 10 years as measured by 
the Thompson Reuters/University of Michigan Surveys of 
Consumers was 2\3/4\ percent in March, which is at the lower 
end of the narrow range that has prevailed for the past few 
years.
    Financial markets have improved considerably since I last 
testified before this Committee in May of last year. Conditions 
in short-term credit markets have continued to normalize. 
Spreads in bank funding markets and the commercial paper market 
have returned to near pre-crisis levels.
    In light of these improvements, the Federal Reserve has 
largely wound down the extraordinary liquidity programs that it 
created to support financial markets during the crisis.
    The only remaining program, apart from the discount window, 
is the Term Asset-Backed Securities Loan Facility, or TABSLF, 
for loans backed by new-issue commercial mortgage-backed 
securities, and that facility is scheduled to close at the end 
of June.
    Overall, the Federal Reserve's liquidity programs appear to 
have made a significant contribution to the stabilization of 
the financial system, and they did so at no cost to taxpayers 
and with no credit losses.
    The Federal Reserve also recently completed its purchases 
of $1.25 trillion of federal agency mortgage-backed securities 
and about $175 billion of agency debt. Purchases under these 
programs were phased down gradually, and to date the transition 
in markets has been relatively smooth.
    The Federal Reserve's asset-purchase program appears to 
have improved market functioning and reduced interest-rate 
spreads not only in the mortgage market but in other longer 
term debt markets as well.
    On net, the financial condition of banking firms has 
strengthened markedly during recent quarters. Last spring, the 
Federal Reserve and other banking regulators evaluated the 
Nation's largest bank holding companies under the Supervisory 
Capital Assessment Program, popularly known as the stress test, 
to ensure that they would have sufficient capital to remain 
viable and to lend to creditworthy borrowers even in a worse-
than-expected economic scenario.
    The release of the stress test results significantly 
increased market confidence in the banking system. Greater 
investor confidence in turn allowed the banks to raise 
substantial amounts of new equity capital and, in many cases, 
to repay government capital.
    The Federal Reserve and other bank regulators continue to 
encourage the banks to build up their capital, ensure that they 
have adequate liquidity, improve their risk management, and 
restructure their employee compensation programs to better 
align risk and reward.
    Despite their stronger financial positions, banks' lending 
to both households and businesses has continued to fall. The 
decline in large part reflects sluggish loan demand and the 
fact that many potential borrowers no longer qualify for 
credit, both results of a weak economy.
    The high rate of write-downs has also reduced the quantity 
of loans on banks' books. But banks have also been conservative 
in their lending policies, imposing tough lending standards and 
terms. This caution reflects bankers' concerns about the 
economic outlook and uncertainty about their own future losses 
and capital positions.
    The Federal Reserve has been working to ensure that our 
bank supervision does not inadvertently impede sound lending 
and thus slow the recovery.
    Achieving the appropriate balance between necessary 
prudence and the need to continue making sound loans to 
creditworthy borrowers is in the interest of banks, borrowers, 
and the economy as a whole.
    Toward this end, in cooperation with the other banking 
regulators, we have issued policy statements to bankers and 
examiners emphasizing the importance of lending to creditworthy 
customers, working with troubled borrowers to restructure 
loans, managing commercial real estate exposures appropriately, 
and taking a careful but balanced approach to small business 
lending.
    We have accompanied our guidance with training programs for 
both Federal Reserve and state examiners, and with outreach to 
bankers throughout the industry.
    For example, we just completed a training initiative that 
reached about 1,000 examiners. We are also conducting a series 
of meetings across the country with private- and public-sector 
partners to gather information about the credit needs of small 
businesses and how those needs can best be met.
    We have also stepped up our information gathering so that 
we can better understand factors that may be inhibiting bank 
lending. These efforts include a survey by examiners of banks' 
practices in working out loans, the results of which will serve 
as a baseline against which we will assess the effectiveness of 
our supervisory guidance.
    We are also obtaining additional information on small 
business credit conditions. For example, we assisted the 
National Federation of Independent Business in developing a 
survey to assess barriers to credit access by small businesses. 
And we are using our own Senior Loan Officer Opinion Survey on 
Bank Lending Practices to monitor changes in bank lending to 
small businesses.
    In addition to the near-term challenge of fostering 
improved economic performance and stronger labor markets, we as 
a Nation face the difficult but essential task of achieving 
longer-term sustainability of the Nation's fiscal position.
    The federal budget deficit is on track this year to be 
nearly as wide as the $1.4 trillion gap recorded in fiscal 
2009. To an important extent, these extremely large deficits 
are the result of the effects of the weak economy on revenues 
and outlays, along with the necessary actions that were taken 
to counter the Recession and restore financial stability.
    But an important part of the deficit appears to be 
structural. That is, it is expected to remain even after 
economic and financial conditions have returned to normal.
    In particular, the Administration and the Congressional 
Budget Office project that the deficit will recede somewhat 
over the next two years as the temporary stimulus measures wind 
down and as economic recovery leads to higher revenues.
    Thereafter, however, the annual deficit is expected to 
remain high through 2020, in the neighborhood of 4 to 5 percent 
of GDP.
    Deficits at that level would lead the ratio of federal debt 
held by the public to the GDP--already expected to be greater 
than 70 percent at the end of fiscal 2012--to rise considerably 
further.
    This baseline projection assumes that most discretionary 
spending grows more slowly than nominal GDP, that no expiring 
tax cuts are extended, and that current provisions that provide 
taxpayers' relief from the alternative minimum tax are also not 
further extended.
    Under an alternative scenario that drops those assumptions, 
the deficit at the end of 2020 would be 9 percent of GDP, and 
the federal debt would balloon to more than 100 percent of GDP.
    Although sizable deficits are unavoidable in the near term, 
maintaining the confidence of the public and financial markets 
requires that policymakers move decisively to set the federal 
budget on a trajectory toward sustainable fiscal balance.
    A credible plan for fiscal sustainability could yield 
substantial near-term benefits in terms of lower long-term 
interest rates and increased consumer and business confidence.
    Timely attention to these issues is important, not only for 
maintaining credibility but because budgetary changes are less 
likely to create hardship or dislocations when the individuals 
affected are given adequate time to plan and to adjust.
    In other words, addressing the country's fiscal problems 
will require difficult choices, but postponing them will only 
make them more difficult.
    Thank you. I would be pleased to take your questions.
    [The prepared statement of Chairman Ben Bernanke appears in 
the Submissions for the Record on page 51.]
    Chair Maloney. Thank you very much.
    The Fed's stance has been that it plans on, and I quote, 
``maintaining exceptionally low levels of the federal funds 
rate for an extended period of time,'' end quote.
    Since there has been a great deal of speculation about the 
possibility that you might change your mind, let me simply ask 
you: Do you still hold that opinion?
    Chairman Bernanke. Well the Federal Open Market Committee 
has stated clearly that they currently anticipate that very 
low, extremely low rates will be needed for an extended period.
    They have emphasized, however, that that projection, that 
forecast, is conditional on three sets of conditions:
    One, very low resource utilization, high unemployment, low 
capacity utilization.
    Second, subdued inflation trends--low inflation.
    And third, stable inflation expectations.
    So if those conditions cease to hold and we anticipate 
changes in the outlook, then of course we will respond to that. 
But the committee at its last meeting issued a statement 
reiterating that expectation about interest rates.
    Chair Maloney. And you mentioned certain criteria. Are 
there any other particular measures that the Fed will be using 
to determine when to raise the federal funds rate?
    Chairman Bernanke. Well we will certainly be looking at a 
broad range of economic indicators to try to assess where the 
economy is going. As was mentioned earlier, our policies take a 
while to work and therefore we have to look at the outlook as 
well as the current situation. And so I tried today to give you 
some sense of our outlook, which is for moderate economic 
recovery going forward.
    In addition of course we will continue to look at 
inflation, and look at inflation expectations. We will also 
look at what is happening in financial markets. And that was 
also mentioned earlier. We want to be sure that financial 
imbalances are not building. And to the best that we can tell, 
we have been trying to evaluate that criterion. And to the best 
we can tell, of course it's very difficult, we're not seeing 
obvious imbalances at this point.
    But certainly it is an issue, and recent experience 
suggests that we need to be very cautious about that, and we 
are paying attention to those issues.
    Chair Maloney. Thank you.
    Mr. Brownback.
    Senator Brownback. Thank you, Madam Chairman.
    Mr. Chairman, in your last statement on fiscal policy, we 
were running a deficit of 4 to 5 percent of GDP, but the more 
likely scenario is 9 percent of GDP if I interpreted you 
correctly, that if you don't make any of these adjustments and 
yet the Congress generally goes on alternative minimum tax and 
things like that, and if we keep delaying action, you're saying 
we are on track to be at 9 percent of GDP debt by 2020. Are we 
on a sustainable path right now on our fiscal policy?
    Chairman Bernanke. Well, Senator, first let me just say 
that those numbers are based on CBO analysis, and assume, as 
you say, that AMT fixes continue to be extended, as they have 
been, and that expiring tax cuts are extended, and that 
nonmilitary spending grows as fast as GDP. So there are some 
assumptions about policy.
    I think it is fair to say that deficit, structural deficit, 
longer term deficits of anywhere between 4 and 9 percent, 
anywhere in that range, is not sustainable because it leads to 
a debt-to-GDP ratio, which grows essentially indefinitely; it 
does not stabilize. It leads to higher interest payments, which 
then feed back into the deficit. So I think it is very 
important that we consider how looking forward, not this year--
because many economic conditions that are moving towards higher 
spending and lower revenues--but over the medium term as we try 
to plan our fiscal policy going forward, we need to find a 
sustainable path, and that would require lower deficits than we 
currently are projecting, or at least the CBO is projecting.
    Senator Brownback. Are we on track to have the same sorts 
of problems that Ireland and some other European countries have 
presently?
    Chairman Bernanke. Well, we are a much larger, diversified, 
advanced economy than Greece and some of the other countries, 
but clearly at some point we need to address those balances. We 
need to make sure that we have a sustainable fiscal program 
that will not lead to indefinite growth in the debt, relative 
to the GDP.
    Senator Brownback. At what point does the global financial 
community determine that the United States is not being serious 
enough about its fiscal policy, so that it starts raising the 
cost of capital for the United States?
    Chairman Bernanke. Senator, that's inherently very hard to 
know. At some point the markets will make a judgment about, 
really not our economic capacity, but our political ability, 
our political will to achieve longer term sustainability. And 
at that point, interest rates could go up, and that would be of 
course a negative for economic growth and recovery.
    So we don't know when that point would be reached. And for 
that reason, I think it is important, even if we cannot balance 
the budget immediately, that we begin to think about how in the 
medium- to long-term we can put the federal budget on a 
sustainable trajectory.
    Senator Brownback. But it is clear that the markets could 
anticipate that happening even now.
    Chairman Bernanke. It is absolutely possible, certainly.
    Senator Brownback. Chairman Bernanke, we have a financial 
regulatory reform bill out of the Senate Banking Committee. I 
want to ask you about a specific issue concerning the Fed in 
this legislation.
    My concern is the placement of an independent Consumer 
Financial Protection Bureau within the Federal Reserve, funded 
by the Fed's ability primarily to print money. Do you have 
views on this stand-alone agency being placed within the Fed?
    Chairman Bernanke. Well I would like to understand better 
how it would work. My current understanding is that the agency 
would not be within the Fed in any kind of accountability 
sense; that the agency would not be reporting to the Board, or 
to the Chairman; it would essentially be free-standing.
    So that means that ``being within the Fed'' is kind of a 
vague idea at this point. It is true that the current proposal 
would involve the Federal Reserve financing this agency. That 
of course does not make it any less costly to the taxpayer; it 
just means that there would be less revenue remitted from the 
Federal Reserve to the Treasury.
    So it is really up to Congress how you want to account for 
and finance the agency. But that particular way of doing it 
would lead to less seniorage, or revenue, being remitted from 
the Fed to the treasury because some would be used to support 
the agency.
    Senator Brownback. Mr. Chairman, I want to urge you to 
continue to speak out about the fiscal condition of the 
country. I think we are in a path that is not a good one, and 
that at any point in time the markets could start to react 
negatively to our fiscal problems. And I think the sooner we 
start to react to that and to show the ability to address it, 
the better for the country.
    Thank you very much, Madam Chairman.
    Chair Maloney. Senator Schumer for as much time as he may 
consume.
    Vice Chairman Schumer. Thank you. Mr. Chairman, I very much 
appreciate your being here.
    You have often spoken about imbalances in the global 
economy and the role that they played leading up to the 
financial crisis. Vice Chairman Kohn noted in a speech last 
week that deficit countries like the U.S. need to rely less on 
consumption, but surplus countries like China must increase 
their domestic demand, if the global economy is going to 
thrive.
    Which brings me to my first question: It is clear to me, 
and many experts agree, that China's policy of keeping its 
currency pegged to the U.S. dollar helps to perpetuate the 
imbalances in the global economy by subsidizing even more 
Chinese exports at the cost of increasing American exports.
    It makes us too much of a consumption country, and China 
too much of an exporting country and not enough of a 
consumption country. This has a direct impact on American jobs. 
Now just about everyone I speak to admits that that is the 
case.
    When Lindsey Graham and I started out on this five years 
ago, everyone was saying, oh, please, just go away; we're not.
    So if China appreciated its currency and moved to a free 
floating exchange rate, it would do more for jobs here in the 
U.S. than any single stimulus program we could pass into law. 
And now Senator Stabenow and I have combined our currency 
reform bills into one and we intend to push for action on it in 
Congress.
    First question: Do you agree that China's currency policies 
contribute to harmful global imbalances, and was one of the 
causes of the worldwide Recession?
    Chairman Bernanke. Yes, I broadly agree with that. I think 
most economists agree that their currency is undervalued and 
has been used to promote a more export-oriented economy.
    I think it would be good for the Chinese to allow more 
flexibility in their exchange rate. It would give them more 
autonomy in their monetary policy so they could address 
inflation and bubbles within their own economy. It would be in 
their interests also to combine a more flexible exchange rate 
with other efforts to increase domestic demand, domestic 
consumption, and achieve a more balanced economy.
    So I don't think the exchange rate is the only factor, but 
it is a contributing factor to these----
    Vice Chairman Schumer. Isn't it a large contributing 
factor?
    Chairman Bernanke [continuing]. It's----
    Vice Chairman Schumer [continuing]. 30 percent?
    Chairman Bernanke [continuing]. I don't know what----
    Vice Chairman Schumer. It's 30 percent. Let's just assume 
that for the sake of argument right now. That is huge.
    Chairman Bernanke [continuing]. I don't know what share of 
the imbalances can be attributed to the exchange rate and how 
much to just the other policies that lead to an imbalance of 
domestic versus foreign demand, but it clearly is a 
contributing factor.
    Vice Chairman Schumer. Okay. Now if it is in China's 
interest to do it, why don't they do it?
    Chairman Bernanke. Well because, like us, they have a 
variety of political considerations and concerns. They are 
being conservative, first of all, because I think they are 
concerned about the effects of any large changes, given what 
they still perceive as the fragile state of the global economy.
    Like we do, they have political factors such as the 
influence of exporters who are interested in maintaining that 
strong export orientation. And so they have a variety of both 
intellectual, if you will, and political rationales.
    Vice Chairman Schumer. Okay. And don't we lose thousands 
and thousands of jobs because of this? And don't billions and 
billions of dollars flow out of the American economy that 
wouldn't if just, arguendo, their exchange rate floated?
    Chairman Bernanke. I would like to qualify that and say 
that, besides floating the exchange rate, they would also need 
to take action such as creating a stronger safety net that 
would increase consumption and create a more domestic 
orientation towards spending.
    I don't think the exchange rate by itself in the short term 
would have a major impact. But over time it would have an 
impact.
    Vice Chairman Schumer. Of course it would. Okay, why don't 
they move--you mentioned political forces. So, you're me. Or 
one of us here. And we hear our manufacturers, for instance, 
saying they cannot compete.
    I have been to manufacturers in Upstate New York that make 
great products. They are selling them in China. The Chinese are 
now copying their products, not letting them sell them in China 
anymore for all kinds of reasons--but then going to sell them 
here. And this firm is worried it is going to go out of 
business.
    I hear this story over and over again. This is a high-end 
product. It's a ceramic that deals with pollution in coal-
producing electricity plants. What do you do, if you are us? I 
have been talking about this for five years. Talking gets you 
nowhere. And we are ready to act.
    What do you suggest we do? What do I tell all those workers 
who have lost their jobs? What do I tell good New York 
manufacturers who are being put out of business, they believe, 
by unfair competition?
    Chairman Bernanke. Senator, it is an important issue and I 
think we should continue to press for a more flexible exchange 
rate----
    Vice Chairman Schumer. Don't you think stronger--we should 
take stronger action than we have so far? It has produced 
virtually nothing.
    Chairman Bernanke [continuing]. Well there has been some 
appreciation, as you know.
    Vice Chairman Schumer. I know, but that was made up for. We 
are now still about 30 percent out of balance, which is where 
we were five years ago.
    Chairman Bernanke. Senator, I am not disagreeing with your 
economic premise at all. But of course the relationship between 
the United States and China is a very complex one and covers 
many, many, many different issues.
    Vice Chairman Schumer. Well, you know it is about time we 
put jobs and American wealth first, and we're not, and I worry 
about the future of the country for that reason.
    Let me go to one final question, Madam Chair. This relates 
to consumer protection, one substantive and one theoretical.
    It is clear that nonbank mortgage companies and others 
outside the mainstream banking system played a major role in 
the financial crisis, committed some of the worst consumer 
abuses. The new consumer bureau proposed in the Senate 
Financial Reform Bill will also have enforcement power over 
large nonbanks. And that power will have to be exercised 
through a rulemaking process.
    Now I filed an amendment in committee to pursue--and I will 
pursue it on the Floor--that would make the new consumer bureau 
able to enforce its rules against nonbank financial companies, 
large or small, payday lenders, rent-to-own debt collectors. 
These are some of the most rapacious people. They prey on the 
poor. And under our bill they are not regulated because they 
are small, nonfinancial.
    Do you agree they should be regulated?
    Chairman Bernanke. I think they should be regulated. I 
think it should be an even playing field, if you wish, between 
say banks and nonbanks in terms of the rules that they face.
    Vice Chairman Schumer. Yes.
    Chairman Bernanke. The only complexity is that of course 
there are many states involved in regulating. Some do a better 
job than others, and I think working with the states would be 
an important part of trying to do this effectively.
    Vice Chairman Schumer. Yes, but to just exempt small, 
nonfinancial companies does not make any sense, right?
    Chairman Bernanke. I think there should be an even playing 
field.
    Vice Chairman Schumer. Okay. And a final question that is 
following up on Senator Brownback. The CFPA. Why would you want 
it in the Fed? I mean, it would seem to me that the whole 
mission of the Fed is not consumer protection; it is safety and 
soundness.
    In my experience--and as you know, I think the Fed has done 
a good job in many areas; it's done a poor job in consumer 
protection--why would you want it in any form in the Fed? 
Wouldn't it be better to have it be an independent agency?
    Now if there are safety and soundness considerations, the 
Fed can always--they have lots of external events that affect 
safety and soundness. Why wouldn't it be better to be 
independent?
    Chairman Bernanke. We haven't asserted anything on this 
issue----
    Vice Chairman Schumer. I understand. I'm asking you, as the 
head of the Fed, why would you want this?
    Chairman Bernanke [continuing]. Well the one thing I would 
like----
    Vice Chairman Schumer. Or are you saying you don't? You 
don't want it, or not want it?
    Chairman Bernanke [continuing]. I understand why people 
would be concerned, given that we were late in taking some 
important steps. I can understand why some advocates would want 
to have a purely independent agency that would have this as the 
top priority. I understand that. It's perfectly sensible.
    Vice Chairman Schumer. I think I want to cut you off right 
there.
    Chairman Bernanke. All right, but may I just say----
    Vice Chairman Schumer. I'm joking.
    Chairman Bernanke [continuing]. Just say, though, that 
while we have acknowledged, again, being late on these issues, 
I do believe that we should receive credit for a much better 
performance in recent years. And note that there are 
advantages, and I know that Congress has been grappling with 
the issue of whether or not the agency should be separated 
completely from the safety and soundness regulatory function, 
for example. There are issues there I think which are worth----
    Vice Chairman Schumer. But if your number one goal were 
consumer protection, you would want it independent? Isn't that 
correct?
    Chairman Bernanke [continuing]. I would want it to have----
    Vice Chairman Schumer. I'm not saying it should be or it 
shouldn't be. I'm just saying, if.
    Chairman Bernanke [continuing]. Well I think we all should 
be concerned about issues like credit availability, for 
example, and there may be benefits to having some strong 
interaction between this agency, or this set of rulemakings and 
the bank regulators.
    Vice Chairman Schumer. Thank you.
    Thank you, Madam Chair. Thank you, Mr. Chairman.
    Chair Maloney. Thank you, very much.
    Representative Brady.
    Representative Brady. Thank you, Madam Chairman.
    I think we all agree that China's currency is undervalued. 
There is some real question about its impact on the U.S. trade 
deficit, and real concerns about the impact of raising prices 
on U.S. consumers.
    It is also important to note that it is equally important 
that we not allow that one single issue to overshadow concerns 
we have with intellectual property rights' protection in China, 
subsidies, and other issues such as protecting investment and 
Chinese barriers to U.S. exports, especially in light of the 
view that this Congress and White House has not pursued pending 
trade agreements that could create over 250,000 new jobs in 
America by ratifying agreements with Panama, Colombia, and 
South Korea.
    A couple of thoughts. One, I appreciate in your testimony 
your reference to the commercial real estate market. I still am 
convinced that there is not a real differentiation in the Fed 
and the other banking regulators between growth markets and 
contracting regions.
    I am concerned that there is not an understanding that 
community and regional banks have picked up the demand left 
unmet by the fall of the CMBS, and of the inflexibility of bank 
examiners. I am convinced today in the real world among banks 
there is a clear view that commercial real estate loans are 
problem loans. The sooner you get them off your books, the 
sooner you contract that portfolio, the better for us.
    The result of that I believe is that we are going to 
exacerbate a problem with more than a trillion dollars of those 
loans coming up for renewal. I do appreciate the effort that 
you are making. In fact, you had representatives at a recent 
roundtable this week with some of our most sound banks and real 
estate leaders in the Houston region. I appreciated the fact 
that you are listening to those concerns.
    Two thoughts. Independence and monetizing debt. You 
referenced the deficit today in your remarks. It's so critical. 
Will you--you know, it's reasonable to expect the 
Administration to press for easy money in the hope of 
artificially lifting output and unemployment in the short run.
    Will you resist the pressure to monetize the debt as rising 
borrowing costs intensify our federal budget problems?
    Chairman Bernanke. Well, Congressman, first absolutely we 
will. Our holdings of Treasury Securities today are about the 
same as they were before the crisis. We have not monetized the 
debt. And we will not. And we will of course continue to make 
sure that price stability is central to our objectives. So let 
me just assure you on that point.
    Let me just add parenthetically that, given the structure 
of our debt it wouldn't even help. It wouldn't even help reduce 
the debt. Given that so many of our obligations are either 
short-term, or indexed, or real obligations such as medical 
obligations or Social Security obligations, which are indexed, 
it wouldn't have a substantial effect even if there were 
willingness to do that, which of course there is not.
    So there really is no alternative but to try to find real 
solutions. Inflation is just not an answer either, for economic 
reasons, and just because it wouldn't even affect the balance 
very much.
    Representative Brady. Well the reason, I noticed OMB's 
projections on Treasury Note yields for the next few years is 
much lower than what is already occurring today, so I think 
that pressure will increase, not just from the White House but 
from Members of Congress.
    I worry about the independence of the Fed, and I wanted to 
ask you. Obviously we're all aware of the Senate bill dealing 
with making major changes to the Federal Reserve such as making 
the president of the Reserve Bank of New York a Presidential 
appointee, removing certain voting rights, and transferring 
your jurisdiction of certain banks.
    Do you have any concerns about making the president of the 
Federal Reserve Bank of New York a Presidential appointee?
    Chairman Bernanke. Yes. I don't think that is the right way 
to go. I think we want to maintain accountability through the 
Board of Governors, which then oversees the system. And that is 
really the appropriate way for us to be accountable to the 
Congress, which we will be.
    We want to be completely open and transparent to the 
Congress on all financial matters, but we do need to maintain 
our independence in our policy decisions.
    Representative Brady. Do you feel like some of the changes 
such as voting rights at the Regional Reserve Banks, do you 
think those changes--do you have concerns that they could 
weaken the Regional Reserve Banks and could undermine the 
independence of the Fed in dealing with monetary policy?
    Chairman Bernanke. Well I think that our FOMC structure, 
which was created in the late 1930s, has worked pretty well. 
It's got a good combination of Presidentially appointed, 
Senate-confirmed governors here in Washington, and Reserve Bank 
presidents around the country.
    There are 19 people on the FOMC, 7 governors and 12 Reserve 
Bank presidents. We all come of course to every meeting, and 
everyone's views are heard. So, not withstanding the voting 
arrangements, it really is a collective decision, a consensus 
decision.
    So I think we get both the Washington perspective and the 
Washington accountability, but we also get very important 
information and input from around the country. And you 
mentioned this earlier, Congressman, that one of the sources of 
that information is our oversight of state member banks, which 
are very well informed about their local economies, and 
therefore are a very important source of information for us.
    And so that is also a concern that we have, that we would 
lose that oversight. So the independence is very important, and 
I think the main issue here is just to make sure that we are 
allowed to take actions in pursuit of our mandate without 
intervention by either the Congress or the Administration.
    Representative Brady. Thank you, Mr. Chairman.
    Chair Maloney. Congresswoman Sanchez.
    Representative Sanchez. Thank you, Madam Chair.
    Thank you again, Mr. Chairman, for being before us today. 
Mr. Chairman, I think that I am having the same problem that a 
lot of other people are having with respect to what's going on 
in our country. And that is, that we continue to say that small 
businesses in particular create the jobs, but we know that 
employment lags behind when the economy is turning around.
    So let's just say for a minute that maybe we're turning 
around. Maybe we have gotten to the break-even point, or we 
might be growing a little bit; or we may not; and we're not 
going to see employment pick up for awhile. I think everybody 
is sort of coming to that realization.
    But here is the problem I have. Most of the small 
businesses, that went into business because it was good times, 
and the money was flowing, and there was lots of excess fat, 
the people who got into business for those reasons are gone.
    Now you have your businesses that have been around for 
awhile. A lot of them took good precautions in a normal period 
and are financially pretty sound, they can't get working 
capital. They just can't get loans to buy inventory, or to 
upgrade the technology that they need, and banks are not 
lending still.
    We are at almost a zero percent interest rate. I mean, 
money is pretty cheap. But even those credits that before were 
good credits, and today are still pretty good credits, can't 
get to the money.
    So what do you suggest? I mean, what is happening out 
there? What are we missing? What do we need to do? Getting a 
loan through the SBA Administration involves a lot of paperwork 
and it is a long and difficult process.
    So these businesses today are saying, we've made it 
through. We're still around, but we still can't get the working 
capital to really move forward. And I have seen a lot of 
businesses like that who are actually good credits but they do 
not have equity in their homes, which is where they used to go 
before to borrow against their own personal wealth. What are we 
going to do about that?
    I mean, what do you suggest? Or what can the Congress do? 
Or what can we do in conjunction to get that moving?
    Chairman Bernanke. Well let me first agree with your 
premise that small businesses do create a lot of jobs, 
particularly in economic recoveries. To the extent that they 
can't get credit, that is going to slow or prevent their 
expansion. That is very important. And so that is a top 
priority for the Federal Reserve.
    I don't want to take too much time, but the issues really 
are complicated. There are some firms that got easy credit 
earlier and now they can't qualify for tougher credit terms.
    There are some firms that are not demanding credit. If you 
look at the surveys, their number one problem is lack of 
demand, lack of customers. And the surveys also suggest that 
some firms are able to get credit, though not all. So it is a 
complicated picture.
    That being said, one creditworthy small business that can't 
get credit, that's too many. We want to fix that. And we have 
approached this from a long list of policy actions, including 
strengthening the banking system, including our interest rate 
policy, as you mentioned. But I mentioned specifically that in 
our supervisory role, as I discussed briefly in my remarks, we 
have issued very strong guidance to banks and to examiners, and 
very explicitly to examiners, that small businesses are to be 
evaluated based on their ability to pay, not based on their 
industry, not based on their geography.
    And we encourage, for example, second-round reviews, if the 
first one doesn't pass. We are very explicit that decline in 
the value of the collateral, of the home or the store, is not 
in itself a reason to mark down or deny the loan.
    We have been working very hard to get feedback. And one of 
the problems we get, frankly, is that bankers tell their 
Congressmen that they're having a problem, but they won't tell 
us, for one reason or another, and we are trying to make sure 
we get as much feedback as possible.
    So we have been having meetings around the country at all 
the Reserve Banks in the different districts with bankers, with 
small businesses, with community activists, to try to 
understand what are the barriers. What can we specifically do?
    So we are working very hard to improve that situation. 
Unfortunately, credit is somewhat tighter and will be somewhat 
tighter, and that is probably unavoidable. But we do want to 
make sure that creditworthy borrowers are able to access 
credit, and we are working very hard on that.
    In terms of what Congress can do, there are some proposals. 
The Administration has a proposal to use some leftover TARP 
funds to essentially incentivize small banks, because small 
banks are more likely to be lenders to small businesses.
    Representative Sanchez. Sure. They know they're closer to--
--
    Chairman Bernanke. And they know them better, and they have 
longer term relationships. We have been doing a lot to try and 
increase our data information about those loans.
    Now it would take another lengthy discussion to talk about 
the pros and cons of a specific proposal, but there may be 
different ways to incentivize or support, either through the 
SBA or directly, small banks which know those customers to 
increase their lending, and I would encourage you to look at 
that.
    Representative Sanchez [continuing]. Well, Mr. Chairman, I 
would like to discuss with you or your people how we might get 
to that point. We have information from our bankers. Maybe 
they're not telling you. Maybe we need to bring them in and 
talk to you. It just seems like there is a disconnect, and we 
need to get beyond this barrier to really get at what seems to 
me to be--I mean, I used to be in the financial industry--
pretty creditworthy businesses when they come and they talk to 
me, and I look at their balance sheets. And yet, it is almost 
like the money is right here, but they can't get to it.
    Chairman Bernanke. I encourage anyone around the table 
there who would like to bring in folks, we can work out ways to 
have those conversations. It would be very helpful to us.
    Representative Sanchez. Thank you, Chairman. I appreciate 
it.
    Thank you, Madam Chair.
    Chair Maloney. Thank you.
    Representative Paul.
    Representative Paul. Thank you, Madam Chairman, and 
welcome, Chairman Bernanke.
    I want to make a brief comment, and then I want to ask a 
question about the IMF.
    My brief comment is a comment about the answer you gave to 
Mr. Brady about monetizing debt. Because your balance sheet 
remains relatively stable with Treasury Bills, it doesn't mean 
that the Fed can't monetize debt.
    You mentioned in your statement that you bought securities, 
mortgage-backed securities, and agency debt, and that's over 
$1.2 trillion. Well where did you get the money? You created 
this money. So you did monetize debt. That went into the 
banking system. The banking system can buy Treasury Bills. And 
they can borrow money at zero percent, and that's why they're 
making a lot of money right now, because they can buy other 
debt and make a little bit more, and it looks magic except for 
the mortgage--the people who are losing their mortgages and 
losing their houses right now.
    But one other quick question. Are the thousand examiners 
that you're training, are any of those new? Or are these people 
already on the payroll?
    Chairman Bernanke. On the payroll, and they include both 
Federal Reserve and State examiners.
    Representative Paul. Okay. Because my comment there is: 
Probably 10,000 won't do much good. Because it isn't a lack of 
examination, if you don't deal with the problem, and the 
problem really comes from a monetary policy of low interest 
rates.
    As long as low interest rates rig the market and gives bad 
information to the investor, all the examiners in the world 
can't compensate for this. And this whole idea that capital can 
come from a printing press rather than savings, I still have a 
terrible time trying to understand how an economy can thrive on 
that. Because it rejects every notion of free-market 
capitalism.
    But the question I have on the IMF is, this week the IMF 
has announced that they are going to open up that new 
arrangement to borrow, or expand. There's a commitment of $50 
billion there now, and it's going to go up to about $560 
billion, and it coincides, you know, with the crisis going on 
in Greece and Europe and how they're going to be bailed out.
    The irony of this promise is that in the new arrangement, 
this increase, Greece is going to put $2.5 billion in there. I 
think this is--only a fiat monetary system worldwide could come 
up and have Greece help bail out Greece, and be prepared to 
bail out even other countries.
    We are going to go from fifty up--no, we are going from ten 
up to a hundred and five. So that is $105 billion we're going 
to commit to bailing out the various countries of the world, 
and who knows what, but I think this does two things I want to 
get your comments on.
    One, why does it coincide with Greece? What are they 
anticipating? Why do they need $560 billion? Do we have a lot 
more trouble?
    And, when it comes to that time where we have to make this 
commitment, who pays for this? Where does it come from? Will 
this all come out of the printing press once again, and we 
expect to bail out the world?
    Are you in favor of this increase in the IMF funding and 
our additional commitment to $105 billion?
    Chairman Bernanke. Well the source of this was going back 
in the G-20 meetings in the crisis. And I think one of the 
agreements that the G-20 leaders came up with was sort of a 
mutual commitment to put more money into the IMF as a way of 
addressing the financial crisis around the world. And that's 
why it happened.
    The Federal Reserve wasn't involved in those meetings. So 
that was before Greece. If money is put out to any country, it 
will be done first of all with specific approval from the 
executive board, which includes of course the U.S. in a veto 
position, and with conditionality. That is, the country has to 
meet certain conditions.
    So the G-20 leadership apparently has agreed that this is a 
way to provide credit to avoid fiscal or exchange rate crises 
in countries around the world.
    Representative Paul. Yes, but do you think this is a good 
idea? Do you agree that we should make this commitment?
    Chairman Bernanke. I think in general that having the IMF 
available to try to avoid crises is a good idea, yes.
    Representative Paul. And again, where will the money come 
from? This is our problem in this country. We're bankrupt, too. 
And also, along this line, do you feel like, you know, you go 
along with this commitment, what are we going to do when a 
state gets under the gun, like California and others?
    I mean, they are approaching the state that Greece is in. 
We can't turn down California. I mean, if we can pay out all 
these banks, and they get off the hook, and now they're making 
billions, and their executive officers are cleaning up, do you 
think we would ever turn down California, or any other State 
that gets in the same situation?
    Chairman Bernanke. Well that is Congress' decision.
    Representative Paul. Well you bailed out a lot of people 
from the IMF. You know, you have the capability of buying up 
some debt and doing all these kinds of things. We can't even 
audit you to find out what you do. So you can do anything you 
want, and you can create as much money as you want. So----
    Chairman Bernanke. You can see any transaction or loan we 
make. We're happy to provide that information to you. And we 
are not involved with lending to the IMF. The IMF is a separate 
institution, which has American executives, part of the 
executive board----
    Representative Paul [continuing]. But where would the money 
come from?
    Chairman Bernanke. It's a loan, but it would come from the 
U.S. Government.
    Representative Paul. Eventually we would create out of thin 
air, because we don't have----
    Chairman Bernanke. Well, it's a loan. If it's not paid 
back, then we would take our share of the loss.
    Representative Paul [continuing]. I yield back.
    Chair Maloney. Thank you.
    Congressman Snyder.
    Representative Snyder. Thank you, Madam Chair.
    Thank you, Mr. Bernanke--Dr. Bernanke, for being here. I 
don't often agree with things that my friend from Texas, Mr. 
Brady, says, but at the beginning of the hearing he said that 
you had quelled the panic at the end of 2008 and 2009, and I 
think that may be a phrase you want to remember. ``He quelled 
the panic.'' That could be tombstone material. So you might 
want to save that and tell your heirs to remember that phrase--
--
    Chairman Bernanke. A long time from now, I hope.
    Representative Snyder [continuing]. Decades from now when 
you're looking for something.
    On page 4 of your statement, you said ``. . . , the 
financial condition of banking firms has strengthened markedly 
. . . .''
    What I want to ask about is the more amorphous of ethics in 
banking. What concerns me is this: If I want to buy a car, I 
will study who puts out the best car. And the manufacturers, 
and the dealers, they stand by their service, they stand by 
their product.
    If I'm looking for someone to paint my house, I ask around 
about who does the best job of painting houses. And I'll get 
references, and I'll go talk to people about, yes, this person 
did the best job of painting my house. And the providers of a 
product, the providers of services, they work to put out a 
product that satisfies me.
    It seems to me that we've got a situation with major 
players in the financial services industry that they work for 
ways that their customers will be unsuccessful. Now what do I 
mean by that?
    Well, the one that we're probably most familiar with now is 
that I'm a Bank of America customer--and they're probably tired 
of me talking about them at these hearings--but the computer 
program. This happened to me. I didn't go into late fees or 
anything, but I just look at it on line. Banks closed on Good 
Friday, Saturday, Sunday, Monday, and I look and all the debit 
card purchases I did through the weekend, regardless of when I 
did them, are processed in the order with the largest first, 
from the $300 down to the $3.65 coffee at Starbucks, or 
something, and we all know what that's about.
    The goal is to drive people unknowingly into overdraft 
fees. They want me to fail as a customer. Now if that's how 
they're treating--I think the study showed they make most of 
their money on overdraft fees from 14 percent of their 
customers--but they're preying on people, hoping that we don't 
succeed at managing our money.
    And then we've had this history over the last several years 
that led into this problem of loans that should never have been 
made, but they made them, and then sell them, so that then they 
can walk away from their mistakes and they then don't care 
about whether they succeed or not.
    So my question is, you have done a great job of quelling 
the panic, and I think that history is going to treat you well, 
but my question is on the more vague one. What about the 
ethics, the morality of the financial services industry?
    I have asked this question of many people, and they say: 
Well, they're responsible to their shareholders. But so are my 
painters. So are my car dealers. What about the issue of 
responsibility to customers, where you actually want your 
customers to succeed, where you actually want to put out a 
product which will help them meet the financial needs of their 
family?
    Where does that come into all these discussions?
    Chairman Bernanke. I think it is incredibly important. I 
think the heart of any good business is ethical treatment of 
your employees, and your customers, and so on.
    And my experience is that among bankers, like in any other 
group of people, there are some who are very ethical, and some 
who are not. And in the cases of those who are not, we need to 
make sure there's adequate protection. It's like a Better 
Business Bureau, if you will.
    In the case of the overdraft protections, the Fed recently 
put out rules requiring opt-in on debit card ATM transactions. 
You have to opt-in in order to be allowed to overdraw and 
receive an overdraft fee.
    Representative Snyder. But you did not do anything about 
this computer program that processes them from larger to 
smaller, did you?
    Chairman Bernanke. We did not in that particular rulemaking 
because it was part of the Electronic Funds Transfer Act and 
did not have a place to put that in, so to speak, but we are in 
fact looking at those practices and we will try to address 
them.
    They are not completely straightforward because there are 
arguments for the big one first because people want to make 
sure that their mortgage gets paid before their coffee gets 
paid, but----
    Representative Snyder. Well I've heard that from local 
bankers many a time----
    Chairman Bernanke [continuing]. Well in any case, we're 
looking at that very seriously and we will try to come up with 
a solution that will address the problem you are talking about.
    Representative Snyder [continuing]. Because, you know, it 
is--I mean, I have had the personal experience of going in and 
checking a balance before I get some cash out on a Saturday, 
and it says I've got $130, and I take out $100, and then 
because of the reprocessing, in fact--this was actually an 
experience several years ago where it did push me into an 
overdraft, but it was one that they had formally said to me, 
yes, you have enough money.
    I mean, that is how nefarious it is, and most people do not 
do online. Most people don't follow it like I do, because I am 
so intrigued by what they're doing. They are just preying on 
people. I just think it is very, very difficult to deal with 
all of the issues that the Chairwoman wants to deal with, what 
Ms. Sanchez was talking about, if there is a morality in the 
industry that says ultimately our goal is to get money from 
people, not necessarily to see them have a successful 
commercial real estate venture, or a successful home loan, but 
to package, and sell, and move on. And I don't know how we get 
at that in this industry very well.
    Thank you.
    Chair Maloney. Thank you. Congressman Burgess.
    Representative Burgess. Thank you.
    Chairman Bernanke, welcome to our Committee. Let me--Dr. 
Paul made an observation that is so important it just bears 
repeating. The concept that the banks that got into trouble 
were able to get money at a very, very low interest rate, and 
now are turning around and loaning it back to you at a much 
higher interest rate. And there is no reason for them to make 
loans to the entrepreneur or the small business person. They 
are actually making money just working off this system that it 
appears to me that the Fed has provided for them.
    So I do urge you to look at that. You talked about the 
creditworthy business who is being given an appraisal that then 
makes them appear non-creditworthy, and this is a real problem. 
I heard from people all over my District during the break that 
this is going on today in almost any Congressional District in 
which you look in the country.
    To the extent that you offer help in that, I intend to take 
you up on that offer. I will have several of these individuals 
visiting me here in Washington next week, and I would like for 
them to be able to tell someone at the Fed just what they told 
me last week. And part of it is mark-to-market but part of it 
is the very slow rate of getting appraisals back, and the 
appraisals are so slow in coming back that they in fact do not 
reflect rapidly changing market conditions, and people in the 
real world cannot function in the system that we have created 
for them.
    So I think Representative Sanchez had some very good 
points, and I will also take you up on that offer because I 
think it needs to--I think there needs to be more, there needs 
to be more hands-on from the Fed about what are the actual 
effects of the monetary policy that you are pursuing.
    You also made a comment that the Fed is open. I know Dr. 
Paul talks a lot about auditing the Fed and knowing what's in 
there. Is there a way for me to know what the Fed holds as far 
as real holdings in my Congressional District?
    You hear stories on the radio about the Fed owning a 
shopping center in Oklahoma City, for example. I didn't know 
you guys were into that. But what do you own in my 
Congressional District? So if I have a constituent ask me that 
question, am I going to be able to get that information?
    Chairman Bernanke. So the answer is: Yes. The only kind of 
strange assets like that that you're referring to, basically 
what we own is Treasuries and the liabilities of Fannie and 
Freddie. That's basically what we own.
    We do have some assets that were involved in the bailouts 
of Bear Stearns and AIG which are still on our balance sheet. 
That's about 5 percent of our balance sheet. Again, this is not 
something we wanted to do, but we didn't have an option at the 
time.
    That not withstanding, we have released all the information 
about what's in that group of assets, and includes information 
about, you know, who the loan is to, et cetera. So, yes, you 
can find that out.
    Representative Burgess. All right, I appreciate that. And I 
will have someone from my office follow up with you on that.
    Now you mentioned, again in response to Senator Brownback's 
question of the concern about the structural deficit and about 
the tax provisions that are due to expire and assumptions made 
that all of those expire. Here's a report from the Joint 
Committee on Taxation. I won't question you about it because 
it's not fair to do that, but it has 50 pages of tax cuts that 
are expiring in the next 10 years. Some of them are quite 
obscure. It appears to me some of them should expire. But have 
people at the Fed gone through this and really put pencil to 
paper about which of these--I doubt very much that Congress is 
going to let the Alternative Minimum Tax kick in. I don't know 
quite what we're going to do about that, or how we're going to 
pay for that before the end of the year, but we always do 
something. So I expect you are correct in that assumption.
    But has someone at the Fed gone through this entire report 
from the Joint Committee on Taxation looking at the expiring 
tax provisions over the next ten years so that we have some 
idea of what we're dealing with as far as what you term the 
structural deficit going forward?
    Chairman Bernanke. Well again we were using the publicly 
available CBO projections there. And on the tax side, I am not 
advocating any policy or anything like that; I am just telling 
you how the CBO has done these projections.
    That particular projection is one where all the expiring 
tax cuts are extended and quantitatively, by far, the two 
biggest are the 2001-2003 tax cuts, and the AMT. And those 
dominate in terms of the dollar amount. Then there are a whole 
bunch of other ones like the research and development credit, 
and other things like that which are often extended, but of 
course may not be.
    Representative Burgess. But all of that of course directly 
affects the policy that we all talk about that we should be 
concentrating on in job creation and job growth.
    Just one final thought to leave you with. And I heard from 
so many people over the break. And you referenced this in your 
testimony. The young person getting out of college today who is 
having terrible difficulty finding a job, and may set a tone 
for their productive years that is forever tainted by their 
experience because of this Recession. And then you have the 
person my age, what I like to refer to as the late boomer, who 
also is having difficulty, the person 45 to 60. Those jobs do 
not exist. And that is really where we've got to look at both 
the beginning and the latter end of the employment years 
because they are both in serious trouble------
    Chair Maloney. The gentleman's time has expired, but 
Chairman Bernanke may answer.
    Chairman Bernanke. No, I would certainly agree with that. 
Both ends, including people near retirement, are having 
difficulty, and there are different ways to address those 
different parts, but it is clear that very long-term 
unemployment is not just a short-term effect, it has a long-
term implication for the person's ability to earn a living in 
the labor market.
    Chair Maloney. Thank you.
    Congressman Hinchey.
    Representative Hinchey. Thank you, Madam Chair.
    Chairman Bernanke, thank you very much. You have a very 
interesting job, and it is fascinating because of the set of 
circumstances that you have to deal with. Among all the things 
you have to deal with, the organization of the monetary policy 
of this country is the critical issue.
    One of the things we are all confronting, of course, is 
this huge national debt. It is important to recognize what 
occasions caused that huge national debt--primarily, the 
illicit, unjustified invasion into Iraq and the hundreds of 
billions of dollars that have been spent there, and now 
continue to be spent there, and hopefully will end shortly.
    The tax reduction for the wealthiest people in this 
country, which has now brought about the greatest concentration 
of wealth in the hands of 1 percent of the population we've 
seen since 1929.
    And of course the dramatic drop in the income of virtually 
everyone else across this country--mostly among the working 
people.
    And other things like the inability to negotiate the price 
of prescription drugs in the context of Medicare, which is 
jeopardizing the future of Medicare.
    All of these things are critically important. The tax cut 
expires the end of this year, but all these other things that 
we have to deal with are critically important. And one of the 
most important aspects of them is just to understand what they 
are all about, and how they came about.
    The engagement of investment in commercial banks now 
continues, in spite of the fact that the economy now is 
beginning to get a little bit better. There are ways in which 
this is being attempted to be addressed.
    One of the ways in which it's being attempted to be 
addressed is in the context of the financial reform bill of 
Chairman Dodd. One of the things that he is trying to do is to 
introduce the elements of the Volcker Rule to deal essentially 
with what happened with the elimination of the Glass-Steagall 
Act, the interaction of commercial and investment banks.
    Now that aspect of his legislation is not solid by any 
means. There is a study that is going on apparently that is 
going to make a determination as to whether or not the 
provisions of the Volcker Rule, which are only partly effective 
in the context of dealing with the commercial and investment 
bank interaction/interrelationship/inter-investments, 
manipulation of investments, all of those things.
    So what do you expect will come out of that study with 
regard to the inclusion of the Volcker Rule? And if it comes 
out positively with the inclusion of that in the Dodd bill, how 
effective is it going to be?
    Chairman Bernanke. Well first, I think we all agree that we 
don't want to have banks or investment banks taking speculative 
positions with the U.S. safety net behind it. So clearly we 
have to draw that line.
    I think inevitably what the study will find is that drawing 
a sharp line is not easy because there are various activities 
such as hedging other positions, or making markets, that 
involve perhaps temporary proprietary holdings, and so on.
    So it may not be quite as easy to say this is proprietary, 
this is not. And so we will need to have a set of rules, or a 
criteria that helps us distinguish which is applicable under 
the Volcker Rule and which is not. And I think that is going to 
be the big challenge. So we will have to see what the results 
are.
    Representative Hinchey. And there's going to be opposition 
to making that clear decision. There's no question about that. 
And that opposition is going to come as a result of the huge 
amount of income that is generated in the process of the 
interaction of this situation.
    So this is something that's got to be brought about 
effectively. Now, you know, we could do something simple like 
bringing back something like the Glass-Steagall Act and 
separating those banks, and eliminating the conflict of this 
kind of investment. And it would seem to me that that would be 
something that would be very effective.
    Back in 1933 when that was put into place, it had a very 
effective means to deal with the Great Depression. But there is 
a great resistance now to doing that, and that resistance is 
coming from a handful of people who are effectively engaged in 
this kind of manipulation of investment.
    So I wonder if you can tell us a little bit more about what 
you think should happen here? And if there's any way in which 
your operation and this Congress can be engaged more 
effectively in bringing about a more open and honest way in 
which this banking situation is engaged, and the elimination of 
this manipulation that has been one of the major causes of this 
deep recession that we're experiencing.
    Chairman Bernanke. Certainly. I don't think Glass-Steagall 
by itself would solve our problems, because we had commercial 
banks losing money on regular loans, and we had investment 
banks losing money on speculative securities trades.
    So separating that, you know, wouldn't have saved Lehman 
Brothers, and it wouldn't have protected a number of the banks 
that had problems----
    Representative Hinchey. But if I could interrupt you just a 
second, I mean some of that elimination had occurred prior to 
the elimination of that complete legislation in 1999. There 
were interactions in the Glass-Steagall Act. There were 
interventions in it. There was some manipulation of it, all of 
which brought about some of the declines.
    Chairman Bernanke [continuing]. I don't think it's just the 
separation. I'm trying to say, I think we do need to take 
important steps. They would include, for example, stronger 
capital requirements to make sure that the institutions who are 
taking risks are bearing those risks themselves.
    It would include making sure that every large financial 
firm has a strong consolidated supervisor. We don't have the 
GAAPs that we had, where some kinds of firms were able to sort 
of sneak by without being overseen.
    And I think it is also very important to have this 
resolution regime that allows us to wind up a failing firm, 
which means basically that the creditors and the shareholders 
would bear the costs, and that creates another set of 
incentives to keep banks and other financial firms away from 
excessively risky investments.
    So I think there are a bunch of things we can do. I don't 
think Glass-Steagall by itself would solve this complex 
problem.
    Chair Maloney. The gentleman's time has expired.
    Senator Klobuchar.
    Senator Klobuchar. Thank you very much, Madam Chairman.
    Thank you, Mr. Bernanke, for being here. Chairman Bernanke, 
I will tell you, I just was in my State last week and we have 
about a 7.3 percent unemployment rate, so it's a little better 
than the national average. And despite all the struggles, there 
are some glimmers of hope there, which I know you see with all 
of your number crunching. Digi-Key in Thief River Falls, 
Minnesota, population 7,500, has 2,500 employees, and they're 
hiring 400. So anyone that wants to come there, should see me.
    So we have some glimmers of hope. And what I wanted to talk 
to you about where I see as a potential limitation on our 
recovery, and that is the debt. And I appreciate you speaking 
out on that.
    A number of us actually held out our votes on the budget 
and lifting the debt cap. We wouldn't do it without a promise 
that we were going to get an up and down vote on the Debt 
Commission. I was very distraught that some of our colleagues 
changed their votes, didn't do it, and then the President 
appointed one.
    Could you talk about the importance of getting something 
done on the debt in the long term for our markets and for our 
economy? And why something like this Debt Commission, if we can 
get some practical recommendations that we can have an up and 
down vote on, is so important?
    Chairman Bernanke. Well it has direct implications for the 
health of our economy, and maybe not even just in the long run. 
I mean, in the long run of course if we have higher interest 
rates that's going to reduce investment, and that's going to 
reduce capital formation growth, and job creation.
    It's going to mean we're going to have to borrow more from 
abroad, which also means a heavier burden on our children to 
pay back. So those are the classic problems. But I think worse 
than that is that right now the markets are essentially 
signaling a lot of confidence that our political system will 
deliver a sustainable trajectory of fiscal policy going into 
the next few decades, and I think it's very encouraging in a 
sense that we can borrow at 30 years at 4 percent, or 4 percent 
plus.
    Senator Klobuchar. And part of that you believe is because 
they believe we're actually going to do something about it?
    Chairman Bernanke. And they believe we're going to do it, 
and I think----
    Senator Klobuchar. And if we don't do something about it?
    Chairman Bernanke [continuing]. If we don't do it, or we 
give a strong indication that we're not going to be able to do 
it----
    Senator Klobuchar. Okay.
    Chairman Bernanke [continuing]. Then it would not be 
something that we'd have to worry about in 2040, it could be 
something we have to worry about on Wednesday----
    Senator Klobuchar. Exactly.
    Chairman Bernanke [continuing]. Because it could happen 
that markets would lose confidence. And again, I want to draw a 
strong distinction between the United States economy and our 
fiscal position and that of some other countries. But we've 
seen around the world just recently, a number of countries who 
have come under pressure because of loss of confidence in their 
resolve or ability to address these problems.
    Now that does not mean we have to balance the budget 
tomorrow, but it does mean we have to have a plan and a 
credible process of some kind to, in the medium term to show 
that we can manage these difficult problems. And they are very, 
very difficult. You have all my sympathy, because they are 
extremely hard politically and intellectually to solve.
    How to do it? I think the commission will be interesting to 
see what they come up with. It's actually a very good 
commission----
    Senator Klobuchar. It is. It is.
    Chairman Bernanke [continuing]. A lot of very good people 
on that.
    Senator Klobuchar. Right. And that's why--I want to move on 
to one other question, but I think this idea that we just put 
our heads in the sand is just not going to work in the long 
term is your point. And that is why I hope my colleagues take 
seriously, on both sides of the aisle, the recommendations of 
this commission and it does not just become a study on a shelf.
    My second focus here--and you and I have discussed small 
business lending, and I know some of my colleagues have 
discussed that with you and how important I believe--I have 
been working with Mark Warner on that proposal.
    The second thing is just these latest proposals by Chairman 
Dodd to look at taking back some of the power from the Regional 
Federal Reserves. We have one in Minneapolis, very close to my 
State Office, and we have found it actually to be helpful. What 
you think of that proposal?
    And then second, the other concern I've heard a lot is from 
our small community banks, the proposal to limit your 
supervision to banks that have more than $50 billion in assets. 
Again, our community banks are not big fans of that proposal 
either; and I would like to hear your perceptions of this 
proposal to limit--to consolidate the Fed power away from 
Regionals and then also to take the community banks out from 
under the Federal Reserve.
    Chairman Bernanke. We are very concerned. We understand we 
need to play a role with the large institutions as part of a 
process of trying to keep our financial system stable, but it 
would be I think a very bad outcome if we were to lose all 
connection with the small- and medium-sized banks where we 
currently supervise state member banks and bank holding 
companies around the country.
    First of all, that provides us a great deal of useful 
information about what's happening out there in the country 
about small business loans, about credit, about the local 
economy.
    It gives us a perspective on the whole financial system and 
the whole economy. We don't want to just be looking at Wall 
Street. We need to look at the whole economy. And not only for 
monetary policy purposes, but also for financial stability 
purposes.
    Small banks, medium-sized banks can be part of a financial 
crisis, too, as they were for example during the thrift crisis, 
or during the Great Depression, or Penn Square in 1982, and 
there are many other examples.
    So both, because we want to have that connection with the 
rest of the economy, and because both monetary policy and 
financial stability require we have a broad view of the entire 
banking system. We think it is very important that we maintain 
that connection.
    We are not asking for new powers. We are asking just that 
the status quo be maintained so that the Fed has the ability to 
supervise and have a strong connection with small- and medium-
sized banks, as well as the very largest banks.
    Senator Klobuchar. And the idea of the Regional Federal 
Reserves, the same thing?
    Chairman Bernanke. The Regional Federal Reserves are in 
fact our ears to the ground. They are where the actual 
supervisors reside, and they do the operational work, and they 
have those local connections, as you well know. And Washington 
is where the policy is set and where the overall accountability 
flows from, but we rely very heavily on those eyes and ears 
around the country to get that feedback.
    Senator Klobuchar. Excellent. Thank you very much.
    Chairman Bernanke. Thank you.
    Chair Maloney. Senator Casey.
    Senator Casey. Madam Chair, thank you very much.
    Chairman Bernanke, thank you for being here. We appreciate 
your testimony and your insights, but also your public service 
at this time. I know it is not easy to be in the position you 
are in.
    I wanted to explore two general areas, if we can get to 
both. One is jobs, and the other is currency.
    First of all with regard to both the data that is out 
there, as well as your testimony, there is a good bit to be 
positive about. I have said a number of times that the actions 
that were taken in the Fall of 2008 when you came to us and 
presented the gravity of the financial situation, plus the 
Recovery bill in 2009, and more recent job creation bills, have 
had a positive impact, and even more so the next couple of 
months.
    But we still face a situation, for example, in our State, 
where even though if you look at the rate, we are at about 8.9 
percent unemployment which in a relative sense is lower than a 
lot of big states, but it still means 577,000 people out of 
work. If it's not a record, it is very close to a record.
    Then I look at it in terms of individual regions. We have 
had this unfortunate confluence of misery in places as large as 
Philadelphia where the unemployment rate has been at 10 for a 
long time, and it just bumped up more recently to over 11. But 
next to Philadelphia you have numbers higher than that in very 
small, and often rural counties where the loss of one employer 
means an unemployment rate of 12 or 13 or 14 percent.
    Having said all of that, in the midst of all that misery 
for a lot of people we keep hearing that small businesses have 
trouble accessing credit. We hear that over and over again. The 
dichotomy between that difficulty that folks are having, 
especially small business owners, and then you see the headline 
in the New York Times saying, and I'll read it, ``J.P. Morgan 
is upbeat on economy as it posts profit.'' For a lot of people 
out there there are two words in that headline that are at 
variance with where they are.
    One is ``upbeat.'' A lot of people are not upbeat for the 
reasons I cited, those numbers. And the other words is 
``profit.'' A lot of people are not seeing profit in the bottom 
lines of their small businesses.
    So as a long predicate, I know that you have highlighted in 
addition your concerns about fiscal matters like the deficit. 
You said, and I quote, ``The decline in large part'' meaning 
the decline in credit to small business, ``reflects sluggish 
loan demand and the fact that many potential borrowers no 
longer qualify for credit, both results of the weak economy.''
    And that is kind of the diagnosis of the problem. What do 
you think are steps we could take in the short run, meaning the 
next six months to the next year, that would have a positive 
impact on the jobs climate as it relates in very particular way 
on small business?
    Chairman Bernanke. Well again, the small business problem 
is a very difficult one because we want small business to have 
credit, but we want to make good loans. We don't want to go 
back to the weak lending standards of before the crisis.
    And so, as I've discussed earlier today as well, it's a 
very high priority of the Federal Reserve to work with our 
banks and our examiners to make sure that there's an 
appropriate balance. That is, loans have to be appropriately 
underwritten. They have to be sufficiently likely to be repaid, 
prudent. We don't want banks to be losing money on bad loans.
    But on the other hand, we certainly don't want a modern 
equivalent of red-lining. We don't want to say that the whole 
category of small business is not to receive credit, or all 
retailers are not to receive credit, or nobody in the State of 
Florida is to receive credit, because of just the general 
category.
    And I think part of this is a cooperation between the banks 
and the examiners working together, understanding each other to 
make sure that every loan is evaluated on its own two feet, so 
to speak, so that you could very well have a situation where 
the value of property has gone down, but the company has a 
stable business and it has been able to repay for many years. 
In which case, we have provided guidance to our examiners in 
training and asking for feedback, in which case that loan 
should be made, or at least it should be given a very careful 
assessment.
    This is something that goes back to a point that Senator 
Klobuchar raised, which is the Fed's involvement with the 
banking system. We are of course bank examiners, and safety and 
soundness examiners, so we are obviously very concerned about 
making sure the banks are safe and sound and making good loans, 
not taking undue risks, et cetera; but on the other hand, as 
the central bank of the United States we are also very 
concerned about the overall health of our financial system in 
our economy.
    Therefore, perhaps more than others, we are really focused 
on getting that balance right. We really want to make sure that 
good loans do get made; that they are very much in everyone's 
interest.
    So I have talked about some of our programs and our 
information gathering, and we have had meetings around the 
country, and conferences, and we are collecting extra data that 
we didn't used to collect before about small business lending. 
We have put extra questions into the NFIB Survey to try and get 
more insight.
    And as I've said earlier, I invite direct feedback from 
Members of Congress and their constituents who have suggestions 
and ideas about how we can better meet this need.
    From Congress's point of view, it is again a difficult 
problem, but we discussed earlier just some proposals to use 
TARP money, $30 billion in TARP money, to provide additional 
capital, or reserves, to incent small banks to make more small 
business loans. And there are a lot of issues in how to do 
that, but that is one direction that could be constructive.
    Senator Casey. Thanks very much.
    Chair Maloney. Thank you.
    Thank you. Chairman Bernanke, you testified earlier that in 
financial regulatory reform we should have stronger capital 
requirements. Many believe that we should also limit leverage. 
Some of these financial institutions were highly leveraged, 60 
percent, 35 percent.
    Do you believe that the leverage should also be limited? 
And, if so, what would you recommend? And do you think we 
should have a specific number put in the legislation, a cap on 
leverage?
    Chairman Bernanke. So in the United States we have, as a 
first line of defense, a risk-weighted capital ratio, which is 
not a straight leverage ratio; it's amount of capital we have 
to hold against assets, where we have to hold more capital 
against riskier assets, which makes sense. The riskier the 
asset, the more capital you want to hold.
    And we, the Federal Reserve and the other bank regulators, 
are working very actively with other regulators around the 
world to strengthen the capital requirements. We have already 
made proposals to do that. We are going to get assessments from 
the banks about how big an impact that would have. And it is 
our intention to move forward with more conservative higher 
capital requirements. So that's the first thing.
    The leverage ratio is kind of a backstop, a failsafe, if 
you will, because that's a very simple ratio. It's just a ratio 
of capital against total assets without making much or any 
distinction between Treasuries versus loans to small 
businesses, for example.
    And the United States has long had a leverage ratio as a 
backstop to our capital rules. One of the interesting things 
that appears to be coming out of the international negotiations 
is that the U.S. leverage ratio, which never was used abroad, 
now looks like it will be adopted by other countries as well, 
which is good for us because it will create a more even playing 
field and create greater safety in the global banking system as 
well as here.
    So the leverage ratio is part of these negotiations and 
discussions we're having internationally, and there are 
proposals on the table. We haven't yet gone through the whole 
process of doing the quantitative analysis to figure out 
exactly what the right number is, so I can't tell you offhand 
what the final number will be. But we are certainly looking to 
make the leverage ratio part of the more conservative approach 
to making sure that banks have enough capital that they can 
absorb, even in a severe crisis like the one we've had, they 
can absorb their losses.
    So, yes, that will be part of our proposal.
    Chair Maloney. Well, I think you should reach your 
conclusion by the time we pass this bill. We should have 
something definite in the legislation on leverage.
    I would like to ask your assessment on international 
banking, your comments on what's been happening in Greece. At 
the Senate Banking Committee hearing in February, you testified 
that the Fed was going to look into credit default swaps on 
sovereign debt.
    Can you tell us what you found?
    Chairman Bernanke. The Goldman Sachs arrangement with 
Greece is where we put most of our focus. On that, we found 
that there was in 2000 and 2001 a contract between the Greek 
Government and Goldman Sachs which, by using exchange rates 
that were different from the market rates, had the effect of 
modestly changing the reported debt and deficit ratios that 
Greece reported to the European Eurostate, their statistical 
agency.
    Goldman Sachs sold this position in 2005 to a Greek bank. A 
couple of comments. One, as I mentioned the effects--they did 
have the effect of distorting the numbers--were relatively 
modest, about 1 percentage point. The debt to GDP ratio changed 
from about 101 percent to 100 percent. So it wasn't a large 
effect, but it was an effect.
    At that time, this of course was well before the Federal 
Reserve was supervising Goldman Sachs, and it was also before 
the Enron episode where following which, the Fed and other bank 
supervisors greatly strengthened our rules against arrangements 
which are basically intended to have accounting impacts, 
essentially to affect the accounting valuations.
    So we have discussed the issue with Goldman, and they have, 
as they are required to do, a much more elaborate procedure now 
to evaluate such possible deals to make sure that they are not 
being motivated by accounting and other kinds of appearance 
issues.
    So we believe that that situation is now well under 
control. And as I said, they divested that position in 2005.
    On the credit default swaps, we haven't found large 
positions in U.S. banks vis-a-vis European governments, but we 
have not addressed the question specifically of using CDS to 
manipulate prices, which of course would be illegal and 
inappropriate. That would be more an SEC responsibility. I know 
they are looking at that issue.
    But again, exposures of U.S. banks via credit default swaps 
or direct holdings to European governments are relatively 
limited.
    Chair Maloney. Are you satisfied with the solution Europe 
has reached? Do you see the problems plaguing Greece spilling 
over into other adjacent countries, or possibly having an 
impact on the United States?
    Chairman Bernanke. Well it's a work in progress. They've 
made, I think, a good bit of progress, but it's politically 
difficult because on the one hand the Europeans don't want to 
assist Greece unless they are persuaded that the Greeks have 
made a very good-faith effort on their own to reduce their 
deficit and improve their own fiscal position; and at the same 
time the Europeans themselves have to agree how they're going 
to share the burdens and how they're going to set up the 
arrangements.
    I think there's a broad understanding that it's very 
important for them to come to a solution, and they've made a 
good bit of progress there. But I think there will still be 
further discussions going forward.
    The United States is not directly involved in these 
negotiations, but I've been informed that they've made good 
progress and that they are quite confident that a solution will 
be forthcoming.
    Chair Maloney. Thank you very much.
    Mr. Brady.
    Representative Brady. Thank you, Madam Chairman.
    I do believe in the importance of small business credit. 
It's not an issue of more capital; it's an over-correction on 
behalf of the regulators at the banks. I really believe--and 
again I'm not a banker, I'm not an expert in the area--but 
especially in commercial real estate, even though they're told 
these are guidelines, repeatedly these are guidelines, banks 
know, community and regional banks know if they go over, a dime 
over the concentration thresholds, they're going to enjoy a 
visit, a special visitation from their friendly banking 
regulator.
    Plus, you know, the requirement of setting aside capital 
reserves for commercial real estate that are far in excess of 
the real risk of that loan is really creating--I can't 
overstate the problems it is creating among creditworthy 
projects, not just inhibiting growth, but I think creating 
again a much more severe commercial real estate crisis where we 
already know there are real challenges anyway.
    I really do appreciate your focus on that area, among all 
the other things you're doing. It's critical that the Fed be 
listening and injecting common sense wherever possible in that 
process.
    Can I ask you about two things. One about sort of the 
tradeoff between inflation and unemployment, and also a 
question about the balance sheet and exit strategy.
    We have had a couple of people testify before Congress here 
recently. Professor Lawrence Ball advocated raising the Fed's 
inflation target to 4 percent. His argument was that higher 
inflation would alleviate unemployment and give the Federal 
Reserve more room to reduce nominal interest rates in the 
future, sort of that tradeoff again, inflation/unemployment.
    How do you respond to Professor Ball's argument that 
unemployment is so dire that we should inflate our way to a 
more rapid recovery?
    Chairman Bernanke. Well his argument is that at a higher 
inflation rate, nominal interest rates would also be higher on 
average, and that would give more space to cut during a 
recession and perhaps more ability to create impetus. So that's 
not an illogical argument, but it has substantial risks.
    Which are: The Federal Reserve over a long period of time 
has established a great deal of credibility in terms of keeping 
inflation low, around 2 percent roughly speaking, and you can 
see that for example in Inflation Index Treasury Debt, which 
shows that people expect over the next 10 years about 2.2 
percent inflation on average over that 10-year period.
    If we were to go to 4 percent, and say we're going to 4 
percent, we would risk I think losing a lot of that hard-won 
credibility because folks would say, well, if we go to 4, why 
not go to 6, and if you go to 6, why not go to 8. It would be 
very difficult to tie down credible expectations at 4, beyond 
which of course in the longer term low inflation is good for 
the economy, and 4 percent is already getting up there a bit 
and would probably have detrimental effects on the functioning 
of our markets, and so on.
    So I understand the argument, but that is not a direction 
that we are interested in pursuing. We are going to keep our 
inflation objectives about where they are. We think about 2 
percent is about appropriate, given biases and measurement of 
inflation, and given the need to have a little bit of space 
between the average inflation rate and the risk of having 
deflation, or falling prices.
    So that is where we are going to be. That is the path we 
are going to be following.
    Representative Brady. You have raised the issue of 
expectations, and there are, I believe, in this economic 
recovery rational expectations that businesses will see higher 
tax rates, higher energy prices, more regulation, I do think 
that has an impact, and individuals as well, the high debt, 
someone has to pay that back, is it going to land on them, and 
does it affect our economy. That's all part of the psyche and 
confidence of business and consumers.
    One of those areas of uncertainty is the extraordinary 
balance sheet expansion of the Fed. Recently testifying before 
the House Financial Services Committee, Professor John Taylor 
stressed how important it would be for the Fed to provide an 
exit strategy with explicit decision rules, so as to allay 
fears of surging inflation, and here in Congress, that the Fed 
will not continue to exceed its traditional purview of monetary 
policy.
    Are you prepared to lay out a definitive roadmap to 
normalization?
    Chairman Bernanke. Yes, we haven't determined all of the 
details. We're obviously going to see how things evolve. But I 
have recently testified before the House Financial Services 
Committee, and also released separately a document, another 
testimony which has laid out our proposed exit strategy.
    We are developing the tools to do that. This has been an 
ongoing campaign on my part and on the Fed's part going back to 
last summer when I published a Wall Street Journal Op Ed----
    Representative Brady. I saw that.
    Chairman Bernanke [continuing]. That laid out the strategy.
    My impression is that early on there was a lot of concern 
in the markets about this large balance sheet, and the large 
amount of reserves in the banking system. Now I'm not saying 
that the concerns have completely evaporated, but I think that 
over time that we have provided a lot of information about our 
exit strategy, and my sense is that it has had a good effect; 
that for the most part there's a lot of confidence in the 
financial markets that we do know how to exit effectively, and 
we will exit effectively, and that we will do so in a way that 
doesn't lead to any increase in inflation. And again, one piece 
of evidence is the long-term break-evens in the inflation 
indexed bond market. So we are doing that.
    I don't think we can give quantitative rules at this moment 
on exactly how to do that because I don't think we have enough 
knowledge. But we do know that we have all the tools we need to 
drain those reserves and to reduce the balance sheet over time, 
and to raise interest rates when it becomes necessary to do so 
to avoid inflation.
    Representative Brady. Right. Thank you, Mr. Chairman.
    Representative Hinchey [presiding]. Mr. Chairman, thank you 
very much. I deeply appreciate the position that you have, and 
how critically important it is, particularly right now. And 
frankly, the relatively candid responses that you give, which 
is in many ways revolutionary from this particular 
responsibility.
    I wanted to ask you a question about the housing market and 
the circumstances that we're dealing with there. This economy 
is still very, very rough. It's not secure by any means. And 
there are a whole host of things that really need to be done, 
and an awful lot of attention needs to continue to be paid to 
it.
    One aspect of that of course is the housing market. As you 
mentioned, the Federal Reserve under your leadership has worked 
with the Administration and Congress to create an environment 
to encourage responsible home ownership. And that was something 
that was very positive, and it stepped in in a very positive 
way to deal with this economic situation.
    The conditions are about to change. And one of the ways in 
which they change is the fact that in March the Federal Reserve 
stopped purchasing mortgage-backed securities, which had kept 
interest rates low and helped to stabilize the housing market.
    Can you give us the justification for that, and what you 
think the aspects of that are going to be?
    Chairman Bernanke. Well, to go back to the comments of Mr. 
Brady, we have already expanded our balance sheet quite 
considerably and we didn't want to create such a large balance 
sheet that it would create uncertainty, or concern about our 
ability to normalize policy at an appropriate time.
    We were concerned about the potential impact of the 
cessation of MBS purchases on mortgage interest rates, and for 
that reason we announced well in advance our proposal, and we 
reduced our purchases very gradually. We tapered off our 
purchases. And I am pleased to say that so far we see very 
little effect on mortgage rates. There's been essentially no 
effect on mortgage-backed security yields, and so at this point 
I don't anticipate any significant impact on mortgage rates.
    Of course if----
    Representative Hinchey. For how long? I mean, there's been 
some--there have been a number of announcements just over the 
course of the last week or so about the interest rates for 
mortgages going up, and specific elements talking about how 
they're about to do it.
    Chairman Bernanke [continuing]. In the last couple of days 
it has gone the other direction. I think the net change since 
we stopped purchasing is pretty close to zero.
    So we will continue to watch that. There's nothing that 
says if the economy weakens and the issue is housing and 
mortgage rates, there's nothing that says we couldn't resume 
those purchases if necessary, and we will certainly keep that 
option open. But again at this point the main effect seems to 
be that we are still holding $1.4 trillion in agency MBS and 
debt, and that amount being taken off the market seems to be 
having the ongoing effect of keeping mortgage rates pretty low.
    Representative Hinchey. Well no question about it, it has 
had a very positive effect. But my concern is, frankly, that 
now that positive effect is being eliminated. And we already 
see issues that indicate that these interest rates are going to 
go up. These interest rates go up, as they go up, that is going 
to reduce the housing market, particularly in the context of 
the ongoing economic circumstances that most working people are 
having to confront.
    So I am deeply worried about this, and I thank you for 
saying that you will be looking at it and considering it and 
maybe making some changes, hopefully, if it seems to be 
necessary.
    There are other aspects of the housing market, however, 
also that are also about to cause some serious problems, it 
seems to me at least. Among those, the first-time homebuyer tax 
credit is due to expire April 30th, and the FHA has recently 
tightened its restrictions on loan eligibility.
    So the housing market is not yet stabilized. So I wonder 
what you think about all three of these issues that are 
essentially being eliminated now, which were put into play to 
deal with the economic circumstances, and which caused a 
positive effect on the housing market. But now, those effects 
are being eliminated.
    And it seems to me that this situation is likely to get 
progressively worse, and maybe rapidly worse.
    Chairman Bernanke. Well the number of starts of housing has 
been very low, and unfortunately all the efforts, including the 
low mortgage rates, have not really rejuvenated new 
construction very much. So that remains a concern.
    I think one other important aspect here is the foreclosure 
mitigation issues. One of the most important aspects of the 
housing market is not even just the amount of construction, but 
what happens to house prices. Because if house prices 
stabilize, that will help consumer confidence--because people 
will feel that the value of their home is not falling anymore--
and it will help probably improve, reduce mortgage 
delinquencies as well.
    So one concern we have is that foreclosures will continue 
to put houses on the market and cause house prices to fall 
further. So we are watching that very carefully and we are 
hopeful that some of the programs that the government has put 
in place will help mitigate that foreclosure rate.
    Representative Hinchey. Well I am deeply concerned about 
the effect of elimination of these three issues, which had had 
a positive effect, and the elimination of these three issues 
prior to the moment when the housing market is improving 
significantly.
    So I think that this is something that needs a lot of 
attention.
    Chair Maloney [presiding]. That is an excellent point, and 
the gentleman's time has expired, and we look forward to the 
Chairman's response.
    Chairman Bernanke. I agree, the housing market has been a 
big part of this whole cycle, absolutely, and we are going to 
have to watch that sector very carefully, not just in terms of 
construction but in terms of prices and in terms of 
foreclosures. Those are all big issues for people in this 
economy.
    Chair Maloney. Congressman Burgess.
    Representative Burgess. Thank you, Mr. Chairman.
    Let's just close the loop on what we were talking about on 
jobs when my time ran out before and talking about the problems 
people have in the beginning of their earning years, midlife 
crisis, and then pre-retirement. It seems like some of the 
things we have done recently in the past 14 or 15 months, the 
health care bill being a big one, and I heard from several 
people back home, a couple who had an assortment of small 
businesses and provided roughly 320-350 entry-level jobs, 
minimum wage jobs, if you will, for which they do not provide 
health benefits. Generally they are looking at the second wage 
earner in a home being the holder of this job, or someone just 
entering the job market who might in fact now be carried on 
their parents' insurance, but they're looking at the $2,000 
fine that they will now have for each full-time equivalent, and 
at their level of employment they just simply can't continue.
    They are either going to have to stop what they're doing, 
sell their businesses and retire and go to Reno, or something 
different, but they cannot continue to do--as they outlined to 
me, they will not be able to continue to do what they're doing.
    And here's again a couple through various entrepreneurial 
activities providing 300 to 350 entry-level jobs for these 
people at the beginning of the job market. And you know that 
that scenario is replicated across the broader economy over, 
and over, and over again.
    We have also frightened people with what we're doing with 
cap-and-trade and possible energy tax. We've also frightened 
people with financial regulatory reform where people just don't 
know what to expect around the next corner.
    And then the 50 pages of tax cuts that are going to expire 
that also add to the uncertainty.
    So where do we begin to ratchet back the uncertainty that 
we are providing to the small business person that prevents 
them from adding a job right now, or worse yet, may make them 
look at, hey, I may have to have my workforce by 2014 because I 
can't do what you've asked me to do?
    Chairman Bernanke. No, we have heard around the country 
that uncertainty, both economic uncertainty, where's the 
recovery going, and policy uncertainty; uncertainty about what 
the regulatory environment is going to look like, has had some 
adverse effects on businesses because they don't know how to 
plan. They don't know exactly what the environment is going to 
look like.
    And so, while it is very important of course that on these 
very important issues of health care, and environment, and 
regulatory reform and so on that Congress do a deliberative 
process and come up with the best possible outcomes. Obviously 
earlier resolution and clarity is better than delay. So that is 
certainly an issue to try to reduce that overhang of 
uncertainty.
    Representative Burgess. Although many more people were 
asking us to look at the problems with jobs and joblessness 
than there were asking us to deal with a problem with global 
warming, and health care inequities. I mean, the numbers are 
stark.
    My time is going to run out again. You were talking with 
Senator Klobuchar about the commission, the deficit commission, 
or as I like to call them, the debt panels, that have been 
created. And of course Congress, the House in particular, we do 
control the purse strings.
    You talked when you were in Dallas, and in fact your 
comments were, nothing prevents us from beginning now to 
develop a credible plan for meeting our long-run fiscal 
challenges. I agree with you. I just think that ought to come 
from the legislative body and not from an Executive Order on a 
death--I mean a debt commission.
    So are you familiar with Ranking Member Paul Ryan on the 
Budget Committee has what he describes as a Roadmap for 
America's future? It's a big lift, but he tackles Tax Code, 
Medicare, Social Security, as sort of one single entity and 
tries to deal with our long-term fiscal future from that 
standpoint.
    Wouldn't that be a better way of going about looking at 
this, rather than the targeted reductions that a commission is 
going to come back with?
    Chairman Bernanke. Well just in general I think the 
entitlements--Social Security, and especially Medicare--are 
quantitatively a very big part of the fiscal issue going 
forward, and I think creative thinking in general about how to 
control those costs is extremely important.
    To go back to your question about health care costs for the 
small business, it's not just the fiscal issue but anything we 
can do to reduce the costs of health care to make it more 
effective and efficient is going to help not only the federal 
budget, but it's going to help the functioning of the economy.
    So I can only agree and encourage any kind of creative 
thinking about bringing forth proposals. And as they come from 
Congress, as you say, all the better. The trouble is that, you 
know, obviously by its nature, you know, Congress is often very 
focused on the near term and it is hard to get the attention on 
the very long-term issues.
    Representative Burgess. Yes. Unfortunately this bill that 
we passed in health care, 4,000 pages that did nothing, nothing 
to reduce the long-term cost of health care other than provide 
for rationing in the very near future.
    Thank you, Madam Chairwoman, I will yield back my time.
    Chair Maloney. I thank the gentleman. And CBO estimates 
that over the 20 years it will save the economy a trillion 
dollars with that health care bill.
    Mr. Chairman, may I ask you, in your opinion what is the 
primary source of risk to the recovery at this time? And what 
is your assessment of the risk of a double-dip recession?
    Chairman Bernanke. I was always fairly humble about 
forecasting. In the last few years, I have become extremely 
humble about forecasting, so I have to be very cautious.
    But having said that, I think there's a pretty broad view 
that we are seeing some building momentum in final demand. 
Consumer spending looks to be picking up. At least equipment 
and software investment looks healthy. The broader global 
economy is stronger, which implies more exports.
    So it looks like we are on a path to moderate recovery, and 
that the risk of a double-dip, while certainly not negligible, 
is certainly less than it was a few months ago.
    That being said, there are any number of possible things 
that could derail it. If for whatever reason consumers under 
the pressure of a weak labor market and tough balance sheets 
decided to become more conservative and slow their spending, a 
financial problem emanating from, I don't know, Greece or 
whatever so-far unknown source that could cause more problems 
in the financial markets. There are all kinds of scenarios you 
could imagine. Oil prices being driven up by a geopolitical 
problem.
    So one could certainly imagine, and one thing we do in our 
Federal Open Market Committee meetings is look at alternative 
simulations and alternative scenarios that look at alternative 
possibilities that could occur. But right now, again as I said 
at the beginning, it looks like the financial markets are more 
stable.
    Banks are still working their way out of a period of high 
losses and financial stress, but they are making progress. The 
consumer looks to be doing better. So for all those reasons I 
think the best bet is that we'll see a moderate recovery.
    But of course again forecasting is not a precise business.
    Chair Maloney. So we are making progress, but have not 
achieved total success.
    What happens, Chairman Bernanke, if the unemployment rate 
does not decline as the economy improves?
    Chairman Bernanke. Well that is a possible risk. So we 
anticipate the unemployment rate is likely to decline 
relatively slowly, and there are a couple of factors that will 
affect that.
    One is the pace of overall growth. Obviously if growth is 
only moderate, that will not quickly lower the unemployment 
rate. That is the first observation.
    The second observation has to do with the rate of 
productivity. Following the 2001 recession, productivity gains 
were quite significant, which is a good thing generally, but 
meant that firms were relatively slow in bringing workers back 
because they didn't need to. They had productivity gains in 
order to meet demand.
    We've seen remarkable productivity gains in the last year 
or so in the U.S. economy. We don't anticipate productivity 
growth will continue at that rate going forward, but if it does 
then that may reduce the number of workers that firms need to 
bring back in order to meet demand.
    So there is a possibility. I wouldn't consider it the 
leading possibility, but there is a possibility that 
unemployment will stay stubbornly high, around 10 percent. If 
that were to happen, that would be one of the risks that we 
were just discussing because that would reduce consumer 
confidence and make them concerned about their ability to 
sustain their spending.
    Chair Maloney. You took some creative steps in creating new 
lending facilities. I believe the only funding facility still 
operating is TALF, and when does the Federal Reserve plan to 
close TALF, or do you plan to make this facility permanent?
    And also, a prime concern from the District that I 
represent in New York is the commercial real estate crisis. I 
would like to know, are there any additional actions that can 
be taken by Congress or others to protect against the crisis in 
commercial real estate? And where do you see this going 
forward?
    Chairman Bernanke. So the only remaining facility is in 
fact the TALF for commercial real estate, and we left it in 
longer because of the extra needs there and because it takes 
longer to bring the commercial mortgage-backed security deals 
to market.
    However, we're planning to close that on June 30th because 
we we're only making those loans on an emergency basis, and we 
do have to justify having this emergency program. And we have 
in fact seen improvements in the commercial mortgage-back 
security market. So our current plan is to close that at the 
end of June.
    On commercial real estate, that is for many banks, 
particularly small- and medium-sized banks, that is a very big 
challenge. And we're seeing a few glimmers of improvement, but 
it's still going to be perhaps a few more quarters before banks 
have worked through their commercial real estate book and have 
gotten to the point where they have complete control and 
understanding of their losses and risks in that area.
    So once again, as in our capacity as bank supervisor the 
Fed has, along with the other supervisors, has issued new 
guidance on commercial real estate. Among other things, we want 
to encourage workouts in the same way that government policy 
has been to help residential mortgages, to help residential 
borrowers work out troubled mortgages, we'd like to see the 
same thing happen for commercial real estate mortgages.
    In fact, we believe that is happening in many cases, and we 
want to promote that. And again we have instructed our 
examiners to work with banks to try to work out problem loans, 
and in general to maintain the flow of credit wherever 
possible.
    So it is a difficult problem. And in part now it's not just 
a financing issue, it's just fundamentals, prices of commercial 
real estate have fallen by 40 percent in many places. Vacancy 
rates are up. Rents are down. And so it is understandable that 
there are going to be some stresses in this market. So we are 
going to continue to work with banks to try to help work 
through that.
    There have been periods in the past where commercial real 
estate has created a lot of banking problems, as you know, and 
eventually we do work through it. But it is going to cause a 
problem for a number of banks in the near-term.
    Frankly, I don't know what to suggest to Congress. I think 
ultimately that the banking system and the borrowers are going 
to have to find solutions and work through this as quickly as 
possible.
    Chair Maloney. Mr. Brady.
    Representative Brady. Madam, I have about a thousand 
questions, but in the interest of time, two proposals have been 
floated to increase banking taxes and enact a transaction fee 
on trades. One purportedly to pay back the TARP, although the 
banking sector is going to be repaying plus some. The 
transaction fee I think is simply a way to raise revenue.
    Your views on those taxes? And the banking one seems to be 
almost a global effort to increase taxes on banks that have 
international relationships and connections. Your view?
    Chairman Bernanke. Well first on the tax on transactions, 
the Treasury has rejected that idea, which came up in other 
jurisdictions, and I think I agree with the Treasury's judgment 
on that.
    The problem is that, by taxing transactions, you would 
greatly reduce liquidity in markets. And people who are just 
ordinary investors transacting in those markets would find that 
bid-ask spreads had gotten much wider and much more costly for 
them to buy and sell assets and to hedge their portfolios and 
so on.
    And indeed what would probably happen is that, so long as 
there was any jurisdiction in the world that didn't have those 
transaction taxes, everything would go offshore and you 
probably wouldn't collect very much in terms of taxes. In the 
current world, I don't think that's a very good way to raise 
revenue.
    The fee on financial institutions, it is basically a tax 
and as such it is up to the Congress to decide whether it wants 
to raise revenue through taxing large financial institutions.
    I think the only observation I would make there is that it 
should be structured, if you do do it, it should be structured 
in a way that doesn't create unnecessary problems.
    So, for example, one of the original ideas was to tax based 
on leverage, but some further investigation and discussion sort 
of revealed that that would cause very severe problems in the 
repo market that would essentially disrupt some very important 
markets because it would create essentially a tax on certain 
kinds of transactions.
    So there are other ways to create the tax base, if that's 
the way you want to go, and so my only advice there is, if 
Congress decides that you want to raise revenue through that 
particular method, and you can justify it just as a general 
revenue measure as well as a repayment, if you wish, that you 
do it in a way that minimizes the disruptive implications for 
the markets.
    Representative Brady. A final point, a real quick question. 
You know, SEC aside, I do think there is merit in allowing 
banks to set aside greater capital reserves during good 
economic times to be able to make it through the tougher times.
    Spain uses a model that provides that--it seems to have 
done, in the banking sector, fairly well in the financial 
recovery--unlike in pensions where the IRS takes a dim view of 
companies setting aside too much reserves during good times, 
seeing it as tax evasion.
    Is there merit in Congress specifically addressing the 
issue of banks being able to put aside more reserves during 
good times, you know, regardless necessarily of the--maybe 
setting aside per category versus per specific loans in order 
to build up those reserves for times like this?
    Chairman Bernanke. I don't know whether it is best handled 
by Congress or by the regulators, but the basic idea I 
certainly agree with, which is that a lot of the reserve policy 
was governed by a desire to avoid income smoothing and those 
kinds of things.
    Representative Brady. Sure.
    Chairman Bernanke. And as a result, the main purpose of 
reserves--which is to protect against losses--was lost. And 
there was not enough reserving done in advance of the crisis. 
So I am very much in favor, and I think the world is coming 
around to the view that banks should be allowed to reserve not 
only for known losses but for, you know, yet unknown but 
nevertheless predictable losses that they will face in the 
future.
    So, yes, I very much encourage the regulators and Congress 
to look at ways to make sure that banks are able to reserve 
substantially during good periods so that they can run it down 
during a crisis.
    Representative Brady. Makes sense. Thanks, Chairman.
    Chair Maloney. Mr. Chairman, we understand that you have to 
leave, but I would like to give Representative Cummings an 
opportunity to ask his questions. Because of other committee 
commitments, he was not able to be here for the first round of 
questions. Do you have time?
    Chairman Bernanke. Certainly.
    Representative Cummings. Thank you, Madam Chair. I 
apologize. I had to be on the Floor to argue three bills, and 
so I apologize, because I really wanted to hear all of your 
testimony. And I know, my staff tells me that we've gone over 
small business quite a bit.
    But you did say one thing before I left that I was just 
curious about, when you were talking about the consumer 
protection agency, and you implied that when borrowers were 
having difficulty getting access to credit it might not be a 
bad idea--or it might be helpful, and you correct me if I'm 
wrong, if the consumer protection agency was inside the Fed. Is 
that a fair statement? Is that what you said?
    And then I want you to explain it to me.
    Chairman Bernanke. No. What I said was that there would be 
some benefit of the consumer protection agency working in a way 
that is cooperative with the bank safety and soundness 
regulators and examiners. Because the safety and soundness 
examiners would have an understanding of the implications of 
the consumer protection rules for the costs and the business 
models of the banks, which in turn would affect whether or not 
credit would be constrained.
    Because you don't want to create rules that just mean that 
people can't get credit.
    Representative Cummings. Yes, yes. The thing, you know, 
there's something going on here in our country, and the 
President, before he became President, said something that I 
found--I quote him all the time--he said: We have an empathy 
deficit. He's been saying this long before he became President.
    And, you know, I look at what has happened in the health 
care area. I look at what is happening in the financial area. 
It seems almost that it is okay, it seems okay, with some folks 
that if people fail, or if they are too weak in a moment, just 
let them die, let them fall off the cliff.
    And when we talk about these small businesses, I sat in a 
meeting yesterday in Baltimore in my District and literally 
people were in tears. These were people, good business people, 
who have had impeccable records. Now they can't get a line of 
credit. They've got business that they could do, but they can't 
get a line of credit. They had one. And so it seems to me, I 
just refuse to believe that we cannot help these Americans who 
go out there every day, do the right thing, not trying to get a 
big bonus, just trying to do the right thing, employ their 
employees, produce what they're supposed to produce, but yet 
and still it seems like when it comes to them, it's okay to 
say, you know, Johnny, sorry, you know, yeah, we're going 
through this economic storm, you're going to be collateral 
damage. Collateral damage means you die in the process--that 
is, your business dies. You may never come back to do this 
business again. And it's okay.
    And like I said, I felt the same thing when we were dealing 
with the health bill. You know, it's like, okay, 45,000 
Americans die? All right. Too weak. Let them go. That's not the 
spirit of this country. That's not the country that I grew up 
in. And that's not the country that I believe in.
    So I am just wondering--and I know the Fed has certain 
powers and certain things, and maybe you can't force people, 
the banks to lend, whatever, but there's something awfully 
wrong. And you basically--and I know that there are some folk 
who the credit may not be what it is, but there are a lot of 
people who have decent credit, and who were doing fine, and 
could get the business. The business is like right there, and 
they cannot reach it because they cannot get the money.
    As I told my constituents yesterday, sometimes $25,000 is 
worth $10 million because it acts as a bridge. So, you know, I 
had a lot of questions I wanted to ask, but I beg you to even 
go further. And I know you've been--and I support you 100 
percent, Mr. Bernanke, but I just believe with all my heart 
that we can do better. I just do.
    And I don't know what that better is. I read in the papers 
where the banks say they're doing okay, they're paying the 
money back and whatever, while my folks are drowning. There's 
something wrong with that picture. It doesn't make sense.
    I know it's complicated, but we have brilliant people like 
you and your staff to figure it out. Comment?
    Chairman Bernanke. Yes. It is very important from an 
empathy perspective and from an economic perspective to get 
small business growing again. Absolutely. I talked a lot today 
about what we're doing with banks in our supervisory and I just 
want to reiterate that we are looking for feedback and ideas 
from the banks and others who will give us more explicit 
suggestions, because we are really working hard on this.
    But let me also say that there are things that Congress is 
doing and can do. There's money that's flowed through the 
CDFIs, which has helped community development. There are 
proposals to use TARP money to incentivize small banks to make 
loans to small businesses.
    There's the SBA. So there are things that can be done, and 
if Congress wants to go in that direction there are instruments 
that can be used.
    Representative Cummings. We have to do our part, and we 
know you're going to continue to do your part.
    [The prepared statement of Representative Cummings appears 
in the Submissions for the Record on page 54.]
    Chair Maloney. The gentleman's time has expired. And I know 
we're up against----
    Representative Cummings. Thank you, Mr. Chairman.
    Chair Maloney [continuing]. Time constraints, but in the 
spirit of Bipartisanship, Congressman Burgess has requested the 
consideration of a one-minute last question, if your time is--
--
    Chairman Bernanke. Certainly.
    Representative Burgess. Thank you. And thank you, Chairman, 
for your visit today. I hope you see the exchange has been 
cordial and collegial, and I hope we will be able to see you 
back sooner rather than later because there are a lot of 
important things.
    Just on that issue of TARP, though, TARP was supposed to 
die last December 31st, and people know that, and they're 
angered that TARP is still there. TARP is not to be a slush 
fund for any activity, no matter how benign it might seem. 
That's the wrong way to go. Find another way to fund that, but 
not TARP. Let's let TARP die.
    I just do have to ask you, because two years ago when we 
were cruising into this really rocky part of the economy, one 
of the early--perhaps not the early, but a mid-level harbinger 
was $5 a gallon diesel and $4 a gallon gasoline in the summer 
of 2008.
    I've got to tell you, I filled up right before I left and 
$2.78 for regular gasoline in the DFW market in Texas. In a 
month we get the clean air stuff where we've got to be buying 
these special blends. It goes up a dollar. So by the end of May 
we will be paying nearly $4 a gallon for gasoline again.
    Is the price of oil, the price of fuel, unimportant now in 
the consideration for the global economy? And if it is 
unimportant, at what price point does it become important 
again?
    Chairman Bernanke. Well every dollar that the price of oil 
goes up is another dollar out of the pockets of consumers, and 
that makes it harder for them to spend on other things. And it 
also adds to inflation. So it is definitely a negative.
    We are at $85 a barrel right now. The forward curve is 
pretty flat. Markets don't expect large increases in the 
future, but we don't know. We'll have to watch it very 
carefully. It depends a lot on global economic activity, which 
has been stronger generally speaking than in the U.S. and 
Europe.
    So of course we are still a long way from $145, which is 
where we were a couple of summers ago. So I do not think at 
this point that the price of oil is a serious threat to the 
recovery, but clearly if it moved a lot it would be a negative, 
and we have to watch that and be careful.
    Representative Burgess. It looks like for what the consumer 
sees, at least in my market, it may be very close to what it 
was two summers ago.
    Chairman Bernanke. Yes, I do not understand that dollar 
extra from oil?
    Representative Burgess. Well because the summer driving 
season they always jack the price up----
    Chairman Bernanke. Okay.
    Dr. Burgess [continuing]. Supply and demand. And then of 
course the Clean Air Act does require we use special ethanol 
blends that always cost more. You've got to transport the 
ethanol. It's more expensive. And that is a whole separate 
discussion. But I've got to believe it is going to play a role 
in the recovery, and it is likely not going to be a positive 
role.
    Chairman Bernanke. Natural gas prices are down.
    Representative Burgess. Yeah. That is actually not a good 
thing for my District. We would like to see those back up.
    Chair Maloney. Thank you once again, Chairman Bernanke, for 
testifying today. Since you testified last May, the economy has 
shown great progress. And the unprecedented actions taken by 
the Federal Reserve to inject liquidity into our financial 
system played a key role in the turnaround of the economy.
    I look forward to working with you in the future, and the 
Committee looks forward to working with you as we continue to 
build on the economic progress so far, and certainly on our 
goal of employing more Americans.
    Thank you so much for your testimony and for staying even 
past your time. So we really, really do appreciate it. Thank 
you.
    Chairman Bernanke. Thank you, Madam Chair.
    Chair Maloney. We are adjourned.
    [Whereupon, at 12:21 p.m., Wednesday, April 14, 2010, the 
hearing was adjourned.]
                       SUBMISSIONS FOR THE RECORD

 Prepared Statement of Carolyn Maloney, Chair, Joint Economic Committee
    America is on a path toward economic recovery. A large part of the 
credit for this turnaround is due not only to President Barack Obama 
but also to Ben Bernanke, the Chairman of the Federal Reserve, a 
respected scholar on the Great Depression.
    Under his guidance, the Fed took creative and effective actions to 
inject liquidity into our financial system which saved our nation from 
economic catastrophe.
    I am confident that you will continue to steer monetary policy at 
the Fed carefully through the next set of obstacles balancing the 
creation of robust economic growth with the prevention of inflation.
    Our hearing today on the economic outlook is timely for many 
reasons.
    Just this week, the committee of economists responsible for dating 
the end of recessions announced that the recovery is still too fragile 
to announce that the recession is over.
    But there are indications that we are indeed well on our way to 
economic recovery:

      After 4 straight quarters of negative growth, the economy 
grew during the last two quarters of 2009. There is a consensus that 
when the latest GDP numbers are announced on April 30th, we will see 
that our economy continued to expand during the first quarter of 2010.
      The most recent employment report showed that 162,000 
jobs were created in March, with three-fourths of those new jobs coming 
from the private sector.
      Manufacturing employment was up for 3 straight months.
      The stock market is at its highest in almost 15 months.
      Temporary help, a leading indicator of the health of the 
labor market, has added 313,000 jobs since October 2009.
      Sales of cars and light trucks were up in March.
      And many surveys of the economy are optimistic about 
growth in both the service and manufacturing sectors.

    These improvements in our economy are proof that actions taken by 
Congress, the Fed, and the Administration have started to have an 
impact.
    In the last year, Congress enacted policies that supported 
struggling families and encouraged job creation. The Recovery Act 
provided tax relief for 95 percent of American families and created 
jobs while investing in clean energy technologies, infrastructure, and 
education.
    Last year, we extended the $8,000 first-time homebuyers credit that 
will spur construction jobs. We extended a host of safety net programs 
that will help struggling families weather the economic storm. We 
extended the net operating loss carry-back provision that will help 
small businesses hire new employees. And we are boosting funding for 
small business loans via the Small Business Administration.
    We passed the HIRE Act to give tax breaks to businesses that hire 
unemployed workers.
    Without these measures the depth of the contraction would have been 
much deeper and far longer.
    Although the recent estimates of the cost of the bailout of the 
financial system are much lower than initially expected, the true cost 
of the financial system failure in terms of lost employment is 
immeasurable.
    Much of the budget deficit over the next 10 years should be 
attributed to the financial crisis--economists have estimated that the 
budget deficit has increased by $3.1 trillion due to the decline in tax 
revenues from the long line of workers who have lost their jobs.
    While we have come far in stabilizing the financial system, we 
would like to hear your thoughts on various reform proposals that have 
been introduced in this Congress to make sure that financial 
institutions don't take on excessive risk and have appropriate capital 
requirements.
    We also look forward to hearing your take on upcoming challenges, 
including the housing market. One important factor in the housing 
market's current recovery is the low mortgage interest rates that were 
sustained by the Fed's purchases of mortgage-backed securities and 
Fannie and Freddie debt.
    Now that the Fed has completed those purchases, we would like to 
hear your assessment of the housing market and the impact of the Fed's 
exit on mortgage rates.
    On another note, I am grateful for your leadership in ushering in 
new rules to prevent unfair or deceptive practices with respect to 
credit card accounts and the rules the Fed put into place to curb 
excessive overdraft fees.
    Chairman Bernanke, we thank you for your testimony and I look 
forward to working with you as the committee continues our focus on 
fixing the economy, putting people back to work, and helping struggling 
families.
                               __________
            Prepared Statement of Representative Kevin Brady
    I am pleased to join in welcoming Chairman Bernanke before the 
Committee.
    The Federal Reserve's injection of $1.3 trillion of liquidity in 
the fall of 2008 quelled the panic in financial markets. Although I 
disagree with the Fed's participation in the ``bailouts'' of AIG and 
Bear Stearns because these institutions were insolvent, the Fed's 
timely actions as lender of last resort to solvent, but illiquid 
financial institutions and markets prevented the financial panic from 
becoming a depression.
    During the spring of 2009, the Supervisory Capital Assessment 
Program, commonly known as the ``stress test,'' and the subsequent 
capital increases by large banks restored confidence in financial 
institutions and markets. Largely because of these decisive actions, 
the U.S. economy is now beginning to recover. However, the recovery 
will continue to be subpar as businesses delay critical hiring and 
investment decisions due to the uncertainty generated by the dangerous 
level of federal debt and proposals by President Obama and 
Congressional Democrats to increase taxes, raise energy prices, and 
enact job-killing regulations.
    Despite recent guidance from Washington to bank examiners about 
commercial mortgage loans, I am concerned that bank examiners are 
exacerbating real estate problems through their inflexibility. Pressed 
by their regulators, community and regional banks may not be renewing 
some performing commercial mortgage loans even though their underlying 
cash flow can easily service the debt.
    That said, I would like to share with you my concerns about 
monetary policy going forward. We are in danger of repeating the 
mistakes that produced stagflation in the 1970s. Because of the lag 
time between monetary policy decisions and their effects, the Federal 
Reserve must act to prevent inflation well before the public perceives 
that prices are rising.
    Yet there are voices demanding that the Federal Reserve delay 
action. Recently, economist Laurence Ball advocated keeping the federal 
funds rate extraordinarily low even as prices rise to reduce the 
unemployment rate, notwithstanding the fact that the so-called Phillips 
Curve trade-off between inflation and unemployment had been thoroughly 
discredited three decades ago.
    Price stability contributes to economic growth, and only the 
Federal Reserve can maintain price stability. My concern is that 
Administration officials may press the Federal Reserve to delay raising 
interest rates and unwinding the expansion of its balance sheet to 
cover for the Obama's anti-growth policies.
    Taxes, especially on small businesses and investment, are about to 
soar as the 2001 and 2003 rate reductions expire and $569 billion of 
new taxes to fund Obama's health care scheme are implemented. 
Additional costs are lurking in the form of regulations to control 
``greenhouse gas'' emissions and complex ``cap and trade'' legislation.
    Despite these tax increases, the CBO projects that higher spending 
under the President's budget would create deficits of $9.8 trillion 
over the next ten fiscal years, spiking publicly held federal debt to 
90 percent of GDP by 2020. Unless Congress controls federal spending, 
these deficits will crowd-out private investment and slow economic 
growth.
    Chairman Bernanke, I urge you to resist any attempt to delay 
raising interest rates in order to offset these anti-growth policies.
    Regarding financial services legislation, I am concerned about 
weakening the Fed's independence, institutionalizing ``too big to 
fail,'' and perpetuating the status of Fannie and Freddie as zombie 
banks. Making the President of the Federal Reserve Bank of New York a 
political appointee and stripping the supervision of smaller banks and 
their holding companies from the Fed would weaken the regional Reserve 
Banks and undermine the Fed's independence. Moreover, diverting the 
Fed's profits from the Treasury to pay for the Consumer Financial 
Protection Bureau would set a dangerous precedent that could open the 
floodgates for other off-budget federal spending.
    The perverse incentives arising from the presumption of government 
backing caused large financial institutions, especially Fannie and 
Freddie, to take excessive risks and inflate a huge bubble in the 
housing market. Instead of ending ``too big to fail,'' the Senate bill 
would establish a permanent bailout fund for large financial 
institutions that may exacerbate this problem by identifying who the 
government regards as too big to fail.
    Incredibly, the Senate bill does not provide for final resolution 
of Fannie Mae and Freddie Mac despite costing taxpayers $128 billion so 
far with no prospect for any recovery. Like walking zombies, Fannie and 
Freddie with their explicit government backing are frightening most 
private capital away from re-entering housing finance.
    Chairman Bernanke, I look forward to your testimony.
                               __________
  Prepared Statement of Senator Sam Brownback, Ranking Minority Member
    Thank you Chairwoman Maloney for arranging today's hearing and 
thank you Chairman Bernanke for testifying today about the economic 
outlook.
    I am anxious to hear your update on the status of and outlook for 
the nation's economy. I am equally interested in probing your views on 
a number of other issues regarding the structure and role of the 
Federal Reserve in monetary policy and financial regulation. Lastly, I 
hope we can discuss the frightening fiscal picture facing the United 
States and the implications that the massive run up in federal spending 
and debt will have on future economic growth.
    Although the U.S. has experienced positive economic growth since 
the second half of 2009, the labor market remains incredibly weak and 
unemployment is not expected to fall below 8.0% until 2012. The 
official unemployment rate of 9.7%, while unacceptably high, masks the 
weakness in the labor market. For the first time since 1962, we have 
witnessed year over year declines in the civilian labor force--a 
disturbing trend.
    The Federal Reserve's aggressive actions continue to prop up the 
economy through exceptionally low interest rates, as well as close to 
$2.0 trillion in purchases of long-term securities. There has been some 
concern, both among economists and policymakers as well as within the 
FOMC, that maintaining interest rates at record-low levels could 
contribute to an increase in financial imbalances and heightened risks 
for long term macroeconomic and financial stability. I am interested in 
hearing what indicators you will be watching for an indication that the 
economy has reached a level of strength that the Federal Reserve can 
shift its accommodative posture by increasing interest rates, begin 
selling its long-term securities, or engage in a combination of both.
    The Federal Reserve has played a monumental role in management of 
the financial crisis that began in 2008. Although there is little doubt 
that the Federal Reserve's actions have, on net, helped alleviate the 
financial crisis and economic downturn, many of the decisions made by 
the Federal Reserve have been quite controversial. The actions of the 
Federal Reserve and of the Federal Open Market Committee (FOMC) are 
highly dependent upon the members and makeup of the Federal Reserve. I 
have long been concerned that too much power is concentrated in the 
hands of Washington and New York to the detriment of the rest of the 
nation.
    Presently, the Federal Reserve Bank of New York enjoys a special 
status and privilege. Unlike other regional Federal Reserve Banks, it 
has a permanent seat on the FOMC. Unfortunately, the financial reform 
legislation passed out of the Senate Banking Committee on a strictly 
partisan vote goes in the wrong direction. The legislation would expand 
upon the special status enjoyed by the NY Fed by making its president a 
presidential appointment. This will only serve to politicize the FOMC 
and ensure that the interests of Washington and New York are even more 
dominant.
    When financial reform legislation reaches the Senate floor, it is 
my intention to offer an amendment that will eliminate the special 
status afforded to the Federal Reserve Bank of New York by 
restructuring the FOMC to ensure that the rest of the country has a 
voice equal to, if not greater than, Washington and New York.
    Another concerning aspect of the financial reform legislation 
recently passed out of the Senate Banking Committee is the elimination 
of the Federal Reserve's supervision of nearly 6,000 small and midsized 
banks. The Kansas banking community is particularly troubled by the 
potential transfer of supervision from regional Federal Reserve Banks 
to the FDIC. The current relationship between the regional Federal 
Reserve banks and the institutions they monitor provides important 
insight into economic conditions facing small businesses around the 
country. A loss of this relationship and information could potentially 
strip the Fed of important information used in its policymaking 
decisions.
    My final concern with the legislation passed by the Senate Banking 
Committee is that it seems not to have ended the notion of ``too big to 
fail,'' but rather to have simply institutionalized it.
    I am interested to hear Mr. Bernanke's opinion on the makeup of the 
FOMC, on the proposed change in supervision of small and midsized 
banks, as well as the proposed institutionalization of ``too big to 
fail.''
    Finally, although fiscal policy is outside the domain of the 
Federal Reserve, it nonetheless is an issue that significantly affects 
both current and future economic and financial conditions, not to 
mention the prospective climate and lifestyle we will leave to our 
children and grandchildren.
    After a record deficit in 2009, the budget deficit in 2010 will 
exceed 10% of GDP. That is, the U.S. will spend 71% more than it 
collects in tax revenues this year. And yet, despite the bleak fiscal 
outlook, the Administration and Congress continue to propose and pass 
massive new spending initiatives, such as the $2.6 trillion healthcare 
entitlement. These costly and most likely inefficient programs will 
stay with us forever and be paid for by hard working Americans.
    The situation is even more disturbing when you consider that 18%, 
nearly one out of every five dollars of personal income in the country 
is the result of a transfer payment from some level of government. In 
contrast, at the end of 2000, less than 13% of personal income was 
derived from government transfer payments. This is an unsustainable 
trend.
    With publicly held debt set to reach 90% of GDP by 2020 under the 
President's proposed budget, I am concerned that the U.S. is on the 
brink of a tipping point where our international creditors lose 
confidence in the United States. It seems that we are moving from a 
housing bubble to a government-debt bubble. But unlike Wall Street or 
smaller countries such as Greece, no one will be there to bail out the 
U.S. Rather, our failure to confront out-of-control spending and 
entitlement programs puts us at risk of suffering decades of 
substandard economic growth and of losing our prominent role in the 
global economy.
                               __________
Prepared Statement of Ben S. Bernanke, Chairman, Board of Governors of 
                       the Federal Reserve System
    Chair Maloney, Vice Chairman Schumer, Ranking Members Brownback and 
Brady, and other members of the Committee, I am pleased to be here 
today to discuss economic and financial developments. I will also make 
a few remarks on the fiscal situation.
                          the economic outlook
    Supported by stimulative monetary and fiscal policies and the 
concerted efforts of policymakers to stabilize the financial system, a 
recovery in economic activity appears to have begun in the second half 
of last year. An important impetus to the expansion was firms' success 
in working down the excess inventories that had built up during the 
contraction, which left companies more willing to expand production. 
Indeed, the boost from the slower drawdown in inventories accounted for 
the majority of the sharp rise in real gross domestic product (GDP) in 
the fourth quarter of last year, during which real GDP increased at an 
annual rate of 5.6 percent. With inventories now much better aligned 
with final sales, however, and with the support from fiscal policy set 
to diminish in the coming year, further economic expansion will depend 
on continued growth in private final demand.
    On balance, the incoming data suggest that growth in private final 
demand will be sufficient to promote a moderate economic recovery in 
coming quarters. Consumer spending continued to increase in the first 
two months of this year and has now risen at an annual rate of about 
2\1/2\ percent in real terms since the middle of 2009. In particular, 
after slowing in January and February, sales of new light motor 
vehicles bounced back in March as manufacturers offered a new round of 
incentives. Going forward, consumer spending should be aided by a 
gradual pickup in jobs and earnings, the recovery in household wealth 
from recent lows, and some improvement in credit availability.
    In the business sector, capital spending on equipment and software 
appears to have increased at a solid pace again in the first quarter. 
U.S. manufacturing output, which is benefiting from stronger export 
demand as well as the inventory adjustment I noted earlier, rose at an 
annual rate of 8 percent during the eight months ending in February. 
Also, as I will discuss further in a moment, financial conditions 
continue to strengthen, thus reducing an important headwind for the 
economy.
    To be sure, significant restraints on the pace of the recovery 
remain, including weakness in both residential and nonresidential 
construction and the poor fiscal condition of many state and local 
governments. Sales of new and existing homes dropped back in January 
and February, and the pace of new single-family housing starts has 
changed little since the middle of last year. Outlays for 
nonresidential construction continue to contract amid rising vacancy 
rates, falling property prices, and difficulties in obtaining 
financing. Pressures on state and local budgets, though tempered by 
ongoing federal support, have led to continuing declines in employment 
and construction spending by state and local governments.
    As you know, the labor market was particularly hard hit by the 
recession. Recently, we have seen some encouraging signs that layoffs 
are slowing and that employment has turned up. Manufacturing employment 
increased for a third month in March, and the number of temporary 
jobs--often a precursor of more permanent employment--has been rising 
since last October. New claims for unemployment insurance continue on a 
generally downward trend. However, if the pace of recovery is moderate, 
as I expect, a significant amount of time will be required to restore 
the 8\1/2\ million jobs that were lost during the past two years. I am 
particularly concerned about the fact that, in March, 44 percent of the 
unemployed had been without a job for six months or more. Long periods 
without work erode individuals' skills and hurt future employment 
prospects. Younger workers may be particularly adversely affected if a 
weak labor market prevents them from finding a first job or from 
gaining important work experience.
    On the inflation front, recent data continue to show a subdued rate 
of increase in consumer prices. For the three months ended in February, 
prices for personal consumption expenditures rose at an annual rate of 
1\1/4\ percent despite a further steep run-up in energy prices; core 
inflation, which excludes prices of food and energy, slowed to an 
annual rate of \1/2\ percent. The moderation in inflation has been 
broadly based, affecting most categories of goods and services with the 
principal exception of some globally traded commodities and materials, 
including crude oil. Long-run inflation expectations appear stable; for 
example, expected inflation over the next 5 to 10 years, as measured by 
the Thomson Reuters/University of Michigan Surveys of Consumers was 
2\3/4\ percent in March, which is at the lower end of the narrow range 
that has prevailed for the past few years.
                     financial market developments
    Financial markets have improved considerably since I last testified 
before this Committee in May of last year. Conditions in short-term 
credit markets have continued to normalize; spreads in bank funding 
markets and the commercial paper market have returned to near pre-
crisis levels. In light of these improvements, the Federal Reserve has 
largely wound down the extraordinary liquidity programs that it created 
to support financial markets during the crisis. The only remaining 
program, apart from the discount window, is the Term Asset-Backed 
Securities Loan Facility for loans backed by new-issue commercial 
mortgage-backed securities, and that facility is scheduled to close at 
the end of June. Overall, the Federal Reserve's liquidity programs 
appear to have made a significant contribution to the stabilization of 
the financial system, and they did so at no cost to taxpayers and with 
no credit losses.
    The Federal Reserve also recently completed its purchases of $1.25 
trillion of federal agency mortgage-backed securities and about $175 
billion of agency debt. Purchases under these programs were phased down 
gradually, and to date, the transition in markets has been relatively 
smooth. The Federal Reserve's asset-purchase program appears to have 
improved market functioning and reduced interest-rate spreads not only 
in the mortgage market but in other longer-term debt markets as well.
    On net, the financial condition of banking firms has strengthened 
markedly during recent quarters. Last spring, the Federal Reserve and 
other banking regulators evaluated the nation's largest bank holding 
companies under the Supervisory Capital Assessment Program, popularly 
known as the stress test, to ensure that they would have sufficient 
capital to remain viable and to lend to creditworthy borrowers even in 
a worse-than-expected economic scenario.\1\ The release of the stress 
test results significantly increased market confidence in the banking 
system. Greater investor confidence in turn allowed the banks to raise 
substantial amounts of new equity capital and, in many cases, to repay 
government capital. The Federal Reserve and other bank regulators 
continue to encourage the banks to build up their capital, ensure that 
they have adequate liquidity, improve their risk management, and 
restructure their employee compensation programs to better align risk 
and reward.
---------------------------------------------------------------------------
    \1\ For more on the SCAP, see Ben S. Bernanke (2009), ``The 
Supervisory Capital Assessment Program,'' speech delivered at the 
Federal Reserve Bank of Atlanta 2009 Financial Markets Conference, 
Jekyll Island, Ga., May 11, www.federalreserve.gov/newsevents/speech/
bernanke20090511a.htm; Board of Governors of the Federal Reserve System 
(2009), ``Federal Reserve, OCC, and FDIC release results of the 
Supervisory Capital Assessment Program,'' press release, May 7, 
www.federalreserve.gov/newsevents/press/bcreg/20090507a.htm; and Daniel 
K. Tarullo (2010), ``Lessons from the Crisis Stress Tests,'' speech 
delivered at the Federal Reserve Board International Research Forum on 
Monetary Policy, Washington, March 26, www.federalreserve.gov/
newsevents/speech/tarullo20100326a.htm.
---------------------------------------------------------------------------
    Despite their stronger financial positions, banks' lending to both 
households and businesses has continued to fall. The decline in large 
part reflects sluggish loan demand and the fact that many potential 
borrowers no longer qualify for credit, both results of a weak economy. 
The high rate of write-downs has also reduced the quantity of loans on 
banks' books. Banks have also been conservative in their lending 
policies, imposing tough lending standards and terms; this caution 
reflects bankers' concerns about the economic outlook and uncertainty 
about their own future losses and capital positions.
    The Federal Reserve has been working to ensure that our bank 
supervision does not inadvertently impede sound lending and thus slow 
the recovery. Achieving the appropriate balance between necessary 
prudence and the need to continue making sound loans to creditworthy 
borrowers is in the interest of banks, borrowers, and the economy as a 
whole. Toward this end, in cooperation with the other banking 
regulators, we have issued policy statements to bankers and examiners 
emphasizing the importance of lending to creditworthy customers, 
working with troubled borrowers to restructure loans, managing 
commercial real estate exposures appropriately, and taking a careful 
but balanced approach to small business lending.\2\ We have accompanied 
our guidance with training programs for both Federal Reserve and state 
examiners, and with outreach to bankers throughout the industry. For 
example, we just completed a training initiative that reached about 
1,000 examiners. We are also conducting a series of meetings across the 
country with private- and public-sector partners to gather information 
about the credit needs of small businesses and how those needs can best 
be met.
---------------------------------------------------------------------------
    \2\ See Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation, Office of the Comptroller of the 
Currency, and Office of Thrift Supervision (2008), ``Interagency 
Statement on Meeting the Needs of Creditworthy Borrowers,'' joint press 
release, November 12, www.federalreserve.gov/newsevents/press/bcreg/
20081112a.htm; Board of Governors of the Federal Reserve System, 
Federal Deposit Insurance Corporation, National Credit Union 
Administration, Office of the Comptroller of the Currency, Office of 
Thrift Supervision, and Conference of State Bank Supervisors (2010), 
``Regulators Issue Statement on Lending to Creditworthy Small 
Businesses,'' joint press release, February 5, www.federalreserve.gov/
newsevents/press/bcreg/20100205a.htm; Board of Governors of the Federal 
Reserve System, Division of Banking Supervision and Regulation (2009), 
``Prudent Commercial Real Estate Loan Workouts,'' Supervision and 
Regulation Letter SR 09-7 (October 30), www.federalreserve.gov/
boarddocs/srletters/2009/SR0907.htm; and Office of the Comptroller of 
the Currency, Federal Deposit Insurance Corporation, Federal Reserve 
Board, Federal Financial Institutions Examination Council and Office of 
Thrift Supervision (2009), ``Policy Statement on Prudent Commercial 
Real Estate Loan Workouts,'' joint policy statement, October 30, 
www.federalreserve.gov/boarddocs/srletters/2009/sr0907a1.pdf.
---------------------------------------------------------------------------
    We have also stepped up our information gathering, so that we can 
better understand factors that may be inhibiting bank lending. These 
efforts include a survey by examiners of banks' practices in working 
out loans, the results of which will serve as a baseline against which 
we will assess the effectiveness of our supervisory guidance. We are 
also obtaining additional information on small business credit 
conditions. For example, we assisted the National Federation of 
Independent Business in developing a survey to assess barriers to 
credit access by small businesses.\3\ And we are using our own Senior 
Loan Officer Opinion Survey on Bank Lending Practices to monitor 
changes in bank lending to small businesses.\4\
---------------------------------------------------------------------------
    \3\ See William J. Dennis (2010), ``Small Business Credit in a Deep 
Recession,'' National Federation of Small Business Research Foundation 
(Washington: NFIB, February), available at www.nfib.com/
ResearchFoundation.
    \4\ See Board of Governors of the Federal Reserve System, ``Senior 
Loan Officer Opinion Survey on Bank Lending Practices,'' webpage, 
www.federalreserve.gov/boarddocs/SnLoanSurvey.
---------------------------------------------------------------------------
                             fiscal policy
    In addition to the near-term challenge of fostering improved 
economic performance and stronger labor markets, we as a nation face 
the difficult but essential task of achieving longer-term 
sustainability of the nation's fiscal position. The federal budget 
deficit is on track this year to be nearly as wide as the $1.4 trillion 
gap recorded in fiscal year 2009. To an important extent, these 
extremely large deficits are the result of the effects of the weak 
economy on revenues and outlays, along with the necessary actions that 
were taken to counter the recession and restore financial stability. 
But an important part of the deficit appears to be structural; that is, 
it is expected to remain even after economic and financial conditions 
have returned to normal.
    In particular, the Administration and the Congressional Budget 
Office (CBO) project that the deficit will recede somewhat over the 
next two years as the temporary stimulus measures wind down and as 
economic recovery leads to higher revenues. Thereafter, however, the 
annual deficit is expected to remain high through 2020, in the 
neighborhood of 4 to 5 percent of GDP. Deficits at that level would 
lead the ratio of federal debt held by the public to the GDP, already 
expected to be greater than 70 percent at the end of fiscal 2012, to 
rise considerably further. This baseline projection assumes that most 
discretionary spending grows more slowly than nominal GDP, that no 
expiring tax cuts are extended, and that current provisions that 
provide most taxpayers relief from the alternative minimum tax are not 
further extended. Under an alternative scenario that drops those 
assumptions, the deficit at the end of 2020 would be 9 percent of GDP 
and the federal debt would balloon to more than 100 percent of GDP.\5\
---------------------------------------------------------------------------
    \5\ These figures have been calculated by the Federal Reserve using 
the CBO's estimates of the budgetary effects of selected policy 
alternatives to adjust the CBO's baseline budget projection released in 
a recent report (see Congressional Budget Office (2010), The Budget and 
Economic Outlook: Fiscal Years 2010 to 2020 (Washington: CBO, January), 
also available at www.cbo.gov/ftpdocs/108xx/doc10871/
frontmatter.shtml). The specific alternative policies used in these 
calculations included the CBO's estimates of the effects of reducing 
troop levels in overseas military operations to 60,000 by 2015, 
increasing regular discretionary appropriations at the rate of growth 
of nominal GDP, extending all expiring tax provisions, and indexing the 
alternative minimum tax for inflation.
---------------------------------------------------------------------------
    Although sizable deficits are unavoidable in the near term, 
maintaining the confidence of the public and financial markets requires 
that policymakers move decisively to set the federal budget on a 
trajectory toward sustainable fiscal balance. A credible plan for 
fiscal sustainability could yield substantial near-term benefits in 
terms of lower long-term interest rates and increased consumer and 
business confidence. Timely attention to these issues is important, not 
only for maintaining credibility, but because budgetary changes are 
less likely to create hardship or dislocations when the individuals 
affected are given adequate time to plan and adjust. In other words, 
addressing the country's fiscal problems will require difficult 
choices, but postponing them will only make them more difficult.
    Thank you. I would be pleased to take your questions.
                               __________
        Prepared Statement of Representative Elijah E. Cummings
    Thank you, Madam Chair.
    It is always a privilege to have Dr. Bernanke before us, and this 
latest installation is no different.
    After nearly falling off a cliff, the U.S. economy remains 
teetering on the edge, and the policies adopted by Dr. Bernanke, 
President Obama, and Secretary Geithner will determine how sure our 
footing is for the recovery.
    Through a series of extraordinary measures to create liquidity in 
the economy and support bank capitalization, the Federal Reserve has 
helped create stability in the financial sector.
    The stock market topped 11,000 recently, and banks are both 
recording profits and paying bonuses.
    However, I have a hard time trumpeting our success to my community 
in Baltimore.
    The minority business leaders with whom I met yesterday are 
struggling to keep their doors open, for one simple reason: They cannot 
access lines of credit.
    These are successful, capable firms, and they are shut out of the 
market because they cannot get a simple business loan.
    I am incapable of exaggerating how upset I was when I heard them 
describe how they may have to shut down because they could not maintain 
financing.
    During the recession, the Federal Reserve and Treasury placed the 
utmost importance on maintaining the market for short-term commercial 
paper and other forms of overnight financing.
    Investment banks that recklessly leveraged themselves to the hilt, 
holding our economy hostage, would have failed if we shut off the 
overnight financing faucet.
    So we left the faucet on, and made it extremely inexpensive to 
access. The Federal Reserve and the taxpayers successfully funded the 
``no trader left behind'' policy.
    Now, when our neighborhood contractors, grocery stores, accounting 
firms, and cleaning businesses need a loan to bid on a government 
contract, or a line of credit to continue to make payroll each month, 
the faucet turns up dry for them.
    I am pleased with Dr. Bernanke's efforts, and I do not doubt his 
motivations in the least.
    But I just cannot see our efforts as truly successful when not just 
one, but many, small and minority firms are forced to shut their doors 
for a simple lack of credit.
    The Federal Reserve, and this Congress, owes them more.
    Hearings like this one today, that embrace honest and frank 
discussions of policy, will help move us toward meeting our obligations 
to these constituent firms, and the families who depend on them.
    With that, Madam Chair, I look forward to our discussion with Dr. 
Bernanke, and I yield back the balance of my time.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                  
