[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
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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
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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
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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.
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\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.
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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.
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\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.
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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\
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\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.
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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\
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\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.
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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.
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