[Senate Hearing 111-287]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-287


        FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2009

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

      OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU- 
       ANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978

                               __________

                             JULY 22, 2009

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html






                  U.S. GOVERNMENT PRINTING OFFICE
55-117 PDF               WASHINGTON : 2010
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001







            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  JIM DeMINT, South Carolina
JON TESTER, Montana                  DAVID VITTER, Louisiana
HERB KOHL, Wisconsin                 MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

              William D. Duhnke, Republican Staff Director

                       Amy Friend, Chief Counsel

                     Dean Shahinian, Senior Counsel

                     Marc Jarsulic, Chief Economist

                   Charles Yi, Senior Policy Adviser

                Julie Chon, Senior International Adviser

               Jonathan Miller, Professional Staff Member

                  Drew Colbert, Legislative Assistant

                   Lisa Frumin, Legislative Assistant

                      Matthew Green, FDIC Detailee

                       Deborah Katz, OCC Detailee

                   Mark Oesterle, Republican Counsel

                    Jim Johnson, Republican Counsel

                       Dawn Ratliff, Chief Clerk

                      Devin Hartley, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)








                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, JULY 22, 2009

                                                                   Page

Opening statement of Chairman Dodd...............................     1
    Prepared statement...........................................    52

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     4
        Prepared statement.......................................    52
    Senator Johnson
        Prepared statement.......................................    53
    Senator Reed
        Prepared statement.......................................    54

                                WITNESS

Ben S. Bernanke, Chairman, Board of Governors of the Federal 
  Reserve System.................................................     5
    Prepared statement...........................................    54
    Responses to written questions of:
        Senator Bennett..........................................    59
        Senator Bunning..........................................    60
        Senator Corker...........................................    66
        Senator Kyl..............................................    68

              Additional Material Supplied for the Record

Monetary Policy Report to the Congress dated July 21, 2009.......    70

                                 (iii)

 
        FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2009

                              ----------                              


                        WEDNESDAY, JULY 22, 2009

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:07 a.m., in room SD-106, Dirksen 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order, and let me 
welcome the Chairman of the Federal Reserve. Chairman Bernanke, 
we are delighted to have you with us and thank you. And we 
have, as you see, a rather full complement of Senate Banking 
Committee Members here this morning, so there is a lot of 
interest, obviously, in having a good conversation with you 
this morning about the issues before our Nation.
    I am going to begin with some brief opening comments, turn 
to Senator Shelby, and I am going to beg the indulgence of my 
colleagues to reserve their opening comments for the question 
period.
    You had the opportunity to testify yesterday before the 
House Financial Services Committee, and I suspect you are not 
going to dramatically change your testimony from yesterday to 
today. And so I think the most important part may be the 
question period where we have a chance to engage with you, and 
the sooner we get to that, I think the better off we will be as 
a Committee. So I respectfully urge my colleagues will accept 
that structure here, and we will move forward.
    Good morning and I thank all of you for being here this 
morning. We are dealing with the semiannual Monetary Policy 
Report to the U.S. Congress by the Chairman of the Federal 
Reserve. I would like to welcome Chairman Bernanke who has 
worked hard, let me point out at the outset, to address the 
enormous challenges during this very difficult time in our 
Nation's history. And let me just say to you, Chairman 
Bernanke, that concerns that I will raise here this morning 
more go to the institutional issue of the Federal Reserve as 
distinguished from your leadership over the last several years 
in grappling with these many complicated issues. You have got 
to go back literally to the mid-part or early part of the last 
century to confront a time as challenging as this one has been. 
And so I am very supportive of the efforts you have been trying 
to make as the Chairman of the Federal Reserve, but I have some 
serious issues about the institutional response to all of this 
as we go forward, as we have talked about. So I appreciate your 
testimony.
    If the success of our Government's attempts to get our 
economy back on track were to be measured by executive 
compensation or large financial institutions' bottom lines, 
then perhaps today would be a day to celebrate the success of 
all that has happened over the last number of months. After 
all, leading economists believe that these indicators are signs 
that we have averted utter catastrophe and suggest that a 
recovery may be imminent. But while this recession may have 
begun on Wall Street, the recovery will not be real until, of 
course, and unless it is felt on Main Street.
    And so today is a day to ask fundamental questions: When 
will working families in our respective States, reflected in 
the Committee Members here, as well as our colleagues who are 
not on this Committee, when will they start to feel the effects 
of our work to restore the economy? After all, today we meet to 
receive the semiannual Monetary Policy Report mandated by the 
1978 Humphrey-Hawkins Full Employment Act. And if the goal is 
full employment, then obviously the news today is rather grim. 
Unemployment in June was 9.5 percent, the highest level in 26 
years. Most economists and the Fed itself believe that it could 
top 10 percent before the end of this year.
    Meanwhile, Americans who have lost or who are worried about 
losing their jobs, their homes, and their retirement security 
have watched as others reap the benefits of our Government's 
response. They hear about a stock market rally and wonder if it 
will ever be enough to make up the retirement savings that have 
been wiped out, in some cases almost within minutes. They hear 
about million-dollar bonuses going to CEOs whose firms caused 
the meltdown in the first place while rank-and-file workers 
across the Nation are laid off or forced to accept pay cuts.
    They hear about large financial institutions and large 
banks bailed out with billions of taxpayer dollars and 
Government-backed credit and now reporting billions of dollars 
in profits, but they still cannot get a loan themselves. Or as 
a small business or a commercial enterprise, they cannot find 
institutions willing to lend those resources so they can begin 
to grow again. Families worry about whether they can borrow the 
money necessary to send a child to college or buy that new 
automobile that is critical as well for economic recovery. They 
are still getting slammed by these very same institutions where 
they have seen fees and credit card rates, as we have all 
witnessed. And despite hearing from everyone in Washington that 
stabilizing the housing market is key to stabilizing our 
economy, they are still having trouble modifying their 
mortgages, even as 10,000 families a day are hit with 
foreclosure notices.
    Mr. Chairman, I appreciate the work that you have done, as 
I said at the outset of these comments, on the monetary policy 
side of the equation and the positive indicators that we have 
seen in recent weeks. But these positive indicators seem to be 
stuck at the top in the process. It is not insignificant, the 
accomplishment. Stabilizing the economy, stabilizing these 
institutions is a critical component if we are going to find 
our economy recovering. And we on this Committee, I think, as 
well as all of us in this room, certainly the Chairman, all 
work for the same people--that is, the American taxpayer.
    But when can we expect the recovery that they have funded? 
And when will we start seeing working families see the rally, 
their pay raises, their jobs being stabilized? What are we 
doing as the holding company supervisor--or are you doing as 
the holding company supervisor of these recipients of TARP 
funds, another extraordinary Government assistance, to ensure 
that we are serving the interests of the American people?
    These struggling people, as we all know, are not ready for 
an exit strategy for economic recovery efforts. First, the 
recovery must reach them. And as we move forward, we need to 
make sure that we lay a strong foundation for economic recovery 
that will reach every corner of our Nation. Part of that 
foundation will entail reforming financial regulations so that 
the mistakes that got us into this mess are not repeated. And 
as you know, many of us here have called for and the 
administration has proposed an independent Consumer Financial 
Protection Agency as part of that mission. But the 
administration has also proposed expanding the Fed's powers 
over systemically important companies.
    I have a number of concerns about this proposal, as many of 
my colleagues do on this Committee, not the least of which is: 
Why does the Fed deserve more authority when institutionally it 
seemed to have failed to prevent the current crisis?
    Now, Mr. Chairman, all of us understand the importance of 
the work you are doing, and that is not just a platitude or a 
generous comment. And we all look forward to continuing to 
partner with you in this effort. But the financiers who 
engineered this crisis are not the reason we are here. It is 
the millions of families who are still struggling and falling 
further and further behind. And I hope that they can be the 
focus of our attention today as we talk about what needs to be 
done to get our Nation back on its feet.
    So the basic questions I have for you are: When will this 
recovery, when will this effort that we are making, reach those 
families who are facing foreclosure, people who have lost their 
jobs, worried about their savings, worried about their long-
term retirement security? What are we doing as the Fed to help 
see to it that they are going to reap the benefits of this 
effort?
    And then, second, as we talk about these large institutions 
with the powers that already exist within the Fed over bank 
holding companies, we come up here and jawbone and ask these 
institutions to make a difference, but the Fed actually has the 
authority to make that difference. And many are asking the 
question why that authority is not being exercised to convince 
these institutions that they need to be moving more 
aggressively when it comes to bank lending.
    So, with those in mind, let me turn to Senator Shelby for 
opening comments, and then we will get directly to your 
testimony and engage in this conversation of how we not only 
deal from the top, which is critically important, but also 
those who depend upon these institutions, recognizing the value 
of what consumers and small businesses need, why we need to do 
more to assist that side of the equation as well.
    Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. Welcome back to 
the Committee, Chairman Bernanke.
    The purpose of today's hearing is to oversee the Federal 
Open Market Committee's conduct of monetary policy. There is no 
doubt that we are in a very challenging economic environment. 
The economy is extremely weak, bank lending remains sluggish, 
and unemployment is rising rapidly. The unemployment rate 
stands at a 26-year high and is expected to increase.
    Although the Fed has gone to great lengths to inject 
liquidity into our economy, its efforts are largely designed, I 
believe, to assist banks, especially large money center 
financial institutions. Many small businesses, however, are 
desperately seeking capital from the financial sector and have 
not been able to secure it. I have heard that from a number of 
my companies in Alabama that have been virtually abandoned by 
all of their traditional funding providers for years and years.
    While it is important to bring stability to the financial 
sector, if the part of our economy most responsible for job 
creation--that is, small business--cannot obtain funding, Mr. 
Chairman, such stability I believe would be short-lived. Going 
forward, the measure of success will have to include whether 
Main Street businesses are retaining or even adding jobs.
    While I understand that the FOMC cannot by itself solve all 
of our economic problems, the effective conduct of monetary 
policy is a necessary condition for economic recovery. 
Therefore, today I hope to hear from Chairman Bernanke whether 
the FOMC will need to take additional steps to revive our 
economy and, if so, where. Because interest rates remain at 
record lows, I am interested to hear what other specific 
actions the FOMC can and is prepared to take if additional 
easing becomes necessary. In addition, I would like to know 
what Chairman Bernanke believes can be done to spur lending to 
small- and medium-size businesses.
    While monetary policy is the central focus of this hearing 
today, I believe we must also examine the Fed's performance as 
a bank regulator as well as its participation in bailouts over 
the past year. I do not believe that the Board or the regional 
banks have handled their regulatory responsibilities very well. 
Many of the large financial companies that have been the focus 
of the Fed's bailout efforts were also subject to the Fed's 
regulatory oversight. And while they were regulated by the Fed, 
these firms were allowed to take great risks, both on and off 
their balance sheets. When the housing bubble burst, those 
risky positions were exposed and firms had to scramble to shore 
up their finances, and the credit crunch quickly followed.
    I am not aware of any effort on the part of the Fed prior 
to the crisis to question or require such firms to take any 
actions to address the significant risks that they were taking. 
In fact, the only effort of which I am aware is an effort to 
modernize bank capital standards. This effort could have 
resulted in a significant reduction in overall bank capital 
levels.
    I wonder where we would be today if the Fed had been able 
to act on its desire to eliminate the leverage ratio. I cannot 
imagine a scenario where banks would fare better with less 
capital during a period of financial stress such as the one we 
are currently experiencing.
    If the Fed had conducted its regulator oversight with 
greater diligence, I do not think the financial crisis would 
have achieved the depth and scope that it did. In the end, it 
was the failure, I believe, of the Fed to adequately supervise 
our largest financial institutions that required the deployment 
of its monetary policy resources to stave off financial 
disaster.
    In light of the Fed's record of failure as a bank 
regulator, it should come as no surprise that Congress is 
taking a closer look at the Fed and reconsidering its 
regulatory mandate.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator Shelby.
    Chairman Bernanke, again, welcome to the Committee.

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

    Mr. Bernanke. Thank you. Chairman Dodd, Ranking Member 
Shelby, and other Members of the Committee, I am pleased to 
present the Federal Reserve's semiannual Monetary Policy Report 
to the Congress.
    Aggressive policy actions taken around the world last fall 
may well have averted the collapse of the global financial 
system, an event that would have had extremely adverse and 
protracted consequences for the world economy. Even so, the 
financial shocks that hit the global economy in September and 
October were the worst since the 1930s, and they helped push 
the global economy into the deepest recession since World War 
II.
    The U.S. economy contracted sharply in the fourth quarter 
of last year and the first quarter of this year. More recently, 
the pace of decline appears to have slowed significantly, and 
final demand and production have shown tentative signs of 
stabilization. The labor market, however, has continued to 
weaken. Consumer price inflation, which fell to low levels late 
last year, remained subdued in the first 6 months of 2009.
    To promote economic recovery and foster price stability, 
the Federal Open Market Committee last year brought its target 
for the Federal funds rate to a historically low range of 0 to 
\1/4\ percent, where it remains today. The FOMC anticipates 
that economic conditions are likely to warrant maintaining the 
Federal funds rate at exceptionally low levels for an extended 
period.
    At the time of our February report, financial markets at 
home and abroad were under intense strains, with equity prices 
at multiyear lows, risk spreads for private borrowers at very 
elevated levels, and some important financial markets 
essentially shut. Today, financial conditions remain stressed, 
and many households and businesses are finding credit difficult 
to obtain. Nevertheless, on net, the past few months have seen 
some notable improvements. For example, interest rate spreads 
in short-term money markets, such as the interbank market and 
the commercial paper market, have continued to narrow. The 
extreme risk aversion of last fall has eased somewhat, and 
investors are returning to private credit markets. Reflecting 
this greater investor receptivity, corporate bond issuance has 
been strong. Many markets are functioning more normally, with 
increased liquidity and lower bid-asked spreads. Equity prices, 
which hit a low point in March, have recovered to roughly their 
levels at the end of last year, and banks have raised a 
significant amount of new capital.
    Many of the improvements in financial conditions can be 
traced, in part, to policy actions taken by the Federal Reserve 
to encourage the flow of credit. For example, the decline in 
interbank lending rates and spreads was facilitated by the 
actions of the Federal Reserve and other central banks to 
ensure that financial institutions have access to adequate 
amounts of short-term liquidity, which in turn has increased 
the stability of the banking system and the ability of banks to 
lend. Interest rates and spreads on commercial paper dropped 
significantly as a result of the backstop liquidity facilities 
that the Federal Reserve introduced last fall for that market. 
Our purchases of agency mortgage-backed securities and other 
longer-term assets have helped lower conforming fixed mortgage 
rates. And the Term Asset-Backed Securities Loan Facility, or 
TALF, which was implemented this year, has helped to restart 
the securitization markets for various classes of consumer and 
small business credit.
    Earlier this year, the Federal Reserve and other Federal 
banking regulatory agencies undertook the Supervisory Capital 
Assessment Program, popularly known as the ``stress test,'' to 
determine the capital needs of the largest financial 
institutions. The results of the SCAP were reported in May, and 
they appeared to increase investor confidence in the U.S. 
banking system. Subsequently, the great majority of 
institutions that underwent the assessment have raised equity 
in public markets. And, on June 17, 10 of the largest U.S. bank 
holding companies--all but one of which participated in the 
SCAP--repaid a total of nearly $70 billion to the Treasury.
    Better conditions in financial markets have been 
accompanied by some improvement in economic prospects. Consumer 
spending has been relatively stable so far this year, and the 
decline in housing activity appears to have moderated. 
Businesses have continued to cut capital spending and liquidate 
inventories, but the likely slowdown in the pace of inventory 
liquidation in coming quarters represents another factor that 
may support a turnaround in activity. Although the recession in 
the rest of the world led to a steep drop in the demand for 
U.S. exports, this drag on our economy also appears to be 
waning, as many of our trading partners are also seeing signs 
of stabilization.
    Despite these positive signs, the rate of job loss remains 
high and the unemployment rate has continued its steep rise. 
Job insecurity, together with declines in home values and tight 
credit, is likely to limit gains in consumer spending. The 
possibility that the recent stabilization in household spending 
will prove transient is an important downside risk to the 
outlook.
    In conjunction with the June FOMC meeting, Board members 
and Reserve Bank presidents prepared economic projections 
covering the years 2009 through 2011. FOMC participants 
generally expect that, after declining in the first half of 
this year, output will increase slightly over the remainder of 
2009. The recovery is expected to be gradual in 2010, with some 
acceleration in activity in 2011. Although the unemployment 
rate is projected to peak at the end of this year, the 
projected declines in 2010 and 2011 would still leave 
unemployment well above FOMC participants' views of the longer-
run sustainable rate. All participants expect that inflation 
will be somewhat lower this year than in recent years, and most 
expect it to remain subdued over the next 2 years.
    In light of the substantial economic slack and limited 
inflation pressures, monetary policy remains focused on 
fostering economic recovery. Accordingly, as I mentioned 
earlier, the FOMC believes that a highly accommodative stance 
of monetary policy will be appropriate for an extended period. 
However, we also believe that it is important to assure the 
public and the markets that the extraordinary policy measures 
we have taken in response to the financial crisis and the 
recession can be withdrawn in a smooth and timely manner as 
needed, thereby avoiding the risk that policy stimulus could 
lead to a future rise in inflation. The FOMC has been devoting 
considerable attention to issues relating to its exit strategy, 
and we are confident that we have the necessary tools to 
implement that strategy when appropriate.
    To some extent, our policy measures will unwind 
automatically as the economy recovers and financial strains 
ease, because most of our extraordinary liquidity facilities 
are priced at a premium over normal interest rate spreads. 
Indeed, total Federal Reserve credit extended to banks and 
other market participants has declined from roughly $1.5 
trillion at the end of 2008 to less than $600 billion, 
reflecting the improvement in financial conditions that has 
already occurred. In addition, bank reserves held at the Fed 
will decline as the longer-term assets that we own are maturing 
or are prepaid. Nevertheless, should economic conditions 
warrant a tightening of monetary policy before this process of 
unwinding is complete, we have a number of tools that will 
enable us to raise market interest rates as needed.
    Perhaps the most important such tool is the authority that 
the Congress granted the Federal Reserve last fall to pay 
interest on balances held at the Fed by depository 
institutions. Raising the rate of interest paid on reserve 
balances will give us substantial leverage over the Federal 
funds rate and other short-term market interest rates, because 
banks generally will not supply funds to the market at an 
interest rate significantly lower than they can earn risk free 
by holding balances at the Federal Reserve. Indeed, many 
foreign central banks use the ability to pay interest on 
reserves to help set a floor on market interest rates. The 
attractiveness to banks of leaving their excess reserve 
balances with the Federal Reserve can be further increased by 
offering banks a choice of maturities for their deposits.
    But interest on reserves is by no means the only tool we 
have to influence market interest rates. For example, we can 
drain liquidity from the system by conducting reverse 
repurchase agreements, in which we sell securities from our 
portfolio with an agreement to buy them back at a later date. 
Reverse repurchase agreements, which can be executed with 
primary dealers, Government-sponsored enterprises, and a range 
of other counterparties, are a traditional and well-understood 
method of managing the level of bank reserves. If necessary, 
another means of tightening policy is outright sales of our 
holdings of longer-term securities. Not only would such sales 
drain reserves and raise short-term interest rates, but they 
also could put upward pressure on longer-term interest rates by 
expanding the supply of longer-term assets. In sum, we are 
confident that we have the tools to raise interest rates when 
that becomes necessary to achieve our objectives of maximum 
employment and price stability.
    Our economy and financial markets have faced extraordinary 
near-term challenges, and strong and timely actions to respond 
to those challenges have been necessary and appropriate. I have 
discussed some of the measures taken by the Federal Reserve to 
promote economic growth and financial stability. The Congress 
also has taken substantial actions, including the passage of a 
fiscal stimulus package. Nevertheless, even as important steps 
have been taken to address the recession and the intense 
threats to financial stability, maintaining the confidence of 
the public and financial markets requires that policy makers 
begin planning now for the restoration of fiscal balance. 
Prompt attention to questions of fiscal sustainability is 
particularly critical because of the coming budgetary and 
economic challenges associated with the retirement of the baby-
boom generation and the continued increases in the costs of 
Medicare and Medicaid. Addressing the country's fiscal problems 
will require difficult choices, but postponing those choices 
will only make them more difficult. Moreover, agreeing on a 
sustainable long-run fiscal path now could yield considerable 
near-term economic benefits in the form of lower long-term 
interest rates and increased consumer and business confidence. 
Unless we demonstrate a strong commitment to fiscal 
sustainability, we risk having neither financial stability nor 
durable economic growth.
    A clear lesson of the recent financial turmoil is that we 
must make our system of financial supervision and regulation 
more effective, both in the United States and abroad. In my 
view, comprehensive reform should include at least the 
following key elements:
    A prudential approach that focuses on the stability of the 
financial system as a whole, not just the safety and soundness 
of individual institutions, and that includes formal mechanisms 
for identifying and dealing with emerging systemic risks;
    Stronger capital and liquidity standards for financial 
firms, with more stringent standards for large, complex, and 
financially interconnected firms;
    The extension and enhancement of supervisory oversight, 
including effective consolidated supervision, to all financial 
organizations that could pose a significant risk to the overall 
financial system;
    An enhanced bankruptcy or resolution regime, modeled on the 
current system for depository institutions, that would allow 
financially troubled, systemically important nonbank financial 
institutions to be wound down without broad disruption to the 
financial system and the economy;
    Enhanced protections for consumers and investors in their 
financial dealings;
    Measures to ensure that critical payment, clearing, and 
settlement arrangements are resilient to financial shocks, and 
that practices related to the trading and clearing of 
derivatives and other financial instruments do not pose risks 
to the financial system as a whole;
    And, finally, improved coordination across countries in the 
development of regulations and in the supervision of 
internationally active firms.
    The Federal Reserve has taken and will continue to take 
important steps to strengthen supervision, improve the 
resiliency of the financial system, and to increase the 
macroprudential orientation of our oversight. For example, we 
are expanding our use of horizontal reviews of financial firms 
to provide a more comprehensive understanding of practices and 
risks in the financial system.
    The Federal Reserve also remains strongly committed to 
effectively carrying out our responsibilities for consumer 
protection. Over the past 3 years, the Federal Reserve has 
written rules providing strong protections for mortgage 
borrowers and credit card users, among many other substantive 
actions. Later this week, the Board will issue a proposal using 
our authority under the Truth in Lending Act, which will 
include new, consumer-tested disclosures as well as rule 
changes applying to mortgages and home equity lines of credit; 
in addition, the proposal includes new rules governing the 
compensation of mortgage originators. We are expanding our 
supervisory activities to include risk-focused reviews of 
consumer compliance in nonbank subsidiaries of holding 
companies. Our community affairs and research areas have 
provided support and assistance for organizations specializing 
in foreclosure mitigation, and we have worked with nonprofit 
groups on strategies for neighborhood stabilization. The 
Federal Reserve's combination of expertise in financial 
markets, payment systems, and supervision positions us well to 
protect the interests of consumers in their financial 
transactions. We look forward to discussing with the Congress 
ways to further formalize our institution's strong commitment 
to consumer protection.
    Finally, the Congress and the American people have a right 
to know how the Federal Reserve is carrying out its 
responsibilities and how we are using taxpayers' resources. The 
Federal Reserve is committed to transparency and accountability 
in its operations. We report on our activities in a variety of 
ways, including reports like the one I am presenting to the 
Congress today, other testimonies, and speeches. The FOMC 
releases a statement immediately after each regularly scheduled 
meeting and detailed minutes of each meeting on a timely basis. 
We have increased the frequency and scope of the published 
economic forecasts of FOMC participants. We provide the public 
with detailed annual reports on the financial activities of the 
Federal Reserve System that are audited by an independent 
public accounting firm, and we publish a complete balance sheet 
each week.
    We have recently taken additional steps to better inform 
the public about the programs we have instituted to combat the 
financial crisis. We expanded our Web site this year to bring 
together already available information as well as considerable 
new information on our policy programs and financial 
activities. In June, we initiated a monthly report to the 
Congress that provides even more information on Federal Reserve 
liquidity programs, including breakdowns of our lending, the 
associated collateral, and other facets of programs established 
to address the financial crisis. These steps should help the 
public understand the efforts that we have taken to protect the 
taxpayer as we supply liquidity to the financial system and 
support the functioning of key credit markets.
    The Congress has recently discussed proposals to expand the 
audit authority of the GAO over the Federal Reserve. As you 
know, the Federal Reserve is already subject to frequent 
reviews by the GAO. The GAO has broad authority to audit our 
operations and functions.
    The Congress recently granted the GAO new authority to 
conduct audits of the credit facilities extended by the Federal 
Reserve to ``single and specific'' companies under the 
authority provided by section 13(3) of the Federal Reserve Act, 
including the loan facilities provided to, or created for, AIG 
and Bear Stearns. The GAO and the Special Inspector General 
have the right to audit our TALF program, which uses funds from 
the Troubled Assets Relief Program.
    The Congress, however, purposefully--and for good reason--
excluded from the scope of potential GAO reviews some highly 
sensitive areas, notably monetary policy deliberations and 
operations, including open market and discount window 
operations. In doing so, the Congress carefully balanced the 
need for public accountability with the strong public policy 
benefits that flow from maintaining an appropriate degree of 
independence for the central bank in making and executing 
monetary policy. Financial markets, in particular, likely would 
see a grant of review authority in these areas to the GAO as a 
serious weakening of monetary policy independence. Because GAO 
reviews may be initiated at the request of Members of Congress, 
reviews or the threat of reviews in these areas could be seen 
as efforts to try to influence monetary policy decisions. A 
perceived loss of monetary policy independence could raise 
fears about future inflation, leading to higher long-term 
interest rates and reduced economic and financial stability. We 
will continue to work with the Congress to provide the 
information it needs to oversee our activities effectively, yet 
in a way that does not compromise monetary policy independence.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Chairman Bernanke.
    I will ask the Clerk to put on 7 minutes on the clock and 
we will try and watch it very carefully so we don't overstep.
    Let me just begin by asking you what recommendations you 
would make. These unemployment numbers are obviously very 
troubling. I mentioned the highest unemployment rates in more 
than a quarter of a century and indications they may actually 
jump up based on economists who are looking at the situation. 
And so what recommendations do you have as Chairman of the 
Federal Reserve that we might take, that you should take in 
order to stem this tide? What are the looming problems out 
there?
    The commercial real estate issue is one that I know some 
have suggested may even dwarf the residential mortgage problems 
in the country. The consumer borrowing practices, the overdraft 
issues and so forth that still persist, consumer debt issues 
obviously are looming, as well. What are those problems you see 
coming along and what steps--for instance, are you considering 
extending the TALF program in the commercial real estate area, 
for instance, beyond the expiration--I think it is in December, 
if I am not mistaken--and whether or not that program will be 
extended to accommodate the problems in commercial real estate?
    But what recommendations would you give to us to start to 
deal with that other side of the equation, the stability of 
institutions that now--and you mentioned some in your 
statements, but I would like you to elaborate, if you would.
    Mr. Bernanke. Certainly, Mr. Chairman. On unemployment, 
that is the most pressing issue and it is the most difficult 
aspect of the problems that we are facing. Both the Federal 
Reserve and the Congress have already taken very aggressive 
actions to try to stimulate economic activity and I am hopeful 
that we are seeing some stabilization in the economy.
    Beyond that, I think to address unemployment more directly, 
the Congress has already extended UI, unemployment insurance, 
to help those who are without work. One particular problem 
which is concerning is that people without work for extended 
period may lose their skills and they find themselves with 
atrophying skills and an inability to find work once the 
economy has recovered. And so I would call to your attention 
the possibility of expanding training and other programs that 
would help people maintain those skills or develop new skills 
as needed to enter new industries. But again, I believe this is 
one of the most difficult and challenging parts of our task at 
this point.
    On commercial real estate, we agree with you that this is 
one of the more difficult areas. During the last few years, 
while residential investment was declining sharply, commercial 
real estate was actually pretty strong. But we have seen now in 
the last 6 months or so that vacancy rates are rising, rents 
are falling, prices are falling, and financing conditions for 
commercial real estate have gotten a good bit more difficult.
    We are working to try to improve those conditions. We are 
working with banks, for example. In the same way that banks 
should be encouraged to try to work out defaulting mortgages 
for residential borrowers, it is in their interest to try to 
make arrangements to work out problem loans in the CRE area, as 
well, and many banks will be facing very extensive amounts of 
CRE challenges going forward.
    On the TALF, as you know, we have recently added to the 
list of assets that we are supporting both new and legacy 
commercial mortgage-backed securities in an attempt to open up 
the CMBS market, which has been an important source of 
financing for this area in the past. It is early yet to know 
how much effect it will have. We were encouraged by the effects 
of the TALF on some other areas, such as consumer lending and 
small business lending.
    We currently have an expiration date of December 31 on the 
TALF, as you pointed out. We will certainly be monitoring the 
situation, and if markets continue to need support, we will be 
extending the final date of that program.
    Chairman Dodd. And you have the authority to do that? You 
don't need any action by Congress to do that, is that correct?
    Mr. Bernanke. We don't need action, but we do--we are using 
the 13(3) authority, which requires us to make a finding of 
unusual and exigent circumstances. So we would have to continue 
to believe that financial markets were in essentially still 
some distance from normal operation. If they are in normal 
operation, then it would be more difficult for us to justify 
such action.
    Chairman Dodd. Well, I appreciate the answer on that.
    Let me go back--and I appreciate the steps, again, you have 
taken on dealing with credit cards and dealing with the 
residential mortgage market and steps, so don't misunderstand 
what I am saying in terms of what you have responded to. 
Obviously, a crisis was emerging here.
    But there is a history at the Fed which is deeply troubling 
to me when it comes to consumer protection. You go back, if you 
will, in 1975 with the FDC Act, which gave the authority to the 
Fed to deal with protecting consumers from unfair and deceptive 
practices. Even as late as 2001, when the FDIC and the OCC 
wrote to the Fed urging that there were problems out there, 
that they needed to step up, the Fed didn't respond to it.
    We have all talked about--I listened to Jim Bunning. Even 
last week, we talked about the 1994 Act, the HOEPA legislation. 
In that, we went 14 years before the Fed, under your 
leadership, stepped up and responded to that situation with a 
series of regulations dealing with the residential mortgage 
market.
    There seems to be a pattern of behavior by the Fed over the 
years that would lead us up here to be concerned about whether 
or not this is just a momentary response to a crisis that is in 
front of us, to step up, rather than the kind of consistent 
behavior that we would depend upon the Federal Reserve to act 
when it comes to consumer issues that have been hammered by the 
problems in the residential mortgage market as well as in some 
of these consumer products. Give me a reason why you think this 
is something I should be less concerned about, given this 
pattern of behavior.
    Mr. Bernanke. Mr. Chairman, I understand your concern 
entirely. It is not literally true the Federal Reserve was 
inactive. We did take steps. We did invoke HOEPA authority to 
broaden the scope of high-cost loans, for example. But we were 
not quick enough and we were not aggressive enough to address 
consumer issues earlier in this decade. I agree with that.
    So I think what we have demonstrated in the last few years 
is we have the capacity. We have the ability. We have the 
expertise, the range of abilities, and the complementarity with 
our other activities to be effective when we are working in 
that direction.
    So my recommendation to you to consider, Mr. Chairman, 
would be to ask whether there are steps that could be taken 
that would strengthen the commitment of the Federal Reserve so 
that it would be strongly committed to this area in the future, 
and a few suggestions I would make. One would be to put 
consumer protection in the Federal Reserve Act along with full 
employment and price stability as a major goal of the Fed.
    The second step could be to require the Chairman to come 
before you or another committee at least once a year, present a 
report in the same way that we do for monetary policy, on our 
consumer protection steps. Adopt a system of hearings or 
sufficiency reviews that would allow the public to see what 
steps the Fed was taking and provide input to make sure that 
actions were being adequately taken in addressing problems.
    And yet another possibility would be to upgrade and 
strengthen the Consumer Advisory Council, which was created by 
Congressional action, to give it a higher, stronger status and 
an ability to meet with the Board on a regular basis.
    So I think there are steps that could strengthen the 
institutional framework that would address your legitimate 
concern about the long-term commitment of the Fed to this 
particular area.
    Chairman Dodd. Let me quickly jump last to this issue 
involving the power the Fed presently has over the bank holding 
companies. And again, all of us here, we go back to our 
respective States and we get an earful on a daily--hourly--
basis about the unwillingness of these lending institutions to 
provide the necessary credit at a critical time, when 
businesses are out there asking for it and demanding it and 
there just seems to be no response at all.
    Now, we can jawbone on the issue, but the Fed has the power 
here to really exercise some greater influence. Why is that not 
happening? Why aren't we getting more support in order to 
demand that these institutions start being far more responsive 
to the demands of industry and business out there that are 
relying on these institutions to expand and grow and help 
recover?
    Mr. Bernanke. Well, Mr. Chairman, I think the first order 
of business last fall was to avert essentially the collapse of 
the system, and that was a very important step and we did 
achieve that and the system now appears to be much more stable. 
It is still very challenged. Banks--some banks are still short 
of capital. Other banks are concerned about future losses. They 
are concerned about the weakness in the economy and the 
weakness of potential borrowers. So there are legitimate 
concerns that banks have.
    That being said, the Fed and the other bank regulators have 
been very clear that banks should be making loans to 
creditworthy borrowers, that it is in their interest, the 
banks' interest, as well as in the interest of the economy, and 
we are working with banks to make sure they do that.
    I think that we are seeing improvement over time. We are 
seeing some stabilization in the terms and standards that banks 
are applying to borrowers. And I suspect we will see some 
continued improvement. But we understand that issue and we are 
trying as best we can to support bank lending through measures 
such as the TALF, which we already discussed.
    Chairman Dodd. I thank you. And I would hope, by the way, 
on the TALF decision, you might make that earlier rather than 
waiting until late fall on that. If you are going to extend the 
TALF, I think that it would be helpful for the institutions to 
know whether or not that is going to happen earlier rather than 
later.
    Senator Shelby.
    Senator Shelby. Thank you, Chairman Dodd.
    Chairman Bernanke, I believe myself that monetary police 
decisions by the Fed should be kept outside of political 
considerations, independently. That said, it often seems that 
the Fed holds a very expansive view of its activities that it 
considers to be monetary policy actions. I assume this is done 
in an effort to expand the range of things subject to limited 
Congressional oversight.
    Would you support an independent review, perhaps by the 
GAO, so that we can establish a clear line as to what must be 
kept independent and what should get more scrutiny?
    Mr. Bernanke. Our general view is that the Congress should 
have the ability to oversee all aspects of our operations, 
including whether or not we have the appropriate financial 
controls, whether we are lending on a good basis of collateral, 
and so on, and so we would be willing to work with you on that. 
We do think that the Congress has the right to see how we are 
using taxpayer money. Where we are concerned is that the 
Congress would be intervening in our specific policy decisions 
relating to monetary policy in the economy. So----
    Senator Shelby. And I understand that.
    Mr. Bernanke. So yes, we are quite willing to work with 
Congress to try to figure out exactly where the line should be. 
And outside the area of policy determination, we are quite open 
to working with you and the GAO to determine appropriate scope 
of oversight.
    Senator Shelby. Mr. Chairman, your monetary policy report 
notes rather casually that, quote, ``nontraditional monetary 
policy actions employed by the Federal Reserve since the onset 
of the current episode of financial turmoil have resulted in a 
considerable expansion of the Federal Reserve's balance 
sheet,'' end quote, from $918 billion at the end of 2007 to 
over $2 trillion last week.
    By categorizing these as, quote, ``nontraditional monetary 
policy actions''--good choice of words--are you suggesting that 
actions by the Fed that have more than doubled the size of the 
Fed balance sheet are beyond Congressional scrutiny?
    Mr. Bernanke. I think that all----
    Senator Shelby. You see where we are coming from.
    Mr. Bernanke. Yes, I see, Senator Shelby. So we have 
already--the GAO has already been given access to the rescues. 
The GAO already has access to the TALF, which is a major 
program. And I think it would be--we would be willing to extend 
GAO access to any extraordinary program with the focus being on 
our operational integrity and making sure we are protecting the 
taxpayers' money. Where we are nervous is when the GAO begins 
to second-guess our monetary policy decisions per se. But in 
terms of safeguarding the taxpayers' money, in terms of making 
sure that the operations are well maintained, all those things, 
I think, are appropriate for Congress to oversee.
    Senator Shelby. I would like to get into something you have 
talked about on the House side on a number of occasions, but I 
don't believe over here yet. That is the Bank of America-
Merrill Lynch merger. What really went on between you, former 
Secretary Paulson, and Mr. Lewis, the former--I guess he is 
still currently the CEO of Bank of America? There has been a 
lot said, a lot of charges both ways, some that you and 
Secretary Paulson threatened Mr. Lewis. I think you basically 
said that you didn't. But I would like to hear in your own 
words what went on there, because that controversy has not gone 
away yet.
    Mr. Bernanke. Well, Chairman Frank yesterday said he saw no 
villains in the story and I don't think there is anybody who--
in that story who did not behave appropriately and in their 
appropriate role.
    You should remember that the way this became even an 
interest of Congress was the report from Attorney General Cuomo 
that Mr. Lewis had said that we had--we, the Secretary and I--
had urged him not to disclose material which he was supposed to 
disclose under SEC rules. He later clarified under oath that no 
one had done that, that there had been no such urging not to do 
appropriate disclosures and that he had been solely in control 
of his own disclosure decisions. So that eliminated the only 
issue that had any legal consequences, as far as I can see.
    Nevertheless, the Committee proceeded to collect e-mails 
and materials and to look for whatever possible problems they 
could find. In fact, as I have said in my testimony, we were 
dealing with a very difficult situation where we, on the one 
hand, we wanted to make sure that we respected the rights of 
Mr. Lewis and his shareholders. On the other hand, we wanted to 
make sure that the financial system was stabilized and 
protected.
    I think that we achieved that. We did that in a way that 
was fully legal and fully ethical and in which Mr. Lewis also 
performed his necessary fiduciary responsibilities with respect 
to his company and the outcome has been very successful, I 
think, that both companies have been stabilized. There has 
been--Merrill Lynch has been contributing to the profits of 
Bank of America. The overall financial system has been 
stabilized, and so I think the outcome was successful and I 
don't think that there is anyone who violated any law or broke 
any ethical code, as far as I can see.
    Senator Shelby. You think the conduct of Secretary Paulson, 
your conduct, and Mr. Lewis was all above board?
    Mr. Bernanke. Yes, sir, and all in good intentions.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator Shelby.
    Senator Johnson.
    Senator Johnson. Welcome, Chairman Bernanke. As you know, 
this Committee recently heard testimony regarding the possible 
creation of a new Federal agency with the specific purpose of 
consumer protection from dangerous financial products. The 
creation of this agency would take consumer protection off of 
the Fed's plate, allowing the Fed to concentrate on other areas 
of responsibility. Do you feel that the Fed has been effective 
in protecting consumers, and would this agency be more 
effective?
    Mr. Bernanke. Senator, as I indicated, I think the Federal 
Reserve in the last 3 years or so has demonstrated that it can 
be very effective. We have a lot of expertise which bears on 
consumer protection. We have been very committed. We have used 
consumer testing and other novel approaches to develop really 
good approaches to solving these issues. So I defend the record 
of the Federal Reserve in recent years and I reiterate what I 
said to the Chairman, that I think with some additional steps 
to strengthen the commitment of the Federal Reserve to this 
area that we could maintain that commitment going forward.
    I also don't think that the consumer protection function is 
in any way detracting from our other activities. I think it is 
complementary, for example, to our bank examination activities. 
When we go in and look at a bank, we do one exam, both for 
compliance, consumer compliance, and also for safety and 
soundness oversight, and many things that we look at, such as 
underwriting standards, have bearing both on safety and 
soundness and on consumer protection.
    That being said, I understand. I agree with Chairman Dodd 
that the Federal Reserve did not do all it should have at 
certain times in the past and I understand why some would want 
to see a new agency that would be fully committed to this area, 
and I am not criticizing that. I am simply saying that from the 
Federal Reserve's perspective, we believe that we can continue 
to do good work in this area.
    Senator Johnson. In your view, does the President's 
proposal allocate cost fairly between large and small financial 
institutions given that most community banks and credit unions 
had little role in the creation of the crisis?
    Mr. Bernanke. If you are referring, Senator, to the fund or 
the cost of resolving failing financially systemically critical 
firms, my understanding of the proposal is that assessments 
would be based on noninsured liabilities. So in principle, any 
bank holding company or almost any financial company might be 
subject to assessments to help pay for an intervention when a 
large systemically critical firm is failing.
    However, small banks, small community banks, most of their 
liabilities are insured, their deposits, for example. And so 
the portion of their liabilities which would be subject to an 
assessment would be relatively small. So I would imagine that 
the bulk of the costs would be borne by larger banks, and 
indeed, you could make the costs progressive and put a heavier 
weight on the assets or liabilities of larger firms.
    So I do think that is an important issue and I do think it 
would be appropriate for larger more systemically critical 
firms to bear their fair share, obviously, of the costs of 
resolving any systemically critical firm.
    Senator Johnson. There has been speculation in recent weeks 
about the effectiveness of the economic stimulus package that 
was enacted in February and if enough has been done at the 
Federal level to bolster our economy. In your judgment, is the 
stimulus package mitigating some of the effects of the economic 
crisis, and are there additional fiscal policy responses that 
Congress can take to help the current economic situation?
    Mr. Bernanke. Well, based on our economic analysis, which 
draws heavily on previous experiences, we would infer that, for 
example, income provided to workers and seniors and veterans 
would affect their consumer spending, to some extent. Likewise, 
money flowing to States and localities should relieve, to some 
extent, their budget pressures and allow them to spend more on 
services than they otherwise would be. And so the economic 
presumption is that there would be some effect on activity and 
spending from a fiscal package.
    That being said, at this point, less than a quarter of the 
monies have been disbursed and probably fewer than that have 
been actually put into action, spent. And so I think it is 
somewhat premature to make a strong case one way or the other 
in terms of the impact of this program, and I also think it is 
premature to consider an additional package at this time.
    With respect to strengthening the economy, I do think, 
although the impact is indirect, I do think that financial 
regulatory reform should be a very high priority and I know 
that this Committee will be spending a lot of time on making 
sure that our financial system is stable and able to provide 
credit to the economy in the future.
    Senator Johnson. Finally, we have repeatedly heard 
testimony in this Committee that families and investors will 
continue to be wary of the housing market until a bottom can be 
found. Has the mortgage market finally hit bottom?
    Mr. Bernanke. It is difficult to know, and we have had 
false dawns before, but the recent data have been mildly 
encouraging. We have seen demand fairly stable now for some 
months in terms of housing. We have seen some increase, 
actually, in construction and permits. The data on house 
prices, there are a number of different series, and they don't 
always agree, but there seems to be, at least for the moment, 
there seems to be some leveling off in house prices. And, of 
course, in part because of the Federal Reserve's actions, 
mortgage rates are a good bit lower than they were last fall, 
and indeed housing affordability right now is the highest it 
has been in many, many years. So there are some positive 
indicators on the housing front.
    That being said, we still also have problems of 
foreclosures coming on the market which will put downward 
pressure on prices, and so we can't get guarantee by any means 
that the price declines are over, but we are seeing a few 
positive indicators in the housing market.
    Senator Johnson. Thank you, Chairman Bernanke.
    Mr. Bernanke. Thank you.
    Chairman Dodd. Thank you very much, Senator Johnson.
    Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman.
    Welcome, Chairman Bernanke. I appreciate your service in a 
time of great stress and difficulty. I appreciate your 
willingness to hang in there and try to remain as calm and 
serene as you can.
    When we were having these discussions a year ago, and we 
have heard you now first with Bear Stearns, and we thought that 
was over, and then we had additional problems all the way 
through, through it all, the one overriding principle that 
motivated me was if we are going to get stability in the market 
in these very difficult times, we have to inject public 
capital, or sovereign capital, if you will, into the market to 
produce stability. And then, as quickly as we can, we want to 
remove that sovereign capital so that private capital can come 
in and fill that vacuum, and that is the 50,000-foot view of 
what it is we have been trying to do.
    Now, you talked about the difficulty with commercial real 
estate and the potential that it could be as bad as the housing 
difficulty. I have heard that there is currently as much as 
$450 billion of private capital waiting to be invested in 
financial institutions, and that is a substantial amount of 
money. My question is, why is this private capital waiting on 
the sidelines? Do you have any sense of that?
    Mr. Bernanke. Well, Senator, we have had some recent 
success in this area, as you know. The Federal Reserve led an 
interagency evaluation of 19 large banks simultaneously, which 
was an enormous effort, I must say, in the so-called stress 
tests, and what that did apparently was give the markets some 
more confidence about what the eventual losses would be and 
what these firms' needs for capital would be in the future. And 
as a direct result of those stress test, virtually every one of 
the 19 firms was able to go out and raise private capital. And, 
of course, about $70 billion of Government capital is repaid.
    So I think that what the private capital is waiting for is 
greater clarity and assurances both about the state of the 
banks, their potential losses, but also there is a lot of 
uncertainty in the economy, and as the economy has looked a bit 
better and stabilized somewhat, the credit markets in general 
have improved and I think that that will lead to more 
confidence in the banking sector, as well.
    So I am not sure what steps we can take other than to try 
to provide as much clarity as we can to the markets so they 
will understand both our policies and also the state of the 
balance sheets of the banks and that would give them every 
opportunity to inject capital.
    Senator Bennett. Well, obviously they are waiting for the 
bottom, waiting for a sense of, OK, this has now stabilized. 
The concern about commercial real estate suggests that it has 
not stabilized. Now, wouldn't it be true that a concern, OK, if 
we are not at bottom, public money will still come in, that 
there is still money to come from the Fed or recycling TARP 
money will still come in, so we will wait on the sidelines in 
addition? Wouldn't it be a further signal to the public money, 
the time to come in, if statements could be made that this is 
the end of the public money that would be available?
    Mr. Bernanke. Well, the stress test did that, to some 
extent. We did a 2-year, forward-looking analysis and we 
included commercial real estate, all different categories of 
assets, and tried to project loss rates, and we concluded for 
the banks that, quote, ``passed the test,'' we concluded that 
without new public money and with these heavy losses still to 
come, that they would at the end of 2 years still be well 
capitalized. And so that was essentially as much of an 
endorsement as we could give.
    I don't think we can unequivocally say that no public money 
will come in under any circumstances because there could be 
situations of systemically critical firms which, you know, for 
one reason or another are on the verge of failure and we need 
to consider whether or not the cost to the broad system of 
allowing a disorderly failure outweighs the cost of putting 
more Government capital in. So I don't think it would be 
reassuring to the market to say that there is no more capital 
under any circumstances. But what we are trying to do is point 
out that there are institutions which seem to be in a situation 
where they are unlikely to need any further Government 
assistance.
    Senator Bennett. Looking at the economy as a whole, getting 
into is this a ``V'' shape, a ``U'' shape, a ``W'' shape, or an 
``L'' shape kind of thing, we have seen inventory liquidations, 
and that was inevitable. When the whole world economy fell off 
the cliff, there were a lot of people who had excess inventory 
and they liquidated it and thereby did not help stimulate the 
economy. Now the liquidation seems to be over in many areas in 
the world, so new manufacturing, new products have to be 
produced to meet the demand.
    My sense is that in the contracted world we are facing, the 
demand is not at the level that it was before and that argues 
for more of an ``L'' shaped kind of circumstance. Yes, we have 
hit bottom, but what signs do we see that we are going to come 
back up, particularly if the American consumer, which is the 
driving force really for the whole world, because the economic 
model of the Chinese and the Indians and the Koreans and so on 
and Japanese are following, let us produce to sell to America. 
If the Americans can't afford to do it or the Americans aren't 
willing to do it at the same levels they were before, the whole 
world economy remains in kind of an ``L'' shaped circumstance.
    Could you respond to all that and give us your sense of 
where we are with respect to inventory liquidation and further 
manufacturing and consumption?
    Mr. Bernanke. Yes, sir. You are absolutely right. Inventory 
liquidation is not complete yet, but it is substantially 
advanced, and that will be a support to production both here 
and perhaps even more so abroad, which will create a stronger 
global economy, which will be helpful indirectly.
    We expect a recovery, and there is still a great deal of 
uncertainty, but we expect a recovery to start off relatively 
slow, and in part it is because of the consumer who is facing a 
damaged balance sheet, still has high debt on the balance 
sheet. Wealth has been reduced by housing and equity price 
declines. So we do not expect the consumer to come roaring back 
by any means, particularly with the labor market in the 
condition that it is in. So the American consumer is not going 
to be the source of a global boom by any means.
    On that very topic we are continuing to encourage our 
trading partners in Asia and elsewhere to understand--and I 
believe that they do--that they need to substitute their own 
domestic spending, their own domestic demand, for American 
consumers as the engine of growth in their economies. And we 
are seeing, for example, in China, with their large fiscal 
package there and their attempts to strengthen their 
infrastructure spending, we are seeing some motion in that 
direction.
    So our anticipation is for a recovery that will start 
slowly, begin to pick up speed over time, but it depends very 
much on to the extent consumers can get comfortable with their 
financial situations going forward, and also to the evolution 
of the labor market.
    Senator Bennett. Thank you.
    Chairman Dodd. Thank you very much, Senator.
    Senator Jack Reed.
    Senator Reed. Thank you, Mr. Chairman. Thank you, Chairman 
Bernanke.
    As Senator Dodd pointed out in his opening comments, the 
real measures, for most Americans, of our success are jobs that 
are stable and housing prices that are stabilized. You 
understand that. But had we not taken action, the Congress in 
TARP and the Federal Reserve with their programs, TALF and 
other programs, where do you think we would be with respect to 
the average American in terms of access to credit, jobs, et 
cetera?
    Mr. Bernanke. Senator, it is very hard to get credit for 
something that did not happen, but in September and October, I 
believe we faced the worst global financial crisis since the 
1930s and perhaps including the 1930s. Beyond the crisis of 
Lehman and AIG and Merrill and Wachovia in September, in mid-
October we faced a global banking crisis where not only the 
United States but many other industrial countries were on the 
verge of collapse of the banking systems.
    There was a loosely coordinated effort around the world 
involving injection of capital, provision of guarantees, 
purchases of distressed assets, provision of liquidity, which 
succeeded in stabilizing the global banking system in mid-
October, which set the basis for the slow stabilization of the 
financial system and recovery that we have seen since then.
    By the way, there has been so much focus here, of course, 
on AIG and the interventions here, but there have been about a 
dozen similar interventions around the world. So we are not 
alone in that respect as other countries have also moved in to 
protect and avoid the collapse of systemically critical firms.
    I believe that if those actions had not been taken, if the 
TARP had not been available to prevent that collapse, if there 
had not been an aggressive international policy response, I 
believe we would be in a very, very deep and protracted 
recession which might be almost like a depression, I think 
much, much worse than what we are seeing now.
    The situation--I do not want to understate--the situation 
now is very poor. The unemployment rate is unacceptably high. 
Americans are suffering. But I do believe that we have a much 
better situation than we would have if we had seen a collapse 
of the global financial system last October.
    Senator Reed. Mr. Chairman, let me focus on the point that 
you just made about unemployment. Approximately 540,000 
Americans will exhaust their unemployment benefits by the end 
of September; 1.5 million will run out by the end of the year. 
We all understand this is a central problem, maybe even a 
systemic risk.
    Would you urge us to extend unemployment benefits?
    Mr. Bernanke. Well, I would urge you to look at the 
unemployment problem. I think one issue that you should at 
least think about is that there may be different ways to extend 
unemployment insurance. For example, should there be a training 
component, as I mentioned to Senator Dodd? But I think clearly 
there are a lot of people who are unemployed for significant 
periods of time through no fault of their own, and I do think 
we need to provide them some kind of support and, I hope, some 
way to continue to remain in touch with the labor market and 
developing new skills so that as the economy does begin to 
recover, they will be productive workers once again.
    Senator Reed. Mr. Chairman, we are in the midst of a very 
important debate on health care, but just let me ask you, if 
the current system persists, if there is no change--and there 
are many versions of change--do you see that as imperiling 
economic growth and prosperity going forward?
    Mr. Bernanke. We have a very significant problem, which is 
that medical costs have been rising at about 2.5 percent a year 
faster than per capita income for some number of years. The 
Medicare trustees just assume that that difference will go down 
to 1 percent, and even so, even with that magical reduction in 
cost increases, they still see an enormous $35 trillion 
unfunded liability for the Federal Government.
    So whether we stick with our current general system, 
whether we adopt a new system, I am really not qualified nor is 
it my place to give detailed advice on health care reform. But 
I do believe for the broad economy's health and for fiscal 
health, we do need to address the problem of increasing cost. 
And so any program that is undertaken should look to how we are 
going to get control of costs so that it will not bankrupt both 
our Government and eventually our economy.
    Senator Reed. Would you agree that action now is probably 
necessary with regard not just to cost but to access, to 
affordability, and to the whole range of issues?
    Mr. Bernanke. Well, there are multiple objectives, 
including access, quality, and others, and I think everyone 
would agree that probably a number of improvements can be made 
on all those fronts. And, of course, Congress is looking at 
that, and I encourage you to keep looking at ways to improve 
our health care system.
    But, again, I come back to the cost issue, which I think is 
the one that is most relevant to the broad economy and to the 
fiscal stability of this country, and just urge you that, as 
you look at other aspects of health care reform, that you keep 
cost on the front burner, because it is very important to 
achieve.
    Senator Reed. Mr. Chairman, we will engage shortly in a 
debate about systemic regulation, and I know you are interested 
in not only the debate but the topic. But one of the things 
that, looking back, we discovered is that we did not have a 
coordinated mechanism to evaluate risk to the system; we did 
not anticipate the risk, et cetera.
    In that complex, what would you describe as the systemic 
risk that we face today?
    Mr. Bernanke. Well, first let me agree with what you said, 
which is that our system was too siloed, too much looking at 
individual firms, individual markets, not enough attempt to 
look at the entire market, and so a more macroprudential 
approach I think would be very valuable.
    The systemic risks today I think come from the fact that 
the financial markets are still unstable. We have some areas 
like commercial real estate, which pose concern. They could 
cause problems in a large number of banks. We have foreclosures 
and their implications for the housing market. So we have a 
number of pretty clear stresses. I do not think in this case 
that they are hidden problems. I think there are some very 
clear threats to the recovery, and we are, of course, trying to 
deal with those.
    But going forward, I do think it would be a good idea to 
have some kind of mechanism to look broadly across the 
financial markets to try to establish whether there is some new 
systemic risk evolving and what measures should be taken to 
address that risk.
    Senator Reed. Thank you, Mr. Chairman.
    Thank you, Chairman Dodd--excuse me. Chairman Johnson.
    Senator Johnson [presiding]. Senator Bunning.
    Senator Bunning. Thank you very much, Mr. Chairman. Thank 
you for being here, Chairman Bernanke.
    Lately, the Fed has spent a lot of effort fighting 
transparency in a real audit. When you were in front of this 
Committee beginning and begging for TARP, you promised 
transparency but haven't delivered. Yesterday, we learned from 
the IG on TARP that nearly $24 trillion--I said ``trillion''--
of support has been offered, including $6.8 trillion by the 
Federal Reserve. And in your statement today, you again said 
how important transparency is, but you still resist fully 
opening your books.
    I understand you are concerned about the Fed's 
independence, but you are the one that threw away the 
independence by acting as an arm of the Treasury and engaging 
in fiscal policy.
    Now, here are the questions:
    One, would you rather have an audit of the Fed or give up 
all of your nonmonetary policy functions?
    Mr. Bernanke. We will work with you on an audit of the Fed. 
I want to respond to the SIG TARP. That number makes all kinds 
of assumptions which are just simply not realistic. For 
example----
    Senator Bunning. Well, but they are not our numbers, sir. 
The IG is in charge of those numbers. So whether you want to 
fight with the IG, that is your business. Do not fight with me 
about it.
    Mr. Bernanke. So, Senator, to answer your question, I will 
be more than happy to work with the Congress to give access to 
all of our operations relating to how we use taxpayer money, 
how we secure the loans, our financial controls, all those 
things to make sure that you are comfortable that we are 
protecting taxpayer money.
    Where I am resisting is congressional intervention in 
monetary policy decision making, which I think would----
    Senator Bunning. No one is asking for that.
    Mr. Bernanke. That is what is in the law. There is no 
carve-out for that in the law. There would be nothing to stop 
you, for example, from saying, ``I did not like''----
    Senator Bunning. There is no law presently.
    Mr. Bernanke. The proposed law. In the proposed bill.
    Senator Bunning. Well, then, we would carve that out and 
make sure that that would not be there.
    Mr. Bernanke. Then I am very open to working with Congress 
with that carve-out to giving access.
    Senator Bunning. Second question: Do you understand why 
Congress and the public think the Fed's independence has 
already been compromised?
    Mr. Bernanke. Well, I understand, but I think it is a 
misconception. The Federal Reserve has worked with the 
Treasury, both the Republican and the Democratic Treasury, 
because in a situation of financial crisis, it is very 
important; I think the American people want to see their 
financial leadership working together to protect the stability 
of the system.
    Senator Bunning. But your job is monetary policy, not 
fiscal policy.
    Mr. Bernanke. My job is also financial stability.
    Senator Bunning. So you think interfering or assisting the 
Treasury with fiscal policy is part of the Fed's task?
    Mr. Bernanke. Not fiscal policy. We have a joint statement 
with the Treasury which makes clear that the Fed should not be 
responsible for credit allocation or fiscal policy. We are 
looking at financial stability. That is our objective.
    Senator Bunning. This question is about unbiased reports of 
the facts, not reports with an agenda. Are you opposed to 
objective external review of monetary policy and other Federal 
functions? If so, what monetary policy information do you not 
want in the hands of the public?
    Mr. Bernanke. We provide a great deal of information, 
including the minutes and eventually the transcripts, and this 
meeting today was posited, was put together by the Humphrey-
Hawkins bill. This is a review by the Congress of monetary 
policy.
    Senator Bunning. This is by law.
    Mr. Bernanke. Yes, and I think it is an appropriate way for 
oversight.
    Senator Bunning. How does providing factual information on 
the Fed's discussions and the data that goes into the Fed's 
decisions compromise the Fed's independence?
    Mr. Bernanke. Because it would inhibit discussion, it would 
inhibit the provision of information, and it would, implicitly 
at least, provide the sense that Congress was second-guessing 
or trying to overrule the FOMC's decisions.
    Senator Bunning. OK. This one includes you, but it includes 
the former Chairman. It has been clear to me for years--and 
finally it is now to just about everyone else--that the Fed's 
monetary policy for the last decade has been flawed. Former 
Chairman Greenspan's attempt to smooth normal economic cycles 
killed the so-called great moderation and led to bigger 
recessions than we would have had if he followed traditional 
monetary policy like the Taylor rule. The way to get the Fed 
back on track is to reduce your responsibilities, not increase 
them.
    To start, we should move consumer protection and banking 
regulation to somewhere like the FDIC. Then we should make the 
Fed's sole responsibility the stability of the dollar since a 
stable currency would lead to a stronger economy with higher 
employment.
    What I want to know from you is what you think the goal of 
monetary policy should be: stable currency or something else?
    Mr. Bernanke. The law, the Humphrey-Hawkins law, says that 
the goals of monetary policy should be full employment and 
price stability, and that is what we are looking to.
    On the issue of taking away other powers, I would just like 
to point out that this was what was happening a few years ago 
in a number of countries, including, for example, the U.K.
    Senator Bunning. Please answer my question. We know what 
the law is. I am asking for your opinion.
    Mr. Bernanke. I think that law is appropriate, and I follow 
that law.
    Senator Bunning. You follow the law to the letter?
    Mr. Bernanke. To try to achieve full employment and the 
price stability, yes.
    Senator Bunning. OK. The last question then, since my time 
is running out. Yesterday, you made it clear that you think the 
Fed has the tools to stop the coming inflation by controlling 
all the new money you have printed. You may be right, but do 
you have the will, as former Chairman Volcker did, to tighten 
even if the economy is still weak?
    Mr. Bernanke. Senator, it was in 1978 in the Humphrey-
Hawkins bill that the Congress put in the exclusion for 
monetary policy in the GAO audit bill, and that was right 
before Volcker came in. And Volcker was able to take those 
decisions because Congress did not intervene, although there 
were plenty in Congress who said they should intervene.
    So, yes, we will do----
    Senator Bunning. But I am asking you, would you do it?
    Mr. Bernanke. We will absolutely do it, so long as we are 
not forced to do something different by Congress.
    Senator Bunning. Even if the economy is still weak?
    Mr. Bernanke. We will take the necessary actions to balance 
off appropriately the price stability and full employment parts 
of our mandate.
    Senator Bunning. You know, it is a balancing act, as most 
Fed Chairmen have found out, including you, that if you start 
to pull too fast, the economy stops recovering; and if you act 
too quickly, you have a tendency to put the economy in a 
recession. So I wish you good luck.
    Mr. Bernanke. Thank you, sir.
    Senator Johnson. Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman. I thank you, 
Chairman Bernanke, for these 2 long days of hearings. This job 
is a very tough one, and, of course, you are subject to 
criticism, and that is part of it. And some of it is valid, and 
some of it I agree with, but I just would remind people where 
we were 6 months ago--worried that we might enter a Great 
Depression. And I think the actions that you and others have 
taken have avoided that. We still have a long way to go, but it 
is easy to take all the shots, and certainly I have my 
criticisms. But also we should remember where we were 6 months 
ago and where we are today and give you some good credit for 
that. So I thank you for that.
    Now I would like to talk about credit cards, something I 
care a lot about. I know Chairman Dodd has mentioned them 
briefly. And the JEC hearing back in May, we had an exchange 
about the Federal Reserve's new credit card rules, and I was 
troubled by the 18-month delay. Senator Dodd and I asked you to 
use your emergency authority to put the new rules into effect 
immediately. And we talked about how consumers were suffering 
from an increase in predatory credit card practices, arbitrary 
rate increases, and you had said you would look into it.
    So the first part of my question is: Have you looked into 
it? It looks to me as if nothing has changed; things are 
getting worse. Credit card issuers right now are changing fixed 
rates to floating rates so that they can say when the law takes 
effect, as the rates go up, well, we are not raising the rates. 
That is outrageous. That is against the whole intent of the 
law. They are also increasing fees for balance transfers. They 
are cutting credit card limits, hiking up interest rates.
    So I would like to ask you: How do these new advance 
notification rules help consumers hit hard by this kind of 
behavior? Isn't it true that consumers slammed with fee or rate 
hikes have no recourse other than to pay the increase and 
cancel the card? Canceling a credit card adds insult to injury 
by lowering a consumer's credit score.
    So I have a question for you. I do not think we can afford 
to wait until our legislation goes into effect. Can the Fed 
take some actions now, which you have the power to do, to deal 
with these practices, some of which are clearly predatory?
    Mr. Bernanke. Well, Senator, I think all our focus now is 
on implementing the law which Congress passed, and, in 
particular, we put our regulations last week which will come 
into effect on August 20th, 3 or 4 weeks from now, and those 
regulations will require a credit card company to give a 
customer 45 days' notice before raising interest rates. And, of 
course, that gives the customer options to find alternatives, 
to opt out.
    Senator Schumer. Then their credit rating is now lowered in 
many cases.
    Mr. Bernanke. Not if they choose voluntarily to move to 
another credit card. I do not think so. I agree with you it is 
a problem, but as we discussed earlier and I got back to you, 
you know, we just did not think we had the authority, given the 
process involved, to move it up substantially. And given that 
the Congress had passed new legislation that was very explicit, 
we thought our best objective would be to implement----
    Senator Schumer. What do you think of the idea of switching 
people from a fixed to a variable rate? Do you think that is 
within the spirit of either your regulations or the law we 
passed?
    Mr. Bernanke. It is not prohibited if the variable rate is 
tied to some publicly available rate, like the LIBOR or 
something like that.
    Senator Schumer. I would just say to you--and to everyone 
else here--that is why so many of us feel we need a Consumer 
Product Financial Safety Commission, because they always find 
ways around this. I mean, for years I said disclosure will do 
the job. It does not. And every law you pass, they find a way 
around it. Frankly, the Fed is not very lithe about these 
things. That is way before you got there, but it continues. And 
we need somebody who is going to focus on consumer products, on 
making sure when they find a new way to get around the intent 
of the law, if not the letter, that somebody is able to stop it 
and stop it quickly.
    I know you were asked about the consumer products financial 
safety commission. I hope you will be supportive of it and help 
us draft it, because we need a regulator who is not going to--
who is going to be a little more lithe than you, than the Fed 
has been, to be honest with you. What is happening is 
outrageous, and you have the power to change some of those 
things. Chairman Dodd and I wrote it.
    Small business lending. The CIT problems have made clear 
how vulnerable small business is to problems. I have heard 
stories all over my State of small businesses who need lending. 
They are profitable businesses. They still have collateral. 
They cannot get loans for reasons nothing to do with their 
fault--nothing to do with them and not their fault.
    Is the Fed considering any additional programs to help 
small business obtain access to credit?
    Mr. Bernanke. Well, first, we are, again, urging the banks 
to make loans to creditworthy borrowers. We do not think it is 
desirable from a safety and soundness point of view to be 
cutting off borrowers who can repay, even if they are small 
business or----
    Senator Schumer. But you admit that is happening.
    Mr. Bernanke. Of course, it is happening. Yes, I realize it 
is happening. So I just wanted to point out we are working with 
the banks. Beyond the banks, the Fed, as you know, has included 
small business in our TALF program, and we have had some 
issuances which seem to have helped that market. And----
    Senator Schumer. Can you give us some numbers on the small 
business TALF?
    Mr. Bernanke. I would have to get back to you with the 
exact numbers, but we have seen improvements on the interest 
rates and spreads in the secondary markets, which suggest some 
increased availability of funds and lower rates. And although 
it is not a Federal Reserve initiative, I would just take note 
of the Treasury's initiatives under the TALF to put money into 
SBA lending and to support that area. But I absolutely agree 
with you, this is one of the toughest areas because 
traditionally, in a downturn, small business is the first to 
get cutoff.
    Senator Schumer. Right. And what about lifting the credit 
unions' cap on small business lending? It was put in as part of 
a political compromise years ago, maybe decades ago. I do not 
think there is any reason not to lift it. If this is another 
place where small business could get loans, and credit unions 
are often tied into their communities and want to help, what do 
you think of that idea? I think it is now 12.5 percent. Some of 
us have proposed legislation to lift it.
    Mr. Bernanke. I would be happy to look at that with you. It 
sounds like a direction to consider. I would have to understand 
better the rationale, but it is certainly worth looking at.
    Senator Schumer. Thanks, Mr. Chairman.
    Senator Johnson. Senator Martinez.
    Senator Martinez. Thank you, Mr. Chairman.
    Chairman Bernanke, welcome, and I want to join with my 
colleague Senator Schumer in also acknowledging the fact that 
you had a very difficult situation back several months ago. 
Everything is not perfect, but you have tried, I know, 
sincerely and, I think, avoided a whole lot of problems that on 
a dark day back in the fall we all were fearful might be right 
around the corner.
    I also want, by way of a question and a comment, to also 
strongly disagree with my colleague from New York, because I 
believe that the worst thing we could do right now under the 
current environment is to overregulate, to overreact to 
circumstances that happened in the marketplace. I have not had 
a more unanimous negative reaction about anything here in the 
Congress than what I have heard for the last several days about 
this regulator scheme that would, I think, take the banking 
industry at a time when it is in a perilous state and choke it. 
And I think it would be an overreaction, and I think we ought 
to take our time before we overregulate the banking industry in 
a way that I think will drive away investment money and 
everything else from the industry. I am very sensitive to 
consumer issues, but I really think we should go slowly on that 
issue and think thoroughly through it.
    Along those lines about investment, private investment 
money into the marketplace, you indicated that investors seemed 
to be returning. It concerns me greatly that I do not believe 
there is any significant private investment going on in the 
mortgage-backed security arena, and, obviously, we have been 
through a very difficult time there.
    I wonder if you could tell me what you anticipate there. I 
come from a State where we have some high-value markets, and 
even though all of them are depressed, conforming loan limits 
do not always cut it.
    Do you anticipate that we will be in a position to see 
private investment money coming into securitized mortgages so 
that we can get away from Fannie and Freddie being the only 
game in town when it comes to mortgages?
    Mr. Bernanke. It is not exactly a question of private 
investment money. It is a question of private label 
securitization, which is not Government guaranteed.
    Senator Martinez. That is really what I am----
    Mr. Bernanke. Yes. We are not seeing much activity or 
really any activity in that area right now, and I think it will 
take two things to get that going. One will be a little bit 
more confidence that housing prices are stabilizing because 
right now there is too much concern on the private label side 
that house prices might go further and that would create losses 
for mortgage holders.
    The other is I think there is still scope to improve the 
instruments, to increase the transparency and the 
standardization of these securitization instruments. And 
industry has an incentive to do that. It has been a pretty slow 
process, in part because activity has been so low, but I think 
there might be scope for trade associations, like the 
Securitization Association, to work with private issuers to try 
to develop a more transparent, more standardized securitization 
issuances.
    Senator Martinez. And I guess rating agencies would come 
into that as well.
    Mr. Bernanke. The rating agencies as well, absolutely. But 
the rating agencies have to show that they have good criteria, 
that they have eliminated potential conflicts of interest and 
that they are transparent as well. So they are also a part of 
the problem as well as the solution at this point.
    Senator Martinez. The issue of bank regulation and getting 
money out on the street from banks out at the local level, I 
continue to hear complaints that banks are not lending, but I 
also hear from bankers that there is not a clear message and 
that regulators are giving a different message than what I hear 
here, from whether it is the FDIC or yourself. What can we do 
to make sure that the message gets down to the local level and 
that we are not seeing a situation where bank regulators are 
overreacting to the situation and expecting banks to do the 
impossible while the marketplace is in desperate need for 
credit?
    Mr. Bernanke. Let me use this opportunity to make a clear 
statement to Federal Reserve examiners everywhere and I hope to 
examiners of other Federal agencies. It is good for the bank, 
it is good for safety and soundness for banks to make safe 
loans to creditworthy borrowers, to maintain those 
relationships, and to extend credit to profitable and economic 
purposes.
    We recognize that there is a kind of a built-in bias among 
examiners in a period like this where the economy is weak and 
there is a lot of risk to be overconservative and push banks to 
be overconservative in their lending decisions.
    On the one hand, we certainly do not want banks to be 
making bad loans. That is how we got into trouble in the first 
place.
    Senator Martinez. Right.
    Mr. Bernanke. But I do think that examiners should be 
appropriately weighing the fact that profitable lending to 
creditworthy borrowers is good for the bank and that 
maintaining those relationships is good for the bank.
    At the Federal Reserve, we have for a long time tried to 
communicate that message, and we have ongoing training, 
workshops, manuals, and other communications with the examiners 
and with the regional directors of supervision to try and put 
that message through.
    Now, I have to admit that it does not always get through, 
but, on the other hand, it is also probably true that, you 
know, bank terms and conditions just are going to be tougher 
now for a while given the difficulties in the economy. And so, 
you know, not everybody who was used to getting credit is going 
to get credit, but to the extent that we can continue to make 
loans to creditworthy borrowers, we really want to support 
that, and we are trying to put that message to our examiners.
    Senator Martinez. I think your statement is very helpful 
and I think also, with no question, that what used to be a good 
credit may not be a good credit in current circumstances, and 
we have to be wary of that.
    But along the same lines, the Federal Reserve implemented a 
TALF program to restart the securitized debt markets and my 
question has to do with the commercial real estate and the 
potential shortfall there. What do you think in terms of your 
program for the private commercial real estate lending, 
investing, and what may be coming in the months ahead, which is 
a very, very serious situation.
    Mr. Bernanke. It is a very serious situation and that is 
why we have brought both new commercial real estate, CMBS, and 
legacy CMBS into the program. The addition of those two asset 
classes is relatively recent, so we haven't yet seen a whole 
lot of activity, which is not surprising because it takes time 
to put together CMBS packages, CMBS deals.
    What we have seen with the TALF in other categories of 
securitization, like in consumer loans, small business loans, 
student loans, and the like, is that it has been very helpful, 
even without a great deal of lending. So we are optimistic that 
this will be helpful, but it will be a few more months before 
we really have a good read on the effect. But at a minimum, I 
think it will get the CMBS market moving again, get new deals 
being made, and that should create more interest on the part of 
investors in getting involved in financing commercial real 
estate.
    Senator Martinez. My time is up and I thank you. I just 
want to mention in conclusion that there is in TALF, I think, 
still room for there to be more lending in the area of--or more 
encouragement to do lending in the area of floor planning for 
RVs, boats. You know, there is a big boating industry in 
Florida which is back on its heels, as well as the securitized 
mortgage market for vacation rentals. I don't mean vacation 
rentals, but time share type of vacation opportunities. Those 
are all industries that employ a lot of people in a State like 
Florida that are currently just wanting for credit 
availability.
    Thank you, Mr. Chairman.
    Senator Johnson. Thank you.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Chairman 
Bernanke, thank you for your testimony, your service.
    As you know, the Congress is in the midst of a very 
rigorous debate about health care and there are those in this 
debate who suggest that we can put off for tomorrow further 
seeking reform of our system. It seems to me that when we look 
at obligations of the Federal Government, that both under 
Medicare and Medicaid, these long-term obligations are 
unsustainable at the rate that we are going, not to mention 
that it is unsustainable for the private sector in terms of 
rising costs for health care which they seek to provide for 
their employees and therefore creating more and more challenges 
to people who have health care coverage today.
    Is it not true that this is one of our significant economic 
challenges moving forward and that the longer we delay, the 
greater the consequences will be?
    Mr. Bernanke. Yes. As I indicated before, there are a lot 
of challenges for health care, including access. There are a 
lot of people who are uninsured. The quality, in the sense that 
we see very different costs in different areas with not 
different results. What is the transparency of the process, and 
so on.
    But speaking as the Federal Reserve Chairman and interested 
in macroeconomic stability, I think for me, the most important 
issue is cost and the current structure has many benefits and 
other problems, but one of the main issues is it has not 
controlled cost. Given the aging of our population, given the 
rapid increase in medical costs, we have both the threat of an 
unstable fiscal situation going forward and a tremendous tax 
essentially on our private economy, which has to bear the costs 
of medical care.
    So I think Congress will be looking at a whole set of these 
issues, but the one that I would try to focus you on is making 
sure that you address the question going forward of bending the 
curve, as they say, or slowing down what is now a really very 
worrisome increase in the rate of costs of health care.
    Senator Menendez. I appreciate that. Let me ask you this. 
In March of 2007 at a Banking hearing, I said that we were 
going to have a tsunami of foreclosures in the residential real 
estate market. I was told at that time that that was an 
exaggeration. Unfortunately, I wish I had been wrong and those 
who told me it was an exaggeration were right. Now I look at 
the commercial real estate market, several trillion dollars 
that there seems to be no present market for as these mortgages 
become due. I heard that you gave an answer previously on this 
issue with reference to TALF.
    Should we not, as I believe we should have done in the 
residential real estate market, been proactive to be ahead of 
the curve instead of facing an enormous challenge after the 
curve? You mentioned TALF. Do you think that the Reserve and 
the administration are focused on dealing with this up front in 
a way that is aggressive and can meet the challenges, not just 
to that industry, but more importantly to our economy and the 
jobs that flow from it?
    Mr. Bernanke. Well, from the Federal Reserve's perspective, 
we have basically a two-pronged approach. One is to work with 
banks to work out commercial real estate projects which are no 
longer performing, in very much the same spirit as we have 
work-outs for residential mortgages that are not performing. 
There, as with residential mortgages, there is an incentive to 
do that if the costs of foreclosure are sufficiently high.
    I think one slightly positive thing is that I don't think 
that commercial real estate experienced quite the increase in 
prices or the bubble component that housing did, but 
nevertheless it is still under a lot of pressure.
    The second element of our program is the TALF, which now 
also will allow borrowing from the Treasury's PPIF program also 
to come in and buy CMBS through the TALF. Whether Congress 
wants to take additional steps, you know, you could intervene 
with guarantees or other kinds of support that would have 
fiscal implications. It would mean the Government was bearing 
risk.
    So I haven't really seen a full-fledged proposal and I 
would be somewhat reluctant to strongly endorse one. I think 
really the Congress has to make those tradeoffs between the 
fiscal cost, the fiscal risk, and what is, I will agree, a very 
real risk on the side of foreclosures and problems in 
commercial real estate----
    Senator Menendez. As I talk to this industry, Mr. Chairman, 
they tell me that at least presently, there isn't--they seek 
the private marketplace. They are not really seeking the 
Government. But there isn't a private marketplace, certainly 
not in a sustainable way, for what is coming down the road.
    And so the question is, do we wait again for the crisis to 
happen, or do we anticipate where it is headed and seek to stem 
it because otherwise we have significant risk to our economy. I 
am just wondering, do you think that what you have today as 
tools is sufficient to meet that challenge in the days ahead or 
not?
    Mr. Bernanke. I think what we have, including the fact that 
some banks are now restructuring mortgages, will help, will be 
in the right direction. Whether it will be enough, I honestly 
can't tell you. And again, I am not sure what interventions 
there are except those that would involve fiscal risk and 
fiscal cost to the Government, which may be appropriate. But I 
think it is Congress's call on that one.
    Senator Menendez. Let me ask you finally, the most 
significant source of money for the Government's economy 
recovery programs has actually not come from TARP but from the 
Federal Reserve using its powers to the tune of about $2.3 
trillion. There are many who are concerned that this may lead 
to some significant inflation in the coming few years. What is 
your view about the risk of some severe inflation and what are 
you doing to avoid it?
    Mr. Bernanke. Well, Senator, I wrote an op-ed in the Wall 
Street Journal yesterday and I discussed it somewhat in my 
testimony. We believe we have all the necessary tools to unwind 
our balance sheet, to reduce the bank reserves that are 
outstanding, and to raise interest rates at the appropriate 
time. We don't think there will be a technical reason that we 
can't raise interest rates and tighten monetary policy when the 
time comes to do that.
    Now, as Senator Bunning pointed out, it is always very 
difficult to know exactly the right moment when that is because 
you have to balance off the risk of moving too soon and 
squelching a recovery versus moving too late and allowing some 
inflation to buildup. So that problem is still there and we 
will have to do our very best to make the right judgment.
    But in terms of having the tools to unwind our actions and 
to raise interest rates, we believe we are quite comfortable 
that we have the tools to do that.
    Senator Menendez. Thank you, Mr. Chairman.
    Senator Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and Mr. Chairman, 
thank you for your testimony.
    I know there has been a lot of discussion about an audit, 
if you will, of the Fed. I hope that you will do everything you 
can to make sure the Fed maintains its independence. I realize 
it sounds like to me there may have been some agreement as to 
what might ought to take place as relates to an audit, but I 
can't imagine a greater catastrophe for our country, for folks 
like us sitting up here or the administration to begin getting 
involved unduly in monetary policy. So I urge you to do 
everything you can to stay independent and hope that we will 
enable that to happen.
    I appreciate the message on CRE, commercial real estate. I 
do think we are creating a self-fulfilling policy out there. I 
know that you sent a message here today out to the Fed folks, 
but I think the functional regulators in many cases are 
creating a self-fulfilling prophecy and I think one of the 
things that could help would be for all of you to send that 
message out to regulators. I hope you will consider doing that. 
I know you said to Chairman Dodd that it is in the banks' best 
interest to make those loans. I think that could help probably 
as much as anything we are doing.
    On consumer protection, the administration came up a couple 
of weeks ago talking about their proposal. I assume folks at 
the Fed were having to hold back some degree of humor. There 
was a discussion about them designing products for the 
financial industry. I assume you, like many of us, believe that 
is pretty outrageous and I would love any comments you might 
have in that regard.
    Mr. Bernanke. Well, there is some economic analysis which 
suggests that there might be benefits in some cases of having a 
basic product available, so-called ``vanilla'' product. I think 
the design of that would have to be an industry decision, but--
--
    Senator Corker. By the private sector.
    Mr. Bernanke. By the private sector. But we would have to 
be also careful to make sure that that didn't eliminate or 
create a regulatory danger in some sense to legitimate products 
that are not the basic product but still have appropriate 
features that are good for some borrowers. So we don't want 
to--we want to make sure that simple, straightforward products 
are available, but we don't--on the other hand, we certainly 
don't want to roll back all of the innovation in financial 
markets that has taken place over the past three decades or so.
    Senator Corker. A very tactful answer, but the fact is, you 
believe that that should reside in the private sector and not 
be administered through the public sector?
    Mr. Bernanke. It should be in the private sector, but there 
is some scope for a basic black, if you will, and then the 
version with sequins on it.
    Senator Corker. Good. On the resolution authority piece, I 
know there has been some discussion, and you are going to be 
highly involved in that. Another piece the administration had 
come forth with out of Treasury was basically keeping TARP in 
place in perpetuity, giving the Treasury the ability when they 
decided to actually invest taxpayer money in companies and also 
to draw a bright line around those companies that posed a 
systemic risk and in essence, in my view, sort of creating a 
more Freddie-Fannie-type view of some institutions that were 
over a certain size. I wonder if you might have any comments 
about that.
    We have watched what the FDIC has proposed, which actually 
would unwind companies that fail. I think you made testimony 
earlier--I know you did, I read it--that says that you believe 
that is the best route to go and I wonder if you might have any 
comments for those of us who are going to be working on 
regulation.
    Mr. Bernanke. Yes. I think too big to fail is an enormous 
problem. We were forced to rescue some companies because the 
alterative was worse and we didn't have good tools. But I think 
it is absolutely essential that we have a good system for 
winding down failing systemically critical firms, and I would 
include in that, first, the provision that creditors of a 
systemically critical firm would presumptively lose money so 
that the firm would no longer be too big to fail in that 
respect and that the firm could be either wound down or broken 
up or sold off or put into a bridge or whatever mechanism is 
appropriate.
    And second, I do think you need some flexibility for the 
resolving agency to borrow from the Treasury for a time, the 
same way the FDIC can do, in case there are some costs up front 
to resolving the company. But ultimately, I would argue that 
most or all of the costs ought to be borne by the financial 
industry.
    Senator Corker. And so the notion of Treasury having the 
ability just to prop them up and actually cause them to be 
going entities again is not one that is good for our market 
system?
    Mr. Bernanke. No, and I don't really think that is--that is 
not my interpretation of the Treasury's proposal. I think that 
the idea would be to have something analogous to the current 
FDIC laws which allows the FDIC to intervene before the actual 
failure, seize the company, sell off assets and so on in order 
to avoid a costly bankruptcy.
    Senator Corker. Back to the independence issue. I know 
there has been discussion about the Fed being the systemic 
regulator, and I guess one of my major concerns is you have 
received criticism here today about activities that have taken 
place. I find it difficult to believe that anybody, even as 
intelligent as you are, can actually look out and see what all 
systemic risks are, and I see that as not possible. I mean, 
there are going to be other failures down the road, I think we 
know that, regardless of what we do. That is the way the market 
works.
    I guess I have a fear that if you become, or if the Fed 
becomes a systemic regulator and you miss it and you are, it is 
going to happen again, we all know that, that that will create 
an opportunity for even further attacks, if you will, on your 
independence, and I wonder how you might respond to that.
    Mr. Bernanke. It is a good point, Senator. I would note 
that, just taking the administration plan as reference, that 
plan does not propose to make the Federal Reserve into a sort 
of super-regulator with capacity to move all over the system 
and to take whatever action it wants. In fact, it is a 
multipart plan that includes a council, as you know, which 
would include eight different regulators that would be mostly 
responsible for looking for emerging risks. It includes the 
resolution regime, which would be the Treasury, the FDIC, and 
not the Fed.
    So the Fed's specific role, which would be much more 
delimited than being the overall regulator in that particular 
proposal, would be to be the holding company supervisor of the 
systemically critical firms, the Tier 1 firms, which would be 
identified through some combination of the Fed and the 
Oversight Risk Council. So our particular role in that plan 
would be not radically different from our current role, which 
is to be the umbrella supervisor of large bank and financial 
holding companies.
    So we would not be given just a broad remit to find any 
risk that emerges. We would have a very specific role, which is 
to supervise and look at the systemic implications of a 
specific set of companies, and therefore I think our 
vulnerability would be much more limited than what you are 
describing.
    Senator Corker. Thank you, Mr. Chairman. I know my time is 
up and we have a vote coming, so I won't extend over like I 
sometimes do. Mr. Chairman, thank you for holding this hearing.
    Chairman Dodd [presiding]. Thank you, Senator Corker, very 
much.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman, and thank you, 
Chairman Bernanke, for being here and enduring such a long line 
of questioning.
    I have got a lot to ask, but I will try to move quickly. I 
want to follow up on my colleague, Senator Corker's, comments. 
I share his concern that as we move toward resolution going 
forward, that the goal of resolution should be allowing large 
institutions to fail, not simply be propped up.
    I do have concerns that what the administration has 
proposed would still in effect have the failed institution not 
bear the burden of the resolution since they would in effect 
still be going to the Fed or the others as a lender of last 
resort to get to a period, and then you would have a post-
resolution assessment. I would rather see that assessment more 
up front for those extra-large institutions.
    One of the questions that I have been struggling with, as 
well, is when we have had the Secretary in and a number of us 
have asked concerns about particularly AIG and the requirement 
to continue to pay off counterparties at 100 cents on the 
dollar. I just wonder whether you have any thoughts on them, 
some of the bankruptcy provisions that have elevated 
counterparties higher in the capital structure in terms of a 
bankruptcy, and those changes having been fairly recently, 
whether those ought to be resisted, the bankruptcy priorities, 
on a going forward basis.
    Mr. Bernanke. Well, the problem with AIG wasn't the 
bankruptcy law per se but the fact that we couldn't go--that a 
company couldn't--that we couldn't allow the company to go 
bankrupt because of the broad implications for the markets, and 
given that, we had to honor all of the existing contracts that 
the company had.
    Under the resolution authority, we would have an 
alternative to bailouts and bankruptcy. I mean, right now, we 
have bankruptcy and chaos or we have bailouts and neither of 
those are satisfactory solutions. A good resolution authority 
would avoid the chaos but would allow both creditors and 
counterparties and others to take losses, you know, in a 
controlled way under perhaps preidentified sets of seniorities, 
as identified by the law----
    Senator Warner. Then we would have to take on the issue 
right now. We have got these exemptions for the repo provisions 
that allowed the counterparties to have precedence over the 
senior creditors----
    Mr. Bernanke. Yes. Those are useful because for very short-
term derivative and other positions, the netting provisions 
that allow you to deal with those before the whole bankruptcy 
process takes place, I think is actually constructive given our 
existing bankruptcy law. But this would intervene prior to the 
standard bankruptcy and would allow the Government to intervene 
and to unwind all different kinds of transactions. That would 
be an appropriate time to think about how you would deal with 
these short-term derivative positions and other types of 
obligations going forward.
    Senator Warner. I differ from the administration and 
perhaps your views in terms of where the responsibility ought 
to be on systemic risk oversight. I believe an independent 
council with an independent chair, including obviously on that 
council the Fed. But regardless of where the policy makers end 
up, in the interim period, are you comfortable, whether it is 
as Senator Menendez mentioned in terms of kind of getting ahead 
of the--potentially getting ahead on the CMBS issue, are you 
comfortable that the Fed is the de facto systemic risk overseer 
at this point? Is aggregating enough information upstream from 
all the day-to-day prudential regulators, not just on the 
banking side but from securities, commodities, and others, that 
this aggregation of information is taking place?
    Mr. Bernanke. No, we are not being the super-regulator at 
all. I mean, we are trying to do a couple of things. One is 
within our scope, which is the bank and financial holding 
companies, we are taking steps to take a more macroprudential 
approach. That is, instead of looking at each firm 
individually, we have taken a number of steps to take into 
account the systemic implications of the failure of one of 
these firms. And so we have been doing that and we have 
basically tried to strengthen our oversight of those firms.
    By the way, the stress test is an example of an analysis of 
19 firms simultaneously to see what the risks were across the 
system. So we have been doing that, and we have been looking at 
the payments and settlements areas where we have 
responsibilities, credit default swaps, things of that sort. 
But in taking a holistic view of the whole system, we don't 
have the resources or the authority to do that, though of 
course in general terms we obviously are watching the economy, 
but not in that kind of detail.
    Senator Warner. So a nonfinancial institution that might be 
posing systemic risk could still be--the next disaster could 
still be looming, and at this point, because we have not taken 
action in the interim, there is no one trying to get ahead of 
that or seeing----
    Mr. Bernanke. Yes, we are not aware of any----
    Senator Warner. Before the next AIG comes down----
    Mr. Bernanke. We are not aware of any such situation, but 
it is true, if there were something that was outside of our 
purview----
    Senator Warner. Let me go back to something the Chairman 
raised, and Senator Schumer and Senator Martinez raised. I do 
fear that one of the casualties of this crisis may be small 
business lending, not just in the short term but over a longer 
period of time, and not just for particularly already 
performing firms, but I used to be in a startup business, and 
while I think venture and early stage capital will reemerge, 
interim financing, startup capital for smaller businesses. I 
would echo what Senator Schumer said. I would hope that we 
could see some actual numbers in terms of take-up rates of TALF 
for small business. I know the Treasury is taking some actions 
with SBA, although that has always had some mixed results.
    I just wonder from a general comment whether--I know you 
don't like to give policy advice, but as we think about trying 
to get the financial system back in place, obviously large cap 
financial markets has kind of reopened, but I could see the 
small business area being really stymied for a long, long time 
and the startup business also being stymied for a long time. 
Comments? Suggestions?
    Mr. Bernanke. Well, one comment is that one of the main 
sources of small business financing is smaller banks, community 
banks which have closer relationships, more information, more 
local information. And to the extent that they remain strong, 
and some of them are under a lot of pressure for various 
reasons, but many of them remain strong and they in some cases 
have been able to step in where the national banks have had to 
pull back. That is one slightly encouraging direction and that 
suggests that we should continue to support community banking, 
which plays a very important role in supporting small business.
    You know, beyond that, I think we just need to get the 
banking system working as well as possible again. I think there 
are even large banks that view small business as an important 
profit center and will continue to lend there. But clearly, in 
a downturn like this, small business, which already has a 
pretty high mortality rate, is even a riskier proposition, and 
so it does pose a tremendous problem right now.
    Senator Warner. My time has expired, but Mr. Chairman, I 
know we have got a lot on the docket, but I would love to have 
the Committee perhaps take a hearing or some examination of 
what we as the Congress could do to look at the state of 
lending in small business and startup businesses, and not just 
existing small businesses but how we get that next step of 
innovation, because that financing market has disappeared. I 
have a lot of folks in that spectrum who say they don't see any 
signs of it returning, that it is basically totally broken. So 
I would love to have your thoughts on that.
    Chairman Dodd. That is a good point. We should. I think the 
point you make, it is the startup. It is also that mezzanine 
level which can be really difficult. You are right at that 
point of kind of going in one or two directions and the idea of 
being able to have someone sustaining that effort for you 
during those critical periods. That has been a great source of 
not only job creation, but tremendous innovation in the country 
in so many areas.
    So I think it is very worthwhile, because it is something, 
as I mentioned earlier, all of us hear about it every single 
day. We grapple with it every day, and we don't have very good 
answers yet on this and we should. So it is a very good 
suggestion. Thank you, Senator Warner.
    Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman, and thank you, 
Chairman Bernanke, for your work.
    I have questions in two areas. The first is the proposed 
Consumer Financial Protection Agency. Do you think it is a good 
idea to have a very powerful consumer issues-driven regulator 
structurally divorced from safety and soundness regulation?
    Mr. Bernanke. I understand the motivation. I understand why 
people are concerned that the Fed and others have not been 
sufficiently active on this and they think that maybe having a 
separate agency would be more committed to these issues. I do 
think, though, that there are some costs to splitting consumer 
compliance regulation from safety and soundness regulation. It 
means banks have to go through two separate sets of 
examinations. It means there are certain areas, like 
underwriting and others, that bear on both safety and soundness 
and on consumer protection which are not being jointly 
considered. And it may mean that there is not sufficient 
feedback from what is going on in the banks to the rule writers 
at the agency. So I think there are some costs there.
    I understand the motivation of those who would like to have 
such an agency, and I am not here to criticize that, but your 
particular point about some cost about splitting the safety and 
soundness and the consumer compliance, I think there is some 
validity to that.
    Senator Vitter. Well, my concern is when you look at the 
recent crisis, some of the causes--not all, I mean, we can 
point to a lot of different things--but some of the causes at 
Fannie Mae, Freddie Mac, in mandates like the Consumer 
Reinvestment Act, are consumer-driven, politically driven 
mandates that essentially got ahead of safety and soundness, in 
my opinion, promoting subprime lending, et cetera, beyond 
reasonable safety and soundness guidelines.
    Aren't we at risk of broadening and institutionalizing that 
danger by having this very powerful separate consumer issues 
regulator again structurally divorced from safety and 
soundness?
    Mr. Bernanke. It would depend whether the agency was 
involved in promulgating--actively promulgating proactively 
actions that the banks should take in terms of the kind of 
lending they should do and so on. If it is promoting certain 
kinds of lending, then it does raise the risk that that lending 
might not be safe and sound. If it is mostly involved in 
putting limits on the types of products that can be offered and 
so on, that could also have implications for bank 
profitability, but it doesn't have the same implications of 
what you are talking about, which is lending which is not safe 
and sound.
    Senator Vitter. Although bank profitability goes to safety 
and soundness, too.
    Mr. Bernanke. That is true, but we want the profits to be 
made with good products. So that is important.
    Senator Vitter. And Mr. Chairman, my second area of concern 
is this effort which I support for fuller audits of the Fed. I 
certainly strongly support Fed independence for monetary 
policy. I am also a coauthor of the Senate bill for broader 
audits.
    I have read your statements against that and specifically 
one of them, quote, ``If we were to raise interest rates at a 
meeting and someone in the Congress didn't like that and said, 
I want the GAO to audit that decision, wouldn't that be viewed 
as an interference?'' close quote. I think that is exaggerated, 
but what if we mandated these broad audits on a regular time 
interval, not at the direction of Members of Congress with a 
specific request? Wouldn't that take care of that concern? 
Every 2 years, every--you know, whatever the reasonable time 
interval is.
    Mr. Bernanke. I would like to discuss it further with you, 
Senator, but we are having right now a semiannual hearing on 
monetary policy where I am here to answer your questions about 
monetary policy. And we provide a statement, we provide 
minutes, and we eventually provide transcripts. So I do not 
think there is an issue of what is the process, what is going 
on in the FOMC's meeting. I think the question is, you know, 
were the policies good choices or not, and I am a little 
concerned about the GAO having its set of experts coming in and 
saying, no, we think that was the wrong choice, and Congress, 
you know, therefore, essentially second-guessing the Fed's 
decisions.
    But, again, this is a very--I am here to be accountable, 
and I want to--if you have questions about monetary policy, I 
am here to explain and respond to you.
    Senator Vitter. Well, again, let me suggest that this sort 
of fuller audit, particularly if it is at regularly scheduled 
intervals, not as a specific response to a member request, 
seems to me is exactly the sort of thing in a less detailed 
basis we are doing now. How is it fundamentally different?
    Mr. Bernanke. Well, the GAO audits really involve an 
assessment of the policy itself and the decision process. So it 
presumably would involve collecting all the materials that we 
had in our meeting. It would involve interviews of the 
participants. It would involve depositions from outside experts 
and so on. It just seems to me that that is more intervention 
than is consistent with the practice around the world that 
central banks operate on monetary policy independently of 
congressional oversight--not of oversight, but of congressional 
intervention.
    Let me respond. One thing of concern I know you have is the 
Fed's balance sheet, the lending we have done, the various 
unusual actions we have taken, and there I think we have common 
ground. I think the Congress and the public ought to have 
comfort and confidence that all the operations that we run, all 
the lending we are doing, all those things are done at the 
highest standard of quality with appropriate controls, 
appropriate attention to collateral and to the taxpayers' 
interest. And on those sorts of things, I think we agree that 
that needs to be done in a way that Congress can be satisfied.
    I am just concerned about what might look like an attempt 
on Congress' part to, even if indirectly, try to send a 
message, if you will, to the FOMC to take a different action 
than it thinks is in the long-run interest of the economy.
    Senator Vitter. Well, again, I think that is really 
exaggerated. I think that possible danger would be even further 
mitigated if these broader audits are regularly scheduled not 
at a specific request. And, quite frankly, I think that would 
pale in comparison to possibly perceived intervention than the 
fact that we call you, you know, sometimes with specific 
actions in mind to come up here and testify before us.
    The President can certainly request meetings with you, 
which I assume you would have, even in the context of his being 
able to reappoint the Chairman or not reappoint the Chairman. 
And it seems to me in all of those context, regularly scheduled 
audits are nothing more significant in terms of any danger of 
interference.
    Thank you.
    Mr. Bernanke. Thank you.
    Senator Reed [presiding]. Thank you, Senator Vitter.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair, and thank 
you for your testimony, Chair Bernanke.
    In your testimony, you noted that you are going to be 
announcing new rules on the compensation of mortgage 
originators. Are you intended to emphasize disclosure on yield 
spread premiums, or are you going to ban the practice?
    Mr. Bernanke. We are going to ban the practice of tying the 
compensation to the type of mortgage, to having prepayment 
penalties, for example.
    Senator Merkley. So in this situation, a broker would get 
the same compensation if they are doing a plain vanilla 30-
year, fixed-rate mortgage as they would if they were doing 
something that provided very high interest rates?
    Mr. Bernanke. We will be providing all the details in our 
meeting tomorrow, but the purpose of the regulation would be 
exactly what you are saying, to provide no incentive to brokers 
to steer borrowers into inappropriate, high-cost mortgages.
    Senator Merkley. I look forward to seeing the details, but 
if that is accomplished, that is very important consumer 
reform.
    There are basically four missions that are being discussed 
in this conversation for the Federal Reserve: the monetary 
mission; the prudential, or safety and soundness, mission; 
consumer protection; and consumer risk evaluation. Can you 
envision circumstances in which these missions are really in 
conflict with each other? There are certainly times that they 
would not be in conflict, but are you aware of circumstances 
when they would be in conflict?
    Mr. Bernanke. I do not think so. I think they are much more 
likely to be complementary. For example, our prudential work in 
banks and our monetary policy work involves a great deal of 
information about financial institutions and markets, as does 
our consumer protection work, and all that feeds into the 
systemic risk work. So I think in terms of operational 
activities, the kinds of people we would have, the expertise we 
would have, I think they are mostly complementary. And I think 
they are complementary in a policy perspective as well.
    For example, I think you need to have good prudential 
supervision and good consumer protection to have good systemic 
stability. I think you have to have good systemic stability in 
order to have full employment and price stability, which is the 
objective of monetary policy.
    So I think, in general, they tend to be complementary. I do 
not see any serious conflicts of interest or inconsistencies 
between those mandates.
    Senator Merkley. Well, frankly, your response frightens me 
because I think there are occasions that they are in conflict, 
at least the pressures of the players within the system. You 
may have practices that are quite profitable for the banking 
system that a person looking at it from a consumer protection 
point of view might say that disclosure really is not complete 
or fairness is not complete. Indeed, some of the many things 
that we have been addressing recently in regard to the 
compensation of how mortgages are issued, prepayment penalties, 
the way loans are packaged and resold, the way they are rated 
within the system--all of these things may be profitable in 
ways that strengthen the banks but weaken the position of 
consumers. And I think at least to be able to carry out these 
missions simultaneously, one has to be conscious and aware of 
the inherent conflicts that arise and have a plan for how one 
addresses those.
    Mr. Bernanke. I do not think--safety and soundness does 
mean maximum profitability. I do not think it is good for banks 
to engage in dubious practices. Eventually, it hurts them 
reputationally. They become subject to suits. So, you know, I 
would say that banks ought to make their money the honest way--
by providing good products. I do not see any incentive to rip 
off consumers in order to provide profits to banks. To the 
contrary, I think we want to have good products for consumers 
and good healthy business for the banks to allow them to be 
safe and sound.
    Senator Merkley. Well, I wish your vision had been fully in 
place 10 years ago, and we would not have much of the mess that 
we have now. I will tell you that on every consumer issue I 
have worked on, the complaint has been that it would undermine 
the success of our financial institutions. And so I think it is 
an inherent tension that one has to wrestle with.
    I am told there are just a few minutes left on the vote, so 
I will be very quick on my final question. That is, do you 
envision a point in the near future, if Congress was to adopt 
the plans related to the ``too big to fail'' issue--and by 
plans, I mean higher capital requirements or the ability to 
unwind nonbank financial institutions, the main ideas that are 
on the table. Do you envision a point where you would be able 
to give a speech and say, ``As of today, no financial 
institution in America, bank or nonbank, should count on being 
bailed out because we will not support that''?
    Mr. Bernanke. I would go further and say if you had the 
systemic risk resolution authority, that the Fed's ability to 
lend to a failing systemic institution ought to be curtailed so 
that it could be invoked only at the request of the resolution 
authority as a support of their operation. So I would make our 
interventions of the sort we did with AIG, I would make them 
illegal.
    Senator Merkley. Well, I appreciate the fact that you could 
envision even going beyond the strength of the statement I was 
laying out, because we have got to address successfully this 
issue of moral hazard, or we are perpetually in a cycle that 
does not serve our financial system or our citizens. And so I 
will look forward to being in attendance when that speech 
occurs, and I thank you very much for your testimony.
    Mr. Bernanke. Thank you.
    Senator Reed. Thank you, Senator Merkley.
    Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Chairman Bernanke, welcome to the Committee. It is always 
good to be in touch with you. We share a firm commitment to 
empowering our citizens through financial literacy to build 
stronger families, businesses, and communities. I greatly 
appreciated your efforts and that of your talented and 
dedicated staff on this issue.
    As we know, too many working families were steered into 
mortgages that they could not afford or effectively understand 
the potential risks associated with mortgage products. Now some 
potential homeowners cannot obtain mortgages or meet 
substantial downpayment requirements, especially in States such 
as Hawaii with high housing costs.
    What must be done? What must be done to ensure that working 
families are better prepared to purchase a home, select an 
appropriate mortgage, and remain in their house when challenged 
with financial hardships?
    Mr. Bernanke. Well, Senator, as you say, you and I agree 
very much on the importance of financial literacy. We have 
talked about this in the past, and I think if there was ever 
any doubt about the importance of financial literacy, the past 
2 years and the problems we have seen would dispel those 
doubts.
    As you know, the Federal Reserve is very actively engaged 
in this on a number of fronts, both at the Board level and also 
at our various reserve banks around the country. We have 
partnerships with a large number of nonprofit organizations, 
schools and others, to provide financial literacy materials and 
to try to learn about what works and what does not work.
    We have found that teaching financial literacy is 
difficult. We have not been as successful--we, the collective 
community, have not been as successful at teaching financial 
literacy in schools as we would like, and I think in part 
because students do not necessarily see the immediate relevance 
of mortgages and things of that sort to their own lives.
    What we have seen, I think, is that people who are close to 
making an important decision to take out a mortgage or to buy a 
car or other important decisions are at that point very 
motivated, and counseling has turned out to be very helpful. 
And so I have been very supportive of counselors to help people 
make better financial decisions.
    I think also there is some room for partnership in that 
parents and kids together can learn. The parents who are 
motivated and who understand the financial challenges they face 
working with kids, maybe in programs after school, those sorts 
of things, may be helpful.
    So there are a lot of ideas out there, and the Fed is 
working on many of them. We do not have a magic bullet yet, but 
I certainly, again, applaud your support of financial literacy 
and financial education. The more people can understand about 
these things, the less risk we run of, you know, problems down 
the road because people just, you know, made bad choices.
    Senator Akaka. Chairman Bernanke, as you know, due to the 
outstanding efforts of the Chairman, other Members of the 
Committee and the administration, we enacted landmark credit 
card reform legislation. I am proud that the law includes 
provisions for my Credit Card Minimum Payment Warning Act, 
which will provide consumers with detailed personalized 
information on their billing statements and access to reputable 
credit counseling services.
    What will be done to ensure that credit card minimum 
payment warning provisions be implemented in the manner that 
will be most helpful to consumers? Also, are there additional 
key personalized disclosures pertaining to other financial 
services products that would enable consumers to make better 
informed choices?
    Mr. Bernanke. Well, you have put your finger on minimum 
payment as being an important issue for consumers to understand 
when they manage their own credit cards. We, of course, are 
writing the rules for this legislation, and as you know, we 
have pioneered the use of consumer testing as a way of making 
sure that disclosures are effective and understandable. And, in 
particular, we have found ways of presenting the minimum 
payment information on the periodic statement that we found 
through the consumer testing is effective. And so we are using 
that very actively.
    I would mention also that the Fed has some online 
resources, including a payments calculator that allows 
consumers to go and ask, you know, ``If I pay just the minimum 
payment and this is my balance and this is my interest rate, 
how many years will it take me to pay off my consumer credit 
card debt?'' So we are trying to be very responsive on that 
issue.
    I also agree that in providing disclosures to consumers, it 
is important to have transaction-specific information. They can 
see their own payment, their own loan, as opposed to some kind 
of generic example. And so we have been working on--we will be 
releasing tomorrow new disclosures for mortgages and for home 
equity lines of credit, which require an earlier presentation 
of information to consumers that includes information specific 
to their particular mortgage, so information about their 
payments, about their principal and so on. And we are using the 
same principle as we look at student loans and some other areas 
where we are working on providing new disclosures.
    So, again, going back to my earlier comment about 
counseling, when people see their own numbers, their own 
transaction, it is much more salient to them, and they are much 
more willing to pay attention. And we hope that by making these 
disclosures more individual specific, we will make them much 
more useful to consumers.
    Senator Akaka. Thank you. Let me ask, finally, even in 
these difficult financial times, many of my constituents 
continue to pay excessive amounts for remittances--remittances 
when they send a portion of their hard-earned wages to 
relatives abroad. What must be done to better inform consumers 
about lower-cost remittances? And how can remittances be used 
to increase access to mainstream financial institutions?
    Mr. Bernanke. Well, the Federal Reserve has been interested 
in this area as well. We have a program that allows for the 
low-cost sending of remittances. I think the Federal Reserve 
Bank of Atlanta, working with the Mexican central bank, has 
developed some low-cost methods. I think this is an area where 
many mainstream institutions--banks and credit unions and the 
like--can provide cheaper, quicker services to minority 
communities. And this is an entree, this is a way to get a 
higher rate of participation by minorities in the mainstream 
banking system.
    Since I have talked about this for a number of years, we 
have seen credit unions in particular, but also banks and 
others, offer new remittance services which gives them an 
opportunity to attract minority customers into their other 
services as well. So I think that is a positive development.
    Senator Akaka. Well, thank you. Again, I want to express my 
appreciation to your talented and dedicated staff as well as 
your work in this area.
    Mr. Bernanke. Thank you.
    Senator Akaka. Thank you, Mr. Chairman.
    Senator Reed. Thank you, Senator Akaka.
    Senator Hutchison has just arrived, and if she is prepared, 
she will be recognized. Senator Hutchison, are you ready?
    Senator Hutchison. Thank you, Mr. Chairman.
    Thank you, Mr. Chairman Bernanke. I wanted to focus again 
on the health care issue that we are certainly grappling with 
right now. And, of course, the cost estimates are all over the 
lot. CBO says there is no way this is going to lower the cost 
to Government. And what we are concerned about, of course, is 
that the Government plan then attracts more and more from the 
private sector plans.
    I just wanted to ask you how you would assess another big 
Government health care program, in addition to Medicare and 
Medicaid that are already causing great concern for the future 
entitlements that will be required; what you think that does to 
debt; and is it the right approach right now considering our 
economy; and let me just add, the disincentive to employers to 
hire people, which is something that we are trying to do the 
reverse of right now when we have this high unemployment rate.
    Just give me your view of whether we should be looking at 
something different. Is there a problem here that you see on 
the horizon looking at the big picture and the long term?
    Mr. Bernanke. Thank you. There are certainly a number of 
issues that health care reform is intended to address, like 
access, like quality, and so on. As I mentioned to a couple of 
your colleagues, though, I think that from a broad economic 
point of view, an extraordinarily important one is the cost. 
Medical costs have been rising more quickly than the GDP for a 
long time now, and even under existing arrangements, with 
Medicare and Medicaid and so on, estimates are that we will in 
a few decades be spending a very big part of the Federal budget 
just to cover those programs.
    And so while I think there are lots of reasons to look at 
our medical system and try to find better ways to deliver 
health care to more Americans, I would urge Congress to pay a 
lot of attention to finding ways to bend the curve or to reduce 
the cost, particularly if the Federal Government is going to 
have a bigger share, because then the fiscal challenge becomes 
even greater.
    So if I could just propose that there be a lot of attention 
paid to how the program, however you look at it, however you 
choose to design it, find ways, either through consumer choice, 
through Government choice, however it is designed, to try to 
limit the so-called--to limit this ongoing increase that will 
really challenge our fiscal stability over a long period of 
time.
    Senator Hutchison. Does it concern you that CBO recently 
came out and said that it would, in fact, raise the curve, not 
lower it or bend it?
    Mr. Bernanke. Well, I have not looked at that in detail, 
and I do not have any specific comments on the CBO's analysis. 
But, again, to reiterate, I think we should make an important 
part of whatever health care reform we do close attention to 
the implications not only for the fiscal expenditure but also 
for the fact--also for the private sector, because the cost of 
health care affects businesses and households, you know, even 
outside the Government's budget. So addressing that cost issue 
I think really needs to be a central part of the discussion.
    Senator Hutchison. One of the things that has been brought 
out is the Medicaid mandate and the cost to the States, and in 
my home State of Texas, it is estimated that it would add $3 
billion a year to the State budget. And, of course, that is 
also a great concern and it is being raised in all of the 
States with that kind of mandate on top of the struggling State 
budgets because revenue is down. Do you see that the mandate on 
Medicaid also is an issue that is going to affect the economy 
in the long term and the big picture?
    Mr. Bernanke. Well, I understand the motivation and 
objective of trying to cover more people and to help people who 
are not already covered by insurance. Not to sound like a 
broken record, but, once again, the cost is the issue. And if 
Government is going to add these costs, they need to think 
about where else they can cut, where else they can raise 
revenue, because we need to have fiscal stability, fiscal 
sustainability going forward.
    So as a broad measure, we need to think about how our 
Government's fiscal picture will look, you know, not just this 
year but 5 years from now, 10 years from now, and make sure 
that, however we choose to structure our health care programs, 
we have a sustainable fiscal outlook.
    Senator Hutchison. Well, thank you. I think that one thing 
we are trying to do is just slow this down enough that we can 
find the information and have the best facts that we can, and 
setting an arbitrary August deadline seems to many of us to be 
very unwise because so much could happen that would be 
irreversible if we really do change our health care system to 
this extent with the cost and in a hard economic time anyway. 
And many of us are concerned as well that employers are going 
to be encouraged to just drop health care coverage, pay the 
fine, and let people go into the public system, which then 
becomes a bigger burden on the Government but also the 
beginning of rationed health care in many views.
    So I thank you for saying that we ought to be very careful 
before we do add more entitlements to our health care system, 
and I hope you will work with us as we are able to get more and 
more information about the real long-term consequences.
    Thank you.
    Senator Akaka [presiding]. Thank you, Senator.
    We will now call on Senator Bayh for his questions.
    Senator Bayh. Thank you for being with us today, Mr. 
Chairman. I would like to follow up on Senator Hutchison's 
question. I realize that you have not had a chance to review 
the OMB analysis of some of the different proposals that have 
come up here, but just let me ask you in general: If we enacted 
a health care reform proposal that did not bend the curve, that 
would not really meet the long-term fiscal challenges that we 
are facing, in your opinion, would it?
    Mr. Bernanke. If it did not, it would not. If it did not 
address the cost issue, it would not meet the challenges.
    Senator Bayh. So, in some ways, the test that is being 
applied around here, they are looking at health care in 
isolation rather than as a part of the broader fiscal picture. 
My concern is that the long-term fiscal policies that we are on 
now are unsustainable. I know you are concerned about the 
increasing debt of more than 2 percent per year. Some people 
would say it really cannot increase more than the annual rate 
of GDP growth.
    If you look at this 5-year budget and the likely 5 years 
after that, in no year will the growth of the debt be really 
below 3 and in many years it will be substantially beyond that. 
So as you know, it takes on a multiplier effect. And if we do 
not come to grips with this, it really is going to get away 
from us.
    So if all we did was even pass a health care bill that was 
deficit neutral, did not make things worse but did not make it 
better fiscally over the next 10 years, that really does not 
get to the heart of the problem either, does it?
    Mr. Bernanke. That is correct.
    Senator Bayh. So, in some ways, I think the standard we are 
holding ourselves to from a fiscal point of view is inadequate. 
And when at least the initial analysis of a couple of proposals 
suggested it might actually exacerbate the situation, well, 
that is a matter of some concern. I know the President cares 
about that, too, and now they are looking at things that really 
can bend the curve, hopefully because it is just not 
sustainable, the financial path that we are on.
    Let me ask you about the revenue side of this. You have 
been an observer of the elected branches of Government for a 
fair amount of time, as have I. The path of least resistance 
here is to claim savings in some sort of out-years that may 
never materialize or to pretend to impose cost reductions that 
the Congress never has the backbone to actually enforce.
    There are about 18 different things that were proposed to 
bend to curve; 16 of them have been included, but they are 
largely pilots or small demonstration projects. They do not 
really get up to scale over the next 10 years in a way that is 
going to make a material impact on the deficits.
    If you were sitting where we are sitting, how do we--and 
the OMB is reluctant to score these things because they are 
just so amorphous and so long term it almost--it defies, you 
know, reliable analysis.
    What do you do if you are a policy maker in a case like 
that?
    Mr. Bernanke. Well, you first judge to see if you have 
approaches which you think are sufficiently well documented 
that you think they would be reliable, and if so, you can score 
them. If not, you might put in triggers of various kinds and 
say, you know, we will limit the growth unless we show that we 
can reduce cost per person and by so much percent. So there 
might be ways to tie the expansion of the program to the 
success of cost-saving measures.
    Senator Bayh. Well, that certainly would be a good thing. 
You know, again, the difficulty is that some of these things 
have been--some companies have implemented some of them, and 
they have worked in sort of a microlevel. But they have never 
been done at scale so that they are not included in the 
proposal at scale. So the OMB says, Look, intuitively it makes 
some sense, but if you are asking us to put our reputation on 
the line with the hard score, just cannot do it. And as you 
know, it is difficult to estimate things a year or two in 
advance, let alone ten. So a lot of this is just educated 
guesswork, and that is--well, it is a difficult platform upon 
which to build long-term fiscal policy, and so that is one of 
the things that we are struggling with now.
    One of the proposals that has been suggested was to take--
and, you know, here, as you are aware, there was some time ago 
an agreement made to reduce Medicare reimbursements for 
physicians. We always waive it every year. And so now there are 
further savings in a variety programs that have been pledged as 
a part of this program. One has to look with some skepticism 
about whether we will actually enforce them. So to kind of take 
the politics out of it, to maximize the chances that the 
savings will actually be achieved, there is a proposal to 
create an independent commission outside of Congress to set 
Medicare reimbursement rates.
    Do you have an opinion about that from a fiscal policy 
standpoint?
    Mr. Bernanke. Well, I think that is ultimately up to 
Congress, but you have seen examples like Base Closing 
Commissions, things of that sort, which have tried to make a 
technical decision and then Congress has had to vote it up or 
down. So maybe something like that would be promising.
    I guess I would note that things like reducing compensation 
to doctors can give you one-off savings, but you have also got 
to deal with just this ongoing growth rate, and that ties into 
the structure of our health care delivery system. So the 
question you have to address is, are we, for example, over 
using technology?
    Senator Bayh. We need systemic reform, not just one-off 
savings.
    Mr. Bernanke. That is right. That is right.
    Senator Bayh. We may have some of both. But you are right. 
In the long run, the rifle shots won't get this done.
    I am having some cognitive dissonance, Chairman. One of the 
things in the stimulus package we enacted was some reduction in 
payroll taxes for most Americans to try and put some money in 
their pocket to buck up consumption. One of the proposals that 
is out there dealing with the employer mandate arena is to 
require employers below a certain size, or above a certain size 
that don't participate to pay up to 8 percent higher payroll 
taxes as their contribution to health care. How do we reconcile 
these two things? We would be cutting payroll taxes on the one 
hand to stimulate the economy, but possibly then raising them 
up to 8 percent on small and medium-sized businesses that don't 
contribute to health care on the other. Do you have a reaction 
to that?
    Mr. Bernanke. Well, in the short run, raising taxes in a 
recession will tend to weaken the economy, so there is no 
inconsistency there. I think the issue is if you are going to 
have additional coverage, how are you going to finance that, 
and I assume that this proposal would be a way of financing 
that in the longer term. This is more of a long-term 
proposition. In terms of the economy, maybe if you are doing 
that, you might want to consider phasing it in slowly so that 
it doesn't have an immediate impact on the profitability of 
small business or on the demand of consumers.
    Senator Bayh. That is true. It is a short-term, long-term 
phenomena. But as you know, businesses tend to make investment 
decisions and even hiring decisions with an eye toward the 
intermediate term and even the longer term, not just----
    Mr. Bernanke. That is true.
    Senator Bayh. ----the circumstances that they face today. 
So in some senses, we are trying to accomplish a humanitarian 
thing here, which is right, and make systemic reform, but 
reconcile that with the budget situation that we face and the 
need to not add burdens to the economy at a time when, as you 
pointed out in your testimony, it is burdened enough.
    I just want to conclude by thanking you. I really 
appreciate your emphasis on the importance of fiscal policy. 
Your comments today reflected your op-ed piece in the Wall 
Street Journal. The hardest decision in this town over the next 
couple of years is going to be how do you go about altering the 
very accommodative policies that we are now pursuing, both 
monetarily and fiscally. It is going to take the wisdom of 
Solomon. I wish you the best with that, but I think we have got 
a good man in a position to do that.
    Mr. Bernanke. Thank you.
    Senator Bayh. So I appreciate your appearance here today.
    Senator Akaka. Thank you, Senator Bayh.
    Senator Bennet.
    Senator Bennet. Thank you. Thank you, Mr. Chairman. Thanks 
for hanging in there. And I apologize if I go over ground that 
was covered since I left. It is because we are working on some 
other things.
    The first thing I wanted to say is I, first of all, 
appreciate your leadership very much, appreciate the difficult 
times that we have been through and also your statement with 
regard to the examiners and the regulators. But I just want to 
testify on behalf of the small businesses and small banks in my 
State that they really feel like the message is not getting 
through.
    And I know you talked about training. I know you talked 
about other kinds of things, all good, but I hope that we could 
work together somehow to create a set of metrics so that we can 
measure in some way whether or not your message is getting 
through. And nobody wants bad loans made, and I am the last 
person who would want that. But to the extent that it is true 
that that hesitancy that you mentioned this morning, that 
natural hesitancy in a time like this to be maybe more risk 
averse than you would otherwise be, to the extent that that is 
really affecting decisions that are being made at the local 
level, we ought to figure out what more we can do to clear that 
up, because where there are willing lenders and willing 
borrowers and where the loan is a reasonable one, given how 
tough these times are, we ought to be doing everything we can, 
I think, to make sure that happens. So I appreciate your 
willingness to at least think about what more can be done.
    The second thing I wanted to ask you about, and quickly 
because my time is short, is on--you were reassuring this 
morning on the question of the stress test and what we learned 
from the banks' ability to raise capital. I continue to hear 
from--but at the same time, you also recognize this coming 
potential crisis in commercial real estate and some other 
things. And I am having a hard time reconciling in my own mind 
how those two things are true at the same time. And I know 
there is a deep concern, continuing concern that the bid-ask 
spread for the assets that are on the books of these banks has 
really not shrunk very much and that we haven't yet taken our 
medicine with respect to commercial real estate.
    I don't know that you have got any more that you want to 
add on that, because you have already talked about it, but I am 
having a hard time seeing how, on the one hand, we should feel 
OK because the stress test came through fairly--the banks came 
through the stress test fairly well. They were able to raise 
private capital. But on the other hand, we know that this 
looming issue is out there with commercial real estate.
    Mr. Bernanke. Well, it is not inconsistent. The stress 
test, first of all, applied to the top 19 banks and we found 
that there is still $600 billion of losses to be experienced in 
the next 2 years, so that is quite substantial. And our 
conclusion was that even after that $600 billion of losses, 
they would still be able to meet well-capitalized requirements.
    The other aspect is that a lot of the commercial real 
estate loans are in smaller banks, and so some smaller banks 
which were not counted in the stress test, were not examined in 
the stress test, will be facing those costs going forward.
    So it is a major challenge to the banking system. I 
discussed with a couple of your colleagues some of the things 
that the Fed is doing, and I think what we will see is that 
banks faced with commercial real estate loans which cannot 
perform at the original terms will be trying to find 
renegotiations to allow at least partial performance on----
    Senator Bennet. And it is my sense that up until now, there 
has been an inclination to roll over these financings, but what 
hasn't happened yet is a resetting of the underlying valuation 
of the assets, which is still something that we are going to be 
facing, I think, in the next 12 months--over the next 12 
months.
    One very quick question and then a longer one. I will be 
very brief. You mentioned twice this morning that I heard that 
you thought that the TALF had had an effect on small business 
lending and consumer lending and I just wondered what the 
evidence of that is.
    Mr. Bernanke. The evidence is, first, in the secondary 
market, you can see the spreads on securitizations that are 
traded and those have come in quite substantially. And we have 
also identified--we have talked to lenders who have said that 
the ability to issue these securitized products has freed up 
their balance sheets to make new loans. And so we do have some 
evidence for that.
    Some of that was discussed, by the way, in the Financial 
Oversight Board that oversees the TARP just released its second 
quarter report, and that has discussion of some of these issues 
because the TALF is partly a TARP facility.
    Senator Bennet. I will look at that. I think that the 
commercial paper efforts were so successful, at least in my 
view, that I hope we will see similar success here. I don't 
know.
    The last question I had is just as you think about 
unwinding this giant bridge loan to the economy that the 
taxpayers have been forced to make and that the Fed has done, 
we have got a lot of work to do around here thinking about what 
we do about these mountains of debt that we have got on the 
Federal Government and our deficit. I know there was some of 
this in your written testimony. I wonder if you have got 
anything you would like to say to us about how we need to think 
about that side of the equation as you are thinking about 
unwinding the work that the Fed has done. How do we acknowledge 
that when you are in a recession like this, it has been 
appropriate to do what has been done, but as we come out of 
this recession, we need to get our fiscal house in order?
    Mr. Bernanke. It is very tough and I don't envy you, your 
task. I think one small piece of advice would be instead of 
thinking about this as a year-to-year situation, think about 
the whole trajectory. How are we going to go forward, not just 
this year and next year, but over the next 5 years and 10 
years, taking into account what we know about population aging, 
health care costs, and those things. So the whole path is what 
matters, not just this year.
    Senator Bennet. Well, thank you for your service. Thanks 
for your testimony. Thank you, Mr. Chairman.
    Senator Akaka. Thank you very much, Senator Bennet.
    Senator Kohl.
    Senator Kohl. Thank you, Senator Akaka.
    Mr. Bernanke, the Federal Reserve has been increasing their 
balance sheet over the past year, as you know, and created many 
new lending programs to continue the flow of credit to 
consumers as well as stabilize the financial markets. 
Additionally, the Federal Reserve announced that it will 
purchase up to one-and-a-quarter trillion dollars of mortgage-
backed securities by the end of 2009 to help support the 
housing markets, and that is good, too.
    Despite all these efforts, loans and lines of credit are 
hard to come by for many creditworthy consumers in smaller 
communities and community banks are having a difficult time 
originating new loans due to liquidity problems, as I am sure 
you are very well aware of. The Federal Reserve has done 
precious little, many people say, for small community banks at 
the national level. So when and what can the Federal Reserve do 
to help small banks all across our country start lending again?
    Mr. Bernanke. Well, we agree with you that the community 
banks are very important, and as I was mentioning to one of 
your colleagues, in many cases where large banks are 
withdrawing from small business lending or from local lending, 
the community banks are stepping in, and we recognize that and 
think it is very important.
    The Federal Reserve provides similar support to small banks 
that we do to large banks in that you mentioned liquidity. We 
provide discount window loans or loans through the Term Auction 
Facility and smaller banks are eligible to receive that 
liquidity at favorable interest rates.
    It is not our department, but the Treasury has been working 
to expand the range of banks which can receive the TARP capital 
funds and they have made significant progress in dealing with 
banks that don't trade publicly.
    We have worked with smaller banks to try to address some of 
the regulatory burden that they face, and we have a variety of 
partnerships, for example, with minority banks to try to give 
them assistance, technical assistance, and the like.
    I agree. If I were a small banker, I would be a little bit 
annoyed because the big banks seem to have gotten a lot more of 
the attention because it was the big banks and their failures 
that have really threatened our system. And that is why it is 
very important as we do financial regulatory reform that we 
address this too big to fail problem so that we don't have this 
unbalanced situation where you either have to bail out a big 
bank or else it brings down the system. That is not acceptable 
and we have to fix that.
    But we are working with small banks, and personally, I 
always try to meet with small bank leaders and the ICBA and 
other trade associations, and I agree with you that they are 
very important. They are playing a very important role right 
now in our economy.
    Senator Kohl. You say you agree that they are important, 
that they play an important role in our economy. Are you 
satisfied that we are doing proportionately as much for small 
community banks as we are doing for the large banks?
    Mr. Bernanke. Well, again, within the powers that we have 
in terms of providing liquidity and from the perspective of the 
Treasury and the TARP providing capital, we are trying to 
provide an even playing field to the extent we can do so. If 
you have other thoughts, I would be happy to think about it.
    Senator Kohl. Well, we have small bankers all across the 
country, and I am thinking about my own State of Wisconsin, 
that are wanting so much to do more business in their 
communities but they don't have the liquidity to do it, and I 
am sure you understand that very well. And in these small 
communities, they are the backbone financially of the 
community. And, of course, I hear from them that they are not 
getting as much attention as they would like at the national 
level and I think you said that you agree.
    Mr. Bernanke. I do agree.
    Senator Kohl. Thank you. While consumer spending has 
remained flat through 2009, the personal savings rate, as you 
know, has finally started to rise, and quite substantially. The 
weak economy has made consumers more skeptical of borrowing and 
increasingly aware of their spending habits, as I am sure you 
know. As we here consider reforms to the banking system to help 
financial institutions prepare for possible future economic 
downturns, we need also to help prepare the American families 
across the country for their next economic crisis. Do you have 
any policy recommendations that would help continue the upward 
trend of the personal savings rate and avoid another bubble 
based on consumer activity?
    Mr. Bernanke. Well, there are very few silver linings to 
this crisis, but I think one of them is the increased thrift 
and increased attention to family finances that is going to 
come out of it. So we welcome the higher savings rate. It is 
constructive for the country. It is constructive--it reduces 
our dependence on foreign lenders. It supports investment. So 
it strengthens family finances, so I think that is positive.
    The Government policy makers have been trying for many 
decades to find a magic bullet to increase saving, and given 
the low savings rates, obviously it has not been very 
successful. There have been a number of ideas. A number of them 
relate to what is called behavioral approaches, taking account 
of the fact that people are sometimes mentally lazy and you 
give them--the first choice you give them is the one they will 
take.
    So, for example, recently the Congress made changes to the 
law that allowed to make 401(k) contributions an opt-out rather 
than an opt-in choice for their workers, and they found that 
just by making that simple change, that many more workers 
decided to contribute to their 401(k) plan, and that builds up 
over time, of course, to a significant amount of saving. Many 
employers also contribute, match 401(k) contributions.
    So those are some of the kinds of methods that may be 
useful. I talked with Senator Akaka recently, just a few 
minutes ago, about financial literacy and financial education. 
And again, I think part of the issue, particularly among lower-
income and minority populations who don't save as much, is 
making them aware of the benefits of saving for retirement, for 
other life goals. So I think education has a role to play, as 
well.
    But I have to tell you, Senator, that the economics 
profession has not been extremely successful in finding good 
methods of increasing saving and it takes, unfortunately, this 
kind of crisis to change behavior the way we have seen it.
    Senator Kohl. Thank you very much, Chairman Bernanke, and 
thank you very much, Senator Akaka.
    Senator Akaka. Thank you very much, Senator Kohl, for your 
questions.
    I want to thank the Chairman for joining us today.
    The hearing record will remain open for 1 week so Members 
can submit additional statements or questions they may have.
    This hearing is adjourned.
    Mr. Bernanke. Thank you.
    [Whereupon, at 12:51 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
           PREPARED STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
    I'd like to welcome Chairman Bernanke, who has worked hard to 
address enormous challenges during a difficult time in our Nation's 
history.
    If the success of our Government's attempts to get our economy back 
on track were to be measured by executive pay or the big banks' bottom 
lines, perhaps today would be a day to celebrate the success of that 
hard work. After all, leading economists believe that these indicators 
are signs that we have averted utter catastrophe, and suggest that a 
recovery may be imminent.
    But while this recession may have begun on Wall Street, the 
recovery won't be real until and unless it's felt on Main Street. And 
so today is a day to ask: When will working families in my State of 
Connecticut and around the country start to feel the effects of our 
work to restore our economy?
    After all, today we meet to receive the semiannual monetary policy 
report mandated in the 1978 Humphrey-Hawkins Full Employment Act.
    And if the goal is full employment, the news today is grim.
    Unemployment in June was 9.5 percent--the highest level in 26 
years. Most economists and the Fed itself believe that it could top 10 
percent before the end of the year.
    Meanwhile, Americans who have lost, or are worried about losing, 
their jobs, homes, or retirement security have watched as others reap 
the first benefits of our Government's response.
    They hear about a stock market rally, and wonder if it will ever be 
enough to make up for the retirement savings that have been wiped out.
    They hear about million-dollar bonuses going to CEOs whose firms 
caused the meltdown in the first place, while rank and file workers 
across the country are laid off or forced to accept pay cuts.
    They hear about big banks, bailed out with billions of taxpayer 
dollars and Government-backed credit and now reporting billions in 
profits.
    But they still can't get a loan to send their kid to college or buy 
a new car. They're still getting slammed by these same companies with 
obscene fees and credit card interest rate hikes.
    And despite hearing from everyone in Washington that stabilizing 
the housing market is key to stabilizing the economy, they're still 
having trouble modifying their mortgages, even as 10,000 families a day 
are hit with foreclosure notices.
    Mr. Chairman, I appreciate your hard work on the monetary policy 
side of the equation and the positive indicators we have seen in recent 
weeks. But these positive indicators seem to be stuck at the top. And 
we on this Committee work for the American people.
    When can they expect the recovery that they have funded? When will 
working families see their rally? Their pay raise?
    What are you doing as the holding company supervisor of these 
recipients of TARP and other extraordinary Government assistance to 
ensure they are serving the interests of the American people?
    These struggling Americans aren't ready for an ``exit strategy'' 
for economic recovery efforts. First, the recovery must reach them.
    As we move forward, we need to make sure we lay a strong foundation 
for economic recovery that will reach every corner of this country. 
Part of that foundation will entail reforming financial regulation so 
that the mistakes that got us into this mess are not repeated.
    As you know, I have called for, and the Administration has 
proposed, an independent consumer financial protection agency as part 
of that mission.
    But the Administration has also proposed expanding the Fed's powers 
over systemically important companies. I have a number of concerns 
about this proposal. Not least of which, why does the Fed deserve more 
authority when it failed to prevent the current crisis?
    Mr. Chairman, all of us understand the importance of the work you 
are doing. And we look forward to continuing to partner with you in 
that effort.
    But the financiers who engineered this crisis aren't the reason 
we're here. It's the millions of families who are still struggling, 
still falling behind. And I hope that they can be the focus of today's 
hearing, as well as our efforts going forward.
                                 ______
                                 
            PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY
    Thank you Mr. Chairman.
    The purpose of today's hearing is to oversee the Federal Open 
Market Committee's conduct of monetary policy. There is no doubt that 
we are in a very challenging economic environment. The economy is 
extremely weak. Bank lending remains sluggish and unemployment is 
rising rapidly.
    The unemployment rate stands at a 26-year high and is expected to 
increase. Although the Fed has gone to great lengths to inject 
liquidity into our economy, its efforts are largely designed to assist 
banks, especially large money-center financial institutions.
    Many small businesses, however, are desperately seeking capital 
from the financial sector and have not been able to secure it. I have 
heard from a number of Alabama companies that have been virtually 
abandoned by all of their traditional funding providers.
    While it is important to bring stability to the financial sector, 
if the part of our economy most responsible for job creation--small 
business--cannot obtain funding, such stability will be short lived.
    Going forward, the measure of success will have to include whether 
Main Street businesses are retaining or even adding jobs.
    While I understand that the FOMC cannot by itself solve all our 
economic problems, the effective conduct of monetary policy is a 
necessary condition for economic recovery.
    Therefore, today I hope to hear from Chairman Bernanke whether the 
FOMC will need to take additional steps to help revive our economy.
    Because interest rates remain at record lows, I am interested to 
hear what other specific actions the FOMC can and is prepared to take 
if additional easing is necessary.
    In addition, I would like to know what Chairman Bernanke believes 
can be done to spur lending to small and medium businesses. While 
monetary policy is the central focus of this hearing, I believe we must 
also examine the Fed's performance as a bank regulator as well as its 
participation in bail-outs over the past year.
    I do not believe that the Board or the regional banks have handled 
their regulatory responsibilities very well. Many of the large 
financial companies that have been the focus the Fed's bailout efforts 
were also subject to the Fed's regulatory oversight. While they were 
regulated by the Fed, these firms were allowed to take great risks both 
on and off their balance sheets.
    When the housing bubble burst, however, those risky positions were 
exposed and firms had to scramble to shore up their finances and the 
credit crunch quickly followed.
    I am not aware of any effort on the part of the Fed, prior to the 
crisis, to question or require such firms to take any actions to 
address the significant risks they were taking. In fact, the only 
effort of which I am aware is an effort to modernize bank capital 
standards. This effort could have resulted in a significant reduction 
in overall bank capital levels.
    I wonder where we would be today if the Fed had been able to act on 
its desire to eliminate the leverage ratio.
    I cannot imagine a scenario where banks would fair better with less 
capital during a period of financial stress such as the one we are 
currently experiencing.
    If the Fed had conducted its regulatory oversight with greater 
diligence, I do not think the financial crisis would have achieved the 
depth and scope that it did.
    In the end, it was the failure of the Fed to adequately supervise 
our largest financial institutions that required the deployment of its 
monetary policy resources to stave off financial disaster.
    In light of the Fed's record of failure as a bank regulator, it 
should come as no surprise that the Congress is taking a closer look at 
the Fed and reconsidering its regulatory mandate.
    Thank you Mr. Chairman.
                                 ______
                                 
               PREPARED STATEMENT OF SENATOR TIM JOHNSON
    Thank you, Chairman Bernanke for being here today. As the economy 
continues to undergo a period of stress and volatility, I look forward 
to hearing the Fed's economic forecast for the rest of 2009 and into 
2010.
    The Fed continues to have a full plate as it looks for ways to 
address the problems plaguing our economy. I applaud your efforts to 
date to achieve economic stability. Unfortunately, I suspect we are not 
yet at the end of the road in terms the challenges facing our economy.
    I am committed to our Nation's economic recovery and to ensuring 
the safety and soundness of the financial sector without placing 
unnecessary burdens on the taxpayer. In the long run, the best way to 
protect taxpayers is to fashion a functional regulatory system that 
prevents situations like the ones we are currently experiencing from 
arising again.
    As the Banking Committee tackles financial regulatory restructuring 
in coming weeks, we will continue to look to your expertise. As many 
others have noted, the status quo is no longer an option. It is my hope 
that Members of this Committee from both sides of the aisle can 
construct a proposal that reflects the needs of our Nation's taxpayers, 
consumers and investors, and financial markets and institutions to 
achieve economic recovery and needed reform.
                                 ______
                                 
                PREPARED STATEMENT OF SENATOR JACK REED
    Today's hearing provides an important opportunity to hear from 
Chairman Bernanke on the overall health of the economy, labor market 
conditions, and the housing sector. These semiannual hearings are a 
critical part of ensuring appropriate oversight of the Federal 
Reserve's integral role to restore stability in our economy and protect 
families in Rhode Island and across the country.
    I continue to work with my colleagues on this Committee to address 
three key aspects of recovering from the financial crisis. First, we 
must stabilize and revive the housing markets. With estimates of more 
than a million foreclosures this year alone, we must recognize this as 
a national emergency no different than when banks are on the verge of 
failing. One in eight mortgages is in default or foreclosure. These are 
more than statistics. They represent individuals and families uprooted, 
finances destroyed, and communities in turmoil. We need to keep pushing 
servicers to expand their capacity and hold them accountable for their 
performance. And we need to make the process more transparent for 
homeowners.
    Second, we need to create jobs, which the American Recovery and 
Reinvestment Act is already doing throughout the U.S. Although there 
have been some positive signs in the economic outlook, the unemployment 
rate in Rhode Island and nationally has continued to climb steeply. In 
the 5 months since you addressed the Committee in February, the 
national unemployment rate has risen from 8.1 percent to 9.5 percent, 
and in Rhode Island it has surged from 10.5 percent to 12.4 percent--
the second highest in the country. I will soon introduce legislation to 
encourage more States to use work share programs, similar to our 
program in Rhode Island, which provide businesses with the flexibility 
to reduce hours instead of cutting jobs.
    Third, we need to stabilize and revitalize the financial markets. 
We've made significant progress in this area, but we need to continue 
to monitor these institutions to ensure they remain well-capitalized 
and are able to withstand market conditions much better than they did 
in the recent past. And we need to be smart about the Federal Reserve 
lending programs to get our credit and capital markets once again 
operating efficiently and effectively. This is especially true for 
small businesses, our job creators, which are the key to our Nation's 
economic recovery.
    Finally, complimenting all of these is a need for comprehensive 
reform of the financial regulatory system. We face several major 
challenges in this area, including addressing systemic risk, 
consolidating a complex and fragmented system of regulators, and 
increasing transparency and accountability in traditionally unregulated 
markets. It is important to recognize that our economic problems have 
been years in the making. It will not be easy to get our economy back 
on the right track. But in working with President Obama we can begin to 
turn the tide by enacting policies that create jobs and restore 
confidence in our economy.
                                 ______
                                 
                 PREPARED STATEMENT OF BEN S. BERNANKE
       Chairman, Board of Governors of the Federal Reserve System
                             July 22, 2009
    Chairman Dodd, Ranking Member Shelby, and other Members of the 
Committee, I am pleased to present the Federal Reserve's semiannual 
Monetary Policy Report to the Congress.
Economic and Financial Developments in the First Half of 2009
    Aggressive policy actions taken around the world last fall may well 
have averted the collapse of the global financial system, an event that 
would have had extremely adverse and protracted consequences for the 
world economy. Even so, the financial shocks that hit the global 
economy in September and October were the worst since the 1930s, and 
they helped push the global economy into the deepest recession since 
World War II. The U.S. economy contracted sharply in the fourth quarter 
of last year and the first quarter of this year. More recently, the 
pace of decline appears to have slowed significantly, and final demand 
and production have shown tentative signs of stabilization. The labor 
market, however, has continued to weaken. Consumer price inflation, 
which fell to low levels late last year, remained subdued in the first 
6 months of 2009.
    To promote economic recovery and foster price stability, the 
Federal Open Market Committee (FOMC) last year brought its target for 
the Federal funds rate to a historically low range of 0 to \1/4\ 
percent, where it remains today. The FOMC anticipates that economic 
conditions are likely to warrant maintaining the Federal funds rate at 
exceptionally low levels for an extended period.
    At the time of our February report, financial markets at home and 
abroad were under intense strains, with equity prices at multiyear 
lows, risk spreads for private borrowers at very elevated levels, and 
some important financial markets essentially shut. Today, financial 
conditions remain stressed, and many households and businesses are 
finding credit difficult to obtain. Nevertheless, on net, the past few 
months have seen some notable improvements. For example, interest rate 
spreads in short-term money markets, such as the interbank market and 
the commercial paper market, have continued to narrow. The extreme risk 
aversion of last fall has eased somewhat, and investors are returning 
to private credit markets. Reflecting this greater investor 
receptivity, corporate bond issuance has been strong. Many markets are 
functioning more normally, with increased liquidity and lower bid-asked 
spreads. Equity prices, which hit a low point in March, have recovered 
to roughly their levels at the end of last year, and banks have raised 
significant amounts of new capital.
    Many of the improvements in financial conditions can be traced, in 
part, to policy actions taken by the Federal Reserve to encourage the 
flow of credit. For example, the decline in interbank lending rates and 
spreads was facilitated by the actions of the Federal Reserve and other 
central banks to ensure that financial institutions have adequate 
access to short-term liquidity, which in turn has increased the 
stability of the banking system and the ability of banks to lend. 
Interest rates and spreads on commercial paper dropped significantly as 
a result of the backstop liquidity facilities that the Federal Reserve 
introduced last fall for that market. Our purchases of agency mortgage-
backed securities and other longer-term assets have helped lower 
conforming fixed mortgage rates. And the Term Asset-Backed Securities 
Loan Facility (TALF), which was implemented this year, has helped 
restart the securitization markets for various classes of consumer and 
small business credit.
    Earlier this year, the Federal Reserve and other Federal banking 
regulatory agencies undertook the Supervisory Capital Assessment 
Program (SCAP), popularly known as the stress test, to determine the 
capital needs of the largest financial institutions. The results of the 
SCAP were reported in May, and they appeared to increase investor 
confidence in the U.S. banking system. Subsequently, the great majority 
of institutions that underwent the assessment have raised equity in 
public markets. And, on June 17, 10 of the largest U.S. bank holding 
companies--all but one of which participated in the SCAP--repaid a 
total of nearly $70 billion to the Treasury.
    Better conditions in financial markets have been accompanied by 
some improvement in economic prospects. Consumer spending has been 
relatively stable so far this year, and the decline in housing activity 
appears to have moderated. Businesses have continued to cut capital 
spending and liquidate inventories, but the likely slowdown in the pace 
of inventory liquidation in coming quarters represents another factor 
that may support a turnaround in activity. Although the recession in 
the rest of the world led to a steep drop in the demand for U.S. 
exports, this drag on our economy also appears to be waning, as many of 
our trading partners are also seeing signs of stabilization.
    Despite these positive signs, the rate of job loss remains high and 
the unemployment rate has continued its steep rise. Job insecurity, 
together with declines in home values and tight credit, is likely to 
limit gains in consumer spending. The possibility that the recent 
stabilization in household spending will prove transient is an 
important downside risk to the outlook.
    In conjunction with the June FOMC meeting, Board members and 
Reserve Bank presidents prepared economic projections covering the 
years 2009 through 2011. FOMC participants generally expect that, after 
declining in the first half of this year, output will increase slightly 
over the remainder of 2009. The recovery is expected to be gradual in 
2010, with some acceleration in activity in 2011. Although the 
unemployment rate is projected to peak at the end of this year, the 
projected declines in 2010 and 2011 would still leave unemployment well 
above FOMC participants' views of the longer-run sustainable rate. All 
participants expect that inflation will be somewhat lower this year 
than in recent years, and most expect it to remain subdued over the 
next 2 years.
Policy Challenges
Monetary Policy
    In light of the substantial economic slack and limited inflation 
pressures, monetary policy remains focused on fostering economic 
recovery. Accordingly, as I mentioned earlier, the FOMC believes that a 
highly accommodative stance of monetary policy will be appropriate for 
an extended period. However, we also believe that it is important to 
assure the public and the markets that the extraordinary policy 
measures we have taken in response to the financial crisis and the 
recession can be withdrawn in a smooth and timely manner as needed, 
thereby avoiding the risk that policy stimulus could lead to a future 
rise in inflation. \1\ The FOMC has been devoting considerable 
attention to issues relating to its exit strategy, and we are confident 
that we have the necessary tools to implement that strategy when 
appropriate.
---------------------------------------------------------------------------
     \1\ For further discussion of the Federal Reserve's ``exit 
strategy'' from its current policy stance, see ``Monetary Policy as the 
Economy Recovers'' in Board of Governors of the Federal Reserve System 
(2009), Monetary Policy Report to the Congress (Washington: Board of 
Governors, July), pp. 34-37.
---------------------------------------------------------------------------
    To some extent, our policy measures will unwind automatically as 
the economy recovers and financial strains ease, because most of our 
extraordinary liquidity facilities are priced at a premium over normal 
interest rate spreads. Indeed, total Federal Reserve credit extended to 
banks and other market participants has declined from roughly $1.5 
trillion at the end of 2008 to less than $600 billion, reflecting the 
improvement in financial conditions that has already occurred. In 
addition, bank reserves held at the Fed will decline as the longer-term 
assets that we own mature or are prepaid. Nevertheless, should economic 
conditions warrant a tightening of monetary policy before this process 
of unwinding is complete, we have a number of tools that will enable us 
to raise market interest rates as needed.
    Perhaps the most important such tool is the authority that the 
Congress granted the Federal Reserve last fall to pay interest on 
balances held at the Fed by depository institutions. Raising the rate 
of interest paid on reserve balances will give us substantial leverage 
over the Federal funds rate and other short-term market interest rates, 
because banks generally will not supply funds to the market at an 
interest rate significantly lower than they can earn risk free by 
holding balances at the Federal Reserve. Indeed, many foreign central 
banks use the ability to pay interest on reserves to help set a floor 
on market interest rates. The attractiveness to banks of leaving their 
excess reserve balances with the Federal Reserve can be further 
increased by offering banks a choice of maturities for their deposits.
    But interest on reserves is by no means the only tool we have to 
influence market interest rates. For example, we can drain liquidity 
from the system by conducting reverse repurchase agreements, in which 
we sell securities from our portfolio with an agreement to buy them 
back at a later date. Reverse repurchase agreements, which can be 
executed with primary dealers, Government-sponsored enterprises, and a 
range of other counterparties, are a traditional and well-understood 
method of managing the level of bank reserves. If necessary, another 
means of tightening policy is outright sales of our holdings of longer-
term securities. Not only would such sales drain reserves and raise 
short-term interest rates, but they also could put upward pressure on 
longer-term interest rates by expanding the supply of longer-term 
assets. In sum, we are confident that we have the tools to raise 
interest rates when that becomes necessary to achieve our objectives of 
maximum employment and price stability.
Fiscal Policy
    Our economy and financial markets have faced extraordinary near-
term challenges, and strong and timely actions to respond to those 
challenges have been necessary and appropriate. I have discussed some 
of the measures taken by the Federal Reserve to promote economic growth 
and financial stability. The Congress also has taken substantial 
actions, including the passage of a fiscal stimulus package. 
Nevertheless, even as important steps have been taken to address the 
recession and the intense threats to financial stability, maintaining 
the confidence of the public and financial markets requires that policy 
makers begin planning now for the restoration of fiscal balance. Prompt 
attention to questions of fiscal sustainability is particularly 
critical because of the coming budgetary and economic challenges 
associated with the retirement of the baby-boom generation and 
continued increases in the costs of Medicare and Medicaid. Addressing 
the country's fiscal problems will require difficult choices, but 
postponing those choices will only make them more difficult. Moreover, 
agreeing on a sustainable long-run fiscal path now could yield 
considerable near-term economic benefits in the form of lower long-term 
interest rates and increased consumer and business confidence. Unless 
we demonstrate a strong commitment to fiscal sustainability, we risk 
having neither financial stability nor durable economic growth.
Regulatory Reform
    A clear lesson of the recent financial turmoil is that we must make 
our system of financial supervision and regulation more effective, both 
in the United States and abroad. In my view, comprehensive reform 
should include at least the following key elements:

    a prudential approach that focuses on the stability of the 
        financial system as a whole, not just the safety and soundness 
        of individual institutions, and that includes formal mechanisms 
        for identifying and dealing with emerging systemic risks;

    stronger capital and liquidity standards for financial 
        firms, with more-stringent standards for large, complex, and 
        financially interconnected firms;

    the extension and enhancement of supervisory oversight, 
        including effective consolidated supervision, to all financial 
        organizations that could pose a significant risk to the overall 
        financial system;

    an enhanced bankruptcy or resolution regime, modeled on the 
        current system for depository institutions, that would allow 
        financially troubled, systemically important nonbank financial 
        institutions to be wound down without broad disruption to the 
        financial system and the economy;

    enhanced protections for consumers and investors in their 
        financial dealings;

    measures to ensure that critical payment, clearing, and 
        settlement arrangements are resilient to financial shocks, and 
        that practices related to the trading and clearing of 
        derivatives and other financial instruments do not pose risks 
        to the financial system as a whole; and

    improved coordination across countries in the development 
        of regulations and in the supervision of internationally active 
        firms.

    The Federal Reserve has taken and will continue to take important 
steps to strengthen supervision, improve the resiliency of the 
financial system, and to increase the macroprudential orientation of 
our oversight. For example, we are expanding our use of horizontal 
reviews of financial firms to provide a more comprehensive 
understanding of practices and risks in the financial system.
    The Federal Reserve also remains strongly committed to effectively 
carrying out our responsibilities for consumer protection. Over the 
past 3 years, the Federal Reserve has written rules providing strong 
protections for mortgage borrowers and credit card users, among many 
other substantive actions. Later this week, the Board will issue a 
proposal using our authority under the Truth in Lending Act, which will 
include new, consumer-tested disclosures as well as rule changes 
applying to mortgages and home equity lines of credit; in addition, the 
proposal includes new rules governing the compensation of mortgage 
originators. We are expanding our supervisory activities to include 
risk-focused reviews of consumer compliance in nonbank subsidiaries of 
holding companies. Our community affairs and research areas have 
provided support and assistance for organizations specializing in 
foreclosure mitigation, and we have worked with nonprofit groups on 
strategies for neighborhood stabilization. The Federal Reserve's 
combination of expertise in financial markets, payment systems, and 
supervision positions us well to protect the interests of consumers in 
their financial transactions. We look forward to discussing with the 
Congress ways to further formalize our institution's strong commitment 
to consumer protection.
Transparency and Accountability
    The Congress and the American people have a right to know how the 
Federal Reserve is carrying out its responsibilities and how we are 
using taxpayers' resources. The Federal Reserve is committed to 
transparency and accountability in its operations. We report on our 
activities in a variety of ways, including reports like the one I am 
presenting to the Congress today, other testimonies, and speeches. The 
FOMC releases a statement immediately after each regularly scheduled 
meeting and detailed minutes of each meeting on a timely basis. We have 
increased the frequency and scope of the published economic forecasts 
of FOMC participants. We provide the public with detailed annual 
reports on the financial activities of the Federal Reserve System that 
are audited by an independent public accounting firm. We also publish a 
complete balance sheet each week.
    We have recently taken additional steps to better inform the public 
about the programs we have instituted to combat the financial crisis. 
We expanded our Web site this year to bring together already available 
information as well as considerable new information on our policy 
programs and financial activities. \2\ In June, we initiated a monthly 
report to the Congress (also posted on our Web site) that provides even 
more information on Federal Reserve liquidity programs, including 
breakdowns of our lending, the associated collateral, and other facets 
of programs established to address the financial crisis. \3\ These 
steps should help the public understand the efforts that we have taken 
to protect the taxpayer as we supply liquidity to the financial system 
and support the functioning of key credit markets.
---------------------------------------------------------------------------
     \2\ See ``Credit and Liquidity Programs and the Balance Sheet'' on 
the Board's Web site at www.federalreserve.gov/monetarypolicy/bst.htm.
     \3\ See the monthly reports on the Board's Web site at ``Credit 
and Liquidity Programs and the Balance Sheet'', Congressional Reports 
and Other Resources, Federal Reserve System Monthly Reports on Credit 
and Liquidity Programs and the Balance Sheet, www.federalreserve.gov/
monetarypolicy/bst_reportsresources.htm.
---------------------------------------------------------------------------
    The Congress has recently discussed proposals to expand the audit 
authority of the Government Accountability Office (GAO) over the 
Federal Reserve. As you know, the Federal Reserve is already subject to 
frequent reviews by the GAO. The GAO has broad authority to audit our 
operations and functions. The Congress recently granted the GAO new 
authority to conduct audits of the credit facilities extended by the 
Federal Reserve to ``single and specific'' companies under the 
authority provided by section 13(3) of the Federal Reserve Act, 
including the loan facilities provided to, or created for, American 
International Group and Bear Stearns. The GAO and the Special Inspector 
General have the right to audit our TALF program, which uses funds from 
the Troubled Assets Relief Program.
    The Congress, however, purposefully--and for good reason--excluded 
from the scope of potential GAO reviews some highly sensitive areas, 
notably monetary policy deliberations and operations, including open 
market and discount window operations. In doing so, the Congress 
carefully balanced the need for public accountability with the strong 
public policy benefits that flow from maintaining an appropriate degree 
of independence for the central bank in the making and execution of 
monetary policy. Financial markets, in particular, likely would see a 
grant of review authority in these areas to the GAO as a serious 
weakening of monetary policy independence. Because GAO reviews may be 
initiated at the request of members of Congress, reviews or the threat 
of reviews in these areas could be seen as efforts to try to influence 
monetary policy decisions. A perceived loss of monetary policy 
independence could raise fears about future inflation, leading to 
higher long-term interest rates and reduced economic and financial 
stability. We will continue to work with the Congress to provide the 
information it needs to oversee our activities effectively, yet in a 
way that does not compromise monetary policy independence.
        RESPONSE TO WRITTEN QUESTIONS OF SENATOR BENNETT
                      FROM BEN S. BERNANKE

Q.1. Mr. Chairman, I understand that there may be up to as much 
as $1.2 trillion in U.S. company earnings in European banks, 
which were generated from the sale of products and services 
outside the U.S. The complicated nature of our U.S. tax system 
has worked to trap these earnings overseas. A few years ago, 
Congress passed a bill that allowed companies to bring some of 
those earnings back at a reduced tax rate, and in less than 18 
months, more than $300 billion was invested in the U.S., and 
that cash worked its way through the economy. Do you believe it 
would be beneficial to incentivize companies again to bring 
those earnings back to the U.S.? Would it make sense to pursue 
policies to have those earnings be held first as deposits in 
U.S. banks, which would provide banks with a capital infusion 
at a time when they desperately need them?

A.1. With regard to specific tax proposals, as you know I have 
avoided taking a position on explicit budget issues during my 
tenure as Chairman of the Federal Reserve Board. I believe that 
these are fundamental decisions that must be made by the 
Congress, the Administration, and the American people. Instead, 
I have attempted to articulate the principles that I believe 
most economists would agree are important for the long-term 
performance of the economy and for helping fiscal policy to 
contribute as much as possible to that performance.
    In that regard, a number of economic studies have shown 
that the U.S. corporate tax structure encourages multinational 
firms to retain earnings in their foreign affiliates rather 
than repatriating them to their U.S. parents. Indeed, the 
temporary tax reduction enacted in 2004, which cut the tax rate 
on repatriated earnings from 35 percent to 5.25 percent for 1 
year, encouraged U.S. multinationals to repatriate about $300 
billion in 2005, markedly higher than their annual average of 
around $60 billion in the previous few years.
    The economic literature generally has found that most firms 
that participated in the repatriation tax holiday apparently 
did not use these funds to boost their investment or hiring, 
although there is some mixed evidence that a small portion of 
firms facing financial constraints may have increased their 
investment spending. Instead, the bulk of these repatriations 
apparently were distributed to the shareholders of these firms, 
primarily through share repurchases. Presumably these 
shareholders either reinvested these funds or used them for 
consumption spending, either of which would have an effect on 
economic activity in the United States.
    We currently estimate that retained earnings at foreign 
affiliates were roughly $1.8 trillion at end 2008. The majority 
of these funds were invested in plant and equipment abroad with 
only around one quarter, or $450 billion, held as cash, short-
term securities, and other liquid assets. We have little 
information on the nature of these liquid assets, but it is 
likely they include deposits in both European and U.S. banks. 
It is not clearly evident that U.S. banks would substantively 
benefit from a policy that boosted repatriated earnings, as any 
increase in deposits would likely be temporary, lasting only 
until firms decided how to allocate their repatriated earnings.
                                ------                                


        RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING
                      FROM BEN S. BERNANKE

Q.1. Back in March, Secretary Geithner, who was FOMC Vice-Chair 
under you and Chairman Greenspan, said he now thinks easy money 
policies by central banks were a cause of the housing bubble 
and financial crisis. Do you agree with him?

A.1. I do not believe that money policies by central banks in 
advanced economies were a significant cause of the recent boom 
and bust in the U.S. housing sector and the associated 
financial crisis. The accommodative stance of monetary policy 
in the United States was necessary and appropriate to address 
the economic weakness and deflationary pressures earlier in 
this decade. As I have noted previously, I believe that an 
important part of the crisis was caused by global saving 
imbalances. Those global saving imbalances increased the 
availability of credit to the U.S. housing sector and to other 
sectors of the U.S. economy, leading to a boom in housing 
construction and an associated credit boom. The role of global 
savings imbalances in the credit and housing boom and bust was 
amplified by a number of other factors, including inadequate 
mortgage underwriting, inadequate risk management practices by 
investors, regulatory loopholes that allowed some key financial 
institutions to assume very large risk positions without 
adequate supervision, and inaccurate assessments of risks by 
credit ratings agencies.

Q.2. You said you think you can stop the expansion of the money 
supply from being inflationary. Does that mean you think the 
expansion of the money supply is permanent?

A.2. Broad measures of the money supply, such as M2, have not 
grown particularly rapidly over the course of the financial 
crisis. By contrast, narrower measures, such as the monetary 
base, have grown significantly more rapidly. That growth can be 
attributed to the rapid expansion of bank reserves that has 
resulted from the liquidity programs that the Federal Reserve 
has implemented in order to stabilize financial markets and 
support economic activity. Nearly all of the increase in 
reserve is excess reserves--that is, reserves held by banks in 
addition to the level that they must hold to meet their reserve 
requirements. As long as banks are willing to hold those excess 
reserves, they will not contribute to more rapid expansion of 
the money supply. Moreover, as the Federal Reserve's 
acquisition of assets slows, growth of reserves will also slow. 
When economic conditions improve sufficiently, the Federal 
Reserve will begin to normalize the stance of monetary policy; 
those actions will involve a reduction in the quantity of 
excess reserves and an increase in short-term market rates, 
which will likely result in a reduction in some narrow measures 
of the money supply, such as the monetary base, and will keep 
the growth of the broad money aggregates to rates consistent 
with sustainable growth and price stability. As a result of 
appropriate monetary policy actions, the above-trend expansion 
of narrow measures of money supply will not be permanent and 
will not lead to inflation pressures.

Q.3. Do you think a permanent expansion of the money supply, 
even if done in a noninflationary matter, is monetization of 
Federal debt?

A.3. As noted above, growth of broad measures of the money 
supply, such as M2, has not been particularly rapid, and any 
above-trend growth of the money stock will not be permanent.
    Monetization of the debt generally is taken to mean a 
purchase of Government debt for the purpose of making deficit 
finance possible or to reduce the cost of Government finance. 
The Federal Reserve's liquidity programs, including its 
purchases of Treasury securities, were not designed for such 
purposes; indeed, it is worth noting that even with the 
expansion of the Federal Reserve's balance sheet, the Federal 
Reserve's holdings of Treasury securities are lower now than in 
2007 before the onset of the crisis. The Federal Reserve's 
liquidity programs are intended to support growth of private 
spending and thus overall economic activity by fostering the 
extension of credit to households and firms.

Q.4. Do you believe forward-looking signs like the dollar, 
commodity prices, and bond yields are the best signs of coming 
inflation?

A.4. We use a variety of indicators, including those that you 
mention, to help gauge the likely direction of inflation. A 
rise in commodity prices can add to firms' costs and so create 
pressure for higher prices; this is especially the case for 
energy prices, which are an important component of costs for 
firms in a wide variety of industries. Similarly, a fall in the 
value of the dollar exerts upward pressure on prices of both 
imported goods and the domestic goods that compete with them.
    A central element in the dynamics of inflation, however, is 
the role played by inflation expectations. Even if firms were 
to pass higher costs from commodity prices or changes in the 
exchange rate into domestic prices, unless any such price 
increases become built into expectations of inflation and so 
into future wage and price decisions, those price increases 
would likely be a one-time event rather than the start of a 
higher ongoing rate of inflation. In this regard, it should be 
noted that survey measures of long-run inflation expectations 
have thus far remained relatively stable, pointing to neither a 
rise in inflation nor a decline in inflation to unwanted 
levels.
    A rise in bond yields--the third indicator you mention--
could itself be evidence of an upward movement in expected 
inflation. More specifically, a rise in yields on nominal 
Treasury securities that is not matched by a rise in yields on 
inflation-indexed securities (TIPS) could reflect higher 
expected inflation. Indeed, such movements in yields have 
occurred so far this year. However, the rise in nominal 
Treasury yields started from an exceptionally low level that 
likely reflected heightened demand for the liquidity of these 
securities and other special factors associated with the 
functioning of Treasury markets. Those factors influencing 
nominal Treasury yields have made it particularly difficult 
recently to draw inferences about expected inflation from the 
TIPS market. The FOMC will remain alert to these and other 
indicators of inflation as we gauge our future policy actions 
in pursuit of our dual mandate at maximum employment and price 
stability.

Q.5.a. Other central banks that pay interest on reserves set 
their policy rate using that tool. Now that you have the power 
to pay interest on excess reserves, are you going to change the 
method of setting the target rate?

A.5.a. At least for the foreseeable future, the Federal Reserve 
expects to continue to set a target (or a target range) for the 
Federal funds rate as part of its procedures for conducting 
monetary policy. The authority to pay interest on reserves 
gives the Federal Reserve an additional tool for hitting its 
target and thus affords the Federal Reserve the ability to 
modify its operating procedures in ways that could make the 
implementation of policy more efficient and effective. Also, 
the Federal Reserve is in the process of designing various 
tools for reserve management that could be helpful in the 
removal of policy accommodation at the appropriate time and 
that use the authority to pay interest on reserves. However, 
the Federal Reserve has made no decisions at this time on 
possible changes to its framework for monetary policy 
implementation.

Q.5.b. Assuming you were to make such a change, would that lead 
to a permanent expansion of the money supply?

A.5.b. No. These tools are designed to implement monetary 
policy more efficiently and effectively. Their use would have 
no significant effect on broad measures of the money supply. It 
is possible that such a change could involve a permanently 
higher level of reserves in the banking system. However, the 
level of reserves under any such regime would still likely be 
much lower than at present and, in any case, would be fully 
consistent with banks' demand for reserves at the FOMC's target 
rate. As a result, the higher level of reserves in such a 
system would not have any implication for broad measures of 
money.

Q.5.c. Would such an expansion essentially mean you have 
accomplished a one-time monetization of the Federal debt?

A.5.c. No. If the Federal Reserve were to change its operating 
procedures in a way that involved a permanently higher level of 
banking system reserves, it is possible that the corresponding 
change on the asset side of the Federal Reserve's balance sheet 
would be a permanently higher level of Treasury securities, but 
the change could also be accounted for by a higher level of 
other assets--for example, repurchase agreements conducted with 
the private sector. The purpose of any permanent increase in 
the level of the Federal Reserve's holdings of Treasury 
securities would be to accommodate a higher level of reserves 
in the banking system rather than to facilitate the Treasury's 
debt management.

Q.6. Is the Government's refusal to rescue CIT a sign that the 
bailouts are over and there is no more ``too-big-to-fail'' 
problem?

A.6. The Federal Reserve does not comment on the condition of 
individual financial institutions such as CIT.

Q.7. Do you plan to hold the Treasury and GSE securities on 
your books to maturity?

A.7. The evolution of the economy, the financial system, and 
inflation pressures remain subject to considerable uncertainty. 
Reflecting this uncertainty, the way in which various monetary 
policy tools will be used in the future by the Federal Reserve 
has not yet been determined. In particular, the Federal Reserve 
has not developed specific plans for its holdings of Treasury 
and GSE securities.

Q.8. Which 13(3) facilities do you think are monetary policy 
and not rescue programs?

A.8. The Federal Reserve developed all of the facilities that 
are available to multiple institutions as a means of supporting 
the availability of credit to firms and households and thus 
buoying economic growth. Because supporting economic growth 
when the economy has been adversely affected by various types 
of shocks is a key function of monetary policy, all of the 
facilities that are available to multiple institutions can be 
considered part of the Federal Reserve's monetary policy 
response to the crisis. In contrast, the facilities that the 
Federal Reserve established for single and specific 
institutions would ordinarily not be considered part of 
monetary policy.

Q.9. Given the central role the President of the New York Fed 
has played in all the bailout actions by the Fed, why shouldn't 
that job be subject to Senate confirmation in the future?

A.9. Federal Reserve policy makers are highly accountable and 
answerable to the Government of the United States and to the 
American people. The seven members of the Board of Governors of 
the Federal Reserve System are appointed by the President and 
confirmed by the Senate after a thorough process of public 
examination. The key positions of Chairman and Vice Chairman 
are subject to presidential and congressional review every four 
years, a separate and shorter schedule than the 14-year terms 
of Board members. The members of the Board of Governors account 
for seven seats on the FOMC. By statute, the other five members 
of the FOMC are drawn from the presidents of the 12 Federal 
Reserve Banks. District presidents are appointed through a 
process involving a broad search of qualified individuals by 
local boards of directors; the choice must then be approved by 
the Board of Governors. In creating the Federal Reserve System, 
the Congress combined a Washington-based Board with strong 
regional representation to carefully balance the variety of 
interests of a diverse Nation. The Federal Reserve Banks 
strengthen our policy deliberations by bringing real-time 
information about the economy from their district contacts and 
by their diverse perspectives.

Q.10. The current structure of the regional Federal Reserve 
Banks gives the banks that own the regional Feds governance 
powers, and thus regulatory powers over themselves. And with 
investment banks now under Fed regulation, it gives them power 
over their competitors. Don't you think that is conflict of 
interest that we should address?

A.10. Congress established the makeup of the boards of 
directors of the Federal Reserve Banks. The potential for 
conflicts of interest that might arise from the ownership of 
the shares of a Federal Reserve Bank by banking organizations 
in that Bank's district are addressed in several statutory and 
policy provisions. Section 4 of the Federal Reserve Act 
provides that the board of directors of Reserve Banks ``shall 
administer the affairs of said bank fairly and impartially and 
without discrimination in favor of or against any member bank 
or banks.'' 12 U.S.C. 301. Reserve Bank directors are 
explicitly included among officials subject to the Federal 
conflict of interest statute, 18 U.S.C. 208. That statute 
imposes criminal penalties on Reserve Bank directors who 
participate personally and substantially as a director in any 
particular matter which, to the director's knowledge, will 
affect the director's financial interests or those of his or 
her spouse, minor children, or partner, or any firm or person 
of which the director is an officer, director, trustee, general 
partner, or employee, or any other firm or person with whom the 
director is negotiating for employment. Reserve Banks routinely 
provide training for their new directors that includes specific 
training on section 208, and Reserve Bank corporate secretaries 
are trained to respond to inquiries regarding possible 
conflicts in order to assist directors in complying with the 
statute. The Board also has adopted a policy specifically 
prohibiting Reserve Bank directors from, among other things, 
using their position for private gain or giving unwarranted 
preferential treatment to any organization.
    Reserve Bank directors are not permitted to be involved in 
matters relating to the supervision of particular banks or bank 
holding companies nor are they consulted regarding bank 
examination ratings, potential enforcement actions, or similar 
supervisory issues. In addition, while the Board of Governors' 
rules delegate to the Reserve Banks certain authorities for 
approval of specific types of applications and notices, Reserve 
Bank directors are not involved with oversight of those 
functions. Moreover, in order to avoid even the appearance of 
impropriety, the Board of Governors' delegation rules withdraw 
the Reserve Banks' authority where a senior officer or director 
of an involved party is also a director of a Reserve Bank or 
branch. Directors are also not involved in decisions regarding 
discount window lending to any financial institution. Finally, 
directors are not involved in awarding most contracts by the 
Reserve Banks. In the rare case where a contract requires 
director approval, directors who might have a conflict as a 
result of affiliation or stock ownership routinely recuse 
themselves or resign from the Reserve Bank board, and any 
involvement they would have in such a contract would be subject 
to the prohibitions in section 208 discussed above.

Q.11. Do you think access to the discount window should be 
opened to nonbanks by Congress?

A.11. The current episode has illustrated that nonbank 
financial institutions can occasionally experience severe 
liquidity needs that can pose significant systemic risks. In 
many cases, the Federal Reserve's 13(3) authority may be 
sufficient to address these situations, which should arise 
relatively infrequently. However, a case could be made that 
certain types of nonbank institutions, such as primary dealers, 
should have ongoing access to the discount window; any such 
increased access would need to be coupled with more stringent 
regulation and supervision. The Federal Reserve also believes 
that the smooth functioning of various types of regulated 
payment, clearing, and settlement utilities, some of which are 
organized as nonbanks, is critical to financial stability; a 
case could also be made that such organizations should be 
granted ongoing access to discount window credit.

Q.12. Do you think any of the 13(3) facilities should be made 
permanent by Congress?

A.12. As noted above, the issue of appropriate access to 
central bank credit by certain types of nonbank financial 
institutions deserves careful consideration by policy makers. 
The financial crisis has illustrated that various types of 
nonbank financial institutions can experience severe liquidity 
strains that pose risks to the entire financial system. 
However, whether access to the discount window should be 
granted to such institutions depends on a wide range of 
considerations and any decision would need to be based on 
careful study of all of the relevant issues.

Q.13. For several reasons, I am doubtful that the Fed or anyone 
else can effectively regulate systemic risk. A better approach 
may be to limit the size and scope of firms so that future 
failures will not pose a danger to the system. Do you think 
that is a better way to go?

A.13. I believe that it is important to improve the U.S. 
financial regulatory system so as to contain systemic risk and 
to address the related problem of ``too-big-to-fail'' financial 
institutions. The Federal Reserve and the Administration have 
proposed a number of ways to limit systemic risk and the 
problem of ``too-big-to-fail'' financial institutions.
    Imposing artificial limits on the size of scope of 
individual firms will not necessarily reduce systemic risk and 
could reduce competitiveness. A challenge of this approach 
would be to address the financial institutions that already are 
large and complex. Such institutions enjoy certain competitive 
benefits including global access to credit.
    At any point in time, the systemic importance of an 
individual firm depends on a wide range of factors. Size is 
only one relevant consideration. The impact of a firm's 
financial distress depends also on the degree to which it is 
interconnected, either receiving funding from, or providing 
funding to, other potentially systemically important firms, as 
well as on whether it performs crucial services that cannot 
easily or quickly be executed by other financial institutions. 
In addition, the impact varies over time: the more fragile the 
overall financial backdrop and the condition of other financial 
institutions, the more likely a given firm is to be judged 
systemically important. If the ability of the financial system 
to absorb adverse shocks is low, the threshold for systemic 
importance will more easily be reached. Judging whether a 
financial firm is systemically important is thus not a 
straightforward task, especially because a determination must 
be based on an assessment of whether the firm's failure would 
likely have systemic effects during a future stress event, the 
precise parameters of which cannot be fully known.
    I am confident that the Federal Reserve is well positioned 
both to identify systemically important firms and to supervise 
them. We look forward to working with Congress and the 
Administration to enact meaningful regulatory reform that will 
strengthen the financial system and reduce both the probability 
and severity of future crises.

Q.14. Given your concerns about opening monetary policy to GAO 
review, what monetary policy information, specifically, do you 
not want in the hands of the public?

A.14. The Federal Reserve believes that a substantial degree of 
transparency in monetary policymaking is appropriate and has 
initiated numerous measures to increase its transparency. In 
addition to a policy announcement made at the conclusion of 
each FOMC meeting, the Federal Reserve releases detailed 
minutes of each FOMC meeting 3 weeks after the conclusion of 
the meeting. These minutes provide a great deal of information 
about the range of topics discussed and the views of meeting 
participants at each FOMC meeting. Regarding its liquidity 
programs, the Federal Reserve has provided a great deal of 
information regarding these programs on its public Web site at 
http://www.federalreserve.gov/monetarypolicy/bst.htm. In 
addition, the Federal Reserve has initiated a monthly report to 
Congress providing detailed information on the operations of 
its programs, types, and amounts of collateral accepted, and 
quarterly updates on Federal Reserve income and valuations of 
the Maiden Lane facilities. This information is also available 
on the Web site at http://www.federalreserve.gov/
monetarypolicy/bst_reportsresources.htm.
    The Federal Reserve believes that it should be as 
transparent as possible consistent with the effective conduct 
of the responsibilities with which it has been charged by the 
Congress. The Federal Reserve has noted its effectiveness in 
conducting monetary policy depends critically on the 
confidentiality of its policy deliberations. It has also noted 
that the effectiveness of its tools to provide liquidity to the 
financial system and the economy depends importantly on the 
willingness of banks and other entities in sound financial 
condition to use the Federal Reserve's credit facilities when 
appropriate. That willingness is supported by assuring 
borrowers that their usage of credit facilities will be treated 
as confidential by the Federal Reserve. As a result of these 
considerations, the Federal Reserve believes that the release 
of detailed information regarding monetary policy deliberations 
or the names of firms borrowing from Federal Reserve facilities 
would not be in the public interest.
                                ------                                


        RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER
                      FROM BEN S. BERNANKE

Q.1. 13(3) Authority--By what key criteria will the Board of 
Governors determine when the unusual and exigent circumstances 
that permitted the use of the Board's extraordinary powers 
under section 13(3) of the Federal Reserve Act are no longer 
present? (Not lots of criteria, but the top three. Follow-up: 
Did the Board's General Counsel write a memo spelling out these 
powers? Would you share that analysis with the Committee? Are 
there any constraints on the Board's discretion here? If so, 
what are they?)

A.1. To authorize credit extensions to individuals, 
partnerships, or corporations under section 13(3) of the 
Federal Reserve Act, the Board must find that, among other 
things, ``unusual and exigent circumstances'' exist. These 
terms are not defined in the Act and are committed to the 
Board's discretion. In exercising this discretion, the Board 
must act reasonably.
    When it approved the establishment and extension of the 
various lending facilities under section 13(3) authority, the 
Board made determinations that unusual and exigent 
circumstances existed based on its assessment that the 
condition of the financial markets presented severe risks to 
the integrity of the financial system and to prospects for 
economic growth. The approvals of lending programs for 
individual financial institutions were based on an assessment 
of the potential disruption associated with the disorderly 
collapse of the particular firm. The Board reached these 
conclusions after careful evaluation of all available economic 
and market data and advice of the Board's General Counsel. The 
determinations are consistent with the manner in which Congress 
intended the 13(3) authority to be used. As noted in the Senate 
report on the 1991 amendments to section 13(3), ``with the 
increasing interdependence of our financial markets, it is 
essential that the Federal Reserve System have the authority 
and flexibility to respond promptly and effectively in unusual 
and exigent circumstances that might disrupt the financial 
system and markets.'' \1\
---------------------------------------------------------------------------
     \1\ S. Rep. No. 102-167, at 203 (Sept. 19, 1991). The Board has 
already taken steps to terminate or scale back some of the 
extraordinary liquidity facilities that it has established, including 
section 13(3) facilities. For example, the Board has decided not to 
extend the Money Market Investor Funding Facility when it expires in 
October 2009, and the Federal Reserve has reduced amounts offered under 
some of its liquidity facilities, such as the Term Securities Lending 
Facility. In making such determinations to date, and in making similar 
determinations in the future, the Board has and will likely continue to 
review a broad range of indicators of financial market conditions. 
These indicators include credit and liquidity spreads in financial 
markets, information on trading and issuance volumes, measures of 
market volatility, assessments of the strength of individual financial 
institutions, and other measures. The Board's focus will be on the 
capability of financial markets and institutions to support a sustained 
recovery in economic activity.

Q.2. What are the key objectives of the Board's various special 
facilities: How will we know if they have been successful? How 
---------------------------------------------------------------------------
will we know if they have failed?

A.2. In general, the Federal Reserve has established special 
facilities over the crisis for two purposes. The facilities 
that have been made available for multiple institutions (for 
example, the Term Auction Facility, the Primary Dealer Credit 
Facility, the Commercial Paper Funding Facility, and the Term 
Asset-Backed Securities Loan Facility) are intended to support 
the extension of credit to households and firms and thus 
contribute to a reduction in financial strains and to foster a 
resumption of economic growth. These programs seem to have been 
helpful in addressing strains in financial markets. Financial 
data including various risk spreads and indicators of market 
functioning as well as anecdotal reports from market 
participants have indicated that strains in financial markets 
have eased substantially in recent months, and particularly so 
in those markets in which the Federal Reserve has provided 
liquidity support. Although it is too early to say whether the 
improvement in financial conditions will be sufficient to 
support a sustained pickup in economic growth, economic 
activity appears to be leveling out, and the prospects for a 
resumption of economic growth over coming quarters have 
improved. Other facilities--for example, those related to the 
difficulties of Bear Stearns and AIG--were established to 
prevent the disorderly failure of large, systemically important 
nonbank financial institutions and thus avoid an exacerbation 
of financial strains during a period when financial stress was 
already intense. By successfully achieving this objective, 
these actions helped prevent further harm to the U.S. economy.

Q.3.a. On commercial real estate--What are the expectations/
benchmarks with the TALF facility? Will it be sufficient and 
timely enough in facilitating private lending/investing, or are 
you considering other programs?

A.3.a. The TALF program has allocated $100 billion to fund 
loans with up to 5 years maturity, including loans backed by 
newly issued commercial mortgage-backed securities (CMBS). We 
believe that this amount, especially if coupled with a modest 
revival of the new-issue CMBS market later next year, should be 
sufficient to allow creditworthy borrowers with maturing loans 
currently in CMBS pools to refinance. The Federal Reserve and 
the Treasury have recently indicated that at this time they do 
not anticipate adding additional collateral types to the TALF 
facility.

Q.3.b. Given the lag time needed to get securitized lending 
going (4 months), how do you handle the reality (as expressed 
by market experts and participants) that the markets need to 
know NOW (not ``year-end'') whether the program will be 
extended in order to see any usefulness in the next several 
months?

A.3.b. Because of the long lead time required to assemble CMBS, 
and because the market for newly issued CMBS appears likely to 
remain impaired for some time, the Federal Reserve and the 
Treasury announced on August 17, 2009, that TALF loans against 
newly issued CMBS will be available through June 30, 2010.
                                ------                                


          RESPONSE TO WRITTEN QUESTIONS OF SENATOR KYL
                      FROM BEN S. BERNANKE

Q.1. As I recall at the Republican Policy Lunch a few weeks ago 
you acknowledged that some or the regional offices of Federal 
bank regulators may be too strict in their examinations and may 
have inadvertently discouraged some institutions from making 
certain loans that would otherwise be viable.
    Have you been able to make any progress in addressing this 
problem?

A.1. In response to your concerns that actions of our examiners 
may be inadvertently discouraging bank lending, it is important 
to remember that the role of the examiner is to promote safety 
and soundness at financial institutions. To ensure a balanced 
approach in our supervisory activities, we have reminded our 
examiners not to discourage bank lending to creditworthy 
borrowers. In this environment, we are aware that lenders have 
been tightening credit standards and terms on many classes of 
loans. There are a number of factors involved in this, 
including the continued deterioration in residential and 
commercial real estate values and the current economic 
environment, as well as the desire of some depository 
institutions to strengthen their balance sheets.
    To ensure that regulatory policies and actions do not 
inadvertently curtail the availability of credit to sound 
borrowers, the Federal Reserve has long-standing policies in 
place to support sound bank lending and the credit 
intermediation process. Guidance, which has been in place since 
1991, specifically instructs examiners to ensure that 
regulatory policies and actions do not inadvertently curtail 
the availability of credit to sound borrowers. \1\ The 1991 
guidance also states that examiners are to ensure that 
supervisory personnel are reviewing loans in a consistent, 
prudent, and balanced fashion and emphasizes achieving an 
appropriate balance between credit availability and safety and 
soundness.
---------------------------------------------------------------------------
     \1\ ``Interagency Policy Statement on the Review and 
Classification of Commercial Real Estate Loans'', (November 1991); 
www.federalreserve.gov/boarddocs/srletters/1991/SR9124.htm.
---------------------------------------------------------------------------
    As part of our effort to help stimulate appropriate bank 
lending, the Federal Reserve and the other Federal banking 
agencies issued a statement in November 2008 reinforcing the 
longstanding guidance encouraging banks to meet the needs of 
creditworthy borrowers. \2\ The guidance was issued to 
encourage bank lending in a manner consistent with safety and 
soundness, specifically by taking a balanced approach in 
assessing borrowers' ability to repay and making realistic 
assessments of collateral valuations.
---------------------------------------------------------------------------
     \2\ ``Interagency Statement on Meeting the Needs of Creditworthy 
Borrowers'', (November 2008); www.federalreserve.gov/newsevents/press/
bcreg/20081112a.htm.

Q.2. If so, how is the Federal Reserve facilitating 
coordination among the regional offices of our regulators to 
ensure standards are applied in a way that protects the safety 
and soundness of the banking system without discouraging viable 
---------------------------------------------------------------------------
lending?

A.2. Federal Reserve Board staff has consistently reminded 
field examiners of the November guidance and the importance of 
ensuring access to loans by creditworthy borrowers. Across the 
Federal Reserve System, we have implemented training and 
outreach to underscore these intentions. We have prepared and 
delivered targeted Commercial Real Estate training across the 
System in 2008, and continue to emphasize achieving an 
appropriate balance between credit availability and safety and 
soundness during our weekly conference calls with examiners 
across the regional offices in the System. Weekly calls are 
also held among senior management in supervision to discuss 
issues on credit availability to help ensure examiners are not 
discouraging viable safe and sound lending. Additional outreach 
and discussions occur as specific cases arise and as we 
participate in conferences and meetings with various industry 
participants, examiners, and other regulators.

              Additional Material Supplied for the Record




