[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
                     THE STATE OF THE U.S. ECONOMY

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, FEBRUARY 9, 2011

                               __________

                            Serial No. 112-2

                               __________

           Printed for the use of the Committee on the Budget


                       Available on the Internet:
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                        COMMITTEE ON THE BUDGET

                     PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey            CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho              Ranking Minority Member
JOHN CAMPBELL, California            ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California              MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri               LLOYD DOGGETT, Texas
TOM COLE, Oklahoma                   EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California           JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah                 BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana          MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma             TIM RYAN, Ohio
DIANE BLACK, Tennessee               DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin            GWEN MOORE, Wisconsin
BILL FLORES, Texas                   KATHY CASTOR, Florida
MICK MULVANEY, South Carolina        HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas                PAUL TONKO, New York
TODD C. YOUNG, Indiana               KAREN BASS, California
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia

                           Professional Staff

                     Austin Smythe, Staff Director
                Thomas S. Kahn, Minority Staff Director



                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 9, 2011.................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     3
    Hon. Chris Van Hollen, ranking minority member, Committee on 
      the Budget.................................................     4
        Prepared statement of....................................     5
    Hon. Ben S. Bernanke, Chairman, Board of Governors of the 
      Federal Reserve System.....................................     6
        Prepared statement of....................................    11
        Responses to questions submitted by:
            Mr. Honda............................................    62
            Mr. Calvert..........................................    65
    Hon. Michael M. Honda, a Representative in Congress from the 
      State of California, questions submitted for the record....    61
    Hon. Ken Calvert, a Representative in Congress from the State 
      of California, questions submitted for the record..........    64


                     THE STATE OF THE U.S. ECONOMY

                              ----------                              


                      WEDNESDAY, FEBRUARY 9, 2011

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in room 
210, Cannon House Office Building, Hon. Paul Ryan, [Chairman of 
the Committee] presiding.
    Members present: Representatives Ryan, Garrett, Campbell, 
Akin, Cole, Price, McClintock, Chaffetz, Stutzman, Lankford, 
Black, Ribble, Flores, Mulvaney, Huelskamp, Young, Amash, 
Rokita, Guinta, Woodall, Van Hollen, Schwartz, Kaptur, Doggett, 
Blumenauer, McCollum, Yarmouth, Pascrell, Honda, Ryan of Ohio, 
Wasserman Schultz, Moore, Castor, Shuler, Tonko, Bass
    Chairman Ryan. Before we begin I want to welcome 
Representative Rob Woodall from Georgia, to the House Budget 
Committee. We have a number of caucus and conferences ending 
right now, so a number of members are going to be coming in. 
But Mr. Woodall will be officially on board this afternoon with 
the adoption of the House Resolution. I ask unanimous consent 
that Representative Woodall be permitted to participate in this 
morning's important hearing. He is our new Rules Committee 
Member. Without objection, it shall be done.
    Thank you, Chairman Bernanke, for coming to our committee 
today to talk about the state of our economy. The U.S. economy 
continues to suffer from slow growth, and unemployment remains 
unacceptably high. Continued uncertainty about our economic 
future is hindering job creation today. Washington is creating 
much of this uncertainty. All one has to do is go home and talk 
to a businessman, a businesswoman, and that is exactly what you 
will hear. The explosive growth in our federal debt is by far 
the biggest source of this uncertainty. By sowing doubt about 
future taxes, interest rates, and price stability, government 
is hindering business' ability to plan and invest, creating a 
drag on economic growth today.
    The purpose of today's hearing is to discuss the fiscal and 
monetary policies that have led us here. On the fiscal side, 
CBO projects a $1.5 trillion deficit this year with publicly 
held debt raising to 69 percent of GDP by the end of the year: 
that is up from 40 percent in 2008. In a few short years, the 
CBO projects government spending to drive our debt to crisis 
levels, overwhelming the entire economy and drowning the next 
generation in red ink. Endless borrowing is not a strategy. We 
must restore the foundations of economic growth: low taxes, 
spending restraint, reasonable regulations, and sound money. To 
help restart the engines of economic growth and job creation, 
that is so essential. We must not neglect the sound money part 
of the equation.
    The Federal Reserve is undertaking another round of 
quantitative easing, purchasing Treasury bonds in an attempt to 
lower borrowing costs and stimulate the economy. My concern is 
that the cost of the Fed's current monetary policy, the money 
creation and massive balance sheet expansion, will come to 
outweigh the perceived short-term benefits. I hope that is not 
the case. These costs may come in the form of asset bubble and 
price pressures. We are already witnessing a sharp rise in a 
variety of key global commodity and basic material prices, and 
we know that some producers and manufacturers here in the 
United States are starting to feel the cost pressure as a 
result.
    According to the Core Price Indexes the Fed closely 
watches, these cost pressures have not been yet passed along to 
consumers, but the inflation dynamic can be quick to 
materialize and painful to eradicate once it takes hold. The 
steepening of the yield curve this week adds to these concerns 
and fuels some of this speculation.
    I'm concerned that normalizing monetary policy, when the 
time comes, may be difficult, not only for the pure technical 
challenges of shrinking the Fed's substantial balance sheet or 
correctly judging economic turning points, but also for 
political reasons. It's hard to overstate the consequences of 
getting this wrong. The dollar is the world's reserve currency 
and this has given us tremendous benefits in the global 
economy. For the sake of our economy in particular, and the 
global recovery as a whole, it is vital that we focus on dollar 
stability if we are to prevent the kind of beggar-thy-neighbor 
currency conflicts that can ultimately destroy a worldwide 
economic recovery. Our currency should provide a reliable store 
of value. It should be guided by the rule of law, not the rule 
of men. There is nothing more insidious that a country can do 
to its people than to debase its currency.
    Chairman Bernanke, we know that you know this. We know that 
you are focused and concerned about this. The Fed's exit 
strategy and its future policy will determine how all of this 
ends. Many of us fear that our monetary policy is on a 
difficult track. We are very concerned about our fiscal policy 
here, and we know that it is on a very, very dangerous track, 
that is a very, very well-established fact.
    I firmly believe that a course correction here in 
Washington is sorely needed to help us get back on the right 
path. While it won't be easy, Americans have risen to the 
challenge, and we have prevailed in the past.
    Thank you for your indulgence, thank you for your time in 
coming here, we understand that you have to be out firm by 
about 12:30, so we will ask our members to stick within the 
time limit, and at this time I'd like to yield to our Ranking 
Member, Mr. Van Hollen.
    [The statement of Mr. Ryan follows:]

Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget

    Before we begin, I want to welcome Rep. Bob Woodall from Georgia to 
the House Budget Committee. He will be officially on board this 
afternoon after the adoption of the House resolution. I ask unanimous 
consent that Rep. Woodall be permitted to participate in this morning's 
important hearing. Without objection.
    Thank you, Chairman Bernanke, for coming before our Committee today 
to talk about the state of the economy.
    The U.S. economy continues to suffer from slow growth and 
unemployment remains unacceptably high.
    Continued uncertainty about our economic future is hindering job 
creation today.
    Washington is creating much of this uncertainty, and the explosive 
growth of our federal debt is by far the biggest source of this 
uncertainty.
    By sowing doubt about future tax rates, interest rates, and price 
stability, government is hindering businesses' ability to plan and 
invest, creating a drag on economic growth today.
    The purpose of today's hearing is to discuss the fiscal and 
monetary policies that have led us here.
    On the fiscal side, the CBO projects a $1.5 trillion deficit this 
year with publicly-held debt rising to 69 percent of GDP by the end of 
the year--up from 40 percent at the end of 2008.
    In a few short years, the CBO projects government spending to drive 
our debt to crisis levels, overwhelming the entire economy and drowning 
the next generation in red ink.
    Endless borrowing is not a strategy. We must restore the 
foundations of economic growth--low taxes, spending restraint, 
reasonable regulations, and sound money--to help restart the engines of 
economic growth and job creation.
    We must not neglect the ``sound money'' part of the equation. The 
Federal Reserve has undertaken another round of quantitative easing--
purchasing Treasury bonds in an attempt to lower borrowing costs and 
stimulate the economy.
    My concern is that the costs of the Fed's current monetary policy--
the money creation and massive balance sheet expansion--will come to 
outweigh the perceived short-term benefits.
    These costs may come in the form of asset bubbles and price 
pressures. We are already witnessing a sharp rise in a variety of key 
global commodity and basic material prices, and we know that some 
producers and manufacturers here in the United States are starting to 
feel cost pressures as a result.
    According to the core price indexes that the Fed watches closely, 
these cost pressures have not yet been passed along to consumers--but 
the inflation dynamic can be quick to materialize and painful to 
eradicate once it takes hold. The steepening of the yield curve this 
week certainly adds to these worries.
    I'm concerned that normalizing monetary policy when the time comes 
may be difficult--not only for the pure technical challenges of 
shrinking the Fed's substantial balance sheet or correctly judging 
economic turning points, but also for political reasons.
    It is hard to overstate the consequences of getting this wrong. The 
dollar is the world's reserve currency and this has given us tremendous 
benefits.
    For the sake of our economy in particular and the global recovery 
as a whole, it is vital that we focus on dollar stability if we are to 
prevent the kind of beggar-thy-neighbor currency conflicts that can 
destroy economic recoveries.
    Our currency should provide a reliable store of value--it should be 
guided by the rule of law, not the rule of men.
    There is nothing more insidious that a country can do to its 
citizens than debase its currency.
    Chairman Bernanke: We know you know this. The Fed's exit strategy 
and future policy--it will determine how this ends.
    We know you are concerned about this nation's fiscal trajectory. We 
have asked you to come here today because our fiscal policy is on a 
dangerous track. That is well established.
    But, many of us fear our monetary policy is on a similar track as 
well.
    I firmly believe that a course correction here in Washington is 
sorely needed to help get us back on the right track. While it won't be 
easy, Americans have risen to greater challenges and prevailed in the 
past.Thank you for your indulgence and at this time, I would like to 
yield to the Ranking Member, Mr. Van Hollen.

    Mr. Van Hollen. Thank you very much, Chairman Ryan, and 
welcome, Chairman Bernanke. I want to thank you for your 
service to our country during a period of great economic 
turmoil. And I think we have been fortunate as a nation to have 
a student of the Great Depression to help us avoid a second 
Great Depression.
    When you appeared before this committee two years ago, 
President Obama had just recently been sworn in. He inherited a 
terrible situation: the economy was in free-fall, spiraling 
downward at a negative growth rate of six percent; Americans 
were losing their jobs at the rate of 700,000 every month.
    Two years later, things have improved substantially. The 
economy grew at an annual rate of 3.2 percent in the last 
quarter, and more than 1.3 million private sector jobs have 
been created since the start of 2010. As you indicated in 
testimony before this committee last year, the measures taken 
by the Federal Reserve, the TARP solicitation by the Bush 
Administration, and the Recovery Act by the Obama 
Administration, averted, and I quote, ``An extraordinarily 
severe downturn, perhaps a great depression.''
    But we know that, while the economy has improved, millions 
of Americans are still out of work, and the unemployment rate, 
while coming down slightly, remains stubbornly and unacceptably 
high. We must use all the tools at our disposal to help 
businesses put people back to work, and I hope at some point 
this Congress, through its legislative agenda, will stop re-
litigating Health Care Reform and start focusing on jobs. I 
commend you and your colleagues at the Fed for using various 
forms of monetary policy to promote maximum employment and 
stable prices.
    I find it astounding that at a time when millions of 
Americans are out of work, some of our Republican colleagues 
have introduced legislation to strip the Federal Reserve of 
that part of its mandate that focuses on full employment and 
putting people back to work.
    Obviously the Fed must not waver in its commitment to price 
stability, but to deprive you of the tools necessary to grow 
the economy would be a huge mistake. People need to pay 
attention to these proposals, and people need to know, at a 
time when millions of Americans are out of work, some are 
proposing that the Fed ignore the unemployment rate part of its 
mandate. That would be taking us backwards, not forwards, on a 
jobs agenda.
    I also commend you for speaking out about the need to put 
our country on a fiscally sustainable path. The President's 
bipartisan Fiscal Commission and the Bipartisan Rivlin-Domenici 
Commission have demonstrated that such plans are difficult, but 
achievable. In his State of the Union Address, the President 
indicated that his budget would include cuts of $400 billion in 
non-security discretionary spending as a down-payment on that 
effort. Clearly, other measures must be taken, including, I 
believe, comprehensive tax reform.
    But both bipartisan commissions also indicated that it 
would be a big mistake to put our fragile recovery at risk by 
slashing outlays too early in the short-term when millions of 
Americans are still out of work, and the demand for goods and 
services is still relatively weak. That commission indicated, 
and I quote, ``In order to avoid shocking the fragile economy, 
the commission recommends waiting until 2012 to begin enacting 
programmatic spending cuts.'' The Rivlin-Domenici Commission 
gave us the same advice.
    Mr. Bernanke, this Congress will have to make difficult 
decisions to put our nation on a fiscally sustainable path. We 
must make those decisions in a responsible manner. One upcoming 
decision involves dealing with the nation's debt ceiling. 
Nobody in this Congress should be playing political games when 
it comes to the full faith and credit of the United States. As 
Speaker Boehner observed recently, the debt ceiling vote 
requires an ``adult moment.''
    Chairman Bernanke, you stated last week that the 
implications of not raising the debt limit would be 
``catastrophic'' for our financial system and our economy. You 
urged the Congress, and I quote, Not to focus on the debt limit 
as being a bargaining chip in this discussion, unquote. I hope 
our colleagues heed your advice and don't engage in reckless 
conduct that puts the entire economy at risk. I have been 
surprised by the number of proposals put forward by some in the 
House and the Senate that would not only jeopardize the credit-
worthiness of the United States, but would extend the full 
faith and credit of the United States Government to China and 
other foreign countries, but not to American businesses and our 
servicemen and women.
    Let's not gamble with the full faith and credit of our 
nation; that would be a recipe for financial and economic chaos 
and would destroy any hope of putting Americans back to work. 
Thank you, Mr. Chairman, and thank you, Chairman Bernanke.
    [The statement of Mr. Van Hollen follows:]

 Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member, 
                     House Committee on the Budget

    Thank you Chairman Ryan and welcome Chairman Bernanke.
    Thank you, Chairman Bernanke, for your service to our country 
during a time of great economic turmoil. We have been fortunate to have 
a student of the Great Depression at the helm of the Federal Reserve to 
help prevent a second great depression.
    When you appeared before this Committee two years ago, President 
Obama had just recently been sworn in. He inherited a terrible 
situation. The economy was in freefall, spiraling downwards at a 
negative growth rate of 6 percent. Americans were losing jobs at the 
rate of over 700,000 every month. Two years later, things have improved 
substantially. The economy grew at an annual rate of 3.2 percent last 
quarter and more than 1.3 million private sector jobs have been created 
since the start of 2010.
    As you indicated in testimony last year before this Committee, the 
measures taken by the Federal Reserve, the TARP solicitation by the 
Bush Administration, and the Recovery Act by the Obama Administration, 
averted 'an extraordinarily severe downturn, perhaps a great 
depression.'
    But while the economy has improved, millions of Americans are still 
out of work and the unemployment rate--while coming down--remains 
stubbornly high. We must use all the tools at our disposal to help 
businesses put people back to work. I hope at some point this new 
Congress will stop re-litigating the health reform law and start 
focusing on jobs.
    I commend you and your colleagues at the Fed for using various 
forms of monetary policy to promote maximum employment and stable 
prices. I find it astounding that, at a time that millions of Americans 
are out of work, a number of our Republican colleagues have introduced 
legislation to strip the Federal Reserve of that part of its mandate 
that focuses on full employment and putting people back to work. 
Obviously, the Fed must not waver in its commitment to price stability, 
but to deprive you of the tools necessary to grow the economy would be 
a huge mistake. People need to pay attention to these proposals. The 
American people need to know that, at a time that millions of Americans 
are out of work, these proposals say that Fed policies should ignore 
the unemployment rate. That would be going backwards, not forwards, on 
a jobs agenda.
    I also commend you, Chairman Bernanke, for speaking out about the 
need to put our country on a fiscally sustainable path. We must put in 
place a responsible plan to bring down and then eliminate the primary 
budget deficit. The President's Bipartisan Fiscal Commission and the 
bipartisan Rivlin-Domenici Commission have demonstrated that such plans 
are difficult but achievable. In his State of the Union address, the 
President indicated that his budget would include cuts of $400 billion 
in non-security discretionary spending as a down payment on that 
effort. Clearly, other measures must also be taken, including 
comprehensive tax reform. But both bipartisan commissions also 
indicated that it would be a big mistake to put our fragile economic 
recovery at risk by slashing outlays too deeply in the short-term when 
millions of Americans are still out of work and the demand for goods 
and services remains weak. The President's Bipartisan Commission stated 
that 'in order to avoid shocking the fragile economy, the Commission 
recommends waiting until 2012 to begin enacting programmatic spending 
cuts.' The Rivlin-Domenici Commission rendered the same advice. Deep 
cuts now will not create a single job; in fact, Mark Zandi and other 
economists have indicated that they will put thousands of American jobs 
at risk.
    I am also pleased that your testimony today calls upon the Congress 
to promote research and development, provide necessary public 
infrastructure, and invest in the skills of our workforce. Some of our 
Republican colleagues have tried to make 'investment' a dirty word, 
but, as you indicate, such investments can help build a more productive 
economy.
    This Congress will have to make difficult decisions to put our 
nation on a fiscally sustainable path. We must make those decisions in 
a responsible manner. One upcoming decision involves dealing with the 
nation's debt ceiling. Nobody in this Congress should be playing 
political games when it comes to the full faith and credit of the 
United States. As Speaker Boehner observed recently, the debt ceiling 
vote requires an 'adult moment.' Chairman Bernanke, you stated last 
week that the implications of not raising the debt limit would be 
'catastrophic' for our financial system and our economy. You urged the 
Congress 'not to focus on the debt limit as being the bargaining chip 
in this discussion.' I hope our colleagues heed your advice and don't 
engage in reckless conduct that puts the entire economy at risk. I have 
been amazed at a number of proposals put forward by Republicans in the 
Senate and the House that would not only jeopardize the 
creditworthiness of the United State, but would extend the full faith 
and credit of the United States government to China and other foreign 
governments, but not to American businesses and our service men and 
women. Let's not gamble with the full faith and credit of our nation. 
That is a recipe for financial and economic chaos that would destroy 
any hope of putting America back to work.
    Chairman Bernanke, I look forward to your testimony of these and 
other pressing issues.

    Chairman Ryan. Chairman Bernanke.

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

    Mr. Bernanke. Thank you very much. Chairman Ryan, Ranking 
Member Van Hollen, and other members of the Committee, thank 
you for inviting me. I am pleased to have this opportunity to 
offer my views on the economic outlook, on monetary policy, and 
on issues pertaining to the federal budget.
    The economic recovery that began in the middle of 2009 
appears to have strengthened in the past few months, although 
the unemployment rate remains high. The initial phase of the 
recovery, which occurred in the second half of 2009 and in 
early 2010, was in large part attributable to the stabilization 
of the financial system, the effects of expansionary monetary 
and fiscal policies, and the strong boost to production from 
businesses rebuilding their depleted inventories.
    But economic growth slowed significantly last spring, and 
concerns about the durability of the recovery intensified as 
the impetus from inventory building and fiscal stimulus 
diminished, and as Europe's fiscal and banking problems roiled 
global financial markets. More recently, however, we have seen 
increased evidence that a self-sustaining recovery in consumer 
and business spending may be taking hold. Notably, real 
consumer spending rose at an annual rate of more than four 
percent in the fourth quarter. Although strong sales of motor 
vehicles accounted for a significant portion of this pick-up, 
the recent gains in consumer spending appear reasonably broad-
based.
    Business investment in new equipment and software increased 
robustly throughout much of last year, as firms replaced aging 
equipment and as the demand for their products and services 
expanded. Construction remains weak, though, reflecting an 
overhang of vacant and foreclosed homes, and continued poor 
fundamentals from most types of commercial real estate.
    Overall, improving household and business confidence, 
accommodative monetary policy, and more supportive financial 
conditions, including an apparently increasing willingness of 
banks to lend, seem likely to result in a more rapid pace of 
economic recovery in 2011 than we saw last year.
    While indicators of spending and production have been 
encouraging on balance, the job market has improved only 
slowly. Following the loss of about eight and three-quarter 
million jobs from 2008 through 2009, private sector employment 
expanded by little more than one million in 2010. However, this 
gain was barely sufficient to accommodate the inflow of recent 
graduates and other new entrants to the labor force, and 
therefore not enough to significantly erode the wide margin of 
slack that remains in the labor market.
    Notable declines in the unemployment rate in December and 
January, together with improvement in indicators of job 
openings and firms' hiring plans, do provide some grounds for 
optimism on the employment front. Even so, with output growth 
likely to be moderate for a while, and with employers 
reportedly still reluctant to add to payrolls, it will be 
several years before the unemployment rate has returned to a 
more normal level. Until we see a sustained period of stronger 
job creation, we cannot consider the recovery to be truly 
established.
    On the inflation front, we have recently seen increases in 
some highly visible prices, notably gasoline. Indeed, prices of 
many industrial and agricultural commodities have risen lately, 
largely as a result of the very strong demand from fast-growing 
emerging market economies, coupled in some cases with 
constraints on supply. Nonetheless, overall inflation is still 
quite low, and longer-term inflation expectations have remained 
stable. Over the 12 months ending in December, prices for all 
the goods and services consumed by households increased by only 
1.2 percent, down from 2.4 percent over the previous 12 months.
    To assess underlying trends in inflation economists also 
follow several alternative measures of inflation. One such 
measure is so-called core inflation, which excludes the more 
volatile food and energy components, and therefore can be a 
better predictor of where overall inflation is headed. Core 
inflation was only 0.7 percent in 2010, compared with about two 
and a half percent in 2007, the year before the recession 
began. Wage growth has slowed as well, with average hourly 
earnings increasing only 1.7 percent last year. These downward 
trends in wage and price inflation are not surprising given the 
substantial slack in the economy.
    Although the growth rate of economic activity appears 
likely to pick up this year, the unemployment rate probably 
will remain elevated for some time. In addition, inflation is 
expected to persist below the levels that the Federal Reserve 
policy makers have judged to be consistent over the longer term 
with our statutory mandate to foster maximum employment and 
price stability. Under such conditions, the Federal Reserve 
would typically ease monetary policy by reducing its target for 
the Federal Funds Rate; however, the target range for the 
Federal Funds rate has been near zero since December 2008, 
leaving essentially no room for further reductions. As a 
consequence, since then we have been using alternative tools to 
provide additional monetary accommodation. In particular, over 
the past two years, the Federal Reserve has further eased 
monetary conditions by purchasing longer-term securities, 
specifically Treasury Agency and agency mortgage-backed 
securities on the open market. These purchases are settled 
through the banking system, with the result that depository 
institutions now hold a very high level of reserve balances 
with the Federal Reserve.
    Although large-scale purchases of longer-term securities 
are a different monetary policy tool than the more familiar 
approach of targeting the Federal Funds Rate, the two types of 
policies affect the economy in similar ways. Conventional 
monetary policy easing works by lowering market expectations 
for the future path of short-term interest rates, which in turn 
reduces the current level of longer-term interest rates and 
contributes to an easing in broader financial conditions. These 
changes, by reducing borrowing costs and raising asset prices, 
bolster household and business spending and thus increase 
economic activity.
    By comparison, the Federal Reserve's purchases of longer-
term securities do not affect very short-term interest rates, 
which remain close to zero, but instead put downward pressure 
directly on longer-term interest rates. By easing conditions in 
credit and financial markets, these actions encourage spending 
by households and businesses through essentially the same 
channels as conventional monetary policy, thereby strengthening 
the economic recovery.
    Indeed a wide range of market indicators suggest that the 
Federal Reserve securities purchases have been effective at 
easing financial conditions, lending credence to the view that 
these actions are providing significant support to job creation 
and economic growth.
    My colleagues and I have said that we will review the asset 
purchase program regularly in light of incoming information and 
will adjust it as needed to promote maximum employment and 
stable prices. In particular, we remain unwaveringly committed 
to price stability, and we are confident that we have the tools 
to be able to smoothly and effectively exit from the current, 
highly accommodative policy stance at the appropriate time.
    Our ability to pay interest on reserve balances held at 
Federal Reserve Banks will allow us to put upward pressure on 
short-term market rates, and thus to tighten monetary policy 
when needed, even if bank reserves remain high. Moreover, we 
have developed additional tools that will allow us to drain or 
immobilize bank reserves as needed to facilitate the smooth 
withdrawal of policy accommodation when conditions warrant. If 
necessary, we could also tighten policy by redeeming or selling 
securities.
    As I am appearing before the Budget Committee, it is worth 
emphasizing that the Fed's purchases of longer-term securities 
are not comparable to ordinary government spending. In 
executing these transactions, the Federal Reserve acquires 
financial assets, not goods and services; thus these purchases 
do not add to the government's deficit or debt. Ultimately at 
the appropriate time, the Federal Reserve will normalize its 
balance sheet by selling these assets back into the market or 
allowing them to run off. In the interim, the interest that the 
Federal Reserve earns through its securities holdings adds to 
the Fed's remittances to the Treasury. In 2009 and 2010, those 
remittances totaled about $125 billion.
    Fiscal policymakers also face significant challenges. Our 
nation's fiscal position has deteriorated appreciatively since 
the onset of the financial crisis and the recession. To a 
significant extent, this deterioration is the result of the 
effects of the weak economy on revenues and outlays, along with 
the actions that the administration and the Congress took to 
ease the recession and steady financial markets. However, even 
after economic and financial conditions return to normal, the 
federal budget will remain on an unsustainable path, with the 
budget gap becoming increasingly large over time unless the 
Congress enacts significant changes in fiscal programs.
    For example, under plausible assumptions about how fiscal 
policies might evolve in the absence of major legislative 
changes, the CBO projects the deficit to fall from its current 
level of about nine percent of GDP to five percent of GDP by 
2015, but then to rise to about six and a half percent of GDP 
by the end of the decade. In subsequent years, the budget 
situation is projected to deteriorate even more rapidly, with 
federal debt held by the public reaching almost 90 percent of 
GDP by 2020 and 150 percent by 2030, up from about 60 percent 
at the end of fiscal year 2010.
    The long-term fiscal challenges confronting the nation are 
especially daunting because they are mostly the product of 
powerful underlying trends, not short-term or temporary 
factors. The two most important driving forces behind the 
budget deficit are the aging of the population and rapidly 
rising health care costs. Indeed the CBO projects that federal 
health spending will roughly double as a percentage of GDP over 
the next 25 years. The ability to control health care spending 
while still providing high quality care to those who need it 
will be critical for bringing the federal budget onto a 
sustainable path.
    The CBO's long-term budget projections, by design, do not 
account for the likely adverse economic effects of such high 
debt and deficits, but if government debt and deficits were 
actually to grow at the pace envisioned, the economic and 
financial effects would be severe. Sustained high rates of 
government borrowing would both drain funds away from private 
investment and increase our debt to foreigners, with adverse 
long-run effects on U.S. output, incomes, and standards of 
living.
    Moreover, diminishing investor confidence that deficits 
will be brought under control will ultimately lead to sharply 
rising interest rates and government debt and, potentially, to 
broader financial turmoil. In a vicious circle, high and rising 
interest rates would cause debt service payments and the 
federal debt to grow even faster, resulting in further 
increases in the debt-to-GDP ratio, and making fiscal 
adjustment all the more difficult.
    In thinking about achieving fiscal sustainability, it is 
useful to apply the concept of the primary budget deficit, 
which is the government budget deficit excluding interest 
payments on the national debt. To stabilize the ratio of 
federal debt to the GDP, a useful benchmark for assessing 
fiscal sustainability, the primary budget deficit must be 
reduced to zero. Under the CBO projection that I noted earlier, 
the primary budget deficit is expected to be two percent of GDP 
in 2015, and then rise to almost three percent of GDP in 2020, 
and six percent in 2030. These projections provide a gauge of 
the adjustments that will be necessary to attain fiscal 
sustainability.
    To put the budget on a sustainable trajectory, policy 
actions, either reductions in spending, increases in revenues, 
or some combination of the two, will have to be taken to 
eventually close these primary budget gaps.
    By definition, the unsustainable trajectories of deficits 
and debt that the CBO outlines cannot actually happen, because 
creditors would never be willing to lend to a government with 
debt relative to national income that is rising without limit. 
One way or the other, fiscal adjustments sufficient to 
stabilize the federal budget must occur at some point. The 
question is whether these adjustments will take place through a 
careful and deliberative process that weighs priorities and 
gives people adequate time to adjust to changes in government 
programs or tax policies, or whether the needed fiscal 
adjustments will come instead as a rapid and painful response 
to a looming or actual fiscal crisis.
    Acting now to develop a credible program to reduce future 
deficits would not only enhance economic growth and stability 
in the long run, but could also yield substantial near-term 
benefits, in terms of lower long-term interest rates and 
increased consumer and business confidence.
    Plans recently put forward by the President's National 
Commission on Fiscal Responsibility and Reform and other 
prominent groups provide useful starting points for a much 
needed national conversation. Although these proposals differ 
in many details, they demonstrate that realistic solutions to 
our fiscal problems do exist.
    Of course, economic growth is affected not only by the 
levels of taxes and spending but also by their composition and 
structure. I hope that in addressing our long-term fiscal 
challenges, the Congress and the Administration will undertake 
reforms to the Government's tax policies and spending 
priorities that serve not only to reduce the deficit, but also 
to enhance the long-term growth potential of our economy: For 
example, by reducing disincentives to work and to save, by 
encouraging investment in the skills of our workforce as well 
as new machinery and equipment, by promoting research and 
development, and by providing necessary public infrastructure.
    Our nation cannot reasonably expect to grow its way out of 
our fiscal imbalances, but a more productive economy will ease 
the trade-offs that we face.
    Thank you, Mr. Chairman, Ranking Member. I'd be very 
pleased to take your questions.
    [The prepared statement of Ben S. Bernanke follows:]

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

    Chairman Ryan, Ranking Member Van Hollen, and other members of the 
Committee, I am pleased to have this opportunity to offer my views on 
the economic outlook, monetary policy, and issues pertaining to the 
federal budget.

                          THE ECONOMIC OUTLOOK

    The economic recovery that began in the middle of 2009 appears to 
have strengthened in the past few months, although the unemployment 
rate remains high. The initial phase of the recovery, which occurred in 
the second half of 2009 and in early 2010, was in large part 
attributable to the stabilization of the financial system, the effects 
of expansionary monetary and fiscal policies, and the strong boost to 
production from businesses rebuilding their depleted inventories. But 
economic growth slowed significantly last spring and concerns about the 
durability of the recovery intensified as the impetus from inventory 
building and fiscal stimulus diminished and as Europe's fiscal and 
banking problems roiled global financial markets.
    More recently, however, we have seen increased evidence that a 
self-sustaining recovery in consumer and business spending may be 
taking hold. Notably, real consumer spending rose at an annual rate of 
more than 4 percent in the fourth quarter. Although strong sales of 
motor vehicles accounted for a significant portion of this pickup, the 
recent gains in consumer spending appear reasonably broad based. 
Business investment in new equipment and software increased robustly 
throughout much of last year, as firms replaced aging equipment and as 
the demand for their products and services expanded. Construction 
remains weak, though, reflecting an overhang of vacant and foreclosed 
homes and continued poor fundamentals for most types of commercial real 
estate. Overall, improving household and business confidence, 
accommodative monetary policy, and more-supportive financial 
conditions, including an apparently increasing willingness of banks to 
lend, seem likely to result in a more rapid pace of economic recovery 
in 2011 than we saw last year.
    While indicators of spending and production have been encouraging 
on balance, the job market has improved only slowly. Following the loss 
of about 8\3/4\ million jobs from 2008 through 2009, private-sector 
employment expanded by a little more than 1 million in 2010. However, 
this gain was barely sufficient to accommodate the inflow of recent 
graduates and other new entrants to the labor force and, therefore, not 
enough to significantly erode the wide margin of slack that remains in 
our labor market. Notable declines in the unemployment rate in December 
and January, together with improvement in indicators of job openings 
and firms' hiring plans, do provide some grounds for optimism on the 
employment front. Even so, with output growth likely to be moderate for 
a while and with employers reportedly still reluctant to add to their 
payrolls, it will be several years before the unemployment rate has 
returned to a more normal level. Until we see a sustained period of 
stronger job creation, we cannot consider the recovery to be truly 
established.
    On the inflation front, we have recently seen increases in some 
highly visible prices, notably for gasoline. Indeed, prices of many 
industrial and agricultural commodities have risen lately, largely as a 
result of the very strong demand from fast-growing emerging market 
economies, coupled, in some cases, with constraints on supply. 
Nonetheless, overall inflation is still quite low and longer-term 
inflation expectations have remained stable. Over the 12 months ending 
in December, prices for all the goods and services consumed by 
households (as measured by the price index for personal consumption 
expenditures) increased by only 1.2 percent, down from 2.4 percent over 
the prior 12 months. To assess underlying trends in inflation, 
economists also follow several alternative measures of inflation; one 
such measure is so-called core inflation, which excludes the more 
volatile food and energy components and therefore can be a better 
predictor of where overall inflation is headed. Core inflation was only 
0.7 percent in 2010, compared with around 2\1/2\ percent in 2007, the 
year before the recession began. Wage growth has slowed as well, with 
average hourly earnings increasing only 1.7 percent last year. These 
downward trends in wage and price inflation are not surprising, given 
the substantial slack in the economy.

                            MONETARY POLICY

    Although the growth rate of economic activity appears likely to 
pick up this year, the unemployment rate probably will remain elevated 
for some time. In addition, inflation is expected to persist below the 
levels that Federal Reserve policymakers have judged to be consistent 
over the longer term with our statutory mandate to foster maximum 
employment and price stability. Under such conditions, the Federal 
Reserve would typically ease monetary policy by reducing its target for 
the federal funds rate. However, the target range for the federal funds 
rate has been near zero since December 2008, leaving essentially no 
room for further reductions. As a consequence, since then we have been 
using alternative tools to provide additional monetary accommodation. 
In particular, over the past two years the Federal Reserve has further 
eased monetary conditions by purchasing longer-term securities--
specifically, Treasury, agency, and agency mortgage-backed securities--
on the open market. These purchases are settled through the banking 
system, with the result that depository institutions now hold a very 
high level of reserve balances with the Federal Reserve.
    Although large-scale purchases of longer-term securities are a 
different monetary policy tool than the more familiar approach of 
targeting the federal funds rate, the two types of policies affect the 
economy in similar ways. Conventional monetary policy easing works by 
lowering market expectations for the future path of short-term interest 
rates, which, in turn, reduces the current level of longer-term 
interest rates and contributes to an easing in broader financial 
conditions. These changes, by reducing borrowing costs and raising 
asset prices, bolster household and business spending and thus increase 
economic activity. By comparison, the Federal Reserve's purchases of 
longer-term securities do not affect very short-term interest rates, 
which remain close to zero, but instead put downward pressure directly 
on longer-term interest rates. By easing conditions in credit and 
financial markets, these actions encourage spending by households and 
businesses through essentially the same channels as conventional 
monetary policy, thereby strengthening the economic recovery. Indeed, a 
wide range of market indicators suggest that the Federal Reserve's 
securities purchases have been effective at easing financial 
conditions, lending credence to the view that these actions are 
providing significant support to job creation and economic 
growth.market expectations for the future path of short-term interest 
rates, which, in turn, reduces the current level of longer-term 
interest rates and contributes to an easing in broader financial 
conditions. These changes, by reducing borrowing costs and raising 
asset prices, bolster household and business spending and thus increase 
economic activity. By comparison, the Federal Reserve's purchases of 
longer-term securities do not affect very short-term interest rates, 
which remain close to zero, but instead put downward pressure directly 
on longer-term interest rates. By easing conditions in credit and 
financial markets, these actions encourage spending by households and 
businesses through essentially the same channels as conventional 
monetary policy, thereby strengthening the economic recovery. Indeed, a 
wide range of market indicators suggest that the Federal Reserve's 
securities purchases have been effective at easing financial 
conditions, lending credence to the view that these actions are 
providing significant support to job creation and economic 
growth.market expectations for the future path of short-term interest 
rates, which, in turn, reduces the current level of longer-term 
interest rates and contributes to an easing in broader financial 
conditions. These changes, by reducing borrowing costs and raising 
asset prices, bolster household and business spending and thus increase 
economic activity. By comparison, the Federal Reserve's purchases of 
longer-term securities do not affect very short-term interest rates, 
which remain close to zero, but instead put downward pressure directly 
on longer-term interest rates. By easing conditions in credit and 
financial markets, these actions encourage spending by households and 
businesses through essentially the same channels as conventional 
monetary policy, thereby strengthening the economic recovery. Indeed, a 
wide range of market indicators suggest that the Federal Reserve's 
securities purchases have been effective at easing financial 
conditions, lending credence to the view that these actions are 
providing significant support to job creation and economic growth.\1\
---------------------------------------------------------------------------
    \1\ For example, in August 2010 we announced our policy of 
reinvesting principal payments on agency debt and agency-guaranteed 
mortgage-backed securities in longer-term Treasury securities and 
signaled that we were considering additional purchases of longer-term 
Treasury securities. Since then, equity prices have risen 
significantly, volatility in the equity market has fallen, corporate 
bond spreads have narrowed, and inflation compensation as measured in 
the market for inflation-indexed securities has risen from low to more 
normal levels. Yields on 5- to 10-year Treasury securities initially 
declined markedly as markets priced in prospective Fed purchases; these 
yields subsequently rose, however, as investors became more optimistic 
about economic growth and as traders scaled back their expectations of 
future securities purchases. All of these developments are what one 
would expect to see when monetary policy becomes more accommodative, 
whether through conventional or less conventional means. Interestingly, 
these developments are also remarkably similar to those that occurred 
during the earlier episode of policy easing, notably in the months 
following our March 2009 announcement of a significant expansion in 
securities purchases.
---------------------------------------------------------------------------
    My colleagues and I have said that we will review the asset 
purchase program regularly in light of incoming information and will 
adjust it as needed to promote maximum employment and stable prices. In 
particular, we remain unwaveringly committed to price stability, and we 
are confident that we have the tools to be able to smoothly and 
effectively exit from the current highly accommodative policy stance at 
the appropriate time. Our ability to pay interest on reserve balances 
held at the Federal Reserve Banks will allow us to put upward pressure 
on short-term market interest rates and thus to tighten monetary policy 
when needed, even if bank reserves remain high. Moreover, we have 
developed additional tools that will allow us to drain or immobilize 
bank reserves as needed to facilitate the smooth withdrawal of policy 
accommodation when conditions warrant. If necessary, we could also 
tighten policy by redeeming or selling securities.
    As I am appearing before the Budget Committee, it is worth 
emphasizing that the Fed's purchases of longer-term securities are not 
comparable to ordinary government spending. In executing these 
transactions, the Federal Reserve acquires financial assets, not goods 
and services; thus, these purchases do not add to the government's 
deficit or debt. Ultimately, at the appropriate time, the Federal 
Reserve will normalize its balance sheet by selling these assets back 
into the market or by allowing them to run off. In the interim, the 
interest that the Federal Reserve earns from its securities holdings 
adds to the Fed's remittances to the Treasury; in 2009 and 2010, those 
remittances totaled about $125 billion.

                             FISCAL POLICY

    Fiscal policymakers also face significant challenges. Our nation's 
fiscal position has deteriorated appreciably since the onset of the 
financial crisis and the recession. To a significant extent, this 
deterioration is the result of the effects of the weak economy on 
revenues and outlays, along with the actions that the Administration 
and the Congress took to ease the recession and steady financial 
markets. However, even after economic and financial conditions return 
to normal, the federal budget will remain on an unsustainable path, 
with the budget gap becoming increasingly large over time, unless the 
Congress enacts significant changes in fiscal programs.
    For example, under plausible assumptions about how fiscal policies 
might evolve in the absence of major legislative changes, the 
Congressional Budget Office (CBO) projects the deficit to fall from its 
current level of about 9 percent of gross domestic product (GDP) to 5 
percent of GDP by 2015, but then to rise to about 6\1/2\ percent of GDP 
by the end of the decade.\2\ In subsequent years, the budget situation 
is projected to deteriorate even more rapidly, with federal debt held 
by the public reaching almost 90 percent of GDP by 2020 and 150 percent 
by 2030, up from about 60 percent at the end of fiscal year 2010.
---------------------------------------------------------------------------
    \2\ This alternative fiscal policy scenario, which assumes, among 
other things, that most of the tax cuts enacted in 2001 and 2003 are 
made permanent and that discretionary fiscal outlays rise at the same 
rate as gross domestic product, is presented in Congressional Budget 
Office (2010), The Long-Term Budget Outlook (Washington: CBO, June 
(revised August)), available at www.cbo.gov/
doc.cfm?index=11579&zzz=40884.
---------------------------------------------------------------------------
    The long-term fiscal challenges confronting the nation are 
especially daunting because they are mostly the product of powerful 
underlying trends, not short-term or temporary factors. The two most 
important driving forces behind the budget deficit are the aging of the 
population and rapidly rising health-care costs. Indeed, the CBO 
projects that federal spending for health-care programs will roughly 
double as a percentage of GDP over the next 25 years.\3\ The ability to 
control health-care spending, while still providing high-quality care 
to those who need it, will be critical for bringing the federal budget 
onto a sustainable path.
---------------------------------------------------------------------------
    \3\ See the two long-term scenarios for mandatory federal spending 
on health care shown in figure 2-3, p. 39, in CBO, The Long-Term Budget 
Outlook, in note 2.
---------------------------------------------------------------------------
    The CBO's long-term budget projections, by design, do not account 
for the likely adverse economic effects of such high debt and deficits. 
But if government debt and deficits were actually to grow at the pace 
envisioned, the economic and financial effects would be severe. 
Sustained high rates of government borrowing would both drain funds 
away from private investment and increase our debt to foreigners, with 
adverse long-run effects on U.S. output, incomes, and standards of 
living. Moreover, diminishing investor confidence that deficits will be 
brought under control would ultimately lead to sharply rising interest 
rates on government debt and, potentially, to broader financial 
turmoil. In a vicious circle, high and rising interest rates would 
cause debt-service payments on the federal debt to grow even faster, 
resulting in further increases in the debt-to-GDP ratio and making 
fiscal adjustment all the more difficult.
    In thinking about achieving fiscal sustainability, it is useful to 
apply the concept of the primary budget deficit, which is the 
government budget deficit excluding interest payments on the national 
debt. To stabilize the ratio of federal debt to the GDP--a useful 
benchmark for assessing fiscal sustainability--the primary budget 
deficit must be reduced to zero.\4\ Under the CBO projection that I 
noted earlier, the primary budget deficit is expected to be 2 percent 
of GDP in 2015 and then rise to almost 3 percent of GDP in 2020 and 6 
percent of GDP in 2030. These projections provide a gauge of the 
adjustments that will be necessary to attain fiscal sustainability. To 
put the budget on a sustainable trajectory, policy actions--either 
reductions in spending, increases in revenues, or some combination of 
the two--will have to be taken to eventually close these primary budget 
gaps.
---------------------------------------------------------------------------
    \4\ This result requires that the nominal rate of interest paid on 
government debt equals the rate of growth of nominal GDP, a condition 
that might plausibly be expected to hold over time. If the interest 
rate on government debt is higher than the growth rate of nominal GDP, 
as might happen if creditors become wary of lending, then a primary 
budget surplus rather than primary balance would be needed to stabilize 
the ratio of debt to GDP.
---------------------------------------------------------------------------
    By definition, the unsustainable trajectories of deficits and debt 
that the CBO outlines cannot actually happen, because creditors would 
never be willing to lend to a government with debt, relative to 
national income, that is rising without limit. One way or the other, 
fiscal adjustments sufficient to stabilize the federal budget must 
occur at some point. The question is whether these adjustments will 
take place through a careful and deliberative process that weighs 
priorities and gives people adequate time to adjust to changes in 
government programs or tax policies, or whether the needed fiscal 
adjustments will come as a rapid and painful response to a looming or 
actual fiscal crisis. Acting now to develop a credible program to 
reduce future deficits would not only enhance economic growth and 
stability in the long run, but could also yield substantial near-term 
benefits in terms of lower long-term interest rates and increased 
consumer and business confidence. Plans recently put forward by the 
President's National Commission on Fiscal Responsibility and Reform and 
other prominent groups provide useful starting points for a much-needed 
national conversation. Although these proposals differ on many details, 
they demonstrate that realistic solutions to our fiscal problems do 
exist.
    Of course, economic growth is affected not only by the levels of 
taxes and spending, but also by their composition and structure. I hope 
that, in addressing our long-term fiscal challenges, the Congress and 
the Administration will undertake reforms to the government's tax 
policies and spending priorities that serve not only to reduce the 
deficit, but also to enhance the long-term growth potential of our 
economy--for example, by reducing disincentives to work and to save, by 
encouraging investment in the skills of our workforce as well as new 
machinery and equipment, by promoting research and development, and by 
providing necessary public infrastructure. Our nation cannot reasonably 
expect to grow its way out of our fiscal imbalances, but a more 
productive economy will ease the tradeoffs that we face.
    Thank you. I would be pleased to take your questions.

    Chairman Ryan. Thank you, Mr. Chairman. First, let me lead 
off with what you have concluded. Just to summarize, you do 
believe that one of the best things we can do for short-term 
economic growth is to put out a plan that actually stabilizes 
our fiscal picture, that actually gets our liabilities under 
control, and shows with confidence that we have a right 
trajectory because we've addressed the programs, which are the 
spending programs that are getting us out of control. Is that 
the case?
    Mr. Bernanke. That's correct.
    Chairman Ryan. Okay. I want to talk to you about QE2. Last 
time you came to the Committee to testify, you said that QE2 is 
not an exercise in monetizing the debt. Now, the question 
basically is this. I understand from your perspective you can 
say that QE2 is not monetizing the debt because it is not 
causing runaway inflation because the money you are creating is 
not yet circulating in the broader economy, it is being held as 
excess bank reserves. But isn't this sort of a distinction 
without a difference? It seems to me that the argument here is 
that the intention of QE2 is what we ought to be focusing on, 
because the intention is to bring rates down to promote 
economic growth, and therefore the intention is what should 
matter here, but this is debt monetization, so isn't that 
really a distinction without a difference?
    Mr. Bernanke. No, sir. Monetization would involve a 
permanent increase in the money supply to basically pay the 
government's bills through money creation. What we are doing 
here is a temporary measure which will be reversed so that at 
the end of this process, the money supply will be normalized, 
the amount of the Fed's balance sheet will be normalized, and 
there will be no permanent increase, either in money 
outstanding, in the Fed's balance sheet, or in inflation.
    Chairman Ryan. So if we get this wrong, and if credibility 
is diminished because of these moves, and if expectations form 
around price increases, then we do have a big interest rate 
problem. And if you look through our fiscal side of it, just 
raising interest rates under normal, average predictions would 
just be vicious to our balance sheet. The interest payments 
alone in the current budget window, which assumes extremely low 
interest rates for the decade, go from $200 billion this year 
to a trillion at the end of the budget window. If interest 
rates move up from their current projections, which I think 
long bonds are about four to five percent throughout the budget 
window, that is about one to anywhere from $6 trillion in extra 
interest payments. So basically, this is all based on 
confidence that what you are doing and saying will actually be 
done, and confidence and credibility is just critical in all of 
this.
    What I'm trying to get at is, and just take a look at 
today's Wall Street Journal: Inflation Worries Spread. You've 
got, basically, inflation jitters spread through emerging 
markets. In Brazil, Latin America's largest economy, the 
government reported Tuesday that inflation is accelerating. You 
know, we've got inflation popping up in other parts of the 
world, after all, many countries peg their currencies to the 
U.S. dollar, and my basic question is, to what extent do you 
think the Fed's monetary policy stance has contributed to these 
global inflationary pressures? Has this contributed to the hot 
money flows abroad that have led to some of these global 
imbalances that are not fully appreciating when we examine the 
costs and benefits of your current QE2 monetary policy stance?
    Mr. Bernanke. Mr. Chairman, your first sentence under the 
headline was very revealing. The inflation is taking place in 
emerging markets because that is where the growth is, that is 
where the demand is, and that is where, in some cases, the 
economy is overheating. It's the responsibility of the emerging 
markets to set their monetary and exchange rate policies in a 
way that will keep their economies on a stable path. The 
increases in oil prices, for example, are entirely due, 
according to the International Energy Agency, to increases in 
demand coming from emerging markets; they are not coming from 
the United States. So the bulk of the increase in commodity 
crisis is a global phenomenon.
    In the United States, inflation made here in the U.S. is 
very, very low. Now, of course, that is a serious problem, but 
monetary policy can't do anything about, for example, bad 
weather in Russia, or increases in demand for oil in Brazil and 
China. What we can do is try to get stable prices and growth 
here in the United States.
    Chairman Ryan. So, as you look at some of the leading 
indicators: the yield curve, for instance, commodity prices, do 
those not send you a warning that inflation is building in 
America? Or are you still looking at core inflation as your 
main guidepost measuring whether or not our monetary policy is 
keeping prices in check? My basic question is, and my concern 
is, using your output gap model, my fear is that you are going 
to catch it before the cow is out of the barn. You are going to 
see inflation after it has already been launched. And given 
that you have a huge balance sheet, given that we are basically 
in uncharted territory with respect to the Great Recession and 
the responses that you put out there, that we are going to 
catch this after it is too late.
    Could you please give us a sense of what else you are 
looking at to gauge inflation in America, other than core 
inflation, which, as you know, there's a big debate as to 
whether or not that is the proper tool we use or not. Even the 
ECB uses broader definitions of inflation. So where are you 
looking, outside of your core deflation, to give you a gauge as 
to how to set monetary policy to prevent inflation from 
actually getting unhinged here in America?
    Mr. Bernanke. Mr. Chairman, let me say first, that there be 
no doubt that we are unwaveringly committed to maintaining 
price stability; that is a very, very strong goal and 
objective, we will do so. In terms of what we are looking at, 
first of all, overall inflation, including food and energy is 
still very low, about one percent. But looking forward, you 
asked about credibility and the yield curve, if you look, for 
example, at inflation breakevens, which are a measure in the 
inflation index bond market of what the markets think inflation 
is going to be. The five year breakeven is about two percent, 
2.1 percent last I looked. So there is not really any 
indication in our financial markets that in the United States 
there's an expectation of inflation.
    That being said, we will look very carefully not only at 
output gaps and those things that you mention, but also at 
commodity prices, at interest rates, and all the other 
indicators that will help us assess when inflation is becoming 
a problem. It is always an issue, as you know, Mr. Chairman, 
that in the recovery period you have to pick the right moment 
to begin removing accommodation, taking away the punch bowl, 
and we, of course, face that problem, as the Central Bank 
always does, but we are committed to making sure that we do it 
at the right time.
    Chairman Ryan. So when you see the steepening of the yield 
curve that has taken place recently, do you see that as market 
participants showing some concerns about future inflation, or 
do you see that as signs that an economic recovery is beginning 
to take root?
    Mr. Bernanke. The inflation breakevens have risen since we 
began the QE2 program in August, but they have moved from very 
low levels to about normal levels. The bulk of the increase in 
interest rates has been, in the real side of the interest rate, 
which means that, like the stock market, the bond market is 
expecting greater future growth and is more optimistic about 
the U.S. economy, and I think that is a good thing, obviously, 
and I think our policies have contributed to that.
    Chairman Ryan. So we obviously have a bigger punch bowl 
than we normally have in these times, and if we were in a 
cyclical situation, I don't think concerns would be as great as 
they are right now. But I think part of our problem, as you 
mentioned, on the fiscal policy side, is structural. We have a 
tidal wave of debt we are running into. If interest rates begin 
to leave the current projections, we have a serious problem on 
our hands. And it just gets to a vicious cycle, like you have 
described.
    The punch bowl, your asset, your balance sheets: Have you 
done a stress test on the Fed's balance sheet assets as an exit 
strategy occurs with higher interest rates that perhaps result 
from what has been going on? So, have you done a stress test on 
your balance sheet? And what level of losses do you think are 
acceptable as you withdraw?
    Mr. Bernanke. We have done multiple stress tests. Under 
most likely scenarios, the fiscal implications of the balance 
sheet are positive. We've already turned in, in the last two 
years, $125 billion to the Treasury, and given our low level of 
cost, our low cost of financing, under most plausible scenarios 
this policy will continue to be profitable. Of course, that is 
not the main objective of it; the objective is to strengthen 
the economy.
    If short-term interest rates were to rise exceptionally 
high, much more than we anticipate, then it could be that the 
remittances to the Treasury would go down for a time, but in 
that case, it would probably also be the case that the economy 
was much stronger than expected, and tax revenues would more 
than compensate for that loss. So our sense is that the net 
expectation from a fiscal side is that this will actually be 
constructive and reduce the federal deficit.
    Chairman Ryan. I'd go on for a long time, but I want to be 
fair to my colleagues. Mr. Van Hollen.
    Mr. Van Hollen. Thank you, Mr. Chairman, and again, 
Chairman Bernanke, thank you for your testimony. Now, obviously 
the United States as part of a global marketplace, but your 
job, your mandate at the Fed is to watch out for the American 
economy, is that right?
    Mr. Bernanke. Yes, sir.
    Mr. Van Hollen. And your testimony, as I understand it, is 
that you are vigilant about looking out for inflation pressures 
but your assessment right now is that we do not have an 
inflation problem in the United States, is that correct?
    Mr. Bernanke. We do not now have a problem, but I do want 
to repeat that we are extremely vigilant, we will be very 
careful to make sure that we don't wait too long.
    Mr. Van Hollen. Right. And your policy known as QE2, you 
had QE1, and QE2 was referenced, by your assessment how many 
American jobs has that saved or created?
    Mr. Bernanke. It is obviously very difficult to know 
precisely. There have been a number of studies which have tried 
to assess, using macroeconomic models and so on. A very careful 
study done by Federal Reserve System economists suggests that 
the total job impact of all of the QE programs, including QE1, 
including the reinvestment, including QE2, could be up to three 
million jobs. It could be less, it could be more, but the 
important thing to understand is that it is not insignificant; 
it is an important contribution to growth and to job creation. 
And we are in a situation where we have almost half of the 
unemployed being out of work for more than six months. And the 
longer that people stay out of work, the more difficult it is 
going to be for them to come back and rejoin the labor force at 
a decent wage, and to return to their previous employment.
    Mr. Van Hollen. Right. So as I understand you, that was a 
credible study in your view, was it not?
    Mr. Bernanke. It is, and there have been other studies as 
well, which are comparable.
    Mr. Van Hollen. Okay. And just focusing on QE2, my 
understanding is that, just with respect to that, those 
monetary decisions that created or saved between 600,000 and 
700,000 jobs, is that correct?
    Mr. Bernanke. The same study attributed, again 
perspectively, in part, to the $600 billion QE2 about 700,000 
jobs. Again, let me just emphasize that these are simulation 
studies, but they do indicate that the potential impact is 
significant.
    Mr. Van Hollen. Right, but Mr. Chairman, simulation studies 
are what the Feds, the OMB, the CBO, we all do, right?
    Mr. Bernanke. Correct.
    Mr. Van Hollen. Okay. With respect to that policy, if you 
did not have those tools at your disposal and you were not able 
to use them, I assume that would mean that you would not be 
able to take action to save or create three million jobs, is 
that correct?
    Mr. Bernanke. That's correct because our interest rate is 
essentially down to zero.
    Mr. Van Hollen. Thank you. Now, I want to turn briefly to 
the question of debt ceiling because this Congress is going to 
face a very important decision coming up, and last week at the 
National Press Club, you indicated that failure to raise the 
debt ceiling would be, quote, Catastrophic for our economy and 
financial system. I assume you have the same opinion today.
    Mr. Bernanke. Yes, sir.
    Mr. Van Hollen. Okay. You also indicated at the National 
Press Club that it would be a mistake for, in your view, for 
the Congress to use the debt ceiling as a, quote, Bargaining 
chip, with respect to decisions on spending and tax, that we 
should address those as part of our normal discussion but not 
hold the debt ceiling hostage to that. I assume you still have 
that view today.
    Mr. Bernanke. To be clear, it is very important to address 
these issues, but the risk of not raising the debt ceiling is 
that interest would not be paid on outstanding government debt, 
and if the United States defaulted it would have 
extraordinarily bad consequences for our financial system, and 
it would mean that we would face higher interest rates 
essentially indefinitely because creditors wouldn't trust us to 
make our interest payments.
    Mr. Van Hollen. I mean it would be reckless from an 
economic and financial perspective to allow, to essentially 
default on our debts and question the creditworthiness and full 
faith credit of the United States, correct?
    Mr. Bernanke. We do not want to default on our debts; it 
would be very destructive.
    Mr. Van Hollen. Have you had an opportunity to look at some 
of the legislative proposals that have been introduced on the 
Senate and the House side that would purport to try and delay 
those payments, and have you seen Secretary Geithner's comments 
in a response?
    Mr. Bernanke. We have just begun to look at the issue of 
whether or not you could reorder, re-prioritize payments so 
that the debt interest would be paid, but other things not 
paid. This has not been done before and our early assessment is 
that there would be some difficulties from just a purely 
operational point of view. For example, you would have to 
differentiate between Social Security payments, which 
presumably would not be going out, versus interest payments to 
individuals holding savings bonds, which would be going out, 
and that might cause some operational issues, so we do have 
some concerns on that score.
    Mr. Van Hollen. Some of these proposals would actually 
allow the full faith and credit of the United States to extend 
to some of our foreign creditors, like China and other 
governments, but not to U.S. businesses and American citizens. 
Let me ask you a quick question on the fiscal policy, because I 
think we all agree that the Congress should act now to put in 
place a plan to get our deficit and debt under control. We need 
to come up with a plan to put this country on a sustainable, 
fiscal path.
    And, as you indicated, you referenced the bipartisan 
commission, the President's Commission, in your remarks. The 
authors of that plan observed, and I quote, In order to avoid 
shocking the fragile economy, the Commission recommends waiting 
until 2012 to begin enacting programmatic spending cuts. Let me 
just ask you this, Mr. Chairman: If you were to take a lot of 
investment out of the economy at this particular point, when it 
is fragile, could that create a drag on the economy and have a 
impact on jobs?
    Mr. Bernanke. If it were large enough, it could, but on the 
other side, I just want to emphasize that the deficit-reduction 
approach should be one that takes a long-term perspective, that 
you are looking at a long-term window and addressing the whole 
trajectory of spending, rather than looking only at the very 
short-term.
    Mr. Van Hollen. Okay. And I agree with that, Mr. Chairman. 
Last question is I was pleased to see in your testimony that 
you believe that certain investments, national investments in 
our economy, can in fact lead to productivity and growth. There 
are some who are trying to turn investment into a dirty word, 
but as you indicate here, investments in our public 
infrastructure, investments in education, and investments in 
science and research can in fact have a positive, productive 
impact on economic growth. Is that correct?
    Mr. Bernanke. If they are well done, yes.
    Mr. Van Hollen. Thank you, Mr. Chairman.
    Chairman Ryan. Something tells me we are going to have a 
big debate over the definition of investment over the next two 
years. Mr. Garrett.
    Mr. Garrett. There we go. And thank you, Mr. Chairman. 
Following up on a couple of those questions, before I get to 
some other ones. So, Mr. Ryan was asking an initial question to 
your response back, with regard to monetary policy, whether 
monetizing the debt and the like. You said your actions right 
now have been short-term in nature, as opposed to permanent 
actions, which, if I understand you, would be effectively 
monetizing the debt. I guess, then, the question becomes, if 
you had implemented permanent, there's nothing that would have 
precluded the Fed, somewhere down the road, undo their actions 
later on. You're not bound by your decisions today. So, 
anything that is actually permanent is also changeable by the 
Fed. Correct? There's nothing permanent that you would do 
today, that you couldn't undo.
    Mr. Bernanke. What's key here is expectations. And the 
markets don't expect inflation, which means they expect us to 
undo this process at the appropriate time.
    Mr. Garrett. Right. And effectively what you have is a 
difference between one's interpretation of what is permanent 
and what is temporary. And I imagine that no Fed Chairman would 
ever come to this witness table, and say, I am engaging in 
permanent monetizing of the debt. That no matter how they would 
describe it to us, they would describe it as, I'm only taking a 
temporary action to get over this period that we are in right 
now. Isn't that correct?
    Mr. Bernanke. That's what we are doing. It's a temporary 
action. But, of course, the Fed always buys securities for 
various reasons. For example, that is how we create the 
currency that Americans use every day.
    Mr. Garrett. But this is obviously outside the norm as far 
as your balance sheet.
    Mr. Bernanke. That's right.
    Mr. Garrett. And part of your opening comments was the fact 
that one of the good signs we are in right now is that consumer 
spending is going along, which is sort of pulling the economy 
going forward, right?
    Mr. Bernanke. Yeah.
    Mr. Garrett. Is that in part because of exactly what you 
are doing, whether we call it permanent or temporary, it is 
because of that, basically, cheap money that is out there that 
is encouraging all of us to say that, Hey, it is cheaper to 
borrow right now, so I can actually increase my consumer 
spending?
    Mr. Bernanke. That's how monetary policy works all the 
time. Not just now.
    Mr. Garrett. Right. But in the area of housing, however, 
you had said, not just last year with regard to housing policy 
and the age old question of what caused us to get into this 
situation. And you said, Well, I don't think it was really 
monetary policy, I'm paraphrasing, here, that got us into this 
situation. And I know the old line, that if you get three 
economists in a room, you will come up with four different 
definitions on what economic policy should be. When you were 
saying that, about three-quarters of business economists were 
just saying the opposite of that. They said that it was a cheap 
monetary policy that was bringing us into this situation. So 
you disagree on that point with a number of other economists, 
as whether it was the low cost of money that actually 
exacerbated the housing problem. Right?
    Mr. Bernanke. Right.
    Mr. Garrett. But now, you are basically, on the other hand, 
saying, We're going to use that exact same policy, of basically 
cheap money, to do what? To try to drive up the cost of the 
housing, in order to pull us out of this economic morass. 
Right?
    Mr. Bernanke. The price of housing isn't responding at all 
to the policy. It's going----
    Mr. Garrett. But that is your ultimate goal here, isn't it? 
Basically, if we have the cheap money, that people will be able 
to start buying houses again, that it'll hit the bottom and the 
housing prices will go back up again. Right?
    Mr. Bernanke. Again, that is the way the monetary policy 
works: by lowering rates of returns, so people will be more 
willing to spend.
    Mr. Garrett. I'm in this quandary here. On the one hand, 
you are saying that, in the past when you had, not you but your 
predecessor, had a cheap monetary policy, that really didn't 
cause the problem because monetary policy really wasn't driving 
the cost of the housing and causing the problems that we have 
here. Now, however, you are going to use that exact same 
formula to say, Yeah, well, actually it does have as 
significant impact, or we should hope it has a significant 
impact on the monetary policy. So I am at a quandary as to 
which is it from the Fed: whether it had an impact in the past, 
or will it have an impact in the future? If you don't think it 
had an impact in the past, why do you think it is going to have 
an impact now on housing?
    Mr. Bernanke. It should have an effect that is 
proportionate to the interest rate change. Now, the housing 
bubble we saw earlier in this decade was far greater than can 
be explained by the monetary policies of that time, which is 
one of the reasons why I don't think that the monetary policy 
was a major source of that bubble.
    Mr. Garrett. Okay. Very quickly, last minute and 15 
seconds, with regards to spending. Wouldn't significant 
reductions, or addressing the short-term spending aspects, be 
good for the market and the economy, despite some of the 
critics on the other side that say this might be detrimental to 
overall growth?
    Mr. Bernanke. Well, again, I think it is really a question 
of convincing the market that there's a long-term plan here, 
and to the extent that that was part of a long-term plan, it 
could be helpful, yes.
    Mr. Garrett. Okay. Well, Moody's looking at what we are 
doing in Washington. I guess they're optimistic about what we 
will do, because they came out a month ago with their report 
looking at the fiscal health, looking at three categories: the 
debt to GDP, the debt to revenue, and the interest payment 
revenue, and they said that the U.S. exceeds the median level 
of AAA rated nations for all these other categories, and 
concludes that it would expect to see, quote, Constructive 
efforts to reduce the current deficits, as well as constructive 
efforts to control long-term growth of entitlement spendings. I 
guess they're optimistic as to what Washington does, making 
those statements. Are you optimistic that we are going to be 
able to make those hard choices, even if they make some 
significant cuts in spending right now?
    Mr. Bernanke. Well, I'm not certain. And that is why I'm 
making this case. I hope that people will listen and take 
seriously the responsibility to address this problem.
    Mr. Garrett. I appreciate that. Thank you.
    Chairman Ryan. Mr. Doggett.
    Mr. Doggett. Thank you very much for your service, Mr. 
Chairman. While it may be true that there are only two 
certainties in life, death and taxes, I would think that a 
close third would be gigantic bonuses for many at gigantic 
Wall-Street financial enterprises. When you were here to 
testify last, you responded to my question about that by 
indicating that the Federal Reserve, under your direction, was 
preparing a public report to the American people on bank 
compensation structures that would be available at the end of 
last year or early this year. About four months ago, your 
general counsel testified here in the House, also, about the 
importance of making that report public to the American people. 
When can we expect to see the report?
    Mr. Bernanke. I believe that will be soon. We certainly are 
working in that direction. As you know, we put guidance out in 
June 2010, and we are working to follow the requirements of the 
Dodd-Frank Act to put out additional restrictions.
    Mr. Doggett. I know there's been some discussion that the 
public report that you testified to us about, and that your 
general counsel testified about, would now be kept secret. But 
it is your intent to make it fully public to the American 
people.
    Mr. Bernanke. That's my understanding, yes.
    Mr. Doggett. And you think that will happen very soon.
    Mr. Bernanke. I believe so, but I'd like to get back to 
you, if I might, on the exact date.
    Mr. Doggett. Please do, especially if any part of it will 
be kept secret, as some have suggested. I think that kind of 
reversal would be very troubling. Thank you, though.
    Moving to the issue of the Consumer Financial Protection 
Bureau, created in the Wall Street Reform Law, you are very 
familiar with it, to arm the American people with information 
that they need to make informed financial decisions. Many 
question whether that Bureau should be located within the 
Federal Reserve, given its traditional mission, and given 
concern about the independence of the Bureau and the ability to 
fulfill its mandate. With it set to begin full operations 
shortly, in July, and with no Consumer Financial Protection 
Bureau Director yet nominated, can you provide us assurances 
that it will be sufficiently strong and independent to fulfill 
its mandate, to offer consumer protection to the American 
people, from the many credit abuses that they have faced in the 
past?
    Mr. Bernanke. Congressman, the CFPB is located in the 
Federal Reserve, only in the narrow sense that the Federal 
Reserve pays the bills. But we have no oversight or control. 
The control really is coming from the Treasury, and I think 
they are the ones who would be most appropriate to respond to 
you about the nature of the Bureau.
    Mr. Doggett. You and the Fed have no involvement in the 
operation of the Bureau? You're just kind of the landlord and 
the paymaster?
    Mr. Bernanke. We're doing our best to help them get set up. 
Obviously, there's a lot to be done, in terms of just hiring 
people and setting up an IT system, and so on, but in terms of 
policymaking, they are completely independent of the Federal 
Reserve. We have no say whatsoever.
    Mr. Doggett. And you are making no recommendations about 
who the director should be, or how the Bureau will operate in 
any way from a policy standpoint?
    Mr. Bernanke. No sir, that is not part of our 
responsibility under Dodd-Frank.
    Mr. Doggett. Another major issue that perhaps involves the 
Treasury some, and it involves you some, is the future of 
Freddie Mac and Fannie Mae. Some are concerned that perhaps 
most, if not all, of their functions would, again, be turned 
over to a few large financial enterprises. What is your general 
approach to the future of these two institutions?
    Mr. Bernanke. Well, as you know, the Treasury is promising 
us a set of proposals very soon, and it will be interesting to 
see what they provide. There are various possibilities that we 
could do, including making them a government utility, or 
privatizing them, which would be two alternatives. One 
suggestion, which I have made in previous remarks, is that if 
the government is involved in providing credit guarantees, it 
should do so only as a deep backstop. That is, the first losses 
should be borne by the originators of the mortgages, or by the 
securitizers. The government, if it does provide backstop 
insurance, should do so for an actuarially fair premium, and 
that would essentially allow the government to provide a 
backstop in situations like we had in the last few years, where 
the housing market came under enormous stress.
    Mr. Doggett. Thank you. Thank you, Mr. Chairman.
    Chairman Ryan. Mr. Campbell.
    Mr. Campbell. Thank you Chairman Ryan and Chairman 
Bernanke. Some things in economics are cyclical and others are 
structural. You mentioned earlier today that you feared that 
unemployment would remain elevated for an extended period of 
time. How much of our current high unemployment, in your view, 
is cyclical, and how much is structural?
    Mr. Bernanke. I don't have a precise number, but we have 
done a lot of work looking at this. And I would say that the 
bulk of it is still cyclical. The risk is that if it goes on 
long enough, it will start becoming structural as people lose 
their skills and their connection to the labor force.
    Mr. Campbell. Is it fair to say that you have control only 
over monetary policy, not fiscal policy and government policy, 
and that to the extent that unemployment is structural, that 
that is something that is really out of your purview to deal 
with, be it QE2, or any other form of monetary policy?
    Mr. Bernanke. That's correct.
    Mr. Campbell. I'd like to talk about what Mr. Ryan referred 
to a minute ago, about this thing of spending and investment. 
There's a lot of talk these days that what we need to grow the 
economy is spending: government spending, spending by 
individuals, spending by consumers. To me, there's a great 
distinction. And the term investment is thrown around a great 
deal, but investment means that someone puts money to work, 
expecting a monetary return. And that is very different from 
spending. In order to achieve long-term growth, stable 
employment growth, isn't investment, from a true definition, 
and savings where we should be trying to head, rather than just 
focusing on consumer spending or government spending? You 
mentioned earlier today that we should remove the disincentives 
to saving and would. Shouldn't we be removing disincentives to 
saving and investment, to get this long-term growth, rather 
than all this focus on spending in both the public and private 
sector?
    Mr. Bernanke. Congressman, I mentioned, improving the tax 
code to reduce disincentives for productive activity. I think 
it is very important, for individuals and for businesses and 
for investment. The government does have some role in providing 
infrastructure and education and so on, obviously, but the way 
that is done and the level which it is done is a matter for 
Congress to decide.
    Mr. Campbell. Do you believe that we currently, since you 
mentioned disincentives to saving, have disincentives in place, 
that block savings or investment from the private sector that 
could add to growth?
    Mr. Bernanke. I think there would be a lot of agreement 
that our tax code is very complex, and is not conducive to the 
most productive activities in many cases.
    Mr. Campbell. Switching to QE2, the flavor of the day, as 
it were, have you fully implemented QE2 yet?
    Mr. Bernanke. No sir. We announced an intention to purchase 
six-hundred-billion, between November and June, and so we are 
about halfway through.
    Mr. Campbell. About halfway through. When QE2 finishes, 
presumably in June, and you mentioned that you could reverse it 
or whatever, what are the metrics that you are following that 
would lead you either to believe that you should have QE3 or 
that you should reverse QE2?
    Mr. Bernanke. Well, first, there's the question of 
efficacy, and we are seeing the intended results in terms of 
financial markets and in terms of financial conditions. So, in 
that respect, we think that it is being successful. In terms of 
looking forward, we will be trying to assess whether the 
recovery is on a sustainable track. And things have moved in 
that direction, which is encouraging. And we will be trying to 
assess whether inflation is low and stable, at around two 
percent or a bit less, which we think is about the right level, 
and most other central banks think is about the right level. 
And looking forward, if that appears to be the trajectory we 
are on, then additional action would not be necessary. If we 
are still in a situation where the recovery does not seem 
established, and deflation risk remains a concern, then we 
would have to think about additional measures.
    Mr. Campbell. What's the trigger that causes reversal?
    Mr. Bernanke. If the economy begins to grow very quickly 
and inflation risk begins to rise, then we would reverse it.
    Mr. Campbell. Okay. Final question. I think Mr. Ryan 
alluded to this earlier. There's been fairly significant moves 
in the 10-year and 30-year Treasury yields, just recently. What 
do you think's causing that? And are you concerned? Or, what is 
your opinion?
    Mr. Bernanke. No, I'm not concerned. I think it reflects, 
primarily, increasing optimism about the U.S. economy, and it 
is natural for the term structure to move in that way when 
investors become more optimistic about growth.
    Mr. Campbell. Thank you.
    Chairman Ryan. Mr. Blumenauer.
    Mr. Blumenauer. Thank you, Mr. Chairman. Thank you for 
joining us again. You come at a time when there are lots of 
people, including in Congress, who are very interested in 
helping you do your job better: critiquing it, maybe 
undertaking some things that would constrain direct control. 
But I got from your message that there are a couple of things 
that Congress should be focusing on, and our primary job. One, 
I guess we are all in the business of making sure there is 
confidence in the United States Government, meeting its 
obligations, not putting an undue cloud over it. Then you 
referenced the aging population and health care, which, again, 
is within our purview. There have been, it is no secret, a lot 
of suggestions as we approach the debt ceiling and it is widely 
acknowledged, no one disputes the need to extend it. There are 
discussions about conditions and terms, under which some of it 
might happen where we will change the scheduled debt repayment. 
Has this been, in your experiences, both as head of the Federal 
Reserve and as an economist and a scholar, has this been the 
routine? Has Congress done this regularly in the past?
    Mr. Bernanke. Well, there have been, in the past, political 
battles, and both parties have done this, over whether or not 
to raise the debt limit.
    Mr. Blumenauer. Excuse me. I'm talking about, has Congress 
ever, in the past, established conditions on limitations on the 
debt ceiling, or the sequencing, changing the order of business 
so we do not just honor our obligations and make sure that 
there's adequate head room?
    Mr. Bernanke. If you are talking about the prioritization 
of payments, no, that is not happened, to my knowledge.
    Mr. Blumenauer. Or have there been conditions attached to 
debt ceiling increases in the past?
    Mr. Bernanke. I don't know if there have been direct 
conditions. Obviously, there have been negotiations about 
budgetary matters which have preceded those decisions.
    Mr. Blumenauer. Setting that aside. We will always do that. 
That's our job. I think that is appropriate. And we will get 
down into cases, in terms of cutting, and I think there may be 
actually some bipartisan initiatives that would implement some 
of the recommendations, for example, that came from the 
President's Debt Commission. I'm just very interested in the 
perception. If we are going to do something for the first time 
that changes the repayment, or we are going to have some sort 
of onerous conditions, or we are actually seriously threatening 
not to raise the debt ceiling, to what extent does that impact 
global perception, market confidence in the United States as 
being a good repository for their investments?
    Mr. Bernanke. We want to address our fiscal issues, but my 
argument is that we don't want to cast any doubt or uncertainty 
on the fact that the United States will make good its 
obligations. I think that is critical.
    Mr. Blumenauer. And I think it is clear if, well, I will 
just say, I appreciate you have some limitations in terms of 
what you say, but I think it is obvious that if we are going to 
start playing games with something as routine as this, holding 
out the prospect that we are not going to actually meet our 
obligations, and even if it is seriously considered, not 
negotiations, not disagreeing about some elements, but 
considering that as the nuclear weapon. That has got to shake 
that confidence.
    You mentioned health care. And that is something that is 
within our purview. There are some differences of opinion, some 
are not interested particularly in advancing the reforms that 
are in place as opposed to, perhaps an opportunity to 
accelerate, to actually put teeth into what we are doing and 
get down to cases to actually change that health care curve.
    From your perspective, are we better off actually following 
through on the commitment to deal with health care reform and 
dealing with long-term costs or making this just one of these 
areas that we continually talk about, push back and forth, and 
make no progress?
    Mr. Bernanke. It's out of my purview to support or not 
support a specific plan, but I do think it is very important 
and essential to the long-term fiscal situation that we address 
the costs, both for the private economy, but also for the 
federal budget, which are going to be increasingly a dominant 
part of our spending.
    Mr. Blumenauer. Thank you, sir.
    Chairman Ryan. Mr. Chaffetz.
    Mr. Chaffetz. Thank you, Mr. Chairman. Mr. Chairman, thank 
you for being here. In January, you said that the Federal 
Reserve would not bail out state and local governments. Is that 
because you have no intention of bailing out the local 
governments or that you physically can't do it because the law 
precludes you from doing that?
    Mr. Bernanke. I would say both.
    Mr. Chaffetz. You mentioned that in page 8, at the very end 
of your testimony here, you said you mentioned that enhancing 
long-term growth potential of our economy, quote, by reducing 
disincentives to work. What are the disincentives that you see 
to work? What are the disincentives to work that you mentioned?
    Mr. Bernanke. Well, I'm speaking generally about the tax 
code and also transfer programs that create, essentially, a 
very high marginal tax rate on earned income. And to the extent 
that we can simplify our tax code, reduce rates, broaden the 
base, eliminate the complexity, et cetera, in ways that would 
make it more financially attractive for people to work, save, 
invest, and so on; it is obviously good for our economy.
    Mr. Chaffetz. Anything above and beyond the tax treatment 
that you have looked at that fall into that category from your 
perspective?
    Mr. Bernanke. Again, tax and transfer policies would be the 
ones. I don't know what else are you thinking of, but those are 
the two that I would focus on.
    Mr. Chaffetz. Thank you. The CBO records Fannie, and 
Freddie, and Budget, and uses fair-value accounting to measure 
the financial impact of the two GSEs. Moreover, not only does 
the CBO consider Fannie and Freddie as federal government 
entities, but it also treats the mortgages they guarantee as 
obligations of the government, scoring them on a market-risk 
adjusted present value basis. Do you agree with this budgetary 
treatment?
    Mr. Bernanke. It's important that we take into account, in 
our budgetary planning, the cost and the prospective costs of 
Fannie and Freddie. Now, there are different ways to do that. 
As I understand it, the Fannie and Freddie are not fully 
consolidated with the federal budget and that is a decision 
that is been made to try to keep some separation between the 
government and those two institutions. But clearly, as we think 
about our budgetary situation, the costs that have already been 
incurred and may still be incurred for Fannie and Freddie are 
obviously something important to keep in mind.
    Mr. Chaffetz. The Fed's been the biggest buyer of 
treasuries over the last several months. And the reports are 
that the Fed is now past China as the biggest owner of 
treasuries. Does that distort the bond markets and create 
dependency, and is this something that the Fed should be 
worried about?
    Mr. Bernanke. We've been very careful to not distort the 
bond market. We've paid a lot of attention to that issue. We've 
monitored the market function. We've made sure that we don't 
own too high a fraction of any particular issue of government 
bonds, and our clear sense is that the treasury markets are 
functioning very normally, very liquid, and we don't see our 
policy, which again, is a temporary policy, as creating any 
particular problems for the market itself.
    Mr. Chaffetz. There have, Mr. Chairman, there have been 
discussions out there in the newspapers and whatnot, other 
countries talking about pegging oil and whatnot to something 
other than the dollar. What type of concern do you have about 
this? Do you see this as a reality?
    Mr. Bernanke. The currency in which goods are invoiced is 
really of not much consequence. Another question, though, a 
broader question is what currency is the reserve currency? The 
currency that countries hold their international reserves in? 
And the fact is that the U.S. dollar share of 60 percent plus 
has been pretty stable, and I really don't see much likely 
change in that. In fact, lately, given the problems of the 
Euro, et cetera, the dollar and the perspective growth in the 
U.S. economy, the dollar has actually been looking a little bit 
more attractive relative to some of the other currencies in the 
world.
    Mr. Chaffetz. Thank you, Mr. Chairman. I yield back.
    Chairman Ryan. Ms. McCollum.
    Ms. McCollum. Thank you, Mr. Chairman. Chairman Bernanke, 
thank you for being here. I believe that we have a lot of work 
ahead of us, and I want to thank you for the work that you did 
in stabilizing our economy in the past, and I look forward to 
hearing some of your advice, suggestions, and ideas on how we 
move forward with getting out of the Great Recession. And I 
want to be part of the solution, and we hear a lot of talk here 
in Congress about spending, but I'm also concerned about a lot 
of the tax perks that lobbyists have been very successful in 
getting for special interests in our tax code, and I think that 
we need to put everything on the table.
    But having said that, today, we've focused on spending 
quite a bit, as some of the questions have come through. And in 
fact, I'm going to paraphrase a popular Tea Party slogan; it 
goes something like, quote, The federal government doesn't have 
a revenue problem, it has a spending problem.
    Now last week, Chairman Ryan put forward his best effort to 
reduce the deficit with spending target cuts, that is $41 
billion from the fiscal year 2011 budget. The Republican target 
reduces the fiscal year 2011 projected deficit by about 2.5 
percent. That leaves 97.5 percent of the deficit intact.
    Now, in an extreme scenario, if all 176 Republican Study 
Committee members were able to have their way and take control, 
they would be allowed to cut four times what Chairman Ryan's 
best effort is. But that would only then still only represent 
10 percent of the federal budget deficit for fiscal year 2011, 
still leaving more than 1.3 trillion.
    Chairman Bernanke, it seems clear to me that the deficit is 
not just a spending problem. Is it possible to reduce the 
federal deficit to responsible levels without capping or 
cutting defense spending and without looking at the tax perks 
that many corporations and lobbyists have been successful in 
getting?
    And my second question is: With the type of cuts that are 
being discussed, do you think that we need to be insightful 
when making these spending decisions on what to cut, on the 
impact of jobs as well as U.S. competitiveness, and the global 
economy? I think we need to be careful of gutting domestic 
investments in education, infrastructure, and R&D in the next 
decade, because we might see reverses that would put us at a 
competitive disadvantage.
    Mr. Bernanke. Well, on your second question, I'm hoping to, 
obviously, it is very important that the deficits be brought 
under control, but it is not just a matter of total spending 
and total revenues, it is also how smart is the spending and 
how are we using it? And the tax code, are we doing it in a way 
that is constructive for growth and for competitiveness?
    So, I would urge the Congress not only to talk about total 
budget numbers, but also to think hard about the various 
programs and tax provisions to make sure that they are growth 
friendly, and that is a very important part of your job.
    In particular, you mentioned perks, et cetera. I think one 
direction that at least should be considered would be, in the 
corporate tax code, for example, to reduce a lot of loopholes, 
to broaden the base, and therefore be able to lower the tax 
rate, which is now soon going to be the highest in the 
industrial world so that the decisions made by corporations are 
based, you know, not on tax distortions, but rather on the 
economics of where, for example, they should locate their 
plants, and so on.
    So, I do think that growth friendliness is a very important 
part of this and that lower rates and broader base is something 
that most economists would agree is a good direction to go in 
the tax code.
    On short-run versus long-run, I, again, I understand 
there's a lot of focus on this year's budget. Without 
commenting directly on that, I do think that in order to be 
credible, given that the budgetary problems get worse over 
time, that is as the baby boomers retire, as health care costs 
rise, and so on, given that the prospective deficits are rising 
over a long period of time, I would hope that a good bit of 
your discussion will be about the long-term over the 10, 15, 20 
year horizon and to the extent that you can change programs 
that will have long-term effects on spending and revenues. That 
will be a more effective and credible program than one that 
focuses only on the current fiscal year.
    Ms. McCollum. Thank you, Mr. Chairman. As you know, we are 
setting the budget. We're setting the spending and Ways and 
Means does its issues with the tax code and addressing what I 
hope will be any tax perks. But I can't make a decision in 
isolation, so I look to all of us to put everything on the 
table so that we make a well-rounded decision as we move 
forward with the budget. So, Mr. Chairman, I'll be looking to 
see what your comment is.
    Chairman Ryan. Thank you, Ms. McCollum, and I can only say 
what we are doing right now is our best; it is our first effort 
at getting fiscal control under this place. Mr. Ribble.
    Mr. Ribble. Thank you, thank you, Chairman Ryan, and thank 
you, Chairman Bernanke, for coming in today. I'm one of the new 
freshman members. I have spent the last 30 years working in the 
private sector owning my own business. My questions today are 
going to relate around kind of two central areas. One is the 
debt ceiling that will hopefully get some understanding there, 
and then also, your take on lending a small business and inside 
businesses. But first of all, and I understand it too, that it 
might be reckless for the U.S. government to default on this 
debt. Would you agree that that is a true statement?
    Mr. Bernanke. Certainly.
    Mr. Ribble. Okay. Is it not also reckless to have the level 
of uncontrolled spending that the American people are 
witnessing by this Congress in the last 20 years or so?
    Mr. Bernanke. Absolutely, and I don't mean to imply you 
shouldn't be addressing that, I just think you should do it as 
a separate measure.
    Mr. Ribble. Yeah, okay. Understood. As a business owner, 
often, the lenders would impose their own debt limit on many 
companies. If we were reckless in our spending and our balance 
sheets didn't look very good, at some point they impose their 
own debt limits. Is it not likely at some point that the 
lenders to the U.S. Government are going to impose a debt 
ceiling of their own?
    Mr. Bernanke. The bankers' debt limit is really a spending 
limit, it says you can't spend any more.
    Mr. Ribble. Correct.
    Mr. Bernanke. And you have already made decisions about 
what the government is going to spend and what revenues it is 
going to collect. That implies a deficit, and that has to be 
financed. If you set a limit that is too low, that just means 
basically that you can't borrow money that you have already 
spent. So, it is really an extraneous thing, once you set 
spending and once you set taxes, you essentially are, by 
definition, defining how much you have to borrow. And if you 
don't allow the government to borrow that, then, again, the 
only way to do that is not to make the required interest 
payments, which, your banker wouldn't like that, I'm sure.
    Mr. Ribble. Correct, sure. Or the other alternative would 
be to either increase revenue or decrease spending so that you 
didn't exceed the debt. Correct?
    Mr. Bernanke. If that can be done before the debt limit.
    Mr. Ribble. Sure, sure. And my point is going back to the 
discussion of long-term because you just mentioned moments ago 
that it is important for us to look at a 10 or 20 year horizon. 
The American people are cynical that we are able to actually do 
that in such a way that in 20 years from now, we are still 
having this same discussion over again. And I think the fear 
that the American people have is that at some point, lenders 
are going to say to us, That's all we are going to lend, or 
We're going to price this at such a place that would be 
catastrophic to the economy.
    Mr. Bernanke. That's a risk, yes.
    Mr. Ribble. Do you see that as a legitimate risk over the 
next decade?
    Mr. Bernanke. Yes.
    Mr. Ribble. Okay. Thank you for that comment. There is 
almost a constant stream of constituents coming into my office 
since I have arrived here in Washington, D.C., discussing the 
difficulty that they're having finding, financing, and lending; 
their ability to borrow has been greatly restricted in the last 
24 months.
    Can you talk to us a little bit about what it might take 
for local, medium, and national banks to begin to, once again, 
to loan money? What's causing the restriction?
    Mr. Bernanke. Well, first, part of it came from the fact 
that banks, after the crisis, were deleveraging and cutting 
back themselves. Part of it came from the fact that the economy 
was very weak, and therefore, borrowers didn't look as 
attractive in their cash flows, their collateral values were 
less attractive than they were before the crisis.
    So, there's both a supply and demand element to that. Now, 
I think that both of those things are looking better. Banks 
have increased their capital. They're feeling much more stable; 
they're much more liquid. And our sense, and we do surveys, is 
that banks, while they still have quite tight standards, are at 
least beginning to ease those standards and beginning to look 
more actively to find good borrowers. And so I think that is 
improving somewhat.
    And likewise, as the economy strengthens, and we are seeing 
for example, increases in the prices of commercial real estate, 
which is what many small businesses use as collateral, that 
there'll be more small businesses that can qualify for credit. 
So we think things will be getting better slowly. The Federal 
Reserve is working very hard with both banks and small 
businesses to try to make sure that, at least from a regulatory 
point of view, that we are not preventing banks from making 
loans that they should make. We want them to make good loans. 
And we have been very clear about that in our instructions to 
banks and our training of our examiners.
    Mr. Ribble. Okay. Thank you very much. Thank you, Chairman 
Ryan.
    Chairman Ryan. Mr. Honda.
    Mr. Ribble. Thank you, Mr. Chairman.
    Mr. Honda. Thank you, Mr. Chairman. Welcome, Mr. Chairman. 
In your speech to the National Press Club on February 3, you 
noted that unemployment, which is, to me, the key economic 
indicator for the well-being of American people, will remains 
stubbornly high and that these conditions will improve 
gradually.
    You also noted that the trajectories of our national 
deficit and debt are unsustainable. You went on to state that 
among the course of corrections needed to address these 
problems are investments in the skills of the workforce, which 
I am going to simply call education, and policy changes to 
reduce our deficits and debt.
    I have two questions. My first question is in regard to the 
latter. The current rules of the House have taken the War on 
Terror off-budget, meaning that the costs of our conflict in 
Iraq and Afghanistan and other actions associated with the so-
called War on Terror can be financed with debt.
    Afghanistan alone represents the costs of approximately $10 
million per hour, 325 million per day, and $150 billion per 
year. Disturbingly, this is our country's largest long-term 
investment. So my question is will the savings that resulted 
from ending combat operations associated with the War on Terror 
reduce projected deficits?
    Mr. Bernanke. If those expenditures were not necessary, of 
course they would reduce deficits, but I'm not qualified to 
comment on whether or not we should be engaging in that 
conflict.
    Mr. Honda. But the budgetary action that we've taken, that 
we put it aside as, in the past we call supplements. What 
impact does that have on our debt and our deficits?
    Mr. Bernanke. Well, clearly, additional spending for 
military or any other purpose, all else equal will add to the 
deficit.
    Mr. Honda. So, if there's no revenue with sustaining that, 
and we take it off budget, we are essentially creating an 
automatic deficit and then a debt.
    Mr. Bernanke. That's right.
    Mr. Honda. Thank you. My second question, Mr. Chairman, is 
that I think it is very important to note that among other 
investments, including encouraging the scaling up of U.S. 
manufacturing by incentivizing purchasing new machinery and 
investment, promoting R&D, rebuilding public infrastructure, 
you single out education as an area of public investment that 
will promote economic growth. Would you explain to this 
Committee how public investment in education promotes economic 
growth?
    Mr. Bernanke. Well, one of the key elements in economic 
growth that a lot of economists have identified is the skills 
of the workforce. And I would like to say that there are a lot 
of ways to impart skills. There is K though 12 education and 
college, certainly, but there's also junior colleges, community 
colleges, technical schools, on the job training, a variety of 
different ways, and that is always been a strength of the 
United States, that we have a diverse set of ways to help 
people get training. But I think that should be something we 
should be at least paying some close attention to.
    It may or may not be a matter of money. It may or may be a 
matter of spending more wisely, but clearly, one of the 
concerns we have about our society is the increase in 
inequality between the richest and the poorest. There are many 
reasons for that, but no doubt the largest reason is that 
there's a part of our society which is not receiving the 
training that they need to get good paying jobs, and that is 
going to be a problem for us and it is a problem for our 
economy.
    Mr. Honda. With the education, I would probably call that 
an investment. And, making that investment into education would 
be something that we can count upon as far as a return on our 
investments. And if we have an education system that is been 
completely decimated, what kind of impact do you think it would 
have on our investments, relative to the entire picture that we 
have before us today?
    Mr. Bernanke. Well, it is very important to have a good 
education system, and we are not doing well on that count, and 
to help people get skills, there's a lot of dispute about 
exactly how to accomplish that, and you know, we could talk 
about that for quite a long time. So, I think we need to think, 
as a country, about how we can both increase the quality of our 
training and also make sure that it is broadly spread, so that 
everyone has a chance to get the skills they need.
    Mr. Honda. Okay, and I understand that. Education comes in 
a lot of forms. In our investment in R&D, and investment in the 
other kinds of programs that we have, but the system of 
education and the Department of Education would seem to be one 
place where we can focus on this very complex problem of equity 
and equal distribution resources. Would you agree on that or do 
you have other comments on that?
    Mr. Bernanke. Well, the Department of Education is 
certainly one place that can help review, and understand, you 
know, what's working, what's not working. I think, as a 
country, we are having a sort of a crisis of confidence, so we 
know how to provide broad based skills. So, I think that is 
really part of the problem; it is not just resources, it is 
also, you know, how do we do this better? And it is not clear 
that our models are working very well right now.
    Mr. Honda. I appreciate your response. Thank you, Mr. 
Chairman.
    Chairman Ryan. Mr. Huelskamp is next.
    Mr. Huelskamp. Thank you, Mr. Chairman; I appreciate Mr. 
Chairman being here today. And I had a couple questions, 
particularly on the issue of job creation, and I'm a little 
confused from the testimony. On one hand, you do indicate, in 
your opinion, we are in a period of economic recovery. Is that 
correct?
    Mr. Bernanke. Yes.
    Mr. Huelskamp. On the other hand, you do indicate that the 
unemployment rate is apparently not where you would like it to 
be. A couple questions on that. What is the targeted 
unemployment rate that you would be comfortable with?
    Mr. Bernanke. Well, the FOMC, the Federal Open Market 
Committee, makes projections on what the long run sustainable 
unemployment rate is, and currently those projections are 
between five and six percent of the labor force. That would be 
a more or less, a more normal level. That being said, I want to 
be clear that that doesn't mean that we would maintain maximum 
monetary policy accommodation until we reach that level. We 
have to withdraw that accommodation at some point before we get 
there, but that would be the area where we hope we could get 
back to.
    Mr. Huelskamp. So, five to six percent. Is there a 
projected time period where that might occur?
    Mr. Bernanke. At the rate we are going, it takes about two 
and a half percent real growth just to keep even because you 
need about that much growth just to make jobs for the new 
entrants to the labor force. So, if we were to average, just 
thinking hypothetically, four and a half percent growth, which 
is quite ambitious, it would still take us another four years 
or so to get down to the five to six percent range, so it could 
take quite a long time.
    Mr. Huelskamp. And at the two and a half percent level, how 
many years would it take to reach?
    Mr. Bernanke. It would take, essentially, I don't want to 
say infinite, but it would be very, very slow.
    Mr. Huelskamp. Okay. And our current rate of growth is what 
for the last quarter?
    Mr. Bernanke. In the last quarter, it was 3.2 percent, and 
we are looking for 2011 to be somewhere between three percent 
and four percent, so that should bring unemployment down over 
the year, but not very quickly.
    Mr. Huelskamp. And at 3.2 percent, how long would it take 
to reach the five to six percent goal?
    Mr. Bernanke. Well, that would lower unemployment by about 
three to four tenths a year. So that would be about 10 years.
    Mr. Huelskamp. Ten years, but you still think your policies 
are promoting success if we are still projecting 10 years until 
we reach a decent unemployment level.
    Mr. Bernanke. I am not projecting them. You asked about the 
fourth quarter, and that was 3.2 percent. We think that it is 
going to pick up in 2011 and possibly even further in 2012, 
depending on a variety of circumstances.
    Mr. Huelskamp. And Mr. Chairman, I appreciate that. And we 
are all hopeful it does that, but one thing you do note is that 
you said, ultimately, at the appropriate time, the Federal 
Reserve will normalize its balance sheets by selling these 
assets back into the market.
    A couple questions about that. If you believe it is a 
thriving economic recovery, can you provide information why you 
apparently believe that a sell-off would not have the opposite 
effect?
    Mr. Bernanke. Well, it is the same pattern that we always 
see with monetary policy, which is that low interest rates help 
stimulate the economy. Once the economy has a self-sustaining, 
you know, once it sort of reached escape velocity, so to speak, 
then that monetary fuel can be withdrawn. And usually, with 
raising short-term interest rates, in this case it would 
involve both raising short-term interest rates and reducing the 
size of the balance sheets. So yes, as the economy begins to 
get stronger and develops its own momentum, then it needs less 
monetary policy support, and we have to begin to withdraw it, 
otherwise we would risk inflation, as Chairman Ryan was 
concerned about.
    Mr. Huelskamp. So, even though we are kind of looking at 
four percent growth, maybe three, and you are comfortable that 
it won't take 10 years to return to normal employment levels; 
you are not certain. Is it more like five years we might have 
those normal employment levels?
    Mr. Bernanke. It could be four or five years. I hope it is 
less than that.
    Mr. Huelskamp. Yeah, I do too, and so do my constituents, 
Mr. Chairman, and my concern that if on one hand, you claim the 
policy is driving economic growth, even though it is very, very 
slow, from what would be the target, my fear would be that the 
reverse policy would potentially have that other effect.
    Last thing, a quick question. I know you picked $600 
billion. Can you tell us again why you picked $600 billion 
versus $500 billion or say, $750 billion for the target?
    Mr. Bernanke. We tried to make an assessment. We asked a 
hypothetical question: If we could lower this federal funds 
rate, how much would we lower it? And a powerful monetary 
policy action at normal times would be about a 75 basis point 
cut in the federal funds rate. We estimate that the impact on 
the whole structure of interest rates, from $600 billion, is 
roughly equivalent to $75 basis point cut, so on that 
criterion, it seemed that that was about enough to be a 
significant boost, but not one that was excessive.
    Mr. Huelskamp. Thank you, Mr. Chairman.
    Chairman Ryan. Ms. Moore is next.
    Ms. Moore. Thank you so much, Mr. Bernanke. I have seen you 
many times on the Financial Services Committee, but I have had 
such a low ranking that it is been such a hard time getting an 
opportunity to actually ask you a question.
    I do want to thank Mr. Huelskamp for his last question, 
because I was very curious about how you say in your testimony 
on page four that exit from the current, highly accommodative 
policy, at an appropriate time, would be very easy, and I think 
you may have answered my question when you spoke with him.
    QE1 and QE2 have been very important, I think, in terms of 
preventing a financial catastrophe, and QE2 has been supported 
by a lot of economists. The Chamber of Commerce has endorsed 
it, American manufacturing is grateful for it. As a matter of 
fact, the manufacturer in my district, Harley Davidson, is 
really grateful for a QE2 in terms of boosting their exports.
    But, you have been accused of everything from creating an 
environment for inflation with this QE2 policy. Everything from 
that to causing the riots in Tunisia and Egypt, so I guess I 
would like for you, because commodities are traded on dollars, 
and they say that food prices, commodities have gone up and the 
speculation on commodities have risen. So this QE2 policy 
really has been very inflammatory with respect to destabilizing 
the region. Can you please respond to that?
    Mr. Bernanke. I'll be glad to. First of all, it doesn't 
matter what commodities are priced in; what matters is the 
currency of the country that is making the purchases, and they 
don't use dollars in Egypt. They use Egyptian pounds, and when 
the dollar weakens, which it has done very slightly, that would 
make the pound stronger, make them better able to buy 
commodities.
    But I think the real issue in Egypt, for example, is the 
fact that Egypt is the world's leading importer of wheat, and 
we've just seen very bad harvests in Russia and Eastern Europe, 
which are their primary sources of wheat. And that is what's 
really happening, is that there are, on the agricultural side 
there have been droughts and other problems around the world 
that have affected crops.
    Monetary policy can't add one bushel of corn to the world. 
I mean, basically, that is determined by agricultural 
productivity, and by the weather, and those factors. And we've 
just seen on the agricultural side that a combination of supply 
issues, like weather, crops, and increased demand from the 
rapidly growing emerging markets has put pressure on those 
supplies, and that is where that is coming from. I think 
monetary policy in the United States has really very little to 
do with the price of wheat in Egypt.
    Ms. Moore. Good. And with respect to your creating an 
environment for increased inflation with QE2 and creating an 
inflation bubble here in the United States and traders being 
leery over these inflation threats. I am wondering what your 
response is to QE2. Because you say that you can exit this 
monetary accommodation; because eventually you are going to 
have to raise interest rates. Walk us through how you will exit 
this without creating inflation.
    Mr. Bernanke. Well first, both actual inflation and 
expected inflation currently are low in the United States. 
Markets are not expecting high rates of inflation. Like I said 
before, the five year tips break even, which is a measure of 
market expectations of inflation: it is a little bit over two 
percent, which is about where we'd like it to be.
    Obviously, we can't continue this level of monetary 
accommodation indefinitely because at some point, it would 
begin to create inflation concerns. And so, at some point, we 
do have to unwind some of this stimulus. In terms of how we 
would do it, of course, the usual question, the difficult 
question is choosing the right moment. But once we've decided 
when to do that, we can raise short-term interest rates as 
normal. We would do that by raising the interest rate paid on 
excess reserves to banks, which in turn would make them 
unwilling to lend in short-term money markets below that rate, 
so we can raise the short-term interest rate pretty much as we 
always do when we tighten monetary policy.
    In addition, we have a number of tools, which I have talked 
about in great detail before the House Financial Services 
Committee that can help us drain bank reserves out of the 
system and reduce the liquidity in the system. For example, we 
had just recently been testing a time deposit program, whereby 
banks lock up their reserves with the Fed for a period of time 
instead of having them liquid and available whenever they want 
them.
    So we do have the tools to do it. As always, we have to 
make the right call about when, you know, when the balance of 
risk is starting to shift, and we think the economy is strong 
enough and inflation has risen, and it is time to take action 
to avoid problems down the road, but it is really not all that 
different from normal monetary policy, in that respect.
    Ms. Moore. Thank you very much, sir.
    Mr. Bernanke. Thank you.
    Mr. McClintock. Turns out I'm next. Mr. Chairman, thank you 
for being here. Earlier today, you testified before the 
Committee that not raising the debt ceiling would be a very bad 
thing because, and you specifically singled out, it would mean 
that interest would not be paid on the debt. In January, you 
told the Senate Budget Committee that we are not seeing 
extraordinary stress in the municipal markets, which suggests 
that investors still are reasonably confident that there won't 
be any default among major borrowers. One reason they might 
believe that is because most states have rules, which put debt 
repayment and interest payment at a very high priority above 
many other obligations of the state and locality. Wouldn't it 
be a good idea if the federal government did the same thing?
    Mr. Bernanke. Well, it would reduce the risk with the debt 
limit, that is for sure. We haven't done that yet, of course. 
This comment that it would take some time to change our systems 
and computers, and so on, to make sure that we could change 
that prioritization in an appropriate way, but doing that 
would, I think, reduce some of the risks associated with the 
debt limit. But again, let me just be clear that we would need 
some notice to make that practical.
    Mr. McClintock. But would you recommend it as a long-term 
reform?
    Mr. Bernanke. Frankly, I, again, I would just prefer that 
you put the debt limit issue aside and just address directly 
the long-term fiscal problems, which I admit, and I agree, and 
in fact, I have been emphasizing, are very serious and need to 
be addressed. I'm not in any way saying that you don't need to 
address these problems; what I'm just saying is that that 
particular device, you know, at least under current law, has 
some risks in terms of the possibility that we would default on 
debt.
    Mr. McClintock. What is the percentage of U.S. debt held by 
the public, that is held by American investors?
    Mr. Bernanke. Less than half, I think.
    Mr. McClintock. Roughly half.
    Mr. Bernanke. Yeah.
    Mr. McClintock. And what's the percentage of U.S. debt held 
by China?
    Mr. Bernanke. About a quarter.
    Mr. McClintock. A quarter of the total debt held by the 
public, my understanding is about 9.5 percent.
    Mr. Bernanke. If you have the numbers there, you may be 
right. But I think they hold more than two trillion of U.S. 
Treasury, and that would be closer to 20, 25 percent.
    Mr. McClintock. Okay. Well, nevertheless, giving priority 
to debt repayment, we are still, apparently, overwhelmingly 
favor American investors to Chinese, would it not?
    Mr. Bernanke. Well, certainly. But, more importantly, the 
financial markets globally are where we borrow and if investors 
lose confidence in us, they won't lend to us in the future, 
which means that we will have a fiscal crisis almost 
immediately.
    Mr. McClintock. Right, which means guaranteeing our debt 
service would provide greater confidence to those investors, 
would it not?
    Mr. Bernanke. It would, again, subject to technical ability 
to make that reprioritization effective in a short-time.
    Mr. McClintock. Mr. Chairman, you also testified today that 
as the economy begins to grow rapidly and inflation begins to 
rise, the Federal Reserve would then reverse the qualitative 
easing. And I'm just wondering how does the Fed intend to drain 
$1 trillion in excess reserves.
    Mr. Bernanke. Well first, we can raise interest rates 
without even draining reserves, as I mentioned, by raising the 
interest rate paid on excess reserves to banks. But we have 
released three other tools for draining reserves.
    Mr. McClintock. If I could just pause right there. How much 
would you have to increase?
    Mr. Bernanke. What we would do is we want to raise the, 
say, we wanted to raise the short-term interest rate to one 
percent. Then if we paid one percent on excess reserves to 
banks, they would not be willing to lend money to the money 
market at less than one percent, and that would essentially 
achieve our objective right there. But there are other tools we 
have to drain reserves, including time deposits, reverse repos, 
asset sales, and perhaps others.
    Mr. McClintock. As you do that, what's the impact on the 
economy?
    Mr. Bernanke. Well, it'll be a tightening monetary policy, 
again, as interest rates will go up. And that will slow the 
economy, but that is what taking away the punch bowl always 
does. It means that the accommodation is no longer needed, the 
economy can move forward on its own, and so the point there is 
to try to normalize interest rates, normalize financial 
conditions so that you can get back to a healthy growth path 
without inflation.
    Mr. McClintock. There are some of us long enough of tooth 
to remember a day when we had, not only double digit 
unemployment, but double digit inflation and interest rates at 
21 percent. What can you tell us to allay our fears?
    Mr. Bernanke. Well, I can also mention that since the early 
1980s, between the early 1980s and 2007, when central banks 
began to understand the critical importance of keeping 
inflation low and stable, that the U.S. economy not only had 
low inflation, but it also had a much more stable economy, and 
that was a 25 year experience. So the difference is that we 
have no illusions about it being not so bad to let inflation 
rise. We are strongly committed to keeping inflation low and 
stable, and we will do so.
    Mr. McClintock. Next is Ms. Castor.
    Ms. Castor. Thank you very much, and welcome, Chairman 
Bernanke. Not unlike many places in the country, my home state 
of Florida was hit particularly hard by the Great Recession. It 
seemed like it started earlier in Florida, in 2007, because the 
housing bubble burst, and we were so tied to real estate 
development. And the job losses happened so quickly, at the end 
of 2008 and early 2009, and we are still in the double digits 
in Florida. You say in your testimony that there is some 
optimism for on the unemployment front, but we need more.
    I think folks at home look at the economic indicators, and 
they see there is plenty of hope out there; corporate profits 
are way up, consumer spending is up, we've had six straight 
quarters of economic growth, but the bottom line for families, 
it is that job. And they need the swifter job growth.
    The economic drivers in my area, the port, the airport, the 
universities, and research centers, the public schools, and 
small businesses, and tourism, and businesses; and all of them 
benefited by the Recovery Act investments. The Recovery Act 
investments are coming to an end now and business owners and 
others in the community are torn; they're hearing this 
schizophrenic message from Washington.
    They understand that we've all got to live within our 
means, and they do it every day. But they also understand that 
those infrastructure investments and keeping the colleges and 
universities healthy and able to do the research, simply 
attracts private investment and allows them to hire, in the 
long run. So they're hearing a lot of talk about, We've got to 
cut spending, cut spending, cut spending, but they are also, at 
the same time, clamoring for additional public investment. It 
is only government that can dredge the ports so that the oil 
tankers can come in, the cruise ships can come in, all the 
private businesses can continue there.
    What can you share with them on this schizophrenia between 
investment and living within our means and where we should be 
headed here in future budget years?
    Mr. Bernanke. Well, it is not an easy problem. Of course, 
you know, the reason that the Federal Reserve is doing what we 
are doing is to try to promote job creation, which we think is 
a very serious concern. But Florida, like California, Nevada, 
and a few other kind of States, were particularly hard hit 
because of the real estate decline.
    We do have to live within our means. The Congress needs to 
try to find ways to make sure that, over the longer term, that 
our revenues and our expenditures are close enough that debt 
does not grow without limit. You know, we just really don't 
have any choice about that; that is just something we have to 
do. But as I tried to indicate in my remarks, at the end, that 
doesn't mean we can't think about the money that we are 
spending. Can we do it better? Can we use the money more 
effectively? Can we do it in ways that will be more growth 
promoting? And, you know, one way to do that, for example, is 
to think hard about health care costs, which are so very high, 
and see whether there are savings there that could be, for 
example, that could be put into, sort of more growth friendly 
types of investments.
    But I appreciate your quandary. You know, we'd like to be 
able to undertake all these different projects, but we have to, 
at least in the longer term, we have to have a budget that will 
be reasonably in balance.
    Ms. Castor. So, it would be helpful for me and others to 
explain back home what you have said in your testimony 
regarding the long-term fiscal challenges confronting the 
nation. The two most important driving forces behind the budget 
deficit are the aging of the population; they'll like that in 
Florida. And rapidly rising health care costs. And the CBO 
projections of federal spending for health care programs will 
roughly double as a percentage of GDP over the next 25 years, 
and may be explained to business owners there that rely on 
certain infrastructure investments, investments in education, 
and innovation that the strategy is working together to 
continue to make those strategic investments, but look at the 
long-term issues, especially surrounding health care and the 
aging population.
    Mr. Bernanke. Yes.
    Ms. Castor. Thank you very much. I yield back.
    Chairman Ryan. Mr. Flores.
    Mr. Flores. Thank you, Chairman. Mr. Chairman. Chairman 
Bernanke, thank you for joining us today. I appreciate your 
service to the country and to the Federal Reserve.
    My first question starts with two principles. The first 
principle is there's a natural debt level for any organization, 
be it a country, a company, a family, whatever. They cannot be 
exceeded without substantial turmoil, and I think you talked 
about that in the past, about the turmoil our country will face 
if we continue to live beyond our means.
    The second principle is that interest rates are made up of 
two components. The first component is expected inflation; the 
second component is a risk premium, which investors in that 
instrument want to receive for the perceived risk, the 
instrument.
    Treasury rates have gone up quite a bit in the last few 
months. Your testimony today says that expected inflation is 
going to be low, so that implies a substantial increase in risk 
premium, which further implies that we are getting close to a 
natural debt limit. So my question for you is: What is the 
natural debt limit of the United States government? And you can 
answer it in one of a couple forms, either an absolute number, 
which would mean you ought to be in Las Vegas gambling, or as a 
percentage of GDP. So, I'd like some help with that, please.
    Mr. Bernanke. Well first, on interest rates, there is a 
third component also, which is the expectation of future short 
rates, which in turn, is tied to growth. So, one important 
reason that rates have gone up so much, and stock market had 
also gone up so much, is that markets are becoming more 
optimistic about growth in the U.S. economy, so that is a good 
thing.
    Now, there may be part of the increase, I don't know how 
much, maybe a little bit, that is related to concerns about 
government fiscal policy, which is the other part of your 
question. There's no magic number for what ratio of debt to GDP 
is the limit. If we look around the world, we see that 
countries in the 60, 70 range, which is where we are now, are 
generally pretty comfortable.
    If you look at Greece, which is 120 or Japan, which just 
got downgraded, because it is at 200, you know, numbers above 
100 then are certainly very concerning. Of course, you always 
want to leave some space for a recession, or a war, or some 
other kind of emergency. So, I hope that we can stabilize the 
debt-to-GDP-ratio somewhere not too much higher than we are 
now, would be the ideal thing. But, I don't think there's a 
magic number, but the higher it gets, the more of your annual 
appropriations are going to pay the interest on the debt. And 
that is in a way, a drain on what the government could 
otherwise be doing.
    Mr. Flores. Thank you. Question number two is: You said 
today that we are on an unsustainable path, but in testimony, 
or in interviews you gave back in June of last year, you 
indicated that you felt like it was inappropriate to reduce 
spending or to increase taxes at that point in time.
    But still, on the deficit, you said we need to reduce the 
deficit. So, you put us, let me rephrase that. If you are in 
our seat, there are not many tools left. So, which direction do 
you go first? Do you reduce spending? Do you raise taxes? 
What's the recommended approach?
    Mr. Bernanke. Well, the spending versus taxes or the 
composition of spending and taxes is a congressional 
prerogative, a congressional responsibility. But what I think 
is the right way to do this, which on the one hand, doesn't put 
too much pressure on the recovery, which is still ongoing, but 
at the same time, makes credible progress towards a balanced 
budget and a sustainable fiscal trajectory, is to talk about 
longer term windows and look at the 10 year window, for 
example, and take actions which are credible, that will cut 
spending, perhaps in the near term, but will cut spending more 
as you go forward in time, or raise taxes, if that is the 
decision that Congress makes.
    So, this is a long-term problem. The numbers that we are 
looking at go out to 2035, 2050, that is when the problem 
really gets, basically, just unbearable. So anything that can 
be done now to change that path, change that trajectory going 
forward over the next decade or two decades, those are the 
kinds of things that will be effective and will have good 
impact on the current economy and current interest rates, as 
well as restore confidence in our fiscal policy.
    Mr. Flores. Thank you.
    Chairman Ryan. Mr. Tonko.
    Mr. Tonko. Thank you, Mr. Chair. Dr. Bernanke, thank you 
for your expertise that you lend to this economic recovery. 
When you came before this Committee last June, you predicted 
that the economic growth rate, our GDP, would rise to an annual 
rate of just over three percent for the last month of 2010, and 
that it very well could increase over the course of 2011. 
That's nearly a double digit turnaround from the six percent 
downturn that we witnessed under the end of President Bush's 
administration. Has your forecast, in your opinion, proven 
accurate in terms of how you calculated it and its bottom line 
result?
    Mr. Bernanke. Well, we were disappointed over last summer, 
as the economy slowed down, and that is why in August, 
essentially, we basically began to take the steps towards this 
second round of so-called quantitative easing. Since we've done 
that, the markets have strengthened again and the outlook has 
improved, and so the numbers you gave, the fourth quarter was 
3.2 percent, and now, looking forward into 2011, you know, most 
forecasters think between 3 and 4 percent is about right. And 
of course, these things are very uncertain, but that does seem 
to be about where we, at this point, were predicting.
    Mr. Tonko. We hear on the Hill here in Washington, in 
Congress, and certainly within the microcosm of the Budget 
Committee in the House, different philosophical approaches or 
programmatic responses to best grow the recovery of our 
economy. That being said, some of our colleagues, from friends 
across the aisle, have been very enthusiastic about these 
numbers, claiming that the growth that we've seen in the last 
three months is related to the outcome of the November 
elections.
    I would ask, is there, within your calculus for these 
projections, was there a result in the November elections that 
guided whatever your forecast would be? In other words, did you 
need to know who would win the elections?
    Mr. Bernanke. We don't take election results into account 
in our forecasting, but I couldn't really make a judgment on 
that.
    Mr. Tonko. I agree with you, that it is more policy-driven 
than politics. And so, can you cite for us, what did go into 
your calculation, your forecast, on growth and employment? And 
specifically, can you emphasize the main elements that we need 
to focus on in order to best drive numbers to help the economy 
improve and become more stable?
    Mr. Bernanke. Well, in terms of what happened since the 
late summer, there have been two policy initiatives at the 
Federal Reserve, QE2, which really came into effect in August, 
because that is when we began to re-invest our maturing 
securities and we announced, at least we indicated that we were 
seriously considering additional securities purchases. The 
other step that is been taken, of course, is the agreement that 
took place during the lame duck session about extending tax 
cuts and creating a payroll rebate, tax rebate, and so on.
    So those two things have, I think, been positive in terms 
of near-term growth. Going forward, it is much more difficult 
because the fiscal space and the monetary space, and both sets 
of policies have much less room to operate than they would have 
under normal circumstances. So, as I was saying before to Ms. 
Castor, I think it is very important to think about the 
composition of what you are doing. Is it growth friendly? Is it 
going to increase confidence? And look for things that will, 
you know, increase productivity, for example.
    Mr. Tonko. Thank you. I appreciate your expertise and would 
hope that, within the spirit of bi-partisanship and the growth 
of consumer investor confidence, we can move forward with a 
progressive bit of policy that will bolster this economic 
recovery and lead to the best way to move forward.
    Just a final question out of the median annual wage for 
American workers, fall into some $26,000, means that just about 
that half of our workforce is making less than that $26,000 
figure. And at the end of 2010, we okayed a tax plan that 
actually raised taxes on those individuals who make under 
$20,000 per year, while relieving the tax burden on our 
wealthiest families. Since those first payments came home in 
mid-January, I have been hearing from dismayed and outraged 
constituents on that outcome. If we continue to finance tax 
breaks for the top 1 percent, at the expense of our bottom 50 
percent of wage earners, how would that impact on the consumer 
spending out there, that you noted is necessary to help lead us 
out of the economic woes?
    Mr. Bernanke. The distributional aspects of taxes are very 
contentious. I am sorry I'm not going to be able to really give 
you the answer you want, because I think, ultimately, there is 
both decisions about equity and decisions about efficiency that 
go into those tax code decisions.
    So, I am going to leave that particular decision to the 
Congress, only note that you have to pay attention to the 
overall revenue collection as part of the plan for restoring 
budget balance over time.
    Mr. Tonko. Why, thank you very much.
    Chairman Ryan. Mr. Lankford.
    Mr. Lankford. Thank you, Mr. Chairman. Chairman Bernanke 
thank you for coming. I'm sure it is your favorite day of the 
week, every time that you come up to the Hill and get a chance 
to spend the morning with us, so thank you for doing this.
    In Oklahoma, where I represent, there have been a very 
large community banks that I have chatted with, that are very 
frustrated with the regulatory environment that is coming down. 
They feel like some of the largest banks in America made some 
mistakes, and they're being punished for it. Lending has slowed 
down dramatically, and they look at a single element for that. 
They look at the regulatory environment that is surrounding 
them.
    Personal perspective from you: Where do you think the 
community banks stand, as far as any need to circle around in 
capital requirements and change the rules from discretionary to 
now? That is really what the rule is on areas. How do we free 
up the flow of money and the lending in smaller community banks 
in rural communities?
    Mr. Bernanke. Well, first, community banks have really 
shown their worth in this lending crisis. As many larger banks 
withdrew from small communities or from small business lending. 
A lot of community banks stepped up and began to make more 
loans, and that just shows the value of their personal 
connections and their knowledge of the local community, and so 
on.
    I absolutely agree with you that small banks should not 
bear, and cannot bear, the same burden of regulation that the 
largest banks bear. They certainly don't pose the same risk to 
the financial system, for example. So what the Federal Reserve 
is doing there is several parts. I mean, first, we have added 
new committees and advisory groups to our regular routine, 
where the board meets with outside committees to create special 
roles for community banks. So, we have a new subcommittee on 
community banking; we have a counsel of community bankers that 
comes three times a year to meet with the board and talk about 
their issues; and we want to make particularly sure that as we 
implement the Dodd-Frank regulations, for example, which are 
mostly aimed at large, systemically critical banks, that we are 
very attentive to the possible implications for small banks. 
And we do want to do that.
    The other thing that we've tried to do, and this is for all 
banks, is that we recognize that in some cases after a crisis, 
that bank examiners can become very conservative, because they 
don't want to see their bank, you know, fail, and be 
responsible for that. And as a result, they may put pressure on 
banks not to make, what would otherwise be potentially good 
loans.
    We've done all we can to fight against that by issuing 
guidance to our examiners and to the banks, that we want loans 
to be made to credit-worthy borrowers by training our 
examiners, by having meetings all across the country with small 
businesses and small banks. So we are very focused on that 
issue, and I think we've made some progress and what I'm 
hearing and what we are seeing from surveys is some modest 
improvement now, in terms of the lending environment for small 
business, and some growth among community banks.
    Mr. Lankford. Well, let me just say to you, from the 
Oklahoma perspective, there has been growth in that area. It 
has been very modest, because there's continued frustration 
with individuals that are saying, I need to lend and have 
plenty of folks that want to be able to borrow, but I'm tapped 
out in all these areas and my regulators are telling me this, 
and I'm stuck. And companies in the local areas are saying, I'd 
like to borrow, I'd like to expand, I'd like to hire more 
people, but currently the bank is hiring more compliance 
officers and we are doing less lending. And that is a very bad 
formula for what is actually functional for us.
    Mr. Bernanke. I agree with you.
    Mr. Lankford. Let me mention a couple things. Right now, 
you mentioned the high priority for you is dealing with 
unemployment, which great on that. Then I'm sure there are 
times in different quarters you deal with inflation. How do you 
balance out what formula do you work through to say, I am going 
to balance, this quarter is going to be more on inflation, this 
quarter is going to be more on unemployment numbers. How do you 
all make that decision?
    Mr. Bernanke. We do it based on a variety of models and 
other things that help us project forward, where we think the 
economy is going to go. And right now, our models are showing 
that unemployment is likely to stay high for some time, as I 
was discussing earlier, and inflation, notwithstanding, we know 
about the commodity price increases, of course we are paying 
close attention to that, but notwithstanding that, underlying 
inflation looks to be still pretty low. And so, based on that, 
we think accommodative policies are still warranted.
    We are very committed to price stability. We are not buying 
into any idea that we can get some more employment by letting 
inflation get higher than normal. We're not going to do that. 
We want inflation to be somewhere around 2 percent, or a bit 
less. So, as our models begin to suggest that the economy is 
moving towards those desired levels, then, you know, just like 
a quarterback has to lead a receiver, we have to begin to move 
before the economy gets there because we've got to withdraw 
that stimulus in advance of the point to where we get to where 
we want to be. So, even though models, and projections, and 
forecasts are obviously not always accurate, they are really 
our best tool to try to analyze at what point we need to begin 
to pull back on that support and begin to worry more about the 
inflation side and less about the employment side.
    Mr. Lankford. Okay, thank you, Mr. Chairman, I yeild back.
    Chairman Ryan. Mr. Ryan.
    Mr. Ryan of Ohio. Thank you, Chairman Ryan. I appreciate 
it. Thank you, Dr. Bernanke. One of the mandates for the Fed is 
to keep unemployment low. There are some folks in town who 
think that that should no longer be the role of the Fed. How 
would you have negotiated this crisis, and where would we be 
today if you didn't have that mandate?
    Mr. Bernanke. Well, our policies would probably have been 
somewhat similar, because from both sides, I mean, we had both 
high unemployment and low inflation, so both of those things 
have moved us to be accommodative. That being said, in 
situations like this, where unemployment is very high, and 
inflation is low, I think that monetary policy does have some 
scope to support recovery, and therefore, to help on the 
employment side. So, I say that, but again, re-emphasizing that 
just like other central banks, the Federal Reserve is very 
committed to price stability, and we will make sure that that 
happens as well.
    Mr. Ryan of Ohio. Would we have the unemployment numbers 
today if you didn't have the ability, or the mandate to look 
out for unemployment and try to keep it low?
    Mr. Bernanke. It is really very hard to tell, because 
again, inflation is also very low, so we might have been, we 
certainly would have had very easy policies anyway because of 
the need to keep inflation away from the deflation zone, to 
keep inflation away from zero. That being said, maybe it would 
have been somewhat less accommodative.
    Mr. Ryan of Ohio. Well I'm just concerned that if we get in 
this situation again and the Fed doesn't have that ability, 
that we could be in a worse scenario to recover and come out of 
this stuff. One of the things that struck me, one of the 
gentlemen from the other side asked you about, you said 
ambitiously four and a half percent growth, and if we had that 
ambitious growth, it would still take five years, and if we had 
three-plus growth percent a year, we would take 10 years to get 
out of here. That's a lost decade, as far as I can tell. We're 
in the same position Japan was in during the 1980s. I mean, 
that is unacceptable to me. I'm from Ohio; we have cities in my 
district that are 10, 15 percent unemployment. Crime is going 
up; we have all these social problems that are happening 
because people are out of work. What else could we do here, 
from the legislative side that could help drive that number 
down quicker?
    Mr. Bernanke. It's very difficult and no easy answers given 
where we are. The one suggestion I have, and I have been trying 
to reiterate this, is that even as you are looking at budget 
cuts and balancing the budget, all of which is very important, 
it is also important to be thinking about the composition. Can 
you, for example, can you make the tax code more growth-
friendly? Can you improve the way your spending is allocated?
    Mr. Ryan of Ohio. Put additional investments in 
infrastructure, like you mentioned, you know, $50 billion, $100 
billion in the next year or two for infrastructure that needs 
to get done anyway in education, in job retraining that would 
put people directly back to work. Is that something that would 
help drive down this unemployment rate quicker?
    Mr. Bernanke. What I would like to see it combined with a 
longer-term perspective that maintains budget discipline over 
the next few years. Otherwise, a risk might be that interest 
rates would go up and that would undo some of the benefits.
    Mr. Ryan of Ohio. I think we are all in agreement that the 
long-term demographics and health care costs, and that is what 
we tried to deal with the Health Care Reform Bill, which CBO 
says will save us a $1 trillion in the second decade and almost 
$200 billion in the first decade, that is what CBO is saying. 
And also some disincentives to work that were mentioned 
earlier. One of the disincentives to work I experience with 
folks in my district is, they're better off being on Medicaid 
because they have health care for their kids. Health care 
reform is now an incentive to go back to work, because you will 
be rewarded with health care. So I think those are two things 
that need to be addressed. So I think we need additional fiscal 
stimulus to drive unemployment down, we shouldn't be so worried 
about inflation in places outside of our country so much, and I 
think we've got to worry about jobs here at home.
    One final question on Chinese currency, do you still 
believe that the Chinese are manipulating their currency, and 
if they are, is that fueling the inflation in China? And how is 
the manipulation of Chinese currency affecting our ability to 
recover here in the United States? So I just wrapped three into 
one there.
    Mr. Bernanke. Their currency, the renminbi is undervalued; 
it would be both in our interest and in Chinese interest for 
them to raise the value of their currency, and it would help 
them with their inflation problem. One of the things that is 
happening, which is a little surprising in a way, is that they 
have an inflation problem and the way they are addressing it is 
not by raising their currency value, which would reduce the 
demand for their exports. Rather, they are leaving it where it 
is, and they are instead trying to reduce domestic demand 
through higher interest rates. And it would seem like a better 
strategy would be to let domestic demand be what it is, and let 
people enjoy a higher standard of living in China, and reduce 
their exports via a higher exchange rate. So yes, it is a 
counterproductive policy both for them and for us, and it is 
contributing to the still-large global imbalances in terms of 
current accounts that we see around the world. Thank you.
    Mr. Ryan of Ohio. Thank you, Dr. Bernanke.
    Chairman Ryan. Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman. Dr. Bernanke, it is 
a privilege to be here and to bring you greetings from Dillon, 
South Carolina, which I have the honor to represent. Thanks for 
doing this. Very quickly, I'm going to try and bring us back to 
the budget process because we are getting ready to start that 
here right away. And one of the things that obviously we look 
at, I know you have looked at, is the CBO baseline projections, 
which were made available to us, I think, last week. And I'm 
comparing it to what I'm seeing happen in the bond market, we 
saw I think the 10-year Treasury go through 3.5 percent on 
Monday, 3.7 yesterday, I understand as recently as 11:30 it was 
still trading above 3.7. When you look at the CBO's projections 
for what the interest rates will be over the course of this 
year, they assume a 3.4 percent rate for the 10-year Treasury 
for the balance of this year. Is it fair to say, sir, that the 
CBO may have underestimated the interest-rate environment that 
we are going to see for the balance of 2011?
    Mr. Bernanke. I would say that since we are at 3.7 now, 
that reflects anticipation of higher growth. Of course, as you 
know, the rates change pretty radically. I don't happen to know 
what the CBO expects for next year. I think for the longer-term 
horizon, it is the whole path that matters. But as the economy 
recovers and normalizes, you would expect interest rates to go 
up.
    Mr. Mulvaney. It's 3.8 percent for next year and roughly 
3.5 percent over the course of the next several years. My 
concern, obviously, is something that you referred to earlier, 
which is that we are so exposed on our debt at roughly $14 
trillion that they even admit, by the way, the CBO does, that 
if they are off by just 1 percent on their estimates for 
interest rates, it translates into an additional 1.3 trillion 
dollars worth of debt over the next decade.
    Brings me to the next issue which you have heard discussed 
a couple times, which is the debt ceiling. And I have heard the 
back-and-forth, and you said something that caught my 
attention, which is that you were concerned, obviously, that 
some of the proposals that may have been offered, including 
Senator Toomey's, you had some questions about the workability 
of that. About trying to prioritize spending amongst debt 
repayment, interest repayment, and various benefit programs. 
Given our fiscal situation, if we were able to figure out a way 
to work through those workability problems, if we were able to 
figure out a way to prioritize, would that assuage your 
concerns about using the debt ceiling as an environment to have 
some discussions about changing our fiscal policy?
    Mr. Bernanke. Well, my concern, since I'm mostly involved 
in the financial side, my concern is about, you know, not 
defaulting on the debt, and I think that for me is a very high 
priority. So that would help, on that count, very much. You 
still would be in a position, of course, where you would be not 
paying contractors, for example, you would be not putting out 
Social Security and Medicare checks and those things, and if 
you think that is something you are willing to do, that is 
really up to Congress to decide.
    Mr. Mulvaney. That's fair enough. Last question, we have 
talked about your plans to exit this expansionary policy when 
you see the need to do so, and you have talked about raising 
rates, talked about redeeming some of the securities that you 
hold. Are you satisfied that you will be able to do that 
quickly enough to react to inflationary concerns?
    Mr. Bernanke. Yes, we can raise short-term interest rates, 
which are the main tool we have, essentially as quickly as we 
like. Because we can raise the interest rate we pay on excess 
reserves to banks. So yes, we don't have to sell off all our 
assets to tighten policy. We can do it via our control over 
short-term interest rates.
    Mr. Mulvaney. Have you given serious consideration to not 
completing the QE2 program?
    Mr. Bernanke. We review that program at every meeting. We 
have another meeting coming up in the middle of March. And we 
will, as we always do, we are going to look at the outlook for 
both employment and inflation, and it is certainly possible. We 
take very seriously that this is a program that needs to be 
looked at every meeting, and in light of however the economic 
news comes in.
    Mr. Mulvaney. Given that QE2 is more of the unusual and 
extreme, extreme is not the right word, but the more unusual 
tool that you are using this period. Would it be fair to say 
that you would consider ending QE2 before raising short-term 
rates?
    Mr. Bernanke. Yes, I think that will be the most likely 
outcome, yes.
    Mr. Mulvaney. And the last question I have got; maybe it is 
not a question, it is a point. There's another $1.4, $1.5-
trillion gorilla in the room, isn't there, in terms of the 
amount that gets dumped in the system, the expansionary 
policies that we are talking about, which is our fiscal policy.
    You have no control over our fiscal policy and you could do 
everything possible to tamp that inflation, to restrict 
monetary expansion policy, and if we continue to spend a bunch 
of money we don't have, we will be contributing to the 
inflationary pressures, won't we?
    Mr. Bernanke. Yes, but I think even more severely, you will 
be contributing to financial problems, stress in the financial 
markets.
    Mr. Mulvaney. Thank you, sir.
    Mr. Bernanke. And say hello to my friends in Dillon for me.
    Mr. Mulvaney. I'd be happy to. Thank you.
    Mr. McClintock. Mr. Pascrell is next.
    Mr. Pascrell. Thank you Mr. Chairman, Dr. Bernanke, thank 
you for laying bare some of the myths for us on both sides of 
the aisle, about the financial situation that we face today and 
the financial situation we actually faced a few years ago, and 
hopefully, we will learn and move on.
    I want to thank both Chairman Ryan and Ranking Member Van 
Hollen because of this civil tone that the questions have 
taken. I think it is struck me, maybe it is normal for all of 
you. So, I will try to continue on that avenue. I will try my 
best.
    For the past several months, some folks have been promoting 
the myth of a Europe, with an overrun health care system, 
overbearing government, and economic stagnation. But not long 
ago, some of these same people had nothing but praise for the 
same country's low taxes, low spending economies. So, the 
problem of this theory is that it is incorrect, I think.
    Ireland ranked near the top of the Heritage Foundation's 
so-called Economic Freedom Index, while sitting on a property 
bubble, fueled by banks that had run wild. Then the bubble 
burst, and the revenue dropped, and the public debt exploded.
    We need to remember, my good friend, the mayor of New York, 
who said a year and a half ago when he was running, that what 
we need to do, it won't be too long before a return, it'll take 
us four or five years before we return to where we were in 
2006.
    The point is, we don't want to return to what it was in 
2006, because that is the problems that we did not address, and 
we see the systemic and we see the results of not addressing 
them. So, these countries are relying on the same theories of 
slash-and-burn budgeting that is being talked about here, not 
just today. The problem is it doesn't work.
    For instance, Britain: its gross domestic product fell 0.5 
percent in the last quarter of 2010, widespread losses in 
construction, widespread losses in transportation, and in 
services rendered to the public. So, I think we are all here to 
roll up our sleeves, with your direction and advice, address 
our long-term deficit. But we cannot pull the legs out from 
under the recovery, and I think this is your message. Correct 
me if I'm wrong. By taking a slash-and-burn approach to 
government operations, or hold the full-faith credit of the 
country hostage.
    Mr. Chairman, what do you see as the results of the 
immediate and drastic cuts to the federal budget? What would be 
the result, in your view?
    Mr. Bernanke. Well, I think if that is all that was done, 
that the costs to the recovery would outweigh the benefits, in 
terms of fiscal discipline. I think we really need to take a 
long-term view. Now, maybe a little bit of a down payment is 
needed, but we need to show that we have a plan that will carry 
us forward for the next decade at least, that will produce 
consistent reductions in that deficit over time, and it has the 
benefit of allowing us to think it through, and to take the 
time needed to change programs, et cetera. So, again, my 
message is that, I think, that the best approach is to take a 
longer term perspective.
    Mr. Pascrell. This is not just the one or two year 
solution.
    Mr. Bernanke. It is not a one or two year thing. Nothing we 
can do this year will serve this long-term problem.
    Mr. Pascrell. I think folks on both sides of the aisle have 
to understand that. On our side of the aisle as well. So, there 
has to be cuts to the budget; there's no two ways about it. We 
cannot continue, and we cannot continue to have tax cuts that 
are not paid for, where we have no offsets, like we did in 
2001, 2003. We were warned in those years; we were warned in 
1999, before those things ever happened.
    And obviously, we did not heed them. My last question is: 
Is it your opinion that whatever deficit savings, we would find 
an immediate and drastic slash approach to the budget, would be 
lost to an economic downturn or stagnation? Do you agree with 
that?
    Mr. Bernanke. I don't know quantitatively, but I do think 
there is a concern about only focusing on short-term cuts, 
because of the recovery, which is, obviously, still not 
complete. I think cuts, combined with a long-term perspective, 
will be both less painful for the current recovery and also 
more credible in the bond markets.
    Mr. Pascrell. Thank you, I do appreciate it. Thank you, 
Chairman.
    Mr. McClintock. Our time is fleeting and the staff has 
suggested and the minority has agreed that we go to three 
minutes, if there's no objection, on the remaining questions. 
So, without objection, we will next go to Mr. Akin.
    Mr. Akin. Thank you, Mr. Chairman. It seems like when we 
talk about dealing with the budget deficit, it reminds me a 
little bit about these all kinds of imaginative weight-loss 
programs, you know? It seems like when you get down to the 
bottom line, you can either eat less or you can exercise more. 
You're only given two alternatives. It seems like we are in the 
same way, we can try and sugar-coat it, but the problem is that 
either we are spending too much or we've got to tax a whole lot 
more. The comment was made earlier, which I thought was an 
amazing quotation from Ms. McCollum, The budget deficit is not 
a spending problem. I found that amazing, because it seemed 
like to me it sure is a big spending problems. We're just on 
different planets, I suppose, but let's just assume, instead of 
you are going to cut spending, that you are going to try to 
increase taxes.
    Now, my understanding is, I take a look at historic data, 
our tax revenues run somewhere in that 18 percent range. My 
understanding is if we were to double the tax rate on 
everything across the board, we couldn't assume that we are 
going to get double in revenue, federal revenue.
    In fact, we may well do what you are saying, crash the 
economy and get even less. I do recall, we did dividends, 
capital gains, and death text in May 2003, and the 
Congressional Budget Office said, Well, now you are going to 
have less revenue, but in fact, there was more revenue because 
the economy kind of got going.
    So, my question is, when I take a look at this overall 
problem that we are, you know, too heavy, in terms of like a 
weight loss thing, it is pretty spooky to me because you add 
all of the entitlements, the main ones, Medicare, Medicaid, 
Social Security, and then the other kinds of entitlements, and 
add debt service to that, and it seems, when I looked at the 
numbers, it was looking like about 2.3, roughly, trillion. And 
our revenue is about the same thing. So that says you get zero 
defense, zero discretionary non-defense, and you are right now 
just a parody. So, I don't understand. I guess my question to 
you is, first of all, don't we have to, essentially, deal with 
the entitlements, just by definition, or can you actually make 
it up by just doubling taxes and hope there's going to be a ton 
more revenue?
    Mr. Bernanke. Well, I think that, as you point out, I mean, 
that in the long run, the way we are going, entitlements plus 
interest would basically be the entire government budget, and 
so, unless you raise taxes considerably. Now it is up to 
Congress to find the right balance between taxes, and cuts, and 
so on, of course. But I think you need to look seriously, 
particularly at the health care costs, which is of course, part 
of what has been going on the last couple of years here in 
Congress, but I think a focus on the cost side is important.
    And, it would be difficult, I think. I'm very loath to 
prescribe exactly how to address these issues; I do think that 
it would be very difficult to leave health care programs 
untouched and still achieve budgetary balance in the next 15 
years.
    Mr. Akin. Thank you. I think what I heard you saying is, is 
you really got a deal with that rate of spending, and 
particularly, in the entitlement, the health care piece is such 
a big part of that, that has to be dealt with. And that raising 
taxes, just to finish the question.
    Mr. McClintock. I am sorry, we are out of time.
    Mr. Akin. Thank you.
    Mr. McClintock. Ms. Schwartz is next.
    Ms. Schwartz. Thank you, and thank you, Chairman Bernanke, 
for your good work over the last few years in helping the 
economy begin to grow and to do your part; not easy decisions 
on any of our parts, so, I appreciate what you have done.
    And, some of your comments this morning were really very 
important to us as we see this beginning of a recovery. And 
some of your comments about your optimism may be too strong, 
but your sense that we are growing and growing out of this.
    You also made some comments I want to follow up on, which 
was really about the debt ceiling and the recklessness of there 
being politics played with raising the debt ceiling. None of us 
want to raise the debt ceiling, I mean, we would much rather 
not have be in this situation, but the two consequences of not 
raising the debt ceiling, as you have pointed out, and I want 
to confirm, the harm it would do to the United States and our 
ability to borrow in the future, interest rates, and really, 
defaulting on our not paying. It is just a huge consequence to 
our economy, so I did want you to talk about that again, if you 
would.
    And secondly, as I think it is been pointed out and 
President of the Chair, Mr. McClintock and Senator from 
Pennsylvania, our new senator, Senator Toomey, have proposed 
legislation that would make debt payment to our creditors, our 
foreign creditors, the priority over paying, instead of paying, 
our Social Security beneficiaries possibly not getting checks, 
or our veterans not getting payments, U.S. contractors not 
getting payments, so it would put the U.S. in a different 
position of no longer having faith with American seniors, 
American veterans, and of course, U.S. companies or creditors.
    So, could you comment on both of those, and I think you 
have commented very much on the first piece about how reckless 
it would be. But of course the second one, to put us in a 
position of losing faith with the American people who have 
counted on us do that and leaving that prioritization, making a 
statement very clearly that we would rather pay our foreign 
creditors than actually pat the American people.
    Mr. Bernanke. On the first, defaulting on the debt would 
create probably an immediate financial crisis, a very severe 
one, and would have very deep consequences for our economy. 
And, even assuming that we were able to get through that, it 
would probably lead to much higher interest rates for the 
United States for many years to come, and that is been pointed 
out by a couple of folks, that applying a higher interest rate 
to our existing debt means that will be a very big step 
backward, in terms of trying to balance our budget.
    On the prioritization, that might help address the default 
problem, which is very important. It is up to Congress, I 
suppose, whether you think it is worth doing what you say, 
which is you would be stopping Social Security checks and those 
sorts of things. I just wanted to make the very narrow point, 
but still important point, that there are operational problems 
as well.
    I mean, even if we were instructed, the Federal Reserve is 
the agent of the Treasury. We make a lot of the payments on 
behalf of the Treasury, and we would have to figure out how to 
tell that this check is Mr. Jones is a payment on his interest, 
and this check is the Social Security check. There would be 
some practical, operational problems that we would like to 
bring up, if we move in this direction.
    Ms. Schwartz. So, you were saying, it is reckless. Thank 
you very much. I appreciate your comments.
    Mr. McClintock. Mr. Woodall is next.
    Mr. Woodall. Mr. Chairman, hi.
    Mr. Bernanke. Hi.
    Mr. Woodall. I appreciate you are willing to spend this two 
and a half hours, with us as a junior member and a tardy 
member, I am the real beneficiary of your commitment to give us 
that time. So, I'm grateful.
    I have appreciated your comments about the economic impacts 
of simplifying the tax codes, lowering rates, eliminating those 
distortions that are there. I wanted to talk specifically about 
those dollars that are overseas. I think back to the Wall 
Street Editorial that the Cisco President and Oracle CEO put 
together $1 trillion overseas that want to come back home, for 
whatever odd reason. I'm new to this body: We'll tax you if you 
try to bring that money and invest it in America but we will 
let you invest it overseas for free. What do you think the 
economic impact would be of having that tax holiday, to allow 
those American companies who want to bring invest those dollars 
in America?
    Mr. Bernanke. Well, we've done that before, a few years 
ago. And a lot of money did come back. Some of it went to 
dividends and that sort of thing. Some of it probably went to 
investment; it is a little hard to tell how much would go in 
each direction. I think if you were going to do that, you might 
want to consider the sort of more permanent alternative, which 
is to do what other countries do, most other countries, and tax 
on a territorial basis in the first place. But you certainly 
would get a lot of repatriation if you did a holiday, no 
question.
    Mr. Woodall. And you have talked a lot about low long-term 
bond rates. I think, when we did it back in 2003, the rate was 
five and a quarter that you could repatriate it. Would we see a 
substantial difference if that rate was zero and without those 
limitations that we placed on that repatriation back in 2003, 
or would it be substantially the same?
    Mr. Bernanke. Either one is probably a good bit less than 
the normal rate, so I think any low rate would create a lot of 
repatriation. I don't really have more to add on that.
    Mr. Woodall. There was a lot of discussion, back at that 
time, about how many of those dollars went to dividends. Now, 
you have talked a lot about the importance of consumer 
spending, in terms of getting us out of our current situation. 
Having those dollars go to dividends, is that a bad thing? Is 
that just different from investment, but it is still going to 
contribute.
    Mr. Bernanke. Yes, dividends can be spent by consumers, 
that is right.
    Mr. Woodall. You also have talked about the importance of 
asking the question of how smart is the spending. Is there any 
spending out there that you would say is sacrosanct and should 
not be examined? Or should we be looking at everything as we 
are asking the question about how smart is the spending?
    Mr. Bernanke. I hope you will look at everything.
    Mr. Woodall. Thank you very much.
    Mr. McClintock. Ms. Wasserman Schultz is next.
    Ms. Wasserman Schultz. Thank you. Chairman Bernanke, it is 
good to be with you. When you testified before the Senate 
Budget Committee last month, you observed that the Recovery Act 
funds will run out in 2011, and you acknowledged at that time, 
that the expiration of those stimulus fund would worsen the 
fiscal outlook of States and localities, and in your words, 
present a headwind for the overall economy.
    In addition, with the announcement of Chairman Ryan's 
spending caps for Fiscal Year 2011, our colleagues on the other 
side of the aisle are intending to further cut some types of 
discretionary spending, that was such a critical component in 
the Recovery Act. And so essentially, that is like an anti-
Recovery Act.
    Given this headwind, what would you say the impact would 
be, coupled with the inevitable cuts in state and local budgets 
because of the deficits that they are now going to face, 
because of the Recovery Act hole, combined with the draconian 
spending cuts proposed by our Republican colleagues, is there 
any way that solely cutting discretionary funding spending in 
2011, which is Mr. Ryan's plan, is going to create jobs on its 
own? And what impact is that going to have?
    Mr. Bernanke. For state and local governments specifically, 
their tax revenues have improved somewhat as the economy's 
gotten better, which is obviously a help, but they are still 
under considerable strain, and that reduction in employment and 
spending at that level is going to be a negative for growth.
    I can only come back to the point I have made a couple of 
times, which is that I think it is very important to address 
the deficit, but I hope that rather than doing a one-off kind 
of thing, that you will look at a longer term window, a longer 
term horizon, and in thinking about it, and keep in mind that 
we are still coming out of the very deep recession right now, 
but that doesn't, in any way, reduce the need to address these 
long-term structural budget problems, and I hope that you will 
do that in a very serious way.
    Ms. Wasserman Schultz. Acknowledging that we do need to 
address the deficit, but taking, by themselves, which is what 
is proposed, draconian cuts from the Chairman of the Budget 
Committee, combined with the impact of the Recovery Act funds 
being phased out and no longer being available, what is that 
likely to do to the jobs, our potential for creating jobs, and 
the continued pace of the recovery?
    Mr. Bernanke. Well, it would depend on the details, but 
again, I just would like to re-iterate that it is better, I 
think, to think about this in the context of a longer term 
plan, a longer term trajectory for fiscal spending.
    Ms. Wasserman Schultz. And, on health care, the Affordable 
Care Act included numerous provisions to contain costs by 
moving from a payment system that rewards quantity to one 
rewards quality, and value and efficiency. Would you agree that 
by giving providers incentives to coordinate care and reduce 
wasteful spending, that we have the potential to generate real 
savings there?
    Mr. Bernanke. I'm not really able to make estimates. I know 
there are some measures in the health care plan that are 
intended to reduce costs. I don't know how effective they are 
going to be. I think that is something that the Congress ought 
to monitor very closely, and look for any additional ways that 
you can find to control wasteful spending, which, of course, 
there is a great deal, I think, in the health care industry.
    So, since, as we were discussing earlier, since health care 
spending is going to be an enormous part of the federal budget 
in coming decades, finding anything you can do to reduce 
unnecessary spending will be very, very helpful.
    Chairman Ryan. Thank you, Chairman. Mr. Rokita.
    Mr. Rokita. Thank you. I love it, how in Washington, D.C., 
cutting 2.5 percent of a budget deficit is draconian. I also 
appreciate your thoughts about long-term reform, because it is 
just the beginning, and I can't wait to get to some long-term 
reforms. When you say you are going to be vigilant about 
watching for inflation, can you name one time in your agency's 
history where you got it right? Where you got on the brakes in 
time to correct runaway inflation, do you have any track record 
at all?
    Mr. Bernanke. Absolutely. Ever since Paul Volcker conquered 
inflation in the early 1980s, inflation has come down very 
steadily.
    Mr. Rokita. I feared that you were going to mention Paul 
Volcker. I don't think you got to it in time.
    Mr. Bernanke. Well, I'm saying after.
    Mr. Rokita. Your goal is two percent or less.
    Mr. Bernanke. By the time Chairman Volcker left office, he 
came in with a 13 percent inflation rate. He left office with a 
four percent inflation rate.
    Mr. Rokita. After it went to
    Mr. Bernanke. Thirteen percent was the highest. Then it 
came down, over about eight years, under his stewardship, to 
about four percent. Then, from there, under Chairman Greenspan, 
until the late 1990s, it came down gradually, to about two 
percent, and it is been there ever since.
    Mr. Rokita. I don't think the agency got to inflation on 
time, as you are proposing.
    Mr. Bernanke. It has. It has, except in the 1970s, which, 
of course, we've learned from.
    Mr. Rokita. Okay, well, maybe we will beg to differ there. 
The banks: there's a lot of government products on the street 
to support this borrowing that we are doing. Doesn't it make 
sense, at least, it does to me, that when banks have one of 
your products to invest in on their balance sheets, versus the 
small business down the street, they're going to go to your 
product. And, so, couldn't you argue, then, to Mr. Lankford's 
point that, my Lord, if we just stop these products from being 
offered and let banks invest in the private sector, where you 
get a better return on your money, that that could be a 
solution? At least to Mr. Lankford's question?
    Mr. Bernanke. No, I don't think so. First of all, we pay 25 
basis points, one fourth of one percent. So, if there's any 
attractive lending opportunity out there, banks would certainly 
prefer to do that than put money with us.
    Secondly, the existence of those reserves is the 
counterpart to the purchase of securities that we are doing, 
which, in turn, is lowering rates, and making it easier for 
borrowers to get credit. So, you can't look at one side, and 
not look at the other side. So, I think that is not correct. I 
think it does help credit extension.
    Mr. Rokita. Okay, thank you. Over the last three years, you 
advocate over $1 trillion in government spending. Considering, 
when government gets a dollar, we make 60 cents I think the 
private sector record is for every dollar the private sector 
makes $1.20 or $1.30. Can't you at least argue that taxing and 
borrowing, and bigger government is not the most effective way 
to grow the economy?
    Mr. Bernanke. It's certainly true that taxation, in 
particular, has what's called a dead-weight loss. And, so the 
loss to the private sector is greater than the taxes actually 
paid because of the distortions that are caused. And, as I have 
said, I think anything that can be done to make the tax code 
more efficient, fairer, lower rates, and so on, would be good 
for the economy.
    Mr. Rokita. I agree with you there. Thank you, sir.
    Chairman Ryan. Commissioner Yarmuth?
    Mr. Yarmuth. Thank you, Mr. Chairman. Chairman Bernanke, 
thank you very much for your testimony. I want to return to 
this issue of the possibility of not extending, or raising, the 
debt ceiling, and focus on the economic consequences. The 
American people, I think, would be repulsed by the idea that we 
would default on our debt, just as a concept, and you have 
called it catastrophic, we call it reckless, all in all, not a 
good idea. But, the idea of prioritizing payments is 
frightening to me, because wouldn't this essentially have the 
effect of we would be paying China before we would be paying 
our troops in Afghanistan?
    Mr. Bernanke. Yes.
    Mr. Yarmuth. It's a pretty scary concept. Talking about, 
again, the impact on the economy, if we were to not raise the 
debt ceiling, and we didn't do it for six months, in that 
period of time, absent that, we would be spending about a $1.8, 
$1.9 trillion, in the current levels, something like that, 
during that six months. Wouldn't that be about right? Just 
short of $4 trillion, overall, we'd be spending close to $2 
trillion. And we are now borrowing 40 to 50 cents of every 
dollar we spend. So, essentially, wouldn't we be taking 
somewhere close to a trillion dollars out of the economy during 
that six-month period? Which, essentially, is more than the 
entire Recovery and Reinvestment Act?
    Mr. Bernanke. Well, first of all, as you point out, some of 
that money would be going overseas, and so on, but, I think 
that effect would be just dwarfed by the financial crisis that 
you would be engendering.
    Mr. Yarmuth. All in all, pretty, draconian, is the word 
that is been thrown around here, pretty draconian, and negative 
impacts all around.
    I wanted to clarify one thing that Mr. Akin raised about my 
colleague, Ms. McCollum's, statement. I don't think she said 
that it was not a spending problem. She said it is not solely a 
spending problem. And, just recently, there was a report out 
that we are at the lowest tax rate in this country in 60 years, 
could you square the concept that we don't have at least 
somewhat of a revenue problem, in terms of the budget deficit?
    Mr. Bernanke. Well, we have a revenue problem right now, in 
part, because we haven't recovered. And, so, the share of GDP 
that were getting revenues is way below the historical average. 
So, that is a temporary situation, we hope. And, we hope that 
we will go back more towards the sort of 19 percent GDP that is 
been normal. But, in the longer term, basically, Congress is 
just going to have to decide where its values are, whether it 
wants to raise taxes, whether it wants to cut spending, or 
wants to make a combination. I hope you look at the whole set 
of options, and try to think about what's best for the economy.
    Mr. Yarmuth. I just want to make one comment, because you 
referenced taxes that are growth-friendly. My brother is in the 
barbecue business. He's done extremely well, paid a lot of 
taxes. And, he said, when we were talking about whether to 
extend the tax rate for the people making over a quarter of a 
million dollars, which certainly includes him, he said, ``I 
don't care what my tax rate is. I care that people can afford 
barbecue. Because, if they can't afford barbecue, it doesn't 
matter what my tax rate is.'' Thank you very much.
    Chairman Ryan. Mr. Guinta.
    Mr. Guinta. Thank you very much, Mr. Chairman. And, thank 
you, Dr. Bernanke, for being here. I want to stay a little bit 
on the subject matter of debt ceiling, and then I want to move 
into state pension reform and state debt and deficit, and how 
that may impact the decisions that Congress has to make.
    Earlier, during the hearing, someone had referred to our 
debt ceiling vote as quote ``routine.'' I happen to be one of 
the people that believes that is part of the problem that we 
are having. This notion that we are going to continue, as the 
federal government, to borrow beyond our means, I think has a 
direct impact to the global markets, to our markets here, and 
to the consumers and employers and small business owners, that 
are trying to have some predictability, who are the ones who 
are going to really help us emerge stronger as a nation, and as 
an economy. I also was concerned about some of the comments you 
had made, or phrases that you had used; some, I appreciated and 
agree with, and some concern me.
    One was unwind some of this stimulus. I agree with that. I 
think what you are saying is we should be stopping the use of 
stimulus, and returning some of those dollars. But, you also 
said, future spending must be quote ``smart'' spending. When 
you say, future spending must be smart spending, how would you 
categorize the spending up to this point, in the last two 
years?
    Mr. Bernanke. I was only making a point. What I'm afraid of 
is that Congress will look only at the total spending, the 
total revenue numbers, and then try to worry about how to make 
those equal, which is important. But, it is also important to 
look at the programs, look at the tax code, and make sure that 
it is as effective as possible. I wasn't claiming that I could 
identify waste, fraud, and abuse. But, clearly, whatever 
changes you can make.
    Mr. Guinta. It's a multi-pronged approach, then.
    Mr. Bernanke. Yes.
    Mr. Guinta. We have got to reduce our spending. We've got 
to simplify the tax code, which I think I had heard you said 
earlier. And we've got to sort of restore, or I would argue, 
reduce some of the regulatory environment that is going to get 
some of that private sector money, that is on the sideline, 
back into the economy, which I think would replace the federal 
spending that is being suggested as required for this economy 
to move forward.
    The second question I have, or concern I have, is according 
to Census Bureau data, this is fiscal year 2008, we have four 
percent of interest on debt as the share of state and local 
expenditures, and we have fiscal year 2008 debt outstanding as 
a share of GSP 18.2 percent. Can you comment briefly on those 
levels? If they're appropriate, if they're high, if they're 
low, and then compare it to our levels at the federal level?
    Mr. Bernanke. Well, they're clearly lower than the federal. 
I mean, it 18 percent versus 69 percent, and most of that debt 
is associated with capital projects as well. So, in that 
respect, the states are not as bad off, in some sense, as the 
federal government.
    On the other hand, they have a very difficult short-term 
situation, because they do have balanced budget amendments, and 
with the fallen tax revenues, they're having some very 
difficult cuts they've had to make on spending and employment.
    But, I would say, also, that 18 percent number doesn't take 
into account some long-term issues, I think you have referred 
to already, with pensions and health care; unfunded 
liabilities, which are potentially much more significant.
    Chairman Ryan. Thank you, sir. Ms. Kaptur?
    Ms. Kaptur. Thank you, Mr. Chairman, very much. And, thank 
you, Chairman Bernanke, for your long suffering today. I 
apologize. I had to leave for another hearing. I have three 
simple questions, that are probably just one-word answers, and 
then a little bit longer one. Have you ever seen a recovery in 
modern history that has not been led forward by housing and 
construction?
    Mr. Bernanke. It is normal for housing and construction to 
be an important part of the recovery.
    Ms. Kaptur. Thank you very much. Its absence is 
particularly troubling to this member.
    Number Two. With the instability in the Middle East, and 
rising gas prices, could I ask you, at what level of gas prices 
in our nation would we trigger a deep recession again? I put 
that number about $4 a gallon. Where would you put it?
    Mr. Bernanke. I don't think there's a single number. But, 
it is absolutely true that as we move up above four that you 
are beginning to take a significant amount of disposable income 
away from people, and that acts like a tax, essentially, and 
makes it more difficult for the economy to grow.
    Ms. Kaptur. Thank you. I don't know if you have any ideas 
about helping to put to work the unemployed you so aptly 
identified in your opening statement; those who've been out of 
work for more than six months. Thank you for recognizing that. 
That lost productivity is of deep concern.
    What, in your opinion, would be the most effective means to 
re-employ them in the short-term, and to gain productivity in 
this economy?
    Mr. Bernanke. I don't have any good answers. As you know, 
the Fed is trying to do our best to help improve the employment 
situation. I guess one area to look at would be the 
unemployment insurance system. Maybe there might be ways to use 
some of the money to give training, for example, rather than 
just simple income support.
    Ms. Kaptur. Thank you very much for that. Longest question, 
last December, Congress and the courts forced the Federal 
Reserve to release its report on what it had done during the 
financial crisis, and which financial institutions received 
money through the Federal Reserve. You had opposed compiling 
and releasing that report, claiming that making Federal Reserve 
activities public would disturb the financial markets.
    What we have learned is that the Federal Reserve really 
wanted to keep secret that it had bought back, from German and 
Swiss banks, more than a half of a trillion dollars of bad 
mortgage-backed securities that Wall Street's megabanks had 
pawned off to those banks. Clearly, this was something that the 
Fed apparently didn't want the Congress and the public to know. 
We now also know that private gains provided to Wall Street and 
foreign banks were at the expense of massive social costs, 
forced on our public in the form of growing debt from historic 
levels of unemployment. Why shouldn't Congress and the public 
know what the Fed is doing, especially when it puts onto the 
U.S. financial system, and public system, such burdens as 
buying back bad bonds from foreign banks?
    And my questions are: Did you defend secrecy for the sake 
of secrecy? Or, did you defend secrecy to protect the Fed from 
the public's view of mistakes made by the Fed and its member 
institutions?
    Mr. Bernanke. There is no longer any secrecy. The discount 
window, where there is some case to have secrecy during the 
period of the crisis, all that information is now revealed, 
with a two-year lag, under the Dodd-Frank Act. So, there is no 
aspect of the Fed's operations now, which is permanently 
secret. I have no idea what you are talking about with the 
Swiss. We have not purchased mortgage bonds from anybody, other 
than Fannie and Freddie, and we lent money to only banks that 
had, through their U.S. operations, which is required by law, 
that we treat all domestically operating banks the same. And 
we'd lent against collateral, and we were paid in every single 
case.
    Ms. Kaptur. Thank You.
    Chairman Ryan. I ask unanimous consent that all members 
questions be included in the record and that the chairman 
respond to them. Mr. Young.
    Mr. Young. Mr. Chairman, thank you for visiting with us. 
It's my privilege to be with you on behalf of my Southern 
Indiana constituents. As you know, Japan recently had its 
credit rating downgraded, in light of its fiscal situation. 
Part of the justification for Standard & Poor's downgrade was 
the fact that Japan has no coherent plan to deal with its 
unsustainable fiscal situation.
    Here in this country, like Japan, we have very low interest 
rates, as compared to recent history. Our own deficits are 
adding to our national debt at a remarkable rate. And, we too, 
have no coherent plan to deal with this; at least in the long 
term.
    You have indicated that there is no magic number. I think 
that is fair. I think history proves it out. There's no magic 
debt to GDP number. That said, you no doubt, have some sense of 
when we are getting close to unsustainable debt dynamics.
    When are we getting close, and what are the main indicators 
that we need to monitor, we, as members of Congress, you as the 
Federal Reserve, to avoid a crisis?
    Mr. Bernanke. We already have a considerable increase in 
our debt-to-GDP-ratio, and we are heading towards ninety 
percent by the end of 2020, I believe. I'm not sure. So, as we 
move up beyond 90, as we move to a hundred, we are approaching 
the levels of where some of the countries in Europe are now 
that are having very serious problems. So, again there's not a 
magic number. And problem is that you can't tell in advance 
when the bond markets might begin to become worried.
    I think the bond markets are looking not only, anyway, at 
the debt to GDP number. They are looking, as you mentioned, at 
the plan. Does the country have a plan? Does it have the 
political will, and so on? I think if we demonstrate that we 
have the political will, I think the markets will be quite 
forgiving.
    Mr. Young. I suspected that you would say that. So, it is 
the very fact that this Congress does not implement a 
bipartisan, coherent plan, to deal with that situation. To that 
end, one of the things that is, no doubt, driving our debt to 
GDP is our federal spending. Things like Medicare. And, I was 
encouraged to hear my friend on the other side of the isle 
indicate earlier, she wants to put everything on the table, as 
we deal with this.
    Medicare, why don't we take that, and put that on the table 
as one example? Because you have recently indicated that we 
have a choice. In your National Press Club comments, you said 
we can either make adjustments, through a careful and 
deliberative process, or, when this crisis hits, we are going 
to have to do things very quickly, in a hasty way that maybe 
most of our country is uncomfortable with. Do you agree that 
Medicare is on an unsustainable path, and that it must be 
addressed fairly quickly here?
    Mr. Bernanke. It's going to be a very, very big share. 
Medicare, Medicaid, all health care spending programs will be a 
very big share of government spending, and of GDP over the next 
10, 15, 20 years. And I think long-term budgetary stability, 
and economic health of the United States in general, requires 
us to look very, very hard at ways to save costs on health 
care.
    Mr. Young. Thanks so much. I regret my time is up.
    Chairman Ryan. Ms. Bass.
    Ms. Bass of California. Thank you. Thank you, Mr. Chairman. 
I'd like to ask you questions about the consequences of not 
lifting the debt ceiling I wanted to know if you could paint a 
picture of the consequences?
    Coming from the State of California, and in the State 
Legislature, we were having to manage our budget crisis. When I 
was first there a couple of years ago, our budget was a hundred 
and $10 billion dollars. We cut it to $83 billion. And, now my 
colleagues, that are still there, are left with a $23 billion 
deficit. And, so, if we didn't lift the debt ceiling, what 
would that do to the States? Would States be able to refinance 
their debt?
    Mr. Bernanke. Well, I think it is important to note that 
California always paid its interest. I mean, it used Scrip, and 
so on, for some employees, and for some payments, but it is 
paid its interest. Even so, I think the risk premium on 
California debt went up for a while; at least following that.
    It's clear that the failure to pay interest on U.S. debt 
would just create enormous crises of confidence in the 
financial markets, and in the bond markets. It would, as a 
practical matter, cascade through the system because banks and 
other institutions who are counting on receiving the interest 
in order to make their payments would not be able to make their 
payments, and so you have a seizing up of the financial system 
that could be quite detrimental to our economy. Even if that 
was worked through somehow, and say for example, the debt 
ceiling was raised for a few hours, the long-term consequences 
in terms of the interest rate that the United States Government 
would have to pay could be quite serious, which in turn would 
make our debt payments, interest payments much higher, and make 
the deficit all that much worse. On the States, I think there 
will be some indirect effects because, after all, the Federal 
Government does provide a good bit of income, revenue sharing, 
et cetera, to the states, would make this situation worse as 
well.
    Ms. Bass of California. Would they have access to 
alternative funding sources if it wasn't raised?
    Mr. Bernanke. No doubt the bond markets would be very 
disrupted, so if they were able to borrow at, very possible, 
they would be at much higher rates than they are borrowing 
today. But whether they would have access, I don't know.
    Ms. Bass of California. What about intergovernmental 
transfers from the Federal to the State Government, you might 
have, you were addressing that a couple of seconds ago, but 
could you elaborate?
    Mr. Bernanke. Well, it depends on the prioritization. If 
all payments are shut down other than interest payments on the 
debt, which again, I think, has some serious technical concerns 
associated with it, but then that would mean, presumably, that 
payments to Social Security, Medicare recipients, contractors, 
and to the States, would all be interrupted until such time as 
the limit was raised.
    Chairman Ryan. All right, thank you, just in the interest 
of the Chairman's time, we have two more. Mr. Stutzman.
    Mr. Stutzman. Thank you. Thank you, Mr. Bernanke, for being 
here as well. I have really enjoyed the discussion and the 
dialogue today. As a small business owner from back in northern 
Indiana, for the last 15 years I have seen a lot of 
fluctuations in several different sectors that we've been 
involved in. And I guess I want to touch on just one thing, 
real quick, because as a business owner, kind of going back to 
what Ms. Bass was talking about with the debt.
    Currently we do not prioritize debt, is that correct? Why 
can't we change that, why can't we focus on making sure that 
our current debt, our primary obligations be taken care of, and 
then start, you know, basically by process of elimination, 
moving down that ladder and saying, We're going to make sure 
that we don't default, because I don't believe that we should 
default either. Even though I'm a freshman Congressman, I think 
that we do have an obligation for doing that.
    Mr. Bernanke. The only point I make there is that there are 
some technical difficulties. Because the Federal Reserve, as 
the agent of the Federal Government, makes many of these 
payments, including interest payments and other kinds of 
payments as well. And we would have to find ways to make sure 
that we were making the interest payments and not other kinds 
of payments. So I think there would be some serious operational 
concerns, particularly if this came with very short notice. So 
I do raise that point for your attention. Beyond that, Congress 
again has to make the determination whether you are willing to 
stop Social Security payments and the like, as a temporary 
measure.
    Mr. Stutzman. But I think if we make that one of our 
priorities, because people have paid into that for years, 
making sure that is a priority, making sure military's a 
priority, making sure that our interest is a priority. Can't we 
then say to those that carry our debt, that we are going to 
make sure that they're taken care of in moving down the ladder 
and making sure our priorities are first and foremost at the 
top of the list? It seems like, coming to Washington so far, it 
is just a foregone conclusion that, well we've got to raise the 
debt ceiling. Well, are we taking measures and steps to say 
long-term, not just with a short-term notification that you all 
would have to change operational infrastructure and things, but 
long-term, wouldn't we be better off having some flexibility 
like that?
    Mr. Bernanke. Well, first, the amount of borrowing the 
government has to do was already determined when you agreed on 
how much you were going to spend and how much you were going to 
tax. So it is like this debt was incurred already. The question 
is, are we just going to make the payments that we owe or not. 
That's what this is about. In terms of the prioritization, 
given enough time I'm sure that that could be worked out, but I 
really do want to make sure people understand that, if this is 
a short-term thing, it might not be technically possible to 
carry out.
    Mr. Stutzman. Right. But long-term, you think it would be a 
good thing?
    Mr. Bernanke. I would just prefer, instead, that, again, 
I'm sorry, I mean I think that this whole issue is very, very 
important, but I think the best way to do it is to just sit 
down and look at the long-term situation, look at each part of 
the budget, and try to come to some decisions about how you are 
going to address these imbalances.
    Chairman Ryan. Ms. Black.
    Ms. Black. Thank you. Thank you. And Mr. Bernanke, I 
apologize for not being here during the entire hearing, but I 
had another meeting, so, it seems to me that I continue to hear 
over and over since I have come in, that you do agree that 
there needs to be a long-term plan. And certainly looking at 
more than half of our budget is not subject to the annual 
approval by Congress, and it is on automatic pilot. As you talk 
about there needs to be an overall plan, do you have an idea 
about how we might reform the budget process to help us to 
consider all of the expenses on a yearly basis?
    Mr. Bernanke. Well, I think it is sensible to, and 
particularly over a long-term plan, to drop the somewhat 
artificial distinction between discretionary and mandatory 
spending. You want to look at everything on the budget over a 
longer term. In a speech I gave a few months ago, I talked 
about fiscal rules. And a lot of countries around the world 
have set up fiscal rules which describe, and this goes back to 
Mr. Stutzman's question a little bit, that these rules, some of 
them for example, would impound or sequester part of the 
government's spending if the deficit exceeded a certain level, 
for example.
    So there are ways to set up rules that would force 
Congress, essentially, to meet certain targets. Something 
similar to that was the Gramm-Rudman-Hollings approach that was 
used some time ago. So I don't have real specific suggestions 
here, but I do think that thinking hard about your framework 
and recognizing that the current approach, when you try to find 
an offset, that is basically saying we are satisfied with the 
deficit where it is. You need to have something that is better 
than an offset. You need something that is going to allow for 
the deficit actually to shrink over time relative to where the 
current projections are, so it is very challenging to do that, 
I understand. But, again, creating some kind of long-term 
overall plan and then, within the context of that plan, fitting 
in various programs, that is essentially what has to be done in 
order to get us back on stable path.
    Ms. Black. I know there has been a lot of talk about us 
having a Balanced Budget Amendment, and of course that takes a 
very long time to get there. What would you think, in the 
meantime, about having a spending cap that we could only spend 
to a certain level?
    Mr. Bernanke. Well, that is up to Congress to do that, if 
you want. I assume that that would be just a legislative action 
as opposed to a Constitutional action. You could do that, but 
then you would have to have a mechanism. This is similar to a 
fiscal rule; I mean basically it says that you'd have to not be 
allowed to appropriate more than a certain level. If more was 
spent because, say, Medicare payments were higher than 
anticipated, you'd have to find a way to deal with that. But 
that is a form of rule that you could apply. And along with 
consideration of how revenues are going to evolve, that could 
help you structure the plan for reducing the deficit over time.
    Ms. Black. Thank you, thank you, Mr. Chairman, I yield back 
my time.
    Chairman Ryan. Chairman, you have been very generous, we've 
gone over your time, we know you are running late, and we 
appreciate your indulgence. This hearing is adjourned.
    Mr. Bernanke. Thank you, Mr. Chairman.
    [Questions submitted for the record by Mr. Honda follow:]

    Questions Submitted for the Record by Hon. Michael M. Honda, a 
        Representative in Congress From the State of California

    In your speech to the National Press Club on February 3, you noted 
that unemployment, which is to me the key economic indicator for the 
well being of the American people, will remain stubbornly high and that 
these conditions will only improve gradually.
    You also noted that the trajectories of our national deficit and 
debt are unsustainable.
    You went on to state that among the course corrections needed to 
address these problems are investments in the skills of the workforce, 
which I am going to simply call education, and policy changes to reduce 
our deficits and debt.

                             1. AFGHANISTAN

    My first question is in regards to the latter. The current rules of 
the House have taken the ``War on Terror'' off-budget, meaning that the 
costs of our conflicts in Iraq and Afghanistan and other actions 
associated with the so called ``War on Terror'' can be financed with 
debt. Afghanistan alone represents a cost of approx. 10 million dollars 
per hour, 325 million dollars per day and 150 billion dollars per year. 
Disturbingly, this is our country's largest long-term investment. So my 
question is:
    Would the savings that resulted from ending combat operations 
associated with the ``War on Terror'' reduce projected deficits?

                              2. EDUCATION

    I think it was very important to note that among other investments 
including encouraging the scaling up of US manufacturing by 
incentivizing purchasing new machinery and investment, promoting R&D, 
and rebuilding public infrastructure, you singled out education as an 
area for public investment that would promote economic growth.
    Can you explain to the Committee how public investment in education 
promotes economic growth?

    [Responses to Mr. Honda's questions follow:]

    
    
    
    
    
    
    [Questions submitted for the record by Mr. Calvert follow:]

       Questions Submitted for the Record by Hon. Ken Calvert, a 
        Representative in Congress From the State of California

    Question #1: One area that I believe has a major impact on our 
nation's economic recovery is the stability of the commercial real 
estate industry. A healthy commercial real estate market provides more 
than 9 million jobs and generates billions of dollars in federal, state 
and local tax revenue. However our commercial real estate market 
continues to suffer and this has a direct and lasting impact on the 
stability of tens of thousands of small businesses and small and mid-
size banks.
    Despite the October 2009 interagency guidance on Prudent Commercial 
Real Estate Loan Workouts, anecdotal evidence shows that bank 
regulators/examiners are still being inconsistent with regards to 
commercial real estate workouts. Regions such as my area of southern 
California continue to suffer as property owners seeking to refinance 
existing loans find access to credit nearly nonexistent. I continue to 
hear stories where capital calls on loans are occurring on property 
that is near full capacity and where owners are paying their bills.
    What else can be done to ensure that creditworthy borrowers, who 
have the willingness and capacity to repay their debts, obtain the 
necessary refinancing or term extension to stay afloat?

    Question #2: The Financial Accounting Standards Board and 
International Accounting Standards Board have proposed new accounting 
rules that would force companies of all sizes to capitalize commercial 
real estate leases onto their balance sheets, which could significantly 
reduce the credit capacity of many borrowers. Are you concerned with 
this proposal, especially in light of the current commercial real 
estate credit crisis?

    [Responses to Mr. Calvert's questions follow:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    [Whereupon, at 1:03 p.m., the committee adjourned subject 
to the call of the Chair]

                                  
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