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




 
                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 2, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-11



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas                BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan       DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri         ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan              JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin             GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York         JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio

                   Larry C. Lavender, Chief of Staff


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 2, 2011................................................     1
Appendix:
    March 2, 2011................................................    53

                               WITNESSES
                        Wednesday, March 2, 2011

Bernanke, Hon. Ben S., Chairman, Board of Governors of the 
  Federal Reserve System.........................................     7

                                APPENDIX

Prepared statements:
    Paul, Hon. Ron...............................................    54
    Bernanke, Hon. Ben S.........................................    55

              Additional Material Submitted for the Record

Bernanke, Hon. Ben S.:
    Monetary Policy Report to the Congress, dated March 1, 2011..    66
    Written responses to questions submitted by Representative 
      Carolyn McCarthy...........................................   122


                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY

                              ----------                              


                        Wednesday, March 2, 2011

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the committee] presiding.
    Members present: Representatives Bachus, Hensarling, Royce, 
Lucas, Paul, Manzullo, Biggert, Capito, Garrett, Neugebauer, 
McHenry, Campbell, Bachmann, Marchant, McCotter, Pearce, Posey, 
Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, 
Hayworth, Renacci, Hurt, Dold, Schweikert, Grimm, Canseco, 
Stivers; Frank, Waters, Maloney, Velazquez, Watt, Ackerman, 
Sherman, Meeks, Capuano, Clay, McCarthy of New York, Baca, 
Lynch, Miller of North Carolina, Scott, Green, Cleaver, Moore, 
Donnelly, Carson, Peters, and Carney.
    Chairman Bachus. This hearing will come to order. We meet 
today to receive the semiannual report to Congress by the 
Chairman of the Board of Governors of the Federal Reserve 
System by Chairman Ben Bernanke on the conduct of monetary 
policy and the state of the economy. Without objection, all 
members' written statements will be made a part of the record.
    For the purpose of an opening statement, I will recognize 
the gentleman from Texas, Dr. Paul. Prior to that, we want to 
welcome you, Chairman Bernanke, to the committee. I want to 
personally commend you for your stand that we need to address 
the national debt and the deficit. I know that makes your job 
much harder and presents challenges in managing our monetary 
policy.
    Dr. Paul, you are recognized at this time for 1\1/2\ 
minutes.
    Dr. Paul. Thank you. It has been said ever since the crisis 
hit that one of the causes has been that interest rates were 
kept too low for too long, and that is more or less a 
consensus. Now, the treatment over these last couple of years 
has been to lower interest rates even longer and keep them low 
for a much longer time.
    We were told yesterday that we shouldn't expect any 
permanent increase in price inflation, that it will be 
temporary and modest and the CPI is under control. If we look 
at the free market economists, we find out that the measurement 
of the CPI the old-fashioned way is going up at 9 percent and 
the true money supply as measured by the Austrian economists is 
going up at 24 percent. So I would suggest that we still have a 
lot of inflation in the system. It is going to get much worse.
    The excuse for the prices going up right now is that we 
have growth. So I guess the answer will be to destroy growth. 
And that is generally the case. What we have done in the past, 
we have growth, and the Keynesian economists always claim 
because of growth, prices go up. But prices don't go up when 
you have growth in the electronics industry, so it is hardly an 
excuse to purposely diminish growth, which is generally done. 
But all kinds of blame are placed, whether it is on the Middle 
East, the weather, labor, prices, speculation; all these 
things. That is the reason prices go up.
    Rarely, if ever, would we see the admission that the real 
cause of price inflation, which is a deadly threat to us right 
now, is the Federal Reserve System and our monetary policy.
    Chairman Bachus. Thank you.
    Ranking Member Frank for 5 minutes.
    Mr. Frank. Thank you, Mr. Chairman. Chairman Bernanke, 
welcome. I appreciate this chance, frankly, to hear from you. 
One of the phenomena we have is that people are able to make 
very negative predictions, and if nothing comes true, the 
predictions are ignored. I looked back over the efforts you 
have engaged in over the past few years, beginning really in 
2008 when the crisis hit, and there have been a series of 
things; the quantitative easing, before that, the TALF and 
other extraordinary interventions.
    I would note that people should be aware--and I am going to 
ask you to comment on it later--that some of what you did, for 
instance, with regard to AIG and that crisis in which we had 
very little time to deal with alternatives, could no longer be 
done in those terms. With your participation, we have redrafted 
the legislation so that, for example, the unilateral granting 
by the Federal Reserve of funding to AIG, people should 
understand is no longer legally possible. We amended a statute 
that had been 70 years on the books, and there was a consensus 
actually on both sides that it should be changed, and leave you 
with some ability to act, but in a more structured way.
    But I want to go back over this whole line of 
interventions, including today, quantitative easing. There has 
been a series of criticisms that have been made and negative 
predictions, and my view is that none of them have come true. 
And I think it is important for us to note that. I know you 
have talked about this. I know you mention in your statement 
some of the points.
    We were told, for instance, that it was going to be very 
inflationary. I know it is your view as of now, and I think 
supported by the facts, that inflation is not now a problem, 
and we do not see inflation--certainly, not one caused by any 
of what has been done going forward. We were told this was 
going to be extraordinarily expensive; that it was going to 
cost a lot of money. I believe the answer is that on many of 
these things, the Federal Government has made a profit by the 
intervention.
    The oddest criticism, of course, was one which we got from 
a number of other countries, and, to my surprise, from some of 
my Republican colleagues who said that what you were doing with 
quantitative easing was unfair to the rest of the world because 
it was a form of currency manipulation that would hold down the 
value of the dollar.
    And I was especially struck by the Chinese complaining that 
you were engaging in currency manipulation. It seemed to be 
clear your motivation was to try to stimulate the American 
economy or to provide some assistance there. But I have to say 
that being accused by the Chinese government of currency 
manipulation struck me as equivalent to being lectured on birth 
control by the Octomom.
    But I would say that it does not seem to me that these 
fears that you were somehow destabilizing the international 
currency system and provoking retaliation proved to be correct. 
There was one other--and we have seen this--and it was the 
suggestion that the Federal Reserve, in a cloak of secrecy, was 
engaged in a whole variety of inappropriate transactions with 
private parties. There were some suggestions of improper 
collusion, etc.
    One of the things we have done as a result of the 
legislation passed last year was a transparency that all of the 
transactions in which you were engaged were to be made public. 
And my recollection is that the news was the fact that it was 
being made public. But virtually no specific revelation was of 
any interest to anybody; that is, in the sense that it showed 
anything bad. Because we do know the view is that good news is 
no news. In the absence of anything negative, that went 
forward.
    So I want to say, finally, I was pleased to see you note 
that you are reserving judgment on quantitative easing being 
continued. We hope it won't be necessary. But we have had this 
situation. Late in the last quarter of 2009, things were 
looking better, and also in the first quarter of 2010, and then 
the European crisis caused problems here in America. We are 
again moving well, although the last quarter's numbers were 
somewhat disappointing, in part I notice because while the 
private sector has been steadily increasing employment, State 
and local governments have been forced to cut back, and that 
has detracted from the overall employment number and subtracted 
a little bit from growth. There is also the potential problem 
caused by the problems in the Middle East.
    So I think it is entirely appropriate that you are 
reserving judgment as to what to do in a couple of months when 
the decision will come forward again. But I do think it is 
important that people who have been so critical of quantitative 
easing tell us what negative effects they think have happened, 
because I think the record is pretty clear that they haven't 
been.
    Chairman Bachus. Thank you, Ranking Member Frank.
    At this time, on our side, we are going to recognize 6 
freshmen for 1 minute and 10 seconds each.
    At this time, Ms. Hayworth.
    Dr. Hayworth. Thank you, Mr. Chairman. And thank you, 
Chairman Bernanke, for testifying today and for your focus on 
jobs and unemployment. I consider, with my colleagues, that our 
primary task in this Congress is job creation. And your 
testimony yesterday was a very welcome voice of reason in the 
debate about how we go forward, particularly your assertion 
that the program with spending cuts we are leading in the House 
will not, as some predict, impede growth.
    Certainly, I am among many who would respectfully contend 
that we need substantial and sustained spending cuts in order 
to achieve growth. I am a physician by profession and I look at 
our current State and the state of the patients, our economy, 
and in a sense it is in suspended animation, sort of cryogenic 
suspension. The actions that you have taken with regard to 
inflation and the monetary supply have had, perhaps at this 
point, their maximal beneficial effect and we are awaiting a 
definitive cure, a reanimation by lifting the burdens that have 
been placed in so many ways by the Congress of the most recent 
session, Dodd-Frank being a key focus for us.
    So I look forward to your testimony about how we go forward 
and we animate and reactivate our economy.
    I yield back the balance of my time.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. Mr. Hurt.
    Mr. Hurt. Thank you, Mr. Chairman.
    Welcome, Chairman Bernanke, and thank you for appearing 
today.
    I represent Virginia's Fifth District, a region that has 
been dramatically affected by our country's recent economic 
struggles with unemployment exceeding 20 percent in some 
places. With $14 trillion in debt and $1.6 trillion in deficit 
spending, my constituents, central and south side Virginians, 
are extremely concerned about the economic outlook of our 
country. And now businesses and individuals are facing rising 
fuel costs at a time when they can least afford it. My 
constituents want to know what actions we Federal policymakers 
will take to lower unemployment, tackle our unsustainable debt 
and deficit, and halt the increases in oil prices. Without such 
actions, these problems will continue to make our circumstances 
even more challenging and stifle our economy.
    I am very interested in your perspective of our Nation's 
overall economic outlook, and I welcome your assessment of 
specific proposals to put our country on a more sustainable 
fiscal track.
    I look forward to your testimony and appreciate your 
appearance today.
    Thank you, Mr. Chairman.
    I yield back.
    Chairman Bachus. Thank you. Mr. Dold.
    Mr. Dold. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you for being here today.
    Obviously, we are facing many economic challenges. First, 
our fiscal policies have unsuccessfully relied upon trillions 
of dollars of new and unsustainable deficits. Even if the 
Federal Reserve handles monetary policy and regulatory 
supervision perfectly, it is hard to see how our economy and 
our future generations can prosper over the long term if 
Congress and the Executive Branch refuse to make the difficult 
but necessary fiscal choices now about excessive borrowing and 
spending.
    Second, we are seeing continuing and disturbing weakness in 
the labor market despite some recent GDP growth. Congress must 
focus on creating the best conditions for private sector job 
growth while considering the effectiveness of the Federal 
Reserve efforts to also promote full employment under its 
existing mandate.
    Third, despite continuing low-core inflation rates, we are 
seeing continuing price increases and instability in the 
important sectors like energy, food, and other commodities. In 
addition to international political instability, these sectors 
could trigger larger inflationary consequences which would then 
require the Federal Reserve to correctly identify and 
effectively address those inflationary consequences.
    Finally, the Federal Reserve has significant new rulemaking 
and supervisory authority, which presents many new challenges 
for the Fed and our economy.
    I look forward to hearing from you on all of these topics, 
and I, again, thank you for your time.
    Chairman Bachus. Thank you.
    Mr. Watt is recognized for 3 minutes.
    Mr. Watt. Thank you, Mr. Chairman. Welcome back, Mr. 
Bernanke. It is great to have you back.
    Listening to the comments of some of my colleagues, I am 
happy to say that we have an independent Federal Reserve, 
because if we listen to the political comments that are being 
made, they are all over the lot. The primary task is job 
creation. Yet, we just did a whole bunch of things last week or 
the week before last, which, if they were put into effect, 
every economist that I have read predictions from suggest that 
they would result in substantial job loss.
    When you get economists of all ``political stripes'' 
suggesting that we could lose 800,000 to a million new jobs as 
a result of some of the cuts that are being proposed, it leads 
me to wonder whether, in fact, as the gentlelady said, the 
primary task of this Congress is job creation.
    Of course, our political slant is always to be preoccupied 
with whatever is negative. If things are going in the right 
direction and moving in the right direction, then we worry 
about whether that is going to cause inflation. When they are 
moving in the wrong direction, then we worry about whether that 
is going to cause deflation. When we are creating jobs, we 
worry about whether we ought to be doing deficit reduction and 
slowing down the pace of job creation. When we destroy jobs, 
then we worry about how we can build them back up.
    So in that context, it is refreshing to know that we have 
had good judgment to create an independent Federal Reserve that 
sets monetary policy without regard to whatever the popular 
political emotion of the moment is.
    With that in mind, I am happy to welcome Mr. Bernanke back 
today to talk about those things in a nonpolitical way 
impacting the economy. And I look forward to your testimony.
    Chairman Bachus. Thank you.
    At this time, I recognize Mr. Schweikert.
    Mr. Schweikert. Thank you, Mr. Chairman.
    Chairman Bernanke has made it clear that the debt crisis is 
our top long-term priority. In my long term as a Member here, 
50-some days, I have come to realize that this body doesn't 
move unless there is a pending crisis. I respect the chairman's 
concerns that the pending debt vote should not be tied to 
fiscal policy reform. But what leverage will this Congress have 
without a pending crisis? That is why I would love the Chairman 
to speak to Pat Toomey's full faith and credit legislation that 
makes it clear that our priorities, God forbid we operate 
without raising the debt ceiling, that the financial markets 
know we pay our debts first. Will that have a calming effect on 
the national and international markets?
    Chairman Bachus. Thank you.
    Mr. Grimm.
    Mr. Grimm. Good morning, and thank you, Chairman Bachus. 
Thank you, Chairman Bernanke, for appearing before the 
committee. I do applaud your recognition that we are, in fact, 
in a debt crisis. But, Chairman, when I look at the current 
state of our economy and the effects that the recent Federal 
Reserve policy has had, it does cause me some concern. And 
since the Fed has announced its second round of quantitative 
easing on November 3rd, oil prices have gone from $84 a barrel 
to $100, an increase of almost 19 percent in 4 months. And I 
understand there is turmoil in the Middle East, but it is still 
something we have to address.
    Officially, unemployment is at 9 percent. When you look at 
alternative measures such as the Gallup survey, you see 
unemployment has been increasing and actually stands at 10 
percent. According to Gallup, when you factor in all the part-
time workers who want full-time jobs, underemployment stands at 
a staggering 19.6 percent. It is simply not sustainable, and we 
must start meaningful gains in employment and real economic 
growth. For that reason, I am very eager to hear your testimony 
today and your thoughts in addressing these concerns.
    Thank you very much, and I yield back the rest of my time, 
Mr. Chairman.
    Chairman Bachus. Thank you, Mr. Grimm.
    Mr. Canseco.
    Mr. Canseco. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you for coming here today.
    Although there are many concerns on the minds of American 
people, the number one concern is jobs. For the past 2 years, 
the solution to job creation coming from my colleagues on the 
other side of the aisle was simply to fling open the Federal 
Treasury in an attempt to buy an economic recovery instead of 
creating one. Just like the Beatles sang ``Can't Buy Me Love,'' 
you just can't buy an economic recovery. Despite spending 
hundreds of billions of dollars of taxpayer money on a failed 
stimulus bill, all taxpayers have to show is an economy where 
nearly 1 out of every 10 Americans is unemployed and many 
Americans are struggling to pay their mortgages, pay their 
health care premiums, and now, to fill up their cars.
    I recently spent several days visiting with my constituents 
across 700 miles of the Texas 23rd Congressional District. What 
I heard from my constituents is that they believe we can create 
jobs by getting government out of the way and removing the 
uncertainty from the economy, cutting spending and putting our 
fiscal house in order, and just letting business do what 
business does best, and that is create jobs. I look forward to 
hearing from you on that regard.
    Thank you. And I yield back.
    Chairman Bachus. Thank you, Mr. Canseco.
    Chairman Bernanke, without objection, your written 
statement will be made a part of the record. You are now 
recognized for a summary of your testimony. There will not be a 
time limit.

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

    Mr. Bernanke. Thank you, Mr. Chairman. I will talk about 
the economic situation and then some monetary policy issues.
    Following the stabilization of economic activity in mid-
2009, the U.S. economy is now in the seventh quarter of growth. 
Nevertheless, job growth remains relatively week and the 
unemployment rate is still high. In the early stages, the 
recovery was attributable to a number of factors, including the 
stabilization of the financial system, expansionary monetary 
and fiscal policies, and inventory rebuilding. Economic growth 
slowed in the spring and summer of last year, due to a number 
of factors, including the European debt issues. More recently, 
we have seen increased evidence that a self-sustaining recovery 
in consumer and business spending may be taking hold. And I 
take special note of solid growth in consumer spending as well 
as increased business investment. We also have had good gains 
in U.S. manufacturing outputs, supported by stronger demand.
    Our projection is that we should see stronger economic 
growth in 2011. The Federal Reserve Board does projections, 
which it prepared in late January, which have real GDP 
increasing 3\1/2\ to 4 percent in 2011, which is higher than 
projections we made in November. Importantly, the private 
sector forecasters are very much in line with this improved 
outlook.
    Despite the improvement in the growth outlook, the labor 
market remains improving slowly. We lost about 8.75 million 
jobs in the downturn. We have only regained about a million 
back, which is barely enough to accommodate the new entrance to 
the labor force. We do see some grounds for optimism, including 
declines in the unemployment rate, declines in the new 
unemployment insurance claims, and improvements in firms' 
reported hiring plans. But even so, this could take quite a 
while for unemployment to come down to desired levels at 
current expected growth rates. And, in particular, the Federal 
Open Market Committee (FOMC) projects unemployment still to be 
in the range of 7\1/2\ to 8 percent by the end of 2012. Until 
we see a sustained period of stronger job creation, we cannot 
consider the recovery to be truly established.
    The housing sector also remains weak. In particular, even 
though mortgage rates and house prices are low, many potential 
home buyers are finding mortgages difficult to obtain and are 
still worried about additional declines in house prices. 
Inflation has been declining overall. Overall inflation, 
including all prices, energy included, was 1.2 percent as of 
January, down from 2\1/2\ percent a year earlier. And 
associated with that is slow wage growth; 1.9 percent nominal 
wage growth over the last year.
    The FOMC sees inflation staying low, expecting about 1\1/4\ 
to 1\3/4\ percent overall inflation this year, and a range of 1 
to 2 percent in the subsequent 2 years. And we get similar 
numbers from private sector forecasters from the Inflation 
Index Treasury Bond Market and from surveys of households. 
Overall, expectations are for inflation to stay low.
    Now, as people have noted, we have seen some increases in 
highly visible prices, including gas prices. Some of these come 
from the unrest in the Middle East and North Africa. Others are 
coming from higher global demand for raw materials associated 
with strong growth and emerging markets as well as some 
problems with the global supply, such as weather conditions and 
the like. I in no way want to understate the hardships 
associated with higher gas prices, but they reflect primarily a 
change in the relative price of this commodity, not an overall 
inflationary impact.
    We have seen in the past that the rate of pass-through from 
commodity price increases to broader inflation tends to be 
quite low, in part because materials inputs are only a small 
part of production. In addition, the cost pressures from 
commodities are being offset by very low increases in labor 
costs.
    Finally, inflation expectations have been quite well-
anchored, which helps to keep inflation stable even if there 
are temporary movements coming from commodity prices.
    That said, sustained rises in the prices of oil and other 
commodities would represent a threat both to economic growth 
and to overall price stability, particularly if they were to 
cause inflation expectations to become less anchored. So we are 
going to continue to monitor these developments and we will 
respond as necessary to best support the ongoing recovery in 
the context of price stability.
    I talked about alternative monetary policy. I talked 
earlier about the slowdown we saw beginning last spring. Over 
the spring and the summer, we saw slowing growth to a level 
that was not sufficient to reduce unemployment. We were 
concerned that unemployment might begin to increase and that 
the economy might suffer a double-dip recession. At the same 
time, we saw inflation falling to very low levels and indeed 
markets were expressing concerns about deflation.
    Under such circumstances, usually the Fed would ease 
monetary policy. The way we would normally do that would be to 
lower the Federal Funds rate. But the Federal Funds rate has 
been close to zero since December 2008, so we needed to do 
something different.
    What we did is to provide monetary policy accommodation by 
buying longer-term securities in the open market, such as 
Treasuries and Agency securities. We had a program that lasted 
from December 2008 through March 2010, which appeared to have a 
lot of success in contributed to growth and stabilization in 
the economy, and in particular, following the expansion of the 
program in March of 2009, we saw a pickup in growth as well as 
improved financial conditions.
    In August of last year, given our concerns about the 
slowing growth and potentially rising unemployment as well as 
the continuing declines in inflation, we decided to return to a 
more accommodative strategy. The first thing we did was we 
began to reinvest the securities that were running off so that 
we would keep our balance sheet constant in size and we began 
to indicate to the market that we were looking to possibly 
expand our balance sheets through additional Treasury 
purchases. In November, we announced our intention to buy $600 
billion additional Treasury securities by the middle of this 
year.
    A lot has been said about so-called QE2. I think it is 
important to understand that it works very much the same way 
ordinary monetary policy works. Ordinary monetary policy works 
by lowering short-term interest rates and by affecting longer-
term interest rates indirectly because of the expectation that 
short-term interest rates will be lower for a period; that 
those lower interest rates stimulate spending by household and 
firms and helps increase demand and production in the economy. 
We get a very similar effect when we buy Treasuries directly. 
It pushes down interest rates and leads to easier financial 
conditions, which helps support economic growth.
    There is very strong evidence in favor that the first 
round, which was in 2009, was very successful, and we are 
seeing similar indications of success for the second round. 
Since August, in particular, we have seen considerable 
improvement in financial markets, including significant gains 
in the equity market and more narrow spreads in the corporate 
bond market. Inflation expectations have normalized from what 
we were before at unusually low levels. We have seen less 
volatility. And in general, we have seen the kinds of response 
in financial markets that we would expect from a monetary 
policy easing.
    In addition, as I have already noted, since August, and 
again since November, private sector forecasters as well as the 
markets have upgraded their expectations of growth in 2011, 
which may or may not be due to our policy actions, but 
certainly doesn't refute the possibility that our actions have 
been constructive. I want to assure the members here that our 
committee will continue to review this asset program meeting by 
meeting, assessing the state of the economy, and will act as 
needed to meet our mandate of maximum employment and stable 
prices.
    We are also quite aware of the need to exit, to unwind this 
accommodation at the appropriate time, and I want to assure you 
we have all the tools we need to do that even if the amount of 
reserves in the banking system remains high. The FOMC is 
unwaveringly committed to price stability in particular, and we 
will make sure that the rate of inflation in the medium term is 
consistent with the Federal Reserve's mandate.
    Finally, just a few words on transparency. The Federal 
Reserve has been given operational independence by the Congress 
to meet its mandate that independence is very important because 
it allows us to make decisions in the longer-term interest of 
the economy without regard to short-term political 
considerations. But the flip side of that independence is that 
we need to be transparent and accountable--and we are indeed 
transparent and accountable, and becoming increasingly so over 
time.
    On monetary policy, I am submitting today the Semiannual 
Monetary Report. But beyond that, we also provide a statement 
after the meeting. We provide minutes after 3 weeks. And after 
5 years, we are the only central bank that provides in that 
kind of timeframe a detailed transcript that includes every 
word spoken at the meeting of the FOMC.
    As Congressman Frank alluded to, we have also been very 
transparent about our balance sheet and our financial 
operations. We voluntarily provided a great deal of information 
about the special credit and liquidity facilities we put in 
place in this crisis, most of which are shut down or largely 
closed down.
    In addition, as required by Dodd-Frank, on December 1st, we 
provided the information related to 21,000 transactions. And 
these have been reviewed substantially. There have been no 
problems identified. And indeed the evidence seems to be that 
these programs were not only well run but they were also 
successful in helping to stabilize financial markets. A recent 
example of that is a study by the Board's independent IG. In 
addition, we continue to work closely with the GAO, the 
SIGTARP, and the Congressional Oversight panel, the Congress, 
as well as private sector auditors, all of who are looking at 
our books making sure that everything is as it should be.
    We are supporting and cooperating with that effort. And we 
will continue to seek ways to enhance our transparency because 
we believe that transparency and accountability are the flip 
side of the independence the Fed needs to make good long-term 
policy decisions.
    So thank you for allowing me to speak, Mr. Chairman. I will 
be happy to take your questions.
    [The prepared statement of Chairman Bernanke can be found 
on page 55 of the appendix.]
    Chairman Bachus. Thank you, Mr. Chairman. Before we start 
with our questioning, the Federal Reserve Chairman has informed 
us that he will need to leave at 1 p.m. today in order to 
accommodate other appointments. That is actually a generous 
allocation of his time. Anyone who doesn't have an opportunity 
to question him orally, your written statements will be made 
part of the record if you didn't get an opportunity to make a 
statement today.
    Mr. Frank. Let me say on our side we will go through the 
seniority list. Where we stop is where we will start when Mr. 
Bernanke returns for his second visit this year. So we will go 
through in seniority. When Mr. Bernanke returns, we will pick 
up, as members come here, as we left off.
    Chairman Bachus. Thank you. At this time, I yield myself 5 
minutes for questions. I don't really have a question at this 
time. Normally, I have short questions. But, Chairman Bernanke, 
I really want to speak to the members on both sides.
    The Chairman has consistently told Members of Congress that 
reducing the deficit will have both long-term and short-term 
benefits for the economy. While acknowledging that a credible 
deficit reduction plan will require difficult choices, Chairman 
Bernanke has stated unequivocally that Congress must act to 
take government spending off an unsustainable path. A year ago, 
in his testimony before this committee, which was on February 
24th, he said it is very, very important for Congress and the 
Administration to come to some kind of program, some kind of 
plan, that will credibly show how the United States Government 
is going to bring itself back to a sustainable position. It 
would be very helpful, even to current recovery to markets' 
confidence, if there were a sustainable, credible path to the 
extent that we can achieve credible plans to be reduce medium 
and long-term deficits will actually have more flexibility in 
the short term if we want to take other kinds of actions.
    And that was in response to a question I asked him.
    Earlier this year--really, 1 month ago today--he told the 
House Budget Committee that acting now to develop a credible 
program to reduce future deficits would not only enhance 
economic growth and sustainability in the long term, it would 
yield substantial near-term benefits in terms of lower long-
term interest rates and increase consumer and business 
confidence. Obviously, that would lead to more jobs.
    He also said 1 month ago to the House, by definition, the 
unsustainable trajectories of deficits and debts that the CBO 
outlines cannot actually happen because creditors will never be 
willing to lend to a government with debt relative to national 
income that is rising without limit.
    So normally, I would ask him, ``What do we do?'' But he has 
told us time and time and time again that we need to get our 
fiscal house in order. So my question would normally be that. 
But, obviously, my question is going to change a little bit.
    I am going to ask you, you are in charge of, the Federal 
Reserve is in charge of monetary policy, as I understand it. I 
think that is true. The Congress and the Executive Branch are 
in charge of fiscal policy. And you can advise us but you can't 
take charge of that policy. Our failure to address fiscal 
policy in a responsible manner, how does that make your job as 
Fed President and the Federal Reserve's charge to manage 
monetary policy harder and more difficult and what effect has 
it had on what you are to do?
    Mr. Bernanke. Thank you for quoting me from earlier 
testimonies. I stand by those statements. The concern is if the 
Federal deficit remains on an unsustainable path, that we could 
see at some point a sharp increase in interest rates, which 
would be both bad for recovery and bad for financial stability. 
It would obviously go against the efforts of the Fed to keep 
interest rates low so that we can have recovery.
    So, while I understand these are difficult decisions and we 
certainly can't solve it all in the current fiscal year, I do 
think we need to look forward. And I know the House Budget 
Committee and others will be setting up a 10-year proposal. It 
is very important and would be very constructive for Congress 
to lay out a plan that would be credible that will help bring 
us to sustainability over the next few years.
    In particular, one rule of thumb is cutting enough that the 
ratio of the debt to GDP stops rising, because currently it is 
rising relatively quickly. If we can stabilize that, I think it 
would do a lot to increase confidence in our government and in 
our fiscal policies.
    Chairman Bachus. Thank you, Chairman Bernanke. Let me say 
to the members, we have mentioned QE2 today. I think the 
Federal Reserve, whether you applaud or criticize that 
decision, our lack of responsibility here, QE2 has given us 
some opportunity to act on our debt and deficit. And we have 
not taken advantage of that. It limits those options. So any 
criticism directed at the Chairman, you need to point that 
finger back at yourself.
    Ranking Member Frank.
    Mr. Frank. Mr. Chairman, I thank you for that very 
thoughtful statement at the end, and I appreciate your 
stressing the constructive assets. You have to appreciate the 
Federal Reserve Chairman has to operate within this particular 
context. So I want to echo the point that we need a long-term 
deficit reduction plan. I did notice in what you quoted from 
Mr. Bernanke, he said medium- and long-term. And it does seem 
to me clear, if we are able to do medium- and long-term plans, 
we get more flexibility in the short term. That is clearly what 
he said. At a time when the private sector has been growing 
jobs, although not at a fast enough pace, and the State and 
local governments shedding jobs, that has been one of the 
constraints.
    So I do agree a medium- and long-term plan is very 
important and it lets us have a little more flexibility in the 
short term. But I want to stress one very important part of 
that. We will not achieve a credible medium- and long-term plan 
for reducing the deficit if we continue to exempt the military 
from any significant reductions. Military spending was about 
$300 billion at the end of the Clinton Administration. It is 
now over $700 billion. It is not just a large percentage 
increase but, of course, a huge dollar increase.
    I must say I share the need to reduce the deficit. But when 
people who voted for the war in Iraq, that enormously costly 
terrible mistake made by the United States, which continues to 
cost us tens of billions of dollars when we have those 
noncombat troops over there refereeing Iraqi religious and 
political disputes, when they lecture me and tell me why I have 
to cut policemen from the cities that I represent, I am not 
impressed. So, yes, I do think we need to do this.
    Some of my colleagues argue somewhat inconsistently that 
the Federal Government is a job-killer except when it comes to 
military spending. I have been struck by the number of my 
colleagues who will get to the Floor and talk about how 
military spending creates jobs. We have a form of militarized 
Keynesianism in which only the military does job creation. So I 
agree there are areas I would like to see expanded, but they 
cannot be.
    I was also struck, of course, that the House recently voted 
to continue to send $150 million per year to Brazilian cotton 
farmers so that we can preserve our legal right to subsidize 
American cotton farmers. That $150 million could have been 
doubled. We could have saved $300 million if we simply cut 
Americans the same as our Brazilian friends.
    So there are inconsistencies and hypocrisies in the 
spending cuts. And if they are done seriously across-the-board, 
I will be supportive.
    Mr. Chairman, I now just want to ask you; we have heard 
people speculate that the whole form of ``too-big-to-fail'', in 
which you were engaged a few years ago, that it is no different 
today than it was when you confronted it in 2008. And you 
confronted it, as we have said, with a very limited set of 
choices. So it is not a question of criticism then. What was 
your reaction to the notion that we are no better off as a 
government in trying to deal with ``too-big-to-fail'' and those 
consequences than we were during 2008?
    Mr. Bernanke. I have to first say that the Dodd-Frank Act 
is not fully implemented. That is very important. So we are not 
really where we will be eventually. But we do have now a 
significant number of tools to address ``too-big-to-fail.'' 
They include tougher capital and liquidity and other 
requirements for systemically significant firms. They include: 
tougher supervision, including supervision by the Fed; living 
wills; the ability to break up firms if they are viewed as 
posing systemic risk; and, very importantly, something that you 
and I talked about during the crisis, it would be nice if we 
had an alternative bankruptcy mechanism that would allow the 
government to wind down a failing financial firm without cost 
to taxpayers but also without creating a highly disruptive 
situation in the financial markets.
    Now, those things are in the process of development. I 
wouldn't say that we have worked all these things out 
completely, and we may--
    Mr. Frank. Could I just say, what you just described, that 
the financial reform bill does give you the basic building 
blocks for doing that?
    Mr. Bernanke. Yes.
    Mr. Frank. The last question--we talked about how you wound 
down most things, even including the AIG intervention, which 
you have acknowledged we could not do again and you wouldn't 
want to do again in that form. What has been the net cost to 
the United States taxpayer from your interventions over the 
time, including QE2?
    Mr. Bernanke. It has been highly profitable. The financial 
stabilization policies, including intervention in AIG and the 
like, assuming that the Treasury can sell its shares in AIG at 
something close to the current market price, the entire program 
involving TARP and financial market interventions will be a net 
profit positive. In addition, the Fed's monetary policies and 
financial stability liquidity facilities have also been 
profitable. We turned over to the U.S. Government $125 billion 
in the last 2 years of profits. Now, I want to emphasize that 
was not the purpose of those interventions.
    Mr. Frank. And we are not going to do it again.
    Mr. Bernanke. And we are not doing it again. But we have, I 
think, managed it at least well enough that the taxpayer can 
feel that they will have gotten, at least in this respect, they 
have gotten their money back.
    Chairman Bachus. Thank you, Ranking Member Frank.
    Dr. Paul, chairman of the Monetary Policy Subcommittee.
    Dr. Paul. Thank you, Mr. Chairman. Let me just say a word 
about the deficit. The spending and the deficit was a concern 
of mine in the early 1970s because I foresaw that after the 
breakdown of Bretton Woods, we would have endless spending, 
endless deficits, endless financial bubbles. And we have had 
that. As to whether or not we have military Keynesianism, we 
do. And I reject that as well as I reject domestic monetary 
economic Keynesianism. And until we put the two together and 
reject them, we are going to continue with these problems.
    But the reason why I don't think it is a Federal Reserve 
job to lecture the Congress, even though I agree Congress is at 
fault, is they spend too much money. Congress at times will say 
the Fed is at fault. Congress and the Fed are symbiotic. They 
have a symbiotic relationship because the Congress spends and 
they know there is a moral hazard involved here because they 
know that if interest rates go up, the Fed accommodates them. 
So the Fed really facilitates this spending. And until we 
realize this, I think the Fed is involved with our deficit and 
encourages this as well as the Congress. But it is true, 
Congress' initial responsibility ought to be to cut the 
spending, because this deficit is exploding, inflation is 
exploding, and interest rates are going to go up. So we are 
going to have one heck of a problem here in the near future.
    But I want to ask a question dealing with monetary policy 
because it used to be that was the key to this hearing. Today, 
economic management, central economic planning, and everything 
is up for grabs. The monetary policy, of course, it was stated 
that the job of the Fed is to give stable prices and full 
employment. But if you look at the last 3 or 4 decades, there 
is nothing stable about it.
    Unemployment today, if we are honest with ourselves, if we 
look at all the people who no longer look for work, it is over 
20 percent. To pretend it is going down and everything is rosy, 
I think we are deceiving ourselves to think that is happening. 
So I would say it is a total failure.
    One other reason I would like to suggest and get your 
comments on is how can you manage monetary policy, which means 
to manage the dollar, if we don't have a definition of a 
dollar? I can't find in the Code what a dollar is or a Federal 
Reserve note. And everybody knows a Federal Reserve note is a 
dollar, you create a note, which is a promise to pay, and that 
is another dollar. So the more debt you have, the more dollars 
you have.
    But I would like to know if you know whether there is a 
definition of a dollar and when it became known that a dollar 
was a Federal Reserve note. I want a definition of money. That 
seems to be the real job. We want a measurement of value. And 
this is a reason I believe that we made a big mistake by 
declaring fiat money, paper money would be our measurement of 
value. There is no way to maintain a true measurement of this.
    If you look at what the stock market--if you bought the 
stock market in the year 2000, the index, it would have taken 
44 ounces of gold. In 1980, it would have taken 1.5 ounces of 
gold. Today, it is back down to 8 ounces. So in true value, the 
stock market is in a crash. You say, oh, no, gold is not money. 
And you and I will have a disagreement on whether gold is money 
or not. But the Fed holds gold, the Treasury holds gold, the 
central bank holds gold. My opinion doesn't matter either 
because it is history. It is the marketplace. Gold is the true 
long-term measurement of value.
    So how can you run your operation without a definition of 
the dollar, and what is your definition of a dollar?
    Mr. Bernanke. You raise some important points, Congressman. 
Our mandate is maximum employment and price stability. My 
definition of the dollar is what it can buy. Consumers don't 
want to buy gold. They want to buy food and gasoline and 
clothes and all the other things that are in the consumer 
basket. It is the buying power of the dollar in terms of those 
goods and services that is what is important, and that is what 
I call price stability. The fact is that after the 1970s, where 
there was a lot of instability, and inflation was very high, 
since Chairman Volcker in the early 1980s, and I know you have 
talked about your relationship with him, brought inflation 
down, that inflation in the United States has been low and 
stable around 2 percent for some time. In fact, it has been 2 
percent over the last 5 years, despite everything else that has 
been going on.
    Moreover, in terms of the unemployment part of the mandate, 
it is certainly true unemployment is unsatisfactory now. My own 
view is that is largely due to the financial crisis, which, in 
turn, had a lot to do with problems in both the private markets 
and in the supervisory and regulatory regime. But putting that 
aside, over the period of the last 25 years or so, stability of 
unemployment has been much greater than it was in previous 
decades. So there has been improvement.
    Chairman Bachus. Thank you, Dr. Paul. I appreciate that.
    At this time Ms. Waters is recognized for 5 minutes.
    Ms. Waters. Thank you very much. I would like to thank you, 
Mr. Bernanke, for coming in one more time to talk with us about 
the economy and to help us to understand exactly what you are 
doing. First, I want to clear up something. You were in the 
Senate and there was some discussion about whether or not the 
$60 billion budget evident cut would be a major drain on the 
economy over the coming year. I think you basically said no, 
not major, but it would have some impact, negative impact. I 
wanted to try and get a sense of that.
    I think the studies show that 650,000 government jobs would 
be lost. Overall, 700,000 jobs would be lost. But some jobs 
would be lost. Could you explain to us what you meant when you 
said it would have a smaller impact? What are you talking about 
in real numbers?
    Mr. Bernanke. We have tried to analyze this to try to get 
the answer to your question. And I should say that this issue 
is raised by some other analyses in the private sector, and I 
am not intimately familiar with those analyses and I am not 
sure that we are making the same assumptions or anything like 
that. But our sense is that a $60 billion cut spread out in the 
normal way, because the reduction of an authorization doesn't 
mean an immediate reduction in the spending. It usually takes a 
little time to actually feed through. It would reduce growth. 
But we think given the size, it is more in a couple of one to 
two-tenths in the first year, another tenth in the next year, 
something in that order of magnitude, and that would translate 
into a couple hundred thousand jobs. So it is not trivial, but 
I think those numbers are little high.
    Ms. Waters. I think that explains it. About a couple 
hundred thousand jobs rather than 700,00 or 650,000. But in a 
sluggish economy, that is important, even if the number is less 
than we thought.
    Let me get to the interview that you had in December 2010, 
with 60 Minutes. You noted that rising economic inequality was 
creating two societies within America and was generally a bad 
phenomenon for this country. This issue is extremely important 
to me, as you know. In fact, I have been very focused on a 
recent study out of Brandeis University, which demonstrated 
that the wealth gap between White and African-American families 
increased more than 4 times since 1984--between 1984 and 2007. 
The study pointed to our Nation's tax policies as the main 
culprit for this rising inequality.
    As you know, I have talked with you many times about a lack 
of access to capital of some of our small banks, which I know 
you don't regulate, but also a lack of access to capital for 
small and minority businesses. And I am really concerned that 
those institutions that you do regulate, the kind of ``too-big-
to-fail'', seem to be flush with cash, based on the generosity 
of the American taxpayer, but we don't see that money coming 
back into communities.
    Also, I am concerned that minorities were targeted in the 
subprime meltdown and our homes were basically the most wealth 
that many of us had. And I want to know, can you elaborate on 
why income inequality is bad for America and do you think that 
the tax cut deal from the end of last year reduced or 
exacerbated income inequality in this country?
    Mr. Bernanke. I think it is part of the American ideal that 
everyone has opportunities to advance themselves economically 
and to participate fully in our society. So I take it as self-
evident that a highly unequal society will be one where 
opportunity is not as broadly spread as it should be and where 
many people will suffer poverty and depravation. So I would 
hope that we can move towards a more equal society, at least in 
terms of opportunities.
    My own view is that education has a lot to do with it, and 
we can see this looking at public and private schools across 
the country, that there is a great deal of variation in the 
quality of education and in the amount of time that students 
spend in school. Given the highly technological globalized 
society that we live in, that is inevitably going to lead to 
increasing differences in wages and wealth.
    Tax policy can help to some extent help close those gaps, 
but I think fundamentally you need to have opportunity, which 
in turn requires people to have the education and the skills 
they need to take advantage of those opportunities.
    Chairman Bachus. Thank you, Chairman Bernanke. Vice 
Chairman Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. Good morning, 
Chairman Bernanke. I want to follow up on a line of questioning 
of our chairman dealing with the long-term structural debt of 
the United States. Certainly, when I have talked to CEOs, 
frankly small business people in East Texas whom I represent in 
Congress, this is a great concern, one that I believe is 
impeding economic growth. In fact, I woke up today and while I 
was putting on my tie and watching television, Mike Jackson, 
the chairman and CEO of AutoNation, stated that his number one 
concern was the national debt. A year ago, you said it would be 
very helpful to put the Nation on a credible plan for fiscal 
exit. And most recently, you have used the term ``critical 
threat.''
    So my question for you is, with the passage of 1 year, do 
you have a greater concern about the Nation's fiscal trajectory 
and do you hear what I hear from job creators in our economy 
that this is becoming a greater impediment to economic growth 
today?
    Mr. Bernanke. It remains a very significant risk for the 
same reasons that I described before. It affects confidence, it 
affects expectations in the future. It, on the margin, may 
affect interest rates either now or in the future. So it 
remains a very serious problem. In terms of progress, clearly 
it has become a more central issue in the congressional debate, 
and we have seen also the results of the various commissions 
and the like. But obviously, so far we have not really seen any 
concrete measures to address the longer term concerns that 
still leave us on an unsustainable path going forward.
    Mr. Hensarling. Let me ask you a question about QE2. You 
and I have had the opportunity to discuss--I am not 
particularly a fan of QE2 because I very fundamentally view 
September 2008 differently than March 2011. Again, I believe in 
statistical evidence. I also believe in anecdotal evidence. The 
folks I talk to have a greater concern over the fiscal 
trajectory of the Nation and have a greater uncertainty about 
tax policy. They have a greater uncertainty about the 
regulatory burden of ObamaCare, of Dodd-Frank, that is what I 
am hearing.
    I believe there are limits to what monetary policy can 
achieve, particularly, if I have observed correctly, the last 
date that I have seen out of the Fed is that public companies 
are sitting on roughly $2 trillion of excess capital, banks 
about a trillion excess.
    We appear to be awash in liquidity and we are in an 
environment of negative to zero real interest rates. Clearly, a 
number of respected economists, and frankly, as you well know, 
more than one of your regional Federal Reserve presidents have 
indicated concern as well. So my question really is the timing. 
As I looked at your testimony, I am not sure you directly 
addressed the timing of the end of QE2, besides its natural 
termination in June. Are there any conditions that you see that 
you would anticipate a QE3?
    Mr. Bernanke. Congressman, that has to be a decision of the 
committee and it depends again on our mandate. What we like to 
see is a sustainable recovery. We don't want to see the economy 
falling back into a double-dip or into a stall-out. And 
obviously, we are looking very closely at inflation both in 
terms of too low and too high. So I want to be sure that you 
understand that I am very attentive to inflation and potential 
risks for inflation. And that will certainly be a major 
consideration as we look to determine how to manage this 
policy.
    Mr. Hensarling. As you well know, a number of people and 
economists are concerned that the Fed is monetizing the debt. 
You and I have had an opportunity to discuss this. I understand 
the arguments on both sides. Let us put reality aside for a 
moment and let us talk about perception. There is, as you well 
know, particularly in international markets where we have seen 
commodity prices spike, a number of these are dollar-
denominated transactions. We know that there is movement within 
the G-20, I think within the IMF to make moves to where the 
world's reserve currency would no longer be the dollar. I don't 
know if you saw it. There was a piece in the Journal this 
morning about why the dollar's reign is near an end. Did you 
happen to see that piece this morning?
    Mr. Bernanke. I saw it, but I didn't read it carefully.
    Mr. Hensarling. I know my time is running out. But by his 
calculations, because of the perception that the United States 
is monetizing its debt, he believes the dollar will fall 
roughly 20 percent and our U.S. living standards will be 
reduced by 1\1/2\ percent of GDP. So the real question is, 
regardless of the reality of your actions, if the perception 
causes the dollar to no longer be the world's reserve currency, 
what are the implications of it?
    Mr. Bernanke. First, I don't see any evidence that is 
happening. So let us be very clear about that. If the dollar 
was no longer the reserve currency, it would probably mean that 
we would have to pay higher interest rates to finance the 
Federal debt and that would be a negative obviously. On the 
other hand, we might not suffer some of the capital inflows 
that contributed to the boom and the bust and the recent 
crisis. Again, there was also a countervailing argument in the 
Journal this morning as well, and I just don't see at this 
point that there is a major shift away from the dollar. I would 
add also on the commodity prices that the fears of some foreign 
governments that we were ``manipulating the currency,'' which 
means we were reducing the value of the dollar, have not come 
true.
    The dollar has not moved very much at all and the commodity 
prices have risen just about as much in other currencies as 
they have in terms of the dollar. So while I take those 
commodity price increases very seriously, I don't think that 
they are primarily a dollar phenomenon.
    Chairman Bachus. Mr. Clay.
    Mr. Clay. Yes. Thank you, Mr. Chairman. And thank you, Mr. 
Bernanke, for being here. Mr. Bernanke, under the Humphrey-
Hawkins Full Employment Act, the Federal Reserve has four 
benchmarks for the economy. One of the four is price stability. 
Currently, economic statistics show an increase in energy 
prices. What can or will the Fed do to try to stabilize the 
prices in the energy sector? Is there anything that can be 
done?
    Mr. Bernanke. You have to distinguish between the prices of 
individual goods and services like gasoline and the overall 
price level, what people pay for all the goods and services 
that they buy. And again, I recognize that the increases in gas 
prices are very troubling for a lot of people and very 
difficult. But they are not inflation per se. Inflation is an 
increase in the overall price level which is very low. The 
inflation rate right now is 1.2 percent for all goods and 
services.
    So the main risk from a price stability point of view would 
be if higher gas prices would start feeding into the broader 
basket that is because people came to expect higher inflation, 
can demand higher wage increases or those costs were being 
regularly passed on by producers that overall inflation would 
begin to rise. And that would be the point at which we would 
become very concerned and make sure that we would take monetary 
policy actions to avoid any significant increase in overall 
inflation.
    The relative price of oil, again, is primarily due to 
global supply and demand. I think it is important to note that 
the United States is consuming less oil today, importing less 
oil and producing more oil than it did before the crisis, that 
all the increase in demand is coming from outside the United 
States, particularly in emerging markets. So there is a limited 
amount of what the Fed can do about oil prices alone. Again, we 
want to be very sure that it doesn't feed into overall 
inflation. And we will make sure that doesn't happen.
    Mr. Clay. And from an environmental standpoint, less 
consumption is better.
    Mr. Bernanke. To the extent that we are worried about 
carbon emissions, absolutely.
    Mr. Clay. Sure. One of the other benchmarks is full 
employment. And currently unemployment is high, even though the 
economy is growing. Currently, Congress is proposing additional 
cuts in the Federal budget. Are you concerned that these cuts 
might undermine the Fed's efforts to ensure a reduction in the 
unemployment rate? Do you see any correlation?
    Mr. Bernanke. Taken on their own, the short-term cuts, as I 
mentioned to Congressman Frank and also Congresswoman Waters, 
would probably lead to some reduced growth in employment in the 
short run. My preference is to see whatever changes are made to 
the budget in the short run coupled with the longer term plan, 
a credible plan that will persuade markets that there is going 
to be real progress made against the deficit over the next 5 
and 10 years. I think that would have a lot of benefits to the 
current recovery without the short-run job affecting impact of 
near-term changes in spending.
    So I don't object to beginning the process of reducing the 
deficit now, but I think it will be much more effective if 
there is a longer-term plan underlying those cuts.
    Mr. Clay. And by longer term, you mean a more comprehensive 
approach to reducing the deficit through possibly increased 
revenues coming into the Treasury as well as reductions in 
budgets throughout the Federal Government?
    Mr. Bernanke. It is up to Congress how exactly to do it. It 
is going to be hard, demanding in any case. But we do need to 
make sure that the deficit doesn't continue to spiral upward; 
it would be very destabilizing if it did.
    Mr. Clay. Thank you for your response. Mr. Chairman, I 
yield back.
    Chairman Bachus. Thank you. Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman. Mr. Chairman, are 
you familiar with the term ``debt saturation''?
    Mr. Bernanke. No, but I can guess what it means.
    Mr. Neugebauer. There is a formula basically dividing the 
GDP by the change in debt. And if you look back at--according 
to the U.S. Treasury, you see one flow and it said back in 
1960, a dollar in debt basically equated to a dollar in the 
increase in productivity or GDP in this country. From 1960 
until present, this economy, both at every level of government, 
individuals and companies, have been leveraging themselves.
    So where we are today is that we are to a point where we 
have reached debt saturation. And basically for every new 
dollar in debt, there is in some cases a negative increase in 
GDP. That results because a lot of companies, even though they 
would like to borrow money, they don't have the capacity to 
borrow because new borrowing creates new debt service, and many 
of them don't have the income necessarily to service that debt.
    In fact, if you look at the United States of America, for 
example, our revenues are a little over $2 trillion and our 
debt service is increasing to, I think, about half a trillion 
dollars and headed up. So when you look at our monetary policy 
and our fiscal policy in this country right now, it is all 
about borrowing and spending. And we are wondering why this 
isn't working.
    And one of the reasons that it is not working is because, 
quite honestly, there is not capacity for a lot of folks to 
take on new debt. And when you look at a lot of companies that 
I talk to, they are building net cash on their balance sheets. 
When you look at quantitative easing that you have done, that 
money really didn't go out into the economy. A lot of those 
folks are holding those moneys in reserves in your bank.
    So the question I have is, you are beginning to see 
families and businesses deleverage because they understand that 
they have reached that debt saturation point, yet the Fed and 
the United States Government has not gotten that message. So 
when you say that you think quantitative easing is working and 
you point to unemployment--I was a little puzzled by that last 
unemployment number going from 9.4 to 9 percent. But when you 
look at what I think is the real unemployment number in this 
country, which is U6, that number actually went up. So if the 
money is not going out, why would we continue a policy of the 
Fed borrowing more money and trying to put more money in the 
system when the system seems to be pretty leveraged up and I 
don't see the benefits from that?
    Mr. Bernanke. Congressman, you are right, that the economy 
got overleveraged during the crisis, households borrowed too 
much, some firms borrowed too much. And one of the reasons that 
the recovery is slow is that this deleveraging process is going 
on. People are building up their savings, their wealth again. 
Firms are trying to reduce their debt, and in some cases, their 
investment for that same reason.
    So that is part of the process. With respect to the Federal 
Reserve, what the Fed is doing is we are buying securities in 
the open market which we will subsequently sell back into the 
market. We are not making any affirmative change in our balance 
sheet. And in particular, the effect of this is not felt 
primarily through the reserves and banking sector. As we buy 
securities in the open market, we both lower term premiums in 
the open market and we push investors into other kinds of 
investments like the stock market or corporate bonds and the 
like and the results do show that bond yields are lower 
relative to treasuries, the stock market is up and those things 
do affect people's behavior and have helped contribute to a 
growing economy.
    What the Fed is doing is not the same thing as government 
spending. We are buying securities which are asset, which pay 
interest and then when the appropriate time comes, we will sell 
those back into the marketplace and return to our previous 
balance sheet.
    Mr. Neugebauer. I disagree a little bit with you on it 
because the monetary policy you have right now is to keep 
interest rates--you have them basically at zero. I don't guess 
you can take them any lower than that. If you can, I might want 
to borrow some money where they pay you to borrow money. But we 
are nearly to that point. So we are really trying to encourage 
people to borrow because we have interest rates at a very low 
rate. And what I am saying is it isn't working, and that is the 
reason that the economy--even in your own testimony, you said 
we are not quite sure if we can attribute the things we are 
doing to the little bump in the economy here.
    I would submit to what is really going on in the economy 
and the bump that we are getting is the fact that some portions 
of our economy do understand what was going on. They are taking 
actions to correct their balance sheets, families are lowering 
their credit card debt, but that the policies that we have, 
both at the Fed and with this Congress of borrowing and 
spending don't work and, in fact, are going to have a negative 
impact that the more we borrow now from this point forward in 
this economy--I believe, particularly at the government level--
it begins to diminish our GDP and not increase our GDP. So I 
thank the Chairman for his comments.
    Chairman Bachus. Thank you, Mr. Neugebauer. Mrs. Maloney.
    Mrs. Maloney. Would you compare and contrast the recovery 
that is under way in Germany with ours? Are there any lessons 
there? Are there any steps that we should be taking to emulate, 
or in essence, achieve Germany's results?
    Mr. Bernanke. That is a tough question. Germany certainly 
didn't have as much job loss as we did, and that part was 
because of policies they had to subsidize firms to keep workers 
on even when they weren't fully utilized. I think the recovery 
of Germany has brought them about back to where they were 
before the crisis, which is comparable to what has happened in 
the United States.
    Unlike the United States, Germany has benefited 
substantially from the rebound in global economic activity 
because they are very much a trade-oriented, export-oriented 
economy and they worked a long time to develop those markets. 
So I guess if I would draw a lesson, it would be that we need 
to do what we can to increase our competitiveness, to increase 
our efficiency and to improve our ability to compete in global 
markets. I think that would be good for jobs and good for 
growth in the longer term. But you don't want to overstate the 
difference. I don't think that Germany overall has had a 
stronger recovery than the United States from this cycle.
    Mrs. Maloney. Speaking about the international economy, it 
does appear that the EU is going--it is not going to adopt the 
Volcker Rule. That is what I seem to be reading. And it is 
unclear whether or not they will adopt the standard of 
transparency for derivatives, and are you concerned about the 
regulatory arbitrage between Europe and the United States in 
terms of competitiveness?
    Mr. Bernanke. Particularly, the CFTC is talking to Europe 
about making standards as close as possible for derivatives and 
for clearinghouses and the like. You are right. I don't think, 
to the best of my knowledge, that Europe is planning to adopt 
the Volcker Rule. That will create some competitiveness 
disadvantage. I don't know how great. Congress made that choice 
because you believed that taking those proprietary trading 
activities out of banks would increase the safety, stability of 
the banks. That is a tradeoff that Congress decided to make. In 
the past, there have also been other differences.
    For example, our banking systems operated with a leveraged 
ratio for a long time, whereas Europeans did not have one. 
Under Basel III, a leverage ratio will be extended to foreign 
banks as well as the U.S. banks. So that is one place where 
competitiveness will be actually improved. But you are right, 
there will be a difference in capacity.
    Mrs. Maloney. And, Mr. Bernanke, there is a possibility 
that the capital requirements may be tougher here in the United 
States under our regulatory Dodd-Frank requirements than the 
Basel III 7 percent. Would that not give us a competitive 
disadvantage?
    Mr. Bernanke. I don't think there is going to be that much 
difference in capital requirements. The Collins amendment only 
requires that the capital be greater than it was as of last 
summer.
    Mrs. Maloney. That is good news. All right. Your most 
sobering comment was that until we see a sustained period of 
stronger job creation, we cannot consider the recovery to be 
truly established. I would like you to comment on how do we 
reconcile the reality of a--basically a jobless recovery as you 
pointed out in your testimony with persistent, stagnant wages 
for 90 percent of workers over the past 20 years with the 
statement that the recession is over in a sense with such high 
unemployment and sustained stagnant wages it appears for 90 
percent of our population?
    Mr. Bernanke. The recession is over only in the technical 
sense that we are no longer falling, we are rising. We have 
been in 7 quarters of expansion. It doesn't mean we are back to 
normal by any means, obviously. Growth has only been about 
enough to accommodate the new entrance to the labor force. And 
therefore, the effects of the unemployment rate have been very 
moderate. And since the demand for labor is weak, then wages 
are naturally weak as well.
    Chairman Bachus. Thank you. Mr. Garrett.
    Mr. Garrett. Mr. Chairman, it was reported in the American 
Banker yesterday that the Fed has helped to broker a deal with 
regard to Dodd-Frank with regard to--where the FDIC is and the 
OCC is with regard to the QRM and the issue of servicing 
agreements. You are fine with that?
    Mr. Bernanke. I don't know the exact status. We have been 
working with the FDIC and the OCC to try to come up with some 
kind of agreement about--
    Mr. Garrett. Try to get the two sides to come together. And 
the rub in that, I guess--I have been in one of the meetings 
where they got together and they didn't come to agreement was 
with the servicing language. Do you know what the legal 
authority is for them to be including servicing--the terms of 
servicing requirements within the QRM, which is, from what I 
understand, is going to be included in the final deal which has 
been brokered with the help of your agency?
    Mr. Bernanke. The law gives the banking agencies the 
ability to define a qualified residential mortgage as a 
mortgage which is of a certain quality so as to avoid the need 
for retained risk.
    Mr. Garrett. But is there anything in there that really 
goes to the language of servicing? I don't think that was in 
Dodd-Frank and that is where the OCC comes from on this and 
they would say there is no legal authority.
    Mr. Bernanke. I would have to get back to you on that. 
Again, I think the servicing is part of the contract, it is 
part of the mortgage contract. What rights does the borrower 
have? And in particular a mortgage which can be restructured 
efficiently is a better quality mortgage than one that cannot 
be restructured.
    Mr. Garrett. All things agreed. But if you could get back 
on that point, it would be great. Another portion--back on this 
whole issue of the mortgage market, back in October, you folks 
issued a report with regard to the risk retention issues, and 
some of the things I totally agree with. Risk retention is not 
a panacea as far as dealing with this. And reforms should be 
tailored by asset classes. I agree with that. Risk retention 
could impact upon credit availability if it is not done 
correctly. So as I understand it, there is going to be a phase-
in of this once it goes through. There is a multiyear 
opportunity to phase all of these in by asset classes. Does it 
make sense if we realize we are dealing with this in different 
asset classes and doesn't it make sense, as you all say, that 
it could impact upon credit availability, that really the 
regulators in this area sort of go slow and maybe see how the 
different asset-backed security markets evolve before they--I 
will use the adjective--precipitously make some rules 
beforehand on these things?
    Mr. Bernanke. We certainly want to get it right. But our 
study took into account the current practices, how these 
markets have operated. There are usually good reasons for why 
markets have evolved the way they have. And our proposals try 
not to radically change the current practices in those markets.
    Mr. Garrett. Right. But there is a phase-in for 1 year for 
the RMBS, 2 years for the CMBS, and so on. Doesn't that give 
all of us and the regulators the opportunity to examine how 
they actually evolved during that period as opposed to saying 
we are going to do it, treat it one-size-fits-all right now for 
all asset classes regardless of how it actually phases in later 
on?
    Mr. Bernanke. Yes, we recommend being very sensitive to the 
particular type of assets--
    Mr. Garrett. Thank you. Going back to the other issue of 
the day, which is the QE2, monetary policy and the like. Some 
have intimated that the QE2 is $600 billion sort of--some would 
say is pulled out of thin air in the creation of it. But the 
reason that the Fed has done this, of course, as they say is 
because they are safe, because inflation is running under 1 
percent right now. Should we feel confident? Should the markets 
feel confident if that in a week or a month or several months 
down the road, or even a longer period, inflation starts 
running at about 3 percent, that at that point in time, the Fed 
will be ready to, what, sell off, to unwind the $600 billion of 
QE2?
    Mr. Bernanke. Inflation can vary considerably in the short 
run. Of course, inflation went up to about 5 percent in the 
summer of 2008, then that was unwound and we had a period of 
negative inflation for a while as commodity prices went up and 
went down.
    Mr. Garrett. So it is going to be a short period that you 
look forward before the unwinding occurs?
    Mr. Bernanke. It is very short because of the unwinding 
that occurred after the crisis in the fall of 2008. During the 
summer of 2008, we had the big spike in oil prices and then 
later in the year and around the turn of the year, we saw 
actually negative inflation as commodity prices collapsed. So 
our objective is to hit low and stable inflation in the medium 
term. To the extent that we have entirely temporary 
fluctuations which are not being fed into the broader inflation 
basket, we have to look through those to some extent. But 
again, we are going to be looking very carefully at inflation 
expectations and making sure that people remain confident that 
inflation will stay low and we will address that. Again, I want 
to reassure you that central bankers have learned the lessons 
of the 1970s. We will not allow inflation to get above low and 
stable levels.
    Mr. Garrett. I guess my question is for how long it takes 
before you act the unwinding, how long the inflation stays at 
that level before you need to see--
    Mr. Bernanke. It depends a lot on whether inflation 
expectations remain anchored and what is happening to the 
broader basket. Again, oil prices alone with nothing else 
moving would probably not be enough to make us respond.
    Mr. Garrett. I thank the chairman.
    Chairman Bachus. Thank you. Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. Chairman Bernanke, 
the Federal Reserve has stated that steady, low inflation 
levels around 1.7 to 2 percent will be helpful to assist 
monetary policy in the economic recovery. What role should 
Federal spending play over the next year to help maintain 
inflation at these levels?
    Mr. Bernanke. The inflation rate is mostly the 
responsibility of the Federal Reserve, and we take 
responsibility for that because monetary policy determines 
inflation in the medium to long term. I think that the 
Congress, in looking at fiscal policy, needs to consider two 
issues. One is the very short term, making sure not to do 
anything that will derail the current recovery, but at the same 
time, taking over a medium- to long-term period, taking the 
necessary hard steps to cut the deficit, to restore 
sustainability and restore confidence in the markets that our 
fiscal policy will be sound. So I would focus not on inflation, 
I would focus on the medium-term prospects for the fiscal 
trajectory and with attention to the current recovery as well.
    Ms. Velazquez. Thank you. Mr. Chairman, a common refrain 
among critics of the Dodd-Frank Wall Street Reform Act is that 
it has contributed to the credit crunch for small businesses. 
But as early as July 2008, 2 years before the bill was enacted, 
your testimony before this committee took note of the growing 
credit crisis, especially for small businesses. Do you believe 
that financial regulatory reforms contained in the Dodd-Frank 
Act are impacting the availability of credit for small 
businesses? Do you have any evidence of that?
    Mr. Bernanke. As you say, we have had significant problems 
with credit availability for a couple of years now. And 
although I know that many community bankers have concerns, 
whether legitimate or not, about the regulatory impact of Dodd-
Frank so far, almost nothing has actually happened. The CFPB is 
not operating, capital requirements have not changed, etc.
    So that is a very difficult problem, the availability of 
credit. The Fed has been working very hard and the other 
banking agencies with the banks, with our examiners trying to 
make sure that good loans get made. But I think the main 
problems at this point are, on the one hand, caution on the 
part of the banks and on the part of the borrowers in many 
cases, financial problems that make them less qualified for 
credit.
    Ms. Velazquez. But we do know that the Federal Reserve 
survey of senior loan officers, the latest one that was 
released right after Dodd-Frank, shows that lending standards 
are easing for small businesses.
    Mr. Bernanke. As I said in my testimony, things are looking 
a little better and we expect credit to improve in 2011.
    Ms. Velazquez. The Federal Reserve stated at its last open 
markets meeting that it will continue with the status quo of a 
near zero funds rate for the foreseeable future. Is there any 
concern that continuing to communicate an expectation that the 
Federal funds rate will remain at an exceptionally low level 
for an extended period could increase inflationary risks?
    Mr. Bernanke. The communication is just one way that we use 
to provide additional policy support to the economy, which, in 
our judgment, it still needs. The economy's recovery is not 
firmly established and we think monetary policy needs to be 
supportive. Clearly, if we leave policy to accommodate it for 
too long, that would lead to inflation and so that is why we 
need to unwind the language, the asset purchases, the interest 
rate policy, all of those things are going to have to be unwind 
at the appropriate time. So I think at this point, it is not 
creating inflation, but it would if we didn't unwind it at the 
appropriate time.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. Mr. Pearce.
    Mr. Pearce. Thank you, Mr. Chairman. I appreciate your 
being here today. And they have kind of worked the inflation 
question over, but I would just make a comment. Roswell, New 
Mexico, is in my district and there are more people who believe 
the aliens landed in Roswell than believe inflation is 1.6 
percent, with all due respect. They are paying higher prices 
for gasoline and food, and I don't know exactly what they don't 
buy that is not inflating. But just earlier this week, we got a 
report that drill pipe and heavy construction metal for the oil 
field is not available because people are so worried about what 
the future price is going to be, that they are holding onto the 
supplies so there are people out there who are being affected, 
whether or not inflation shows on the books to be increasing. 
And I am interested in your comment on page 3 that mortgages 
are difficult to obtain. Do you have any speculation of why 
that might be?
    Mr. Bernanke. Partly because Fannie Mae and Freddie Mac 
have tightened up their standards and more generally because 
lenders are quite uncertain about where house prices are going 
to go. They are still being very cautious after the debacle, 
mortgage debacle of the crisis. So what we are seeing is that 
lenders are requiring unusually high downpayments, high FICO 
scores. And so people without those qualifications are just not 
able to get mortgages.
    Mr. Pearce. I was just recently talking to a young couple. 
They both just graduated from college and both have pretty good 
jobs and can't get financing, exactly the circumstance here. 
And when we talked to bankers and we talked--we had a 
conference call with New Mexico bankers and they said that the 
safety and soundness reviews were not problematic; it is the 
compliance reviews. Things that used to simply get written up 
as exceptions now have a $50,000 potential fine with them. They 
said why would we loan money on the houses when a typographical 
error or when a failure to calculate the floodplain which it 
has been since Noah's time that some of these mountainous areas 
in New Mexico that we have had flood insurance claims and we 
are paying for the people on the coastlines, with all due 
respect to the chairman and those guys, but--New Mexico, flood 
insurance is not a big deal except if you make one little 
mistake in it, you are going to get a $50,000 fine. Why would 
you loan money?
    If you ever get a chance to talk to the people on the other 
side of the aisle over there, the regulators, you might hint to 
them that the compliance reviews are scaring the daylights out 
of people when they used to just get written up into a report. 
Looking forward to evaluate our ability to respond to crisis, I 
would like to look backward at the way that we responded to the 
crisis. And so, who was actually in a pilot seat in the 
troubles in 2008; was that the Treasury or was that the Fed?
    Mr. Bernanke. We cooperated. We both were--
    Mr. Pearce. Are you indeed familiar with the decisions? Who 
made the decision--keep in mind that we bailed out Fannie Mae 
and Freddie Mac, we bailed out Bear Stearns, we let Lehman 
fail. And then 2 days later, 3 days later, we bailed out AIG. 
Who made the decision to let Lehman fail?
    Mr. Bernanke. I was not personally in that meeting. I was 
in Washington when these discussions were taking place in New 
York. But my belief and understanding was that it was not a 
decision. It was an inevitability that we could not find any 
way to avoid the failure. If we could have, we would have.
    Mr. Pearce. It was inevitable for Bear Stearns to fail too. 
We had inevitability facing us. In fact, statements made in 
that period of time indicated Fannie and Freddie were really 
sound and, in fact, it was the variability, it was the ad hoc 
nature of the implementation of these things that caused great 
instability in the market on Wall Street. The price of stocks 
began to fall. As people said, we can't trust that the 
government is going to be predictable in this and we better be 
bailing out. So I just would look at that time as a period of 
overreaction, underreaction, and questionable judgments. False 
statements were made and I believe that it severely impacted 
the length and the depth of what was going on. Do you have any 
comments?
    Mr. Bernanke. My comment is that we did everything we 
could, given the limited tools we had, to prevent any 
collapses, we did find a way to solve the Bear Stearns problem. 
What I think Lehman demonstrated is that if we had allowed 
other firms to fail as well, that the entire financial system 
could have collapsed and we would have seen a far worse 
recession than the one we had.
    Mr. Pearce. Thank you, Mr. Chairman.
    Mr. Hensarling. [presiding]. The time of the gentleman has 
expired. The Chair recognizes the gentleman from North 
Carolina, Mr. Watt, for 5 minutes.
    Mr. Watt. Thank you, Mr. Chairman. And thank you, Chairman 
Bernanke, for being here. Chairman Bernanke, you know and I am 
sure the folks at the Fed know that as chairman of the Monetary 
Policy Subcommittee for the last couple of years, I gained a 
healthy respect for the work that you all were doing, and I 
think that you all did a great job to get us to where we are 
today. And I want to applaud the work of your staff on that 
front. My questions today--I really want to go outside the box 
a little bit because I think I have some concerns about things 
that are further down the road that I think could really be 
difficult economic, fiscal, and social impacts to our economy. 
And my question is, to what extent are you all doing things in 
these areas, studying or looking down the road to anticipate 
some of these issues?
    There are two of them that I want to talk about. One is 
climate change, which from all indications is going to result 
in dramatic weather swings at the extremes that will have 
devastating impacts economically that make New Orleans look 
like small potatoes on the coast, in the west, in the Gulf, in 
Florida, in places where just a 2- or 3-point temperature 
change has dramatic impacts on weather conditions.
    The second is on the growing gap between the well-off in 
this country and people who are not well off in this country. 
The gap is growing. I think we are about to experience a 
greater growth because this whole Fannie and Freddie 
discussion, and the way it is being shaped now will result in 
fewer and fewer people of modest wealth and incomes being able 
to be homeowners and the great bulk of low-income and moderate-
income people's wealth is in home equity, not in stocks, not in 
companies, entrepreneurship and all that.
    I know neither one of those things, climate change or the 
gap, is specifically in the rubric of inflation control, 
monetary policy and job things. My question is, what work or 
research, if any, are you all--is the Fed doing to anticipate 
the impacts of either one of those things?
    Mr. Bernanke. Congressman, on the climate change, there has 
been good economic work done on this by people like Bill 
Nordhaus and others. And I am sure that we have staff who are 
familiar with that work. But we really haven't had the capacity 
to do a great deal of work on this as far as I am aware at the 
Federal Reserve. The story is somewhat different with the 
inequality issue because we--within the sphere of our duties, 
we are looking at things like access to banks and access to 
credit, wealth creation, education and labor, skill 
development. All of those things fall within our financial, 
regulatory, and labor market responsibilities. And we have 
quite a few people looking at those issues.
    I don't know whether we have anyone looking at the really 
long-term consequences for the economy of inequality, but the 
components relating to labor markets and financial markets, we 
certainly have people looking at those issues.
    Chairman Bachus. The time of the gentleman has expired. The 
Chair now recognizes the gentleman from North Carolina, Mr. 
McHenry.
    Mr. McHenry. Thank you, Mr. Chairman. And, Chairman 
Bernanke, thank you for your service to your government. You 
have certainly done so in extraordinary times and we certainly 
appreciate that, much less having to endure a number of these 
hearings. It is certainly a challenge. But I wanted to ask you 
today about the municipal bond market. It has been a concern of 
a number of us here on the Hill and a number of policy 
proposals have been put forward trying to bring transparency to 
that marketplace, in terms of State indebtedness and municipal 
indebtedness, especially with their pension programs.
    I am not asking you to comment about Wisconsin or any of 
that going on. But do you believe that the municipal bond 
market could pose a systemic risk to our Nation's recovery?
    Mr. Bernanke. It could in principle. I should just be 
clear. While I understand that municipals are facing some very 
difficult budgetary situations, both in the short term because 
of the recession, but also in terms of long-term obligations 
for health and pensions. Recently tax revenues have been coming 
up with some recovery in the economy. A lot of painful cuts 
have already been made in many States and municipalities. So I 
think that these States and localities are making progress to 
addressing those issues. That being said, I would applaud any 
efforts to improve transparency, clarity. It would help 
investors certainly and it would force the States and 
municipalities themselves to address these problems more head-
on.
    Mr. McHenry. So transparency would be helpful. In terms of 
the municipal bond market, is this something where the Fed 
actively reviews what is happening and the impact it could have 
on treasuries and our lending at the Federal level? Borrowing.
    Mr. Bernanke. We review essentially every financial market 
and this is one of them. And we do have people who are paying 
close attention to the developments there. I think recently 
things have improved a bit is my sense. The tone has improved a 
bit lately in part because of the better economy and because of 
the progress that is being made on the budget.
    Mr. McHenry. Certainly. And we are going to shift a little 
bit. This is something that--at our last hearing on the 
implementation of derivatives regulations, I know Mrs. Maloney 
touched on this. But international harmonization, when we look 
at the derivatives piece and implementation of derivatives 
legislation, the regulators implementing the derivatives piece 
of the Dodd-Frank bill, we see that other major markets around 
the world aren't coming along as fast as we are. You could see 
Europe is maybe a year behind us. Is that a concern? Is that 
something that you are trying to bring other central banks 
around to this?
    Mr. Bernanke. I think in many of these cases, the Commodity 
Futures Trading Commission is taking the lead in terms of 
trying to harmonize transparency rules, recordkeeping rules, 
operational rules for clearinghouses and exchanges and the 
like. There are some differences, which I don't think will be 
reconciled. Europe is not following the Lincoln amendment 
approach, the pushout of derivatives. So that will create some 
differences in the competitive position of American and other 
banks, I think. But it is difficult to assess at this point how 
significant that would be.
    Mr. McHenry. But in terms of ensuring that there is some 
harmonization with--where our market regulation is moving, are 
these conversations you actively have with other central banks?
    Mr. Bernanke. Yes, we are. We are having those. And there 
are international committees like the Basel Committees, which 
look at these issues and try to establish global standards. As 
we set prudential rules for financial market utilities, we take 
into account these global standards. So there is an attempt 
there to try to create a harmonization.
    Mr. McHenry. Thank you. And I yield back.
    Mr. Hensarling. The Chair now recognizes the gentleman from 
California, Mr. Sherman.
    Mr. Sherman. Mr. Chairman, I want to commend you on your 
monetary easing policy. I know not all my colleagues agree, but 
the economy is a patient in critical condition and the 
traditional medicines are not available. Fiscal policy is 
politically over, and I don't think you can lower short-term 
interest rates.
    So the fact is you have come up with a new and inventive 
medicine at a time when the easy thing to do for you would have 
been to walk away from the patient and say, everything that can 
be done, has been done, at least by the Fed. So you have shown 
courage, you have shown innovation. And I hope this new 
experimental medicine of yours works. A colleague just asked 
about municipal bonds. I would like to focus just on State 
borrowing. The rule is States can't go bankrupt. People invest 
in State bonds with that as the rule, the assumption and there 
are some politicians talking about allowing States to go 
bankrupt. And these politicians don't even want the bondholders 
to lose money.
    It is just they hate the public employee union so much they 
have lost sight of the reason we don't let States go bankrupt, 
which is to encourage people to lend money to States. What 
effect would it have if there was a really serious discussion 
and we were close to passing a bill allowing States to go 
bankrupt? What effect would it have if a State actually went 
bankrupt on the ability of all 50 States to borrow at the 
present time and in the coming years?
    Mr. Bernanke. That is really hard to judge. I think if 
those States can't go bankrupt, they can't default. And that 
has happened 160 years ago. So bond, municipal bondholders do 
try to assess the risk that there will be a default. The 
bankruptcy idea is a very complex one because of States' rights 
issues--you have to raise the question, could a bankruptcy 
judge tell a State to raise taxes.
    So I think there are some very thorny legal questions at 
the very beginning of that debate. Again, I am sorry I cannot 
really judge what impact the creation of the Bankruptcy Code 
would have on those risks. I think the bondholders 
fundamentally at the condition of the States and also rules 
like what is the precedence of interest payments and those 
sorts of things.
    Mr. Sherman. And I would point out that the State 
treasurers around this country do not want us to give the 
States the ability to go bankrupt. Right now, Fannie and 
Freddie are paying 10 percent dividend, the TARP banks paid a 5 
percent dividend for annual payment. I am not at all sure on a 
net basis you are really going to collect anything from Fannie 
and Freddie. Why do you--why should we have a 10 percent 
payment that we are receiving from Fannie and Freddie?
    Mr. Bernanke. As with the capital injection programs and 
the like, it was set up to be paid back via giving the 
government preferred stock and by having a dividend. But, as 
you know, Fannie and Freddie have been requiring injections of 
money and they have not made any significant progress in paying 
it back.
    Mr. Sherman. As to my colleague saying that all of our 
constituents believe there is much higher inflation, they all 
do--that is because if you go to the market and lettuce is a 
$1.59 a head, you notice that. If onions are down to $.39 cents 
a pound, nobody winces. They just buy a few more onions. So 
people will always think prices are going up. Your predecessor 
testified before Congress that, in fact, the CPI overstates the 
inflation rate by 3 quarters of a point, perhaps a point or 
even more. Do you think that is a correct analysis or does the 
CPI best reflect inflation given quality improvements in a lot 
of our products?
    Mr. Bernanke. You are correct that the professional 
economists, including the ones at the Bureau of Labor and 
Statistics who have looked at price measurement, do conclude 
that the CPI probably does overstate actual inflation, although 
they have made progress in addressing some of the issues that 
were identified a decade ago. That being said, we understand 
the visibility of gas prices and food prices and we want to be 
sure that people's expectations aren't adversely affected. I 
think it is important to note that according to the Michigan 
survey of consumers, long-term inflation expectations have been 
basically flat. They haven't moved, notwithstanding ups and 
downs in gas prices, for example.
    Mr. Sherman. Gas prices are there, but flat-screen TVs are 
in the other direction. And I yield back.
    Mr. Hensarling. The Chair now recognizes the gentleman from 
California, Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman. Thank you, Chairman 
Bernanke. Rather than ask you about the consequences of the 
actions you, the Federal Reserve, are taking, I am going to ask 
you about the consequences of the inaction that we, Congress, 
are doing relative to our fiscal problem. The chairman, the 
vice chairman and the ranking member all alluded to some of 
your prior comments relative to our fiscal trajectory. What if 
we don't act? What if we don't set any long-term sustainable 
policy or projection and that we run up a $1.5 trillion deficit 
this year, $1.6 trillion next year as estimated by the 
President and north of $1 trillion, so almost somewhere close 
to $5 trillion in deficit in the next 36 months. What impact 
does that have on jobs, the economy, interest rates, on 
everything?
    Mr. Bernanke. It is hard to know exactly what the timing 
would be. But what we do know is that eventually lenders would 
decide the United States wasn't a good credit risk and interest 
rates would spike and that would slow the recovery or slow the 
economy. It would create financial stress for not only holders 
of treasuries, but holders of other fixed-income assets. It 
would have effects on confidence. It would cause people to 
expect higher taxes in the future. So it is hard to say exactly 
when the confidence gets lost. Just recently, we have seen 
examples where on Tuesday everything was okay, but on Wednesday 
there was suddenly a fear that maybe the process was breaking 
down and there was not going to be sufficient progress and you 
saw sharp increases in interest rates and loss of confidence in 
that country's economy and fiscal policy.
    Mr. Campbell. So over the next 3 years, it could happen, 
right? If we are running up that sort of--towards $5 trillion, 
it could happen at some point in there as you say, no one knows 
exactly when the markets might react that way? But it isn't 
necessarily something that is 10 years away, is it?
    Mr. Bernanke. No, it is not necessarily 10 years away. The 
way I think about it is that the markets are less looking at 
our economy because we have the capacity to address these 
problems. They are looking more at the political will and 
decision-making, and I hate to put this on you because I know 
these are hard problems, but an extended period of Congress 
ignoring or not making progress on these issues would be 
exactly the kind of thing that would create disruption in the 
bond market.
    Mr. Campbell. And that, as you say, the consequences are 
interest rates--people stop buying bonds, interest rates go up. 
We get into a spiral, don't we? Because the interest rate going 
up increases the interest on our debt which increases the 
deficit, which increases the interest rates, which reduces--we 
potentially get into a spiral from which it becomes very 
difficult to recover without significant economic damage; is 
that right?
    Mr. Bernanke. Economists have a sterile term that they call 
debt dynamics, which is exactly what you described, which is 
that interest rates get higher, it makes the deficit higher, it 
makes the debt higher, it makes interest rates higher and 
things kind of spiral out of control. That is right.
    Mr. Campbell. If we continue to, as we have been, not 
really deal with the problem at all in any long-term or 
sustainable manner, then it could have a very bad fiscal result 
in not too long a time?
    Mr. Bernanke. I have said that a number of times, and I 
agree with that risk. Though again, as you point out, we don't 
know exactly when.
    Mr. Campbell. Right. Mr. Chairman, I appreciate your 
comments and I appreciate your candor on this. It seems to me 
that Members of Congress, politicians in general, are generally 
kind of risk-averse. And that as we saw in 2008 when we were in 
the midsts of that crisis, we seemed to not be willing to act 
to solve the problem until the consequences of that problem 
exceed what we perceived to be the political consequences of 
inaction. And right now, unfortunately, it seems to me that in 
this town, the political consequences of action seem to be 
greater than those of inaction. But I think, as we did back in 
2008, eventually we make people aware that the prospects for 
the problem were very strong and very imminent and we increased 
the level of rhetoric we used in order to emphasize the 
severity of the problem. But we are going to need to do that to 
get this place to act. And I yield back.
    Mr. Hensarling. The time of the gentleman has expired. The 
Chair recognizes the gentleman from New York for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman. Good morning, Chairman 
Bernanke. I have a number of questions on different topics that 
I want to ask. But before I get there, my concern is as we look 
at this and we talk about we all have--we talk about how we are 
in deficits, and we have to fix it. And it seems to me that we 
talk about cutting. We have to make sure that everybody feels 
some of the pain. And as we are dealing with the current CR, 
etc., of course, because of some of the deals that we made 
prior, the only way we are talking about balancing this budget 
right now is on the cutting side and generally, you also have 
cutting and you have revenue. And some kind of way when you 
have both, it helps eliminate the deficit because you are 
cutting and you have more money coming in also.
    Then that kind of levels out the playing field to a degree 
also so that everybody feels some pain. And if we are going to 
create a situation where all Americans feel better about the 
current situation, it seems to me that everybody has to feel 
some pain. And part of the problem that we have here is some 
people feeling pain and others will say as in my City of New 
York, the others are getting huge bonuses and yet nobody is 
lending money, but somebody else is making money. And we are 
really not having the kind of balance that is needed so that 
there is pain felt on all the sides so that we can move and 
then have the kind of agreement that we need to have so that we 
can move forward.
    We still have individuals who are losing their homes. And 
it is hard to talk to those individuals about them losing more 
when they have lost everything they already have. And then it 
appears to them that others on the other side are not losing 
anything. In fact, they are back to where they were. They are 
still making--they are making more money than they ever made. 
And that really causes the schisms even in politics and causes 
politics to take place so we are not doing what we should be 
doing for the benefit of our country as a whole because we 
are--one side or the other side--and I am not trying to--the 
left or the right and we are not pulling this thing together so 
that we can have something that is down the middle that moves 
us forward. This brings me to my first question to you, because 
I want to get something clarified--I guess this was yesterday--
in your statement on the impact of the CR, for example, on the 
economy. And I was wondering whether or not it was based on 
your in-depth analysis of the specific cuts to various programs 
or--because there is a discrepancy. Goldman Sachs came out with 
an opinion of what it would do to the growth of the economy, 
and you said it would be less than what Goldman said.
    So I was wondering, what was your statement based upon?
    Mr. Bernanke. It was based on a rough and ready econometric 
analysis using models. But based on a total dollar amount of 
$60 billion this year and $40 billion next year, without any 
real attention to the composition of that. So we didn't really 
get into the breakdown.
    Mr. Meeks. You didn't get into the breakdown of this 
program, anything of that nature; those effects, which is what 
I kind of figured.
    Let me ask you another question. Let me just go off on 
something that I think that hopefully we can work on in a 
bipartisan manner in this committee to deal with and a 
statement you made also recently, and that is dealing with 
interchange. Two weeks ago, you told the Senate Banking 
Committee that you thought the smaller issue exemption for 
interchange fee regulation may not, in fact, work. I believe 
that is what you stated. So my question is, what will the 
impact on community banks and credit unions be if that 
exemption fails?
    Mr. Bernanke. We don't know whether it will work or not, as 
I said. If it doesn't work and if the reduction in interchange 
fees ends up applying or partially applying to smaller banks 
and credit unions, then obviously it will cut their earnings 
from that program, unless they can recoup it through other fees 
or charges to their depositors.
    Mr. Meeks. In your opinion, in this area becomes very 
critical because this is something that I think we can work on 
because, going back and forth and in dealing with the Fed's 
recent rulings with regard to interchange and whether they are 
looking at cost or not looking at cost as it pertains to some 
of the banks, and you look at the merchant side. So we really 
need a balance there also. And I think that as we move forward 
on this committee and we are having some dialogue, I hope we 
can work together across the aisle to try to solve that 
problem.
    I am out of time already.
    Mr. Hensarling. The time of the gentleman has expired. The 
Chair recognizes the gentleman from Florida, Mr. Posey.
    Mr. Posey. Thank you, Mr. Chairman. Chairman Bernanke, I 
want to compliment you on your forthrightness. It is something 
that, unfortunately, we don't see that much of on this side of 
that table. And thank you for being so frank with us when you 
appear before us.
    In your statement, you indicated that until we see a 
sustained period of stronger growth creation, we cannot 
consider this recovery to be truly established. Is it fair to 
say then that despite the claims from the academics to the 
contrary, this indicates the recession has not yet bottomed 
out?
    Mr. Bernanke. Again, ``recession'' is a technical term. It 
just means that the decline has stopped and that we are now 
growing. So we have been growing. But I would say that if the 
labor market doesn't continue to improve, the risk would be 
that consumers would see unemployment going back up again. They 
would lose confidence. And then you would have increasing risk 
that the thing might stall out. So that is the risk, although I 
think that risk has declined in the last few months.
    Mr. Posey. I assume part of the Fed's goal with QE2 is to 
provide an influx of capital into the economy to ensure that 
our financial institutions have adequate capital to lend for 
housing construction, commercial purposes, etc. And given that 
goal, I wanted to call your attention to a recent proposed 
regulation by the Internal Revenue Service that I believe could 
have a pretty devastating impact on our financial institutions.
    The proposed IRS rule would force banks to hand over 
interest payment information on foreign deposits. There would 
be no tax on the interest earned, but the IRS would turn this 
information over to a foreigner's home country, which could 
have some adverse impacts on people who deposit their money 
here, which we enjoy using in our economy. The proposed rule 
could lead to, I am told, between $200 billion and $400 billion 
leaving our country and going to lower tax jurisdictions. 
Obviously, that could be very harmful to our economy.
    I just wondered if you agree that this is a bad idea. I 
think it was a bad idea in 2001 when it was proposed before and 
the Administration and Congress opposed it and defeated it. I 
just wondered if you think this is as bad an idea right now as 
I do.
    Mr. Bernanke. I hesitate making a judgment, not having read 
this regulation. It is the case that the United States has 
recently negotiated with Switzerland to get more information 
about Americans bank accounts in Switzerland because a lot of 
that was being used for tax evasion. I don't know whether this 
is parallel to that or related to that or not. You just said I 
was forthright. I think I would like to say ``no comment'' on 
this one until I can look at the regulation more carefully.
    Mr. Posey. Given the facts that I am aware of--and it is a 
proposed rule at this point--what Switzerland does is 
Switzerland's business; what we do is our business. I don't 
want us to be like Switzerland in a great number of ways, and I 
will leave it at that.
    I touch on this second issue because I have had personal 
stories about it happening in my district, and I know it is not 
a bad dream and discussed it with Secretary Geithner yesterday, 
and that is regulators--basically, overregulation back in our 
districts. Go to a bank to examine a bank and determine that in 
their opinion a performing loan should not be a performing 
loan, which can cause the bank obviously to have to take that 
off their books. They can't earn interest on it. You know the 
consequences of a markdown. It is very, very damaging.
    I am told that the examiners have been directed not to 
micromanage these lending services. I just wonder what we can 
do about it.
    Mr. Bernanke. Yes, I should just say that we have made an 
enormous effort to train the examiners, to issue guidances, to 
have outreach conferences, to have meetings with small bankers 
and small businesses. So we are trying really hard. I know that 
maybe on the ground level it doesn't always work, but we are 
trying really hard.
    What I would recommend to your constituents is if it is a 
Federal Reserve examiner as opposed to OCC or FDIC, we do have 
an ombudsman who will follow through and without giving the 
name to the examiners so they won't have to worry about any 
kind of retaliation or anything like that. We will try to 
follow through if there are specific concerns. So please let us 
hear from them and we will see what we can do.
    Mr. Posey. You realize how serious a problem that is then, 
and I am grateful that you do.
    Mr. Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Capuano.
    Mr. Capuano. Thank you, Chairman Bernanke, for being here. 
Before I get to my question, I have to make sure I heard you 
right on a couple of things. In response to Mr. Frank's 
question on the amounts of money that were made or lost, I am 
not sure I heard it right, did I hear you correctly that all 
the bailouts that we did and all the windows that you opened 
earned a positive; I think you said $125 billion estimate. Did 
I hear that correctly?
    Mr. Bernanke. I will make two separate statements. The 
first one is you look at all the TARP-related financial 
investments and all the Fed special programs, facilities, etc., 
all of those have been or certainly will be profitable. That is 
the first statement. The second statement is that the Fed has 
remitted $125 billion in the last 2 years to the Treasury. That 
money comes from those programs. It also comes from our 
purchase of securities where we take the interest and just give 
it back to the Treasury.
    Mr. Capuano. So after all the wailing and gnashing of teeth 
over the last 2 years, you and we just earned the American 
taxpayers $125 billion.
    Mr. Bernanke. That is correct.
    Mr. Capuano. Thank you. I was a little stunned. After 
everything I have heard for the last 2 years, apparently we 
were just throwing money away, but I guess that just didn't 
turn out to be true. The other one I wanted to follow up on was 
Ms. Waters' question. I know there was a little back and forth 
last week as to what you said or what you didn't say; how it 
was interpreted. On the basis of the $60 billion in cuts to the 
Federal Government that has been proposed and passed by this 
House--not by the Senate but by the House--did I hear you 
correctly that the real disagreement was not on whether it 
would cost jobs, but how many jobs that would cost. Is that 
fair?
    Mr. Bernanke. That is right.
    Mr. Capuano. You are in the 200,000 range?
    Mr. Bernanke. Yes.
    Mr. Capuano. Over a period of approximately how long?
    Mr. Bernanke. A couple of years.
    Mr. Capuano. A year?
    Mr. Bernanke. A couple of years.
    Mr. Capuano. So the debate is really whether they are going 
to cut 200,000 jobs versus 700,000 jobs. And I guess it would 
probably be fair to say that you don't think cutting jobs is a 
really smart thing right now.
    Mr. Bernanke. No, I would like to see jobs creation. And 
what I have been trying to focus on, we have to keep our eye on 
deficit reduction, but we need to think of it in a long-term 
framework.
    Mr. Capuano. Fair enough. I agree with that statement. But 
those two statements today, to me, were the two most 
interesting statements that have been made all day. I have lots 
of other questions I am not going to have time to ask, so I 
will send them in writing.
    I want to talk about the growing gap between the wealthiest 
and the poorest in this country but that will have to wait 
until later. I know other members have mentioned it. I want to 
talk at some point, and I will probably put this in writing to 
you, the real definition of how many people are really 
unemployed. It really bothers me that for some reason, we don't 
count discouraged workers in the unemployed rank, because even 
though they are not looking for work and they really would like 
to work, we don't count them. It really bothers me that we 
don't take any account for the participation rate. The so-
called participation rate has gone down. And we don't seem to 
count them. I actually would like to really get your opinion on 
the Red Sox's chance for middle relievers this year, but that 
will have to wait as well.
    Mr. Bernanke. I would be happy to talk about that.
    Mr. Capuano. I know you would. And I actually would respect 
your opinion on the matter.
    I do want to talk a little bit; do you have any estimate of 
how much money corporations are sitting on at the moment? I 
know there have been reported numbers all over the place; 
hundreds of billions, maybe even trillions of dollars that 
corporations are holding on their books. Do you have any 
estimate on that?
    Mr. Bernanke. Two trillion dollars, I think that is cash on 
balance sheets. But a lot of that, I should add, is overseas.
    Mr. Capuano. But this is U.S. corporations holding it?
    Mr. Bernanke. Yes.
    Mr. Capuano. Okay. Do you think it would be good for the 
economy if that $2 trillion were to be moved into either 
investing in capital equipment or hiring people, or do you 
think it is best that corporations sit on the money?
    Mr. Bernanke. It would be better if it was invested or used 
for hiring, but firms have to make their own determination 
about whether that is a profitable thing to do
    Mr. Capuano. Do you think it would be a reasonable thing 
for this government and for your agency to look at ways to 
encourage--not punish, not demand--them to move that money 
around and get it back into the economy?
    Mr. Bernanke. That is one of the ways the QE2 works. It 
lowers yield in safe cash-like instruments like treasuries and 
makes it more expensive to hold cash. It makes people look for 
other things.
    Mr. Capuano. So you are already doing it.
    Mr. Bernanke. We are trying to do that, yes, now.
    Mr. Capuano. Do you think it would be good for this 
government to do it as well if we can find appropriate ways to 
encourage them?
    Mr. Bernanke. As you know, I have suggested looking at the 
corporate Tax Code. One aspect of it is the territoriality 
provision. If you were to allow firms to bring back cash from 
abroad without additional taxation or limited additional 
taxation, there might be more incentive for them to bring it 
home and use it domestically.
    Mr. Capuano. Excellent. I am not even going to use all my 
time because you have answered all my questions. I really want 
to thank you for being honest on those two items. Thank you 
very much, Mr. Chairman.
    Mr. Hensarling. The Chair now recognizes the gentleman from 
Pennsylvania, Mr. Fitzpatrick.
    Mr. Fitzpatrick. Thank you. And good afternoon, Chairman 
Bernanke. I have just two questions: one has to do with trade; 
and the second is a little closer to home. In connection with 
the trade gap with China, which has shown no signs of closing 
and despite the fact there is currency that has appreciated 
somewhat, my question is: What share of the trade imbalance can 
be attributed to exchange rates as opposed to more structural 
and institutional issues like high corporate taxes, which I 
believe we will soon have the highest corporate tax in the 
world, and other challenges that manufacturing has in this 
country?
    Mr. Bernanke. Exchange rates are certainly playing a role. 
The other most direct factors have to do with the saving and 
investment patterns in the two countries. In China, savings 
rates are extraordinarily high even though their investment is 
also high. And so they have a lot of extra savings to send 
abroad. And that corresponds to the current account surplus 
that they have. In the United States, our savings rate is much 
lower, both at the household level but also at the government 
level. So we need to borrow abroad. That corresponds to that as 
well.
    So I think those two factors, saving investment patterns 
and exchange rates, are the most important. There are other 
issues related to the mix of goods that we produce; the 
manufactured goods and specialized goods and China's need. A 
lot of what China imports is really components that they use to 
assemble and then export to other countries.
    Mr. Fitzpatrick. We still have a lot of manufacturing in 
Pennsylvania, so those issues are important. A little closer to 
home, my district, Pennsylvania's Eighth, is Bucks County, 
northeast Philadelphia. Housing and financial services are key 
industries in the district. Both have been hit hard in this 
recession. My sense is that up until 2008, banks were making 
loans to persons of good credit and also persons not of good 
credit, perhaps as a result of several Administrations' 
interest in housing policies.
    The question is: What can we do now in this economy to 
incentivize banks to start making loans again to persons of 
good quality credit?
    Mr. Bernanke. I was referring to some of our efforts 
earlier. We have to strike an appropriate balance, which your 
question suggested. We don't want banks to make bad loans. We 
want them to make loans to good borrowers and loans that will 
be paid back. I think banks are increasingly willing to do 
that. They are a little bit less shell-shocked than they were 
and their capital has built up and their profits are building 
up. So I think from a government point of view, our job and the 
Federal Reserve's job is to make sure that examiners and 
regulators are playing a neutral referee role and not actively 
restraining lending.
    So, as I mentioned, we have made a lot of effort to provide 
guidance to the banks and our examiners; to train our examiners 
to talk to the banks, to talk to businesses. And I think we are 
making some progress, but I admit there may be situations where 
good loans are still not being made. But I am hopeful that we 
will see some improvement this year.
    Mr. Fitzpatrick. But it is your sense that regulators are 
becoming more neutral or more reasonable?
    Mr. Bernanke. Of course, we are only one of several bank 
regulators. The Fed is only one. But we are working hard and 
trying to train our examiners and push them in the direction of 
a fair, neutral position on lending.
    Mr. Fitzpatrick. Mr. Chairman, may I yield 30 seconds to 
the gentleman from Ohio, Mr. Stivers?
    Chairman Bachus. You have 1 minute and 13 seconds you can 
yield to him.
    Mr. Stivers. I would like to thank the gentleman from 
Pennsylvania for yielding. As the most junior member, sometimes 
I don't get to ask questions. If I have time when it comes back 
to me, I would love to follow up on your answer to Mr. Capuano 
and I would love to have your thoughts on things that are not 
in your purview--tax trade and fiscal policy--but I would like 
to focus on your monetary role and part of your two-tiered 
mandate from Congress with regard to price stability, first.
    I am hearing from a lot of consumers in my district about 
prices. Gas prices just went up 10 percent; thirty cents a 
gallon last week. Obviously, that will ebb and flow over time. 
Commodity prices are up, food prices are up. The question I 
have for you is: How often do you look at the basket of goods 
that make up the price index for personal consumption 
expenditures to see if it is really what people are spending 
and what they are seeing as inflation?
    Mr. Bernanke. The CPI and the other inflation indices are 
weighted, which means that the prices are weighted according to 
how much people spend on them. So housing gets a heavy weight 
because people spend a large share of their income on rents.
    Mr. Stivers. Sure. But how often do you look at what is in 
it? It is not really updated, is it?
    Mr. Bernanke. The Bureau of Labor Statistics, which 
constructs those, updates the weights every few years, using 
survey data.
    Mr. Stivers. Thank you. I yield back, Mr. Chairman. 
Hopefully, it will get back to me
    Chairman Bachus. Thank you. At this time, Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman. Thank you, Mr. 
Chairman, for your willingness to help the committee with its 
work.
    I wanted to ask you, there has been a lot of discussion 
about quantitative easing--QE2--and your decision to go ahead 
and purchase long-term treasuries and the impact that has on 
interest rates going forward. I realize the fund rate is so 
low, you can't do much more on that side. Is there any way to 
quantify the benefit of that QE2? Would you be able to make an 
assessment of what would happen without it and what the 
repercussions would be for a credit?
    Mr. Bernanke. As with any macroeconomic policy, the 
question is what is the counterfactual; what would have 
happened. And you can never know that with certainty. We have 
done extensive analysis using models and so on. And there was a 
paper published that estimated, for example, that the $600 
billion would provide an additional 700,000 jobs, and that if 
you looked at all of the efforts, including the first QE round, 
there would be several million jobs created by that. Also, that 
the QE efforts together have added about a percentage point to 
inflation, which means that it has helped us move away from the 
deflation risk zone, so to speak.
    So our analysis, which I think is pretty well-founded and 
based on a lot of research, suggests that these effects, while 
obviously not curing the problem, have been substantial. But, 
of course, I was agnostic in my testimony because that is a 
model that isn't certain evidence.
    Mr. Lynch. If I can ask you, though, the banks are saying 
that they are lending less because businesses are requesting 
loans less. It is not the availability. It is sort of the 
willingness. If that were true, then just providing us 
liquidity to businesses that don't have that confidence, it 
wouldn't necessarily create 700,000 jobs.
    Mr. Bernanke. There are a lot of reasons why lending is 
down, including lack of demand for loans, issues related to 
regulation and capital, and so on. Our view of how QE2 works is 
not through bank reserves. Our view is that it works by 
changing asset market prices, including stock prices and 
corporate bond yields. And those effects have been quite 
substantial.
    To show a link, if you ask small businesses why they are 
not borrowing and what is their biggest problem, they say lack 
of demand--people aren't buying from me. But what we have seen 
in the last few months is a pretty significant pickup in 
consumer purchases. And that in turn is at least partly related 
to the increase in the stock market and lower interest rates 
and other factors making it more attractive for consumers to go 
out and spend. So the availability of credit to a firm is not 
the only factor. The demand from consumers is also a factor. It 
appears that we are affecting that.
    Mr. Lynch. I know this has been hit on by a few of the 
members here. But Mr. Zandi's--you know everything is political 
here. The CR that we just voted in would cut $60 billion out of 
the economy. Now, on previous occasions, I asked you about 
other measures that might have pulled money out of the economy. 
Is there any best guess that you have in terms of what it would 
result in terms of your mandate under Humphrey-Hawkins 
regarding full employment? Is there any delta that you think 
cutting $60 billion out of our economy would translate to in 
terms of the job market?
    Mr. Bernanke. Everything else equal and assuming that there 
is no further improvement in the long-term deficit position, 
our analysis of that proposal gives a couple of tenths on 
growth and maybe 200,000 jobs over a couple of years. Again, it 
is just a simple analysis. I don't know why we get smaller 
numbers than some of the private sector people do. It may be 
some differences in assumptions. But we have tried to do a 
realistic analysis of what those cuts would do over a couple of 
years.
    Mr. Lynch. Right now, we have a $1.6 trillion deficit; 
something like that. We are borrowing that money from the 
Chinese and from the Saudis. So I am not sure if we are 
assuming we are going to borrow it for other reasons, should 
the budget require it.
    With that, I will let you go.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. Mrs. Capito.
    Mrs. Capito. Thank you, Mr. Chairman. And welcome. Chairman 
Bernanke. I apologize if you have already answered this 
question. I had to slip out for a little bit.
    I have heard kind of conflicting information, and there was 
a news report, I believe in December, saying that $1 trillion 
is being held in cash on hand by corporations and companies and 
investors. They are kind of hunkered in, in a savings capacity. 
But in your report, it says that the total net national savings 
still remains low by historical standards. So my first question 
is, is this phenomenon of companies and investors holding their 
assets, is it large by historical perspective or is it lower?
    Mr. Bernanke. It is a question not of the new savings being 
done but of how the overall existing wealth and what form it is 
held. Firms have taken advantage of low interest rates to pay 
off debt or refinance debt and they are holding an awful lot of 
cash relative to longer-term norms.
    Mrs. Capito. Right. In terms of job creation, obviously if 
they let go of their cash or reinvest, that is going to create 
more jobs and more expansion of our economy. For instance, in 
my State--I am from West Virginia--a lot of our investors are 
kind of hunkered down because of the regulations regarding our 
fossil fuel industry; the uncertainty of where we are going to 
go with that. Do you see this as a problem in terms of the 
rulemaking that is going to be continuing on Dodd-Frank for the 
next several years? Do you think this will cause financial 
institutions and other investors to kind of hunker down on cash 
and not spread it out to create jobs we desperately need?
    Mr. Bernanke. There are two schools of thought: one is that 
we should delay in order to get further information; and the 
other is that we should do it as quickly as possible to get 
past the uncertainty. We are trying to do both. The Dodd-Frank 
Act put some pretty tough deadlines in terms of how quickly we 
are are supposed to get this done. We are working flat out at 
the Federal Reserve with over 300 people working on these 
regulations. And we would like to get them done right, but we 
would also like to get them done quickly. We appreciate that 
uncertainty is bad for business and bad for lending. And the 
sooner we can get a clear set of rules on the table, the more 
quickly the firms can go back to business.
    Mrs. Capito. Right. My other question is, I ask on my e-
newsletter: If you could ask a question to your Member of 
Congress, what would it be? It would be around a lot of 
different issues but the debt and deficit issue, the very 
simple question they ask is: What are you doing up there, just 
printing money? They do not understand the process. So I am 
going to take us back to the beginning process. In your report, 
you have said that Federal debt has risen but the demand for 
power securities is well maintained, particularly foreign 
custody holdings and foreign investments on the auction.
    The next question people ask is, who is holding our debt; 
what countries? Mr. Lynch mentioned this; that China is holding 
a lot of our debt. So we are not just printing money. We are 
creating debt and it is being held by foreign countries. What 
would you tell somebody in a very simplistic way how that is 
going to affect our national security, our trade, and our 
ability to move forward?
    Mr. Bernanke. As you say, what we are doing is borrowing 
and giving IOUs, Treasury securities which say we owe you a 
certain amount of money, we will pay you back with interest. At 
this point, both foreign central banks and investment funds as 
well as domestic investors seem pretty content to hold that 
debt for relatively low interest rates, 3\1/2\ percent for 10 
years. So that shows that there is still a pretty good 
willingness to hold U.S. Treasury securities.
    That being said, what I have said a couple of times today 
with respect to questions about our deficit situation is that 
we do need to move to provide confidence to lenders that we 
will control our deficit over time so that our borrowing needs 
won't explode. And if we can do that, then perhaps we can 
continue to borrow at reasonable interest rates.
    If we can't, then the risk that we are taking is that 
interest rates would spike up and then we would be in a really 
bad situation because not only would we have a big deficit, but 
we would also have to pay more interest, which would add 
further to the deficit and get us in a kind of vicious circle.
    It is just like borrowing, and like any unit firm or 
family, if you borrow more than you can repay, then eventually 
you are going to get in trouble.
    Mrs. Capito. Right.
    Chairman Bachus. Thank you. Mr. Miller.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. 
Several members on the Republican side have said that the 
Federal Government, Washington, never deals until with a 
problem until there is a great urgency, until we are on the 
brink of catastrophe. But that is not always true. A decade 
ago, the government was running a surplus. Your predecessor, 
Alan Greenspan, was worried about the economic effect of paying 
off the national debt too quickly. And even though it did not 
seem to be a particularly urgent concern, the President and 
Congress set about solving that problem with great enthusiasm. 
And if there is one problem the Federal Government solved in 
the last decade, it was the problem of paying off the national 
debt too quickly. I have to admit, my Party can claim no credit 
for that. It was a Republican President and a Republican 
Congress who solved that problem so thoroughly.
    And the tax cuts that were so much part of solving that 
problem did seem to skew dramatically to the richest 
Americans--65.5 percent of the tax cuts went to the top 
quintile, the top fifth. A lot of these folks really are 
hardworking and middle class. 26.8 to the top 14.7 percent to 
the top one-tenth of 1 percent. Those are families making more 
than $2 million a year, and the average benefit to them of 
those tax cuts was $340,000. And we saw just a couple of months 
ago in December how important it was to Republicans that they 
protect the tax cuts to the very richest Americans.
    It seems if we were worried about helping the economy, that 
would not have been where the focus was, because the people who 
are the richest are going to spend the least of their marginal 
income adding to demand for the economy. And now, to pay for 
that, supposedly we are cutting dramatically funding for 
education, we are firing tens of thousands of teachers in the 
CR, the continuing resolution, with special educators, cutting 
scientific research, cutting job training, cutting Pell Grants 
that middle-class families could afford which allow middle-
class kids to go to college; Head Start programs to help the 
kids who show up for kindergarten too far behind ever to catch 
up, and on and on. You said you wanted to solve the deficit 
problem in a long-term framework. That does seem to be the 
long-term framework.
    But the question I wanted to ask you about was three 
sentences in your testimony about housing. You said the housing 
sector was exceptionally weak. That certainly seems to be a 
fair statement. Overhang of existing homes on the market or the 
shadow inventory, 10 to 11 million units. The home values 
continue to go down. You have said that the biggest problem in 
the economy now is demand more than anything else, that 
businesses are sitting on $2 trillion in cash, but not 
increasing their operations, not making more stuff because they 
are not sure anybody is going to buy their staff if they make 
it, which does not seem to--making stuff people won't buy does 
not seem to be a good business decision.
    Declining home values seem to be affecting people's life 
savings or net worth in a pretty dramatic way. What effect is 
that having on our demand?
    Mr. Bernanke. You just said it. First, what probably is a 
smaller effect is that if people aren't buying houses, then 
there is no demand for construction to build houses. So the 
construction industry is quite reduced. The other effect is 
that people, in thinking about their retirements and so on, and 
their savings, will take into account to some extent their 
equity in their home. Unfortunately, one of the effects of the 
crisis is that a very significant number of people who had 
equity now are ``underwater.''
    Mr. Miller of North Carolina. About one in four.
    Mr. Bernanke. Meaning that they don't have any equity 
anymore. And that makes them--in order to therefore meet their 
retirement goals, they have to save rather than spend. So it 
has an effect on their spending decisions.
    Mr. Miller of North Carolina. The biggest single driver of 
the continued decline or the failure to rebound of the housing 
market appears to be foreclosures, that when more people are 
underwater, they can't really get out. They are stuck if they 
can't pay their mortgage for some reason. If they lose their 
job or someone in the family gets sick or they go through a 
divorce, they can't sell their house, they can't refinance. 
They are stuck. And they end up losing their homes to 
foreclosure. Foreclosed houses sit vacant in neighborhoods, 
pulling down the home values for everybody else. There are a 
great many markets in the country where well more than half of 
the homes on the market are foreclosures. Those are priced to 
sell.
    How urgent would you put dealing with foreclosure; 
foreclosure mitigation?
    Mr. Bernanke. You are absolutely right. That is a major 
problem and it causes a lot of hardship as well. So I would say 
it is a very high priority. Unfortunately, we haven't had a 
whole lot of success. We had some success, but it is a tough 
problem because if somebody is unemployed and doesn't have any 
income, it is hard to figure out how to keep them in their home 
if they can't pay their mortgage. So it would be terrific if we 
could reduce foreclosures--and we have been making efforts as a 
government--but it is a difficult problem.
    Chairman Bachus. Thank you. Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you for being here today.
    A quick question with regard to interchange fees. The other 
day, whenever Governor Raskin was here speaking to us, you were 
on the other side of the building speaking to the Senate. We 
were led to believe by the comments that you made that you were 
considering extending the date for the rule on the pricing of 
interchange fees. Have you thought about that a little bit more 
in the last couple of weeks? Are you still thinking about 
extending the date for coming up with the pricing on the 
interchange fees or are you pretty hard and fast at the end of 
April here?
    Mr. Bernanke. We have just now gotten all the comments 
back. We got about 8,000 comments. We have a lot of work to do. 
We also have to do a lot more work on some of the issues where 
we really didn't even make a proposal, like the fraud 
adjustment. So we are moving as quickly as we can, but whether 
we can make April 21st is a question at this point. Part of the 
law goes into effect in June, independent of whether we make 
the rules or not. But we are moving forward as quickly as we 
can. But, obviously, we want to do it right and we want to take 
into account the comments that we have received.
    Mr. Luetkemeyer. Are you still considering extending that 
time then?
    Mr. Bernanke. We are not extending the time in the sense 
that we are doing so in order to get more comments or anything 
like that, but we will have to take as much time as we need to 
do the appropriate rule.
    Mr. Luetkemeyer. Okay. As a former examiner myself, what do 
you say to your examining folks whenever they go out to the 
banks and they are losing roughly 13 percent of their income by 
taking away the interchange fee? What do you say to them when 
you walk in and their income has been cut by 13 percent?
    Mr. Bernanke. The examiners have no responsibility for it.
    Mr. Luetkemeyer. Yes, but they are examining the banks. 
They are looking at capital accounts. They are looking at the 
impact of the lack of income. What are you going to say to 
those guys? Are you going to give the banks forbearance as a 
result of this or are you going to come down harder, require 
them to go raise fees? They have been telling to who to do with 
their loans so are you going to tell them what to do with their 
income now?
    Mr. Bernanke. They have to still be well capitalized and 
meet those standards. I don't know what the income effects will 
be. Obviously, some of it can be made up by other fees or 
charges. So we will have to see what the impact is. It probably 
would be negative, you are right about that.
    Mr. Luetkemeyer. It is a very real concern from the 
standpoint that if the income isn't made up, the services have 
to go away. Because you can't provide something at a cost and 
continue to keep your doors open. At some point, this is a 
problem for everybody. I was wondering if the examiners are 
going to be giving some special instructions on how to handle 
this or are you going to just see what happens?
    Mr. Bernanke. I think I need to say that we are following 
the statute that Congress provided, and we don't have the 
authority to make our own decisions on that.
    Mr. Luetkemeyer. Okay. With regard to what is going on over 
in Europe right now, there are a lot of difficulties with their 
economy over there. Our banks have, I think, $1.3 trillion of 
loans to the governments of those different countries over 
there. What effect do you think that is going to have on our 
economy and our monetary policy?
    Mr. Bernanke. Most of the exposures that our banks have are 
to the stronger countries, the so-called poorer countries like 
Germany and France. They have limited, direct exposure to the 
countries of the governments that are dealing with fiscal 
issues right now. Of course, they have exposures to banks and 
companies as well in Europe. So we are watching that very 
carefully. But at the moment, my expectation is that Europe 
will solve their problems because they are very committed to 
preserving the Euro and the European Unification project.
    So I wouldn't put that in the very top rank of risks that 
our banking system has right now.
    Mr. Luetkemeyer. We do not, though, as a fallback position 
for them, their access to our Fed discount window?
    Mr. Bernanke. No. If they have a subsidiary in the United 
States, a subsidiary in the United States can borrow from our 
discount window, if it is fully collateralized.
    Mr. Luetkemeyer. That puts us right in the middle, doesn't 
it?
    Mr. Bernanke. No, it doesn't expose us to any credit risk.
    Mr. Luetkemeyer. Just very quickly, then, one quick concern 
I have is with regard to the QE2. I know over the course of 
last fall when I was talking to a lot of my businesses in my 
district, there was a lot of uncertainty. That is one of the 
reasons they didn't get engaged with regards to land, they are 
trying to expand their businesses or whatever, if you are 
talking to banks or talking to manufacturers or whatever. One 
of the things was QE2. The other was a lack of extension of the 
income tax rates. At the end of the year, we did that. And, 
quite frankly, I would go talk to manufacturers. The next day 
after that happened, orders started to pick up because some of 
the businesses felt there was more certainty.
    Obviously, there is still some uncertainty with regard to 
QE2 because of a concern about inflation. How would you 
address, if you were in my position, trying to talk to some of 
the business folks? How would you address that problem? What do 
you want me to say to them?
    Mr. Bernanke. I would say that consumers have come back. 
They are spending. We see some pretty strong numbers in auto 
purchases. And I think that there is nothing that will overcome 
uncertainty like demand in the store. If firms see that kind of 
demand, they are going to respond to that.
    Mr. Luetkemeyer. I see my time is up. Thank you very much.
    Chairman Bachus. Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman. Welcome, Mr. Bernanke. 
Let me ask you just quickly a followup on the previous question 
concerning interchange fees that I certainly would urge an 
extension of time or delay to make sure we have our hands 
around this complete issue. There are a lot of conflicting 
reports coming in as to just what is in the best interest of 
the consumer and the fact that many of our smaller community 
banks were not a part of the survey. There is still the issue 
of fraud. And certainly, there is some dispute over what impact 
the debit has in relationship to the retailers as you compare 
their cost savings with actually getting the checks cleared. So 
there are a lot of issues here, and I would urge that the Fed 
take a little more time on this to make sure.
    I want to ask you about also the corporate tax rate and 
what implications and how impactful this is in terms of our 
ability of our companies and our corporations to compete on the 
world stage, and the fact that the need--how serious is the 
need for us to review it, for us to make some changes in it, 
and especially given the fact that ours is the highest, at 
about 38 percent. I think only Japan is hiring, and they are 
considering lowering those, which seriously is going to put us 
at an impact.
    Would you comment on that and give us your thoughts on what 
needs to be done as far as the corporate tax rate is concerned?
    Mr. Bernanke. Congressman, you are correct that our tax 
rate looks soon to be the highest among industrial countries. 
And that is not helpful because in firms deciding where to 
invest, where to locate, they may choose to go elsewhere.
    So I think most economists would agree that a good Tax Code 
typically would have a broad base, which means you eliminate a 
lot of special deductions and exemptions and credits and all 
those things. And by getting a broad base, you can lower the 
rate. That, in turn, provides greater incentives for firms to 
locate in the United States. So that is the kind of reform I 
think that most economists would probably advocate. I think 
there would be benefits for Congress just to take a look at 
this.
    The other issue was the territoriality issue. Do you tax 
based on profits earned in the United States or on global 
profits? We are somewhat out of sync in the United States with 
what the practices of other countries on that particular issue.
    Mr. Scott. What rate do you think we should aim for that 
would put us in the best position in terms of competition on 
the world stage?
    Mr. Bernanke. I don't have a single number in mind, but a 
lot of countries have cut their rates down into to the 
twenties, for example. Now, whether we can there and still 
maintain revenue neutrality, I don't know. But there are 
obviously a number of deductions and exemptions and tax 
expenditures and so on that might be worth taking a look at
    Mr. Scott. But you would agree we certainly need to bring 
it into the twenties?
    Mr. Bernanke. We should certainly get it down, if we can, 
and we can do that without losing revenue or without losing 
significant revenue by broadening the base.
    Mr. Scott. Now, let me ask you about the unemployment 
levels, because a part of your charge is to keep prices stable 
and keep unemployment low. We have a real kind of contradictory 
dilemma before us when it comes to cutting Federal spending 
because on the one hand, we have to pay down the debt, we have 
to cut Federal spending, but at what cost to our faltering 
economy, that is still volatile, is still weak? And you 
mentioned a discrepancy between the Zandi report about 700,000 
jobs--let's just take the figure; the $61 billion cut that we 
passed last week. Why is there such a discrepancy between your 
figure of 200,000 jobs that would be lost and the figure of 
around 650,000 to 700,000? That is a huge difference. And I 
wonder, if you might, who do you believe here? Why is there a 
difference?
    Mr. Bernanke. I don't know the details of his calculation. 
I think it would probably behoove us, given the number of 
questions we have gotten, to be in touch with him and try to 
understand the reasons for the difference, but I don't know the 
reason right now.
    Mr. Scott. And would you say that those 200,000 that you 
estimate accurately, in your estimate, do you feel that is 
worth it? Do you feel that is collateral damage we are going to 
have to accept to put 200,000 more--
    Chairman Bachus. Go ahead and briefly answer.
    Mr. Bernanke. This is why I keep saying that we need to 
address the deficit. That is very important. But I think it 
would be most effective if we did that over a timeframe of 5 or 
10 years and did not try to do everything immediately.
    Chairman Bachus. Thank you.
    Mr. Hurt.
    Mr. Hurt. Thank you, Mr. Chairman. Thank you, again, 
Chairman Bernanke, for your appearance here today and for being 
willing to stay so late to answer our questions.
    As I said in my opening statement, I represent a very rural 
part of Virginia, and we have dozens and dozens of main streets 
with dozens and dozens or hundreds of small businesses, and 
small banks that provide capital so that those businesses can 
succeed. I think we all would agree that their success will 
drive our future economic recovery.
    I would like you to comment on your view of the atmosphere 
for lending by small banks in our rural communities, and was 
wondering if you could talk about that in the context of the 
regulatory structure that they have to deal with, the banking 
regulatory structure, as well as the upcoming implementation of 
Dodd-Frank.
    Mr. Bernanke. First of all, I agree with you that small 
businesses are very important and they create a lot of jobs. We 
don't have really good data on what is happening in terms of 
small business job creation, although I note that the ADP 
numbers this morning showed a lot of the bulk of the creation 
of jobs was in the smaller firms.
    So I think there is some recovery going on in small 
businesses, although the confidence is still pretty low.
    Anyway, the need for credit for small businesses is 
obvious. And we know from experience that small banks are often 
the ones that are best situated to provide that credit because 
they know the customer, they know the community, and so on. So 
we agree with that very much. As I have indicated on a couple 
of occasions here already, we can't solve all the problems. We 
can't ensure that all the small businesses are financially 
sound enough to warrant credit. We can't ensure that all the 
banks have enough capital to make more loans. But one thing we 
can do is try to ensure that the examination process doesn't 
unfairly penalize lending or discriminate against firms that 
are potentially profitable but are temporarily in a weak 
condition.
    Mr. Hurt. Are there specific things that you can speak 
about that address the maybe perceived micromanagement by 
regulators? Are there steps that are being taken to avoid 
micromanagement and allowing the smaller banks and all banks to 
use their judgment to make capital available in their 
communities?
    Mr. Bernanke. Absolutely. We have provided guidance to the 
banks and the examiners. We have provided extensive training to 
the examiners to try to get them to understand in great detail 
what kinds of considerations should be taken into account and 
which ones should not be taken into account. We have had 
various outreach programs like an ``Ask the Fed'', where banks 
and businesses call in and ask questions and we respond. We 
have had meetings all over the country with small banks and 
small businesses, including a capstone the last summer in 
Washington. We have an ombudsman line if anyone wants to call 
in who has a concern.
    So we take this very seriously. We are putting a great deal 
of effort into this. We have also added a new community bank 
council that will have a member from each Federal Reserve 
district around the country that will meet with the board three 
times a year. We have had a community banking committee to our 
supervision function.
    We understand this is a serious problem. And within the 
limits that we have, we are doing all we can to try to 
eliminate at least artificial barriers to new loans.
    Mr. Hurt. Thank you. Just one final question. With Dodd-
Frank being in the process of being implemented--and there are 
concerns about micromanagement by regulators--do you think that 
the costs that will accrue to the smaller banks will make it 
more difficult for them to survive and thereby be subject to 
merger and thereby create the ``too-big-to-fail'' problem that 
I think that Dodd-Frank was purportedly designed to avoid?
    Mr. Bernanke. We will see, but I don't think so. The Dodd-
Frank rules are very heavily concentrated, very heavily focused 
on the larger banks, because that is where the systemic risk 
occurred. Very few of the rules that are added are aimed at 
smaller banks. We will be very sensitive as we make the rules 
to the regulatory burden on small banks. I think to the extent 
that we can tighten up the supervision of large banks and also 
nonbank lenders, actually small banks may see that they have a 
more level playing field and may give them more opportunities 
than they haven't had in recent years.
    Mr. Hurt. Thank you, sir.
    Chairman Bachus. Ms. Moore.
    Ms. Moore. Thank you so much, Mr. Chairman. And thank you, 
Chairman Bernake, for appearing. I hail from Wisconsin, and so 
I am very concerned about our economic development conditions 
in Wisconsin--and I realize you don't have before you the 
budget that our Governor submitted yesterday, and in fact, I 
only have a thumbnail sketches from the Administration. So I am 
not going to expect you to respond in detail. But as a 
backdrop, I do want to ask you some questions about your role 
in monetary policy and in giving an overarching view of what 
makes a healthy economy.
    I notice from your comments that you started out 
immediately talking about the importance of consumer confidence 
and spending and about the importance of bringing down the 
unemployment rate. I want you to start out by giving me just a 
brief overview of your dual role for maintaining prices for 
monetary policy and how reducing unemployment fits into that 
equation for healthy balancing of monetary policy.
    Mr. Bernanke. As you have noted, we have a dual mandate 
from Congress, which includes both maximum employment and price 
stability. The way we implement that is to try to help the 
economy return to a full employment situation, which doesn't 
mean zero unemployment, because there are always going to be 
people moving between jobs and entering the labor force and so 
on, but to a level of unemployment which is consistent with our 
resources being fully utilized in our economy. And so in the 
current situation, that means we are trying to help the 
recovery, we are trying to help the economy grow.
    Ms. Moore. Thank you, Mr. Chairman. Having said that--
again, I am from Wisconsin--the strategy that our State 
currently has is to try to attract investors to create 250,000 
jobs. And so in doing that, we are establishing a 100 percent 
exclusion for capital gains for investors. We are spending $5.7 
billion on our transportation system. We are reducing burdens 
on our local governments to have standards for clean water 
beyond the Federal mandate. We are ending our recycling 
programs. And in order to pay for this, we are going to 
increase our unemployment rate.
    We gained 36,000 jobs nationwide in January--but just in 
State workers, we are going to fire 21,000 State workers. Then 
we are going to lower wages for other State workers by ending 
collective bargaining, health benefits, by $725 million. Even 
those who receive transfer payments like welfare recipients, we 
are going to reduce their $653-a-month welfare check by $20, 
and make them pay copayments for Medicaid. We are going to 
reduce school aids a total of almost a billion dollars, and cut 
other aids to cities, counties, and the technical colleges to 
the tune of $636.9 million.
    So this is going to increase unemployment, reduce the 
ability for these folks to consume. This is all over the course 
of a 2-year period of time. And I am wondering just in sort of 
a generic framework how we can expect--will this attract 
investors, will this make our bond market stronger? And the 
250,000 jobs that we are planning on creating, do you think 
that will--that these investments will suffice and override the 
damage that we are doing on the unemployment and on the 
consumer side? How do we balance those?
    Mr. Bernanke. Congresswoman, Wisconsin, like other States, 
has a balanced budget requirement. And that means that over the 
last couple of years, as revenues have gone down, a lot of 
tough choices have been made. We have seen about 350,000 State 
and local workers laid off in the last few years. So there are 
very tough decisions being made there.
    Ms. Moore. Does that help with home purchases?
    Mr. Bernanke. I can't judge whether or not without a lot 
more information and probably even then whether the private 
sector job gains created by attracting more business will 
offset the State and local.
    Ms. Moore. Thank you, Mr. Chairman.
    Chairman Bachus. Our last member to ask questions will be 
Mr. Dold, who is up next. I do want to say to Ms. Hayworth, Mr. 
Renacci, Mr. Schweikert, Mr. Grimm, Mr. Canseco, Mr. Huizenga, 
Mr. Duffy, and Mr. Stivers, you will be first up in 6 months 
when Chairman Bernanke comes back before the committee. By that 
time, we will have a balanced budget. But at this time, Mr. 
Dold and other members are free to do whatever they want to do, 
which is to listen to Chairman Bernanke.
    Mr. Dold. Thank you, Mr. Chairman. Chairman Bernanke, thank 
you so much for your time. A number of questions that I had 
have been answered--and we certainly have several. But we will 
try to make this somewhat brief.
    On the rulemaking and supervision, one important component 
is identifying the supposedly systemically significant nonbank 
institutions for enhanced Federal regulation. Can you update on 
that process and can you help give me some assurances that this 
designation process won't be overly broad or arbitrary? For 
example, I have talked to many insurance companies that are in 
the property and casualty business, life insurance companies 
that feel that they are going to get lumped into this process 
because AIG obviously was involved in this. But we know that 
their property and casualty business was really not a problem 
in this instance. It was the derivative side. So can you 
comment on that for me?
    Mr. Bernanke. Yes. It is the responsibility of the 
Financial Stability Oversight Council to set rules and make 
these designations. We have put out for public comment a 
proposed rulemaking that would ask for input about what 
criteria should be used. We are looking forward to getting 
those comments and to establishing a set of general criteria 
that we will then apply. And then we hope to begin to make 
designations by mid-year, I think would be a goal. So the 
process is moving forward.
    There are different views about how broad this should be. I 
think the agencies on the Council will need to continue to 
discuss it. The Federal Reserve has indicated that we think 
that a relative handful of firms will be so designated. We 
don't want to overextend this definition. That being said, we 
want to be sure to include every firm that would be a serious 
threat to systemic stability in case of its failure. I don't 
know the exact answer because, again, there may be some 
different views around the table, but we should have some more 
clarity in the next few months.
    Mr. Dold. Are we going to wait, because I know that the 
FSOC's expert hasn't even been named or appointed yet. Are we 
going to wait?
    Mr. Bernanke. That is a good question. It certainly would 
be desirable to have the insurance industry represented. We 
have a State insurance commissioner now. But we need another 
position as well. But you are correct.
    Mr. Dold. Thank you. Another question that I had is with 
regard to the methodology. What methodology did the Federal 
Reserve use to determine that $600 billion was the correct 
amount of money to deploy for the open market Treasury 
purchases?
    Mr. Bernanke. We have been able, by looking at the impact 
of purchases on markets to derive a rough equivalence between 
purchases and points on the Federal funds rate, and our very 
rough equivalent is something like $150 billion to $200 billion 
of purchases at roughly the same as a 25-basis-point cut in the 
Federal Funds rate. So $600 billion was interpreted by us as 
roughly a 75-basis point cut, which would be a significant cut, 
but not an unprecedented cut; one that would be taken in a 
situation where significant additional stimulus was needed and 
we seemed to be seeing the kind of response that we would get 
with a 75-basis point cut. That was roughly the analogy. Of 
course, we used our forecasting models and the like to try to 
assess what that impact would be.
    Mr. Dold. What would you consider, Mr. Chairman, standards 
for determining success or failure of open market purchases, 
and should you need to go into them again?
    Mr. Bernanke. The first question is efficacy; is it doing 
what we expect it to be doing. I think in a preliminary way it 
looks like it is. It seems to be having the effects on markets 
that one would anticipate. Beyond that, I think two criteria in 
corresponding to the two sides of our mandate. On the first 
side, we would like to see the recovery on a self-sustaining 
pace. When stimulus is withdrawn, we would like to be see the 
private sector leading a sustainable recovery.
    On the inflation side, I think we have succeeded in moving 
the economy away from deflation. We just want to be absolutely 
sure that we don't allow inflation to go above the levels 
consistent with our mandate in the long run, which is, in our 
view, about 2 percent.
    Mr. Dold. Thank you, Mr. Chairman. I would like to yield 
what little time I have remaining to my colleague from 
Wisconsin, Mr. Duffy.
    Mr. Duffy. I thank the gentleman from Illinois. Thank you, 
Mr. Bernanke. A few quick questions. We have a $14 trillion 
debt. We are going to borrow $1.6 trillion. We have talked 
about a lack of confidence or an issue with confidence, fear of 
interest rate hikes, fear of tax increases. Are you able to 
quantify the effect that has had on jobs and investment in the 
economy?
    Mr. Bernanke. I don't think I can easily quantify it. It is 
not so much an ongoing effect that we have today as in some 
sense a risk of a shock that this bond market might suddenly 
become less confident than we can repay those debts and 
interest rates with jobs. So it is more a risk than it is an 
effect.
    Mr. Duffy. As I talk to my folks in my district, they talk 
about a lack or unwillingness to invest because of concerns for 
interest rate hikes, they are concerned about tax increases.
    Mr. Bernanke. No, I don't have a number.
    Mr. Duffy. But you came out and said that a $61 billion cut 
is going to cost 200,000 jobs roughly. But you can't quantify 
how many jobs will be saved when we start to get our fiscal 
house in order?
    Mr. Bernanke. I was talking about that in isolation, 
looking directly at the effects of demand. If you couple that 
with a long-term plan that really shaved the deficit, I think 
that the overall effect would be much more favorable.
    Mr. Duffy. Positive. So you aren't saying that our actions 
are going to cost us 200,000 jobs. It is actually going to move 
in a positive direction?
    Mr. Bernanke. I would like you to address the deficit in a 
long-term basis if you can.
    Mr. Duffy. Okay. I yield back. Thank you.
    Chairman Bachus. Thank you, Chairman Bernanke. I want to 
just close by saying I think you and Ranking Member Frank and I 
have all said that unless we demonstrate a strong commitment to 
making critical plans for midterm and long-term reductions in 
our deficit, then to quote you, we will have neither financial 
stability nor healthy economic growth. I think that is 
something that we can unite across. And it seems as if there is 
agreement, hopefully in 6 months we will have some credible 
plans to demonstrate that commitment.
    With that, the Chair notes that some members may have 
additional questions for Chairman Bernanke which they may wish 
to submit in writing. Without objection, the hearing record 
will remain open for 30 days for members to submit written 
questions to this witness and to place his responses in the 
record. This hearing is adjourned. Thank you.
    [Whereupon, at 1:04 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             March 2, 2011


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