[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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65-672 WASHINGTON : 2011
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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
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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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