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

                        MONETARY POLICY AND THE 
                          STATE OF THE ECONOMY 



                               BEFORE THE


                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION


                             JULY 13, 2011


       Printed for the use of the Committee on Financial Services

                           Serial No. 112-46

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                   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
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT J. DOLD, Illinois

                   Larry C. Lavender, Chief of Staff

                            C O N T E N T S

Hearing held on:
    July 13, 2011................................................     1
    July 13, 2011................................................    49

                        Wednesday, July 13, 2011

Bernanke, Hon. Ben S., Chairman, Board of Governors of the 
  Federal Reserve System.........................................     6


Prepared statements:
    Paul, Hon. Ron...............................................    50
    Bernanke, Hon. Ben S.........................................    52

              Additional Material Submitted for the Record

Bernanke, Hon. Ben S.:
    Monetary Policy Report to the Congress, dated July 13, 2011..    65
    Written responses to questions submitted by Representative 
      Fitzpatrick................................................   123
    Written responses to questions submitted by Representative 
      Luetkemeyer................................................   126

                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY


                        Wednesday, July 13, 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, King, 
Royce, Lucas, Paul, Jones, Biggert, Miller of California, 
Capito, Garrett, Neugebauer, McHenry, Pearce, Posey, 
Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, 
Hayworth, Renacci, Hurt, Dold, Schweikert, Grimm, Canseco, 
Stivers, Fincher; Frank, Waters, Maloney, Velazquez, Watt, 
Ackerman, Sherman, Meeks, Capuano, Clay, McCarthy of New York, 
Baca, Lynch, Miller of North Carolina, Scott, Green, Cleaver, 
Perlmutter, Donnelly, Carson, Himes, 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 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 purposes of opening 
statements, I recognize myself for 5 minutes.
    Chairman Bernanke, welcome back to the committee. I want to 
commend you for your service to the country during these 
challenging economic times. America is confronted with many 
challenges, not least of which is a crisis of confidence. For 
the first time in the history of our country, the majority of 
Americans no longer believe that their children will be better 
off than they are. One great challenge is to preserve the 
American spirit of individual initiative and responsibility, 
what was once called the American ``can-do'' spirit. I briefly 
looked over your testimony this morning, and I noticed you 
mentioned confidence on several occasions in your speech. 
Confidence is critical. It is critical for us to believe in 
ourselves, to believe in our future, to believe that it will 
get better.
    The uncertainty and lack of confidence are at the center of 
the failure of our economy to achieve a robust recovery with 
job creation, the job creation which will be necessary to 
support the continued improvement in our citizens' lives that 
we have come to expect as Americans. The origin of this crisis 
of confidence is debatable. The great recession and its legacy 
of job losses and home foreclosures is a contributing factor. 
Those are things we will have to work through. As your 
testimony said, it will be a long process.
    But in my opinion, the seeds of this lack of confidence 
were first sown in well-intentioned programs of the 1930s and 
of the Lyndon Johnson Great Society. I commend to you and to my 
colleagues here an article by Thomas Donlan in Barrons on June 
25th. In that article, Donlan describes the historical 
underpinnings of the entitlement philosophy that has brought 
our budget to what you have called an ``unsustainable path.''
    Let me quote from that article. Actually Lyndon Johnson 
recorded all his conversations, and they are there for us to 
see. And speaking in March of 1965 with his press secretary, 
Bill Moyers, on his motivation for Medicare, here is what he 
said: ``I have never seen one''--he is talking about the 
average worker--``I have never seen one have too much health 
benefits. So when they come in to me and say we have to have 
$400 million more so we can take care of some doctor bills, I 
am for it on health. None of them ever get enough. They are 
entitled to it. That's an obligation of ours. It's just like 
your mother writing you and saying she wants $20. I always send 
mine $100 when she asks. I always did because I thought she was 
entitled to it.''
    We have. That is what we have been doing with Medicare. 
When Wilbur Mills called President Johnson to tell him that 
Medicare had passed, that conversation was recorded, too, and 
here is what Wilbur Mills said to President Johnson: ``I think 
we've got you something that we won't only run on in 1960 but 
will run on from hereafter.''
    It seems like the Congress and the Administrations have 
been running on entitlement programs ever since, and now the 
money has run out. President Johnson, as I said, he was quoted 
as saying that people are entitled to an unlimited amount of 
medical benefits. I have two charts during my questioning I 
want to show you and to my fellow colleagues on the committee, 
but you have said that the Federal entitlement programs and the 
deficit spending they cause are not--if they are not put on a 
sustainable path, things will come apart. I fear we are at that 
point. Things are coming apart.
    I want to give two other quotes I have. My time is running 
out. But let me just say this, the buck stops with this 
Congress, and if the Federal Reserve cannot address this 
problem, we have to. We have to confront our entitlement 
problems and take your advice. If we do not, we will not 
restore confidence. If we do not, we will not restore a future 
for our children and grandchildren. So I thank you for your 
testimony. I recognize the ranking member.
    Mr. Frank. Thank you. Welcome, Mr. Chairman, and Mr. 
Chairman, thank you. I thank you, too, Mr. Chairman, for your 
bipartisan restraint because in blaming Franklin Roosevelt and 
Lyndon Johnson, you let Woodrow Wilson off the hook, and I 
think that was an act of generosity.
    The notion that the problems we are now facing are the 
fault of efforts begun under FDR and continued under LBJ with 
some others, Harry Truman and John Kennedy also helping, that 
is the cause of the current problem is a very hard one for me 
to understand. I guess it is particularly hard because 
apparently these terrible efforts by Roosevelt and Johnson to 
put a set of policies in place that help us have a middle class 
when people get old took a very long time to take effect. 
Apparently, these 1965 and 1930s decisions did not begin to 
blow up until fairly recently. I note the chairman said, oh, 
well, the great recession was a contributing factor. Here is 
where we differ in our analysis, and I think the history is 
pretty clear. We were doing very well. We did very well in the 
1990s, we did very well in the 1990s even though this Congress 
and Bill Clinton raised the marginal tax rate on the wealthiest 
people in the country.
    And predictions to the contrary notwithstanding, we then 
had some of the best economic years we have ever had because it 
turned out that raising the marginal rate from 36 percent to 39 
percent on the wealthiest 2 percent had no negative economic 
effect. It did not lead them to stop working on Saturdays or 
take longer lunch hours. They continued their productivity.
    The problem was, and Mr. Bernanke is here now, he was here 
in 2008 as an appointee of President Bush, and in good faith, 
and I believe quite appropriately came to this Congress as the 
chairman knows because he was there along with Secretary 
Paulson, George Bush's Secretary of the Treasury, and said we 
are on the verge of a total economic collapse, and we suffered 
from 2008 until well into 2009 that serious economic collapse, 
a total lack of economic activity caused by the financial 
crisis. And to say that terrible set of events, the worst since 
the Great Depression, and they did not become worse only 
because of actions taken on a bipartisan basis to stave off 
even worse, that is a contributing factor, but it is really 
Lyndon Johnson's fault, seems to me, to be very odd history at 
    In fact, when President Obama came to office, he inherited 
the worst economy in 75 years. We have made progress. It has 
not been good enough. Part of the problem has been public 
policies that have retarded progress. Unemployment is much too 
high. As the Chairman of the Federal Reserve makes clear in his 
report, we have added about a million jobs so far this year in 
the private sector. Unfortunately, we have been simultaneously 
losing State and local jobs, teachers, police officers, 
firefighters, and public works employees because of the 
policies of my Republican colleagues. In fact, while 
unemployment is not what we would like it to be, beginning with 
the period of 2009 when the stimulus was at its height, we have 
since then lost a half a million jobs. That is, unemployment 
would be 0.4 percent lower if we had not lost State and local 
jobs. I am not talking about a failure to gain. I am talking 
about there being fewer State and local jobs because of a 
failure to differentiate between the need to do long-range 
deficit reduction and the counterproductive activity of forcing 
State and local governments to fire people in the short term 
and then complain about unemployment.
    And then I will address the problems financially. The 
chairman thinks it is Lyndon Johnson's fault. No, I do not 
think that Medicare is a terrible thing. I do not think it has 
caused us a problem. I think the ability of the American 
people, when they get older, to have a decent middle-class life 
through Social Security and Medicare is something of which we 
should be very proud as a country. And it is true at $580 
billion a year, Medicare costs us a lot of money. Almost as 
much--well, not even almost as much, but perhaps the same order 
of magnitude as the Pentagon--almost $700 billion will go to 
the military. And when Members of this House who voted to 
continue to spend money in the infrastructure program for 
Afghanistan, when there were people who appear to be arguing, 
and I will say this to my Administration that I support, the 
notion that they would go beyond George Bush and keep troops in 
Iraq next year when we are in such a terrible financial 
situation is a very hard one for me to understand. But Members 
who would not even--we talk about austerity. A majority of this 
House voted to give the Pentagon a $17 billion increase over 
this year for next year, $17 billion. Money spent in 
Afghanistan and Iraq. I do not believe that Members who are 
prepared to spend almost without limit in those wars that 
should have been ended and on the Pentagon ought to be telling 
older people to feel embarrassed about getting adequate medical 
    Chairman Bachus. I now recognize the subcommittee chair, 
Mr. Paul, and also acknowledge that he has announced that at 
the end of this term, he will be leaving Congress, and I am 
sure that came as quite a disappointment to the Federal 
    Mr. Frank. Mr. Chairman, would you yield briefly, can I 
join because Mr. Paul and I have worked in opposition on some 
issues, and together on some others. He has been an 
extraordinarily valuable Member, and I will miss him. Could I 
also note, Mr. Chairman, that you have the honor of I think 
presiding for the first time in American history over a 
committee that has three declared Presidential candidates. I 
hope we will not soon have to have Secret Service replacing our 
Capitol policemen at the door, but I will miss Mr. Paul.
    Chairman Bachus. And one of them is here today.
    Dr. Paul. I thank the chairman for yielding. Somebody had 
told me that announcement would put a smile on Chairman 
Bernanke's face.
    Chairman Bachus. And his staff, they are all smiling.
    Dr. Paul. But I thank the chairman for yielding and I 
welcome Chairman Bernanke. The country today has become very 
aware of how serious our problems are. I think everybody 
understands that it is very, very serious. It is critical, and 
from my viewpoint, I think the country is literally bankrupt, 
and we are not quite willing to admit that. But these are 
overwhelming problems that we do face. Unfortunately, from my 
viewpoint, I think we have more going on here on who to blame 
for the problems and who is going to benefit by blaming. I see 
it a little bit differently because I see it as a failed 
policy, a policy of central economic planning, and that has not 
been going on just with this Congress and this President. It 
has been going on for quite a few decades. I think that is what 
we have to address.
    Literally, the Congress appropriates the money and is a big 
blame. But also, the special interests have tremendous 
influence, and they are to blame, but also we have citizens 
groups who always want handouts and special benefits. They have 
some blame to assume as well. But also it is these wars that 
continue to go on, the undeclared war, the consonance of wars. 
Nobody can even tell us exactly how many wars we are in today 
and when the next one is going to start or when the last one is 
going to end. And then all of this spending and pressure.
    Then we also have the Fed to deal with, too. And I see the 
Fed as a problem because I see so much of this other spending 
would not have gotten out of hand if we did not have a monetary 
system where the system provides the funds. We do not have to 
be responsible because we can always say, it is up to the Fed. 
If we did not have the Fed buying up our debt, interest rates 
would rise and everybody would yell and scream, but you know 
what it would do? It would put pressure on us here in the 
Congress to do something about it. But I see the monetary 
system and the Federal Reserve System as a facilitator for all 
these special interests, and for a good many decades, we have 
been able to get away with this. But we are not getting away 
with it anymore because we have run out of steam. We have run 
out of jobs. We have run out of productive capacity.
    Our Tax Code is all out of whack. The entitlements are out 
of control. Our good jobs are going overseas. We chase capital 
away, we have a deliberate policy of a weak currency. Weak 
currency chases away capital. So I see this has all added up to 
give us this crisis, and unfortunately we are still looking for 
who to blame for this. You cannot find one individual or one 
Administration. You have to blame the policy, and unfortunately 
central economic planning, whether of the Soviet style or 
whether of the style of the interventionist where we do it 
through congressional activity as well as central banking, the 
central economic planning is always flawed because it is never 
as smart as the market. That is why I object to the idea that 
we are knowledgeable enough to set interest rates and know what 
the money supply should be because that is information that 
should come from the market. When it does not come from the 
market, it is a failed policy and leads to the type of crisis 
we are now suffering from.
    Chairman Bachus. I thank the subcommittee chair. At this 
time, I would like to recognize the ranking member of the 
Subcommittee on Monetary Policy, Mr. Clay, for 3 minutes.
    Mr. Clay. Thank you, Mr. Chairman. I, too, want to say that 
I will miss my colleague, Dr. Paul. Perhaps he will remain in 
this town in some capacity.
    Let me thank you for holding this hearing on the conduct of 
monetary policy and the state of the economy. Also thank you, 
Chairman Bernanke, for once again appearing before us. The Full 
Employment and Balanced Growth Act of 1978, better known as the 
Humphrey-Hawkins Act, set forth benchmarks for the economy: 
full employment; growth in production; price stability; and a 
balance of trade and budget. To monitor progress towards these 
goals, the Act mandated that the Federal Reserve must present 
semiannual reports to Congress on the state of the U.S. economy 
and the Nation's financial outlook. The Humphrey-Hawkins Act 
also charges the Federal Reserve with a dual mandate: 
maintaining stable prices; and promoting full employment.
    According to the Department of Labor, in June, the Nation's 
unemployment rate was 9.2 percent. Over 14 million Americans 
are looking for work. Another 5 million are underemployed at 
jobs that pay much less than they previously earned and offer 
few benefits. In urban areas, like the district that I 
represent in St. Louis, the unemployment rate among African 
Americans and other minorities is over 16 percent. The Majority 
party has been in power in the House for 190 days, and yet we 
have not seen one jobs bill, and America is still waiting.
    Chairman Bernanke, I am eager to hear what additional steps 
the Federal Reserve is willing to take to free up the flow of 
credit to small businesses and to encourage major banks to 
finally invest in the recovery instead of sitting on the 
sidelines with trillions of dollars that could be creating 
millions of new jobs. I also look forward to Chairman 
Bernanke's comments regarding what other urgent steps Congress 
can take to spur private sector job growth and restore 
confidence in our economic future.
    With that, Mr. Chairman, I yield back.
    Chairman Bachus. Thank you, Mr. Clay. I appreciate that 
opening statement. Before I recognize the Chairman, I would 
like to remind the members of the committee that traditionally, 
the Chairman is here until 12:30, and we will adhere to that 
today. To accommodate as many members as possible, I am going 
to strictly enforce the 5-minute rule. The opening statements 
will all be given within that time limit. Without objection, 
Chairman Bernanke, your written statement will be made a part 
of the record, and you are now recognized for a summary of your 


    Mr. Bernanke. Thank you. Chairman Bachus, Ranking Member 
Frank, and other members of the committee, I am pleased to 
present the Federal Reserve's semiannual monetary policy report 
to the Congress. I will begin with a discussion of current 
economic conditions and the outlook and then turn to monetary 
    The U.S. economy has continued to recover, but the pace of 
expansion so far this year has been modest. After increasing at 
an annual rate of 2\3/4\ percent in the second half of 2010, 
real GDP rose at about a 2 percent rate in the first quarter of 
this year, and incoming data suggests the pace of recovery 
remained soft in the spring. At the same time, the unemployment 
rate, which had appeared to be on a downward trajectory at the 
turn of the year, has moved back above 9 percent.
    In part, the recent weaker-than-expected economic 
performance appears to have been the result of several factors 
that are likely to be temporary. Notably, the run-up in prices 
of energy, especially gasoline and food, has reduced consumer 
purchasing power. In addition, the supply chain disruptions 
that occurred following the earthquake in Japan caused U.S. 
motor vehicle producers to sharply curtail assemblies and 
limited the availability of some models.
    Looking forward, however, the apparent stabilization in the 
prices of oil and other commodities should ease the pressure on 
household budgets, and vehicle manufacturers report that they 
are making significant progress in overcoming the parts 
shortages and expect to increase production substantially this 
    In light of these developments, the most recent projections 
by members of the Federal Reserve Board and the President of 
the Federal Reserve Banks prepared in conjunction with the FOMC 
meeting in late June reflected their assessments that the pace 
of economic recovery will pick up in coming quarters. 
Specifically, participants project for the increase in real GDP 
a central tendency of 2.7 to 2.9 percent for 2011 inclusive of 
the weak first half, and 3.3 to 3.7 percent in 2012, 
projections that if realized, would constitute a notably better 
performance than we have seen so far this year.
    FOMC participants continue to see the economic recovery 
strengthening over the medium term, with the central tendency 
of their projections for the increase in real GDP picking up to 
3.5 to 4.2 percent in 2013. At the same time, the central 
tendencies of the projections of the real GDP growth in 2011 
and 2012 were marked down nearly one-half percentage point 
compared with those reported in April, suggesting that FOMC 
participants saw at least some part of the first-half slowdown 
as persisting for a while.
    Among the headwinds facing the economy are the slow growth 
in consumer spending, even after accounting for the effects of 
higher food and energy prices, the continued depressed 
condition of the housing sector, still limited access to 
credits for some households and small businesses, and fiscal 
tightening at all levels of government. Consistent with 
projected growth and real output modestly above its trend rate, 
FOMC participants expected that over time, the jobless rate 
will decline, albeit only slowly, toward its longer term normal 
level. The central tendencies of the participants' forecasts 
for the unemployment rate were 8.6 to 8.9 percent for the 
fourth quarter of this year, 7.8 to 8.2 percent at the end of 
2012, and 7.0 to 7.5 percent at the end of 2013.
    The most recent data attests to the continuing weakness of 
the labor market. The unemployment rate increased to 9.2 
percent in June and gains in nonfarm payroll employment were 
below expectations for a second month. To date, of the more 
than 8\1/2\ million jobs lost in the recession, 1\3/4\ million 
have been regained. Of those employed, about 6 percent, 8.6 
million workers, report that they would like to be working 
full-time but can only obtain part-time work. Importantly, 
nearly half of those currently unemployed have been out of work 
for more than 6 months, by far the highest ratio in the post-
World War II period. Long-term unemployment imposes severe 
economic hardships on the unemployed and their families, and by 
leading to an erosion of skills, it also impairs their lifetime 
employment prospects and reduces the productive potential of 
our economy as a whole.
    Much of the slowdown in aggregate demand this year has been 
centered in the household sector, and the ability and 
willingness of consumers to spend will be an important 
determinant of the pace of recovery in coming quarters. Real 
disposable income over the first 5 months of 2011 was boosted 
by the reduction in payroll taxes, but those gains were largely 
offset by higher prices for gasoline and other commodities. 
Households report that they have little confidence in the 
durability of the recovery and about their own income 
prospects. Moreover, the ongoing weakness in home values is 
holding down household wealth and weighing on consumer 
    On the positive side, household debt burdens are declining, 
delinquency rates on credit cards and auto loans are down, and 
the number of homeowners missing a mortgage payment for the 
first time is decreasing. The anticipated pickups in economic 
activity and job creation, together with the expected easing of 
price pressures, should bolster real household income 
confidence and spending in the medium run.
    Residential construction activity remains at an extremely 
low level. The demand for homes has been depressed by many of 
the same factors that have held down consumer spending more 
generally, including the slowness of the recovery in jobs and 
income as well as poor consumer sentiment. Mortgage interest 
rates are near record lows, but access to mortgage credit 
continues to be constrained. Also, many potential homebuyers 
remain concerned about buying into a falling market, as weak 
demand for homes and the substantial backlog of vacant 
properties for sale and the high proportion of distressed sales 
are keeping downward pressure on house prices.
    Two bright spots in the recovery have been exports and 
business investment in equipment and software. Demand for U.S.-
made capital goods from both domestic and foreign firms has 
supported manufacturing production throughout the recovery thus 
far. Both equipment and software outlays and exports increased 
solidly in the first quarter and the data on new orders 
received by U.S. producers suggests that the trend continued in 
recent months. Corporate profits have been strong and larger 
nonfinancial corporations with access to capital markets have 
been able to refinance existing debt and to lock in funding at 
lower yields. Borrowing conditions for businesses generally 
have continued to ease, although as mentioned, the availability 
of credit appears to remain relatively limited for some small 
    Inflation has picked up so far this year. The price index 
for personal consumption expenditures rose at an annual rate of 
more than 4 percent over the first 5 months of 2011 and 2\1/2\ 
percent on a 12-month basis. Much of the acceleration was the 
result of higher prices for oil and other commodities and for 
imported goods. In addition, prices for motor vehicles 
increased sharply when supplies for new models were curtailed 
by parts shortages by the earthquake in Japan. Most of the 
recent rise in inflation appears likely to be transitory, and 
FOMC participants expect inflation to subside in coming 
quarters to rates at or below the level of 2 percent or a bit 
less, that participants view is consistent with our dual 
mandate of maximum employment and price stability.
    The central tendency of participants' forecast the rate of 
increase in the PCE price index was 2.3 to 2.5 percent for 2011 
as a whole, which would imply a significant slowing of 
inflation in the second half of the year. In 2012 and 2013, the 
central tendency of the inflation forecast was 1.5 to 2.0 
    Reasons to expect inflation to moderate include the 
apparent stabilization in the prices of oil and other 
commodities, which is already showing through to retail 
gasoline and food prices. The still substantial slack in U.S. 
labor and product markets, which has made it difficult for 
workers to obtain wage gains, and for firms to pass through 
their higher costs, and the stability of longer-term inflation 
expectations as measured by surveys of households, the 
forecasts of professional private sector economists and 
professional market indicators.
    The judgments of FOMC members, the pace of the economic 
recovery overcoming quarters will likely remain moderate, that 
the unemployment rate will consequently decline only gradually, 
and that inflation will subside are the basis for the 
committee's decision to maintain a highly accommodative 
monetary policy. As you know, that policy currently consists of 
two parts: First, the target range for the Federal funds rate 
remains at zero to one-fourth percent, and as indicated in the 
statement released after the June meeting, the committee 
expects that economic conditions are likely to warrant 
exceptionally low levels of the Federal funds rate for an 
extended period.
    The second component of monetary policy has been to 
increase the Federal Reserve's holdings of longer-term 
securities, an approach undertaken because the target for the 
Federal funds rate could not be lowered meaningfully further. 
The Federal Reserve's acquisition of longer-term Treasury 
securities boosted the prices of such securities and caused 
longer-term Treasury yields to be lower than they would have 
been otherwise. In addition, by removing substantial quantities 
of longer-term Treasury securities from the market, the Fed's 
purchases induced private investors to acquire other assets 
that serve as substitutes for Treasury securities in the 
financial marketplace, such as corporate bonds and mortgage-
backed securities.
    By this means, the Fed's asset purchase program, like more 
conventional monetary policy, has served to reduce the yields 
and increase the prices of those other assets as well. The net 
result of these actions is lower borrowing costs and easier 
financial conditions throughout the economy. We know from many 
decades of experience with monetary policy that when the 
economy is operating below its potential, easier financial 
conditions tend to promote more rapid economic growth. 
Estimates based on a number of studies as well as Federal 
Reserve analyses suggest that all else being equal, the second 
round of asset purchases probably lowered longer-term interest 
rates approximately 10 to 30 basis points. Our analysis further 
indicates that a reduction in longer-term interest rates of 
this magnitude would be roughly equivalent in terms of its 
effect on the economy to a 40-to-120 basis point reduction in 
the Federal funds rate.
    In June, we completed the planned purchases of $600 billion 
in longer-term Treasury securities that the committee initiated 
in November while continuing to reinvest the proceeds of 
maturing or redeemed longer-term securities and treasuries. 
Although we are no longer expanding our securities holdings, 
the evidence suggests that the degree of accommodation 
delivered by the Federal Reserve securities purchase program is 
determined primarily by the quantity and mix of securities that 
the Federal Reserve holds rather than by the current pace of 
new purchases.
    Thus, even with the end of net new purchases, maintaining 
our holdings of these securities should continue to put 
downward pressure on market interest rates and foster more 
accommodative financial conditions than would otherwise be the 
    It is worth emphasizing that our program involved purchases 
of securities, not government spending, and as I will discuss 
later, when the macroeconomic circumstances call for it, we 
will unwind those purchases. In the meantime, interest on those 
securities is remitted to the U.S. Treasury.
    When we began this program, we certainly did not expect it 
to be a panacea for the country's economic problems. However, 
as the expansion weakened last summer, developments with 
respect to both components of our dual mandate implied that 
additional monetary accommodation was needed. In that context, 
we believe that the program would both help reduce the risk of 
deflation that had emerged and provide a needed boost to 
faltering economic activity and job creation. The experience to 
date with the round of securities purchases that just ended 
suggests that the program had the intended effects of reducing 
the risk of deflation and shoring up economic activity.
    In the months following the August announcement of our 
policy of reinvesting maturities and redeemed securities, and 
our signal that we were considering more purchases, inflation 
compensation as measured in the market for inflation indexed 
securities rose from low to more normal levels, suggesting that 
the perceived risks of deflation had receded markedly. This was 
a significant achievement, as we know from the Japanese 
experience that protracted deflation can be quite costly in 
terms of weaker economic growth.
    With respect to employment, our expectations are relatively 
modest. Estimates made in the autumn suggested that the 
additional purchases could boost employment by about 700,000 
jobs over 2 years, or about 30,000 extra jobs per month. Even 
including the disappointing readings for May and June, which 
reflected in part the temporary factors discussed earlier, 
private payroll gains have averaged 160,000 per month in the 
first half of 2011 compared with average increases of only 
about 80,000 private jobs from the months of May to August 
2010. Not all of the step-up in hiring was necessarily the 
result of the asset purchase program, but the comparison is 
consistent with our expectations for employment gains. Of 
course, we will be monitoring developments in the labor market 
    Once the temporary shocks that have been holding down 
economic activity pass, we expect to again see the effects of 
policy accommodation reflected in stronger economic activity 
and job creation. However, given the range of uncertainties 
about the strength of the recovery and prospects for inflation 
over the medium term, the Federal Reserve remains prepared to 
respond should economic developments indicate that an 
adjustment in the stance of monetary policy would be 
    On the one hand, the possibility remains that the recent 
economic weakness may prove more persistent than expected and 
that deflationary risks might reemerge, implying a need for 
additional policy support. Even with the Federal funds rate 
close to zero, we have a number of ways in which we could act 
to ease financial conditions further. One option would be to 
provide more explicit guidance about the period over which the 
Federal funds rate and the balance sheet would remain at their 
current levels. Another approach would be to initiate more 
securities purchases or to increase the average maturity of our 
holdings. The Federal Reserve could also reduce the 25 basis 
point rate of interest it pays to banks and their reserves, 
thereby putting downward pressure on short-term rates more 
generally. Of course, our experience with these policies 
remains relatively limited, and employing them would entail 
potential risks and costs. However, prudent planning requires 
that we evaluate the efficacy of these and other potential 
alternatives for deploying additional stimulus if conditions 
    On the other hand, the economy could evolve in a way that 
would warrant a move to less accommodative policy. Accordingly, 
the committee has been giving careful consideration to the 
elements of its exit strategy, and as reported in the minutes 
of the June FOMC meeting, it has reached a broad consensus 
about the sequence of steps that it expects to follow when the 
normalization of policy becomes appropriate. In brief, when 
economic conditions warrant, the committee would begin the 
normalization process by ceasing the reinvestment of principal 
payments on its securities, thereby allowing the Federal 
Reserve's balance sheet to begin shrinking.
    At the same time or sometime thereafter, the committee 
would modify the forward guidance in its statement. Subsequent 
steps would include the initiation of temporary reserve-
draining operations, and when conditions warrant, increases in 
the Federal funds rate target. From that point on, changing the 
level or range of the Federal funds rate target would be our 
primary means of adjusting the stance of monetary policy in 
response to economic developments.
    Sometime after the first increase in the Federal funds rate 
target, the committee expects to initiate sales of agency 
securities from its portfolio, with the timing and pace of 
sales clearly communicated to the public in advance. Once sales 
begin, the pace of sales is anticipated to be relatively 
gradual and steady, but it could be adjusted up or down in 
response to material changes in the economic outlook or 
financial conditions.
    Over time, the securities portfolio and associated quantity 
of bank reserves are expected to be reduced to the minimum 
levels consistent with the efficient implementation of monetary 
policy. Of course, conditions can change, and in choosing the 
time to begin policy normalization as well as the pace of that 
process, should that be the next direction for policy, we would 
carefully consider both parts of our dual mandate. Thank you, 
and I am pleased to answer questions.
    [The prepared statement of Chairman Bernanke can be found 
on page 52 of the appendix.]
    Chairman Bachus. Thank you, Chairman Bernanke. Chairman 
Bernanke, I mentioned our entitlement programs in my opening 
statement and what I consider sort of the genesis of our 
entitlement philosophy in this country, and I did quote 
President Johnson. His quote is that people are entitled to an 
unlimited amount of medical benefits. I think that is an 
admirable statement, but I think it has proven to be 
unaffordable, and you have actually, on many occasions, warned 
both the Budget Committee and our committee that an 
unsustainable budget path makes your job much harder, and I 
know that you, in your outline yesterday and this morning, have 
said that you remain flexible and accommodative, and I know you 
have been criticized by some for an accommodative monetary 
policy and for maintaining interest rates at such levels, but I 
want to commend you. I believe that probably the 1-in-5 jobs we 
have recovered we would not have recovered had we had higher 
interest rates. I think that is pretty much a given. And 
inflation appears to be transitional. We do not know. But I 
will say this, you have warned that if we do not get our budget 
in order, our deficit and our debt, that we will have higher 
inflation, we will have higher taxes, and we will have a weak 
    Let me put a chart up, and I have handed you in front. This 
is what I mean when I say unsustainable. That is Social 
Security, Medicaid, and Medicare, and most of that is Medicare, 
and that basically just tells you that is when I say 
unsustainable, and it did start in the 1970s. Before that, when 
I mentioned the New Deal or our agricultural subsidies, which I 
know have received criticism, we are talking now about tax 
revenues and tax spending, and a subsidy is tax spending, it is 
a cost of revenue, and that started with the AAA, where we paid 
farmers not to raise crops, and I believe that is part of the 
solution, as this idea of fighting three wars. I agree with the 
    But if we do not solve entitlements, I think we make your 
job a lot harder. I would just like you to--let me show you a 
second slide. And this is--I do not know that I blame anybody 
for this, medical technology may have as much to do with this 
as anything else, but the figure on the right is the growth in 
the GDP, our economy. The left and the right are the growth in 
Medicare and Medicaid. So they are actually--those prices are 
going up at 3 times what other prices are going up. And that is 
actually bankrupting the Federal Government. It is also that 
second figure--the State of Washington just recently said--the 
State of Washington has a Democratic governor and a Democratic 
legislature. They said, give us Medicaid, let us administer 
Medicaid. They say if you do not, you are going to bankrupt 
Washington State. Washington State is one of the more healthy 
States, but our Medicaid programs are bankrupting our State.
    So I would like you, once again, if you will, to give us 
your ideas on what are unsustainable budget paths, how they 
affect your job and how they affect the economy and what the 
result will be.
    Mr. Bernanke. Thank you, Mr. Chairman. As the graphs point 
out, we have an aging society. Health care costs are rising 
more quickly than GDP, and as your picture shows, ultimately 
maintaining tax rates at the level they currently are will be 
inconsistent with maintaining those levels of benefits. You 
show a relatively long timeframe, but even within the next 10 
to 15 years, we could be coming to a point where we would be 
making entitlement payments, paying interest, and that would be 
it, unless we raise taxes.
    So this imbalance is very worrisome. I think we certainly 
cannot continue on an unsustainable path. If we were to do so 
in the long term, clearly we would have higher interest rates, 
less capital formation, more foreign borrowing, slower growth 
in the economy, but I think we even risk worse if we were to 
lose the confidence of foreign creditors and to have a threat 
to our fiscal and financial stability.
    So I do think it is important to address these long-term 
issues. I would emphasize, as your graph shows, that these are 
long-term issues. It does not have to be solved today or 
tomorrow, but we need to take some important steps to look at 
this long-term perspective and to try to restore some stability 
and sustainability to our fiscal outlook.
    Chairman Bachus. What I have advocated is simply turning 
these things into an insurance program where they are not 
unfunded but the premiums pay for the cost, turn what I think 
is an entitlement into an insurance program or pension program, 
which is what FDR proposed with Social Security, is that 
premiums will pay the cost. They do not today. Thank you. I 
recognize the ranking member.
    Mr. Frank. Thank you, Mr. Chairman. I want to join your 
first remarks about the performance of the Chairman and the 
Federal Reserve with regards to interest rates and inflation. I 
appreciate your speaking out in support of this. I think that 
has been a great success. The predictions of gloom and doom 
that came, that it was going to cost us money or be 
inflationary have all been proven incorrect, and there will be 
some later reference to a very good study that came out from 
Allan Sloan about that, but I want to talk about the job 
picture. We have several issues here.
    And I welcome on the very first page of the testimony, Mr. 
Chairman, you note that the weaker-than-expected economic 
performance appears to have been the result of several factors 
that are likely to be temporary: The run-up in prices of 
energy, especially gasoline and food, supply chain disruptions, 
finally the earthquake in Japan. I think we would probably add 
the uncertainty that came from the problems with Greece and 
other European countries, and I stress those because those are 
all external in many ways to us, the Libyan situation, the 
Greek situation, the Japanese situation.
    So people who want to blame this Administration need to 
take into account that, as you have enumerated some of these 
things, they are external, and we hope to sort of deal with 
them. My own view is there is a big debate here, that if we 
were to able to fully implement last year's bill and do some 
things about speculation in both energy and food that we could 
have a positive effect. But I want to talk more about the job 
situation and one thing in particular.
    You say these are temporary, but we hope you expect things 
to get better, but there are headwinds, and there is one 
headwind in particular that I want to talk to you about, and 
that is, a quote from page 2, fiscal tightening at all levels 
of government. As you know here, we have this year gained so 
far about a million jobs in the private sector. Now that is a 
good thing. It is not good enough. But that has been offset 
every month by a loss of jobs in the public sector. Of course, 
when those jobs are lost, you do not simply have those people 
unemployed, but there is a negative effect rather than a 
multiplier effect in terms of their ability to help generate 
other spending. And I was very pleased to hear you just make a 
clear distinction between the urgency of dealing with the 
deficit problem and the time horizon in which we have to do it.
    And I would take these together to say that do I infer 
correctly from here that further fiscal tightening of the 
degree that we will ultimately need over the next 6 months, 
say, is problematic and could be--you assume those are 
headwinds, that if we would engage in very drastic fiscal 
tightening over the next few months, we increase the strength 
of the headwinds and that we should be doing longer-term 
    I differ with my chairman, yes, we have spent some money. 
If we had not gone to war in Iraq, we would have a trillion 
dollars now to spend. I must say, when it comes to the debt 
limit, having voted against the war in Iraq and having voted 
against the Bush tax cuts, we are not up against my debt limit, 
I have a couple trillion left to go. I am going to be generous 
and vote to raise it because I think it would be disastrous, 
but people who voted for the war in Iraq and the Bush tax cuts 
and other things who act as if they are doing me a favor by 
paying for the debts they incurred over my objection puzzle me.
    But now, just to get back to the question, we can debate 
about how to do the longer-term thing. I would rather end the 
war in Afghanistan than cut Medicare, but--although we can make 
it more efficient. But let me ask what are the implications of 
your noting here that fiscal tightening at all levels of 
government is among the headwinds, and what is the balance we 
should achieve? We all agree there need to be reductions in the 
debt and that it has to come, I believe, both from some 
revenues and from some cuts. But what about the timing of this? 
What about the interrelationship of a policy in place that 
reduces the deficit over time, but the danger of increasing the 
headwinds, as you say, if you cut too much too soon right away?
    Mr. Bernanke. There appears to be a contradiction between 
the need to maintain support for the recovery in the short term 
and the need to address fiscal issues in the longer term, but I 
do not think there is a contradiction if we recognize that we 
can take a long-term perspective on addressing the deficit and 
achieving the sustainability of our fiscal position.
    As the chairman pointed out, these increases in entitlement 
costs are very serious, but they take place over a long period 
of time. So we should be addressing those now. But it is a 
long-term proposition.
    We should also be looking at how our spending and tax 
policy affects our long-term growth. Those are important 
issues. We need to reform our Tax Code, we need to make sure 
that we are investing our government spending wisely. So there 
are some very substantial long-term issues. But I think we do 
need to take some care that we do not, by excessive restriction 
in the short term, hamper what is already a very slow recovery. 
Of course, that would be a very bad thing from the point of 
view of the unemployed, but it would also be a problem from the 
point of view of the Federal budget because if you slow 
economic growth, you affect tax collections as well.
    Mr. Frank. People have talked about confidence. At this 
point, the greatest threat to confidence is the threat that we 
will not raise the debt limit with all of what that would mean. 
Would you agree with that?
    Mr. Bernanke. I think it is a concern, along with European 
issues and others, but as I have argued, we need both an 
increase in the debt limit, which will prevent us from 
defaulting on obligations which we have already incurred and 
which would create tremendous problems for our financial system 
and our economy, but we also need to take a serious attack on 
the unsustainability of our fiscal position. I think both of 
those things can be accomplished.
    Chairman Bachus. Thank you, Mr. Chairman, and thank you, 
ranking member. At this time, I recognize Mr. Paul, the 
subcommittee chair, for 5 minutes.
    Dr. Paul. Thank you. I thank you, Mr. Chairman. We hear 
that in the future we are going to have a better economy, and 
everybody hopes so, but it is hard to believe, it is hard for 
me to believe, anyway, because I look back on our past 3 years, 
and what Congress has done and what the Fed has done, we have 
literally injected about $5.3 trillion, and I do not think we 
got very much for it. The national debt went up $5.1 trillion. 
Real GDP grew less than 1 percent. So I do not think we have 
gotten a whole lot. Unemployment really has not recovered. We 
still have 7 million people who have become unemployed, and one 
statistic that is very glaring, if you look at the chart, is 
how long people are unemployed. The average time used to be 17 
weeks. Now it is nearly 40 weeks they stay unemployed. So 
nothing there reassures me.
    And also when we talk about prices, we are always reassured 
there is not all that much inflation, and we are told that they 
might start calculating inflation differently with a new CPI. 
Of course, we changed our CPI a few years back. There is still 
a free market group that calculates the CPI the old-fashioned 
way. They come up with a figure in spite of all this weak 
economy that prices have gone up 35 percent, 9.4 percent every 
year. I think if you just went out and talked to the average 
housewife, she would probably believe the 9 percent rather than 
saying it is only 2 percent.
    So I would say what we have been doing is not very 
reassuring with all this money expenditure. But my question is 
related to the overall policy. Spending all this money has not 
helped, and yet many allies that would endorse so much of what 
has been going on, whether it is the Fed or the Congress, they 
recognize that consumer spending is very, very important. And 
they concentrate on that. But the $5.1 trillion did not go to 
the consumers, it went to buying bad assets, it went to bailing 
out banks, it went to bailing out big companies, and lo and 
behold, the consumer did not end up getting this. They lost 
their jobs and they lost their houses and mortgages, and they 
are still in trouble.
    But my question is, if you took that $5.1 trillion and said 
that consumer spending is good, you could have given every 
single person in this country $17,000. Why is it the program of 
both the Congress and the Fed to direct the money to the people 
who have been making a lot of money instead to the people who, 
if you argue that the consumer needs to spend the money, I 
obviously do not advocate this, but I would suggest that maybe 
it could have worked better--it could not have worked any 
worse. But what is the reason we directed it towards the banks 
and the big corporations too-big-to-fail and we do not pay that 
much attention to the consumer, if it is true, and I do not 
know if you agree with that or not that consumer spending is an 
important issue?
    Mr. Bernanke. It is an important issue, Congressman, but 
you are mistaken in saying that the Federal Reserve has spent 
any money. You say $5 trillion. We have lent money. We have 
purchased securities. That is not buying, that is not 
dissipating the money. We have gotten all the money back. As an 
article over the weekend by Allan Sloan showed, in fact, the 
Fed has been a major profit center for the U.S. Government. We 
have turned over profits in the last 2 years of $125 billion. 
We are not costing any money in terms of budget deficits or 
anything like that.
    In terms of what we were trying to do, the reason the 
Federal Reserve was founded a century ago was to try to address 
the problems arising from financial panics which did, by the 
way, occur in an unregulated environment in the 19th Century. 
We provided liquidity and short-term loans to help financial 
systems stabilize. We did that not because we particularly care 
about the managers or the shareholders of financial firms.
    Dr. Paul. I hate to interrupt, but my time is about up. I 
would like to suggest that you say it is not spending money, 
but it is money out of thin air. You put it into the market and 
you hold assets, and the assets are diminishing in value when 
you buy up bad assets.
    But very quickly, if you could answer another question 
because I am curious about the price of gold today is $1,580. 
The dollar during these last 3 years was devalued almost 50 
percent. When you wake up in the morning, do you care about the 
price of gold?
    Mr. Bernanke. I pay attention to the price of gold, but I 
think it reflects a lot of things. It reflects global 
uncertainties. I think the reason people hold gold is as a 
protection against what we call tail risk, really, really bad 
outcomes. To the extent that the last few years have made 
people more worried about the potential of a major crisis, then 
they have gold as a protection.
    Dr. Paul. Do you think gold is money?
    Mr. Bernanke. No, it is not money; it is a precious metal.
    Dr. Paul. Even if it has been money for 6,000 years, 
somebody reversed that and eliminated that economic law?
    Mr. Bernanke. It is an asset. Would you say Treasury bills 
are money? I do not think they are money either, but they are a 
financial asset.
    Dr. Paul. Why do central banks hold it?
    Mr. Bernanke. It is a form of reserves.
    Dr. Paul. Why do not they hold diamonds?
    Mr. Bernanke. It is tradition, a long-term tradition.
    Dr. Paul. Some people still think it is money. I yield 
back. My time is up.
    Chairman Bachus. Thank you. At this time, I recognize Mr. 
Clay, the subcommittee ranking member.
    Mr. Clay. Thank you, Mr. Chairman. Chairman Bernanke, has 
the Federal Reserve analyzed the impact on the economy if the 
debt ceiling is not lifted by August 2nd? Yesterday, President 
Obama stated that VA benefits may not get to recipients and 
that some Social Security checks may not get mailed to American 
seniors. Has the Federal Reserve examined what may happen on 
another level on August 3rd if we do not lift the debt ceiling?
    Mr. Bernanke. Yes, of course we have looked at it and 
thought about making preparations and so on. The arithmetic is 
very simple. The revenue that we get in from taxes is both 
irregular and much less than the current rate of spending. That 
is what it means to have a deficit. So immediately there would 
have to be something on the order of a 40 percent cut in outgo. 
The assumption is that as long as possible the Treasury would 
want to try to make payments on the principal and interest of 
the government debt because failure to do that would certainly 
throw the financial system into enormous disarray and have 
major impacts on the global economy.
    So just as a matter of arithmetic, fairly soon after that 
date there would have to be significant cuts in Social 
Security, Medicare, military pay or some combination of those 
in order to avoid borrowing more money.
    If we ended up defaulting on the debt, or even if we did 
not, I think it is possible that simply defaulting on our 
obligations to our citizens might be enough to create a 
downgrade in credit ratings and higher interest rates for us, 
which would be counterproductive because that makes the deficit 
worse, but clearly if we went so far as to default on the debt, 
it would be a major crisis because the Treasury security is 
viewed as the safest and most liquid security in the world. It 
is the foundation for much of our financial system, and the 
notion that it would become suddenly unreliable and illiquid 
would throw shock waves through the entire global system.
    Mr. Clay. And higher interest rates would also impact the 
individual American consumer; is that correct?
    Mr. Bernanke. Absolutely. The Treasury rates are the 
benchmark for mortgage rates, car loan rates, and all other 
types of consumer rates.
    Mr. Clay. Thank you for that response. In the area of 
unemployment, according to the Labor Department, our 
unemployment rate in June was 9.2 percent. What can the Federal 
Reserve and Congress do to put Americans back to work? Any 
    Mr. Bernanke. It is a difficult problem. I would like to 
make it very clear that I think we have two crises in the 
economy. One of them is the fiscal set of issues that you are 
all paying a lot of attention to right now, but I think the job 
situation is another crisis. What is particularly bad about it 
is that so many people have been out of work for so long that 
it is going to be hard to get them back to anything like the 
kind of jobs they had when they lost their jobs back in the 
beginning of the recession. So it is a major problem.
    The Federal Reserve is doing quite a bit. As I described in 
my testimony, we have lowered interest rates almost to zero; we 
have done additional policy measures, including purchases of 
several trillion dollars of securities; we are prepared to take 
further steps if needed.
    We are operating in other dimensions, like trying to 
promote lending to small business and other things that could 
potentially help. So we are very focused on jobs. We think that 
is an incredibly important part of the current economic crisis, 
and it is one of the two parts of our dual mandate.
    I need to be careful not to endorse specific programs, 
etc., but as I mentioned, one thing to take into account is to 
try to avoid sharp contractions in the near term that might 
weaken the recovery.
    I think there are areas where attention might be paid. And 
just to name three I have talked about before, one would be to 
try to address unemployment through training or other types 
that might help workers get back into the job market. A second 
problem is the housing market. Clearly, that is an area that 
should get some more attention because that has been one of the 
major reasons why the economy has grown so slowly. And I think 
many of your colleagues would agree that the Tax Code needs a 
look to try to improve its efficiency and to promote economic 
growth as well.
    So there are a number of areas where Congress could be 
looking, and I hope that we will keep in mind that we have two 
sides to this crisis. There is a jobs crisis and there is a 
fiscal set of issues as well.
    Mr. Clay. Thank you so much for your response.
    Mr. Chairman, my time is up.
    Chairman Bachus. Mr. Royce, a senior member of the 
committee, is recognized for 5 minutes.
    Mr. Royce. Hello, Chairman Bernanke. I think one of the 
realities you also face is that when we look at these numbers 
and the deficits you are borrowing at a historically low cost 
over at Treasury, maybe your borrowing costs are 2\1/2\ 
percent. If those go up to the average over the last 20 years, 
you are suddenly more than doubling the costs of borrowing. So 
the deficits we are talking about that are projected are going 
to get a lot worse.
    If we could go back to the chart that shows the climb in 
entitlement costs, this is one of the concerns we have. If we 
go back to the 1970s and that argument over having both guns 
and butter under LBJ, the Vietnam War and the new entitlement 
spending and all the social welfare spending. We tried to do 
both, and at that time the Federal Reserve was a party to 
trying to assist in that. This is one of the arguments that 
some of your allies have made or your colleagues have made on 
the Federal Reserve.
    When they look back at the policies at that time, they say, 
the Fed tried to help accommodate the solution to that. 
Clearly, it couldn't be paid for at the time. So one of the 
things they did was they put in place monetary policy that 
helped eventually create what was called the great inflation of 
the 1970s.
    I think you might concur with this. As we move forward, we 
are sort of in the same position, and as we draw down and draw 
out the troops from Iraq and Afghanistan, as we draw this down, 
that is one thing we have to face, is reducing again the costs 
of the military budget.
    But we are also going to have to face this entitlement 
question. Some of these were set up on the premise that they 
would be partly sort of an insurance program where people would 
pay in, right? Now, they morph into a situation where 
eventually they gobble up such a huge percentage of the budget 
that it has to be faced as well. Otherwise, we put you in the 
untenable position of perhaps doing what was done in the late 
1960s and early 1970s by the Fed, which might end up again with 
a great inflation.
    These are my concerns. I would like for you to speak for a 
minute about this issue and about the deficit and the steps 
that need to be taken on entitlements.
    Mr. Bernanke. Certainly. First, you are absolutely right 
about the interest rate problem. We are seeing that in Europe 
where investors lose confidence in a country's fiscal 
situation. That drives up interest rates, that makes the 
deficit higher, so you have a vicious circle that can be very 
hard to break.
    On entitlements, you are also correct that they are not 
true insurance programs. I think many Americans think the money 
they put in Social Security or in Medicare is somewhere in the 
bank someplace. That is not really quite right. What is 
happening mostly is that younger generations are paying through 
their taxes for older generations' benefits. And that worked 
okay as long as the population was shaped more like a pyramid, 
instead of more like a rectangle, as is becoming now the case.
    On monetary policy, we have learned the lesson of the 
1970s. We are in much better shape now because inflation 
expectations are much better anchored after many years of low 
and stable inflation since Paul Volcker brought inflation down 
in the 1980s.
    Mr. Royce. But what if Congress doesn't do its part? What 
if we don't tackle entitlement spending and what if this chart 
that we have up in terms of what drives our debt, what if that 
entitlement ramp-up continues unabated? What then?
    Mr. Bernanke. I think there are different views on this, 
and we can get very deeply into the discussion, but I believe 
if the Fed refuses to accommodate or pay for this extra 
spending by money creation, that we can maintain control of 
inflation. But what will still happen will be much higher 
interest rates, which will have a very negative effect both on 
the deficit and on the private economy.
    Mr. Royce. So it is imperative that we tackle it now. And 
would you say a small solution to this will take care of the 
problem, or do we need to reach for that overarching true 
reform of entitlements that take care in the long haul of what 
is going to happen with Social Security and Medicare and so 
    Mr. Bernanke. I recognize that these are complicated 
matters that may not be able to be done in a few weeks. But I, 
like many other people who watch the budget developments, have 
been very excited by the idea that a very big program might be 
feasible and that we might do something that would stabilize 
our debt over the next decade. That would be a tremendous 
accomplishment if Congress can find a way to do that.
    Mr. Royce. I think if you can articulate the consequences 
if we don't, it might help the goal of getting the entitlement 
reforms done.
    Thank you, Mr. Chairman.
    Mr. Bernanke. Thank you.
    Chairman Bachus. Thank you.
    At this time, I recognize Mr. Green of Texas for 5 minutes.
    Mr. Green. ``It was a low down, no good, God-awful bailout, 
but it paid.'' This is the style of an article written by Allan 
Sloan and Doris Burke. They contend that the bailout, which was 
accorded after we had two votes in the House--the first vote, 
Mr. Chairman, I remember. I was there on the Floor of the House 
and I saw after that first vote the stock market start to 
spiral out of control. They contend that the bailout not only 
worked, but they contend it paid. They contend it will make 
taxpayers $40 billion to $100 billion. They contend that the 3 
percent, which was TARP, gets 97 percent of the attention.
    My question to you is this: Is William Cullen Bryant right? 
He reminds us that truth will be crushed to Earth, but he also 
says that it will rise again. Will truth crushed to Earth rise 
again? Is this the opportunity to tell the truth about TARP and 
about the bailout and what it actually did? That these many 
persons who say that it was not needed, it was not useful, it 
didn't benefit us, can truth crushed to Earth rise again today?
    Your response, please?
    Mr. Bernanke. I hope truth will come out. I understand why 
Americans were unhappy with this. It seemed very unfair to see 
money going to large financial institutions. But just a few 
    First, we know from a lot of history that the collapse of 
the financial system will bring down the whole economy, and we 
saw the damage that even a partial collapse of the system 
brought in 2008 and 2009. So in attempting to stabilize the 
financial system, the Fed, the Treasury, the Congress were 
trying to stabilize the economy and trying to protect the 
average American citizen. That is point number one.
    Point number two, the program was successful. We did 
stabilize the system. We avoided a massive collapse, like we 
saw in the Great Depression, and it was a global effort. We 
worked together to provide the assistance needed to avoid a 
meltdown of the global financial system.
    The third fact I would like people to understand is that 
historically, it often is very expensive to stabilize financial 
systems, somewhere between 5 and 20 percent of GDP in many 
cases. The country of Ireland is having fiscal problems right 
now because of the money it put into its banking system and 
didn't get back.
    In the United States, essentially all of the investments 
made by the TARP and certainly all the investments made by the 
Fed were repaid or are being repaid with interest and 
dividends, and as far as the direct financial costs to 
taxpayers is concerned, there are none. It will be a profit and 
a reduction of the U.S. Federal deficit relating to these 
    Mr. Green. Just as an additional commentary, Mr. Chairman, 
I had an experience with this bailout that I would like to 
share with you. It is very brief. The calls coming into our 
office were overwhelmingly opposed to it, the initial vote. I 
had people call and say, ``If you vote for this, we will run 
you out of town.''
    I did not vote for it. I saw what happened to the stock 
market. And the next day I got calls, Mr. Chairman. ``What is 
wrong with you? We are going to run you out of town. You voted 
against the bailout.''
    I mention this to you because memories seem so short. I 
don't know whether that is by accident or design, but they seem 
so short. They don't seem to recall that we were on the edge of 
a disaster unlike we have seen since the Great Depression. And 
I am honored that you would take the time today just to clear 
the record so that William Cullen Bryant, so that he will truly 
know that we believe in him and he was right, truth crushed to 
Earth will rise again.
    Thank you. Mr. Chairman, I also want to share this with 
you. I think history will be kind to you. I think that you have 
taken the helm at a tough time in this country's history, and I 
believe history will be kind to you.
    Thank you very much.
    I yield back, Mr. Chairman.
    Chairman Bachus. Thank you, Mr. Green.
    At this time, I recognize Mr. Lucas, the chairman of the 
Agriculture Committee, for 5 minutes.
    Mr. Lucas. Thank you, Mr. Chairman.
    My first goal is to make sure that we don't become history 
as a result of what we do. That said, Mr. Chairman, I represent 
essentially the northwest half of the great State of Oklahoma, 
a place where in the course of the last 3 years, unemployment 
rates have run about 3 points less than the rest of the 
country. We are, as you and I discussed before in past years, a 
commodity-driven economy; oil, gas, wind energy, livestock, 
grain, fiber on the ag production side. So I am a little 
sensitive about maintaining the investment in those industries.
    That said, we are a very capital intensive district. The 
view of many of my constituents and the level of economic 
activity we have at home compared to the rest of the country 
essentially is, we didn't make this mess. We shouldn't be a 
part of sorting this mess out. It is their mess.
    Could you expand on your comments to both Representative 
Clay and to Representative Royce and now to me in that regard 
what my constituents would expect in the event that some grand 
understanding dealing with the national debt ceiling, dealing 
with Federal spending, if some grand understanding is not 
achieved, what does that do not just to the Treasury bond rate 
here in New York City, but what impact does that have in a 
place like the northwest half of the great State of Oklahoma?
    Mr. Bernanke. The risk is, first, that interest rates will 
begin to rise as our creditors lose confidence in our ability 
to repay or willingness to repay. When Treasury rates rise, 
that makes the deficit worse, as we were discussing before, and 
it makes the problem even worse. But interest rates on Treasury 
debt also feed into all other interest rates in our economy, 
including farm mortgages, including capital for oil or natural 
gas exploration, and including consumer loans of all kinds, 
student loans and the like. So it would weaken our economy, it 
would make the deficit worse, and it would hurt confidence and 
be a negative.
    So I am very much in favor of us trying to address this 
problem in a big way, again taking a long-term perspective and 
understanding that this is a long-term problem. But I think 
there would be real benefits certainly over time to your 
constituents as well as to all other Americans.
    Mr. Lucas. So it is fair to say then, summarizing what you 
have said, that if there is not an agreement worked out in a 
big way that has a long-term impact, not only would my 
constituents see a reduced demand for the commodities they 
produce, both ag and energy, but they would also see the 
interest rates that affect--because we are a capital-starved 
area--we would see the interest rates that affect their ability 
to invest in their businesses and grow and expand go up. Is 
that a fair statement, sir?
    Mr. Bernanke. We don't know the exact timing of that, but 
ultimately, that would be the case, yes.
    Mr. Lucas. And is it also fair to say to back home, to note 
that at some point if big, bold tough decisions are not made, 
at some point the markets will begin to conclude that maybe we 
don't have the capacity to make those decisions and they will 
begin to adopt a defensive posture. Is that a fair statement, 
Mr. Chairman?
    Mr. Bernanke. That is right, yes.
    Mr. Lucas. And when that defensive posture begins, then we 
all together see what is right around the corner.
    Thank you, Mr. Chairman. I yield back the balance of my 
    Chairman Bachus. Mr. Perlmutter?
    Mr. Perlmutter. Thanks. I always like following my friend 
Mr. Lucas, because we agree on a lot of things. Sometimes, 
there is a sort of a different approach that we might have. But 
I think we have to have a big bold approach to dealing with our 
full faith and credit, dealing with our budget. And I would 
like you to take a look at a couple of your charts. I always 
like looking through your monetary book.
    I want to start with chart number 22 on page 14, Federal 
receipts and expenditures, 1991 to 2011. And I think one of the 
places though where Mr. Lucas and I might have a difference is 
how we deal with this big bold plan that we have to have going 
forward to show people we really mean business about the fiscal 
strength of this country.
    In 1999, 2000, 2001, receipts exceeded expenses. We in 
effect had a surplus for a time there. And then we had tax 
cuts. So I think my question is going to focus on the revenue 
side of any big bold plan. And I noticed you were very careful 
in the choice of words you used when Chairman Bachus was 
questioning Medicare and entitlements, and you said, based on 
the current revenue stream, those are unsustainable.
    Back in 2001-2002, we had a series of tax cuts that dropped 
that revenue stream, isn't that right?
    Mr. Bernanke. Yes.
    Mr. Perlmutter. And has as the Federal Reserve figured out 
how much of a reduction to revenue over the last 10 years that 
has been to this country?
    Mr. Bernanke. I think I would leave that to the 
Congressional Budget Office, but they have scored fairly 
significant numbers.
    Mr. Perlmutter. A couple trillion dollars, as I understand 
it. So as part of this big bold plan, which I agree with Mr. 
Lucas I think this country must undertake, it has to have a 
revenue side to it as well as Chairman Bachus' concerns about 
entitlements. Would you agree?
    Mr. Bernanke. I hope you understand that I am not going to 
take sides on this issue. I want to see the numbers add up. I 
want to see the revenues and the expenditures balance. It is 
your job, and that is why you get the big bucks.
    Mr. Perlmutter. Mr. Green was asking about William Cullen 
Bryant, whether history will be kind to him. Do you think Paul 
Giamatti was kind to you?
    Mr. Bernanke. I haven't seen the show.
    Mr. Perlmutter. You haven't seen the show?
    Mr. Bernanke. No, I haven't.
    Mr. Perlmutter. I think he did a great job. His beard is 
precisely the way yours is.
    Let me turn to chart number 23, because this was some of 
the questioning that you received too as to the fiscal 
restraints and the fiscal restrictions that have come into 
    Can you tell me, it looks like in 2008 there was a huge 
surge of Federal spending. Am I reading that right?
    Mr. Bernanke. It looks like 2009. I see what you are 
    Mr. Perlmutter. 2008-2009.
    Mr. Bernanke. I see what you are saying. Yes, sir.
    Mr. Perlmutter. Then there was a big expenditure in 2008, 
2009, 2010. But in the first quarter of this year, a 
substantial drop. Am I reading that right?
    Mr. Bernanke. Yes.
    Mr. Perlmutter. I guess the other thing, and coming from my 
law practice I did a lot of Chapter 11 bankruptcy work, and 
when you--and I don't think this country is anywhere near 
bankruptcy. We have some fiscal management we have to 
undertake, but you don't, as you come out of a tough time, you 
don't pay every bill overnight, because that just puts you back 
into the troubles you were already in. You have to invest and 
you have to believe that you are going to keep going, and I 
believe this country is going to keep going.
    How would you describe these cuts that occurred in this 
first quarter? Is that the direction you would like to see our 
fiscal policy go?
    Mr. Bernanke. I am sorry not to be able to be too direct. I 
want to get into the details here.
    I think some of the big spike in 2008, I think the way the 
TARP was scored was that it was counted as an expenditure when 
it went out and then it was treated as a receipt when the money 
actually came back, which it did. So that kind of obscures a 
little bit what happened.
    Part of what is happening here is that the stimulus in the 
spring of 2009 ramped up spending for a while, and that as that 
spending is now beginning to come down you are seeing a drop in 
total spending.
    So this is what I said in my remarks, that there is at this 
point a net drag, and that is what that picture shows, in terms 
of the government component of total demand in the economy. And 
this is why I just urge some attention and caution to the 
timing of your work on the fiscal sustainability issue so that 
you don't unnecessarily weaken what is at this point still not 
a very strong recovery.
    Mr. Perlmutter. Thank you.
    Chairman Bachus. Thank you.
    Mr. Hensarling?
    Mr. Hensarling. Thank you. Good morning, Mr. Chairman.
    Mr. Bernanke. Good morning.
    Mr. Hensarling. I believe we have seen the greatest fiscal 
and monetary stimulus thrown at our economy in the history of 
our country, perhaps the history of the world. Regardless of 
where we were in September of 2008, to round out some of the 
analysis in your testimony, we now are at 29 consecutive months 
of unemployment being above 8 percent, when the President told 
us if we passed the stimulus bill, it would not exceed 8 
percent. We know that we have had 3 months now where 
unemployment has been on the rise above 9 percent.
    Since the President has taken office, there has been a 40 
percent increase in the number of Americans who receive food 
stamps, one in seven. The average number of weeks it takes to 
find a job, according to the Bureau of Labor Statistics, is 
39.9 weeks, the longest in recorded history. And now, 
entrepreneurship or new business starts apparently are at a 17-
year low.
    So after the largest monetary and fiscal stimulus in 
history, if I have my figures right, and I believe they came 
from the Fed, public companies are sitting on roughly $2 
trillion of excess liquidity. Banks have about $1.5 trillion of 
excess reserves, I believe, that is according to your data.
    In your testimony you mention a lack of consumer 
confidence, but nowhere in your testimony did I hear a lack of 
business confidence. And what I believe I am seeing is the 
economy is not so much suffering from a lack of capital, but a 
lack of confidence. So either you and I are looking at 
different business surveys and talking to different people, but 
I was curious why that was not part of your testimony?
    Mr. Bernanke. The business confidence picture I think is 
more mixed. I mentioned in my testimony that equipment and 
software investment has actually been quite strong, which 
suggests that firms are not hunkering down completely. They 
have been very slow to hire though; you are correct.
    In terms of the surveys, some of the recent purchasing 
manager surveys have been at least positive, but the small 
business confidence has been weak, and I think that would be 
consistent with what you are saying.
    Mr. Hensarling. Mr. Chairman, having spoken to a number of 
``Fortune 50'' CEOs, very large investment fund managers, the 
people who are most important to me, small business people in 
east Texas that I represent, I can tell you the anecdotal 
evidence is overwhelming that job creators and investors lack 
confidence in this economy.
    We can argue about the underlying cause. What I am hearing 
is the fear and uncertainty surrounding the President's health 
care plan, frankly, major portions of the Dodd-Frank 
legislation, the tax snap-back that is already in current law, 
regulatory overkill from the EPA, and then, last but not least, 
certainly the national debt that looms before us. So, again, 
perhaps we are speaking to different people.
    Speaking of the national debt, and the Nation is somewhat 
focused on the debt ceiling, although I think the investment 
community is still somewhat focused on the Eurozone, I believe 
that August 2nd is a very, very serious date. But I do want to 
separate fact from fiction.
    When people speak of debt, I believe--rather, of default, I 
see that as something very different from sovereign default. In 
your opinion, does the President, does this Administration lack 
either the will, the means or the authority to keep bondholders 
    Mr. Bernanke. Let me just say one word about the previous 
thing, which is I don't think we are in all that much 
disagreement. There are a lot of uncertainties in the economy, 
regulatory, fiscal, and also about the sustainability of this 
recovery. So I agree with you on that.
    On the ability to pay debtors, I think there are some 
operational risks and concerns, but I think for at least a 
while, the Administration will do all that it can to pay the 
debt. The question arises if to do that we stop paying other 
obligations to government contractors--
    Mr. Hensarling. The question was specifically on default on 
sovereign debt. My time is just about to run out. But the 
President 2 days ago on the 11th said, ``And what I have tried 
to explain to them is, number one, if you look at the numbers, 
then Medicare in particular will run out of money and we will 
not be able to sustain that program no matter how much taxes go 
    My time has expired. But perhaps in writing, you could 
respond to the extent whether you agree with the President and 
to what extent--
    Chairman Bachus. We actually have allowed people to give a 
response to your question. So if you want to respond?
    Mr. Hensarling. In dealing with the long-term structural 
    Chairman Bachus. I will let him answer then.
    Mr. Bernanke. As you know, Medicare is not a fully funded 
program. The premiums that are paid in only cover a portion of 
the costs. There is a trigger when the reserves get into a 
certain point, which forces Congress to look at it. But I think 
from a fundamental economic point of view, it is clear that the 
increase in health costs and the aging of the population make 
this a larger and larger part of our economy and it is going to 
be very, very difficult to find the revenues to finance it in 
its current form.
    Chairman Bachus. Thank you.
    At this time, Mr. Cleaver is recognized for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Thank you, Mr. Chairman. Like Mr. Hensarling, I am a native 
Texan. In fact, I was born not far from where he lives. So, 
believe it or not, there is a town in Texas called Cut and 
Shoot, and I grew up in public housing and it is a little 
rough, so I learned the term ``cut and run home.'' So now we 
are having a new version put up, it is called ``cut and grow.''
    I am just wondering if that is real, if we can cut spending 
dramatically and then the economy grows, if that is an accurate 
description? Can you help me understand it, cut and grow?
    Mr. Bernanke. I think you have to maybe look at it on 
several different dimensions. First, we have a fiscal 
sustainability problem over the long term so we need to take a 
long-term perspective on that. But we do have a problem and we 
do need to address that.
    Secondly, in terms of longer-term growth, we really just 
don't want to cut, cut, cut or we just want to look at what we 
are cutting and how we are cutting. We want to make sure that 
we are doing the things, making the investments that will help 
the economy grow, and that includes things like fixing the Tax 
Code and so on.
    But in terms of the very short term, as we were discussing 
a little bit earlier, I think that you need to be a little bit 
cautious about sharp cuts in the very near term because of the 
impact, potential impact, on the recovery. That doesn't at all 
preclude, in fact, I believe it is entirely consistent with a 
longer-term program that will bring our budget into a 
sustainable position.
    Mr. Cleaver. Thank you. A couple of quick ones, if I can 
get them in. If cutting taxes creates jobs, and we cut taxes 
over the last 10 years and fell into a recession, an 
historically impactful recession, is it then logical that if we 
continue to cut taxes, that all of a sudden we will grow 
because we said tax cutting will somehow create jobs?
    Mr. Bernanke. The very severe recession which we have 
recently experienced and which we are still trying to recover 
from was caused primarily by the financial crisis, and that had 
many, many causes, regulatory, private sector behavior and so 
on. So I think of that as sort of something that happened that 
wasn't really directly related very much to tax policy, for 
example, except very indirectly. So I wouldn't draw that 
    I think taxes can be viewed as having two roles. One is 
that like the payroll tax cut, they provide some extra income 
to consumers in a period of very weak consumer spending to give 
them more income to help provide demand for the economy. In the 
longer term, you want to have a Tax Code which promotes good 
economic decisions, work effort, saving, investment, efficient 
choices and so on. So they are somewhat different. You don't 
want to conflate those two. Depending on the state of the 
economy, those two sources of benefits from tax cuts are 
somewhat different.
    Mr. Cleaver. But if we paid $1.3 trillion in wars that 
shouldn't be continuing, we took $250 billion out of the 
economy with Medicare Part D that we just gave the American 
public without paying for it, I am convinced that all of that 
put together with the tax cuts and some other factors that you 
mentioned created the problem.
    We are not able to create jobs right now, so here is what 
is happening I think in my district in Missouri, the Kansas 
City, Missouri, area. Somebody lays off 10 workers, line 
workers, and then they decide they are going to hire again, and 
this time they hire 2, maybe 3 workers, in tech jobs, which 
means that most of those people who were laid off are never 
going to be able to get their job back. Is this the time that 
we probably should have some workforce retraining in order to 
make sure that we have a workforce that can actually compete 
with foreign companies for productivity?
    Mr. Bernanke. As I mentioned earlier, I think one of the 
big problems we have, and it is going to last even beyond this 
recovery, is the fact that we have millions of people who have 
been out of work for 6 months or a year or more. We have 
millions of people who are insufficiently trained to work with 
new technologies and to compete on a global basis.
    There are many ways to help people get up to speed, through 
technical schools or a whole variety of programs. But I do 
think that one of the important things we need to do for our 
working people is to make sure they have the skills they need 
to get decent work and that those skill requirements are only 
going to go up over time.
    Chairman Bachus. Mr. Miller?
    Mr. Miller of California. Thank you. It is good to have you 
here, Mr. Bernanke. I enjoyed your testimony. I agree that 
instability in the marketplace is having tremendous impact on 
the recovery, and historically about every recovery has been 
led by the housing industry. And you also say that people 
aren't consuming because of the wealth lost in the housing 
sector, and I think you are absolutely correct in that.
    But there is a lack of confidence in the housing market 
today. Mortgage refinances continue to fall, as you said, 
mortgage purchases continue to decrease, and mortgage 
applications continue to fall. In my State of California, and 
many other high-cost States, raising the conforming loan limits 
like we have recently has had a positive impact on the 
marketplace. Yet at the same time now, we are going to decrease 
those loan limits in those high-cost areas, which on the other 
side is going to have a hugely negative impact on those 
markets. And the loans being made in those marketplaces right 
now seem to be some of the best producing loans that they are 
    Without a doubt, Freddie Mac and Fannie Mae as they 
currently exist have to go away, but there has to be a viable 
replacement for them. To say we are just going to get rid of 
them without having a viable alternative is unrealistic. It is 
going to be counterproductive to the marketplace. But at the 
same time the housing action needs to be taking place at this 
point in time, a need for a viable secondary marketplace has to 
be established, taxpayers must be protected. Safety and 
soundness has to be a huge concern, but we must allow the 
private sector at the same time to stand up and be given an 
opportunity to stand up.
    Do you believe that now is the time for major reforms to 
the housing market?
    Mr. Bernanke. Yes, sir. This was the main piece of 
unfinished business in the financial regulatory reform, the 
area not addressed. As you know, Treasury has put forth some 
propositions. A number of Members of Congress have put out 
plans. I think it would be very helpful if we could begin to 
get some clarity about that. It would probably increase 
confidence on the part of mortgage originators and so on to 
know they would be able to find secondary markets for their 
    Mr. Miller of California. And lack of charity is killing 
the marketplace. Nobody knows what to expect tomorrow. Many are 
pulling back today because they don't know what to expect. So 
do you see the potential in the future for private capital 
playing a strong role in the functioning market for mortgage 
    Mr. Bernanke. Certainly. Many plans that have been proposed 
involve private capital. One example is so-called covered 
bonds, where banks sell bonds backed by mortgages to private 
investors. It doesn't involve any government funding at all. Or 
we could have some system where the securitization function 
performed by Fannie and Freddie is done by private financial 
institutions. So I think it is entirely possible.
    It should be noted that Fannie and Freddie were effectively 
subsidized and therefore a private market system is probably 
going to increase the cost of mortgages a little bit. But that 
is just the consequence of taking away a subsidy which in the 
end proved to be very costly to our economy.
    Mr. Miller of California. The problem I have with the 
Freddie and Fannie hybrid concept was that the taxpayers were 
at risk and the private sector made all the profits.
    Mr. Bernanke. That is right.
    Mr. Miller of California. That is unacceptable. What do you 
see as barriers to private capital entering mortgage lending 
and the market for home loans?
    Mr. Bernanke. Currently, there is not much private capital 
because of concerns about the housing market, concerns about 
still high default rates. I suspect though that when the 
housing market begins to show signs of life, there will be 
expanded interest.
    I think another reason, to go back to what Mr. Hensarling 
was saying, is that the regulatory structure under which 
securitization, etc., will be taking place has not been tied 
down yet. So there are a lot of things that have to happen. But 
I don't see any reason why the private sector can't play a big 
role in the housing market, securitization, etc., going 
    Mr. Miller of California. Representative McCarthy and I 
introduced a bill last week that we believe does that. It sets 
up a function of the facility, recognizing housing is critical 
to stabilizing the economy. Private capital must be the 
dominant source of credit. The government must have some 
continuing role, but it must be protected, and safety and 
soundness of underwriting principles must be in place to 
protect the taxpayers.
    But the problem we have today is that most investors, you 
are looking at mortgage-backed securities, doubt the confidence 
in many that are put out by the private sector. The GSEs are 
the only ones that they have confidence in they will be paid 
their investment back and receive a return on it. But it seems 
like there needs to be a facility available that prioritizes 
safety and soundness but provides liquidity to the secondary 
market from the private sector. And we think that has to be 
done. The longer Fannie and Freddie go, the larger the losses 
are going to be, and that has to be terminated.
    I yield back. Thank you.
    Chairman Bachus. Thank you. Mr. Ackerman?
    Mr. Ackerman. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you. It is good to see you.
    All of us on this side of the table ran for office seeking 
the jobs that we have. Many of us told the people who put us 
here that we understood that their first priority had to do 
with jobs and we pledged to make jobs our first priority and to 
do everything that we could do to improve the job situation and 
increase the number of jobs and help to create jobs. Jobs are 
not just a concept. You don't have to explain it to people. 
They understand the consequences of having one or not having 
    Many of us also, to the great applause of some crowds, told 
people that we would never, and took blood oaths, never raise 
the debt ceiling, and the crowds yelled their approval. The 
debt ceiling is a lot more difficult and is more conceptual to 
a lot of people and they don't really understand it, and a lot 
of people use jingoistic phrases about sit around your kitchen 
table and balance your checkbook, and people say yes, that 
makes a lot of sense. A number of us pledged affirmatively on 
both the jobs and the debt ceiling.
    In a very short number of days, the rubber is going to hit 
the road or something is going to hit the fan or we are going 
to have one of those moments. But it is going to be very 
telling. If indeed the people who took the blood oath on the 
debt ceiling and swore to people on jobs refuse to move and we 
actually do not raise the debt ceiling, could you explain the 
correlation and how many jobs we would be creating?
    Mr. Bernanke. First, the analogy about balancing your 
checkbook, getting your finances in order is wrong. The right 
analogy for not raising the debt limit is going out and having 
a spending spree on your credit card and then refusing to pay 
the bill. That is what not raising the debt limit is.
    Mr. Ackerman. I know you get it.
    Mr. Bernanke. In terms of jobs, I think the worst outcome 
if we don't raise the debt limit is that at some point, we 
default on the debt, and that would create, as I have said 
before, a huge financial calamity, which in turn would affect 
everybody and would set job creation back very significantly. 
But even if--
    Mr. Ackerman. What do you mean by significantly? Is that 
    Mr. Bernanke. We saw what happened in 2008-2009 when we had 
two consecutive quarters of 6 percent negative growth in the 
economy. I think something on that order of magnitude would be 
certainly conceivable.
    As to Mr. Hensarling's question, even if we are able to 
maintain payments on the debt and the interest by prioritizing 
it and assuming that operational issues and so on are solved 
and confidence is retained, it still would involve a very 
substantial reduction in government payments, including Social 
Security checks and military pay and things of that sort that 
would force people to cut back on their spending, reduce their 
confidence. It would no doubt have a very adverse effect very 
quickly on the recovery. So even if we were able to continue to 
pay our debts, it would have a negative impact.
    Mr. Ackerman. So you just said we would lose jobs and not 
create jobs if we don't--
    Mr. Bernanke. If we don't raise the debt ceiling. Yes, I am 
quite certain of that.
    Mr. Ackerman. I have a second question, not related, and 
that has to do with the conforming loan limits that are about 
to change. I represent one of the counties in the country, and 
there are 669 such counties and they are in 42 different 
States, that are going to be affected by this.
    The housing market in one of my counties is pretty high. It 
doesn't mean the houses are way above modest. It means that 
real estate prices are very high. It could be the regional 
market up in New York and on Long Island. These are not 
necessarily mansions, but there are many of them, as there are 
in the other 669 districts that have this kind of situation, 
that are affected.
    You make note in your statement that the housing market and 
the low level of new home buys is a huge problem. The people 
looking for these homes are among the most qualified buyers by 
any set of standards and circumstances--
    Chairman Bachus. Mr. Ackerman, I will let him answer the 
    Mr. Ackerman. How do we reconcile the fact that these 
people are not going to buy homes when they are qualified to do 
so and to absorb so many of the homes on the market?
    Mr. Bernanke. As far as Fannie and Freddie are concerned, 
there is a tradeoff there between supporting the higher priced 
homes and weaning the system off of unusual limits that were 
put on during the crisis. I understand that the private sector 
is taking at least a significant number of the so-called jumbo 
mortgages, but maybe at a higher cost, so it is a little bit of 
a tradeoff there.
    I don't really have an answer, other than to say we have to 
get our housing finance system back into working order.
    Chairman Bachus. Thank you.
    Mr. Westmoreland?
    Mr. Westmoreland. Thank you, Mr. Chairman.
    Mr. Bernanke, you made a statement that not raising the 
debt ceiling was like going out on a spending spree and then 
not being willing to pay your bill. Were these people on a 
spending spree drunk and didn't understand that they were 
eventually going to have to pay it back?
    Mr. Bernanke. I don't know. The point was that the debt is 
to pay for tax decisions and spending decisions that the 
Congress has made and the President has signed and have been 
already implemented.
    Mr. Westmoreland. Because I know the debt ceiling was 
raised in June of 2010 after a spending spree of deficit 
spending. The Senate has not passed a budget in almost 800 
days. We continued to operate our government by a continuing 
resolution until April of this year. So the people who were in 
charge of spending this money either didn't care if we had to 
pay it back or they didn't think we had to pay it back. There 
is something there.
    So I agree with you that it is not like paying your debt, 
but I don't know if the people who accumulated this debt, what 
they had in mind for the program. To me, the people who spent 
the money and got us into this debt have come up with no 
solution to how we should fix it. So the people who didn't run 
the debt up are the ones trying to come up with a solution.
    Let me ask you another question. You are talking about the 
housing market. I come from an area in Georgia that had a lot 
of new development, a lot of growth. We have had 65 bank 
failures in Georgia. A lot of those were due to the fact of 
people being so heavy into commercial real estate, acquisition 
and development and so forth.
    What is your take on a bank that either received TARP funds 
or a bank that came in under a loss share agreement, an 
acquiring bank, and fire-sold the assets of either their bank 
or the bank that they acquired by putting them on an auction, 
selling them for 30 or 40 cents on the dollar, and by doing 
that, because they had a loss share agreement with the 
government, or because they had gotten this TARP money, that 
the community banks that had loans in this same area on real 
estate, their values were deflated, knocked down. Homeowners 
who lived in these subdivisions that had bought these houses, 
their value was knocked down. They no longer had any equity, 
not out of any fault of their own, but because the government 
had given money to banks or entered into loss share agreements 
for them to come in and to flush these so-called troubled 
assets away.
    So we have had a lot of communities that have immediately, 
community banks, that have immediately had to write down these 
loans. They close them because they don't have the capital. 
They can't raise the capital reserve. So do you see a problem 
with that?
    Then the last question, and I will give you a chance to 
answer, on the Neighborhood Reinvestment Act, we just had a 
situation in my district where a county purchased some homes 
from a bank that had been foreclosed on, so they got the bank 
out of the deal. This is Federal money that we gave them for 
the neighborhood revitalization. It is an active neighborhood, 
it is a fairly new neighborhood. People have just moved in. 
There are still builders in there building. This county gets 
the money, goes in, rehabs the houses, and gives anybody that 
wants to buy one $20,000 for a downpayment. It kills the 
builders. It kills jobs.
    So those are three examples of government intervention 
coming in to try to do something good that has actually 
destroyed jobs, destroyed wealth, and destroyed communities. I 
have counties that don't even have a community bank.
    Could you explain some of the thinking behind that?
    Mr. Bernanke. I am not familiar with those specific cases. 
I do know that fire sales from failing banks or from banks that 
are just trying to get their capital position in better shape, 
or distressed sales of REO, real estate owned by banks, have 
brought down prices, have brought down appraisals, and that is 
one of the reasons that the housing market is weak, because it 
is hard to get a loan because your house doesn't appraise at 
the level that you would think it would because of nearby 
houses which are in distressed condition. So I think that is a 
major issue and we need to address that.
    I didn't quite understand the part about the downpayment. 
One of the things that is also harming home values is being in 
neighborhoods with a lot of foreclosed houses around. I think 
efforts to rehabilitate neighborhoods and perhaps to convert if 
necessary owned homes to rental homes or do whatever is 
necessary to restore the neighborhood, that is only going to be 
good for housing prices if you can do that. So it is really a 
question of executing these policies in a constructive way.
    Chairman Bachus. Thank you.
    Mr. Carson?
    Mr. Carson. Thank you, Chairman Bachus and Ranking Member 
Frank. Thank you, Chairman Bernanke.
    Some are still expressing concerns over an unduly 
lackluster economy and problems that will loom heavier, such as 
unemployment heading toward 10 percent. I did support TARP 
because I believed the consequences of inaction were far too 
grave to not respond at all. However, banks are still not 
lending to the public and vital small businesses.
    How, sir, do you plan on, firstly, encouraging banks to 
lend to our Nation's small businesses and the American public 
in general? And, secondly, as you know, more banks have indeed 
tightened their lending standards than have eased them. Does 
the Fed plan to keep interest rates low for an extended period 
of time? Are the Fed's inactions here meaningless unless banks 
are willing to lend? And, lastly, what are your thoughts on the 
requirement of 20 percent as a downpayment and do you believe 
that this will impact homeowners significantly or not at all?
    Mr. Bernanke. Banks have stopped tightening their lending 
standards according to our surveys and have begun to ease them, 
particularly for commercial and industrial loans and some other 
kinds of loans. Small business lending is still constrained, 
both because of bank reluctance, but also because either lack 
of demand, because they don't have customers or inventories to 
finance, or because they are in weakened financial condition, 
which means they are harder to qualify for the loan.
    The Federal Reserve has been very focused on trying to 
promote small business lending. I don't want to take all your 
time, but we have provided guidance to our examiners. We have 
worked with our examiners to tell them how to balance between 
the needs of safety and soundness and the needs of making good 
loans to small businesses. We have had meetings and conferences 
all over the country with small businesses trying to get their 
perspective. We have an ombudsman. If anybody wants to tell us 
about a problem, we would like to know about it. That is on our 
Web site. So we have been working hard to do that.
    Our low interest rates do support the economy through a 
number of mechanisms, including lowering mortgage costs and 
lowering car loans and other types of rates.
    On the 20 percent down, I think you are referring to the 
qualified residential mortgage, the QRM. This is a rule which 
we had out for comment and we are still listening to the 
comments. The idea was that Congress passes a risk retention 
requirement of 5 percent, that if you sell a securitized 
package of mortgages, you have to keep 5 percent of that as a 
guarantee, essentially, you are guaranteeing those mortgages as 
being of good quality. The QRMs are the mortgages Congress 
intended to be exempt from that requirement, so presumably that 
should be mortgages that are very high quality.
    We looked at the criteria that affect mortgage delinquency 
rates, and high downpayments were one of the things that really 
stood out as being one of the factors that keeps delinquency 
rates down, because people have a lot more cushion if they have 
a big downpayment.
    We don't think that this would necessarily block 
homeownership because there would still be a large market 
subject to the risk retention requirement where downpayment 
requirements would be set by the originators, as is now the 
    But, again, we are taking comments on this and we will 
certainly listen carefully to whatever the public has to say.
    Mr. Carson. Thank you, Chairman Bernanke.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mr. Huizenga?
    Mr. Huizenga. Thank you, Mr. Chairman.
    Mr. Bernanke, I appreciate this opportunity. I plan on kind 
of talking fast and I may be sending out a letter with some 
additional questions. But I want to flash back a couple of, 
maybe a couple of weeks ago, a month ago, when the Republican 
Caucus met with the President at the White House. One of my 
colleagues, Reid Ribble from Wisconsin, who is the chairman of 
a new committee, a new caucus that he created I am a member of, 
the Small Business Owners Caucus, I will say the Job Creators 
Caucus, got up and said, ``Mr. President, there are three 
things that those of us in small business are looking for. One 
is consumer confidence, two is credit availability, and the 
third is certainty. We are looking for certainty so that we can 
    That really would be the basis and the foundation for 
recovery. I want to try to work through a couple of those. And 
I appreciated my colleague from California talking about 
housing. My background is in real estate and developing and 
also in construction. My family has a ready mixed concrete 
company, and I own our gravel company and gravel-sand company. 
So I can tell you on page 3 when you talk about residential 
construction is at extremely low levels, that might be the 
understatement of your remarks, especially coming out of 
Michigan where for a protracted time here, we have had some 
very difficult times.
    But I want to focus in on what I am concerned about, 
consumer confidence, which you reference on page 3 of your 
remarks as well. On page 8, you reference, ``temporary shocks 
to the economy.'' I am looking at that and I am seeing 
inflation, I am seeing oil prices which translate directly into 
at the pump, food and commodities and those types of things.
    Then on page 4, you also said that this rise in inflation 
is transitory and you expect inflation to subside. And I am 
curious, what is going to subside? Oil prices? Gas prices? 
Commodity prices? Are housing prices going to recover so people 
are going to have that cushion that you were just talking 
    I am curious. I want to know what you believe is going to 
cause that confidence to increase.
    Mr. Bernanke. On the question of inflation, we had 
substantial increases in oil prices earlier this year. There 
was about a $25 jump per barrel in oil prices after the Libyan 
revolution began, so oil prices were driven up about $10 or $15 
above where they are now. Since then, gas prices are down about 
35 cents, something like that. So gas prices and oil prices 
were a very big part of the inflation that we saw, and that 
seems to be leveling off and coming down some.
    The same way with food. A lot of the increase in food 
prices had to do with bad weather, bad crops. There have been 
some expectations now of much bigger harvests, say, in corn, 
which is driving down those prices. So we are going to see some 
relief in food prices as well.
    Mr. Huizenga. I am sorry, I am running out of time and I 
want to quickly move on. I understand where you are going. I do 
need to express though, I was recently in Iraq and Saudi 
Arabia. I had a chance to meet with the oil minister in Iraq, 
Mr. Shahristani, and the oil minister in Saudi Arabia. Both of 
them said after Libya, they actually ramped up their 
production. It is not a production issue.
    We were asking specifics about why gas prices were going to 
be coming in. And I broached the subject with his excellency, 
Mr. Shahristani, and said, ``What about the U.S. dollar and the 
valuation of the U.S. dollar?'' He paused and kind of looked at 
me. He said, ``Congressman, I was trying to be polite.''
    They recognize that what we have done by devaluing our 
dollar as an artificial increase in oil prices, because oil is 
paid for in one way around the world--U.S. dollars. And I am 
concerned about that as well, and I am curious if you can 
address that?
    Mr. Bernanke. The falling dollar, which has fallen for a 
lot of reasons, including our reduced safe haven demand and so 
on, has contributed some to the increase in oil prices. But if 
that were the only factor, prices in Euros and other currencies 
would be going down. In fact, prices are rising in all 
currencies. So it is not just the dollar.
    Mr. Huizenga. Not according to the two oil ministers.
    Mr. Bernanke. It is a fact that prices are rising in all 
    Mr. Huizenga. Maybe we can address that in some of our 
dialogue. I am concerned. My wife is from Canada originally; 18 
years ago, when I had the opportunity to marry her, it took 64 
cents U.S. to buy a Canadian dollar. Yesterday, it was $1.04 to 
buy a Canadian dollar. I simply don't see how we are not going 
to avoid inflation in the future, and isn't that sort of a 
consequence of some of our monetary policy as we are moving 
    Mr. Bernanke. There are two separate concepts. The buying 
power of the dollar, which is inflation domestically, and then 
the exchange value of the dollar externally, which is what you 
are talking about. We have kept inflation low and steady since 
the eighties.
    Mr. Huizenga. Internally.
    Mr. Bernanke. Internally, yes. And as far as the monetary 
policy is concerned, the one thing we could really do to 
support the dollar is keep our inflation rate low, and that is 
what we have done. So the reason the dollar is falling over 
long periods of time has to do with things like flows in the 
trade deficit and flows of capital in and out of the country.
    Mr. Huizenga. And not due to us printing money.
    Chairman Bachus. Thank you.
    Mr. Himes?
    Mr. Himes. Thank you, Mr. Chairman, and thank you, Chairman 
Bernanke, for being with us today. I have just a couple of 
    The first is based on the fact that it is a parlor game 
around here, perhaps no better exemplified by Mr. 
Westmoreland's question about whether those people were drunk 
to you in making policy over the last couple of years to attach 
blame and to try to saddle either the President or the majority 
or the minority with full responsibility for the economy.
    I was struck by your testimony that in this quarter in 
particular there was a significant effect around temporary 
factors, the earthquake in Japan, oil prices, perhaps the 
drought. I wonder if you could elaborate on that for a minute 
or two and give us a sense for what the magnitude of that 
effect was over the roughly three quarter drop in GDP growth, 
and though you can't obviously predict exogenous events in the 
future, how that is likely to taper off in the coming quarters?
    Mr. Bernanke. We saw pretty significant effects on both the 
production and sales and prices of automobiles coming from the 
supply chain disruptions in Japan. There were also some effects 
on the tech industry as well, but much smaller. Oil price 
increases really hit, as you know, family budgets. Gasoline 
prices. And that was a reason that consumer spending in the 
second quarter was extremely weak.
    So we are looking at a first half growth rate of in the 
vicinity of 2 percent or maybe even a little bit less, which is 
not enough to bring down the unemployment rate. The Federal 
Reserve is expecting 3 percent plus growth in the second half. 
We will see if that is the case. That would represent in 
particular a resurgence in auto production and sales, coming 
from the fact that the supply chain problems are now being 
dealt with and gas prices are a little lower, and we expect to 
see consumers a little bit stronger because they have more 
disposable income after their energy costs.
    Mr. Himes. Thank you. My second question is, I was struck 
that in your testimony you list four headwinds facing the 
economy. The fourth of those headwinds was fiscal tightening at 
all levels of government. I share with Mr. Lucas and Mr. 
Perlmutter the belief that we need to put together a large 
package that will involve cuts over time for fiscal 
sustainability, but there is also a current circulating in the 
Congress and elsewhere that there is a notion that severe cuts 
now will contribute to the health of the economy. Your listing 
as fiscal tightening at all levels of government as a headwind 
would seem to be a rebuttal of that notion. I am wondering if 
in fact you would consider that a rebuttal of the idea that 
severe cuts now are economically positive.
    Mr. Bernanke. To the extent possible, we should make the 
cuts over a long term because this is a long-term problem. That 
is where the issue of sustainability is. I do think you need to 
be careful about sharp cuts in the very near term, exactly for 
the reason you mention, which is that the economy is still 
growing very slowly. For example, in the job market report just 
last week, the private sector job creation, which of course is 
very important, was a good bit better than the headline number 
because there were about 40,000 jobs lost in State and local 
governments, and it is not just jobs in government. It also 
involves the indirect effects of procurements or tax cuts or 
whatever is working through the rest of the system. So I think 
some care needs to be taken there.
    I realize it is difficult, at the same time being credible 
and strong about the long-term addressing of the deficit 
    Mr. Himes. Understood. No, and I agree with that. Would you 
agree with my playing back to you the notion that very 
significant cuts to government spending now, with its effect on 
aggregate demand, runs the risk of an adverse economic 
    Mr. Bernanke. I think that is a consequence that really 
needs to be taken into account.
    Mr. Himes. Thank you. The Simpson-Bowles proposal, which I 
thought was a good start on such a big package, suggested that 
significant cuts perhaps be postponed until late 2012 or early 
2013. I wonder if in my remaining time you can give us a feel 
of your sense for from the standpoint of not doing damage to 
what is a hesitant recovery, how you might encourage us to 
think about the effects of different levels of cuts over time 
on the GDP.
    Mr. Bernanke. That is a tough question. It depends in part 
on how quickly the economy recovers. We have been disappointed 
so far. If it is still growing very slowly, that will continue 
to be a problem. At some point, there is an issue of being 
credible and demonstrating that you are serious, and so I think 
beginning to phase in cuts, along the lines that Simpson-Bowles 
talked about or a couple years down the road is certainly 
something you may have to do in order to convince the markets 
that you are going to take action against the deficit problem.
    Mr. Himes. Thank you. Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. Mr. Duffy?
    Mr. Duffy. Thank you, Mr. Chairman, and hello, Chairman 
Bernanke. Just quickly, could you give me the exact number of 
what you mean by severe cuts? Are we talking billions over 10 
years, trillions over 10 years?
    Mr. Bernanke. Oh, over the 10 years?
    Mr. Duffy. Sure.
    Mr. Bernanke. Several numbers have been put out.
    Mr. Duffy. But just quickly, what is your number?
    Mr. Bernanke. The so-called grand bargain that has been 
discussed is something in the vicinity of $4 trillion over 10 
    Mr. Duffy. Is that too much?
    Mr. Bernanke. No, it is not too much. It has the advantage, 
if it can be done, it has the advantage that it will stabilize 
our debt, the ratio of our debt to GDP, and that will be a very 
encouraging development.
    Mr. Duffy. Thank you for that because I want to make sure 
we are all on the same page of what severe means. We talk about 
    Mr. Bernanke. We are talking about timing also. I am 
talking about a 10-year window or a 12-year window.
    Mr. Duffy. Would you like to see those all backloaded or do 
we need to have some of those cuts up front?
    Mr. Bernanke. It can't be completely backloaded for the 
reasons I have said. We have to be careful in the short term.
    Mr. Duffy. Here is one of my concerns. I am talking to my 
job creators I represent the northwest quarter of Wisconsin. 
They talk about uncertainty in the marketplace and we have 
heard a lot about that today, but it comes from this health 
care reform bill, it comes from the stimulus bill, it comes 
from our government picking winners and losers, but more 
frequently I am hearing them talk about the massive debt, this 
$14 trillion-plus debt, the fact that we are going to borrow 
$1.5 trillion this year, and what I keep hearing them talk 
about, we are concerned about where interest rates are going 
and we are concerned about inflation. We are concerned about 
punishing tax increases to pay for this debt, and so if I am 
looking at expanding or growing my business, I do not know that 
I am going to do that because of all the uncertainty that is 
created in the environment today. It does not necessarily hurt 
them. It hurts folks in our communities who need jobs.
    You have talked about certain numbers of how much we should 
cut and where we should go, but there has not been a lot of 
clarity on where we need to be today as we move forward. Right 
now, we are at 70 percent of debt to GDP in publicly held debt. 
Within 10 years, within a decade we are going to be at 90 
percent of debt to GDP. I think that is very concerning because 
that is going to have a real impact on our economy.
    Maybe this is a rhetorical question, but if we are not 
going to cut now, then when? If you look at the political 
difficulty that we face today, when we have a debt that is $200 
trillion in interest payments, when we go back to historic 
norms, it is going to be 400-plus in interest payments. At what 
point is there going to be political courage to get the debt 
under control if we cannot do it today? And I think this whole 
conversation does come back to jobs, and my friends across the 
aisle talk about where is the Republican jobs plan. We tried 
the stimulus bill, nearly a trillion dollars of spending. It 
was their silver bullet, but the White House Council of 
Economic Advisers came out and told us really it was about 
$278,000 in government spending per job that was created. I 
would submit that is not a very good investment for the 
American taxpayer.
    But my question goes to this. As we look at an unemployment 
rate of 9.2 percent, do you think that we can help our job 
seekers by taxing our job creators a little bit more? Will it 
put more people back to work if we raise our taxes?
    Mr. Bernanke. Again, I am not going to get into the 
breakdown of the deal, but I want to agree with the points you 
made earlier, which is if you were to really do something 
significant to solve the fiscal sustainability problem, I think 
it would have benefits in the short term.
    Mr. Duffy. But do you think we can put people back to work 
by raising taxes on folks? Does that sound economically--
    Mr. Bernanke. There are tradeoffs between fairness, between 
    Mr. Duffy. But putting people back to work, are we going to 
put more people back to work by raising taxes?
    Mr. Bernanke. It depends what the alternatives are. It 
doesn't just--the question--
    Mr. Duffy. So maybe we will put more people back to work if 
we raise taxes?
    Mr. Bernanke. I am talking hypothetically now because I am 
not taking sides in this issue. You also talked about the 
benefits of reducing the deficit, so if there was some tax 
increase with a lot of spending increases that reduce the 
deficit a lot, maybe that benefit would outweigh the other 
    Mr. Duffy. Sure, and I was just isolating taxes and 
increasing taxes and what does that do. Let me move on to a 
different question. We had talked about the QE2 with Dr. Paul. 
When you buy assets, where does that money come from?
    Mr. Bernanke. We create reserves in the banking system 
which are just held with the Fed. It does not go out into the 
    Mr. Duffy. Does it come from tax dollars, though, to buy 
those assets?
    Mr. Bernanke. It does not.
    Mr. Duffy. Are you basically printing money to buy those 
    Mr. Bernanke. We are not printing money, we are creating 
reserves in the banking system.
    Mr. Duffy. In your testimony--I only have 20 seconds left--
you talked about a potential additional stimulus. Can you 
assure us today that there is going to be no QE3 or is that 
something that you are considering?
    Mr. Bernanke. I think we have to keep all the options on 
the table. We don't know where the economy is going to go. If 
we get to a point where we are like, the economy, recovery is 
faltering and we are looking at inflation dropping down towards 
zero or something where inflation issues are not relevant, 
then, we have to look at all the options.
    Mr. Duffy. And QE3 is one of those?
    Mr. Bernanke. Yes.
    Mr. Duffy. Thank you. I yield back.
    Chairman Bachus. Thank you. Mr. Peters?
    Mr. Peters. Thank you, Mr. Chairman, and thank you, 
Chairman Bernanke, for being here today. In lieu of some of 
your comments that you have made through some of the questions 
regarding short-term fiscal policy and the importance of that 
in getting the economy stabilized, I would like to hear some of 
your comments on an issue that we are going to be taking up in 
Congress next week, which is a balanced budget amendment.
    As I know you are very aware, that with Federal policy and 
fiscal policy is at times of weak economy, oftentimes tax 
revenues are going to drop, and yet the demands for government 
will go up for unemployment compensation and other types of 
stabilizers are in place as a result of that.
    Do you have concerns about a balanced budget amendment and 
your ability as Federal Reserve Chairman to deal with a weak 
economy and unemployment issues in the future where fiscal 
policy is certainly a key component of that along with your 
monetary policy? Would you comment a little bit about a 
balanced budget amendment and are you concerned about that for 
the future?
    Mr. Bernanke. Sure. First of all, let me just reiterate 
again because I don't think everybody has heard me, that I am 
very much in favor of a substantial reduction in our fiscal 
deficits over time, and I think we need to do that, and it may 
very well be that some kind of structure, whether it is some 
kind of caps and triggers or whatever may be effective in 
helping Congress meet those goals.
    If you were to do something like a balanced budget 
amendment, I just would like to say that it would be very 
important to make it sufficiently flexible to deal with 
different contingencies. For example, what do you do during 
recession? What do you do during war? What do you do during a 
natural disaster?
    The Congressman mentioned so-called automatic stabilizers. 
One of the benefits of the budget as it is now is that when the 
economy weakens, tax revenues automatically decline, spending 
automatically rises and provides a little bit of stability to 
the economy. So I would not rule out, by any means, that kind 
of approach, but I think it has to be written very carefully to 
create the necessary flexibility to deal with unforeseen 
    At the same time, and this is what makes it very hard, if 
there are no binding rules, no discipline, it is probably not 
going to help you very much. So it is a tough challenge to 
write an amendment like that that will accomplish everybody's 
    Mr. Peters. So flexibility obviously is very important. I 
know in this particular amendment, we need a three-fifths vote. 
I have been around long enough that a three-fifths vote is a 
pretty difficult thing to come by in this Congress. So that 
flexibility is not in that proposal, and it sounds as if you 
would have some concerns with that because of the lack of 
flexibility in order to deal with that.
    I want to switch gears a little bit and move to an article 
that Bruce Bartlett wrote yesterday that I thought was 
interesting. I do not know if you saw it. He was a senior 
policy adviser to Presidents Reagan and Bush, and it talked 
about the parallels of what we are seeing now to the 1930s, and 
I know you are a well known scholar of the Great Depression era 
in the 1930s. I would appreciate your comments.
    I quote a little bit here, he says Friday's jobs report 
clearly indicates that the economy remains weak, yet the 
pressure to reverse stimulus and begin tightening fiscal and 
monetary policy has become overwhelming. He goes on to say, 
some economists are getting very nervous with the economy in a 
fragile state, and it may not take much to bring on another 
recession. Even a small amount of fiscal or monetary tightening 
may be enough to do that, and I thought it was interesting in 
his comparisons to 1937, and he goes on to say, the combination 
of fiscal and monetary tightening which conservatives advocate 
today, actually which is what they did in 1937, brought on a 
sharp recession beginning in May of 1937 and ending in June of 
1938, and according to the National Bureau of Economic 
Research, real GDP fell 3.4 percent in 1938 and unemployment 
rose to 12\1/2\ percent from 9.2 percent in 1937. I believe we 
are at 9.2 percent right now.
    Do you see some parallels between what happened in the late 
    Mr. Bernanke. It is true that most historians ascribe the 
1937-1938 recession to premature tightening of both fiscal and 
monetary policy, so that part is correct. I think every episode 
is different. We have to look at what is going on in the 
economy today. I think with 9.2 percent unemployment, the 
economy still requires a good deal of support. The Federal 
Reserve is doing what we can to provide monetary policy 
accommodation. But as we go forward, we are going to obviously 
want to make sure that as we support the recovery that we also 
keep an eye on inflation, make sure that stays well-controlled. 
So we are aware of that lesson, but we have to take each 
situation as it plays out, and to see how the outlook varies 
according to new information that we receive.
    Mr. Peters. I am glad you are aware of the lesson; 
hopefully Congress will also be aware of history so we don't 
have to repeat it.
    I appreciate those comments. Thank you, Mr. Chairman.
    Chairman Bachus. Thank you, Mr. Peters. I do think that is 
one thing they did right in 1937 is what the Chairman refers 
to. I think that did help.
    I mean they made a mistake by tightening, I am sorry. That 
is one of the things they did right.
    Mr. Renacci?
    Mr. Renacci. Thank you, Mr. Chairman. And thank you, 
Chairman Bernanke, for being here. I read in quarterly reports 
investor perspectives and industry research that patience and 
moderate meager expectations are necessary regarding growth and 
job creation, but with 9.2 percent unemployment nationwide, 
sitting at 10 percent in my district, and the U6 up over 16 
percent, my constituents can no longer really afford modest 
expectations or tolerate those. Patience is a virtue they can 
no longer afford to have.
    To me the whole thing we are doing here in Washington has 
to be about jobs, jobs, jobs. Tax reforms, stripping away 
harmful mandates and overburdensome regulations, getting our 
spending down to sustainable levels, free trade agreements, the 
whole thing all needs to be about economic growth and letting 
businesses create jobs. I believe, and my beliefs are not a 
political statement, my beliefs are from being a businessman 
for 28 years, employing over 3,000 people, creating jobs, being 
the CPA for multiple businesses, that today the business 
community and the financial services sector are locked up in 
uncertainty. Our economy is drowning in unprecedency of new 
reforms with each wave of new regulations, and the regulations 
crashing down on their heads before the effects of the last 
wave can really be understood, evaluated, and properly 
    The battering that our job market has taken by these waves 
has not gone unnoticed by me or by the unemployed and 
underemployed constituents in my district, and thankfully not 
by you either. You made some headlines about a month ago at a 
press conference when Jamie Dimon asked you about performing an 
examination of the cumulative effects of these new mandates--
Dodd-Frank, Basel III, not to mention health care--on jobs and 
credit availability. As I recall, your response was that you 
cannot pretend that anybody really has because it is just too 
    I learned a long time ago in my business career that 
anything I do and anything we do should be SMART. SMART is an 
acronym for specific, measurable, attainable, realistic, and 
timely. The measurable one is the one I have a problem with. It 
has been a month now, the banks are now looking at much higher 
capital standards, the small community banks are looking at a 
repeal of Regulation Q, everyone is facing higher compliance 
    Has the Fed begun such an examination study yet? Can we 
expect to see it? Can we expect to see some measurability of 
what these regulations are?
    Mr. Bernanke. Yes. Let me first say that I agree with a lot 
of what you said about free trade, smart regulations, fiscal 
stability, all those things would help, and I hope the Congress 
will pursue those directions, a good Tax Code and so on.
    It is very difficult to figure out all of the interactions 
of a complex system, but I do want to be clear that the Fed 
does do cost-benefit analyses of every rule that we put out, 
and we publish those cost-benefit analyses. That is both by law 
and by our internal practice. And we are doing our very best to 
take the statute that Congress gave us and try to make it as 
unburdensome as possible and still achieve the objectives. We 
have a very difficult balancing act here. We do not want to 
hamstring the financial system because it is so critical to the 
economy, to growth.
    On the other hand, it has only been a couple of years since 
we had this enormous financial crisis which threw us into this 
deep recession, so we do have to take necessary steps to make 
sure it does not happen again, and I assure you that the 
Federal Reserve has always been very attentive to trying to 
make sure that the rules and regulations that we promulgate 
consistent with the statute are as cost-effective as possible, 
and we do cost-benefit analysis quantitatively on these rules.
    Mr. Renacci. It is interesting, though, you said that based 
on the statutes you have been handed. Do you ever look at them 
and say, these just are not working and come back and say, it 
is not working, here are the problems? Because, again, we have 
so much uncertainty in the marketplace. We have to get some 
predictability here to get this job market created again.
    Mr. Bernanke. We are working to get this done as clear and 
fast as possible. Broadly speaking, the statute addresses the 
main areas where there were problems, and there are certain 
parts of it that we may want to revisit. There are others we 
might learn more about over time. So I am not saying it is a 
perfect bill by any means. I am not claiming that at all. But I 
also agree with you that we need to make our regulations as 
clear and as effective and as quickly done as possible, and we 
are aiming to do that.
    Mr. Renacci. I know some people have asked in previous 
questions, but do you put uncertainty as a concern? Again, 
being a business owner in the past, uncertainty will cause a 
lock-up. We could talk about the government cutting costs and 
cutting jobs, but the private sector, small business owners 
create almost 67 percent of our jobs. We have to give them the 
certainty so they can create jobs.
    Mr. Bernanke. You are not interested in my Ph.D. thesis of 
32 years ago, but it was entitled, ``Uncertainty in 
Investment,'' and it was about how uncertainty can reduce 
investment spending, and I believe that. But there are many 
kinds of uncertainty. There is certainly uncertainty about 
regulation and those sorts of things, but there is also 
uncertainty about whether this is a durable recovery. People do 
not know whether to invest or to hire because they do not know 
whether the recovery is going to continue. So I think--
obviously, we want to address the regulatory, trade, tax 
environment, absolutely fiscal environment. We also want to do 
whatever we can to make the economy grow faster and make people 
more confident. I think we will see a dynamic going forward. If 
the economy begins to pick up some, I think confidence will 
improve because people will have more certainty about the sense 
that this will be a durable recovery. I think that is a very 
important thing to be looking for.
    Mr. Renacci. Thank you.
    Chairman Bachus. Mr. Carney?
    Mr. Carney. Thank you, Mr. Chairman, and thank you, 
Chairman Bernanke for coming today. I appreciate your remarks. 
It is obvious that when the Fed Chairman speaks, people listen. 
This rostrum was full when you started your testimony today, as 
was the room, and I think you have enlightened us with a lot of 
what you have said. I would like to review some of that and 
then try to explore some of these issues around coming up with 
a plan for fiscal discipline that makes sense, and we have had 
a little bit of back and forth with Mr. Duffy, Mr. Himes, and 
Mr. Peters as well.
    You said you support significant reduction in fiscal 
deficits, but you have also warned us against what you called, 
you cautioned us against what you called sharp cuts in the 
short term. Could you characterize in any kind of way the kinds 
of cuts, the kinds of programs? I know you have tried to shy 
away from that kind of a thing, but we have discretionary 
domestic spending, we have discretionary military spending, we 
have mandatory military and mandatory domestic, and then we 
have these big entitlement programs, and I would just like your 
view on those kinds of cuts as it relates to your caution about 
sharp cuts in the short term.
    Mr. Bernanke. Let me preface this by saying that there is 
already a good bit of fiscal contraction going on in the sense 
that there was a big run-up in spending related to the stimulus 
and so on. That is now being withdrawn from the economy. 
Similarly, the States and localities have been under continuous 
pressure because of their limitations on their budgets, which 
has led them to be cutting, so we are already experiencing a 
good bit of fiscal tightening going on, and that is part of the 
reason why there are some headwinds in the economy.
    I cannot really pick and choose among programs. You 
certainly want to think about the efficacy and the desirability 
of these programs on their own merits, but I just want to be 
clear that cutting programs or raising taxes in ways that will 
reduce aggregate demand and spending and the ability of 
consumers to meet their bills and to purchase goods and 
services is going to slow the economy, and that is in turn 
going to offset some of the benefits of the cuts because it 
will reduce revenues and make the deficit worse in the short 
    Mr. Carney. So let me suggest an approach based on the 
Chairman's graph that he displayed on the screen, which showed 
basically entitlement programs spending that created the real 
challenge in the long-term deficits. You said yourself that the 
long-term deficits were really the problem. So is that to 
suggest that the structure of those entitlement programs is 
really what we ought to focus on in terms of the long term, and 
then in the short term maybe a different kind of an approach?
    Mr. Bernanke. Yes. I do not think anybody is really 
proposing big cuts in, say, Medicare this year, but--
    Mr. Carney. But as the chairman pointed out and others, you 
just have to look at the graphs to see that Medicare and health 
care spending generally, whether you are talking about 
Medicare, Medicaid, military health care, is the big 10,000-
pound gorilla.
    Mr. Bernanke. That is right. I was going to say this graph 
shows a very long-run trend that we have to be worried about, 
but that means that this is a long-term problem that we have 
and we need to address it over a period of time. Certainly, 
entitlements are part of the picture, and we will need to look 
at those and make sure that they are providing the support and 
medical care that they are intended to provide at the least 
possible cost. That is an important thing for us to be doing.
    But, again, that is a long-term issue. This is something 
that is going to take place over not just 10 years but maybe 20 
or 30, but the more we can do now to persuade the markets and 
the public that we are serious about this and are making 
changes the better we will be.
    Mr. Carney. That is kind of the point with respect to 
having a plan in place when you raise the debt ceiling, right? 
It is important to raise the debt ceiling and it is important 
to have a plan in place is what I heard you say earlier.
    Mr. Bernanke. Those are two legs, both important.
    Mr. Carney. So let me just explore with the 30 seconds I 
have left the interchange you had with Mr. Duffy. Mr. Duffy 
said putting people back to work--will we be able to put people 
back to work by raising taxes? I think I heard you say that it 
depends on how you do that, and if maybe I could reframe that, 
can we strengthen our economy in the long term with additional 
tax revenues maybe through tax reform or some other way?
    Mr. Bernanke. Again, with the preface that these are 
congressional decisions, I think that taxes, the structure of 
the Tax Code matters a lot. So, the incentives are most 
affected by the marginal tax rates, and that is a very 
important thing to look at. There may be tax expenditures or 
tax exclusions, etc., which are maybe just government spending 
in disguise or just breaks that are not really achieving 
anything, and that might be a place that you would look and 
still be able to maintain or even lower marginal tax rates and 
improve the efficiency of the Tax Code in that way. I think 
most economists agree that broadening the base by eliminating 
breaks and cutting or at least maintaining marginal tax rates 
gives you a better tax system, promotes growth.
    Mr. Carney. So you think additional revenue has to be part 
of the picture?
    Mr. Bernanke. Again, this is your decision, but I am just 
talking about how Tax Code should be structured.
    Mr. Carney. Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. We are going to go to Mr. 
Schweikert and Ms. Waters. We would like to end on a balance, 
if that would be possible. Those will be our last two 
questioners of the day.
    Mr. Schweikert. Thank you, Mr. Chairman. Chairman Bernanke, 
I would have been interested in your thesis from, what, 32 
years ago. Oh, come on, that was funny.
    In the uncertainty, you have how many, what, about 99 Ph.D. 
economists at the Fed?
    Mr. Bernanke. Oh, I don't know. More than that.
    Mr. Schweikert. Oh, okay. I have been struggling to try to 
find good data or someone who has actually modeled the 
uncertainty of a regulatory environment, and I know some of 
that is, it may not even be the reg, it is the promulgation of 
the reg, the rule writing, and the dampening effect that may 
have on economic growth or velocity in money or people willing 
to engage in activities.
    When you are doing your modeling of saying here is where we 
are, here is what we see coming in the next year or next month, 
but here is what we see in the regulatory environment, whether 
it be Dodd-Frank, whether it be EPA, whether it be some of the 
other things, do you ever model on the dampening effect of 
    Mr. Bernanke. We have been trying to analyze that. 
Unfortunately, we can look at things like stock market 
volatility in banks: things of that sort that reflect the 
uncertainty that banks have. Unfortunately, it is really hard 
to disentangle the effects of regulatory uncertainty from other 
kinds of uncertainty, like just the state of the economy, but 
we have tried to find those kinds of effects, and it certainly 
plays a prominent role. If you read our minutes of the FOMC, 
you will see that we discuss that issue quite substantially.
    Mr. Schweikert. It is an area I have a real interest in, 
particularly rulemaking, sometimes we would be better off even 
trying to squeeze down the timeline because knowledge is much 
easier to do decision-making than what is coming.
    You touched on something earlier, and this is one of--you 
and I have actually had the opportunity to talk about this 
before, the overhang of nonperforming assets that are still on 
balance sheets, and this could be everything from the home down 
the street that is under foreclosure to the nonperforming to 
toxic paper that may still be sitting on balance sheets. From a 
personal philosophy, I am one of those who believes we would be 
much better off if we aggressively pushed through nonperforming 
mortgage debt and others through the economy, got them sold, 
whether it was sold to an investor or first-time home buyer. Do 
you have any personal opinion on how much overhang is being 
created by the nonperforming debt, and, am I right or wrong in 
your opinion on being somewhat of an evangelical, of pushing 
that through the system and getting it consumed?
    Mr. Bernanke. The area where this is most relevant is in 
the housing market, where we want to do all we can to keep 
people in their houses, to avoid foreclosures, to stabilize 
neighborhoods and so on. With that being said, there have been 
very long delays because of servicing problems and so on, and 
moratoriums, etc., that have really slowed this process down, 
and it is true that as long as there is a large number of 
distressed properties overhanging the housing market, it would 
be very hard for the housing market to begin to recover, and so 
addressing that problem I think is a very important one. I 
agree with that basic point.
    Mr. Schweikert. And I know we have seen some charting that 
when some of the large servicers have actually gone into 
mortgage forbearance, we have had a robo-signing or other 
issues, we are going to hold for 90 days, we can actually see 
values coming down even more aggressively. I don't know if it 
is the anticipation of another wave of foreclosures or that 
typical uncertainty.
    I have often heard in some of the discussions here were the 
positives of the Fed buying this much paper, the quantitative 
easing. Would you be willing to share, because for every 
positive side there is often some negative, what you would say 
would be the dampening or some of the costs in the economy of 
the fairly rapid monetary expansion?
    Mr. Bernanke. I think the main one is that there has been 
some contribution to commodity prices, which we anticipated. 
Again, I think that supply and demand factors globally were by 
far the more important, but that increase in commodity prices 
offsets some of the benefits that the lower interest rates and 
more accommodative financial conditions have for growth and for 
addressing the risks of deflation, which we saw last August.
    Mr. Schweikert. The inflationary pressures you saw on many 
commodity classes, were they within the range you expected?
    Mr. Bernanke. No, they were much larger, but because the 
bulk of those movements can be attributed and quite directly--I 
recently gave a speech that went through some detail on this 
issue--to global supply and demand conditions. For example, on 
the oil side, it is very striking that the United States is 
using less oil today and importing less oil today than it was 
10 years ago. All the growth in oil demand is in emerging 
markets, which are growing very quickly. That demand is going 
up very substantially. At the same time we have seen 
constrictions on supply. So those are some of the factors that 
have been important. We did not anticipate Libya, we did not 
anticipate Japan.
    Mr. Schweikert. So it is externalities outside of our 
national borders?
    Mr. Bernanke. Right. That is right.
    Mr. Schweikert. Thank you, Mr. Chairman. The last thing I 
will throw out is I think the Chairman may have broke Chairman 
Paul's heart when he said gold wasn't money.
    Chairman Bachus. Thank you.
    Mr. Bernanke. I think he will survive.
    Chairman Bachus. Yes. Ms. Waters?
    Ms. Waters. Thank you very much. Thank you for being here, 
Mr. Bernanke. We are always pleased to see you.
    I would like to ask you a little bit about the tremendous 
power that you have. It seems that there are about 21,000 
transactions that are being examined. Basically, it is about 
the billions that you were able to lend out to banks and, I 
don't know, hedge funds, what have you.
    This article that I am sure you have seen in Rolling Stone 
called, ``The Real Housewives of Wall Street'' mentions that 
the Fed spent billions in bailout to banks in places like 
Mexico, Bahrain, Bavaria, billions more to a spate of Japanese 
car companies, more than $2 trillion in loans each to Citigroup 
and Morgan Stanley and billions more to a string of lesser 
millionaires and billionaires and on and on and on. It mentions 
loans you made in the Cayman Islands, which causes us all a 
little bit of concern. You know the reputation of the Cayman 
    But this is what caught my eye. This so-called shadow 
budget. There was a loan that was reported under your TALF 
program to something called Waterfall TALF Opportunity, a 
company whose chief investors included the wife of Morgan 
Stanley Chairman John Mack and a widow of a close friend of Mr. 
Mack who served as the president of Morgan Stanley's Investment 
Banking Division. Neither of these women had any business 
experience to amount to anything, but yet for an investment of 
$15 million, they received $220 million in cash from the Fed to 
purchase asset-backed securities like student loans and 
commercial debt, with the investors keeping 100 percent of any 
gains and taxpayers taking 90 percent of all losses.
    The reason I point that out to you is you know I have been 
in your face for a long time about opening up opportunities to 
minority banks, for example, and the discount window, they are 
undercapitalized. If they had money, they would lend money to 
our businesses that would create jobs in the minority 
community. The unemployment rate is just unconscionable. 
Business cannot get any capital.
    How is it that in this TALF program you and the so-called 
shadow budget that they are referring to could make it possible 
for Waterfall Opportunity to end up with just a $15 million 
investment getting $220 million when I cannot get any money 
from you for these small and minority banks. Could you answer 
me that?
    Mr. Bernanke. We will have to look at that story. I am very 
    Ms. Waters. You mean you have not read this story and 
investigated in your house to see what happened?
    Mr. Bernanke. What I do know is that this story completely 
misrepresented how this program worked and what the goal of it 
was. The goal of it was to get the asset-backed securities 
market working again, which we did very successfully and at no 
cost to the taxpayer. It worked very similarly to the PPIP 
program in the Treasury, where any U.S. company, minority or 
otherwise, if they purchased assets could use part of--
    Ms. Waters. I don't want to interrupt you, but I understand 
what TALF was all about. Remember, I was deeply involved in 
TARP and TALF and all of that.
    Mr. Bernanke. Right.
    Ms. Waters. But as I have talked with you over the years, 
you always remind me that minorities need to concentrate on 
education and training and competency, and as you know, I have 
created these opportunities for you to meet very competent 
investment bankers and asset managers, I have brought them to 
Washington. You have been very generous. You have come to our 
    Why is it that something like this little company with 
these two women with no background, no experience, no education 
can end up because they are connected get this kind of money, 
and I cannot open up these opportunities for minorities?
    Mr. Bernanke. That program was open to any U.S. company.
    Ms. Waters. How many African Americans did you fund through 
the TALF program?
    Mr. Bernanke. Any who qualified and--
    Ms. Waters. No, no, no, Mr. Bernanke.
    Mr. Bernanke. I don't know the answer to your question 
offhand. We can certainly try to find out for you.
    Ms. Waters. I don't want to interrupt, but I really do need 
some answers. Can you tell me--if you cannot tell me today, can 
your office give to me the number of minorities, and African 
Americans in particular, who have been funded under the TALF 
program? Similar to the way these two women were who have no 
    Mr. Bernanke. Again, I do not think that story is very 
accurate. But, anyway, I am not sure we can because we lent to 
companies, and they have lots of shareholders, and I am not 
sure we can identify the race of the shareholders.
    Ms. Waters. All right. I will follow up and expect to get 
some answers from you on that. Meanwhile, I have a few seconds 
    The Bank of America is attempting to settle with investors 
in Countrywide mortgage-backed--
    Chairman Bachus. Your time is actually over, but I will let 
you ask one more question if the Chairman is willing to 
    Ms. Waters. Thank you. For $8.5 billion, the New York Fed 
is one of the investors settling in this deal. Some have 
questioned whether the deal is very favorable to Bank of 
America and about conflicts of interest. Does the Federal 
Reserve Bank of New York have a conflict of interest? How can 
they both be the regulator of Bank of America and a party 
trying to exact a fair settlement in a lawsuit? The $8.5 
billion settlement is for $174 billion in mortgages. This 
amounts to about a 5 percent liability rate for Bank of 
America. Given that independent investigation suggested that 
two-thirds of the loans had representation and warranty 
problems, the $8.5 billion settlement seems awfully low. Can 
you explain that?
    Mr. Bernanke. First of all, the Bank of America is not 
regulated by the Federal Reserve Bank of New York but by the 
Federal Reserve Bank of Richmond. The Federal Reserve Bank of 
New York led this lawsuit in order to recoup as much as 
possible for the taxpayer. That is what the objective of that 
    Ms. Waters. And that is all they could get?
    Mr. Bernanke. Sorry?
    Ms. Waters. All they could get is $8.5 billion?
    Mr. Bernanke. No, we went for all we could.
    Ms. Waters. Of $174 billion in mortgages?
    Mr. Bernanke. This was a collective suit with many 
participants in it, and this is what the court said it was 
willing to award.
    Ms. Waters. Thank you very much, Mr. Chairman, Mr. 
    Chairman Bachus. Chairman Bernanke, let me compliment you 
on your testimony and your answers to our questions. One thing 
that I do want to say, you have always stressed, and I agree 
with you, and I think Mr. Carney was saying, agreeing with you, 
I think there is agreement on both sides of the aisle that 
long-term structural changes in our programs, particularly our 
entitlement programs, and in our tax policy will bear short-
term benefits, and I think you agree that if we do not make 
those long-term structural changes, there will be consequences, 
and they could be immediate.
    I think 4 years ago you said that that there would be a 
time when we would run out of time, and I hope that is not the 
case, and we all do appreciate the consequences of this country 
having never defaulted on its obligations, and I would hope 
that we can--we were all, some of us disappointed that we are 
not going to see a ``grand bargain,'' and I think that also 
what many members on this committee realize is that tax 
spending and tax subsidies, it is quite a different thing from 
an increase of the tax rates. In fact, that is sometimes more 
spending than it is a tax. We appreciate that. And I will say 
that the members on both sides, some of their questions, and 
Mr. Peters talked about in 1937 your study that there was an 
overtightening or credit restriction, monetary policy, that can 
be very deflationary, it can be adverse on the economy, and I 
believe now some of our--we have gone from being too loose on 
our housing, some of our lending, particularly mortgage 
lending, to too restrictive. I do believe, particularly with 20 
percent I hope qualified residential mortgages, the 
downpayment, and other things could be problematic.
    So we would appreciate continuing the dialogue we have had 
with you, and as I said, we, at least I think many of us on 
this committee, believe that your approach has been very 
beneficial and that I am glad that you are going to maintain 
some flexibility and that you do not get straitjacketed into 
not having some flexibility, which may be needed because we do 
not know what tomorrow brings. So thank you very much for your 
    Mr. Bernanke. Thank you, Mr. Chairman.
    Chairman Bachus. The Chair notes that some members may have 
additional questions for Chairman Bernanke which they may wish 
to submit in writing, and without objection, the hearing record 
will remain open for 30 days for members to submit written 
questions to the him and to place his responses in the record.
    Chairman Bernanke, the committee appreciates your testimony 
today and your service to our country. This hearing is 
    Mr. Bernanke. Thank you.
    [Whereupon, at 12:45 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             July 13, 2011