[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE
STATE OF THE ECONOMY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
JULY 13, 2011
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-46
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
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
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
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 HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
Larry C. Lavender, Chief of Staff
C O N T E N T S
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Page
Hearing held on:
July 13, 2011................................................ 1
Appendix:
July 13, 2011................................................ 49
WITNESSES
Wednesday, July 13, 2011
Bernanke, Hon. Ben S., Chairman, Board of Governors of the
Federal Reserve System......................................... 6
APPENDIX
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
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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
best.
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
care.
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
Reserve.
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
testimony.
STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
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
policy.
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
summer.
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
sentiment.
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
firms.
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
percent.
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
case.
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
closely.
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
appropriate.
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
warrant.
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
economy.
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
Chairman.
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
things.
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
suggestions?
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
forth?
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
facts.
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
activities.
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
time.
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
play.
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
saying.
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
current?
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
up.''
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
debt--
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
connection.
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
making.
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
mortgages.
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
lending?
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
forward.
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
one.
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
quantifiable?
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
question.
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
case.
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
plan.''
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
about?
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
currencies.
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
forward?
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
questions.
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
problem.
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
consequence?
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
years.
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
these--
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
efficiency.
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
costs.
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
public.
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
assets?
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
circumstances.
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
goals.
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
1930s?
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
implemented.
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
complicated.
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
costs.
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
term.
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
rulemaking?
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
Islands.
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
skeptical.
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
meetings.
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
experience.
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
here.
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
indulge.
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
was.
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.
Bernanke.
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
testimony.
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
adjourned.
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
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