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


 
                           THE STATE OF THE 
                              U.S. ECONOMY 

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, FEBRUARY 2, 2012

                               __________

                           Serial No. 112-18

                               __________

           Printed for the use of the Committee on the Budget


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                        COMMITTEE ON THE BUDGET

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

                           Professional Staff

                     Austin Smythe, Staff Director
                Thomas S. Kahn, Minority Staff Director
                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 2, 2012.................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     2
    Hon. Chris Van Hollen, ranking member, Committee on the 
      Budget.....................................................     3
        Prepared statement of....................................     5
    Hon. Ben S. Bernanke, Chairman, Board of Governors of the 
      Federal Reserve System.....................................     6
        Prepared statement of....................................    10
        Response to questions submitted for the record...........    51
    Hon. Mike Honda, a Representative in Congress from the State 
      of California, questions submitted for the record..........    49


                     THE STATE OF THE U.S. ECONOMY

                              ----------                              


                       THURSDAY, FEBRUARY 2, 2012

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in room 
210, Cannon House Office Building, Hon. Paul Ryan, [Chairman of 
the Committee] presiding.
    Present: Representatives Ryan, Garrett, Simpson, Campbell, 
Cole, Price, McClintock, Lankford, Black, Flores, Mulvaney, 
Huelskamp, Young, Rokita, Van Hollen, Doggett, Blumenauer, 
McCollum, Pascrell, Honda, Wasserman Schultz, Moore, Castor, 
Tonko.
    Chairman Ryan. The committee will come to order. Thank you, 
Chairman Bernanke, for coming to our committee today to talk 
about the state of the economy. You have been here a number of 
times and we appreciate your time. We know that your schedule 
is tight, so we will proceed quickly so we can get you back on 
your schedule.
    Nothing is more critical to today's economy than restoring 
real job and business growth in America. Yet, for almost three 
years the U.S. economy has remained mired in a slow growth, 
high unemployment trap. The president and his party leaders say 
things are getting better. Yet we continue to hear from 
families and businesses in our districts who tell us this kind 
of talk is completely disconnected from reality.
    The fact is that this administration told us stimulus plan 
would keep unemployment from ever rising about 8 percent, and 
that the economy would have grown at 4 percent last year. In 
reality, unemployment climbed as high as 10 percent and today 
it stands at 8.5 percent. Worse, CBO confirmed just yesterday 
that it is projecting economic growth to remain sluggish, and 
that the unemployment rate might hover near 9 percent through 
2014. So the obvious question is why did these policies fail? I 
think when you get out and talk to families and businesses, the 
answer becomes quite clear. The president's policies added 
hundreds of billions of dollars to our annual deficits. As a 
result, the explosive growth of our debt created tremendous 
uncertainty about our physical and our economic future. When 
government shows doubt about future tax rates, interest rates, 
and price stability, it undermines that feeling of future 
security that businesses and families need in order to plan and 
invest, and this puts a drag on economic growth.
    There is a monetary side to this uncertainty, as well. The 
Fed announced that it is going to continue to hold interest 
rates at extremely low levels through 2014. I think this policy 
runs the great risk of fueling asset bubbles, destabilizing 
prices, and eventually, eroding the value of the dollar. The 
prospect of all three is adding to uncertainty and holding our 
economy back in many of our judgments. And I fear that 
normalizing monetary policy when the time comes will be 
incredibly difficult, not just technically difficult, but 
politically difficult as well.
    For instance, I was greatly concerned to hear that the Fed 
recently announced that it would be willing to accept higher 
than desired inflation in order to focus on the other side of 
its dual mandate, which is promoting employment. This is not 
because unemployment is a lesser concern, far from it. It is 
because the Fed's tools for promoting employment are limited, 
imprecise, and could have highly undesirable, unintended 
consequences.
    By contrast, the Fed is uniquely positioned to protect the 
currency, the value of our money. And I would find it very 
disturbing if that role were to be diminished. The inflation 
dynamic can be quick to materialize and painful to eradicate 
once it takes hold. For the sake of our economy in particular, 
and the global recovery as a whole, it is vital that we focus 
on stability and certainty, especially when it comes to the 
value of the dollar. I firmly believe that a course correction 
here in Washington is sorely needed to help us get back on the 
right track. While it will not be easy, Americans have risen to 
greater challenges and have prevailed in the past, and we hope 
to provide a plan to do just that. With that, I would like to 
yield to the ranking member, Mr. Van Hollen.
    [The prepared statement of Chairman Paul Ryan follows:]

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

    Thank you, Chairman Bernanke, for coming before our Committee today 
to talk about the state of the economy.
    Nothing is more critical to today's economy than restoring real job 
and business growth. Yet for almost three years, the U.S. economy has 
remained mired in a slow-growth, high-unemployment trap.
    The President and his party's leaders say things are getting 
better. Yet we continue to hear from families and businesses in our 
districts who tell us that this kind of talk is completely disconnected 
from reality.
    The fact is that this administration told us its stimulus plan 
would keep unemployment from ever rising above 8 percent. In reality, 
it climbed as high as 10 percent, and today it stands at 8.5 percent.
    Worse, the CBO confirmed just yesterday that it is projecting 
economic growth to remain sluggish and the unemployment rate to hover 
near 9 percent through 2014.
    So the obvious question is this: Why did the President's policies 
fail?
    I think when you get out and talk to families and businesses, the 
answer becomes clear: The President's policies added hundreds of 
billions to our annual deficits. As a result, the explosive growth of 
our debt created tremendous uncertainty about our fiscal and economic 
future.
    When government sows doubt about future tax rates, interest rates, 
and price stability, it undermines that feeling of future security that 
businesses and families need in order to plan and invest--and this is 
puts a drag on economic growth.
    There is a monetary side to this uncertainty as well. The Fed has 
announced it's going to continue to hold interest rates at extremely 
low levels through 2014.
    I think this policy runs the great risk of fueling asset bubbles, 
destabilizing prices, and eventually eroding the value of the dollar. 
The prospect of all three is adding to uncertainty and holding our 
economy back.
    And I fear that normalizing monetary policy when the time comes 
will be incredibly difficult--not just technically difficult, but 
politically difficult as well.
    For instance, I was greatly concerned to hear the Fed recently 
announce that it would be willing to accept higher-than-desired 
inflation in order to focus on the other side of its dual mandate, 
which is promoting employment.
    This is not because unemployment is a lesser concern--far from it. 
It is because the Fed's tools for promoting employment are limited, 
imprecise, and can have highly undesirable unintended consequences.
    By contrast, the Fed is uniquely positioned to protect the 
currency, and I would find it very disturbing if that role were being 
diminished. The inflation dynamic can be quick to materialize and 
painful to eradicate once it takes hold.
    For the sake of our economy in particular and the global recovery 
as a whole, it is vital that we focus on stability and certainty--
especially when it comes to the value of the dollar.
    I firmly believe that a course correction here in Washington is 
sorely needed to help get us back on the right track. While it won't be 
easy, Americans have risen to greater challenges and prevailed in the 
past.
    With that, I would like to yield to the Ranking Member, Mr. Van 
Hollen.

    Mr. Van Hollen. Thank you, Mr. Chairman. Welcome, Dr. 
Bernanke. We must use all the tools at our disposal to help put 
people back to work, and I commend you and your colleagues at 
the Fed for using various forms of monetary policy to promote 
stable prices and higher levels of employment. I do find it 
troubling at a time when millions of Americans are still out of 
work, many of our Republican colleagues want to strip the 
Federal Reserve of that part of its mandate that focuses on 
full employment and putting Americans back to work. Obviously, 
the Federal Reserve must not waver in its commitment to price 
stability, but to deprive you of the tools necessary to boost 
employment would be a big mistake. Indeed, without those tools, 
the economy today would be in much worse shape.
    Dr. Bernanke, as you testified previously before this 
committee, the measures taken by the Federal Reserve, the 
politically unpopular, but economically necessary TARP 
legislation, engineered by the Bush Administration, and the 
Recovery Act, by the Obama Administration, averted, and I quote 
what you said earlier, ``an extraordinarily severe downturn, 
perhaps a Great Depression.'' And indeed, we have averted a 
Great Depression.
    And it is important to remember that the day President Bush 
left office, the day President Obama was sworn in, the economy 
was collapsing at an even faster rate than originally thought. 
The gross domestic product was plummeting at a rate of 8.9 
percent. In other words, negative 8.9 percent GDP, and we were 
losing 840,000 jobs every month. Three years later, conditions 
have improved. The economy grew at an annual rate of 2.8 
percent in the last quarter, and 3.2 million private sector 
jobs have been created since March 2010. Reports and findings 
by the Congressional Budget Office confirm your earlier 
assessments, that the passage of the Recovery Act, coupled with 
the actions by the Federal Reserve and others, did help end the 
free fall, and it helped begin the climb upward toward economic 
growth.
    Indeed, the Congressional Budget Office has told us that 
the Recovery Act helped save or create up to 3 million jobs in 
the year 2010, and lowered unemployment by up to 1.4 percentage 
points in 2011, compared to what it would have been if Congress 
had not acted. Those are not my facts, those are from the 
Congressional Budget Office.
    It is clear that we were on a huge, vast downhill slide, 
and action taken by the Federal Reserve, President Obama, and 
the Congress at the time helped end the economic free fall and 
begin to turn the corner. Still, we know, that while the 
economy has improved, millions of Americans still remain out of 
work, unemployment remains unacceptably high, and American 
families around the country are still hurting. Our economy is 
still very vulnerable to outside shocks, whether it is the 
Japanese tsunami, to the brewing European debt crisis. That is 
why our first priority has to be nurturing this fragile 
economy, and making sure we do what we can to help small 
businesses and other businesses help put people back to work.
    So I commend you, Chairman Bernanke, in articulating in 
your prepared testimony that in pursuing medium and long-term 
fiscal sustainability, which we absolutely must do, we ought 
take care not to slash investments too quickly because those 
would impede the economic recovery. In fact, some policy makers 
in Europe are coming to this notion a little late. The British 
economy, for example, contracted by .2 percent last quarter, 
due in part to the severity of government spending cuts, 
according to the January 31 article in ``The Wall Street 
Journal.'' Of course, the British model was much heralded just 
a few years ago by some of our colleagues as an example of how 
austerity could work. Severe austerity is now coming back to 
bite them.
    Christine Lagarde, director of the IMF, was quoted by BBC 
just recently saying, ``The IMF is not suggesting there should 
be fiscal consolidation across the board.'' She went on to 
point out that you need to look at this on a case by case 
basis, and rating agency standards in poor, in a quote 
explaining the rationale behind their January 13 downgrade of 
nine Eurozone nations noted, and I quote, ``a budgetary reform 
process based on a pillar of fiscal austerity alone risks 
becoming self-defeating, as domestic demand falls in line with 
consumer's rising concerns about job security and disposable 
incomes, eroding national tax revenues * * *'' and by the way, 
of course, then, also contributing to long-term deficits.
    These are reasons why we should take immediate actions, to 
take up the president's job plan, which he presented in 
September, including important investments in our national 
infrastructure. It is also why we should finish the job with 
respect to extending the payroll tax cut to 160 million working 
Americans, and make sure that unemployment insurance is there 
for millions of others who were out of work through no fault of 
their own.
    Dr. Bernanke, I apologize to you in advance; the conference 
committee on the payroll tax cut also begins at 10:00, so I am 
going to have to leave before I want to.
    Let me just close by saying that as we nurture the very 
fragile economy, we should also take immediate steps to enact a 
plan to reduce our out year deficits and debt. We should do it 
in a stable, predictable, and balanced way. The question is not 
whether we should do that. The question is how we do that. And 
I believe that the bipartisan commission, Simpson-Bowles, 
Rivlin-Domenici, provide the overall framework to the approach 
for doing that, if not every specific recommendation they make.
    So with that, Dr. Bernanke, again, thank you and your 
colleagues for your work. Mr. Chairman.
    [The prepared statement of Chris Van Hollen follows:]

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

    Thank you very much, Chairman Ryan, and welcome, Chairman Bernanke.
    We must use all the tools at our disposal to help put people back 
to work, and I commend you and your colleagues at the Federal Reserve 
for using various forms of monetary policy to promote higher levels of 
employment and stable prices. I find it troubling that, at a time when 
millions of Americans are still out of work, some of our Republican 
colleagues want to strip the Federal Reserve of that part of its 
mandate that focuses on full employment and putting people back to 
work.
    Obviously the Federal Reserve must not waver in its commitment to 
price stability, but to deprive you of the tools necessary to boost 
employment would be a huge mistake. Indeed, without those tools, the 
economy today would be in much worse shape.
    Chairman Bernanke, as you testified previously before this 
Committee, the measures taken by the Federal Reserve, the politically 
unpopular but economically necessary TARP legislation engineered by the 
Bush Administration, and the Recovery Act by the Obama Administration, 
averted ``an extraordinarily severe downturn, perhaps a great 
depression.''
    Indeed, the day that President Bush left office, the day that 
President Obama was sworn in, the economy was collapsing at an even 
faster rate than originally thought. The gross domestic product was 
plummeting at a rate of 8.9 percent, in other words negative 8.9 
percent GDP, and we were losing more than 840,000 jobs a month. Three 
years later, conditions have improved. The economy grew at an annual 
rate of 2.8 percent in the last quarter, and 3.2 million private sector 
jobs have been created since March of 2010. Reports and findings by the 
Congressional Budget Office confirm your earlier assessments--that the 
passage of the Recovery Act, coupled with actions to save the auto 
industry and efforts by the Federal Reserve, helped end the free fall 
and began the climb upward toward economic growth.
    Indeed, the Congressional Budget Office has told us that the 
Recovery Act helped save or create up to 3 million jobs in the year 
2010 and lowered unemployment by up to 1.4 percentage points in 2011, 
compared to what it would have done if the Congress had not taken 
action. It is clear that we were on a huge downhill cascade and action 
taken by the Federal Reserve and President Obama helped end the 
economic freefall and turn the corner.
    Still, we know that while the economy has improved, millions of 
Americans are still out of work, and the unemployment rate remains 
unacceptably high. Our economy is still vulnerable to outside shocks, 
from the Japanese Tsunami last year to the brewing European debt 
crisis, which has been ongoing. That is why our first priority has to 
be nurturing this fragile economy and making sure we do what we can to 
help small business and put people back to work.
    So I commend you, Chairman Bernanke, for articulating in your 
prepared testimony that in pursuing medium- and long-run fiscal 
sustainability, we ought to take care not to do so much budget-cutting 
in the short-term that we impede the current economic recovery. In 
fact, you note that the two objectives--long-run fiscal sustainability 
and short-run stimulus--are mutually reinforcing.
    Clearly, some policymakers in Europe are coming to this notion a 
little late. The British economy, for example, contracted 0.2 percent 
last quarter due in part to the severity of government spending cuts, 
according to a January 31 article in the Wall Street Journal. Christine 
Lagarde, Director of the International Monetary Fund, was quoted by BBC 
News in Davos, Switzerland as saying ``[The IMF is] not suggesting 
there should be fiscal consolidation across the board.'' Ratings agency 
Standard & Poor, in a note explaining the rationale behind their 
January 13th downgrade of nine Eurozone nations, noted, ``A [budgetary] 
reform process based on a pillar of fiscal austerity alone risks 
becoming self-defeating, as domestic demand falls in line with 
consumers' rising concerns about job security and disposable incomes, 
eroding national tax revenues.''
    These are all reasons why we should take immediate action in this 
House on the jobs plan the President submitted to the Congress last 
September, including his significant infrastructure investments to help 
rebuild our infrastructure around the country.
    We should also finish the job with respect to extending the payroll 
tax cut for 160 million Americans and making sure that unemployment 
insurance is there for people who have lost work through no fault of 
their own. And, Mr. Chairman, I'm going to apologize to both you and 
Chairman Bernanke, because after this statement I'm going to have to go 
to the conference committee on that issue and I hope that conference 
committee will move forward quickly and without delay to get that job 
done.
    As we nurture the fragile economy, we should also take immediate 
action to enact a plan to reduce the out-year deficits and debt in a 
stable, balanced, predictable way. The question is not whether we do 
that, but how. I support the kind of balanced framework proposed by 
bipartisan commissions like Simpson-Bowles and Rivlin-Domenici.

    Chairman Ryan. Thank you. Chairman Bernanke, the floor is 
yours.

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

    Mr. Bernanke. Thank you. Chairman Ryan, Vice-Chairman 
Garrett, Ranking Member Van Hollen, and other members of the 
committee, I appreciate this opportunity to discuss my views on 
the economic outlook, monetary policy, and the challenges 
facing federal fiscal policy makers. Over the past two and a 
half years, the U.S. economy has been gradually recovering from 
a deep recession. While conditions have certainly improved over 
this period, the pace of the recovery has been frustratingly 
slow, particularly from the perspective of the millions of 
workers who remain unemployed or underemployed.
    Moreover, the sluggish expansion has left the economy 
vulnerable to shocks. Indeed, last year, supply chain 
disruption stemming from the earthquake in Japan, a surge in 
the prices of oil and other commodities, and spillovers from 
the European debt crisis risked derailing the recovery. 
Fortunately, over the past few months, indicators of spending, 
production, and job market activity have shown some signs of 
improvement, and in economic projections just released, the 
Federal Market Committee participants indicated that they 
expected somewhat stronger growth this year than in 2011. The 
outlook remains uncertain, however, and close monitoring of 
economic developments will remain necessary.
    As is often the case, the ability and willingness of 
households to spend will be an important determinant of the 
pace at which the economy expands in coming quarters. Although 
real consumer spending rose moderately last quarter, households 
continue to face significant head winds. Notably, real 
household income and wealth stagnated in 2011, and access to 
credit remained tight for many potential borrowers. Consumer 
sentiment has improved from the summer's depressed levels, but 
remains at levels that are still quite low by historical 
standards.
    Household spending will depend, in turn, heavily on 
developments in the labor market. Overall, the job situation 
does appear to have improved modestly over the past year. 
Private payroll employment increased by about 160,000 jobs per 
month in 2011. The unemployment rate fell by about 1 percentage 
point, and new claims for unemployment insurance declined 
somewhat. Nevertheless, as shown by indicators like the rate of 
unemployment and the ratio of employment to population, we 
still have a long way to go before the labor market can be said 
to be operating normally.
    Particularly troubling is the unusually high level of long-
term unemployment. More than 40 percent of the unemployed have 
been jobless for more than six months, roughly double the 
fraction during the economic expansion of the previous decade.
    On certain job prospects, along with tight mortgage credit 
conditions continue to hold back the demand for housing. 
Although low interest rates on conventional mortgages and the 
drop in home prices in recent years have greatly improved the 
affordability of housing, both residential sales and 
construction remain depressed. A persistent excess supply of 
vacant homes, largely stemming from foreclosures, is keeping 
downward pressure on prices and limiting the demand for new 
construction.
    In contrast to the household sector, the business sector 
has been a relative bright spot in the current recovery. 
Manufacturing production has increased 15 percent since its 
trough, and capital spending by businesses has expanded briskly 
over the past two years, driven in part by the need to replace 
aging equipment and software.
    Moreover, many U.S. firms, notably in manufacturing, but 
also in services, have benefited from strong demand from 
foreign markets over the past few years. More recently, the 
pace of growth in business investment has slowed, likely 
reflecting concerns about both the domestic outlook and 
developments in Europe. However, there are signs that these 
concerns are abating somewhat. If business confidence continues 
to improve, U.S. firms should be well-positioned to increase 
both capital spending and hiring. Larger businesses are still 
able to obtain credit at historically low interest rates, and 
corporate balance sheets are strong. And though many smaller 
businesses continue to face difficulties in obtaining credit, 
surveys indicate that credit conditions have begun to improve 
modestly for those firms as well.
    Globally, economic activity appears to be slowing, 
restrained in part by spillovers from fiscal and financial 
developments in Europe. The combination of high debt levels and 
weak growth prospects in a number of European countries has 
raised significant concerns about their fiscal situations, 
leading to substantial increases in sovereign borrowing costs, 
concerns about the health of European banks, and associated 
reduction in confidence and the availability of credit in the 
Euro area. Resolving these problems would require a concerted 
action on the part of European authorities. They are working 
hard to address their fiscal and financial challenges. 
Nonetheless, risks remain if developments in Europe or 
elsewhere may unfold favorably and could worsen economic 
prospects here at home. We are in frequent contact with 
European authorities, and we will continue to monitor the 
situation closely, and take every available step to protect the 
U.S. financial system and the economy.
    Let me turn now to a discussion of inflation. As we had 
anticipated, overall consumer price inflation moderated 
considerably over the course of 2011. In the first half of the 
year, a surge in the prices of gasoline and food, along with 
some pass through of these higher prices to other goods and 
services, had pushed consumer inflation higher. Around the same 
time, supply disruptions associated with the disaster in Japan 
put upward pressure on motor vehicle prices. As expected, 
however, the impetuous from these influences faded in the 
second half of the year leading inflation to decline from an 
annual rate of about 3.5 percent in the first half of 2011 to 
about 1.5 percent in the second half, close to its average pace 
in the preceding two years. In an environment of well-anchored 
inflation expectations, more stable commodity prices, and 
substantial slack in labor and product markets, we expect 
inflation to remain subdued.
    Against that backdrop, the FOMC decided last week to 
maintain its highly accommodative stance on monetary policy. In 
particular, the committee decided to continue its program to 
extend the average maturity of its securities holdings, to 
maintain its existing policy of reinvesting principle payments 
on its portfolios of securities, and to keep the target range 
for the federal funds rate at 0 to .25 percent. The committee 
now anticipates that economic conditions are likely to warrant 
exceptionally low levels to the federal funds rate, at least 
through late 2014.
    As part of our ongoing effort to increase the transparency 
and predictability of monetary policy, following its January 
meeting, the FOMC released a statement intended to provide 
greater clarity about the committee's longer term goals and 
policy strategy. The statement begins by emphasizing the 
Federal Reserve's firm commitment to pursue its Congressional 
mandate to foster stable prices and maximum employment.
    To clarify how it seeks to achieve those objectives, the 
FOMC stated its collective view that inflation at the rate of 2 
percent, as measured by the annual change in the price index 
for personal consumption expenditures, is most consistent over 
the longer run with the Federal Reserve's statutory mandate. 
And it indicated that the central tendency of FOMC 
participants' current estimates of the longer run, normal rate 
of unemployment is between 5.2 and 6 percent. The statement 
noted that these statutory objectives are generally 
complementary, but when they are not, the committee will take a 
balanced approach in its efforts to return both inflation and 
employment to their desired levels.
    In my remaining remarks, I would like to briefly discuss 
the fiscal challenges facing your committee and the country. 
The federal budget deficit widened appreciably with the onset 
of the recent recession, and it has averaged around 9 percent 
of GDP over the past three fiscal years. This exceptional 
increase in the deficit has mostly reflected the automatic 
cyclical response of revenues and spending to a weak economy, 
as well as the fiscal actions taken to ease the recession and 
aid the recovery. As the economy continues to expand and 
stimulus policies are phased out, the budget deficit should 
narrow over the next few years. Unfortunately, even after 
economic conditions have returned to normal, the nation will 
still face a sizable structural budget gap if current budget 
policies continue. Using information from the recent budget 
outlook by the CBO, one can construct a projection for the 
federal deficit assuming that most expiring tax provisions are 
extended, and that the Medicare's physician payment rates are 
held at their current level. Under these assumptions, the 
budget deficit would be more than 4 percent of GDP in fiscal 
year 2017, assuming that the economy is in close to full 
employment.
    Of even greater concern is that longer run projections, 
based on plausible assumptions about the evolution of the 
economy and the budget under current policies, show the 
structural budget gap increasing significantly further over 
time, and the ratio of outstanding federal debt to GDP rising 
rapidly. This dynamic is clearly unsustainable. These 
structural imbalances did not emerge overnight. To a 
significant incident, they are the result of an aging 
population and especially fast rising health care costs, both 
of which have been predicted for decades. Notably, the CBO 
projects that net federal outlays for health care entitlements, 
which were about 5 percent of GDP in fiscal year 2011, could 
rise to more than 9 percent of GDP by 2035. Although we have 
been warned about such developments for many years, the time 
when projections become reality is coming closer.
    Having a large and increasing level of government debt 
relative to national income runs the risk of serious economic 
consequences. Over the longer term, the current trajectory of 
federal debt threatens to crowd out private capital formation, 
and thus, reduce productivity growth. To the extent that 
increasing debt is financed by borrowing from abroad, a growing 
share of our future income would be devoted to interest 
payments on foreign held federal debt. High levels of debt also 
impair the ability of policy makers to respond effectively to 
future economic shocks and other adverse events. Even the 
prospect of unsustainable deficits has costs, including an 
increased possibility of a sudden fiscal crisis. As we have 
seen in a number of countries recently, interest rates can soar 
quickly if investors lose confidence in the ability of a 
government to manage its fiscal policy.
    Although historical experience and economic theory do not 
indicate the exact threshold at which the perceived risks 
associated with the U.S. public debt would increase markedly, 
we can be sure that without directive action, our fiscal 
trajectory will move the nation ever closer to that point.
    To achieve economic and financial stability, U.S. fiscal 
policy must be placed on a sustainable path that ensures that 
debt relative to the national income is at least stable, or 
preferably, declining over time. Attaining this goal should be 
a top priority. Even as fiscal policy makers address the urgent 
issue of fiscal sustainability, they should take care not to 
unnecessarily impede the current economic recovery. 
Fortunately, the two goals of achieving long-term fiscal 
sustainability and avoiding additional fiscal head winds for 
the current recovery are fully compatible; indeed, they are 
mutually reinforcing. On the one hand, a more robust recovery 
will lead to lower deficits and debt in coming years. On the 
other hand, a plan that clearly and credibly puts fiscal policy 
on a path to sustainability could help keep longer term 
interest rates low and improve household and business 
confidence, thereby supporting improved economic performance 
today.
    Fiscal policy makers can also promote stronger economic 
performance in the medium term through the careful design of 
tax spent policies and spending programs. To the fullest extent 
possible, our nation's tax and spending policies should 
increase the incentives to work and save, encourage investments 
in the skills of our work force, stimulate private capital 
formation, promote research and development, and provide 
necessary public infrastructure.
    Although we cannot expect our economy to grow its way out 
of our fiscal imbalances, a more productive economy will ease 
the trade-offs that we face and increase the likelihood that we 
leave a healthy economy to our children and grandchildren. 
Thank you, Mr. Chairman.
    [The prepared statement of Ben S. Bernanke follows:]

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

    Chairman Ryan, Vice Chairman Garrett, Ranking Member Van Hollen, 
and other members of the Committee, I appreciate this opportunity to 
discuss my views on the economic outlook, monetary policy, and the 
challenges facing federal fiscal policymakers.
                          the economic outlook
    Over the past two and a half years, the U.S. economy has been 
gradually recovering from the recent deep recession. While conditions 
have certainly improved over this period, the pace of the recovery has 
been frustratingly slow, particularly from the perspective of the 
millions of workers who remain unemployed or underemployed. Moreover, 
the sluggish expansion has left the economy vulnerable to shocks. 
Indeed, last year, supply chain disruptions stemming from the 
earthquake in Japan, a surge in the prices of oil and other 
commodities, and spillovers from the European debt crisis risked 
derailing the recovery. Fortunately, over the past few months, 
indicators of spending, production, and job market activity have shown 
some signs of improvement; and, in economic projections just released, 
Federal Open Market Committee (FOMC) participants indicated that they 
expect somewhat stronger growth this year than in 2011. The outlook 
remains uncertain, however, and close monitoring of economic 
developments will remain necessary.
    As is often the case, the ability and willingness of households to 
spend will be an important determinant of the pace at which the economy 
expands in coming quarters. Although real consumer spending rose 
moderately last quarter, households continue to face significant 
headwinds. Notably, real household income and wealth stagnated in 2011, 
and access to credit remained tight for many potential borrowers. 
Consumer sentiment has improved from the summer's depressed levels but 
remains at levels that are still quite low by historical standards.
    Household spending will depend heavily on developments in the labor 
market. Overall, the jobs situation does appear to have improved 
modestly over the past year: Private payroll employment increased by 
about 160,000 jobs per month in 2011, the unemployment rate fell by 
about 1 percentage point, and new claims for unemployment insurance 
declined somewhat. Nevertheless, as shown by indicators like the rate 
of unemployment and the ratio of employment to population, we still 
have a long way to go before the labor market can be said to be 
operating normally. Particularly troubling is the unusually high level 
of long-term unemployment: More than 40 percent of the unemployed have 
been jobless for more than six months, roughly double the fraction 
during the economic expansion of the previous decade.
    Uncertain job prospects, along with tight mortgage credit 
conditions, continue to hold back the demand for housing. Although low 
interest rates on conventional mortgages and the drop in home prices in 
recent years have greatly improved the affordability of housing, both 
residential sales and construction remain depressed. A persistent 
excess supply of vacant homes, largely stemming from foreclosures, is 
keeping downward pressure on prices and limiting the demand for new 
construction.
    In contrast to the household sector, the business sector has been a 
relative bright spot in the current recovery. Manufacturing production 
has increased 15 percent since its trough, and capital spending by 
businesses has expanded briskly over the past two years, driven in part 
by the need to replace aging equipment and software. Moreover, many 
U.S. firms, notably in manufacturing but also in services, have 
benefited from strong demand from foreign markets over the past few 
years.
    More recently, the pace of growth in business investment has 
slowed, likely reflecting concerns about both the domestic outlook and 
developments in Europe. However, there are signs that these concerns 
are abating somewhat. If business confidence continues to improve, U.S. 
firms should be well positioned to increase both capital spending and 
hiring: Larger businesses are still able to obtain credit at 
historically low interest rates, and corporate balance sheets are 
strong. And, though many smaller businesses continue to face 
difficulties in obtaining credit, surveys indicate that credit 
conditions have begun to improve modestly for those firms as well.
    Globally, economic activity appears to be slowing, restrained in 
part by spillovers from fiscal and financial developments in Europe. 
The combination of high debt levels and weak growth prospects in a 
number of European countries has raised significant concerns about 
their fiscal situations, leading to substantial increases in sovereign 
borrowing costs, concerns about the health of European banks, and 
associated reductions in confidence and the availability of credit in 
the euro area. Resolving these problems will require concerted action 
on the part of European authorities. They are working hard to address 
their fiscal and financial challenges. Nonetheless, risks remain that 
developments in Europe or elsewhere may unfold unfavorably and could 
worsen economic prospects here at home. We are in frequent contact with 
European authorities, and we will continue to monitor the situation 
closely and take every available step to protect the U.S. financial 
system and the economy.
    Let me now turn to a discussion of inflation. As we had 
anticipated, overall consumer price inflation moderated considerably 
over the course of 2011. In the first half of the year, a surge in the 
prices of gasoline and food--along with some pass-through of these 
higher prices to other goods and services--had pushed consumer 
inflation higher. Around the same time, supply disruptions associated 
with the disaster in Japan put upward pressure on motor vehicle prices. 
As expected, however, the impetus from these influences faded in the 
second half of the year, leading inflation to decline from an annual 
rate of about 3\1/2\ percent in the first half of 2011 to about 1\1/2\ 
percent in the second half--close to its average pace in the preceding 
two years. In an environment of well-anchored inflation expectations, 
more-stable commodity prices, and substantial slack in labor and 
product markets, we expect inflation to remain subdued.
    Against that backdrop, the Federal Open Market Committee (FOMC) 
decided last week to maintain its highly accommodative stance of 
monetary policy. In particular, the Committee decided to continue its 
program to extend the average maturity of its securities holdings, to 
maintain its existing policy of reinvesting principal payments on its 
portfolio of securities, and to keep the target range for the federal 
funds rate at 0 to \1/4\ percent. The Committee now anticipates that 
economic conditions are likely to warrant exceptionally low levels of 
the federal funds rate at least through late 2014.
    As part of our ongoing effort to increase the transparency and 
predictability of monetary policy, following its January meeting the 
FOMC released a statement intended to provide greater clarity about the 
Committee's longer-term goals and policy strategy.\1\ The statement 
begins by emphasizing the Federal Reserve's firm commitment to pursue 
its congressional mandate to foster stable prices and maximum 
employment. To clarify how it seeks to achieve these objectives, the 
FOMC stated its collective view that inflation at the rate of 2 
percent, as measured by the annual change in the price index for 
personal consumption expenditures, is most consistent over the longer 
run with the Federal Reserve's statutory mandate; and it indicated that 
the central tendency of FOMC participants' current estimates of the 
longer-run normal rate of unemployment is between 5.2 and 6.0 percent. 
The statement noted that these statutory objectives are generally 
complementary, but when they are not, the Committee will take a 
balanced approach in its efforts to return both inflation and 
employment to their desired levels.
---------------------------------------------------------------------------
    \1\ Board of Governors of the Federal Reserve System (2012), 
``Federal Reserve Issues FOMC Statement of Longer-Run Goals and Policy 
Strategy,'' press release, January 25, www.federalreserve.gov/
newsevents/press/monetary/20120125c.htm.
---------------------------------------------------------------------------
                        fiscal policy challenges
    In the remainder of my remarks, I would like to briefly discuss the 
fiscal challenges facing your Committee and the country. The federal 
budget deficit widened appreciably with the onset of the recent 
recession, and it has averaged around 9 percent of gross domestic 
product (GDP) over the past three fiscal years. This exceptional 
increase in the deficit has mostly reflected the automatic cyclical 
response of revenues and spending to a weak economy as well as the 
fiscal actions taken to ease the recession and aid the recovery. As the 
economy continues to expand and stimulus policies are phased out, the 
budget deficit should narrow over the next few years.
    Unfortunately, even after economic conditions have returned to 
normal, the nation will still face a sizable structural budget gap if 
current budget policies continue. Using information from the recent 
budget outlook by the Congressional Budget Office, one can construct a 
projection for the federal deficit assuming that most expiring tax 
provisions are extended and that Medicare's physician payment rates are 
held at their current level. Under these assumptions, the budget 
deficit would be more than 4 percent of GDP in fiscal year 2017, 
assuming that the economy is then close to full employment.\2\ Of even 
greater concern is that longer-run projections, based on plausible 
assumptions about the evolution of the economy and budget under current 
policies, show the structural budget gap increasing significantly 
further over time and the ratio of outstanding federal debt to GDP 
rising rapidly. This dynamic is clearly unsustainable.
---------------------------------------------------------------------------
    \2\ The Congressional Budget Office (CBO) reported an ``alternative 
fiscal scenario'' (Table 1-7, p. 22) that assumed that most expiring 
tax cuts and the Medicare ``doc fix'' would be extended and also that 
the automatic spending reductions required by the Budget Control Act 
(BCA) would not take effect; under this scenario the deficit would be 
about 5 percent of GDP in fiscal 2017. If the automatic spending cuts 
from the BCA, however, are assumed to be put in place (the effects of 
which are shown in Table 1-6, p. 18) then the deficit would be more 
than 4 percent in fiscal 2017. See Congressional Budget Office (2012), 
The Budget and Economic Outlook: Fiscal Years 2012 to 2022. Washington: 
Congressional Budget Office, January, www.cbo.gov/doc.cfm?index=12699.
---------------------------------------------------------------------------
    These structural fiscal imbalances did not emerge overnight. To a 
significant extent, they are the result of an aging population and, 
especially, fast-rising health-care costs, both of which have been 
predicted for decades. Notably, the Congressional Budget Office 
projects that net federal outlays for health-care entitlements--which 
were about 5 percent of GDP in fiscal 2011--could rise to more than 9 
percent of GDP by 2035.\3\ Although we have been warned about such 
developments for many years, the time when projections become reality 
is coming closer.
---------------------------------------------------------------------------
    \3\ This projection is under the alternative fiscal scenario 
developed by the Congressional Budget Office, which assumes most 
current policies are extended. See Congressional Budget Office (2011). 
The Long-Term Budget Outlook. Washington: Congressional Budget Office, 
June, www.cbo.gov/doc.cfm?index=12212.
---------------------------------------------------------------------------
    Having a large and increasing level of government debt relative to 
national income runs the risk of serious economic consequences. Over 
the longer term, the current trajectory of federal debt threatens to 
crowd out private capital formation and thus reduce productivity 
growth. To the extent that increasing debt is financed by borrowing 
from abroad, a growing share of our future income would be devoted to 
interest payments on foreign-held federal debt. High levels of debt 
also impair the ability of policymakers to respond effectively to 
future economic shocks and other adverse events.
    Even the prospect of unsustainable deficits has costs, including an 
increased possibility of a sudden fiscal crisis. As we have seen in a 
number of countries recently, interest rates can soar quickly if 
investors lose confidence in the ability of a government to manage its 
fiscal policy. Although historical experience and economic theory do 
not indicate the exact threshold at which the perceived risks 
associated with the U.S. public debt would increase markedly, we can be 
sure that, without corrective action, our fiscal trajectory will move 
the nation ever closer to that point.
    To achieve economic and financial stability, U.S. fiscal policy 
must be placed on a sustainable path that ensures that debt relative to 
national income is at least stable or, preferably, declining over time. 
Attaining this goal should be a top priority.
    Even as fiscal policymakers address the urgent issue of fiscal 
sustainability, they should take care not to unnecessarily impede the 
current economic recovery. Fortunately, the two goals of achieving 
long-term fiscal sustainability and avoiding additional fiscal 
headwinds for the current recovery are fully compatible--indeed, they 
are mutually reinforcing. On the one hand, a more robust recovery will 
lead to lower deficits and debt in coming years. On the other hand, a 
plan that clearly and credibly puts fiscal policy on a path to 
sustainability could help keep longer-term interest rates low and 
improve household and business confidence, thereby supporting improved 
economic performance today.
    Fiscal policymakers can also promote stronger economic performance 
in the medium term through the careful design of tax policies and 
spending programs. To the fullest extent possible, our nation's tax and 
spending policies should increase incentives to work and save, 
encourage investments in the skills of our workforce, stimulate private 
capital formation, promote research and development, and provide 
necessary public infrastructure. Although we cannot expect our economy 
to grow its way out of our fiscal imbalances, a more productive economy 
will ease the tradeoffs that we face and increase the likelihood that 
we leave a healthy economy to our children and grandchildren.

    Chairman Ryan. Thank you. We agree completely with the last 
part of your statement, which is if we do not get our fiscal 
house in order, it is going to get ugly pretty fast.
    Also, I want to salute you for having more transparency on 
the operation of the Federal Reserve. The latest FOMC statement 
clearly was an attempt to put your policy on the table and let 
the country see it. But it is in that policy that I have a 
couple of questions.
    Early on, you put out an inflation target rate of 2 
percent. That puts, certainly, more clarity. But at the end of 
the statement, I am just going to quote it, ``In setting 
monetary policy, the committee seeks to mitigate deviations of 
inflation from its longer term goal, and deviations of 
employment from the committee's assessment of its maximum 
level. These objections are generally complementary, however, 
under circumstances in which the committee judges that 
objectives are not complementary, it follows a balance approach 
in promoting them. Take into account the magnitude of the 
deviations and the potentially different time horizons over 
which employment and inflation are projected to return to 
levels judged consistent with its mandates.''
    Here is what I do not get. It seems as if you are moving 
away from an inflation target with that kind of a statement, 
and at best, it is ambiguous; at worst, it says that if a 
deviation is higher on unemployment, which clearly it is, then 
it is on inflation, is follows, in my interpretation, that the 
Fed is willing to accept higher levels of inflation than your 
preferred rate in order to chase your employment mandate. Is 
that not what we should interpret out of this?
    Mr. Bernanke. No, Mr. Chairman, I would not say that is 
correct. So, 2 percent is our definition of price stability. As 
part of our mandate we want to achieve that 2 percent inflation 
rate in the medium term. Obviously, monetary policy works with 
a lag. We cannot achieve it every day, every week, but over a 
period of time, we want to move inflation always back towards 2 
percent.
    We will not actively seek to raise inflation or to move 
away from the target. We are always trying to bring inflation 
back to the target. The only sense in which there is a balance, 
of course, is that, in looking at the two sides of the mandate, 
the rate of speed, the aggressiveness, may depend, to some 
extent, on the balance between the two objectives. But we are 
always trying to return both objectives back to their mandate. 
We are not seeking higher inflation. We do not want higher 
inflation, and we are not tolerating higher inflation.
    Chairman Ryan. The core mission of every central bank is 
stable prices. It is a necessary precondition for economic 
growth, and therefore, then, full employment, at least in some 
of our judgment. And you and I talked about mandates, single 
versus double, a lot. But if we were to say that we are now 
going to look at the deviations between the two, and if we are 
saying that we think that full employment is 5.2 to 6 percent, 
we are clearly way above that, but at your PCE we are closer to 
where your inflation target is. I do not know how other else to 
interpret this, that the result of this balanced approach is 
that higher than preferred inflation may be tolerated, not that 
it is desired, but that it will be tolerated. And I will simply 
just quote Paul Volcker, who said in the late 1970s, ``Central 
bankers who are willing to tolerate a little more inflation 
usually end up getting a whole lot more than they expected.''
    My concern is that this appears less to be an inflation 
targeting statement than an inflation equivocation statement, 
because we are now targeting deviations and that is the 
concern. When this statement was released we saw a buildup of 
commodity prices, even though, I think you said fairly recently 
that demand is down, therefore commodity prices should be low. 
So my basic question is if this is our interpretation, and we 
have a spike in commodity prices that occurred after the 
statement released, is that not the market's interpretation of 
this statement?
    Mr. Bernanke. Mr. Chairman, first of all, as we say, the 
two sides of the mandate are generally complementary. I mean, 
we agree that low, stable inflation is good for the economy, 
and it is goof for growth, it is good for employment, and we 
think most of the time that there is a complementary 
relationship between those two.
    You discussed earlier the responsibility of the central 
bank for the dollar and for the price level. Inflation, 
currently, looks to be very well-controlled. Our expectation, 
of course, we will adjust policy as needed, but our expectation 
is that inflation will be below target over the next couple of 
years. Of course, unanticipated events can happen. The dollar 
has been pretty stable since the crisis. I do not think you 
should read into this any unwillingness to keep price stability 
as a critical goal of the central bank. All central banks, 
including those with the price stability mandate, take into 
account, to some extent, the overall state of the economy, but 
over the medium term they seek to return inflation to its 
objective, and that is what we are intending to do.
    Chairman Ryan. So let me turn to quantitative easing. The 
Federal Reserve has applied an unusual and unprecedented amount 
of monetary easing for a long period of time. Not just during 
the crisis moments, but well after that, and now, apparently, 
through 2014. And by buying down Treasury rates, is it your 
view that this is putting an artificial cap on price discovery 
in the treasury markets, and is that not lulling policy makers, 
fiscal policy makers, into a false sense of security, when true 
price discovery in our treasury market, like it has in other 
countries, might give us the wakeup call we need to get our act 
in order, to fix our problem? Are we not lulling ourselves in a 
false sense of security by this intervention in the treasury 
markets?
    Mr. Bernanke. Mr. Chairman, first, quantitative easing is 
very analogous to the usual monetary policy of cutting short-
term interest rates. I mean, basically, that also lower longer 
term rates. It is basically a way of trying to provide more 
support for the economy. Our policies are hardly unusual. At 
this point, almost every major industrial central bank, 
excluding Canada, which had less of a recession than we did, 
has a large balance sheet and low interest rates, including the 
ones with single mandates, again, as I mentioned, not having 
any signs of higher inflation or declining dollar.
    In terms of the issue relating to distorting the bond 
market, again, it is the objective of the policy to get rates 
somewhat lower to provide more support for the economy, and to 
bring inflation up to target, if necessary. But I think the 
basic reasons for low long-term rates, which are also a feature 
of every other major industrial economy, are low inflation, 
slow expected growth, and the fact that the dollar is a safe 
haven. And with problems in the world, people are investing in 
U.S. treasuries, because they are attractive.
    I think it is important for me to say that if Congress is 
being lulled, they should not be lulled. I think we agree that 
the attention needs to be paid to these issues. As the case of 
some of the countries you are referring to, like Greece and 
Portugal, suggests, if investors lose confidence in the fiscal 
policy of a country, the rates are going to go up, and there is 
nothing the central bank can do about that. And so, obviously, 
it is important for Congress to address these problems, and I 
have spoken out about it quite consistently, as you know.
    Chairman Ryan. I think we would agree that we think 
sustainable long run economic growth derives from savings and 
investments, and therefore, increased productivity instead of 
borrowing and consumption. I know you well enough to know that 
we more or less agree with that. But do you measure the effects 
that these policies have on savers, on people living on fixed 
income, living on CDs? Are you concerned at all about the very 
low interest payments that these savers are getting from these 
kinds of fixed incomes assets, which are hitting our savings 
and investments side of the economy, in exchange for helping 
the borrowing and consumption side of the economy?
    Mr. Bernanke. We are quite aware of that issue. We hear a 
lot about it. We consider it, we think about it, and I 
recognize that for people on a fixed income whose main income 
is interest on a CD, I think I recognize that imposes a 
hardship. The purpose of our policy, though, is to create a 
stronger economy. And savers, collectively, hold all the 
assets, all the capital in the economy, and if you do not have 
a strong economy, if you have a weak economy, you are not going 
to get good returns on all the other assets.
    Chairman Ryan. My time is running out, let me give you just 
a sense of this. A lot of us believe that the Federal Reserve 
was too loose for too long in the 2003 to 2005 period, and that 
is what, in part, led to the asset bubble and the malinvestment 
that occurred, and the problems we have today. I know you do 
not agree with that, but because you do not agree with that, 
our fear is that you are just going to repeat these same 
mistakes again, but by orders of magnitude that we cannot even 
comprehend right now. And that the Federal Reserve, whose 
primary goal is to manage our money, is involving itself in 
fiscal policy. It is sort of bailing out fiscal policy because 
the branch of government in charge of fiscal policy, this 
branch, is not going its job. I mean, a budget has not passed 
Congress in two years. We are going to pass a budget, we did 
one last year, but there is nothing in the Senate.
    So fiscal policy is not being done the way it needs to be 
done, but that is not an excuse for the Federal Reserve to step 
in and try and bail us out, because that could be done at the 
expense of the priority, which is unique to the Federal 
Reserve, of maintaining our currency as a reliable store of 
value; and we fear that these exercises and these new ambiguous 
statements will compromise that. That is the point I am trying 
to make. Mr. Van Hollen?
    Mr. Van Hollen. Thank you, Mr. Chairman. Dr. Bernanke, 
thank you for your testimony, and you laid out what I think is 
a very clear two-track strategy for dealing with economic 
growth as we move forward. The first is recognizing the fiscal 
and budgetary challenge that we have got, and I think there is 
agreement on this committee that we need to come up with a 
predictable, stable way to reduce our deficits and debt. We 
have had disagreements over how we do it, but not whether we do 
it.
    There are two lessons, I think, from what we see happening 
here. One, of course, is the debt crisis, that if you wait too 
long to address these issues, you are right, your borrowing 
costs are going to go up, people are going to lose faith, and 
we should heed that as an early warning and not delay putting 
in place those predictable changes. But your testimony also 
pointed out that there is a danger in overreacting to that in 
the near term, in terms of the negative impact it could have on 
economic growth. And the other strategy that you have laid out 
is the need to nurture this very fragile economy we are in 
right now.
    So if you could just briefly talk about some of the lessons 
we have learned from the European experience, recognizing the 
debt crisis and early warning system, but the austerity only 
and immediately approach. Some countries cannot avoid it, like 
Greece, because they have got themselves in a fix, but talk 
about the fact that an austerity only and immediate deep cuts, 
whether or not that can have a negative impact on the very 
fragile recovery that we are having now.
    Mr. Bernanke. Well, the European situation is complicated. 
Among other things, of course, they have a monetary union and a 
fiscal disunion. They do not have the same kind of situation we 
have here. And you are correct, also, that there are some 
countries, like Greece, obviously, and others that have very 
difficult fiscal sustainability issues, and they have tried to 
address those in the near term. I hesitate a bit to advise my 
colleagues in Europe, but I would cite the IMF and others to 
point out that very slow growth, or recession, makes fiscal 
improvement more difficult, because tax revenues fall, and 
spending automatically rises if there are social safety nets 
and the like. So it is important to try to figure out what the 
right balance is there.
    I want to be very clear; I do not want anyone to interpret 
me saying anything other than that this Congress has a very 
difficult and important job to address the long-term fiscal 
sustainability of our federal budget. That is a critical thing. 
I think that even more aggressive strategies than have been 
pursued recently are warranted over the longer term, but I also 
think that that can be done in a way which is persuasive to 
markets and achieves those objectives, but does not quite jolt 
the recovery, and it does not do it at once. I think that as 
long as there is a credible, strong plan over a period of time, 
and we move into that plan, then we will achieve most of the 
objectives of fiscal sustainability. We need to at least avoid 
doing harm. I would say, ``do no harm'' is an important piece 
of advice I would offer you. So there is a balancing act there 
that I think is important for us to pay attention to.
    Mr. Van Hollen. Thank you, Dr. Bernanke. As you point out, 
those two goals are totally consistent. Sometimes they get 
muddled in the message, and I understand that sometimes people 
interpret the need to prevent doing harm to the fragile economy 
now as meaning we should not move ahead on long-term deficit 
reduction. Of course we should, as you said. You can do things 
at the same time, but if you undermine the fragile economy, as 
the IMF, as you indicated, has warned is being done with 
certain fiscal policies in Europe, that just creates an even 
bigger hole.
    And again, I apologize, I have to leave to go to the 
conference on the payroll tax extension, if you could just 
comment on whether or not failure to extend the payroll tax cut 
for 160 million Americans, whether failure to extend 
unemployment compensation for millions of Americans who are out 
of work through no fault of their own, whether failure to do 
that would be a drag on what is already very fragile economic 
growth.
    Mr. Bernanke. Congressman, I know you appreciate that I do 
not endorse individual tax and spending policies, and I think 
that is a good approach for me to take. Obviously, you need to 
look at the whole picture. I agree with what you said before, 
that you cannot do one and not the other, you know? You cannot 
say we have got to protect the recovery, and therefore, we just 
completely put aside all of fiscal approaches to fiscal 
sustainability. You have got to do both simultaneously, and you 
have to got to do both credibly.'' So I think it is the 
question of balance, which is important.
    Mr. Van Hollen. Just to follow up, as I look at your GDP 
numbers, your projected growth numbers, it seems pretty clear 
that they assume some extension of current policy, for example, 
an extension of, at least through the end of the year, payroll 
tax. I am not saying specific numbers, but there are 
differences between those and CBO, and CBO had to assume 
current law. They had to assume we do not extend the payroll 
tax cut, and they have to assume that all the tax cuts at the 
end of the year, including middle income tax cuts lapse. That 
is one of the reasons the CBO economic forecast GDP projections 
are lower than yours.
    Mr. Bernanke. Yes.
    Mr. Van Hollen. Thank you, Mr. Chairman. I thank my 
colleagues.
    Chairman Ryan. Should we just yield the rest of the time to 
Mr. Doggett?
    Mr. Van Hollen. Yield the time, and I think he also has a 
little time of his own, as well. So thank you, Mr. Chairman.
    Chairman Ryan. So members he is leaving, so we are going to 
allow Mr. Doggett to finish his time, and then we will go back 
in order. Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Chairman. And thank you, Mr. 
Chairman, for your testimony. Just continuing along the same 
line of questioning Mr. Van Hollen was raising, Chairman Ryan 
has expressed some concern that under certain circumstances the 
Fed pursues a balanced approach. Do you believe that the Fed is 
having any difficult in achieving the goals of both employment 
and price stability?
    Mr. Bernanke. Well, I think it is evident that, 
particularly on the unemployment side, we would like to see 
greater progress than we have seen. On the inflation side, I am 
very cognizant of Chairman Ryan's concerns, but at least for 
now we appear to be pretty close to target. I think what I 
would say about that is, of course, we are going to have to 
continue to evaluate monetary policy as the new data come in, 
as we see how the outlook changes, and so on, but I said 
before, and I think it is important to emphasize that monetary 
policy cannot do everything; it is not a panacea. And this 
body, and others, need to think about the troubled parts of the 
economy, places where improvements can be made in the tax code 
or in other areas.
    Again, to answer your question, we are obviously not 
satisfied with where we are, and while we will continue to do 
all we can to meet our dual mandate, which is what Congress has 
given us, we hope that all of you, and the administration and 
like, will look for alternative ways to strengthen our economy.
    Mr. Doggett. And you certainly have the capacity to 
recommend to the Congress that it alter that mandate if you 
thought it was interfering with the objectives of the Fed.
    Mr. Bernanke. I think that the dual mandate has worked 
fine. We have as good an inflation record as any other central 
bank. I do not think it has been a major problem, so I think it 
has served us well. That being said, Congress created the Fed, 
Congress gave us our mandate. If you determine that you want to 
change it, we will, of course, do whatever you assign us to do.
    Mr. Doggett. And you, of course, determine how to implement 
that mandate, and you have said, with reference to price 
stability, a goal of about 2 percent is your goal. And with 
reference to unemployment, did I hear you say 4.5 to 6 percent?
    Mr. Bernanke. 5.2 percent.
    Mr. Doggett. 5.2 to 6 percent?
    Mr. Bernanke. The difference, Congressman, between 
inflation and unemployment is that the Fed can control 
inflation in the long run. We cannot control unemployment in 
the long run; that is determined by many other factors in labor 
markets and other policies that we do not control. So we cannot 
set an arbitrary target, but what we can do is try and make our 
best guess of what level of unemployment the economy could 
sustain over a period of time, and we do not have an official 
number, but the 5.2 to 6 percent is the central tendency of the 
estimates provided by the members of the FMOC.
    Mr. Doggett. And while we would certainly be delighted to 
be at that range today, or at the end of this year, that is 
still a substantial amount of unemployment, is it not?
    Mr. Bernanke. Certainly. We have a very high level of 
unemployment; we have not come remotely close to replacing the 
jobs that were lost in the recession. We have a very high level 
of long-term unemployment. I think we all agree that 
unemployment, and underemployment, and people leaving the labor 
force, and all those things, are a serious problem. I mean, we 
may disagree about remedies, but the problem is certainly 
there.
    Mr. Doggett. Right, and all I am saying is that the 
objective you set is not an overly demanding objective as far 
as employment, the 5.2 to 6 percent.
    Chairman Ryan. We will let you answer that in his next five 
minutes. Mr. Garrett.
    Mr. Garrett. Mr. Chairman, thank you. So I heard your 
answer to Mr. Van Hollen and you said you normally do not like 
to comment on fiscal policy, in particular, tax bills and the 
like. I thought, really, Mr. Chairman? Is that still your 
opinion? I was truly taken aback, just recently, as you know, 
the Fed issued an unsolicited white paper, if you will, on 
housing policy, where if you did not advocate for, you 
certainly mirrored much of the positions of this 
administration. So I do not know how the two go together. On 
the one end, you say you do not get involved in these areas, 
but here you had a white paper that was not solicited from us. 
I know you are protective of your independence, but when you 
advocate for a position like that, why would you issue such a 
paper, when we do not ask for it?
    Mr. Bernanke. Well, Congressman, first, the Fed has a lot 
of interest in housing. It is important for the economy, it is 
important for monetary policy. We are bank supervisors, so we 
are interested in mortgage and lending.
    Mr. Garrett. So let me ask you this, then. Congress has a 
lot of interest in monetary policy. I guess the comparable 
would be for us to do a House resolution with regard to 
monetary policy. Is that an invitation now to Congress that we 
should be issuing resolutions to what the monetary policy that 
the Fed should be doing? If so, I am sure there is a lot of 
members who would like to engage in it.
    Mr. Bernanke. Well, I hear lots of advice from congressmen, 
but let me say that the bottom line here, though, is that we 
have done a lot of work on this, we have gotten a lot of 
requests from individual congressmen for our views and for our 
analysis. It was not the intent of that white paper to provide 
a set of recommendations. There is not a list of 
recommendations at the end of the white paper. We were trying 
to provide pros and cons, analysis, background. I am sorry if 
you think we went too far, but we tried to provide that 
information.
    Mr. Garrett. But within 24 hours after that paper went out, 
the New York Fed president was out there basically advocating 
for some of the positions in there. Governor Elizabeth Duke was 
out there basically advocating for positions out there. So you 
cannot be on both sides of the issue, where you are just saying 
this is what we think, and then the Governor is coming out 
there advocating.
    And if it is because you are saying that members were 
asking your opinion, well, we were asking your opinion and we 
would have certainly have liked to see a white paper back when 
the president's colossal failure with the stimulus was going 
through, and we certainly would have liked a white paper at 
that time from the Fed to say just how that would have all 
worked out. Why did we not see a white paper at that time, 
spelling out whether this would work, and whether you advocate 
or did not advocate.
    Mr. Bernanke. Well, again, I know you are skeptical, but we 
are trying very hard to avoid encroaching on Congress' fiscal 
responsibilities. With respect to the points you made about 
Governor Duke and President Dudley, they are not representing 
any official position of the Board. They are speaking on their 
own recognizance. If you pay attention to the speeches that 
Reserve bank presidents give, you know there is a wide variety 
of opinion even on monetary policy. So there was no official 
endorsement of those positions. We are, again, trying to 
provide useful background. I apologize if it was 
misinterpreted. Again, our goal was just to be helpful.
    Mr. Garrett. Well, I guess I would just sort of take off of 
what the Chairman was talking about. You have two mandates, in 
the area of employment, the area of monetary policy, and that 
is obviously a lot for the Fed to be responsible for. We have a 
mandate in the area of fiscal policy, and we would like to 
retain that.
    Let me then go to another area. You do have a 
responsibility, as others may have, where you are the owner of 
about $1 trillion right now in mortgage back securities. In 
that position of the owner, wearing that hat, can you comment, 
then, on the president's new proposal on the Refi plan? What 
have you looked into that, what would the impact be, as far as 
realized losses to the balance sheet, if that plan was to go 
through?
    Mr. Bernanke. No, we have not done that specific 
calculation, and once again, I am not going to endorse or not 
endorse his program.
    Mr. Garrett. What is the cost if we were to do that?
    Mr. Bernanke. There are costs, as the president 
acknowledged, there are costs to it, and they would have to be 
raised somehow, whether it is from a bank tax, or some other 
way. He mentioned $5 to $10 billion; we have not looked at that 
number, we do not know if it is correct or not. There would 
also be costs to investors, including the Federal Reserve.
    Mr. Garrett. Right, you are the investor in this situation.
    Mr. Bernanke. Yes.
    Mr. Garrett. You bought these things, some would say, at a 
premium, so not what it costs to the taxpayer, but your costs. 
Have you begun to look to see what your costs would be as the 
loss realized on those?
    Mr. Bernanke. No, we have not, although we acknowledged, or 
I think it should be acknowledged, that the rates of refinance 
have been extremely low, lower than expected, over the last 
couple of years, and so in some sense that is reversing a gain 
that we got. But you are right, there are costs to the program, 
there are costs, potentially, to investors, and those costs to 
the government, potentially. Yes.
    Mr. Garrett. So that would be one area that we would like 
to have a specific information back on, and also as a 
regulator, what the impact would be for the banks that you 
regulate, what the impact would be if you increased the fees on 
that. And I see my time is up.
    Chairman Ryan. Thank you, Mr. Garrett.
    Mr. Garrett. Thank you, Mr. Chairman.
    Chairman Ryan. Back to Mr. Doggett.
    Mr. Doggett. Let me just return to the last question, and 
that is, many economists would think that unemployment of 5.2 
to 6 percent leaves many people out there hurting badly in an 
economy. It is a fairly substantial rate of unemployment, even 
though it is much, much better than where we are today. In 
setting your goals of trying to avoid excessive price 
instability and inflation, you have not taken a drastic 
position on unemployment. You have tried to have some, as you 
said, balance between the two, have you not?
    Mr. Bernanke. Well, there is nothing in our statement which 
suggests that we think that 5.2 to 6 percent unemployment is 
desirable or is a good outcome. We are just saying that given 
where the economy is today, that is what we think it can 
sustain under more normal conditions. There are many policies 
that Congress could consider, work force skills and other 
things that might affect that long-run unemployment, and if 
that unemployment rate is changed, then we will respond to 
that.
    Mr. Doggett. And on your estimates of what type of growth 
we will see in the near term in the economy that are in your 
testimony and the reports of the Fed, what assumptions do those 
estimates make concerning fiscal policies and where the 
Congress will be? I understand you are not getting into 
specific bills, pro and con.
    Mr. Bernanke. Well, in order to make forecasts, we make 
guesses about what Congress will actually do. There is no 
endorsement; there is no endorsement involved in that. 
Basically, the CBO presented, sort of, two kind of extreme 
proposals: one is the current law proposal, which assumes, for 
example, that all the tax cuts are ended, and that the doc fix 
is not adopted and so on; and then there was a alternative 
scenario, which assumed that there was no sequestration, and 
that all the tax cuts were extended, and sort of took the 
opposite approach. Our numbers, obviously, are based on an 
intermediate level, assumes that some of these policies are 
undertaken, but not all of them, and we try to make our best 
guess, but it is only staff guesses about what they think 
Congress may do. And I do not think those forecasts, or the 
details of that, are particularly helpful to you. I mean, 
obviously, you are going to be trying to figure out what the 
right thing to do is.
    Mr. Doggett. With regard to an issue we have discussed when 
you have been here in the committee before on whether the 
policies of the financial community concerning rewards and 
compensation for taking excessive risks remain a problem. You 
finally issued a report in October dealing with that. It 
indicated that there had been some improvement, but among the 
largest banks there continued to be a number of problems with 
regard to risk-taking and how that leads to rewards from some 
of those that are taking the risk with other people's money. 
Could you give us an assessment of what has happened since that 
report came out, in terms of what progress is being made to 
deal with this issue that many of us are concerned could lead 
to another financial meltdown?
    Mr. Bernanke. The Federal Reserve undertook, even before 
financial reform was passed by the Congress, we undertook to 
look at this as a safety and soundness matter, and very early 
on we began working with the Boards and the compensation 
committees of the major institutions to try to structure their 
compensation in ways that did not lead to more or excessive 
risk taking. And I think, as the report suggested, we have made 
a good bit of progress. It is really sort of about that time of 
year when a lot of this information is finalized, in terms of 
what the compensation packages are going to look like. We 
continue to make progress on that, we continue to work with the 
banks. I think, as I said, that a lot of the major institutions 
are taking serious steps in this direction.
    I would point out, in addition, that beyond the actions 
that the federal reserve took independently, Dodd-Frank 
requires the Fed and other bank regulators to establish 
incentive compensation standards, and that rulemaking process 
is underway, and so that will augment and add to the guidance 
that we have already provided. So we have seen progress, and we 
continue to work actively with the banks, I think, in 
everyone's interest, to make the bank safer and reduce the 
risks to the tax payer.
    Mr. Doggett. Does more need to be done?
    Mr. Bernanke. Well, we continue to work on it. As we said 
in our report, we do not think that we are where we need to be 
necessarily. I think that there are a lot of interesting 
questions. This is actually an active topic of academic 
research about how best to structure pay packages, what role 
should options, and stock, payments, and so on, play? So more 
does need to be done, but I think part of the process will be 
learning in our consultations with the institutions, and with 
academics, and others about what works best. And of course the 
Europeans are doing similar things in this interchange there as 
well.
    Chairman Ryan. Thank you. Mr. Simpson?
    Mr. Simpson. Thank you, Mr. Chairman, and thank you, Mr. 
Chairman, for being here today and for your testimony and 
comments. You know, I have been a member of this committee, and 
I think the Chairman has also, for eight years now. And for 
eight years, we have had economists and other experts come and 
tell us that we have a structural deficit problem that is 
unsustainable, and we need to do something about it. So far we 
failed to heed the warning. We are now at a situation where I 
think if we do not heed the warning, there is going to be 
consequences to paythat nobody is willing to accept. And the 
sad thing about it is that both parties, Republicans and 
Democrats, sit and demonize one another no matter what we try 
to do to address this problem. We call the Democrats ``just tax 
and spend Liberals'' that do not care about the economy, and 
they show us pictures of Paul Ryan pushing Grandma off the 
cliff.
    Unfortunately, that does not solve the problem when 
everyone in this room, everyone listening to us, and everyone 
on this committee knows what has to be done. We have had 
several commissions that have looked at what needs to be done. 
They all say, almost universally, that you have got to get the 
$4 to $6 trillion in savings if you are going to have an impact 
on the long-term deficit of this country, whether it is 
Simpson-Bowles, Domenici-Rivlin, the Gang of Six, or whatever. 
We all know that we have got to restrain discretionary 
spending. We all know that we have got to get entitlements 
under control. And we all know that we need a pro growth tax 
policy in this country instead of a 19th century tax code, one 
that fits the 21st century. We all know that. We might have 
some differences of exactly how to do some of these things, but 
we all know that the problem exists, and we all know we have 
got to come together. What we need is an armistice between 
Republicans and Democrats to solve this problem, because if we 
do not, all of these other things we have talked about are not 
really going to matter, are they?
    Mr. Bernanke. That is correct. It is, I think, striking 
that when the U.S. debt was downgraded by SNP last summer, it 
was more about what they cited was the political concerns about 
the ability of the Congress to work effectively to make 
progress. So it is easy for me to say and, obviously, I 
recognize that politics is a tough game and that there are a 
lot of disagreements in Congress, but obviously the more that 
can be done to show cooperation and collaboration on this very 
important issue. I think we all agree on the issue, as you say.
    Mr. Simpson. The 1st of January I was in New Zealand, 
Australia, and the Philippines, and talking with officials 
there and businesses there, I was surprised that they are 
really watching Congress. There are worried about Congress' 
inability to get together to solve this problem because they 
know the problem is going to extend to them if we do not solve 
our problem here. And I was surprised that they follow us as 
closely as they do.
    Let me ask you, do you believe that the general assumption 
that we have to get to $4 to $6 trillion in savings is the 
right number or a number that will stabilize our deficit and 
get us headed in the right direction? Could you paint a picture 
for us because it is sometimes hard for us to explain to the 
public what could potentially happen if we do not do anything? 
Could you paint a picture for us of what you think will happen 
to this economy if we do not take the steps necessary to 
stabilize our debt, and if we put it off for another year or 
another year after that as we have been kicking that can down 
the road forever?
    Mr. Bernanke. The $4 to $6 trillion, Congressman, was a 
number that was talked about for the next decade; and the idea 
was that achieving that would stabilize the debt GDP ratio, and 
maybe get some progress there, and I was supportive of going 
big, so to speak, when we, we the country, were discussing 
these issues last summer. So yes, I think a very substantial 
additional tack on the deficits is needed.
    The other point I would make is that the 4 trillion, the 6 
trillion number is, again, about the next decade. The biggest 
problems we have are beyond the next decade. They stretch out 
into the next 20 or 30 years, as entitlement costs, in 
particular, begin to rise further, and as our demographics 
begin to move, I guess some would say, adversely. So one thing 
I would urge you, as you think about these issues, is not just 
to focus only on the 10 year official budget window, but to 
think about the longer term, beyond 10 years, because what we 
have seen, an example would be the Social Security reform that 
was done in the early 1980s, which is still phasing in; it is 
not even all phased in yet, 30 years later. The more time you 
give people, the slower the process, the more warning, the more 
likely it is going to be successful, both politically and 
economically. So you need to look beyond 10 years.
    In terms of the implications for the economy, I think the 
good scenario is that when the economy recovers that we have 
higher interest rates, we have higher borrowing abroad, we have 
a slower growing economy, slower productivity gains, et cetera, 
as I discussed in my testimony. The bad case scenario, which, 
ultimately, will happen if we do not change this trajectory, is 
that, analogous to what we have seen in some countries in 
Europe, that investors will begin to lose confidence that we 
can manage our long-term fiscal situation, and we will see 
sharp movements in interest rates or loss of confidence in U.S. 
debt, in which case, changes would have to be made, but in a 
much more chaotic, rapid, and disruptive way than by doing it 
in a long-term, thoughtful way.
    Chairman Ryan. Thank you. Mr. Blumenauer?
    Mr. Blumenauer. Thank you. Thank you, again, sir, for 
joining us. I cringed a little when my good friend from New 
Jersey's portrayal. It seems to me that you are independent of 
Congress. You are not CBO; you are managing the monetary system 
and you are purposefully an independent agency trying to 
insulate the notion that somehow you are at all the beck and 
call of a particular administration or Congress. My 
understanding is that is the structure that is in place to try 
and give you that independence. Am I missing something here?
    Mr. Bernanke. Well, the Fed was created by Congress, but 
Congress did set up in a way, for example, 14 year terms for 
governors and so on, to try to create independence in making 
monetary policy decisions. We have a number of roles, including 
supervisory roles and so on, which bring us into contact with 
issues related to housing, and mortgages, and so on. Again, I 
just want to be clear to this committee, that our intention was 
to try to provide useful background, and we, in all cases, 
looked at both sides of the issue, and we recognize, we have no 
doubt whatsoever, that it is Congress that has to make those 
decisions.
    Mr. Blumenauer. And I appreciate that. Having been here 
through some of the stormy weather, I think there are lessons 
to be learned by all of us. I think you, some of your 
governors, looking at the events, I hope Congress is looking at 
what we did or did not do, hopefully people in the private 
sector. The notion that somehow we might ask the Fed to come up 
with a report on the Recovery Act, I mean, there is an 
independent agency; it is called the CBO, which we set up to 
give us that, who produced such a report that said that it 
raised real inflation adjusted GDP between .3 tenths of a 
percent and 1.9 percent; that it lowered the unemployment rate 
between .2 of a percent and 1.3 percent; it increased the 
number of employed between 400,000 and 2.4 million; it 
increased the number of full-time equivalent jobs by between 
half a million and 3.3. That is an independent agency that 
Congress set up. You may not like the answer, but asking 
somebody else, an independent agency, to do it, I think is not 
going to get us any further down the line.
    I am personally struck by what my good friend from Idaho 
said, because as usual, he is making sense, get to it, deal 
with the notion, and I have opined in this committee and 
elsewhere that we know what to do; it is not that hard, that we 
could do things to reign in military spending without putting 
us at risk. We could reform agricultural spending. We could, in 
fact, move to have a health care system that rewards value 
instead of volume that meets Mr. Bernanke's test, which is not 
just in 10 years. The real test is 20 and 30 years, that 
potentially sinks it.
    And I am hopeful that we are able to focus on the big 
picture, that this Budget Committee, in the course of our 
deliberation, can look at things that actually enjoy bipartisan 
support, and that could make a difference over the next quarter 
century, and not have the picture that is being portrayed today 
and yesterday by independent experts become a fulfilling 
prophecy.
    I just feel from the bottom of my heart that this is 
something we ought to be focusing on, and in particular, the 
notion that we are looking at the longer term. We live with a 
10-year budget window. But the real challenges are beyond that, 
and that is where the savings have to occur, that is where it 
actually gets easier, not harder. And for us to bludgeon the 
Fed, I think you have done an extraordinary job trying to 
balance being more transparent in what you are doing, but not 
spooking people, not adding fuel to one fire or the other. I 
appreciate your continued patience coming here, although I know 
it is probably a statutory duty, but you do it with good humor. 
I do not know that we have subpoena power, but I am hopeful 
that we can focus on the lessons that we learned or should have 
learned, and get to the work that Mr. Simpson talked about, in 
terms of getting to it.
    Chairman Ryan. Sounds like an endorsement of our budget.
    Mr. Blumenauer. I will yield back. I am with you on 
agriculture.
    Chairman Ryan. Okay, thank you. You are.
    Mr. Blumenauer. I have only started on military.
    Chairman Ryan. Your gentleman's time has expired.
    Mr. Blumenauer. I hope we build on what used to be 
bipartisan approaches to controlling Medicare.
    Chairman Ryan. Agreed. Mr. Campbell?
    Mr. Campbell. Thank you, Mr. Chairman and Dr. Bernanke. A 
suggestion was made earlier that you make policy pronouncements 
on housing, and I am very deeply, as you know, involved in 
trying to restructure housing finance and housing market. And 
as much as I personally wish that were true, and that you would 
weigh in on the side of the proposals that I have made versus 
others, you and the Fed have been, I think, quite judicious in 
not doing that. But what you have opined on, and I would like 
to ask you to say in your own words, is the importance of the 
housing market and a housing recovery, if we wish to have a 
robust economic recovery and job growth. Would you care to 
comment on that?
    Mr. Bernanke. I certainly would, and this is the reason 
that we have a housing committee, basically, at the Fed with a 
bunch of staff and some governors who were looking at this 
almost all the time. I would say that one of the main reasons 
that the recovery has been as disappointing as it has been is 
that usually housing provides an important amount of the 
impetus to growth. Not just construction, but all the related 
industries and services that are tied to housing. In this case, 
housing has been very weak. In fact, we have seen a few small 
positive indicators, but generally it remains at a very low 
level. So the recovery in housing would be a very important 
boost to the overall recovery. It works through a number of 
different ways, not just through construction but by affecting 
the wealth of consumers and their financial well-being. The 
mortgage market, the problems with a access to credit, for 
example, mean that the Federal Reserve's monetary policies are 
less effective than they otherwise would be, because not as 
many people as could be are taking advantage of the low 
mortgage rates that we have tried to create.
    There is a lot of other implications for both borrowers and 
lenders. Clearly, continued poor conditions in housing markets 
imply losses on mortgages, imply foreclosures, imply people 
underwater who cannot move or sell their houses. So there are a 
lot of costs at the neighborhood and the household level, as 
well. But I do think that the lack of a housing recovery is one 
of the big reasons that recovery has not been stronger than it 
has.
    Mr. Campbell. So without advocating a specific solution, 
kind of like on the budget deficits, you are saying it is 
something to which we should be paying policy attention?
    Mr. Bernanke. I think it would repay your efforts to think 
about ways to remove some of the barriers to recovery and 
housing. I do not think it is superiorly a market phenomenon. I 
think there are a number of legal and administrative and 
regulatory barriers to housing being as strong as it should be.
    Mr. Campbell. Thank you. Shifting gears for a second and 
going to Europe, in the last 30 days or 60 days, has a recovery 
or a positive solution in Europe, is it closer or farther away, 
in your view? And while we cannot control this, but if they 
were to have a failure of some sort over there which was not 
well-constructed or whatever, that would affect us. Could you 
comment on where you think Europe is today and what impact it 
would have on us, even though we cannot control it, if they 
were to have some form of failure or collapse?
    Mr. Bernanke. Certainly, Congressman. So there have been a 
couple of positive developments. The European Central Bank has 
provided extensive financing to the European banking system, 
and will provide another round of financing at the end of this 
month. That has had the benefit of reducing some of the 
stresses in the banking system. It has even gone so far as to 
bring down, to some extent, the borrowing costs of some of the 
more fiscally troubled countries, as well. So that has taken 
away some of the financial stress, and has given a little bit 
more breathing space.
    There has also been progress made, and in terms of an 
international agreement within the Eurozone to have mutual 
surveillance of fiscal policies, to try and get long-term 
agreement on fiscal stability within the Eurozone and within 
individual countries; and that is a necessary condition for a 
full solution, so those are positive things.
    There is an awful lot that remains to be done. The Greek 
negotiations are still ongoing; we do not know how those are 
going to come out. The banking system remains undercapitalized. 
It has been contracting its credit, which has been contributing 
to a weakening economy in many countries in Europe. And I think 
the back stops that are needed to protect if one country has 
problems, to protect other countries from contagion, the 
Europeans have been setting up financial backstops to do that. 
There is still a lot of uncertainty about the size of those 
backstops and how they would be used, and so on; more work 
needs to be done there.
    I think it is important, finally, just to conclude, that 
there are some really deep fundamental problems, not just 
fiscal issues, slow growth issues, but also issues of 
competitiveness. Countries on the periphery, like Greece and 
Portugal, are not at all competitive to Germany. They have big 
current account deficits; they cannot change the value of their 
exchange rate because they are tied to the Euro, so it is going 
to be a very difficult process for them to get to a more 
competitive situation. All those things put together mean that 
you could have very slow growth in some European countries for 
quite a while.
    Chairman Ryan. Ms. Castor?
    Ms. Castor. Thank you, Mr. Chairman. Good morning.
    Mr. Bernanke. Good morning.
    Ms. Castor. Dr. Bernanke, the economy is creating jobs. We 
have had 22 months of private sector job growth. The 
unemployment rate is at its lowest level for three years, and 
it is very noticeable at home in Florida. In 2007 and 2008, the 
headlines in the newspaper were devastating about companies 
closing and people losing jobs. And it is noticeably different; 
it was noticeably different last year, with stories about 
companies hiring. It is pretty steady right now, but obviously, 
we can do better. In your testimony, you said a more robust 
recovery will lead to lower deficits and debts in coming years. 
So here is the frustration, and our colleague who gave us the 
list of ways to reduce the debt and deficit, it was very 
noticeable that he did not include job creation in that list. 
It was cuts, spending, we are doing that; in the Budget Control 
Act, we did that. We need to do more entitlements. There is 
some common ground we could find there. But he left off that 
very important list job creation. And Dr. Elmendorf, from the 
CBO, testified yesterday that yes, if we had a lower 
unemployment rate we would have a lower deficit, and that 
followed up on his letter of October, where he used technical 
language, says the underutilization of capital and labor 
resources in the economy. If we had better utilization, if we 
had more people working, the projected federal deficit under 
the current law in fiscal year 2012 would be about one-third 
lower. That deficit would be equal to about 4.0 percent of 
gross domestic product compared with 6.2 percent projected for 
2012 in the CBO's baseline. If the economy were operating at 
its potential, the deficit would be lower because incomes, and 
therefore revenues, would be higher, while the rate of 
unemployment, and therefore outlays for certain government 
programs, would be lower.
    So here is our frustration, and the frustration of folks 
back home. They know we can be doing more to reduce the deficit 
and put people back to work, but the Congress has not been able 
to get off the dime and come to common agreement on ways we 
invest in infrastructure, and research and development. So give 
us some words of wisdom on this. Going forward, what do you 
believe are the most effective policy options that all of us 
can pursue to speed job creation and thereby lower the deficit?
    Mr. Bernanke. Well, Congresswoman, first of all, I am glad 
to hear that the tone is a little better in Florida. That is 
good. There has been some progress, obviously, but it is still 
very slow. In my testimony, I made, I think, three related 
points about fiscal policy. The first is that whatever we do 
for confidence purposes and for long-run sustainability; we 
have got to keep our eye on the long-term. We have got to make 
sure that we have a credible plan put in place that will be 
moving us towards stability and sustainability in our fiscal 
policies over the next few years and into the subsequent 
decade. So I think we have got to keep that part always on the 
table. I think that is really important.
    Secondly, I think we can avoid, if we can, unnecessary 
disruption to the recovery. I think that is important. Mr. 
Elmendorf, I am sure, pointed out that under current law there 
is going to be a massive fiscal contraction in 2013. Without 
addressing any of the specific policies involved, I think 
Congress should be aware of that and try to avoid having too 
big a hit on the recovery in 2013.
    And then finally, again, without taking the side of 
specific policies, I think, my third point was that fiscal 
policy is not just about total spending and total taxes. A lot 
of it is the quality of the budget. I mean, are the things we 
are spending on going to help our economy? Do they support RND, 
or work force skills, or other things that will help the 
economy grow in the long run?
    On the tax side, are we moving towards more efficient, more 
effective tax codes, simpler, fairer, and the like? So I think 
you want to look at the top lines, total spending and total 
taxes to deficit, but obviously, and it is easy for me to say, 
but it makes a difference, the quality of the programs, the way 
the money is spent, the way the money is collected, makes a 
difference in terms of jobs and growth.
    Chairman Ryan. Mr. Cole?
    Mr. Cole. Thank you very much, Mr. Chairman. And before I 
get to my questions, I just, I want to thank you for the role 
you played during the TARP situation, which I think was a 
critical point for the country, and I want to thank you for the 
transparency and the efforts since then. I think to try and 
restore a measure of public confidence in the Fed. In the 
history of the periods written, I think, a lot of people, Fed, 
SEC, the GSE, Congress, they are going to have a lot to answer 
for in the lead-up, but at the moment of crisis, I think you 
did a really terrific job for the country, and I appreciate it 
very, very much.
    Mr. Bernanke. Thank you.
    Mr. Cole. You laid out pretty compellingly the fiscal 
challenge that we face going forward, and I think that is what 
we wrestle with on this committee more than almost anything 
else. And let me pause at a couple things, and then try and get 
your opinion on it, if it is appropriate.
    First you mentioned spending restraint, and that is 
actually beginning to happen. The Appropriations Committee has 
actually cut discretionary spending two budget years in a 
single calendar year. We have an agreement in the Budget 
Control Act going forward that is going to let out the belt a 
little, but honestly, in the context of the federal budget, not 
a lot. We can argue about whether it was a good policy or not, 
but we did tie long-term spending cuts in some fashion to the 
debt ceiling increase. So there is lots of signs, at least on 
the discretionary side, we are beginning to see some 
discipline, and it is likely to stay here for a while.
    Second, on the revenue front, our president obviously 
extended all the tax cuts for two years. He had the ability not 
to do that; he could have knocked all of them out or any of 
them that he wanted to knock out, because we could not have 
possibly overridden the veto, and frankly, he had the 
majorities until January to do pretty much what he wanted. He 
told us pretty clearly then that he thought we needed those tax 
cuts for another two years, and he bargained, in exchange for 
that, an extension of unemployment, and obviously, payroll tax 
holiday. But he signaled that come January next time, we are 
going to have a revenue increase for high income earners, if I 
am still the President of the United States. And he will have 
the ability to impose that, if he chooses. So let's just pause 
it for a minute, hate to do this as a Republican, but he is in 
the position to do that. So that will be a revenue increase of 
some sort.
    Are those two things, in and of themselves, spending 
restraint and revenue increases of the kind that we are talking 
about, sufficient to deal with the long-term structural deficit 
that you describe?
    Mr. Bernanke. No, I do not think they are, and I think 
standard CBO calculations would support that discretionary 
spending is not particularly high, as a share of GDP, relative 
to history. I think you could cut discretionary spending pretty 
close to zero, and not solve the problem in the long-term. So 
focusing only on discretionary spending is probably not going 
to be, by itself, sufficient on the spending side.
    Mr. Cole. Or, and I do not mean to put words in your mouth, 
or only on the revenue side, or only on the tax side.
    Mr. Bernanke. Well, I was going to say, on the other side 
there are many arguments for and against changing the taxes on 
higher income individuals, but that, by itself, is not going to 
close the budget deficit either. We need a much broader set of 
policies. I think the elephant in the room is really health 
care costs. As I mentioned in my testimony we are heading 
towards 9 or 10 percent of GDP just from federal spending on 
health care, and then another 8 or 9 percent eventually in 
private sector health care spending. So that is a broad issue 
that affects the budget and affects the efficiency of our 
economy. I do not think we are going to get a real solution 
there without some kind of way of addressing that problem.
    Mr. Cole. I agree very much with that, and obviously, we 
had an effort in this committee to do exactly that, in the so-
called Ryan budget. I suspect we will have something very 
similar again this year. I hope we look at Social Security as 
well; I know that decision has not been made, because I think 
that is the crux of the issue. We have a lot of commissions 
that have put out a lot of ideas. Are you aware of any other 
elected officials that have actually passed, or proposed, has 
the president laid out, a set of long-term reforms and 
entitlement spending, or anybody else other than my friend, the 
Chairman, here?
    Mr. Bernanke. I do not know of any comprehensive plan. 
Again, as you point out, there have been a number of 
commissions, but even those commissions are not fully detailed. 
I mean, for example, I do not think Bowles-Simpson had a lot to 
say about health care and how to control that spending. I think 
that is where a lot of the serious work has been done, in think 
tanks and the like.
    Mr. Cole. Thank you very much. Thank you, Mr. Chairman.
    Chairman Ryan. Mr. Pascrell?
    Mr. Pascrell. Thank you, Mr. Chairman, for bringing us 
together today. Chairman, I want to associate myself with the 
comments of Mr. Cole, as to keeping a steady head through this 
real, financial crisis, economic crisis, and I can appreciate 
that it is not a very easy task, nor is it an easy task for 
this committee.
    First chart up there, Mr. Chairman.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    We have heard a lot about how some people can pay 15 
percent, a tax rate around 10 percent to 13 percent lower than 
firefighters, teachers, and police officers, as an example, 
particularly in North Jersey. I understand you can use the 15 
percent rate on investment income rather than the higher 35 
percent top rate on wage income. We have been told that 
increasing the rate on capital gains will discourage 
investment. Warren Buffett said that he had worked with 
investors for 60 years, and he is yet to see anyone, not even 
when capital gains rate were at 39.9 percent back in the mid-
1970s, shy away from a sensible investment because of the tax 
rate on the potential gain. ``People invest to make money, and 
potential taxes have never scared them off,'' unquote. Now 
according to the National Income and Product Accounts tables, 
the top tax rate on investment income significantly changed 
over the past 80 years, which you are very familiar with, which 
I have heard you speak about many times. It was as high as 39.7 
percent in 1976, and now today it is 15 percent. Yet investment 
grows with the cycle. Chairman, in your opinion, do changes in 
the capital gains tax rate mainly affect investments already 
made, rather than new investments being considered? And the 
latter is what drives growth. What is your opinion?
    Mr. Bernanke. Well, you are pulling me into a complex 
topic. The economic theory says that you should tax 
consumption, rather than saving or investment, and that is the 
rationale for lower rates on capital gains and capital income. 
That is the theoretical results; there is a variety of 
estimates about how strong the affect is, which is what you are 
alluding to. It is hard to pin it down exactly. There are many 
other issues related to this, I do not want to be pinned down 
on a simple response, because on the one hand, tax and 
investment income, as I said, can be justified by economic 
theory, it can be justified by arguments to the need for 
personal corporate tax integration and so on, but I think 
Congress has an appropriate task to try to balance whatever 
benefits that low taxes on capital income have against 
considerations of equity, considerations of implementation. Can 
people convert regular income into interest income or capital 
gains income, and thereby evade taxes? So there are some 
complex issues on both sides.
    To try to answer your questions, I think while there is 
some disagreement in the literature, I think there is some 
effect of after tax rate of return on investment decisions, but 
there is a lot of disagreement about how strong it is.
    Mr. Pascrell. Do you see the problems, as it is, not just 
that the rate on capital gains is so much lower than the rate 
on earnings? And we could discuss that at length, because we 
have seen a real turnaround in the last 50 to 70 years on what 
we do tax. And one that feeds those who say that income earners 
are at a disadvantage in terms of what we make, how we taxed 
the profits of investments. The problem amplified, and we 
debated this, the carried interest loophole that encourages 
capping the difference. What is your opinion about that?
    Chairman Ryan. Time of the gentleman has expired.
    Mr. Pascrell. Can he answer the question?
    Mr. Bernanke. I am going to punt anyway, I think. It is a 
complicated question.
    Chairman Ryan. Let's try to get to everybody else here. Dr. 
Price?
    Mr. Price. Thank you, Mr. Chairman. I do want to comment 
about Warren Buffet. Warren Buffet, peculiarly, has become kind 
of a financial guru making recommendations for some peculiar 
reason, I am not quite certain. He is a gentleman, who, as I 
understand it, will not release his tax returns, who pays 
himself an income of 100,000, who has never contributed any 
more to the federal government. In fact, he is doing all he can 
not to pay taxes, to skirt his responsibility. But that is a 
complete aside, and I apologize for it.
    Mr. Chairman, I think you for coming. I want to turn our 
attention to the European situation. The European situation, to 
quote your testimony, is quote ``leading to substantial 
increases in sovereign borrowing costs, concerns about the 
health of European banks, and associated reductions in 
confidence in the availability of credit in the Euro area. 
Resolving these problems will require concerted action on the 
part of European authorities.'' My first question is do you 
believe that loans to European countries today carry a greater 
risk than they did two or three years ago?
    Mr. Bernanke. When you say ``to countries,'' do you mean to 
the governments?
    Mr. Price. Yes.
    Mr. Bernanke. Surely they do, and you can see it in the 
interest rates that they have to pay.
    Mr. Price. And would you please explain what the exposure 
of the United States, the American tax payer, is to that credit 
challenge that they have?
    Mr. Bernanke. Well, in the official sector, the United 
States is 15 percent shareholder of the IMF. The IMF is 
involved in programs for the three small countries: Greece, 
Portugal, and Ireland. The IMF does have a very good record of 
being paid back. They have a senior position in the debt of 
those countries, and they are very much engaged in making sure 
that those countries are taking appropriate policies. As I have 
explained in previous venues, the Federal Reserve has a swap 
line with the European central bank. That is not an obligation 
of any European government directly. The European Central Bank 
is highly credit worthy. It is owned by the central banks of 
all the countries in the Eurozone. And moreover, they give us 
Euros as collateral, so it is swap of currency rather than a 
loan, per se. They lend the proceeds on to their banking system 
in dollars, and there is some important reasons for that. But 
just from an exposure point of view, they take all the credit 
risks, all the interest rate risks, and all the exchange rate 
risks, and I think it is a good bargain for us.
    Mr. Price. Are you able to quantify the exposure of the 
U.S. tax payer to the risks, through the IMF and elsewhere?
    Mr. Bernanke. Through the IMF? I do not have the number 
exactly, but it would be in the tens of billions.
    Mr. Price. It may even be higher than that, I think. Do you 
believe that it is appropriate for the United States, for the 
Fed, and hence the United States tax payer, to have a greater 
exposure through the IMF, or are we at about where we ought to 
be, or should we decrease our exposure?
    Mr. Bernanke. Well, I think the IMF plays a really 
important role in helping to stabilize countries that are in 
stress. The administration, the treasury secretary is our 
director, and he has the most direct responsibility for the 
IMF, and he has been very clear that he is not supportive of 
any increase in U.S. contribution to the IMF, and so I would 
leave that to his judgment. His view, as I understand it, you 
should speak to him, of course, his view is that it is up to 
the Europeans, first, to take the necessary actions to 
stabilize the situation.
    Mr. Price. Let me switch very quickly in the brief moments 
that I have left to the comments that you made about health 
care and Medicare/Medicaid. Our discretionary budget is about a 
trillion dollars. The amount of the deficit is greater than a 
trillion dollars. So one could do away with all discretionary 
spending is that not correct. You could do away with all 
discretionary spending and not even get to a balanced budget 
without addressing Medicare, Medicaid, Social Security.
    Mr. Bernanke. Well, part of the trillion dollar deficit is 
due to the fact that the economy is in very weak condition, and 
the CBO suggested that if the economy returns to normal, say by 
2017, that the deficit would be more in the order of 4 to 5 
percent, which would be in the order, in today's terms, 60 to 
75 billion. So the balance it is not quite what you said. What 
I said before is true, that discretionary spending cannot bear 
the entire brunt of deficit closing. It is just not 
arithmetically possible.
    Mr. Price. Thank you, Mr. Chairman.
    Chairman Ryan. Mr. Tonko?
    Mr. Tonko. Thank you, Mr. Chair. Chairman Bernanke, thank 
you for appearing before the committee. I represent a part of 
upstate New York that hosts the third fastest growing high-tech 
jobs hub in the country, and we have a higher share of our work 
force in green power jobs than anywhere else in America. And 
the innovation economy in our region is not just a talking 
point; it is a reality that is paying bills for many families. 
It came about with a huge bit of planning, and the investment 
from both public and private sectors in providing the 
industrial clustering that is currently underway. So I am 
interested in your comments about the investments that need to 
be part of the response to a troubled economy, that encourage 
investments in RND, in the development of skills of a labor 
force that is essential for an ideas economy, and also the 
requirement of sound public infrastructure. After 20 years of 
investment through work in the policy development and the state 
assembly, and when I served at the State Energy Research and 
Development Authority, we saw what happened when people brought 
it all together, and now enabled us to experience this 
comeback.
    Interestingly, when I arrived here I saw a lot of tug 
against investment in these given dynamics that you made 
mention of. Can you develop further for us the benefit, the 
value added, that comes with this focus on RND, on skill set, 
and on infrastructure?
    Mr. Bernanke. Yes, there is a lot of evidence that 
clustering can be beneficial, as you described. If you have a 
number of high-tech industries, for example, close together, 
they can share ideas, and suppliers, work force, and the like. 
The public sector has a role there. One of the great strengths 
of the United States is our university system. Many of the 
high-tech clusters, I do not know about the one you are 
speaking of, have grown up in the context of a strong 
university where there is a lot of exchange between scientists 
or other professionals in the university and in the private 
sector. And of course the U.S. Government supports university 
education in many direct and indirect ways. Of course, it also 
supports public education for younger people, and the high-tech 
industries require skilled workers. A range of people, but 
certainly people who are conversant with math and science, is 
very important. So there is some important roles.
    Infrastructure, while that is certainly a topic of debate, 
about how much and what kind, I think most people agree that 
there is certain kinds of infrastructure that the government 
has a role in providing, from roads, to airports, to public 
crime and firefighting services, and a variety of things, to 
the extent that can support activity that is useful.
    Research and development is an interesting question. I 
recently gave a speech on this topic and talked about some of 
the considerations about what role, if any, the government 
should play there, and I think that, again, it is an issue 
debated among economists, but there is some argument to the 
fact that without any government intervention, that purely 
basic research may be underprovided because the people who are 
doing that do not share in all the benefits from that. So there 
may be some case for government encouragement of basic 
research; of course, you have an RND tax credit. That is 
certainly one way; there are other ways as well, to support 
National Science Foundation, and so on, or to support research 
and development. So I think the lessons of experience is that 
industrial policies which attempt to dictate exactly what 
companies, exactly what products are not, generally, very 
successful. There often is a role for government partnerships 
to help create the basis where a private sector can be very 
productive, particularly in high-tech areas.
    Mr. Tonko. Do you have any sense of how we might fare with 
the international community in terms of RND investment?
    Mr. Bernanke. We do pretty well, including both public and 
private. We certainly have the biggest amount, in absolute 
terms, of research and development investment, and we have a 
pretty high percentage of GDP as well. Some emerging markets 
like China are beginning to approach us, at least in terms of 
share of GDP, but we remain an RND leader.
    Mr. Tonko. Thanks.
    Chairman Ryan. Mr. Flores?
    Mr. Flores. Thank you, Mr. Chairman. Thank you, Chairman 
Bernanke, for joining us today. I want to follow up on some of 
the questions we have had earlier today, and to talk about 
policy responses. As you said, you are worried about the 
federal government's fiscal sustainability as we move forward, 
and it looks to me like we do not really have to reinvent the 
wheel when it comes to policy responses. If you look at this 
chart that we have on the screen, you can see the differences 
in recoveries during the 2006-2011 timeframe versus 1982 to 
1986.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    There was an op-ed in The Wall Street Journal this morning 
by Phil Gramm and Mike Solon that said that if we had just 
followed the same policies that Reagan followed when he 
inherited a really bad economy, that we would have about 17 
million more Americans working today, and that our GDP per 
family would be about 23,000 higher. We all recognize that the 
Constitution says the federal government has certain basic 
responsibilities. It is explicit that we have to provide for 
national security. Some people feel like we need to provide for 
basic research funding, and I agree with that particular idea, 
but then everything else is really sort of on the table when 
looking forward. So my questions are fairly simple. I would 
like you to give me the abbreviated, abridged, Reader's Digest 
bed response, if you can. Who is a better allocator of capital 
to the greater public good: is it the private sector or the 
federal government?
    Mr. Bernanke. Well, as I was saying earlier, there are some 
areas where the federal government is really the only provider, 
it is very hard to get the private sector to provide roads, but 
for innovative industries and those sorts of things, I think it 
is generally agreed that the private sector is better. China is 
an example of a country which has a Communist party running the 
show, but they allow private sector activity a very large role 
in the development of new industries.
    Mr. Flores. Right. You have got the difference between 
private sector investments, like the Keystone pipeline, versus 
public sector investments like Solyndra. I mean, that one is 
pretty obvious at face value that the federal government does a 
pretty poor job of allocating resources? Do you see anything 
that should dissuade us from thinking that it would be better 
for the private sector to allocate resources instead of the 
federal government?
    Mr. Bernanke. Well, again, the private sector, because of 
the profit motive and so on, is often better in innovating. But 
again, I do not want to get into the Keystone situation. I do 
not know enough about it, but I do know it involves in a multi-
state, right of way, and all those environmental issues, and so 
forth.
    Mr. Flores. I was not trying to get into the weeds on 
Keystone. I am just saying, as an example, you have got, on one 
hand, you have got a private investment of $7 billion and 
thousands of jobs created, on the other hand, you have got a 
half a billion tax payer dollars to spend and no jobs today.
    Mr. Bernanke. To be fair, you can point to situations where 
government investments, in the space program or in the 
Internet, have paid off, you know, they paid off for the 
public, but clearly, we have a market economy and we want to 
use the market wherever appropriate.
    Mr. Flores. Good, exactly. Looking at the stimulus plan, if 
you use the most aggressive, optimistic numbers of jobs created 
or saved that have been promulgated, the cost of the stimulus 
plan divided by the number of jobs is about $400,000 per job. 
Would you say that the private sector could have done better 
than that, if we had just said, ``Okay, private sector, through 
some sort of tax reform or tax reduction, we are going to leave 
those stimulus dollars in the hands of the tax payers to start 
with, instead of cycling them through Washington.'' Would that 
have created a better economic outcome for the United States?
    Mr. Bernanke. Well, it is hard to say. I mean, we were in a 
deep recession, and one of the differences between this 
recession and the 1982 and 1986 was that the Fed's tightening 
to reduce inflation was one of the main reasons for the 1982 
recession, and so when the Fed relented and cut interest rates, 
that was a big reason for the recovery. In this case, rates are 
zero; we cannot do as much as they did in the mid-1980s. The 
other thing, I would comment is that dividing the total cost by 
the number of jobs is, to me, not exactly the right way to 
think about it, because the total cost also involved the 
provision of whatever was built or constructed.
    Mr. Flores. I was not trying to get into the knacks like 
that. I am just saying, at a macro level, what would have been 
a better policy response? What would have produced a better 
economic benefit for the average American? A, you know, $800 
billion in the hands of the tax payers.
    Mr. Bernanke. If I could just quickly respond, I think 
there are times when monetary and fiscal policy can help to 
create better employment, but the private sector, clearly, is 
where the decisions about what industries, what products, and 
so on, should take place.
    Mr. Flores. Very good, thank you.
    Chairman Ryan. Ms. McCollum?
    Ms. McCollum. Thank you, Mr. Chair. Mr. Chair, back to the 
chart that we just had, could I ask to have that put up again, 
even though it was not my chart?
    [Chart]
    Chairman Bernanke, some of my colleagues are talking about 
the Reagan recovery a lot more. But I think when you talk about 
recoveries you also have to talk about how you got into the 
position you are in. You talked about how the Fed had interest 
rates to work with during the recovery; we did recover during 
the recession, that was pointed out. But I think it is 
important, historically, to point out that with what we are 
facing right now, we had two wars that went on credit cards. We 
had a housing collapse, which really, it broiled us into, as 
you pointed out, housing being the last leg, maybe, of this 
recovery moving forward. So you really cannot compare the two 
and say that the same solutions would have worked for this 
recovery. And then the other question I might ask you is would 
you say that 2007 is a fair starting point for talking about 
where the recovery started on this chart?
    Mr. Bernanke. No, December 2007 is beginning of the 
recession. The recovery began, according to the NBER, in June 
of 2009. I think this has been a unique experience, this last 
crisis. We have never had a housing boom and bust, and such an 
impact on the financial system, as this particular example. The 
financial crisis was extraordinarily severe. We did come very 
close to a total global meltdown. And while people can disagree 
about how much that has held back the recovery, I am sure that 
tight credit, and mortgages, and small businesses, and some 
other areas has been part of that. And I think the monetary 
policy issue is an important one. I mean, mortgage rates in the 
early 1980s were 18 percent, or something like that, and 
letting interest rates come down as the Fed lightened up, as 
inflation came down, was certainly part of what the economy 
bounced back as quickly as it did, and housing was one of the 
areas that bounced back. Obviously there is some comparability 
of all recessions, but there is some important differences as 
well.
    Ms. McCollum. Thank you, Mr. Chairman. Mr. Chairman, in my 
remaining time, I would like to go back to some of the 
discussion that we have had about our interaction with the 
economies on an international market. And we are facing some 
decisions, and I believe that we need a balanced package of 
revenue, spending cuts, and that as a robust discussion about 
how we move forward. But there are many in Congress, some of my 
colleagues who want to implement deep cuts. Going back to some 
of the discussions that you were having with Mr. Tonko, I had 
an interesting meeting with Ford Motor Company a couple years 
ago, and they said if we had an energy plan that would allow 
Ford to determine to go gang busters, whether it is going to be 
electric, whether it is going to be bio fuels, whatever, if we 
have an energy policy that countries like Japan have an energy 
policy, the EU came out deciding to go diesel, that that would 
really help our business sector be part of global competition 
in the way forward with competitives. Could you maybe talk 
about energy policy and a determinist for our country to really 
embrace one, to allow our businesses to kind of move forward 
together? Ford really said, when they knew that they had to 
build diesel, they could build the best diesel car, they were 
totally competitive in Europe, but the lack of us having an 
energy policy for a nation as large as ours really left them up 
in the air.
    Mr. Bernanke. Well, I think companies would like to have 
clarity about what energy sources are going to be used, how the 
government is going to tax or subsidize different types of 
energy. I think the main issues there, frankly, are 
environmental, as much as anything else. Japan, for example, 
has decided to phase out its nuclear power because of the 
safety concerns. The EU decision on diesel, I think, was 
generated primarily by environmental issues, so those are the 
kinds of issues that is an area where government may make some 
decisions about energy policy because certain types of energy 
may be judged or better for the environment.
    Putting that aside, we do need to maintain a role for 
energy markets, and we were talking about this before. There is 
a remarkable increase in the supply of natural gas, for 
example, in the United States, and that is a good thing, as 
long as we can manage it in a safe and environmental, sound 
way.
    Chairman Ryan. Thank you. Mr. Mulvaney?
    Mr. Mulvaney. Thank you, Mr. Chairman. Dr. Bernanke, I want 
to drill down a little bit on something you have talked about 
in general here today, which is Europe, and I want to go into 
some detail on the Central Bank liquidity swaps, what some 
folks call ``the dollar swap agreements.'' Since you have been 
here last time, the agreements with very central banks have 
grown from roughly $2.8 billion to about $103 billion, as of 
last week. And my first question is where does that money come 
from? Is that money that you have existing reserves, is that 
new money, where does that $103 billion come from that we 
participate in those agreements?
    Mr. Bernanke. It becomes both a liability and an asset on 
the Federal Reserve's balance sheet. I mean, it is, in some 
sense, paid for by greater excess reserves in the banking 
system, and on the other side, we have an asset, which is the 
money given in exchange to the European Central Bank.
    Mr. Mulvaney. But to the extent it is ``greater excess 
reserves,'' that would be in laymen's terms, new money. It is 
not money that you took out of a maturing treasury, and then 
moved over to a swap agreement. This is money that you have set 
aside for this purpose.
    Mr. Bernanke. We chose to do it that way because monetary 
policy currently has rates very close to zero, but it would not 
be difficult to sterilize that to a number of different 
methods.
    Mr. Mulvaney. Fair enough. You stated earlier that it is 
your current intention, with all of your maturing securities, 
to reinvest those. As these securities mature, I think 90 
percent of them are less than 90 days; actually, all of them 
are less than 90 days, is your intention to reinvest those in 
domestic securities, reinvest them in swap agreements? What is 
your current intention with that?
    Mr. Bernanke. Well, it is the ECB and the Bank of Japan, 
the two main counter parties who would determine what their 
request is, and then we would decide whether or not to grant 
the request. So it is not our choice; we are not looking to 
invest there. If the swaps run out then that will just be 
extinguished. It will mean a comparable drop in our liabilities 
and in our assets.
    Mr. Mulvaney. Fair enough. And to the extent that part of 
this $103 billion goes over to Europe in the swap agreements, 
comes back within the term of the agreements, and are 
reinvested in domestic securities, does that have an 
expansionary effect on the domestic monetary supply?
    Mr. Bernanke. It does increase the high powered money 
supply a little bit. In this case, it would be about 4 percent, 
3, 4 percent. It does not have, in practice, have much effect 
on money and circulation, only the amount of excess reserves 
that the banks are holding with the Fed; and it does not affect 
interest rates. So what we see it as doing is reducing 
financial stress, strengthening the role of the dollar in 
international markets, improving funding for both U.S and 
foreign banks. We do not see it as having any major 
implications for inflation, for example.
    Mr. Mulvaney. How is that different from what you have just 
described, from what you were trying to accomplish with QE1 and 
QE2?
    Mr. Bernanke. Well, the difference being that with QE1 and 
QE2, first of all, they were much bigger. Secondly, we were 
buying medium to long-term securities on the open market. In 
this case, the money is going via the ECB, who are our counter 
party and take all the risks, are going to help finance the 
dollar assets of European banks, which is then put back, 
basically, in the ECB.
    Mr. Mulvaney. So I understand the first half of the 
transaction, but when the money comes back from Europe, and you 
reinvest it, how is that different from QE1 and QE2?
    Mr. Bernanke. There is no change. This does not involve any 
change in our holdings of securities. We have an asset, which 
is the obligation of the ECB, and we have a liability, which is 
increase in excess reserves. Unless banks are lending those 
reserves out, it is not going to be turning into more money 
supply.
    Mr. Mulvaney. You have got the option, as you exercised in 
2008, to lend this money directly to the European banks. You 
could do it to domestic subsidiaries of European banks. Why are 
you not doing that? Why are you using the swap agreements 
instead of lending directly to domestic subsidiaries of 
overseas banks?
    Mr. Bernanke. Well, if subsidiaries, domestic subsidiaries, 
of overseas banks came to the discount window, by law, we have 
to treat them on an even playing field with U.S.-only banks. We 
do not have any lending right now through the discount window. 
From our perspective, and an economic perspective, from the 
U.S. tax payer's perspective, doing it through a swap is much 
better because it is the responsibility of the ECB to take the 
collateral, to decide on who can qualify for the loan, to 
decide how much is needed to address the money market problems, 
and so on and we are totally protected that way. And we are 
protected, also, in discount window through collateral, but I 
think this is a better way to do it.
    Mr. Mulvaney. Lastly, and very quickly, we established, I 
think, you have got the ability to lend directly to domestic 
subsidiaries, you have the ability to do these swaps, but you 
told my colleague from South Carolina in December that you had 
neither the intention nor the authority to bail out European 
banks. Do you still stand by that statement? You do not have 
the intention or the authority to do that?
    Mr. Bernanke. So in that particular conversation, off-the-
record conversation, I was asked, and I said, well, first of 
all, let me be clear, we have done these swaps, and I explained 
it to him and talked about them; and they had been done well 
before that conversation. And then the question was were we 
going to do additional things, were we going to make loans to 
the IMF, or something like that, and the answer is no.
    Mr. Mulvaney. Thank you, sir.
    Chairman Ryan. Ms. Wasserman Schultz?
    Ms. Wasserman Schultz. Thank you, Mr. Chairman. Chairman 
Bernanke, it is good to see you. Our friends on the other side 
of the aisle, since the debate over the Recovery Act ensued, 
have furiously tried to insist that it had no impact, that it 
created no jobs, and that it was not necessary. According to 
CBO, the Recovery Act lowered the unemployment rate by up to 
1.8 percentage points in calendar year 2010, up to 1.4 
percentage points in 2011, relative to what it would have been 
had Congress not acted at all. Since that time, actually since 
2005, we have created more jobs in last year than we have since 
2005. Since March of 2010, 3.2 million jobs have been created 
in the private sector. So my question to you is had we not 
acted and passed the Recovery Act, would that recovery have 
happened as soon, or even at all? Mr. Flores seemed to be 
pressing the notion that it is only private market investment 
that we should use to help an economy or a recession 
turnaround, are there times when you think public investments, 
like the Recovery Act, is necessary?
    Mr. Bernanke. Well, to answer your question directly, as 
you say, the CBO calculated some effects on GDP and employment. 
Obviously, that requires some assumptions about the 
counterfactual, what would have happened otherwise, but the 
Fed, in our analysis, in our modeling, we are basically pretty 
comfortable with the CBO's conclusions. We think it did have 
some positive effects on growth and employment, so, yes.
    Ms. Wasserman Schultz. Thank you. Then just shifting gears, 
there has also been a pretty raging debate over the course of 
the last year over what is the best way to reduce the deficit? 
Clearly, we all share the goal of reducing the deficit as 
significantly and as quickly as possible. Would you agree, 
though, because our friends on the other side of the aisle 
believe, and have tried to enact, only spending cuts, that they 
deem wasteful, as a strategy towards deficit reduction. Would 
you agree that wasteful spending also exists and is created in 
the tax code?
    Mr. Bernanke. Well, you are pushing me into areas which are 
at the province of Congress. I think the law that I would 
support is the law of arithmetic. So if you believe that the 
government should be doing more and spending more, then you 
should be willing to collect the taxes to do that. And if you 
want to cut taxes and keep revenues low, then you have to find 
the spending cuts that match that. So I think that balance is 
what is critical. People have different visions of what the 
role of government should play, and I do not think I am the one 
to adjudicate that. Clearly, it is a big issue.
    Ms. Wasserman Schultz. I know, and I am not asking you to 
make a political judgment, because that is our job. Would you 
agree with CBO, who has said that tax cuts, like the 2001-2003 
tax cuts for the wealthiest, provide the least bang for our 
buck in terms of job creation and reducing unemployment?
    Mr. Bernanke. I think that is a debatable point. They 
provide some demand from the point of view of putting more 
income in people's pockets. I think the other issue, though, is 
to ask the question of, how do they play into the long run 
efficiency of the tax code. I have not talked about it much 
today, but I think there would be a lot of benefit, without 
much budgetary cost, of thinking about our corporate and 
personal income tax codes, and improving those, reducing 
inefficient exemptions, broadening the base, and so on. So from 
a purely demand side perspective, tax cuts do provide income, 
do provide a source of spending. They may be less in some cases 
than spending on a purely demand side perspective. But you also 
have to think about the role of the tax code in promoting 
growth in the long-term.
    Ms. Wasserman Schultz. And just one other quick question 
before my time expires. Would you say that deficit finance tax 
cuts tend to pay for themselves?
    Mr. Bernanke. No, expect in very rare circumstances. I do 
not think many people, including many good friends of mine on 
both sides of the aisles, would argue that tax cuts fully pay 
for themselves. The question is whether or not they improve 
efficiency and growth, but not whether they fully pay for 
themselves.
    Ms. Wasserman Schultz. Thank you, Mr. Chairman, I yield 
back.
    Chairman Ryan. Thank you. Mr. Young?
    Mr. Young. Thank you, Mr. Chairman. Thank you, Dr Bernanke, 
for visiting with us today. Clearly, this economic recovery has 
been long delayed. It remains fragile. My constituents are 
frustrated, as are so many of us serving them, that we are not 
doing some things here on the fiscal side of the ledger to get 
the economy moving more quickly. 2011, real GDP growth was 1.7 
percent. Private sector forecasts indicate that in the coming 
year, we are going to be at 2.2 percent. That is well below the 
3 percent growth that trends in recent history.
    We have a jobs deficit, 8.6 million jobs lost in the 2008, 
2009 recession, less than a third of those recover. I am really 
concerned about our country tipping back into recession at this 
point, maybe as a result of Europe. We spent some time 
discussing Europe here today, in your interaction with ECB 
officials and others. But what I would like to hear from you, 
doctor, is what preparation our Fed has made for a disorderly 
default by Greece or some of these other countries within 
Europe? I have not heard any specifics there. You have 
indicated that the Fed was prepared to use all the different 
levers that you have, all policy options.
    So that is the general question. But specifically, I would 
also like you to speak to the money market mutual fund market. 
Right after Lehman, there was a bail-out of the money market 
mutual funds, because of panic over so-called breaking the 
buck. That is, the investment income would not cover all 
operating expenses, it would not cover all the investment 
losses, and so there was an intervention by the United States 
into that market. Could that also be something that people 
begin demanding, right here in Washington? We bail out the 
money markets as a result of a disorderly default in Europe?
    Mr. Bernanke. So in terms of preparations, other than 
beyond the swaps, which we just discussed, the Federal Reserve 
has been operating in a supervisory capacity, working with 
other bank supervisors to understand the exposures of banks to 
European nations, to European banks, European economies, trying 
to help them manage the risks, and reduce the risks wherever 
possible. We have been doing that.
    The other set of tools that we have in the event of a 
crisis, which I think, if it was severe enough, would have very 
adverse effects for our economy and our financial system, no 
matter how well prepared we are, is the modified 13-3 
authorities that Dodd-Frank left us. We can, of course, refuse 
the discount window, as we always do, as a backstop liquidity 
provision for banks that come under pressure from funders, and 
if necessary, we could use the 13-3 authority to provide 
additional programs to lend to other institutions that are 
under funding pressure. So we would try to mitigate any 
resulting contagion from the problems in the banking sector, or 
in the economies of Europe.
    We pay close attention to money market mutual funds. Of 
course the SEC is a primary regulator there. They, too, like 
our banks, have been working to reduce their exposure to 
Europe. They have substantially reduces their exposure to the 
Eurozone countries, and all of that is to the good.
    Mr. Young. If I could interject briefly, is there a reason 
why the Financial Stability Oversight Council, created by Dodd-
Frank to monitor systemic risks, has not characterized the 
money market mutual funds as a systemic risk, in this case?
    Mr. Bernanke. Well, I think it did, actually, in July. It 
did point to money market mutual funds as an area that needed 
more work. You mentioned the bailout. The things that were done 
in 2008, such as the Treasury using exchange stabilization fund 
to guarantee money market mutual fund deposits, were outlawed 
by Dodd-Frank, and so those things are not available. So it is 
very important that the money market mutual funds take the 
necessary actions to be safe in the event of some kind of 
problem. As I said, one thing they are doing is reducing the 
risks and their exposures, but the SEC, which has already 
imposed some improvements in the regulation of these funds, is 
considering additional steps and consulting with the Federal 
Reserve, and we are quite sympathetic to the idea that more 
might need to be done in order to ensure that we do not see 
another run like we did in 2008.
    Mr. Young. I will yield back my remaining two seconds. 
Thank you.
    Chairman Ryan. Mr. Rokita?
    Mr. Rokita. Thank you, Mr. Chairman. Mr. Chairman, thanks 
for coming back again. It is good to talk to you. As I said 
yesterday to the other witnesses, it is about this time in the 
day that we always seem to talk to each other. And trying to 
synthesize everything that has been said, I have several 
distinct questions, and if we could be succinct in our answers 
as much as possible. You may be repeating, and if so, just say 
so.
    First of all, this discussion about the inflation, and we 
talked about this the last time we talked via microphone here, 
when you say you are not worried about the increase in 
inflation, my laymen's way of looking at this is that when you 
are effectively printing money for the quantitative easing, and 
the money is piling up, the inflation may be measured by the 
lack of velocity when that money changes hands. And so it is my 
perception that the banks are holding out on the money, to make 
sure the sheet is balanced for the regulators, and for fiscal 
soundness. People might be stuffing money in their mattress 
because they are so uncertain, or putting it somewhere. They 
are not using the money. And are you not worried that when they 
start, when we get this government believing again, for 
example, in a true, free market system, and people start having 
confidence, and the money starts picking up velocity, are you 
not worried that you are not going to be able to stop that 
runaway train?
    Mr. Bernanke. No, we are not concerned. We have two broad 
sets of tools to remove the money at the appropriate time. One 
is simply to sell assets, which extinguishes the money. The 
other is to use a variety of tools we developed to sterilize, 
or essentially remove that, either lock up or remove those 
excess reserves in the banking system. So at the time it comes 
we have to raise interest rates to fight inflation, we have 
made explicit what our inflation goal is now: 2 percent. The 
markets seem very confident in our forecast. The private sector 
forecasters, even surveys of consumers all feel that inflation 
is well controlled and will be well controlled, and we do have 
the tools to withdraw that money.
    Mr. Rokita. Thank you, Chairman. Many baby boomers are 
retiring, we know, 10,000 per day. It traditionally has been 
the strategy to have the more elderly in our society be able to 
rely on the less riskier investments, like bond interest, and 
the kind of things like that. And it seems with the interest 
rate so low that we may be forcing our most vulnerable citizens 
into risky investments. Do you have a comment on that?
    Mr. Bernanke. Well, I did talk about it before. We do take 
that into account. We understand it is an issue for many 
people. That being said, our savers, collectively, have to hold 
all the assets in the economy, and a strong economy produces 
much better returns in general.
    Mr. Rokita. Fair enough. Kevin Warsh was a former Federal 
Reserve governor; I am sure you know him. He wrote an article 
in The Wall Street Journal December 6, 2011, and if you do not 
mind, I will quote from it, and then have you comment on it. 
``However well intentioned, the Federal Reserve's continued 
purchase of long-term treasury securities risk camouflaging the 
country's true cost of capital. Private investors are crowded 
out of the market when the Fed shows up as a large and powerful 
bidder.''
    Mr. Bernanke. Private investors are not being crowded out; 
they have the best access to capital they have had in a long 
time, at low interest rates, bond markets are open. I think the 
people who have trouble are small businesses and others who 
cannot access bank credit to the extent we would like.
    Mr. Rokita. Okay, and then you mentioned Canada earlier on, 
and you indicated that they had less of a recession than we 
did. Why do you think that is?
    Mr. Bernanke. Well, there were several reasons, but the 
main reason, I think, is that they have a small number of large 
banks, which has plusses and minuses, but in this case they had 
probably better regulation. The banks did not get involved in 
sub-prime mortgages and the like. So some of the things that 
created our housing boom and bust in our financial crisis, were 
not as severe there, and that is why they did not have as deep 
a recession.
    Mr. Rokita. Would you personally favor a model more like 
Canada's in terms of quote unquote ``better regulations''?
    Mr. Bernanke. Well, I do not think I want to go to just a 
small numbers of large banks. I think community banks, medium-
sized banks play an important role in our economy, but I think 
they were right in being tougher and making sure that banks 
were not taking excessive risks. Our system is much more 
complicated, and therefore, some of the steps have been taken 
to provide a more systemic or macro-oriented approach, I think, 
is a plus here, and it was less necessary in Canada with a 
slightly less complicated financial system.
    Mr. Rokita. And finally, if you had to choose between one 
of the mandates, which would you rather pursue?
    Chairman Ryan. Please answer the question.
    Mr. Bernanke. You said you had subpoena power, was that 
right? Ultimately, as far as central banks, in the long run, 
they only control inflation, so obviously price stability is a 
critical function of central banks, and that provides a 
healthier economy in the long term. You know, that being said, 
in the short term, I think that some benefits can be had in 
terms of supporting a weak recovery, like the one we have now.
    Mr. Rokita. I thank both the Chairmen.
    Chairman Ryan. Ms. Black, will you yield for just a moment?
    Ms. Black. Sure.
    Chairman Ryan. To tack on to what Mr. Rokita is saying with 
this new statement, we know there were deliberations whether or 
not to have an employment mandate, and that is not in there, 
but you reference specifically 5.2 to 6 percent. In the next 
paragraph, you talk about focusing on deviations. We have an 
incredible, unprecedented expansion of the monetary base. And 
so when velocity turns back on, that is when paying higher 
interest on reserves must occur to sop up the money supply, 
which is your plan. But I would argue that this is made more 
complicated now, less certain from us as to whether that is 
going to occur on time, because what if the employment 
deviation is greater than the inflation deviation at that time? 
And with that kind of monetary base running through a system 
with faster velocity, it is like putting a cruise missile 
through goal posts. The question is are you going to do this? 
Are you going to be able to mop it up on time, now that you 
have, perceptibly, more emphasis based on the employment 
mandate? And that is why these things are made more ambiguous.
    Mr. Bernanke. No, I am sure we can do it. We have the 
technical ability, of course, as always. As always, in any 
situation, there is always the question of whether or not you 
have tightened too early or too late, but that is a judgment 
you always have to make. But in terms of technically, we have 
no difficulty in doing it. I would point out that the Bank of 
England and the ECB, both of which are a single mandate banks, 
currently have larger balance sheets than we do, as a share of 
GDP.
    Chairman Ryan. I hope you are right. Ms. Black?
    Ms. Black. Thank you, Mr. Chairman. Thank you, Mr. 
Bernanke, for being here and giving us so much time. I want to 
turn to your testimony on Page 6, and because I am a visual 
learner, I did a little diagram here that helps me to work 
through what you are saying here, and I think you make some 
very good points. And you start out by saying in that second 
full paragraph that having a large and increasing level of 
government debt relative to national income runs the risk of 
serious economic consequences. So I started out here with 
increased debt, and then I go down here, and what you say is it 
crowds out private capital, and then, therefore, reduces 
productivity growth, which then results in more borrowing, i.e. 
from foreign governments, from abroad, which then increases our 
future income devoted to interest payments, which then comes 
back full circle to increasing the amount of debt. So I think 
that cyclical piece there, in a diagram, really would help my 
constituents to see how this is so important that we take care 
of this issue.
    I am also intrigued by your results that you say here 
impairs the ability of the policy makers to respond effectively 
to future shocks or adverse events, which is our role and our 
responsibility, then ultimately unsustainable deficits increase 
the possibilities of sudden fiscal crisis, which, as we look at 
what has happened in Europe, certainly can happen here. I think 
you have diagrammed that well for us.
    And then finally, my point is that you make here that 
investors lose confidence in the ability of the government to 
manage its fiscal policy. So the fiscal policy piece of that is 
our role and responsibility. Would you agree that the economic 
growth flows from investments and savings in the long term, and 
not borrowing? We can agree with that?
    Mr. Bernanke. Well, sometimes you have savers who want to 
provide funds to invest. If you are a startup firm and you do 
not have enough of your own money to invest, and you have got 
savers over here, then borrowing could be part of the process 
by which the money from the savers goes to the investors. So I 
do not think you want to get rid of borrowing in general. 
Mortgagees help people own homes, et cetera. But certainly, 
from the federal point of view, if borrowing is so large that 
the deficit relative to the size of the economy continues to 
grow, then that feedback loop you were talking about, higher 
interest rates, bigger deficits, and bigger debt are a 
significant concern, and bond markets can bring that forward, 
and anticipation of that can bring that forward. So if your 
question is should the federal government have a long-term plan 
to keep its fiscal situation sustainable and stable, obviously, 
the answer is yes.
    Ms. Black. Okay, so that given, then can you help me with 
how did the policies of the Fed on setting the interest rates 
affect the investors and the savers?
    Mr. Bernanke. Well, my comment a moment ago about investors 
having access to capital, currently, the economy is not in a 
recession, but it is far from full employment. So there are 
plenty of unused resources available to be put to work by 
firms, and we are not seeing any evidence that either monetary 
or fiscal policy is crowding out private sector activity. To 
the contrary, to the extent that we can support growth and 
lower rates for borrowers, we can facilitate investment 
spending. But clearly when the economy is at full employment, 
deficits raise interest rates, and they, therefore, reduce 
investment. Monetary policy, which is too easy, distorts the 
economy and leads to inflation pressures. So clearly it is a 
function of where the economy is.
    Ms. Black. And on the other hand, does a zero interest rate 
encourage savers to save?
    Mr. Bernanke. It may because there is both what economists 
call substitution effects and income effects. You may need to 
save more in order to get the same return.
    Ms. Black. I am not sure that, for me, and maybe I am just 
abnormal, but I am not sure that putting my money into accounts 
where I am going to get a zero return is probably what I want 
to do, especially in an economy that is so uncertain.
    Mr. Bernanke. So let's just think this through.
    Ms. Black. I will put it underneath my mattress.
    Mr. Bernanke. Suppose in order to solve, savers' problems, 
suppose the Fed raised interest rates sharply. That would 
almost certainly throw the economy back into recession. It 
would mean the stock market would decline, it would mean 
returns on other investments would go down, and it might mean 
that increased deficits might lead to more concerns about our 
federal government. So, again, we understand the concern that 
savers have, but we are trying to deal with a bad situation and 
this is one of the tools we have to try to get the economy back 
to full employment.
    Ms. Black. I know my time is out, but I am not advocating a 
sharp increase. I am just saying that there is not an incentive 
there right now if there is zero percent interest. Thank you.
    Chairman Ryan. There is a case for normalizing policy. Mr. 
Langford?
    Mr. Lankford. Chairman, thank you for being here very much, 
and I also appreciate your open communication that you have 
started: more press conferences, more communication, any time 
you get the Federal Reserve ideas and thoughts out there, it is 
obviously helpful, and I know that is part of strategy as well, 
so I appreciate you taking that on, allowing some more sunshine 
into your thoughts and the plans here.
    You mentioned earlier about small business access to 
capital, and that is a concern, and that is something we 
actually talked about the last time that you were here. And the 
fact that you had mentioned bank examiners were becoming more 
conservative in this time of instability, and that is an issue. 
I can tell you in the community banks that I deal with, and I 
represent Oklahoma, community bankers are still very concerned 
with the approach on compliance. Safety and soundness, they 
have no issue with. Compliance becomes a big issue, and 
especially with the number of rules that are coming down now 
and the number of regulations. Let me just give you one 
example.
    The new Volcker was intended to only affect big banks. Our 
community banks have to prove that they are exempt from it, and 
so you have got a bank of 40 people, total employees, going 
through pages, and pages, and pages of documents to prove they 
do not apply to this. It is adding a tremendous amount of 
workload that is not into lending, and that is forcing them to 
second guess. When we talked about this last year, you said 
there have been some modest improvements on that. I would like 
to follow up and say, what improvements can we still expect in 
the coming days? Because the community bankers that I have 
talked to still are not actively lending and are still second 
guessing every bit of risk, not sure if someone is going to 
come in and second guess them.
    Mr. Bernanke. So I will not go into the safety and 
soundness part, because your question was about compliance.
    Mr. Lankford. Right.
    Mr. Bernanke. So it is certainly true that many of the 
provisions of Dodd-Frank are aimed at the biggest banks, and 
the small banks, it is irrelevant to them. And I agree with you 
that they should be spared even the need to demonstrate to 
their small banks, we know they are small banks.
    Mr. Lankford. But they currently do have to demonstrate it.
    Mr. Bernanke. So what we are doing at the Fed, we have a 
sub-committee of two governors, Governor Duke, who was a 
community banker, and Governor Raskin, who was, besides being a 
Senate staff person, was also the head of supervision in 
Maryland; so they are both very knowledgeable about small 
banks. Their job working with staff is to try to first make 
sure that rules that do not apply to small banks are not put in 
force, and that in addition to that we provide as much clarity 
as we can to what the small banks need to worry about and what 
part they can just throw away. To help us on that we have 
created a advisory council of community depository institutions 
that we meet with, and get their feedback. I appreciate your 
point, and I think it is progress that we are moving away from 
the safety and soundness, but we are working on that.
    Mr. Lankford. Do you feel like it is getting better the 
next year, because community bankers that I am talking to are 
getting more frustrated, and to them, it is death by 1,000 
paper counts.
    Mr. Bernanke. Right.
    Mr. Lankford. It is not any one single piece, it is just 
the frequency of how many small pieces are coming at them, and 
with the bank again, 35, 40 people in total employees, they 
cannot keep up with the frequency of things that are coming 
out.
    Mr. Bernanke. We have already begun a process whereby we 
will try to provide instructions and guidance to smaller banks, 
about what part they can just throw away without looking at.
    Mr. Lankford. Okay. That would be very helpful and I will 
continue to press on that. Obviously that is the highest number 
of banks that we have out there, and not the highest systemic 
risk, but they are getting the brunt of a lot of this.
    Separate question for you, and it is a broader issue that I 
personally struggle with in trying to watch across the world. 
We have so much sovereign debt worldwide, and we are continuing 
to add more and more sovereign debt worldwide. At what point do 
we reach the definition of unsustainable worldwide, that we 
reach some kind of limit where we do not have enough liquid 
capital sitting out there for all the borrowing that has 
happened in the sovereigns? Not just us, obviously we are the 
largest of that, but there has to be some point that would be 
defined as unsustainable. There is not enough liquid capital to 
manage this, and we are pulling it out of the markets, and we 
have hit that cycle.
    Mr. Bernanke. Well, at the moment private borrowing is way 
down because of the weakness of the economy; so there is money 
out there. As we get to full employment, then you are going to 
start seeing the crowding out, and that people are going to 
have to pay higher rates, and that is going to have the adverse 
effects I discussed on capital formation and productivity. I do 
think, though, that from our perspective in the United States, 
I think we are the premier economy, we are the safe haven, we 
have a strong interest in maintaining that status, and so I 
guess I would worry less about the global supply of capita and 
just really think about managing our own need for capital, 
going forward.
    Mr. Lankford. I understand that, but there is a limited 
amount of liquid capital at any moment worldwide, and every 
country is competing for it at a higher rate.
    Mr. Bernanke. Well, there is a supply and demand. Interest 
rates will go up until supply equals demand. So the money will 
be there is some sense, but if the rate is so high, that will 
be bad both for the fiscal borrowers and for the private 
sector.
    Mr. Lankford. That would be the definition of 
unsustainable, that we suddenly cannot get the money at the 
rate that we need it for in other countries, and obviously that 
affects us and then the contagion beings. The sense is, are we 
even close to that kind of point? I mean, that is predicting, 
that is crystal ball type stuff, but you have got to be 
watching that as well.
    Mr. Bernanke. Well, again, for countries like the United 
States, and the U.K., and others, rates remain very low, 
government bond rates. Again, the bond market is very forward 
looking; a lot of the bonds of 30 years, right? So a lot of 
this depends on what the bond markets expect the sovereign 
financing needs to be over the next few decades. And so, once 
again, it is really, to some extent, a country by country 
issue. If we can take a strong set of policies to ensure the 
sustainability of our fiscal situation, I am sure that the 
funding for the United States will be there.
    Mr. Lankford. Okay, thank you. I yield back.
    Chairman Ryan. Queue is closed, last question? Mr. 
Huelskamp.
    Mr. Huelskamp. Thank you, Mr. Chairman, and Dr. Bernanke, I 
appreciate your time today. I remember our discussion last 
year. And one thing I asked my staff in the last few days was 
to read through transcripts of the 2006 Federal Open Market 
Committee meetings, and looking at those comments and the 
transcripts, is it fair to say that the Fed did not see the 
severity of the housing crisis coming in 2006?
    Mr. Bernanke. I think the mistake was a little different 
than that. House prices were already falling in 2006, and we 
were aware of that. What we did not know was what the impact 
going to be, and in particular, we did not have a sufficient 
understanding of how the falling house prices, the resulting 
effects on mortgage quality and so on, would affect the 
financial system. That was the linkage that we did not see in 
2006. Obviously, we did not see the crisis coming, but we 
certainly were aware in 2006 that the housing market was 
cooling, and we talked about that quite frequently, and I 
talked about it in testimony.
    I have to emphasize that we have learned a lot of lessons 
from that experience and we have radically changed the way we 
do our supervision, and also, in particular, we now focus very 
much on the interactions between different parts of the system, 
looking at it from a systemic point of view, not just from 
individual institutions. So while I can never promise that we 
will not have another financial crisis, I think we have made a 
lot of progress in our ability to monitor those situations.
    Mr. Huelskamp. And Mr. Bernanke, looking at the economic 
projections from last January, if I had the right ones here, 
you projected growth of 3.4 to 3.9 percent for GDP for this 
past year. It came in at 1.7. What happened, why were you so 
far off, and what kind of expectations do you have, or will you 
potentially be that far off in your projections for the coming 
year?
    Mr. Bernanke. I would like to look at those numbers. I do 
not recall what our projection was, but I would say two classes 
of things. One is that there was some developments that were 
impossible to anticipate, like the tsunami in Japan, and 
simplications for global supply chains, and the like, or the 
effects of the Arab spring on oil prices, a few things like 
that. I think, more generally, it is fair to say that since the 
recession ended that we have, until recently at least, been too 
optimistic about the pace of recovery, and as I go back and 
look at the reasons for it, I think the two main areas I would 
point to, one is the housing sector, which I have talked about 
today, which is not recovered the way we had hoped and 
expected, and continued pressure in financial markets, part of 
which is related to Europe, which, again, we did not fully 
anticipate in 2010.
    Mr. Huelskamp. But you believe those factors were the 
primary reasons you were about a 100% over the actual growth we 
achieved this last year, which was an anemic 1.7 percent. 
Again, these are your figures: 3.4 to 3.9 percent was the 
range. You projected for 2012, 3.5 to 4.4 percent. Now you are 
back, I guess, more reality, you projected roughly 2 percent 
growth. But pretty far off, and pretty rosy, and we sat in this 
room here and thought we had some difficulties. I am just 
concerned with how comfortable and confident you are on how 
long we will stick at the two point whatever percent growth.
    Mr. Bernanke. Well, you know, macroeconomic forecasting is 
very difficult. We do not pretend that we have the crystal 
ball. What we try to do is set our projections at a level where 
we think the chances of being too optimistic are roughly equal 
to the chances of being too pessimistic. So we will see what 
happens.
    Mr. Huelskamp. Well, I understand. That is the range.
    Mr. Bernanke. We could be better than we expect.
    Mr. Huelskamp.: Well, I would hope it would be, but seeing 
those figures that have been talked about earlier, how we have 
such an anemic recovery, the worse one since the war. We are 
13.7 jobs short of where we would be on average recovery. From 
your estimates, I have not seen that coming out that is getting 
that flavor for that.
    One other thing I want to mention about the transcripts, 
and others have talked about thanking you for being a big 
supporter of transparency, but is there a reason you have to 
wait five years to release transcripts of your meeting, for 
transparency purposes?
    Mr. Bernanke. Well, that was the agreement that was made 
with Congress. I think it was a reasonable compromise. No other 
central bank, virtually, releases transcripts ever. The Bank of 
Japan does after a 10 year lag. As far as we are aware, no 
other government agency releases the transcripts of 
confidential meetings. It adds a real cost to our deliberation 
process. When the transcripts began to be released, the 
meetings became much more scripted, much less free interchange. 
So I think it would inhibit the discussion process and the free 
exchange of ideas. Five years seems just to be an appropriate 
compromise. It certainly satisfies the needs of history, and 
again, it is a more aggressive transparent policy than other 
agencies or other central banks.
    Mr. Huelskamp. Okay, and Mr. Chairman, if I might, 15 more 
seconds, just to close on that comment.
    Chairman Ryan. Go fast.
    Mr. Huelskamp. Thank you. Doctor, I appreciate this, but 
this is America, and we are responsible for fiscal policy, and 
the impacts, particularly in proposals you have made on housing 
policy, suggest an incredibly bigger role than in other 
countries. So I appreciate the transparency; I wish we would 
step that up so the American people feel more comfortable with 
decisions that have been made. So thank you, Mr. Chairman.
    Chairman Ryan. Thank you. Chairman, you have indulged us 
for two and half hours. I appreciate your patience, and the 
hearing is adjourned. Thank you.
    [Questions submitted for the record from Mr. Honda follow:]

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

                         unemployment benefits
    Mr. Chairman, I was reading through your comments from the press 
conference on January 26th following the FOMC meeting, and your 
thoughts on the long-term unemployed particularly caught my eye. To 
quote from your remarks,
    ``We're concerned that the large amount of long-term unemployment 
may be causing some workers to lose skills or lose labor force 
attachment, which at least for awhile will also likely increase the so-
called natural rate or sustainable rate of unemployment.''
    Mr. Chairman, I'm also very concerned about the long-term 
unemployed, and making sure we get these people back in the workforce 
as soon as possible.
    With this in mind, can you comment on a recent Congressional 
proposal that would pare back unemployment benefits from 99 weeks to 54 
or less weeks? This bill would cut off unemployment benefits for more 
than 3 million Americans--more than half a million Californians.
    Would this hamper demand for goods and services, and stifle our 
economic recovery?
               volcker rule & venture capital investments
    I'd like your comments on the well-known proposed Volcker Rule. I 
am an ardent supporter of the Dodd-Frank Act and the Volcker Rule, as 
intended. The intent of Congress was to limit the ability of commercial 
banking institutions and their affiliated companies to engage in risky 
trading unrelated to customer needs. However, it was NOT intended to 
restrict properly conducted venture capital investments.
    Throughout the Dodd-Frank legislation, Congress addressed private 
equity funds and venture capital funds separately. This consistency, in 
my belief, should remain in the Volcker Rule.
    Congress intended to keep this consistency, as confirmed by a 
colloquy on the floor of the Senate, when Senator Dodd responded to an 
inquiry from Barbara Boxer specifically on this issue. The text of this 
exchange is below:
From proceedings in the United States Senate on July 15, 2010
    Mrs. Boxer. Mr. President, I wish to ask my good friend, the 
Senator from Connecticut and the chairman of the Banking Committee, to 
engage in a brief discussion relating to the final Volcker rule and the 
role of venture capital in creating jobs and growing companies.
    I strongly support the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, including a strong and effective Volcker rule, which is 
found in section 619 of the legislation.
    I know the chairman recognizes, as we all do, the crucial and 
unique role that venture capital plays in spurring innovation, creating 
jobs and growing companies. I also know the authors of this bill do not 
intend the Volcker rule to cut off sources of capital for America's 
technology startups, particularly in this difficult economy. Section 
619 explicitly exempts small business investment companies from the 
rule, and because these companies often provide venture capital 
investment, I believe the intent of the rule is not to harm venture 
capital investment.
    Is my understanding correct?
    Mr. Dodd. Mr. President, I thank my friend, the Senator from 
California, for her support and for all the work we have done together 
on this important issue. Her understanding is correct.
    The purpose of the Volcker rule is to eliminate excessive risk 
taking activities by banks and their affiliates while at the same time 
preserving safe, sound investment activities that serve the public 
interest. It prohibits proprietary trading and limits bank investment 
in hedge funds and private equity for that reason. But properly 
conducted venture capital investment will not cause the harms at which 
the Volcker rule is directed. In the event that properly conducted 
venture capital investment is excessively restricted by the provisions 
of section 619, I would expect the appropriate Federal regulators to 
exempt it using their authority under section 619(J).

    Chairman Bernanke, could you comment on the potential affects that 
an overly expansive Volcker Rule on sound investments?

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

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    [Whereupon, at 12:33 p.m., the Committee was adjourned.]

                                  
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