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

                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY



                               BEFORE THE


                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION


                           FEBRUARY 29, 2012


       Printed for the use of the Committee on Financial Services

                           Serial No. 112-103



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                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT J. DOLD, Illinois

           James H. Clinger, Staff Director and Chief Counsel

                            C O N T E N T S

Hearing held on:
    February 29, 2012............................................     1
    February 29, 2012............................................    53

                      Wednesday, February 29, 2012

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


Prepared statements:
    Paul, Hon. Ron...............................................    54
    Bernanke, Hon. Ben S.........................................    56

              Additional Material Submitted for the Record

Bernanke, Hon. Ben S.:
    Monetary Policy Report to the Congress, dated February 29, 
      2012.......................................................    65
    Written responses to questions submitted by Chairman Bachus..   129
    Written responses to questions submitted by Representative 
      Fitzpatrick................................................   131
    Written responses to questions submitted by Representative 
      Luetkemeyer................................................   134
    Written responses to questions submitted by Representative 
      Schweikert.................................................   136

                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY


                      Wednesday, February 29, 2012

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the committee] presiding.
    Members present: Representatives Bachus, Hensarling, Royce, 
Paul, Biggert, Capito, Garrett, Neugebauer, McHenry, McCotter, 
Pearce, Posey, Fitzpatrick, Luetkemeyer, Huizenga, Duffy, 
Hayworth, Renacci, Hurt, Dold, Schweikert, Grimm, Canseco, 
Stivers, Fincher; Frank, Waters, Maloney, Velazquez, Watt, 
Ackerman, Sherman, Meeks, Capuano, Hinojosa, Clay, McCarthy of 
New York, Baca, Lynch, Miller of North Carolina, Scott, Green, 
Cleaver, Ellison, Perlmutter, Donnelly, Carson, Himes, Peters, 
and Carney.
    Chairman Bachus. This hearing will come to order. We meet 
today to receive the semiannual report to Congress by the 
Chairman of the Board of Governors of the Federal Reserve 
System (the Fed) on the conduct of monetary policy and the 
state of the economy. Pursuant to committee rule 3(f)(2), 
opening statements are limited to the chair and ranking 
minority member of the full committee and the chair and ranking 
minority member of the Subcommittee on Domestic Monetary Policy 
and Technology for a period of 8 minutes on each side.
    Without objection, all Members' written statements will be 
made a part of the record. I recognize myself for 5 minutes for 
an opening statement.
    In my opening statement today, I am going to avoid making 
any predictions about future events since I do not have a 
crystal ball. Nor do you, Mr. Chairman. Instead, I am going to 
address two subjects: the need for long-term entitlement 
reform; and the Federal Reserve's dual mandate.
    For the last 3 years, we have operated in a low interest 
rate environment, which has artificially lowered the cost of 
our debt servicing. This temporary respite will not last 
    Chairman Bernanke, in each of your past appearances before 
this committee, you and I have discussed the dangers posed to 
the U.S. economy by record levels of debt and deficits and the 
critical need for entitlement reform.
    Let's have order in the committee, and respect from all of 
the Members, and that will go for the staff, as well.
    We have discussed how long-term restructuring of our 
entitlement programs will have clear benefits for our economy 
today and will give our country a greater chance of success in 
the long term. Fortunately, and sadly, too few in Washington 
appear to be listening to this discussion. Your appearance here 
today is yet another opportunity for us to have this important 
dialogue, and it is my hope that Congress and the White House 
will join together and address entitlement reform. And as we 
have discussed, this is not something the Federal Reserve can 
do. You have kept interest rates low. It has given us an 
opportunity, but it is not an opportunity that will last 
    Your appearance is also an opportunity for us to have 
another important dialogue, this one on the Federal Reserve's 
dual mandate. You discuss this in your opening statement. The 
Federal Reserve's conduct of monetary policy through the 
manipulation of interest rates and its control of the money 
supply implies a certain level of government management of the 
economy. While this makes some Americans uncomfortable, and 
makes me uncomfortable at times, there is a general recognition 
of the need for an independent central bank to set monetary 
policy. Yet, if one closely examines the Federal Reserve's dual 
mandate--price stability; and maximum employment--it quickly 
becomes apparent that while the first part of that mandate 
involves monetary policy, the second is largely a function of 
economic policy. You acknowledge this, Chairman Bernanke, in 
your testimony for today's hearing when you state that ``while 
maximum employment stands on an equal footing with price 
stability as an objective of monetary policy, the maximum level 
of employment in an economy is largely determined by 
nonmonetary factors that affect the structure and dynamics of 
the labor market.
    ``By giving the Federal Reserve a mandate that includes 
maximum employment, it is fair to ask whether we have 
surrendered too much control over the economy to a government 
agency and whether a mandate that is more centrally focused on 
monetary policy would be a better approach.''
    In other words, the Federal Reserve would continue to deal 
with monetary policy, but would not have responsibility or the 
burden, and really you don't have the power, to control 
economic events. Indeed, for the first 65 years of its 
existence, the Federal Reserve did not operate under a dual 
mandate. It was only in 1977 that Congress passed a law 
requiring the Federal Reserve to promote both maximum 
employment and price stability. It may therefore be appropriate 
for Congress to revisit the dual mandate with an eye towards 
refocusing the Fed on its core mission of long-term price 
stability and other matters that constitute monetary policy. 
The Congress, on the other hand, could focus on employment, 
because it is and continues to be our responsibility to focus 
on jobs.
    Chairman Bernanke, I know all of us look forward to your 
testimony. I now recognize the ranking member, Mr. Frank.
    Mr. Frank. Thank you, Mr. Chairman. I will accept your 
invitation for a civil debate on these subjects. Let me begin 
with the deficit reduction, which I agree is a great 
requirement, but I disagree with this focus which you reflect 
on entitlement reform. Before I reduce Social Security payments 
to elderly people--particularly, for example, those who want to 
reduce the cost-of-living increase so that 82-year old women 
living on a fairly modest income would get less of a 
compensation for inflation, particularly since healthcare costs 
are a major cost for them and go up more than regular 
inflation--I think we should withdraw from Afghanistan.
    I support the President's decision to withdraw troops from 
Iraq, and I know that many on the Republican side have been 
critical of that. We do have to reduce spending. But we spend 
far more as a favor to much of the rest of the world on the 
military than we need to. And before I will impose costs on 
elderly Americans, I should add, I regard the enactment of 
Social Security and Medicare as two of the great 
accomplishments of this country in the 20th Century. They were 
opposed on partisan grounds, both of them, when they came. Yes, 
there are some areas where there can be greater efficiencies, 
but the notion that that is the major place you get savings, 
when we continue to spend 5.4 percent or more or less, but 
around 5 percent of our gross domestic product on the military 
while our NATO allies spend 1.7 percent and get the benefit of 
an enormous subsidy from us, makes no sense. When people are 
critical of the President's proposal to begin to withdraw from 
Afghanistan, I think it ought to be done more quickly, and then 
tell me that they want to cut the deficit and don't want to 
raise taxes, I fear for Social Security and Medicare because to 
do that would require cuts in those programs that go far beyond 
efficiency or reference to sort of reduce what goes to people 
in the upper-income brackets.
    I particularly welcome this debate on the dual mandate 
because I think there is an illogic in the way it was just 
stated. It is true that the Federal Reserve has more direct 
impact control of the monetary policy than it does over 
employment, but the point is that monetary policy, the level of 
interest rates, has an effect on employment. The notion that 
they are unconnected, obviously, isn't the case. The chairman 
didn't say that, but I think that is the implication of saying 
that the Federal Reserve shouldn't be dealing with employment.
    In fact, let me give an example. We have had a debate about 
what should have been done because of mortgages being given 
that shouldn't have been given. One argument has been that the 
Federal Reserve should have shut down the whole economy to some 
extent by raising interest rates, that it should have deflated 
the bubble by raising interest rates, with a consequent 
negative effect on employment as well as other things. Many of 
us believe instead that the Federal Reserve under Mr. 
Bernanke's predecessor--not him--should have used the authority 
this Congress gave him in 1994 to prevent the bad mortgages; 
that is, that there should have been more targeted efforts to 
deal with this rather than deflate the economy as a whole as a 
way of dealing with that problem.
    We do have a serious employment problem. It is to Mr. 
Bernanke's credit that he has taken seriously this dual 
mandate, and this shouldn't be a partisan issue. I think people 
may sometimes forget that Mr. Bernanke, whose work in this job 
I greatly admire, was one of the highest ranking appointees on 
economic matters by President George W. Bush. He was Chair, I 
believe, of the Council of Economic Advisors. It was President 
Bush who appointed him to the Federal Reserve. He is an example 
of bipartisanship, and what I find is that while a lot of my 
colleagues like bipartisanship in principle, they just have 
never found an example of it that they want to tolerate. Mr. 
Bernanke's concern for inflation and employment is a very good 
one, and the notion that we should say okay to the Federal 
Reserve, you don't pay attention to employment, we will handle 
that, and you should simply try to prevent inflation invites 
them to impose an interest rates regime which would be 
unfortunate. And by the way, I would contrast the Federal 
Reserve under our dual mandate with the European Central Bank 
until recently with their unitary mandate of just inflation. I 
think, frankly, that the Federal Reserve's record in trying to 
deal with the balanced economy has been a better one, and to 
some extent the European Central Bank has improved partly 
because they have almost explicitly been following the model of 
the U.S. Federal Reserve, which has cooperated with them.
    So yes, I think we should reduce the deficit, but to talk 
about doing that by cutting Social Security, and Medicare to 
the exclusion, in fact, many of my colleagues want to spend 
even more on the military as this great gift to the rest of the 
world so they don't have to spend on their own, and the notion 
that the Federal Reserve, a very powerful economic entity, 
should set interest rates with no regard for their impact on 
employment both seem to be wrong, and I think the country would 
benefit from that kind of debate.
    Chairman Bachus. I thank the gentleman. And let me simply 
say that I think we could address both of them. I don't think 
that they are mutually exclusive, and as you know, I have a son 
who served in the Marines, and--
    Mr. Frank. Mr. Chairman, if we are getting in extra things, 
I would simply respond to what you said, and you are a 
representative of a large group that talks about entitlements 
and the military only comes up as an afterthought.
    Chairman Bachus. I think it needs to be a grand bargain. We 
discussed that, and I think we need to agree on that. 
Everything ought to be on the table but without entitlement 
reforms we won't get--
    Mr. Frank. Mr. Chairman, are we going to continue this 
debate after our 5 minutes?
    Chairman Bachus. All right, at this time Mr. Paul, your 
thorn in the flesh, is recognized for 3 minutes.
    Dr. Paul. Thank you, Mr. Chairman, and welcome, Chairman 
Bernanke. I guess over the last 30 or 40 years I have 
criticized the Fed on occasion, but the Congress deserves some 
criticism, too. The Federal Reserve is a creature of the 
Congress, and if we don't know what the Fed is doing, we have 
the authority and we certainly have the authority to pursue a 
lot more oversight, which I would like to see.
    So although the Fed is on the receiving end, and I think 
rightfully so when you look at the record, the Fed has been 
around for 99 years, a few years before you took it over, and 
99 percent, 98 percent of the dollar value is gone from the 
1913 dollar. So that is not really a very good record. And I 
think what we are witnessing today is the end stages of a grand 
experiment, a philosophical experiment on total fiat money. 
Yes, they have been debasing currencies for hundreds, if not 
thousands of years, and it always ends badly. They always 
return to market-based money, which is commodity money, gold 
and silver. But this experiment is something different than we 
have ever had before, and it started in 1971, where we were 
actually given an opportunity in many ways to be the issuer of 
the fiat currency, and we had way too many benefits from that 
than people realized.
    But it has gone on for 40 years and people keep arguing 
from the other side of this argument that it is working, it is 
doing well, and yet, from my viewpoint and the viewpoint of the 
free-market economists, all it is doing is building a bigger 
and bigger bubble. And the free-market economists were the ones 
who predicted the NASDAQ bubble, the housing bubbles, but we 
never hear from the Keynesian liberal economists and the 
central bankers saying watch out, there is a bubble out there. 
There is too much credit, too many problems there. There is a 
housing bubble. We have to deal with it. Usually, we get 
reassurance from the Fed on that.
    But I believe that there is a logical reason for this, 
because the Federal Reserve is given a responsibility to 
protect the value of the dollar. That is what stable prices are 
all about. We don't even have a definition of a dollar. We ask 
about the definition of a dollar; oh, it is whatever it buys. 
Every single day it buys less than the next day. To me, it is 
sort of like building an economy and having economic planning, 
like a builder had a yardstick that changed its value every 
single day. Just think of the kind of building you would have. 
This is why we have this imbalance in our economic system.
    But it was a system designed to pyramid debt. We have a 
debt-based system. The more debt we have and the more debt that 
the Federal Reserve buys, the more currency they can print, and 
they monetize this debt. And no wonder we are in a debt crisis. 
It is worldwide. I think it is something we have never 
experienced before. And I think the conclusion would be a 
vindication either for sound money, or if you win the argument 
and say yes, we are great managers, we know how to do it, we 
want the credit for the good times, and we want the credit for 
getting us out of those good times, I think within a few years, 
we are going to know. Of course, I am betting that the market 
is smarter, commodity money is smarter, nobody is smart enough 
to have central economic planning. So I am anxiously waiting 
for this day, for the conclusion, because reforms have to come. 
They are already talking about--when you see Robert Zoellick 
talking about monetary reforms, and talking about gold, the 
time has come for serious discussion on monetary reform.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you, Dr. Paul, for that statement. 
And at this time, the gentleman from North Carolina, Mr. Watt, 
is recognized for 3 minutes.
    Mr. Watt. Thank you, Mr. Chairman, and I appreciate the 
opportunity to substitute for my friend, William Lacy Clay, the 
ranking member of the subcommittee, because he is unable to be 
here due to a conflict.
    And I am glad to see my friend President Paul back from the 
campaign trail. This seems to me like deja vu all over again 
since I was the chairman of the Monetary Policy Subcommittee 
and he was the ranking member, and I got to go back to back 
with him quite often.
    Since I am substituting, I think I can do something kind of 
out of the ordinary today, and that is praise the work of my 
good friend, Chairman Bernanke, for doing his job and really 
not bowing to the political pressure of either the right or 
left, or political pressure of Republicans and Democrats, since 
the Federal Reserve is supposed to be free of all of those 
influences. I just think he has done a magnificent job, and the 
Fed has done a magnificent job of navigating us through some 
very, very difficult times, even as we will, I am sure, 
experience in today's sharing in the midst of criticisms about 
the dual mandate, which the chairman has already raised, which 
I am sure the Federal Reserve certainly can't do anything 
about. We gave them that mandate. They can't refuse to do it. 
Criticisms about inflation-fighting policy, steps required for 
recovery of the economy, interest rate policies, quantitative 
easing, transparency, involvement with the European Union and 
the rest of the world, involvement with the IMF, there is going 
to be plenty of criticism to go around today, and so I am 
pleased to have this opportunity to say thank you on behalf of 
myself, and hopefully some other members of the committee, and 
certainly members of private enterprise who believe that the 
Fed has stayed steady, and followed a course of action that has 
really saved our economy rather than leading us into the kind 
of defaults and problems that we could have experienced in 
these turbulent economic times.
    So I say that, and I yield back, Mr. Chairman.
    Chairman Bachus. Thank you, Mr. Watt. I think you gave a 
very thoughtful statement, and I think Mr. Clay would approve 
of your statement.
    I will pick up on what Mr. Watt said, and thank you for 
being here, Chairman Bernanke. You do have a difficult job. You 
have tremendous challenges that face the country.
    Chairman Bernanke has informed us that he will need to 
leave at 1 p.m., and it is a gracious accommodation to be here 
for that length of time, so the Chair will strictly enforce the 
5-minute rule.
    Without objection, Chairman Bernanke, your written 
statement will be made a part of the record, and you will now 
be recognized for a summary of your testimony.


    Mr. Bernanke. Thank you. Chairman Bachus, Ranking Member 
Frank, and other members of the committee, I am pleased to 
present the Federal Reserve's semiannual Monetary Policy Report 
to the Congress. Let me begin with the discussion of current 
economic conditions and the outlook, and then I will turn to 
monetary policy.
    The recovery of the U.S. economy continues, but the pace of 
expansion has been uneven and modest by historical standards. 
After minimal gains in the first half of last year, real GDP 
increased that a 2\1/4\ percent annual rate in the second half. 
The limited information available for 2012 is consistent with 
growth proceeding, in coming quarters, at a pace close to or 
somewhat above the pace that was registered during the second 
half of last year.
    We have seen some positive developments in the labor 
market. Private payroll employment has increased by 165,000 
jobs per month on average since the middle of last year and 
nearly 260,000 new private sector jobs were added in January. 
The job gains in recent months have been relatively widespread 
across industries. In the public sector, by contrast, layoffs 
by State and local governments have continued. The unemployment 
rate hovered around 9 percent for much of last year, but has 
moved down appreciably since September, reaching 8.3 percent in 
January. New claims for unemployment insurance benefits have 
also moderated.
    The decline in the unemployment rate over the past year has 
been somewhat more rapid than might have been expected given 
that the economy appears to have been growing during that 
timeframe at or below its longer-term trend; continued 
improvement in the job market is likely to require stronger 
growth in final demand and production. And notwithstanding the 
better recent data, the job market does remain far from normal. 
The unemployment rate remains elevated, long-term unemployment 
is still near record levels, and the number of persons working 
part time for economic reasons is very high.
    Household spending advanced moderately in the second half 
of last year, boosted by a fourth quarter surge in motor 
vehicle purchases that was facilitated by an easing of 
constraints on supply related to the earthquake in Japan. 
However, the fundamentals that support spending continue to be 
weak. Real household income and wealth were flat in 2011, and 
access to credit remains restricted for many potential 
borrowers. Consumer sentiment, which dropped sharply last 
summer, has since rebounded but remains relatively low.
    In the housing sector, affordability has increased 
dramatically as a result of decline in house prices and 
historically low interest rates on conventional mortgages. 
Unfortunately, many potential buyers lack the downpayment and 
credit history required to qualify for loans. Others are 
reluctant to buy a house now because of concerns about their 
income, employment prospects, and the future path of house 
prices. On the supply side of the market, about 30 percent of 
recent home sales have consisted of foreclosed or distressed 
properties, and home vacancy rates remain high, putting 
downward pressure on house prices. More positive signs include 
a pickup in construction in the multifamily sector and recent 
increases in home builder sentiment.
    Manufacturing production has increased 15 percent since the 
trough of the recession and has posted solid gains since the 
middle of last year, supported by the recovery in motor vehicle 
supply chains and ongoing increases in business investment and 
exports. Real business spending for investment of equipment and 
software rose at an annual rate of about 12 percent over the 
second half of 2011, a bit faster than the first half of the 
year. But real export growth, while remaining solid, slowed 
somewhat over the same period as foreign economic activity 
decelerated, particularly in Europe. The Members of the Board 
and the Presidents of the Federal Reserve Banks recently 
projected that economic activity in 2012 will expand at or 
somewhat above the pace registered in the second half of last 
year. Specifically, their projections for growth in real GDP 
this year, provided in conjunction with the January meeting of 
the FOMC, have a central tendency of 2.2 to 2.7 percent. These 
forecasts were considerably lower than the projections they 
made last June.
    A number of factors have played a role in this 
reassessment. First, the annual revisions to the national 
income and product accounts released last summer indicated the 
recovery had been somewhat slower than previously estimated. In 
addition, fiscal and financial strains in Europe have weighed 
on financial conditions and global economic growth, and 
problems in U.S. housing and mortgage markets have continued to 
hold down not only construction and related industries, but 
also household wealth and confidence. Looking beyond 2012, FOMC 
participants expect that economic activity will pick up 
gradually as these headwinds fade, supported by a continuation 
of the highly accommodative stance for monetary policy.
    With output growth in 2012 projected to remain close to its 
longer run trend, participants did not anticipate further 
substantial declines in the unemployment rate over the course 
of the year. Looking beyond this year, FOMC participants expect 
the unemployment rate to continue to edge down only slowly 
towards levels consistent with the committee's statutory 
mandate. In light of the somewhat different signals received 
recently from the labor market than from indicators of final 
demand and production, however, it will be especially important 
to evaluate incoming information to assess the underlying pace 
of the economic recovery.
    At our January meeting, participants agreed that strains in 
global financial markets posed significant downside risk to the 
economic outlook. Investors' concerns about fiscal deficit and 
the level of government debt in a number of European countries 
have led to substantial increases in sovereign borrowing costs, 
stresses in the European banking system, and associated 
reductions in the availability of credit, and economic activity 
in the euro area.
    To help prevent strains in Europe from spilling over to the 
U.S. economy, the Federal Reserve in November agreed to extend 
and to modify the terms of its swap lines with other major 
central banks, and it continues to monitor the European 
exposures of U.S. financial institutions. A number of 
constructive policy actions have been taken of late in Europe, 
including the European Central Bank's program to extend 3-year 
collateralized loans to European financial institutions. Most 
recently, European policymakers agreed on a new package of 
measures for Greece, which combines additional official sector 
loans with a sizeable reduction of Greek debt held by the 
private sector. However, critical fiscal and financial 
challenges remain for the euro zone, the resolution of which 
will require concerted action on the part of European 
authorities. Further steps will also be required to boost 
growth and competitiveness in a number of countries. We are in 
frequent contact with our counterparts in Europe and will 
continue to follow the situation closely.
    As I discussed in my July testimony, inflation picked up 
during the early part of 2011. A surge in the price of oil and 
other commodities along with supply disruptions associated with 
the disaster in Japan that put upward pressure on motor vehicle 
prices pushed overall inflation to an annual rate of more than 
3 percent over the first half of last year. As we had expected, 
however, these factors proved transitory and inflation 
moderated to an annual rate of 1\1/2\ percent during the second 
half of the year, close to its average pace in the preceding 2 
years. In the projections made in January, the Committee 
anticipated that over coming quarters, inflation will run at or 
below the 2 percent level we judge most consistent with our 
statutory mandate. Specifically, the central tendency of 
participants' forecast for inflation in 2012 ranged from 1.4 to 
1.8 percent, about unchanged from the projections made last 
June. Looking further ahead, participants expected the subdued 
level of inflation to persist beyond this year. Since these 
projections were made, gasoline prices have moved up, primarily 
reflecting higher global oil prices, a development that is 
likely to push up inflation temporarily while reducing 
consumers' purchasing power. We will continue to monitor energy 
markets carefully. Longer-term inflation expectations as 
measured by surveys and financial market indicators appear 
consistent with the view that inflation will remain subdued.
    Against this backdrop of restrained growth, persistent 
downside risk to the outlook for real activity, and moderating 
inflation, the Committee took several steps to provide 
additional monetary accommodation during the second half of 
2011 and in early 2012. These steps included changes to the 
forward rate guidance included in the Committee's post-meeting 
statements and adjustments to the Federal Reserve's holdings of 
Treasury and agency securities. The target range for the 
Federal funds rate remains at 0 to \1/4\ percent, and the 
forward guidance language in the FOMC policy statement provides 
an indication of how long the Committee expects that target 
range to be appropriate.
    In August, the Committee clarified the forward guidance 
language, noting that economic conditions, including low rates 
of resource utilization and the subdued outlook for inflation 
over the medium run, were likely to warrant exceptionally low 
levels for Federal funds rate at least through the middle of 
2013. By providing a longer time horizon than had been 
previously expected by the public, the statement tended to put 
downward pressure on longer-term interest rates.
    At the January 2012 FOMC meeting, the Committee amended the 
forward guidance, further extending the horizon over which it 
expects economic conditions to warrant exceptionally low levels 
of the Federal funds rate to at least through late 2014.
    In addition to the adjustments made to the forward 
guidance, the Committee modified its policies regarding the 
Federal Reserve's holding of securities. In September, the 
Committee put in place a maturity extension program that 
combines purchases of longer-term Treasury securities with 
sales of shorter-term Treasury securities. The objective of 
this program is to lengthen the average maturity of our 
securities holdings without generating a significant change in 
the size of our balance sheet. Removing longer-term securities 
from the market should put downward pressure on longer-term 
interest rates and help make financial conditions more 
supportive of economic growth than they otherwise would have 
been. To help support conditions in the mortgage markets, the 
Committee also decided at a September meeting to reinvest 
principal received from its holdings of agency debt and agency 
MBS in agency MBS, rather than continuing to reinvest those 
proceeds in longer-term Treasury securities as had been the 
practice since August 2010. The Committee reviews the size and 
composition of its security holdings regularly and is prepared 
to adjust those holdings as appropriate to promote a stronger 
economic recovery in the context of price stability.
    Before concluding, I would like to say a few words about 
the statement of longer-run goals and policy strategy that the 
FOMC issued at the conclusion of its January meeting. The 
statement reaffirms our commitment to our statutory objectives 
given to us by the Congress of price stability and maximum 
employment. Its purpose is to provide additional transparency 
and increase the effectiveness on monetary policy. The 
statement does not imply a change in how the Committee conducts 
    Transparency is enhanced by providing greater specificity 
about our objectives. Because the inflation rate over the 
longer run is determined primarily by monetary policy, it is 
feasible and appropriate for the Committee to set a numerical 
goal for that key variable. The FOMC judges that an inflation 
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 its statutory mandate. 
While maximum employment stands on an equal footing with price 
stability as an objective of monetary policy, the maximum level 
of employment in an economy is largely determined by non-
monetary factors that affect the structure and dynamics of the 
labor market. It is therefore not feasible for any central bank 
to specify a fixed goal for the longer-run level of employment. 
However, the Committee can estimate the level of maximum 
employment and use that estimate to inform its policy 
decisions. In our most recent projections, in January for 
example, FOMC participants' estimates of the longer-run normal 
rate of unemployment had a central tendency of 5.2 to 6.0 
percent. As I noted a moment ago, the level of maximum 
employment in an economy is subject to change. For instance, it 
can be affected by shifts in the structure of the economy and 
by a range of economic policies. If at some stage the Committee 
estimated that the maximum level of employment had increased, 
for example, we would adjust monetary policy accordingly.
    The dual objectives of price stability and maximum 
employment are generally complementary. Indeed, at present, 
with the unemployment rate elevated and the inflation outlook 
subdued, the Committee judges that sustaining a highly 
accommodative stance for monetary policy is consistent with 
promoting both objectives. However, in cases where these 
objectives are not complementary, the Committee follows a 
balanced approach in promoting them, taking into account the 
magnitude of the deviations of inflation in employment from 
levels judged to be consistent with the dual mandate, as well 
as potentially different time horizons over which employment 
and inflation are projected to return to such levels.
    Thank you, and I would be pleased to take your questions.
    [The prepared statement of Chairman Bernanke can be found 
on page 56 of the appendix.]
    Chairman Bachus. Thank you, Chairman Bernanke. Chairman 
Bernanke, the biggest driver of the ever-increasing deficits 
this Nation faces is the runaway growth in all of our major 
entitlement programs: Medicare; Medicaid; and Social Security. 
You have repeatedly stressed that the United States needs to 
return the Federal Government to a sound fiscal footing over 
the long term. Yet, the Administration's 2013 fiscal budget 
does nothing to reform these programs or rein in their costs.
    Now, we did address military spending with cuts in the 
budget and with sequestration, but if we fail to reform our 
major entitlement programs, what will be some of the 
consequences? And if we do make major long-term structural 
changes on entitlement programs, do you see immediate or short-
term benefits?
    Mr. Bernanke. Yes, Mr. Chairman, thank you. I have often, 
as you noted, talked about the importance of establishing long-
run fiscal sustainability in the United States. If you take a 
look at the Congressional Budget Office's report that recently 
came out, what you see is that under current law, which is the 
basis of the projections they have to make, over the next 10 to 
15 years you begin to see an increasing acceleration in the 
size of the debts and deficits. It reaches a point where 
obviously it is just not going to be sustainable. Once the 
markets lose confidence in the ability of the government to 
maintain fiscal sustainability, then there are numerous risks. 
The most extreme case would be a financial crisis or a sharp 
increase in interest rates, analogous to what we have seen in 
some European countries. Even absent that extreme result, large 
deficits and debt over a longer period of time raise interest 
rates above levels where they normally would be and crowd out 
private investment and are bad for growth and productivity. 
They also involve borrowing from foreign lenders, which also is 
a drain on current U.S. income.
    So it is important to address this issue. I guess one point 
I would make is that there may be some problems with the focus 
on the 10-year window that is part of the effective analysis of 
the Congress since many of the problems are really just 
becoming more severe after 10 years. So I would ask Congress to 
consider not just the 10-year window, but the longer horizon 
implications of their policy decisions.
    Would they have benefits for today? I think that a credible 
plan put in place that would strengthen the view that the 
United States would be fiscally sustainable in the longer term, 
it would have current benefits in terms of lower expected tax 
rates, greater confidence, and perhaps lower interest rates.
    Chairman Bachus. Thank you, Chairman Bernanke. Chairman 
Bernanke, you are a member of the Financial Stability Oversight 
Council (FSOC), which is charged with responding to threats to 
financial stability and mitigating the problem of too-big-to-
fail. The Economist recently published a piece on the Dodd-
Frank Act entitled, ``Too Big Not To Fail,'' which noted that 
there is never more apparent risk that the harm done by the 
massive cost and complexity of its regulations and the effects 
of its internal inconsistencies will outweigh what good may 
come of it.
    Will the Financial Stability Oversight Council consider the 
threat to financial stability that the cost and complexity of 
Dodd-Frank poses to the financial system and offer advice on 
how to minimize that cost and complexity, and how do you view 
the Fed's role in that process?
    Mr. Bernanke. Yes, Mr. Chairman. I have actually been quite 
pleased with the functioning of the FSOC. We have met 
regularly. The meetings involve essentially every principal, 
who come to every meeting. We have good discussions, and 
between the formal meetings, we have extensive discussion among 
the senior staff of the various agencies. So, there has been a 
lot of interaction.
    I think there are a lot of benefits to coordination. We 
have talked to each other about making sure our policies are as 
consistent as possible, that they provide a level playing field 
and obviously, where we can avoid redundancy and successive 
complication, we want to do that.
    At the Federal Reserve's level, we support the basic goals 
of Dodd-Frank, which are to create a more macro-prudential 
approach to supervision to make sure that we are looking for 
systemic risks as well as risks to individual institutions, to 
make sure that our large institutions have more capital, more 
liquidity, and are better supervised. All those are the key 
goals. We understand that the specifics of the regulations make 
a big difference. It is very important to make sure that we get 
the best result for the least burden. And we have a process of 
both comments, consultations, and of course cost-benefit 
analyses to try to make sure that we are putting out rules that 
are, on the one hand, effective at reducing the risk of 
financial crisis, but that minimize the regulatory cost; 
particularly, I would add, for the smallest banks, which are 
least able to deal with those costs.
    Chairman Bachus. Thank you very much.
    Ranking Member Frank?
    Mr. Frank. Mr. Chairman, thank you for that implicit 
refutation of the notion that the financial reform bill is 
causing people all of these terrible problems. I should point 
out, by the way, that its bipartisan nature has not been fully 
understood. In addition to yourself, one of the major 
contributors to that bill was another appointee of President 
Bush whom I greatly admired, Sheila Bair, who was head of the 
FDIC. I was at the Treasury Department and noted the portrait 
of Hank Paulson that has gone up in which a write-up that 
obviously was with his approval at least, noted his having 
initiated many of the reforms that wound up in the financial 
reform bill. So Mr. Paulson, who was also there.
    I do want to go back again to the deficit, because the 
chairman said to me, yes, he agrees it should be the military, 
but again he only talks about the entitlements. And when you 
talk about the level of reduction we need, if you are going to 
get that all out of Social Security and Medicare and not go 
elsewhere, you are going to be doing damage. And I believe you 
start with overseas military expenditures that are quite 
excessive. Let me just ask you from an economic standpoint, 
given the importance of a longer-term policy to produce a 
deficit, from a purely economic standpoint, there are policy 
preferences that I know you don't want to get into, but from 
the purely macroeconomic standpoint, would it be greatly 
different if those came from, say, reducing the cost of living 
increases, Social Security or restricting Medicare, or from 
some change in the Tax Code at the upper levels of income? 
Would there be any macroeconomic difference?
    Mr. Bernanke. From a macroeconomic perspective, the main 
thing is to achieve sustainability, which means that deficits 
come under control, and debt to GDP ratio--
    Mr. Frank. So it didn't make that much difference which way 
you did it from the macroeconomic standpoint?
    Mr. Bernanke. Of course, it is important to make good 
decisions about how you spend your money.
    Mr. Frank. I appreciate that, but I just want to go back to 
this question of the dual mandate and the notion that somehow 
you really can't do much about employment. You repudiate that, 
and I think you have not just done this rhetorically; you have 
done it in practice. About a year ago, two very distinguished 
economists, Alan Blinder and Mark Zandi, did a paper about how 
the Great Recession was brought to an end. Now, Mr. Blinder was 
a Democrat. He was the Vice Chair with you at the Fed, but Mr. 
Zandi has been bipartisan, and let me quote from them. They 
talk about aggressive fiscal and monetary policies that not 
only averted a Great Depression but are resulting now in the 
beginnings of a recovery. When we divide these into two 
components, one attributed to the fiscal stimulus and other to 
financial market policies, including the Fed's quantitative 
easement, we estimate that the latter was substantially more 
powerful than the former. In other words, this assessment of 
how we did better says that monetary policy and things within 
the jurisdiction of the Fed were even more important than the 
stimulus, although they thought the stimulus was important. So 
this effort to denigrate the role you can play in that seems to 
be greatly mistaken.
    I also have handed out a chart to the press, and I would 
ask people who have a copy to look to page 17 of your report. 
And there is a chart on the bottom, ``Net change in private 
payroll employment, 2005 to 2012.'' It measures monthly job 
loss. The nadir of this, the lowest point, the worst monthly 
job loss comes in early 2009, in other words, just after the 
change in Administrations. And you then are beginning, and I 
would say this looks like February or March of 2009, you get 
one of the steepest rises I have ever seen. You get a very 
substantial, an almost vertical increase in employment that 
takes place. You have a drop of the numbers losing, and then it 
hits, in early 2010 it goes into a positive thing. It levels 
off. I think that Europe was part of the problem, and then it 
starts to rise again. And I would note not only does this show 
a very significantly--it shows the worst employment position 
was right around the time of the changes in Administrations, 
but very substantial increases beginning with early 2009, and a 
point now where the monthly increases in 2012 are equal to what 
they were in 2005. We have come back now. The total losses were 
so great during that period below the line that we haven't yet 
undercut it.
    I would also note that you correctly point out that while 
we have done very substantial improvements in the private 
sector, not yet what we want, that has been diminished somewhat 
by reductions in State and local government. And the fact is if 
State and local government had been even, no gains, but hadn't 
lost over half a million, then unemployment would now be under 
7 percent.
    Now, let me ask you because we are moving along. As I see 
it, one of the major problems we have--and I guess I won't even 
ask you to comment. I will say this. I think I am reflecting 
what you said, that one of the major obstacles or the major 
problems that might keep us from a continued upward trend, 
which is a good trend, although slower than we would like, 
would be troubles in Europe. I should just note, I think the 
role that you and your agency have played in helping to get 
Europe to avoid greater troubles has been very helpful. And I 
think it is striking that you were getting criticism, 
particularly on the Republican side, but some from people on 
the left for a series of very constructive actions.
    So I just wanted to express my support for what you have 
been doing with the swap agreement, and in other ways, because 
the greatest threat to the American economy at this point is in 
Europe. I should note, by the way, thanks in part to what we 
have been doing here where there are problems, the American 
economy, I think, is the best performing economy of the 
developed world right now of any size, and you have been 
helping that. And the attacks on what the Fed has been doing to 
try and keep you from continuing to encourage the right kinds 
of things in Europe are about as disastrous a prescription for 
American policy, and I hope you will continue to ignore them.
    Chairman Bachus. Dr. Paul?
    Dr. Paul. Thank you, Mr. Chairman. Mr. Bernanke, if you 
don't mind, would you tell me whether or not you do your own 
shopping at the grocery store?
    Mr. Bernanke. Yes, I do, sir.
    Dr. Paul. Okay, so you are aware of the prices. This 
argument that the prices are going up about 2 percent, nobody 
believes it. In the old CPI, it says prices are going up about 
9 percent so they believe this. People on fixed incomes are 
really hurting. The middle class are really hurting because 
their inflation rate is very much higher than the government 
tries to tell them, and that is why they lose trust in 
government. But this whole idea about prices and debasement of 
currency, if you loaned me $100, and 2 years from now I gave 
you $90 back, you would be pretty upset. But we pay that money 
back and it is worth 10 or 15 or 20 percent less, and nobody 
seems to be able to do anything about it. It is very upsetting. 
But it is theft if I don't give you your full $100 back and you 
loan me $100. I am stealing $10 from you. So somebody is 
stealing wealth and this is very upsetting. But in January, at 
one of your press conferences, you said that--you sort of poked 
a little bit of fun at people to downplay the 2 percent 
inflation rate, but if you say it is 2 and I say it is 9, let's 
compromise for the sake of argument; it is 5 percent. You said 
that it doesn't hurt you unless you are one of those people who 
stick the money in the mattress. But where are you going to put 
it? Are you going to put it in a CD and not make any money at 
all? So this doesn't make any sense. It doesn't encourage 
savings. And it just discourages people.
    But I do want to make a point about prices, because prices 
go up. That, to me, is not the inflation. It is one of the bad 
consequences of the inflation which comes from the increase in 
the money supply. And that is one of the bad effects. But you 
took over the Fed in 2006. I have a silver ounce here, and this 
ounce of silver back in 2006 would buy over 4 gallons of 
gasoline. Today, it will buy almost 11 gallons of gasoline. 
That is preservation of value. And that is what the market has 
always said should be money. Money comes into effect in a 
natural way, not in edict, not by fiat by governments declaring 
it is money.
    But why is it that we can't consider, the two of us, an 
option? You love paper money. I think money should be honest, 
constitutional, it is still on the books, gold and silver legal 
tender. Why don't we use it? Why don't we allow currencies to 
run parallel? They do around the world. One of my options, as 
much as I would like to do something with the Fed, I say the 
Fed is going to self-destruct eventually anyway when the money 
is gone. But why wouldn't we legalize competing currencies? Why 
couldn't people save, put this in a mattress, and get 4 or 5 
times as much of the value in a few years. So the record of 
what you have done in the last 6 years is to destroy the value 
of real money, of paper money, at the same time real money is 
    But a competing currency--we already have a silver eagle. 
It is legal tender for a dollar, and some people say well, it 
is legal tender. It is a dollar. It is on the books and they 
use it and they get into big trouble. The government comes and 
closes them down. You can get arrested for that. But what would 
be wrong with talking about parallel currency, competing 
currencies? This is something that Hayek talked about, 
something that I think would be a compromise and that we could 
work along those views.
    Mr. Bernanke. First of all, it is good to see you again, 
Congressman Paul. Just one word on inflation. Of course, those 
numbers are constructed by the Bureau of Labor Statistics, not 
by the Fed. They are independently constructed, and I think 
they are done in a very serious and thoughtful way.
    On alternative currencies, nobody prevents you from holding 
silver or gold if you want to. It is perfectly legal to do 
that, and it is also perfectly fine to hold other currencies, 
euros or yen or whatever else. So in that respect, you can do 
that and I would be happy to talk to you about--
    Dr. Paul. But Mr. Chairman, that is not money. When you pay 
taxes to buy a coin or you have capital gains tax, when it is 
not--if you have to settle a lawsuit, it is always settled in 
depreciating Federal Reserve notes. It is never settled in the 
real contract. So that is nothing near money when it is illegal 
to use it. But to do it, you would have to repeal the legal 
tender laws. You would have to legalize this. You would have to 
get rid of the sales taxes, you would have to get rid of the 
capital gains taxes. People even in Mexico, they are talking 
about this. They are trying to have competing currencies. They 
have been wiped out too many times with inflation, and wiped 
out the middle class. They are allowing people to start to save 
in a silver currency.
    So I hope we move along in that direction because there 
shouldn't be any overwhelming changes all of a sudden that 
there could be a transition so people could vote on it. Maybe 
they will give up on the Federal Reserve note and vote for real 
    Mr. Bernanke. I would be very happy to talk to you about 
    Dr. Paul. Thank you very much.
    Chairman Bachus. Thank you.
    Ms. Waters?
    Mr. Frank. Mr. Chairman, can I just make an announcement 
for the Democratic Members? We are going to follow the policy 
on our side. Obviously, we won't be able to get to everybody 
here. The committee is too big. I wish it wasn't. But our 
policy will be when Mr. Bernanke comes back for his second 
appearance this year, we will begin where we left off. So 
Members who do not get to ask a question today, we will start 
from there, and they will get to ask questions the second time. 
Thank you.
    Chairman Bachus. Thank you. We also have some procedures. 
Dr. Paul and Chairman Bernanke are getting along so 
marvelously, Ms. Waters, and we hope you will continue this 
    Ms. Waters. Thank you very much. I am interested in 
housing. Everyone agrees that this economy is not going to 
rebound until the housing market is vigorously operating. So I 
want to find out a little bit about what is happening with the 
servicers and maybe something about principal reduction.
    On February 9th, the Federal Reserve assessed monetary 
penalties totaling $776 million on the 5 largest market 
servicers pursuant to the consumer orders you issued in April 
of 2010. These five servicers also happen to be part of the 
settlement between the State Attorneys General and the Federal 
Government announced on the same day. As I understand it, the 
penalties paid by the servicers, under the consent orders 
issued by the Fed, can be satisfied by loan modifications that 
they make under the State AG settlement. In other words, unless 
the servicers fail to comply with the settlement with AGs, 
there will be no monetary penalties for servicing violations 
identified by the consent orders, though we don't know all of 
the details yet, because the State AG settlement terms have not 
been released. I understand that servicers can satisfy at least 
some of the requirements of the $26 billion AG settlement by 
writing down loans, including investor loans, owned loans that 
they service.
    My question is, will servicers be able to use the writedown 
of loans held by investors to satisfy the penalties levied by 
the Fed in response to their unsafe and unsound practices? That 
is the first part of my question.
    Mr. Bernanke. No, we are part of the overall agreement and 
by participating we helped make it happen. By the way, we just 
released our engagement letters and action plans for those 
companies that we oversee. The banks will have to verify that 
they have reduced their own holdings, their own assets by the 
amount that they are taking credit for in the overall holding, 
and if they don't meet those full amounts, then they will have 
to pay the rest in cash.
    Ms. Waters. On the issue of whether to pursue principal 
reduction modifications on residential mortgages, your report, 
your Federal Reserve White Paper report acknowledges some of 
the problems with negative equity, but the report never 
endorses principal reduction as a stabilization strategy. So 
with that said, I wanted to ask you what you thought of the 
speech by New York Fed President Dudley shortly after your 
paper came out. In his remarks, Mr. Dudley suggested that 
principal reduction for GSE loans could minimize loss of value 
on the delinquent loans they guarantee, and that a shared 
appreciation approach could help policymakers without giving 
certain homeowners a windfall. He also suggests a reduction to 
people who are current on their payment.
    What do you think of the ideas proposed by Mr. Dudley in 
his speech? Does this approach abort some of the problems with 
principal reduction you identified in your report? Couldn't 
this shared appreciation approach discourage homeowners from 
defaulting when they could otherwise pay their mortgage?
    Mr. Bernanke. First, the Fed has no official position on 
principal reduction, and we were careful not to make explicit 
recommendations precisely because we thought that was the 
congressional prerogative to make those determinations. We 
tried to provide a balanced analysis of principal reduction.
    I think it is a complex subject. It is not that we disagree 
on the goals. We want to reduce foreclosures and delinquencies. 
We want to help people who want to move to be able to do that, 
but there are often a number of alternatives in different 
situations. For example, if the idea is just to be able to 
move, then a short sale or deed in lieu might be the most 
effective way to do it. If the goal is to reduce payments, then 
refinancing at a lower interest rate or modification might be 
the most effective way to do it in terms of the dollars spent.
    So I think there are some interesting questions from the 
perspective of public policy about what the best way to proceed 
is, whether that is the most cost-effective approach or not.
    Ms. Waters. We are really interested, many of us, in 
principal reduction. In your report to Congress you note that 
facilitating principal modifications for all underwater 
borrowers would be too costly, but that identifying targeted 
segments of borrowers who would go to foreclosure without 
principal reduction is too difficult. And I won't go on to talk 
about what Mr. Dudley said.
    So if you are not supporting principal reduction, and you 
are not talking about how homeowners can get out from under 
this foreclosure problem, what are you suggesting we do to 
improve this housing market?
    Mr. Bernanke. We discuss a whole variety of things in our 
White Paper, though again with the proviso that our goal was to 
provide background analysis that would help the Congress make 
good decisions. For example, we have a big overhang of homes in 
the market. One of the ideas that we have discussed is moving 
REO, that is real estate owned, to rental. That is something 
that the FHFA has begun a pilot program on that is interesting. 
We talked about trying to identify some of the barriers to 
doing that on a large scale. That is one potential direction.
    There are a lot of issues right now with the tightness of 
mortgage standards where people are not able to get mortgage 
credit, even when they meet the GSE standards. So we have 
talked about clarifying the representations and warranties that 
are part of the mortgage contract. FHFA and the GSEs have in 
fact looked at that as well, and I think that could be a 
constructive step.
    Servicing is an important issue. You referred to, in the 
beginning, the servicing agreement. Since early last year, we 
have put consent orders on all of the major servicers requiring 
them to improve their practices to have principal points of 
contact for individual borrowers, to provide more counseling, 
better controls, and so on. There are a variety of things that 
can be done. Not all of them are congressional. Some of them 
are our own responsibilities as regulators, but some of them 
would require some congressional input.
    Chairman Bachus. Thank you. Thank you, Chairman Bernanke. 
The vice chairman of the full committee, Mr. Hensarling, is now 
recognized for 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. Chairman Bernanke, 
in your testimony you describe the recovery as modest relative 
to historic terms. I would note for the record that in this 
Administration, when you add in those who are underemployed, 
those who have left the labor force due to giving up, the true 
unemployment rate is 15.4 percent.
    Half of all Americans are now classified by the Census 
Bureau as either low income or in poverty, and one in seven now 
have to rely on food stamps. So from the perspective of my 
constituents, the use of the term ``modest'' is indeed modest.
    I would like to first return to the subject of our 
structural debt. One of the major players in our economy has 
said, ``The major driver of our long-term liabilities--
everybody here knows it--is Medicare and Medicaid. In our 
health care spending, nothing comes close.'' That, of course, 
was President Barack Obama.
    So I would suggest to the ranking member that when 
convenient, he first debate the President on this subject 
before he debates us.
    And I would ask this simply, Mr. Chairman. Even if we cut 
the Pentagon by 25 percent, make it 50 percent, have we solved 
the long-term structural debt crisis in our Nation?
    Mr. Bernanke. You refer specifically to health care. And 
this is an area where costs have been going up much faster than 
GDP. The output of the health care industry is not markedly 
better than other countries. So, clearly, not only for fiscal 
issues, but also for private sector productivity, it is an 
important issue to address. And as a matter of arithmetic, it 
is true that over time, an increasing share of the total 
outlays to the Federal Government will be going to Medicare, 
Medicaid, and other health-related programs. So it is very 
important to address that.
    Mr. Hensarling. Thank you.
    On page 7 of your testimony, in dealing with your dual 
mandate, you said the maximum level of employment in an economy 
is largely determined by nonmonetary factors. In my remaining 
time, I really want to pursue this theme. I certainly agree 
with the assessment, but I question--after 3 years of the most 
highly accommodative monetary policy, I believe, in the history 
of our Nation--the recent announcement that we will continue 
this policy for 2 more years.
    I note according to your own statistics that public 
companies are now sitting on $2.1 trillion in excess liquidity. 
Banks have $1.5 trillion of excess liquidity, which seems to 
suggest that perhaps monetary policy is not the challenge that 
we have today.
    Recently, the Dallas Fed President, Richard Fisher, made me 
aware of a Harvard business study showing the greatest 
impediments to job creation to be taxation, red tape, and 
uncertainty. A recent Gallup Poll of small businesses, of which 
you may be aware, shows that roughly half believe that health 
care and government regulations are what is causing them not to 
hire more workers.
    You have job creator after job creator, like Bernie Marcus 
in Home Depot, saying, ``I can tell you today that the 
impediments that the government imposes are impossible to deal 
with; Home Depot would have never succeeded if we tried to 
start today.''
    I would add the voices of just about every small business 
person I have talked to in the Fifth Congressional District of 
Texas, which I represent.
    And so, again, it begs two questions: Number one, the 
limits of the efficacy of monetary policy, and frankly, the 
risk as well. It was brought up earlier that we have retirees 
who are being squeezed, pension funds, savers. You certainly 
know that community banks are feeling squeezed. Many of them 
are lending out on the risk curve.
    And I am very grateful that you have shown your concern and 
anxiety over the structural debt, but to some extent, you are 
one of the major players by creating these artificial rates 
that I would argue mask the true cost of our fiscal folly. And 
to some extent, by keeping rates artificially this low, aren't 
you simply postponing and exacerbating the problem, 
particularly the unintended consequences of another asset 
bubble? Do you share these concerns, and how do you balance 
    Mr. Bernanke. You raise a lot of good points. First, I do 
think the monetary policy has been constructive in bringing 
employment back toward the maximum employment level. Ranking 
Member Frank pointed out the sharp movement in March of 2009. 
That was exactly the date when we began QE1. Since QE2 in 
November 2010, there have been 2.5 million new jobs created. 
Now, I don't claim credit for all of those jobs; of course, 
many other factors are at work. But I think it has been 
    But you are also absolutely right, that in terms of what 
long-term employment productivity gains can be sustained by 
this economy, monetary policy is not the answer to that; the 
answer is certainly the private sector but in a partnership 
with good other economic policies, ranging from trade to 
regulation to education to infrastructure to tax code and so 
on. And all those things are in the province of Congress.
    Of course, I certainly agree with you that monetary policy 
is not a panacea, that it could help offset cyclical 
fluctuations in financial crises like we have had, but the 
long-term health of the economy depends mostly on decisions 
taken by Congress and the Administration.
    Chairman Bachus. Thank you very much.
    Mrs. Maloney?
    Mrs. Maloney. Thank you. Welcome, Chairman Bernanke, and 
thank you very much for your public service.
    In your testimony today, you had some encouraging points, 
specifically that in January, the private sector gained over 
260,000 private sector jobs and that we have seen over the past 
23 months a steady gain in private sector employment, over 3.7 
million new jobs gained. I believe your chart that the ranking 
member pointed out is very graphic. We were losing 700,000 jobs 
a month when President Obama took office, and we have been 
moving forward with economic recovery. And I thank you for your 
leadership, really your brave and innovative leadership during 
this time.
    But we are still facing many, many challenges, including 
the challenge of the long-term unemployed, that seems so 
persistent and deep and strong. Over 40 percent of those who 
are unemployed have been so over 6 months. I would like to know 
whether you feel this is structural, or is this something we 
can address with improved conditions in our overall economy?
    And I am deeply concerned about the fact that we are facing 
the largest income disparity in the history of our country and 
that the gap seems to be getting larger and larger, and the 
challenges for the middle-, moderate-, and low-income people 
become stronger for them to make progress. The Administration 
has announced that their number one priority is creating jobs, 
growing our economy. What are the things that we could 
accomplish in order to stabilize our economy and create the 
conditions that would improve the opportunity for more job 
growth? I, obviously, believe in the dual mandate.
    Specifically, do you think that at this point in the cycle, 
we need the kind of budgetary tightness or shrinking of the 
government that my friends on the other side of the aisle are 
advocating for? Doesn't it make more sense in terms of our 
fragile economy to have more fiscal stimulus, to pass the 
transportation bill, to help create jobs and improvements in 
our economy?
    And again, thank you for your service.
    Mr. Bernanke. Thank you.
    It is a very worrisome problem, the very high level of 
long-term unemployment. As you say, 40-plus percent of the 
unemployed have been unemployed for 6 months or more, which is 
the highest by far in the post-war period. I think that 
happened because the decline in the economy was so sharp and so 
severe in 2008 and 2009 that firms in a panic-stricken mode 
just cut many, many workers, and many of those people have not 
found work.
    This has a lot of potentially serious long-run 
consequences. We know that if you lose a job, and you are out 
of job for a long time and you find a new job, it will 
typically be a much lower paying job, for example, or a much 
less secure job. The concern in particular is that people who 
are out of work for 6 months or more will be starting to lose 
skills. They will be losing attachment to the labor force. They 
won't know what is happening in their field or their industry. 
And that is really one reason for urgency, to try to get jobs 
created and try to bring the economy back to a more normal 
labor market. So that is certainly something to which we are 
paying a lot of attention.
    There is obviously no easy solution here. You asked about 
fiscal policy, and I have tried to make three points about 
fiscal policy. One, as we have already talked about--that 
achieving long-run sustainability and providing comfort to the 
public and the markets that deficits will come under control 
over a period of time--is very important for confidence and for 
creating more support for the recovery.
    But at the same time, I think you also have to protect the 
recovery in the near term. Under current law, on January 1, 
2013, there is going to be a massive fiscal cliff of large 
spending cuts and tax increases. I hope that Congress will look 
at that and figure out ways to achieve the same long-run fiscal 
improvement without having it all happen one day. So attention 
should be paid to the--
    Mrs. Maloney. Mr. Chairman, my time is running out. In some 
ways, monetary policy has replaced fiscal stimulus. And 
wouldn't the recovery happen faster if we had a better balance 
between the two? Could you comment on the need for more fiscal 
    Mr. Bernanke. I think if you do that, it needs to be part 
of a two-handed plan, so to speak. The actions that you take in 
the short run, whether they be infrastructure or education or 
tax reform or whatever they may be, I hope that they are 
considered and wisely chosen. But it is also important that we 
keep in mind the long-term necessity of making fiscal policy 
sustainable. So you need to think about those two things 
    Mrs. Maloney. Thank you very much.
    Chairman Bachus. Thank you.
    The Chair at this time recognizes the Chair of the 
Subcommittee on Financial Institutions, Mrs. Biggert, who has 
actually done some very good work on housing issues, on housing 
    Mrs. Biggert. Thank you, Mr. Chairman. And I would like to 
return to housing for a moment. Today, through FHA and RHS and 
Fannie Mae and Freddie Mac, the Federal Government and 
taxpayers back nearly 100 percent--it is in the 90 percent 
range right now--of residential mortgages. Is this healthy for 
the economy, and what are the barriers to private capital 
reentering the mortgage lending and the secondary market for 
home loans?
    Mr. Bernanke. You are correct that government-supported 
agencies are now pretty much the entire securitization market. 
They don't make all the mortgage loans, but they do securitize 
and buy most of the mortgages in the economy. That obviously is 
not healthy. We would like to have a more diversified system 
with greater private-sector participation. We are not seeing 
    The reasons are not certain. I think, in part, the private 
label (so-called) mortgage markets are still recovering from 
the shocks of the financial crisis. There is still a lot of 
uncertainty about where the housing market is going, and 
therefore, the uninsured securities that are put together by 
non-GSE securitizers are not yet as appealing as they were 
before. There is still uncertainty about the regulatory and 
legal framework for securitization in the future. So there are 
a lot of reasons, and we need a more diversified system.
    Mrs. Biggert. Does Dodd-Frank help or hurt the reentry of 
the private capital into the market?
    Mr. Bernanke. I think it is important to create more 
certainty, and we are not there yet. There is still a lot of 
    For example, the Federal Reserve and the other agencies are 
still thinking about risk-retention requirements for example, 
and those have not been specified. So it would be helpful to 
get greater clarity.
    It would also be helpful to get greater clarity about what 
the long-run housing market or mortgage market structure will 
be. There has been plenty of discussion in this committee about 
GSE reform, about covered bonds and other types of structures, 
but there is still a lot of uncertainty about which way that is 
going to go.
    Mrs. Biggert. Thank you.
    And then I go on to another question. The Dodd-Frank 
effective date for the Volcker Rule is July 21st. And we have 
heard that regulators think it is a daunting task to complete 
that by then. Do you have any plans to phase in implementation 
of the Volcker Rule?
    Mr. Bernanke. Yes. The statute allows for a 2-year 
transition period. And so, we will certainly be giving 
institutions adequate time to adjust and adapt to whatever rule 
is put out.
    Mrs. Biggert. Thank you. I have heard from some of my 
constituent insurance companies that Fed staff has been 
deployed to insurance companies. What is the purpose of their 
presence, given that the insurance companies are regulated by 
the States? Is the Fed simply increasing its insurance 
expertise, or does Dodd-Frank give the Fed the authority to 
regulate insurers?
    Mr. Bernanke. No, we don't have any authority to regulate 
insurers, unless in the future, a systemically critical 
insurance company is so designated by the FSOC. That has not 
happened yet. I am not quite sure what you are alluding to. It 
could be that there have been some discussions to give us a 
better insight into the industry.
    Mrs. Biggert. What I am alluding to is that there have been 
insurance companies where 10 of your staff members have kind of 
moved in and taken up residency, and they don't exactly know 
why they are there.
    Mr. Bernanke. I will find out, and I will communicate with 
    Mrs. Biggert. I appreciate that.
    And what kind of discussions are you or your staff having 
with the new Federal Insurance Office (FIO), which was 
designated to be a Federal insurance expert on national and 
international issues?
    Mr. Bernanke. We have been interacting with them on the 
FSOC, the Financial Stability Oversight Council, and our staff 
has been interacting in that respect. On your previous 
question, it could be that the insurance companies in question 
are thrift holding companies because they hold thrifts, in 
which case we would have actually some oversight.
    Mrs. Biggert. All right. Thank you.
    I yield back, Mr. Chairman.
    Chairman Bachus. Thank you.
    Ms. Velazquez?
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Bernanke, while credit conditions for small 
businesses have improved over the past year, the number of 
small dollar loans, loans of $250,000 or less, remains below 
pre-recession levels. And as you know, these are the type of 
loans that are important to early stage and start-ups. Do you 
think credit availability for these loans will ever fully 
rebound to the high water mark set in 2007?
    Mr. Bernanke. I think there are a number of reasons why the 
number of loans being made is lower. First, given that the 
economy isn't that strong, the demand for loans is not quite 
what it was.
    Second, of course, lending standards have tightened since 
before the crisis, and some of that is appropriate, because as 
you know, credit standards were on the whole too easy before 
the crisis. So there are some reasons why lending has fallen, 
which no doubt will improve over time. But I think it is still 
the case that the pendulum has swung a little bit too far, and 
we are certainly working with banks, particularly small banks. 
And I will reiterate this point that it is incredibly important 
for banks to take a balanced approach and for examiners to take 
a balanced approach so that, on the one hand, they make safe 
and sound loans, but that they also make loans to credit-worthy 
borrowers because they are so important for our communities and 
our economy to recover.
    Ms. Velazquez. If you look at the type of loans that banks 
are making, they are the big loans, because they are the 
profitable ones. So, in that regard, this is why we passed the 
small business lending bill where the Feds were lending 
community banks money that they used to pay TARP money back, 
but they didn't make the loans that we were expecting them to 
make. So given that scenario, do you think that it is still an 
important and meaningful role for the Federal Government to 
play in providing lending programs that will fill that gap that 
exist for the private sector?
    Mr. Bernanke. The Fed has had a good relationship with the 
SBA, the Small Business Administration, and there were some 
additional provisions during the crisis that gave them more 
flexibility and more funding. That might be an area worth 
looking at.
    Ms. Velazquez. Under your leadership, the Fed has 
significantly increased its commitment to transparency, holding 
more press conferences and releasing interest rate forecasts 
for the first time in its history. While these policy tools are 
good for the financial markets and most big firms, they are of 
limited use to the general public. Would you consider releasing 
guidance for households and small businesses after FOMC 
meetings on what changes to monetary policy means to them?
    Mr. Bernanke. That is an interesting idea. We have of 
course many speeches, and I am here giving a report to Congress 
about monetary policy.
    I would like to think about what that would look like. But 
obviously, we are trying to communicate to the general public. 
I have been on some TV programs and the like. And in fact, 
later this spring, I will be giving lectures at George 
Washington University, which will be available to anybody 
online, about the Fed and the financial crisis. So we are 
working to improve our communications, and your suggestions are 
more than welcome.
    Ms. Velazquez. Thank you.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mr. McCotter?
    Mr. McCotter. Thank you, Mr. Chairman.
    First, just a quick note, we heard much talk about the Wall 
Street reform bill and we will continue to, and it was said 
that the bill was bipartisan and that the nature of that should 
not be overlooked. I would just like to point out for the 
record that the bill is so bipartisan it is called Dodd-Frank.
    Mr. Bernanke, thank you for being here today. In your 
testimony, in your written remarks, there are some things 
coming from Michigan, a very hard-hit State that is struggling 
to come back in this stagnant economy, there are some things 
that bear repeating on page, I believe, 2: ``The economy 
appears to have been growing during that timeframe at or below 
its long-term trend. Continued improvement in the job market is 
likely to require stronger growth and final demand in 
production. Notwithstanding the better recent data, the job 
market remains far from normal. The unemployment rate remains 
elevated. Long-term unemployment is still near record levels, 
and the number of persons working part time for economic 
reasons is very high.
    ``Fundamentals that support spending continue to be weak. 
Real household income and wealth were flat in 2011. And access 
to credit remained restricted for many potential borrowers. 
Consumer sentiment, which dropped sharply last summer, has 
since rebounded but remains relatively low.''
    Now, two questions, and then I will be quiet and listen. 
The first is in terms of the credit still not getting to 
potential borrowers, what specifically do you think the reason 
for that is, and what do you think would be specifically done 
about it if not by you? I can understand why you can't 
discourse on that.
    And finally, my concern is that--just a question about how 
this operates. It says here on page 6 that the target range for 
the Federal funds rate remains at zero to a quarter percent. 
Now, when that type of rate remains in effect, does that have 
an effect on the personal savings interest rates that 
individuals who bank get? And if that is the case, somehow that 
stops them from getting a higher rate of return, would that not 
constitute them essentially subsidizing the operations to try 
to get money to, say, the banks or to other people, who are 
still not getting the credit, which then leads to the horrible 
things that I started off my remarks with?
    Mr. Bernanke. On the latter point, we are certainly paying 
attention to the effects of low interest rates, not only on 
savers but on other financial institutions and the like. The 
banks complain about the low interest rates. They say that 
reduces their net interest margin, so it is not a profitable 
thing from their perspective.
    I would say from the point of view of savers, though, for 
most savers, I think, on average, something less than 10 
percent of all savings by retirees is in the form of fixed-
interest instruments like CDs. Remember, people also own 
equities. They own money market funds. They own mutual funds. 
They have 401(k)s and a variety of things. And those assets are 
assets whose returns depend very much on how strong the economy 
is. And so, in trying to strengthen the economy, we are 
actually helping savers by making the returns higher, as we can 
see has happened in the stock market for example.
    Mr. McCotter. That is a very important point.
    I personally don't subscribe to the fact that just because 
it is 10 percent, that would mean it was okay to have their 
rate of return artificially lowered. And I think that what you 
are saying then is that, yes, they are subsidizing this, but in 
the long run, it is better for them because you believe this 
will lead to economic growth. Although, again, and we will get 
to the second part of my question, that very much remains in 
doubt; doesn't it?
    Mr. Bernanke. The economy has been recovering, and I 
believe monetary policy is set appropriately to help the 
economy recover. Again, you can't get good returns in the 
economy unless you have growth. The other thing, as you know, 
is we have set an inflation target, and we are committed to 
keeping inflation low and stable. And that, also, of course, is 
good for savers because it is the inflation adjusted return 
that matters in the end.
    Mr. McCotter. If I can, and we can skip the first part of 
the question because they are interrelated. So, in short, it is 
almost as if you decided that you are going to invest what 
their potential interest rates return would have been into your 
recovery for the economy. And again, it may be recovering, but 
by your own admission, it is either at or below long-term 
trends. We still have trouble getting money down into the hands 
for people for credit, into the hands of people who can grow 
this economy and get jobs back. And the long-term prognosis is 
not particularly good for unemployment rates dropping in a 
precipitous fashion any time soon. That doesn't necessarily 
sound like a very good investment if I am saving and you are 
spending my money on recovery.
    Mr. Bernanke. We are not spending anybody's money. It is 
arguable that interest rates are too high, that they are being 
constrained by the fact that interest rates can't go below 
zero. We have an economy where demand falls far short of the 
capacity of the economy to produce. We have an economy where 
the amount of investment and durable goods spending is far less 
than the capacity of the economy to produce. That suggests that 
interest rates in some sense should be lower rather than 
higher. We can't make interest rates lower, of course; they can 
only go down to zero. And again, I would argue that a healthy 
economy with good returns is the best way to get returns to 
    On providing credit, I would just make one observation, 
which was the news this morning that bank lending increased 
last quarter at the fastest rate since the recession.
    Chairman Bachus. Thank you.
    Also, the housing market declined in I think 19 or 22 major 
markets. We are seeing some signs of deflation.
    Mr. Watt?
    Mr. Watt. Thank you, Mr. Chairman.
    I just wanted to let my friend know that the protocol has 
been to name bills after the people who head the committees of 
jurisdiction, which is why the bill was called Dodd-Frank. We 
had the majority in the House and the Senate. When it was 
split, it was Sarbanes-Oxley, which he doesn't like anymore, I 
guess. Oxley was a Republican because we were in the majority; 
the Republicans were in the majority in the House. So we are 
following the same protocol.
    Mr. McCotter. If the gentleman will yield?
    Chairman Bachus. Of course, you know we didn't vote for it 
    Mr. Watt. But the name of the bill is voted for as part of 
the bill, and you lost that vote, and nobody has reversed it 
yet. So anyway--
    Mr. McCotter. If the gentleman will yield?
    Mr. Watt. Let me get on to what we are here for.
    Chairman Bernanke, one of the problems with setting these 
horizons out so far is that when you set an accommodative 
policy horizon out through late 2014, the private sector starts 
to expect that. And if circumstances change, crawling back off 
that limb could be very difficult from a private sector 
perspective. What if things do change substantially in a 
different direction? I assume the Fed has given itself enough 
leeway here to say we can go back to a more aggressive, less 
accommodative policy, is that correct?
    Mr. Bernanke. Yes, sir. The policy is a conditional policy. 
It says, based on what we know now, this is where we think we 
are going to be. But of course, if there is a substantial 
change in the outlook, we would have to adjust accordingly.
    Mr. Watt. Good luck if it does. I know how the private 
sector relies on accommodative policy, but I won't--we don't 
need to go any further on that. I just wanted to make sure that 
everybody knows that you can go in the opposite direction; the 
Fed has the authority to go in the opposite direction.
    On page 5 of your statement, you talk about continuing to 
monitor energy markets carefully. And one of the real 
uncertainties out there is gas prices and the extent to which 
we rely on gas prices as an indicator of how the economy is 
going and what we can do in our own individual lives. Are there 
really any things that we can do as Congress? I know you can't 
do anything as the Fed, but are there things that we can do? Is 
there a menu of possibilities that we might consider on the 
energy side?
    Mr. Bernanke. There are many things that you can debate 
about long-term development of natural resources--hydrocarbons 
and so on. But in the short run, I think the main problems are 
coming from some supply disruptions or some fear to supply 
disruptions, particularly Iran. So I think the best thing we 
could do would be to resolve that situation. But obviously, 
that is well beyond my capacity or probably anyone's capacity. 
So I am not sure what can be done to provide substantial relief 
in the very short term.
    Mr. Watt. I guess President Gingrich is getting ready to 
tell us at some point how to solve this problem, although he 
didn't solve it when he was the Speaker. Maybe he thinks he can 
solve it that way.
    Let me ask one other question. Europe, obviously, is the 
major, even more major than oil prices is what happens in 
Europe. Are you satisfied that they are taking steps in the 
right direction to try to satisfy their problems, and have we 
done as much as we can reasonably do to help with that?
    Mr. Bernanke. They have taken some positive steps recently, 
as I mentioned in my testimony. The ECB had its second long-
term refinancing operation today, 3-year lending to the banks. 
They are still working on getting the Greek deal done. A number 
of the countries in fiscal trouble had been taking strong steps 
to try to improve their budget balances. There has been some 
progress on a fiscal compact, whereby there will be more 
coordination among countries. But there is still a lot to be 
    In the short term, there still needs to be more effort on 
providing so-called firewalls that will be financial backstops 
in case there is a default or potential contagion. And in the 
long run, the real problem--or a very serious problem that has 
not been solved--is that many of these countries are not only 
fiscally challenged, but they are not competitive. They have 
large current account deficits, and their costs are too high, 
and so that is a process that can take a long time to fix.
    Mr. Watt. Thank you, Mr. Chairman. I yield back.
    Chairman Bachus. Thank you. Let me point out one thing 
about energy that we all need to look at, and that is natural 
gas. I think it was in 1985 that we estimated we had 200 TCFs 
of reserves; it is now 2,500. So we ought to take advantage of 
that price differential, and I know we do that with natural gas 
vehicles, but it will be a game changer.
    Ms. Hayworth?
    Dr. Hayworth. Thank you, Mr. Chairman.
    And welcome, Chairman Bernanke. It is always a pleasure to 
hear from you because you are eminently sane about all these 
    I have heard from our life insurers and grantors or 
providers of annuities that they are very concerned, as you can 
imagine, about an interest rate squeeze that may occur in the 
future, that almost feels predictable in certain respects. How 
do you recommend that they proceed, that they anticipate the 
challenges we are facing because of the way in which we have to 
have an accommodative monetary policy?
    Mr. Bernanke. We have had numerous discussions with 
insurance companies and pension funds and others, and there 
certainly is a problem in the sense that under our current 
accounting rules, their obligations to put money into the fund 
can be greater with low interest rates. And I agree that is a 
problem and one that we have discussed with them.
    Again, going back to my conversation with Mr. McCotter, on 
the other side, we are trying to strengthen an economy that 
will give them higher returns on their portfolios, so it cuts 
both ways. As I have said, I have talked to insurance 
companies. They recognize that low interest rates are not a 
permanent condition, that at some point, the economy will get 
back to the situation where interest rates can be more normal, 
that we are trying to help the economy, that we recognize that 
there are some side effects of low interest rates and that we 
are attentive to that. But again, our first responsibility is 
to meet our dual mandate and try to support the economy and 
keep inflation near its target.
    Dr. Hayworth. A similar question, obviously, could be asked 
on behalf of our community banks who are concerned about their 
long-term loans that are being obviously offered at very low 
interest rates, the same sort of approach, I assume?
    Mr. Bernanke. Yes. I actually discussed this point in a 
speech I gave a couple of weeks ago at the FDIC. And I made 
essentially the same point, which is that the net interest 
margin has two parts: the difference between deposit rates and 
safe rates; and the difference between safe rates and loan 
rates. The ability to make profitable loans depends on having a 
healthy economy. And so the short-run cost of low rates should 
be worth it if we can get the economy moving again.
    Dr. Hayworth. Chairman, if I may, a bit broader question or 
perhaps more of a 30,000-foot question. You have many, many 
times, including here today, pointed out how important it is to 
have Federal policy that reflects the impending crisis that we 
face in terms of managing the debt and how that weighs on 
economic growth. Do you ever feel as though you are talking 
past your Administration and Congress, that we are talking past 
each other, and somehow you know how can we make your message 
resonate? People like me are very sympathetic to it, obviously.
    Mr. Bernanke. These criticisms are easy for me to make. I 
don't have to deal with the politics. And I know they are very, 
very difficult. It is always hard to explain to people why you 
have to tighten your belt one way or another.
    I think, on the one hand, that educating the voters is an 
important thing and making sure people understand what the 
tradeoffs are. I think if they understand it, they will be more 
sympathetic to the tough choices that we face as a country. But 
I also think that there is some scope for bargaining within the 
Congress. We have had some very close calls recently in terms 
of making progress. And we have, as I mentioned before, this 
fiscal cliff on January 1st. That might prove an opportunity to 
negotiate a better longer-term outcome. We will see.
    But I think those are the two directions: one is trying to 
create a framework in Congress for debates, maybe a set of 
goals, for example; and the other is to get the voters on our 
side by education.
    Dr. Hayworth. I sympathize very much, sir, with that point 
of view and have said so myself as well, that it is about 
education and awareness. The fiscal cliff to which you refer 
would be the enormous tax increase that we face--
    Mr. Bernanke. We have a number of measures, including both 
tax increases, the expiration of the payroll tax cut, the 
sequestration that comes out of the supercommittee 
negotiations. All those things are hitting on the same day 
basically, and it is quite a big impact.
    Dr. Hayworth. Thank you for emphasizing how important that 
is, sir, and thank you for your great work.
    I yield back, Mr. Chairman.
    Chairman Bachus. Very good points, Chairman Bernanke and 
Ms. Hayworth.
    Mr. Meeks, I appreciate your thoughtful questions on every 
    Mr. Meeks. Thank you, Mr. Chairman.
    Mr. Chairman, I want to pick up where Congressman Watt left 
off. I am on this committee, of course. I am also the lead 
Democrat on the Europe-Eurasia Subcommittee, so Europe is very 
much on my mind. And we just recently came back from a trip 
over in Europe where their economy, of course, was much 
    So I would like to ask two questions, because I know I have 
limited time, and see if I have any time left after your 
answer. First, given the close linkage between our economies, 
it seems access to the Fed's swap lines is crucial in times of 
market tension. And so, can you discuss how American companies 
benefit from the availability of the Fed swap lines with 
foreign central banks and the difficulties U.S. companies and 
workers would face, if any, if those swap lines did not exist?
    Second, could you also tell us, what is the exposure of 
U.S. financial institutions to European sovereign debt? And can 
you categorize our financial system's exposure--or would you 
categorize it, the exposure, as significant?
    Mr. Bernanke. Very good questions. On the swap lines, 
European banks do significant business in dollars, so they need 
dollars to conduct that business. They were having a great deal 
of difficulty accessing those dollars. About half of those 
dollars are used for making loans in the United States, so they 
directly affect credit availability in the United States and 
therefore affect households and businesses in this country. The 
rest mostly goes for trade finance, which helps facilitate 
international trade and also adds to prosperity. So we have a 
direct interest in having international dollar funding markets 
work well. And indeed, it creates confidence in the dollar that 
those markets are working properly. The swap lines seem to have 
been very successful. They have reduced the stress in dollar 
funding markets. And it looks at this point that the demand for 
those swaps is starting to go down as stress has been reduced.
    In terms of U.S. financial institutions, we are monitoring 
that very carefully. We have continuously looked at banks' 
exposures. We are making them do stress tests of their European 
exposures. Our basic conclusion is that the direct exposure, 
say, of U.S. banks to European sovereign debt is quite limited, 
particularly on the periphery. Exposure to Italy and Spain is 
somewhat greater, obviously, than to the smaller three 
countries. We think the banks generally have done a pretty good 
job of hedging the exposures they have to sovereign debt and, 
to some extent, to European banks.
    They will be reporting this information. The SEC has 
provided some guidance on how to report both their exposures 
and their hedges to the market to the public. So a lot of 
progress is being made there. Having said that, I think if 
there was a major financial accident in Europe, the main 
effects on our banks would not be so much through direct 
exposures as through general contagion, flight from risk-
taking, loss of faith in the financial system, economic stress 
and so on.
    So I think there is a significant risk, even though we have 
done what we can to make sure banks are managing their direct 
exposures to banks and sovereigns in Europe.
    Mr. Meeks. I think that answers my question, but just so it 
is clear, how closely linked would you say that the U.S. and 
European economies are with respect to the U.S. export market 
and U.S. corporate profits?
    Mr. Bernanke. We are obviously very integrated. About 2 
percent of our GDP is in the form of exports to Europe. So if 
Europe has a significant slowdown, we will feel that. Our 
companies are highly integrated. You think of companies like 
Ford and GM, which produce in Europe as well as the United 
    However, we do think that if Europe has a mild downturn, 
which is what they are currently forecasting, and if the 
financial situation remains under control, that the effect on 
the United States might not be terribly serious--at least it 
would probably not threaten the recovery--but nevertheless, it 
would certainly have an effect.
    Mr. Meeks. One of the things that was also discussed when 
we were over in Europe was the fact that they said that Greece 
equalled about 2 percent of the economy, and they were going to 
try to keep them so that they wouldn't have to move the euro. 
But they said if they did and Greece defaulted, that there 
would not be contagion, that they thought it would be pretty 
much contained, and they would move on; they liked what was 
happening in Italy. So I would just like to get from your 
viewpoint, if Greece was to default, do you see the possibility 
of contagion to Italy, Portugal and Spain, or are they such a 
small part of this that it doesn't matter?
    Mr. Hensarling [presiding]. The time of the gentleman has 
expired. So, Mr. Chairman, if you could give a very brief 
    Mr. Bernanke. I would just say that leaving the euro would 
be very difficult, and an uncontrolled disorderly default would 
create a lot of problems.
    Mr. Hensarling. The gentleman from Illinois, Mr. Grimm, is 
recognized for 5 minutes.
    Mr. Grimm. Thank you, Mr. Chairman.
    And thank you, Chairman Bernanke, for being with us today. 
If I could switch gears a little bit and ask, obviously, the 
Volcker Rule is a topic of discussion in the financial services 
industry. And Section 619 becomes effective this July. But just 
last month, the Federal Reserve governance rule mentioned that 
it probably wouldn't be implemented, completed until January of 
2013. When do you expect the Volcker Rule to be finalized, and 
do you expect that there will be a re-proposal for public 
    Mr. Bernanke. I don't think it will be ready for July. Just 
a few weeks ago, we closed the comment period. We have about 
17,000 comments. We have a lot of very difficult issues to go 
through. So I don't know the exact date, but we will obviously 
be working on it as fast as we can.
    As I understand it, the Volcker Rule includes a 2-year 
transition period starting in July. And as we did, for example, 
with the interchange fee, where we were also late relative to 
the statute, we will make sure that firms have an adequate 
period of time to adjust their systems and comply with the 
    Mr. Grimm. So I am assuming then, that obviously, you are 
not going to be strictly enforcing a rule that is not in place 
    Mr. Bernanke. Obviously.
    Mr. Grimm. So that does leave some ambiguity and 
uncertainty as to how we are going to treat market-making and 
underwriting. And that I think is the concern for industry, 
that we are laden with so much uncertainty. And I would just 
emphasize that bringing some certainty to the markets obviously 
should be part of the goal.
    Mr. Bernanke. It is. Thank you.
    Mr. Grimm. A question that I have had for awhile, Mr. 
Volcker was unable to really give a clear definition; 
basically, I will know it when I see it. That is as uncertain I 
think as you can get. Do you have a definition of what 
proprietary trading is?
    Mr. Bernanke. Proprietary trading is short-term trading in 
financial assets for the purposes of the profits of the bank 
itself as opposed to its customers. That is my best definition. 
But obviously, it is hard to know in every case whether it fits 
that definition or not.
    Mr. Grimm. But you believe that is what the regulators will 
use in promulgating the rule and enforcing the rule, something 
similar to that?
    Mr. Bernanke. The most difficult distinction is between 
proprietary trading and market making. Because in market 
making, firms often have to buy assets, which they hold for a 
short period, and then they sell to a customer. So the question 
is, did they buy that asset for a proprietary purpose, or did 
they buy it for a market-making purpose? We will need to 
develop metrics and other criteria to distinguish those two 
types of activities.
    Mr. Grimm. Switching gears again. I am concerned that the 
President's proposed budget for 2013 could lead to massive 
increases in capital gains as much as--I think as much as 
triple, from 15 percent to almost 45 percent. I believe a 
dramatic rate increase like that will discourage investment and 
entrepreneurship. And I would like--over the long term, I think 
it would be detrimental--your views on increasing capital gains 
that significantly. Do you think it could have a negative 
    Mr. Bernanke. It will be a tax on investment, that is for 
sure. I think I have been advocating at least consideration of 
doing a still more comprehensive type of reform. We have a lot 
of inconsistencies say between the way corporations are taxed 
and the way private individuals are taxed. So, for example, if 
you eliminate the deductibility for interest at the corporate 
level and then you still have private individuals paying taxes 
on interest, you are double taxing interest as much as you are 
double taxing dividends. So these are ultimately congressional 
decisions. But I think it would be useful to put this all in a 
broader framework and try to find a reform, both to corporate 
and to individual tax codes, that fits together and makes sense 
from the perspective of achieving both the equity and the 
efficiency goals.
    Mr. Grimm. From a purely economic point of view, from an 
economist point of view, we are seeing that in the U.K., they 
raised their top rate to 50 percent, and in their first month, 
they actually took in less revenue than they did before the 
increase. Is it logical to say that is a possibility and a 
strong possibility if we were to raise our rates substantially 
that way and see that deduction?
    Mr. Bernanke. Yes, in the short run, because capital gains 
people can choose when to realize capital gains, and they may 
decide to delay that realization and that could affect that in 
the short run. In the longer run, it might be less elastic.
    Mr. Grimm. I see my time has expired. I will yield back. 
Thank you very much, Mr. Chairman.
    Mr. Hensarling. The gentleman from Texas, Mr. Hinojosa is 
now recognized for 5 minutes.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Chairman Bernanke, I want to thank you for coming to visit 
our committee and giving us your thoughts.
    I would like to thank you and your staff at the Federal 
Reserve for offering your insights on the drag of the housing 
market on our economy in that recent White Paper. That paper 
explains that foreclosures are considered dead weight loss to 
the economies we have heard from, meaning that they cost 
everyone. They cost the banks, they cost the government, they 
cost families, and they cost society. I think there is no 
better word for the glut of vacant properties in my district in 
deep south Texas. I think that they are being dragged by this 
dead weight of foreclosed homes and by the headwinds of 
negative equity.
    Project Rebuild would put Americans to work refurbishing 
and repurposing current foreclosed properties to help ease the 
shortage of affordable housing options. So my question is, if 
programs such as the Real Estate Own-to-Rent (REO) Program, the 
Housing Trust Fund, and Project Rebuild were to be enacted and 
funded, what do you predict would be the effect of not only the 
housing market but the rental market?
    Mr. Bernanke. First, Congressman, I agree that foreclosures 
impose a lot of costs, not only on the family, the borrowers 
and the lending institution, but also on the neighborhood, the 
community, and the national housing market, so it is very 
    I am not all that familiar with the specific programs you 
are referring to, but we have discussed in the White Paper the 
idea of REO-to-rental. It would seem to make sense to remove 
any artificial barriers to letting the market do what the 
market seems to want to do--which, given higher rents and low 
house prices, it seems like it would make sense to take some of 
those empty houses and put them up into rental.
    As you know, the GSEs are doing a pilot program to see if 
that will work. The issues have to do with whether there are 
enough foreclosed homes within a local area; is there financing 
available for mass purchases of homes? Are there supervisory 
restrictions on banks that would prevent them from doing so? I 
think there are some barriers that we can remove that might 
make this economic--we might see even the private sector 
undertaking this, and part of that would be refurnishing--
refurbishing and repairing dilapidated homes.
    Mr. Hinojosa. The biggest barrier that I see has been the 
lack of community banks giving loans to those who want to carry 
out those programs.
    But let me move to another question that is of great 
interest to me. I serve as ranking member of the Higher 
Education Subcommittee, and I am deeply concerned about the 
cost of higher education and the ever-increasing amount of debt 
that our students are being burdened with. Last year, students 
received more than $100 billion in college loans for the first 
time ever, and the total outstanding college loans are 
projected to surpass $1 trillion. Student debt now exceeds 
credit card debt for the first time, and recently, default 
rates from college loans have jumped up. I would like to hear 
your insights on the possible effects of such unprecedented 
student college loan debt on our economy and the possibility of 
a student loan bubble crisis here in our country.
    Mr. Bernanke. Student loans are becoming a very large 
category of loans. My son in medical school recently informed 
me that he expects to have $400,000 in debt when he graduates 
from school. I don't know about a bubble, per se, because going 
forward, most of the new lending is being done by the Federal 
    Now, there could be, of course, losses that might affect 
the taxpayers if that program is not adequately managed, so I 
think it does require some careful oversight. On the one hand, 
it is good that people who don't have the means can obtain the 
means to go to school; that is important. And student loans 
play an important role in that respect.
    But one might consider whether there are ways of tying 
repayment to financial conditions, for example, as a share of 
income earned or with discounts for certain types of service. 
There are various ways to look at how to repay student loans 
that might better adjust the cost of the loans to the capacity 
of the student. But student loans are a good thing in 
principle, but obviously, the program has to be well-managed, 
and it has become increasingly a Federal responsibility to do 
    Mr. Hensarling. The time of the gentleman has expired.
    The gentleman from Texas, Mr. Canseco, is now recognized 
for 5 minutes.
    Mr. Canseco. Thank you, Mr. Chairman.
    And Chairman Bernanke, thank you very much for being here 
with us today. Our Nation's fiscal health is in very bad shape 
and only getting worse as Medicare and Social Security begin to 
absorb all of the Baby Boomers who are entering into the 
system. And former White House Budget Director Alice Rivlin and 
Senate Budget Chairman Pete Domenici recently said that while 
the President's budget stabilizes debt over the next decade, 
the real problems arise thereafter, as entitlement costs spiral 
out of control and revenues are inadequate to deal with a wave 
of retiring Baby Boomers. You said before that Congress needs 
to act now to put our fiscal house in order. So would you agree 
that in order to do that, Congress must address the 
unsustainability and pending insolvency of Medicare and Social 
    Mr. Bernanke. I noted earlier that the current budgeting 
procedures focus on the next 10 years, but many of the most 
serious problems occur after 10 years, and they do include 
entitlements as one major category of spending. So I urge 
Congress in thinking about this not to be artificially 
constrained by the 10-year budgeting window, but to be thinking 
even longer term, because the longer in advance you can make 
changes, the more time there will be for people to adjust to 
them and the easier it will be politically.
    Mr. Canseco. Excuse me, I don't mean to be putting words in 
your mouth, but your answer is, yes, we need to address that?
    Mr. Bernanke. Particularly on the health care side, I think 
costs are very high.
    Mr. Canseco. And in your opinion, was the budget passed by 
the House of Representatives last year a serious effort to 
address our Nation's long-term fiscal health?
    Mr. Bernanke. I hope you will forgive me if I don't get 
into a political debate like that. Those are Congress' 
decisions. My role here I think is to try to encourage you to 
address the long-run sustainability issue.
    Mr. Canseco. And I hope I am not putting you in a political 
yea-or-nay type of situation, but I highlight the words 
``serious effort.'' It has to be addressed.
    Would you say that any legislative effort to deal with our 
Nation's long-term fiscal health that doesn't address Medicare 
and Social Security is not a serious proposal?
    Mr. Bernanke. It is a fact that health care costs, Medicare 
and Medicaid in particular, are going to become an increasingly 
large part of the Federal budget, and that unless you are 
willing to have the government be a much bigger share of the 
economy than it is now, ultimately those programs would 
basically squeeze out the other components of Federal spending.
    Mr. Canseco. And we will ultimately see a situation where 
our entitlement programs are 90 or 80 percent of the budget, 
and the rest we will have to fight over. To your knowledge, has 
the Administration put forward a plan to address the impending 
bankruptcy of Medicare and Social Security?
    Mr. Bernanke. Again, I think the focus has been on the next 
10 years. The Administration has addressed the long-run issues 
to some extent through some of the aspects of the Affordable 
Care Act that have oversight boards and other kinds of things 
that would try to reduce costs. But obviously, it is still a 
major challenge for Congress to address health care costs.
    Mr. Canseco. In your opinion, would you say that the 
Administration's budget would not seriously address our long-
term deficits because it does not address our entitlements?
    Mr. Bernanke. I would just reiterate that the budget they 
put out was for the next 10 years. By definition, if you are 
only looking at the next 10 years, you are not addressing the 
very long-run implications.
    Mr. Canseco. Thank you very much. Let me go now to 
regulations. I don't know if you read this cover of last week's 
Economist entitled, ``Overregulated America.'' It presents a 
pretty dark portrait of our financial system in the wake of 
``Dodd-Frankenstein,'' as the article puts it. I think the last 
sentence of the article just about sums it up in ambition is 
often welcome, but in this case, it is leaving the roots of the 
financial crisis under-addressed and more or less everything 
else in finance overwhelmed.
    Now, Mr. Chairman, Dodd-Frank required that regulators 
write over 400 rules for the financial system, yet over 300 of 
these remain unwritten. Would you agree that this lack of 
clarity is a hindrance on the financial sector?
    Mr. Bernanke. I think so. We are working as quickly as we 
can. We want to create as much clarity as we can. As you note, 
some of these rules are complex, and it is important to get 
comment and input and to do a good job.
    Mr. Canseco. So as a follow-up--
    Mr. Hensarling. The time of the gentleman has expired.
    Mr. Canseco. Thank you, Mr. Chairman.
    Mr. Hensarling. The gentleman from Missouri, Mr. Clay, is 
now recognized for 5 minutes.
    Mr. Clay. Thank you, Chairman Hensarling.
    And thank you, Chairman Bernanke, for your return to the 
    Unemployment is declining and is now at 8.3 percent, the 
lowest in 3 years, and we can get pretty technical in these 
hearings. But my constituents in St. Louis would like to know 
what we in Congress and you at the Federal Reserve can do to 
put Americans back to work in ways that perhaps we can all 
understand. What do you suggest?
    Mr. Bernanke. From the Federal Reserve's point of view, as 
you know, we have been keeping interest rates low and trying to 
create financial conditions that will foster investment in 
entrepreneurship and demand on the part of consumers, and that 
should help bring the economy back toward a more normal level 
of functioning. But as I said earlier, again, the Fed cannot 
affect the long-run health, prosperity, and productivity of the 
economy. That is really up to Congress. And there is a whole 
range of policies there, starting with fiscal I would say, 
having a fiscal program that on the one hand, achieves fiscal 
sustainability in the long run, and on the other hand, is 
protective of the recovery, which is still not complete.
    We need to talk about skills. We need to talk about the Tax 
Code, infrastructure, etc., that allows our economy to function 
at its best level. So there is a lot to be done, but I guess I 
would put the fiscal issue first, from Congress' point of view, 
and from the Fed's point of view, we are going to pursue our 
dual mandate.
    Mr. Clay. Speaking of interest rates, it has been suggested 
by the House Budget Chair that if interest rates remain low 
until 2014, this will hurt the dollar. Do you think that is 
accurate, and would it risk fueling asset bubbles?
    Mr. Bernanke. I would like to make a distinction that is 
not often made. When people say, ``hurt the dollar,'' there are 
two definitions of the dollar. One is the buying power that is 
the inflation rate in the United States. Does the dollar buy 
more today than it did yesterday? The other definition is the 
dollar versus other currencies, the foreign exchange value of 
the dollar. Those are two separate concepts. Now, in fact, our 
policies have been accommodative since 2008, and on both 
counts, I think we are doing okay. Inflation over my tenure as 
Chairman has been about 2 percent, which is lower than previous 
Chairmen. At the same time, over the last 3 years, the dollar 
in its foreign exchange sense has been up and down, but it is 
roughly where it was 3 years ago. So I don't think that is 
really a problem, although I think it is important to 
distinguish those two components.
    You asked about interest rates on the second part of your 
    Mr. Clay. Yes, on refueling the asset bubble.
    Mr. Bernanke. The bubble. Obviously, that is something that 
we have to pay close attention to. We have greatly expanded our 
ability at the Fed to monitor the financial system broadly to 
take a so-called macroprudential approach. And right now, we 
don't see any obvious bubbles in the economy, but certainly 
that is something that we are going to need to look at and 
continue to monitor.
    Mr. Clay. Thank you for your response. And Mr. Chairman, 
many citizens in the Nation are concerned about the rise in 
gasoline prices at the pump, especially the working class. What 
measures can the Federal Reserve take to stabilize the recent 
rise in gas prices?
    Mr. Bernanke. We are concerned about it as well. It has a 
direct effect on inflation, and it is also bad for growth 
because it takes away buying power from households. So it is a 
real concern for us. On the other hand, overall inflation is 
low and stable, so it is really a question of this particular 
product becoming more expensive relative to other products. And 
again, as I mentioned earlier, the main reason for it is the 
higher price of crude, which in turn relates to a number of 
factors, but among them is uncertainty about supply in Iran and 
in the Strait of Hormuz and in Africa. So I don't think the Fed 
can do much about the price of gas. It is more important that 
we try to establish security of supply and also take measures 
to continue to reduce demand, and it is important to note that 
the United States has been reducing its dependence because we 
are producing more energy and we are importing less.
    Mr. Clay. Would you suggest tapping into the reserves?
    Mr. Bernanke. That is really for the Administration to 
decide. The reserves are typically used for disruptive 
situations where there has been some breakdown in supply 
chains, like during Hurricane Katrina, for example. It would be 
of less assistance during a situation where there is a long-
term supply/demand problem, but again that is an Administration 
    Mr. Clay. Thank you. My time is up.
    Mr. Hensarling. The gentleman from Ohio, Mr. Stivers, is 
now recognized for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman. And thank you to the 
Chairman for coming to testify before us. I appreciate the job 
you do and you have a hard job. I want to ask you about one 
big-picture question, and then talk about some things that are 
important in my district. The big-picture question is, I have 
been here for 13 months and I have pretty quickly realized that 
the only things that happen in this town are the things that 
have to happen. And you have heard some really robust debate in 
this committee about how we might solve our fiscal crisis. You 
have admitted that it is the thing that we should stay focused 
on and I believe the best way to fix it is to require it to 
happen through a balanced budget amendment. That doesn't say 
how we will balance the budget, but it just requires it to 
happen, and I do believe we can do that in a thoughtful way 
with some relief valves for natural disaster, time of war, for 
only that spending related to those activities. Usually, you 
punt these questions, but I am going to ask you anyway. What do 
you think about a balanced budget amendment as a technique for 
solving our fiscal crisis long term and forcing it to become 
one of the things that has to happen in this town?
    Mr. Bernanke. In general, I think there is some evidence 
that rules or structures are helpful in getting better fiscal 
outcomes--for example, offsets and things of that sort. I think 
1 year might be too short a time to demand balance. But over a 
longer period of time with appropriate provisions, some kind of 
rule--I don't know whether you want to go the amendment route--
for the Congress to provide a guidepost both to its own 
deliberations and for the public's awareness could be a helpful 
structure to make things happen.
    Mr. Stivers. Thanks for that thoughtful answer. I do want 
to follow up on a question Mr. Clay just asked, and I asked you 
this last year, but--and I know that the Bureau of Labor 
Statistics does both of your measures that you measure yourself 
against, unemployment and inflation, and I just want to ask you 
to continue to pay attention to the way they measure things 
because the unemployment number does not count the people who 
have dropped out and are no longer looking for work. It also 
does not account for underemployed folks and as we go through 
structural changes in our economy, I am not asking you to 
comment because I know you don't do these, but I am worried 
about the way that they count.
    I am also worried about the way they count inflation 
because when they put together the consumer basket for 
inflation the reduction in the price of housing masking the 
massive increases in commodity prices, including oil and gas, 
including foodstuffs that people buy at the grocery story. And 
if you think about how the people in my district and in the 
rest of this country manage their finances, they lock in long-
term rates on their housing through a mortgage or a long-term 
lease and they have a known amount that they are going to pay, 
which changes only a minor amount. The thing that changes their 
real inflation they see is commodity prices, the price of gas 
at the pump, the price of foodstuffs at the grocery store. So I 
know the Bureau of Labor Statistics does that work for you, but 
I learned a long time ago in the military that what you measure 
is what counts and how you measure it counts. So I would remind 
you again to always review the way those things are measured, 
and I am not asking you to comment because I know it is not 
yours, but I would like you to pay attention.
    Mr. Bernanke. Thank you. I would comment that the BLS does 
provide alternative unemployment measures U5 and U6, which do 
take into account discouraged workers and so on.
    Mr. Stivers. Yes, sir. And so, I would ask you to keep 
looking at those.
    The last thing I want to talk about is community banks. You 
mentioned it in your testimony when you talked about your work 
in the FSOC, and I think we all recognize that community banks 
weren't the interconnected cause of the crisis in 2008, and 
that they also bear a disparate impact of many of these 
regulations because of their size and the fact that they don't 
have big compliance departments. I will tell you a story, and 
then remind you to talk to your friends at the FDIC and the OCC 
because I will tell you, I have not heard a bad story about Fed 
regulators from community banks, but I have heard several 
horror stories about the FDIC and I will tell you a new one 
that I heard since the last time we talked. There is a 
community bank that recognized a borrower was in a 
deteriorating position. They asked him to put money in an 
account, sign an agreement with them, a forbearance agreement, 
but they got a year of principal and interest in a restricted 
account the consumer can't touch so they know that loan is good 
for a year. And the FDIC came in and asked them to put all of 
that money towards principal and write the loan down and 
violate the forbearance agreement with the customer, and then 
basically downgraded the loan. They know that loan is going to 
be good for a year, and the gentleman's financial condition may 
change in that year. They have taken responsible action, and 
the FDIC has forced them to do things that I think are 
    My time has expired, but I would ask you to go back to the 
regulators at the FDIC and the OCC and ask them to please not 
encourage our community banks to do things that actually hurt 
borrowing and hurt our economy. Thank you.
    Mr. Hensarling. The gentleman from California, Mr. Sherman, 
is now recognized for 5 minutes.
    Mr. Sherman. Thank you. Chairman Bernanke, I want to 
commend you on everything you have done to keep short and long 
interest rates as low as possible. We face a difficult 
circumstance and the Fed is doing more than any other agency of 
government to try to get us out of it.
    I will have a question for the record for you on the 
Volcker Rule and applying it to international situations, and 
my first question is about the Society for Worldwide Interbank 
Financial Telecommunications, SWIFT. I am the lead Democrat 
here in the House on a bill designed to, in effect, expel Iran 
from SWIFT. Do you agree that allowing Iranian access to SWIFT 
undermines U.S. national security objectives and our objectives 
in preventing money laundering in the financing of terrorism 
and proliferation, and do you think that we can successfully 
exclude all Iranian banks from SWIFT rather than just those 
Iranian banks that are under EU sanction?
    Mr. Bernanke. I shouldn't make national security judgments, 
and I won't. But on SWIFT, I will say that the Fed is one of 
the supervisors of SWIFT. We work with the Bank of Belgium and 
other international supervisors, and my understanding is that 
it would be feasible and it is a very important system because 
it is part of almost every international money transfer that 
occurs. So it could be a real problem for Iranian financial 
markets or financial institutions if they were banned from 
using it, yes.
    Mr. Sherman. Let me assure you that every institution of 
the Federal Government that is typically involved in national 
security policy would like to see Iran as financially isolated 
as possible, and so while you don't have a national security 
staff, whether it is the Foreign Affairs Committee, the House, 
the full House, the Senate, the State Department, I think you 
should use your position at SWIFT to achieve what is already 
the national security policy.
    Mr. Bernanke. We will do whatever Congress instructs us to 
    Mr. Sherman. Turning to another issue, I want to commend 
you for your White Paper on the U.S. housing market. And I 
think it is appropriate for the Fed to comment on the housing 
sector. There is this program of going REO-to-rental, and I 
think it is important that we not sell these homes in such 
large packages that only huge Wall Street firms are likely to 
bid. I think it is important that you sell packages of homes in 
the same area so that the same management company could 
administer 20, 50, 100 homes, and I think it is important that 
you deal with local investors who have a real stake in the 
local community. I don't know if you have any comment about all 
of that?
    Mr. Bernanke. Only that the FHFA is running a pilot 
program. The tradeoff is you need to have enough homes so that 
it is economical for the management company to maintain them. 
But otherwise, I think it makes sense not to over-concentrate 
the ownership.
    Mr. Sherman. And I think whatever package you have ought to 
be in the same area.
    Mr. Bernanke. Certainly.
    Mr. Sherman. Now, we have seen adjustments to the LLPA from 
Fannie Mae and Freddie Mac, the GSEs, and Congress needed to 
fund a couple of months of the lower Social Security tax, so we 
hit another 10 basis points for the next 10 years. Do you see 
us hurting the housing market if we go back to that well again 
and increase the LLPA or increase the guarantee fee that is put 
on top of what home buyers, and home refinancers have to pay 
when they get a home mortgage?
    Mr. Bernanke. Here is the tradeoff. The benefits of a 
higher fee are, first, the fiscal benefits: reducing increasing 
profits of the GSEs and reducing their call on the Treasury. 
Another benefit is that by raising those fees gradually, you 
may eventually begin to bring private competitors into the 
market. That is part of the strategy. On the other side, as you 
point out, if you make it more costly to get a mortgage, in the 
short term that will hurt the demand for housing, which is 
already pretty weak.
    Mr. Sherman. Yes, and I would think another decline in 
housing prices, or a failure to stabilize them and get them 
inching upward would be very bad for the economy, at least for 
the people I represent. I yield back.
    Mr. Hensarling. The gentleman from California, Mr. Royce, 
is now recognized for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman. I would like to go back 
to that chart, ``Government Spending as a Share of the 
Economy,'' and have that posted. The Congressional Budget 
Office puts this together every year, and they project, Mr. 
Chairman, the point at which the general fund transfers to 
entitlements equal the total tax revenue for the Federal 
Government. And I would just ask you, is this projection 
sustainable? Is this situation sustainable?
    Mr. Bernanke. No, I don't think it is.
    Mr. Royce. And what impact might continuing on this 
trajectory have in terms of interest rates? Say, for a minute, 
that the bond vigilantes start to turn on us the way they did 
on Europe based upon the projections. What potential impact 
could that have on cost of borrowing?
    Mr. Bernanke. If market participants are not persuaded that 
the United States is on a sustainable fiscal course, then 
eventually something will give, and that could be a financial 
crisis. It could be something else.
    Mr. Royce. And since this is a projected budget, what do we 
do, and what responsibility do we have in order to elevate this 
issue, and get Americans, and get the Congress to realize the 
necessity of dealing with reform on this front?
    Mr. Bernanke. It is one of the most fundamental 
responsibilities of the Congress and the Administration to 
manage our finances. But as I indicated in an earlier question, 
it is obviously politically very difficult, and that is what 
you have to confront. Part of the problem, I think, is that the 
public may not fully understand all of the issues and they need 
to be further educated.
    Mr. Royce. And that is why I think part of the 
responsibility lies with Congress, part lies with the central 
bank, and part lies with the Federal Reserve in terms of 
demonstrably explaining to the public the consequences of this. 
And your colleague, Mr. Draghi, the head of the ECB, made 
headlines just last week. He had some very harsh words for 
member countries of the ECB. He said, ``There is no feasible 
tradeoff between economic overhauls and fiscal belt 
tightening.'' And he had some very damning words also for the 
future of the European welfare state.
    I would like to get your thoughts about Mr. Draghi's 
comments, and also in light of the 2012 projected deficit for 
the United States, which is 8.5 percent of GDP. I am looking at 
these numbers for the PIIGS nations; it is comparable or maybe 
a little worse in some cases. So looking at what you describe 
as the sizeable structural budget gap under current policy, and 
looking and beginning to compare that, I would ask 
structurally, is there any material difference between us and 
these nations, or is it simply that the market has turned on 
Europe, but they haven't yet turned on us?
    Let me get your thoughts on that front.
    Mr. Bernanke. There is an important structural difference 
in Europe, in that they have a common monetary policy but they 
don't have a common fiscal policy. In the United States, if a 
single State is in fiscal distress, Social Security and 
Medicare payments still get made because they are done by the 
Federal Government. There is no equivalent of a Federal 
Government in Europe, and so part of their reform process is 
seeing to what extent there should be greater fiscal union. 
Overall, it is true that Europe doesn't have a bigger deficit 
than we do. So that is certainly true.
    All I can say is that Mr. Draghi certainly is right, at 
least for the peripheral countries like Greece, Portugal, and 
Ireland, which really have no alternative but to tighten the 
belt immediately. There may be more flexibility in other 
    Mr. Royce. Okay, I understand that, but with our debt to 
GDP now over 100 percent, with these comparable short-term 
annual deficits when we look at Europe, with comparable 
structural deficits, at what point do our general calls for 
debt reduction become more in line with the comments that your 
counterpart is making? At what point do we ring that bell and 
say the long-term structural adjustments have to be made?
    Mr. Bernanke. You mentioned 8.5 percent. Part of that is 
cyclical and part of that can be addressed by having the 
economy recover. Part of it is structural. In other words, it 
is not going to be better once the economy gets back to full 
employment. So I think you have to pay attention to the 
recovery in the very short run. You can't ignore that. But it 
is important to create a credible plan for long-run 
sustainability as soon as possible, and that would remove a 
risk to our economy.
    Mr. Royce. I agree, but to the extent that you explain this 
to the public, and explain it loudly, more demonstrably, I 
think that they could then understand the need for the 
structural reforms. At this point, I don't think it is 
    Mr. Hensarling. The time of the gentlemen has expired. The 
Chair now recognizes the gentleman from Massachusetts, Mr. 
Lynch, for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman. And thank you, Chairman 
Bernanke, for your willingness to help this committee with its 
work. In your remarks, I think on page 4, you cited the concern 
regarding the downside risk of the economic outlook that is due 
to stresses in the European banking system and the euro zone in 
general. And I note that recently there was an agreement 
between the Greek Government and private bondholders where the 
Greek Government will impose a haircut of about a little over 
50 percent on those bondholders. But I am trying to understand 
the agreement itself. It looks like there is a collective 
action clause that says once a certain amount of the old bonds 
are redeemed, then the government will impose a collective 
haircut across all of those bondholders, and there is a 
question here--I guess you could say that charitably at least, 
there is a default here. And I guess there is a controlled 
default, and what remains unclear is whether these bond swaps 
will constitute a credit event for some of our default 
protection derivatives and whether it will trigger a payout on 
a credit default swap on Greek debt.
    And I guess what I am concerned about, even though the 
amount is fairly small, 3 plus billion is still a small number, 
relatively speaking, is what that means to U.S. banks' exposure 
to Greek debt, and whether or not credit default swaps are 
still a mechanism for protecting against that event. Does this 
make you concerned about what those balance sheets look like if 
there is a rather loose definition now of what a default really 
is and whether or not that protection is actually there?
    Mr. Bernanke. There is a private sector body that 
determines whether a credit event has happened. And I don't 
know what they will determine. My guess would be if they invoke 
the CACs, the collective action clauses, and enforce the write-
down on all private lenders, I think it would be a pretty high 
probability that body would invoke the CDS contracts. So that 
would be my guess. And in terms of U.S. banks, their exposure 
either hedged or unhedged to Greek debt is very small, so I 
don't expect any direct impact. But it is important to maintain 
market confidence more broadly both in the CDS contract, but 
also in the idea that whatever happens in Greece, so to speak, 
stays in Greece, and doesn't spread to other countries, and 
that is why I talked before about the need for financial 
firewalls or other protections that will prevent contagion from 
Greece to other vulnerable countries.
    Mr. Lynch. Okay, so, I guess--what if a decision goes the 
other way? What if they say a default has not occurred and 
there is no payout? I know that is hypothetical. I know that 
the derivatives association probably won't come out that way, 
but what if we ended up with that scenario? Would that 
undermine the whole idea of this protection?
    Mr. Bernanke. In some people's minds, I am sure it would, 
yes. But again, it is up to this group, which obviously is 
interested in maintaining confidence in those contracts to make 
that determination.
    Mr. Lynch. All right, thank you. I yield back.
    Mr. Hensarling. The Chair now recognizes the chairman of 
the Capital Markets Subcommittee, Mr. Garrett of New Jersey, 
for 5 minutes.
    Mr. Garrett. Thank you, and I thank Chairman Bernanke, and 
I am perhaps your last questioner. I appreciate your stamina 
for being here at this time. What I would like to talk to you 
about is what is necessary in some economists' view as to get 
jobs going, the economy broadening and what have you, and that 
is dealing with the money multiplier effect, and for the need 
for that to expand. At least some economists I read say that 
the decline in the multiplier effect is directly related to or 
has some correlation to the fact that the Fed pays interest on 
reserves, and you are nodding, so you know where I am heading 
on this.
    So the purpose of doing that, to pay interest on the 
reserves, is to do what, create a floor, if you will, right? 
You have already sort of created that floor by what interest 
rates are now set in the zero-bound range. So can you elaborate 
as to why the Fed continues to see the need under the power 
that it has to pay IOR?
    Mr. Bernanke. Yes. We have looked at the possibility of not 
paying that 25 basis points, 1/4 of 1 percent that we currently 
pay. In the perspective of, would it be beneficial to the 
economy, the Federal funds rate is currently around 10 or 12 
basis points, or something like that. So limiting that might 
lower it further, but obviously not below zero.
    Mr. Garrett. Right.
    Mr. Bernanke. So the stimulative effect, the effect on 
interest rates generally in eliminating that or the effect on 
credit extension would be quite small. On the other side, we 
have some concerns about the effects of the almost zero rates 
on various financial institutions like money market mutual 
funds, and also on the functioning of the Federal funds market 
itself. We have a weaker guidance from the market in terms of 
what the funds rate actually is because there are fewer 
participants than there used to be because the rates are so low 
that it doesn't cover the cost of making the market. So we 
think there are some financial side effects that would be 
negative, that the benefits for the economy would be very 
small, and for that reason, we haven't reduced the--
    Mr. Garrett. Am I correct to understand that what you are 
actually doing by this is sort of incentivizing the banks, I 
guess, for the reasons that you just said, incentivizing the 
banks to keep their excess reserves at the Fed?
    Mr. Bernanke. Right.
    Mr. Garrett. And that would, in my way of thinking about 
it, sort of contract their ability, and outset the multiplier 
effect on their ability then, or their incentive to lend. Isn't 
that sort of counter to what your policy should be? If you did 
away with it, I understand some of the other ramifications that 
you just talked about, but if you did away with it, there would 
be less incentive for me as a bank to leave my reserves with 
you and hopefully then to lend to a business?
    Mr. Bernanke. No, analytically you are correct, but 
quantitatively, it is trivial, because against the 25 basis 
points, the banks also have to pay an FDIC assessment. So they 
are basically getting maybe 1/10 of 1 percent return to hold 
that money with us. That is certainly not going to prevent them 
from making good loans.
    Mr. Garrett. Is that a better--if I am a bank right now say 
that is still a better bet than what I am getting elsewhere, 
and if you did away with that entirely, then would I have an 
incentive to try and find that--I don't want to use the word 
``better''--investment elsewhere?
    Mr. Bernanke. It would be a 10-basis point incentive and 
that is pretty small. That is only an overnight rate. It is 
probably less of an effect on the monetary rates.
    Mr. Garrett. Okay, so if that is the case then it seems 
that would--watching my time here--run counter to what your 
opening statement is as far as the incentive and the effect on 
the money market funds and the rest, since it is only a de 
minimis amount?
    Mr. Bernanke. No, because, remember, bank loans are 
typically a year or more, whereas money market funds are mostly 
under 30-day investments. And the Federal funds market of 
course is an overnight market.
    Mr. Garrett. Another question--I only have a minute here. A 
couple of questions. One, you talked about the situation in 
Greece and what stays there should stay there. One of the 
concerns about it not staying there is the fact that you have 
an open swap line, not just with--not necessarily with Greece, 
but with Europe. Can you just comment briefly as to why we 
should not be concerned as far as the potential for the 
contagion if things do not stay in Greece and things do not 
stay in Europe, that this swap line may be negatively impacted 
as the asset values drop over there?
    Mr. Bernanke. First of all, the swap line has some very 
distinct benefits that I discussed before.
    Mr. Garrett. I understand those.
    Mr. Bernanke. And on the cost side, it is a very safe 
proposition. First, our counterparty is the ECB. It is not 
banks, it is not Greece. It is the European Central Bank 
itself, which in turn is well-capitalized and it has behind it 
the national central banks of 17 countries. The swaps are also 
collateralized by euros, and in addition, the contracts are 
such that they pay us back in dollars in interest rates 
determined in advance. So we have no interest rate risk, we 
have no exchange rate risk and we believe that we have no 
credit risk.
    Mr. Hensarling. The time of the gentlemen has expired. The 
Chair now recognizes the gentlemen from Georgia, Mr. Scott, for 
5 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman. Welcome, 
Chairman Bernanke, it is very good to have you here. Let me 
commend you and the Fed. I think it is very important for us to 
recognize the achievement and the progress we are making with 
the economic recovery, and I think it is in no small measure 
due to your monetary policy of accommodation and creating 
credit facilities and certainly ensuring liquidity for 
borrowers. I think that is the real core. And unemployment now 
is going down. We are at 8.3 percent. We have come up. We are 
averaging about 200,000 new jobs each month now. We are not 
bleeding jobs. We are adding them. The Dow Jones is still 
cracking around 13,000. We have come a long way, but we are not 
out of the woods. But I do--it is important for us to recognize 
your contribution in helping us to wade through some very 
troubled waters.
    Let me just ask you about the stringent prudential 
standards under Dodd-Frank, and under Section 165 of Dodd-
Frank. You were given the opportunity to differentiate among 
companies on an individual basis, or by category, taking into 
consideration their capital structure, riskiness and 
complexity, and of course Congress put this provision in 
because we expected that you will differentiate between the 
largest and most complex bank holding companies and those with 
more traditional activities who also exceed the $50 billion 
level in assets.
    Can you tell us, have you yet established, at least 
conceptually, the different categories or tiers of risk 
subcategories and associated enhanced safeguards, including 
specifically with regard to capital that will exist for the 
bank holding companies that have assets larger than $50 
    Mr. Bernanke. As you know, that is Section 165, 166 of 
Dodd-Frank. We put that out for comment. We are still receiving 
comment on that, and we have also made public our discussions 
on the Basel capital rules, Basel III. And both of those call 
for gradated application to banks, with the highest application 
to the largest, most complex banks and then obviously less 
going down. So that would be true both in terms of supervisory 
effort, but specifically in terms of capital. As you know, the 
Basel III involves a capital surcharge, and that will be 
determined by a formula which I believe we have provided, or at 
least some variant of it. That will put the highest surcharge 
only at the very top most complex banks and then will be 
gradated down essentially to zero, once you get to large but 
less complex banks. So the capital surcharge and the extended 
supervisory oversight will be gradated according to size and 
    Mr. Scott. Right. Let me just turn for a moment to the 
Volcker Rule as well, and its implication regarding what is 
happening around the world. And let me just add, too, I think 
your policy of the firewall to kind of keep what is going on in 
Greece in Greece, but let me just ask you, how is Spain doing? 
Is this firewall--I think Spain's situation is probably the 
next most egregious. Is its firewall doing a good job from 
getting to spread there?
    Mr. Bernanke. Generally, the firewalls, which are European 
funding to stand as a backstop in case there is contagion, we 
think more needs to be done there and the Europeans I am sure 
will be looking at that and trying to strengthen those 
firewalls. So I think there is more to be done there. But 
Spain, on the one hand, I think is doing better. They have made 
progress in terms of their fiscal consolidation. They are 
taking actions to strengthen their banking system, and their 
cost of credit has gone down probably in part because of 
fundamentals, but also in part because of the ECB's long-term 
refinancing operations.
    Mr. Scott. Now, let me ask you very quickly about the 
Volcker Rule. I am curious as to why you believe it is 
appropriate to extend the jurisdiction of the United States 
throughout the world in this regard. It seems to me that we 
should at a minimum wait to see what other countries are doing 
in this regard so that we do not put the United States capital 
markets or U.S. investors at risk. Are other countries, to your 
knowledge, planning to adopt an approach such as the Volcker 
    Mr. Bernanke. Not to my knowledge, no. But we are not 
extending jurisdiction outside the country, except insofar as 
that American-based banks will have to follow the rule in their 
worldwide operations. But we are obviously not going to require 
European banks operating in Europe to obey the rule.
    Mr. Scott. But our banks who are operating will?
    Mr. Bernanke. Yes.
    Mr. Hensarling. The time of the gentleman has expired. The 
Chair now recognizes the chairman of the Oversight and 
Investigations Subcommittee, the gentleman from Texas, Mr. 
Neugebauer, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. Chairman Bernanke, 
it is good to have you back again. I have two or three 
questions here. One of the things, the G8 central banks have 
expanded their balance sheets. If you convert all of their 
currencies to dollars to about $15 trillion over the last 2 
years, what do you see looking forward? How much more expansion 
in these balance sheets in these central banks do you see, and 
what could be some of the consequences of that?
    Mr. Bernanke. I don't know what the expansion may or may 
not be. The Japanese, for example, have, again, begun some 
asset purchases. The ECB has put out again this morning about a 
half a trillion euros of bank lending, but it doesn't all 
reflect a larger balance sheet. Some of it, I think, is 
sterilized. Each of these central banks is dealing in a similar 
way. In this respect, the Federal Reserve is not unusual. It is 
trying to find ways to provide more accommodation in a 
situation where interest rates are close to zero, and so 
cutting the basis of the Federal funds rate by 25 basis points 
doesn't work. All of the central banks in question have similar 
tools to the ones we have, including the ability to pay 
interest on reserves, the ability to sell assets, and the 
ability to sterilize their balance sheets so that I think we 
all have adequate tools to withdraw that accommodation and to 
shrink those balance sheets at the appropriate time. I think 
this is currently where the best approach, the best available 
approach is to provide additional financial accommodation in a 
world where rates are close to zero, and we can't obviously go 
below zero.
    Mr. Neugebauer. So keep printing, basically?
    Mr. Bernanke. I know there has been some debate about the 
use of the word ``printing.'' It is in fact the case that the 
amount of currency in circulation has not been affected by any 
of these policies. What has happened is that the amount of 
electronic reserves held by the banks at the Federal Reserve 
has gone up by a great deal, but they are sitting there. They 
are not doing much. Mr. Garrett raised the question of whether 
they should be doing more in some sense, but so far we have not 
seen any indication that they have proved inflationary.
    Mr. Neugebauer. Another question, does the Federal Reserve 
own gold?
    Mr. Bernanke. No.
    Mr. Neugebauer. So you don't hold any gold?
    Mr. Bernanke. I don't think so. Maybe a little bit.
    Do we hold gold? Looking to my colleagues there, I don't 
think so, no.
    Mr. Neugebauer. Somebody asked me to ask you that question, 
so I am--
    Mr. Bernanke. I am told we have gold certificates.
    Mr. Neugebauer. Gold certificates, okay, and what do we do 
with those?
    Mr. Bernanke. They are part of our reserves.
    Mr. Neugebauer. And can you furnish me with how much that 
    Mr. Bernanke. We will, but what I do know is that the great 
bulk of U.S. gold is held by the Treasury, and not by the Fed.
    Mr. Neugebauer. Okay, thank you. We have been trying to 
track the cumulative effect of the Dodd-Frank Act and, as you 
know, it has about 400 rulemaking requirements in it. Some of 
them you are required to comply with. And recently, we have 
reached a milestone. I think of the 400, we have put out about 
140 of the rules, and so we still are about a third of the way 
through there. It was alarming to find that basically the 
regulators themselves published that it would take about 22 
million manhours per year to comply with the first 140 
regulations. That means we are two-thirds of the way through, 
and so we are obviously headed to a lot of compliance hours. It 
was interesting also to note that it only took 20 million 
manhours to build the Panama Canal. I think that most everybody 
would agree that 20 million manhours spent building the Panama 
Canal created more economic opportunity than the 22 million 
manhours complying with regulations.
    Are you concerned that this level of regulation and this 
kind of burden that we are putting on the markets and the 
market participants, is that healthy?
    Mr. Bernanke. Congressman, I do think it is important to 
point out what we are trying to prevent. We had a terrific 
financial crisis that has cost this country enormous amounts of 
money and created enormous amounts of hardship, and it is 
certainly worth some cost to try to make sure that it doesn't 
happen again. Yes, those regulations are costly, but speaking 
for the Fed, we have taken a lot of steps to try to minimize 
those costs, including bunching, grouping rules together in 
packages so that we can look at the interactions among them; 
doing a lot of cost-benefit analysis; having long transition 
periods and so on. So we need to do what needs to be done to 
prevent another crisis, certainly, and of course people can 
differ on how much needs to be done. But we are trying as best 
we can to carry out the statutory obligations that Congress 
gave us at the lowest cost to the industry.
    Mr. Hensarling. The time of the gentleman has expired. The 
Chair now recognizes another gentlemen from Texas, Mr. Green, 
for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. And I thank you, 
Chairman Bernanke, for being here today. We greatly appreciate 
your attendance, and you always share great information with 
    Mr. Chairman, FSOC, the Financial Stability Oversight 
Council, has that been beneficial? Do you find it beneficial to 
meet with the other prudential regulators? Could you just 
elaborate for a moment on this, please?
    Mr. Bernanke. Yes, it has been beneficial. I believe there 
are 10 voting members, and we have been meeting on a reasonably 
frequent basis. And as I mentioned earlier, virtually every 
principal is there at every meeting so the leadership is really 
there to talk. And it has had two other benefits. One is that 
we have extensive staff interactions so there is staff 
interaction going on between meetings which has been very 
useful. And in addition, while there has always been a certain 
amount of interagency cooperation, coordination, and joint 
rules and so on, I think that has really picked up and been 
improved and been helped by the fact that we are working 
together in this FSOC context. So I think it has been helpful.
    Mr. Green. Is it fair to say that you did not have a 
similar circumstance prior to Dodd-Frank, a similar meeting 
arrangement comparable to what FSOC provides?
    Mr. Bernanke. Not exactly. We did have the President's 
working group which involved some of the agencies and we did 
have a lot of bilateral and trilateral discussions over various 
rules. But we did not have a single place where all the major 
regulators got together to discuss possible threats to the 
    Mr. Green. Are these meetings well-coordinated and do they 
take place at the specific times such that this has become a 
part of your agenda?
    Mr. Bernanke. The meetings are, although on specific dates, 
they are set up by the Treasury. Sometimes it is hard to 
schedule because we want all of these folks to be there, but we 
have been meeting more frequently than quarterly, and again the 
meetings are quite substantive. They usually have both a 
private session where we discuss matters among ourselves and 
then there is a public session as well.
    Mr. Green. One additional question on this. With FSOC, are 
you better positioned to deal with systemic risk than you were 
prior to FSOC?
    Mr. Bernanke. I believe so, because it allows us to take a 
broader perspective. Each individual agency, for example, if it 
has an issue it is working on, can make a presentation to 
everybody, and we will all be informed about what, say, the SEC 
is doing on money market mutual funds or the insurance people 
are doing on insurance issues.
    Mr. Green. Let's talk for just a moment about cutting our 
way to prosperity. Is there a downside to cutting our way to 
prosperity, and I am referencing to some extent, cutting to the 
extent that we start to decrease the number of jobs, we are 
cutting jobs. We talk quite often about systemic risk, well, 
actually stimulus, providing a stimulus for the economy, and 
not wanting to provide too much stimulus. But can we also move 
to a point where we are cutting such that we are hurting the 
    Mr. Bernanke. I have expressed concern about what happens 
on January 1st, which would be a major fiscal contraction. I 
think it would pose a risk to the recovery. But what I have 
advocated is sort of a two-point, two-part process, one of 
which is critically making sure that we have a fiscally 
sustainable path going forward in the medium to long term, but 
that at the same time we pay attention to the recovery and make 
sure we don't snuff it out unintentionally.
    Mr. Green. Ranking Member Frank presented a chart from your 
Monetary Policy Report, and this is number 30, and this chart 
really speaks volumes about what has happened and what is 
happening. If you consider zero terra firma or above water, 
obviously, we were going down fast, sinking. We were falling 
off a cliff, and now we are coming up. In fact, we are back 
above water, on terra firma. Not where we would like to be, but 
we are clearly moving in the right direction. If down is bad, 
then up is good. It is kind of simple to see where we are here. 
If down is wrong, up is right; if down is worse, up is better. 
I hate to use this highly technical terminology. Some people 
may not quite comprehend all of what I am saying, but I thank 
you for the chart.
    Mr. Hensarling. The time of the gentlemen has expired. The 
Chair now recognizes the gentleman from New Mexico, Mr. Pearce, 
for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman. And thank you, 
Chairman Bernanke, for being here today. Mr. Garrett was asking 
a little bit about the European exposure, and you stated that 
the European banks are pretty sound. Did I hear you correctly 
that you were saying that they have pretty stable--
    Mr. Bernanke. I was talking about the European Central 
Bank, the central bank. The European banking system is 
currently being asked by the European banking authority to 
raise a good bit more capital, and of course, their liquidity 
situation is being satisfied almost entirely by, or very 
substantially by the European Central Bank rather than by 
private markets.
    Mr. Pearce. So that would explain, because I was a little 
confused. On page 4, you were talking about your continuing to 
monitor the European exposure of U.S. financial--
    Mr. Bernanke. Yes.
    Mr. Pearce. So that would be that. How long have you been 
watching the exposure of U.S. firms to financial--to the 
European financial--
    Mr. Bernanke. The European situation became prominent about 
2 years ago, so pretty much throughout that period.
    Mr. Pearce. I guess my question then is about the New York 
Fed that gave primary dealer status to MF Global, and so 2 
years ago would be somewhere in the timeframe that they were 
making application, in February of 2011 is when they got the 
application done. That is when it was given. And so this 
watching of exposure, MF Global had gone up by $4 billion 
during that very time period. Why didn't the New York Fed catch 
this exposure if that was something you all were concerned 
    Mr. Bernanke. Because we are regulating banks and we are 
looking at the banks' exposure. MF Global wasn't a bank and we 
weren't their regulator.
    Mr. Pearce. But they were taking a look at them. They had 
to take a look at them to give dealer--
    Mr. Bernanke. But only as a counterparty. They met the 
criteria for size and capital and experience.
    Mr. Pearce. They had been turned down several times before.
    Mr. Bernanke. I don't know.
    Mr. Pearce. I will tell you, they were turned down several 
times before.
    Mr. Bernanke. They met the criteria when the New York Fed 
gave the primary dealer status. It has been our goal not to 
restrict the primary dealer status to just a few of the larger 
institutions. We want to have a number of institutions there, 
and they met the standards to be a counterparty to the New York 
Fed. But again, it is not the New York Fed's responsibility to 
supervise them.
    Mr. Pearce. Okay. You used some fairly significant words 
regarding what is downstream from us if we continue this 
spending by the Federal Government. Didn't you earlier, in 
answer to a question; in other words, if we keep going, it is 
going to get fairly significant. You used terms that were 
almost catastrophic.
    Mr. Bernanke. There is a significant risk that if fiscal 
sustainability is not achieved within a reasonable period, 
markets might decide it is never going to be achieved, and then 
we would face a crisis of confidence. That is always a 
    Mr. Pearce. So this spending that we are doing is deficit 
spending. You would say it is borrowed money, except that no 
single country has the ability to loan a trillion dollars when 
we are running $200 billion, $300 billion deficits. China could 
lend us the money, but with a $6 trillion economy, China 
doesn't appear to be able to lend $1 trillion, which would be 
1/6, every year. So the Federal Reserve by owning $1.2 trillion 
in U.S. treasuries is really facilitating this spending, and it 
seems like you all have the capability to give some discipline 
into the institutions here in Washington that don't have the 
discipline internally. Even if it was only a 10 percent 
reduction, say, we are not going to buy that many Treasuries, 
not going to do that much quantitative easing, or whatever 
method you are using. Why don't you all say no?
    Mr. Bernanke. Because our mandate given to us by Congress 
is to try to achieve maximum employment and price stability, 
and that is what determines our interest rate.
    Mr. Pearce. Maximum employment and price stability, you 
already said that we are facing very serious things if we keep 
spending what we are spending.
    Mr. Bernanke. That is correct, so that is why I am here 
advocating to Congress that Congress take responsible action.
    Mr. Pearce. You are independent, and you are not indicating 
any discipline, in disciplining us. Thank you, Mr. Chairman. I 
yield back.
    Mr. Hensarling. The time of the gentleman has expired. The 
Chair now recognizes the gentleman from Colorado, Mr. 
    Mr. Perlmutter. Thank you. And thank you, Chairman 
Bernanke, for being here, and for staying all this time. I 
usually get to ask questions right at the end. And I appreciate 
your stamina, really, through this hearing, and through a storm 
that none of us quite understood what was coming. You can 
always look back and say--and I look at Casey Stengel or Yogi 
Berra who said, ``Look it up.'' We can look it up in this 
monetary report, and we can see the storm. You can see where 
the cliffs were. You can see the drop in the employment. You 
can see the drop in the GDP, and I think as we went through 
this storm, and there are still some showers to come, there is 
no question about that, but we came through this storm, and I 
just want to compliment you for being a pretty good captain, 
one of many, but a pretty good captain in all of this.
    But I do have a few questions, and Mr. Pearce just brought 
up something for me. I would like to discuss charts 23 and 24; 
Chart 23 is Federal receipts and expenditures, 1991 through 
2011; and Chart 24 is change in real government expenditures on 
consumption investment, 2005 through 2011. So when I look at 
Chart 23, I see a continued reduction in revenue to the Federal 
Government, and I see in part of those spikes, a huge spike in 
the fall of 2008 and 2009, as demand for Federal services or 
services went up, GAP being debt accumulated. Would that be a 
fair statement?
    Mr. Bernanke. Yes.
    Mr. Perlmutter. Okay, and then in 24, as opposed to saying, 
there hasn't been any effort to rein in experiences, if I read 
chart 24 correctly, there has been a reduction, at least based 
on this chart in Federal expenditures. Is that correct? Am I 
reading it right or wrong?
    Mr. Bernanke. Yes, you are reading it correctly. That is 
really the phasing out of the stimulus in 2009, and then of 
course, States and localities also have been laying off workers 
and cutting back spending.
    Mr. Perlmutter. Okay, so let's talk about what is happening 
at the end of this year. Now, if our goal is to pay down the 
country's debt, there are two ways to do it. You have more 
revenue and you have less expense, as opposed to what we saw in 
chart 23, where we had less revenue and more expense. So if I 
am not mistaken, you called it a fiscal cliff. I am not sure I 
would say that. It is the Bush tax cuts expire, so revenue 
increases, and the sequestration or the budget cuts kick in, we 
can start paying down the debt. Now, you said that may cause a 
major contraction. Can you explain that?
    Mr. Bernanke. I don't think I used those words exactly, 
    Mr. Perlmutter. Okay, so use your own words. I don't mean 
to put words in your mouth.
    Mr. Bernanke. I would just cite as my authority the CBO, 
the Congressional Budget Office, has to make projections based 
on current law. So they assumed in their projections that the 
current law, the current expiration of the tax cuts and of the 
payroll tax relief and the sequestration all came into play in 
2013, and their economic projection based on that was for 1 
percent growth and for unemployment to begin to rise again. And 
it is just the usual logic that if you cut spending sharply and 
raise taxes, you are going to pull demand out of the economy, 
and it is going to hurt the recovery.
    Again, it is very important to address these issues in the 
medium to long term, but if it all hits the economy at one 
time, it would be very hard to adjust to that.
    Mr. Perlmutter. So I guess what you are saying is that we 
have these two things out there, and if we have the 
opportunity, both sides of the aisle, we ought to be a little 
more refined or targeted as we try to approach paying down the 
debt. At least that is how I am understanding your--
    Mr. Bernanke. You can get the same pay-down, the same long-
term benefits, but just a little more gradually, I think.
    Mr. Perlmutter. I have a question on page 2 of the report. 
It says, ``Additionally the ECB made a significant injection of 
euro liquidity via its first 3-year refinancing operation and 
central banks agreed to reduce the price of U.S. dollar 
liquidity based on swap lines with the Federal Reserve.'' What 
does that mean?
    Mr. Bernanke. So, European banks are having trouble raising 
    Mr. Perlmutter. Right.
    Mr. Bernanke. Most of their funding is in euros. Some of it 
is in dollars. On the euro side, the European Central Bank, 
which controls the supply of euros, has lent a trillion euros 
for 3 years to European banks on a collateralized basis and 
that has greatly reduced the problems that European banks have 
in raising euro funding. The European Central Bank doesn't 
control dollars. The Federal Reserve controls dollars. In order 
to get dollars to the European banks who use it, in turn to 
make loans to U.S. citizens, among other things, the Federal 
Reserve has swapped dollars for euros. We give the European 
Central Bank dollars, and they give us euros. On their 
recognizance they take the dollars and lend them for shorter 
periods, not 3 years, less than 3 months, to European banks 
thereby relieving them of their dollar funding problems. They 
pay us back with interest, so we don't lose anything, but it 
helps relieve the funding tensions for European banks.
    Mr. Perlmutter. All right, thank you. Thank you, Mr. 
    Mr. Hensarling. The time of the gentlemen has expired. The 
gentleman from Minnesota, Mr. Ellison, is recognized for the 
remaining time.
    Mr. Ellison. Thank you, Mr. Chairman. Chairman Bernanke, 
thank you for coming. I just want to know your views on what 
more you think could be done to try to help the housing market 
get back on track? Let me just observe that about 60 percent of 
all the mortgages are either owned or backed by the GSEs, and 
perhaps some people have proposed that we write those down, the 
ones we can write down. And yet, they haven't been, and there 
is some resistance to that.
    Is that a feasible solution? And if not, what other ideas 
do you have regarding the housing market, because it seems like 
that is the one persistent thing that is dragging the economy 
down. It is not just construction jobs. It is just the loss of 
equity. People did not--it is the general prevailing sort of 
diminishment of demand, as I see it. So let me hand it over to 
you. That is actually going to be my only question.
    Mr. Bernanke. As you may know, Congressman, the Federal 
Reserve put out a White Paper recently that had an analytical 
discussion of a variety of different options without making 
    There are a whole range of issues. GSEs have actually 
addressed some of them to some extent. One problem is getting 
the excess supply of housing off the market, so to speak. And 
one way to do that is to convert housing, REO housing, into 
rental housing. GSEs have a pilot program to do that, and we 
discussed some of the issues related to that in our White 
    There is also for us to get rid of dilapidated or 
uninhabitable houses, land banks and similar institutions are a 
useful tool potentially. We also consider--we have not taken a 
position, and there certainly is no official Fed position on 
principal reduction, but we have looked at various alternatives 
to foreclosure, including, for example, deed in lieu or short 
sales, which allow people to get out of the house and for the 
bank to avoid the foreclosure process.
    I guess a final area where we have a good bit of discussion 
is about availability or access to mortgage credit which is now 
very, very tight. And one of our recommendations was that the 
GSEs look at their policies regarding representations and 
warranties to provide greater assurance to originators that 
their loans would not be returned to them. GSEs are looking at 
that. That is a positive development.
    Another way to improve originations is to reduce 
uncertainty about servicing obligations. And between the 
various agreements that have occurred recently in the Fed's 
cease-and-desist orders, current discussions about national 
servicing standards and the like, I think some of that 
uncertainty is being removed. So there is a whole variety of 
things that can be done. None of them is a silver bullet, but 
many of them could be helpful.
    Mr. Ellison. Thank you.
    Thank you, Mr. Chairman.
    Mr. Hensarling. The time of the gentleman has expired.
    Chairman Bernanke, we thank you for your testimony today.
    The Chair notes that some Members may have additional 
questions for Chairman Bernanke, which they may wish to submit 
in writing. Without objection, the hearing record will remain 
open for 30 days for Members to submit written questions to 
Chairman Bernanke and to place his responses in the record. 
This hearing is now adjourned.
    [Whereupon, at 1:02 p.m., the hearing was adjourned.]

                            A P P E N D I X

                           February 29, 2012