[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE
STATE OF THE ECONOMY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
FEBRUARY 29, 2012
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-103
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
James H. Clinger, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
February 29, 2012............................................ 1
Appendix:
February 29, 2012............................................ 53
WITNESSES
Wednesday, February 29, 2012
Bernanke, Hon. Ben S., Chairman, Board of Governors of the
Federal Reserve System......................................... 6
APPENDIX
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
forever.
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
forever.
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.
STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you. Chairman Bachus, Ranking Member
Frank, and other members of the committee, I am pleased to
present the Federal Reserve's semiannual Monetary Policy Report
to the Congress. 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
policy.
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
preserved.
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
money.
Mr. Bernanke. I would be very happy to talk to you about
it.
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
cordiality.
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
them?
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
constructive.
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
stimulus--
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
together.
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
actually.
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
that.
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
discussion.
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
you.
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
savers.
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
either.
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
done.
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
issues.
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
occasion.
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
discussed.
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
States.
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
answer.
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
comment?
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
rule.
Mr. Grimm. So I am assuming then, that obviously, you are
not going to be strictly enforcing a rule that is not in place
yet?
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
effect?
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
costly.
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
Government.
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
that.
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
Security?
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
committee.
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
question?
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
decision.
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
irresponsible.
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
do.
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
countries.
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
understood.
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
billion?
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
complexity.
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
Rule?
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
is?
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
us.
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
economy.
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
economy?
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
about?
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
possibility.
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.
Perlmutter.
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,
but--
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
funds.
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.
Chairman.
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
recommendations.
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
Paper.
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
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