[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

                               __________

                             JULY 18, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-145










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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

                              ----------                              
                                                                   Page
Hearing held on:
    July 18, 2012................................................     1
Appendix:
    July 18, 2012................................................    51

                               WITNESSES
                        Wednesday, July 18, 2012

Bernanke, Hon. Ben S., Chairman, Board of Governors of the 
  Federal Reserve System.........................................     7

                                APPENDIX

Prepared statements:
    Paul, Hon. Ron...............................................    52
    Bernanke, Hon. Ben S.........................................    54

              Additional Material Submitted for the Record

Schweikert, Hon. David:
    U.S. Senate letter regarding PCCRAs..........................    62
Bernanke, Hon. Ben S.:
    Monetary Policy Report to the Congress, dated July 17, 2012..    66
    Written responses to questions submitted by Representative 
      Cleaver....................................................   126
    Written responses to questions submitted by Representative 
      Hurt.......................................................   127
    Written responses to questions submitted by Representative 
      McCarthy...................................................   130
    Written responses to questions submitted by Representative 
      Paul.......................................................   132
    Written responses to questions submitted by Representative 
      Schweikert.................................................   134

 
                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY

                              ----------                              


                        Wednesday, July 18, 2012

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the committee] presiding.
    Members present: Representatives Bachus, Hensarling, Royce, 
Lucas, Paul, Manzullo, Jones, Biggert, Miller of California, 
Garrett, Neugebauer, McHenry, Campbell, Pearce, Posey, 
Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, 
Hayworth, Renacci, Hurt, Dold, Schweikert, Grimm, Canseco, 
Fincher; Frank, Waters, Maloney, Watt, Sherman, Capuano, Clay, 
Lynch, Miller of North Carolina, Scott, Green, Perlmutter, 
Donnelly, Carson, Himes, and Carney.
    Chairman Bachus. This hearing will come to order. We meet 
today to receive the semi-annual report to Congress by the 
Chairman of the Board of Governors of the Federal Reserve 
System on 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 now recognize myself for 5 minutes for the purpose of 
making an opening statement. We are honored to have Federal 
Reserve Chairman Ben Bernanke before us today. Thank you, 
Chairman Bernanke, for appearing before our committee once 
again, and for your dedicated service to the country.
    As we meet this morning, we continue to find our Nation on 
a path that is fiscally and economically unsustainable. And 
some in the Senate, Chairman Bernanke, apparently believe that 
only you can do something about it. Since the economy is bad 
and unemployment is high, one of those Senators pointedly told 
you yesterday that you have to get to work. That leads to an 
important question: Who is ultimately responsible for the state 
of our economy? We once had a President who had a sign on his 
desk in the Oval Office that said, ``The buck stops here.'' I 
will amend that to say the buck stops with the President of the 
United States and with Congress, who are the elected leaders of 
this country.
    The President and Congress are the ones who have created 
America's spending-driven debt crisis by hitting the gas when 
what was needed was someone stomping on the brakes, and more 
importantly, the need for reform of our entitlements. Some in 
the Senate may want to duck responsibility, but the truth is 
the Federal Reserve cannot rescue Americans from the 
consequences of failed economic and regulatory policies passed 
by Congress and signed by the President. The Chairman of the 
Fed cannot save the economy when those elected leaders decide 
they are prepared to send our country over a fiscal cliff, as 
one of those elected leaders in the Senate declared earlier 
this week.
    Chairman Bernanke has warned Congress and the 
Administration time and time again that without action, growing 
deficits and the debt will erode our prosperity and leave the 
next generation of Americans with less opportunity. To avoid 
this fate, we must start taking action now to tame Washington's 
appetite for spending, and more importantly, as Chairman 
Bernanke has said, tackle the difficult but necessary long-term 
restructuring of our entitlements.
    The House, to its credit, has had the courage, in this 
hyperpartisan attack atmosphere, to begin the long-term 
process; the Senate has not. So I would like to take this 
opportunity to tell the Senate that it is time for them to go 
to work. Our economy is hobbled not only by our deficits and 
debt, but also by the cumulative weight of Washington 
overregulation. This committee hears constantly from private 
sector witnesses who tell us the regulatory burdens being 
placed on them are, as one small town banker witness said, 
slowly but surely strangling their ability to do business and 
create jobs. This is not to argue we don't need regulations. 
Reasonable regulations provide clear rules of the road for 
businesses and protect consumers.
    Businesses need certainty and to know what to expect. They 
don't have it under the present regulatory regime. 
Unfortunately, job creators will tell you that reasonable and 
clear rules aren't what they are getting from Washington right 
now. Instead, they tell us the regulators do not coordinate 
their actions, and the result is businesses are subjected to 
confusing and often conflicting rules. While many in Washington 
attack Wall Street and big corporations when they call for more 
regulation, the reality is the burden of Federal red tape falls 
disproportionately on small businesses and the small community-
based financial institutions that lend to them.
    As the Small Business Administration reports, it costs 
small businesses 36 percent more per employee to comply with 
Federal rules than large companies. This has driven a 
consolidation which is evident in our financial services 
industry. And because small businesses are the engine of job 
growth in our economy, we can hardly blame the Fed when 
policies passed by this Congress and signed by the President 
result in regulatory overkill that makes it harder for small 
businesses to thrive and hire.
    Instead of more regulations, Congress and the President 
need to do more to eliminate the government roadblocks that 
stand in the way of small business success and job creation. 
The President recently said that entrepreneurs and small 
businesses aren't successful on their own; they can succeed 
only with the help of the government. That is akin to saying 
that Apple Computer is a success because of the person who 
built Steve Jobs's garage. Small businesses succeed in this 
country in spite of the government, not because of it.
    Chairman Bernanke, I know all of us look forward to your 
testimony and the discussion that we will have today. Again, I 
thank you for being here, and I yield to the ranking member.
    Mr. Frank. I appreciate that. I am always struck by the 
ability of my Republican colleagues to engage in a kind of 
duality of the mind with regard to Federal spending. I listened 
to the chairman talk about the need to rein in spending, and 
note that we are going to be given a bill today to vote on that 
will increase military spending beyond what the President has 
asked for.
    There is this curious notion that somehow military spending 
is very different from all other government spending. People 
who tell us how government spending never creates a job become 
the most militant Keynesians when it comes to military 
spending, even though a very large percentage of it is spent 
overseas. We will be asked today to continue a subsidy to NATO 
so that the wealthy nations of western Europe can continue to 
spend very little on their military, so that they in turn can 
have lower retirement ages than we have here in America, and we 
will then be telling Americans that we have to cut back on 
their Social Security and their Medicare.
    Note when my Republican friends say ``entitlement,'' they 
mean Social Security and Medicare. And I am proud of those. 
While we can make them more efficient, I am not prepared to 
maintain more and more military spending at their expense.
    Next, I want to comment on what Chairman Bernanke has told 
us. And I want to begin by noting that when people look for 
bipartisanship, it is striking the degree of partisan criticism 
I have heard from Republicans of Chairman Bernanke, who is 
single-handedly the most bipartisan institution in Washington. 
He was appointed 3 times to important economic positions by 
George Bush: first, to the Federal Reserve Board of Governors 
in 2002; second, to be Chairman of the Council of Economic 
Advisers in 2005; and third, to be Chairman of the Federal 
Reserve.
    It does appear that when Mr. Bush had an important economic 
appointment to make, he said, get me the usual suspect, which 
was Chairman Bernanke. And I think that is very important, 
because he is genuinely bipartisan, and therefore, I look at 
his analysis of the economy. And it has very little do with the 
very partisan caricature we hear.
    I read the economic report, the Monetary Policy Report; 
there is a basic statement that our economy has been recovering 
from the terrible crisis brought about by the complete absence 
of regulation and consequent, unchecked irresponsibility by 
some financial institutions, obviously not all, and we are told 
that it is slowed down by a number of factors. The most 
important, according to the way it is presented here, is what 
is going on in Europe. Nothing that we have done is 
responsible. In fact, the Federal Reserve has tried to be 
helpful in alleviating the situation in Europe, drawing again 
partisan criticism from the Republicans for their cooperation 
with the ECB to ease that situation to our benefit. We are told 
that there is a problem because there is uncertainty about the 
tax and spending policies. But those are wholly bipartisan. By 
the way, I voted against the bill that included the sequester. 
I think we can substantially cut military spending, but 
sequestering is a stupid way to do it.
    A better way to do it would be to tell western Europe they 
are on their own, to stop figuring that we have to win a 
thermonuclear war with a now nonexistent Soviet Union. But the 
fact is that the uncertainty that Chairman Bernanke talks 
about, our bipartisan Republican and Democratic-appointed top 
economic official, is an uncertainty that is bipartisan and has 
nothing to do with regulation. And I listen to this complaint 
about regulatory uncertainty. Apparently, maybe there is a part 
of the Monetary Policy Report I haven't read. I don't see a 
word in here that says that financial reform or other forms of 
regulation are part of the problem. It does talk about some 
other things that are part of the problem, for example, the 
cutback in hiring and construction by State and local 
governments. And that is a direct preference of the 
Republicans.
    We began in 2009, when we had a President and a Democratic 
Congress, to provide funding so State and local governments 
could continue to be economically active in the face of the 
crisis that had hit them. We were told by our Republican 
colleagues that was government spending; it didn't create jobs. 
Apparently, you couldn't shoot anybody with it. And if you 
can't shoot anybody with something, or if you can't send it to 
an overseas base, it has no job creation impact, so they only 
do it for the military. But in fact, if State and local 
governments had not been forced to cut back, unemployment would 
now be below 8 percent, even if they had been able to hold 
even.
    We have lost about 15 percent of the jobs created in the 
private sector by cutbacks in the public sector. So again, as I 
read this, there are discussions of what is causing a recovery 
slower than we want it to be. None of them have to do with what 
my Republican colleagues have said. And again, this comes from 
Chairman Bernanke, who was, as I said, was appointed 3 times to 
important economic positions by George Bush, a man with whom I 
sometimes disagree, but whose integrity and intellectual 
honesty ought to be unquestioned. Unfortunately, in this 
hyperpartisan atmosphere, to quote the chairman, it sometimes 
isn't.
    Chairman Bachus. I thank the ranking member. Before 
recognizing Dr. Paul for his statement, I want to note that 
this may be his last committee meeting with the Chairman of the 
Federal Reserve. Throughout his time in office, Dr. Paul has 
been a consistent and strong advocate for sound monetary 
policy. And his leadership on the committee, especially during 
these hearings when we have had the Federal Reserve Chairman up 
here before us, have certainly made the hearings more 
interesting and provided several memorable YouTube moments.
    Mr. Frank. Mr. Chairman, could I ask unanimous consent just 
to say that having served for a long time with Ron Paul, with 
whom I agree on on a number of issues, I am very pleased that I 
was able to serve one term with him as the chairman, because 
there were times during our joint service when despite his 
seniority, I thought he would never get to it. So I am glad 
that he finally achieved that chairmanship that he should have 
had long ago.
    Chairman Bachus. Thank you. And let me note that my 
statement didn't talk about Democrats and Republicans.
    Mr. Frank. Mr. Chairman, if we are going to debate it, I 
know you talked about the Administration and Obama, and I think 
most people know what party he is in.
    Chairman Bachus. All right. Thank you. For the record, we 
do know that. Thank you. Dr. Paul for 3 minutes.
    Dr. Paul. Thank you, Chairman Bachus. And welcome, Chairman 
Bernanke. I appreciate your comments, Chairman Bernanke and 
Ranking Member Frank. I am delighted to be here today, but I 
just want to refresh a few people's memories. I was first 
elected to Congress in 1976 in April in a special election. And 
the biggest bill on the docket at that time was the revamping 
of the IMF. There was a major crisis going on from the 
breakdown of the Bretton Woods agreement, and they had to 
rewrite the laws. They wanted to conform the laws with what 
they had been doing for 5 years. And that was a major piece of 
legislation. But it was only a consequence of what was 
predicted in 1945, because when 1945 established that Bretton 
Woods, it was predicted by the free market economists that it 
wouldn't work, that it would fail.
    This whole idea that they could regulate exchange rates and 
deal with the balance of payments totally failed. And so, they 
had to come up with something new. And 1971-1976 is that 
transition period. Those same economists at that time said this 
was an unworkable system, too, and it would lead to a major 
crisis of too much debt, too much malinvestment. It would be 
worldwide. It would be worse than anything because it would be 
based on the fiat dollar globally, and many of the problems we 
have domestically would be worldwide.
    That certainly has been confirmed with the crisis that we 
are in, and it has not been resolved yet. We are still 
floundering around, and we still have a long way to go.
    I have, over the years, obviously been critical of what 
goes on in monetary policy, but it hasn't been so much of the 
Chairman of the Federal Reserve, whether it was Paul Volcker or 
Alan Greenspan or the current Chairman; it has always been the 
system. I think they have a job that they can't do because it 
is an unmanageable job. And it is a fallacy, it is a flawed 
system, and therefore we shouldn't expect good results.
    And generally, we are not getting results. Policies never 
change. We say the same thing. No matter what the crisis is, we 
still do more of the same. If spending and debt was the 
problem, spending more and in greater debt and have the Fed 
just buy more debt doesn't seem to help at all. And here we are 
doing the same thing. We don't talk about the work ethic and 
true productions and true savings and why this excessive debt 
is so bad for us. We talk about solving a worldwide problem of 
insolvency of nations, including our own, by just printing 
money, and creating credit.
    The Fed, in the last 4 years, tripled the monetary base, 
and it has $1 trillion more money sitting there, and the banks 
are sitting with trillions of dollars. Just the creation of 
money doesn't restore the confidence that is necessary. And 
until we get to the bottom of this and restore the confidence, 
I don't think we are going to see economic growth. This whole 
idea that you have the job of managing money, and we can't even 
define the dollar--nobody has a definition of the dollar; it is 
an impossible task.
    So I have hoped in the past to try to contribute to the 
discussion on monetary policy and the business cycle and why it 
benefits the rich over the poor, and so far, my views have not 
prevailed. But I have appreciated the opportunity, and I 
appreciate this opportunity to have served on the Financial 
Services Committee.
    Chairman Bachus. Thank you. Thank you, Dr. Paul. The 
gentleman from Missouri, Mr. Clay, is recognized for 3 minutes.
    Mr. Clay. Thank you, Mr. Chairman. And let me thank 
Chairman Bernanke for appearing at today's hearing. Let me also 
publicly thank our subcommittee chairman, Dr. Paul, for his 
honorable service in Congress and to his country. As you know, 
the Humphrey-Hawkins Act charges the Federal Reserve with a 
dual mandate: to maintain stable prices, which I understand we 
have positive news about; and full employment, which is what I 
would like to talk about today. Full employment means everyone. 
Currently, the national average unemployment rate is 8.2 
percent.
    Chairman Bernanke, this has decreased compared with when 
you were here a year ago, when it was 9.1 percent. 
Unfortunately, the unemployment rate for African Americans is 
much higher. For African-American males, it is a too-high 14.2 
percent. 12.7 million people in the United States want to work, 
but cannot find a job. That is down from last year's 14 
million. But too many of those 12.7 million are African 
Americans. Nonfarm payroll employment is continuing to rise by 
80,000, but too few of those who are getting jobs are African 
Americans. Average hourly earnings for all private nonfarm 
employees rose to $23.50 over the past 12 months, but not for 
enough African Americans.
    Consumer food prices have risen slightly, but consumer 
price inflation has decreased overall, and energy prices have 
decreased too. But if you are out of work, you cannot pay your 
electric bill even if it is slightly lower than it was last 
year. The disparity in the unemployment between the national 
average and African Americans is unacceptable, and we have to 
do more to solve it. Mr. Chairman, it is important to put 
everyone back to work in this country. But as we look at 
policies and strategies that will continue the improvement in 
job numbers, be aware that we as a Nation are only as strong as 
the weakest link.
    So let's make sure we don't leave behind a large and 
important part of our communities. And I look forward to your 
statement and continuing this important and ongoing discussion. 
Mr. Chairman, I yield back.
    Chairman Bachus. Thank you, Mr. Clay. Before I recognize 
Chairman Bernanke, let me say that because the Financial 
Stability Oversight Council on which the Chairman serves is 
meeting today at 1 p.m., the Chair will excuse Chairman 
Bernanke at 12:45, so that he can fulfill his important 
obligation with that Council. The Chair also announces that in 
order to accommodate questioning of Chairman Bernanke by as 
many Members as possible, we will strictly enforce the 5-minute 
rule.
    Members who wait until the final seconds of their 5 minutes 
to begin asking their questions to the Chairman should be 
advised that they will be asked to suspend when the red light 
comes on so that we can allow all Members to be recognized. I 
have often said that our freshman class and sophomore class are 
some of our more capable Members, and I want them to have an 
opportunity to ask questions.
    Chairman Bernanke, your written statement will be made a 
part of the record, and you are now recognized for a summary of 
your testimony.

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

    Mr. Bernanke. Thank you, Chairman Bachus, Ranking Member 
Frank, and members of the committee. I am pleased to present 
the Federal Reserve's semi-annual Monetary Policy report to the 
Congress. Let me begin with a discussion of current economic 
conditions and the outlook, and then I will talk a bit about 
monetary policy. The U.S. economy has continued to recover, but 
economic activity appears to have decelerated somewhat during 
the first half of the year. After rising at an annual rate of 
2.5 percent in the second half of 2011, real GDP increased at a 
2 percent pace in the first quarter of this year, and available 
indicators point to a still smaller gain in the second quarter. 
Conditions in the labor market improved during the latter part 
of 2011 and early this year, with the unemployment rate falling 
about a percentage point over that period. However, after 
running at nearly 200,000 per month during the fourth and first 
quarters, the average increase in payroll employment shrank to 
75,000 per month during the second quarter.
    Issues related to seasonal adjustment and the unusually 
warm weather this past winter can account for a part, but only 
a part, of this loss of momentum in job creation. At the same 
time, the jobless rate has recently leveled out at just over 8 
percent. Household spending has continued to advance, but 
recent data indicate a somewhat slower rate of growth in the 
second quarter. Although declines in energy prices are now 
providing support to consumers' purchasing power, households 
remain concerned about their employment and income prospects 
and their overall level of confidence remains relatively low. 
One area where we see modest signs of improvement is housing. 
In part, because of historically low mortgage rates, both new 
and existing home sales have been gradually trending upward 
since last summer, and some measures of house prices have 
turned up in recent months as well.
    Construction has increased, especially in the multi-family 
sector. Still, a number of factors continue to impede progress 
in the housing market. On the demand side, many would-be buyers 
are deterred by worries about their own finances or about the 
economy more generally. Other prospective home buyers cannot 
obtain mortgages due to tight lending standards, impaired 
creditworthiness, or because their current mortgages are 
underwater, that is, they owe more than their homes are worth.
    On the supply side, the large number of vacant homes, 
boosted by the ongoing inflow of foreclosed properties, 
continues to divert demand from new construction. After posting 
strong gains over the second half of 2011 and into the first 
quarter of 2012, manufacturing production has slowed in recent 
months. Similarly, the rise in real business spending on 
equipment and software appears to have decelerated from the 
double digit pace seen over the second half of 2011 to a more 
moderate rate of growth over the first part of this year. 
Forward-looking indicators of investment demand, such as 
surveys of business conditions and capital spending plans, 
suggest further weakness ahead.
    In part, slowing growth in production and capital 
investment appears to reflect economic stresses in Europe, 
which together with some cooling in the economies of other 
trading partners, is restraining the demand for U.S. exports. 
At the time of the June meeting of the Federal Open Market 
Committee, or FOMC, my colleagues and I projected that under 
the assumptions of appropriate monetary policy, economic growth 
will likely continue at a moderate pace over coming quarters 
and then pick up very gradually.
    Specifically, our projections for growth in real GDP 
prepared for the meeting had a central tendency of 1.9 to 2.4 
percent for this year, and 2.2 to 2.8 percent for 2013. These 
forecasts are lower than those we made in January, reflecting 
the generally disappointing tone of the recent incoming data. 
In addition, financial strains associated with the crisis in 
Europe have increased since earlier this year, which, as I 
already noted, are weighing on both global and domestic 
economic activity.
    The recovery in the United States continues to be held back 
by a number of other headwinds, including still tight borrowing 
conditions for some businesses and households and, as I will 
discuss in more detail shortly, the restraining effects of 
fiscal policy and fiscal uncertainty. Moreover, although the 
housing market has shown improvement, the contribution of this 
sector to the recovery is less than has been typical of 
previous recoveries. These headwinds should fade over time, 
allowing the economy to grow somewhat more rapidly and the 
unemployment rate to decline toward a more normal level.
    However, given that growth is projected to be not much 
above the rate needed to absorb new entrants to the labor 
force, the reduction in the unemployment rate seems likely to 
be frustratingly slow. Indeed, the central tendency of 
participants' forecasts now has the unemployment rate at 7 
percent or higher at the end of 2014. The committee made 
comparatively small changes in June to its projections for 
inflation. Over the first 3 months of 2012, the price index for 
personal consumption expenditures rose about 3.5 percent at an 
annual rate, boosted by a large increase in retail energy 
prices that, in turn, reflected the higher costs of crude oil. 
However, the sharp drop in crude oil prices in the past few 
months has brought inflation down.
    In all, the PCE price index rose at an annual rate of 1.5 
percent over the first 5 months of this year, compared with a 
2.5 percent rise over 2011 as a whole. The central tendency of 
the Committee's projections is that inflation will be 1.2 to 
1.7 percent this year, and at or below the 2 percent level that 
the Committee judges to be consistent with its statutory 
mandate in 2013 and 2014. Participants at the June FOMC meeting 
indicated that they see a higher degree of uncertainty about 
their forecasts than normal, and that the risks to economic 
growth have increased. I would like to highlight two main 
sources of risk. The first is the euro-area fiscal and banking 
crisis, and the second is the U.S. fiscal situation. Earlier 
this year, financial strains in the euro-area moderated in 
response to a number of constructive steps by the European 
authorities, including the provision of 3-year bank financing 
by the European Central Bank. However, tensions in euro-area 
financial markets intensified again more recently, reflecting 
political uncertainties in Greece, and news of losses at 
Spanish banks, which in turn raised questions about Spain's 
fiscal position and the resilience of the euro-area banking 
system more broadly. Euro-area authorities have responded by 
announcing a number of measures, including funding for the 
recapitalization of Spain's troubled banks, greater flexibility 
in the use of the European financial backstops, and movement 
toward unified supervision of euro-area banks. Even with these 
announcements, however, Europe's financial markets and economy 
remain under significant stress, with spillover effects on 
financial and economic conditions in the rest of the world, 
including the United States.
    Moreover, the possibility that the situation in Europe will 
worsen further remains a significant risk to the outlook. The 
Federal Reserve remains in close communication with our 
European counterparts. Although the politics are complex, we 
believe that the European authorities have both strong 
incentives and sufficient resources to resolve the crisis. At 
the same time, we have been focusing on improving the 
resilience of our financial system to severe shocks, including 
those that might emanate from Europe. The capital and liquidity 
positions of U.S. banking institutions have improved 
substantially in recent years, and we have been working with 
U.S. financial firms to ensure that they are taking steps to 
manage the risks associated with their exposures to Europe.
    That said, European developments that resulted in a 
significant disruption in global financial markets would 
inevitably pose significant challenges for our financial system 
and for our economy. The second important risk to our recovery, 
as I mentioned, is the domestic fiscal situation. As is well 
known, U.S. fiscal policies are on an unsustainable path, and 
the development of a credible medium-term plan for controlling 
deficits should be a high priority.
    At the same time, fiscal decisions should take into account 
the fragility of the recovery. That recovery could be 
endangered by the confluence of tax increases and spending 
reductions that will take effect early next year if no 
legislative action is taken. The CBO has estimated that if the 
full range of tax increases and spending cuts were allowed to 
take effect, a scenario widely referred to as the ``fiscal 
cliff,'' a shallow recession, would occur early next year, and 
about 1\1/4\ million fewer jobs would be created in 2013. These 
estimates do not incorporate the additional negative effects 
likely to result from public uncertainty about how these 
matters will be resolved.
    As you recall, market volatility spiked and confidence fell 
last summer in part as a result of the protracted debate about 
the necessary increase in the debt ceiling. Similar effects 
could ensue as the debt ceiling and other difficult fiscal 
issues come into clearer view toward the end of the year. The 
most effective way that Congress could help to support the 
economy right now would be to work to address the Nation's 
fiscal challenges in a way that takes into account both the 
need for long-run sustainability and the fragility of the 
recovery. Doing so earlier rather than later would help reduce 
uncertainty and boost household and business confidence.
    Finally, on monetary policy, in view of the weaker economic 
outlook, subdued projected path for inflation, and the 
significant downside risk to economic growth, the FOMC decided 
to ease monetary policy at its June meeting by continuing its 
Maturity Extension Program, or MEP, through the end of this 
year. The MEP combines sales of short-term Treasury securities 
with an equivalent amount of purchases of longer-term Treasury 
securities. As a result, it decreases the supply of longer-term 
Treasury securities available to the public, putting upward 
pressure on the prices of those securities and downward 
pressure on their yields, without affecting the overall size of 
the Federal Reserve's balance sheet. By removing additional 
longer-term Treasury securities from the market, the Fed's 
asset purchases also induced private investors to acquire other 
longer-term assets such as corporate bonds and mortgage-backed 
securities, helping to raise their prices and lower their 
yields, and thereby making broader financial conditions more 
accommodative.
    Economic growth is also being supported by the 
exceptionally low level of the target range for the Federal 
funds rate from zero to one-fourth percent and the economy's 
forward guidance regarding the anticipated path of the funds 
rate.
    As I reported in my February testimony, the FOMC extended 
its forward guidance in January, noting that it expects that 
economic conditions, including low rates of resource 
utilization and a subdued outlook for inflation over the medium 
run, are likely to warrant exceptionally low levels for the 
Federal funds rate at least through late 2014. The Committee 
has maintained this conditional forward guidance at its 
subsequent meetings. Reflecting its concerns about the slow 
pace of progress in reducing unemployment and the downside risk 
to the economic outlook, the Committee made clear at its June 
meeting that it is prepared to take further action, as 
appropriate, to promote a stronger economic recovery and 
sustained improvement in labor market conditions in a context 
of price stability. Thank you, Mr. Chairman. I would be happy 
to answer your questions.
    [The prepared statement of Chairman Bernanke can be found 
on page 54 of the appendix.]
    Chairman Bachus. Thank you, Chairman Bernanke. Next week, 
the House will be voting on Dr. Paul's bill to audit the 
Federal Reserve. Would you please give us your views on the 
legislation?
    Mr. Bernanke. Yes. Thank you. I absolutely agree with Dr. 
Paul that the Federal Reserve needs to be transparent and it 
needs to be accountable. I would argue that at this point, we 
are quite transparent and accountable. On monetary policy, 
besides our statement, besides our testimonies, we issue 
minutes after 3 weeks, we have quarterly projections, I give a 
press conference 4 times a year. There is quite a bit of 
information provided to help Congress evaluate monetary policy, 
as well as the public. Also, very importantly, the Federal 
Reserve's balance sheet, its finances, and its operations are 
thoroughly vetted. We produce an annual financial statement 
which is audited by an independent external accounting firm. We 
provide quarterly updates and a weekly balance sheet. We have 
an independent Inspector General (IG.)
    We have additional scrutiny imposed by the Dodd-Frank Act. 
And very importantly, and this is, I think, the crux of the 
matter, the U.S. Government Accountability Office, the GAO, has 
extensive authority, broad authority to audit essentially all 
aspects of the Federal Reserve. And the Federal Reserve accepts 
that, and is cooperative with the GAO's efforts.
    There is, however, one important exception to what the GAO 
is allowed to audit under current law, and that specifically is 
monetary policy deliberations and decisions. So what the audit 
of the Fed bill would do would be to eliminate the exemption 
for monetary policy deliberations and decisions from the GAO 
audit. So in effect, what it would do is allow Congress, for 
example, to ask the GAO to audit a decision taken by the Fed 
about interest rates.
    That is very concerning because there is a lot of evidence 
that an independent central bank that makes decisions based 
strictly on economic considerations, and not based on political 
pressure, will deliver lower inflation and better economic 
results in the longer term.
    So, again, I want to agree with the basic premise that the 
Federal Reserve should be thoroughly transparent, and 
thoroughly accountable. I will work with everyone here to make 
sure that is the case. But I do feel it is a mistake to 
eliminate the exemption for monetary policy and deliberations, 
which would effectively, at least to some extent, create a 
political influence or political dampening effect on the 
Federal Reserve's policy decisions. Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. I will note that bill did not 
come before the Financial Services Committee, which surprised 
me. Throughout your tenure as Chairman, you have warned this 
committee and others about the dangers of the U.S. fiscal 
position, the annual deficit, and the growing national debt. 
And now, we are facing what you call correctly a fiscal cliff 
next January.
    I mentioned in my opening statement the need for long-term 
restructuring of our entitlements. And as the ranking member 
said, I was talking about Medicaid, Medicare, and to a lesser 
extent, Social Security. Would you tell us why you are 
concerned about the fiscal cliff, what will happen to the 
economy if we don't do anything to address it, and what long-
term strategies Congress should be thinking about as we address 
these issues?
    Mr. Bernanke. Certainly. Thank you. First, I think there is 
very little disagreement that the U.S. fiscal situation is not 
sustainable. Under current law, deficits will continue to grow, 
interest will continue to accumulate, and ultimately we will 
simply not be able to pay our bills. So it is very important 
over the long term to make decisions collectively about tax and 
spending policies that will bring our fiscal situation into a 
more sustainable configuration.
    Now that, I should add, is very much a long-run 
proposition. Many of the issues that affect our long-term 
fiscal sustainability are decades rather than months or 
quarters in the future. And therefore, I think--I would just 
suggest, if I might, that in looking at these issues, we might 
want to go beyond the 10-year window which is usually the basis 
for fiscal decisions, and at least consider implications of 
actions for even longer horizons.
    So it is very important for fiscal stability, for financial 
stability, for Congress to provide a credible plan for 
stabilizing our long-term fiscal situation as soon as possible. 
That is a long run proposition, however. And the way the 
current law is set up, we are going to have a very, very sharp 
contraction in the fiscal situation, increased taxes, and cuts 
in spending, that are very dramatic and that occur almost 
simultaneously on January 1, 2013.
    As I discussed in my remarks, and as the CBO has documented 
in some detail, if that all happens, it will, no doubt, do 
serious damage to the recovery, and probably will cost a 
significant number of jobs. It is not essential to do it that 
way. I think the best way to address this is to attack the 
long-run fiscal sustainability issue seriously and credibly, 
but to do it in a more gradual way that doesn't have such 
negative effects on the recovery. And I think both of those 
goals can be met simultaneously, recognizing that it is not 
politically easy. But I believe that is the correct broad 
approach for addressing our fiscal situation.
    Chairman Bachus. Thank you. The ranking member is 
recognized for 5 minutes for questioning.
    Mr. Frank. Mr. Chairman, you say on page 6 that we should 
address the fiscal challenges in a way that takes into account 
both the need for long-range sustainability and the fragility 
of the recovery. There are some in the Congress who have been 
arguing that it is very important in the appropriations we are 
now voting on for the fiscal year that begins in a couple of 
months that we substantially reduce what we are committed to 
spend. Is that what you are warning us against when you talk 
about the fragility of the recovery? Is it the timing issue, 
that we should not be trying to do this in the immediate next 
fiscal year, but put into place a longer-term situation?
    Mr. Bernanke. I am talking about the collective impact of 
the tax increases and the spending cuts, which together come 
something close to 5 percent of GDP, which would, if it all hit 
at the same time, be very negative for growth. It is important 
to combine a more gradual approach with, of course, a longer-
term plan to address sustainability.
    Mr. Frank. Let me ask you, you have been doing a great deal 
with your colleagues to try to provide an impetus to economic 
growth, at least an offset to the headwinds I think would be 
the way to put it. A number of people from the beginning of 
your efforts to do this, quantitative easing and the twist and 
all the other ways that you have been trying to make more money 
available, have warned that you were risking inflation, and 
some have said that this might worsen our fiscal condition 
because you might be losing money. You are aware of the 
criticisms. This many, I don't know, a couple of years into 
this, what is the record? Were you wrong?
    Mr. Bernanke. No, we are not wrong. I have a collection of 
op-eds and editorials from 2008 and 2009 about immediate 
hyperinflation which is right around the corner, collapse of 
the dollar, those sorts of things. None of that has happened. 
None of that is going to happen. The Federal Reserve is 
responsibly using monetary policy to try to support the 
recovery.
    We are very cognizant of our responsibility for price 
stability, and we have the tools to withdraw the policy 
stimulus at the appropriate time. But markets, for example as 
reflected in interest rates and inflation-adjusted Treasury 
securities, suggest that markets are quite confident that 
inflation will remain low.
    Mr. Frank. Thank you, Mr. Chairman. I will share with you 
an insight that I am sure you have already figured out for 
yourself. But being able to say, ``I told you so'' is one of 
the few pleasures that improves with age. And you are certainly 
entitled to do that with the people who were crying wolf. Part 
of the problem though, was it was ideologically motivated, some 
of this criticism. That is there are people, and we have 
legislation that has been introduced, they are holding it off 
until after the election because they don't want to, I think, 
be seen supporting it too popularly, but people will advance it 
if they can, which would cut in half your dual mandate.
    You are mandated by the law under which you appear today to 
be equally concerned about price stability and employment. And 
there are some who argue that is inconsistent, and that you 
have, in fact, been distracted from your focus on price 
stability by this equal mandate on employment.
    I believe, by the way, that is part of what people are 
trying to get at with the audit. Because as you say, we have 
put into the law already auditing of all your financial 
transactions, any activity you have with a private company will 
sometimes be public. I believe this is part of an effort to 
undermine the dual mandate indirectly. They will try do it 
directly if they can later. Have you found any inconsistency 
between the two parts of the mandate? Has the concern for 
employment, which I admire you for showing, interfered with 
your ability to bring about price stability?
    Mr. Bernanke. As you noted, inflation is low. It is in fact 
a little bit below our 2 percent target, so there has not been 
an evident inconsistency. And I think the dual mandate has 
served us well, and we do have the ability to address both 
sides. That being said, we will do of course whatever Congress 
tells us to do.
    Mr. Frank. But have you found any inconsistency in meeting 
both aspects of the dual mandate?
    Mr. Bernanke. Generally speaking, no. In particular, low 
inflation does contribute to healthy employment in the longer 
term. So, they are complementary in that respect.
    Mr. Frank. And your efforts to help the economy overcome 
the headwinds have not led to any inflation?
    Mr. Bernanke. No.
    Mr. Frank. Another argument we have seen is that it is 
regulation that is slowing things down. You talked about the 
headwinds. I notice you did not mention the committee meeting 
you are about to go to as one of those headwinds. Having talked 
to us about the headwinds, in your judgment the financial 
reform legislation that we passed, is that one of the 
headwinds?
    Mr. Bernanke. I wouldn't want to rule out regulatory and 
tax factors as part of the uncertainty. There are a lot of 
uncertainties in the economy.
    Mr. Frank. I don't mean in theory; I mean the one that we 
have adopted.
    Mr. Bernanke. It is possible that some of these regulations 
have some impact on the cost of credit, but there has been a 
lot of analysis that suggests that the benefits in terms of 
reducing the risk of a financial crisis are extremely large, 
and that whatever costs are involved are worthwhile.
    Mr. Frank. I thank you. I hope, with that analysis from our 
bipartisan appointee here, that some of my colleagues who 
preach the virtues of benefit cost analysis will not ignore its 
benefits as you have just mentioned them. Thank you, Mr. 
Chairman.
    Chairman Bachus. Thank you. Dr. Paul for 5 minutes.
    Dr. Paul. Thank you, Mr. Chairman. I had a question 
prepared, but I think I better follow up on the question you 
asked Chairman Bernanke dealing with the audit of the Fed. 
Because when the Fed talks about independence, what they are 
really talking about is secrecy, not transparency. And it is 
the secrecy that I don't like and that we have a right to know 
about.
    What the GAO cannot audit, and I believe it would be the 
position of the Chairman, is it cannot audit monetary policy. 
And you expressed yourself on monetary policy. It would not be 
able to look at agreements and operations with foreign central 
banks and governments and other banks, or transactions made 
under the direction of the FOMC, discussions or communications 
between the Board and the Federal Reserve system related to all 
those items.
    It is really not an audit without this. It is still 
secrecy. And why this is important is because of what happened 
4 years ago. It is estimated that the amount of money that went 
in and out of the Fed for the bailout overseas was $15 
trillion. How did we ever get into this situation where 
Congress has nothing to say about trillions and trillions of 
dollars bailing out certain banks and governments through these 
currency swaps?
    And the Chairman has publicly announced that he is 
available, there is a crisis going on in Europe, part of this 
dollar crisis going on that has been building. It is unique to 
the history of the world of monetary policy. And we stand 
ready. Who stands ready? The American taxpayer, because we are 
just going to print up the money. As long as they take our 
dollars, we will print the money and we will bail them all out 
and we are going to destroy the middle class. The middle class 
is shrinking. The banks get richer, and the middle shrinks, 
they lose their houses, they lose their mortgages.
    The system is biased against the middle class and the poor. 
So I would say that if we protect this amount of secrecy, it is 
not good policy and it is not good economics at all, and it is 
very unfair. But my question is, Mr. Chairman, whose 
responsibility is it under the Constitution to manage monetary 
policy? Which branch of government has the absolute authority 
to manage monetary policy?
    Mr. Bernanke. The Congress has the authority, and it has 
delegated it to the Federal Reserve. That is a policy decision 
that you have made.
    Dr. Paul. Yes, but they can't transfer authority. You can't 
amend the Constitution by just saying we are going to create 
some secret group of individuals and banks. That is amending 
the Constitution. You can't do that, and all of a sudden allow 
this to exist in secrecy. Whose responsibility is it for 
oversight? Which branch of government has the right of 
oversight?
    Mr. Bernanke. Congress has the right of oversight. And we 
certainly fully accept that, and we fully accept the need for 
transparency and accountability. But it is a well-established 
fact that an independent central bank will provide better 
outcomes. There is no constitutional reason why Congress 
couldn't take over monetary policy. If you want to do that, I 
guess that is your right to do it. But I am advising you that 
it wouldn't be very good from an economic policy point of view.
    Dr. Paul. Yes, but if it is allowed to be done in secret, 
this is the reason why I want to work within the system. What I 
want to say is Congress ought to get a backbone. They ought to 
say we deserve to know, we have a right to know, we have an 
obligation to know because we have an obligation to defend our 
currency. It is the destruction of the currency that destroys 
the middle class. There is a principle in free market banking 
that says if you destroy the value of currency through 
inflation, you transfer the wealth from the middle class and it 
gravitates to the very wealthy. The bankers, the government, 
the politicians, they all love this. It is a fact that the 
Federal Reserve is the facilitator. You couldn't have big 
government--if everybody loves big government, loves the Fed, 
because they can finance the wars and all the welfare you want. 
But it doesn't work, and it eventually ends up in a crisis. It 
is a solvency crisis, and it can't be solved by printing a 
whole lot of money.
    So I think the very first step is transparency, and for us 
to know. We have a right to know. And you may be correct in 
your assumption, at least I am sure you believe this, but maybe 
I should be talking to the Congress that we should stand up and 
say, yes, we demand to know. Trillions and trillions of dollars 
being printed out of thin air, and bailing out their friends. 
They stand ready to do it. The crisis is just, as far as I am 
concerned, my opinion is it is in the early stages. It is far 
from over. We are in deep doldrums, and we never change policy. 
We never challenge anything. We just keep doing the same thing.
    Congress keeps spending the money. Welfare expands 
exponentially. Wars never end. And deficits don't matter. And 
when it comes to cutting spending, Republicans and Democrats 
get together and say, oh, no, we can't really cut. And if we do 
cut, we just cut proposed increases.
    Mr. Frank. Mr. Chairman, regular order. Regular order, Mr. 
Chairman.
    Dr. Paul. And you stand there and facilitate it all.
    Chairman Bachus. Thank you, Dr. Paul. Congressman Clay for 
5 minutes.
    Mr. Frank. Can we get the answer in writing to that 
question, Mr. Chairman?
    Mr. Bernanke. May I just comment, Congressman Paul, your 
objections are to the structure of the system, as you 
mentioned. But all of the actions we took during the crisis, 
the swaps, all of those things are fully disclosed. It is not a 
question of information. It is a question of whether or not you 
want to give the Fed those powers. If you don't want to, of 
course, Congress has the right to take them back.
    Mr. Clay. Thank you.
    Mr. Frank. Will the gentleman yield me 10 seconds?
    Mr. Clay. I yield to the ranking member.
    Mr. Frank. Just to mention that, in fact, in the financial 
reform bill, I think unanimously, while there were some 
differences, we repealed Section 13(3) of the Federal Reserve 
Act, which was the single biggest grant of power to the Federal 
Reserve to lend any money it wanted if it thought there was a 
chance to do it. It was the AIG loan. So in fact, this 
Congress, in 2010, made a substantial reduction in the Federal 
Reserve's authority.
    Mr. Clay. Chairman Bernanke, the national unemployment rate 
is 8.2 percent, lower than it was a year ago. And as I said, it 
is important to put all Americans back to work. But I am 
troubled by the large disparity between the unemployment rate 
in the country at large and that of African Americans, which is 
at 8.2 percent versus 14.2 percent. I think that is a national 
crisis. Mr. Chairman, to what do you believe this large 
difference can be attributed?
    Mr. Bernanke. It is a tragedy and a problem, of course. It 
is a long-standing difference. I don't know how to parse the 
difference. Some of it is educational and other differences, 
some of it is discrimination. It is hard to say how much. Age 
and other demographic factors play a role. Unfortunately, this 
is not something monetary policy can do much about. We can only 
hope to address the overall state of the labor market and hope 
that a rising tide will lift all ships, so to speak. But 
clearly, African Americans remain disadvantaged in education, 
in wealth creation, and in opportunity. And those are issues 
that collectively I hope we can address.
    Mr. Clay. Do you think there is anything that the Federal 
Reserve, along with Congress, can do to address it?
    Mr. Bernanke. Again, the Federal Reserve's monetary 
policies are limited. We have a variety of things that bear on 
this indirectly, such as our Office of Minority and Women 
Inclusion, which tries to help ensure that in our own 
employment, we have full diversity. Financial literacy programs 
that try to help people in lower- to moderate-income 
communities achieve a better level of savings and wealth. But 
more broadly, I think to really address these questions, issues 
of mobility and education, skills, et cetera, are more a 
function of congressional and State and local efforts than the 
Federal Reserve.
    Mr. Clay. Thank you for your response. Can the Federal 
Reserve institute a monetary policy that is strong enough to 
avoid a double-dip recession?
    Mr. Bernanke. At this point, we don't see a double-dip 
recession, we see continued moderate growth. But we are very 
committed to ensuring, or at least doing all we can to ensure 
that we continue to make progress on the employment side. And 
we have stated that we are prepared to take action as needed to 
try to make sure that we see continued progress on employment.
    Mr. Clay. In another area of the economy, how will the 
Federal Reserve expansion of asset rates for stimulating the 
economy succeed when many individuals have liquid assets that 
may lose value?
    Mr. Bernanke. You are talking about various monetary 
policies of the FOMC?
    Mr. Clay. Yes.
    Mr. Bernanke. Our monetary policies actually generally 
increase asset values, broadly speaking. The concern has been 
raised, and I fully understand it and sympathize with it, that 
low interest rates penalize people who live off the interest 
earnings of their investments or their savings. And again, I 
fully appreciate that concern. My response, at least in part, 
is that if we are going to have good returns on savings and 
investment overall, we need a healthy economy. And if we raise 
interest rates prematurely and cause the economy to go into 
recession, that is not going to be an environment where people 
can make a good return on their retirement funds or their other 
investments.
    Mr. Clay. If the United States were to announce it was 
moving to a gold standard, what would you expect to happen to 
the price of gold? And how difficult would that make it for the 
country to fix the value of currency in terms of the price of 
gold?
    Mr. Bernanke. That is a very complex question. I think 
there is an issue about whether, at least at current prices, 
there would be enough gold to set up a global gold standard. 
But there are more fundamental issues with the gold standard 
than that which I have addressed on other occasions. And in 
particular, a gold standard doesn't imply stability in the 
prices of the goods and services that people buy every day. It 
implies a stability in the price of gold itself.
    Mr. Clay. Thank you for your response. I yield back.
    Chairman Bachus. Thank you. Let me advise the Republicans 
on the committee that Mr. Hensarling and Mr. Jones, because of 
the questioning lineup, go first, and then under the Greenspan 
rules, Mr. Manzullo and Mr. Fincher, if they are here. And 
then, we will resume with Mr. Royce. So at this time, I 
recognize Mr. Hensarling, the vice chairman.
    Mr. Hensarling. Thank you, Mr. Chairman. Good morning, 
Chairman Bernanke. You are clearly here before us because of 
your dual mandate. And speaking of maximizing employment, 
clearly the Fed took a number of dramatic actions in 2008, some 
of which I consider proper, some of which I still question. 
2008 was 4 years ago. I think it is an inescapable conclusion 
that we have seen the greatest monetary and fiscal stimulus 
thrown at an economy in our history, and what do we see but 41 
months of 8 percent-plus unemployment, 14.9 percent real 
unemployment, if we look at those who have left the labor force 
and those who are seeking full-time employment. We have anemic 
GDP growth, probably half of what it should be by historic 
standards. And my interpretation of your testimony is you are 
predicting much of the same. Why shouldn't the American people 
come to the inescapable conclusion that we have either had a 
profound failure of monetary policy or a profound failure of 
fiscal policy, and which is it?
    Mr. Bernanke. I don't think it is the case that there has 
been no progress. In the last quarter of 2008 and the first 
quarter of 2009, we almost had a collapse in the economy, a 
tremendous increase in unemployment. The unemployment rate went 
about 10 percent. Now, it is true that the recovery has been 
slower than we would have liked. But clearly, we have made 
progress in unemployment and in job creation.
    Mr. Hensarling. Isn't it true that if you look at the 10 
post-war recessions, we are in the midst of the slowest, 
weakest recovery of all?
    Mr. Bernanke. There is some evidence that financial crises 
lead to recessions that are slower to mend. We also had a 
housing boom and bust, which is also a major factor. So there 
have been a number of reasons that are consistent with 
historical experience why the recovery should be slower than 
average.
    Mr. Hensarling. Okay, let me move on since you don't agree 
with the premise of that question. You at least acknowledged in 
the question from the gentleman from Missouri, I think you used 
the phrase, there are limits to what monetary policy can 
achieve. I would like to explore those limits for a moment.
    Again, when I look at QE1, QE2, I think we are in our 
second Operation Twist--and, again, I think it is hard to 
conclude that we have--that, again, we have seen the greatest 
monetary stimulus in the history of the country. Obviously, you 
have a rather unique balance sheet today with asset-backed 
securities. And, yet, your new data reveals that public 
companies are sitting on $1.7 trillion of excess liquidity, 
banks have $1.5 trillion in excess reserves.
    And so I am trying to figure out, what is it that--on the 
Federal Reserve menu, what would two more Operation Twists and 
two more QEs, even if you supersized them, achieved that 
haven't already been achieved?
    Mr. Bernanke. First, I think that the previous efforts did 
have productive effects. QE1, for example, was followed a few 
months later by the beginning the recovery in the middle of 
2009. And QE2 came at a time when we were seeing increased risk 
of deflation, which was eliminated by the QE2--
    Mr. Hensarling. Then why is all this capital, Mr. Chairman, 
sitting on the sidelines? And you putting in more to excess 
reserves, how is that improving our economy?
    Mr. Bernanke. The excess reserves are not the issue. The 
issue is the state of financial conditions. And we are still 
able to lower interest rates, improve, broadly speaking, asset 
prices, and that provides some incentive.
    Now, if I might--
    Mr. Hensarling. Are we not essentially in a negative real 
interest rate environment already?
    Mr. Bernanke. Let me just agree with you on the following, 
that monetary policy is not a panacea, it is not the ideal 
tool. Part of the problem is that we hit the zero lower bound, 
so we can't use the usual practice of cutting short-term 
interest rates. So I would like to see other parts of the 
government--
    Mr. Hensarling. In the very limited time I have, Mr. 
Chairman, I have to tell you, when I am speaking to either 
Fortune 50 CEOs, world-class investors, small business people 
in east Texas, here is what I hear: number one, uncertain 
Federal regulation and certainly harmful Federal regulation is 
crushing jobs; number two, the threatened single largest tax 
increase in U.S. history; number three, a Nation on the road to 
bankruptcy; and number four, rhetoric out of this President 
that vilifies success in the free enterprise system. And 
monetary policy is not going to solve that problem.
    Chairman Bachus. Thank you.
    Mr. Capuano?
    Mr. Capuano. Thank you, Mr. Chairman.
    Chairman Bernanke, first of all, I want to thank you for 
your steadfast commitment to taking action as you deem 
appropriate. I am not any different than anybody else; I 
haven't agreed with everything you have done. But--and today is 
another day of it, where everybody gets to criticize everything 
you have ever done for the last 10 years. And I may take my 
shot here or there, but I just want to say thank you for not 
giving up, thank you for not withering under this. We still 
need you and the Fed to be actively involved, even if there are 
things you do with which I disagree.
    There are so many things I would like to talk about, but in 
5 minutes, I can't do it. So I think I am going to talk a 
little bit first about the Libor situation.
    For me--and I am not asking for a decision. I know it is 
not technically some of the things you are--but one of the 
things I have heard from the fiscal crisis of 2008 is that so 
many people walked away scot-free, that the general public 
thinks that we, the whole government, turned our back on any 
potential wrongdoing.
    And in this particular situation, if it turns up that our 
largest banks in the world repeatedly, intentionally lied in 
order to manipulate the market, do you think it is appropriate 
for them to be held accountable?
    Mr. Bernanke. Of course.
    Mr. Capuano. Either civilly or criminally, whatever might 
be--and I am not asking you to make a judgment, but--
    Mr. Bernanke. Let me just--
    Mr. Capuano. --if others make a determination that is 
appropriate, would you think that is an appropriate--
    Mr. Bernanke. Currently, there are any number of 
enforcement agencies, including the Department of Justice, the 
CFTC, the SEC, and foreign and State regulators looking at 
this, and I am sure that they will apply the law appropriately.
    Mr. Capuano. Because I would appreciate and I think the 
American people would appreciate it very much if somebody who 
intentionally lied to manipulate a worldwide market on 
something that affects every one of our daily lives will be 
held accountable.
    I want to shift a little bit to the fiscal cliff item. And, 
again, I am not asking you to tell us what to do. I respect the 
difference of opinion. But this whole fiscal cliff thing is 
revolving around, give or take, $450 billion, $500 billion that 
will be shifted around, give or take, January of next year. 
That is round numbers, round dates. Five hundred billion 
dollars--the Fed itself changed the fiscal situation in this 
country for over a trillion dollars in a matter of less than a 
year between 2000 and 2008. And to suggest that $500 billion in 
an economy that is $15 trillion is going to change the dynamics 
of the world, I think it is a little concerning to me.
    But I guess I would like to ask, if it is not going to be 
$450 billion, $500 billion--and I am not asking you to tell me 
whether it should be tax cuts or spending cuts--what is a 
number, do you think, a general number--to me, that looks like 
approximately 3 percent of the economy. I think you said 5 
percent. Whatever the number is, what do you think is an 
acceptable number either in tax cuts or tax increases or 
spending cuts to shift?
    Because we are not going to maintain the status quo. We are 
going to do something. That something may, of course, be the 
reaction of doing nothing. But something will change. And I am 
just wondering, what is a number that you think will not 
dramatically throw us off this cliff?
    Mr. Bernanke. First, the Federal Reserve's actions are 
buying and selling securities, not spending and taxing. They 
are very different.
    The CBO says that the fiscal cliff is on the order of 4 to 
5 percent of GDP, and that big a shift would have a significant 
effect on real activity in employment. So I am in favor of an 
aggressive plan over a period of time. The $4 trillion number 
gets tossed around sometimes over the next decade; I am in 
favor of that.
    And I can't give you a specific number for the short term, 
but I think there ought to be a more gradual approach. I am not 
saying that you shouldn't consolidate the budget; I just don't 
want it all to happen on 1 day, essentially.
    Mr. Capuano. As I understand this, it may happen in 1 day, 
but it won't impact in 1 day, like everything else. Federal 
spending doesn't end that day; we have obligations that we have 
to continue. Sequestration cuts aren't going to happen like 
that. Tax increases, I don't all of a sudden give the Federal 
Government $3,000 more that day; it is a slow, gradual item 
over a year.
    So I think that some of the fiscal cliff thing really needs 
a dose of reality. I am asking you this because, up until now, 
I have seen you as a person of reality and a conservative 
approach toward the real impact of whatever we do.
    Mr. Bernanke. The CBO estimates that it would cost 1\1/4\ 
million jobs next year, and I don't think that is an 
unreasonable estimate.
    Mr. Capuano. Oh, no, I understand. I have read the CBO 
report. I know exactly what they say. At the same time, the CBO 
is one source, and you are another. You are not telling me you 
fully embrace everything the CBO says in that report?
    Mr. Bernanke. I am just saying that order of magnitude, in 
terms of jobs and GDP, seems reasonable to me.
    Mr. Capuano. I don't think everybody would like that, but 
there is a serious question. See, I would argue with the CBO 
report on other issues, but they are not here today; you are.
    It is unrealistic to think that nothing is going to happen. 
Either we are going to do nothing, which will mean tax 
increases, which will mean massive spending cuts, or we will do 
something. We probably will not do everything; probably not 
kick the ball down the road and just extend all of the tax cuts 
and get rid of sequestration altogether. We are going to do 
something in the middle.
    The question is, what is in the middle that is a reasonable 
number?
    Chairman Bachus. Thank you.
    Mr. Capuano. I am not looking to jeopardize the economy, 
and--
    Chairman Bachus. Thank you, Mr. Capuano.
    Mr. Capuano. --I guess I am just looking for some guidance.
    Mr. Bernanke. I don't have a magic number. I just think you 
should take a smoother approach to obtaining fiscal 
sustainable.
    Chairman Bachus. Thank you.
    Mr. Jones?
    Mr. Jones. Mr. Chairman, thank you very much.
    And, Chairman Bernanke, thank you for being here.
    I want to say, two of my worst votes in 18 years were the 
Iraq war--we didn't have to go to Iraq--and the repeal of 
Glass-Steagall. And if I was not going to yield my time, I 
would ask you about reinstating Glass-Steagall. I think I will 
write you a letter with that question, sir.
    But at this time, because he is one of my dearest friends 
and I supported him for the Republican nomination to be 
President of the United States, I yield my time to Dr. Ron 
Paul.
    Dr. Paul. I thank the gentleman from North Carolina.
    I wanted to make a very brief statement about our previous 
discussion about the Audit the Fed bill. That bill has nothing 
to do with transferring who does monetary policy. It is 
strictly a transparency bill. Monetary policy reform, I 
believe, will come, but that is another subject. This is just 
to know more about what the Federal Reserve is doing.
    Mr. Chairman, one of your key points that you have made 
through your academic career as well as being at the Fed has 
been the need to prevent deflation. Would you agree with that?
    Mr. Bernanke. Generally, yes, sir.
    Dr. Paul. Right. And you argue that the depression was 
prolonged by the Federal Reserve not being able to reinflate. 
So, in that sense, I think you really have achieved--you have 
had the chance--you were put in a situation that you alone 
didn't create. It is, as far as I am concerned, the system 
created it and other managers helped create this. And there was 
this, what I see as a natural tendency to deflate and liquidate 
and clear the market. And under your philosophy, you say we 
can't allow this to happen, we have to prevent it. And I would 
say you have done a pretty good job. The monetary base has been 
tripled, and in the last 12 months I think M1 has grown about 
16 percent, M2 over 9 percent. So it seems to be like the 
monetary system, the monetary numbers are still growing.
    But the pricing houses--everybody knows there is a bubble. 
I like to believe that the free-market economists knew about it 
and other predicted it; others did not. But the prices soared 
up, everybody knows there was a bubble, and then they 
collapsed. When those prices of houses collapse, do you call 
that deflation?
    Mr. Bernanke. No. Deflation is the price of current goods 
and services. So, inflation doesn't capture house prices. It 
includes the house or the rental--
    Dr. Paul. Okay. And I think one of the problems even 
getting a full-fledged discussion out is sometimes the 
definition of words, about what ``inflation'' and ``deflation'' 
means. Because as far as I am concerned, deflation is when the 
money supply shrinks, and inflation is when the money supply 
expands. But just about everybody in the country, especially 
the financial markets, and the way I think the conventional use 
of inflation is the CPI. And I think it is a lousy measurement. 
Because if it is the money supply increase, if prices going 
down of houses is not deflation, I wonder why it is that 
inflation is measured by the CPI going up rather than the money 
supply going up.
    Our argument is that once you distort interest rates and 
increase the supply of money, you end up with this gross 
distortion that is demanding some correction. So I would--I 
have worked on this for years, and we are not going to solve it 
today. The definitions would be much better if we--if prices of 
houses going down is not deflation, then CPI going up shouldn't 
be inflation.
    But we have had trouble for 5 years. The monetary system, 
you say this is not the be-all and end-all. You can't solve 
every problem with monetary policy. We have had this for 5 
years, and we are still in a mess.
    Is there ever a time--let's say we go 5 more years and we 
have the same problems but much worse--you might say, I have to 
reassess my philosophy on monetary policy, or do you think it 
will be the same no matter what kind of crisis? Can you foresee 
any kind of problem that we would have that would cause you to 
reassess your assumptions?
    Mr. Bernanke. I can't conjecture what specifically, but of 
course, yes. I am evidence-based; I look and see what happens 
and try to draw conclusions from that. Certainly.
    Dr. Paul. The definitions, obviously, to me are very, very 
important. And if we don't come to this conclusion and we use 
these terms--inflation demands corrections, and the market 
wants to correct. So this is why we believe that we are going 
to have perpetual doldrums and finally have a big one.
    Do you consider this recession that we are facing today 
something that is significantly different since 1945? Much 
worse and different in any way?
    Mr. Bernanke. Yes, because of the financial crisis, yes.
    Mr. Frank. Regular order.
    Chairman Bachus. Thank you. Thank you, Dr. Paul. That was a 
double dose you got. So that was pleasantly unexpected, I 
guess.
    Mr. Miller?
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    Chairman Bernanke, Mr. Capuano has already asked you about 
the need for accountability if Libor was, in fact, 
systematically gamed. But we frequently hear, with respect to 
whatever the latest scandal is and certainly with respect to 
the conduct that led up to the financial crisis, that the 
conduct might have been unethical, it might be objectionable, 
but it probably wasn't illegal, it certainly wasn't criminal, 
and that the fault was with Congress in not passing tougher 
laws, for having passed weak laws.
    And I have no stake in defending the laws passed by 
Congress before I got here, but I have read the transcript of 
the telephone conversation between an employee of the New York 
Fed and the Barclays trader, and I have examined the criminal 
fraud statutes. Several transcripts show that Barclays admitted 
they were filing false reports. They were not filing an honest 
interest rate. But one transcript sort of set out why. They 
said that the Financial Times had done a chart that showed that 
Barclays was consistently paying a higher rate. Folks thought 
that meant that the other banks knew something about Barclays 
that was not generally known. And Barclays' stock went down, 
their shares went down. And he said that was why they were not 
filing an honest rate. They were filing a rate that would be 
kind of like everybody else's, so that it wouldn't call 
attention to them, like the attention that the Financial Times 
had called to them, and it wouldn't affect their shares.
    The definition of fraud appears to be willful intent--
providing false information with the willful intent to deceive. 
It can be words or acts or the suppression of material facts, 
again, with intent to deceive. A material fact is one that 
someone, a shareholder or an investor, would attach importance 
to in determining whether or not to sell and in determining the 
price at which to sell those shares.
    With respect to the Barclays shares, presumably the traders 
and many Barclays executives held a substantial number of 
Barclays shares. They probably had options to buy Barclays 
shares. They probably were paid bonuses in Barclays shares. So 
it appears that Barclays was providing information they knew to 
be false. They were providing information that they knew would 
affect the share price. They provided it with the intent of 
affecting the share price. And they personally benefited from 
the effect on the share price of having provided false 
information.
    What is missing there? What does Congress need to do? If 
that does not meet the definition of criminal fraud, how does 
Congress need to change the law?
    Mr. Bernanke. I would recommend--the Federal Reserve is not 
an enforcement agency. This is currently under the purview of 
the Department of Justice--
    Mr. Miller of North Carolina. Right.
    Mr. Bernanke. --and other enforcement agencies.
    Mr. Miller of North Carolina. But at the time of those--
Mervyn King, the Governor of the Bank of England, and Secretary 
Geithner are now in a dispute over exactly what Secretary 
Geithner told him. But there doesn't seem to be any dispute 
that there was no referral to a U.S. Attorney for criminal 
prosecution.
    Why was there not a referral for criminal prosecution?
    Mr. Bernanke. As I understood, what the information came 
across was not quite as explicit as you characterized. It was 
more, sort of, market chatter about--
    Mr. Miller of North Carolina. No. That is directly from the 
transcript of a conversation between a Barclays employee, a 
Barclays trader, and an employee of the New York Federal 
Reserve.
    Mr. Bernanke. The Barclays trader was based in New York and 
was talking about rumors and things that he had heard. He 
didn't have explicit information.
    But the point, the real point, the relevant point and the 
important point is that the Federal Reserve Bank of New York 
did inform the appropriate authorities, and it briefed all of 
the financial regulators, who, in turn, undertook 
investigations which began about the same time, including 
especially the CFTC investigation.
    Mr. Miller of North Carolina. You said yesterday that you 
did not know, that no one at the Federal Reserve, the New York 
Fed knew the reports that Barclays was filing false information 
to affect the Libor rate because it affected their derivative 
positions, presumably interest rate swaps. There are many 
reports that there are many banks under investigation. 
Obviously, that conduct would be much more effective if it was 
done in concert rather than independently. But it wouldn't make 
sense to act in concert and it wouldn't really be effective 
independently if their derivatives position were all over the 
place.
    Is there examination now into whether the derivatives 
positions, the interest rate swap positions of the various 
Libor banks, in fact, moved in concert?
    Mr. Bernanke. The CFTC is looking at that kind of issue. 
That is not under our jurisdiction. The investigations from 
other agencies are addressing those questions.
    Chairman Bachus. Thank you.
    Mr. Manzullo?
    Mr. Manzullo. Thank you for coming, Chairman Bernanke.
    What role does uncertainty in the marketplace have to do 
with our financial recovery?
    Mr. Bernanke. I think uncertainty is--as I have mentioned 
once or twice in this venue, my Ph.D. thesis was about the 
effects of uncertainty on investment decisions and suggested 
that it would impede decisions that would be hard to reverse 
later when information became available.
    So I am sure uncertainty is playing some role. I think 
where there is some disagreement is on the relative weights of 
different kinds of uncertainty. No doubt, regulatory and tax 
uncertainty are part of the broad set of issues that are 
concerning investors and entrepreneurs. We hear that a lot in 
our anecdotes. There is also, though, general uncertainty about 
the recovery itself. Will the recovery be sustained or not? In 
order to be confident about hiring people, for example, you 
like to have greater confidence that, in fact, your sales will 
be--
    Mr. Manzullo. What you are hearing is also what I am 
hearing. But I am also hearing from a lot of small business 
people who have around 50 people that they are going to fire 
people to get below 50 so they are not covered by the 
President's health care. I could tell you story after story of 
small manufacturing facilities that are--they are going to fire 
people because they are not going to tolerate having to put up 
with the Affordable Health Care Act. And even one major 
employer back home in Rockford, Illinois, simply told his 
employees, ``I am going to offer you no more health care. I 
will pay the $2,000 fine because I am well over 50.''
    Those businesspeople have money. Large corporations have 
money. And have you heard about the uncertainty out there with 
the businesspeople over the President's Affordable Health Care 
Act and the impact that that has on the recovery?
    Mr. Bernanke. We get lots of anecdotes. The Reserve Bank 
Presidents from around the country come to the meeting and talk 
about what they are hearing from their contacts, and contacts 
frequently cite various kinds of uncertainty, including 
regulatory uncertainty. As I said, though, it is hard to judge 
whether there is a small factor or a large factor.
    Mr. Manzullo. From what I can tell, it is a very large 
factor. I spend most of my time in this place working on 
manufacturing issues. And couple that uncertainty with the weak 
orders coming from the EU, which I think is our second-largest 
trading partner besides Canada, and the Institute for Supply 
Management is now below 50. It dropped, I think, a dramatic 6 
points just in 1 month.
    If the manufacturing sector isn't going to lead the 
recovery, what will?
    Mr. Bernanke. I noted in my remarks that manufacturing 
seems to have slowed somewhat. And part of it is the global 
economic situation--
    Mr. Manzullo. Demand.
    Mr. Bernanke. --demand, slowing in European and Asia. And 
that was part of my earlier point. There are multiple factors 
involved here.
    One sector which is doing a little better is housing, and 
over time that will be a contributing factor. But it is true, 
as Mr. Hensarling pointed out, for example, that growth has 
been slow, and part of the reason is that following a financial 
crisis, some of the factors that normally lead to a strong 
recovery, like a housing recovery or extension of credit, have 
been affected to some extent by--
    Mr. Manzullo. What I have been seeing is that those 
manufacturers involved in mining, oil, and gas exploration, 
anything dealing with energy, they are actually expanding 
because they see the need for that. And banks are lending based 
upon that. But the massive uncertainty in the manufacturing 
sector, the fact that companies are unwilling to make decisions 
is, as you said, compounding everything.
    I met with a bunch of European Union parliamentarians 
yesterday. They believe--of course, it is in their best 
interest to say so, but I really believe that they think that 
things are stabilizing in Europe. Your opinion of that?
    Mr. Bernanke. I don't think they are close to having a 
long-term solution that will solve the problem. And until they 
find those long-term solutions, we are going to continue to see 
periods of financial market volatility, I think.
    Mr. Manzullo. Okay. Thank you.
    I yield back.
    Chairman Bachus. Mr. Scott, I guess. No--
    Mr. Scott. Thank you, Mr. Chairman. I want to--
    Chairman Bachus. --Mr. Carson. I am sorry.
    Mr. Carson?
    Mr. Carson. Thank you, Mr. Chairman.
    Chairman Bernanke, in previous testimony before this 
committee, you have mentioned that one of the best ways to 
strengthen our labor force is to improve the quality of 
education, especially in disadvantaged areas suffering from 
persistent unemployment and underemployment.
    Some encouraging news that I found in the new monetary 
report is that consumer debt has shrunk. It is not clear to me 
whether our U.S. savings rate is increasing in proportion to 
the decrease in consumer debt. But I am very interested in your 
assessment on the role of financial education, particularly for 
young people and especially students. The disturbing aspect to 
me of current consumer debt is the alarming increase of student 
loan debt.
    Do you believe, sir, that investments in financial 
education can help strengthen our economy? And are there any 
successful models or programs that you see as being effective 
in this area?
    Mr. Bernanke. The Federal Reserve is very committed to 
financial education and economic education more generally. I 
mentioned yesterday that I am, later this summer, going to 
meet, on video, with teachers from all over the country who are 
doing financial education to talk about different approaches 
and the value of that.
    It is clearly very important. The crisis showed that many 
people made bad financial decisions, and that hurt not only 
them but also hurt the broader economy. So it is extremely 
important. At the same time, I think on the other side of the 
ledger it is important that we make sure that financial 
information, such as credit card statements and the like are 
understandable, that they are not full of legalese and small 
print and those kinds of things. So there are really two sides 
to it.
    So, yes, that is very important. There is still a lot of 
work going on about trying to figure out what works in 
financial education, and I would say that the record is mixed. 
One of the things that we have learned, I think, is that 
financial education should be introduced in school, in high 
schools and so on, but it is also important to have a lifelong 
opportunity. And many folks don't pay much attention to these 
issues until the time comes for them to buy a house or make 
some other big financial decision, and that is when they are 
most likely to listen carefully and absorb those lessons.
    Mr. Carson. Thank you, sir.
    I yield back.
    Chairman Bachus. Thank you.
    Mr. Fincher for 5 minutes.
    Mr. Fincher. Thank you, Mr. Chairman.
    Privileges to the lowest-ranking Member, myself: I am close 
to the action. So thank you for coming in today.
    To the chairman's opening question, Chairman Bernanke, 
about auditing the Fed, none of us are challenging--I am not 
challenging the transparency that you have given to us in 
seeing what is happening. But moving forward to the future, not 
the past, the ranking member's opening comments about playing 
politics, most of--I know the freshman class, we are not here 
to play politics. This is about trying to prevent--or hopefully 
build a better America than we have now. And auditing the Fed, 
to most of the American people, seems like something that is 
responsible if the political games wouldn't be played.
    Can you just kind of comment? Are you that opposed to 
auditing the Fed?
    Mr. Bernanke. Very much so, because I think the term 
``audit the Fed'' is deceptive. The public thinks that auditing 
means checking the books, looking at the financial statements, 
making sure that you are not doing special deals and that kind 
of thing. All of those things are completely open. The GAO has 
complete ability to address all the things we did during the 
crisis. All of our books are audited by an outside, private--
Deloitte & Touche, a private auditor. We have an Inspector 
General. If there is anything that Congress wants to know about 
our financial operations, all they have to do is say so.
    The one thing which I consider to be absolutely critical, 
though, about the bill is that it would eliminate the exemption 
for monetary policy in deliberations. And the nightmare 
scenario I have is one in which some future Fed Chairman would 
decide, say, to raise the Federal funds rates by 25 basis 
points, and somebody in this room would say, ``I don't like 
that decision. I want the GAO to go in and get all the records, 
get all the transcripts, get all the preparatory materials, and 
give us an independent opinion on whether or not that was the 
right decision.''
    And I think that would have a chilling effect and would 
prevent the Fed from operating on the apolitical, independent 
basis that is so important and which experience shows is much 
more likely to lead to a low-inflation, healthy-currency kind 
of economy.
    Mr. Fincher. Is there anything that could be done, any kind 
of compromise, in your opinion, that needs to be done, any more 
than it is being done now?
    Mr. Bernanke. I think everything in the bill is basically 
fine except for getting rid of this exemption for monetary 
policy deliberations and operations. I think that is the part 
that is critical. And it has nothing to do with our books. That 
is the thing I hope to convey.
    Mr. Fincher. Okay.
    The second question: Since the financial crisis of 2008, 
the Federal Reserve has put into play several measures to help 
stimulate an economic recovery, like quantitative easing, 
Operation Twist, et cetera. Do you see these measures as 
temporary solutions to stimulating the economy, or would the 
Federal Reserve continue these measures on a more permanent 
basis?
    Some of us fear that we are just dumping tons of money into 
the economy, and that sooner or later, with the low interest 
rates, that things are really going to spin out of control when 
we do have a recovery.
    Mr. Bernanke. They are, of course, temporary.
    The economy grows in the long run because of all kinds of 
fundamental factors: the skills of the workforce, the quality 
of the infrastructure, how effective the tax system is, 
research and development, all of those things. Monetary policy 
can't do much about longer-term growth.
    Mr. Fincher. Right.
    Mr. Bernanke. All we can try to do is try to smooth out 
periods where the economy is depressed because of lack of 
demand. And because of the financial crisis, the economy has 
been slow to reach back to its potential, and we are trying to 
provide additional support so the recovery can bring the 
economy back to its potential.
    But in the medium- and long-term, monetary policy can't do 
anything to make the economy healthier or grow faster except to 
keep inflation low, which we are committed to doing. Things 
like education, infrastructure, R&D, Tax Code, all those 
things, obviously, are the private sector and Congress, not the 
Federal Reserve.
    Mr. Fincher. Do you fear--last question--that when the 
economy starts to turn and move--and it is going to move, 
hopefully when Washington can add certainty and stability and 
give confidence back to the American people that we are not 
going to mess things up--there is so much money out there, that 
this thing is going to really go and inflation is going to be a 
huge problem?
    Mr. Bernanke. No, it will not. We know how to reverse what 
we did. We know how to take the money out of the system. We 
know how to raise interest rates. So it will be a similar 
pattern to what we have seen in previous episodes where the Fed 
cut rates, provided support for the recovery, and then when the 
economy reached a point of takeoff where it could support 
itself on its own, then the Fed pulled back, took away the 
punchbowl. And we can do that and we will do that when the time 
comes.
    Mr. Fincher. Thank you, Chairman Bernanke.
    Chairman Bachus. Mr. Himes for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman.
    And, Chairman Bernanke, thank you for being with us, and 
thank you for your efforts and work over the course of the last 
several years to stabilize our economy.
    Mr. Chairman, I read very closely and listened to your 
testimony on the things that are holding back our recovery and 
read that monetary policy report here. And I want to just dwell 
on them for a minute or 2. I saw financial strains associated 
with Europe, still-tight borrowing conditions, the restraining 
effects of fiscal policy and fiscal uncertainty, and the 
housing market are the four that you highlighted.
    Presuming that we are not, in the near term, going to do a 
lot about number one and number four, I want to explore with 
you still-tight borrowing conditions and whether there is 
anything that Congress could do to assist in that. I know you 
are hesitant to sort of make prescriptions to the Congress, and 
I understand that. But, of course, the Federal Reserve has been 
pretty clear in their message that monetary policy alone is not 
enough, so I am going to explore that a little bit with you.
    In the report, you say that still-tight borrowing 
conditions are a result of uncertainty in the economic outlook 
and high unemployment. You did not mention uncertainty 
associated with Dodd-Frank and the rule-writing process and the 
new regulations. Can I assume from that omission that you, the 
Federal Reserve, does not believe that that regulatory 
uncertainty is, in fact, a material cause of still-tight 
borrowing conditions? And if it is material, should we be doing 
something about it?
    Mr. Bernanke. There are a lot of reasons for the problem. 
Part of it is on the demand side, that borrowers are 
financially impaired from the crisis and they are not as 
creditworthy or as attractive to lenders as they were earlier. 
There are other various factors, including, for example, 
concerns that banks have about having mortgages put back to 
them if they go bad, et cetera. So there is a lot of 
conservatism in lending right now, as well.
    I don't think I would say that there was no effect of 
financial regulatory policy on any of this. For example, as we 
try to develop rules for mortgage lending, for mortgage 
securitization, there is still uncertainty about what the 
playing field will look like when the private-sector 
securitization market comes back or if it does come back--
    Mr. Himes. No, no, I understand, Mr. Chairman. I am sorry 
to interrupt, but, again, my question wasn't was there no 
effect; it was, was it material? I happen to think that the 
reforms in Dodd-Frank, many of them are terribly, terribly 
important, and there are obviously things that we will need to 
change over time.
    I am really, sort of, looking for materiality. Because, 
frankly, you don't mention it in the report. If you were to say 
that, no, it is a material effect on credit availability, I 
might rethink my position.
    Mr. Bernanke. I think it is partly on us, the regulators, 
more than on Congress, in that some of these things have not 
been resolved one way or the other. A number of people have 
talked about uncertainty. If we can move to provide clarity 
about how the regulations will be written and so on, I think 
that will be helpful.
    And I certainly agree that the benefit of financial reform, 
which is to reduce the threat of another financial crisis, is 
extremely important to take into consideration.
    Mr. Himes. Thank you.
    The second question: In your second reason for headwinds 
here, ``the restraining effects of fiscal policy,'' I wonder if 
you could elaborate on what you mean by ``the restraining 
effects of fiscal policy.'' How is that providing a headwind to 
our economic recovery?
    Mr. Bernanke. Broadly speaking, fiscal policy both at the 
Federal and the State and local level is now contractionary--
that is, pulling demand out of the system rather than putting 
it in. And you can see that most clearly at the State and local 
level, where tight budgets over the last few years have meant 
that at the same time that we are trying to increase employment 
in the country as a whole, that, of course, many people are 
being laid off by the State and local governments.
    So I am not making a judgment about that. Obviously, they 
have fiscal issues they have to deal with. But it is just a 
fact that fiscal tightening, particularly at the State and 
local level, has been something of a drag on the recovery in 
the last few--
    Mr. Himes. Can I conclude from all that, though, that your 
achieving your mandate of full employment, were we to abide by 
the policies suggested by some in this institution for more 
severe austerity now, can I conclude that if we pursued that 
policy, it would actually not be helpful toward full 
employment?
    Mr. Bernanke. Again, what I have been advocating is sort of 
a two-part policy, one which makes strong and credible steps 
toward achieving sustainability over the medium term, over the 
next decade, while avoiding sharp cliffs and sharp contractions 
in the near term, yes.
    Mr. Himes. Last question, drawing on your experience as an 
economist: There is all sorts of debate around here about the 
things that we might do--extending safety net programs, 
unemployment insurance, tax cuts, tax cuts for middle-class 
families, tax cuts for the wealthy, infrastructure investment. 
Each of these things, each of these fiscal policies have 
different multiplier effects, more positive impact on the 
economy.
    Chairman Bachus. Okay--
    Mr. Himes. I wonder if you might just relatively rank the 
multiplier effects of those four initiatives that I just laid 
out.
    Mr. Bernanke. No, I think that would come too close to 
advocating the different approaches. And each of these things 
has not only multiplier effects but it has different costs, it 
has different benefits to the economy, different philosophies 
about the size of government and so on. So I think, 
unfortunately, that is a congressional prerogative to figure 
that out.
    Chairman Bachus. Thank you.
    Mr. Himes. Thank you, Mr. Chairman.
    Chairman Bachus. Mr. Royce for 5 minutes.
    Mr. Royce. Thank you.
    Chairman Bernanke, looking out on the horizon, on the long 
road ahead of us, there are two studies that seem to indicate 
the same thing: one recently that came out of the IMF which 
indicated that a 10-percentage-point fall in the debt-to-GDP 
ratio typically leads to output rising by 1.4 percent; and a 
similar conclusion coming from the other direction from Rogoff 
and Reinhart who say in their paper, ``Growth in a Time of 
Debt,'' that debt burdens above 90 percent are associated with 
1 to 2 percent lower median growth going forward.
    Our entitlement obligations will consume all of the average 
post-war projected tax revenue in a few decades, if we just 
look at the studies that, frankly, you have shared with us. 
Will we be able to see strong sustainable economic growth 
without addressing our entitlement obligations, which you have 
labeled ``unsustainable'' in terms of the way they are 
currently set to compound?
    Mr. Bernanke. On current law, healthcare expenditures are 
expected to rise very substantially, to the extent that they 
would be crowding out other parts of the government or, 
alternatively, requiring significant tax increases. So if you 
want to avoid those outcomes, it is important to find ways to 
reduce expenditure. I hope that it can be done in ways that 
don't involve worse health care but just involve a more 
efficient delivery of health care.
    Mr. Royce. Would you like to make any other observations in 
terms of the deficits or the size of the debt as you look 10 
years out, 15 years out?
    Mr. Bernanke. Again, the CBO has done many analyses which 
show that our fiscal path is unsustainable, even if we avoid 
some kind of crisis at some point. While I don't necessarily 
buy exactly into the 90 percent number and so on, I think it is 
pretty clear that a high level of debt to GDP, both because of 
future tax obligations, high interest rates, is going to impede 
growth, all else equal.
    Mr. Royce. And that will impact employment in the future.
    Let me go to another question, regarding Basel III. I think 
it is a step in the right direction, but at the end of the day, 
capital is the ultimate buffer that stands between the taxpayer 
and the systemically risky institutions, right? So under Basel 
III, my concern is that it continues to rely on internal risk 
models at financial institutions when you set the capital 
levels, the requirements there. I don't mind those being used 
internally for purposes, but to use that to set the capital 
levels--if I may quote your former colleague, Alan Blinder, he 
says that, prior to the crisis, these models were gained, is 
the argument he is making, to avoid raising additional capital. 
And, of course, what that means is that they had excessive 
leverage.
    And if you look at the Basel committee study: ``Capital 
levels in American banks employing the internal ratings 
approach would experience a capital reduction of 7 to 27 
percent. Those adhering to the standardized approach typically 
used by the smaller banks would experience a 2 percent increase 
in capital demands.'' So we have a recent study which found 83 
percent of institutional investors want to get rid of model 
discretion.
    Mr. Chairman, given the history of the gaming of these 
models in setting capital levels, and given that institutional 
investors are demanding to move away from model discretion, are 
you comfortable with continuing to use these models in setting 
capital calculations? If you just look at the minimum leverage 
ratio, are you comfortable with that 3 percent level of Tier 1 
capital to total assets, or a 33-to-1 total leverage there?
    Mr. Bernanke. Right. So the overall system has been 
strengthened quite a bit with the international leverage 
ratio--more capital, higher-quality capital, buffers, liquidity 
rules, and so on. So I think it is a stronger system.
    Your point is well-taken. For those models to be 
worthwhile, they need to be validated and they need to be good. 
The Federal Reserve and the other regulators don't just let you 
use whatever model you want; they have to be approved and 
validated by the regulators. And I believe that is an 
adequate--
    Mr. Royce. But the argument I am making is that the only 
way to guarantee that doesn't happen is to focus on the old-
fashioned minimum leverage ratio--
    Chairman Bachus. Thank you.
    Mr. Royce. --which, under Basel III, is far too low.
    Chairman Bachus. Thank you, Mr. Royce.
    Mr. Carney?
    Mr. Carney. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you for coming in today. By the 
time you get to me, many of my questions that I have have 
already been addressed. So I would like to just go back to some 
of the things that were in your statement and in your report, 
just to confirm my understanding.
    Since I get it that the Fed is doing everything it can, 
with respect to monetary policy, to address the employment part 
of your dual mandate--is that correct?
    Mr. Bernanke. We can continue to evaluate the situation, 
evaluate the outlook, look at the tools that we have, and we 
are committed to make sure that we continue to have improvement 
on employment. But I don't want to imply that we have done 
everything we can. We may do more in the future.
    Mr. Carney. So there is more that you might do?
    Mr. Bernanke. It is certainly possible that we will take 
additional action if we conclude that we are not making 
progress toward higher levels of employment.
    Mr. Carney. Thank you.
    And there seems to be little reason for concern on the 
price stability side at the moment.
    Mr. Bernanke. For now, inflation seems to be well in check.
    Mr. Carney. And you also said that progress has been made 
in terms of the recovery, but unemployment is still too high, 
and the recovery has stalled and is not as strong as maybe you 
had hoped at this point.
    Mr. Bernanke. The recovery has decelerated recently. It is 
sort of a pattern we have seen for the last few years, that 
things seem to be stronger in the beginning of the year and 
then the slowdown around spring, spring and summer. So we will 
try to assess whether this is just a temporary slowdown or 
whether something more fundamental is happening. Again, we are 
committed to doing what is necessary to make sure the recovery 
continues and employment continues to grow.
    Mr. Carney. At one point, you said that two big risks to 
economic growth were the European situation and the effects of 
the U.S. fiscal policy, the so-called fiscal cliff. And in part 
of your response to that, you said that the most effective 
thing that Congress could do would be to address the fiscal 
cliff. And I think you said the sooner we did that, the better.
    What do you mean by that, the sooner we did that, the 
better?
    Mr. Bernanke. One of the issues--and this is not explicitly 
accounted for in the CBO study--is that, even putting aside the 
effects on activity of the fiscal cliff, as time passes, as we 
get closer to the end of the year, we are likely to see 
increased uncertainty both in financial markets and among 
people who are making investment and hiring decisions about 
what programs will be in place, which ones will not, what the 
tax rates will be, and those kinds of things.
    Mr. Carney. So certainty and confidence are a big part of 
that, right?
    Mr. Bernanke. Absolutely.
    Mr. Carney. And I know--I am going to try not to ask you to 
suggest things that we should be doing, because I know you 
won't answer those questions. But I would like to ask you once 
to go back to the question that Mr. Capuano left you at, which 
is really a sense of what ``gradual'' means. Can you describe 
that numerically in some kind of way, as opposed to 
prescriptively in terms of policy?
    Mr. Bernanke. I think there is a range that--people would 
have different views about whether you should be more proactive 
or just avoid the cliff.
    Mr. Carney. Right, right, right.
    Mr. Bernanke. There is a range of views there.
    Mr. Carney. So when you say more proactive, in terms of 
maybe stimulating?
    Mr. Bernanke. Some folks would want to do more fiscal 
activity.
    Mr. Carney. Right.
    Mr. Bernanke. There are different views. What I am taking 
here is a sort of do-no-harm kind of approach and say that you 
just want to avoid the impact of the cliff.
    Mr. Carney. Have we learned anything from the European 
response? Have they taken through the requirements that the 
eurozone have imposed on some of the members' fiscal policies 
that probably aren't the best?
    Mr. Bernanke. I think we have learned that sharp fiscal 
contractions can slow economic activity. We are seeing that in 
a number of countries. That is not to say that they have any 
choice. In the case of Greece, for example, they don't have 
many options about cutting back on their fiscal deficits. But 
we have seen countries that have very sharply contracted their 
fiscal positions experiencing recessions at the same time.
    Mr. Carney. I only have time for one more question. So, two 
of the big issues that are in our fiscal situation--and you 
have talked about healthcare spending, that is the biggest part 
on the spending side, and of course tax policy. Is certainty 
more important than the underlying policy or as important?
    The Affordable Care Act was intended and will--projections 
are it will reduce costs in the long term but will create a lot 
of uncertainty in the short term. Similarly on tax policy. I 
see my time is running out. Do you have a thought on that?
    Mr. Bernanke. Whenever you can have clarity about your 
policy intentions--and this applies to the Federal Reserve, 
too--it is going to be better.
    Mr. Carney. Thank you.
    Mr. Lucas [presiding]. The gentleman's time has expired.
    The Chair now recognizes himself.
    Mr. Chairman, press reports have indicated--and let's 
return to Libor for just a moment--that the New York Fed first 
learned of possible rigging of Libor in 2008. However, when the 
CFTC announced the enforcement action and the $200 million fine 
against Barclays in June, they said the interest rate rigging 
continued sporadically well into 2009.
    Chairman Bernanke, did anyone at the New York Fed inform 
the Federal Reserve in Washington, D.C., of potential rigging 
in 2008?
    Mr. Bernanke. Let me be clear. There are two types of 
behaviors that the CFTC has identified. One is manipulation of 
the rate by derivatives traders for short-term profit. That 
information has only recently come to light; none of that was 
known in 2008-2009.
    What the Federal Reserve heard about in 2008 had to do with 
banks that were members of the panel, the Libor panel, possibly 
underreporting their borrowing costs in order to avoid 
appearing weak in the market. This was information that was 
about that time becoming generally known. There were media 
reports in April of 2008, for example, talking about widespread 
chatter in the markets about that kind of behavior.
    So that was understood, and it was understood that part of 
the problem was the structural problems with the Libor system. 
And so, the New York Fed took two kinds of steps. One was to 
inform all the relevant regulators what it had learned. But it 
also took steps to try to make improvements in how Libor is 
collected and calculated.
    Mr. Lucas. And you can understand the perspective of myself 
and the Agriculture Committee, since literally thousands of 
those derivative contracts, which fall under the jurisdiction 
of the committee, were settled potentially using those what now 
appear to be rigged rates. The impact is very relevant.
    So can I take your answer to say, therefore, that someone 
from the Federal Reserve did, indeed, tell the CFTC about this 
potential issue in 2008?
    Mr. Bernanke. Absolutely. As was released in the materials 
on Friday, the New York Fed made presentations to the 
President's Working Group, which includes the CFTC, the SEC, 
the Fed, and the Treasury. It made separate presentations to 
the Treasury. And it communicated with British authorities 
about the issues of how to strengthen Libor and address this 
underreporting problem.
    Mr. Lucas. Thank you, Mr. Chairman.
    And, with that, surprisingly enough, I will yield back the 
balance of my time and recognize the gentlelady from 
California, Ms. Waters, for 5 minutes.
    Ms. Waters. Thank you very much.
    Thank you for being here, Chairman Bernanke. There is so 
much all of us would like to discuss.
    As I recall, in the past year since the passage of Dodd-
Frank, we can see that major U.S. banks have managed to make 
themselves profitable again, but really, the scandals still 
keep coming, and public trust in the integrity of the financial 
system, I think is at an end. That is why I have been 
advocating for the swift implementation of the Wall Street 
reform law, strong enforcement of existing law, and for 
adequate funding for our regulators.
    But as I did last week at another hearing of this 
committee, I just want to remind us all, in just the last 2 
years we have seen the robo-signing of foreclosure documents, 
the robo-signing of credit card judgments, billions of dollars 
of put-back lawsuits over mortgage-backed securities, the 
failure of two major Futures Commission merchants, municipal 
bond bid rigging, alleged energy market manipulation, money 
laundering now for drug cartels, the losses of the ``London 
Whale,'' and the bungling of the Facebook initial public 
offering. And this is just a partial list.
    And it is capped off by what might be the most far-reaching 
scandal of all, Libor manipulation. One commentator, Andrew Lo, 
a professor at MIT, has noted that this Libor fixing scandal 
dwarfs by orders of magnitude any financial scam in the history 
of the markets.
    I guess in all of this, let me just ask, as it relates to 
Libor, what are you going to do about primary dealers who we 
find have been involved in manipulating the information in 
order to look better? You have that responsibility; you 
determine, do you not, who the primary dealers are?
    Mr. Bernanke. We determine who the primary dealers are. We 
don't necessarily regulate them.
    This particular issue is now under heavy coverage by the 
CFTC, the DOJ, the SEC, and authorities from other countries as 
well. And I am sure that they will follow through with every 
company involved.
    Ms. Waters. As I understand it, the New York Fed may not 
regulate primary dealers, but they do set out business 
standards and technical requirements for primary dealers, and 
they can fire a primary dealer at any time. Are any going to be 
fired, do you know?
    Mr. Bernanke. If there are questions raised about the 
integrity and competence of a primary dealer, yes. It could 
happen, certainly.
    Ms. Waters. Okay. That is good to know.
    Let me just segue into something that perhaps you had not 
anticipated. Out in California, we have a number of cities that 
are filing bankruptcy, and a lot of this has to do with the 
housing crisis and the problems that they have. San Bernardino 
is one, of course, and Stockton, and some time ago, it was 
Vallejo.
    In San Bernardino, they had some interesting discussions 
about how to use eminent domain in order to keep people in 
their homes. From what I can understand, they would access the 
properties through eminent domain, and then they would pay the 
fair market value. But the fair market value is different than 
the mortgage agreement because they are now underwater. They 
would keep people in their homes and, of course, try and 
stabilize the housing.
    But what do you think about that?
    Mr. Bernanke. I think it raises legal issues that I am just 
not qualified to comment on. It is a very difficult set of 
problems that they are facing, and I am very sympathetic to 
their attempts to try to address it, but whether this is a good 
vehicle or not, I am not qualified to answer the question.
    Ms. Waters. Do you believe that these cities are taking 
action because they are just basically tired of waiting for us 
to solve the problems of the housing crisis? There is one thing 
that I think you were involved in with the OCC, and it had to 
do with the mitigation process for dealing with some of the 
issues of getting information out to some of the people who had 
been harmed and getting them compensated up to $125,000, I do 
believe, but only 8 percent returns?
    Former Chairman Frank and I have met with the OCC, and they 
talked about coming up with new outreach-type programs, et 
cetera. Have you been in discussion with them about what you 
could do to do better outreach and get more people involved and 
responding?
    Mr. Bernanke. We have. We have been trying really hard, 
done a lot of advertising, Web-based, social-media-type 
communications. We have taken the GAO commentary and tried to 
incorporate that. But, most recently, I understand, we are 
trying to make a more community-based approach to reach out to 
churches and African-American groups and the like and trying to 
get their assistance as well, as well as home mortgage 
counselors. Yes, we are trying to address that.
    Mrs. Biggert [presiding]. The gentlelady's time has 
expired.
    I recognize myself for 5 minutes.
    Chairman Bernanke, could you just talk a little bit about 
the differences between insurance and banking, as the Federal 
Reserve looks at it?
    Mr. Bernanke. Sure.
    For insurance companies that either own a thrift or should 
one become designated as a nonbank systemically important firm, 
the Federal Reserve would have consolidated supervision over 
those insurance companies' responsibilities.
    We recognize there are differences between insurance 
companies and banks, so a couple of differences in the way we 
would manage that. One would be, of course, that the insurance 
companies themselves, the insurance subs, will continue to be, 
as I understand it, will continue to be regulated by the State, 
State authorities, and be subject to the insurance company 
regulatory and capital requirements. The Federal Reserve will 
impose capital requirements at the holding company level to 
make sure that overall the company is well-capitalized. But 
even in doing that, we will try to take into account 
differences between insurance companies and other types of 
firms. So, for example, there are certain types of assets that 
insurance companies have, like not fully guaranteed accounts 
that some of their customers might have, and we are looking to 
give those different capital treatments.
    So there will be a lot of similarities, admittedly, at the 
holding company level, but we recognize insurance companies 
have both a different composition of assets and a different set 
of liabilities. And appropriate regulation needs to take that 
into account.
    Mrs. Biggert. Okay. I think that there have been other 
Federal regulators that have either signaled or taken action to 
allow State insurance regulators to continue to do their job, 
regulating insurance.
    There is concern, I think, with the Fed plan that, how are 
you going to relate to the companies that maybe have only 1 
percent or 2 percent of their assets as part of a thrift or a 
savings and loan, when 98 to 99 percent of their assets are in 
insurance?
    Mr. Bernanke. As I said, we will try to take into account 
the differences. Insurance companies have many of the same 
assets that banks do and, therefore, share the credit and 
market risks that banks have. And so, for those kinds of 
assets, it could be appropriate to have similar capital 
requirements for insurance companies and banks.
    But in those cases where there are distinctive differences, 
then I think we need to try and accommodate that the best we 
can, consistent with the Collins Amendment and other rules in 
Dodd-Frank.
    Mrs. Biggert. That brings up--you have the June 7th 800-
page proposed capital rules that intend to regulate insurance 
companies as well as the banks. So do you think there will be a 
good distinction between those two?
    And I am also concerned about the fact that it is a 90-day 
comment period. Do you think that will be extended for some of 
these companies to have to come in and really--
    Mr. Bernanke. If the comment period is insufficient to get 
a full response from the public, we certainly can consider 
extending it.
    Mrs. Biggert. Okay. And there is a question then of, do you 
think that the Federal Reserve has the statutory flexibility to 
recognize the insurance risk-based capital and leverage 
requirements? There is the Collins Amendment, and then there is 
Dodd-Frank, which I think goes through with that. But does the 
Collins Amendment then prevent a difference?
    Mr. Bernanke. My understanding, and I will be happy to 
follow up with you on this, is that we have to meet certain 
requirements at the holding company level. So at the holding 
company level, there will be a lot of overlap between the 
regulation of a bank holding company and a thrift holding 
company. But again, my understanding is that we will not try to 
impose bank-style capital requirements on individual insurance 
subs, and that those can still be subject to the State capital 
requirements.
    Mrs. Biggert. Okay. I thank you. The gentlelady from New 
York is recognized for 5 minutes.
    Mrs. Maloney. Thank you, and thank you for your public 
service. I would like to note that the Consumer Financial 
Protection Bureau issued its first enforcement action today, 
ordering a financial institution to pay a fine for what the 
agency described as deceptive marketing tactics related to 
credit card products. I wanted to publicly thank you for your 
leadership and this Congress' leadership on credit card reform, 
and note that it is good to see that consumers have an agency 
speaking up and fighting for their protections and financial 
products.
    The Libor problem, really, is readily solvable if we use a 
different index, one that is objective, public, readily 
verifiable, and manipulation-resistant by any single bank. So I 
would like to ask you what are your favorite alternatives to 
Libor? And have you relayed that to Mr. King at the Bank of 
England? And if so, what was his response?
    Mr. Bernanke. As I discussed yesterday, I think there still 
are problems with the current Libor system because it doesn't 
always reflect an actual market transaction. And the Federal 
Reserve Bank of New York made some recommendations for reform 
which have not been fully adopted. So one strategy would be to 
switch to a market-based indicator. The Federal Reserve has not 
come out in favor of a specific one. But a number of 
possibilities include repo rates, the so-called OIS index, and 
even potentially Treasury bill rates, for example.
    So there are a number of possible candidates. I have not 
addressed this issue to Governor King. I have talked to Mark 
Carney, who is the governor of the Bank of Canada, who is the 
head of the Financial Stability Board, which is an 
international body which looks at issues pertaining to 
regulation and financial stability. And that body is going to 
be looking at the Libor controversy, implications for financial 
stability, and possible ways to move forward. So that will be 
one international effort to look at alternatives.
    Mrs. Maloney. Okay. Why is the American economy doing 
better than Europe's? The Europeans seem to be more focused on 
debt, and working towards austerity, and austerity in their 
public policy instead of stimulating the economy. And what role 
do you think stimulating the economy with monetary stimulus and 
fiscal stimulus, what role do you think that played in the 
American recovery, which is better so far than the European 
one?
    Mr. Bernanke. Yes. The U.S. recovery is somewhat 
disappointing, of course, but it has been stronger than some 
other areas. In Europe, they are facing a number of challenges, 
mostly related to the structural problems associated with the 
common currency and with the structure of the eurozone. So a 
number of factors contributed to the slowdown in the economy. 
One of them is the fact that a number of countries, which are 
under a lot of pressure from markets, are severely cutting 
their fiscal positions. And that is contributing to the slowing 
economic activity. But in addition to that, their banking 
system is having problems, and credit has become very tight in 
some countries. Moreover, all of the issues related to the 
possible default of various countries, or the risks borne by 
financial institutions have led to a lot of volatility in 
financial markets, which has also been a negative factor. So 
they really are facing a lot of headwinds there, and it is 
quite a difficult situation.
    Mrs. Maloney. I am especially worried about the efforts of 
some of my colleagues on the other side of the aisle to limit 
the Fed's ability to use monetary stimulus. Long-term 
unemployment is really high, and I am worried that we don't 
have enough tools to combat it. And don't you believe that the 
long-term unemployment would be even higher if the Fed had 
raised the Federal funds rate and not purchased government 
securities?
    Mr. Bernanke. I am quite confident of that. We haven't had 
the recovery we would like, but certainly, monetary policy has 
contributed to growth and reduction of unemployment in the last 
3 years.
    Mrs. Maloney. And I would like to hear your comments on 
positive signs that you see in the latest U.S. economic data.
    Mrs. Biggert. The gentlelady's time has expired.
    Mr. Bernanke. I note housing is one area.
    Mrs. Biggert. The gentleman from California, Mr. Miller, is 
recognized for 5 minutes.
    Mr. Miller of California. Thank you, Madam Chairwoman. 
Welcome back, Chairman Bernanke. It is good to have you here. 
In your testimony, you cited low demand and high inventory for 
houses throughout the country. In California, it is kind of an 
interesting process. We are kind of going the other way. 
Inventories overall in California are down to about 3.5 months, 
down from 4.2 months in May, which is a really good trend. In 
fact, in the Inland Empire, which was hit very, very hard, San 
Bernardino County, it is actually down to about 40 days.
    It is nice to go into a real estate office and actually see 
lists of buyers instead of lists of homes for sale. What do you 
think we can do to keep this trend going? Because I don't 
believe the economy is going to come back until the housing 
market recovers.
    Mr. Bernanke. As you say, there is improvement in the 
market as a whole, and particularly in some areas. I am not 
sure that this low inventory situation will persist, because 
there is a pretty big backlog of houses that are in the 
foreclosure process that may come onto the market. And that 
will be an issue.
    We provided a working paper earlier this year that 
discussed some of the issues in housing. For example, in order 
to keep down that inventory, one strategy is to undertake 
programs that convert REO, real estate owned by banks and other 
owners, to rental properties. And the GSEs are running a 
program like that, which has some promise. It is important to 
do what we can to avoid foreclosure, obviously, where it is 
possible. Or if that is not possible, to give people a way, 
through deed-in-lieu or short sales or other mechanisms, to get 
out of their home and to sell it and to avoid a lengthy 
process.
    Access to credit remains a very significant problem. It is 
hard to point to specific things that can be done. But one 
thing I think is promising is that the GSEs, as I understand 
it, are considering changes in their practices that will reduce 
the concerns that banks have about so-called put-back risk, so 
that when banks make a mortgage loan and sell the mortgage to 
Fannie Mae or Freddie Mac, there is a substantial risk that if 
the mortgage goes bad, if there is any kind of problem with 
documentation or anything else, that they will get that 
mortgage back and be liable to the--
    Mr. Miller of California. I like that.
    Mr. Bernanke. There are a number of areas where we could 
hope to see improvement in the housing market, but 
unfortunately, there is no single solution. And to some extent, 
just economic recovery more generally is going to drive the 
housing market.
    Mr. Miller of California. There is a concern about what we 
are doing. FHFA has developed a pilot program with Freddie and 
Fannie to sell their REOs on a bulk sale. You saw that program, 
they are doing a pilot program on it.
    Mr. Bernanke. That is right.
    Mr. Miller of California. And the problem I have with that 
is they are doing it in the Inland Empire, which has a 40-day 
supply of homes. When they sent the letter out, there was a 
group of us in our area, 19 of us who represent that region, 
who wrote a letter objecting to it. And they said, well, these 
houses have been on the market. When we saw the data, 70 
percent of the homes have never even been listed. And my 
concern is, why would we do that? If we bulk sell them, we are 
going to sell them for less than market value. If we sold them 
in the traditional foreclosure process, you would get more 
money listing with a REALTOR and selling them out. But we are 
actually going to cost the taxpayers money starting a pilot 
program in a part of the country that has a very low amount of 
homes listed.
    Why would we do that? It doesn't make any sense when we 
should--I agree there are probably some parts of the country 
where maybe there is a high inventory level and you need to 
bulk sale them out. But why would they pick the one area of the 
country that is starting to recover? Maybe it is because the 
house prices are so depressed. But you are bulk selling them 
out, costing taxpayers money. Why would we do that?
    Mr. Bernanke. I am not sure it is costing taxpayers money. 
I hope not. I think one of the reasons they would be doing that 
is in order to make REO to rental programs work, you want to 
have a large number of houses close together, foreclosed homes 
close together so that they can be managed by rental--
    Mr. Miller of California. But if you sell them off in bulk, 
you are going to sell them for less than market value, the way 
they are selling them off.
    Mr. Bernanke. But more quickly and with less cost.
    Mr. Miller of California. But if you have a 40-day supply 
of inventory, my argument is that there are probably places 
where 7 months is considered normal. We have a 40-day supply of 
inventory. And Freddie and Fannie are bulk selling those 
through FHFA at a reduced price, when those houses could be 
listed and sold.
    Mr. Bernanke. That is a good point. I hadn't heard that 
before. And I would urge you to talk to Ed DeMarco about that.
    Mr. Miller of California. I did. And the response from Mr. 
DeMarco was that, ``We are afraid we would lose credibility by 
not selling them now that we have bid them out.'' And my 
response was, ``I am concerned with losing credibility by 
costing the taxpayers money selling homes in a region that has 
no inventory and an abundance of buyers.'' I just think that is 
something somebody should talk about when you are in meetings.
    Mr. Bernanke. Okay. Thank you.
    Mr. Miller of California. Thank you, sir.
    Mrs. Biggert. The gentleman's time has expired. The 
gentleman from Georgia, Mr. Scott, is recognized for 5 minutes.
    Mr. Scott. Thank you very much, Madam Chairwoman, and 
welcome, Chairman Bernanke. It is good to have you here. I want 
to talk about what I think is the core of our issue now dealing 
with especially unemployment, and that is a very serious 
paralysis of partisanship that has basically hijacked this 
Congress. And I say that because I think that you all have done 
pretty much what you can do. You have reached in the Fed your 
point of what you call zero lower bound, where you can't go any 
further with your interest rates.
    And everything that we have done here, we talked about, for 
example, the policies that we made, nowhere is the economy more 
impacted than health care. The whole issue was the rising costs 
of that. We passed a health care bill. And that bill has a 
direct impact on unemployment and employing people. For 
example, in there we have the Medicaid expansion, which will 
bring in another 18 million individuals. And most importantly, 
it will have an extraordinary impact on job creation, 
maintaining jobs, and other jobs.
    Most critical, you find on basically a partisan basis, 
already those States that have the most to lose, that have the 
highest rates of uninsured and have the highest rates of 
unemployed are saying they are going to turn away billions of 
dollars in Medicaid that will go directly to their largest 
employers, which are the hospitals. One-third of all the 
hospitals in this country are facing closure, which means 
rising unemployment. And so there has to be--what message can 
you give the Nation and the Congress here on how we can get our 
act together and how devastating this partisanship--just we 
will deny the unemployed, we will deny this in these States 
strictly because of partisanship. How serious is this to this 
country?
    Mr. Bernanke. Unemployment is an enormous problem. It 
represents not only wasted resources; it represents hardship. 
And given the large number of people who have been unemployed 
for 6 months or more, there are a lot of people who will never 
really come back to the labor force, or if they do, they will 
have lost their skills and will not be as employable as they 
were before. So the costs are very, very high. The Federal 
Reserve is, as you say, doing our best to try to help the 
economy recover and put people back to work. But monetary 
policy isn't a panacea; it doesn't have all the tools that 
could be used. And so, I would urge Congress to work together 
as much as possible to address this. It is a very serious 
problem. And it is not just a temporary cyclical problem, the 
long-run unemployed could affect our labor force for many, many 
years because of their loss of skills.
    Mr. Scott. Let me get to the other point because I know my 
time is shrinking, thank you very much. But let's talk about 
what we can do in the future. We have sequestration coming up, 
for example. How can we formulate our policy dealing with 
sequestration to shorten and lessen the impact on unemployment? 
Let's look at defense, for example. We have 50 percent 
arbitrary we are going to cut. Can we not have some indication 
of how devastating this is going to be in employment, 
particularly with many of our defense industries which have 
huge, huge plants, with huge numbers of employees?
    And what impact will sequestration have not just in cutting 
our defense capabilities, but in employment? Can we not have a 
direction or leadership where we would be very careful as we 
move forward with sequestration to make sure we have less of an 
impact of how that will put people out of work?
    Mr. Bernanke. I cited the CBO number of 1\1/4\ million jobs 
from the fiscal cliff would be lost, or fewer created than 
otherwise. So there is a big employment implication. On the 
other hand, it is very important not just to forget about the 
long run, we have to make sure we are addressing our long run 
issues of fiscal sustainability. And so, what I have been 
recommending is a combination of more moderate fiscal 
retrenchment in the shorter term to respect the fragility of 
the recovery, but combined with serious and credible actions, 
to address fiscal unsustainability in the longer term.
    Mr. Scott. And very quickly, the other shoe that we have 
that will drop is the ending of the Bush tax cuts. What is your 
advice on which way we should go in that direction as far as 
having a lessening impact on unemployment?
    Mr. Bernanke. I can't advise on specific tax cuts and 
spending. But in looking at the package overall--
    Mrs. Biggert. The gentleman's time has expired.
    Mr. Bernanke. --I am concerned about the contraction of the 
entire program.
    Mrs. Biggert. The gentleman from New Jersey, Mr. Garrett, 
is recognized for 5 minutes.
    Mr. Garrett. I thank the chairwoman. So ever since 2009, we 
have been hearing that the Fed is sort of out of bullets. But 
we could also argue that you and your colleagues have been 
pulling the trigger quite a bit since that time, whether it is 
with 3 rounds of quantitative easing, with 6 years of interest 
rates being almost 0 percent, balance sheet still stands almost 
triple its normal size. It is obviously safe to say that we 
have been, we are, and we continue to be in uncharted 
territory. Now, through all this, you normally come and you 
defend yourself on these policy decisions by arguing the 
counterfactual, that is to say, that things could have been a 
lot worse had we not taken these actions. But before we go down 
that line of argument, or discussion, you have to think about 
where things really are.
    With the recent decline in interest rates where we are in 
the market today, is that the result of what the Fed is doing 
or is that the result of the marketplace? The real return out 
there on a 10-year Treasury is roughly negative 5 percent, 
right? Is that a function of the Fed's action keeping the rates 
down or is that a function of the market in general? And if it 
is an action in response to the Fed, then the question would 
be, what is the appropriate rate that we should have in the 
market? And if the appropriate rate is where the Fed is trying 
to keep it and where you have said you are going to keep it for 
the next foreseeable future, the next couple of years, down 
near zero, isn't that actually discouraging investment by 
individuals and businesses at the same time?
    If I know as a businessman or individual that the interest 
rates are going to be this low for this year and next year and 
beyond, maybe I put off those investment decisions to a later 
date. So some of these decisions may actually have a negative 
side to them. In other words, maybe there is a counterfactual 
to your counterfactual. Maybe there is a risk inherent in the 
policies that you have taken. And I will close on this: The Fed 
involves itself all across the economy. You fix the Fed's fund 
rate; you manipulate the yield curve via Operation Twist; you 
essentially monetize our national debt; you manipulate the 
mortgage market along with every other part of the credit 
market via quantitative easing; you attempt to manipulate the 
stock market and the prices there through the portfolio balance 
channel; you involve yourself in every aspect of the economy.
    There is not a price in the marketplace that is not 
subsidized in one sense or another by the Fed. Yesterday at the 
hearing--I listened to the tape of the hearing--you said you 
had more bullets that you could pull. You said that there is a 
range of possibilities, buying Treasuries, MBS, using a 
discount window, employing additional communication tools, 
commit to holding rates below even through 2015 or beyond, 
cutting the rate the Fed pays on excess reserves. So these are 
all additional bullets that continue to push us into uncharted 
territory.
    What I would ask is, is the Fed being as transparent in all 
these things in going forward on the downside of all these, on 
the downside of accommodation? Particularly, what I would say 
is the failed accommodation. How does QE3 create a single job? 
Yes, it props up the commodity markets; yes, that is great for 
those in the commodity market area. But if I am on the other 
side of that trade, if I am the individual like an airline that 
is buying these commodities, I may be laying off people. Is 
there enough transparency in that area to say what the 
downsides are in the failed portions of your policies?
    Mr. Bernanke. Some years ago, we provided research that 
showed, based on models and analysis, how easing financial 
conditions, lowering interest rates--and by the way, it is 
minus half a percent I think, not minus 5 percent--
    Mr. Garrett. Yes, minus .5 percent.
    Mr. Bernanke. --increases spending and investment, 
increases the incentive for spend and invest, and that provides 
extra demand and helps the economy recover. It is certainly not 
a panacea, it is certainly not without costs and risks which I 
have talked about, and I agree with that. But I think on the 
whole, there is evidence that it has provided some support for 
the recovery. It is not the only solution, but it has had a 
positive effect.
    Mr. Garrett. My time is limited. I would ask if you could 
come back to us and just indicate, have you made any mistakes 
in any of these areas, where you would have liked to seek other 
actions that you should have taken? And I will ask maybe if you 
could give us that in writing. But I will just close in the 
last 30 seconds on the situation with regard to Libor. I saw 
your testimony in the Senate hearing yesterday. In essence, you 
said you knew about it in 2008. You said the entire world and 
the media knew about it in 2008. You sort of point the finger 
over at London, and said you made some suggestions over to them 
what they should be doing on this. Isn't there some action both 
the New York Fed and you could have taken? Aren't there some 
recommendations that you could have made for Dodd-Frank over 
the last 4 years when that was coming forward? Isn't there 
something that you could have done as far as regulations, 
perhaps with regard to how banks report their information to 
Libor, perhaps with regard to the requirements in our banks 
here, perhaps setting up firewalls with regard to the offices 
within there that they--couldn't you have done something?
    Mrs. Biggert. The gentleman's time has expired.
    Mr. Garrett. Can I have an answer to what he could have 
done?
    Mr. Frank. The rule has been that you ask a question. We 
have people--
    Mrs. Biggert. The gentleman's time has expired. The 
gentleman from North Carolina, Mr. Watt, is recognized for 5 
minutes.
    Mr. Watt. Thank you, Madam Chairwoman. And let me do three 
things quickly. First of all, I want to apologize for not being 
here for your testimony, Chairman Bernanke. Unfortunately, I 
had a hearing on intellectual property in the subcommittee on 
which I am the ranking member, in the Judiciary Committee. So, 
I couldn't be here.
    Second, I want to follow up on Congresswoman Waters' 
encouragement to be more aggressive in the outreach on these 
real estate settlements. There is money there. It seems to me 
that there is a built-in disincentive for the lenders to go and 
find the people because they get to keep the money if they 
don't find the people. So somebody needs to be more 
aggressively reaching out, even to the point of sending people 
door to door to find these folks who would be eligible to get 
the relief. So I want to encourage that. And we will do more 
encouragement offline on that.
    Third, I want to pick up on Mr. Garrett's point and take 
the counter position. I want to express my thanks to you for 
shooting all of these bullets. Because if I hear what Mr. 
Garrett is saying, he would prefer that the Fed be as 
dysfunctional as Congress has been, and that nothing be done, 
and that the economy just be allowed to collapse, which I think 
would have been the result had not the Fed taken some 
significant actions. And I think you point that out on the 
bottom of page 5 and the top of page 6 of your abbreviated 
testimony when you say the important risk to our recovery is 
the domestic fiscal situation.
    As is well known, U.S. fiscal policies are on an 
unsustainable path. Development of a credible medium-term plan 
for controlling deficits should be a high priority. And you 
paint, unfortunately, kind of a doomsday scenario if Congress 
does not act because--and you lay out the significant dilemma 
that we are in, because we need to be spending short term to 
stimulate the economy, keeping tax rates low short term to 
stimulate the economy, yet we need to be more fiscally 
responsible.
    You can't both spend and keep taxes low without increasing 
deficits. That is unsustainable. And I guess I am expressing my 
belief that Congress doesn't seem to be up to that task. Lay 
out that scenario. I don't want to get you in the politics of 
this, but talk to us a little bit more about the delicate 
balance short term about what we ought to be doing versus long 
term about what we ought to be doing. And maybe at least edify 
the public about how difficult these choices are going to be, 
both short and long term.
    Mr. Bernanke. Certainly. They are very difficult choices. 
If Congress only allows the fiscal cliff to happen and doesn't 
do anything else, it is actually kind of counterproductive 
because higher taxes mean that people won't have income to 
spend. Less spending by the government means layoffs in the 
defense industries, for example. So it will slow the economy 
and actually mean that tax revenues will be less than expected. 
And the benefits in terms of deficit reduction will be smaller 
than really was anticipated. And we will see a slower economy 
and less job creation.
    At the same time, if you simply push everything off without 
any additional comment, then there is the risk that people will 
become concerned that Congress has no intention ever of 
addressing the deficit. And you could see, for example, 
concerns in the bond market about that.
    So it is a difficult balancing act, but it is a 
recommendation that has been made not just by the Fed and the 
CBO, but the IMF and pretty much every sort of nonpartisan 
fiscal authority, which is to mitigate, moderate the extent of 
the fiscal cliff in the short term, avoid destabilizing the 
weak recovery, but at the same time, work together to establish 
a framework and a plan, and a credible plan that will, over 
time, over the 10-year window, and even beyond that, will bring 
our fiscal situation into balance.
    Mrs. Biggert. The gentleman's time has expired. The 
gentleman from Texas, Mr. Neugebauer, is recognized for 5 
minutes.
    Mr. Neugebauer. Thank you, Madam Chairwoman. And Chairman 
Bernanke, I want to thank you. Your office was very responsive 
the other day when we sent you a letter in reference to the 
Libor issue. I think we will be sending you an additional 
letter today or tomorrow. One of the things that is kind of 
interesting to me, 16 banks, I think, report in the Libor 
dollar index, it would be difficult for just one bank to 
influence that index, wouldn't it?
    Mr. Bernanke. Generally, yes.
    Mr. Neugebauer. So it had to be more than one bank 
underreporting or not accurately reporting their borrowing. 
Would you say that is correct?
    Mr. Bernanke. The reason the banks, some of them apparently 
underreported during the crisis, was not to affect the overall 
Libor rate necessarily, but rather, because these numbers are 
reported publicly, they wanted to avoid giving the impression 
that they were weak and others were strong.
    Mr. Neugebauer. But if one bank is reporting differently 
than the other ones, obviously it wouldn't influence the 
overall index?
    Mr. Bernanke. If they were in the top four or the bottom 
four, they would be cut out.
    Mr. Neugebauer. That is right. So when the Fed first 
learned about this, you had some correspondence with the Bank 
of England, but three domestic banks were involved. Did anybody 
say, I wonder if anybody else is doing this? Or was all of your 
focus just on Barclays?
    Mr. Bernanke. Our focus wasn't on a specific bank. Barclays 
is, after all, a British bank, and not supervised by the 
Federal Reserve. Our focus was on the general phenomenon. And 
the New York Fed did two basic things: to inform the relevant 
regulators here and in the U.K. about this problem so that they 
could look at it; and to try to address the structural problems 
in Libor, which were, as you were indicating, incentivizing 
banks to lowball their rate information. So it was approached 
as an overall problem.
    Mr. Neugebauer. Are you familiar with the term ``price 
fixing?''
    Mr. Bernanke. Of course.
    Mr. Neugebauer. So price fixing, if a bunch of us are in 
the carpet business and we all get together and we decide that 
we are going to sell carpet at this price, then that is price 
fixing, right?
    Mr. Bernanke. Yes.
    Mr. Neugebauer. So if money is a commodity and pricing of 
money is a function of that, wasn't this almost price fixing on 
Libor?
    Mr. Bernanke. It may be. But as you pointed out, there are 
two issues. One is did the individual reporting, misreporting 
affect the overall Libor? And it may or may not have. And I 
think that needs to be investigated. The other is that, in some 
cases, there were no transactions taking place. So during the 
crisis, there were mostly just overnight transactions, and yet 
the banks were asked to report what they would have to pay for 
money a year out. And so a question is whether or not they 
were, in fact, misreporting or whether they were simply shading 
their estimate in some way. So I think there is a question--I 
think the details need to come out. And we don't have enough 
details yet to know whether this was deliberate price fixing or 
whether there was another interpretation.
    Mr. Neugebauer. I think the thing that is kind of alarming 
to some of us is the fact that given how widely used that index 
is throughout our economy, from just about every area of the 
financial community, that I felt like the New York Fed's 
response was a fairly lukewarm response to if, in fact, 
somebody was manipulating this rate, that could have huge 
implications. Now, it depends obviously whether you would have 
benefited from that or if you were penalized from that, whether 
you were on the buy side or the sell side. But can you explain 
why you thought--why the Fed thought that wasn't a big deal?
    Mr. Bernanke. I am sure that the Fed thought it was a big 
deal. The information was widely known. It was reported in the 
press. And the British Bankers' Association is not subject in 
any way to U.S. policy. So it was hard to directly affect the 
calculation of Libor. But surely, it is a very big deal. It 
affects lots of different financial contracts. And as I 
mentioned in my comments yesterday, I think that one of the bad 
effects of all this is that it is going to further erode 
confidence in financial markets and in financial instruments.
    Mr. Neugebauer. Thank you, Chairman Bernanke.
    Mr. Bernanke. Thank you.
    Mrs. Biggert. The gentleman yields back. The gentleman from 
Texas, Mr. Green, is recognized for 5 minutes.
    Mr. Green. Thank you, Madam Chairwoman. And thank you, 
Chairman Bernanke, for being here today. I would like to yield 
most of my time to you, because I have something that I would 
like for you to respond to. I find that we have some very 
credible people who make some incredible statements. And one of 
the statements that causes a good deal of consternation is that 
we are now doing worse than we were in 2009, that the economy 
is in worse shape today than it was in 2009.
    Now, I can give my opinion on it, but I don't think that it 
will have the impact that a person of your stature, your 
standing would have. And I am begging that you, if you would, 
juxtapose the auto industry with the auto industry today with 
2009, financial services, lending in general. Just please, if 
you would, so that we can bring some clarity to what I believe 
is an incredible statement. Kindly do so.
    Mr. Bernanke. Nobody is satisfied with where we are today, 
of course. But there certainly has been significant improvement 
since mid-2009, when the recovery began. We have had economic 
growth now for about 3 years. The unemployment rate has fallen 
from about 10 percent to about 8 percent. Obviously, not as far 
as we would like, but still in the right direction. Banks are 
much stronger and have much more capital than they did a couple 
of years ago. Manufacturing is much stronger, has improved 
considerably, particularly in autos, as you mentioned. We have 
seen important steps in the energy area in terms of U.S. 
production and conservation. The housing market, which was 
completely dead in 2009, is still not where we would like it to 
be, but is moving in the right direction.
    So clearly, there has been improvement. I recognize that 
many Americans will still feel that the situation is not 
satisfactory, but it is going in the right direction.
    Mr. Green. Would you say that it is not worse than it was 
in 2009, Chairman Bernanke?
    Mr. Bernanke. Clearly not.
    Mr. Green. It is not currently?
    Mr. Bernanke. Not by all the criteria I just mentioned.
    Mr. Green. Yes, sir. And I just want to restate a couple of 
things. We were about to lose the auto industry. We now have 
the auto industry, and it is coming back. We were about to lose 
a good portion of the financial services industry. Larger banks 
were about to go under. They are now stabilizing. AIG was about 
to go under. We lost Lehman. And it now is better than it was, 
obviously not what it was prior to the decline. And it just 
amazes me that credible people will make such incredible 
statements. And that adds fuel to this flame of confusion that 
is engulfing us.
    People want to have someone with credibility to speak truth 
about the conditions. And it is just amazing that this line of 
logic seems to have some degree of credibility in certain 
circles. Now, if you would respond, just for the record, is the 
auto industry in better shape now than it was in 2009?
    Mr. Bernanke. It is producing more cars and is more 
profitable, yes.
    Mr. Green. Is the banking industry in better shape now than 
it was in 2009?
    Mr. Bernanke. Yes, it is more profitable, has more capital, 
and is making more loans.
    Mr. Green. Is the economy in the main in better shape now 
than it was in 2009?
    Mr. Bernanke. Again, it is not where we would like it to 
be, but many parts of the economy have improved, yes.
    Mr. Green. All right. Now, my next line of questions will 
have to do with something that we refer to as structural versus 
cyclical. You can't solve structural problems if you use 
cyclical solutions, generally speaking. And it is difficult to 
ascertain what amount of what we are dealing with is structural 
as opposed to cyclical. Do you have some sense of how much of 
what we are trying to, for want of a better term fix, what we 
are trying to fix is structural as opposed to cyclical?
    Mr. Bernanke. That is widely debated, and it is hard to 
know for certain. But I guess my view, and the view of many 
economists, is that a good bit of our unemployment problem, for 
example, remains cyclical, which means it can be addressed in 
principle by monetary and fiscal policies. But structural 
problems are probably increasing, and in particular, the very 
long-term unemployed, the problem is, the risk is they will 
over time become unemployable, and that they will contribute 
therefore to a structural issue.
    Mr. Green. Thank you. I yield back.
    Chairman Bachus. Mr. McHenry for 5 minutes.
    Mr. McHenry. Thank you, Mr. Chairman. Chairman Bernanke, 
thank you so much for being here today, and thank you for your 
service to our government and our people. I certainly 
appreciate that. Now, with quantitative easing, do you think 
there is a limit to how much quantitative easing that can be 
used? And do you think we are approaching that limit right now?
    Mr. Bernanke. There is certainly a theoretical limit, which 
is the fact that the Federal Reserve can only buy Treasuries 
and agencies, and moreover, quantitative easing typically 
involves buying longer-term Treasuries and agencies, as opposed 
to bills, for example. So there are finite amounts of that 
available. And moreover, beyond a certain point, if the Federal 
Reserve owned too much, it would greatly hurt market 
functioning, which would have the effect of reducing the 
efficacy of the policy. So I wouldn't say that we are at that 
point yet, but ultimately, there would be some limit to how 
much you could do, yes.
    Mr. McHenry. So there is some limit?
    Mr. Bernanke. Yes.
    Mr. McHenry. But we are nowhere close to approaching it is 
what you are saying?
    Mr. Bernanke. I don't have a number for you. But we still 
have some capacity at this point, yes.
    Mr. McHenry. Okay. Now, there is a separate question. You 
said that you have a target inflation number, sort of ideal. 
And what is that?
    Mr. Bernanke. Two percent.
    Mr. McHenry. Okay. Now, would the Fed be comfortable with 
an inflation rate a little higher than that? Maybe 3 percent?
    Mr. Bernanke. I don't know what you mean by 
``comfortable.'' If for whatever reason, for example, in the 
last few years, we have seen oil price shocks which have driven 
inflation up to 3 percent or higher, that is not a good 
situation. And it is our objective in that case to try to move 
inflation gradually down back to 2 percent. So if you are 
asking would we target 3 percent, would we seek to get 3 
percent, the answer is no.
    Mr. McHenry. Are you more comfortable with 3 percent or 1 
percent? A little higher or a little lower? What are you more 
comfortable--
    Mr. Bernanke. I think both of those are concerns. Both are 
concerns because 3 percent, of course, means that we are moving 
towards a more inflationary situation, but 1 percent is closer 
to the deflation range, which is also not healthy for the 
economy.
    Mr. McHenry. Okay. The reason why I am trying to get at 
this is because there has been a lot of discussion that with a 
little higher inflation rate, a belief--now, I don't subscribe 
to this--but a little higher inflation rate that it, de facto, 
reduces debt burdens and perhaps could spur spending and the 
perception, more of the perception of less debt and actually 
the impact of it. And that might spur the economy. It is more 
consumer spending. Do you think that is desirable or not 
desirable?
    Mr. Bernanke. I recognize that some people would advocate 
that we set an inflation target, say at 4 percent, and maintain 
that for a number of years. I don't think, first, that we could 
do that without losing control of the inflation process. 
Second, I am very skeptical that it would increase confidence 
among businesses and households and increase economic activity. 
I think it would create a lot of problems in financial markets 
as well. So I don't think that is a strategy that has a lot of 
support on the Federal Open Market Committee.
    Mr. McHenry. So a lower inflation rate, the target 
inflation rate of around 2 percent, the Fed would have more 
control than perhaps a higher inflation rate?
    Mr. Bernanke. Because we have maintained inflation near 2 
percent for a long time, and there is a lot of confidence in 
the financial markets that the Fed will keep inflation close to 
2 percent.
    Mr. McHenry. Okay. So it is confidence, but also Fed 
capacity?
    Mr. Bernanke. The issue is that we currently have very 
well-anchored inflation expectations. People are strongly 
accustomed to 2 percent inflation. If we were to say 4 percent, 
first would be the issue of getting there. Could we get there? 
And could we get there with some accuracy? But beyond that, 
people would say, if they said 4 percent, why not 6 percent, 
why not 8 percent? So in the short run at least, it is not at 
all clear that people would be confident that this new target 
of 4 percent would, in fact, be stable and sustainable. 
Instead, they would wonder where inflation is going to be in 
the medium term.
    Mr. McHenry. So right now, in order to--with the Fed 
contemplating more easing, and then you also have the question 
of liquidity in the marketplace, making sure that Fed policy 
enables more liquidity in the marketplace, we also see Europe 
running counter to that, right? The woes of Europe are making 
the markets less liquid. Does the Volcker Rule--do you have a 
concern about the timing of the Volcker Rule that would rein in 
liquidity?
    Mr. Bernanke. We are paying close attention to issues 
related to market liquidity and market making, which are exempt 
activities under the Volcker Rule. In any case, the Volcker 
Rule doesn't come into effect for a couple more years. So I 
would say that is not a first order issue right now.
    Mr. McHenry. Thank you.
    Chairman Bachus. I am now going to recognize Mr. 
Perlmutter. And let me say this, we have a hard stop at 12:45. 
So if you want all the time, you can have it. Mr. Pearce would 
like a minute, if you can work that out.
    Mr. Perlmutter. I will be quick. Chairman Bernanke, thank 
you for being here, thank you for maintaining a steady hand 
through all of this, whether it was kind of the collapse on 
Wall Street or some of the clashes that we have here in 
Congress ideologically that don't give the economy some of the 
fiscal tools that I think would also help continue to improve 
our economic situation.
    And so I want to ask a couple of specific questions and 
then see where we are. Can we talk a little bit about Basel III 
for a second, because it came up in a conversation yesterday 
with a medium-sized bank that we have back in Colorado. In 
Dodd-Frank, we established some lower limits as to a lot of the 
regulations that go in place. And I think either it was a $10 
or $15 billion-sized institution, and if you were above it, you 
had many more things that you had to do, whether it is dealing 
with derivatives or the like. And as I understand it now, these 
Basel III regulations, that could potentially become worldwide-
type regulations, are going down to a half a billion dollars, 
$500 million. And it would take into consideration lots of 
smaller banks. And they are fearful that this will really dry 
up their capital and make it very difficult for them to 
continue to operate. Can you comment on that?
    Mr. Bernanke. Yes. Certain parts of Basel III are being 
proposed to go down to smaller banks, some of the risk weights, 
for example, some of the basic capital definitions. And the 
idea here is to try to make sure that small banks as well as 
large banks are well-capitalized. But I think it is important 
to note two things. First, many of the aspects of Basel III do 
not apply to small banks. They simply are--first of all, things 
like derivatives books and things of that sort just aren't 
relevant to small banks. And there are other rules such as the 
international leverage ratio which applies only to the largest 
internationally active banks.
    Mr. Perlmutter. But I want to impress on you, if I could, I 
would like you to take this away, say you are a smaller 
Colorado bank, you are generally going to have loans on 
shoppettes and real estate and some home loans and some small 
business loans. And in my opinion, it wasn't the smaller banks 
that led us into the deep recession that we suffered in 2008 
and 2009. And I would just ask you, as Chairman of our central 
bank, to make sure that we don't penalize--we were pretty tough 
in some of the Dodd-Frank regulations that we passed to make 
sure that the banking system had some restraints, didn't just 
run amok, that there was capital, and there were certain things 
that had to be watched closely. But I would ask you, sir, to 
just keep an eye on that, if you would. My last question, and 
then I will turn it over to Mr. Pearce, is can you describe for 
us what has happened with the liquidation of the assets that 
were in Maiden Lane one, two, and three?
    Mr. Bernanke. They basically have been sold off, and the 
Federal Reserve and the government and the taxpayer received 
all their money back with interest and additional profits 
beyond that. So it has all been sold back into the marketplace.
    Mr. Perlmutter. So we pretty much liquidated it all or do 
we hold any of it?
    Mr. Bernanke. We have a little bit left, but we have paid 
off the loans. So we are, from now on, whatever we sell is pure 
profit.
    Mr. Perlmutter. All right. Thank you. Mr. Chairman, I will 
yield back.
    Chairman Bachus. Thank you. And Mr. Pearce for 1 minute.
    Mr. Pearce. I thank the gentleman for his consideration. 
Mr. Chairman, thank you for your service. I am looking at page 
4, where you talk about the great risks to us financially. And 
I assume that is because of their size and because of the 
underfunding of them. But when I look at that size, I consider 
the pension systems. And just yesterday, the California pension 
system said that they only got a 1 percent rate of return. 
Their projection, in order to be solvent, is up in the 7\3/4\. 
Maybe just in that one system, the $500 billion shortfall now 
just on the teachers. And then that is the smaller of the two. 
Nationwide, maybe a $3 trillion shortfall. I didn't see that, 
but I do see Spain talked about, and yet Spain is only $1 
trillion exposure. Could you kind of tell us what the risk is 
associated with the unfunded pensions?
    Mr. Bernanke. Low interest rates do put some stress on 
pension funds and life insurance companies for the reasons that 
you described. I think our goal, basically, is to get the 
economy strong enough that returns will rise and that things 
will normalize over time. Obviously, pension funds can't be 
underfunded forever. But if the economy strengthens and returns 
go back to a more normal level, then these underfunding 
problems will not disappear, of course, but they will be 
mitigated.
    Mr. Pearce. Thank you, Mr. Chairman. I yield back.
    Chairman Bachus. Thank you. Chairman Bernanke, the 
committee appreciates your testimony today. And you are 
dismissed.
    I am going to ask the audience to remain in your seats 
until Chairman Bernanke and his staff exit.
    Mr. Schweikert is recognized for a unanimous consent 
request.
    Mr. Schweikert. Mr. Chairman, I request unanimous consent 
to place a letter into the record. It is just some concerns and 
wanting some additional visibility on the PCCRAs, the premium 
capture reserve accounts, and where we are going on that 
policywise.
    Chairman Bachus. Without objection, it is so ordered.
    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 adjourned.
    [Whereupon, at 12:49 p.m., the hearing was adjourned.]










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                             July 18, 2012





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