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


                                                        S. Hrg. 112-322
 
                          THE ECONOMIC OUTLOOK 

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 4, 2011

                               __________

          Printed for the use of the Joint Economic Committee

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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

SENATE                               HOUSE OF REPRESENTATIVES
Robert P. Casey, Jr., Pennsylvania,  Kevin Brady, Texas, Vice Chairman
    Chairman                         Michael C. Burgess, M.D., Texas
Jeff Bingaman, New Mexico            John Campbell, California
Amy Klobuchar, Minnesota             Sean P. Duffy, Wisconsin
Jim Webb, Virginia                   Justin Amash, Michigan
Mark R. Warner, Virginia             Mick Mulvaney, South Carolina
Bernard Sanders, Vermont             Maurice D. Hinchey, New York
Jim DeMint, South Carolina           Carolyn B. Maloney, New York
Daniel Coats, Indiana                Loretta Sanchez, California
Mike Lee, Utah                       Elijah E. Cummings, Maryland
Pat Toomey, Pennsylvania

                 William E. Hansen, Executive Director
              Robert P. O'Quinn, Republican Staff Director























                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Robert P. Casey, Jr., Chairman, a U.S. Senator from 
  Pennsylvania...................................................     1
Hon. Kevin Brady, Vice Chairman, a U.S. Representative from Texas     3

                               Witnesses

Hon. Ben S. Bernanke, Chairman, Board of Governors of the Federal 
  Reserve System, Washington, DC.................................     5

                       Submissions for the Record

Prepared statement of Chairman Robert P. Casey, Jr...............    46
Prepared statement of Vice Chairman Kevin Brady..................    47
Prepared statement of Hon. Ben S. Bernanke.......................    48
Prepared statement of Representative Michael C. Burgess, M.D.....    51
Letter dated October 18, 2011, transmitting questions from Vice 
  Chairman Kevin Brady to Hon. Ben S. Bernanke...................    52
Letter dated January 25, 2012 transmitting responses by Hon. Ben 
  S. Bernanke to Vice Chairman Kevin Brady.......................    57


                          THE ECONOMIC OUTLOOK

                              ----------                              


                        TUESDAY, OCTOBER 4, 2011

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:00 a.m. in Room 
G-50 of the Dirksen Senate Office Building, the Honorable 
Robert P. Casey, Jr., Chairman, presiding.
    Senators present: Casey, Klobuchar, Sanders, DeMint, Coats, 
and Lee.
    Representatives present: Brady, Burgess, Campbell, Duffy, 
Amash, Mulvaney, Hinchey, Maloney, and Cummings.
    Staff present: Brenda Arredondo, Gail Cohen, Will Hansen, 
Colleen Healy, Jesse Hervitz, Madi Joyce, Matt Salomon, Ted 
Boll, Connie Foster, Robert O'Quinn, Sean Ryan, Jeff 
Schlagenhauf, Michael Connolly, and Rachel Greszler.

  OPENING STATEMENT OF HON. ROBERT P. CASEY, JR., CHAIRMAN, A 
                 U.S. SENATOR FROM PENNSYLVANIA

    Chairman Casey. The hearing will come to order.
    I look forward to Chairman Bernanke's report on the state 
of the economy, his perspective on recent actions taken by the 
Federal Reserve, and his insights into the short- and long-
term, long-run, I should say, challenges facing the United 
States economy.
    My hope for today's hearing is to move beyond the partisan 
politics and finger pointing that sometimes colors discussions 
about the Federal Reserve and what it should or should not do. 
Instead, I think we should focus today on the economic 
challenges facing the country and the potential solutions to 
those problems.
    All of us on this Committee share a belief that Congress 
needs to take action to bolster the economy and to help 
Americans get back to work. Similarly, monetary policy has an 
important role to play in strengthening our economy.
    Millions of Americans are still struggling in the wake of 
the Great Recession. The economy is not growing fast enough or 
adding enough jobs to make significant progress in reducing 
unemployment.
    Just by way of example:
    Fourteen million Americans are unemployed and 6 million of 
the jobless--some 43 percent--have been out of work for 6 
months or more.
    Second, private-sector job creation which had been well 
above 200,000 a month in February, March, and April, fell to 
less than 20,000 in August.
    State and local governments are reeling as they lay off 
workers to meet balanced budget requirements. In the past 12 
months alone, state and local government payrolls have been 
slashed by 345,000.
    In my home State of Pennsylvania, the unemployment rate--
after declining to 7.4 percent in May--has climbed back to 8.2 
percent in August, with more than a half a million people out 
of work.
    Economic indicators also have been weakening abroad. With 
financial conditions in the Eurozone deteriorating, contagion 
spreading to other parts of the world is now a significant risk 
to the global economic outlook.
    The Fed has already used a variety of approaches to ease 
monetary policy. In the current economic environment, we need 
to use all available tools to support our economy in the short 
run. We also need to take the actions that will get our fiscal 
house in order in the medium and long term. The two reinforce 
each other. Getting our economy growing at a healthy pace is 
critical to sustained deficit reduction.
    As Chairman Bernanke observed in a September speech to the 
Economic Club of Minnesota--and I am quoting: ``There is ample 
room for debate about the appropriate size and role for the 
government in the longer term, but--in the absence of adequate 
demand from the private sector--a substantial fiscal 
consolidation in the shorter term could add to the headwinds 
facing economic growth and hiring.''
    The Federal Reserve Act created the Federal Reserve System 
and established objectives for the Nation's monetary policy: 
maximum employment and stable growth--stable prices, I should 
say. This is what is commonly referred to as the Fed's dual 
mandate: maximum employment and stable prices.
    The Federal Reserve's recent announcement that it will ease 
monetary policy further is consistent with that dual mandate. 
The Federal Open Market Committee said it will purchase $400 
billion of long-term Treasury Securities and pay for those 
Securities by selling an equal amount of shorter-term 
government debt. In the so-called Operation Twist, the Fed is 
not expanding its portfolio but shifting its composition so 
that the average maturity of its holdings is longer.
    The goal of the Fed's action is to bring down long-term 
interest rates further--reducing borrowing costs for businesses 
and consumers, sparking additional economic activity, and 
ultimately boosting employment. The Fed also affirmed that it 
will continue to pay close attention to inflation and inflation 
expectations.
    Some in Washington have called on the Fed to, quote, 
``resist further extraordinary intervention in the U.S. 
economy'', unquote, arguing that action by the Fed could 
further harm the U.S. economy.
    I disagree. With so many Americans out of work, and with 
GDP growth having slowed to less than half of one percent 
annual rate in the first half of this year, additional actions 
are needed to strengthen the economy.
    Let me say a word before I conclude about an issue that is 
in front of the Senate right now: currency as it relates to 
China.
    This problem has had a substantial harmful impact on the 
U.S. economy and American jobs. A recent report by the Economic 
Policy Institute finds that the U.S. trade deficit with China--
caused in large measure by China's undervaluation of the yuan--
has cost our economy 2.8 million jobs over the past decade.
    Chairman Bernanke, in testimony before this Committee in 
April of 2010, noted that, quote, ``most economists agree that 
the Chinese currency is undervalued and has been used to 
promote a more export-oriented economy.'' Unquote. The Chairman 
also said at the time that it would be, quote, ``good for the 
Chinese to allow more flexibility in their exchange rate,'' 
unquote, and that, quote, ``we should continue to press for a 
more flexible exchange rate.'' Unquote.
    I agree with those statements by the Chairman. This week 
the Senate has the opportunity to take action in response to 
China's unfair trade practices when we vote on bipartisan 
legislation to crack down, at long last, on China's currency 
manipulation. Last night the Senate passed the first procedural 
hurdle with a strong bipartisan vote to move forward with 
debate on the legislation.
    So to sum up briefly, more than two years after the 
recovery officially began, our economy remains very vulnerable. 
Unemployment is stuck above 9 percent, and long-term 
unemployment remains at near record levels. We need to use 
every weapon in our arsenal to support a stronger economic 
recovery.
    Chairman Bernanke, thank you for being here today. Thank 
you for your testimony that you are about to give in a few 
moments, and I look forward to working with you and others to 
make sure that we can focus on the economy, creating jobs, and 
putting America back to work.
    [The prepared statement of Senator Casey appears in the 
Submissions for the Record on page 46.]
    Vice Chairman Brady.

 OPENING STATEMENT OF HON. KEVIN BRADY, VICE CHAIRMAN, A U.S. 
                   REPRESENTATIVE FROM TEXAS

    Vice Chairman Brady. Chairman Casey, I join with you in 
welcoming Chairman Bernanke to today's hearing on the economic 
outlook.
    Unfortunately, ominous clouds are gathering. Economic 
growth is nearly stagnant. We have 6.8 million fewer payroll 
jobs today than when the recession began in December 2007.
    According to economists Carmen Reinhart and Kenneth Rogoff, 
recoveries from financial crises are weak and vulnerable to 
external shocks that may trigger double-dip recessions.
    Republican Members of Congress recognize this. We are 
critical of the President's expensive economic policies because 
not only have they failed to spur job growth and restore 
business and consumer confidence, but also, as we feared, they 
have left America susceptible to a double-dip recession.
    Today as we meet, America faces a growing risk from the 
European debt crisis. The United States and the European Union 
are major trading partners. I am very concerned about the 
effects of contagion from the euro crisis on American financial 
institutions and markets, as well as the broader economy. I am 
anxious, Mr. Chairman, to hear your assessment of the euro 
crisis and any steps that the Federal Reserve may take to 
quarantine any contagion.
    In response to the financial panic, the Federal Reserve 
took extraordinary actions to stabilize U.S. financial 
institutions and markets during the fall of 2008. Many of these 
actions were both necessary and proper. Instead of rehashing 
the past, however, I would instead like to initiate a 
discussion on the framework for monetary policy in the future.
    Nobel Laureate economist Robert Mundell said, ``If you want 
a certain policy outcome, you have to use the right policy 
lever.'' Unfortunately, too many Washington policymakers are 
ignoring Mundell's wisdom.
    Monetary policy affects prices. In contrast, budget, tax, 
and regulatory policies affect real output and jobs. While the 
Great Contraction from August 1929 to March of 1933 proved that 
bad monetary policy can shrink production and destroy jobs, 
good monetary policy cannot accelerate economic growth or 
foster job creation except in the very short term.
    Washington--Congress--affects business investment, 
production, and job creation through its budget, tax, and 
regulatory policies. If the prospects for a swelling federal 
debt, higher taxes, and additional costs from the President's 
health care plan, as well as burdensome regulations, are 
deterring entrepreneurs from investing in new buildings, 
equipment, and software and therefore hiring more workers, 
there is little that the Federal Reserve can do to overcome 
this drag.
    Until 1978, the Federal Reserve's mandate regarding 
monetary policy was merely to provide ``an elastic currency.'' 
That year, the Full Employment and Balanced Growth Act, known 
informally as the Humphrey-Hawkins Act, was enacted. This Act 
imposed a dual mandate on the Federal Reserve that gives equal 
weight to achieving both price stability and full employment.
    Since 1978, many countries have examined what a central 
bank should do and have opted for a single mandate for long-
term price stability. By law, the 17 member states of the 
European Monetary Union and 13 other developed and major 
developing countries have enshrined mandates for price 
stability either as the sole goal or the primary goal with the 
subordination of other goals for their central banks. Moreover, 
Australia and Canada have adopted single mandates through 
published statements.
    The time has come for Congress to reconsider the Federal 
Reserve's mandate. In my view, the dual mandate should be 
replaced with a single mandate for long-term price stability. I 
will introduce legislation to make this change in the near 
future.
    While some may mistakenly claim that a single mandate means 
maximizing employment is unimportant, history proves the best 
way for the Federal Reserve to maximize employment is to focus 
on achieving long-term price stability.
    Under a single mandate, the Federal Reserve would publicly 
announce an inflation target. The Federal Reserve would retain 
full operational independence from both Congress and the 
President to achieve that inflation target.
    While I may criticize certain actions that the Federal 
Reserve has taken, I want to be absolutely clear. For our 
economy's sake, the Federal Reserve must remain independent and 
free from any undue political pressure in implementing monetary 
policy.
    Congress should also reconsider the Federal Reserve's 
lender-of-last-resort policy. I remain deeply concerned about 
the precedents set in 2008 regarding clearly insolvent 
financial institutions--especially AIG, Bear Stearns, Fannie 
Mae, and Freddie Mac.
    In 1913, Congress envisioned the Federal Reserve would act 
as lender-of-last-resort during financial crises. However, the 
Federal Reserve has never articulated a clear lender-of-last-
resort policy.
    As celebrated economist Allan Meltzer observed:
    ``The absence of a [lender-of-last-resort] policy has three 
unfortunate consequences. First, uncertainty increases. No one 
can know what will be done. Second, troubled firms have a 
stronger incentive to seek a political solution. They ask 
Congress or the administration for support or to pressure the 
Federal Reserve or other agencies to save them from failure. 
Third, repeated rescues encourage banks to take greater risk 
and increase leverage. This is the well-known moral hazard 
problem.'' End of quote.
    If the Federal Reserve were to promulgate a clear statement 
about its lender-of-last-resort policy, it would go far to 
diminish uncertainty, reduce the likelihood of political 
interventions, and mitigate the moral hazard problem.
    Finally, many years ago Congress gave the responsibility 
for exchange rate policy to the Secretary of the Treasury. This 
is a vestige of the long defunct Bretton Woods system of fixed 
exchange rates.
    By controlling the money supply, the Federal Reserve 
directly affects the foreign exchange value of the U.S. dollar. 
Moreover, swings in exchange rates influence domestic prices. 
Thus, the responsibility for exchange rate policy should be 
moved from the Secretary of the Treasury to the Federal 
Reserve.
    Chairman Bernanke, I look forward to your testimony and the 
questions that follow it.
    I yield back.
    [The prepared statement of Representative Brady appears in 
the Submissions for the Record on page 47.]
    Chairman Casey. Thank you, Mr. Vice Chair.
    Chairman Bernanke, I would like to provide a brief 
introduction. Dr. Ben Bernanke began a second term as Chairman 
of the Board of Governors of the Federal Reserve System on 
February the first, 2010. Dr. Bernanke also serves as Chairman 
of the Federal Open Market Committee, the System's principal 
monetary policymaking body. He originally took office as 
Chairman on February the first, 2006, when he also began a 14-
year term as a member of the Board. Dr. Bernanke was Chairman 
of the President's Council of Economic Advisers from June 2005 
to January 2006. Prior to beginning public service, Dr. 
Bernanke was a Chaired Professor at Princeton University, and 
he has been a Professor of Economics and Public Affairs at 
Princeton since 1985.
    Dr. Bernanke, it is good to have you here.

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

    Chairman Bernanke. Thank you.
    Chairman Casey, Vice Chairman Brady, and other members of 
the Committee, I appreciate this opportunity to discuss the 
economic outlook and recent monetary policy actions.
    It has been three years since the beginning of the most 
intense phase of the financial crisis in the late summer and 
fall of 2008, and more than two years since the economic 
recovery began in June 2009.
    There have been some positive developments:
    The functioning of financial markets and the banking system 
in the United States has improved significantly.
    Manufacturing production in the U.S. has risen nearly 15 
percent since its trough, driven substantially by growth in 
exports; indeed, the U.S. trade deficit has been notably lower 
recently than it was before the crisis, reflecting in part the 
improved competitiveness of U.S. goods and services.
    Business investment in equipment and software has continued 
to expand, and productivity gains in some industries have been 
impressive.
    Nevertheless, it is clear that overall the recovery from 
the crisis has been much less robust than we had hoped. Recent 
revisions of government economic data show that the recession 
was even deeper, and the recovery even weaker than previously 
estimated. Indeed, by the second quarter of this year--the 
latest quarter for which official estimates are available--
aggregate output in the United States still had not returned to 
the level that it had attained before the crisis. Slow economic 
growth has in turn led to slow rates of increase in jobs and 
household incomes.
    The pattern of sluggish growth was particularly evident in 
the first half of this year, with real GDP estimated to have 
increased at an average annual rate of less than one percent. 
Some of this weakness can be attributed to temporary factors.
    Notably, earlier this year political unrest in the Middle 
East and North Africa, strong growth in emerging market 
economies, and other developments contributed to significant 
increases in the prices of oil and other commodities which 
damped consumer purchasing power and spending. And the disaster 
in Japan disrupted global supply chains and production, 
particularly in the automobile industry.
    With commodity prices having come off their highs, and 
manufacturers' problems with supply chains well along toward 
resolution, growth in the second half of the year seems likely 
to be more rapid than in the first half.
    However, the incoming data suggest that other, more 
persistent factors also continue to restrain the pace of 
recovery. Consequently, the Federal Open Market Committee, the 
FOMC, now expects a somewhat slower pace of economic growth 
over coming quarters than it did at the time of the June 
meeting when Committee participants most recently submitted 
their economic forecasts.
    Consumer behavior has both reflected and contributed to the 
slow pace of recovery. Households have been very cautious in 
their spending decisions as declines in house prices and in the 
values of financial assets have reduced household wealth, and 
many families continue to struggle with high debt burdens or 
reduced access to credit.
    Probably the most significant factor depressing consumer 
confidence, however, has been the poor performance of the job 
market. Over the summer, private payrolls rose by only about 
100,000 jobs per month on average--half of the rate posted 
earlier this year.
    Meanwhile, state and local governments have continued to 
shed jobs as they have been doing now for more than two years. 
With these weak gains in employment, the unemployment rate has 
held close to 9 percent since early this year. Moreover, recent 
indicators--including new claims for unemployment insurance and 
surveys of hiring plans--point to the likelihood of more 
sluggish job growth in the period ahead.
    Other sectors of the economy are also contributing to the 
slower-than-expected rate of expansion. The housing sector has 
been a significant driver of recovery for most recessions in 
the United States since World War II. This time, however, a 
number of factors--including the overhang of distressed and 
foreclosed properties, tight credit conditions for builders and 
potential home buyers, and the large number of ``underwater'' 
mortgages--have left the new rate of home construction at only 
about one-third of its average level in recent decades.
    In the financial sphere, as I noted, banking and financial 
conditions in the United States have improved significantly 
since the depths of the crisis. Nonetheless, financial stresses 
persist.
    Credit remains tight for many households, small businesses, 
and residential and commercial builders, in part because weaker 
balance sheets and income prospects have increased the 
perceived credit risk of many potential borrowers.
    We have also recently seen bouts of elevated volatility and 
risk aversion in financial markets, partly in reaction to 
fiscal concerns both here and abroad. Domestically, the 
controversy during the summer regarding the raising of the 
federal debt ceiling and the downgrade of the U.S. long-term 
credit rating by one of the major rating agencies contributed 
to the financial turbulence that occurred at about that time.
    Outside the United States, concerns about sovereign debt in 
Greece and other euro-zone countries, as well as about the 
sovereign debt exposures of the European banking system, have 
been a significant source of stress in global financial 
markets.
    European leaders are strongly committed to addressing these 
issues, but the need to obtain agreement among a large number 
of countries to put in place the necessary backstops and to 
address the sources of the fiscal problems has slowed the 
process of finding solutions.
    It is difficult to judge how much these financial strains 
have affected U.S. economic activity thus far, but there seems 
little doubt that they have hurt household and business 
confidence, and that they pose ongoing risks to growth.
    Another factor likely to weigh on the U.S. recovery is the 
increasing drag being exerted by the government sector. 
Notably, state and local governments continue to tighten their 
belts by cutting spending and employment in the face of ongoing 
budgetary pressures, while the future course of the federal 
fiscal policies remains quite uncertain.
    To be sure, fiscal policymakers face a complex situation. I 
would submit that in setting tax and spending policies for now 
and the future, policymakers should consider at least four key 
objectives.
    One crucial objective is to achieve long-run fiscal 
sustainability. The federal budget is clearly not on a 
sustainable path at present. The Joint Select Committee on 
Deficit reduction formed as part of the Budget Control Act is 
charged with achieving $1.5 trillion in additional deficit 
reduction over the next 10 years on top of the spending caps 
enacted this summer. Accomplishing that goal would be a 
substantial step. However, more will be needed to achieve 
fiscal sustainability.
    A second important objective is to avoid fiscal actions 
that could impede the ongoing economic recovery. These first 
two objectives are certainly not incompatible, as putting in 
place a credible plan for reducing future deficits over the 
longer term does not preclude attending to the implications of 
fiscal choices for the recovery in the near term.
    Third, fiscal policy should aim to promote long-term growth 
and economic opportunity. As a Nation, we need to think 
carefully about how federal spending priorities and the design 
of the tax code affect the productivity and vitality of our 
economy in the longer term.
    Fourth, there is evident need to improve the process for 
making long-term budget decisions to create greater 
predictability and clarity while avoiding disruptions to the 
financial markets and the economy.
    In sum, the Nation faces difficult and fundamental fiscal 
choices which cannot be safely or responsibly postponed.
    Returning to the discussion of the economic outlook, let me 
turn now to the prospects for inflation. Prices of many 
commodities--notably oil--increased sharply earlier this year 
and, as I noted, led to higher retail gasoline and food prices.
    In addition, producers of other goods and services were 
able to pass through some of these higher input costs to their 
customers. Separately, the global supply disruptions associated 
with the disaster in Japan put upward pressure on prices of 
motor vehicles.
    As a result of these influences, inflation picked up during 
the first half of this year. Over that period, the price index 
for personal consumption expenditures rose at an annual rate of 
about 3-1/2 percent, compared with an average of less than 1-1/
2 percent over the preceding two years.
    As the FOMC anticipated, however, inflation has begun to 
moderate as these transitory influences wane. In particular, 
the prices of oil and many other commodities have either 
leveled off or have come down from their highs, and the step-up 
in automobile production has started to reduce the pressures on 
the prices of cars and light trucks.
    Importantly, the higher rate of inflation experienced so 
far this year does not appear to have become ingrained in our 
economy. Longer-term inflation expectations have remained 
stable according to surveys of households and economic 
forecasters, and the five-year-forward measure of inflation 
compensation derived from yields on nominal and inflation-
protected Treasury Securities suggests that inflation 
expectations among investors may have moved lower recently.
    In addition to the stability of longer term inflation 
expectations, the substantial amount of resource slack in U.S. 
labor and product markets should continue to restrain 
inflationary pressures.
    In view of the deterioration in the economic outlook over 
the summer and the subdued inflation picture over the medium 
run, the FOMC has taken several steps recently to provide 
additional policy accommodation.
    At the August meeting, the Committee provided greater 
clarity about its outlook for the level of short-term interest 
rates by noting that economic conditions were likely to warrant 
exceptionally low levels for the federal funds rate at least 
through mid-2013.
    And at our meeting in September, the Committee announced 
that it intends to increase the average maturity of the 
securities in the Federal Reserve's portfolio.
    Specifically, it intends to purchase by the end of June 
2012, $400 billion of Treasury Securities with remaining 
maturities of 6 years to 30 years, and to sell an equal amount 
of Treasury Securities with remaining maturities of 3 years or 
less, leaving the size of our balance sheet approximately 
unchanged.
    This maturity extension program should put downward 
pressure on longer-term interest rates and help make broader 
financial conditions more supportive of economic growth than 
they would otherwise have been.
    The Committee also announced in September that it will 
begin reinvesting principal payments on its holdings of agency 
debt and agency mortgage-backed securities--into agency 
mortgage-backed securities, rather than into long-term Treasury 
Securities.
    By helping to support mortgage markets, this action too 
should contribute to a stronger economic recovery. The 
Committee will continue to closely monitor economic 
developments and is prepared to take further action as 
appropriate to promote a stronger economic recovery in a 
context of price stability.
    Monetary policy can be a powerful tool, but it is not a 
panacea for the problems currently facing the U.S. economy. 
Fostering healthy job growth and job creation--economic growth 
and job creation is a shared responsibility of all economic 
policymakers in close cooperation with the private sector.
    Fiscal policy is of critical importance, as I have noted 
today, but a wide range of other policies--pertaining to labor 
markets, housing, trade, taxation, and regulation, for 
example--also have important roles to play.
    For our part, we at the Federal Reserve will continue to 
work to help create an environment that provides the greatest 
possible economic opportunity for all Americans.
    Thank you. I would be happy to take your questions.
    [The prepared statement of Hon. Ben S. Bernanke appears in 
the Submissions for the Record on page 48.]
    Chairman Casey. Mr. Chairman, thank you very much.
    I want to note for the record that members' statements will 
be made a part of the record. I would ask unanimous consent 
that they all be made part of the record.
    [No objections.]
    Without objection.
    Mr. Chairman, I want to start close to where you left off 
with regard to the maturity extension program. I am looking at 
the top of page 6 of your testimony when you say, in pertinent 
part, quote, that the Fed ``intends to purchase, by the end of 
June 2012, $400 billion of Treasury securities with remaining 
maturities of 6 years to 30 years and to sell an equal amount 
of Treasury securities with remaining maturities of 3 years or 
less, leaving the size of our balance sheet approximately 
unchanged.'' Unquote.
    That is described as the ``maturity extension program.'' I 
have two questions on that:
    Number one is, as a result of the implementation of that 
policy how much of a decline in long-term interest rates would 
you expect?
    Chairman Bernanke. Well we would expect something on the 
order of 20 basis points, approximately. We see this as being 
roughly equal to something like a 50-basis-point cut in the 
federal funds rate. In that respect it is a significant step, 
but not a game changer in some respect.
    Chairman Casey. And in terms of the intended or hoped-for 
economic boost from that, what is your sense of that? How can 
you assess that?
    Chairman Bernanke. Well we think this is a meaningful but 
not an enormous support to the economy. I think it will provide 
some additional monetary policy accommodation. It should help 
somewhat on job creation and growth.
    It is particularly important now that the recovery is close 
to faltering. We need to make sure that the recovery continues 
and does not drop back, and that the unemployment rate 
continues to fall downward.
    So I do not have a precise number, but I would just put it 
as a moderate support; not something that is expected to 
radically change the picture, but should be helpful both in 
keeping prices near the price stability level, but also 
providing some support for growth.
    Chairman Casey. I wanted to--I mean have some follow-ups 
with that, but I did want to move to the question of currency. 
It just happens to be a major issue and a front-burner issue 
for us this week.
    I am going to read you a statement that you made, going 
back into 2006. This is a part of a speech you made at the 
Chinese Academy of Social Sciences in December of 2006, and I'm 
quoting:
    ``Greater scope for market forces to determine the value of 
the RMB would reduce an important distortion in the Chinese 
economy. Namely, the effective subsidy that an undervalued 
currency provides for Chinese firms that focus on exporting 
rather than producing for the domestic market.
    A decrease in this effective subsidy would induce more 
firms to gear production toward the home market, benefitting 
domestic consumers and firms.'' Unquote.
    I read that to you just by way of a reminder about things 
you have said about currency. When I talk to people in 
Pennsylvania, and beyond, but especially back home, there is a 
unanimity about this issue that is pretty rare, across 
regional, party lines, in terms of the reality for people's 
lives--the adverse impact that China currency policies have had 
on our jobs in our communities.
    I guess one question I wanted to ask you--and if you can 
answer the first one; the other two may be more difficult to 
answer--but has the Fed attempted to quantify the magnitude of 
the impact of this subsidy on the U.S. economy or U.S. jobs? 
Has there been a recent attempt to do that?
    Chairman Bernanke. No, I don't think so. We have mostly 
followed work by the IMF and other international agencies, and 
also by think tanks, you know, like the Institute for 
International Economics, which have found that the Chinese 
currency is undervalued by a significant amount. The exact 
amount varies according to estimates.
    Chairman Casey. And do you have any sense of the aggregate 
number of jobs lost that you could attribute to this policy?
    Chairman Bernanke. I don't have a number. It's difficult to 
estimate because there are many direct as well as indirect 
effects. I mean, working through third-party, other trading 
nations, and so on.
    I think right now a concern is that the Chinese currency 
policy is blocking what might be a more normal recovery process 
in the global economy. In particular, we have a two-speed 
recovery where advanced industrial countries like the United 
States and Europe are growing very, very slowly and where 
emerging market economies are growing quite quickly.
    And a more normal recovery, a more balanced recovery, would 
have some more demand being shifted away from the emerging 
markets toward the industrial economies. The Chinese currency 
policy is blocking that process. And so it is to some extent 
hurting the recovery process.
    So it is certainly a negative. I am sorry I do not have an 
exact number.
    Chairman Casey. Thank you very much. Vice Chairman Brady.
    Vice Chairman Brady. Thank you, Chairman. As often as not, 
a country that undergoes a severe financial crisis as America 
did falls into a double-dip recession within the first two or 
three years afterwards.
    Given that America's economy is not flying strong and 
steady at 50,000 feet, but flying low and slow today, and given 
U.S. exposure in banks and money market accounts to Europe, do 
you have any concern that the turbulence from a financial 
crisis in Europe could trigger a double-dip recession here at 
home?
    Chairman Bernanke. I do have concerns about the European 
situation. I should say first that we have looked very 
carefully at bank exposures, both to foreign sovereigns and to 
foreign banks; and in particular the exposures of U.S. banks to 
the most troubled sovereigns--Portugal, Ireland, and Greece--is 
quite minimal.
    So the direct exposures there are not large. There are 
somewhat larger exposures in the money market mutual fund area, 
but there too they have moved mostly away from Portugal, 
Ireland, Greece, towards the other European countries like 
France and Germany.
    So it is not so much the direct exposures that concern me. 
Rather, market uncertainty about the resolution of the Greek 
situation, about the broader resolution of both sovereign debt 
issues and European banking issues has created an enormous 
amount of uncertainty and volatility in financial markets. And 
it is through that volatility and in direct effects I think 
that we are being affected now.
    I believe that one of the reasons that our recovery has 
been slower this year than it was last year is that we have 
faced a lot of financial volatility, and some of that is coming 
from the European situation.
    Vice Chairman Brady. If there is a liquidity run on 
European banks, if there is a financial crisis in Europe, what 
tools are you considering to mitigate and limit the adverse 
economic effects on the United States?
    Chairman Bernanke. Well first, in Europe there are 
substantial facilities to provide liquidity to European banks. 
First, the European Central Bank has enormous capacity to 
provide liquidity to European banks.
    And as you know, we have conducted a swap line with the 
European Central Bank whereby they give us euros, they give 
them dollars, and on their own responsibility and on their own 
credit risk they re-lend dollars as necessary to European banks 
that need dollars.
    So we are doing what we can to cooperate with the European 
Central Banks and other central banks to provide dollar funding 
for global dollar money markets. That is the first thing.
    Domestically, I think our main lines of defense would be to 
make sure that there is first adequate supervision of our 
banks, which we are very much engaged in, and I would have to 
say that the good news here is that U.S. banks have 
substantially increased their capital bases since the crisis 
three years ago.
    But secondly, we would make sure that we would stand ready 
to provide as much liquidity against collateral as needed as 
lender-of-last-resort for our banking system.
    Congressman, you mentioned earlier the lender-of-last-
resort policy regarding AIG and other individual firms, and I 
basically agree with you. I would just note that Dodd-Frank has 
made that illegal. We could not do that again. We are not 
allowed to do any lending to individual firms, or to insolvent 
firms.
    What we could do with the permission of the Secretary of 
the Treasury, is to provide a broad-based lending program to 
try to address a run on our financial system, which we do not 
anticipate, but we will certainly be prepared to respond if 
anything eventuates.
    Vice Chairman Brady. I think the question is raised again 
because of Europe. In a financial crisis it is difficult to 
ascertain the difference between liquidity and insolvency. And 
without a clear lender-of-last-resort policy in advance, it 
lends itself to the uncertainty that we have seen obviously 
here in the United States and we are seeing I believe in 
Europe.
    Can I ask you, are there any other tools you are 
considering other than the swap lines, creating liquidity with 
the European Central Bank? Any other tools you are looking at 
should that crisis occur?
    Chairman Bernanke. Our basic tools are supervision and 
oversight and monitoring of our own financial system. And we 
are looking broadly at the financial system, not just at banks, 
as part of our macro prudential responsibilities under the new 
legislation.
    And secondly, standing ready, as central banks always have 
in financial crises, to provide backstop liquidity as 
necessary.
    Vice Chairman Brady. Can you answer this? We have just a 
short time left, but you have been reading the papers, as I 
have. There is some concern that the swap lines with the 
European Central Bank create in effect a back door bailout to 
European banks and leave exposure for U.S. Taxpayers.
    We have had swap lines in the past. My understanding is 
this lending is to the ECB, not to the banks themselves, but 
can you address the authority and the potential exposure that 
might occur?
    Chairman Bernanke. You said it exactly right, Congressman. 
The authority is given to the Federal Open Market Committee by 
the Congress and has been used many times in the past. There is 
no question about the authority. But in terms of the exposure, 
as you say, our loan is really not a loan, it's a swap. Because 
what we are doing is we are swapping dollars for euros with the 
European Central Bank.
    We have a contract with the European Central Bank that they 
will return to us the full amount of dollars, plus interest, 
that we give them. So we do not face any exchange rate risk, or 
any interest rate risk.
    Moreover, they make the loans to their own banks about 
which they have appropriate information, supervisory 
information, and the like. And if there are any losses, they 
are responsible, not us.
    So Taxpayers are under no risk whatsoever through these 
swap lines, which by the way proved very, very helpful during 
the 2008 crisis.
    Vice Chairman Brady. Thank you, Mr. Chairman. Yield back.
    Chairman Casey. Thank you, Vice Chair. Senator Sanders.
    Senator Sanders. Thank you, Mr. Chairman, and thank you 
very much for being here, Mr. Bernanke.
    Mr. Bernanke, let me start with a question coming from a 
slightly different direction. I think most Americans perceive 
today that the middle class is collapsing, poverty is 
increasing, real unemployment as you know is about 16 percent, 
25 million people without jobs or underemployed, and yet at the 
same time we have growing inequality--income in wealth 
inequality in America.
    The top 1 percent earn more income than the bottom 50 
percent. The wealthiest 400 people own more wealth than the 
bottom 150 million Americans. That gap is the greatest of any 
major country on earth.
    Do you believe that this economy will recover so long as we 
continue to have this growing gap between the very, very rich 
and everybody else where some people have so much, and so many 
people have so little? Are you concerned about that issue?
    Chairman Bernanke. I am concerned, Senator. I have spoken 
on this issue. It is not a recent development. It has been 
happening since at least the late '70s that the inequality has 
been increasing, and at the top in particular there has been 
increased income.
    There are a whole variety of reasons for it. I do not 
necessarily know that the short-term recovery of the economy is 
crucially tied to it, although it would help to have broader 
based purchasing power throughout the economy. But I certainly 
agree that it is a real concern, and that it is something that 
we should try to address as a society.
    Senator Sanders. In a similar vein, let me ask you this: 
Today we have on Wall Street the six largest financial 
institutions who have assets equal to more than 60 percent of 
the GDP.
    Are you concerned that after we went through the disaster 
of too-big-to-fail a few years ago, that with that type of 
concentration of ownership where three out of the four largest 
financial institutions today are bigger than they were before 
we went through the bailout, (a) are you concerned that we are 
going to be in a position again where Congress is going to have 
to bail out these financial institutions who have not changed 
their ways, who are still into highly speculative activities; 
and (b) are you concerned, when you have so much concentration 
of ownership in these top institutions that this does not 
create in any way, shape, or form a competitive dynamic 
economy?
    Chairman Bernanke. Well, Senator, we very much supported 
the reforms in the Dodd-Frank Act which are intended to 
eliminate, or at least substantially reduce, the too-big-to-
fail problem. And as I was saying to Congressman Brady, we no 
longer have the authority to bail out anybody. And, you know, 
it is our anticipation that Congress will never have to bail 
anybody out, because we have now put in resolution authority. 
We have put in extra supervision, more capital, and so on.
    Senator Sanders. Be that as it may, I am not quite so 
confident that that reality may not come again, but here is my 
question. When you have six financial institutions with that 
much economic power, why shouldn't we break them up?
    I mean, do you believe that if an institution is too big to 
fail it should be allowed to continue? Why don't we break them 
up? Provide more competitive aspects to the economy?
    Chairman Bernanke. Well, the authority is there. If we 
determine that they present a grave threat to the economy----
    Senator Sanders. Do you believe--if you were sitting where 
we were, would you be supportive of breaking up these large 
financial institutions?
    Chairman Bernanke. I think I would look and see how the 
market works here. There are benefits to size. The 60 percent 
of GDP you mentioned is much smaller than many other countries 
that have banks that are bigger than their GDP.
    I think the right response is to put extra cost, extra 
supervision on these firms that will give them an incentive to 
eliminate unnecessary size, to eliminate unnecessary 
activities, and to reduce their risk taking. And that is what 
Dodd-Frank attempts to do.
    Senator Sanders. Let me, my last question is this: I 
secured a provision in Dodd-Frank, which you were not too 
enthusiastic about as I recall, which allowed for an audit of 
the Fed during the financial crisis. And what we learned is 
that the Fed provided, in a revolving way, some $16 trillion in 
low-interest loans to every financial institution in this 
country, many of the central banks throughout the world, many 
large corporations in America, many very wealthy individuals. 
My question is this: That at a time when large banks have 
parked over a trillion dollars at the Fed, why aren't we doing 
the same? Providing low-interest loans to small businesses so 
that they can create jobs?
    In other words, if you during the financial crisis provided 
$16 trillion to banks all over this world, why are you not 
providing the kinds of money that small businesses now 
desperately need so they can expand and create jobs?
    Chairman Bernanke. Well, Senator, as you pointed out, this 
is revolving. So many of these loans were overnight.
    Senator Sanders. Yes, I understand that.
    Chairman Bernanke. And over and over again. The Federal 
Reserve was created in 1913 to address financial panics. And 
like all central banks around the world for 300 years, the way 
we do that is provide backstop liquidity during a panic when 
financial institutions lose their funding.
    And it is very much in the interests of the broader economy 
and to the average person that we prevent the collapse of the 
financial system. It is not our role, and we do not have the 
authority, to make general loans to the broader economy.
    Senator Sanders. But you do have the authority. Some would 
disagree that--whether you should have that authority--to deal 
with unemployment. Unemployment is a crisis situation now. Why 
aren't you doing for small business what you did for the large 
financial institutions?
    Chairman Bernanke. Well we are addressing unemployment. I 
just discussed in my testimony the aggressive steps we are 
taking to ease monetary policy, which is our main tool to 
address----
    Senator Sanders. Are you prepared to provide low-interest 
loans to small businesses in the same way you provided it to 
large financial institutions around the world?
    Chairman Bernanke. I don't think that's our role, and I am 
sure we don't have the authority to do that.
    Senator Sanders. Thank you.
    Chairman Casey. Thank you, Senator Sanders. Representative 
Campbell.
    Representative Campbell. Thank you, Mr. Chairman, and 
Chairman Bernanke.
    I would like to first follow up a little bit on what Vice 
Chairman Brady was talking about on the European situation. You 
know, with all the issues relative to our economy, we have some 
modicum of control--you and us up here, of monetary policy and 
fiscal policy. But I think one of the frustrations is that we 
do not have any control over Europe's decisions relative to 
their current problems and crises, but yet it can affect us 
here.
    To what extent would a default in Greece, or in some of the 
other countries, where that sovereign debt has some--those 
holders of that sovereign debt have some laws, is our financial 
system sufficiently protected from that that kind--a default in 
Greece and perhaps another country over there would not impact 
our financial system, at least?
    Chairman Bernanke. Well first it would depend on the 
conditions of the default. If it were done in a way where there 
were very substantial firewalls, backstop protections, done in 
a very orderly and controlled way, then that would be one 
thing.
    If it was disorderly, unplanned, and disruptive, that would 
be a very different matter.
    As I said to Congressman Brady, the direct exposures of our 
banks to Greece are minimal, but if there were a disorderly 
default which led to runs or defaults of other sovereigns, or 
stresses on European banks, it would create a huge amount of 
financial volatility globally that would have a very 
substantial impact not only on our financial system, but on our 
economy.
    So it is a very, very serious risk if that were to happen. 
And that is why it is extremely important that the Europeans 
continue along the lines that they have been on, which is to 
try to address that situation.
    Representative Campbell. I understand that, as you say, if 
it affects their economy and demand there is reduced, that 
obviously affects the global economy and there is not that 
much, I would perceive--and if you disagree, say so--that we 
can do about that.
    But are there--you obviously are taking all the steps you 
believe you can, and that are prudent in order to create a 
firewall around our financial sector--is there anything we 
should be doing in that regard? Meaning Congress.
    Chairman Bernanke. Unfortunately, as you pointed out at the 
beginning, we are kind of innocent bystanders here. The Federal 
Reserve, the Treasury, and others, have been consulting with 
and been kept informed by our European colleagues. I am 
persuaded that they are very much aware of the risks associated 
with the situation. They are very much committed to trying to 
address it.
    The problems there are not really economic; they are 
essentially political because what they are trying to do is 
find solutions that will be acceptable to 17 different 
countries, which as you can imagine is very difficult.
    So I do not have any good suggestions other than to support 
their efforts and to continue to push them to move aggressively 
to put this behind us. Because even the current situation of 
just ongoing uncertainty has been I think a negative for our 
economy.
    Representative Campbell. Just switching gears for a moment, 
you mentioned housing, which I agree is one of the primary 
elements of the economy; that we cannot grow without housing, 
cannot grow robustly without housing being a part of that. And 
we never go into a recession without them contributing.
    What can and/or should we be doing at this point in order 
to aid that sector of the economy specifically? Should we be 
looking at a new system of housing finance past Fannie and 
Freddie, to replace Fannie and Freddie as they currently exist? 
Should we be looking at the foreclosure situation? What are 
your thoughts on that?
    Chairman Bernanke. This is a very important issue. I would 
just urge Congress to look carefully at what might be done. 
There are a lot of possibilities.
    One issue is the treatment of real estate owned, REO. As 
you know, one of the problems is such a big overhang of 
foreclosed and distressed properties. Would there be programs 
that would allow REO to be converted to rental, or to rent-to-
own? Some way to manage the REO overhang?
    A second issue is refinancing. There are a lot of barriers 
to refinancing, including the fact that people who are 
underwater have a great deal of difficulty refinancing. Would 
it be possible to help that happen?
    You mentioned Fannie and Freddie. I think for the near term 
it will be difficult to create a full-fledged alternative to 
Fannie and Freddie who are currently now the basic source of 
all securitization in the mortgage market. But to the extent 
that Congress is able to lay out a clear framework, or a clear 
path to a new housing finance system, I think that would create 
some certainty and maybe would allow some of the private sector 
securitization activities to resume.
    So I think there are things that can be done, and I am sure 
there are many other things that could be done, and I would 
urge you to think about, you know, what Congress could do.
    Representative Campbell. Thank you, Mr. Chairman.
    Chairman Casey. Thanks, Representative Campbell. Senator 
Klobuchar.
    Senator Klobuchar. Thank you very much, Chairman.
    Chairman Bernanke, I know you were recently in my State and 
spoke there, and I think you saw the strong and vibrant 
business community in our State. It is a community that works 
together well. It is one of the reasons we have an unemployment 
rate that is 2 points better than the national average, and it 
is a State that tends to believe in making things, and 
inventing things, and exporting to the world.
    And so you can imagine the frustration our business 
community has felt by some of the games that have been going on 
in Washington recently. I was thinking back to the last year 
that you testified, and you were talking about how, this was 
about a year ago, you indicated that the markets were 
signalling a lot of confidence in our political system to 
deliver a sustainable fiscal trajectory.
    What effect do you think that the debate this summer over 
the Nation's debt limit, how that was handled, how this was 
simply handled even last week, I think it is something that the 
New York Times in an editorial last week called ``governing by 
crisis.'' They talked about how each one of these 
confrontations have a high cost. They eat up valuable 
legislative bandwidth. They add uncertainty to the financial 
system. They contribute to a cynicism and lack of confidence in 
the political system that damages everyone.
    And I would just like your opinion on how things have been 
handled in the last six months, and how they have--that has 
been inconsistent or consistent with the goals that you have 
laid out today?
    Chairman Bernanke. Well, Senator, first let me just say 
that I strongly support efforts to put our fiscal policy back 
on a long-term sustainable path. I am in no way putting down 
that very important objective.
    That being said, unfortunately the brinkmanship of the 
summer and at least the perception in the minds of some 
investors that the United States might actively consider 
defaulting on its debt, and more over the possibility that this 
might be recurring periodically, I think was a negative for the 
financial markets.
    It was the reason that the downgrade occurred. The S&P 
cited the political process more than the amount of debt 
outstanding. And it is really no way to run a railroad, if I 
might say so. So I very much support continued strong 
bipartisan efforts to bring our long-term fiscal situation 
under control, but I do sincerely submit to you--that doing it 
in a way that raises the risk of default on our debt is going 
to be counterproductive. Because eventually it is going to lead 
to higher interest rates, which will make deficits worse, which 
goes against exactly the purpose of the exercise.
    Senator Klobuchar. Thank you. And I was actually one, I 
know also on this Committee, Senator Coats and Senator Warner, 
one of 37 Senators, a bipartisan group that said we need to 
reach that $4 trillion figure in debt reduction.
    Now I believe we need to do that with a balanced approach; 
that we need to do it with a mix of the spending cuts, which 
are very important as you have pointed out; but also closing 
some of the loopholes which would enable us to bring down the 
corporate tax rate leading to one of your other goals of the 
sustainable growth, as well as looking at some of these 
fairness issues that Senator Sanders has addressed.
    And do you see it as possible to moving forward with this 
$4 trillion debt reduction by doing it in a balanced way?
    Chairman Bernanke. Well it is up to the Congress exactly 
how you would like to do it. I laid out some goals. One is to 
achieve the sustainability. That can be done with a larger 
sized government or a smaller government. It depends on what 
you want the government to do.
    But I hope that as you think about--let me put it this way: 
As you think about reducing our deficits and putting us on a 
sustainable path, which is critically important, it is also 
important to think about how good is our tax system? How 
efficient and how effective is it? How equitable is it? How 
effective is our government spending? Is it producing the 
results we want? Is it supporting growth and recovery?
    So we should continue to think about the components of the 
budget, as well as the overall need for sustainability.
    Senator Klobuchar. Thank you. And one last thing that I 
have appreciated that you have talked about in some way, this 
need to focus on our country's competitiveness and innovation.
    I saw a recent survey in my State that 46 percent of our 
businesses cannot find workers to serve in certain jobs. Our 
tech schools, some of them have 96 percent placement rates--and 
they are not your grandpa's tech schools anymore. They are 
training students to learn to run computer systems that are 
running the assembly lines that are running our Nation's 
papermills, or that are making our medical devices.
    I just wondered if you could briefly talk about, as you 
mentioned, exports are so important, the need to retool our 
workforce and not just pretend this is something on the side, 
but should be a major piece of our competitive agenda.
    Chairman Bernanke. This is where many of our exports are 
now, either in specialized high-tech capital goods, or 
professional services, for example. And so developing both the 
human capital, the expertise, the skills, and making sure that 
we retain our global leadership in research and development, I 
think these are incredibly important for productivity and 
living standards going forward.
    Senator Klobuchar. Thank you, very much. I appreciate you 
being here.
    Chairman Casey. Thank you, Senator Klobuchar. 
Representative Burgess.
    Representative Burgess. Thank you, Mr. Chairman.
    Just picking up on what Senator Klobuchar just said, a 
brief commercial: The Food and Drug Administration is 
undergoing a reauthorization process next year. It will be 
tough, because it is a political year as well, but it is 
absolutely critical to our ability for the approval of new 
medical devices and is something where we are severely 
insufficient in this country. We are driving that business 
overseas, and that investment overseas.
    And at the same time, under the Affordable Care Act, we are 
going to be taxing that segment of our intellectual capital, 
and I just think it is unconscionable the way we have behaved.
    We hear a lot of talk about the trillion dollars sitting on 
the sidelines that corporations have, a trillion dollars that 
they are just waiting to see what is going to happen. Is that 
accurate?
    [The prepared statement of Representative Burgess appears 
in the Submissions for the Record on page 51.]
    Chairman Bernanke. I think it is more than that. I think it 
is more like $2 trillion.
    Representative Burgess. And what is it that they are 
waiting to see?
    Chairman Bernanke. Well, partly it is a liquidity 
preference from the crisis where they want to make sure they 
have enough cash on hand in case there are more financial 
issues.
    But more generally I think it is----
    Representative Burgess. So are those capital requirements 
that you have imposed?
    Chairman Bernanke. I am talking now about corporations, not 
about banks.
    Representative Burgess. Okay.
    Chairman Bernanke. Corporations remain very uncertain about 
the strength of the recovery. At this point they are able to 
meet demand with their existing capital stocks and workforces, 
and they are looking to see a stronger recovery and greater 
clarity before they deploy some of those funds.
    Representative Burgess. And is that greater clarity from 
the Legislative Branch? Or from the Federal Reserve? Or from 
the Executive Branch? Where is that----
    Chairman Bernanke. Well it comes from many areas. I think 
first and foremost will the recovery continue and be strong, or 
will it falter? And there is a lot of uncertainty about what 
the economy is going to do.
    Certainly, policy uncertainty is an important issue. As far 
as the Federal Reserve is concerned, we in our regulatory 
efforts are doing our best to move as quickly as possible to 
provide clarity about the regulatory framework that we are 
responsible for.
    Representative Burgess. Do you think tax policy influences 
it?
    Chairman Bernanke. It's possible, yes. In general, the most 
clarity we can provide to firms and households, the more likely 
they are to make commitments of various sorts.
    Representative Burgess. Let me ask you a question. I need 
to move on because time is limited.
    Do you think that the actions that have been taken over the 
last three years have prevented a recurrence of the events that 
we saw in September of 2008? Have we prevented the next 
meltdown?
    Chairman Bernanke. I think we made a substantial 
improvement in----
    Representative Burgess. Wrong answer. Have we prevented--
have we prevented? It is a 'yes' or 'no' question.
    Chairman Bernanke. If we had not taken those actions, we 
wouldn't have had to prevent because we would have had a 
collapse.
    Representative Burgess. Let me ask you this: A lot of 
people talk about the reinstitution of Glass-Steagall. You 
mentioned ``moral hazard.'' Do we need to draw that bright line 
again?
    Chairman Bernanke. I don't think Glass-Steagall per se 
would have avoided the crisis. Many investment banks or 
commercial banks that were not combined had significant 
problems.
    We have made a lot of steps to try to address those issues. 
I know not everybody agrees on all of them, but I think we have 
made a lot of progress in getting our financial system back on 
a more stable footing.
    Representative Burgess. Let me ask you this: In your 
testimony, the second-to-the-last paragraph, the closing 
sentence, you said:
    ``The Committee will continue to closely monitor economic 
developments and is prepared to take further action. . . ''. Do 
you have further arrows in your quiver at this point? Have most 
of them already been used? Is the only arrow you have left the 
printing press?
    Chairman Bernanke. Well the basic tool that the Federal 
Reserve has is operations in the open market that may or may 
not increase the money supply. But the attempts to reduce 
interest rates and to create more financial accommodation, we 
do have tools. But obviously we want to evaluate the costs and 
the benefits of any decisions we take, and we want to make sure 
that the economy is getting the appropriate amount of stimulus 
from us.
    Representative Burgess. So the answer to that question is: 
The printing press may be the only arrow left in your quiver?
    Chairman Bernanke. Well the printing press, I think that is 
a rather unfair characterization. The printing press literally 
is not actually involved.
    I mean what we are doing right now is selling short-term 
securities and buying long-term securities. We are not changing 
the size of our balance sheet, and we are not changing the size 
of the money supply in any significant way.
    Representative Burgess. As long as it works.
    Let me just ask you something unrelated, because my time is 
running out. You see protests both on the right and the left. 
Right now the protesters that are getting the headlines are on 
the left in New York. What does that protest say to you? What 
are you hearing from that activity in New York right now?
    Chairman Bernanke. Well I would say very generally, I think 
people are quite unhappy with the state of the economy and what 
is happening. They blame, with some justification, the problems 
in the financial sector for getting us into this mess. And they 
are dissatisfied with policy response here in Washington. And 
at some level I can't blame them. Certainly 9 percent 
unemployment and very slow growth is not a very good situation. 
That's what they are protesting.
    Representative Burgess. And are you incorporating that into 
the remedies that you are proposing?
    Chairman Bernanke. I am taking into account the growth rate 
in the unemployment rate, as well as the inflation rate. I am 
not taking the protests into account, specifically, but like 
everyone else, I am dissatisfied with what the economy is doing 
right now.
    Representative Burgess. Thank you, Mr. Chairman.
    Chairman Casey. Thanks, Representative Burgess. 
Representative Hinchey.
    Representative Hinchey. Thank you very much, Mr. Chairman.
    Chairman Bernanke, thank you very much. Thanks for being 
here, and thanks for all the responsibilities that you are 
engaged in.
    I have a couple of simple questions to ask, one which 
expands upon what Mr. Sanders said just a few moments ago. We 
have a serious issue with distribution of wealth in this 
country, and that really needs to be addressed, and it needs to 
be straightened out.
    The top 1 percent of Americans hold 33 percent of the total 
wealth in this country. The top 5 percent hold nearly 60 
percent of the total wealth. The top 10 percent hold 72 percent 
of the total wealth. The bottom 50 percent of Americans holds 
only 3 percent of the total wealth.
    All of that is a similarity and reminiscent to the deep 
Great Depression which our country suffered back in the 1930s. 
That needs to be overcome.
    So can you tell me candidly what accounts for the 
significant concentration of wealth in this country? And in 
your opinion, what is the most effective initiative that 
Congress can do to increase household wealth among the working 
and middle class?
    The working and middle class are the drivers of the economy 
of this country. When the working and middle class experience 
hardship, the entire economy declines. That is what we have got 
to concentrate on: working people, building them up, making 
them more successful.
    Chairman Bernanke. Well in the shorter term, clearly it is 
people with the middle class, but also the working class, who 
take the brunt of high unemployment. The Federal Reserve is 
taking strong actions to try to restore economic growth and try 
and bring down the unemployment rate. I think that would be a 
very important step to take.
    In the longer term, there are a number of reasons for this 
inequality which, as I pointed out to Senator Sanders, is not a 
new phenomenon. It has been growing for 30 or 40 years. A lot 
of it has to do with divergent educational and skill levels, 
and I think we have more diversity in terms of high quality and 
low quality educational systems in the U.S. than almost any 
industrial country, and we need to have stronger, more 
consistent training and education for everybody.
    We need to make sure people have technical skills, because 
technological change has been one place where a lot of people 
are getting left behind. We need to help people learn how to 
save and to budget. Financial literacy is an important issue.
    People have talked about trade. Senator Casey mentioned the 
Chinese currency issue. I think we need to have open and fair 
trade. That would be helpful.
    So there are a variety of things that can be done to try to 
do that. Many of them, unfortunately, don't happen overnight. 
But broadly speaking, I think we all agree that we want to 
create as much opportunity in this society as possible. And 
when there are people who do not have access to good education, 
they are kind of shut out from the beginning.
    Representative Hinchey. Well I would suggest that some of 
the things you can do is to recommend to this Congress positive 
things we can do. And the concentration of wealth was affected 
in 1977-78, when Congress passed dramatic cuts In capital gains 
tax which primarily benefit wealthy people. That in and of 
itself has got to be dealt with, and dealt with effectively by 
this Congress to upgrade the quality of life for middle income 
people. That needs to be done.
    Let me just ask a little bit about the Volcker Rule. Since 
the passage of Dodd-Frank, the Federal Reserve has been working 
on implementing the Volcker Rule. This important provision 
limits banks' ability to engage in proprietary trading. This 
Rule upholds the spirit of the important Glass-Steagall Act 
which separated commercial banking and investment banking until 
its unfortunate repeal back in 1999. That needs to be 
corrected.
    Recently, news reports have indicated that a draft final 
rule will include a significant loophole allowing banks to 
continue to make risky bets with their own capital to hedge 
against portfolio risks. This new exception significantly 
diminishes the impact of the Volcker Rule.
    How can we expect to see a change in bank behavior if we 
continue to allow proprietary trading through a watered down 
Volcker Rule?
    Chairman Bernanke. Well first let me just say, we are about 
to put out a proposed rule. I would say within a couple of 
weeks we should have something out that the public can look at 
and give us comments on it.
    It is a complicated rule, and we want to make sure it is 
workable. But at the same time, we certainly want to follow the 
spirit of the statute. There are in the statute provisions that 
allow banks to hedge their positions, which is something you 
want them to do because that reduces risk.
    I'm not sure I know exactly what you are referring to, but 
I assure you that we will look very carefully and respond to 
any comments that you might have about the actual rule when it 
comes out.
    Representative Hinchey. Well with regard to the Volcker 
Rule, it has been weakened. Now the question is, what are we 
going to do? Are we going to continue to allow it to be 
weakened? Or are we going to do something to correct that 
weakening and make it more effective, as it was intended?
    Chairman Bernanke. I don't know what you mean by ``run 
down.'' The rule is about to be put out. So when you see the 
rule, if you will tell us what your objections or concerns are, 
we will be happy to respond to them.
    Representative Hinchey. Well you can see clearly what it 
means by weakened, I think.
    Chairman Bernanke. If you're referring to current 
activities by the financial institutions, of course the Volcker 
Rule is not in effect yet and it will take some time before it 
is in effect. But it is our intention to follow the spirit of 
the rule. After all, Chairman Volcker was the Chairman of the 
Federal Reserve, and I look at his picture every day. So we 
will certainly try to make sure that the spirit of the rule is 
enforced.
    Representative Hinchey. Thank you very much.
    Chairman Casey. Thank you, Representative Hinchey.
    Senator Coats.
    Senator Coats. Thank you, Mr. Chairman.
    Mr. Chairman, thank you for your service. Both sides of the 
financial houses here, the Congress and the Fed, face 
significant challenge. We are both sort of on the hot seat. I 
don't think it is appropriate for one to blame the other for 
the problem, and you have not done that.
    It seems to me sometimes too much attention is focused on 
what the Fed should do when it is not within the Fed's purview 
of doing; it is in ours; and we are deflecting the blame over 
to you.
    Nevertheless, you indicate in your opening statement here 
that--and I quote--``The future course of federal fiscal 
policies remains quite uncertain'', and that uncertainty is 
something we all hear as we go back to our states and talk to 
businesses and others. It is pervasive throughout industry, 
throughout business, throughout households. And I guess the 
question is: How can we together work to eliminate some of that 
uncertainty and restore confidence not only in the investment 
market but in the consumer market?
    Clearly that would have a positive impact in terms of our 
going forward. You outlined four key objectives in that regard 
in your statement, one of which is, as you describe, putting 
together a long-term fiscally sustainable credible plan.
    You state that what is before the Congress in terms of what 
has been done in August, and what the goals are for the Super 
Committee that is going to report in November, are far short of 
what we need to do. That is reinforced by the rating agencies. 
It is reinforced by the President. It has been reinforced by 
various economists and analysts, saying generally anything 
short of $4 trillion in spending, viable spending cuts, over a 
10-year period of time is going to be inadequate to regain that 
confidence and achieve the goal of a fiscally sustainable plan.
    My question to you is, as others have suggested, you can't 
get there just--to get that kind of a plan--just through 
spending cuts. You need certain reforms in the system, one of 
which is entitlement reforms to mandatory spending, another of 
which is comprehensive tax reform.
    My question is: How important is that to be part of a 
package that can be deemed what you would conclude to be long-
term fiscally sustainable and credible?
    Do you have some comments and thoughts on that?
    Chairman Bernanke. Yes. So first it would be a major 
achievement to have a credible plan that delivered stability 
and sustainability over the next decade. As I was indicating to 
Senator Klobuchar, the quality of the product also matters. It 
is not just the bottom-line numbers. In terms both of economic 
efficiency and growth and in terms of certainty, reforming the 
tax code would be very useful and very valuable.
    I think everybody agrees that it is a very complex and, in 
many ways, counterproductive system right now.
    And likewise, evaluating the quality of our programs. Is it 
possible, for example, to deliver health care to senior 
citizens at the same level, or the same quality for less cost? 
Those are some of the issues that we need to address.
    So I agree, the bottom-line number is critical, but so is 
whether or not we achieve some clarity and some improvement in 
both the tax and spending programs.
    Senator Coats. Now some say this is not--putting that 
comprehensive package together by the end of this year, the 
Congress voting on that and pushing it forward, is not 
attainable particularly with regards to the complexity of the 
entitlement, the reform, and the tax reform.
    Many suggest that, well, these are elements--these are 
initiatives that ought to be started up in 2013. Can we wait 
until then?
    Chairman Bernanke. Well, Senator, you are a better judge 
than I am of how quickly this could be done in Congress, but 
clearly the sooner the better. 2013 is a ways away, and at 
least giving some indication of the directions that you are 
going and the broad ideas that you would be incorporating I 
think would be helpful.
    Senator Coats. You state in your comments here that these 
difficult and fundamental fiscal choices cannot be safely or 
responsibly postponed. I assume you stand by that?
    Chairman Bernanke. Yes, sir.
    Senator Coats. And 2013, would that fall in that? Would you 
describe that as something that is safely and responsibly done?
    Chairman Bernanke. I think we would all like to see as much 
progress as possible. And if that involves now laying out some 
plans and beginning the discussion, I think that would be very 
useful.
    Senator Coats. My own belief is that at least some strong 
indication with some enforcement mechanism is necessary in that 
package now in order to assure the investment world and the 
consumer world that we are on the right path, and therefore 
have the psychological effect of improving confidence and 
helping move forward with some sustainable measures.
    Thanks very much for your testimony.
    Chairman Bernanke. Thank you.
    Chairman Casey. Thank you, Senator Coats. Representative 
Mulvaney.
    Representative Mulvaney. Thank you, Mr. Chairman.
    Mr. Bernanke, as difficult as it is for two Southerners to 
talk about anything in five minutes, I will do my best to speak 
a little faster than I would if you and I met back home, and 
also be a little more blunt than if we had met back in South 
Carolina.
    You came to our Committee on the Budget back in the 
springtime and gave much the same presentation, and encouraged 
us at that time to do everything that we could to get our 
fiscal house in order. We have talked about that several times 
here today.
    In my opinion, we have woefully underperformed in that area 
and are continuing to make some of the mistakes that you 
brought to our attention last spring. We have not fixed the 
spending problem. We have not come up with a way to close the 
deficit.
    I would suggest to you, sir, that the Fed is part of the 
difficulty with that. And I encourage you to consider the fact 
that with all of the steps that you take to keep interest rates 
low, in the long term, in the short term, to encourage lending, 
you are also encouraging borrowing.
    You are encouraging the Federal Government to continue to 
do what we do. You have made our effective borrowing rate the 
lowest it has ever been in the history of the Nation, and 
therefore there are no consequences in the immediate term to 
our actions to continue borrowing money.
    So I would suggest to you, sir, that you do consider that 
when you all go forward on the Open Market Committee, that one 
of the unintended consequences of doing what you are doing is 
making it easier for us to continue to do what we are doing--
which is, to borrow money.
    You make it more difficult for us to drive home to our 
colleagues the down side of incurring all of this significant 
debt.
    With that, I will move on to my question, which deals with 
inflation. I think we have seen that inflation has either been 
flat or up in the last 13 months. It is up each month I think 
this year. Yet we are looking at an environment where 
industrial capacity is still low, unemployment is still high, 
wages are flat, factory orders I think it was announced they 
were down last month--they announced that this morning.
    I recognize your comments about energy having some 
influence on inflation, recognizing that core inflation 
excludes raw energy costs; and also the Japanese auto market, 
the situation we had over there. But I think it is reasonable 
to suggest that monetary policy is having some inflationary 
pressures.
    Now, when you were before the Budget Committee last spring, 
I asked you if you were comfortable with your ability to turn 
off the flow, turn off the flow of money which you referred to 
as the flow into the punch bowl. Now, since then you have 
announced two fairly significant new plans--the program to 
reinvest in mortgage-backed securities instead of allowing the 
balance sheet to shrink, and also the Operation Twist of 
extending the maturities structure on the debt.
    I ask you, sir, if you believe that those two policies have 
in any way impaired your ability to deal with inflation should 
the need arise?
    Chairman Bernanke. Congressman, I need to respond to that 
first point. I don't think that is a valid point. We keep 
interest rates down somewhat. I don't think that eliminates the 
responsibility of Congress to take its own action.
    But putting that aside, looking at Europe we see the 
European Central Bank buying the debt of Greece, and the 
interest rate in Greece is, whatever it is, 40 percent. If 
investors lose confidence in the U.S. fiscal situation, the 
Fed's actions are not going to have any effect on that.
    Representative Mulvaney. And I would not suggest you are 
the only thing depressing our interest rates. Certainly the 
flight to quality out of Europe is depressing our borrowing 
costs, but I think you all represented 40 or 45 percent of our 
borrowings every month during QE-1 and QE-2. You all are a big 
part of where we go to get the money.
    And until you all start saying no, you can't borrow any 
more, we are going to continue to do what we have done for the 
last 30 years.
    Chairman Bernanke. Well, we need to keep interest rates low 
to provide support for the economy, which needs the support. On 
the inflation situation, the impact of energy and food prices, 
which arose from a large number of reasons early in the year, 
is now receding and inflation expectations in the financial 
markets from forecasters, from the public, are quite low and 
quite stable.
    I don't expect inflation to be a problem going forward. As 
far as exiting our policies we laid out in June a exit strategy 
that was in our minutes and was widely discussed, and we have 
all the tools we need to reverse our policies at any time. And 
I really am quite confident about that.
    And when the times comes, we will certainly do what is 
necessary to maintain price stability. And right now, we are 
much further away from full employment than we are from price 
stability.
    Representative Mulvaney. My last question is this: We are 
operating now in an environment where inflation is above your 
target rate. Unemployment is above everybody's target rate. 
Dealing with those two situations would, some would say, 
require two different things. It would take one thing to solve 
employment and that would actually make inflation worse, or you 
can help solve inflation and make employment worse.
    My question to you is this. Now, you talked a lot today 
about clarity, and I agree, and stability in the markets is 
what the Fed is supposed to provide. Would you be better 
positioned to provide clarity and stability if we were to 
remove one of your two mandates?
    Chairman Bernanke. Well, Congressman, it is a complicated 
question. I can't answer it real quickly. I would say that we 
do have some ability to improve the employment situation, and I 
think the dual mandate has worked pretty well on average over 
time.
    I would also point out that central banks that have 
inflation as their primary, or technically only mandate, do pay 
attention to economic conditions if for no other reasons than 
that affects inflation expectations.
    So, I think our dual mandate is workable. Although, I agree 
that in the long run the only thing the Fed can control is 
inflation. In the long run, low inflation is the best thing we 
can do for growth. I agree with all that.
    So my bottom line is, I think we can make the dual mandate 
work. I think it has worked pretty well. But of course it is up 
to Congress. If you want us to change to a single mandate, we 
will do whatever you assign us to do.
    Representative Mulvaney. Thank you, sir.
    Chairman Casey. Thank you, Representative Mulvaney. 
Representative Duffy.
    Representative Duffy. Thank you.
    And thank you for coming in, Mr. Chairman--over here on 
this side, now. I appreciate your testimony.
    Quickly, as I talk to a lot of folks who are studying what 
is happening in Greece, many of them will say it is kind of a 
foregone conclusion that Greece is going to default. I know you 
are not going to say that.
    But as we look here, I think your testimony today is 
basically saying we don't have primary exposure to Greece or 
Italy, but we do have secondary exposure through the banking 
system.
    How great is that exposure?
    Chairman Bernanke. Well again, our banks have de minimis 
exposure to the sovereign debt of Portugal, Ireland, and 
Greece. They have quite modest exposure to the sovereign debt 
of Italy and Spain. They have much more substantial exposure to 
the banking systems of Italy, Spain, France. And of course, 
very substantial exposure to the economies, more broadly 
speaking.
    So the direct exposures to say Greece are quite small, but 
indirectly to the Continent and more generally through the 
stability of the financial markets overall, of course we have 
significant exposure.
    Representative Duffy. And we see that, I think you've 
indicated, it's pretty clear that what the Europeans have to do 
to stave off this crisis, it is not an issue of do they know 
what to do, it is do they have the political will to actually 
step forward and do what is necessary.
    Do you think they are doing enough? Do you think they have 
the political will to get the job done?
    Chairman Bernanke. I think they appreciate how much is at 
stake. I mean, it is not just short-term stability; it is the 
continuation of their common European project. It is the 
continuation of their common currency. So I think there is a 
very strong desire and will to achieve success here.
    But again, the process has been slowed by the political 
complexities.
    Representative Duffy. And I think it is analogous to what 
we see here. I mean, we have a situation in this country where 
we look out into the future and you go: Listen, we are going to 
down the road have some serious issues with our debt. And we 
will all sit around these tables, and we have bipartisan 
discussions, but there is not a political will to get it done.
    And when we have our own conversations today about our 
debt, where it's set at $14.5 trillion, and it's pretty tough 
to get a political consensus to deal with it, do you think it 
gets more politically easier to deal with the debt when it is 
10 years down the road, and $25 trillion?
    I mean, the more debt we rack up, the more politically 
difficult it gets, doesn't it?
    Chairman Bernanke. I have great sympathy for you. These are 
very, very difficult problems. They involve very fundamental 
questions of what the government should do and how big it 
should be. And I understand that there is an enormous amount of 
disagreement, and I hope that we will be able to find a common 
ground.
    Representative Duffy. But looking at what we see in Greece, 
I mean would you say it is fair that the alarm bells are going 
off with regard to American debt?
    Chairman Bernanke. Well there are two sides to that. On the 
one side, clearly as Mr. Mulvaney pointed out we have got 
flight to quality coming into U.S. debt. If people are seeing 
all kinds of problems in the global financial system, they are 
buying U.S. debt and driving yields of the U.S. debt down to 
very low levels.
    That being said, I think everybody appreciates now that you 
can't run large deficits forever. We are seeing that in other 
countries. And in fact, S&P downgraded the U.S. Treasuries. So 
clearly this is an issue that we have to address, and it is not 
something that can wait 10 years.
    Representative Duffy. Okay, and I just want to quickly 
pivot to Operation Twist. You are in the process of selling 
short-term Treasuries, $400 billion, and are going to purchase 
long-term Treasuries.
    Are you doing a market-value to market-value? Or are you 
going market-value to par-value?
    Chairman Bernanke. It is going to be par to par, which 
means the market values are not going to exactly match.
    Representative Duffy. So is this going to be a minor QE-3 
that's going to happen through these purchases?
    Chairman Bernanke. It is possible that the value of the 
securities holdings may change, but it would be very small and 
not significant in terms of stimulative effect.
    Representative Duffy. The last time we chatted in a hearing 
over the summer you indicated you were considering QE-3. Is 
that still on the table as one of your tools that you may use?
    Chairman Bernanke. We never take anything off the table 
because we don't know where the economy is going to go. We 
can't forecast what might happen in the future. But we have no 
immediate plans to do anything like that.
    Representative Duffy. I would yield back.
    Chairman Casey. Thank you, Representative Duffy. Senator 
Lee.
    Senator Lee. Thank you. Thank you, Chairman Casey, and Vice 
Chairman Brady.
    I don't want to make a lengthy statement. I am far more 
interested in your testimony. But I do want to share just a 
couple of my own thoughts about the current state of our 
economy, and share some of my concerns about the Federal 
Reserve System.
    In 1977, Congress gave the Federal Reserve the dual mandate 
that Representative Mulvaney referred to, to promote both 
maximum employment and simultaneously promote stable prices.
    Unfortunately, since that time--and more recently, just in 
the last few years--we have had anything but maximum employment 
and stable prices. Most Americans believe, correctly I think, 
that prices of products and services they buy on a daily basis, 
things like gasoline, electricity, heating oil, health care 
services, have increased significantly in recent years and have 
grown more volatile. And at the same time, we have unemployment 
in excess of 9 percent. And a lot of Americans, as a result of 
those factors, are struggling in this difficult economy.
    So the result of that, in my view, is the Federal Reserve 
may well be said to be failing in its Congressional Mandate, 
two-fold mandate, that we have just described. And I wonder 
whether some action ought to be taken to remedy that, or at 
least to bring the mandate more into line with reality.
    I would add that I am troubled by the Federal Reserve's 
role in shoring up failing banks--some would say ``bailing 
out,'' others would say ``shoring up'' or engaging in some form 
of swaps. But regardless of what they are doing, they are 
arguably creating asset bubbles through policies that lead to 
artificially low interest rates and the general veil of secrecy 
under which the Federal Reserve typically operates is also of 
concern to me.
    So with some of those concerns in mind, I want to ask you a 
couple of questions. Given that many Americans are retirees, 
including the Baby Boom Generation getting ready to retire, 
those saving for retirement often invest in fixed-income 
products, including a lot of Treasury Securities.
    Are you concerned about the implications of these 
historically low interest rates on retirees and those saving 
for retirement?
    Chairman Bernanke. Congressman, could I please reply 
quickly to your earlier----
    Senator Lee. Please feel free.
    Chairman Bernanke [continuing]. Statement on inflation.
    Inflation has come down over the last 30 years, and during 
my tenure it has been about 2 percent, which is essentially 
price stability. So I think the record on price stability has 
been very, very good according to BLS statistics.
    On unemployment, I would blame the current crisis mostly on 
the financial crisis. Obviously the Fed had some responsibility 
there but it was not, in my opinion, coming from the dual 
mandate; it came from financial oversight issues.
    We are not bailing anybody out. All central banks have a 
responsibility to provide backstop liquidity to solvent 
institutions only, fully collateralized. We do not lose any 
money. We do not take any risk. This is what central banks do 
to try to reduce financial stress and to help the economy.
    As far as Fed audits, we are very thoroughly audited at 
this point. I would refer everyone to our website which has an 
FAQ ``Is the Fed audited?'' We are audited by the GAO, by the 
Inspector General, by outside private accountants. We produce 
regular financial statements. All of our emergency lending 
facilities have been thoroughly audited and nobody has found 
any impropriety whatsoever.
    So that is really just an urban legend.
    Thanks for letting me respond to that.
    On the saving issue, it is a very difficult question. I 
guess one consolation for Treasury holders is they have had a 
lot of capital gains as interest rates have gone down. But more 
seriously than that, I understand that fixed income savers do 
often suffer from low interest rates. It is a consideration. It 
is something we think about.
    But clearly if you are going to be investing in the U.S. 
economy you need a strong economy. And it is our view that the 
low interest rates over a period of time, not permanently, help 
have a stronger economy going forward, and that gives better 
opportunities for investment for all savers.
    And so ultimately, I think the short-term low rates are 
necessary to give the kind of economy we need that people can 
get ultimately high returns in.
    Senator Lee. What do you expect interest rates to do over 
the next few years? Or maybe I should direct it more 
specifically toward Treasury Yield Rates. Where do you expect 
those to go in the next five or six years?
    Chairman Bernanke. Well it depends very much on how the 
economy evolves. If the economy recovers gradually, as we 
currently anticipate, then over time Treasury Rates will go up.
    Senator Lee. I see my time has expired. Thank you, 
Chairman.
    Chairman Casey. Thank you, Senator Lee. Senator DeMint.
    Senator DeMint. Thank you, Senator Casey.
    And thank you, Mr. Chairman, thank you for your service to 
our country. It is a very difficult time, and I appreciate your 
calmness through the storm here.
    Over the past three years, the Federal Reserve has engaged 
in what seems to me like unprecedented action. Originally these 
actions were aimed at managing a financial crisis as a lender-
of-last-resort. And we clearly were in crisis.
    But the Fed has continued to expand its balance sheet with 
multiple rounds of quantitative easing, Operation Twist, an 
exponential increase in monetary supply relative to the growth 
of the economy. And you've in effect become a major player in 
the private sector economy, much beyond banking, but a major 
economic player.
    My question is: If you had a single mandate of just 
protecting the value of the dollar itself, how much of the 
actions that you have taken in the last three years would 
change if you did not have the mandate of protecting 
employment?
    Because this may be the way we want it to be, but it does 
seem, when you combine Congressional and Executive policies 
with what the Fed has done in the markets, that it is getting 
to where the private sector players do not know what to expect 
from government.
    How much of that would change if you did not have a mandate 
to increase employment?
    Chairman Bernanke. Well at certain times there would be a 
difference in policy, certainly. But in this case, as I have 
mentioned, our forecast for inflation is that it will be 
somewhere around 2 percent next year, which is pretty close to 
what most central banks around the world, even those that have 
only a single mandate, define as price stability.
    Our second round of quantitative easing last August in 2010 
was in response to an inflation rate that was below 1 percent 
and falling, and we were concerned about the risk of deflation. 
So the efforts just to keep inflation close to sort of the 2 
percent target, the fact that it is close to 2 percent now, 
suggests we would have had to do most of what we have already 
done just to keep inflation there.
    So the evidence is that all the things we have done have 
not driven inflation above the price stability level.
    Senator DeMint. Are we concerned that we are setting the 
stage for that to happen, though, in effect? It does seem that 
the dollar is okay for now because the euro is in such bad 
shape. And as you have said before in testimony, you understand 
as the economy grows you are going to have to withdraw the 
stimulus effect of monetary supply.
    Is this something we can really control at this point? As I 
think the monetary supply continues to increase dramatically, 
the Federal Reserve has bought through intermediaries a 
significant amount of our debt, as you have expanded your 
balance sheet.
    Is this something we can come back and control? And is that 
much control a good thing?
    Chairman Bernanke. Well, Senator, first the monetary base, 
which is the reserves the banks hold with the Fed, has grown 
tremendously, reflecting the size of our balance sheet. But the 
money supply that most Americans think about, currency in 
circulation, checking accounts, those things, has not grown 
unusually, first.
    But secondly, as we have discussed on a number of 
occasions, I have given several speeches and we have provided 
this exit strategy in the June minutes, we have a number of 
tools for exiting. We are very confident that on a technical 
level we can do so, and we will be paying very careful 
attention to inflation as we make that determination.
    So I assure you that we are quite confident that we can 
reverse our policies when necessary.
    Senator DeMint. Thank you, Mr. Chairman. Thank you, Senator 
Casey.
    Chairman Casey. Thank you, Senator DeMint.
    We will move to a second round of questioning now. They 
will be something approaching a lightning round, three minutes, 
so that everyone knows that.
    I will start, and then I will turn to our Vice Chair. I did 
not want to let too much time go by without re-emphasizing some 
of the good news in the early part of your testimony. We do not 
have enough. I t is good to have a list of good news items.
    I was just looking at page one. By my count there are at 
least four, maybe five, depending on how you break them up, but 
the functioning of financial markets and the banking system 
improved significantly. That is one you mentioned.
    Manufacturing production has risen 15 percent.
    The trade deficit is noticeably lower--notably lower, I 
should say, in your testimony.
    Business investment in equipment and software has continued 
to expand.
    And productivity gains in some industries have been 
impressive.
    So that is good news. But when you get to the point in your 
testimony where you have the four objectives, which again I 
think are helpful for us:
    Number one, long-term fiscal sustainability;
    Number two, avoiding actions that could impede a recovery;
    Third, the fiscal policy aim should be on long-term growth; 
and then
    Four, improving the process of how we do things around 
here.
    I wanted to focus on kind of the first two or three, the 
focus on the long-term fiscal sustainability, which has been 
your focus, appropriately so. And you also say that we need 
short-term strategies as well.
    One of the strategies put in place back in December of 2010 
was the payroll tax cut for the employee. And now there is a 
debate about the next step to take, whether we extend that or 
whether there is a cut put in place for the employer.
    I guess, other than a strategy like that, or maybe even 
extending unemployment insurance benefits--that is one that is 
on the table as well--not that you want to have a recitation of 
a long menu, but any other short-term strategies that you think 
would be helpful?
    Chairman Bernanke. I made reference to housing as an area 
where there might be various steps that could be taken to make 
the market work better.
    In terms of growth, considering investments in capital, 
whether it's public capital, or supporting private capital 
formation, or human capital formation is one possibility.
    The unemployed obviously is a major area of concern. 
Perhaps assistance could be provided there. But on the tax 
side, a couple of people have mentioned tax reform, and that is 
something to look at that could provide more certainty and a 
more effective and efficient tax system going forward.
    Those are some ideas. Obviously, I am not endorsing 
specific policies, and I have no concerns about the creativity 
of your colleagues in finding strategies to work on.
    Chairman Casey. Thank you. Vice Chairman Brady.
    Vice Chairman Brady. Thank you. I am pleasantly pleased to 
get a second round, so we will do a lightning round with you, 
Chairman, if that is okay.
    Transparency is a major issue with the Fed, and we hear 
critics today. I've experienced you to be honest. You've been 
an advocate for transparency through the financial crisis, both 
in meetings here and in our meetings face to face as well.
    To that end, is there any logistical reason why the lag 
time between Open Market Committee meetings and the release of 
the transcripts shouldn't be reduced from five to two years or 
less? Is there any reason we can't see that sooner?
    Chairman Bernanke. There is no logistical reason. My 
concern is that two years is within a tightening or easing 
cycle. What we noticed when the transcripts were released with 
a five-year lag was that the meetings became much more 
constrained. People started reading their statements. There was 
just much less give and take.
    I think with that short a lag, I think you are actually 
going to inhibit discussion and you may have adverse impacts on 
markets. We provide a great deal of information in our minutes, 
in our testimonies, and speeches, and the like. And I am happy 
to meet with you and discuss issues that you might have.
    I think no other central bank in the world provides the 
transcripts with any lag, as far as I know. So this is actually 
quite a transparent policy that we have. And I do think it 
would create some problems to shorten that considerably.
    Vice Chairman Brady. With China there is a focus on 
currency. But noting that the U.S. devalued its currency by a 
peak of about 15 percent over two years, it's now closer to 12 
percent today, and since the driver behind the currency 
legislation seems to be our trade deficit, what I hear from our 
businesses is that, while currency certainly is an issue 
especially for select industries, there are a number of trade 
barriers we face in China from theft of intellectual property 
rights, directed subsidies, closed capital account, 
restrictions on raw and rare export materials, on and on, 
choosing of national champions, on and on.
    If Congress is to tackle our trade deficit with China, 
isn't it more important that we look at the whole range of 
trade barriers that restrict our sales into that growing 
market?
    Chairman Bernanke. On our currency, Congressman, the dollar 
is about the same place it was in the summer of 2008. It has 
gone up and down with flows of flights to safety, but it hasn't 
been really on a trend.
    On your question, absolutely. I have been involved in the 
strategic and economic dialogue since its inception, and we 
talk every time with the Chinese about all these issues, and I 
think continue to press your discussion with them about these 
trade barriers and these related issues. I think it is very 
important and very constructive.
    Vice Chairman Brady. Thank you, Mr. Chairman.
    Chairman Casey. Thank you, Vice Chairman Brady. Senator 
Sanders.
    Senator Sanders. Thank you, Mr. Chairman.
    Mr. Chairman, as you know, there are people demonstrating 
against Wall Street in New York City and other cities around 
the country. And I think the perception on the part of these 
demonstrators, and millions of other Americans, is that as a 
result of the greed, the recklessness and the illegal behavior 
on Wall Street we were plunged into this horrendous recession 
we are currently in.
    Do you agree with that assessment? Did Wall Street's greed 
and recklessness cause this recession that led to so many 
people losing their jobs?
    Chairman Bernanke. Excessive risk taking on Wall Street had 
a lot to do with it, and so did some failures on the part of 
regulators.
    Senator Sanders. Do you believe that we have made any 
significant progress since the collapse of Wall Street to 
suggest that we will not, either in the short term or the 
longer term, once again see a collapse on Wall Street and the 
necessity of a bailout?
    Chairman Bernanke. Senator, yes, we are making substantial 
progress, although I would point out that many of the rules 
implementing Dodd-Frank are not yet in force or fully 
implemented. But I believe as this process goes forward that we 
will have made a very substantial improvement, yes.
    Senator Sanders. Well I would respectfully disagree, but 
let me ask you this on another subject.
    I get calls in my Vermont office every week from people who 
are paying 25 or 30 percent interest rates on their credit 
cards. Some would argue that that is usury, and yet that is the 
policy of the largest financial institutions in this country.
    Do you believe that if the Bank of America and Citigroup is 
charging somebody 30 percent interest rates that that 
constitutes usury and should be prohibited?
    Chairman Bernanke. I would have to know more information, 
Senator. The Congress just passed a whole set of rules 
requiring banks to be much clearer about the information they 
disclose on credit cards----
    Senator Sanders. Disclosure, that's correct.
    Chairman Bernanke. And on practices as well in terms of----
    Senator Sanders. But the bottom line is, today there are 
people in America--and I think you won't deny this--who are 
being charged 25 or 30 percent interest rates. Now Congress has 
passed legislation which has been in effect for many, many 
years limiting the interest rates that credit unions can charge 
to 15 percent. Credit unions are doing just fine.
    Can you give us any reason why Congress should not do the 
same for the large financial institutions?
    Chairman Bernanke. I think as long as there is complete 
clarity about the conditions of the card, and people understand 
what the provisions are, I am not quite sure what the basis 
would be.
    Senator Sanders. What the basis would be is that when 
people are in bad economic shape, they do not have a whole lot 
of money. They have to borrow. They have no alternative. And 
right now, the Bank of America and Citigroup are charging them 
30 percent. That seems to me to be outrageous. It seems to me 
to be usurious. And it seems to me to be wrong. And I would 
urge your support to do what you can to make sure that those 
outrageous interest rates are done away with.
    The last point is, picking up on a point that I made 
earlier, I disagree with some of my colleagues here who think 
that the Fed should not continue to focus on unemployment. As I 
understand it, Section 13.3 of the Fed Reserve Act does allow 
you to provide emergency loans to any individual, partnership, 
or corporation under unusual and exigent circumstances.
    I would argue that when real unemployment today is 16 
percent, those are unusual circumstances. I believe you do have 
the emergency authority to provide emergency loans to small 
businesses so that we can create millions of jobs. Would you 
give some consideration to doing that?
    Chairman Bernanke. Well again I think there are several 
other provisions besides unusual and exigent. They include, 
among other things, that the loans be fully secured. I mean you 
couldn't just give a loan----
    Senator Sanders. Right.
    Chairman Bernanke [continuing]. Without collateral, for 
example.
    Senator Sanders. Right.
    Chairman Bernanke. Of course with banks and financial 
institutions we supervise them, and we know what their 
financial condition is, and we know that they are solvent when 
we make them a short-term loan.
    But we are not banks. We do not have any capacity to 
evaluate a small business. If you think that the banking system 
is not working, why wouldn't Congress consider its own 
provision?
    Senator Sanders. Congress might, but I would just simply 
suggest that during the financial crisis you acted very, very 
boldly--$16 trillion in revolving loans.
    I would urge you to try to do the same, give the same line 
of thought, to the unemployment crisis right now.
    Thank you, Mr. Chairman.
    Chairman Casey. Thanks, Senator Sanders. Representative 
Campbell.
    Representative Campbell. Thanks, Mr. Chairman. I will stay 
on the same two topics I was on before.
    During 2008, we talked about too-big-to-fail, but also too-
interconnected-to-fail. Dodd-Frank and some of us have other 
ideas to try to deal with that.
    Getting back to the European contagion, the risk to us is 
due to interconnectivity. I presume if they had a disorderly, I 
believe as you described it, default of Greece or some other 
thing there, is it international financial interconnectivity 
that puts us at risk? And if so, is there anything, obviously 
not in the short term, but that we ought to be thinking about 
that in the future?
    Because obviously it is frustrating you and frustrating up 
here as well that here is thing going on over which we have no 
control, but which could have a major impact on us.
    Chairman Bernanke. Well that is part of the issue. And 
there are provisions in the financial reform that penalize 
interconnectivity in various ways, and try to force more 
transparency about counterparties and those sorts of thing. But 
I think beyond that as we are seeing in the markets recently, 
just general pulling back, general risk aversion.
    In 2008, we saw an enormous impact on emerging market 
economies that had very little direct connection to what was 
happening in the U.S. in the financial markets.
    So just the general fear, and the general risk aversion 
would also be a very big effect. Even between institutions that 
were not interconnected in that sense that you are talking 
about.
    Representative Campbell. So the concern actually is almost 
more psychological, or as much psychological as it is purely 
economic?
    Chairman Bernanke. It is psychological, but also in the 
sense that when there are losses occurring, in a panic people 
will not know what is safe and what is not safe, and their 
general reaction is to just pull back from everything.
    Representative Campbell. Yes. Okay. Switching back to 
housing again, you mentioned about people being able to 
finance, or refinance who are currently underwater in their 
houses.
    One of the issues with that of course is the regulatory 
system that financial institutions have to deal with, Basel II 
and so forth. Do you have any thoughts or suggestions along 
that line of how you could do that and still maintain 
compliance with the international regulatory systems and so 
forth?
    Chairman Bernanke. Yes, I think that could be done. If I am 
mistaken I would be happy to look at it. The key here is if you 
are refinancing your own loan, one that you made, then you 
don't have to in some sense underwrite it from scratch. The 
credit risk is already yours.
    So the fact that it is an underwater loan, the refinance 
might actually make it more likely to pay off because the 
payments would be reduced, and maybe it could be combined with 
some kind of principal forgiveness that could be worked off as 
well.
    There are various ways to structure that. So I am not aware 
of any fundamental reason why a bank could not do that on its 
own loan.
    Representative Campbell. Thank you.
    Chairman Casey. Thank you, Representative Campbell. We are 
joined by Representative Cummings, and, Representative, we are 
down to the three-minute drill here but we are willing to 
extend yours another two minutes.
    Representative Cummings. Thank you very much, Mr. Chairman. 
I am sorry I couldn't be here. I was ranking member at my main 
committee.
    Chairman Bernanke, I want to thank you for appearing before 
the Committee today, and I thank you for your service. And I 
really mean that. Whether the members of this Committee agree 
or disagree with the policies of the Federal Reserve Board, I 
think we all can agree that you have been tireless and 
steadfast in your efforts to use the Fed's tools to address the 
extraordinary economic circumstances that continue to confront 
our Nation. And I thank you.
    Mr. Chairman, according to economist Mark Zandi, housing is 
ground zero for the economy's problems, high unemployment, and 
lost jobs. A recent Wall Street Journal editorial declared that 
housing is to the United States what Greece is to the eurozone. 
Because just as the eurozone won't prosper until Greece gets 
its act together, the United States recovery won't gain 
traction until the housing sector deals with the excesses of 
the past.
    From the Federal Reserve's standpoint, you have lowered 
interest rates first to unlock the credit markets, and 
currently to spur borrowing and spending. But as one observer 
recently stated regarding your most recent round of bond 
buying, and I quote: ``The Fed is trying to pump air into a 
balloon that has a big hole in it, and that balloon is called 
housing.'' End of quote.
    Mr. Chairman, how critical is the stabilization of the 
housing market to our economic recovery? And do you believe, 
Mr. Chairman, that we are doing enough to stabilize the housing 
market and end this foreclosure crisis that we are going 
through?
    Chairman Bernanke. You make a very good point. As I 
discussed in my testimony, housing is very central to the 
situation we have now. Housing is usually a big part of the 
recovery process, and here it is not doing anything.
    Moreover, many people are underwater. That is affecting 
them financially. Their loss of equity means that they are 
poorer. They are less willing to spend. So addressing the 
housing situation is very, very important.
    And indeed, as you point out, the Fed has done a lot to 
bring mortgage rates down, but it is not very effective if 
people cannot get a mortgage loan. So I think a lot could be 
done to address the mortgage and housing situation.
    I mentioned a few things to Mr. Campbell earlier. Just to 
reiterate quickly, looking at the management of real estate 
owned by banks or by the GSEs to make sure that they are 
maintained, converted to rentals as appropriate, converted to 
rent-to-own, avoiding destabilization of neighborhoods from 
foreclosed houses, helping people who are underwater to 
refinance, removing unnecessary barriers to mortgage access.
    There are a whole range of things. Getting Fannie's and 
Freddie's future clarified so that people can plan and so that 
maybe the private sector will come back in and provide some 
more mortgage credit. I think there are a whole range of 
things, and I am sure that you and your colleagues have other 
ideas. And I do think that, relatively speaking, that what 
would seem like small measures could actually have a very 
positive effect in housing, and for the whole economy.
    Representative Cummings. Would you agree that it is going 
to be almost impossible to resolve our economic situation when 
you have people losing their houses at the rate they are losing 
them? Would you agree with that?
    Chairman Bernanke. I would agree with that, yes.
    Representative Cummings. Let me just ask you one other 
question.
    Mr. Chairman, do you agree with Director Elmendorf that 
there is no inherent contradiction between implementing 
policies that would boost economic growth in the short term and 
implementing policies that would impose fiscal restraint 
several years from now?
    Chairman Bernanke. I do agree with that. And I mentioned 
that also in my testimony, that we should be looking 
simultaneously at long-term consolidation, long-term fiscal 
stabilization; at the same time, trying to think about what 
actions we should take now to make sure the recovery continues.
    Representative Cummings. And finally, Mr. Chairman, do you 
believe that, given the fragile state of the United States 
economy, the most prudent course is to implement policies now 
that spur economic growth, and implement fiscal consolidation 
once the economy has recovered?
    Chairman Bernanke. Well I think you can do them 
simultaneously if you have a strong, credible plan for 
consolidating the fiscal situation over the next few years. But 
also, to take what actions are necessary--and I am not 
endorsing any specific one--but taking whatever actions are 
necessary to help the recovery in the near term.
    Representative Cummings. Thank you, Mr. Chairman.
    Chairman Casey. Thank you, Representative Cummings. 
Representative Burgess.
    Representative Burgess. Thank you, Mr. Chairman.
    Thank you, Chairman Bernanke, for staying with us for a 
second round. Let me just ask a follow-up to something that was 
asked a moment ago I think by Senator Sanders. It certainly 
comes up in every town hall that I do back home.
    You talked about a failure of the financial system, and a 
failure of the regulatory system. In your opinion, why wasn't 
there a more aggressive effort to find out what went wrong and 
who was responsible? Perhaps even prosecute someone for those 
failings?
    Chairman Bernanke. Well the Congress set up a Financial 
Crisis Inquiry Commission, and it provided a report. And, you 
know, that was your----
    Representative Burgess. It was pretty ineffective, wasn't 
it? And we certainly had nothing to compare with the Pecora 
Commission of the 1930s that arguably a lot of people wanted to 
see. Water under the bridge, and I acknowledge that.
    Let me ask you this. When we came up on that August 2nd 
deadline this summer and there was some concern as to whether 
or not the debt limit would be extended, what was keeping you 
awake at night then? And did you have any contingency plans 
that you were putting in place at the Fed to deal with the fact 
that Congress might not extend the debt limit?
    Chairman Bernanke. We certainly did have contingency plans. 
First of all, the Fed is the fiscal agent of the Treasury. We 
are technically responsible for getting the payments done. So 
we were working on plans on how we would address the situation 
if the government had to cut back on what it was paying.
    So we were dealing with that set of issues. And we were 
also looking at what we might be able to do to try to reduce 
the impact on financial markets and on the banking system. But 
we were quite concerned that the failure of the Congress to 
pass the debt limit in a timely way would create a crisis of 
confidence in the financial system, and we were not quite sure 
that we really had the tools to address that.
    Representative Burgess. I don't mean to interrupt, but my 
time is short. Would that crisis of confidence in any way have 
mirrored or matched the crisis in confidence that occurred 
after the failure of Lehman Brothers?
    Chairman Bernanke. If there had been a default on U.S. 
debt, it is possible that you would have had something in the 
same order of magnitude, yes.
    Representative Burgess. And did you have tools to deal with 
that?
    Chairman Bernanke. We would have had some palliative tools, 
but we could not have prevented a very serious crisis, no.
    Representative Burgess. Well let me just ask you another 
question because we are all now focusing on the Debt 
Commission. Your predecessor, in talking to a group of us right 
before he left, a question came up about Medicare and long-term 
financial sustainability of Medicare. The Chairman thought for 
a moment and he said: I believe when the time comes Congress 
will make the necessary adjustments, and the sustainability of 
the Medicare Program will continue.
    He stopped for a minute, and then he said: What concerns me 
more is will there be anyone there to deliver the services that 
you require in that program.
    And that was a pretty powerful statement for him to make, 
and one that has concerned me in the now five or six years 
since. One of the things we are looking at in the Deficit 
Commission, if the targets are not met, one of the rescissions 
is going to be in the Medicare system, not to affect 
beneficiaries but likely be on providers, which I would argue 
will ultimately affect beneficiaries. Do you have any thoughts 
or any concerns about that?
    Chairman Bernanke. Well there is a constraint, which is 
that physicians and hospitals do not have to take Medicare 
patients. And so you have to pay enough to induce them to do 
so. Which makes me think that the fundamental issue is getting 
health care costs down and making our health care sector more 
productive--not just in terms of Medicare, but in terms of our 
entire economy.
    Representative Burgess. And in your opinion is centralized 
command and control of the health care system the way to do 
that?
    Chairman Bernanke. There are lots of different ways to 
address health care, and lots of different models around the 
world.
    Representative Burgess. Maybe we can visit about that more 
later.
    Chairman Bernanke. We can speak about that later.
    Representative Burgess. Thank you, Mr. Chairman.
    Chairman Casey. Thanks, Representative Burgess. 
Representative Hinchey.
    Representative Hinchey. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you very much for everything you 
are doing here. It is very interesting. I wanted to mention 
about unemployment and trade deficit.
    The U.S. economy has not been able to regain its footing 
since the near Wall Street collapse which came about in 2008. 
GPD is low. Unemployment remains stubbornly high. And we are 
still facing a significant foreclosure crisis across the 
country.
    Can you respond to how much of a current economic situation 
is due to a large trade imbalance this country has with China 
and other countries? And also, what effect does the trade 
deficits have on manufacturing jobs that are being outsourced 
into other countries, particularly to China?
    And also, how do you anticipate the current eurozone crisis 
will affect our already struggling economy?
    Chairman Bernanke. Well as I indicated in an earlier 
question, I do not have a number in terms of jobs, but I do 
think that the Chinese currency policy, besides creating 
problems for them--in particular, they have dealt with some 
inflation lately, which is a result to a large extent of their 
currency policy--has been to some extent preventing global 
adjustment.
    That is, we have a two-speed recovery where emerging market 
economies have been growing very quickly; advanced industrial 
economies have been growing very slowly. And some of the more 
balanced growth paths could be achieved if there was greater 
flexibility in currencies.
    China's currency policy not only affects obviously U.S.-
China relations, but it also affects third-party currency 
policies as well.
    You asked me about Europe. We have discussed Europe quite a 
bit. I would press my European colleagues to take strong 
actions to try to address that problem. I know that they are 
very concerned about it, and they are working hard to try to 
address it.
    Currently even now we are seeing a lot of volatility in the 
financial markets, which is no doubt a negative influence on 
the U.S. recovery, and unless the European situation is brought 
under control--which I anticipate it will be, but requires 
still considerable more effort on the part of the Europeans--it 
could be a much more serious situation for the U.S. economy.
    Representative Hinchey. Well the fact that US multinational 
corporations can shield profits abroad encourages outsourcing 
of manufacturing outside of this country. This also had a 
negative effect. Are you interested in trying to get this 
changed? A lot of us here in Congress oppose it, but 
nevertheless it remains in effect.
    And that has a significant impact on more jobs leaving this 
country and going to other places.
    Chairman Bernanke. I'm not quite sure which specific issue 
you're referring to.
    Representative Hinchey. I am referring to the fact that 
corporations can shield profits overseas avoiding US taxation. 
Are you interested in maintaining the jobs here in this country 
rather than exporting them outside of this country? And by 
doing so, by changing that tax shield, that encourages the 
exportation of jobs outside of this country?
    Chairman Bernanke. Well I certainly can agree that we want 
to encourage policies that maintain good jobs in the United 
States; absolutely.
    Representative Hinchey. Thank you very much.
    Chairman Casey. Thanks, Representative Hinchey. 
Representative Mulvaney.
    Representative Mulvaney. Dr. Bernanke, earlier today you 
said that the Committee will continue to closely monitor 
economic developments and is prepared to take further action as 
appropriate to promote a stronger economic recovery, in the 
context, obviously, of price stability.
    Given that we are already at the zero amount on federal 
funds rates, you have already announced the decision to 
reinvest the mortgage-backed security position instead of 
unwinding that, and you have announced Operation Twist earlier 
this month, or late last month, depending on what month today 
is--what's left? When you talk about further additional 
activity, what other tools are you contemplating?
    Chairman Bernanke. Well, I talked about some of them in the 
Humphrey-Hawkins testimony. Generally speaking, there's a 
variety of things under the heading of communication, giving 
information to the public about how long and under what 
conditions we would hold interest rates low. That is one way of 
providing more stimulus.
    Continuing to buy securities in the Open Market, would be a 
second way.
    A third relatively small step would be to reduce the 
interest that we pay on the reserves that banks hold with the 
Federal Reserve.
    Those are the main directions that I could cite.
    Representative Mulvaney. Gotcha. And in the little time I 
have left, I want to make clear from my earlier comments that I 
am not blaming the Fed for our inability in Congress to work 
out our fiscal situation. What I am saying is:
    As dysfunctional as this body is--and it is, there is no 
question--the laws of economics still apply to us. And if you 
participate in a process that allows us to borrow money at less 
than 2 percent, which is what our effective rate was last year, 
I can assure you that we will do it. I have heard those 
discussions within my own party, within the Congress as a 
whole: Why not borrow money now? It's so cheap, you would be 
stupid not to.
    I will assure you that there are other moral hazards out 
there other than just, for example, the banking community. 
There is a moral hazard as it applies to this institution as 
well.
    In layman's terms, what effectively the government is 
facing right now is a teaser rate. We are able to borrow so 
much money right now at a reduced rate, there is a very strong 
impetus here to simply put off the tough decisions for another 
day. If the interest rates today were at the historical average 
and the government was paying 5 or 6 percent on its money, I 
can assure you we would be having a lot longer, more serious 
conversations about what to do about this debt than we are 
having today.
    But I in no way meant to imply that the Fed was responsible 
for our shortcomings.
    And with that, I yield back my time.
    Chairman Casey. Thank you, Representative. Senator Lee.
    Senator Lee. Thank you. Mr. Bernanke, I want to refer back 
to something that I understood you to have said earlier, which 
is roughly to the effect that Congress not engage in any deep 
spending cutting activities until such time as the economy 
recovers. If I understood you correctly, I think you were 
saying that if we engaged in too much deep cutting in the near 
term future that might thwart any recovery.
    First of all, did I understand you correctly in saying 
that? Was that----
    Chairman Bernanke. I didn't say that precisely. What I said 
was that you can do both. You can take policy actions which are 
supportive of recovery, and that would involve perhaps not 
doing sharp near-term cuts that might involve other things, 
other things that might be helpful like in the housing market. 
At the same time that you provide clarity and a strong and 
credible plan for achieving fiscal stability. Those two things 
are not incompatible.
    Senator Lee. Okay. So a strong and credible plan. Does that 
imply both spending cuts and tax reform?
    Chairman Bernanke. Well that is up to Congress. As I have 
said often before, I am in favor of the law of arithmetic. 
Spending cuts, tax increases, as long as it adds up and as long 
as the policies themselves make sense, I think that is what 
counts.
    Senator Lee. But do you have an opinion as to the rate at 
which that cutting might occur? I mean, are you suggesting not 
to cut more than a trillion dollars over the first three years?
    Chairman Bernanke. No, I don't have specific numbers, 
except to say that I think as you look at the amount of cuts, 
and I think maybe Senator Casey mentioned $4 trillion over the 
next decade or so to get stability in the debt-to-GDP ratio, 
clearly that is something that can be done with an increasing 
effect over the decade.
    Senator Lee. Now there is a fair amount of empirical 
support for the notion that if you are wanting to help an 
economy recover, but you are also trying to balance the federal 
budget, that there are a couple of ways of going about it.
    One way is to increase taxes. The other way is to cut 
federal spending, or perhaps a combination of the two. But the 
empirical evidence tends to support the notion that you will 
help the economy recover faster if you focus primarily on 
cutting expenses rather than on increasing taxes. Do you agree 
with that viewpoint?
    Chairman Bernanke. The empirical evidence is very complex. 
There is some literature which suggests that sharp budget cuts 
can lead to recovery. But that is only in limited 
circumstances. I do not think that is a general proposition.
    I think generally you ought to look at your tax and 
spending policies and ask are these policies doing what we want 
them to do for our economy? And are the tradeoffs that they 
engender good tradeoffs for us?
    Senator Lee. Okay. Thank you.
    Chairman Casey. Thanks, Senator Lee. Representative 
Cummings.
    Representative Cummings. Chairman Bernanke, on April 13th, 
2011, the Federal Reserve Board, along with the Office of the 
Comptroller of the Currency, the Office of Thrift Supervision, 
and to a limited extent the Federal Deposit Insurance 
Corporation, issued a joint report summarizing the results of a 
horizontal review of the foreclosure practices of the Nation's 
14 largest mortgage servicers.
    Specifically, you found, and I quote, ``critical weaknesses 
in servicers,'' end of quote. ``Foreclosure practices, 
foreclosure document preparation processes, and oversight and 
monitoring of third-party vendors, including foreclosure 
attorneys, which individually or collectively resulted in 
unsafe and unsound practices in violations of applicable 
federal and state law and requirements.'' End of quote.
    Simultaneously, you entered into consent orders with these 
servicers and third-party service providers which required 
servicers and providers to take steps to correct the problems 
identified in the review. Specifically, the banks were required 
to retain independent firms to conduct a thorough review of 
foreclosure actions that were pending any time from January 1, 
2009, through December 31st, 2010, to identify borrowers that 
have been financially harmed by deficient practices.
    I understand that the retention of these firms and the 
process by which these reviews are to be conducted was required 
to be spelled out in engagement letters that the regulators 
have to approve.
    This is my question: Mr. Chairman, what is the status of 
these engagement letters?
    Have all of the banks retained their independent firms and 
spelled out the manner in which they are going to identify 
borrowers who have been harmed by their improper and, in many 
instances, illegal practices?
    And, Mr. Chairman, how do you respond to the criticism that 
when the consent orders were released,the primary criticism was 
that they were overly vague and allowed the servicers to 
develop their own plans for identifying harmed borrowers and 
correcting deficiencies going forward.
    How do you respond to that criticism? What is the 
methodology that each servicer will use to ensure that looking 
back every single harmed borrower in our districts is 
identified and remediated? And going forward, that this kind of 
industry-wide breakdown never occurs again?
    I know that is a lot, but you get the drift.
    Chairman Bernanke. Well the engagement letters with the 
consulting firms and the remediation plans are being developed 
and they will be carefully reviewed and approved by the 
supervisor----
    Representative Cummings. Do we have a timetable on that? A 
timeline on when we expect that to happen? Because people are 
losing their homes, as you well know.
    Chairman Bernanke. Well the letters are being reviewed, and 
they will be, I think--I can assure you it will be very soon, 
but the point is that the process is already underway.
    Representative Cummings. Okay.
    Chairman Bernanke. The servicers are already reaching out 
to find people who had problems. In fact, there was something 
in the paper this morning about that. And they have already 
made progress in improving their operations and addressing some 
of the worst abuses. But we will continue to monitor them very 
carefully. So it is a process that has already begun, and we 
are well advanced in getting the formal agreements completed 
and reviewed.
    Representative Cummings. Thank you, Mr. Chairman.
    Chairman Casey. Representative Cummings, thank you.
    Mr. Chairman, thank you for your testimony. I just want to 
note for the record that for Members the record will be open 
for five business days to submit statements or additional 
questions in writing. And we are adjourned.
    [Whereupon, at 12:09 p.m., Tuesday, October 4, 2011, the 
hearing was adjourned.]
                       SUBMISSIONS FOR THE RECORD

 Prepared Statement of Robert P. Casey, Jr., Chairman, Joint Economic 
                               Committee
    I look forward to Chairman's Bernanke's report on the state of the 
economy, his perspective on recent actions taken by the Federal 
Reserve, and his insights into the short- and long-run challenges 
facing the U.S. economy.
    My hope for today's hearing is to move beyond the partisan politics 
and finger pointing that sometimes colors discussions about what the 
Federal Reserve should or shouldn't do. Instead, we should focus on the 
economic challenges facing the country and the potential solutions.
    All of us on this Committee share a belief that Congress needs to 
take action to bolster the economy and help Americans get back to work. 
Similarly, monetary policy has an important role to play in 
strengthening our economy.
    Millions of Americans are still struggling in the wake of the Great 
Recession. The economy is not growing fast enough or adding enough jobs 
to make significant progress reducing unemployment.

      14 million Americans are unemployed and six million of 
the jobless (43 percent) have been out of work for six months or more.
      Private-sector job creation, which had been well above 
200,000 a month in February, March and April, fell to less than 20,000 
in August.
      State and local governments are reeling, as they lay off 
workers to meet balanced budget requirements. In the past 12 months 
alone, state and local government payrolls have been slashed by 
345,000.
      In Pennsylvania, the unemployment rate, after declining 
to 7.4 percent in May, has climbed back up to 8.2 percent in August 
(with more than 516,000 workers unemployed).

    Economic indicators have also been weakening abroad. With financial 
conditions in the Eurozone deteriorating, contagion spreading to other 
parts of the world is now a significant risk to the global economic 
outlook.
    The Fed has already used a variety of approaches to ease monetary 
policy. In the current economic environment, we need to use all 
available tools to support our economy in the short-term. We also need 
to take the actions that will get our fiscal house in order in the 
medium and long-term. The two reinforce each other. Getting our economy 
growing at a healthy pace is critical to sustained deficit reduction.
    As Chairman Bernanke observed in a September speech to the Economic 
Club of Minnesota:

        ``There is ample room for debate about the appropriate size and 
        role for the government in the longer term, but--in the absence 
        of adequate demand from the private sector--a substantial 
        fiscal consolidation in the shorter term could add to the 
        headwinds facing economic growth and hiring.''

    The Federal Reserve Act created the Federal Reserve System and 
established two objectives for the nation's monetary policy--maximum 
employment and stable prices. This is what is commonly referred to as 
the Fed's dual mandate.
    The Federal Reserve's recent announcement that it will ease 
monetary policy further is consistent with that dual mandate. The 
Federal Open Market Committee said it will purchase $400 billion of 
long-term Treasury securities and pay for those securities by selling 
an equal amount of shorter-term government debt. In the so-called 
Operation Twist, the Fed is not expanding its portfolio, but shifting 
its composition so that the average maturity of its holdings is longer.
    The goal of the Federal Reserve's action is to bring down long-term 
interest rates further--reducing borrowing costs for businesses and 
consumers, sparking additional economic activity and ultimately 
boosting employment. The Fed also affirmed that it will continue to pay 
close attention to inflation and inflation expectations.
    Some in Washington have called on the Fed to ``resist further 
extraordinary intervention in the U.S. economy,'' arguing that action 
by the Fed could further harm the U.S. economy. I disagree. With so 
many Americans out of work and GDP growth having slowed to a less than 
1 percent annual rate in the first half of this year, additional 
actions are needed to strengthen the economy.
    Finally, I would like to address currency manipulation, especially 
on the part of China, because it has such a harmful impact on the U.S. 
economy and American jobs. A recent report by the Economic Policy 
Institute finds that the U.S. trade deficit with China--caused in large 
measure by China's undervaluation of the yuan--has cost our country 2.8 
million jobs over the past decade.
    Chairman Bernanke, in testimony before this Committee in April 
2010, you noted that ``most economists agree the Chinese currency is 
undervalued and has been used to promote a more export-oriented 
economy.'' You also said that it ``would be good for the Chinese to 
allow more flexibility in their exchange rate'' and that ``we should 
continue to press for a more flexible exchange rate.''
    I agree. This week, the Senate has the opportunity to take action 
in response to China's unfair trade practices when we vote on 
bipartisan legislation to crack down on China's currency manipulation. 
Last night the Senate passed the first procedural hurdle, with a strong 
bipartisan vote to move forward with debate on the legislation.
    To sum up briefly: more than two years after the recovery 
officially began, our economy remains vulnerable. Unemployment is stuck 
above 9 percent and long-term unemployment remains at near-record 
levels. We need to use every weapon in our arsenal to support a 
stronger economic recovery.
    Chairman Bernanke, thank you for your testimony. I look forward to 
working with you as the committee continues to focus on strengthening 
the economy, creating jobs, and putting Americans back to work.
                               __________
   Prepared Statement of Kevin Brady, Vice Chairman, Joint Economic 
                               Committee
    Chairman Casey, I join with you in welcoming Chairman Bernanke to 
today's hearing on the economic outlook.
    Ominous clouds are gathering. Economic growth is nearly stagnant. 
We have 6.8 million fewer payroll jobs today than when the recession 
began in December 2007, according to the Bureau of Labor Statistics. At 
the comparable point during the Reagan recovery, there were 5.4 million 
more payroll jobs.

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    According to economists Carmen Reinhart and Kenneth Rogoff, 
recoveries from financial crises are weak and vulnerable to external 
shocks that may trigger double-dip recessions. Republican members of 
Congress recognize this. We are critical of the President's expensive 
economic policies because not only they have failed to spur job growth 
and business confidence, but also, as we feared, they have left America 
susceptible to a double-dip recession.
    Today as we meet, America faces a growing risk from the European 
debt crisis.
    The United States and the European Union are major trading 
partners. I am very concerned about the effects of contagion from the 
euro crisis on American financial institutions and markets, as well as 
the broader economy. I am anxious to hear your assessment of the euro 
crisis and any steps that the Federal Reserve may take to quarantine 
any contagion.
    In response to the financial panic, the Federal Reserve took 
extraordinary actions to stabilize U.S. financial institutions and 
markets during the fall of 2008. Many of these actions were both 
necessary and proper, while some of them I question. Instead of 
rehashing the past, however, I would instead like to initiate a 
discussion with you on the framework for monetary policy in the future.
    Nobel laureate economist Robert Mundell said, ``If you want a 
certain policy outcome, you have to use the right policy lever.'' 
Unfortunately, too many Washington policymakers are ignoring Mundell's 
wisdom.
    Monetary policy affects prices. In contrast, budget, tax, and 
regulatory policies affect real output and employment. While the Great 
Contraction from August 1929 to March 1933 proved that bad monetary 
policy can shrink production and destroy jobs, good monetary policy 
cannot accelerate economic growth or foster job creation, except in the 
very short term.
    Washington affects business investment, production, and job 
creation through its budget, tax, and regulatory policies. If the 
prospects for a swelling federal debt, higher taxes, and additional 
costs from Obama-care and burdensome regulations are deterring 
entrepreneurs from investing in new buildings, equipment, and software 
and therefore hiring more workers, there is little that the Federal 
Reserve can do to overcome this drag.
    Until 1978, the Federal Reserve's mandate regarding monetary policy 
was merely to provide ``an elastic currency.'' That year, the Full 
Employment and Balanced Growth Act, known informally as the Humphrey-
Hawkins Act, was enacted. This act imposed a dual mandate on the 
Federal Reserve that gives equal weight to achieving both price 
stability and full employment.
    Since 1978, many countries have examined what a central bank should 
do and have opted for a single mandate for long-term price stability. 
By law, the 17 member-states of the European Monetary Union and 13 
other developed and major developing countries have enshrined mandates 
for price stability either as the sole goal or the primary goal with 
the subordination of other goals for their central banks. Moreover, 
Australia and Canada have adopted single mandates through published 
statements.
    The time has come for Congress to reconsider the Federal Reserve's 
mandate. In my view, the dual mandate should be replaced with a single 
mandate for long-term price stability. I will introduce legislation to 
make this change in the near future.
    While some may mistakenly claim that a single mandate means 
maximizing employment is unimportant, history proves that the best way 
for the Federal Reserve to maximize employment is to focus on achieving 
long-term price stability.
    Under a single mandate, the Federal Reserve would publicly announce 
an inflation target. The Federal Reserve would retain full operational 
independence from both Congress and the President to achieve the 
inflation target.
    While I may criticize certain actions that the Federal Reserve has 
taken, I want to be absolutely clear. For our economy's sake, the 
Federal Reserve must remain independent and free from any undue 
political pressure in implementing monetary policy.
    Congress should also reconsider the Federal Reserve's lender-of-
last-resort policy. I remain deeply concerned about the precedents set 
in 2008 regarding clearly insolvent financial institutions, especially 
AIG, Bear Stearns, Fannie Mae, and Freddie Mac.
    In 1913, Congress envisioned that the Federal Reserve would act as 
lender of last resort during financial crises. However, the Federal 
Reserve has never articulated a clear lender-of-last-resort policy.
    As celebrated economist Allan Meltzer observed:

        The absence of a [lender-of-last-resort] policy has three 
        unfortunate consequences. First, uncertainty increases. No one 
        can know what will be done. Second, troubled firms have a 
        stronger incentive to seek a political solution. They ask 
        Congress or the administration for support or to pressure the 
        Federal Reserve or other agencies to save them from failure. 
        Third, repeated rescues encourage banks to take greater risk 
        and increase leverage. This is the well-known moral hazard 
        problem.

    President Dwight Eisenhower said, ``In preparing for battle I have 
always found that plans are useless, but planning is indispensable.'' 
Similarly, if the Federal Reserve were to promulgate a clear statement 
about its lender-of-last-resort policy, it would go far to diminish 
uncertainty, reduce the likelihood of political interventions, and 
mitigate the moral hazard problem.
    Finally, many years ago, Congress gave the responsibility for 
exchange rate policy to the Secretary of theTreasury. This is a vestige 
of the long defunct Bretton Woods system of fixed exchange rates.
    By controlling the money supply, the Federal Reserve directly 
affects the foreign exchange value of the U.S. dollar. Moreover, swings 
in exchange rates influence domestic prices. Thus, the responsibility 
for exchange rate policy should be moved from the Secretary of the 
Treasury to the Federal Reserve.
    Chairman Bernanke, I look forward to your testimony.
                               __________
 Prepared Statement of Ben S. Benanke, Chairman, Board of Governors of 
                       the Federal Reserve System
    Chairman Casey, Vice Chairman Brady, and other members of the 
Committee, I appreciate this opportunity to discuss the economic 
outlook and recent monetary policy actions.
    It has been three years since the beginning of the most intense 
phase of the financial crisis in the late summer and fall of 2008, and 
more than two years since the economic recovery began in June 2009. 
There have been some positive developments: The functioning of 
financial markets and the banking system in the United States has 
improved significantly. Manufacturing production in the United States 
has risen nearly 15 percent since its trough, driven substantially by 
growth in exports; indeed, the U.S. trade deficit has been notably 
lower recently than it was before the crisis, reflecting in part the 
improved competitiveness of U.S. goods and services. Business 
investment in equipment and software has continued to expand, and 
productivity gains in some industries have been impressive. 
Nevertheless, it is clear that, overall, the recovery from the crisis 
has been much less robust than we had hoped. Recent revisions of 
government economic data show the recession as having been even deeper, 
and the recovery weaker, than previously estimated; indeed, by the 
second quarter of this year--the latest quarter for which official 
estimates are available--aggregate output in the United States still 
had not returned to the level that it had attained before the crisis. 
Slow economic growth has in turn led to slow rates of increase in jobs 
and household incomes.
    The pattern of sluggish growth was particularly evident in the 
first half of this year, with real gross domestic product (GDP) 
estimated to have increased at an average annual rate of less than 1 
percent. Some of this weakness can be attributed to temporary factors. 
Notably, earlier this year, political unrest in the Middle East and 
North Africa, strong growth in emerging market economies, and other 
developments contributed to significant increases in the prices of oil 
and other commodities, which damped consumer purchasing power and 
spending; and the disaster in Japan disrupted global supply chains and 
production, particularly in the automobile industry. With commodity 
prices having come off their highs and manufacturers' problems with 
supply chains well along toward resolution, growth in the second half 
of the year seems likely to be more rapid than in the first half.
    However, the incoming data suggest that other, more persistent 
factors also continue to restrain the pace of recovery. Consequently, 
the Federal Open Market Committee (FOMC) now expects a somewhat slower 
pace of economic growth over coming quarters than it did at the time of 
the June meeting, when Committee participants most recently submitted 
economic forecasts.
    Consumer behavior has both reflected and contributed to the slow 
pace of recovery. Households have been very cautious in their spending 
decisions, as declines in house prices and in the values of financial 
assets have reduced household wealth, and many families continue to 
struggle with high debt burdens or reduced access to credit. Probably 
the most significant factor depressing consumer confidence, however, 
has been the poor performance of the job market. Over the summer, 
private payrolls rose by only about 100,000 jobs per month on average--
half of the rate posted earlier in the year.\1\ Meanwhile, state and 
local govenunents have continued to shed jobs, as they have been doing 
for more than two years. With these weak gains in employment, the 
unemployment rate has held close to 9 percent since early this year. 
Moreover, recent indicators, including new claims for unemployment 
insurance and surveys of hiring plans, point to the likelihood of more 
sluggish job growth in the period ahead.
---------------------------------------------------------------------------
    \1\ The figure of 100,000 private jobs per month adjusts for the 
effects of the two-week strike by communications workers at Verizon, 
which held down measured payrolls in August.
---------------------------------------------------------------------------
    Other sectors of the economy are also contributing to the slower-
than-expected rate of expansion. The housing sector has been a 
significant driver of recovery from most recessions in the United 
States since World War II. This time, however, a number of factors--
including the overhang of distressed and foreclosed properties, tight 
credit conditions for builders and potential homebuyers, and the large 
number of ``underwater'' mortgages (on which homeowners owe more than 
their homes are worth)--have left the rate of new home construction at 
only about one-third of its average level in recent decades.
    In the financial sphere, as I noted, banking and financial 
conditions in the United States have improved significantly since the 
depths of the crisis. Nonetheless, financial stresses persist. Credit 
remains tight for many households, small businesses, and residential 
and commercial builders, in part because weaker balance sheets and 
income prospects have increased the perceived credit risk of many 
potential borrowers. We have also recently seen bouts of elevated 
volatility and risk aversion in financial markets, partly in reaction 
to fiscal concerns both here and abroad. Domestically, the controversy 
during the summer regarding the raising of the federal debt ceiling and 
the downgrade of the U.S. long-term credit rating by one of the major 
rating agencies contributed to the financial turbulence that occurred 
around that time. Outside the United States, concerns about sovereign 
debt in Greece and other euro-zone countries, as well as about the 
sovereign debt exposures of the European banking system, have been a 
significant source of stress in global financial markets. European 
leaders are strongly committed to addressing these issues, but the need 
to obtain agreement among a large number of countries to put in place 
necessary backstops and to address the sources of the fiscal problems 
has slowed the process of finding solutions. It is difficult to judge 
how much these financial strains have affected U.S. economic activity 
thus far, but there seems little doubt that they have hurt household 
and business confidence, and that they pose ongoing risks to growth.
    Another factor likely to weigh on the U.S. recovery is the 
increasing drag being exerted by the government sector. Notably, state 
and local governments continue to tighten their belts by cutting 
spending and employment in the face of ongoing budgetary pressures, 
while the future course of federal fiscal policies remains quite 
uncertain.
    To be sure, fiscal policymakers face a complex situation. I would 
submit that, in setting tax and spending policies for now and the 
future, policymakers should consider at least four key objectives. One 
crucial objective is to achieve long-run fiscal sustainability. The 
federal budget is clearly not on a sustainable path at present. The 
Joint Select Committee on Deficit Reduction, formed as part of the 
Budget Control Act, is charged with achieving $1.5 trillion in 
additional deficit reduction over the next 10 years on top of the 
spending caps enacted this summer. Accomplishing that goal would be a 
substantial step; however, more will be needed to achieve fiscal 
sustainability.
    A second important objective is to avoid fiscal actions that could 
impede the ongoing economic recovery. These first two objectives are 
certainly not incompatible, as putting in place a credible plan for 
reducing future deficits over the longer term does not preclude 
attending to the implications of fiscal choices for the recovery in the 
near term. Third, fiscal policy should aim to promote long-term growth 
and economic opportunity. As a nation, we need to think carefully about 
how federal spending priorities and the design of the tax code affect 
the productivity and vitality of our economy in the longer term. 
Fourth, there is evident need to improve the process for making long-
term budget decisions, to create greater predictability and clarity, 
while avoiding disruptions to the financial markets and the economy. In 
sum, the nation faces difficult and fundamental fiscal choices, which 
cannot be safely or responsibly postponed.
    Returning to the discussion of the economic outlook, let me turn 
now to the prospects for inflation. Prices of many commodities, notably 
oil, increased sharply earlier this year, as I noted, leading to higher 
retail gasoline and food prices. In addition, producers of other goods 
and services were able to pass through some of their higher input costs 
to their customers. Separately, the global supply disruptions 
associated with the disaster in Japan put upward pressure on prices of 
motor vehicles. As a result of these influences, inflation picked up 
during the first half of this year; over that period, the price index 
for personal consumption expendituresrose at an annual rate of about 
3\1/2\ percent, compared with an average of less than 1\1/2\ percent 
over the preceding two years.
    As the FOMC anticipated, however, inflation has begun to moderate 
as these transitory influences wane. In particular, the prices of oil 
and many other commodities have either leveled off or have come down 
from their highs, and the step-up in automobile production has started 
to reduce pressures on the prices of cars and light trucks. 
Importantly, the higher rate of inflation experienced so far this year 
does not appear to have become ingrained in the economy. Longer-term 
inflation expectations have remained stable according to surveys of 
households and economic forecasters, and the five-year-forward measure 
of inflation compensation derived from yields on nominal and inflation-
protected Treasury securities suggests that inflation expectations 
among investors may have moved lower recently. In addition to the 
stability of longer-term inflation expectations, the substantial amount 
of resource slack in U.S. labor and product markets should continue to 
restrain inflationary pressures.
    In view of the deterioration in the economic outlook over the 
summer and the subdued inflation picture over the medium run, the FOMC 
has taken several steps recently to provide additional policy 
accommodation. At the August meeting, the Committee provided greater 
clarity about its outlook for the level of short-term interest rates by 
noting that economic conditions were likely to warrant exceptionally 
low levels for the federal funds rate at least through mid-2013. And at 
our meeting in September, the Committee announced that it intends to 
increase the average maturity of the securities in the Federal 
Reserve's portfolio. Specifically, it intends to purchase, by the end 
of June 2012, $400 billion of Treasury securities with remaining 
maturities of 6 years to 30 years and to sell an equal amount of 
Treasury securities with remaining maturities of 3 years or less, 
leaving the size of our balance sheet approximately unchanged. This 
maturity extension program should put downward pressure on longer-term 
interest rates and help make broader financial conditions more 
supportive of economic growth than they would otherwise have been.
    The Committee also announced in September that it will begin 
reinvesting principal payments on its holdings of agency debt and 
agency mortgage-backed securities in agency mortgage-backed securities 
rather than in longer-term Treasury securities. By helping to support 
mortgage markets, this action too should contribute to a stronger 
economic recovery. The Committee will continue to closely monitor 
economic developments and is prepared to take further action as 
appropriate to promote a stronger economic recovery in a context of 
price stability.
    Monetary policy can be a powerful tool, but it is not a panacea for 
the problems currently faced by the U.S. economy. Fostering healthy 
growth and job creation is a shared responsibility of all economic 
policymakers, in close cooperation with the private sector. Fiscal 
policy is of critical importance, as I have noted today, but a wide 
range of other policies--pertaining to labor markets, housing, trade, 
taxation, and regulation, for example--also have important roles to 
play. For our part, we at the Federal Reserve will continue to work to 
help create an environment that provides the greatest possible economic 
opportunity for all Americans.
                               __________
     Prepared Statement of Representative Michael C. Burgess, M.D.
    Thank you Mr. Chairman for the recognition. I'm glad to be here 
today to discuss this important subject.
    Our economy is stuck in a rut, a major rut. Chairman Bernanke, the 
last time you appeared before our committee in April 2010 some of my 
Democratic friends were proclaiming that the economy was on a path to 
economic recovery, due in part to the Fed. Indeed you Chairman Bernanke 
stated an economic recovery had begun. Well unfortunately that's not 
true anymore.
    We're not moving forward or backward. The Federal Reserve has done 
a great deal in the last three years to fix this problem, whether it be 
lowering interest rates to historically low levels, buying treasury 
bonds and other securities to lower rates further, or the latest steps 
by the Fed.
    Unfortunately our economy is still not where we want it to be. 
Where the economy would be without the aforementioned steps, no one can 
be sure. However, what we do know is we need to move forward.
    I believe the best thing the federal government can do is get out 
of the way of businesses and let them create jobs. Republicans here in 
Washington have said a great deal recently about relieving the 
regulatory burden and with that I totally agree. But we also need to do 
more. We need to reform and simplify the tax code. We need to cut the 
debt. We need to increase domestic energy production of all types. We 
need to get corporate America to invest some of its $1 trillion in cash 
reserves into the economy. Finally, we need to repeal the health care 
law that will cost the federal government trillions of dollars.
    I am eager to hear from Chairman Bernanke today to hear what 
Congress can do to help, and also to hear his words to the American 
people about what they can be doing. Thank you Mr. Chairman and I yield 
back.

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