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


                                                        S. Hrg. 112-485
 
                          THE ECONOMIC OUTLOOK 

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              JUNE 7, 2012

                               __________

          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 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...............    38
Prepared statement of Vice Chairman Kevin Brady..................    38
Prepared statement of Hon. Ben Bernanke..........................    41
Letter dated June 8, 2012, transmitting questions from Vice 
  Chairman Brady to Chairman Bernanke............................    49
Letter dated July 2, 2012, transmitting Chairman Bernanke's 
  responses to Vice Chairman Brady...............................    52
Letter dated June 14, 2012, transmitting questions from 
  Representative Mick Mulvaney to Chairman Bernanke..............    57
Letter dated July 16, 2012, transmitting Chairman Bernanke's 
  responses to Representative Mick Mulvaney......................    59
Letter dated June 12, 2012, transmitting questions from Senator 
  Jim DeMint to Chairman Bernanke................................    63
Letter dated July 16, 2012, transmitting Chairman Bernanke's 
  responses to Senator Jim DeMint................................    66


                          THE ECONOMIC OUTLOOK

                              ----------                              


                         THURSDAY, JUNE 7, 2012

             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, Bingaman, Klobuchar, Sanders, 
DeMint, Coats, Lee, and Toomey.
    Representatives present: Brady, Burgess, Campbell, Duffy, 
Mulvaney, Hinchey, Maloney, Sanchez, and Cummings.
    Staff present: Brenda Arredondo, Conor Carroll, Gail Cohen, 
Cary Elliott, Will Hansen, Colleen Healy, Madi Joyce, Jessica 
Knowles, David Michaelson, Patrick Miller, Matt Salomon, 
Annabelle Tamerjan, Justin Ungson, Jim Whitney, Andrew Wilson, 
Ted Boll, Al Felzenberg, Robert O'Quinn, Sean Ryan, Jeff 
Schlagenhauf, Michael Connolly, Christina Forsberg, 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. Thank you 
for being here, Chairman Bernanke. We are grateful for your 
presence here and your testimony.
    After my opening statement, we will have Vice Chairman 
Brady go through his statement, and then we will get to the 
Chairman.
    We all look forward today to Chairman Bernanke's report on 
the state of the economy and his perspective on additional 
actions that the Federal Reserve may take to strengthen the 
economic recovery.
    With the May jobs report this past Friday, it is clear that 
Washington needs to continue our focus on creating jobs. 
Today's hearing is especially timely for that reason.
    There are a number of bipartisan actions Congress can take 
right now to create jobs and strengthen the recovery. We know 
that the Surface Transportation bill now is one opportunity to 
create jobs. We have got to get that legislation out of 
conference and signed into law.
    We know that infrastructure, transportation infrastructure, 
is central to our national competitiveness and the bipartisan 
bill that passed in the Senate with 70 votes--74 votes, I 
should say--would create almost 3 million jobs by accelerating 
those infrastructure projects.
    Second, we should do more to support small businesses. By 
targeting tax incentives to firms that expand their payrolls, 
we can help to strengthen the recovery.
    A bill that I have introduced would provide a tax credit of 
10 percent for any increases to the payroll tax base--that 
could be hiring workers, increasing hours, or raising wages of 
existing employees.
    Third, the Senate this week has taken up the Farm Bill, 
which is legislation which cuts the deficit by some $23 
billion, and I think has tremendous bipartisan support. It 
helps farmers manage their risks relating to rapidly 
fluctuating prices for their crops, and it provides critical 
support to rural America--part of our country that was 
especially hard hit in the recession, and still has major 
challenges.
    We have fiscal challenges to tackle in a bipartisan manner, 
as well. Without Congressional action, the automatic spending 
cuts contained in the Budget Control Act of 2011, along with 
the expiration of several tax cuts, will present a significant 
economic headwind in 2013.
    The Congressional Budget Office recently estimated that 
real GDP growth will slow to just .5 percent in 2013 unless 
Washington in fact acts.
    Chairman Bernanke has expressed concerns regarding the risk 
that a so-called ``fiscal cliff'' presents to the recovery. I 
share that concern, and I know a lot of others share that same 
concern.
    But let us be clear: There are right ways and wrong ways to 
balance the budget. We have to be smart about the cuts we make 
so we can keep growing the economy and create jobs rather than 
make a bad situation even worse. That means we should not 
increase taxes on middle-income families.
    We cannot put America on the road to full recovery unless 
we all agree on tackling the huge budget deficit and debt that 
America faces. We need to continue to cut spending. There is no 
doubt about that. And certainly you cannot reduce the deficit 
by spending tens of billions of dollars on tax cuts for the 
very wealthiest.
    Additionally, just as when Chairman Bernanke was before 
this Committee when we spoke about this, I would like to 
address very briefly currency manipulation, especially on the 
part of China, because it has such a harmful impact on the 
American economy and American jobs.
    We recently learned that China allowed its currency to 
weaken more in May than in any other month since 2005. Chairman 
Bernanke has testified previously that allowing the yuan to 
appreciate would be good for both the U.S. and China's economy 
as well.
    The Chinese Government manipulates their currency so that 
their goods sell for less than they should. Some people may 
think it is some far off theoretical issue--it is not. When 
China cheats, we lose jobs.
    So I urge my colleagues in the House to pass the currency 
exchange legislation that deals with this issue. It has passed 
in the Senate in a bipartisan way, and we want to get that out 
of the House.
    So to sum up, our economy, while in much better shape than 
it was three years ago, is still recovering from the Great 
Recession. With unemployment above 8 percent, the labor market 
still needs to heal. Europe continues to wrestle with debt 
issues, as well, and we know that, which will continue to 
impact U.S. financial markets and the global economy.
    So against this backdrop, it is clear we need to stay 
focused on promoting a stronger economic recovery, and of 
course that means jobs.
    Chairman Bernanke, thank you for your testimony and now we 
will turn to Vice Chairman Brady.
    [The prepared statement of Chairman Casey appears in the 
Submissions for the Record on page 38.]

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

    Vice Chairman Brady. Well, Chairman Casey, thanks for 
holding this hearing. And thank you, Chairman Bernanke, for 
appearing before the Joint Economic Committee at this critical 
juncture to discuss America's economic outlook.
    While we are all anxious for signs of a strong, sustainable 
recovery, the recent jobs report for May was grim--with U.S. 
employers creating a mere 69,000 non-farm payroll jobs, the 
fewest in a year.
    Job growth over the past two months has dropped by two-
thirds over the first quarter of the year. Business and 
consumer confidence is down. First quarter GDP estimates were 
revised downward.
    Four-and-a-half years after the recession began, Americans 
are enduring the 40th straight month of an official 
unemployment rate at or above 8 percent. This is a post-World 
War II record.
    And much of the drop in the unemployment rate from its high 
of 10 percent in October of 2009 is attributable to Americans 
simply dropping out of the workforce. The labor force 
participation rate is scraping a 30-year low. Without this 
severe drop in the number of workers since the recession began, 
the unemployment rate would be nearly 11 percent.
    Since the Recession ended, our economy has struggled to 
grow at an annualized average quarterly increase of 2.4 
percent. And to place it in perspective, of the 10 economic 
recoveries since World War II lasting more than a year, this 
recovery ranks, regrettably, tenth. And dead last is 
unacceptable by any standard.
    Today, because our economy is not flying strong and steady 
at 50,000 feet as it should be at this point, but rather flying 
low and slow, we are increasingly vulnerable to external 
shocks.
    The economic crisis in Europe has intensified in recent 
weeks. A nascent bank run has begun in Greece. Greek banks are 
rapidly depleting their eligible collateral for lender-of-last-
resort loans from the European Central Bank.
    Not just Greece, but the European Union as a whole appears 
to be in recession. Questions of whether Greece or other 
member-states of the European Monetary Union will exit the euro 
and reissue national currencies are dominating the news.
    Mr. Chairman, at this hearing I hope we will get your 
perspective on Europe, including the likelihood of a Greek exit 
from the Eurozone, the contagion risk for the exit of other EMU 
Member-States, and the consequences of these possible events 
for the European Union, the United States, and the rest of the 
world.
    When you appeared before this Committee last October--in 
response to a question about the tools you are considering to 
mitigate and limit the adverse economic impact on the United 
States--you testified that you believe that the European 
Central Bank has enormous capacity to provide liquidity to 
European banks, that traditional currency swaps can provide 
dollar funding for global dollar money markets, and that the 
main line of defense is adequate supervision of well-
capitalized American banks--with the Fed standing ready to 
provide as much liquidity against collateral as needed as 
lender-of-last-resort to the American banking system.
    Is that still your assessment? And are you considering any 
tools beyond those?
    In addition, American taxpayers and lawmakers--like their 
counterparts in Germany--are becoming increasingly concerned 
that they will be asked to bail out, however indirectly, 
struggling European governments and banks.
    There is a growing concern that the U.S. Treasury will try 
to bail out the Eurozone either directly through the Exchange 
Stabilization Fund or indirectly through the International 
Monetary Fund. The Fed has a challenge as well, explaining to a 
skeptical Congress why traditional currency swap lines with the 
European Central Bank will not turn into an indirect bailout of 
Eurozone countries.
    At the same time that European economies are weakening, 
growth is also slowing in both China and India. Given the 
prospects of a global slowdown, some economists are speculating 
that the Federal Reserve may initiate a third round of 
quantitative easing.
    Mr. Chairman, during the questions I would like to discuss 
with you whether and under what conditions the Federal Reserve 
would consider launching a third round of quantitative easing.
    It is my belief that the Fed has done all that it can do--
and perhaps done too much. Further quantitative easing won't 
stimulate growth and create jobs. There exists a real risk that 
the massive amount of liquidity the Fed has already injected 
into the economy could trigger higher inflation before the Fed 
can execute its exit strategy.
    I also believe another round of Fed intervention will 
increase uncertainty among job creators while ignoring the 
genuine reason for low business investment and job creation--
which is sound, timely fiscal policy.
    The businesses I look to along Main Street aren't holding 
back on hiring because they're waiting to learn what the 
government will do ``for'' them; they are holding back on 
hiring for fear of what the government will do ``to'' them.
    The obsessive push for higher taxes on job creators, the 
unprecedented tax and fiscal cliff we face at the end of this 
year, the unsustainable structural federal debt and deficits, 
along with the flood of red tape and fear of the consequences 
of the President's new health care law, these are the true 
drags on the economy.
    And no matter what actions the Fed takes, without strong 
leadership by the President today--and action by Congress now--
on these fiscal issues, Americans will not see the jobs or the 
strong recovery we deserve.
    And of course the combination of sluggish growth and the 
rapid accumulation of federal debt is a toxic brew that could 
eventually spark a debt-driven economic crisis here at home 
unless the United States soon reverses course.
    Finally, Mr. Chairman, last January the Federal Open Market 
Committee adopted an explicit inflation target of two percent, 
measured by the price index for personal consumption 
expenditures. By doing so, the Fed has taken an important step 
toward establishing a rules-based monetary policy going forward 
that should help to achieve price stability and protect the 
purchasing power of the dollar over time.
    Nevertheless, your adoption of the target raises as many 
questions as it answered. Is the two percent target a minimum, 
a mid-point, or a maximum? How wide is the range? How long will 
the Federal Reserve tolerate a deviance from the range before 
taking action?
    I also appreciated that you distinguished between that 
which monetary policy can control--namely prices--and that 
which monetary policy cannot--namely employment.
    By letter, I will request further clarification on this 
monetary policy statement in more depth.
    With that, Chairman, I again thank you for appearing before 
the Committee and I look forward to your testimony.
    [The prepared statement of Representative Brady appears in 
the Submissions for the Record on page 38.]
    Chairman Casey. Thank you, Vice Chairman Brady.
    Just two housekeeping matters before I introduce Chairman 
Bernanke. Number one is we will keep to our time limits more 
strictly than we sometimes do because of the number of members 
here. Number two, the Senate has a vote at 10:30--and I do not 
think that is going to change--so we will accommodate members 
for that reason.
    But let me briefly introduce Chairman Bernanke. Dr. 
Bernanke began a second term as Chairman of the Board of 
Governors of the Federal Reserve System on February 1st of 
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 1st, 
2006 when he 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 of '05 to January of '06. Prior to 
beginning public service, Dr. Bernanke was a chaired professor 
at Princeton University. He has been a professor of economics 
and public affairs at Princeton since 1985.
    Mr. Chairman, welcome.

STATEMENT OF HON. BEN BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF 
           THE FEDERAL RESERVE SYSTEM, WASHINGTON, DC

    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 economic policy.
    Economic growth has continued at a moderate rate so far 
this year. Real GDP rose at an annual rate of about 2 percent 
in the first quarter after increasing at a 3 percent pace in 
the fourth quarter of 2011. Growth last quarter was supported 
by further gains in private domestic demand, which more than 
offset a drag from a decline in government spending.
    Labor market conditions improved in the latter part of 2011 
and earlier this year. The unemployment rate has fallen about 1 
percentage point since late August; and payroll employment 
increased 2,325,000 per month on average during the first 3 
months of this year, up from about 150,000 jobs added per month 
in 2011.
    In April and May, however, the reported pace of job gains 
slowed to an average of 75,000 per month, and the unemployment 
rate ticked up to 8.2 percent. This apparent slowing in the 
labor market may have been exaggerated by issues related to 
seasonable adjustment and the unusually warm weather this past 
winter.
    But it may also be the case that the larger gains seen late 
last year and early this year were associated with some catch-
up in hiring on the part of employers who had pared their 
workforces aggressively during and just after the Recession.
    If so, the deceleration in employment in recent months may 
indicate that this catch-up has largely been completed and, 
consequently, that more rapid gains in economic activity will 
be required to achieve significant further improvement in labor 
market conditions.
    Economic growth appears poised to continue at a moderate 
pace over coming quarters, supported in part by accommodative 
monetary policy. In particular, increases in household spending 
have been relatively well sustained.
    Income growth has remained quite modest, but the recent 
declines in energy prices should provide some offsetting lift 
to real purchasing power.
    While the most recent readings have been mixed, consumer 
sentiment is nonetheless up noticeably from its levels late 
last year. And despite economic difficulties in Europe, the 
demand for U.S. exports has held up as well. The U.S. business 
sector is profitable and has become more competitive in 
international markets.
    However, some of the factors that have restrained the 
recovery persist. Notably, households and businesses still 
appear quite cautious about the economy. For example, according 
to surveys, households continue to rate their income prospects 
as relatively poor and do not expect economic conditions to 
improve significantly. Similarly, concerns about developments 
in Europe, U.S. fiscal policy, and the strength and 
sustainability of the recovery have left some firms hesitant to 
expand capacity.
    The depressed housing market has also been an important 
drag on the recovery. Despite historically low mortgage rates 
and high levels of affordability, many prospective homebuyers 
cannot obtain mortgages as lending standards have tightened and 
the creditworthiness of many potential borrowers has been 
impaired.
    At the same time, a large stock of vacant houses continues 
to limit incentives for the construction of new homes, and a 
substantial backlog of foreclosures will likely add further to 
the supply of vacant homes.
    However, a few encouraging signs in housing have appeared 
recently, including some pickup in sales and construction, 
improvements in homebuilder sentiment, and the apparent 
stabilization of home prices in some areas.
    Banking and financial conditions in the United States have 
improved significantly since the depths of the crisis. Notably, 
recent stress tests conducted by the Federal Reserve of the 
balance sheets of the 19 largest U.S. bank holding companies 
showed that those firms have added about $300 billion to their 
capital since 2009.
    The tests also showed that, even in an extremely adverse 
hypothetical economic scenario, most of those firms would 
remain able to provide credit to U.S. households and 
businesses.
    Lending terms and standards have generally become less 
restrictive in recent quarters, although some borrowers such as 
small businesses and, as already noted, potential homebuyers 
with less-than-perfect credit, are still reporting difficulties 
in obtaining loans.
    Concerns about sovereign debt and the health of banks in a 
number of euro-area countries continues to create strains in 
global financial markets. The crisis in Europe has affected the 
U.S. economy by acting as a drag on our exports, weighing on 
business and consumer confidence, and pressuring U.S. financial 
markets and institutions.
    European policymakers have taken a number of actions to 
address the crisis, but more will likely be needed to stabilize 
euro-area banks, calm market fears about sovereign finances, 
achieve a workable fiscal framework for the euro area, and lay 
the foundations for longer term economic growth.
    U.S. banks have greatly improved their financial strength 
in recent years, as I noted earlier. Nevertheless, the 
situation in Europe poses significant risks to the U.S. 
financial system and economy and must be monitored closely. As 
always, the Federal Reserve remains prepared to take action as 
needed to protect the U.S. financial system and economy in the 
event that financial stresses escalate.
    Another factor likely to weigh on the U.S. recovery is the 
drag being exerted by fiscal policy. Reflecting ongoing 
budgetary pressures, real spending by state and local 
governments has continued to decline. Real Federal Government 
spending has also declined, on net, since the third quarter of 
last year, and the future course of federal fiscal policies 
remains quite uncertain, as I will discuss shortly.
    With regard to inflation, large increases in energy prices 
earlier this year caused the price index for personal 
consumption expenditures to rise at an annual rate of about 3 
percent over the first three months of the year.
    However, oil prices and retail gasoline prices have since 
retraced those earlier increases. In any case, increases in the 
prices of oil or other commodities are unlikely to result in 
persistent increases in overall inflation so long as household 
and business expectations of future price changes remain 
stable.
    Longer term inflation expectations have indeed been quite 
well anchored according to surveys of households and economic 
forecasters and as derived from financial market information.
    For example, the five-year-forward measure of inflation 
compensation derived from yields on nominal and inflation-
protected Treasury securities suggests that inflation 
expectations among investors have changed little, on net, since 
last fall and are lower than a year ago.
    Meanwhile, the substantial resource slack in U.S. labor and 
product markets should continue to restrain inflationary 
pressures. Given these conditions, inflation is expected to 
remain at or slightly below the 2 percent rate that the Federal 
Open Market Committee judges consistent with our statutory 
mandate to foster maximum employment and stable prices.
    With unemployment still quite high and the outlook for 
inflation subdued, and in the presence of significant downside 
risks to the outlook posed by strains in global financial 
markets, the FOMC has continued to maintain a highly 
accommodative stance of monetary policy.
    The target range for the federal funds rate remains at 0 to 
1/4 percent and the Committee has indicated in its recent 
statements that it anticipates that economic conditions are 
likely to warrant exceptionally low levels of the federal funds 
rate at least through late 2014.
    In addition, the Federal Reserve has been conducting a 
program, announced last September, to lengthen the average 
maturity of its securities holdings by purchasing $400 billion 
of longer term Treasury securities and selling an equal amount 
of shorter-term Treasury securities.
    The Committee also continues to reinvest principal received 
from its holdings of agency debt and agency mortgage-backed 
securities in agency MBS and to roll over its maturing Treasury 
holdings at auction.
    These policies have supported the economic recovery by 
putting downward pressure on longer-term interest rates, 
including mortgage rates and by making broader financial 
conditions more accommodative. The Committee reviews the size 
and composition of its securities holdings regularly and is 
prepared to adjust those holdings as appropriate to promote a 
stronger economic recovery in a context of price stability.
    The economy's performance over the medium and longer term 
will also depend importantly on the course of fiscal policy. 
Fiscal policymakers confront daunting challenges. As they do 
so, they should keep three objectives in mind.
    First, to promote economic growth and stability the federal 
budget must be put on a sustainable long-run path. The federal 
budget deficit, which averaged about 9 percent of GDP during 
the past three fiscal years, is likely to narrow in coming 
years as the economic recovery leads to higher tax revenues and 
lower income support payments.
    Nevertheless, the CBO projects that if current policies 
continue the budget deficit would be close to 5 percent of GDP 
in 2017 when the economy is expected to be near full 
employment.
    Moreover, under current policies and reasonable economic 
assumptions, the CBO projects that the structural budget gap 
and the ratio of federal debt to GDP will trend upward 
thereafter, in large part reflecting rapidly escalating health 
expenditures and the aging of the population.
    This dynamic is clearly unsustainable. At best, rapidly 
rising levels of debt will lead to reduced rates of capital 
formation, slower economic growth, and increasing foreign 
indebtedness.
    At worst, they will provoke a fiscal crisis that could have 
severe consequences for the economy. To avoid such outcomes, 
fiscal policy must be placed on a sustainable path that 
eventually results in a stable or declining ratio of federal 
debt to GDP.
    Even as fiscal policymakers address the urgent issue of 
fiscal sustainability, a second objective should be to avoid 
unnecessarily impeding the current economic recovery. Indeed, a 
severe tightening of fiscal policy at the beginning of next 
year that is built into current law--the so-called fiscal 
cliff--would, if allowed to occur, pose a significant threat to 
the recovery.
    Moreover, uncertainty about the resolution of these fiscal 
issues could itself undermine business and household 
confidence. Fortunately, avoiding the fiscal cliff and 
achieving long-term fiscal sustainability are fully compatible 
and mutually reinforcing objectives.
    Preventing a sudden and severe contraction in fiscal policy 
will support the transition back to full employment, which 
should aid long-term fiscal sustainability. At the same time, a 
credible fiscal plan to put the federal budget on a longer-run 
sustainable path could help keep longer-term interest rates low 
and improve household and business confidence, thereby 
supporting improved economic performance today.
    A third objective for fiscal policy is to promote a 
stronger economy in the medium and long term through the 
careful design of tax policies and spending programs. To the 
fullest extent possible, federal tax and spending policies 
should increase incentives to work and save, encourage 
investments in workforce skills, stimulate private capital 
formation, promote research and development, and provide 
necessary public infrastructure.
    Although we cannot expect our economy to grow its way out 
of federal budget imbalances without significant adjustment in 
fiscal policies, a more productive economy will ease the 
tradeoffs that are faced by fiscal policymakers.
    Thank you, Mr. Chairman, I would be glad to take your 
questions.
    [The prepared statement of Hon. Ben Bernanke appears in the 
Submissions for the Record on page 41.]
    Chairman Casey. Thank you, Chairman Bernanke.
    I will start with the first round of questions, and I will 
set forth a predicate for the question before I ask it, based 
upon three news items, I'll call them.
    First of all, we know that China announced just today I 
guess that it has cut its benchmark lending rate for the first 
time in nearly four years in order to reverse an economic 
slowdown.
    Secondly, the European Central Bank hinted at least that it 
would take no further action to aid the faltering European 
economy.
    And then third, two Federal Reserve Board Governors, as 
well as Vice Chair Janet Yellen, have hinted at additional 
action by the Federal Reserve.
    So based upon those three items, and based upon your 
testimony, the basic question I have for you is: Is the Federal 
Reserve planning to take any additional actions in the short 
term to spur economic growth and create jobs?
    Chairman Bernanke. Well, Mr. Chairman, first I think China 
and Europe face rather different economic situations than we 
do. We obviously have to make our judgments based on what is 
happening here in the United States.
    Looking forward to our meeting in about 10 or 11 days, I 
think the main question we have to address has to do with the 
likely strength of the economy going forward.
    As I discussed in my testimony, the weakness in labor 
markets in the last couple of months may reflect the end of a 
catch-up period in which employers were offsetting the very 
sharp declines in employment that occurred during and after the 
Recession.
    If that analysis is correct, then going forward in order to 
see continued improvement in employment and a lower 
unemployment rate, we will need to see growth at or above the 
trend rate of growth. And so that is the essential decision and 
the central question that we have to look at: Will there be 
enough growth going forward to make material progress on the 
unemployment rate?
    So my colleagues and I are still working on our own 
assessments. Staff are working on their updated forecasts. We 
will have a new round of economic projections by all the 
participants in the FOMC between now and the meeting. And that 
is I think a key question.
    If we decide that further action is required, then of 
course we also have to decide what action is appropriate, or 
what communication is appropriate. We have a range of options. 
Obviously the traditional reduction in the short-term interest 
rate is no longer feasible, but we do have options that we can 
consider.
    In looking at those options, we are going to have to make 
some difficult assessments both about how effective they would 
be, and whether there are costs and risks associated with those 
steps that would outweigh the benefits that they might achieve.
    Obviously I cannot directly answer your question; it is too 
soon for me to do that; and we have a committee meeting which 
will try to evaluate these questions. I think the key question 
we will be facing will be: Will economic growth be sufficient 
to achieve continued progress in the labor market?
    And our mandate for maximum employment says that we should 
be looking to try to achieve continued improvement.
    Chairman Casey. Well thank you. That helps to give us a 
sense of how you are approaching the question.
    I want to ask you about the so-called, ``fiscal cliff,'' 
which you have spoken to a number of times. A lot of Americans 
I think have a sense of it, but when you line up the matters 
that we have got to confront in literally just a number of 
months, the question of tax cuts, the automatic spending cuts 
that are put into place by last year's Budget Control Act, the 
payroll tax cut expiration, Federal Unemployment Insurance 
expires, and a whole host of other challenges.
    Can you assess--and if you can assess it, we would want to 
hear your assessment--the impact on the economy just on one of 
those items? And specifically, if the tax cuts for middle-
income folks were to expire? Just that particular question, if 
you can make an assessment of that?
    Chairman Bernanke. Well the potential expiration--I am not 
sure I can break it down to the different components--but the 
potential expiration of the so-called Bush tax cuts, the 2001-
2003 tax cuts, is the single biggest item in the fiscal cliff 
and would have, I think if everything else held constant, would 
have an adverse effect on spending and growth in the economy 
that would be significant.
    Now in saying that, I am again talking about the size, the 
fiscal impact of that. I am not necessarily saying that the 
right thing to do is to extend those cuts. It could be there 
are other steps you could take that would have a similar 
impact. But that is the single biggest component of the so-
called ``cliff.''
    Chairman Casey. And in keeping with my orders on time, I am 
going to turn to Vice Chairman Brady.
    Chairman Bernanke. Thank you.
    Vice Chairman Brady. Thank you, Chairman. You mentioned the 
options, a third round of quantitative easing. Would purchases 
in the third round be confined to Treasuries? Or would other 
debt securities be purchased?
    Chairman Bernanke. We have, again, obviously made no 
decisions. The law permits us to purchase Treasuries and 
government agency securities, and those are the securities that 
we have purchased in the past and I wouldn't want to take 
anything off the table at this juncture.
    But I want to emphasize, again, that there's really in some 
sense two steps here. The first is to determine whether we 
think that growth will be adequate to lead to further 
improvement in employment. And I think at the same time of 
course we will be assessing the price stability mandate and the 
outlook for inflation.
    If we determine that further action is at least potentially 
warranted, then obviously we have a number of different options 
and we would have to consider each of them and the costs and 
benefits associated with them.
    But at this point, I really can't say that anything is 
completely off the table.
    Vice Chairman Brady. Well I guess my more direct question 
is: Long-term interest rates, other than in the financial 
crisis, we have not seen this level since the 1950s. Do you 
really think that is holding back our economy?
    Chairman Bernanke. Well the question is, again: Could, 
again, if additional stimulus is needed, could the actions the 
Federal Reserve might take achieve additional financial 
accommodation?
    Putting aside potential bad side effects, or costs that 
might be associated with that, I recognize that rates are quite 
low. So that clearly is a consideration. I do think that we do 
have methods--we do have tools that would allow us to get 
further accommodation in the economy and provide some support.
    It is one thing--it is not quite the same thing to say that 
the problem of the U.S. economy is not lack of financial 
accommodation. It is a different thing to say that, and to say 
that, even if the main problems are coming from elsewhere, that 
the Federal Reserve might provide some support from using the 
tools that it has.
    But I do want to say--and I have said this before--that 
monetary policy is not a panacea. It would be much better to 
have a broad-based policy effort addressing a whole variety of 
issues. I leave the details to Congress who has considered many 
of these issues.
    So I would be much more comfortable if in fact Congress 
would take some of this burden from us and address those 
issues.
    Vice Chairman Brady. Well I think that is the point I would 
like to make. You--my belief is, I wish you would take a third 
round of quantitative easing off the table. I wish you would 
look the market in the eye and say: The Fed has done all it 
can, perhaps too much. I wish you would look this President and 
Congress in the eye and say: It is time to do your job. Get 
your tax policy right. Get your financial house in order. 
Rebalance your regulation so that you are encouraging job 
creation. And mitigate the uncertainty and concern over the 
President's new health care law.
    I am not asking you to say that today, but I wish you 
would. Because back home on Main Street I believe those are the 
elements that are holding this economy back. And until we get 
that right, no actions from the Fed will get this recovery 
moving in a way I think we would all be satisfied with.
    May I ask, very quickly, on Europe. There are a lot of 
concerns about what will happen with Greece as far as exiting 
the euro. What type of contagion will occur in Europe. Earlier 
you said--or last October, you said the tools you believed 
important were providing liquidity through the currency swaps, 
ensuring American banks are in strong financial condition, and 
being there to provide liquidity to solvent banks.
    Are there any other tools than that that you are 
considering, should that contagion reach us from Europe?
    Chairman Bernanke. No. You have a pretty good list there. 
We did the swaps, as you know. They were very helpful in 
reducing stress in dollar funding markets. They have been 
coming down quite significantly from a peak of about $110 
billion down to now about $20 billion. So their need seems to 
be declining.
    I would like to emphasize that on the banking side we have 
worked really hard to try to make sure the banks and the 
financial system would be resilient to shocks coming across the 
Atlantic, including our stress tests which have shown very 
strong capital positions and liquidity positions. Our ongoing 
reviews of exposures of banks to Europe. So we are taking steps 
to try to make sure that we are as well prepared as possible in 
the financial system.
    And then as I said in my remarks, the Federal Reserve 
retains broad-based authority to provide liquidity against 
collateral in the event of intense financial stress. That was 
retained in Dodd-Frank. And in its role as liquidity provider 
of last resort, the Federal Reserve stands ready to do whatever 
is necessary to protect our financial system.
    Vice Chairman Brady. Thank you, Chairman.
    Chairman Casey. Thank you, Vice Chairman Brady. 
Congresswoman Sanchez.
    Representative Sanchez. Thank you, Mr. Chairman. And thank 
you, Mr. Chairman, for being before us today.
    I want to go back to something you just said to my 
colleague from the Senate. You were talking about one of the 
biggest portions of that fiscal cliff would be the expiration 
of the Bush tax cuts. But, you said, I am not advocating that 
necessarily. There are other steps that Congress could do.
    Could you, in your wisdom, tell us what those other steps 
might be? Just articulate them so I sort of have a to-do list, 
if that's the case. I think I know them, but----
    Chairman Bernanke. I think I am wise enough not to tell you 
the answer to that question.
    [Laughter.]
    What I am saying is that the concern here in the short term 
is that all of these measures together, if they all occur, will 
amount to a withdrawal of spending and an increase in taxation, 
depending on how you count between 3 and 5 percent of GDP, 
which would have a very significant impact on the near-term 
recovery--whatever benefit you might see in those programs in 
the very long term.
    And what I am saying is that in ways that are up to 
Congress, steps should be taken to mitigate that overall 
impact. And what combination of tax reductions and spending 
increases, that is really up to you, but if no action is 
taken--I mean, what is particularly striking here is that this 
is all preprogrammed.
    Representative Sanchez. Right.
    Chairman Bernanke. If you all go on vacation, it is still 
going to happen. So it is important to be thinking about that 
and working with your colleagues to see how you might address 
that concern at the appropriate time.
    Representative Sanchez. That leads me into my second 
question. Because I hear this out a lot in--I hear it on 
television, I hear it among some of my colleagues even, I hear 
it from people back home--that we are all headed towards the 
Greece situation.
    Now to some people, the Greece situation is: Hey, you spent 
too much, you didn't--you retired early, there are not enough 
workers, there's not enough economy going to sustain the people 
who are living on payments, if you will, mostly from the 
taxpayers.
    Then there are other people who are saying, you know, the 
Greece situation is: You cut too much spending. And you're 
trying to collect taxes too fast. And the economy has 
contracted. And it's almost like a vicious cycle going on.
    So my question to you is, for those people are saying we 
are headed toward the Greece situation, what do you think the 
Greece situation is? And is it really true that we are 
mirroring in any form that?
    Because I see us in a totally different manner. Are we 
really subject to what's going on in Greece with the type of 
real economy that we have?
    Chairman Bernanke. No. I think the United States and Greece 
are extremely different economies. Greece is a very small 
economy. The causes of the crisis vary quite a bit from country 
to country. Greece was in fact a country that overspent and 
overborrowed. And that is a major reason why it is currently in 
such trouble.
    The United States is a large, diverse economy with deep 
financial markets, international reserve currency, independent 
monetary policy, great credibility after 200 years of paying 
our debts--which by the way we should be, is a strength which 
we should not squander if at all possible.
    That being said, I do not think we are in a Greek 
situation. And the evidence for that is that we are currently 
paying about 1.5 percent for 10-year money, where Greece cannot 
borrow at any price essentially.
    That being said, I do not think we should be complacent. 
Obviously we have a situation which is not sustainable, and we 
do need to be thinking very seriously about how to put the 
fiscal budget on a path that will be sustainable in the longer 
term.
    Representative Sanchez [presiding]. Thank you. And in the 
interests, because we have so many members, I will yield back 
my time.
    And I will call on Mr. Campbell from California for his 
five minutes.
    Representative Campbell. Thank you, Ms. Sanchez.
    Chairman Bernanke, you have made it quite clear that so-
called QE3 is the decision that has not been made and will not 
be made for at least 11 days.
    What I would like to ask is, from my perspective a QE3 
would affect interest rates potentially, and potentially 
liquidity, neither of which it seems to me are obstacles to 
growth at the moment, interest rates being historically low and 
there appears to be plenty of liquidity.
    So my question is: Why, in considering a QE3, if the 
decision were made to do it--and I understand you have not made 
that--but in what ways do supporters of QE3 believe it would 
help the current economic situation?
    Chairman Bernanke. So again, putting aside the question of 
whether we need further steps, putting aside the question of 
the adverse side effects that are risks and costs that might be 
associated with given policies, our analysis is that the 
quantitative easing programs we did in the past did ease 
financial conditions. They lowered interest rates. They lowered 
the spreads between private rates and government rates.
    So in other words, even given a level of Treasury Security 
interest rates, it could lower the rate paid by corporations. 
We have lowered mortgage rates. It has raised stock prices and 
increased therefore wealth effects for consumers.
    So in general we continue to believe that, while some may 
think that the effects are less powerful than they were for 
example in 2009, we continue to believe that potentially, that 
these sorts of measures could still add some additional 
accommodations, some additional support to the economy.
    But then again, you know, as you point out, there may be 
some diminishing returns, and that would be a consideration we 
would have to look at as we try to analyze what our options 
are.
    Representative Campbell. Okay. Let me move over to Europe, 
if I can. In your testimony you said that we should monitor the 
situation and that the Federal Reserve remains prepared to take 
action. And you outline what some of that action should be.
    What should we as policymakers be monitoring?
    And what action might we be prepared to consider or to 
take?
    Obviously in Europe we cannot control their fiscal policy, 
their monetary policy, nor their political decisions. If there 
were to be a deterioration, a rapid deterioration of some 
situation in Europe, be it the currency or the banks or 
whatever, how can we put up a firewall? Or can we? Or what 
things might we be prepared to do?
    You mentioned you are doing what you can to minimize the 
impact on the U.S. economy.
    Chairman Bernanke. Well, the Congress and the 
Administration have not, you know, agreed to any kinds of 
direct support to Europe. The Administration has not, for 
example, asked for additional IMF funds.
    So I think the main things that Congress could do would be 
to help strengthen our own economy. The more momentum, the 
stronger our economy, the better able we would be to withstand 
the financial spillover from problems in Europe. And so that 
goes back to my earlier points about getting our fiscal 
situation clarified, taking appropriate steps to help troubled 
parts of our economy from the employment market, to the housing 
market, to whatever else you would be looking at.
    But again, I think my bottom line here is that there is not 
a whole lot that can be done that I can think of to attenuate 
the problems in Europe. We obviously have to monitor very 
carefully. I think the best thing we can do is try to make sure 
that we are strong and prepared here in the United States.
    Representative Campbell. Are the risks to our economy and 
Europe, are they greater today than they were six months ago?
    Chairman Bernanke. Well the risks have waxed and waned.
    You know, this problem has been going on now for more than 
two years. This crisis has been going on for more than two 
years. And there have been periods of greater intensity and 
less intensity.
    Earlier this year, particularly following the long-term 
refinancing operations conducted by the European Central Bank, 
as well as the debt restructuring of Greece, the situation 
calmed down fairly notably for awhile. But for a number of 
reasons, including the Greek election which raised questions 
about whether Greece would in fact meet the requirements of its 
program, and concerns about Spain and Italy, the Spanish 
banking system and so on, the stresses have risen pretty 
significantly in the recent month or two.
    So I am not quite sure whether it is the highest point it 
has been, but it certainly is at a point where it is important 
for European leaders to take additional effective steps to 
contain the problem.
    Representative Campbell. Thank you, Mr. Chairman.
    Representative Sanchez. I will recognize Representative 
Cummings from Maryland now for five minutes.
    Representative Cummings. Thank you very much.
    Chairman Bernanke, it is good to see you again. When you 
appeared before this Committee last October, you testified that 
in most recessions the housing sector is usually, and I quote, 
``a big part of the recovery process,'' end quote.
    You testified that many people are underwater, and that 
their loss of equity means that they are poorer, they are less 
willing to spend, and that addressing the housing situation is 
very, very important.
    In January the Federal Reserve issued a report on current 
conditions in the United States housing market. The report says 
this, and I quote:
    ``Continued weakness in the housing market poses a 
significant barrier to more vigorous economic recovery.''
    Chairman Bernanke, I assume you still believe that 
addressing the housing crisis is critical to resolving our 
economic situation? Is that correct?
    Chairman Bernanke. Yes.
    Representative Cummings. And economists and experts across 
the political spectrum believe that one key tool to addressing 
the housing crisis is to target principal reductions for 
underwater mortgages because they help homeowners and save 
taxpayers money by avoiding default.
    Mr. Chairman, in 2008 you said this to the Independent 
Community Bankers of America, and I quote:
    ``In this environment, principal reductions that restore 
some equity for the homeowner may be a relatively more 
effective means of avoiding delinquency and foreclosure.''
    And a lot of people have characterized principal reductions 
as helping only homeowners, but can you please explain why in 
some cases they actually could help the taxpayers, too?
    Chairman Bernanke. Well I think we have made some progress 
on this. First of all, the housing market looks to be 
stabilizing, which if true would be good news. And going 
forward, it would be helpful I think to the recovery.
    There's been a lot of effort since I gave that speech to 
try to modify mortgages, to try to reduce foreclosures, and so 
on. And some of that has taken the form of principal reduction. 
Notably, the Fannie and Freddie have decided that some 
principal reduction, or at least they are looking at principal 
reduction as a tool for reducing foreclosures. And principal 
reduction is part of the settlement, you know, with the large 
servicers.
    So we are going to get some more evidence on this I think 
very soon. The Board of Governors does not have an official 
position on principal reduction versus other means of modifying 
mortgages or otherwise avoiding foreclosure.
    I think as a practical matter you would want--if there's a 
limited amount of resources available, you would want to 
consider whether, say for example reducing payments is more 
effective in some cases than reducing principal owed.
    So I think there are some important questions there. But 
generally speaking, I think the point that I was trying to make 
a few years ago is that, while we all focus on the help that 
avoiding unnecessary foreclosures gives to the homeowner, if it 
is successfully done, it also reduces the losses to the lender. 
It supports the housing market. And that in turn helps the 
broader economy.
    So to the extent that we can avoid unnecessary foreclosures 
and do so in a cost-efficient way, then there are benefits that 
are broader than just the help to the individual homeowner.
    Representative Cummings. Now last November William Dudley, 
the president of the Federal Reserve Bank of New York, 
testified before the House Oversight Committee and he said 
this, and I quote:
    ``We think that you can devise a program for homebuyers 
that have mortgages that are underwater to incent them to 
continue to pay on those mortgages by giving them some program 
of principal reduction. Obviously the devil is in the detail, 
so you have to have good program design, but we are confident 
that one can design a program which would be beneficial net 
positive to the taxpayer.''
    Do you agree with Mr. Dudley, that a targeted principal 
reduction program could be designed in a way that would be net 
present value positive for taxpayers, investors, and 
homeowners?
    Chairman Bernanke. Well first, president Dudley was 
speaking for himself, as I said before----
    Representative Cummings. I understand that.
    Chairman Bernanke [continuing]. The Board does not have an 
official position on that.
    Where I do agree with him is to say that the devil is in 
the details. I mean, a lot would depend on what the criteria 
are for being eligible for principal reduction, and how it 
would be structured.
    For example, a useful approach would be to give principal 
reduction but to have an equity-sharing arrangement whereby if 
there are future gains those would flow back to the lender.
    So I think it depends very much on the way the principal 
reduction is structured. No doubt there are some situations 
where that would be the most effective method of averting 
unnecessary foreclosures, but I do think we should look not 
only at that, we should look at the whole range of tools for 
averting unnecessary foreclosures. And we should look at other 
issues like the conversion of foreclosed homes to rentals, 
steps to improve the access to credit of mortgage borrowers, 
and so on, to really address the whole range of issues in the 
housing market.
    Representative Cummings. Thank you very much, Mr. Chairman.
    Chairman Casey [presiding]. Thank you very much. 
Representative Mulvaney.
    Representative Mulvaney. Thank you.
    Dr. Bernanke, I want to talk about a different topic here 
today, a somewhat esoteric topic that may not be of interest to 
a lot of folks but it is something that caught my attention.
    I want to talk a little bit about the interest rate 
derivative market. And specifically the market for interest 
rate swaps. Apparently, if I have got my numbers correctly, the 
notional value of the size of this market has grown from $682 
billion in 1987 to over $400 trillion today--roughly a sixth 
size of the world economy. And I recognize that is notional 
value. But it certainly implies a large underlying gross market 
value to this particular market.
    And there was a Federal Reserve of New York report back in 
March called ``An Analysis of OTC Interest Rate Derivative 
Transactions'' that essentially said that this market was very 
difficult to measure, very difficult to see, very difficult to 
value. So that most of the transactions occurred over the 
counter and not in the broader exchanges, and they actually 
said that the lack of comprehensive transaction data has been a 
barrier to understanding how the OTC derivative markets 
operate.
    And as I was reading this, it struck me that a lot of those 
words could be used to describe what happened with the 
mortgage-backed securities and the collateralized debt 
obligations' issues that we had back in 2008.
    So I guess my first question is: Should we be concerned 
about this market and its lack of transparency?
    Chairman Bernanke. Well it is probably one of the most 
important derivatives markets, and we pay a lot of attention to 
it, as do the SEC and the CFTC, which has a lot of the 
jurisdiction over those swaps.
    I think it is important to say, first, on the one hand that 
those numbers that you cite greatly overstate the actual 
exposures that the people involved in the swap are facing. 
Those are just notional values.
    It is also true that interest rate swaps are typically 
among the most straightforward and simple to understand of 
derivatives. So that many of them are vanilla swaps that are 
pretty easy for regulators and for participants in the market 
to understand. So in some ways it does not pose the risks that 
the credit default swaps during the crisis posed, for example.
    All that being said, you know, I agree with the general 
thrust, which is that we have seen that over-the-counter 
derivatives can be dangerous. And following the spirit of 
financial reform from this Congress, we and our fellow 
regulators are working to put as big a share as possible of 
swaps on centrally cleared, central counterparty type 
exchanges. And, to increase the transparency so that the 
regulators and the public will have more information.
    So we are working in that direction. I agree with you, it 
is an important--important objective.
    Representative Mulvaney. Does the size of this overall 
market somehow give a false impression of the true demand for 
debt, and thus a false impression of the true interest rates?
    Chairman Bernanke. Well interest rate swaps are basically 
ways in which participants can convert, for example, a fixed 
interest payment into an interest payment which is floating and 
depends on some indicator.
    So it is really a way of just customizing the flow of 
interest received, or interest paid. You can have enormous 
amounts of interest rate swaps based on a relatively modest 
amount of underlying debt.
    So I don't think it overstates the amount of actual debt in 
the market. It is really a hedging tool for market participants 
who want to customize the flow of their payments and receipts 
and interest rates.
    Representative Mulvaney. Does the size of the market, and 
the risks that some of the larger financial institutions--
because I think that mostly just large financial institutions 
play in this market--and given the losses that they could 
incur, given rapid swings in interest rates, does that somehow 
impair your ability to perform your job?
    Does it impair your ability to exercise independence in 
monetary policy?
    Chairman Bernanke. No, I don't think it does because the 
underlying instruments, credit instruments, are still the same, 
which is just a way of sharing the risk, or the pattern of 
interest receipts and payments.
    I should have said that to the extent that interest rate 
swaps are not traded on central counterparties, we are also 
working when, if they're traded over the counter, the 
regulators are also working to make sure that (a) there is 
sufficient margin posted on both sides of the swap so that if 
there are rapid changes in the value of the swaps that both 
parties will be protected; and also, in fact this afternoon we 
are going to have a meeting at the--open meeting at the Federal 
Reserve to discuss Basel III, and our discussion will include 
capital requirements for the market book, including 
derivatives.
    So in other words, even over-the-counter financial 
institutions are going to be protected both by the capital that 
they hold and by the margin that they place when they transact 
with counterparties.
    So it is important for us to take steps to make sure that 
individual banks are not exposed unduly to large swings in 
interest rates, for example.
    The counter example is AIG, which was basically taking a 
huge one-way bet. And when it lost the bet, it lost enormous 
amounts of money which nearly brought down the company.
    So we want to avoid a situation like that. And that means 
as much central counterparty trading as possible, and adequate 
capital and margin for over-the-counter transactions.
    Representative Mulvaney. Thank you, Mr. Chairman.
    Chairman Casey. Thank you very much. Senator Klobuchar.
    Senator Klobuchar. Thank you, very much.
    Thank you, Mr. Chairman, for being here. I continue to work 
with a bipartisan group of Senators--there's something like 45 
of us, Democrats, Republicans--trying to come up with a 
comprehensive solution for the debt. We have made some headway, 
and it would be a mix of spending cuts and revenue to get us to 
that $4 trillion figure in 10 years in debt reduction.
    You made it clear that you believe we need to do something 
significant to address these fiscal challenges. Do think a 
balanced approach would be about the best way to do it with a 
mix of the spending cuts and the revenue?
    Chairman Bernanke. Well first of all, I congratulate you on 
these efforts. I am glad to see people are working hard on 
this.
    It is really not my place to advise Congress on the 
particular mix of spending and tax changes, so I hope you will 
understand that. But I am glad to see that there is a 
bipartisan effort involved in trying to address this important 
problem.
    Senator Klobuchar. But I remember the last time we talked, 
you did talk--at the hearing, you talked about how if we failed 
to act again and went to the brink, as happened last summer 
with the debt ceiling, that that clearly created some problems 
with our economy and the fiscal situation in this country.
    Chairman Bernanke. The debt ceiling is a somewhat separate 
issue. It is a strange thing that Congress can approve say to 
spend $5 and to tax $3, and not approve the $2 issuance of 
debt, which is implied by those two previous decisions. No 
other country that I know of has anything like the debt limit 
rule that we have.
    And the brinkmanship last summer over the debt limit had 
very significant adverse effects for financial markets and for 
our economy. For example, it really knocked down consumer 
confidence quite noticeably.
    So that is a somewhat separate issue. But I urge Congress 
to come to agreement on that well in advance so as not to push 
us to the 12th hour.
    But again, I think that trying to put our fiscal situation 
on a sustainable basis is perhaps one of the most important 
things that Congress can be working on.
    Senator Klobuchar. You know, when you look at the Fed's 
last action since late 2008, short-term interest rates have 
been held at zero. The Fed has pushed over $2 trillion in the 
U.S. Treasury, and mortgage securities, in an effort to support 
our economy.
    Do the past actions inform you as you go forward in the 
current economic situation as you make your decisions?
    Chairman Bernanke. Yes. Obviously when we began these 
nonstandard actions, we did not have the benefit of very much 
experience except looking say at Japan. But we now have more 
actual data, more experience. We've been able to observe the 
effects of these actions on financial market prices.
    We have some model-based analysis of the effects on the 
broader economy. So there's still a lot of uncertainty about 
the effectiveness of these tools, and the channels through 
which they work. And it is probably also the case that monetary 
policy is less effective than it would normally be because of 
various constraints on lending and so on.
    But all that said, having had that experience has certainly 
made us better informed and better prepared to use these tools 
if necessary.
    Senator Klobuchar. Okay. My State is doing better than a 
lot of the states. Our unemployment rate is at 5.6 percent, but 
there are still people hurting. And one of the things that I 
have noticed when you look at the numbers in past recoveries, 
we have seen a more direct correlation nationally between 
economic growth and hiring.
    We do not seem to have that correlation today. What has 
changed? And do you think we could be doing more to address 
that issue?
    Chairman Bernanke. Well I talked about this a bit in my 
testimony. In fact, the pace of improvement in the labor market 
from last summer through say March, was actually surprisingly 
strong, given the relatively tepid rate of growth in overall 
economic activity. And it was a puzzle that we were trying to 
understand.
    I gave a speech about this in March. And one hypothesis is 
that there was a burst of extra hiring that reflected the 
reversal of what might have been excessive layoffs during the 
recession period, where firms felt they had actually laid off 
too many workers----
    Senator Klobuchar. This is the catch-up you were referring 
to?
    Chairman Bernanke. The catching up to that. If that is 
true, which we do not know for sure because there are a lot of 
other things going on, but if that is true then the implication 
is that if growth stays near the potential rate of growth, say 
2 to 2\1/2\ percent, that the improvement in the unemployment 
rate going forward might be quite limited.
    And so that is, again, as I said, a question that we really 
have to think about.
    Senator Klobuchar. Thank you.
    Chairman Casey. Senator DeMint.
    Senator DeMint. Thank you.
    Thank you, Mr. Chairman, for being here. My experience in 
business and politics tells me that most of the time when we're 
trying to solve problems we are actually treating symptoms. And 
I am worried about that with our political policy, as well as 
monetary policy.
    It is pretty clear our current tax rates did not cause the 
deep recession. As you know, they were implemented during a 
downturn in the early 1990s. We had six years of growth.
    The problem clearly came from loose credit policies that 
resulted in subprime mortgages and toxic securities. And we 
have not really addressed that, except it appears that we 
overaddressed it from talking to a lot of businesses, home 
builders, realtors; that we have constricted credit to such a 
degree that local banks do not have the flexibility to deal 
with their local economies because the Federal Government and 
various agencies are telling them what has to be in their 
portfolio.
    So I feel like maybe the solution is much simpler. Maybe 
not simple, but in effect we are not addressing that problem 
that would allow the flexibility. You know we cannot deal with 
the overbuilding of houses. It is going to take years to do 
that.
    But I don't think we have addressed the true cause, or at 
least a big part of the cause. Instead, we have tried 
unprecedented bank bailouts, unprecedented government spending, 
unprecedented federal monetary activism, and it is not working.
    And so I am concerned about that. And the thing I am really 
concerned about now is, since 2008 the national debt has 
increased about 50 percent, but the interest paid on that debt 
has increased about 2 percent. And I think some of the things 
you are doing in the Federal Reserve is giving us a false sense 
of security.
    Last year I think you bought over 75 percent of the debt 
that we created, which masks the real problem and I think 
probably give us a debt interest rate that is much lower than 
it would be.
    And part of my concern now is, as my colleague just said, 
that on one side you appear by these huge derivative markets 
and other things that are going on to have to keep our interest 
rates low, and on the other side if you don't keep Treasury 
yields low banks are going to park the free money we're giving 
them in Treasuries.
    It seems you are caught in a Catch 22 now where you have to 
work both sides of this to keep interest rates abnormally low 
and you have to continue to buy Treasuries, or we will be 
paying so much on our national debt that the fiscal problems we 
are looking at will complicate overnight.
    So we are on one side doing things that don't appear to 
address the true root causes of our problem. We seem to now be 
in a quagmire that we can't get out of.
    Now I am sure you have a totally different take on that, 
but I think you would have to agree that the activism has been 
unprecedented and reason to at least cause some concern?
    Chairman Bernanke. Well of course there's been a whole 
range of approaches and responses to this crisis, which of 
course was a terrible crisis and required a strong response.
    I guess I would comment on your point about interest rates 
and the federal debt. The reason we keep interest rates low is 
not to accommodate Congressional fiscal policy. The reason we 
keep interest rates low is because we think it is going to help 
the economy recover just a bit faster and keep inflation near 
our 2 percent target. Those are our objectives for low interest 
rates.
    But I would question whether or not low interest rates are 
in some way enabling fiscal deficits. The deficit over the last 
three years has been over a trillion dollars a year, as you 
know, about 9 percent of GDP.
    If we were to raise interest rates by a full percentage 
point, and ignoring the fact that most debt is of longer 
duration and would not reprice--that would still only raise the 
annual deficit by something a little over a hundred billion 
dollars.
    Senator DeMint. Which is a trillion dollars over ten years. 
I mean, that is real money.
    Chairman Bernanke. No. A trillion dollars a year is what I 
am saying is what the current deficit is.
    Senator DeMint. Right. But is the interest cost on that, if 
it would be $100 billion a year, we're talking $1 trillion over 
10 years, we are talking real money.
    Chairman Bernanke. A trillion there, a trillion here.
    [Laughter.]
    Yes, sir. No, I agree with that. But what I am saying is 
that the situation is--the deficits are so large, particularly 
going out over the next few years, irrespective of the level of 
interest rates, that I would think that Congress would have 
plenty of motivation to try to address that; and that, whether 
or not the interest rates are currently 1\1/2\ percent for 10 
years, or 2\1/2\ percent, just does not make that much 
difference.
    Senator DeMint. I want to respect the Chairman's time, but 
just one other point. My concern now is we are equating pro-
growth economic policies with more government spending. And our 
President is talking about that to the Europeans. Austerity is 
bad? And on the one hand you are telling us this debt is 
creating a potential huge crisis, yet you're telling us we need 
to keep spending with more debt.
    What is the real signal here?
    Chairman Bernanke. Well first of all, it is not necessarily 
more spending. Appropriate tax relief would also help in the 
same way. But I have always said, and I said in my remarks, and 
I have said this a number of times, that you do not want to 
just do short-run stuff and ignore the long-run. You don't want 
to just do long-run stuff and ignore the short-run. You need a 
balanced program, I would say a ``do no harm'' policy is what I 
am looking for here that at least avoids derailing the recovery 
in the short term, but combines that with a strong and credible 
plan for reducing the deficit over the medium term.
    I think that is the best policy. It may be very difficult 
to achieve, but that--in principle, that would be the best way 
to go.
    Senator DeMint. Thank you, Mr. Chairman.
    Chairman Casey. So far we have got a bipartisan commitment 
to keeping time. Senator Sanders.
    Senator Sanders. Thanks very much, Mr. Chairman.
    And, Mr. Bernanke, thank you very much for being with us. I 
am going to try to be as brief as I can. I think I have three 
questions which I would appreciate your answering.
    Number one, the first one deals with conflicts of interest 
at the Fed. As you know, Jamie Diamon is the CEO and Chairman 
of J.P. Morgan Chase, which is the largest financial 
institution in this country.
    During the Fed bailout, if you like, when $16 trillion in 
low interest loans over a period of time were given out to 
every financial institution in this country, J.P. Morgan Chase 
received over $300 billion of those loans.
    The American people, I believe, perceive a conflict of 
interest when you have, among others, the head of the largest 
financial institution in America sitting on the New York Fed, 
which is presumably supposed to be regulating the Fed--
regulating these financial institutions.
    I think many people, including myself, see this as a 
situation where the fox is guarding the henhouse, and that we 
need real reform in the Fed to make sure that it is 
representing the middle class and small businesses of this 
country, rather than just Wall Street and the big-money 
interests.
    Would you be supportive of legislation that I have 
introduced which says that representatives of financial 
institutions--not just Mr. Diamon but others--get off of the 
Fed and they be replaced by folks from the general public?
    Chairman Bernanke. Well you raised--Senator, you raised an 
important point, which is that this is not something the 
Federal Reserve created.
    Senator Sanders. Right.
    Chairman Bernanke. This is in the statute.
    Senator Sanders. Yes.
    Chairman Bernanke. Congress, in the Federal Reserve Act, 
said this is the governance of the Federal Reserve. And more 
specifically, that bankers would be on the board and----
    Senator Sanders. Six out of nine.
    Chairman Bernanke. Sorry?
    Senator Sanders. Six out of nine in the regional banks are 
from the banking industry.
    Chairman Bernanke. That's correct. And that is in the law.
    Senator Sanders. Right.
    Chairman Bernanke. And what we have done is try to make 
something useful out of that. What we have done is, first of 
all, we have taken a lot of actions to negate conflict of 
interest. And under Dodd-Frank, the GAO did a comprehensive 
study, as you know, of our governance and did point out some 
appearances of conflict----
    Senator Sanders. I know. I wrote that provision. I am 
familiar with it.
    Chairman Bernanke. Yes. And I congratulate you.
    But it also found that there were not ``actual'' conflicts 
of interest.
    Senator Sanders. Right.
    Chairman Bernanke. Because there is a firewall so that the 
bankers do not have any information, or ability to influence 
supervisory decisions.
    I will answer your question, though. The answer to your 
question is that Congress set this up. We have tried--I think 
we have made it into something useful and valuable. We do get 
information from it. But if Congress wants to change it, you 
know, of course we will work with you to find alternatives.
    Senator Sanders. Okay. Thank you. And I think that is 
something--you are quite right. This is something the Congress 
established a long time ago. I think it is time to change it.
    My second question is: In America today we have the most 
unequal distribution of wealth and income of any major country 
on earth, worse than at any time in our country since before 
the Great Depression.
    You've got 400 individuals owning more wealth than the 
bottom 150 million Americans. You've got the top 1 percent 
owning 40 percent of the wealth of America. While, incredibly 
enough, the bottom 60 percent own only 2 percent of the wealth 
in America.
    The last report that I have seen in terms of income, not 
wealth, suggests that in 2010 93 percent of all new income from 
the previous year went to the top 1 percent.
    Now my question is, we can talk about economic growth all 
you want, but to the average person it doesn't mean a damn 
thing if all of that new income is going to the top 1 percent.
    Do you believe that we can see an expanding middle class if 
we continue to have that kind of grossly inequitable 
distribution of wealth and income?
    Chairman Bernanke. Well I think it is not so much a 
question of bringing down the top 1 percent as it is bringing 
up the lower 99 percent. The question is: How can you 
strengthen the middle class? How can you make middle class 
incomes higher and more secure?
    This has been, as you know, a trend that has been going on 
for 35 years and it is related to a lot of factors, including 
globalization, the technical change which has made a high 
school education simply less valuable.
    I would be very much in favor of measures to strengthen the 
middle class and to help the average American do better, 
focusing on approaches like education and so on would be very 
constructive.
    Senator Sanders. Last question.
    Chairman Bernanke. Yes.
    Senator Sanders. You have six of the largest financial 
institutions in this country, the large Wall Street banks, that 
have together assets equivalent to two-thirds of the GDP of the 
United States of America, over $9 trillion.
    You have some folks on the Regional Feds, and I, and some 
others, beginning to talk about the need to break up these huge 
financial institutions which have so much economic and 
political power. The top six banks write two-thirds of the 
credit cards in this country, and half of the mortgages.
    My suspicion is, if Teddy Roosevelt were here, a good 
Republican, he would be talking about breaking up these 
financial institutions.
    How do you feel about the need to finally break up these 
large financial institutions that have so much economic and 
political power?
    Chairman Bernanke. Well I first commented, a lot of these 
people saying they want to break up the banks are not very 
specific. Does that mean making them a little smaller? Does it 
mean making everything community banks?
    I really would like to see a plan that clarifies what is 
really meant by that. The Dodd-Frank Act put forward a strategy 
for ending too-big-to-fail. I think it is incredibly important 
to end too-big-to-fail.
    That strategy involves taking away the advantages of size. 
It means that banks will be allowed to fail, but through a safe 
method that will avoid the effects on the broader financial 
markets through the orderly liquidation authority that Dodd-
Frank created for the FDIC.
    It means that large banks will pay--will have higher 
capital requirements, tougher supervision, will be subject to a 
whole set of rules that smaller banks will not face. I will 
guess that if the size of banks is basically motivated by a 
too-big-to-fail motivation, as we take that away the market 
forces themselves will make it attractive for banks to 
downsize, rationalize, and so on.
    I would add an additional tool that we have from the Dodd-
Frank is the so-called ``living wills'' which require banks to 
give us information about their very complex structures.
    One approach would be to ask banks, for the purposes of 
being able to be brought into receivership if necessary, is to 
simplify their structures to avoid these very complex 
interconnected types of situations that I think are as much a 
problem as sheer size.
    Senator Sanders. Okay. Thank you very much.
    Chairman Casey. Senator Coats.
    Senator Coats. Thank you, Mr. Chairman.
    And thank you, Mr. Chairman. On page 4 of your statement 
you talk about inflation. You say with regard to inflation: 
``Longer-term inflation expectations have, indeed, been quite 
well anchored'', ``expectations among investors have changed 
little, on net, since last fall and are lower than a year 
ago.'' `` . . . substantial resource slack in U.S. labor and 
product markets should continue to restrain inflationary 
pressures.''
    That is good news. That is good news for all of us. Let me 
ask you a question about the reverse of that, and that is: 
deflation.
    We have gotten some bad employment numbers not only for May 
but the revision for April. We have bad news out of Asia. It 
appears that the Australian manufacturing is in recession. 
India has posted its slowest growth in nine years. China, many 
say, is on the verge of a manufacturing downturn.
    A lot of people are saying that we are at stall-speed here 
in the United States. The question is: What is the risk of 
spending too much time worrying about inflation and ending up 
in a potentially deflationary new recession, perhaps prompted 
by a shock from Europe if they can't pull it together?
    What are your concerns about that? What is the Fed thinking 
about that? Is that something we should worry about? Is that 
something you are worrying about? What kind of guidance can you 
give us on that?
    Chairman Bernanke. Well when we set our definition of price 
stability as 2 percent inflation, we meant that to operate in 
both directions. We do not want inflation above that, but we 
also do not want inflation well below that. We obviously want 
to avoid deflation.
    And it is one of the principal motivations for the so-
called QE2 we did in November of 2010 to avoid deflationary 
pressures. And we were in fact successful and brought inflation 
back to--back to target.
    Now part of your question was about general slow-down in 
the global economy. And there are some signs certainly in 
Europe. China cut interest rates today. Some of the emerging 
markets have seen some slowdown. So there's certainly some 
signs of global slowdown and we are trying to assess how 
important those are, and what implications they have for the 
United States.
    I would say, though, at this juncture that with respect to 
deflation specifically that we think deflation is at this point 
probably a pretty low probability risk. And at the moment, 
inflation seems to be pretty stable, close to 2 percent. We 
haven't seen much indication of declining inflation, 
particularly when you look at the--either the noncommodity 
prices, or look at expectations.
    So that particular concern right now is not I think very 
much in our forefront of our concerns.
    Senator Coats. What would a shock to the system, a war in 
the Middle East, euro coming apart, what would that do to that 
analysis of what you just gave?
    Chairman Bernanke. I think it depends on what the shock is 
and how it ramifies. A shock in the Middle East presumably 
would cause oil prices to go up a lot. That would tend to be 
inflationary. But it would also probably slow the economy 
further because it would be like a tax increase on consumers 
who would have to pay more for gas and therefore less for other 
things.
    The euro situation depends a lot on the situation, which we 
hope will not occur, in which there is a big escalation of 
financial stress. It would depend a lot on exactly how that 
happened. If Greece for example were to leave the Eurozone but 
the stresses were contained there, then the effects would 
likely be fairly moderate.
    If the financial distresses were to spread more broadly, 
then that would create a lot of volatility in our own financial 
markets and would put stress on our financial institutions, 
would probably reduce lending, and would at a minimum tend to 
slow the economy.
    But again, I don't think deflation is the main concern 
here. I think the main concern is promoting adequate growth to 
continue to bring down unemployment over time.
    Senator Coats. Given the kind of fragile economic state 
that we are in and the situation unfolding in Europe, do you 
sleep well at night?
    Chairman Bernanke. Do I?
    Senator Coats. Do you sleep well at night?
    Chairman Bernanke. I generally sleep pretty well, yes. But 
I have a lot to do during the day and I need to be well rested.
    [Laughter.]
    Senator Coats. Thank you, Mr. Chairman.
    Thank you.
    Chairman Casey. Thank you. Representative Maloney.
    Representative Maloney. Thank you, Mr. Chairman.
    And welcome, Mr. Bernanke. I would like to respectfully 
speak in opposition to the point of view that has been put 
forward by my colleagues on the other side of the aisle in 
strong opposition to any QE3.
    I believe that the Fed should use any tool in your arsenal, 
whatever it is, to provide support to our fragile economy. And 
we need to ensure against any downward turns that would hurt 
housing, employment, and all the other areas in our economy.
    I think it is particularly important, coming up on your 
June 19th meeting, that you act forcefully to help our economy, 
given the fact that China has cut its benchmark lending rate. 
And already, in response to that, the price of gold has gone 
up; the dollar fallen.
    I would like to hear your comments on China. Will China be 
buying our Treasury Notes now with this economic downturn in 
what appears to be in their economy, and combined with the news 
from the past month that the Eurozone debt and banking crisis 
seems to have deteriorated further in Europe? So could you 
comment further? You have, in many ways, but even further on 
China specifically and the impact China will have in the 
overall, really, our economy? They have been a partner in our 
financial recovery, and your comments on China?
    Chairman Bernanke. Well, China has slowed somewhat. So far 
the slowdown is pretty moderate. They still have rates of 
growth that we would love to have here.
    Part of the slowdown is policy-induced, intentional. In 
particular, China took a number of actions to try to avoid what 
looked to be a building bubble in real estate prices. So they 
took a number of actions to mitigate that. That tended to slow 
activity.
    And they have in general tried to slow growth both to 
achieve a more sustainable pace of growth, and also as a part 
of their process for trying to switch from an export-led 
economy to one that has a greater emphasis on domestic demand.
    So there has been some slowing there. We watch that very 
carefully. But so far I don't think the change in Chinese 
prospects on net are enough to be concerning for the United 
States, particularly since there are some offsetting factors--
notably, when China slows, that tends to bring down oil prices, 
and that is actually a positive for the U.S. economy.
    I think the greater concerns for us right now are still 
coming from Europe. Even as the situation is still being 
managed, we are seeing of course, as you can see every day, the 
volatility in large movements in stock prices and other asset 
prices, and the uncertainty that that generates.
    So that is a concern.
    Representative Maloney. I would also like to ask you a 
question about the so-called ``fiscal cliff'' that we confront 
next year if current laws governing taxes and spending are 
maintained and the Bush tax cuts expire. Also, the payroll tax 
cut expires. The Federal Unemployment Insurance expires. And 
the automatic spending cuts mandated by the Budget Control Act 
would take effect.
    CBO tells us that this will cause the economy to fall into 
a recession. It also tells us that if we continue all current 
policies, we can avoid a recession but that our long-term 
budget situation will continue to deteriorate. Certainly 
neither of these outcomes are satisfactory.
    My question is: What would happen if we failed to achieve a 
budget agreement in the lame duck session and all the fiscal 
cliff priorities kicked in?
    Chairman Bernanke. Well I agree very much with the CBO's 
general analysis there. If no action were taken and the fiscal 
cliff were to kick in in its full size, I think it would be 
very likely that the economy would begin to contract, or 
possibly go even into a recession, and that unemployment would 
begin to rise.
    So that is obviously something we want to avoid if at all 
possible. At the same time, I am not advocating undoing all of 
these measures and simply ignoring the distant future. I mean, 
I think as I have said before, what we need is a combination of 
sensible policies that allow the recovery to continue over the 
next year or two, with a long-term credible plan for putting 
our budget on a sustainable path.
    Representative Maloney. Thank you. My time has expired.
    Chairman Casey. Thank you. Representative Burgess.
    Dr. Burgess. Thank you, Mr. Chairman.
    Dr. Bernanke, welcome to our Committee again. I just want 
to pick up, Senator DeMint used the word ``quagmire,'' Senator 
Coats used the term ``stall-speed.'' And I've got to admit, I 
am concerned about some of these same things.
    The Vice Chair of the Fed yesterday at the Boston Economic 
Club described adverse shocks that could push the economy into 
territory where a self-reinforcing downward spiral of economic 
weakness would be difficult to arrest.
    I am not an economist, but that sounds bad. Is that right?
    Chairman Bernanke. The concern she is expressing is that if 
growth is not sufficiently strong, that it would not take too 
much to put us back into a----
    Dr. Burgess. That's correct.
    Chairman Bernanke [continuing]. Into either a recession or 
at least a significant slowdown.
    Dr. Burgess. So I won't admit to having trouble sleeping 
every night, but what does bother me at night is Lehman 
Brothers. And that is, when I wake up at three o'clock in the 
morning, that is what I am worried about.
    Now I do not know what the next Lehman Brothers will look 
like. I do not even know whether it would be in this country, 
or perhaps be in Europe, but I think she summed it up pretty 
well. And this was reported on the CNBC Squawkbox this morning. 
And I must admit, when they played that clip it really got my 
attention because this was one of the things that has bothered 
me since September of 2008.
    I see a lot of parallels as we cruise into this summer 
season with the summer of 2008. Gas prices have moderated, so 
perhaps you can move that off the table a little bit, but 
similar situations. Presidential election year coming up, and 
the economy still in tough shape and has not recovered.
    And we see all this stuff happening in Europe. So you said 
on page 3 of your testimony down right at the bottom of the 
page, you said you're ``prepared to take action as needed''. 
Can you outline for us very briefly maybe what the top three 
steps are of that ``action as needed'' item that you have 
there?
    Chairman Bernanke. Sure. First of all, we are already 
taking some actions, important actions. Notably, that we are 
working to ensure that banks have adequate capital and 
liquidity. And as I noted, banks are now much better 
capitalized than they were prior to Lehman, which is helpful.
    Dr. Burgess. Can I ask you a question about that?
    Chairman Bernanke. Certainly.
    Dr. Burgess. You talk about ``our banks''----
    Chairman Bernanke. Our banks.
    Dr. Burgess. Our domestic banks.
    Chairman Bernanke. Yes.
    Dr. Burgess. You really cannot control what is happening in 
banks in Europe. Is that correct?
    Chairman Bernanke. I cannot, no.
    Dr. Burgess. And we cannot do a stress test. Timothy 
Geithner can't run over there and do a stress test.
    But if we are asked to help with the situation in Europe, 
what assurance do you have, or can you give us, or can you tell 
us that we can give the American people, that we are doing that 
due diligence? Or is that help just not available? Is that one 
of the things that's just not on your--within your realm of 
being able to help?
    Chairman Bernanke. Well I think the U.S. Government's 
position has been, reasonably, that Europe is a rich region, 
and that they have the resources necessary to achieve 
stability.
    I think the main problems over there are political, rather 
than economic. There's a lot of different--17 countries are 
involved, and a lot of different interests. So, you know, I'm 
not sure that there's much that the United States can do other 
than be supportive and try to provide whatever advice and, you 
know, verbal help that we can do, but----
    Dr. Burgess. We can send them a get-well card.
    Chairman Bernanke. Send them a get-well card. What the 
Federal Reserve can do is try to protect our own country, and 
we are doing that by strengthening our financial system by 
making sure--or at least by monitoring on a regular basis the 
exposures that our financial institutions have to Europe, both 
direct and indirect, and how they are hedged.
    We have done the swaps, which was I think a useful thing 
that we did to help stabilize the money markets, the bank 
funding markets over there.
    I think the main thing that we have not done yet, but could 
do if financial conditions got sufficiently severe, would be to 
use our authority through the discount window, or through our 
13.3 authority, to lend to financial institutions against 
collateral to make sure that lack of liquidity was not a reason 
that they would collapse or at least stop lending.
    So I think that's the main tool that we obviously have in 
reserves that we could use, and we will use if financial 
conditions call for it.
    Dr. Burgess. Let me ask you this. Are there any U.S. banks 
whose capital could be seriously jeopardized by what's 
happening in Europe that then could push a Lehman-type scenario 
to the forefront?
    Chairman Bernanke. Well as I said, we've been monitoring 
the direct exposures. And for the most part, our banks are far 
less exposed to European sovereign debt and the European 
financial institution debt than are the European banks. Which 
is why there's such a difficult interaction between the 
sovereign debt problems and the banking problems in Europe.
    That being said, if there's widespread contagion, hard to 
predict, operating through financial markets, operating through 
the potential problems of a large European institution, 
whatever that might be, then we can't really foresee or 
guarantee that there might not be serious stresses on some U.S. 
financial institutions. In which case, the Federal Reserve with 
the experience that we had in 2008, is certainly going to do 
what's necessary to try to mitigate that problem.
    But I don't mean to be represented as saying that there is 
no problem. There is a risk. And all we can do is prepare for 
it as best we can.
    Dr. Burgess. Thank you, Mr. Chairman. I will yield back.
    Chairman Casey. Representative Hinchey.
    Representative Hinchey. Well thank you very much, Mr. 
Chairman.
    Dr. Bernanke, thank you very much for everything that you 
have done, and for all the things that you are engaged in, and 
for also being with us here today to talk about these issues.
    I think that we have come a long way, considering the 
financial meltdown that occurred back in 2007, but we have 
still got a long way to go.
    I think there are still some things that Congress must do 
to ensure we do not go down the same paths of our European 
counterparts. And I think that that is an interesting set of 
circumstances there.
    Since the end of the Recession, our economy has steadily 
improved. We are still working hard on that. We have created 4 
million private-sector jobs, and unemployment has steadily 
decreased to 8.2 percent now.
    President Obama I think deserves enormous credit for 
turning the economy around. If it had not been for his action 
and those of the Democratic majority, I have no doubt our 
country would have fallen into a deeper economic depression.
    So we obviously have a long way to go, but the President is 
on the right path. The Fed's aggressive action and monetary 
policies that have stimulated the economy have also been 
instrumental to getting our economy back on track.
    Europe, on the other hand, has been a total disaster. 
Europe has clearly proven that austerity was the wrong policy 
to pursue during a recession. If you look at the situation that 
they're dealing with there, Greece and Spain, 20 and 24 percent 
respectively unemployment in those two countries. Britain has 
shown zero economic growth over the course of the past year.
    So naturally I am surprised that with such strikingly 
different recoveries occurring between the United States and 
Europe, that so many United States lawmakers will continue to 
support the same types of policies that are utilized by Europe.
    What do you think are the key lessons that we should learn 
from Europe's failed monetary policies, particularly austerity? 
What do you think the United States is most at risk, in the 
context of that situation, of repeating?
    Chairman Bernanke. Well I think in fairness you have to 
agree that there are structural differences. You have 17 
different countries on a single monetary policy, essentially a 
fixed exchange rate.
    There are in fact some very serious fiscal situations. 
Greece for example probably has no alternative but to try to 
cut its deficits. So there are some important differences.
    I think, though, that the main message I would take is the 
one I have been trying to sell here for the last couple of 
hours, which is that a sensible fiscal policy is one that takes 
into account both the short-run needs of the economy, not to 
lose fiscal support sharply and rapidly during a period of 
fragile recovery; while at the same time combining that with a 
medium-term plan, we do have to address these fiscal 
sustainability issues.
    So I don't think it is inconsistent to do both of those 
things. And that is where I would differ with at least a few of 
the countries in Europe. But again, the situation is much more 
complicated. The countries that have capacity to expand their 
budgets, for example, like Germany, have much less need than 
the countries like Greece which have very little capacity to 
spend more or borrow more.
    Representative Hinchey. Well Germany is another example. 
But the other things are negative examples that we have to deal 
with, and we have to be acting I think in a very positive way.
    Also, after Congress and President Obama acted in 2009 and 
2010 to turn around our economy, since then the House has 
basically done nothing significant to revive our economy. As a 
result, the Fed has really led the efforts to help get our 
economy back on track.
    However, we have nearly exhausted all the Fed's tools to 
nurture our economy back to health. Congress needs to step up 
to the plate. Clearly our actions back in 2009 and 2010 turned 
things around. But more needs to be done.
    We cannot allow the European austerity model and allow 
growth to just continue to fail, and have it fail on us. The 
American Jobs Act is a prime example, unfortunately, of stalled 
legislation in the House that would inject nearly $450 billion 
worth of tax cuts, jobs, business opportunities, all of those 
things, into our economy.
    I think it has been a major mistake to sit on this 
legislation when it could be helping so many people. So do you 
think Congress has carried its fair share of the burden with 
regards to stimulating economic activity? And do you think 
legislation such as the American Jobs Act is important to help 
the Fed stimulate job growth and economic activity?
    Chairman Bernanke. Well I certainly agree, as I have said 
before, that monetary policy cannot carry this burden by 
itself. We need good policies over a range of areas from 
Congress.
    Now you know I am not going to endorse a specific program. 
But I hope that Congress can work together to address their 
problems across the economy in a number of different sectors, 
and I hope that, you know, Congress will work collaboratively 
to try to address some of those problems.
    Representative Hinchey. Thank you.
    Chairman Casey. Representative Duffy.
    Representative Duffy. Thank you, Mr. Chairman.
    And good morning, Mr. Chairman. I want to talk to you about 
too-big-to-fail. We had all heard two years ago when Dodd-Frank 
passed that this was going to be our silver bullet to address 
this issue of too-big-to-fail, and to make sure that the 
taxpayers wouldn't hold the bag should one of these large 
institutions fail, to make sure that it doesn't roil our whole 
economy.
    And I guess I would argue that Dodd-Frank has not fully and 
completely addressed the issue of too-big-to-fail. And it still 
exists. I think it has come up more recently as we look at what 
is happening in Europe. But here at home it has come up with 
regard to J.P. Morgan, and they experienced a $2 billion loss 
that might go up to $4 or $5 billion.
    And some have argued that the Volcker Rule would have 
addressed--had it been implemented, and it is going to come 
shortly--had it been implemented, it would have addressed this 
massive loss from J.P. Morgan.
    One of my concerns, though, is as you look at the Volcker 
Rule and you look at these trades, it becomes very difficult to 
determine what is prop trading and what is macro hedging.
    So as you sit in a classroom, it might be easy to work 
through the Volcker Rule, but in practice isn't it very 
difficult to use the Volcker Rule to stop the issue of J.P. 
Morgan?
    Chairman Bernanke. Well let me just say, in the specific 
case we are still investigating it, and I don't want to talk 
very much about the specific case. But in general, yes, 
differentiating proprietary trading from legitimate hedging 
activities and marketmaking activities is inherently very 
difficult, and regulators are looking at 19,000 comment letters 
and trying to figure out how to do that as best as possible.
    The one comment I would make, which my colleague, Governor 
Tarullo, made yesterday is the one requirement of the Volcker 
Rule is that there be very extensive documentation and 
explanation to the supervisors in advance for complex hedges, 
as well as auditing and appropriate incentives for the 
executives involved in the activities of the traders.
    So at a minimum, if the Volcker Rule had been in place we 
would have known a lot more about this whole situation. And 
that might have been helpful.
    Representative Duffy. And the classroom theory, I agree 
with. I am not opposed to it. I am concerned about the 
implementation. But isn't really the silver lining here that 
there was no taxpayer loss here? J.P. Morgan had the 
appropriate capital requirements to cover the loss, which is 
what you guys are talking about later on today when you're 
going to talk about Basel III. Isn't the real issue here is not 
thousands of new rules and a 2000-page bill, but really 
increasing the capital requirements of our American banks? 
Making sure that they have more skin in the game, and that the 
taxpayer is not going to bear that loss, the investors in those 
banks are going to be responsible for the losses of bad trades?
    Chairman Bernanke. I agree with you entirely. The reason 
for high capital requirements--and we are looking to greatly 
increase capital requirements--is because we are not going to 
be able to anticipate everything that could happen. And the 
good news here is that J.P. Morgan's losses are a very small 
fraction of their very substantial capital base.
    There have been losses to the shareholders, as you say, but 
there is not any risk that the firm will fail or that taxpayers 
will be in danger in any way.
    So, yes, capital is extremely important and I agree with 
you a hundred percent on that.
    Representative Duffy. And so in essence we increase those 
ratios. And I imagine you would--and I do not have much time--
but you would agree with the SIFI surcharge, making sure that 
our larger banks are required to hold more capital? Yes?
    Chairman Bernanke. Yes.
    Representative Duffy. Okay. Just quickly, sometimes--and I 
know you have to do this--but when you talk to us, what you say 
can be open to interpretation. You do a very nice job of that. 
But as you're talking about the cliff, as we are talking about 
taxes specifically, are you telling us if we allow nothing to 
happen and we see all of these taxes increase--the Bush tax 
cuts, the Obama tax cuts go away--there is going to be a direct 
impact on economic growth and job creation?
    Chairman Bernanke. I am looking not just to the taxes, but 
also the sequester and the end of the payroll tax, and 
everything else. Yes, I think that it--I mean, of course 
economic forecasting is an imperfect science, but everything we 
understand about fiscal policy suggests it would be a 
significant short-term effect. Yes.
    Representative Duffy. Okay. So in essence our--you are not 
here to advise us, but if you were you are telling us to extend 
them?
    Chairman Bernanke. I would tell you to try to avoid a 
situation in which you have a massive cut in spending and 
increase in taxes all hitting at one moment, as opposed to 
trying to spread them out over time in some way that will 
create less short-term drag on the U.S. economy.
    Representative Duffy. I appreciate your testimony. I yield 
back.
    Chairman Casey. Thank you.
    Senator Lee.
    Senator Lee. Thank you very much, Mr. Chairman.
    And thank you for joining us today, Chairman Bernanke.
    What are some of the risks that accompany quantitative 
easing? Could you walk us through those and help us understand 
the risk factors you consider as you approach a decision like 
that one?
    Chairman Bernanke. Well I think a preliminary thing to say 
is that, since we have less experience with quantitative easing 
our estimates and our understanding of its efficacy and exactly 
how much is needed and so on are less than the traditional 
monetary policy.
    But in terms of potential side effects, a number have been 
identified. But I think the two that we would pay most 
attention to:
    First, there are some who believe that greatly expanding 
our balance sheet would make the exit strategy more difficult, 
and that therefore inflation is more likely. And then that 
might lead inflation expectations to go up, which could be a 
problem.
    Now I want to be very clear that we are very confident that 
we can exit in a timely way from our balance sheet strategy, 
and that there is in fact no justification for such a concern. 
But nevertheless, some people might have that concern. So that 
is one issue.
    The second issue----
    Senator Lee. No justification for which concern?
    Chairman Bernanke. The concern that inflation will rise 
excessively because we can't get out of our balance sheet 
position.
    Senator Lee. Okay. Okay. So go ahead to your second point.
    Chairman Bernanke. The second one has to do with financial 
stability. The question is does the prospect of very low 
interest rates for a long time, does it create problems for 
certain types of firms like life insurance companies or pension 
funds? Does it induce excessive risk taking? Does it lead to 
effects that could be counter productive in the longer term?
    There, we do extensive monitoring, extensive analysis to 
try to identify any such problems. But it is always possible 
that we might miss something.
    Senator Lee. Okay. And it sounds like you are not 
discounting--you are not refuting the possibility that it can 
have inflation effects, you are just saying that you think you 
can time it in such a way that it is less likely to?
    Chairman Bernanke. There are two separate issues. One is 
our timing of when we take monetary policy back to a more 
normal stance.
    In any monetary policy easing episode, there is always the 
question of whether the Fed gets it exactly right--too soon? 
Too late?
    And it is always the case that if the Fed waits too long to 
remove monetary accommodation, you could get some inflation 
effect.
    What I am talking about here is the question of whether it 
is technically possible to undo the balance sheet expansion in 
a timely way. We are very confident that we have the technical 
tools to bring the balance sheet down to a more normal level, 
to bring the amount of reserves in the banking system down to a 
more normal level, at the appropriate--you know, when we decide 
it is time to tighten monetary policy.
    So the technical side, we think we are quite comfortable 
with.
    It is always the case, no matter, under the most normal 
traditional monetary policy that the timing of withdrawal of 
stimulation is difficult. And it is always possible that you 
could either under-shoot or over-shoot, and that is 
unavoidable.
    Senator Lee. With Treasury yield rates being at all-time 
historic lows, I think it becomes difficult to dispute that at 
some point in the next few years we will start to see a 
normalization and we will start to see yield rates return to 
their historic averages, perhaps above.
    Do you have any sense, and can you offer us any insight 
into when we might expect to see that happen?
    Chairman Bernanke. Well, we have indicated that we expect 
to keep short-term rates low until late 2014, at least. But 
even then, longer term rates might be rising. If in fact we are 
removing short-term rate reductions at that point, since long 
rates include expectations of short rates even beyond that 
window, you could be seeing some movement by then.
    We do expect of course rates to normalize over time, but 
the exact timing is very difficult to judge because it depends 
very much on the recovery of the economy. And while we see the 
economy moving in a moderate pace in the right direction, the 
point at which we are comfortable that it is time to withdraw 
monetary stimulus is obviously quite uncertain.
    Senator Lee. Is there a risk of a sharper rebound the 
longer you keep the rates low?
    Chairman Bernanke. Um, I don't think so. It is true that, 
that the quantitative easing measures have pushed down the so-
called term premia on longer term rates, and if those were to 
normalize quickly that would make the increase in rates a 
little faster than might otherwise be the case.
    But we have stress-tested both our economic models and our 
financial portfolio--I mean the financial portfolios of 
financial institutions, and we don't see at this point any 
serious risk either to economic recovery or to the financial 
stability of that return of interest rates to more normal 
levels.
    But it's obviously, again, something we need to pay close 
attention to.
    Senator Lee. Okay. Thank you, Chairman Bernanke. I see my 
time has expired.
    Chairman Casey. Thank you very much.
    Chairman Bernanke, thank you for your testimony.
    For the Members, the record will remain open for five 
business days to submit either additional questions or of 
course a statement.
    And we are adjourned.
    [Whereupon, at 11:50 a.m., Thursday, June 7, 2012, the 
hearing of the Joint Economic Committee was adjourned.]
                       SUBMISSIONS FOR THE RECORD

           Prepared Statement of Senator Bob Casey, Chairman,
                        Joint Economic Committee
    I look forward to Chairman Bernanke's report on the state of the 
economy and his perspective on additional actions that the Federal 
Reserve may take to strengthen the economic recovery.
    With the May jobs report released on Friday--it is clear that 
Washington needs to continue our focus on creating jobs. Today's 
hearing is especially timely.
    There are a number of bipartisan actions Congress can take right 
now to create jobs and strengthen the recovery.
    First, we need to get the Surface Transportation Reauthorization 
out of conference and signed into law.
    Our transportation infrastructure is central to national 
competitiveness and the bipartisan bill that passed the Senate, with 74 
votes, would create almost three million new jobs by accelerating 
infrastructure projects.
    Second, we should do more to support small businesses. By targeting 
tax incentives to those firms that expand their payrolls, we can help 
to strengthen the recovery.
    The Small Business Jobs and Tax Relief Act would provide a tax 
credit of 10 percent for any increases to the payroll tax base--hiring 
new workers, increasing hours, or raising wages of existing employees 
up to the $110,100 cap for the payroll tax. The proposed credit is 
capped at $500,000 per firm in order to target the tax credit to small 
businesses.
    Third, the Senate this week has taken up the Farm Bill, responsible 
legislation that cuts the deficit by $23 billion, helps farmers to 
manage risks relating to rapidly fluctuating prices for their crops, 
and provides critical support to rural America.
    We have fiscal challenges to tackle in a bipartisan manner. Without 
congressional action, the automatic spending cuts contained in the 
Budget Control Act of 2011 along with the expiration of several tax 
cuts will present a significant economic headwind in 2013.
    The non-partisan Congressional Budget Office recently estimated 
that real GDP growth will slow to 0.5 percent in 2013 unless Washington 
acts.
    Chairman Bernanke has expressed concerns regarding the risk the 
fiscal cliff presents to the recovery. I share that concern. But let's 
be clear there are right ways and wrong ways to balance the budget. We 
have to be smart about the cuts we make so we can keep growing the 
economy and create jobs rather than make a bad situation even worse.
    We can't put America on the road to full recovery unless we all 
agree on tackling the huge budget deficit and debt America faces. We 
need to continue to cut spending. And certainly, you cannot reduce the 
deficit by spending tens of billions on tax cuts for the very 
wealthiest.
    Additionally, just as when Chairman Bernanke was before this 
Committee in October, 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.
    We recently learned that China allowed its currency to weaken more 
in May than in any other month since 2005.
    Chairman Bernanke has testified previously that allowing the yuan 
to appreciate would be good for both the U.S. and Chinese economies. 
The Chinese Government manipulates their currency so that their goods 
sell for less than they should. Some people may think it's some far off 
theoretical issue but when China cheats, Pennsylvania and the rest of 
the country loses lots of jobs.
    I urge my colleagues in the House to pass legislation, such as the 
Currency Exchange Rate Oversight Reform Act already passed by the 
Senate, to crack down on countries that manipulate their currencies to 
promote their own exports.
    To sum up briefly: our economy, while in much better shape than it 
was three years ago, is still recovering from the Great Recession. With 
unemployment above 8 percent, the labor market still needs to heal. 
Europe continues to wrestle with debt issues, which impact U.S. 
financial markets and the global economy.
    Against this backdrop, it is clear that we need to stay focused on 
promoting a stronger economic recovery.Chairman Bernanke, thank you for 
your testimony.
                               __________
    Prepared Statement of Representative Kevin Brady, Vice Chairman,
                        Joint Economic Committee
    Thank you, Chairman Bernanke, for appearing before the Joint 
Economic Committee at this critical juncture to discuss America's 
economic outlook.
    While we're all anxious for signs of a strong, sustainable 
recovery, the recent jobs report for May was grim--with U.S. employers 
creating a mere 69,000 non-farm payroll jobs, the fewest in a year. Job 
growth over the past two months has dropped by two-thirds over the 
first quarter of the year. Business and consumer confidence is down. 
First quarter GDP estimates were revised downward.
    Four and a half years after the recession began Americans are 
enduring the 40th straight month of an official unemployment rate at or 
above 8%--a post-World War II record. And much of the drop in the 
unemployment rate from its high of 10% in October of 2009 is 
attributable to Americans simply dropping out of the workforce--the 
labor force participation rate is scraping a 30-year low. Without this 
severe drop in the number of workers since the recession began, the 
unemployment rate would be nearly 11%.
    Since the recession ended, our economy has struggled to grow at an 
annualized average quarterly increase of 2.4%. To place it in 
perspective, of the 10 economic recoveries since World War II lasting 
more than a year, this recovery ranks, regrettably, tenth. And dead 
last is unacceptable by any standard.
    Today, because our economy isn't flying strong and steady at 50,000 
feet as it should be at this point, but rather flying low and slow, we 
are increasingly vulnerable to external shocks.
    The economic crisis in Europe has intensified in recent weeks. A 
nascent bank run has begun in Greece. Greek banks are rapidly depleting 
their eligible collateral for lender-of-last-resort loans from the 
European Central Bank. Not just Greece, but the European Union as a 
whole appears to be in recession. Questions of whether Greece or other 
member-states of the European Monetary Union (EMU) will exit the euro 
and reissue national currencies are dominating the news.
    Mr. Chairman, at this hearing I hope we'll get your perspective on 
Europe, including the likelihood of a Greek exit from the Eurozone, the 
contagion risk for the exit of other EMU Member-States, and the 
consequences of these possible events for the European Union, the 
United States, and the rest of the world.
    When you appeared before this Committee last October--in response 
to a question about the tools you are considering to mitigate and limit 
the adverse economic impact on the United States--you testified you 
believe that the European Central Bank has enormous capacity to provide 
liquidity to European banks, that traditional currency swaps can 
provide dollar funding for global dollar money markets, and that the 
main line of defense is adequate supervision of well-capitalized 
American banks--with the Fed standing ready to provide as much 
liquidity against collateral as needed as lender-of-last-resort to the 
American banking system.
    Is that still your assessment? Are you considering any tools beyond 
those?
    In addition, American taxpayers and lawmakers--like their 
counterparts in Germany--are becoming increasingly concerned that they 
will be asked to bailout, however indirectly, struggling European 
governments and banks.
    There is a growing concern that the U.S. Treasury will try to bail 
out the Eurozone either directly through the Exchange Stabilization 
Fund or indirectly through the International Monetary Fund. The Fed has 
a challenge as well, explaining to a skeptical Congress why traditional 
currency swap lines with the European Central Bank will not turn into 
an indirect bailout of Eurozone countries.
    At the same time that European economies are weakening, growth is 
also slowing in both China and India. Given the prospects of a global 
slowdown, some economists are speculating that the Federal Reserve may 
initiate a third round of quantitative easing.
    Mr. Chairman, during the questions, I would like to discuss with 
you whether and under what conditions the Federal Reserve would 
consider launching a third round of quantitative easing.
    It's my belief that the Fed has done all that it can do--and 
perhaps done too much. Further quantitative easing won't stimulate 
growth and create jobs. There exists a real risk that the massive 
amount of liquidity the Fed has already injected into the economy could 
trigger higher inflation before the Fed can execute its exit strategy.
    I also believe another round of Fed intervention will increase 
uncertainty among job creators while, ignoring the genuine reason for 
low business investment and job creation: sound, timely fiscal policy.
    The businesses I look to along Main Street aren't holding back on 
hiring because they're waiting to learn what the government will do for 
them--they're holding back on hiring for fear of what the government 
will do to them.
    The obsessive push for higher taxes on job creators, the 
unprecedented tax and fiscal cliff we face at the end of this year, the 
unsustainable structural federal debt and deficits, along with a flood 
of red-tape, and fear of the consequences of the President's new health 
care law--these are the true drags on the economy.
    No matter what actions the Fed takes, without strong leadership by 
the President today--and action by Congress now--on these fiscal 
issues, Americans will not see the jobs or the strong recovery we 
deserve.
    And, of course, the combination of sluggish growth and the rapid 
accumulation of federal debt is a toxic brew that could eventually 
spark a debt-driven economic crisis here at home unless the United 
States soon reverses course.
    Finally, Mr. Chairman, last January the Federal Open Market 
Committee adopted an explicit inflation target of 2%, measured by the 
price index for personal consumption expenditures.
    By doing so the Federal Reserve has taken an important step toward 
establishing a rules-based monetary policy going forward that should 
help to achieve price stability and protect the purchasing power of the 
dollar over time.
    Nevertheless, your adoption of an explicit target raised as many 
questions as it answered. Is the 2% target a minimum, mid-point, or a 
maximum? How wide is the range? How long will the Federal Reserve 
tolerate a deviance from the range before taking action?
    I also appreciated that you distinguished between that which 
monetary policy can control--namely prices--and that which monetary 
policy cannot control--namely employment.
    By letter, I will request further clarification on this monetary 
policy statement in more depth.
    With that, I again thank you for appearing before the Committee, 
and I look forward to your testimony.

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