[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
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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
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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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