[Senate Hearing 112-8]
[From the U.S. Government Publishing Office]



                                                          S. Hrg. 112-8

 
        FEDERAL RESERVE'S FIRST MONETARY POLICY REPORT FOR 2011

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

      OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU- 
       ANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978

                               __________

                             MARCH 1, 2011

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                    Lynsey Graham Rea, Chief Counsel

                Laura Swanson, Professional Staff Member

            Andrew J. Olmem, Jr., Republican Senior Counsel

              Michael Piwowar, Republican Senior Economist

                       Dawn Ratliff, Chief Clerk

                     William Fields, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                         TUESDAY, MARCH 1, 2011

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2

                                WITNESS

Ben S. Bernanke, Chairman, Board of Governors of the Federal 
  Reserve System.................................................     3
    Prepared statement...........................................    43
    Responses to written questions of:
        Chairman Johnson.........................................    48
        Senator Reed.............................................    50
        Senator Akaka............................................    53
        Senator Merkley..........................................    56
        Senator Vitter...........................................    60
        Senator Wicker...........................................    69

              Additional Material Supplied for the Record

Monetary Policy Report to the Congress dated March 1, 2011.......    75

                                 (iii)


        FEDERAL RESERVE'S FIRST MONETARY POLICY REPORT FOR 2011

                              ----------                              


                         TUESDAY, MARCH 1, 2011

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:03 a.m., in room SH-216, Hart 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I would like to call this Committee to 
order.
    I want to thank Chairman Bernanke for being here today to 
deliver the Semiannual Monetary Policy Report to the Congress. 
Chairman Bernanke, your reports to this Committee are a 
reminder of how far we have come in just a few short years, but 
it is also the challenges our Nation continues to face.
    I am pleased that our economy continues to show positive 
signs of recovery. Two-point-eight percent growth in 2010 is a 
start. But I remain concerned about sustaining the recovery and 
being able to strike the right balance of positive growth, low 
inflation, increased employment, and long-term deficit 
reduction.
    As Chairman of the Fed, you have strived to strike that 
balance, but not without some controversy. The Fed has taken 
unprecedented steps to minimize the negative impact of the 
financial crisis and get us back on track, including a second 
round of quantitative easing. While some critics have been very 
vocal, even going so far as to call for an end to the Fed's 
dual mandate, I believe that you should be commended for your 
work. As the economy continues to struggle to recover, we 
should be using every tool in the toolbox to create jobs and 
spur growth. Taking tools away from the Fed now is the wrong 
idea at the wrong time.
    Clearly, there are many challenges ahead and the Fed has an 
important role to play. American consumption continues to be 
depressed, and without increased demand, businesses will be 
reluctant to expand, increase output, or hire new employees. It 
was encouraging to see the unemployment rate drop to 9.0 
percent in December, but the duration of the average 
unemployment period has increased. While subprime mortgages 
made up the initial wave of the foreclosure crisis, we are now 
also seeing millions of families facing foreclosure because of 
unemployment. Even optimistic forecasters say it will take 
several years before the unemployment rate returns to precrisis 
levels, but it is going to require effective policies to jump-
start hiring, production, and exports.
    Congress has taken steps to spur growth, including measures 
to increase small business lending and to provide needed 
certainty and protection in the financial system. There is 
certainly more we as Congress can do and must do to ensure our 
economy is on solid ground, and only then can we turn our focus 
entirely to deficit reduction.
    Chairman Bernanke, today, I am very interested in hearing 
your analysis of our current economic situation and what more 
Congress and the Fed can do to increase output, employment, and 
overall economic growth. I would also like to hear your 
thoughts on how we balance sustainable economic growth amid 
calls to cut Government spending and reduce the Nation's 
deficit. As a Nation, we face significant challenges and I 
appreciate your thoughts on these challenges today.
    Ranking Member Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you. Thank you, Chairman Johnson. 
Chairman Bernanke, welcome again to the Committee.
    Over the past year, the Fed's balance sheet has increased 
to $200 billion and now stands at over $2.5 trillion. In the 
upcoming months, the Federal Reserve's balance sheet is 
expected, Mr. Chairman, as I understand it, to balloon even 
further.
    Last November, the Federal Open Market Committee, FOMC, 
announced its intent to purchase an additional $600 billion of 
Treasuries by the middle of this year. The second round of so-
called quantitative easing, commonly referred to as QE2, means 
that the Fed will be purchasing the equivalent of all Treasury 
debt issued through June. Chairman Bernanke has said that the 
QE2 is necessary because of the high unemployment rate, low 
inflation rate, and near zero Federal funds rate.
    QE2, however, has not been strongly embraced by all of the 
members of the Federal Open Market Committee. From the 
beginning, one Fed bank president has voted against QE2 because 
the purchase of additional securities could cause, he thinks, 
an increase in long-term inflationary expectations and thereby 
destabilize the economy. Three other members of the FOMC have 
publicly stated that an early end to QE2 may be required to 
help limit inflation pressures. And a fifth member has said 
that we are, quote, ``pushing the envelope'' with the QE2 
purchases.
    In addition, several prominent economists have publicly 
urged the Fed to discontinue QE2, stating that it risks 
sparking inflation and it is not helpful in addressing our 
fundamental economic problems.
    These are serious questions, Mr. Chairman, of the QE2. 
After all, once price stability has been lost, as you well 
know, it is difficult and very costly to regain. I think we 
only need to remember the soaring interest rates and high 
unemployment that followed Chairman Volcker's efforts in the 
early 1980s to regain control over inflation.
    In light of the risk that the Fed is taking with QE2, I 
believe it is appropriate that the Fed provide a more thorough 
explanation of what it hopes to accomplish with QE2. Is it an 
effort to reduce unemployment by tolerating a higher inflation 
rate? Is the purpose to help the Administration out of its 
fiscal problems by monetizing Federal debt? Is the purpose to 
inflate our way out of our housing problems, or is it something 
else?
    Additionally, the Fed has not yet clearly articulated the 
basis on which QE2 should be judged. For example, if inflation 
rises to 3 percent, is QE2 still deemed a success? If 
unemployment stays above 8 percent, is QE2 a success? If 
inflation falls to near zero, is QE2 a success?
    These basic questions cannot be answered without clearer 
guidance from the Federal Reserve. Today, Mr. Chairman, I hope 
that you explain how the Fed will determine if QE2 is working 
and how the Fed believes QE2 should be evaluated. I hope to 
hear what indicators the Fed will use to determine if QE2 needs 
to be scaled back or expanded.
    Make no mistake. We all know the Fed has had to respond to 
the worst economy in a generation. Unemployment stands at 9 
percent. Home prices continue to decline. And the Federal 
deficit exceeds $1.3 trillion. Monetary policy is always a 
difficult task, but our fragile economy and perilous fiscal 
situation have presented new and difficult challenges for the 
Fed, Mr. Chairman, as you know.
    However, I believe that the public, the American taxpayer, 
deserves to have clear measures by which it can easily evaluate 
Fed policy, especially extraordinary actions like QE2. Without 
clear metrics, the public cannot determine if QE2 was a 
success, nor can it hold the Fed accountable for failure or 
success.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Senator Shelby.
    I would like to briefly introduce our witness, the 
Honorable Ben S. Bernanke, Chairman of the Board of Governors 
of the Federal Reserve System, currently serving his second 
term, which began on February 1, 2010. Prior to becoming 
Chairman, Dr. Bernanke was Chairman of the President's Council 
of Economic Advisors from 2005 to 2006. In addition to serving 
the Federal Reserve System in a variety of roles, Dr. Bernanke 
was previously a Professor of Economics and Public Affairs at 
Princeton University.
    I want to thank you again for being here today. Chairman 
Bernanke, you may begin your testimony.

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

    Mr. Bernanke. Thank you, Mr. Chairman. Chairman Johnson, 
Ranking Member Shelby, and other Members of the Committee, I am 
pleased to present the Federal Reserve's Semiannual Monetary 
Policy Report to the Congress. I will begin with a discussion 
of economic conditions and the outlook before turning to 
monetary policy.
    Following the stabilization of economic activity in mid-
2009, the U.S. economy is now in its seventh quarter of growth. 
Last quarter, for the first time in this expansion, our 
Nation's real GDP matched its precrisis peak. Nevertheless, job 
growth remains relatively weak and the unemployment rate is 
still high.
    In its early stages, the economic recovery was largely 
attributable to the stabilization of the financial system, the 
effects of expansionary, monetary, and fiscal policies, and a 
strong boost to production from businesses rebuilding their 
depleted inventories. Economic growth slowed significantly in 
the spring and early summer of 2010, as the impetus from 
inventory building and fiscal stimulus diminished and as 
Europe's debt problems roiled global financial markets.
    More recently we have seen increased evidence that a self-
sustaining recovery in consumer and business spending may be 
taking hold. Notably, real consumer spending has grown at a 
solid pace since last fall and business investment in new 
equipment and software has continued to expand. Stronger 
demand, both domestic and foreign, has supported steady gains 
in U.S. manufacturing output.
    The combination of rising household and business 
confidence, accommodative monetary policy, and improving credit 
conditions seems likely to lead to a somewhat more rapid pace 
of economic recovery in 2011 than we saw last year. The most 
recent economic projections by the Federal Reserve Board 
members and Reserve Bank presidents, prepared in conjunction 
with the FOMC meeting in late January, are for real GDP to 
increase 3.5 to 4 percent in 2011, about one-half percentage 
point higher than our projections made in November. Private 
forecasters' projections for 2011 are broadly consistent with 
those of FOMC participants and have also moved up in recent 
months.
    While indicators of spending and production have been 
encouraging on balance, the job market has improved only 
slowly. Following the loss of about eight-and-three-quarter 
million jobs from early 2008 through 2009, private sector 
employment expanded by only a little more than one million 
during 2010, a gain barely sufficient to accommodate the inflow 
of recent graduates and other entrants to the labor force.
    We do see some grounds for optimism about the job market 
over the next few quarters, including notable declines in the 
unemployment rate in December and January, a drop in new claims 
for unemployment insurance, and an improvement in firms' hiring 
plans. Even so, if the rate of economic growth remains 
moderate, as projected, it could be several years before the 
unemployment rate has returned to a more normal level. Indeed, 
FOMC participants generally see the unemployment rate still in 
the range of 7.5 to 8 percent at the end of 2012. Until we see 
a sustained period of stronger job creation, we cannot consider 
the recovery to be truly established.
    Likewise, the housing sector remains exceptionally weak. 
The overhang of vacant and foreclosed houses is still weighing 
heavily on prices of new and existing homes, and sales and 
construction of new single-family homes remain depressed. 
Although mortgage rates are low and house prices have reached 
more affordable levels, many potential home buyers are still 
finding mortgages difficult to obtain and remain concerned 
about possible further declines in home values.
    Inflation has declined since the onset of the financial 
crisis, reflecting high levels of resource slack and stable 
longer-term inflation expectations. Indeed, over the 12 months 
ending in January, prices for all of the goods and services 
consumed by households, as measured by the Price Index or 
personal consumption expenditures, increased by only 1.2 
percent, down from 2.5 percent in the year earlier period.
    Wage growth has slowed, as well, with average hourly 
earnings increasingly only 1.9 percent over the year ending in 
January. In combination with productivity increases, slow wage 
growth has implied very tight restraint on labor cost per unit 
of output.
    FOMC participants see inflation remaining low. Most project 
that overall inflation will be about 1.25 to 1.75 percent this 
year, and in the range of one to 2 percent next year and in 
2013. Private sector forecasters generally also anticipate 
subdued inflation over the next few years. Measures of medium- 
and long-term inflation compensation derived from inflation 
indexed Treasury bonds appear broadly consistent with these 
forecasts. Surveys of households suggest that the public's 
longer-term inflation expectations also remain stable.
    Although overall inflation is low, we have seen significant 
increases in some highly visible prices, including those of 
gasoline and other commodities. Notably, in the past few weeks, 
concerns about unrest in the Middle East and North Africa and 
the possible effects on global oil supplies have led oil and 
gasoline prices to rise further. More broadly, the increases in 
commodity prices in recent months have largely reflected rising 
global demand for raw materials, particularly in some fast-
growing emerging market economies, coupled with constraints on 
global supply in some cases. Commodity prices have risen 
significantly in terms of all major currencies, suggesting that 
changes in the foreign exchange value of the dollar are 
unlikely to have been an important driver of the increases seen 
in recent months.
    The rate of pass through from commodity price increases to 
broad indexes of U.S. consumer prices has been quite low in 
recent decades, partly reflecting the relatively small weight 
of material inputs and total production costs, as well as the 
stability of longer-term inflation expectations. Currently, the 
cost pressures from higher commodity prices are also being 
offset by the stability in unit labor costs. Thus, the most 
likely outcome is that the recent rise in commodity prices will 
lead to a temporary and relatively modest increase in U.S. 
consumer price inflation, an outlook consistent with the 
projections of both FOMC participants and most private 
forecasters.
    That said, sustained rises in the prices of oil or other 
commodities would represent a threat both to economic growth 
and to overall price stability, particularly if they were to 
cause inflation expectations to become less well anchored. We 
will continue to monitor these developments closely and are 
prepared to respond as necessary to best support the ongoing 
recovery in a context of price stability.
    As I noted earlier, the pace of recovery slowed last spring 
to a rate that, if sustained, would have been insufficient to 
make meaningful progress against unemployment. With job 
creation stalling, concerns about the sustainability of the 
recovery increased. At the same time, inflation, already at low 
levels, continued to drift downward, and market-based measures 
of inflation compensation moved lower as investors appeared to 
become more concerned about the possibility of deflation, or 
falling prices.
    Under such conditions, the Federal Reserve would normally 
ease monetary policy by reducing the target for its short-term 
policy interest rate, the Federal Funds Rate. However, the 
target range for the Federal Funds Rate has been near zero 
since December 2008 and the Federal Reserve has indicated that 
economic conditions are likely to warrant an exceptionally low 
target for an extended period.
    Consequently, another means of providing monetary 
accommodation has been necessary since that time. In 
particular, over the past 2 years, the Federal Reserve has 
eased monetary conditions by purchasing longer-term Treasury 
securities, agency debt, and agency mortgage-backed securities 
on the open market. The largest program of purchases, which 
lasted from December 2008 through March 2010, appears to have 
contributed to an improvement in financial conditions and a 
strengthening of the recovery. Notably, the substantial 
expansion of the program announced in March 2009 was followed 
by financial and economic stabilization and a significant pick-
up in growth in economic activity in the second half of that 
year.
    In August 2010, in response to the already mentioned 
concerns about the sustainability of the recovery and the 
continuing declines in inflation to very low levels, the FOMC 
authorized a policy of reinvesting principal payments on our 
holdings of agency debt and agency MBS into longer-term 
Treasury securities. By reinvesting agency securities rather 
than allowing them to continue to run off, as our previous 
policy had dictated, the FOMC ensured that a high level of 
monetary policy accommodation would be maintained.
    Over subsequent weeks, Federal Reserve officials noted in 
public remarks that we were considering providing additional 
monetary accommodation through further asset purchases. In 
November, the Committee announced that it intended to purchase 
an additional $600 billion in longer-term Treasury securities 
by the middle of this year. Large-scale purchases of longer-
term securities are a less familiar means of providing monetary 
policy stimulus than reducing the Federal Funds Rate, but the 
two approaches affect the economy in similar ways.
    Conventional monetary policy easing works by lowering 
market expectations for the future path of short-term interest 
rates, which in turn reduces the current level of longer-term 
interest rates and contributes to both lower borrowing costs 
and higher asset prices. This easing in financial conditions 
bolsters household and business spending and thus increases 
economic activity.
    By comparison, the Federal Reserve's purchases of longer-
term securities by lowering term premiums put downward pressure 
directly on longer-term interest rates. By easing conditions in 
credit and financial markets, these actions encourage spending 
by households and businesses through essentially the same 
channels as conventional monetary policy.
    A wide range of market indicators supports the view that 
the Federal Reserve's recent actions have been effective. For 
example, since August, when we announced our policy of 
reinvesting principal payments and indicated that we were 
considering more securities purchases, equity prices have risen 
significantly, volatility in the equity market has fallen, 
corporate bond spreads have narrowed, and inflation 
compensation as measured in the market for inflation indexed 
securities, has risen to historically more normal levels. 
Yields on 5- to 10-year nominal Treasury securities initially 
declined markedly as markets priced with respect to Fed 
purchases. These yields subsequently rose, however, as 
investors became more optimistic about economic growth and as 
traders scaled back their expectations of future securities 
purchases.
    All of these developments are what one would expect to see 
when monetary policy becomes more accommodative, whether 
through conventional or less conventional means. Interestingly, 
these market responses are almost identical to those that 
occurred during the earlier episode of policy easing, notably 
in the months following our March 2009 announcement.
    In addition, as I already noted, most forecasters see the 
economic outlook as having improved since our actions in 
August. Downside risks to the recovery have receded and the 
risk of deflation has become negligible. Of course, it is too 
early to make any firm judgment of how much of the recent 
improvement in the outlook can be attributed to monetary 
policy, but these developments are consistent with it having 
had a beneficial effect.
    My colleagues and I continue to regularly review the asset 
purchase program in light of incoming information and we will 
adjust it, as needed, to promote the achievement of our mandate 
from the Congress of maximum employment and stable prices. We 
also continue to plan for the eventual exit from unusually 
accommodative monetary policies and the normalization of the 
Federal Reserve's balance sheet. We have all the tools we need 
to achieve a smooth and effective exit at the appropriate time.
    Currently, because the Federal Reserve's asset purchases 
are settled through the banking system, depository institutions 
hold a very high level of reserve balances with the Federal 
Reserve. But even if bank reserves remain high, our ability to 
pay interest on reserve balances will allow us to put upward 
pressure on short-term market interest rates and thus to 
tighten monetary policy when required.
    Moreover, we have developed and tested additional tools 
that will allow us to drain or immobilize bank reserves to the 
extent needed to tighten the relationship between the interest 
paid on reserves and other short-term interest rates. If 
necessary, the Federal Reserve can also drain reserves by 
seizing the reinvestment of principal payments on the 
securities it holds by selling some of these securities on the 
open market. The FOMC remains unwaveringly committed to price 
stability, and in particular to achieving a rate of inflation 
in the medium term that is consistent with the Federal 
Reserve's mandate.
    The Congress established the Federal Reserve and set its 
monetary policy objectives and provided it with operational 
independence to pursue those objectives. The Federal Reserve's 
operational independence is critical, as it allows the FOMC to 
make monetary policy decisions based solely on the longer-term 
needs of the economy and not in response to short-term 
political pressures. Considerable evidence supports the view 
that countries with independent central banks enjoy better 
economic performance over time.
    However, in our democratic society, the Federal Reserve's 
independence brings with it an obligation to be accountable and 
transparent. The Congress and the public must have all the 
information needed to understand our decisions, to be assured 
of the integrity of our operations, and to be confident that 
our actions are consistent with the mandate given to us by the 
Congress.
    On matters related to the conduct of monetary policy, the 
Federal Reserve is one of the most transparent central banks in 
the world, making available extensive records and materials to 
explain its policy decisions. For example, beyond this 
Semiannual Monetary Policy Report that I am presenting today, 
the FOMC provides a postmeeting statement, a detailed set of 
minutes 3 weeks after each policy meeting, quarterly economic 
projections together with an accompanying narrative, and with a 
5-year lag, a transcript of each meeting and its supporting 
materials. In addition, FOMC participants often discuss the 
economy and monetary policy in public forums, and Board members 
testify frequently before the Congress.
    In recent years, the Federal Reserve has also substantially 
increased the information it provides about its operations and 
its balance sheet. In particular, for some time, the Federal 
Reserve has been voluntarily providing extensive financial and 
operational information regarding the special credit and 
liquidity facilities put in place during the financial crisis, 
including full descriptions of the terms and conditions of each 
facility, monthly reports on, among other things, the types of 
collateral posted and the mix of participants using each 
facility, weekly updates about borrowings and repayments at 
each facility, and many other details.
    Further, on December 1, as provided by the Dodd-Frank Act, 
the Federal Reserve Board posted on its public Web site the 
details of more than 21,000 individual credit and other 
transactions conducted to stabilize markets and support the 
economic recovery during the crisis. This transaction-level 
information demonstrated the breadth of these operations and 
the care that was taken to protect the interest of the 
taxpayer. Indeed, despite the scope of these actions, the 
Federal Reserve has incurred no credit losses to date on any of 
the programs and expects no credit losses in any of the few 
programs that still have loans outstanding.
    Moreover, we are fully confident that independent 
assessments of these programs will show that they were highly 
effective in helping to stabilize financial markets, thus 
strengthening the economy. Indeed, the operational 
effectiveness of the programs was recently supported as part of 
a comprehensive review of six lending facilities by the Board's 
independent Office of Inspector General.
    In addition, we have been working closely with the GAO, the 
Office of the SIGTARP, the Congressional Oversight Panel, the 
Congress, and private sector auditors on reviews of these 
facilities as well as a range of matters relating to the 
Federal Reserve's operations and governance. We will continue 
to seek ways of enhancing our transparency without compromising 
our ability to conduct policy in the public interest.
    Thank you for your attention. I would be very pleased to 
take your questions.
    Chairman Johnson. Thank you, Mr. Chairman.
    I will remind my colleagues that we will keep the record 
open for 7 days for statements, questions, and any other 
material you would like to submit, and I will ask the Clerk to 
put 5 minutes on the clock for each Member's questions. I will 
not cut you off midsentence, but I would appreciate it if you 
would begin winding down with the clock.
    Mr. Chairman, have the bipartisan tax cuts enacted last 
December been a boost to economic growth, and to what extent 
does it complement the Fed's QE2 program short term?
    Mr. Bernanke. Yes, Mr. Chairman. Everything else equal, the 
additional tax cuts, including the payroll tax cut and the 
business expensing provisions, should add to aggregate demand 
and contribute somewhat to growth in 2011 and 2012. And so in 
that respect, it is complementary to the Fed's monetary policy 
actions.
    I should say that in our projections and forecasts, we try 
to make an assessment of what we think is most likely in terms 
of fiscal policy and we had anticipated, as of November, that 
many of these provisions, including the UI and most of the tax 
cuts, would be extended, and so we had taken that into account 
in our analysis. That being said, there was some additional 
stimulus coming from the payroll tax cut, which we had not 
anticipated when we were looking in our forecast in November.
    Chairman Johnson. What do you see as the impact of rising 
gasoline prices?
    Mr. Bernanke. Well, this is something we have to pay very 
close attention to because it affects both sides of our 
mandate. On the one side, it obviously directly affects the 
inflation rate, and to the extent that it raises inflation 
expectations or reduces confidence in the public in the 
maintenance of low inflation, it can be an inflation risk.
    At the same time, higher gas prices take income out of the 
pockets of consumers and reduces their spending and their 
confidence, and so it can also be a problem for recovery, and 
so we have to look at it from both perspectives.
    My sense is that the increases that we have seen so far, 
while obviously a problem for a lot of people, do not yet pose 
a significant risk either to the recovery or to the maintenance 
of overall stable inflation. However, we will just have to 
continue to watch, and if we see any significant additional 
increases, we will obviously have to take that very seriously.
    Chairman Johnson. What is your perspective on how we can 
promote long-term growth in light of the need to reduce the 
size of the deficit? Are there particular policies or 
Government investments that will promote U.S. economic growth 
and our international competitiveness over the long term even 
as we work to reduce spending overall?
    Mr. Bernanke. Mr. Chairman, I spoke about this a bit in 
testimony before the Senate Budget Committee. The fiscal 
situation is very challenging, so on the one hand, it is 
clearly important and indeed a positive thing for growth to 
achieve long-term fiscal sustainability. That will help keep 
interest rates down. That will increase confidence. That will 
mean that future taxes will be lower than they otherwise would 
be, and that will be beneficial for growth.
    At the same time, to the extent possible, I hope that 
Congress will not just look at the inflow and outgo but will 
also think about the composition of spending and the structure 
of the tax code. On the tax side, I think there is a good bit 
that could be done to make the tax code more efficient and also 
more fair and less difficult to comply with. On the spending 
side, I think attention should be paid to important areas like 
research and development, education, infrastructure, and other 
things that help the economy grow and provide a framework that 
allows the private sector to bring the economy forward.
    So it is a double challenge. On the one hand, the need to 
control longer-term spending, on the other hand, not to lose 
sight of the importance of making sure that the money that is 
spent is spent effectively and with attention to long-term 
growth.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you. Thank you, Mr. Chairman.
    Chairman Bernanke, how did the Federal Reserve initially 
determine that $600 billion was the appropriate amount for QE2 
and that 8 months was the appropriate timeframe?
    Mr. Bernanke. Well, first, Senator, I want to emphasize 
that in last August or so when we were looking at this 
possibility, we were quite concerned about where the economy 
was. Inflation was declining and deflation risk was rising. 
Growth had slowed to a point where we were unsure that 
unemployment would even continue to decline. It might even 
begin to rise. And so there was a lot of talk about double-dip 
and that kind of thing. So we felt that we needed to take some 
action.
    In terms of the $600 billion, we have tried through a 
number of methods to establish a correspondence between these 
purchases and what our normal interest rate policies would be, 
and a rule of thumb is that $150 to $200 billion in purchases 
seems to be roughly equivalent to a 25 basis point cut in the 
Federal Funds Rate in terms of the stimulative power for the 
economy. So $600 billion is roughly a 75 basis point cut in the 
policy rate in terms of its broad impact.
    Seventy-five basis points in normal times would be 
considered a very strong statement, but not one outside of the 
range of historical experience. It would be one that would be 
taken at a period of concern and then we would observe the 
effect. So that was roughly the analysis that we did.
    Senator Shelby. In your testimony, you state, and I will 
quote you today, ``The Federal Reserve's independence brings 
with it the obligation to be accountable and transparent.'' As 
I mentioned in my opening statement here, I believe that there 
needs to be a clear basis for judging if QE2 is a success or a 
failure. What specific metrics should the public use to 
evaluate your performance in achieving the goals of QE2? In 
other words, on what basis should we judge the success or 
failure of QE2?
    Mr. Bernanke. That is an excellent question, Senator, and a 
very fair question. First, there is the question of whether or 
not it actually works, whether it has effects----
    Senator Shelby. That is right.
    Mr. Bernanke. ----and some have claimed that it does not. 
As I talked about in my testimony, as we look at financial 
markets, which is the way all monetary policy is transmitted to 
the real side of the economy, the movement of the wide variety 
of financial prices and returns are quite consistent with what 
you would expect to see with that 75 basis point cut in 
interest rates, and I mentioned the stock market spreads, 
inflation expectations, interest rates, and the like.
    So our assessment of the effects of the policy are that it 
is providing stimulus through the usual mechanisms that 
monetary policy works and we can use our econometric tools to 
judge how important and how powerful that stimulus is.
    Now, for the public, what they want to see is results, and 
I would argue that we have basically two objectives 
corresponding to the two sides of our mandate. The first is to 
stabilize inflation at a long-run normal rate, which is about 2 
percent, which is consistent with international standards of 
where inflation should be to appropriately trade off the 
benefits of low inflation against the risks of being too close 
to a deflationary zone, and we are moving in that directly, and 
clearly, deflation risk has greatly declined.
    On the other side, I think it is a little harder to be 
quantitatively specific, but I think the key here is that 
instead of unemployment stagnating or going up, that we see a 
sustainable recovery moving forward, and I think we are 
beginning to see that and over the next few months we will be 
able to make a judgment as to whether this economy now has 
enough momentum to move ahead on its own and, therefore, the 
additional support from policy can begin to be withdrawn.
    Senator Shelby. Over the past year, the total amount of 
public debt outstanding increased by about $1.7 trillion under 
the financial spending policy of the Administration. Over that 
same time period, the Fed increased its holdings of U.S. 
Treasury securities by $337 billion. In other words, the Fed 
alone was responsible for financing almost 20 percent of the 
massive increase in Government spending. How has the lack, Mr. 
Chairman, of fiscal discipline complicated the Fed's conduct of 
monetary policy, and when the Fed ends its large-scale 
purchases of Treasury debt, what impact will it have on the 
ability of the Treasury to finance our public debt?
    Mr. Bernanke. Well, the intent of the program first was to 
hold down interest rates or term premium relative to where they 
otherwise would be----
    Senator Shelby. Has that worked?
    Mr. Bernanke. That seems to be working, yes.
    Senator Shelby. A lot of people dispute that, but go ahead.
    Mr. Bernanke. Well, as I noted in my testimony, interest 
rates have gone up. The same thing happened in 2009 after our 
previous policy because interest rates depend on future 
expectations of growth as well as on policy actions.
    But that being said, we certainly want to be sure to remove 
that stimulus at the appropriate time, so I am at least as 
concerned as you, Senator, about inflation. We want to be sure 
we do not have an inflationary effect. So we must remove that 
at an appropriate time.
    We learned in the first quarter of last year when we ended 
our previous program that the markets had anticipated that 
adequately and we did not see any major impact on interest 
rates, and so I do not expect, when the time comes for us to 
end the program, that we will see a big impact. I think it is 
really the total amount of holdings rather than the flow of new 
purchases that affects the level of interest rates.
    Now, all that being said, you asked whether the fiscal 
policy was a problem. I think the long-term unsustainability of 
our debt is a significant problem because it threatens higher 
interest rates, less confidence, and it could have impact on 
the current recovery. And so I had been urging Congress to 
address these problems, not just in the current fiscal year, 
but looking over a longer timeframe, because it is over the 
next 10 or 20 years that these problems are going to be 
extraordinarily pressing.
    Senator Shelby. Is that our number one problem, as you see 
it, is our unsustained--I mean, our continued spending and our 
accumulation of the debt?
    Mr. Bernanke. It is--yes, I would say it is----
    Senator Shelby. The number one economic problem facing this 
country?
    Mr. Bernanke. Over the longer term, and it is certainly 
something that must be addressed to get us back on a 
sustainable path. Now, that cannot all be done next week, but 
we need to look over the next 5, 10, 15 years about how we are 
going to get back on a sustainable path.
    Senator Shelby. Thank you. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman.
    Chairman Bernanke, I assume you are familiar with two 
recent reports by Moody's Analytics and Goldman Sachs which 
talked about the proposed House Republican budget. Their 
conclusion is that, if passed without modification, there could 
be as much as a 2-percent decrease in the growth next year 
going forward and as many as 700,000 jobs lost because of the 
contraction of spending at the Federal level. Do you agree with 
that analysis?
    Mr. Bernanke. If that is referring to a $60 billion cut, 
obviously, that would be contractionary, to some extent. But 
our analysis does not give a number that high----
    Senator Reed. Well, the proposed cut----
    Mr. Bernanke. ----gives us a smaller number.
    Senator Reed. ----this year is $100 billion in the House.
    Is that what you used for your projection report?
    Mr. Bernanke. We are assuming 60 this year and 40 next 
year, which would be the $100 billion over the fiscal year. We 
also assume a normal spend-out. The impact is not immediate, 
but it is spent out over time. The reduction is effective over 
time. And we get a smaller impact than that. I am not quite 
sure where that number----
    Senator Reed. What is your impact?
    Mr. Bernanke. Several tenths on GDP.
    Senator Reed. And jobs?
    Mr. Bernanke. I do not have that number, but it would be 
certainly much less than 700,000.
    Senator Reed. And that is--I just want to understand what 
the--the assumed cut would be in this year, because some of the 
things we have heard in the House proposal, it is a $100 
billion cut for this year----
    Mr. Bernanke. This year.
    Senator Reed. ----which would be $40 billion larger than 
you would--that you are using as a parameter?
    Mr. Bernanke. Well, then I would multiply it by one time, 
two-thirds greater. I am happy to send you our analysis, 
Senator, but I, 2 percent is an enormous effect. Two percent of 
the GDP is $300 billion right there, so assuming a multiplier 
of one, $60 to $100 billion is not sufficient to get to that 
level. But it would have the effect of reducing growth on the 
margin, certainly.
    Senator Reed. It would have the effect of reducing growth, 
which would--again, the question is how much, which would be 
contradicting or at least a countervailing force to your 
stimulus effect of QE2, is that----
    Mr. Bernanke. To some extent, that is right, and that is 
why I have been trying to emphasize, and I know that this 
Congress will be looking at this, the need to think about the 
budget issue not as a current year issue, because whatever can 
be done, $60 billion is not going to have much impact on the 
long-run imbalances in our economy in fiscal policy. I think it 
is much more effective both in terms of its short-term effects 
on the economy, but also in terms of longer-term sustainability 
and confidence to address the budget deficits over at least a 
5- to 10-year window, not simply within----
    Senator Reed. Well, I agree with you----
    Mr. Bernanke. ----the next quarters.
    Senator Reed. ----but the issue that confronts us is this 
year's budget and next year's budget. That is an issue du jour, 
literally.
    Mr. Bernanke. Right.
    Senator Reed. Again, my presumption is the last quarter of 
GDP was originally estimated about 3.2 percent, downgraded to 
about 2.8 percent. Is that your rough understanding, Chairman?
    Mr. Bernanke. That is what the Bureau of Economic Analysis 
said, yes.
    Senator Reed. And their conclusion was a lot of that was a 
result of contraction and spending at the State and local 
governments.
    Mr. Bernanke. That is correct.
    Senator Reed. So I am just wondering here, if we contract 
spending at the Federal level, which has a ripple effect at the 
local level very quickly, because many of the programs that we 
support are really run by and delegated to and staffed by State 
and local employees, you do not anticipate a fall-off, a 
significant fall-off in growth?
    Mr. Bernanke. It would have a negative impact, but again, I 
would like to see their analysis. It just seems like a somewhat 
big number relative to the size of the cut.
    Senator Reed. And you are, again, just for the record, you 
are assuming in this year's budget a reduction of $60 billion 
from the President's proposal?
    Mr. Bernanke. Yes, that is right.
    Senator Reed. That is right?
    Mr. Bernanke. Yes.
    Senator Reed. And we have heard from the Republican side, 
the House side, $100 billion. So there is a $40 billion which 
you have not factored into your estimates.
    Mr. Bernanke. Is it $100 billion in calendar year 2011?
    Senator Reed. It is the fiscal year 2011, I believe.
    Mr. Bernanke. Well, that goes into next calendar year, so--
--
    Senator Reed. June 30.
    Mr. Bernanke. So talking about----
    Senator Reed. Excuse me----
    Mr. Bernanke. Talking about calendar year 2011----
    Senator Reed. No, we are talking fiscal year 2011.
    Mr. Bernanke. Well, in terms of growth numbers, it would be 
an effect this year of a tenth or two, and then it would be an 
additional effect in 2012, assuming that those cuts continued 
and also that the effects of them spread out over time beyond 
the fiscal year itself.
    Senator Reed. Thank you.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman, and Mr. Chairman, 
thank you for being with us.
    I would like to follow up on that line of questioning for 
just a minute because we get into these constant debates here 
whenever we try to reduce spending at the Federal level, about 
whether that is going to cost jobs or whether it is going to 
cause a decrease in the economy. But do you not believe that at 
some point, Congress has to start paring back the spending?
    Mr. Bernanke. Certainly, and I have said so many times. But 
again, we do not have a single-year problem. We have a long-
term problem and it needs to be addressed on a long-term basis.
    Senator Crapo. Several economists talked to the President's 
Fiscal Commission about this fact, and they were talking about 
the long-term commitment that is needed. They indicated that 
one of the best things we could do for our economy was to, as a 
Congress, adopt a long-term plan that made sense and that would 
show the world economies that we were committed to dealing with 
our fiscal problems. Would you agree with that?
    Mr. Bernanke. Yes, Senator. I was the first witness for the 
Fiscal Commission and I made basically that point. And to the 
extent that we can address the longer-term trajectory, which 
currently is not sustainable, we could ensure lower interest 
rates, greater confidence, and it would, at a minimum, be 
helpful to the current recovery, but more importantly, it would 
protect us from fiscal or financial crisis down the road.
    Senator Crapo. And I would just add as a comment--you do 
not need to comment on this unless you would like to--I would 
just add that Congress budgets on a 1-year at a time basis, and 
so, frankly, we have to look at the year we are dealing with as 
we move forward. And so although I agree that we have to look 
long term, we do not adopt long-term budgets here, at least 
historically, and some of us are going to try to get us to do 
that. Thank you very much for your involvement in that process.
    In the context of the transparency issues that you have 
discussed with us, I would like to focus for a minute on the 
GSE reform, Fannie Mae and Freddie Mac, in particular, because 
I am one who believes that it is imperative that Congress 
grapple with the need to deal with Fannie Mae and Freddie Mac 
and to determine how we will proceed. And I have my opinions on 
how we should proceed in that context, but at least a start, I 
think it is important that we begin what I consider to be 
honest accounting with regard to the Federal obligations 
represented by Fannie Mae and Freddie Mac.
    In a January 2010 CBO report, it was concluded that Fannie 
Mae and Freddie Mac have effectively become Government entities 
in the way that they are now managed and their operations 
should be included in the Federal budget. Do you agree with 
that CBO report in that context, in the--in other words, 
whether the debt obligations of Fannie Mae and Freddie Mac 
should be included in our Federal budget?
    Mr. Bernanke. Well, I am not an accountant. I defer to 
those with better knowledge on that point. But I would just say 
that if you do that you would add to the Federal debt, but you 
would also have to offset that, to some extent, with the assets 
that Fannie and Freddie hold. So whether you consolidate or 
whether you simply take as a charge the obligations that the 
Government has to support Fannie and Freddie, you would still 
have the same net effect on the Government's fiscal position 
overall.
    Senator Crapo. Yes. At a minimum, it seems to me that we 
ought to acknowledge the taxpayer is on the hook for the debt 
and we ought to let the American public know what that is, and 
I fully agree that if we also need to show the assets, so be 
it. But right now, the American public is on the hook for the 
debt, We are not necessarily going to be able to obtain access 
to the assets. It is going to be very interesting to see how 
Congress moves forward to deal with this.
    Another question, just shifting subjects for a minute, is 
do you believe that an explicit inflation target would help to 
promote the credibility of the Federal Reserve by being 
explicit about its objectives and help it to anchor inflation 
expectations?
    Mr. Bernanke. Well, I have supported this idea for many, 
many years, and the subtlety is helping everyone understand 
that by giving a number which would help clarify what the Fed 
is trying to achieve and would help, we hope, anchor 
expectations more firmly, that we would not be abandoning in 
any sense the other part of the Congressional mandate to 
maximum employment. We have moved partway in that direction in 
that we provide information in our projections about what the 
Committee individually thinks is the best long-run inflation 
outcome, and that currently is somewhere between 1.5 and 2 
percent on the PCE price index, but we have not gone all the 
way to a formal inflation target. Again, the communication 
issue here is to make people understand that this is a way of 
improving communication in general without necessarily 
abandoning the other side of our mandate.
    Senator Crapo. Thank you. I see my time has expired.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Thank you, 
Chairman Bernanke, for your service.
    You know, my main goal every day is how do we grow this 
economy and how do we get people back to work, certainly from 
my home State of New Jersey and, for that fact, every American. 
It was my hope that the quantitative easing that the Fed was in 
the midst of would produce more jobs, more exports, more 
investments, and ultimately a smaller budget deficit by 
obviously generating profits that would go into the Treasury's 
coffers. But as we expand this balance sheet and buy Treasuries 
and buy from entities like Goldman Sachs and expect that these 
ultimately get deposited in banks or that those banks would 
ultimately lend, I have to be honest with you, I am not quite 
sure--and this is where I am headed in terms of my question, 
I'd like to get a grasp from you--I do not see that lending 
still taking place, and I hear it all over my State.
    I see food prices rising. I see gas prices rising, even 
before what was happening in North Africa, although that 
certainly is an exacerbating reality. Tuition rates rising. And 
so while we are worried about deflation, I just see a 
combination of rising prices for the average family, of the 
lack of investment that I hoped would take place here, and so 
would you give me your view of how the first and second rounds 
of quantitative easing are working?
    Mr. Bernanke. I think they are working well. The first 
round in March 2009 was almost the same day as the trough of 
the stock market, and since then, the market has virtually 
doubled. The economy was going from total collapse at the end 
of the first quarter of 2009 to pretty strong growth in the 
second half of 2009, and as I said, it is now in the seventh 
quarter of expansion. So I think that was clearly a positive.
    The current QE, as it is called, appears to have had the 
desired effects on markets in terms of creating stimulus for 
the economy, and I cited not just Federal Reserve forecasts, 
but private sector forecasts which have almost uniformly been 
upgraded since August, since November, suggesting that private 
sector forecasters are seeing more growth and more employment 
this year than they had previously expected. And so I think it 
is having benefits for growth and employment.
    On the inflation side, as I have said before, I think the 
bulk of the commodity price movements are not resulting from 
Federal Reserve policy but are resulting from global supply and 
demand factors. For example, in the case of food, there have 
been major crop failures and weather issues and things around 
the world which have affected supply. And on the demand side, 
you have emerging market economies which are growing very 
quickly and creating extra demand for raw materials, and that 
is what is happening there.
    Even with that increase in commodity prices, overall 
inflation, as I mentioned, still remains quite low in the 
United States and we are determined to make sure that higher 
gas prices and food prices do not become imbedded in the 
overall inflation----
    Senator Menendez. I appreciate the market going up. We are 
thrilled to see that. But to be honest with you, if you talk to 
an average family in New Jersey and you say, what is your food 
bill, what is your gas price, what is your tuition rising, they 
are not going to tell you there is deflation. And so in a real 
context, I am wondering how this macroeconomic policy is going 
to get to the average person in a way that changes their lives 
in a more positive way. Certainly, the market is a nice 
indicator in one sense, but it is not for everybody in their 
lives.
    And that brings me to the question, how will you decide how 
to tighten monetary policy? How do you know when you have 
reached the point where that is wise, and what type of 
considerations are you going to take into account?
    Mr. Bernanke. Well, monetary policy works with a lag, and 
therefore, we cannot wait until we get to full employment and 
the target inflation rate before we start to tighten. We have 
to think in advance, which means we have to use our models and 
our other forms of analysis and market indicators and so on to 
try to project where the economy is heading over the next 6 to 
12 months. Once we see the economy is in a self-sustaining 
recovery and employment is beginning to improve and labor 
markets are improving, and meanwhile that inflation is stable 
at approaching roughly 2 percent or so, which, I think, is 
where you want to be in the long term in inflation, at that 
point, we will need to begin withdrawing.
    I just want to emphasize, it is not at all different from 
the problem that central banks always face, which is when to 
take away the punch bowl, and the only way you can do that is 
by making projections of the economy and moving sufficiently in 
advance that you do not stay too easy too long. And we are 
quite aware of this issue and quite committed to price 
stability and we will continue to analyze our models and our 
forecasts and move well in advance of the time that the economy 
is completely back to full employment.
    Senator Menendez. Well, thank you, Mr. Chairman. My time is 
up, and I look forward, maybe off of the hearing, to pursue 
some of this with you.
    Mr. Bernanke. Certainly.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and Mr. Chairman, 
thank you for your testimony and your service.
    I appreciate your comments regarding the Goldman report. I 
know a lot of people may not have seen it, but 47 economists 
came out quickly thereafter to basically say the Goldman report 
regarding cutting spending was way off base and the thing we 
can do to get our country moving ahead is to begin having some 
fiscal discipline. I agree with you, we need a long-term plan. 
It cannot all happen in 1 year. But we have to begin at some 
point, and we are working together, I hope, to put Congress in 
a straightjacket so that over the course of the next 10 years, 
we will have the discipline we need.
    You talked a little bit with Senator Crapo about inflation 
and an explicit target and you now have a dual mandate, unlike 
the European Central Banks, unlike the Bank of England. What 
policy rubs does that create internally or perception issues, 
having the dual mandate that you now have?
    Mr. Bernanke. Well, it means that we have to look at both 
sides of the mandate in making our policy decisions. Sometimes 
that causes a conflict in a stagflationary situation where 
unemployment is too high but inflation is also too high. 
Currently, there is not really that much of a conflict because 
inflation and employment have been quite low, and so 
accommodative policy has been appropriate in any case.
    Senator Corker. I guess at rare times, you have high 
inflation and high unemployment, and I think that is what 
people are concerned about possibly happening now. That would 
create a conflict with that dual mandate, is that correct?
    Mr. Bernanke. It would pose a very difficult situation. I 
think we have learned that there is no way to have sustained 
economic growth with high and variable inflation. So keeping 
inflation low and stable is, whatever your mandate, is 
absolutely essential and we are committed to doing that.
    Senator Corker. Would it give the Fed greater credibility 
if you had the single mandate, since, in essence--I know we 
have had a lot of conversations--price stability, I think by 
most people, is the thing that helps create maximum employment 
more than anything else. Would it help if we clarified that for 
you?
    Mr. Bernanke. Well, we have been functioning under the dual 
mandate. We think it is appropriate and we are not right now 
seeking any change. Congress can certainly discuss that issue 
and we will do whatever Congress tells us to do.
    Senator Corker. But it does create a policy rub from time 
to time, or can, to have a bipolar mandate.
    Mr. Bernanke. It can, but on the other hand, there may be 
circumstances when a monetary policy can be constructive on the 
employment side and would we want to ignore that.
    Senator Corker. You are lauded for being a great student of 
the Great Depression. As we have gone through hopefully three-
quarters of what it is we are dealing with--again, hopefully--
what is it about that model that is relevant to what we have 
been dealing with over the last couple of years and what is 
not?
    Mr. Bernanke. Well, I have done a lot of work on the 
Depression and thought about it quite a bit. There are two 
basic lessons that I personally took from my studies of the 
Depression. The first had to do with monetary policy. The 
Federal Reserve and other countries were very, very passive on 
monetary policy, and as a result permitted a deflation of 
actually about 10 percent a year for several years, which was 
highly destructive to the economy. This was a point that Milton 
Friedman made in his history of the monetary history of the 
United States, and he argued that that was the primary cause of 
the Great Depression. The Federal Reserve, in this particular 
episode, was more proactive and aggressive in terms of easing 
monetary policy to ensure that we did not have deflation risk 
and excessively tight monetary policy.
    The other lesson I take is that financial instability can 
be extremely costly to the economy. We had in the fall of 2008 
a financial crisis which was, in many ways, as big or bigger 
than anything they saw in the 1930s. But we know that in the 
1930s, the collapse of a big Austrian bank and a number of 
other problems, including the failure of about a third of the 
banks in the United States, was a major blow to credit 
extension, to confidence, and to prices, and was a big source 
of the Depression. And so for that reason, we were very 
aggressive, working with the Treasury and others, to try to 
stabilize the financial system as quickly as possible. Even so, 
the impact on the economy was quite substantial.
    Senator Corker. I see my time is up and I thank you for 
your testimony.
    Chairman Johnson. Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman.
    Chairman Bernanke, it is nice to see you again. Thank you 
for your testimony.
    You talked a little bit in your remarks about the 
importance of not just talking about cutting, not just talking 
about what the composition of the spending looks like, what the 
comprehensive approach to taxation looks like, but your view, I 
think, is more nuanced than the headlines that come out of this 
place and I appreciate it very much.
    I wanted to ask you in that context how you evaluate the 
product of the Fiscal Commission. What do you think about their 
suggestions about their mixes of cuts versus--cuts to spending 
versus revenue? Do you think it should be weighted one way or 
another? I realize you are here to talk about monetary policy, 
not fiscal policy, but you testified there. Senator Crapo was 
on the Committee, took a courageous vote to support the 
Commission report. So I wonder if you would spend a few minutes 
sharing your views on it.
    Mr. Bernanke. What I think is impressive about the Deficit 
Commission is that it highlighted the size of the problem. 
Second, it, made a set of proposals that, while obviously 
painful, would address the problem. I say that for the most 
part, because in some areas they kind of punted. Like on health 
care spending, which is really the biggest single issue, they 
just sort of assumed that cuts would be made and they did not 
give many details.
    So I appreciate that it was a bipartisan effort and I think 
it was very successful in the sense that it gave a sense of the 
magnitude of the response that is needed and showed at least 
one path forward to addressing the problem. And some other 
commissions, like the Rivlin Commission and others, have done 
similar things.
    I would not want to tie myself down too much to the details 
of that commission, I am sorry, because I think there are many 
different ways that you could address it. And ultimately, 
fiscal priorities are the Congressional prerogative, not the 
Federal Reserve's.
    But certainly one element is the importance of addressing 
the long-term entitlement issues, which are going to become 
bigger and bigger and need somehow to be managed in a way that 
will provide essential services, but will be affordable to the 
country.
    Senator Bennet. I appreciate you not wanting to endorse the 
specifics of the plan. I guess, directionally--let me try it 
this way. We are at a place right now where we have a $1.5 
trillion, roughly, deficit, $14 trillion of debt. The Fed's 
balance sheet has expanded dramatically in order to deal with 
this crisis. And one of the things that I worry about is that 
if the capital markets decide 1 day that they do not want to 
buy our debt at the price that they are now buying it, that the 
result of that is going to be catastrophic, and because of the 
position we are in today with your balance sheet and with the 
Federal Government's balance sheet, that there is no room for a 
policy response at that point.
    So while you talked about how painful some of the 
suggestions are from the Commission report, I wonder if you 
could tell the Committee a little bit how painless that would 
seem compared to the pain we would go through in the scenario 
that I just described.
    Mr. Bernanke. No, there, I am in complete agreement. I 
think the thing to understand is that the long-term imbalances 
are not just a long-term risk. They are a near and present 
danger.
    Senator Bennet. Right.
    Mr. Bernanke. To the extent that markets lose confidence in 
the Congress' ability to make tough choices, and they are going 
to be tough, there is the risk of an increase in interest 
rates, which would just make things worse because it would 
increase the deficit because of higher interest payments.
    So I think the sooner that a long-term plan is put in place 
to make significant and credible reductions in the path of the 
deficit, the better it will be and it would actually have 
benefits in the near term, not just 20 years from now.
    Senator Bennet. Right. I think that is very important, 
because earlier, there was some discussion about 10 years or 20 
years. I just want to underscore and underline your observation 
that this is actually a near and present danger and that the 
sooner that we get after it, the less painful it is actually 
ultimately going to be, and the more likely we are to protect 
ourselves. You said financial instability is extremely costly 
to the economy. I would argue that the financial instability 
that would come in the scenario I was talking about actually 
would be more costly than what we have just been through. I 
wonder if you have got a view on that.
    Mr. Bernanke. No. That is very possible. It would create 
both a fiscal crisis and require a scramble by the Congress to 
try to find any kind of cut or tax increase to address the 
problem. But a spike in interest rates would have also very 
adverse effects on a lot of institutions and portfolios and 
could create a financial panic, as well. So it is really a very 
worrisome situation.
    Now, fortunately, the markets to this point seem to have a 
lot of confidence that we will address the problem, and I hope 
we can make that confidence--that we can meet that expectation.
    Senator Bennet. Thank you. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman. Thank you, Mr. 
Chairman, for your work and your testimony.
    I want to build on some of the discussion we have been 
having about the fiscal situation. I think you have said we are 
on--fiscally, we are on an unsustainable path. That challenge 
is a long-term challenge. However, it can have very immediate 
consequences. Who knows when it can break in terms of the 
consequences if we do not start to deal with it. Is that a fair 
summary of some of the things you have said?
    Mr. Bernanke. Yes, Senator.
    Senator Vitter. In that context, I am wondering the 
following. We are coming up on a big deadline--several big 
deadlines. Probably the biggest is our reaching our debt limit 
as a Nation sometime between late March and May. What do you 
think it would do to the viewpoint on all of this, on our 
seriousness about correcting our fiscal situation, if Congress 
increased that debt limit without at the same time passing some 
meaningful budget reform?
    Mr. Bernanke. Well, Senator, as I hope I have made clear, I 
think it is extremely important that you address this issue. So 
in no way am I disagreeing with your basic premise that you 
have to address this long-term budget issue. I am just worried 
about using the debt limit as the vehicle. The reason being 
that if it were even a possibility that the Government would 
default on its existing debt, not pay the interest and 
principal on existing debt, some of the financial crisis issues 
that Senator Bennet mentioned would immediately happen because 
currently there is absolute confidence that the U.S. Government 
will pay its bills. If you do not do that, it would have very 
negative effects on financial markets and on our economy, and 
for a very long afterwards, the U.S. would have to pay higher 
interest rates in the market and that would make our deficit 
problems even more intractable.
    So again, I very strongly support efforts to address the 
long-term deficit problem, but I am a little nervous about 
taking the chance that we would not be paying the interest and 
principal on our debt.
    Senator Vitter. Let me ask the same question in a different 
way. Would it be better to increase the debt limit and go along 
our merry way on the present fiscal path, or would it be better 
to increase the debt limit and at the same time pass meaningful 
budget reform?
    Mr. Bernanke. Well, clearly, the latter. You want to make 
sure that the debt is paid, interest is paid. Meaningful budget 
reform is highly desirable. I am just concerned that there be a 
significant probability that we would not raise the debt limit 
and that would cause real chaos. So I am completely with you, 
Senator, on the need for budget reform and I hope that Congress 
will be able to come together and make some tough decisions.
    Senator Vitter. Well, again, let me go back to my first 
point. I understand your concerns about the consequences of not 
raising the debt limit. However, that event is so big, it seems 
to me if we do it and do not do any meaningful budget reform, 
that is a very clear, very strong negative signal about how 
serious we are about correcting our fiscal path. That is my 
point. Would you disagree with that?
    Mr. Bernanke. I guess I draw a distinction between not 
increasing the debt limit and maybe even shutting down the 
Government, those sorts of things. Not increasing the debt 
limit is like saying we are going to solve our family's 
financial problems by refusing to pay our credit card bills. 
These are bills that have already been accrued, as opposed to 
cutting up the credit card and saying we are not going to do 
any more spending. But these are--this is money we have already 
borrowed. These are commitments we have already made to 
contractors, to senior citizens, and so on, and what we are 
saying here is we are not going to make these payments that we 
promised. So I would rather that we be forward-looking and say 
we are going to restrict new spending or new commitments until 
we have reform.
    Senator Vitter. Well, maybe you misunderstood me. I was not 
suggesting not acting on the first. I was just suggesting that 
we should act on both together, because if we do not, I think 
that is a very strong negative signal about our lack of 
commitment to changing our fiscal path.
    Mr. Bernanke. I really support a program to improve the 
long-term fiscal sustainability.
    Senator Vitter. Thank you.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you, Mr. Chair, and thank you, Mr. 
Chairman.
    You commented that our deficit is not a single-year 
problem, but a long-term problem, our deficit, our debt. The 
Budget Committee plan from last year sought to essentially stop 
digging the hole any deeper after about 4 years, but to avoid 
driving us into a double-dip recession, a more serious 
recession, in the short term. When you are talking about a 
long-term problem, and as we wrestle with the short-term 
impacts, is that type of framework, where within a couple of 
years you are getting to a point you do not dig the hole any 
deeper, and then from that point you are reducing it, is that 
kind of the type of profile you are talking about in terms of 
the long-term, short-term tradeoffs?
    Mr. Bernanke. Well, one criterion which is very useful is 
looking at the primary budget deficit, which is the deficit 
less interest payments, and you need to get the primary budget 
deficit down to zero in order to avoid increases in the debt-
to-GDP ratio. Currently, under current CBO projections, the 
primary budget deficit is 2 percent in 2015 and 3 percent in 
2020, of GDP. That gives a sense of the kind of cuts we would 
like to see over the next 10 years--that would help stabilize 
that debt-to-GDP ratio over that period, and so that is the 
kind of criterion I would be looking for, over the next 5 to 10 
years, reducing the structural deficit by 2 to 3 percent.
    Senator Merkley. Thank you. Now let me switch to energy 
policy. There is a lot of discussion now about the impact of 
foreign oil price shocks and the possibility that oil at $125 
or higher might trigger a real challenge. Does it make sense 
for us to have a national strategy to radically reduce our 
dependence on foreign oil?
    Mr. Bernanke. I think that anything we can do to diversify 
our energy sources is probably helpful. We want to make sure 
what we do is economic, but it is true that oil does bring with 
it geopolitical risks and uncertainties that other forms of 
energy might not have and that probably should be taken into 
account as we think about the range of energy sources. I think 
the recent developments in natural gas here in the United 
States and the increased supply of that is a very good 
development. It is going to be very helpful. I know that some 
people are supporting additional nuclear powered utilities, 
energy producing. So, yes, I think some attention to 
diversifying the energy sources that we use is a good idea to 
avoid some of these risks.
    Senator Merkley. I will keep jumping topics here, given the 
short time I have, but commercial lending has been in a real 
challenging position, with a lot of balloon mortgages, 7- to 
10-year mortgages coming due and banks reluctant to relend 
because of the declining value of the buildings. The Fed was 
involved in the Term Asset-Based Securities Loan Facility, or 
TALF, which helped in the short term, and then they kind of 
pulled back from that. Where are we now in terms of commercial 
lending being a major structural challenge for our economy?
    Mr. Bernanke. Well, the TALF was about stimulating the 
commercial mortgage-backed securities market, and there was a 
story in the paper this morning to the effect that the CMBS 
market, not in a big way but in a modest way, is coming back, 
at least for the better properties. So that is a positive 
development.
    The Fed has also worked with banks, providing guidance 
about how to rework, restructure CRE loans, which seems to be 
having some beneficial effects, as well.
    We had a Fed testimony by Pat Parkinson recently on this 
topic and I would say, overall, that some of the worst fears 
about commercial real estate seem not to be coming true, that 
there is some stabilization of vacancy rates and prices and so 
on in this market. That being said, there is still a lot of 
properties that are going to have to be refinanced and probably 
some losses that banks are still going to have to take. So it 
is still certainly a risk to the financial system, but it does 
seem to be looking at least marginally better than we were 
fearing 6 months ago.
    Senator Merkley. Thank you.
    Chairman Johnson. Senator Johanns.
    Senator Johanns. Mr. Chairman, thank you, and Mr. Chairman, 
good to see you again.
    As I was listening to the discussion about QE2, which you 
know I have been a critic of that, I am not supportive of what 
you are doing, but having said that, it occurred to me that 
maybe we are focusing on consequences and not focusing enough 
on the reasons that maybe got you to that decision point. So 
let me, if I might, offer a thought about that, and I would 
like your reaction to it.
    Never in the history of this country has there been a 
greater need for people, foreign countries, whoever, to buy our 
debt than now. In fact, nothing comes close to it. It is kind 
of breathtaking in its magnitude. Just week after week after 
month after month, somebody has to be out there buying this 
massive amount of debt.
    I look at what has happened to commodity prices, which have 
been so very strong. I look at what has happened to the Dow and 
the NASDAQ, and that also has been strong. It has been quite a 
run. There is so much competition out there. So as the economy 
improves, there is more reason to be in those investments than 
getting less than a percent return on a 2-year Treasury or, I 
do not know, 2 percent-plus on a 10-year Treasury.
    So it just occurs to me, Mr. Chairman, that part of what is 
driving this is the real, genuine, bona fide worry that in 
order to attract people to buy Treasuries, the Government would 
have to entice them with higher yields. And eventually, heaven 
forbid, good Lord forbid, there is a day at which there just is 
not an appetite to buy more paper, because those who are in 
that marketplace look at the U.S. Government and say, you know, 
you have so detached the joy of spending from the pain of 
taxation that you do not have a fiscal plan.
    And then I look at the impact on real people, like there 
was talk, well, we do not have to do anything about Social 
Security. Well, that assumes that we can keep borrowing, 
because there is no trust fund. It is just paper, again. And if 
we are not able to borrow more money, we cannot even pay 
current beneficiaries.
    So it seems with those kinds of weighty issues, all of 
which I think are accurate, if I am reading this correctly, you 
almost had no choice. You have got to be in this marketplace to 
keep interest rates low to start out with. And you have become 
a big player in buying our debt, and you must lay awake at 
night wondering, if I exit this marketplace, what happens? Tell 
me where I am wrong in that thinking.
    Mr. Bernanke. Well, that was not our motivation for getting 
into this. Our motivation was the state of the economy, which 
as of last summer and fall, we had significant concerns that 
the recovery was going to stall, that growth was not 
sufficiently fast to bring down unemployment, and that 
inflation was moving down and down and down to where we were 
getting closer and closer to the deflation zone. So that was 
the reason we took the action and we felt, although there are 
admittedly risks with the QE2 program, that there were also 
very significant risks to not taking the action. So we did it 
for the same reasons that monetary policy is always used, which 
is to try to meet our dual mandate for employment and 
inflation.
    Our policies affect interest rates in two ways. One is as 
we promote growth, that is causing interest rates to rise for 
the reasons you were describing, because other investments 
become attractive, but also it is important for us to keep 
inflation low and well under control because inflation also 
affects the level of nominal interest rates.
    So we were not motivated by anything related to the deficit 
or the debt and I do not--and I would make two points. One is 
that when we stop buying, whenever that may be, our previous 
experience suggests that the market takes it in stride because 
the market anticipates at some point that the purchases will 
stop. And then we are not monetizing the debt because we will 
be returning our balance sheet to a more normal level 
ultimately.
    I think what it all comes down to is that what the markets 
are looking at is the long-term fiscal discipline of the U.S. 
Government, and whether or not interest rates will spike or 
whether they will remain reasonable depends far more on 
Congress' decisions about long-term fiscal planning than 
anything the Fed is going to do.
    Senator Johanns. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman. I am honored to be 
on this Committee. Thank you so much.
    Chairman Bernanke, in your last Monetary Policy Report to 
Congress, you touched on housing finance when you noted that, 
on balance, interest rates on fixed-rate mortgages decreased 
over the first half of 2010. But you also acknowledged that 
despite falling mortgage rates, the availability of mortgage 
finance continued to be constrained.
    I hear time and time again from constituents throughout my 
State in North Carolina that they are having difficulty taking 
advantage of the low rates that are out there. As you know, one 
of my biggest priorities during the consideration of the Dodd-
Frank Act was to include a qualified residential mortgage 
standard in the bill. I worked with Senator Landrieu and 
Senator Isakson and we worked to include a standard that would 
provide access to safe, stable, and affordable home loans for 
creditworthy borrowers. I understand that risk retention might 
serve as a deterrent to types of excessive risk taking, but I 
am concerned that risk retention could impose significant costs 
and reduce liquidity in the mortgage market. As a result, we 
tried to fashion an amendment that addressed the primary causes 
of the problem directly and yet also provided an incentive for 
lenders to originate safe, stable, and affordable mortgages.
    I was hoping you could speak a little bit more today about 
the state of the mortgage market and the impact that the 
qualified residential mortgage definition that is currently 
being written will have on housing finance. Are we going to 
continue to see constrained credits, and if regulators were to 
draw too narrow an exemption, for example, if they required a 
20 percent down payment, as advocated by some, would credit 
further be constrained? I am really concerned that if loans do 
not meet the qualified residential mortgage standards and 
lenders have to set aside the extra capital to meet this risk 
retention requirement, we are going to see constrained credit 
going forward.
    Mr. Bernanke. Well, Senator, we are working very hard on 
the QRM in conjunction with the FDIC and other agencies and we 
expect to have some rules available for comment very shortly. 
We have been discussing in particular to what extent servicing 
requirements should be attached to the QRM. So the goal there 
is to have a definition of mortgages that are of sufficiently 
high quality and meet sufficiently high underwriting standards 
that the risk retention is not necessary, and so that would 
reduce the cost of those mortgages.
    So on the one hand, I understand you do not want it to be 
too narrow or too tough, but on the other hand, you want this 
to be a good mortgage. You want it to be one that will be safe, 
well underwritten, and that investors will be happy to buy even 
without the risk retention. So we are trying to balance those 
two issues.
    Unfortunately, in terms of the mortgage market, most of the 
mortgage market is still Fannie and Freddie at this point, and 
so we know directly what is happening there, which is that they 
are continuing to keep pretty tight standards in terms of a de 
facto 20 percent down, pretty high FICO scores. So terms and 
conditions for getting a mortgage are quite tight, particularly 
relative to the excessively loose terms that were in play 
before the crisis.
    My own guess is that improving the economy will cause 
lenders to be a little bit less restrictive, but on the other 
hand, as we move toward a fully privatized market, as the GSEs 
become less and less important, the private sector may decide 
to keep terms moderately tight.
    So currently, the terms are pretty tight. That is a problem 
for the housing market. I expect some modest improvement, but 
probably not anything dramatic in the near term. We continue to 
work on the QRM, and I think that will be a constructive 
addition to the housing finance programs that we have.
    Senator Hagan. Well, I am sure you will continue to be 
hearing from us. We are really concerned about not making it so 
restrictive that we cannot have as many well-qualified loans as 
possible, obviously recognizing that there does need to be a 
good definition of that.
    Mr. Bernanke. OK. Thank you.
    Senator Hagan. Also, the FOMC has used unconventional 
monetary policy tools since late 2008 to promote economic 
recovery and price stability. Most recently, as you have been 
talking about, quantitative easing and the purchase of 
Government bonds with the newly printed money has made monetary 
policy more complicated. We still do not know the long-term 
effects this policy may have, and more importantly, what 
effects unwinding these policies may have.
    I understand that these tools, especially the asset 
purchases, will take time to unwind and that economic 
conditions will dictate much of the decision making. A recent 
study by a group of Federal Reserve Board economists 
constructed a baseline scenario for unwinding the large-scale 
asset purchases that would see the Fed's $2.6 trillion balance 
sheet normalize in size and composition by 2017. Do you agree 
with this baseline trajectory? What are the factors that will 
influence this trajectory toward balance sheet normalization? 
Will the price stability or maximum employment drive the 
decision making?
    Mr. Bernanke. Well, Senator, we had had earlier discussions 
about the pace of normalization and one concern we had was not 
to sell off our securities so quickly that it would disrupt the 
market. And so the sense was that it would be a relatively slow 
process and one that would be clearly announced in advance so 
that markets would be able to anticipate.
    What I need to emphasize here is that that does not mean 
that QE will continue until 2017 or easy money will continue 
until 2017. We have tools that will allow us to tighten 
monetary policy in more or less the normal way even if the 
balance sheet remains large.
    For example, we have the authority to pay interest on 
reserves. By raising the rate that we pay on reserves to banks, 
we can effectively raise the short-term money market rate and 
that will work through the financial system just pretty much 
the same way that a higher Federal funds rate target will work.
    So there are different ways for us to unwind. Obviously, as 
Senator Shelby has pointed out, it is important for us to get 
back to a more normal size of our balance sheet and we will do 
so, but the pace at which we do that does not constrain us from 
tightening monetary policy at the appropriate time. And as I 
was trying to explain also to Senator Shelby, we want to be 
sure that price stability is maintained, that inflation remains 
low and stable, and in doing that, we will have to look ahead 
to where inflation is going, not just where it has been, but 
also to the extent that is consistent with that, we want to 
make sure that recovery is self-sustaining, that the private 
sector is leading the recovery so that the artificial support 
from the Fed and from fiscal authorities and so on can be 
withdrawn and let the private economy lead the recovery.
    Senator Hagan. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Wicker.
    Senator Wicker. Am I next?
    Chairman Johnson. Yes.
    Senator Wicker. Thank you. Let me see if I understand an 
answer that I believe you gave Senator Merkley. You said the 
commercial mortgage-backed security market is coming back to a 
small extent.
    Mr. Bernanke. Correct.
    Senator Wicker. And I assume that is a good thing.
    Mr. Bernanke. Yes, because that is an important source of 
finance for commercial real estate, and given that banks are 
not expanding their balance sheets and we need alternative 
sources of finance.
    Senator Wicker. Right. And I got information from CRS 
yesterday that with regard to residential mortgage-backed 
securities, that market is virtually dead, is that correct?
    Mr. Bernanke. Yes.
    Senator Wicker. Would it be a good thing if that came back?
    Mr. Bernanke. Well, I would think so, although it is 
important to remember that a lot of bad lending took place 
through that market and helped contribute to the crisis. But 
conditional on underwriting standards or other oversight that 
makes the loans created through that process of sufficiently 
good quality, then again, it would be good to have multiple 
sources of financing for the housing market.
    Senator Wicker. OK, and that is what my question is sort of 
directed toward, as to what standards you might recommend in 
that regard. You know, most of us have had to go to school 
since 2008 on this whole issue of mortgage-backed securities 
and what we learned is that as they were leading up to 2008, 
they were outside many of the SEC's regulatory structures 
because they were privately placed transactions. And so with 
regard to the definition of delinquency or being in default or 
the classification of the mortgages or how those mortgages are 
worked out when they get in trouble, there were not those 
standards in place because generally they were considered 
transactions involving the big boys.
    So would it be helpful, and what suggestions would you have 
in this regard about having standards, greater disclosures, and 
structural reforms put in place to perhaps revive the private 
mortgage-backed security market and bring back more private 
mortgage capital into the residential market?
    Mr. Bernanke. Well, there are a number of steps taken in 
the Dodd-Frank Act to try to address this. For example, one of 
the problems in the crisis was conflicts of interest or 
shopping around for credit ratings, and so there are some new 
regulations, regulatory authorities at SEC to reduce those 
conflicts of interest and the credit rating agencies have been 
reworking their models for securitized products. What we saw in 
the crisis, where firms would take a whole bunch of lousy 
mortgages and then use financial engineering to make them into 
triple-A securities, that should not be possible anymore if the 
credit rating agencies are forced to meet certain standards.
    Second, the----
    Senator Wicker. Let me interject here.
    Mr. Bernanke. Sure.
    Senator Wicker. Did we adequately address that issue in 
Dodd-Frank, or is there really a need to----
    Mr. Bernanke. Well, before I can answer that question, I 
would like to see the full panoply of steps that the SEC takes. 
But I know they are serious about trying to address 
particularly the shopping around problem, where a securitizer 
would try different agencies until they found one who gave them 
the rating they wanted. So more disclosures on that, for 
example, would be helpful.
    Then I was just talking to Senator Hagan about the QRM, the 
qualified residential mortgage, which would set some standards 
for high-quality mortgages, and mortgages that did not meet 
that would have to have a skin-in-the-game credit risk 
retention element that is provided by Dodd-Frank. I think that 
supervisors will be paying more attention to this in the future 
and we should pay more attention to it.
    And finally, one thing that the Federal Reserve is very 
interested in, and we have been talking about this with 
Congress and with other agencies, is to have national servicing 
standards, because that turns out to be an important part of 
the process of making sure that people who do run into trouble 
are able to get restructured mortgages and a chance to keep 
their home. So there are a number of things in the bill, but I 
think as we go forward, we will want to make sure that we have 
sufficient oversight that we can assure that the mortgages are 
of good quality.
    I think that as the GSEs begin to pull back, as they 
inevitably will, that we will see private label mortgage-backed 
securities coming back into the market, but it is pretty 
limited right now.
    Senator Wicker. OK. Well, my time has expired. Would you 
take for the record the question of some recommendations about 
how to go further on structural changes that might make the 
mortgage-backed security market more viable with regard to 
residences?
    Mr. Bernanke. Certainly.
    Senator Wicker. Thank you, sir.
    Chairman Johnson. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman, and Mr. Chairman, 
it is good to see you again, as well.
    I think one of the comments you made earlier, we all need 
to bear in some level of mind. While you have had to take some 
extraordinary actions, when we reflect back on where we were in 
the spring of 2009 and how deep a ditch we were in and the 
prognostications at that point, while clearly employment 
numbers are not where we would like, some of the other recovery 
has been, frankly, more dramatic than I think many of us would 
have even predicted.
    One thing--I have got two issues I want to raise in my 
short time, and I will try to be quick about it because I want 
to follow up on Senator Bennet's question. But before I get 
there, one of the things I think, and hopefully we will have a 
wise way to avoid a Government shutdown right now, but I do 
think at times within the public, there is some confusion 
between these issues around shutdown and an issue that we will 
have to address in the next few months around the debt ceiling 
limit. And as we have heard from your testimony, and I 
absolutely believe we need to put in place a long-term plan to 
deal with our debt and deficit and I am proud of the bipartisan 
work that is being done on that.
    But as we are still kind of in this hopefully strengthening 
recovery, can you, in as plain of language as a central banker 
can, make clear what the ramifications would be, maybe to an 
average American or to our economic recovery, if we were to 
default and not raise that debt ceiling limit and the 
ramifications that would have toward our recovery to an average 
American family, two or three examples.
    Mr. Bernanke. Well, it would be an extremely dangerous and 
very likely recovery-ending event. First, it would almost 
certainly create a new financial crisis as firms that rely on 
receiving their interest and principal do not receive it and 
they are unable to make payments, and so that problem would 
cascade through the financial markets. Then there would be a 
massive loss of confidence in the U.S. Treasury securities, 
which are the deepest, most liquid market in the world. 
Interest rates would spike, and that would, in turn, affect 
many other assets, as well as Treasuries.
    So the near-term effect would almost certainly be a very 
sharp resumption of the kinds of instabilities we saw in 2008. 
Even if we were able to avoid those kinds of effects, the 
interest rate that lenders would demand of the U.S. to finance 
our debt going forward would be higher, reflecting the greater 
riskiness and uncertainty associated with funding the U.S. 
Government, and that would make our fiscal problems all the 
more severe because interest payments are part of the deficit. 
So it means that cuts would have to be sharper and tax 
increases larger and those things themselves would also be a 
negative for the recovery.
    So, broadly speaking, it would be, a very, very bad outcome 
for the U.S. economy.
    Senator Warner. So it would be safe to say that 2 years of 
extraordinary actions, many of them politically unpopular, 
could all be washed away and whatever recovery we have got 
could all be put in jeopardy if we, as Members of Congress and 
the American public, does not realize that there is a major 
distinction between the questions around the debt ceiling limit 
and equally important questions around Government shutdown. But 
Government shutdown compared to messing with the debt ceiling 
limit could have dramatically different ramifications.
    Mr. Bernanke. We have never had a failure to raise the debt 
limit. We have had a number of Government shutdowns and they 
have created problems, but they have not been as destructive as 
a debt limit failure would be.
    Senator Warner. All right. Well, being sensitive to those 
of us on the end who have been waiting a while, I will try to 
get my last question in and observe the time limit. One of the 
things I know, as much as Senator Bennet tried to pin you down 
on the Deficit Commission report, you will not go on the 
specifics, but I would like to ask, because there are many 
folks here who feel that we can solve this crisis simply on the 
spending side. There are some on our side that want to do it 
only on the revenue side, or revenue side with the exclusion of 
entitlements.
    But the nature and size of this challenge is so great, do 
you believe that we can really get there without having an open 
mind on both sides of the balance sheet?
    Mr. Bernanke. Well, I hope there will be an open mind. I 
hope there will be plenty of discussion about all possible ways 
forward. So certainly, I cannot disagree with that.
    Senator Warner. But both spending and revenues have to be 
part of this discussion if we are going to be able----
    Mr. Bernanke. I hope there will be an open mind and that 
there will be discussion of all options, including reforms of 
the tax code, including restructuring of spending and the like, 
yes.
    Senator Warner. I wish I had had another 30 seconds.
    Chairman Johnson. Senator Moran.
    Senator Moran. Mr. Chairman, thank you very much. Chairman 
Bernanke, thank you for the opportunity to question and make 
comments.
    Mr. Menendez asked earlier about, I think, at least from my 
perspective, the crux of his point was that despite significant 
monetary policy changes designed to put additional dollars into 
the banking system, loans are not being made. Credit is not 
being extended to the degree that we need to increase the 
economy. And I am interested in knowing whether that is 
accurate. Are we still trying to--I assume our goal is still 
try to increase loan demand. And do you think that the 
regulatory environment that particularly community banks face 
has a consequence in the fact that credit is not being extended 
and is there something we should do?
    Mr. Bernanke. Well, first, the QE2 is not intended to work 
primarily through banks. It is intended to work through broader 
markets and we have seen, very open corporate bond markets, in 
part because of the monetary policy actions we have taken. So 
that is not the direct object of the QE2 and what we have seen 
is easier, broader credit conditions as opposed to bank lending 
specifically.
    We have tried to address the bank lending issues in 
different ways from a supervisory perspective, and I do not 
want to take all your time, but we have a long list of steps we 
have taken in terms of guidance, in terms of examiner trading, 
in terms of outreach, to try to make banks appreciate and make 
our own examiners appreciate that what we are looking for here 
is an appropriate balance. On the one hand, we do not want 
banks making bad loans, but on the other hand, it is good for 
everybody if they make loans to creditworthy borrowers, and we 
are encouraging that and encouraging our examiners to encourage 
that.
    My sense is that although credit conditions are still 
tight, that they are improving. I mentioned that in my 
testimony. We have seen in our surveys of banks that terms and 
conditions have stopped tightening and in some cases have begun 
to loosen a bit. Many banks have introduced new programs like 
second-look programs for looking at small business loans. My 
sense is that this year will see some improvement, not anything 
like what we saw before the crisis, and that is, in fact, 
probably a good thing, but we will see some improvement in bank 
lending and we are going to continue to follow that carefully. 
It is a very high priority for us.
    Senator Moran. I raised this topic in your last appearance 
with other regulators before our Committee and I again would 
tell you that bankers continue to suggest that the ability to 
make loans is significantly hampered by the regulatory 
environment, and in most instances, the suggestion, at least, 
is that those regulations are not keeping them from making bad 
loans. They are keeping them from making good loans. And so 
again, I would encourage the Fed to pursue what you outline as 
your current course of action in a more significant or 
strenuous way.
    Often, your policy is criticized on QE2, and in doing so, 
the comparison is made to Japan, and I would like to know your 
thoughts about the correlation between what has occurred in the 
Japanese economy and its central bank's response and yours in 
our economy.
    And then you indicated earlier that, long-term, our 
deficits are not sustainable, and you have had some 
conversation with my colleagues here on the Committee about not 
extending the debt ceiling, for example. What are the 
precipitating factors that you are concerned about? I know 
every central banker has got to portray confidence, but what 
are the things that are out there that may make this, when you 
say long term not sustainable, that long term becomes a 
significantly a shorter term? What are the things in the world 
economy that we ought to keep our eye on that may change the 
timeframe in which we have to operate?
    Mr. Bernanke. First, let me say on your bank issue that we 
do have an ombudsman, and I would encourage any bank that has 
concerns about Federal Reserve examiners to get in touch with 
us and we will try to follow through on that.
    Senator Moran. Thank you.
    Mr. Bernanke. On Japan, the Japanese did a lot of things 
earlier because they had a bubble and a collapse earlier than 
we did, but, one important difference is that, instead of 
simply focusing on bank reserves, which have not been lent out 
very much, we do not want it to be excessively lent out in the 
sense that we want it to be controlled. Otherwise, it would 
tend to create higher money supply and pose an inflation risk. 
What we have done instead is focus on longer-term securities, 
taking duration out of the market, and that has the effect of 
pushing investors into other types of investments and, again, 
making the corporate bond market more attractive, making the 
stock market stronger, and the like.
    So our approach has been somewhat different than what the 
Japanese took, but we have faced the same concern that 
following a financial crisis, recovery can be quite slow and 
deflation can be a risk, and we saw those things happening last 
summer and that is why we decided to take additional steps as 
we have.
    On terms of what could bring the fiscal crisis into the 
present, it is very hard to know. There is no way, to judge 
when markets will change their mind. Currently, 10-year bonds 
are still 3.5 percent, and currently, they seem to still have 
the confidence of the bond markets.
    I think what would be a real problem would be if investors 
saw not so much the economic capacity, but the political 
capacity of the United States as being inadequate to address 
these problems. If it became clear that these problems were not 
going to be adequately addressed because we were just in a 
perpetual gridlock, I think that would raise significant 
concerns and would risk bringing these problems forward into 
the present.
    Senator Moran. Mr. Chairman, thank you. I think we often in 
Congress tend to criticize the Fed when so much of this, as you 
said earlier, is determined by decisions made here on spending, 
deficits, and revenues. Thank you, Mr. Chairman.
    Mr. Bernanke. Thank you.
    Chairman Johnson. Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman, and thank you, 
Mr. Chairman.
    My first question relates to concentration limits in 
competitive in your role as a member of the FSOC group. Section 
622 prohibits any firms whose total liabilities are greater 
than 10 percent of all financial firms' liabilities from 
merging with or acquiring another company. I am concerned, the 
way those numbers are calculated could put U.S. companies at a 
competitive disadvantage. That is because for U.S. companies, 
the number in the numerator includes all their liabilities 
worldwide, but for non-U.S. companies, only their U.S. 
liabilities. That means if a U.S. company and a Swiss company 
simultaneously bought a Brazilian bank, the concentration ratio 
for the U.S. company would go up and the ratio for the Swiss 
company would go down. As I understand it, the FSOC committee 
has the ability to change that and make it fairer. What are 
your thoughts, and what should FSOC do?
    Mr. Bernanke. Well, I fully agree with your concern. It is 
unfair in the sense that a foreign bank that has operations in 
the U.S. could purchase a domestic U.S. bank where a U.S. bank 
of the same size could not buy that bank, and that is an 
issue----
    Senator Schumer. Or a foreign bank of the same size.
    Mr. Bernanke. Or a foreign bank. I may be mistaken, but my 
understanding is that we did not have discretion----
    Senator Schumer. You do.
    Mr. Bernanke. Well, I will look at that----
    Senator Schumer. OK. Good.
    Mr. Bernanke. ----because I do think it is a problem.
    Senator Schumer. OK. The FSOC the statute says FSOC can, A, 
take competitiveness into account, and B, that any rules are 
subject to the recommendations of FSOC. So you have some 
discretion and I hope you will.
    Second issue, you have persistently, wisely, in my view, 
you defer to Congress on taxing and spending, but I want to ask 
you a more general question about the ``when'' of deficit 
reduction rather than the ``how,'' about the timing of our 
efforts to reduce the deficit. Last month when you were 
testifying before the House Budget Committee, you said the 
following, and I am quoting, ``This very moment is not time to 
radically reduce our spending or raise our taxes because the 
economy is still in a recovery mode and needs that support.''
    Now, private economists seem to agree. Mark Zandi yesterday 
in his report said too much cutting too soon would be 
counterproductive and would be taking an unnecessary chance 
with recovery. Do you agree with those sentiments?
    Mr. Bernanke. Yes, if I may add a small qualification, only 
that----
    Senator Schumer. No, do not do that.
    [Laughter.]
    Mr. Bernanke. Thank you, Senator. Only that it is important 
to be showing progress, and therefore, I hope that we will take 
a long-term perspective and do things that will be persuasive 
to the market, and that over time----
    Senator Schumer. Yes.
    Mr. Bernanke. ----we are committed to----
    Senator Schumer. I do not disagree with that caveat, at 
all. I mean, that is a fair caveat. But in the short term, we 
had better be careful not to snuff out this nascent recovery by 
doing too much cutting, in the words of Zandi. That is correct, 
in your opinion?
    Mr. Bernanke. Yes.
    Senator Schumer. OK. Do you also agree--he said that cuts, 
significant cuts could cause job loss. Those cuts would create 
job loss. I do not mean overall job loss, macro, but those cuts 
could. Do you agree with that?
    Mr. Bernanke. That cuts would presumably lower overall 
demand in the economy, would have some effect on growth and 
employment.
    Senator Schumer. Good. So the answer is yes?
    Mr. Bernanke. Yes.
    Senator Schumer. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Kirk.
    Senator Kirk. Thank you, Mr. Chairman.
    I would just like to briefly comment for you on the work, 
This Time is Different, by Reinhart and Rogoff. What do you 
think?
    Mr. Bernanke. Well, Ken Rogoff is one of my long-term 
colleagues and friends and I have great respect for both him 
and for Ms. Reinhart and I think it is a very interesting piece 
of work. It is particularly instructive because it uses a lot 
of historical episodes, data, as opposed to a purely 
theoretical approach to the problem.
    Senator Kirk. I think it is an important piece of work. You 
were effusive in your praise, at least on Amazon, I saw, and I 
thought it was--the title is important, because every central 
banker or economic official says, this time is different, and 
yet the basic themes of debasing a currency, inflation, lack of 
spending discipline, Reinhart and Rogoff highlight the 
similarity of poor action by bankers and governments to destroy 
their economy through a lack of discipline, and it is an 
important lesson for us.
    We have a report from the National Council of State 
Legislators that talk about financial stress now in 12 American 
States. Just recently, the State of Illinois borrowed another 
$3.7 billion, paying 50 basis points more to borrow than 
corporate debt at the lowest investment grade.
    You and I talked earlier about the potential of States 
posing a systemic risk to our economy. Do you feel that they 
could pose a systemic risk?
    Mr. Bernanke. It is possible, but currently, while States 
are facing very tough financial conditions, at least as long as 
the recovery continues, they are seeing higher tax revenues and 
that will at least be helpful to some of them in trying to 
address these problems. But obviously this is something we have 
to watch carefully.
    Senator Kirk. Certainly a panic in the State and municipal 
bond market could trigger a systemic risk, in your view?
    Mr. Bernanke. If it was sufficiently severe, yes.
    Senator Kirk. Yes. You have expressed opposition to any 
Federal bailout of the States, is that correct?
    Mr. Bernanke. I think that it is a Congressional, Federal 
matter. It is not a Federal Reserve matter. The Federal Reserve 
is not going to be involved in that. If Congress wants to 
address it, that is----
    Senator Kirk. What would your view be to accelerate Federal 
borrowing to give money to the States?
    Mr. Bernanke. Again, I think that is a Congressional 
decision. If you are going to be increasing borrowing, 
obviously, that bears its own risks.
    Senator Kirk. Right, I think tremendous. Would you regard 
the proposal to defer State payments of principal and debt on 
loans made from the Federal Government as a State bailout?
    Mr. Bernanke. Well, to some extent, it has fiscal 
implications for the Federal Government.
    Senator Kirk. I would think so. Also, maybe we could use 
language that is more clear. In your testimony on page five, 
you talked about we are considering providing additional 
monetary accommodation through further asset purchases. In 
November, the committee announced that it intended to purchase 
an additional $600 billion in longer-term Treasury securities 
in the middle of this year. In more layman's terms, you are 
talking about lending money to the U.S. Government, correct?
    Mr. Bernanke. Well, not exactly, because we are buying 
these securities on the secondary market. So somebody has 
already lent the money directly, but yes, we are holding 
Government debt.
    Senator Kirk. Yes, my point exactly. Section 14 of the 
Federal Reserve Act legally prevents you from--well, this would 
say from buying newly issued securities, which in a more 
layman's term would be lending directly to the U.S. Government.
    Mr. Bernanke. And that is why we are not doing that.
    Senator Kirk. Right. But instead, what you do is others 
lend to the U.S. Government and then you buy their loans.
    Mr. Bernanke. Well, we do that all the time, even in most 
normal conditions.
    Senator Kirk. Correct. The CRS says, in modern times, the 
Fed has always held Treasury securities as part of normal 
operations, but now under QE2, it is a $600 billion commitment.
    But the CRS goes on to say, nonetheless, the effect of the 
Fed's purchase of Treasury securities on the Federal budget is 
similar to monetization, whether the Fed buys securities on the 
secondary market or directly from Treasury. When the Fed holds 
Treasury securities, Treasury must pay interest to the Fed as 
it would to any private investor. These interest payments after 
expenses become part of the profits of the Fed. The Fed, in 
turn, remits 95 percent of the profits to the Treasury, where 
it is added to the general revenues. CRS concludes, in essence, 
the Fed has made an interest-free loan to the Treasury because 
almost all of the interest paid by the Treasury to the Fed is 
subsequently sent back to the Treasury. Would you agree with 
that?
    Mr. Bernanke. Yes, we have remitted $125 billion to the 
Treasury in the last 2 years. So it is important to understand 
that what we are doing is not fiscal spending. It is, in fact, 
purchasing securities which we will then sell back to the 
market.
    Senator Kirk. So because of Section 14 of the Act, maybe 
the simple way of saying it is others are lending money to the 
Federal Government. You are purchasing those loans, and then 
the interest payments being made to you because you are now the 
holder of the--or you are the official maker of the loan--are 
then remitted back to the Treasury. So maybe in layman's terms, 
this is one part of the Government lending another part of the 
Government money, which would not lead to long-term confidence 
once the American people understood the basics a little bit 
better.
    Mr. Bernanke. Well, it should be added that we also have a 
funding cost, and as interest rates go up, we will have a 
liability cost as well as an asset cost. So it may or may not 
be a return to the Treasury.
    Monetary policy, even in most normal times, as the CRS 
says, involves buying and selling Treasury securities. We could 
not have currency outstanding if we did not have securities to 
back them up.
    Senator Kirk. Although I would say, we had a currency for 
many parts of our history without any Federal debt.
    Mr. Bernanke. When was that?
    Senator Kirk. Under the Jackson administration.
    Mr. Bernanke. So this was before the Civil War. This was 
during the period where individual banks issued currency. We 
did not have a national currency.
    Senator Kirk. I just might say that it is possible for a 
country to have a currency without a trillion-dollar debt.
    Mr. Bernanke. Yes.
    Senator Kirk. Thank you.
    Chairman Johnson. Senator Kohl.
    Senator Kohl. Thank you, Mr. Chairman.
    Chairman Bernanke, I would like to ask you two questions. 
The first question will be about rising oil prices. The second 
question will be about interchange fees. First, Mr. Chairman, 
we all agree that the rising price of oil will slow the 
economic recovery. To me, one of the most anticompetitive 
forces in the world, which raises the price of oil, are the 
price-fixing activities of the 12 member nations of OPEC oil 
cartel.
    I have a bill, Mr. Chairman, called NOPEC that would, for 
the first time, make the actions of OPEC subject to U.S. 
antitrust law. This bipartisan bill passed the Senate 4 years 
ago with 70 votes. Mr. Chairman, if this price-fixing cartel 
did not exist, wouldn't the market function better and wouldn't 
oil prices be lower? I would like your comment after I make my 
second question to you.
    Interchange fees. The issue of interchange fees is very 
controversial, as you know. In the recent Wall Street Reform 
Bill, Congress exempted small banks and credit unions so that 
they would not be impacted by any attempt to regulate 
interchange fees. But small banks are still worried that they 
will be discriminated against.
    Now, you and your staff are smart people, so can you see 
that the interests of small banks and credit unions are 
protected when you write the interchange rule?
    Mr. Bernanke. Senator, on the first one, on OPEC, it is 
difficult to tell how much impact on the price OPEC has. It is 
a global market and there are non-OPEC producers. What OPEC 
does try to do is set production quotas, that are restrictive, 
but they are violated to some extent, you know, because it is 
very hard to monitor them. So I do not honestly know how big an 
affect OPEC has on oil prices.
    On the interchange fees, we are following the law and we 
are certainly exempting the small banks and credit unions from 
the limits and other restrictions on the interchange fees that 
they can charge. Whether or not there will be any effect on the 
interchange fees charged by small banks remains to be seem.
    There are really, two issues. One is whether the networks, 
which are not required to differentiate in their payments to 
small banks and to others, whether they do have a two-tier 
pricing system or whether they find it, for one reason or 
another, inconvenient or uneconomic to do so.
    The other factor which may affect the interchange fees for 
smaller institutions is the fact that with the route with the 
network competition that is required by the bill, there may be 
some general downward pressure on interchange fees just coming 
from the fact that there is more competition in the marketplace 
and that may affect small banks to some extent.
    So I think there are some things we cannot fully control. 
That being said, we are certainly trying to write the rule in a 
way that will achieve Congress' intention and provide 
exemptions for banks under 10 billion and for the other kinds 
of debit cards that receive the exemption.
    Senator Kohl. Can you say to us that that goal that you are 
trying to hard to achieve when you write the rule is something 
that you are going to exert tremendous effort and energy on in 
order to see to it that you do meet that goal?
    Mr. Bernanke. We will do everything we can, but there are 
certain areas where we do not have control. For example, we 
cannot dictate the pricing policies of the networks, and it was 
part of the goal of the bill to put competitive pressure on 
interchange fees in general, and Congress chose not to exempt 
smaller institutions from that particular provision. So they 
are still subject to the competitive pressures arising from 
multiple networks.
    But again, we understand the intent of Congress and we will 
do everything that has been given to us via the statute to try 
to achieve that objective.
    Senator Kohl. Thank you so much. Thank you, Mr. Chairman.
    Chairman Johnson. Senator DeMint.
    Senator DeMint. Thank you, Mr. Chairman.
    Mr. Chairman, thank you for being here. Just a quick 
follow-up on Senator Kirk's question. Can you tell us 
absolutely that there will be no quantitative easing for States 
and no buying of State debt by the Federal Reserve?
    Mr. Bernanke. I can say that, yes.
    Senator DeMint. OK, good. Thank you. There are a lot of 
different economic and political philosophies here in the 
Congress, and I think oftentimes, we may look to you to help 
provide some consensus, so I have got a couple of just general 
questions.
    Do you generally agree that the private sector is a more 
efficient allocator of resources than the Government?
    Mr. Bernanke. In most spheres. There are a few areas where 
the Government plays an important role, like defense.
    Senator DeMint. Sure. But so generally, a dollar left in 
the private sector provides a greater economic multiplier than 
a dollar taken by Government and spent?
    Mr. Bernanke. Again, there are some areas where the 
Government plays an important role.
    Senator DeMint. Sure. But just generally, could we 
generally conclude that the Government taxing and spending is 
not as an effective stimulus to the economy as money that is 
kept and spent and invested in the private sector?
    Mr. Bernanke. It sounds like the conclusion of your 
argument is that taxes should be zero and I would not argue 
that.
    Senator DeMint. No, no, but generally, as far as--I mean, I 
am not talking about essential services like military, but as 
we are looking at raising taxes versus cutting spending in the 
debates we are going through now, I mean, I think a basic 
underlying economic philosophy is the private is the more 
efficient allocator of resources. Building a consensus here is 
very difficult and we are often talking about effects rather 
than true causes. But I will move on from there just to ask a 
couple of other questions.
    Government spending and debt and borrowing obviously 
tightens credit, and that brings about--forces your hand to 
some degree with the quantitative easing. Is that a simple way 
to explain it? If we were not in debt, you would not need to do 
the QE, right?
    Mr. Bernanke. I am not sure about that. The recession was 
tied primarily to the financial crisis, which drove the economy 
into a deep recession, and that in turn led to inflation 
falling toward the deflation zone, and the weakness of the 
economy and the deflation risk were the things that motivated 
us.
    Senator DeMint. But if there was no debt problem, then you 
would be looking at other ways to stimulate the economy than 
actually buying Federal Reserve notes; is that right? I mean, 
excuse me, Treasury notes.
    Mr. Bernanke. Well, if there were no debt to buy, we would 
have to find some other way to do it.
    Senator DeMint. Right. What I am trying to get at is, when 
is enough enough as far as what the Federal Reserve will do 
with quantitative easing in the future? If we continue on our 
path, or even cut the projected deficits in half, do you expect 
to continue to buy more and more Treasury notes?
    Mr. Bernanke. Well, first, if you were able to do that, I 
think it would be helpful for the economy. It would probably 
lower interest rates. It would probably increase confidence. So 
I urge you to continue to address the fiscal issue. Our 
quantitative easing policy, which is just another form of 
monetary policy, is trying to address the recovery of the 
economy right now, which is still underway.
    As I said in my testimony, it looks like a self-sustaining 
recovery is beginning to take place, so that is encouraging. 
But what we will be looking at is the state of the economy. Our 
mandate from Congress is to look at inflation and employment, 
so those are the things that we will be looking at as we 
determine how to withdraw or maintain our policy.
    Senator DeMint. The quantitative easing, monetizing of 
debt, or however we term that, has caused some concern about 
our currency, the long-term value of our currency, and it has 
caused a lot of us to look at ways to create a more substantial 
or more soundness and stability to our monetary policy. In 
1981, former Chairman Greenspan, wrote in the Wall Street 
Journal about an idea of using 5-year notes payable in gold 
that the Federal Reserve would issue--excuse me--the Treasury 
Department, payable in gold or dollars to create some standard, 
as just a test. A lot of folks are talking about some form of 
standard, some way to create some boundaries for our monetary 
policy.
    Have you given any thought to the idea of a gold standard 
or ways like that, issuing bonds payable in gold that would 
begin to create some standard for our currency?
    Mr. Bernanke. Well, first, I would just say that the 
Federal Reserve is not debasing the currency; that the dollar's 
value is roughly the same as it was before the crisis in 
foreign exchange markets; that inflation is low and that is the 
buying power of the dollar. So I think those concerns are 
somewhat overstated, in fact, way overstated.
    On the gold standard, I have done a lot of study of that 
and it did deliver price stability over very long periods of 
time, but over shorter periods of time, it caused wide swings 
in prices related to changes in demand or supply of gold. So I 
do not think it is a panacea. And there are also other 
practical problems like the fact that we do not have enough 
gold to support our money supply.
    Senator DeMint. The question is about just the bond. That 
is what Greenspan was talking about. Is that something that you 
have given any thought to?
    Mr. Bernanke. I really have not analyzed that, that 
particular point. I do not think that a full-fledged gold 
standard would be practical at this point.
    Senator DeMint. OK. I realize I am out of time. I 
apologize, Mr. Chairman. Thank you.
    Chairman Johnson. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman, and thank you, 
Chairman Bernanke, for your patience. I think I am last, so 
that must be a bit of a relief.
    I would like to very briefly, if we could, go back to this 
discussion that we had earlier about the debt limit, because I 
think it is a huge mistake and factually incorrect for some to 
suggest that failure to immediately raise the debt limit is 
equal to a default on our debt. I am not accusing you of saying 
that, but I know others have.
    I am sure that you are well aware that the total fraction 
of projected Government spending next year that would be 
necessary to service our debt is about 6 percent. Even if the 
debt limit were not raised, ongoing tax revenue amounts to 
nearly 70 percent of the projected spending.
    So as much as I acknowledge that it would be extremely 
disruptive, and so I am hoping that we will have an appropriate 
and timely increase in the debt limit, given that there is so 
vastly much more in revenue than what is necessary to honor our 
debt obligations, it seems to me that a Treasure Secretary 
would have to willfully choose to default on our bonds. It is 
unfathomable to me that any Treasury Secretary would make such 
an imprudent decision.
    And so, I guess my brief question, if I could--I'd like to 
get on to monetary policy is, would you acknowledge that 
markets understand the difference between an unfortunate and 
temporary delay in a payment to a vendor, which they have seen 
before, on the one hand, versus failure to make an interest or 
a principal payment on our Treasury securities, which we have 
never done before?
    Mr. Bernanke. My concern is not necessarily just a question 
of willful decision. There are technical problems associated 
with making payments, including the fact that notwithstanding 
the facts, the data that you gave, that on a day-to-day basis, 
the amount of principal and interest which is due might exceed 
the free cash that the Treasury has. So I am worried about 
this. I am worried about the assurance that we would not risk 
failing to pay the debt.
    Senator Toomey. Well, I want to get back to this point, but 
as a former bond trader who earned a living trading fixed 
income securities and derivatives, I have to tell you, the 
market knows the difference between delaying a payment to the 
guys who cut the grass on the Mall, and failure to make a bond 
payment. It is a huge difference and I really do not think we 
should be even pretending that there is any equivalence between 
those two.
    On the QE2, and let me just preface by saying, I thought 
that many of the extraordinary measures that you guys took in 
2008, did not agree with all of them, but I felt that--I did 
agree with many and I recognize that they were decisions being 
made during a crisis.
    But we are not in a financial crisis now. We are in a 
subpar economic recovery, way subpar in terms of job growth, 
and we are all disappointed by it. But what concerns me is that 
the problems that I perceive affecting our economy are not 
fundamentally monetary in nature. It does not seem to me that 
we have a lack of money supply, that we have a lack of 
liquidity that is driving the biggest problems that we have.
    And when I look at some of the conventional ways of looking 
at monetary policy, whether you look at the Taylor Rule or 
whether you look at growth by some measures of money supply, or 
whether you look at commodity prices, the breadth and scope of 
which has been, I think, stunning, you look at all of these 
things and many of them suggest that at a minimum, we are 
planting the seeds of serious inflation down the road.
    I also worry that excessive expansion of the money supply 
creates the illusion of growth, but not real growth. So I guess 
my concern is, if the economy remains weak, are there any--you 
know, what measures of inflation? Are there any changes in 
asset prices that would cause you to decide that despite a weak 
economy, we need to pull back on this quantitative ease?
    Mr. Bernanke. Well, first, I think that many of the 
monetary or nominal indicators that somebody like Milton 
Friedman would look at did suggest the need for more monetary 
stimulus. For example, nominal GDP has grown very slowly. I am 
not talking about the reserves held by banks, which are 
basically idle, but if you look at M-1 and M-2, those have 
grown pretty slowly.
    The Taylor Rule suggests that we should be, way below zero 
in our interest rate, and therefore, we need some method other 
than just normal interest rate changes to----
    Senator Toomey. Do you know if Mr. Taylor believes that?
    Mr. Bernanke. Well, there are different versions of the 
Taylor Rule, and there is no particular reason to pick the one 
he picked in 1993. In fact, he preferred a different one in 
1999, which if you use that one, gives you a much different 
answer.
    Senator Toomey. My understanding is that his view of his 
own rule is that it would call for a higher Fed funds rates 
than what we have now.
    Mr. Bernanke. There are many ways of looking at that rule, 
and I think that ones that look at history, ones that are 
justified by modeling analysis, many of them suggest that we 
should be well below zero, and I just would disagree that that 
is the only way to look at it. But anyway, I think there is 
some basis for doing that.
    I am sorry. The last part of your question was?
    Senator Toomey. Whether there are----
    Mr. Bernanke. Yeah, I am sorry.
    Senator Toomey. What, in a context of even unfortunately 
slow economy growth should that persist? What kind of inflation 
indication would cause you to----
    Mr. Bernanke. Sir, we are committed. A few economists have 
suggested temporarily raising inflation above normal levels as 
a way of trying to stimulate the economy. We have rejected that 
approach and we are committed to not letting inflation go above 
sort of the normal level of around 2 percent in the medium 
term.
    So we are looking very carefully at indicators of 
inflation, including actual inflation, including commodity 
prices, including the spreads between nominal and index bonds, 
which is a measure of inflation compensation, looking at 
surveys, business pricing plans, household inflation 
expectations. We look at a whole variety of things and I just 
want to assure you, we take the inflation issue very, very 
seriously and we do not have the illusion that allowing 
inflation to get high is, in any way, a constructive thing to 
do and we are not going to do that.
    Senator Toomey. I see my time is expired. Thank you, Mr. 
Chairman.
    Chairman Johnson. Thank you. Senator Shelby has a couple 
additional questions.
    Senator Shelby. Thank you for your indulgence, Mr. 
Chairman.
    In a recent article, Dr. Martin Feldstein, who is well 
known, former president of the National Bureau of Economic 
Research, asked an important question about QE. And he says, 
Does the artificial support for the bond market, inequities 
from QE2 mean that we are looking at asset price bubbles that 
may come to an end before the year is over?
    Chairman Bernanke, what data do you examine to calculate 
the risk of creating asset bubbles within QE2? Is that a real 
concern?
    Mr. Bernanke. It is something, Senator, that we pay a great 
deal of attention to. We have created a new office called the 
Office of Financial Stability----
    Senator Shelby. OK.
    Mr. Bernanke. ----which is providing regular reports and 
data to the FOMC as well as to the supervisors. If you look at 
most indicators of equity markets, bond markets, and the like, 
while of course nobody can know for sure, there seems little 
evidence of any significant bubbles. Where there have been 
concerns, a few people have noted the increase in farmland 
prices.
    We have been following that carefully and we have been in 
substantial contact with the agricultural banks that lend to 
the farmers to make sure that they are appropriately managing 
that risk. So we are very attentive to that and I do not 
believe that there is a dangerous bubble in U.S. financial 
markets.
    Senator Shelby. Shifting over to Basel 3 capital standards, 
your counterpart at the Bank of England, Governor Mervyn King, 
recently gave a speech in which he stated that the new Basel 3 
capital standards are, quote, insufficient to prevent another 
crisis. He went on to say that capital requirements should be 
several orders of magnitude higher.
    Do you agree with Governor King's view that the Basel 3 
capital standards are insufficient to prevent another crisis, 
or do we not know yet?
    Mr. Bernanke. Several orders of magnitude would mean 700 
percent capital.
    Senator Shelby. It would be a lot.
    Mr. Bernanke. The capital under Basel 3 is a multiple of 
what it was under Basel 2 and also of higher quality, because 
it is common equity.
    Senator Shelby. It is a big improvement, isn't it?
    Mr. Bernanke. It is a substantial improvement. In addition, 
the risk weights against which capital is calculated on the 
assets held by the banks are much more sensitive to risk and 
less liberal than in the earlier version of Basel.
    So there has been a substantial improvement in the amount 
of capital and quality of capital that banks have. In addition, 
as required both by the Basel agreement and by Dodd-Frank, to 
have additional capital for systemically significant banks, and 
we are looking at how best to do that.
    We agreed with the consensus of about 7 percent high 
quality capital in Basel based on looking at worst case losses 
to banks over the last 50 years, and it was our assessment that 
that amount of capital would have prevented any banks from 
failing in the crisis that we just suffered through.
    So although there is more to be done in terms of adding 
some additional capital to the most systemically significant 
banks, I do think that we have made a lot of progress and I do 
not agree with the view that this is likely to lead to another 
crisis.
    Senator Shelby. Do you believe that it is very important 
for--and you are a regulator, too--that any bank with strong 
regulators, strong capital, and good strong management will 
generally survive?
    Mr. Bernanke. Yes, except in the worst economic conditions. 
We have also, I should add, we have added a leverage ratio 
which will now be international, not just for the United 
States.
    Senator Shelby. How would that work?
    Mr. Bernanke. Well, there is a leverage ratio which will 
apply to risk weighted assets and it is currently in an 
observation period. But the previous situation was one in which 
only United States banks were required to have a minimum amount 
of capital as a fraction of total assets, and now all banks, 
including European and other competitors, will have to have 
that.
    The other thing we are doing is adding liquidity 
requirements. In the crisis, a lot of the problems arose when 
banks that were technically solvent were unable to meet their 
short-term liquidity demands and we want to address that as 
well. So I think these will be much stronger than we had before 
overall.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Johnson. Thanks again to my colleagues and 
Chairman Bernanke for being here today. Economic growth is one 
of this Committee's top priorities and we will do all we can to 
formulate policies that help support us----
    Senator Corker, do you have additional questions?
    Senator Corker. Are you wrapping it up? I will submit it in 
writing.
    Chairman Johnson. ----that helps us support a sustainable 
economic recovery. I will remind my colleagues that we will 
leave the record open for the next 7 days for Members to submit 
their questions for Chairman Bernanke. This hearing is 
adjourned.
    Mr. Bernanke. Thank you.
    [Whereupon, at 12:26 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

                 PREPARED STATEMENT OF BEN S. BERNANKE
       Chairman, Board of Governors of the Federal Reserve System
                             March 1, 2011

    Chairman Johnson, Ranking Member Shelby, and other Members of the 
Committee, I am pleased to present the Federal Reserve's semiannual 
Monetary Policy Report to the Congress. I will begin with a discussion 
of economic conditions and the outlook before turning to monetary 
policy.
The Economic Outlook
    Following the stabilization of economic activity in mid-2009, the 
U.S. economy is now in its seventh quarter of growth; last quarter, for 
the first time in this expansion, our Nation's real gross domestic 
product (GDP) matched its precrisis peak. Nevertheless, job growth 
remains relatively weak and the unemployment rate is still high.
     In its early stages, the economic recovery was largely 
attributable to the stabilization of the financial system, the effects 
of expansionary monetary and fiscal policies, and a strong boost to 
production from businesses rebuilding their depleted inventories. 
Economic growth slowed significantly in the spring and early summer of 
2010, as the impetus from inventory building and fiscal stimulus 
diminished and as Europe's debt problems roiled global financial 
markets. More recently, however, we have seen increased evidence that a 
self-sustaining recovery in consumer and business spending may be 
taking hold. Notably, real consumer spending has grown at a solid pace 
since last fall, and business investment in new equipment and software 
has continued to expand. Stronger demand, both domestic and foreign, 
has supported steady gains in U.S. manufacturing output.
    The combination of rising household and business confidence, 
accommodative monetary policy, and improving credit conditions seems 
likely to lead to a somewhat more rapid pace of economic recovery in 
2011 than we saw last year. The most recent economic projections by 
Federal Reserve Board members and Reserve Bank presidents, prepared in 
conjunction with the Federal Open Market Committee (FOMC) meeting in 
late January, are for real GDP to increase 3\1/2\ to 4 percent in 2011, 
about one-half percentage point higher than our projections made in 
November. \1\ Private forecasters' projections for 2011 are broadly 
consistent with those of the FOMC participants and have also moved up 
in recent months. \2\
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     \1\ Forecast ranges here and below refer to the central tendencies 
of the projections of FOMC participants, as presented in the ``Summary 
of Economic Projections'' released with the minutes of the January FOMC 
meeting, available at www.federalreserve.gov/monetarypolicy/
fomcminutes20110126ep.htm.
     \2\ For example, both the Survey of Professional Forecasters (see, 
the first quarter 2011 survey released by the Federal Reserve Bank of 
Philadelphia on February 11, available at www.philadelphiafed.org/
research-and-data/real-time-center/survey-of-professional-forecasters) 
and the Blue Chip forecasting panel (see, the February 10, 2010, issue 
of Blue Chip Economic Indicators (New York: Aspen Publishers)) now 
project real GDP growth of about 3\1/2\ percent from the fourth quarter 
of 2010 to the fourth quarter of 2011, about one-half percentage point 
higher than the corresponding projections made in August. Looking 
further ahead, most FOMC participants project that economic growth will 
pick up a bit more in 2012 and 2013, whereas private forecasters tend 
to see the expansion proceeding fairly steadily over the next few 
years. (Note: Blue Chip Economic Indicators and Blue Chip Financial 
Forecasts are publications owned by Aspen Publishers. Copyright  2009 
by Aspen Publishers, Inc. All rights reserved; 
www.aspenpublishers.com.)
---------------------------------------------------------------------------
    While indicators of spending and production have been encouraging 
on balance, the job market has improved only slowly. Following the loss 
of about 8\3/4\ million jobs from early 2008 through 2009, private-
sector employment expanded by only a little more than 1 million during 
2010, a gain barely sufficient to accommodate the inflow of recent 
graduates and other entrants to the labor force. We do see some grounds 
for optimism about the job market over the next few quarters, including 
notable declines in the unemployment rate in December and January, a 
drop in new claims for unemployment insurance, and an improvement in 
firms' hiring plans. Even so, if the rate of economic growth remains 
moderate, as projected, it could be several years before the 
unemployment rate has returned to a more normal level. Indeed, FOMC 
participants generally see the unemployment rate still in the range of 
7\1/2\ to 8 percent at the end of 2012. Until we see a sustained period 
of stronger job creation, we cannot consider the recovery to be truly 
established.
    Likewise, the housing sector remains exceptionally weak. The 
overhang of vacant and foreclosed houses is still weighing heavily on 
prices of new and existing homes, and sales and construction of new 
single-family homes remain depressed. Although mortgage rates are low 
and house prices have reached more affordable levels, many potential 
homebuyers are still finding mortgages difficult to obtain and remain 
concerned about possible further declines in home values.
    Inflation has declined, on balance, since the onset of the 
financial crisis, reflecting high levels of resource slack and stable 
longer-term inflation expectations. Indeed, over the 12 months ending 
in January, prices for all of the goods and services consumed by 
households (as measured by the price index for personal consumption 
expenditures (PCE)) increased by only 1.2 percent, down from 2.5 
percent in the year-earlier period. Wage growth has slowed as well, 
with average hourly earnings increasing only 1.9 percent over the year 
ending in January. In combination with productivity increases, slow 
wage growth has implied very tight restraint on labor costs per unit of 
output.
     FOMC participants see inflation remaining low; most project that 
overall inflation will be about 1\1/4\ to 1\3/4\ percent this year and 
in the range of 1 to 2 percent next year and in 2013. Private-sector 
forecasters generally also anticipate subdued inflation over the next 
few years. \3\ Measures of medium- and long-term inflation compensation 
derived from inflation-indexed Treasury bonds appear broadly consistent 
with these forecasts. Surveys of households suggest that the public's 
longer-term inflation expectations also remain stable.
---------------------------------------------------------------------------
     \3\ The Survey of Professional Forecasters projects PCE inflation 
to run at about 1\1/2\ percent in 2011 and to subsequently rise 
gradually to nearly 2 percent by 2013. The corresponding projections 
from the Survey of Professional Forecasters for Consumer Price Index 
(CPI) inflation are about 1\3/4\ percent this year and about 2 percent 
next year and in 2013. Blue Chip forecasts for CPI inflation stand at 
about 2 percent for both 2011 and 2012.
---------------------------------------------------------------------------
    Although overall inflation is low, since summer we have seen 
significant increases in some highly visible prices, including those of 
gasoline and other commodities. Notably, in the past few weeks, 
concerns about unrest in the Middle East and North Africa and the 
possible effects on global oil supplies have led oil and gasoline 
prices to rise further. More broadly, the increases in commodity prices 
in recent months have largely reflected rising global demand for raw 
materials, particularly in some fast-growing emerging market economies, 
coupled with constraints on global supply in some cases. Commodity 
prices have risen significantly in terms of all major currencies, 
suggesting that changes in the foreign exchange value of the dollar are 
unlikely to have been an important driver of the increases seen in 
recent months.
    The rate of pass-through from commodity price increases to broad 
indexes of U.S. consumer prices has been quite low in recent decades, 
partly reflecting the relatively small weight of materials inputs in 
total production costs as well as the stability of longer-term 
inflation expectations. Currently, the cost pressures from higher 
commodity prices are also being offset by the stability in unit labor 
costs. Thus, the most likely outcome is that the recent rise in 
commodity prices will lead to, at most, a temporary and relatively 
modest increase in U.S. consumer price inflation--an outlook consistent 
with the projections of both FOMC participants and most private 
forecasters. That said, sustained rises in the prices of oil or other 
commodities would represent a threat both to economic growth and to 
overall price stability, particularly if they were to cause inflation 
expectations to become less well anchored. We will continue to monitor 
these developments closely and are prepared to respond as necessary to 
best support the ongoing recovery in a context of price stability.
Monetary Policy
    As I noted earlier, the pace of recovery slowed last spring--to a 
rate that, if sustained, would have been insufficient to make 
meaningful progress against unemployment. With job creation stalling, 
concerns about the sustainability of the recovery increased. At the 
same time, inflation--already at very low levels--continued to drift 
downward, and market-based measures of inflation compensation moved 
lower as investors appeared to become more concerned about the 
possibility of deflation, or falling prices. \4\
---------------------------------------------------------------------------
     \4\ For example, deflation probabilities inferred from prices of 
certain inflation-indexed bonds increased during this period.
---------------------------------------------------------------------------
    Under such conditions, the Federal Reserve would normally ease 
monetary policy by reducing the target for its short-term policy 
interest rate, the Federal funds rate. However, the target range for 
the Federal funds rate has been near zero since December 2008, and the 
Federal Reserve has indicated that economic conditions are likely to 
warrant an exceptionally low target rate for an extended period. 
Consequently, another means of providing monetary accommodation has 
been necessary since that time. In particular, over the past 2 years 
the Federal Reserve has eased monetary conditions by purchasing longer-
term Treasury securities, agency debt, and agency mortgage-backed 
securities (MBS) on the open market. The largest program of purchases, 
which lasted from December 2008 through March 2010, appears to have 
contributed to an improvement in financial conditions and a 
strengthening of the recovery. Notably, the substantial expansion of 
the program announced in March 2009 was followed by financial and 
economic stabilization and a significant pickup in the growth of 
economic activity in the second half of that year.
    In August 2010, in response to the already-mentioned concerns about 
the sustainability of the recovery and the continuing declines in 
inflation to very low levels, the FOMC authorized a policy of 
reinvesting principal payments on our holdings of agency debt and 
agency MBS into longer-term Treasury securities. By reinvesting agency 
securities, rather than allowing them to continue to run off as our 
previous policy had dictated, the FOMC ensured that a high level of 
monetary accommodation would be maintained. Over subsequent weeks, 
Federal Reserve officials noted in public remarks that we were 
considering providing additional monetary accommodation through further 
asset purchases. In November, the Committee announced that it intended 
to purchase an additional $600 billion in longer-term Treasury 
securities by the middle of this year.
    Large-scale purchases of longer-term securities are a less familiar 
means of providing monetary policy stimulus than reducing the Federal 
funds rate, but the two approaches affect the economy in similar ways. 
Conventional monetary policy easing works by lowering market 
expectations for the future path of short-term interest rates, which, 
in turn, reduces the current level of longer-term interest rates and 
contributes to both lower borrowing costs and higher asset prices. This 
easing in financial conditions bolsters household and business spending 
and thus increases economic activity. By comparison, the Federal 
Reserve's purchases of longer-term securities, by lowering term 
premiums, put downward pressure directly on longer-term interest rates. 
By easing conditions in credit and financial markets, these actions 
encourage spending by households and businesses through essentially the 
same channels as conventional monetary policy.
    A wide range of market indicators supports the view that the 
Federal Reserve's recent actions have been effective. For example, 
since August, when we announced our policy of reinvesting principal 
payments on agency debt and agency MBS and indicated that we were 
considering more securities purchases, equity prices have risen 
significantly, volatility in the equity market has fallen, corporate 
bond spreads have narrowed, and inflation compensation as measured in 
the market for inflation-indexed securities has risen to historically 
more normal levels. Yields on 5- to 10-year nominal Treasury securities 
initially declined markedly as markets priced in prospective Fed 
purchases; these yields subsequently rose, however, as investors became 
more optimistic about economic growth and as traders scaled back their 
expectations of future securities purchases. All of these developments 
are what one would expect to see when monetary policy becomes more 
accommodative, whether through conventional or less conventional means. 
Interestingly, these market responses are almost identical to those 
that occurred during the earlier episode of policy easing, notably in 
the months following our March 2009 announcement. In addition, as I 
already noted, most forecasters see the economic outlook as having 
improved since our actions in August; downside risks to the recovery 
have receded, and the risk of deflation has become negligible. Of 
course, it is too early to make any firm judgment about how much of the 
recent improvement in the outlook can be attributed to monetary policy, 
but these developments are consistent with it having had a beneficial 
effect.
    My colleagues and I continue to regularly review the asset purchase 
program in light of incoming information, and we will adjust it as 
needed to promote the achievement of our mandate from the Congress of 
maximum employment and stable prices. We also continue to plan for the 
eventual exit from unusually accommodative monetary policies and the 
normalization of the Federal Reserve's balance sheet. We have all the 
tools we need to achieve a smooth and effective exit at the appropriate 
time. Currently, because the Federal Reserve's asset purchases are 
settled through the banking system, depository institutions hold a very 
high level of reserve balances with the Federal Reserve. Even if bank 
reserves remain high, however, our ability to pay interest on reserve 
balances will allow us to put upward pressure on short-term market 
interest rates and thus to tighten monetary policy when required. 
Moreover, we have developed and tested additional tools that will allow 
us to drain or immobilize bank reserves to the extent needed to tighten 
the relationship between the interest rate paid on reserves and other 
short-term interest rates. \5\ If necessary, the Federal Reserve can 
also drain reserves by ceasing the reinvestment of principal payments 
on the securities it holds or by selling some of those securities in 
the open market. The FOMC remains unwaveringly committed to price 
stability and, in particular, to achieving a rate of inflation in the 
medium term that is consistent with the Federal Reserve's mandate.
---------------------------------------------------------------------------
     \5\ These tools include the ability to execute term reverse 
repurchase agreements with the primary dealers and other 
counterparties, which drains reserves from the banking system; and the 
issuance of term deposits to depository institutions, which immobilizes 
bank reserves for the period of the deposit.
---------------------------------------------------------------------------
Federal Reserve Transparency
    The Congress established the Federal Reserve, set its monetary 
policy objectives, and provided it with operational independence to 
pursue those objectives. The Federal Reserve's operational independence 
is critical, as it allows the FOMC to make monetary policy decisions 
based solely on the longer-term needs of the economy, not in response 
to short-term political pressures. Considerable evidence supports the 
view that countries with independent central banks enjoy better 
economic performance over time. \6\
---------------------------------------------------------------------------
     \6\ See, for example, Alberto Alesina and Lawrence H. Summers 
(1993), ``Central Bank Independence and Macroeconomic Performance: Some 
Comparative Evidence'', Journal of Money, Credit and Banking, vol. 25 
(May), pp. 151-162; or, more recently, Christopher Crowe and Ellen E. 
Meade (2008), ``Central Bank Independence and Transparency: Evolution 
and Effectiveness'', European Journal of Political Economy, vol. 24 
(December), pp. 763-777. See, Ben S. Bernanke (2010), ``Central Bank 
Independence, Transparency, and Accountability'', at the Institute for 
Monetary and Economic Studies International Conference, Bank of Japan, 
Tokyo (May 25), for further discussion and references.
---------------------------------------------------------------------------
    However, in our democratic society, the Federal Reserve's 
independence brings with it the obligation to be accountable and 
transparent. The Congress and the public must have all the information 
needed to understand our decisions, to be assured of the integrity of 
our operations, and to be confident that our actions are consistent 
with the mandate given to us by the Congress.
    On matters related to the conduct of monetary policy, the Federal 
Reserve is one of the most transparent central banks in the world, 
making available extensive records and materials to explain its policy 
decisions. For example, beyond the semiannual Monetary Policy Report I 
am presenting today, the FOMC provides a postmeeting statement, a 
detailed set of minutes 3 weeks after each policy meeting, quarterly 
economic projections together with an accompanying narrative, and, with 
a 5-year lag, a transcript of each meeting and its supporting 
materials. In addition, FOMC participants often discuss the economy and 
monetary policy in public forums, and Board members testify frequently 
before the Congress.
    In recent years the Federal Reserve has also substantially 
increased the information it provides about its operations and its 
balance sheet. In particular, for some time the Federal Reserve has 
been voluntarily providing extensive financial and operational 
information regarding the special credit and liquidity facilities put 
in place during the financial crisis, including full descriptions of 
the terms and conditions of each facility; monthly reports on, among 
other things, the types of collateral posted and the mix of 
participants using each facility; weekly updates about borrowings and 
repayments at each facility; and many other details. \7\ Further, on 
December 1, as provided by the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010, the Federal Reserve Board posted on 
its public Web site the details of more than 21,000 individual credit 
and other transactions conducted to stabilize markets and support the 
economic recovery during the crisis. This transaction-level information 
demonstrated the breadth of these operations and the care that was 
taken to protect the interests of the taxpayer; indeed, despite the 
scope of these actions, the Federal Reserve has incurred no credit 
losses to date on any of the programs and expects no credit losses in 
any of the few programs that still have loans outstanding. Moreover, we 
are fully confident that independent assessments of these programs will 
show that they were highly effective in helping to stabilize financial 
markets, thus strengthening the economy. Overall, the operational 
effectiveness of the programs was recently supported as part of a 
comprehensive review of six lending facilities by the Board's 
independent Office of Inspector General. \8\ In addition, we have been 
working closely with the Government Accountability Office, the Office 
of the Special Inspector General for the Troubled Asset Relief Program, 
the Congressional Oversight Panel, the Congress, and private-sector 
auditors on reviews of these facilities as well as a range of matters 
relating to the Federal Reserve's operations and governance. We will 
continue to seek ways of enhancing our transparency without 
compromising our ability to conduct policy in the public interest.
---------------------------------------------------------------------------
     \7\ See, the reports available on the Board's webpage, ``Credit 
and Liquidity Programs and the Balance Sheet'', at 
www.federalreserve.gov/monetarypolicy/bst_reports.htm.
     \8\ See, Board of Governors of the Federal Reserve System, Office 
of Inspector General (2010), ``The Federal Reserve's Section 13(3) 
Lending Facilities To Support Overall Market Liquidity: Function, 
Status, and Risk Management'' (Washington: Board of Governors OIG, 
November), www.federalreserve.gov/oig/files/
FRS_Lending_Facilities_Report_final-11-23-10_web.pdf.
---------------------------------------------------------------------------
    Thank you. I would be pleased to take your questions.

       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON
                      FROM BEN S. BERNANKE

Q.1. Recognizing the critical need to reduce our structural 
deficit to avert the problems you were discussing with Senator 
Bennet, and given the importance of continuing to make 
selective investments in R&D, education and infrastructure, 
would defunding those areas now hurt the recovery and damage 
long term U.S. growth?

A.1. The costs and risks to the U.S. economy will rise if the 
Federal budget persistently runs large structural deficits. If 
global financial market participants were to lose confidence in 
the United States' ability to manage its fiscal policy, the 
historical experience of countries that have faced fiscal 
crises should warn us that interest rates could increase 
suddenly and quickly, which would impose substantial costs on 
our economy. The threat from our currently unsustainable fiscal 
policies is real and growing, which should be sufficient reason 
to put in place a credible plan to place fiscal policy on a 
sustainable path over the medium and longer term. Acting now to 
develop a credible program to reduce future structural deficits 
would not only enhance economic growth in the longer run, these 
policy actions would likely also yield near-term economic 
benefits from lower long-term interest rates and increased 
consumer and business confidence. Moreover, the sooner a 
credible fiscal plan is established, the more time affected 
individuals would have to adjust to the necessary policy 
changes, which would probably make those changes less painful 
and more politically feasible.
    That said, economic growth is affected not only by the 
levels of spending and taxes, but also by their composition and 
structure. Changes in the Government's tax policies and 
spending priorities could be made that not only reduce the 
deficit but also enhance the long-term growth potential of the 
economy--for example, by reducing disincentives to work and to 
save, by encouraging investment in the skills of our workforce 
as well as new machinery and equipment, by promoting research 
and development, and by encouraging and providing necessary 
infrastructure. In the current fiscal environment, policy 
makers will want to intensively review the effectiveness of all 
spending and tax policies and be willing to make changes in 
order to provide necessary programs more efficiently and at 
lower cost. These policy choices will certainly be difficult 
and will require tradeoffs to be made, but a more productive 
economy will ease the tradeoffs that we face.

Q.2. Following up on Senator Moran's question to you at the 
hearing, what can the Federal Reserve do to help encourage, or 
direct banks to, increase lending to small businesses on Main 
Street that are responsible for so much job growth?

A.2. During the past few years, we have frequently received 
reports that small businesses are facing difficulty in 
obtaining credit. We share the Senator's concerns about the 
effect that tight credit conditions can have on Main Street and 
in response have taken several steps to foster access to loans 
by creditworthy businesses. Early in the crisis, the Federal 
Reserve and the other banking agencies recognized the 
possibility that bankers and examiners could overcorrect for 
underwriting standards that had become too lax and issued 
guidance to instruct examiners to take a measured and balanced 
approach to reviews of banking organizations and to encourage 
efforts by these institutions to work constructively with 
existing borrowers that are experiencing financial 
difficulties. The Federal Reserve subsequently conducted 
significant training for its examiners on this guidance to 
ensure that it was carefully implemented. In addition, we 
continue to strongly reinforce the guidance with our examiners 
and are focusing on evaluating compliance with the guidance as 
part of our regular monitoring of the examination process, 
which includes local management vettings of examination 
findings in the district Reserve Banks, review of a sample of 
examination reports in Washington, and investigation of any 
specific instances of possible undue regulatory constraints 
reported by members of the public.
    Our monitoring to date suggests that examiners are 
appropriately considering the guidance in evaluating supervised 
institutions. However, to the extent that a banking 
organization is concerned about supervisory restrictions 
imposed by Federal Reserve examiners, we have encouraged them 
to discuss their concerns with Reserve Bank or Federal Reserve 
Board supervisory staff. Bankers also have been advised that 
they can confidentially discuss these concerns with the Federal 
Reserve Board's Ombudsman, who works with bankers and 
supervisory staff to resolve such issues.
    In addition to our efforts to encourage careful 
implementation of the interagency guidance, the Federal Reserve 
last year also completed a series of more than 40 meetings with 
community leaders from across the country to gather information 
to help the Federal Reserve and others better respond to the 
credit needs of small businesses. Emerging themes, best 
practices, and common challenges identified by the meeting 
series were discussed and shared at a conference held at the 
Federal Reserve Board in Washington in early July and are 
described in a summary report posted on the Federal Reserve's 
Web site at: http://www.federalreserve.gov/events/conferences/
12010/sbc/downloads/small_business_summary.pdf The agenda for 
this meeting and remarks that address our plans for following-
up on our findings are also available on the Federal Reserve's 
Web site.
    More recently, the Federal Reserve has been working with 
staff at the U.S. Treasury and the other banking agencies to 
implement the Small Business Lending Fund created by the Small 
Business Jobs Act of 2010. This fund is intended to facilitate 
lending to creditworthy borrowers by providing affordable 
capital support to community banks that lend to small 
businesses.

Q.3. We also want to ensure that individuals have appropriate 
access to credit. Is the Federal Reserve considering how its 
policies (both regulatory and monetary) impact consumer access 
to credit? If there is a negative impact on access to credit, 
what steps will the Federal Reserve take?

A.3. In the context of both monetary and regulatory or 
supervisory policy, the Federal Reserve regularly analyzes data 
and other information about the availability of credit to 
consumers. The availability of credit is a key factor 
pertaining to the outlook for consumer spending, which is, 
itself, a major component of aggregate demand in the U.S. 
economy. Therefore, when determining the appropriate stance of 
monetary policy, the Federal Open Market Committee considers 
consumers' access to credit along with many other factors that 
shape the macroeconomic outlook.
    The Federal Reserve also considers the potential effects of 
its regulatory or supervisory policies on the availability of 
consumer credit. A recent example of this is the Comprehensive 
Capital Analysis and Review (CCAR) that was completed by the 
Federal Reserve on March 18, 2011. One element of the study of 
the capital plans of the 19 largest bank holding companies in 
the CCAR was to ascertain each firm's ability to hold 
sufficient capital to maintain access to funding, to continue 
to serve as credit intermediaries, to meet their obligations to 
creditors and counterparties, and to continue operations, even 
in an adverse macroeconomic environment. In other words, a key 
element of the review was to evaluate the capital plans of 
large bank holding companies in the context of their ability to 
support lending to consumers, even in an adverse macroeconomic 
environment.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                      FROM BEN S. BERNANKE

Q.1. In your testimony you described an apparent willingness on 
the part of banks to lend. However, we continue to hear that 
small businesses are still having trouble obtaining needed 
lending. Considering that small businesses take the leading 
role in job creation, what are you doing to ensure that 
creditworthy small businesses have access to lending?

A.1. We are also aware of reports that some small businesses 
are facing difficulty in obtaining loans and are concerned 
about the impact on job creation. As a result, we have taken a 
number of steps to try to improve small businesses' access to 
credit in the time since the recent financial crisis began. 
Initially, the Federal Reserve and the other banking agencies 
recognized the possibility that bankers and examiners could 
overcorrect for underwriting standards that had become too lax 
in the run-up to the crisis and unnecessarily constrain access 
to credit by creditworthy borrowers. In order to address this 
possibility, they issued guidance to instruct examiners to take 
a measured and balanced approach to reviews of banking 
organizations and to encourage efforts by these institutions to 
work constructively with existing borrowers that are 
experiencing financial difficulties. The Federal Reserve 
subsequently conducted significant training for its examiners 
on this guidance to ensure that it was carefully implemented. 
Currently, we continue to strongly reinforce the guidance with 
our examiners and are focusing on evaluating compliance with 
the guidance as part of our regular monitoring of the 
examination process.
    Our monitoring to date suggests that examiners have been 
appropriately considering the guidance in evaluating supervised 
institutions. However, to the extent that a banking 
organization is concerned about supervisory restrictions 
imposed by Federal Reserve examiners, we have encouraged them 
to discuss their concerns with Reserve Bank or Federal Reserve 
Board supervisory staff or, if they prefer to raise their 
concerns confidentially, to raise them with the Board's 
Ombudsman, who works with bankers and supervisory staff to 
resolve such issues. In addition, last year the Federal Reserve 
conducted a series of more than 40 meetings with community 
leaders from across the country to gather information to help 
the Federal Reserve and others better respond to the credit 
needs of small businesses. Emerging themes, best practices, and 
common challenges identified by the meeting series were 
discussed and shared at a conference held at the Federal 
Reserve Board in Washington in early July 2010 and are 
described in a summary report posted on the Federal Reserve's 
Web site at: http://www.federalreserve.gov/events/conferences/
2010/sbc/downloads/small_business_summary.pdf.
    There are several initiatives currently underway to address 
issues identified through these meetings. Most recently, the 
Federal Reserve has been working with staff at the U.S. 
Treasury and the other banking agencies to implement the Small 
Business Lending Fund created by the Small Business Jobs Act of 
2010. This fund is intended to facilitate lending to 
creditworthy borrowers by providing affordable capital support 
to community banks that lend to small businesses.

Q.2. During this economic crisis the length of time workers 
have remained unemployed has increased substantially. The 
longer someone remains outside the workforce, the harder it 
becomes to find employment and contribute to economic growth. 
What can policy makers do to get people back to work as soon as 
possible? What actions can be taken to help the long-term 
unemployed so we can make sure they do not lose the ability to 
reenter the workforce?

A.2. Although the economy recovery appears to be on firmer 
footing, unemployment remains a significant concern in the 
United States. The recent declines in the unemployment rate are 
encouraging, but the level of unemployment is still very high, 
and it is likely to be some time before the unemployment rate 
returns to a more normal level. In addition, more than 40 
percent of the unemployed have been out of work for 6 months or 
more. As you indicate, long-term unemployment is a particularly 
serious problem because it erodes the skills of those workers 
and may cause lasting damage to their future employment and 
earnings prospects.
    Given the current situation in which unemployment is high 
and inflation is low, the Federal Open Market Committee has 
maintained the target range for the Federal funds rate at 0 to 
\1/4\ percent. In addition, the Committee decided in November 
2010 to expand its holdings of securities, with the intention 
of purchasing $600 billion of Treasury securities by the end of 
the second quarter of 2011. The Committee believes that its 
policies will promote a stronger pace of economic recovery and 
anticipates a gradual return to higher levels of resource 
utilization in a context of price stability. The Federal 
Reserve also continues to provide guidance to banks to ensure 
that creditworthy borrowers, including small businesses and 
other potential employers, have access to credit. Finally, as I 
indicated in my recent testimony, I believe that efforts to 
address the Nation's longer-run fiscal challenges could also 
help to promote the economic recovery. In particular, the 
adoption of a credible program to reduce future deficits would 
not only enhance economic growth and stability in the long run, 
but could also yield substantial near-term benefits in terms of 
lower long-term interest rates and increased consumer and 
business confidence. All of these policies should help to 
reduce unemployment over time.
    With regard to other actions that might be taken to help 
the long-term unemployed, it seems to me that policies targeted 
towards providing those workers with the resources they need to 
upgrade their skills and find new jobs as the economy continues 
to recovery can be helpful. For example, community college and 
other adult education programs have been effective in helping 
workers who have lost their jobs to obtain new skills that 
strengthen their qualifications for available jobs. Similarly, 
innovative workforce development programs can play an important 
role in anticipating future job market demands, and it might be 
fruitful to couple these programs with job search assistance 
that channeled search and training toward the most promising 
areas. Unfortunately, however, long-term unemployment is a 
complex problem and there are no simple or guaranteed 
solutions.

Q.3. What steps is the Federal Reserve taking toward 
establishing macroprudential tools that will assist it in 
identifying and responding to future asset bubbles that have 
the potential of igniting another financial crisis?

A.3. The Federal Reserve is taking steps to identify and 
respond to emerging asset bubbles. Macrostress tests of 
financial institutions--such as those recently performed by 
Federal Reserve as part of the Comprehensive Capital Analysis 
and Review (CCAR) of large bank holding companies (BHCs )--are 
an important macroprudential tool. The macro stress tests help 
to identify the threats to financial stability from BHCs that 
would be posed by adverse economic conditions and large falls 
in asset prices. In addition, enhanced supervision and 
prudential standards required under the Dodd-Frank Act will 
make large BHCs and nonbank institutions determined to be 
systemically important subject to more stringent requirements 
on capital, leverage, and liquidity, as well as tighter 
limitations on their single-counterparty credit exposures. 
These enhanced standards should help to make the financial 
sector more resilient to asset price adjustments and thus would 
diminish the cost to the real economy. Finally, the Federal 
Reserve is working closely with other member agencies of the 
Financial Stability Oversight Council (FSOC) to identify 
threats to the financial stability of the United States, which 
could include emerging asset bubbles, and, moreover, to respond 
preemptively to such threats. Because the FSOC's mandate is to 
focus on the stability of the U.S. financial system as a whole, 
this focus should reduce the possibility of undetected 
regulatory gaps which could, left unmonitored, fuel asset 
bubbles.

Q.4. In a recent speech you explained the role played by global 
imbalances in encouraging the asset bubbles that led to the 
financial crisis. If this was a contributing factor to the 
crisis, what actions should be taken to address these global 
imbalances so that they do not destabilize the global financial 
system again in the future?

A.4. The primary cause of the boom and bust in the housing 
market was the poor performance of the financial system and 
financial regulation, including misaligned incentives in 
mortgage origination, underwriting, and securitization; risk-
management deficiencies among financial institutions; conflicts 
of interest at credit rating agencies; weaknesses in the 
capitalization and incentive structures of the Government-
sponsored enterprises; gaps and weaknesses in the financial 
regulatory structure; and supervisory failures. Global 
imbalances and the capital flows associated with them likely 
played a role in helping to finance the housing bubble and thus 
setting the stage for its subsequent bust. But it was the 
interaction between strong capital inflows and weaknesses in 
the domestic financial system that proved so injurious to 
financial stability.
    The appropriate response to the concerns posed by global 
imbalances is not to try to reverse financial globalization, 
which has conferred considerable benefits overall. Rather, we 
need to pursue reforms that promote financial stability in the 
context of an increasingly globalized financial arena. First, 
countries must work together to create an international system 
that more effectively supports the pursuit of internal and 
external balance: Countries with excessive and unsustainable 
trade surpluses will need to allow their exchange rates to 
better reflect market fundamentals and increase their reliance 
on domestic demand, while countries with large trade deficits 
must encourage higher national saving, including by 
strengthening their fiscal positions. Second, the United States 
must continue to work with its international partners to 
increase the efficiency, transparency, and resiliency of our 
national financial systems and to strengthen financial 
regulation and oversight.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR AKAKA
                      FROM BEN S. BERNANKE

Q.1. Chairman Bernanke, as you know, I am most concerned with 
the well-being of consumers. In the current economic climate, 
consumers are confronted with difficult financial decisions. 
This is the case in Hawaii, where many homeowners face possible 
foreclosure and the average credit card debt of a resident is 
the second highest in the country.
    Last week was America Saves Week. We highlighted the 
importance of personal savings and teach consumers how to 
increase their financial security through better money 
management. By saving, individuals can help protect themselves 
during economic downturns and unforeseen life events.
    And yet, we also know that our slow economic recovery is 
partially due to low consumption or consumer spending.
    Chairman Bernanke, my question to you is about these two 
different motivations. How can we continue our efforts to 
promote economic recovery? And, how do we at the same time 
encourage responsible consumer behavior and financial decision 
making?

A.1. The Federal Reserve System is strongly committed to 
promoting consumer financial education through research, 
community outreach and a wide range of information on issues 
related to personal finance that we make available to the 
public. One objective of our consumer and community activities 
is to foster informed and prudent financial decision making of 
the type promoted by the America Saves campaign. Indeed, the 
Federal Reserve Board is a member of the America Saves National 
Advisory Committee.
    The exercise of sound judgment in personal financial 
affairs is not inconsistent with a healthy growing economy. 
Quite the contrary. As the events of the past several years 
have shown, outsized debt accumulation can leave many 
households vulnerable to great distress if collateral values 
drop sharply or income is disrupted, which leads to cutbacks in 
aggregate demand, production and employment. These cutbacks can 
lead to further financial distress and income disruptions and 
associated declines in production and employment. However, 
sound household decision making can lay the foundations for 
sustainable economic growth. Looking forward, a combination of 
rising business confidence, accommodative monetary policy, and 
improving credit conditions seems likely to lead to continued 
gains in production and employment. These gains, in turn, 
should boost incomes and provide the wherewithal for households 
to increase their spending without taking on excessive debt, 
which helps to further support increases in production and 
employment in a virtuous cycle.

Q.2. Chairman Bernanke, because of the high number of recent 
foreclosures, an alarming number of Americans face the 
extremely difficult task of placing themselves back on sound 
financial footing. They are especially vulnerable to 
nontraditional and predatory financial products and services.
    What can be done to help these individuals overcome 
foreclosure and restore their financial well-being?

A.2. The Federal Reserve has been working at various levels to 
support consumers and communities struggling with the impact of 
the foreclosure crisis since 2007. Through the 12 Federal 
Reserve Banks, the System works with financial institutions, 
local leaders, and community groups to provide relevant 
research, and data through a broad range of programs and 
activities. The Board of Governors provides guidance and 
support to the Reserve Banks' efforts, offering a national 
perspective on various policy issues and programs that help 
provide further understanding of the mortgage market and the 
options available to stabilize neighborhoods and assist 
borrowers struggling with the impacts of foreclosure. A 
comprehensive overview of these efforts undertaken by the 
Federal Reserve in response to the foreclosure crisis is 
provided in ``Addressing the Impact of the Foreclosure Crisis: 
Federal Reserve Mortgage Outreach and Research Efforts.'' This 
report is available online. \1\
---------------------------------------------------------------------------
     \1\ For ``Addressing the Impact of the Foreclosure Crisis . . . '' 
report, see www.chicagofed.org/digital assets/others/in_focus/
foreclosure_resource_center/more_report_final.pdf.
---------------------------------------------------------------------------
    The Federal Reserve also has a centralized call center, the 
Federal Reserve Consumer Help (FRCH), to accept consumer 
complaints against financial institutions, including consumers 
experiencing difficulty with their mortgages or who experience 
communication issues with the financial institution regarding 
their mortgage. Consumers can contact FRCH for assistance and 
information. \2\ Complaint specialists are trained in 
responding to consumers' mortgage and foreclosure issues and to 
direct them to additional assistance as their circumstances 
require. The FRCH Web site provides one-stop shopping for 
resources and links to Government and nonprofit organizations 
that offer foreclosure assistance. In addition, each of the 
Federal Reserve banks and the Board of Governors has 
established a Web site where consumers can access online 
Federal and local resources designed to help homeowners with 
foreclosure prevention and assist their efforts to recover from 
financial difficulties. \3\ For example, the Federal Reserve 
Bank of St. Louis' Foreclosure Resource Center includes a 
``Foreclosure Mitigation ToolKit'' that identifies steps that 
community leaders can take to address foreclosures in their 
neighborhoods, including outreach to those consumers at risk of 
losing their homes and for developing postforeclosure support 
systems. \4\
---------------------------------------------------------------------------
     \2\ For additional information about the Federal Reserve Consumer 
Help center, see www.federalreserveconsumerhelp.gov/index.cfm.
     \3\ Board of Governors, Consumer Information web page, 
www.federalreserve.gov/consumerinfo/foreclosure.htm.
     \4\ For additional information, see Federal Reserve Bank of St. 
Louis, Community Development, Foreclosure Resource Center at 
www.stlouisfed.org/community_ development/foreclosure/mitigation-l.cfm.
---------------------------------------------------------------------------
    The Board has also issued a number of supervisory guidances 
to the banks on policies and procedures that are essential to 
ensuring they work with consumers struggling with their 
mortgages and comply with appropriate consumer protection laws 
and regulations that relate to foreclosure and loss mitigation. 
In 2007, the Board, in concert with other banking supervisory 
agencies, issued guidance letters specifically related to 
working with borrowers struggling with their mortgages, as well 
as guidance in 2009 on tenants' rights when landlords fall into 
foreclosure. \5\ Most recently, the Board announced formal 
enforcement actions requiring 10 banking organizations to 
address patterns of misconduct and negligence related to 
deficient practices in residential mortgage loan servicing and 
foreclosure processing. A copy of the press release and the 
accompanying publication that documents the supervisory 
agencies' findings, Interagency Review of Foreclosure Policies 
and Practices, can be found online on the Board of Governors' 
public Web site. \6\
---------------------------------------------------------------------------
     \5\ Federal Reserve Board, Supervision, Consumer Affairs Letters, 
2007, CA 07-01, ``Working with Mortgage Borrowers'', and ``Statement on 
Loss Mitigation Strategies for Servicers of Residential Mortgages''. In 
2009, CA 09-05, ``Information and Examination Procedures for the 
`Protecting Tenants at Foreclosure Act of 2009' '' and CA-13,``Mortgage 
Loan Modifications and Regulation B's Adverse Action Requirement''.
     \6\ For the Board of Governors' enforcement actions and the 
report, ``Interagency Review of Foreclosure Policies and Practices'', 
see http://www.federalreserve.gov/newsevents/press/enforcement/
20110413a.htm.

Q.3. Chairman Bernanke, I know that we share an interest in 
remittances. During difficult economic times, individuals who 
normally remit money to their relatives overseas are under 
greater financial pressure. At the same time, they also are 
under greater pressure to provide assistance to their families 
abroad.
    I know that the Federal Reserve is working hard to 
implement the remittance protection provisions of the Dodd-
Frank Act. It requires more meaningful disclosures for 
remittance transactions. It also establishes an error 
resolution process for consumers.
    Please update us on what progress has been made to 
implement the remittance protections in the Dodd-Frank Act.

A.3. On May 12, 2011, the Federal Reserve Board requested 
public comment on a proposed rule that would create new 
protections for consumers who send remittance transfers to 
recipients located in a foreign country. The press release and 
related information can be found on the Board's public Web site 
at: www.federalreserve.gov/newsevents/press/bcreg/
20110512a.htm.
    The proposed rule would require that remittance transfer 
providers make certain disclosures to senders of remittance 
transfers, including information about fees and the exchange 
rate, as applicable, and the amount of currency to be received 
by the recipient. In addition, the proposed rule would provide 
error resolution and cancellation rights for senders of 
remittance transfers. The proposed model disclosure forms were 
developed with the use of extensive consumer testing to ensure 
that they presented the information that consumers of 
remittance products need to make informed decisions regarding 
fees and features across providers.
    The public comment period will end on July 22, 2011, and 
all comment letters will be transferred to the Consumer 
Financial Protection Bureau which will have responsibility for 
issuing the final rules.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                      FROM BEN S. BERNANKE

Q.1. Federal Reserve Audit. During the debate over the Dodd-
Frank Act, the Federal Reserve argued that revealing the names 
of borrowers from its emergency lending facilities would 
imperil the financial institutions and other borrowers and 
chill the use of those emergency facilities that may be 
necessary to stabilize the economy. Yet, as mandated by the 
Dodd-Frank Act, the Federal Reserve on December 1, 2010 
revealed the names of many of the borrowers from its emergency 
lending facilities during the 2008 financial crisis.
    What lessons can be drawn from this experience? Does this 
experience suggest that the Federal Reserve can be more 
transparent regarding its borrowers during or soon after a 
crisis?

A.1. As you note, the Federal Reserve published the names of 
the borrowers from its emergency lending facilities, as well as 
details on the loans extended, on December 1, 2010. The 
publications added to the large volume of information that the 
Federal Reserve had made available in weekly and monthly 
reports on its emergency lending throughout the financial 
crisis. In addition, as required by the Dodd-Frank Act, any 
borrowers at future emergency credit facilities would be 
identified 1 year after the emergency facility was closed, and 
borrowers at the Federal Reserve's normal discount window would 
be identified 2 years after borrowing. It is difficult to 
assess the effect of these disclosures on the effectiveness of 
Federal Reserve lending programs that may put in place to 
address a future financial crisis and support credit 
availability to U.S. businesses and households. Financial firms 
may be less willing to participate in such programs because 
they will anticipate that their names will be disclosed and 
will remain concerned about the possible effects of that 
disclosure on the behavior of their creditors and 
counterparties in some circumstances. Indeed, some firms have 
publicly stated that they no longer intend to access the 
discount window.
    We think that an effective discount window can be an 
important source of backup liquidity for the banking system, 
and we will monitor carefully the discount window borrowing of 
depository institutions.

Q.2. Commodities. Financial experts have noted that speculative 
booms in commodities, especially oil, tend to immediately 
precede recessions in the U.S. Are you concerned at all that 
commodities are getting out of hand? If monetary policy ought 
to be focused on the big risks to the U.S., such as from 
housing, are there other tools that can be applied to the 
commodities markets to ensure we don't have a speculative 
bubble and bust? For example, both the U.S. and European 
financial regulators have new authorities to impose position 
limits. Please share your views regarding the use of these.

A.2. The prices of oil and other commodities can have important 
implications for U.S. economic growth and price stability. 
Accordingly, the Federal Reserve closely monitors developments 
in these markets. Broad movements in commodity prices have been 
in line with developments in the global economy. These prices 
rose throughout most of the past decade while global growth was 
strong and supply was constrained, they collapsed with the 
onset of the global recession, and they subsequently rebounded 
amid the economic recovery. The increases in commodity prices 
in recent months have largely reflected rising global demand, 
particularly in some fast-growing emerging market economies, 
coupled with constraints on global supply in some cases. In 
particular, political unrest in the Middle East and North 
Africa has led to further increases in oil prices, and adverse 
weather has boosted prices of some important food commodities.
    Some have argued that speculative activities on the part of 
financial investors have been responsible for the extreme 
swings in commodity prices. Notwithstanding considerable study, 
however, conclusive evidence of the role of speculators remains 
elusive. If conclusive evidence emerged that commodity markets 
were not performing their price discovery and allocative role 
effectively, changes in regulatory policies might be 
appropriate. Policy makers should be cautious and careful in 
proposing changes to the regulation of commodity markets, so as 
to not excessively shrink market liquidity, impede the price 
discovery process, or interfere with the ability of commodity 
producers and consumers to manage their risks.

Q.3. Foreign Exchange. We have heard some argue that foreign 
exchange markets performed well during the crisis, that those 
markets did not need to be bailed out, and that as a result 
``foreign exchange swaps'' ought to be exempt from Dodd-Frank 
swaps regulation (as permitted if the Secretary of the Treasury 
makes the finding required under Dodd-Frank Act). Please 
refresh the Committee on how the foreign exchange markets, 
especially the markets in these foreign exchange swaps, 
performed during the crisis.

    Did they freeze up at any point such that firms 
        would not enter into transactions with each other?

    Did some firms place trades betting that currencies 
        would decline and then suffer losses when their 
        counterparties were unable to repay?

    What role did the Federal Reserve's central bank 
        foreign exchange swap lines--which in December of 2008 
        reached nearly $600 billion in outstanding lending, or 
        25 percent of the Fed's assets--play in those ensuring 
        the functioning of these ``foreign exchange swap'' 
        markets?

A.3. All financial markets experienced some stress during the 
crisis. However, foreign exchange markets were arguably more 
resilient than many other wholesale money markets. In 
particular, unlike some dollar funding markets--such as markets 
for commercial paper, asset-backed commercial paper, repurchase 
agreements, and Eurodollars--which essentially seized up during 
the crisis, the foreign exchange market continued to function. 
Liquidity in the market for spot foreign exchange was only 
slightly impaired. The market for dollar-related foreign 
exchange swaps, which is used by some financial institutions to 
acquire dollar funding, exhibited more strains because of its 
tighter links with dollar funding markets more generally. 
However, trading in the foreign exchange swap market for 
dollars was not affected as much as trading in some of the 
other market segments. And nondollar foreign exchange swap 
markets were relatively unaffected.
    Some firms may have taken directional positions in 
currencies during the crisis, as part of their standard 
business activity, but we did not hear of any significant 
troubles with failures to repay in the swap or forward market 
for foreign exchange.
    The Federal Reserve's swap operations were not done in the 
private market with private-market counterparties. They were 
done with other central banks, so there was no direct support 
provided by these operations to the foreign exchange swap 
market. The Federal Reserve's swap operations with other 
central banks provided the other central banks with dollar 
liquidity that they in turn could lend to private financial 
institutions in their jurisdictions. The dollar transactions of 
the foreign central banks in their local markets were nearly 
all in the form of repurchase agreements or other 
collateralized lending operations. Such operations were not in 
direct support of the market for foreign exchange swaps. 
Nonetheless, because the operations of the foreign central 
banks did help relieve pressures in dollar funding markets more 
generally, these operations had an indirect impact on the 
functioning of the dollar foreign exchange swap market, too.

Q.4. Housing Risks. The Case-Schiller housing price index fell 
by 3.9 percent from November to December 2010, and was down 4.1 
percent year on year. As you know, declining housing prices in 
the U.S. expose families and financial institutions to a great 
deal of hardship and risk. And while employment appears to be 
improving in some places, many people continue to be out of 
work, especially in my home State of Oregon.
    What risk to the economy do you see from falling or 
stagnant housing market, with an inventory of distressed 
properties constituting a large proportion of the homes for 
sale? What monetary or supervisory tools does the Federal 
Reserve have to manage such risks? What role can fiscal and 
other Government policy play?

A.4. In many markets across the country, housing activity 
remains weak and home prices remain depressed. Weakness in real 
estate markets is an important headwind for economic growth and 
represents a key risk to macroeconomic performance in the 
period ahead.
    Against this backdrop and in the context of low overall 
rates of resource utilization, subdued inflation trends, and 
stable inflation expectations, earlier this month, the Federal 
Open Market Committee has maintained the target range for the 
federal funds rate at the historically low level of 0 to \1/4\ 
percent and continued its existing policy of reinvesting 
principal payments from its securities holdings and of 
purchasing additional longer-term Treasury securities through 
the end of the second quarter of 2011. Should the Committee 
determine it to be necessary, the overall size and pace of the 
Federal Reserve's asset-purchase program can be adjusted as 
needed to best foster maximum employment and price stability.
    The Federal Reserve also has a variety of supervisory tools 
at its disposal to help manage risks stemming from weakness in 
real estate markets. Indeed, to improve both the Federal 
Reserve's consolidated supervision and our ability to identify 
potential risks to the financial system, such as those posed by 
weakness in housing markets, we have made substantial changes 
to our supervisory framework. In particular, we have augmented 
our traditional approach to supervision, which focuses on 
examinations of individual firms in isolation, with greater use 
of horizontal reviews that simultaneously examine risks across 
a group of firms, to identify common sources of risks and best 
practices for managing those risks. To supplement information 
gathered by examiners in the field, we have also enhanced our 
quantitative surveillance program to use data analysis and 
modeling to help identify vulnerabilities at both the firm 
level and for the financial sector as a whole.
    A recent example of this improved supervisory framework is 
the Comprehensive Capital Analysis and Review (CCAR) that was 
completed by the Federal Reserve on March 18, 2011. One element 
of the forward-looking evaluation of the internal capital 
planning processes of the large, complex banking organizations 
in the CCAR was to ascertain each firm's ability to hold 
sufficient capital to maintain access to funding, to continue 
to serve as credit intermediaries, to meet their obligations to 
creditors and counterparties, and to continue operations, even 
in an adverse macroeconomic environment. The ``supervisory 
stress scenario'' that was part of the CCAR included a 
deterioration in real estate markets resulting in a significant 
further decrease in home prices nationwide.
    Regarding fiscal policy and other governmental policy, the 
Congress could, in principle, decide to pursue a range of 
responses to weakness in housing markets. However, the Congress 
would, of course, have to weigh the potential benefits of such 
policy responses in the context of the overall Federal budget 
situation and a number of competing demands on scarce 
resources.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                      FROM BEN S. BERNANKE

Q.1. When are you going to get out of the ultra-low interest 
rates policies of near zero interest rates? What specific 
metrics will guide your decision? What will you look at in 
terms of factors that will influence your decision as to when 
to increase rates off of zero?

A.1. The Federal Reserve conducts monetary policy to foster its 
statutory objectives of maximum employment and stable prices. 
Consistent with these objectives, the Federal Reserve eased 
monetary policy aggressively over the course of 2008 in 
response to the financial crisis and the associated steep 
economic downturn. By late 2008, the Federal Open Market 
Committee (FOMC) had reduced its target for the Federal funds 
rate to a range of 0 to \1/4\ percent. It also had begun large-
scale purchases of agency debt and agency-guaranteed mortgage-
backed securities in order to provide additional monetary 
policy accommodation. Subsequently, the Federal Reserve also 
purchased longer-term Treasury securities with the same 
objective. As the FOMC noted in its most recent statement, 
recent data suggest that the economic recovery is proceeding at 
a moderate pace and labor market conditions are improving 
gradually. Nonetheless, the unemployment rate remains elevated, 
and measures of underlying inflation continue to be somewhat 
low, relative to levels that the FOMC judges to be consistent, 
over the longer run, with its dual mandate. Based on this 
outlook, the FOMC decided at its most recent meeting that it 
was appropriate to maintain its accommodative stance of 
monetary policy.
    As the economy recovers further, the FOMC will eventually 
need to remove the current degree of policy accommodation so 
that the stance of monetary policy remains consistent with the 
FOMC's dual mandate. The FOMC monitors a wide range of 
indicators in order to assess progress toward its dual 
objectives and hence the appropriate stance of policy. In 
particular, the FOMC has noted factors that are important in 
its assessment of the appropriate level of the Federal funds 
rate in the current environment including low rates of resource 
utilization, subdued inflation trends, and stable inflation 
expectations.

Q.2. Mr. Chairman, as you are well aware, since the Federal 
Reserve lowered the Federal Funds rate to ``0 to \1/4\ 
percent'' the FOMC statement has included the following 
statement, the Fed ``continues to anticipate economic 
conditions . . . are likely to warrant exceptionally low levels 
of the federal funds rate for an extended period of time.''
    As I'm sure you are aware Kansas City Federal Reserve Bank 
President Hoenig cast dissenting votes on the Federal Open 
Market Committee 8 times throughout 2010 because he felt that 
``continuing to express the expectation of exceptionally low 
levels of the Federal funds rate for an extended period was no 
longer warranted because it could lead to the buildup of 
financial imbalances and increase risks to longer-
runmacroeconomic and financial stability.''
    At what point, Mr. Chairman, would it be warranted not to 
increase the Federal funds rate, but to simply remove that 
phrase: ``likely to warrant exceptionally low levels of the 
Federal funds rate for an extended period of time?'' Can you 
give this Committee a time frame on when that might happen? If 
not, can you describe the metrics you will use to make that 
decision?

A.2. The FOMC regularly evaluates all aspects of the current 
stance of policy and its statement in light of the evolution of 
the economic outlook. The phrase noted is intended to provide 
market participants with greater clarity about the FOMC's 
expectations for the path of the Federal funds rate given its 
assessment of the economic outlook. Importantly, this so-called 
``forward guidance'' for the funds rate is explicitly 
conditional on the economic outlook. As a result, any changes 
in the forward guidance will depend on the evolution of the 
outlook for economic activity and inflation. As the economy 
continues to recover, policy accommodation will eventually need 
to be removed so that the stance of monetary policy remains 
consistent with the Federal Reserve's dual mandate to foster 
maximum employment and stable prices. The FOMC monitors a wide 
range of indicators in order to assess progress toward its dual 
objectives and hence the appropriate stance of policy. The FOMC 
has noted some of the important metrics that form the basis for 
its current forward guidance regarding the funds rate target. 
In particular, the FOMC statement notes that low rates of 
resource utilization, subdued inflation trends, and stable 
inflation expectations are some of the key factors supporting 
its judgment that exceptionally low levels of the funds rate 
are likely to be warranted for an extended period.

Q.3. In a speech last year, Mr. Hoenig advocated a policy that 
remains accommodative but slowly firms as the economy itself 
expands and moves toward more balance. He advocated dropping 
the ``extended period'' language from the FOMC's statement and 
removing its guarantee of low rates. This tells the market that 
it must again accept risks and lend if it wishes to earn a 
return. The FOMC would announce that its policy rate will move 
to 1 percent by a certain date, subject to current conditions. 
At 1 percent, the FOMC would pause to give the economy time to 
adjust and to gain confidence that the recovery remains on a 
reasonable growth path. At the appropriate time, rates would be 
moved further up toward 2 percent, after which the nominal Fed 
funds rate will depend on how well the economy is doing. Are 
you aware of this proposal? Have you considered it?

A.3. The FOMC reviews its policy stance at every FOMC meeting, 
and meeting participants regularly offer their views about a 
range of policy options. President Hoenig expressed his views 
at FOMC meetings, and they were noted in the minutes of the 
meetings. (See, for example, the minutes to the September 2010 
meeting at http://www.federalreserve.gov/monetarypolicy/
fomcminutes20100921.htm.)
    As noted above, the FOMC will eventually need to remove 
policy accommodation in order to maintain an overall stance of 
monetary policy that is consistent with the statutory 
objectives of maximum employment and stable prices. Currently, 
the unemployment rate remains elevated, and measures of 
underlying inflation continue to be somewhat low, relative to 
levels that the FOMC judges to be consistent, over the longer 
run, with its dual mandate. At its most recent meeting, the 
FOMC again judged that it was appropriate to maintain the 
current 0 to \1/4\ percent target range for the Federal funds 
rate to foster its dual mandate. In addition, the FOMC again 
continued to anticipate that economic conditions--including low 
rates of resource utilization, subdued inflation trends, and 
stable inflation expectations--were likely to warrant 
exceptionally low levels for the Federal funds rate for an 
extended period.

Q.4. What specific metrics will guide your decision for ending 
QE2?

A.4. The FOMC's decision last fall to undertake a second round 
of large scale asset purchases reflected its judgment that, 
while the economic recovery was continuing, progress toward 
meeting the FOMC's dual mandate of maximum employment and price 
stability had been disappointingly slow. Moreover, members 
generally thought that such progress was likely to remain slow. 
While incoming economic and financial data since that time has 
suggested some improvement in the economic outlook, that 
improvement has been fairly gradual, and the FOMC has judged 
that the current program of purchases remains appropriate.
    The FOMC regularly reviews the pace of its securities 
purchases and the overall size of the asset purchase program in 
light of incoming information and will adjust the program as 
needed to best foster its statutory goals of maximum employment 
and price stability. In considering the appropriate stance of 
policy, including the decision for ending the asset purchase 
program, the FOMC must be forward-looking because changes in 
monetary policy affect the economy with a lag. In making its 
assessment of the likely trajectory for the economy and the 
risks around that trajectory, the FOMC monitors a wide range of 
economic and financial indicators, including measures of 
spending and production in various sectors of the economy, 
labor market indicators across sectors and regions, measures of 
price and wage developments, and financial variables that shed 
light on the financing conditions faced by businesses and 
households, as well as overall conditions in the financial 
system.

Q.5. Mr. Chairman, you and the Federal Reserve have said 
repeatedly that QE2 related purchase will end in June. Do you 
still plan for that to be the case--for QE2 to definitely end 
in June? What factors would dissuade you from pursuing that 
course?

A.5. Yes, at its most recent meeting, the FOMC announced that 
the Federal Reserve will complete purchases of $600 billion of 
longer-term Treasury securities by the end of the current 
quarter. Of course, going forward, the FOMC will continue to 
monitor a wide range of economic and financial indicators and 
assess their likely implications for the achievement of its 
objectives.

Q.6. There are long term risks and short term benefits 
associated with the policy of QE2. How do you appropriately 
balance the short term benefits the long term risk?

A.6. The main benefit the FOMC saw to the new asset purchase 
program was that by providing additional monetary 
accommodation, the purchases would help to support the 
attainment of the Federal Reserve's statutory goals of maximum 
employment and price stability. As I noted earlier, the FOMC's 
decision last fall to undertake a second round of large scale 
asset purchases reflected its judgment that, while the economic 
recovery was continuing, progress toward meeting the FOMC's 
dual mandate of maximum employment and price stability had been 
disappointingly slow. Moreover, in the absence of additional 
policy stimulus, there was a risk that further adverse shocks 
to the economy could lead to deflation--that is, to falling 
prices and wages--and a protracted period of economic weakness.
    However, as you note, the benefits of the asset purchase 
program need to be weighed against the associated risks. One 
risk was that, given our relative lack of experience with this 
policy tool, we did not have very precise knowledge of the 
quantitative effect of changes in our holdings of longer-term 
securities on financial conditions and on the economy. This 
uncertainty about the quantitative effect of securities 
purchases increased the difficulty of calibrating and 
communicating the policy response, and it made a flexible, 
conditional approach to the new purchases attractive. As a 
result, the FOMC, while noting its intent to purchase $600 
billion of Treasury securities by the end of the second quarter 
of 2011, emphasized that it would regularly review the pace of 
its securities purchases and the overall size of the asset 
purchase program in light of incoming information and adjust 
the program as needed to best foster its statutory goals of 
maximum employment and price stability. Ultimately, the FOMC 
decided to complete the program as originally announced.
    Another concern associated with our securities purchases is 
that substantial further expansion of the Federal Reserve's 
balance sheet might reduce public confidence in the ability of 
the Federal Reserve to execute a smooth exit from its 
accommodative policies at the appropriate time. Even if 
unjustified, such a reduction in confidence might lead to an 
undesired increase in inflation expectations. However, the 
Federal Reserve has expended considerable effort in developing 
the tools needed to ensure that the exit from highly 
accommodative policies can be smoothly accomplished when 
appropriate, and I am confident that those tools are ready for 
use when needed. By providing clarity to the public about the 
methods by which the FOMC will exit its highly accommodative 
policy stance--which we have done through speeches and 
testimonies by FOMC members--the Federal Reserve can help to 
anchor inflation expectations and so help to foster our dual 
mandate.

Q.7. One thing that I am deeply concerned about is how the 
Federal Reserve will deal with inflationary pressure. The Fed's 
extraordinary response to the financial crisis has exposed 
itself to potential losses that would be exacerbated by any 
attempt of the Federal Reserve to fight inflation--with the 
average cost of gas already on the rise ($3.19/gallon last 
week)--is something you will have to address in the very short 
term. How do you, Mr. Chairman, plan to fight inflation without 
increasing the losses you would take on interest rate sensitive 
assets the Fed now owns because of your previous actions?

A.7. The Federal Reserve is unwaveringly committed to carrying 
out its dual mandate to promote price stability and maximum 
employment. Although increases in energy prices over recent 
months have boosted headline inflation in the near term, 
inflation is likely to moderate substantially over the 
intermediate term given that measures of underlying inflation 
are subdued and long-run inflation expectations remain stable. 
At the same time, the unemployment rate is quite high and seems 
likely to return to a more normal level at a very gradual pace. 
Based on this outlook, the FOMC decided at its most recent 
meeting that it was appropriate to maintain its very 
accommodative stance of monetary policy. However, if the 
inflation outlook were to worsen appreciably, the Federal 
Reserve has the will and the tools to remove monetary 
accommodation as needed on a timely basis. As discussed in more 
detail below in response to Question 10, the removal of policy 
accommodation could result in some losses on sales of 
securities. However, we expect that any such losses would be 
more than offset by interest income generated by the Federal 
Reserve's securities portfolio. In all cases, the Federal 
Reserve's monetary policy decisions will be guided solely by 
its statutory mandate to foster maximum employment and price 
stability.

Q.8. On January 6, 2011, the Federal Reserve quietly announced 
a significant change to its accounting rules. Reuters reported 
that rule change ``was tucked quietly into the Fed's weekly 
report on its balance sheet and phrased in such technical terms 
that it was not even reported by the financial media when 
originally announced on January 6.''
    The change itself was buried in footnote 15 of supplemental 
table number 10. The footnote states: ``15. Represents the 
estimated weekly remittances to the U.S. Treasury as interest 
on the Federal Reserve Notes or, in those cases where the 
Reserve Bank's net earnings are not sufficient to equate 
surplus to capital paid-in, the deferred asset for interest on 
Federal Reserve notes. The amount of any deferred asset, which 
is presented as a negative amount in this line, represents the 
amount of the Federal Reserve Bank's earnings that must be 
retained before remittances to the U.S. Treasury resume. The 
amounts on this line are calculated in accordance with the 
Board of Governors policy, which requires the Federal Reserve 
Banks to remit residual earnings to the U.S. Treasury as 
interest on Federal Reserve notes after providing for the costs 
of operations, payment of dividends, and the amount necessary 
to equate surplus with capital paid-in.''
    Does accounting change mean that Treasury, and therefore 
the U.S. taxpayer, is now in a first-loss position should the 
Fed become book-value insolvent as a result of potential losses 
that might be incurred on asset sales as part of its efforts to 
absorb the excess liquidity the Federal Reserve has injected 
into the financial system?

A.8. The financial relationship between the Federal Reserve and 
U.S. Treasury was not affected by this accounting change. 
Instead, the accounting change was made to present that 
financial relationship in the weekly release more clearly and 
similarly to how it is presented in the Federal Reserve Banks' 
annual audited financial statements.
    As noted in the footnote to which your question refers, the 
Board requires the Reserve Banks to remit excess earnings to 
the Treasury as interest on Federal Reserve notes after 
providing for the costs of operations, payment of dividends, 
and reservation of an amount necessary to equate surplus with 
capital paid-in. This practice has been in effect since 1964 
and has not changed. The Board requires these remittances to be 
made by each Reserve Bank weekly unless that Reserve Bank's 
earnings are less than the total of these three elements. In 
those cases, remittances are suspended until earnings again 
exceed the three elements. The U.S. Treasury and the taxpayer 
have always been the beneficiaries of Reserve Bank earnings.
    The accounting change implemented in January essentially 
requires Reserve Banks to record their obligation to remit 
excess earnings to the U.S. Treasury as a liability each day, 
rather than only at year-end. This accounting treatment is 
consistent with generally accepted accounting principles and 
more clearly presents each Reserve Bank's obligation to remit 
earnings to the Treasury. Previously, unremitted earnings were 
reflected on the Reserve Bank balance sheets as ``other 
capital'' pending ultimate reclassification at year-end to the 
appropriate surplus and liability accounts. The accounting 
change ensures that the Reserve Banks' weekly balance sheets 
clearly reflect the capital position of each Reserve Bank and 
the amount of that ReserveBank's earnings yet to be remitted to 
the Treasury.
    Your question related to the possibility that a Reserve 
Bank's liability for remittances to the Treasury would be 
negative and represented as a deferred asset. This occurs when 
earnings are less than the three elements noted above and 
remittances have been suspended. Just as Reserve Bank earnings 
above those elements create a liability for the amount to be 
remitted, earnings less than those elements create a deferred 
asset for the amount of future earnings that will be retained 
before remittances will resume.

Q.9. Do these accounting changes really prevent the Federal 
Reserve from being bankrupt? Is it appropriate that the Federal 
Reserve is allowed to make this sort of dramatic change to how 
it keeps its book without any oversight or approval from 
anyone?

A.9. The accounting changes have no bearing on the fundamental 
financial condition or solvency of the Reserve Banks. As stated 
previously, the accounting change made in January aligned our 
weekly accounting practices with our year-end accounting 
practices and generally accepted accounting principles. The 
Reserve Banks continue to receive clean annual audit opinions 
from the external auditors. The accounting for the distribution 
of excess earnings is designed to be transparent and show 
clearly the economic substance of the distribution policy each 
week. The change has no impact on the financial operations of 
the Reserve Banks.

Q.10. Mr. Chairman, were these changes made because of the 
increasingly significant exposure to interest rate risk, 
through the acquisition of mortgage-backed-securities and long-
term Treasuries due to Fed actions during the financial crisis 
and QE2?

A.10. No. The changes to Federal Reserve accounting policy were 
made to provide greater transparency regarding Federal Reserve 
income and remittances to the U.S. Treasury. Regarding the 
Federal Reserve's interest rate risk, the Federal Reserve's 
System Open Market Account (SOMA) portfolio currently has an 
overall unrealized gain position of about $70 billion. An 
increase in interest rates and a decline in the market value of 
the securities in the portfolio could result in unrealized 
losses for the portfolio. However, the Federal Reserve does not 
realize losses on its portfolio unless a security is sold. As a 
result, even if the securities in the SOMA portfolio were to 
decline in value, there would be no implication for Federal 
Reserve earnings unless the assets are sold. Moreover, we 
currently expect that any realized losses on any potential 
sales of securities would be more than offset by the 
substantial interest income that the Federal Reserve earns, and 
is expected to continue to earn, on the SOMA portfolio. If 
interest rates were to rise more than is implied by current 
market rates, or if the Federal Reserve were to sell assets 
relatively rapidly, realized losses would be higher than 
expected, reducing the Federal Reserve's net income. While 
there may be scenarios in which asset sales could lead to 
realized losses that exceed net interest income, those 
scenarios seem very unlikely. Moreover, any reduction in 
Federal Reserve net income resulting from realized losses on 
securities holdings would most appropriately be viewed in the 
context of the very sizable Reserve Banks remittances to the 
Treasury over the past few years, much of which reflects the 
large-scale asset purchases that have been pursued by the FOMC 
to foster the goals of monetary policy.

Q.11. Mr. Chairman, this time last year you were asked about 
your thoughts about the GSEs--Fannie Mae and Freddie Mac--and 
what sort of time frame we [Congress] should try to come up 
with a solution--6 months? 9 months? End of the year?
    In response, you said, ``Well, the sooner you get some 
clarity about where the ultimate objective is, the better.''
    Here we are a year later and the administration has just 
released its plan--which is more of a menu of options than a 
plan. Do you think the lack of clarity from Congress on the 
future direction of the economy is having an adverse impact on 
the housing finance market?

A.11. Greater clarity from the Congress on the direction of 
housing finance in the United States would have a positive 
effect on mortgage markets. Market participants would be better 
able to plan for the future if they knew what institutions and 
policies were likely to be important in coming years.

Q.12. As you know between FHA and Fannie Mae and Freddie Mac 
the Government is originating roughly 95 percent of new loans 
in the market today. Do you think Congressional action on GSE 
reform could help reinvigorate the private mortgage lending 
sector?

A.12. Congressional action on GSE reform could help 
reinvigorate the private mortgage lending sector. As described 
in the recent Department of the Treasury Report to the Congress 
on ``Reforming America's Housing Finance Market,'' the 
Administration lays out three options for moving forward with 
the reform of Fannie Mae and Freddie Mac. These options are 
reasonable and feasible approaches for reforming mortgage 
finance. By presenting these options, the report appropriately 
leaves to Congress the question of the extent of Government 
involvement in mortgage markets. By settling on an approach for 
managing future Government involvement in mortgage markets, 
Congress would also provide the private mortgage sector with 
important information about its future role in housing finance.

Q.13. Some have criticized the Obama administration for 
suggesting that the Government should be completely removed 
from the housing finance market. One industry group (the 
National Association of Realtors) has said, ``The Obama 
administration and some members of Congress want to turn the 
clock back on the housing market to the 1930s, turning us into 
a Nation of renters and making home ownership something that 
only the rich can afford.'' Do you think that is a fair 
criticism or is that hyperbole from people who are addicted to 
the current system of subsidy for housing?

A.13. The Administration's housing finance reform proposal 
rejects privatization of the housing markets. As its states, 
``Complete privatization would limit access to, and increase 
the cost of, mortgages for most Americans too dramatically and 
leave the Government with very little it can do to ensure 
liquidity during a crisis'' (page 26). Instead, the 
Administration proposes three options that have less Government 
involvement in mortgage markets than in the past, but still 
have a significant role for Government. The options presented 
in the Administration's proposal strike a balance between 
access to mortgage credit, incentives for housing investment, 
taxpayer protection, and financial stability.

Q.14. Given the fact that jumbo 30-year fixed-rate mortgages 
existed before the crisis, don't you think it's likely that a 
strictly private housing finance market would offer a 30-year 
fixed-rate product, though maybe at a slightly higher priced 
than in the past?

A.14. A strictly private market is likely to offer a 30-year 
mortgage that is somewhat more costly than such mortgages in 
the past, but such mortgages may only be available during good 
economic times. Fannie Mae and Freddie Mac did not dominate the 
mortgage markets until the late 1980s, but the 30-year mortgage 
was offered to mortgage borrowers prior to that time. Moreover, 
the 30-year fixed-rate mortgage is currently offered to 
borrowers in the jumbo mortgage market (without Fannie Mae or 
Freddie Mac guarantees). Therefore, some evidence strongly 
suggests that the 30-year mortgage is a product that can be 
provided by the private sector. However, it seems unlikely that 
the 30-year fixed-rate mortgages would be available even at 
somewhat higher prices under all economic conditions. The 
implicit Government backing of Fannie Mae and Freddie Mac 
likely provides them with some significant advantages in 
funding and in hedging the interest rate risks associated with 
such mortgages, particularly during times of financial market 
turmoil. Jumbo mortgages were not available during the worst 
times of the most recent financial crisis, and when they became 
available in the latter part of the crisis, such mortgages were 
priced at very high spreads relative to Treasury yields. Thus, 
as suggested by the Treasury's recent white paper, some form of 
Government backing may be needed to maintain reasonable 30-year 
fixed-rate mortgage rates and a steady supply of mortgage 
credit during times of substantial financial stress.

Q.15. First, does he support age discrimination?

A.15. No. The Board complies with the Age Discrimination in 
Employment Act of 1967 (ADEA). The ADEA and the implementing 
regulations of the EEOC authorize employers to impose mandatory 
retirement based on age in limited circumstances and the Board 
policy referred to below complies with the ADEA. (See 29 USC 
631(c) and 29 CFR 1625.12.)

Q.16. Why does the Board of Governors require the regional Feds 
to have a mandatory retirement age?

A.16. The Reserve Banks are private entities for purposes of 
the ADEA. Accordingly, as is the case in many private firms, 
the Reserve Banks follow a policy of mandatory retirement of 
the type that is expressly permitted under the ADEA, as passed 
by Congress. (See 29 USC 631(c).) The ADEA permits private 
employers to require the retirement of any employee who has 
attained 65 years of age, and who, for the 2-year period 
immediately before retirement, is employed in a bona fide 
executive or higher policymaking position, if such employee is 
entitled to an immediate nonforfeitable annual retirement 
benefit from a pension, profit-sharing, savings, or deferred 
compensation plan, or any combination of such plans, of the 
employer of such employee which equals, in the aggregate, at 
least $44,000. An employee within this exemption can lawfully 
be required to retire at age 65 or above.
    The mandatory retirement policy adopted by the Board 
applies only to the two most high level officers at the Federal 
Reserve Banks, the President and the First Vice President, and 
meets all of the conditions for mandatory retirement under the 
ADEA, as noted above. The Board's mandatory retirement policy 
is intended to enable successors to move into these positions 
at an earlier age than might have been the case without the 
policy. Moreover, when successors have come from within the 
organization, earlier turnover at the top has meant earlier 
advancement, as well as the possibility of increased 
advancement opportunities for other officers whom the Federal 
Reserve needs to retain. On the other hand, a fixed mandatory 
retirement age without due regard for tenure may, on balance, 
require a frequency of turnover that may be more disruptive 
than beneficial, and may require an individual to retire when 
he or she is becoming able to make the greatest contribution. 
As a result, Board policy requires Reserve Bank presidents and 
first vice presidents to retire at age 65 or after 10 years in 
their positions, whichever is later, up to age 75.

Q.17. Is there a similar age restriction on the Board of 
Governors?

A.17. No. Tenure of service on the Board of Governors is 
governed by the terms set by Congress in the Federal Reserve 
Act. Members of the Board are limited in how long they may 
serve. Under the Federal Reserve Act, both the Chairman and 
Vice Chairman of the Board serve in this position for a term of 
4 years and may only continue as Chairman/Vice Chairman if the 
then sitting President renominates them for office and the 
Senate confirms the appointment. All Members, including the 
Chairman and the Vice Chairman, are appointed to complete fixed 
terms of 14 years, which start and expire in staggered fashion. 
Upon the expiration of their terms, Members may continue to 
serve until their successors are appointed and have qualified.

Q.18. Do you support the mandatory retirement age for regional 
Feds?

A.18. Yes. The Board's mandatory retirement policy for 
Presidents and First Vice Presidents of Federal Reserve Banks 
has provided a beneficial balance between tenured policy makers 
and incoming executives with new perspectives, while providing 
for reasonable advancement opportunities for others within the 
organization. As noted above, the Board's policy complies with 
the terms of the ADEA as enacted by Congress and the EEOC's 
implementing regulations.

Q.19. Do you support giving Federal Reserve Board of Governors 
their own staff?

A.19. All staff of the Board of Governors report to, and 
perform work for, all members of the Board, and any Board staff 
may be called upon by any Member to perform work for them in 
furtherance of official Board functions. In addition, the Board 
has established delegations of authority which assign 
responsibility for Board operations to various Members of the 
Board. Staff who work within these areas of responsibility 
report directly to the Member who has oversight responsibility 
for the relevant Board function. Members determine the 
performance ratings of high level staff within their oversight 
area and are able to request additional resources for their 
areas of responsibility if they consider such resources 
necessary to carrying out the function. Final determinations on 
staffing and funding levels are voted on by the full Board, 
with each Member having an equal vote on the ultimate outcome.

Q.20. How can other Governors exercise independent judgment 
when they have to rely on information fed to them by your 
staff?

A.20. As noted above, Board staff do not work solely for the 
Chairman. Board staff report to, and perform work for, all 
members of the Board based on the duties the Board member 
performs for the Board.

Q.21. Don't you think, in a crisis such as the one the Federal 
Reserve just dealt with, that you would have been better served 
if the other Governors had additional resources with which to 
make their decisions?

A.21. The Members of the Board worked collaboratively, 
creatively, and diligently, to address the issues raised by the 
financial crisis. In addition, staff of the board worked with 
all Board Members to identify and address concerns. The result, 
in my estimation, led to a very successful series of policy 
decisions. All Members of the Board have an equal vote on the 
Board's budget, which is what determines the level of resources 
available to carry out the Board's functions.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WICKER
                      FROM BEN S. BERNANKE

Section 1

Q.1. The Federal Reserve is the primary regulator for the 
largest U.S. banks and one of the regulators most concerned 
about securitization, which affects not only the health of 
those banks but the U.S. financial system in general. I am very 
concerned that the mortgage backed securities (MBS) market has 
no standards and no real working structure, and these problems 
affect not just financial institutions' ability to monitor and 
value the MBS they hold but also regulators' ability to 
understand what is happening with the institutions they are 
regulating.
    In your earlier testimony, you mentioned the steps that 
regulators are taking to make sure that mortgages are better 
underwritten, such as the ``qualified residential mortgage'' 
definition, national servicing standards, and possible 
improvements to credit rating agencies' performance. However, I 
would like you to focus on potential problems with the 
securities and not the underwriting of mortgages in response to 
my questions.
    Each set of securities has its own pooling and servicing 
agreements, its own definitions of such fundamental concepts of 
delinquency and default, and its own internal plumbing 
mechanisms as to how cash flows work. Can you describe the 
challenges banks have in placing values on their MBS holdings 
when it is difficult to compare to other MBS holdings that have 
different standards?

A.1. MBS valuation has two important components: the projection 
of cash flows and the identification of appropriate discount 
rates based on portfolio and market information. Banks 
investing in MBS should analyze the terms and conditions of 
Pooling and Servicing Agreements (PSAs) governing the 
transactions in order to understand the cash flow waterfall and 
other factors that affect the value of these securities. While 
there is a greater degree of standardization in PSAs for 
securities issued by the Government sponsored entities (GSEs), 
thereby facilitating the valuation of these securities, there 
is less standardization in the private label MBS market, 
thereby making the valuation of private label MBS somewhat more 
complex. These differences include potential loss mitigation 
strategies and payment advance requirements for delinquent 
loans as well as other items that give the service some level 
of discretion in the private label MBS market. Additionally, 
the underlying representations and warranties and requirements 
for originators to repurchase mortgage loans not meeting the 
representations and warranties may vary widely among private 
label MBS deals. These differences are more acute in private 
label deals than in issuances involving the GSEs. Further, 
there can be significant structural differences between 
issuances of private label MBS that need to be considered such 
as the number of junior classes and the amount of 
subordination.
    There are a number of challenges in projecting cash flows, 
including but not limited to mortgage prepayment speeds, 
uncertainty about housing values, the willingness of borrowers 
without significant equity to continue to service their 
mortgage debt, resolution of documentation issues around the 
foreclosure process, and differences in the quality of servicer 
data and servicer practices.

Q.2. When there are no standard classifications of mortgages 
into basic categories such as ``prime,'' ``subprime,'' and 
``alt-A,'' how can banks, investors, and regulators be sure 
about what kind of mortgages are in these securities? Without 
standards, is it possible for the underwriters to throw the 
poorest quality mortgages into securities with good marketing 
labels?

A.2. The Federal Reserve Board staff agrees that these 
classifications for mortgages are often subject to 
interpretation and there is a lack of clear specifications for 
different mortgage credit classifications. MBS materials and 
transactional documents should contain clear definitions and 
detailed disclosures regarding the credit quality of underlying 
mortgage loans to help protect against potential abuses from 
mortgage underwriters and MBS issuers. In addition, loan data 
should be provided far enough in advance of offering dates to 
give investors adequate time to analyze the credit risk of the 
portfolio. (This issue has been partially addressed by the 
Securities and Exchange Commission (Commission) through, for 
example, its Regulation AB.) While the use of standardized 
classifications for mortgage credit quality may be a partial 
solution, additional disclosure regarding the credit quality of 
the underlying loans would enhance the ability of investors to 
make a more granular and independent assessment of risk.

Q.3. Is it true that there is no loan-level data on MBS 
generally available to banks, investors, and regulators who 
purchase MBS?

A.3. PSAs generally do not require servicers to provide monthly 
loan-level data to investors in MBS. Servicers usually provide 
a monthly cash flow report to investors that summarizes the 
performance of the underlying mortgage pools. These monthly 
investor reports include information on the total amount of 
principal and interest collected on the portfolio, delinquent 
loans, including the severity of delinquencies, servicing and 
other fees charged by the servicer, and other information. 
However, such reports may not always contain all relevant data, 
and investors often utilize information from third party data 
providers to analyze the performance of MBS. Implementation of 
revisions to Regulation AB by the Commission should also help 
improve the amount and standardization of performance data 
available to investors.

Q.4. Is it true that most MBS are sold through private 
placements rather than public offerings, which means that 
important legal documents for MBS are not generally available 
to banks, investors, regulators, and the public, making it 
impossible for anyone except the underwriter and the original 
purchaser of the securities to completely understand the assets 
making up the MBS?

A.4. Prior to the mortgage crisis, the vast majority of private 
label MBS were issued using publicly registered shelves. Very 
few issues were privately placed. However, the private 
placements issued during that time posed problems for 
investors. Most investors who initially purchased the offering 
did not receive the private placement memo until after the 
trade date. Also, monthly loan performance data is generally 
not available to new investors after a private placement. Under 
the terms of private placements, investors are not entitled to 
the data unless they own the securities, thereby complicating 
the purchase and sale of these securities in the secondary 
market. The Commission's proposed enhancements to Regulation AB 
are designed to address this problem by requiring issuers to 
provide investors in both public deals and private placements 
with better access to monthly loan performance data.

Q.5. Without information and good analysis as to what these 
securities are worth, how can regulators have confidence that 
the banks with MBS holdings are able to value them correctly?

A.5. A holder of actively traded MBS has access to market bid 
and ask prices to value these investments. As part of the 
examination process, regulators assess the processes and 
methods banks use to value their securities relative to the 
prices for these securities in the marketplace. The absence of 
adequate monthly data and the sometimes imprecise terms of PSAs 
create uncertainty in valuing less liquid assets, particularly 
where bid and ask prices are not readily available in the 
market. Banks and other investors employ cash flow models to 
estimate the expected cash flows from these securities in order 
to determine the present value and price of the securities. 
Examiners evaluate the assumptions and have the ability to 
challenge or change the assumptions, if necessary.

Q.6. Is it true that Fannie Mae and Freddie Mac already have 
standard legal documents--like pooling and servicing 
agreements--for the MBS that they guarantee? Has this 
contributed to these entities sponsoring the only MBS that 
investors are buying right now? Should the private MBS market 
have similar standard legal documents and structures?

A.6. Fannie Mae and Freddie Mac have standardized terms for the 
pooling and servicing agreements for the mortgages they 
guarantee. Minor variations exist among servicers. However, 
this standardization in the pooling and servicing agreements is 
not likely a rationale for investors to purchase GSE-issued 
MBS. Investors purchase GSE securities because of the 
Government guarantee as well as the absence of private label 
mortgage backed securities in the market currently. The private 
label market would benefit from standardized pooling and 
servicing agreements once that market restarts.

Section 2

Q.1. The banks and investors that buy MBS rely on the 
representations and warranties on the underlying mortgage loans 
being met and for servicers and trustees to enforce remedies 
for banks and investors if they are not met.
    Is it true that the servicers of MBS mortgage pools are 
responsible for detecting breaches of these representations and 
warranties and for putting loans that do not meet them back to 
originators, who often are the servicers' affiliates? Is this a 
fundamental conflict of interest?

A.1. Under most existing PSAs, servicers do not have the 
responsibility to review every loan file for violations of 
representations and warranties or to put the loans that violate 
representations and warranties back to the originator. However, 
servicers do have the responsibility to report loans found in 
violation of representations and warranties in the normal 
course of business to the bond trustee and the originator. When 
notified, the originator has the obligation to repurchase the 
loan or cure the violation. Investors in private label MBS have 
filed a number of lawsuits alleging, among other claims, that 
the underlying loans contain breaches of representations and 
warranties and that the servicers have breached their fiduciary 
duty to require originators to repurchase these loans. Much of 
this litigation is still in its early stages, and at this time, 
it is difficult to predict its ultimate impact.

Q.2. Is it true that the trustees of MBS mortgage pools provide 
little to no protection for the banks you regulate that invest 
in MBS, as the trustees are selected and paid by the 
underwriter, generally insist on being indemnified for 
everything, and are generally required to do very little when 
the mortgage pool is not being serviced properly?

A.2. Federal Reserve Board staff understands that there have 
been complaints from MBS investors regarding trustees and the 
terms of trust agreements. Existing agreements can often 
provide broad indemnifications to trustees. Additionally, 
trustees are generally not obligated to initiate broad 
investigations of loan files for breaches of representations or 
warranties under these agreements, unless a substantial number 
of investors petition the trustee. The industry will need to 
come to agreement on any appropriate changes to trust and PSA 
agreements in order to address investors' concerns.

Q.3. Do you believe that Congress should consider requiring 
legally and financially meaningful protections for the banks 
you regulate, and for investors, when they buy MBS and the 
underlying mortgage quality is not as it was represented by the 
underwriter?

A.3. The Federal financial industry regulators are discussing 
the content and extent of guidance on mortgage servicing 
standards that can help address issues that have arisen in the 
mortgage and MBS markets as a result of the recent financial 
crisis. The group may develop solutions that could be 
implemented through banking supervision and regulation. In 
circumstances where the scope of bank regulatory authority is 
limited, the agencies may make recommendations to Congress for 
further action, if appropriate.

Q.4a. What do you believe the implications would be for the 
private mortgage finance market as the Government pulls back 
from its support?

A.4a. Federal Reserve Board staff can see the benefit of 
standardized guidelines for certain types of mortgages eligible 
for securitizations. However, these guidelines would need to be 
one component of an overall housing finance strategy in the 
United States. The final determination of the role of Freddie 
Mac and Fannie Mae as well as FHA in the MBS market will 
determine the course of the private label MBS market. As you 
may know, a number of standardization efforts are under way. 
The American Securitization Forum (ASF), through its Project 
Restart, has a goal to standardize the PSA agreements. The 
Commission has proposed changes to Regulation AB as noted 
above.

Q.4b. Mandated standardization of mortgage categories for 
securitization and of the legal documents that govern MBS.

A.4b. Generally, transparency and disclosure about the 
financial contracts is helpful for improving the operation of 
markets for financial assets. However, mandating the details of 
contracts among private market participants may or may not be 
helpful depending on the circumstances. For example, 
standardization can at times be helpful and improve the market 
liquidity of some financial assets. At other times, however, 
standardization may impede financial innovation and hinder 
market liquidity if the standards are too inflexible or not 
designed to meet new or evolving market changes. Thus, the 
details of any particular approach to financial market 
transactions or contracts have to be known and studied to know 
if such actions help or hurt financial market performance. Such 
details are also important for helping to define the 
appropriate role for GSEs in such markets.

Q.4c. Better disclosure of MBS data and the legal documents.

A.4c. The Federal Reserve Board supports greater transparency 
and disclosure of MBS data and legal documents. For example, 
investors need other avenues to access monthly mortgage loan 
data other than Bloomberg and Loan Performance. In addition, 
the Federal banking agencies, the Commission, the Federal 
Housing Finance Authority, and the Department of Housing and 
Urban Development are working together on issuing proposed 
rules to require that a securitizer retain an economic interest 
in a material portion of the credit risk for any asset that it 
transfers, sells, or conveys to a third party. These rules 
would require certain mandatory disclosure requirements in 
securitizations transactions involving MBS that are designed to 
enhance the information available to investors.

Q.4d. Meaningful remedies for banks and investors of MBS if the 
underlying mortgage quality is worse than was originally as 
promised.

A.4d. Securitization documents should provide a framework that 
permits investors to access loan files so that they can confirm 
completeness and compliance with the representations and 
warranties. The Federal Reserve Board supports a securitization 
framework that would ensure effective oversight of compliance 
with securitizers' representations and warranties.

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