Congressional Testimony

MONETARY POLICY AND THE STATE OF THE ECONOMY HEARING BEFORETHE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED NINTH CONGRESS SECOND SESSION FEBRUARY 15, 2006 Printed for the use of the Committee on Financial Services Serial No. 109–72 ( U.S. GOVERNMENT PRINTING OFFICE 28–024 PDF WASHINGTON : 2006 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 G:\DOCS\28024.TXT RODNEY HOUSE COMMITTEE ON FINANCIAL SERVICES MICHAEL G. OXLEY, Ohio, Chairman JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania DEBORAH PRYCE, Ohio MAXINE WATERS, California SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California NYDIA M. VELA´ZQUEZ, New York FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon RON PAUL, Texas JULIA CARSON, Indiana PAUL E. GILLMOR, Ohio BRAD SHERMAN, California JIM RYUN, Kansas GREGORY W. MEEKS, New York STEVEN C. LATOURETTE, Ohio BARBARA LEE, California DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas WALTER B. JONES, JR., North Carolina MICHAEL E. CAPUANO, Massachusetts JUDY BIGGERT, Illinois HAROLD E. FORD, JR., Tennessee CHRISTOPHER SHAYS, Connecticut RUBE´N HINOJOSA, Texas VITO FOSSELLA, New York JOSEPH CROWLEY, New York GARY G. MILLER, California WM. LACY CLAY, Missouri PATRICK J. TIBERI, Ohio STEVE ISRAEL, New York MARK R. KENNEDY, Minnesota CAROLYN MCCARTHY, New York TOM FEENEY, Florida JOE BACA, California JEB HENSARLING, Texas JIM MATHESON, Utah SCOTT GARRETT, New Jersey STEPHEN F. LYNCH, Massachusetts GINNY BROWN-WAITE, Florida BRAD MILLER, North Carolina J. GRESHAM BARRETT, South Carolina DAVID SCOTT, Georgia KATHERINE HARRIS, Florida ARTUR DAVIS, Alabama RICK RENZI, Arizona AL GREEN, Texas JIM GERLACH, Pennsylvania EMANUEL CLEAVER, Missouri STEVAN PEARCE, New Mexico MELISSA L. BEAN, Illinois RANDY NEUGEBAUER, Texas DEBBIE WASSERMAN SCHULTZ, Florida TOM PRICE, Georgia GWEN MOORE, Wisconsin, MICHAEL G. FITZPATRICK, Pennsylvania GEOFF DAVIS, Kentucky BERNARD SANDERS, Vermont JOHN CAMPBELL, California ROBERT U. FOSTER, III, Staff Director (II) VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 G:\DOCS\28024.TXT RODNEY C O N T E N T S Page Hearing held on: February 15, 2006 ............................................................................................ 1 Appendix: February 15, 2006 ............................................................................................ 61 WITNESSES WEDNESDAY, FEBRUARY 15, 2006 Bernanke, Hon. Ben S., Chairman, Federal Reserve Board of Governors.......... 6 APPENDIX Prepared statements: Oxley, Hon. Michael G. .................................................................................... 62 Gillmor, Hon. Paul E........................................................................................ 64 Bernanke, Hon. Ben S...................................................................................... 65 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Frank, Hon. Barney: Excerpts from the Monetary Policy Report to Congress, February 15, 2006 ................................................................................................................ 75 Lee, Hon. Barbara: The Price Of Credit: Prime and Subprime Lending in California 2004 ...... 76 Bernanke, Hon. Ben S.: Monetary Policy Report to Congress, February 15, 2006 .............................. 79 Written responses to questions from Hon. J. Gresham Barrett ................... 108 Written responses to questions from Hon. Harold E. Ford, Jr. .................... 111 Written responses to questions from Hon. Mark R. Kennedy ...................... 116 Written responses to questions from Hon. Ron Paul..................................... 118 Written responses to questions from Hon. Brad Sherman ........................... 119 (III) VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 G:\DOCS\28024.TXT RODNEY VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 G:\DOCS\28024.TXT RODNEY MONETARY POLICY AND THE STATE OF THE ECONOMY Wednesday, February 15, 2006 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, WASHINGTON, D.C. The committee met, pursuant to notice, at 10:05 a.m., at 2128 Rayburn Building, Hon. Michael G. Oxley [chairman of the com- mittee] presiding. Present: Representatives Oxley, Leach, Bachus, Castle, Royce, Lucas, Kelly, Paul, Gillmor, Jones, Biggert, Shays, Kennedy, Gar- rett, Brown-Waite, Pearce, Price, Fitzpatrick, Davis of Kentucky, McHenry, Frank, Kanjorski, Waters, Sanders, Maloney, Velazquez, Carson, Sherman, Meeks, Lee, Moore of Kansas, Capuano, Ford, Hinojosa, Crowley, Clay, McCarthy, Matheson, Miller of North Carolina, Scott, Davis of Alabama, Green, Cleaver and Bean. Chairman OXLEY. The committee will come to order. Pursuant to Rule 3(f)(2) of the rules of the Committee on Financial Services for the 109th Congress, the chairman announces he will limit recogni- tion for opening statements to the Chair and ranking minority member of the full committee, and the Chair and ranking minority member of the subcommittee on Domestic and International Mone- tary Policy, or their respective designees, to a period not to exceed 16 minutes, evenly divided between the majority and minority. The prepared statements of all members will be included in the record, and the Chair now recognizes himself for an opening state- ment. Chairman Bernanke, welcome to the House Financial Services Committee, and on behalf of the entire committee, congratulations on your confirmation as the 14th Chairman of the Federal Reserve Board. We look forward to getting to know you and gaining a better un- derstanding of how you intend to run the Federal Reserve. Even though this is your first appearance before this committee, we’re well familiar with the Fed, your staff, and the work of the Fed in setting monetary policy and supervising banks and financial hold- ing companies. Based on my brief conversation with you and your amazingly smooth confirmation hearings, I’m confident that you will be suc- cessful as your predecessor. I know the setting and this testimony can be intimidating. I hope it puts you at ease to know that you will have numerous opportunities to testify before this committee and the Congress. (1) VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 2 As a matter of fact, you’re mandated by law to come over here twice each year. I’m sure you’re comforted by that. This morning, the press and the markets will focus on your every word and gesture. This committee will take a long-term view and I hope focus more on public policy, not the fleeting gyrations of the markets. Your predecessor and over time the members of this committee have come to view this hearing as an ongoing dialogue between an independent Fed and the elected representatives of the American public. These hearings have become the highlight of our year. I hope they will become the highlight of yours and that like Chairman Greenspan, you will use them as an opportunity to hear a wide range of views and take the temperature of more parts of the coun- try than you can visit in a year. You are addressing us at a time when there is universal agree- ment that monetary policy is where it should be and that the econ- omy is thriving. We can report that the U.S. economic growth is steady and strong. In fact, we are beginning the fifth full year of the current expan- sion. While we face some uncertainty abroad, and we can be as- sured of the likelihood that there will always be uncertainty abroad, our national economic performance is the envy of the world. Americans are well aware of the economy’s steady growth, low inflation, and productivity gains. Consumer confidence numbers are optimistic, and economic predictions show annual growth in the three to four percent range for the short and intermediate term. Alan Greenspan has handed you the wheel of monetary policy at a time of unparalleled growth and prosperity in America. While Federal law requires that the Federal Reserve conduct monetary policy in a way that ensures maximum employment, stable prices, and moderate long-term interest rates, we know that monetary pol- icy is only one tool to achieve that goal. Another equally important tool is fiscal policy, as set by Congress in the annual budget, and tax policy. As you contemplate the start of your tenure as Chairman of the Fed, I pledge to you to use my influence and the influence of this committee, not only to support you in your work, but also to see to it that Congress conducts fiscal policy with the same acumen as the Fed has shown in monetary policy. I’m confident that we can maintain the excellent track record of the U.S. economy if we work together and understand each other’s goals. We will face challenges together in the future. Some will be self-inflicted, and some will be inflicted upon us. Let us use this relatively quiet time to begin our dialogue, fine- tune the monetary and fiscal policy, and pledge to work together. Mr. Chairman, it’s a pleasure to have you before the committee, your first appearance before our committee on monetary policy, and again congratulations on your outstanding career before here and your confirmation by the Senate. I now yield to the gentleman from Massachusetts for an opening statement. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 3 [The prepared statement of Hon. Michael G. Oxley can be found on page 62 in the appendix.:] Mr. FRANK. Thank you, Mr. Chairman and Mr. Chairman, thank you and thank you for the courtesies you’ve extended to us. You have made yourself very available for the kind of conversations that will be helpful in our having to work together and including be able to articulate those legitimate policy disagreements that are part of a democracy. I just want to apologize in advance because the Fund Joint bill has been scheduled to come up, and I’m going to go over after I do my questioning, I’m sorry to say to you. But I will be on the floor and come back again. So I apologize for that. But I want to just talk to the Chairman because I think we are facing a kind of crisis in our economy. I am glad to see that eco- nomic growth is steady and solid. I agree with the projections that it will good going forward. But we face a problem we haven’t faced a long time in America. I’m not enough of an economic historian to know when, if ever, that was. There is a decoupling between growth in the gross domestic product and the economic situation of the average American. The report documents that—the monetary report to Congress. On page nine of the report, page eight, ‘‘With profits posting further solid gains in 2005,’’ et cetera, and on page nine, ‘‘Corporate profits continue to grow strongly in 2005. The ratio of before-tax profits of domestic non-financial corporations to that sector’s gross value added grows to more than 12 percent of its 1997 peak.’’ ‘‘Operating earnings for S&P 500 firms appear to have been nearly 14 percent above their level four quarters earlier. That’s ex- plained in part by the growth in productivity. It was not as high last year as it’s been, but it will still considerably above trend. If you look productivity over the last 5 years, as has been noted, it has been very high.’’ Then we get to page 17. ‘‘Increases in hourly labor compensation were moderate in 2005.’’ In fact, real wages, wages paid to people who work for other people, taking into account inflation, have not gone up for years. They have been flat. What we have is an economy in which thanks to increased pro- ductivity, gross domestic product goes up and a very, very large share, an excessive share of the increased wealth has gone to a very small number of people who own the capital. Now obviously for the system to work, there needs to be com- pensation for those who own capital. No one is, I hope, arguing that that shouldn’t happen at all. But in recent years, that has be- come disproportionate. Your predecessor had acknowledged that on several occasions. You have wages flat; you have insecurity caused by pensions being underfunded, being abandoned, defined benefits going over to 401(k)s; you have medical care costs increasing, the extent to which workers have to pay them. The consequence is this, and it’s something that people compare. I will tell you when I was in Davos listening to a leader of one our financial institutions lament the fact that the American people seem so unimpressed with globalization, so resistant to the effort VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 4 to adapt that very productivity which many believe is so important for the economy, and I share that. He said, ‘‘Recent studies show that globalization adds a trillion dollars a year to the American economy. That’s $9,000 per family. Why are Americans so resistant to something that adds $9,000 per family?’’ My answer was, ‘‘Because they don’t have the $9,000. Not only do they not get the $9,000,’’ I said to this individual, ‘‘but they think you have their $9,000. In fact, you have the $9,000 for about 2,000 of them or more.’’ This disparity, this problem is why you now encounter increasing resistance to trade to deregulation, to the very flexibility that many think are important for the economy. So these numbers are right here. Productivity goes up. The econ- omy is going to go well. But average Americans collectively assert that they are getting little if any of the benefit. And then those people tell you, ‘‘Well, you know, some of these things, globalization means that tee shirts are a lot cheaper now than they used to be at Wal-Mart and elsewhere.’’ But I’m talking about real wages. That factors in the cost of liv- ing. So when you talk about real wages being flat, you can’t double- count the low prices. Real wages is obviously nominal wages dis- counted by inflation. So if we do not do a better job in this country of not getting rid of inequality, which is essential for our society’s markets to func- tion, but diminish it, you will continue to have the resistance to many of the policies that people advocate, and that I think is the major test before us. We have to end this decoupling of growth of the GDP and the economic well-being of the average American. Chairman OXLEY. The gentleman’s time has expired. The gentlelady from Illinois, Ms. Biggert. Ms. BIGGERT. Thank you, Mr. Chairman and Chairman Bernanke. First, let me associate myself with the chairman’s re- marks, both in welcoming you to the committee, and in recognizing both the skills you bring to this new job and the enormity of the job. We are looking forward to your testimony. We want to get to know you and understand the subtle differences, and there will be differences in the way that you will do your job, from the methods of your predecessor. To date, we have mostly been able to only read about your views. So today, I hope than you will elaborate a little. For example, any- one who had read much about you knows of your interest in real world problems, particularly the Great Depression. We also know of your reputation as a proponent of inflation tar- geting, expressly setting a band in which you think inflation should be kept. Naturally, I might like to hear a little bit more on that, both because we have read so much about it recently, but also be- cause of the spin-up in energy prices and the quite welcome drop in unemployment. Both of these are well-recognized as potential inflation triggers. Most analysts believe that at the first meeting you chair late next VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 5 month, the Open Market Committee will continue its measured tightening. But many are wondering at what point a new Fed Chair will be moved to, as the longest-tenured Chairman, William McChesney Martin famously said, ‘‘take away the punch bowl just as the party gets going.’’ As well I think many members would like to better understand your views on the global saving glut; economists and politicians of all stripes and colors have for years wrung their hands about the alleged low savings rate in the United States. Many are also puzzled about both the high balance of payments deficit and what your predecessor called the conundrum of low, long-term bond rates as the Fed gradually pushed up short-term rates. Of course, in classic economics, a trade deficit in theory can be managed and a rate inversion is a thing to be avoided. So I think we’d like to hear if there is a savings glut, what are the implica- tions for capital investment here and in emerging markets; is there more that we should do unlock capital investment? And how much of the current account deficit should we imagine may erode if the economies of other developed and developing countries picks up? Anyway, I hope you will take some time, either at this hearing or at your next appearance here in July, to talk to us a little bit about the equality of economic data and its impact on the Fed’s ability to confront monetary policy. Doubtless the Fed is awash in data, but it is troublesome to think that in our high tech society in the 21st Century that Feder- ally-collected economic data is sometimes a month out of date and often trails privately-collected data. I know, I remember a number of members on the committee are interested in this topic, and I hope you’ll let us know if and when and where you think there is need for improvement, along with suggestions. With that, Mr. Chairman, I wish you well in a new and very important job. Thank you for your testimony and I yield back the balance of my time. Chairman OXLEY. The gentlelady yields back. The gentlelady from New York, Ms. Maloney? Mrs. MALONEY. Thank you, thank you. Thank you, Mr. Chair- man and welcome. We on this committee are particularly honored that your first appearance before Congress is before this particular committee, and I might add that the President’s choice to fill the shoes of Chairman Greenspan has been greeted with consistent bi- partisan applause, and this is a true testament to your reputation as an economist, scholar, and independent thinker. First of all, I’d like to be associated with the comments of our ranking member, Frank. We are deeply concerned about the grow- ing gap between the haves and have-nots. That is a very troubling trend for our country and I am particularly concerned that the American worker, after inflation in the past 2 years, has taken less home in their paychecks. Again, a very troubling trend. In your job on the President’s Council of Economic Advisors, you were thoroughly immersed in issues of employment, jobs, wages, debts, and deficits, and I hope and expect that those issues will VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 6 continue to influence your decisions now that you are on the mone- tary policy side. In my opinion, this Administration has made your new job much more difficult through its reckless spending and lack of fiscal dis- cipline. On Friday, we learned that once again, this Administration has set a new record; only it’s the wrong kind of record, a record for debts now over eight trillion dollars in deficits. The trade deficit for 2005 was the highest ever for the fourth year in a row, at over $700 billion. The trade deficit for this year is 18 percent higher than the year before, even though the Admin- istration has been saying all year that it plans to do something to address this imbalance, which our allies have repeatedly said and warned us is unsustainable. Fully one-third of that debt is our trade deficit with China, which is exploding, and I don’t think it’s any secret that if China and Japan were to slow its purchases of U.S. debt, the Fed would be forced to tighten monetary policy beyond what the domestic market would be comfortable with. In fact, the widely discussed concern that Asian banks will slow their investment in U.S. debt because they seek diversification is now a reality. We are now actually seeing that happen. According to the Fed, in the last several, months Asian foreign central banks have shifted their purchases from Treasury debt to Government- sponsored entities and mortgage-backed bonds to such an extent that this new type of debt is now about a third of the U.S. debt held by foreign central banks. Chairman Greenspan strongly believed that our current account deficit is caused by the fact that America is saving too little and that our huge Federal budget deficit is Exhibit No. 1. Recently, the Administration has switched to saying that the real problem is that China is saving too much. I don’t think that Ameri- cans particularly care about this sort of blame game, but are more concerned about the actual impact of our huge Federal budget def- icit and our record trade deficit on monetary policy. American workers have not yet seen the benefits of this economic recovery. They haven’t seen it in their paychecks. An international financial crisis could lead to more inflation and higher interest rates that could choke off the recovery before American workers have a chance to share in it. I hope that you will address these concerns today. We wish you well in your new position and congratulate you on your appoint- ment. Chairman OXLEY. The gentlelady yields back, and Mr. Chairman, again welcome to the Financial Services Committee, and you may begin your testimony. Thank you. Mr. BERNANKE. Thank you, Mr. Chairman. I’ve submitted writ- ten testimony. I’d like to excerpt from that testimony. Chairman OXLEY. Without objection. STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. BERNANKE. Mr. Chairman and members of the committee, I am pleased to be here today to present the Federal Reserve’s mone- tary policy report to the Congress. I look forward to working closely VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 7 with the members of this committee on issues of monetary policy, as well as on matters regarding the other responsibilities with which the Congress has charged the Federal Reserve system. The U.S. economy performed impressively in 2005. Real gross do- mestic product increased a bit more than three percent, building on a sustained expansion that gained traction in the middle of 2003. Payroll employment rose two million in 2005, and the unemploy- ment rate fell below five percent. Productivity continued to advance briskly. The economy achieved these gains despite some significant obsta- cles. Energy prices rose substantially yet again, in response to in- creasing global demand, hurricane-related disruptions to produc- tion, and concerns about the adequacy and reliability of supply. The gulf coast region suffered through severe hurricanes that in- flicted a terrible loss of life, destroyed homes, personal property, businesses and infrastructure on a massive scale, and displaced more than a million people. The storms also damaged facilities and disrupted production in many industries, with substantial effects on the energy and petro- chemical sectors and on the region’s ports. Full recovery in the af- fected areas is likely to be slow. The hurricanes left an imprint on aggregate economic activity as well, seen in part in the marked deceleration of real GDP in the fourth quarter. However, the most recent evidence, including indi- cators of production, the flow of new orders to businesses, weekly data on initial claims for unemployment insurance, and the payroll employment and retail sales figures for January suggests that the economic expansion remains on track. Inflation pressures increased in 2005. Steeply-rising energy prices pushed up overall inflation, raised business costs, and squeezed household budgets. Nevertheless, the increase in prices for personal consumption expenditures, excluding food and energy, at just below two percent, remained moderate, and longer-term in- flation expectations appeared to have been contained. With the economy expanding at a solid pace, resource utilization rising, cost pressures increasing, and short-term interest rates still relatively low, the Federal Open Market Committee over the course of 2005 continued the process of removing monetary policy accom- modation, raising the Federal funds rate two percentage points in eight increments of 25 basis points each. At its meeting on January 31st of this year, the FOMC raised the Federal funds rate another one quarter percentage point, bring- ing its level to four and a half percent. At that meeting, monetary policymakers also discussed the eco- nomic outlook for the next 2 years. The central tendency of the forecasts of members of the Board of Governors and the presidents of Federal Reserve Banks is for real GDP to increase about three and a half percent in 2006 and three percent to three and a half percent in 2007. The civilian unemployment rate is expected to finish both 2006 and 2007 at a level of between four and three quarters percent and five percent. Inflation, as measured by the price index for personal consump- tion expenditures excluding food and energy, is predicted to be VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 8 about two percent this year and one and three quarters percent to two percent next year. While considerable uncertainty surrounds any economic forecast extending nearly 2 years, I am comfortable with these projections. In the announcement following the January 31st meeting, the Federal Reserve pointed to risks that could add to inflation pres- sures. Among those risks is the possibility that to an extent greater than we now anticipate, higher energy prices may pass through into the prices of non-energy goods and services or have a per- sistent effect on inflation expectations. Another factor bearing on the inflation outlook is that the econ- omy now appears to be operating at a relatively high level of re- source utilization. Gauging the economy’s sustainable potential is difficult, and the Federal Reserve will keep a close eye on all of the relevant evidence and be flexible in making those judgments. Nevertheless, the risk exists that with aggregate demand exhib- iting considerable momentum, output could overshoot its sustain- able path, leading ultimately, in the absence of countervailing mon- etary policy action, to further upward pressure on inflation. In these circumstances, the FOMC judged that some further firming of monetary policy may be necessary, an assessment with which I concur. Not only the risks to the economy concern inflation. For example, a number of indicators point to a slowing in the housing market. Some cooling of the housing market is to be expected and would not be inconsistent with continued solid growth of overall economic activity. However, given the substantial gains in house prices and the high levels of home construction activity over the past several years, prices and construction could decelerate more rapidly than currently seems likely. Slower growth in home equity in turn might lead households to boost their saving and trim their spending relative to current in- come by more than is now anticipated. The possibility of significant further increases in energy prices represents an additional risk to the economy. Besides affecting in- flation, such increases might also hurt consumer confidence and thereby reduce spending on non-energy goods and services. Although the outlook contains significant uncertainties, it is clear that substantial progress has been made in removing monetary pol- icy accommodation. As a consequence, in coming quarters, the FOMC will have to make ongoing provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data. As I noted, core inflation has been moderate, despite sharp in- creases in energy prices. A key factor in this regard has been con- fidence on the part of the public and investors in the prospects for price stability. Maintaining expectations of low and stable inflation is an essen- tial element in the Federal Reserve’s effort to promote price sta- bility. Thus far, the news has been good. Measures of longer-term inflation expectations have responded only a little to the larger fluctuations in energy prices that we have VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 9 experienced, and for the most part they were low and stable last year. Inflation prospects are important, not just because price stability is in itself desirable and part of the Federal Reserve’s mandate from the Congress, but also because price stability is essential for strong and stable growth of output and employment. Stable prices promote long-term economic growth by allowing households and firms to make economic decisions and undertake productive activities with fewer concerns about large or unantici- pated changes in the price level and their attendant financial con- sequences. Experience shows that low and stable inflation and inflation ex- pectations are also associated with greater short-term stability of output and employment, perhaps in part because they give the cen- tral bank greater latitude to counter transitory disturbances to the economy. Similarly, the attainment of the statutory goal of moderate long- term interest rates requires price stability because only then are the inflation premiums that investors demand for holding long- term instruments kept to a minimum. In sum, achieving price stability is not only important in itself; it is also central to attaining the Federal Reserve’s other mandated objectives of maximum sustainable employment and moderate long- term interest rates. As always, however, translating the Federal Reserve’s general economic objectives into operational decisions about the stance of monetary policy poses many challenges. Over the past few decades, policymakers have learned that no single economic or financial indicator, or even a small set of such indicators, can provide reliable guidance for the setting of monetary policy. Rather, the Federal Reserve, together with all modern central banks, has found that the successful conduct of monetary policy re- quires painstaking examination of a broad range of economic and financial data, careful consideration of the implications of those data for the likely path of the economy and inflation, and prudent judgment regarding the effects of alternative courses of policy ac- tion on prospects for achieving our macroeconomic objectives. In that process, economic models can provide valuable guidance to policymakers, and over the years, substantial progress has been made in developing formal models and forecasting techniques. But any model is by necessity a simplification of the real world, and sufficient data are seldom available to measure even the basic relationships with precision. Monetary policymakers must therefore strike a difficult balance, conducting rigorous analysis informed by sound, economic theory and empirical methods, while keeping an open mind about the many factors, including myriad global influences at play in a dy- namic, modern economy like that of the United States. Amid significant uncertainty, we must formulate a view of the most likely course of the economy under a given policy approach, while giving due weight to the potential risks and associated costs to the economy should those judgments turn out to be wrong. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 10 During the nearly 3 years that I previously spent as a member of the Board of Governors and of the Federal Open Market Com- mittee, the approach to policy that I just outlined was standard op- erating procedure under the highly successful leadership of Chair- man Greenspan. As I indicated to the Congress during my confirmation hearing, my intention is to maintain continuity with this and the other practices of the Federal Reserve in the Greenspan era. I believe that with this approach, the Federal Reserve will continue to con- tribute to the sound performance of the U.S. economy in the years to come. Thank you, and I’d be happy to take your questions. [The prepared statement of Hon. Ben. S. Bernanke can be found on page 65 in the appendix.:] Chairman OXLEY. Thank you, Mr. Chairman. Let me begin by saying there’s been a lot written and a lot discussed about, and as a matter of fact your predecessor described it as a conundrum, the whole issue of rate inversion, the conundrum being that when you raise the short-term rates, long-term rates don’t respond accord- ingly. I think it was interesting that Chairman Greenspan, at least on more than one occasion, I think, described that as a conundrum. Is it a conundrum or is it a major problem going forward with the economy, or is the economy strong enough to do that? I know you addressed that in your prepared testimony. I wonder if you could expand on that issue. Mr. BERNANKE. Mr. Chairman, the conundrum is a very inter- esting question. The issue is that, unusually, long-term interest rates are lower than short-term interest rates, so we have an in- verted yield curve. There are at least two broad sets of reasons for why that’s occur- ring. The first is that term premiums, the premiums that investors charge for holding long-term debt, have fallen in recent years, re- flecting a variety of influences including, I believe, greater con- fidence that inflation will be kept low, greater stability in the econ- omy more generally, and additional influences such as demand for duration, the idea that pension funds, for example, are looking for longer-term assets to hold. So the term premium has come down. Therefore, the normal term structure is going to be flatter now than it was in the past. The second factor, and one that I’ve talked about myself in some speeches, is that currently there are a lot of savings in the global capital market looking for returns. That appears to have driven down, to some extent, the real re- turn to capital around the world. That factor also has contributed to lowering long-term real interest rates. And, as we can see, it’s a global phenomenon, and we’re seeing inversion. We’re seeing low long-term real interest rates in other countries. The question arises is whether or not this inversion portends a slowdown in the real economy. Historically, there has been some association between inversion of the yield curve and subsequent slowing of the economy. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 11 However, I think at this point in time that the inverted yield curve is not signaling a slowdown. First, the historical relationship has certainly weakened in the last 15 years or so. But more importantly, in the past, when the inverted yield curve presaged a slowdown in the economy, it was usually in a situation where both long-term and short-term interest rates were actually quite high in real terms, suggesting a good bit of drag on the econ- omy. Currently, the short term real interest rate is close to its average level, and the long-term real interest rate is actually relatively low compared to historical norms. So with real interest rates not creating a drag on economic activ- ity, I don’t anticipate that the term structure is a signal of oncom- ing slowing of the economy. Chairman OXLEY. Well, what effect, if any, will the return of the 30-year bond have on the whole process, in your opinion? Mr. BERNANKE. Well, the return of the 30-year bond just a few days ago was very welcomed by the investor community because, in part, as I mentioned, there is a demand for long-term assets, for pensions and other reasons. The arrival of the bond meant that the inversion extends even further out into the future, but I don’t think it changes the basic forces. It just suggests that investors are looking for long-term pay- ing assets and that they’re willing to accept a relatively low real yield in order to get long-term safe assets. Chairman OXLEY. In retrospect, do you think it may have been a mistake to suspend the 30-year bond? Mr. BERNANKE. The suspension of the bond occurred at a time when there predictions that the U.S. Government debt was going to be declining rather than rising and, therefore, considerations of maintaining liquid markets at different horizons suggested the idea of reducing the number of issuances that the Treasury made. Now with the U.S. Government debt rising again, I think it actu- ally makes good sense for the Treasury to afford itself of the low real interest rates that are available on these long-term bonds, and I think the Treasury is well-served, the American public is well- served, and the investor community is well-served by the reissuance of these bonds. Chairman OXLEY. The initial issuance was relatively small in overall terms. Is it contemplated that those sales will go on periodi- cally? Mr. BERNANKE. Those decisions are made by the Treasury, and I know they’re concerned about making sure that the market is liq- uid, and that means they would want to issue sufficient bonds that the secondary market will be deep enough so that they’ll be suffi- cient trading and liquidity in that market. So my expectation is that they’ll continue to issue those securi- ties on a regular basis. Chairman OXLEY. Thank you. My time is expired. The gentleman from Massachusetts. Mr. FRANK. Thank you, Mr. Chairman. I’ll start my time and give credit where credit is due. As this colloquy about the 30-year bond has occurred, when President Bush came to office, there was some concern, and Mr. Greenspan had it, about how the Federal VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 12 Government would deal with this problem with surpluses and a disappearing debt, and the Bush Administration certainly solved that problem. No one has to worry any more, thanks to our recent fiscal policy about the possibility of surplus and not enough debt. So I did want to acknowledge that accomplishment. On the question that I began with, Mr. Bernanke, I wonder, Mr. Greenspan did on several occasions lament the increasing inequal- ity that was happening in America. Again, I want to stress inequal- ity is a good thing in a capitalist economy. The economy doesn’t work without it. But it can become excessive in ways that I think don’t, are not necessarily for efficiency and can cause other kinds of problems. Do you feel his concern about inequality, both in the abstract and in terms of how we’ve been in the last few years? Mr. BERNANKE. I agree with you, Congressman, that rising in- equality is a concern in the American economy. It’s important for a society that everyone feels that they have a chance to participate in the opportunities that the economy is creating. In a situation where incomes are becoming less equal, there will be less support, for example, for free trade, for keeping the markets flexible. So the strength of the economy itself again requires a cer- tain amount of belief on the part of the broad public that they are participants and beneficiaries of the strength of the economy. Now there’s a deep question as to why there have been some in- dications of rising inequality. There are a number of factors. I don’t want to take all your time. I guess I would submit that the most important factor is a long-term trend, which has been going on for a quarter of a century or more, which is the rising school premium, the increase return to education. We’ve seen since about 1980 that people with a high school edu- cation or lower have seen essentially no increases in their real wages, whereas people with a college education or greater have seen a significant increase. Mr. BARNEY. Well, and I think that’s true. One thing, and then I’ll just give you a chance to respond. Committed to the institution which you now have, not even in indirect quotes, but in the finan- cial pages, the saying is attributed to your institution that one of the things that troubles you is the possibility that wages might rise, and we see that the Fed is worried that wages will rise, and this will of course cause terrible things. We are, of course, delirious when profits rise, but the potential that wages might rise causes concern. Are you worried that wages might rise, Mr. Chairman? Mr. BERNANKE. Congressman, there’s a bit of a misunder- standing there. What would not be desirable would be for nominal wages to rise and for nominal prices to rise even more, leaving workers worse off than when they started. What is desirable is for real wages, wages measured in terms of purchasing power, to rise. I believe that will happen as the market strengthens, and I have certainly no objection to— Mr. FRANK. Well, I’m glad to hear you say that because it is the matter. I am quoting some of the financial pages, and that dif- ference you mentioned isn’t there. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 13 In fact, as we’ve noted, productivity has been outstripping wage increases. Real wages have in fact been stagnant, and if you throw in what’s happening in health and elsewhere, there are other prob- lems. Now one other thing I just would note, and I know there’s a de- bate about the cause of this, but it is true that unemployment has dropped, but a significant factor in the drop of unemployment has not been growth in jobs above trend—at least that’s a part of it— but a drop in the participation rate. You’ve noted this; the Council of Economics has noted this; your report. The participation rate of people in the work force. In Janu- ary 2006, it was 66 percent, well below the high of 67 and a quar- ter percent reached in early 2000. Now there’s a debate about what extent it’s demographic. The Council of Economic Advisors does say on page 171, it’s at least partly cyclical. But in any case, we ought to be clear that the drop in unemployment has been greatly helped not by job growth above trend, but by demographics. Here’s a question. I agree with you that the skill premium has been increasing. Natural trends in the economy, globalization, tech- nological change, productivity; those I agree are exacerbating in- equality. The problem is that I believe public policy has made it worse rather than better. It might be the global public policy in part ought to be to try to mitigate the inequality, not the point where you destroy incentives, but at least mitigate it. Frankly, I think that is the difference between the approach in the previous Administration and the current one, through tax pol- icy. You know, we read today there’s a new assault being launched by very conservative elements on labor unions. We see a major funded effort to try and undercut labor unions. We see, in my judgment, a budget which cuts back on virtually all of the Federal programs that would go to diminishing the inequal- ity. So the question is—I know I’m out of time, and I’d be glad to take this in writing later—given that we agree that inequality is a problem, and I agree that it is trends in the economy that cause it. But my problem is that public policy has gone from trying to mitigate that, it seems to me, to exacerbating it, maybe out of the motive that this will promote incentives that lead to growth. So the question is what do we do about it? What Federal policies would make sense, if we all agree that inequality is increasing be- yond what is healthy? What should we do about it? Chairman OXLEY. The gentleman’s time has expired. The Chair- man may respond. Mr. BERNANKE. Well, the discussion we were having a moment ago that turns to skills, suggests that one very positive thing would be to continue to strengthen education and to continue to strength job training and skills acquisition through lifelong learning. I think that’s a very important dimension of public policy. Chairman OXLEY. The gentlelady from Illinois. Ms. BIGGERT. Thank you, Mr. Chairman. Mr. Chairman, could you discuss the role that you see R&D playing in the future VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 14 robustness of our economy, and what sort of incentives you believe are necessary in this area? I know that the President has talked about research and develop- ment and how important that is to our country. Mr. BERNANKE. Congresswoman, thank you. I believe that re- search and development are essential to our growth in a techno- logical era. I think there are considerable grounds for optimism. The United States remains a technological leader. We retain a very substantial share of the world’s patents and publications and innovations. That’s a position we want to keep. How to promote that? First on the public side, I think most economists would agree that support by the Government of basic research in a variety of areas is productive. Private companies can’t necessarily capture the benefits of basic research and, therefore, Government support in that area is beneficial. We also have in this country substantial private sector research and research within universities. I don’t want to get into any de- tails, really, on tax policy, but I simply note that this Congress will consider extension of the research and development tax credit, which will be one mechanism to support R&D at the private sector level. So I agree. This is a very high priority for the U.S. economy, and it’s needed to keep us technologically at the frontier. Ms. BIGGERT. Thank you. We have had a relatively warm winter, a little bit of snow lately in various parts of this country. But there hasn’t been any—I don’t think any noticeable slowing in the steady rise in the price of en- ergy over the last year or more. But however, the economy is going strong. Why has the economy been able to shrug off such a signifi- cant rise in the cost of energy? Mr. BERNANKE. That’s an excellent question. And the Federal Re- serve has given a great deal of thought to that question. Part of the answer is that the U.S. economy is less dependent on energy, on oil, than it was 30 years ago. The increase in prices we saw in the ’70s did lead to increased efficiency and, therefore, less sensi- tivity to changes in oil prices. Secondly, the increase in energy prices, although substantial, with the exception of the hurricane period, has been generally less rapid than occurred in some episodes during the 1970s. Third, the economy is very resilient. It showed remarkable strength after the hurricanes. It showed remarkable strength after 9/11. So our economy does have a lot of staying power, a lot of abil- ity to deal with shocks. But the final point that I’d like to make, and it relates to some comments I made in my testimony, is that a big difference between the 1970s and today is that inflation expectations are low and sta- ble. The public has a great deal of confidence that the Federal Re- serve will keep inflation low and stable. In the 1970s, that con- fidence did not exist, and when oil prices rose, wages and prices began to spiral upward. The Federal Reserve had to raise interest rates quite substantially, slowing the economy, in order to keep the inflation rate under control. Today we see oil prices going up, but we see very little response in wages and prices. We see overall inflation relatively stable. We VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 15 don’t have to have the same aggressive monetary policy response we had in the ’70s, and that’s a direct benefit of the improvement in inflation expectations that we’ve gotten in the last 30, 35 years. Mrs. BIGGERT. Do you have a crystal ball or a view of what can be done to move energy prices lower? Mr. BERNANKE. No. I wish I had such a crystal ball. We’re in a difficult period because, for the foreseeable future, we are operating close to the margins of available global supply of oil and natural gas. And as a result, prices are likely to stay high, and the risk ex- ists, if there are significant disruptions of supply, that we’ll get ad- ditional spikes or movements in energy prices. Now in the longer term, energy prices at the current level should be sufficient to bring forth a number of alternative sources of sup- ply as well as induce significant conservation on the part of con- sumers and firms. So I’m actually fairly optimistic about 10, 15, 20 years down the road because these high prices will allow the econ- omy to adjust. But over the next 5 or 10 years, we are in the zone of vulner- ability without available alternatives to the extent we would like and with a relatively small margin of error in terms of global sup- plies. Mrs. BIGGERT. Thank you very much. I yield back, Mr. Chair- man. Chairman OXLEY. The gentlelady yields back. The gentlelady from New York, Ms. Maloney. Mrs. MALONEY. Thank you, Mr. Chairman. I’d like to follow up on Ranking Member Frank’s question. You mentioned that edu- cation was very important, but the last time we focused on edu- cating large segments of our unemployed population, those jobs ended up being outsourced. And what I hear from many of my constituents, particularly women that are middle-aged and possibly older is, ″What jobs are we going to educate them for?″ We live in a changing economy, but what policies, including the Federal Reserve’s policies, have played a role in labor’s share of economic gains dropping to an unusually low level? Mr. BERNANKE. Congresswoman, with respect to the Federal Re- serve’s policies, of course our mandate is maximum sustainable em- ployment. We will strive for that mandate by maintaining a level of employment which is not only high but is also sustainable. In that way, we make it possible for better jobs to be created because we don’t have seasonal and fluctuating jobs as we would in a boom/ bust kind of cycle. So that’s the contribution that the Federal Re- serve will make. With respect to the relationship between productivity and real wages, I have some confidence that there will be some catch-up. During the late 1990s in the previous episode when productivity surged ahead, there was a period where labor’s share declined below its long-term average and real wages fell somewhat behind productivity gains. After a couple of years, as the labor market strengthened, we saw that those gains translated into overall real wages. And I be- lieve that as the market continues to strengthen now that we’ll see real wages rising as well. That’s a statement about overall real VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 16 wages. It doesn’t necessarily address the entire distribution of wages, and we’ve already discussed some of those issues. With respect to your question about education, I think an impor- tant point to make is that education is much more than K-12 and university. It involves continuing education. Community colleges play an important role. So does job training, on-the-job training. I think we need to promote those kinds of activities, and the Govern- ment has some role in assisting on that. Mrs. MALONEY. Many of us are fortunate to represent highly educated people that have lost their jobs in a changing economy, and particularly in the economy in my state, many of our jobs have been outsourced overseas, and there is this troubling trend in dis- tribution of income. And what policies or change in public policy, including the Fed or other policies, may be needed to move the distribution of income back to a more normal and healthier distribution of income in our country? Mr. BERNANKE. Well, Congresswoman, I lack a lot of good an- swers, as many of us do. I think there really is only one funda- mental solution, and that is increasing skills. Now there are dif- ferent ways to increase skills. There’s formal education. Mrs. MALONEY. Mr. Chairman, I’m with highly skilled workers, and they tell me they can’t find a job and they’ve lost their job. But I would like to go back to the point that Mr. Oxley raised over the great mystery in rates over the past year or so and that the Fed tightening has not yet caused long-term interest rates to budge. And I’d like to ask you to elaborate. And does this dis- connect between Fed actions and long-term interest rates have im- plications for the Fed’s ability to control inflation? Mr. BERNANKE. Congresswoman, if you break up the term struc- ture into short tranches, or term interest rates across the length of the term structure, you’ll see that what’s happening is that the far out short-term rates, the ones at far maturities, are the ones that have been declining. And this is the phenomena we discussed before, the decline in term premiums and the expectation of low re- turns to investment. So that’s the reason for the phenomenon. I don’t think that it necessarily affects our ability to affect inflation. Short-term interest rates, first of all, directly affect a good bit of economic activity. And secondly, there’s also going to be impact on longer-term rates that will feed through into the rest of the economy. Our strategy is not to pick a magic rate or to pick a magic long- term rate. Rather, we consider alternative paths of future policy rates, and under each alternative path, we try to make a forecast about where the economy is going to go. Based on those forecasts, we try to judge what path will give us the best outcomes in terms of our mandated objectives. Mrs. MALONEY. I can see you were a former teacher. You’re very clear in your responses. Mr. BERNANKE. Thank you. Mrs. MALONEY. And finally, this large debt, deficit, and trade deficit—what is the implication for growth for our economy, and isn’t this structure bad for economic growth in the long term? VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 17 Mr. BERNANKE. Are you referring to the fiscal deficit or to the current account? Mrs. MALONEY. Current account. Mr. BERNANKE. Current account deficit. The current account def- icit, I should first say, I was asked about it earlier, is a very com- plicated phenomenon. There are many factors underlying it. And perhaps I’ll have an opportunity to talk more about those factors. The immediate implication, though, is that the U.S. economy is consuming more than it’s producing, and the difference is being made up by imports from abroad, which in turn are being financed by borrowing from abroad. So the concern is that over a period of time, we will be building up a foreign debt to other countries which will lower national wealth and lower our ability to consume in the future. So it is a concern. I do believe that the current account deficit can and should come down gradually over a period of time. I think it’s neither possible nor desirable to have it shift radically in a short period of time. But over a longer period of time, a combination of higher na- tional savings in the United States, increased demand by our trad- ing partners, and greater exchange rate flexibility, taken together, will allow the current account deficit to come down in a way that I hope would not be disruptive to our economy. Chairman OXLEY. The gentlelady’s time has expired. The gen- tleman from Iowa, Mr. Leach. Mr. LEACH. Thank you, Mr. Chairman. Mr. Chairman, as you know, there are odd financial entities on the financial landscape called industrial loan companies, which have powers of banks in many different ways. Because they allow the merging of commerce and banking, a number of well known companies have established ILCs or are seeking to establish them. And then, because of their regulatory arbitrage advantages, a number of financial companies have also established ILCs. In his last communication to the Congress, the former Chairman of the Fed, Mr. Greenspan, endorsed a bill called H.R. 3882 that would subject industrial loan companies to the same laws and prin- ciples that apply to financial holding companies. In this hearing as your first appearance before the Congress, I’m wondering if you would care to present your views on the industrial loan company issue. Mr. BERNANKE. Yes, Congressman. If I understand your bill cor- rectly, and you should correct me if I’m mistaken, the bill would require any firm acquiring an industrial loan company to take fi- nancial holding company status, which in turn could create restric- tions on its activities, require consolidated supervision, and indeed would also require that the firm hold its subsidiaries to a some- what higher standard that might otherwise be the case. Is my understanding correct? Mr. LEACH. That’s correct. It simply puts ILCs under the Bank Holding Company Act, which has that effect. Mr. BERNANKE. Congressman, as you know, the Federal Reserve has had concerns about industrial loan companies and the level playing field and the separation of banking and commence. In my view, the bill that you’re describing would solve the problem and VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 18 would relieve our anxieties considerably about this particular type of organization. Mr. LEACH. Thank you, sir. Chairman OXLEY. The gentleman yields back? Mr. Kanjorski. Mr. KANJORSKI. Mr. Chairman, welcome to your new role. Prob- ably this will be the most entertaining session you’ll ever have with this committee. So enjoy. Ms. Maloney brought up the question of the deficit, and your predecessor used to always indicate that deficits matter a great deal, but it never seemed that the leadership came from the Fed- eral Reserve as to facing the reality of what causes the deficit and what limited policies both the Federal Reserve and the Congress has with fiscal policy to resolve the problem. But two or three things have come to my attention in the last several months that are to me very frightening. One, the deficit is rising faster than productivity, or what I should say is growth of the American economy. If you take a three percent growth of the American economy at roughly a $12 trillion size, that’s about $360 billion a year, and our deficits are far outstripping that. And, too, as a result of that and the policies over the last 5 years, the debt owed by the United States to foreign entities, it was from 1789 to 2000 it took us that period of time to have a combined bor- rowing of one trillion, .01 trillion. Now since 2000 till today under this Administration, we’ve bor- rowed 1.05 trillion, which means it exceeds that entire 200-plus year history, more under this Administration than all 42 Presi- dencies prior to it. And with no end in sight, it seems to me, al- though we keep hearing that there’s a plan of the Administration to reduce the deficit by half at a year beyond this Administration’s term in office, which is always interesting. I think the Congress has a tendency to promise action for future Congresses but not to take action in this Congress. It seems to me we’re at a point now that the American people really don’t understand deficits, the problems attendant thereto, and the potential long-term problems, particularly the potential since most of this debt is owed to Japan, China, and the United Kingdom, how that will affect our foreign policy in years to come. At what point is the chairman of China going to be able to call the President of the United States when he disagrees with a policy, foreign policy of the United States, and not threaten war, not threaten retaliation of a military way, but just say, Mr. President, you won’t be able to pay your Social Security checks next month if you don’t change your policy? I think that’s rather dire. That ac- tually could occur today. If we weren’t able to fund this deficit with foreign money, we could not meet our Social Security obligations in the next month. Where do you see your role as a leader and an educator of the American people as to the significance of this and how that policy should change or shouldn’t it change? Mr. BERNANKE. Congressman, I think that in my role as chair- man of the Federal Reserve, it is appropriate for me to talk about long-term Government spending, taxes, and deficits. I think that bears on economic stability and financial stability, and I will speak out on those issues. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 19 I am concerned about the prospective path of deficits. I believe that it does reduce national savings, and, therefore, imperils to some extent the future prosperity of our country, and increases the burden that will be faced by our children and grandchildren. Of particular concern to me is that in the very near term, the de- mographic changes in our economy are going to lead to increasing promises, increasing entitlement payments associated with the large programs of Social Security, Medicare, and the Federal con- tribution to Medicaid. Indeed, according to the best estimates we have, the share of GDP going to those three programs will go from about 8 percent today to about 16 percent when my children, who are now in college, are contemplating retirement. If that were in fact to happen, given that total revenues are now about 18 percent of GDP, that would suggest that either we would have to eliminate all other Government spending, raise taxes con- siderably, or else take some action to bring entitlement spending under control. I’m not saying which of these things. I’m just point- ing out that the implications of these obligations are quite draco- nian in the long run. We need to be addressing those long-term issues soon. We need to give people the time to prepare for whatever changes might occur in entitlement programs. And, therefore, I think that we do need to think about fiscal deficits and their implications for our na- tional saving and our long-run ability to meet our obligations to our citizens. Chairman OXLEY. The gentleman’s time has expired. The gen- tleman from Alabama, Mr. Bachus. Mr. BACHUS. Thank you. Chairman Bernanke, you’re known, widely known, as a proponent of greater transparency at the Fed. Now that you’re Chairman, would you give us some idea of what specifics you’re considering to bring greater transparency to the Fed? And in answering that question, at some point, could you reach a point where too much transparency and too much openness ties your hands in terms of policymaking? And if so, what prin- ciples will you use in determining what a proper balance would be? Mr. BERNANKE. I do believe that transparency is very important for the Federal Reserve for a variety of reasons, including demo- cratic accountability. I also believe that a more transparent Fed is going to be more effective because the public and the markets will have a better understanding of what the Fed is trying to do. Expec- tations will be better anchored, and I think policy will just work better if the Fed is more transparent. I don’t want to give the impression that I’m coming in with a whole new program. Transparency has been increasing at the Fed over the last decade quite significantly. During the time that I was Governor there, we increased the informativeness of the state- ments. We moved up the release of the minutes, and generally in speeches and testimonies, I think there was a definite movement towards trying to be more open about the Federal Reserve’s strat- egy and approach. I would like to continue that direction of increased transparency. Obviously, I’ll have to do that in concert with my colleagues on the Federal Open Market Committee. But one of the possibilities that’s already been mentioned is providing guidance on the long-term VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 20 range of inflation which is most consistent with our objectives of maximum sustainable employment and price stability. I will also, individually and personally as I come before commit- tees or make speeches, try to be as open and forthcoming as I can in providing information about the Fed’s strategy and how we see the economy. Now you quite correctly ask, is it possible for transparency to go too far. And I think it is possible. We certainly wouldn’t want a sit- uation where the transparency is such that it inhibits the discus- sion, that it inhibits the policymaking process. I would not, for ex- ample, favor TV cameras in the FOMC meeting because I think that would not allow a full and frank discussion to take place. So there are limits, and we have to pay attention to those limits. But I think broadly speaking that fresh air is good for the Federal Reserve, and I want to keep moving us in that direction. Mr. BACHUS. Thank you. You mentioned today maximum sus- tainable employment, and I want to commend you in your state- ment today; you’ve spent a considerable time talking about energy. One thing that you said because of Hurricane Katrina, but I think it’s also true today is we have tremendous restraints on our econ- omy because of the high price of energy. And you go talk to plant owners, you talk to company owners, you talk to even union offi- cials, and they used to complain about low wage subsidized foreign competition, taxes, and regulation, being able to get skilled, edu- cated workforce, which is still—those are all still concerns. But today I hear time and time again the high cost of natural gas and petroleum. Recently the chemical industry has come out and said we’re un- competitive with the world. In your testimony and in former testi- mony, the Fed has suggested that the recent energy price increases have not been a major negative impact on the economy. But today I think maybe you’ve indicated that they may be. You know, China has just announced plans to build 30 nuclear power plants. We don’t even have one in the licensing process today. Japan has built 23 LNG terminals while we’ve built four. France has built 58 nuclear power plants. We’ve built none—or one during that time, and that was 1996 or 1997, Watts Bar. So going forward, are you—what is the level of your concern that if we don’t do the things our competition is doing that it will affect our sus- tainable employment? We’ve lost 150,000 jobs in forestry and paper just recently because of energy. Mr. BERNANKE. Congressman, when I was responding to the question about the effect on the economy, I was talking about broad aggregates like GDP growth. You’re absolutely correct that there are many industries that depend on natural gas, for example, which have suffered quite severely in the recent episode. Natural gas is unusual because, unlike oil, which is traded freely on a global market, natural gas is a much more regional market because of the difficulties in transportation. And so building LNG terminals is one thing that we, I think that we can do and we should continue to do to create a more global market for natural gas. I can only just endorse your sentiment that while I was opti- mistic that in the long run these high prices will call forth alter- VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 21 native sources of supply, the Government does have a role in sup- porting that activity. I mentioned just two possibilities. One is that the Government has been very helpful in basic research to help develop new designs to find new methods of conservation. And secondly, certainly there are many legitimate reasons to reg- ulate, say, new refineries, for example, and there’s absolutely no reason, you know, to eliminate their regulation. But clearly, one should try to make the regulation as clear and straightforward as possible so that new refineries can meet the appropriate standards and operate. So by clarifying regulations, by providing additional support for basic research, those are just methods that the Government can undertake to help with the energy situation. Again, I agree it’s a very important issue for us in the next 10 years or so. Chairman OXLEY. The gentleman’s time has expired. Mr. BACHUS. Let me make a closing comment. If I can just say, yeah, we need alternative energy, conservation, but even with all that, we’re projected, with all those things, if we do those things, we’re still going to have about 40 percent more need for electricity and energy 20 years from now. And I know Mr. Sanders knows Vermont gets about 78 percent of their electricity from nuclear power plants, but that’s the only State in the Union where they are over 50-some. Chairman OXLEY. The gentleman’s time has expired. The gen- tleman from Vermont, the aforementioned Mr. Sanders. Mr. SANDERS. Thank you, Mr. Chairman. And Chairman Bernanke, welcome to the Financial Services Committee and very best of luck on your new job. Mr. Bernanke, there is a great concern in this country that our current economic policies are not working for ordinary Americans. The middle class continues to shrink. Poverty is increasing. The gap between the rich and the poor is now wider than it has been in over 7 years. We have a recordbreaking national debt as well as a recordbreaking trade deficit. And the Bush Administration has the worst record of private job creation since Herbert Hoover. Meanwhile, while millions of American workers are seeing their real wages decline, or they’re using their pensions and their health care, while they can’t afford child care or college education, the wealthiest people in this country frankly have never had it so good. My own view is that the time is long overdue for the Bush Ad- ministration and Congress to start making fundamental changes in our economic policies so the Government works for everybody and not just the very wealthy and their lobbyists who descend on Cap- itol Hill every day. And if we don’t, what we are going to see in my view is that for the first time in the modern history of America, our kids are going to have a lower standard of living than we do. Now I want to just very briefly, because time is limited, solicit your remarks, your thoughts on some very important economic questions. And my first one is the following. Since President Bush has been in office, more than five million Americans have slipped into poverty. Childhood poverty has increased by over 12 percent. We continue to have by far the highest rate of childhood poverty in the industrialized world. American house—average America VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 22 household income has declined for the past 4 consecutive years. It’s down by more than $1,600. Twenty percent of American jobs now pay less than a poverty level wage for a family four. My question is a very simple one. All over America, States like the State of Vermont have raised the minimum wage, which now at the Federal level remains $5.15 an hour and in fact has the low- est purchasing power that it has had in over 50 years. Chairman Bernanke, should the Congress raise the minimum wage so that every worker in America who works 40 hours a week escapes from poverty? Very simple question, sir. Mr. BERNANKE. Well, I’m going to be an economist and give you the one hand and the other hand. On the minimum wage, it’s actu- ally a very controversial issue among economists. Clearly, if you raise the minimum wage, then those workers who retain their jobs will get higher income and that, therefore, it helps them. The concerns that some economists have raised about the min- imum wage are first, is it as well targeted as it could be? That is, how much of the increase is going to the teenage children of subur- ban families, for example? And secondly, does it have an employ- ment effect? That is, do higher wages lower employment of low wage workers? Mr. SANDERS. And your response is? Mr. BERNANKE. My response is that I think it does lower employ- ment, that, however, I note that the literature is fairly controver- sial on this subject, and my colleagues from Princeton, Alan Kruger and David Card, have presented results saying that— Mr. SANDERS. Should Congress raise—I’m sorry to be abrupt, but we have a limited amount of time. Should Congress raise the min- imum wage? Mr. BERNANKE. I’m very reluctant to comment on specific meas- ures of this sort. But I will say this, that one might consider alter- native ways of helping working class Americans, for example, the earned income tax credit, which delivers money to working fami- lies— Mr. SANDERS. Okay. Thank you. Mr. BERNANKE.—without necessarily the employment effect. Mr. SANDERS. I’m sorry to be abrupt, but we have just a limited amount of time. This is my second question. Our country now has a recordbreaking $720 billion trade deficit, and our trade deficit with China, as you know, is over 200 billion. Over the past 5 years, the United States has lost almost 3 million good paying manufac- turing jobs—industry after industry, good paying jobs, good bene- fits, hemorrhaging. Many of the new jobs that are being created are low wage, minimal benefits. To my mind, to more and more Members of Congress and to more and more Americans, it appears clear that our current trade policies—NAFTA, permanent normal trade relations with China— are a disaster, leading us to a race to the bottom, encouraging American companies to throw workers out on the street, move to China, pay people 30 cents an hour. Question. Do you think that the time is now to rethink our disas- trous trade policies which have lost millions of good jobs and run up a recordbreaking trade deficit? VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 23 Mr. BERNANKE. Well, Congressman, Ambassador Portman has just released a report on trade with China, and he’s pointed out a number of areas where he’s concerned about China’s adherence to international agreements and to free and fair and open trade. I know he’s going to pursue some of these issues and try to make sure that trade with China is on a fair and open basis. Mr. SANDERS. Well, let me ask you this. Chairman OXLEY. The gentleman’s time has expired. The gentle- man’s time has expired. Mr. SANDERS. Just, you know— Chairman OXLEY. The gentleman may respond. The Chairman may respond. Mr. SANDERS. Is it a fair—no, you asked—Mr. Bachus was able to continue just for a little bit, okay? Chairman OXLEY. Your time has expired, Bernie. Mr. SANDERS. So did other people who were continuing their questioning. Chairman OXLEY. Make it quick. Mr. SANDERS. Is it a level playing field when people in China make 30 cents an hour compared to American wages? How can that be a level playing field? Mr. BERNANKE. Well, again, I think we need to have free and open trade. I think there are many benefits from that. And I don’t want to move back from free trade, but I think it’s important to make sure that the trade that takes place is done on a fair and open basis and that, for example, that the Chinese respect our in- tellectual property so that we receive the appropriate compensation for that. I favor free trade, however. Chairman OXLEY. The gentleman from the first State, Mr. Cas- tle. Mr. CASTLE. Thank you, Mr. Chairman. Chairman Bernanke, the House-passed GSE reform bill, which is H.R. 1461, you may be fa- miliar with it, consolidates regulations of the three housing GSEs, and for the first time fully empowers a new independent regulator to—and I’ll go through it specifically—set minimum and risk-based capital requirements, review and adjust portfolio holdings, estab- lish credential management and operation standards, approve new business programs through public rulemaking, take prompt correc- tive and enforcement actions, put a failing enterprise into receiver- ship, and fund the agency outside the Congressional appropriations process. I recognize that our bill does not go as far as some would prefer, but do think that H.R. 1461 is an improvement over current law? Or any other comments you have on that. Mr. BERNANKE. I think, Congressman, that we have an oppor- tunity now to address the important concerns about GSEs and their potential effects on financial stability. I understand the good intentions underlying the House bill, but I feel that it does not solve the problem. And, therefore, if we were to go with that bill, we would be missing perhaps the last oppor- tunity we’re going to have in many years to really address these problems. In particular, the House bill does not go as far as the Senate bill or as bank regulatory bills do in giving the GSE regulator power VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 24 over capital and setting capital. Secondly, it is not precise in terms of when receivership would be invoked, leaving uncertainty in the market about exactly when that would happen and creating an im- pression of Government backing for the GSEs. And thirdly, and I think most important, the point that Chair- man Greenspan made extensively in his numerous testimonies on the subject, the portfolios of the GSEs are much larger than can be justified in terms of their fundamental housing mission. And these large portfolios represent a risk to financial stability. And if the taxpayer were to be called upon, also to the FISC. The House bill does address portfolios, but it doesn’t provide, in my opinion, sufficiently strong guidance to the regulator to man- date that the portfolios be limited to an amount needed to serve the true housing mission of those organizations. Mr. CASTLE. Thank you for a very specific answer. Let me change subjects for a moment, sort of building on some other questions that have been answered here. But I think we’re all becoming increasingly concerned, and maybe it’s the baby boomers’ fate that we should be concerned about what’s happening in the economy. That is, defined benefit pensions going out the window. The borrowing rate, particularly because the borrowing rate seems to be shifting from general bor- rowing to added mortgages based on the value of housing. The cost of medical care, the medical insurance if not the medical care. All the various aspects that seem to be eroding the assets that people are going to have as they come closer to the end of their lives with the exception of, say Social Security. Is there anything that we in Congress should be doing? I mean, should we be consolidating the various tax-created savings type plans that we have done, most of which, frankly, are hard to under- stand? There’s a whole lot of them. Are there other things that we should be doing to somehow spur the savings? I mean, every econo- mist you talk to says with both of their hands that we need to have additional savings in the United States of America, but there seems to be a creeping problem where people are not going to have the old standbys, their pensions, their savings accounts, et cetera, that they had in the past. Do you have any thoughts about anything that we can be doing other than using the bully pulpit to encourage people to save more and to be more careful? Mr. BERNANKE. Congressman, it’s a very tough problem. As I al- ready indicated, one way to address saving at a national level is through fiscal responsibility and in reducing over a period of time the deficit, which adds to national saving. Mr. CASTLE. Right. But I was trying to go to the individual’s level. Mr. BERNANKE. At the individual level, again, I want to be care- ful not to endorse specific programs, but there are various ways of providing tax benefits for saving. The evidence on their effects is somewhat mixed. We really haven’t found a magic bullet for in- creasing saving. There is some view among economists that more consumption- based taxation would be helpful in that regard. That is a pretty VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 25 broadly held view, but is one that has not been firmly dem- onstrated. I think financial literacy has got to play a role here. People need to understand, first of all, the importance of saving, the importance of planning, and also understand how to utilize the financial mar- kets to accumulate wealth. You mentioned defined benefit pensions. There really is a prob- lem in that we have seen companies that have promised their workers pensions and now essentially are reneging on those prom- ises. Going forward, I know Congress is considering various pen- sion reform bills. We need to make sure that when companies promise pensions that they fully fund those obligations and that they are sufficiently transparent so that workers can understand that their pensions will be there when they retire. So, again, I think there are some policies that may help with sav- ing in terms of providing incentives for saving, allowing people to combine savings in a limited number of accounts and the like. But the truth is that there is still some controversy about how effective these incentives will be, and education has got to be part of the ef- fort. Mr. CASTLE. Thank you, Mr. Chairman, and good luck to you, sir. I yield back. Chairman OXLEY. The gentleman yields back. The gentlelady from Indiana, Ms. Carson. Ms. CARSON. Thank you very much, Mr. Chairman, and thank you, Mr. Chairman, for being here today. I have a quick question concerning the housing market. At one point it was just sky- rocketing and booming, and now it seems to be on the decline. Could you anticipate what kind of effect, impact that’s going to have on the domestic economic growth? Mr. BERNANKE. Yes, Congresswoman. We discuss it in our report. The housing market has been very strong for the past few years. Housing prices have been up quite a bit. Residential investment has been very strong. It seems to be the case, there are some straws in the wind, that housing markets are cooling a bit. Our expectation is that the de- cline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise, but not at the pace that they had been rising. So we expect the housing market to cool, but not to change very sharply. If the housing market does cool more or less as expected, that would still be consistent with a strong economy in 2006 and 2007. In particular, capital investment and other forms of demand would take up the slack left by residential investment. Ms. CARSON. Thank you very much, Mr. Chairman. Mr. BERNANKE. Thank you. Chairman OXLEY. The gentlelady yields back. The gentleman from Texas, Mr. Paul. Dr. PAUL. Thank you, Mr. Chairman. Thank you, and welcome, Chairman. Mr. Chairman, I was very pleased with what you said about your support for transparency, and I want to ask a question dealing with that. Also, at the bottom of page 8, you said something that I thought was very important, where you said that the Federal Reserve, to- VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 26 gether with all other central bankers, has found that successful policy depends on painstaking examination of a broad range of eco- nomic and financial data, and I also think that’s very important. There is a famous quote by an economist, which I’m sure you’re familiar with, that inflation is always and everywhere a monetary phenomenon. And likewise, another famous economist from the 20th Century, and I’ll paraphrase this, said that monetary authori- ties deliberately confuse the issue of inflation by talking only about price increases. Yet it’s the price increases which are merely the in- evitable consequence of inflation. This is done on purpose to dis- tract from the real cause, which is the increase in the quantity of money and credit. And I notice in your report to the Congress, you do report M2, and it went up last year at four percent. And M3 was not men- tioned, other than the fact that it won’t be reported any more. M3, interestingly enough, went up twice as fast, and M3 is going up probably more than two times as fast as the GDP. And this is information that I consider important and I know a lot of other economists consider important. And I find it rather in- teresting and ironic that one of the reasons that the Federal Re- serve has given—of course, this was before you were the chair- man—for this change is the fact that it costs money; it costs too much money. Now that is really something in this day and age, especially since the Federal Reserve creates their own money and their own budget and they have essentially no oversight, and all of a sudden it costs too much money to give us a little bit of information. So that to me is a bit ironic that this information will not be available to us. And my question to you is, would you ever recon- sider this policy of denying this information to the Congress just so that we have another tool to analyze what’s going on with mone- tary policy? It seems like with your support for transparency, this should be something that you would heartily support. Mr. BERNANKE. Congressman, first, you’re absolutely right. We do look at a wide variety of indicators, and money aggregates are among those indicators. In particular, M2 has proven to have some forecasting value in the past, and I think the slowdown this year is consistent with the removal of accommodation that’s been going on. In regard to your references to M3, a still broader measure of money, we have done, and I’m now speaking about the Federal Re- serve before my arrival, but we have done periodic analyses of the various data series that we collect to see how useful they are. And our research department’s conclusion was that M3 was not being used by the academic community, nor were we finding it very use- ful ourselves in our internal deliberations. Now it’s not just a question of our own cost; although, of course, we do want to be fiscally responsible on our own budget, but it’s also I think important for us to recognize the burden that’s placed on banks that have to report this information. And so when we can reduce that burden, we would like to do so. And that was one of the considerations in the decision that was made about M3. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 27 Would we reconsider it? If there were evidence that this was an informative series and that it was useful to the public and to the Federal Reserve in forecasting the economy, naturally we would look at it again. There’s nothing dogmatic going on here. Dr. PAUL. If the Congress expressed an interest in receiving this information, would you take that into consideration? Mr. BERNANKE. If there was broad interest in the Congress in re- ceiving this information, we would look at it. But, again, Congress- man, remember, it’s a burden on the reporting banks to provide the information, and we are trying to reduce that burden as much as we can. Dr. PAUL. But, of course, this has been available to the financial community for a lot of years, and for some people it’s very impor- tant to measure what you’re doing. If the money supply is impor- tant, which a lot of people believe it is, and it causes the inflation, this to me seems like we’re taking information about the money supply and literally hiding it from the people. And I yield back. Chairman OXLEY. The gentleman’s time has expired. The gen- tleman from California, Mr. Sherman. Mr. SHERMAN. Thank you. Chairman Bernanke, I’m the only member of this committee to actively work to thwart your appoint- ment. Nothing personal. I simply authored legislation to extend your predecessor’s term limits. You owe your office to that bill’s sole and very powerful opponent, Andrea Mitchell. Speaking of how you get appointed, you are as insulated from politics as anyone in Government. The natural tendency of Con- gress year in and year out, the pressures on us are to spend more, tax less. It’s caused many to wonder whether the U.S. is ready for self-government. Now can we count on you, being so insulated, to make the tough decisions? I’m going to ask a whole bunch of questions and allow you to respond at the end. And I realize I may be asking too many for you to respond to all of them, and I hope that you’ll respond for the record. I also ask unanimous consent that we all be given 5 days to submit additional questions for the record. Chairman OXLEY. Without objection, that’s the standard. Mr. SHERMAN. But I hope that you would, in your written re- sponse, comment on whether we can count on you to urge both spending restraint and restraint on tax cuts and push for adequate revenues. And I’ll also be asking you whether you agree with your predecessor and his comments before this committee in response to my question in 2003, that tax cuts do not pay for themselves, that they do reduce revenue; unless through some mysterious legislative process that I’ve been unable to observe, a tax cut bill leads to spending reductions. The next series of questions I hope you can respond to is the fact that we have this enormous trade deficit. Several have commented on it. An adjustment in currency values is inevitable, and I would like you to set forth how we can work with other countries to make sure that any realignment of the value of the dollar compared to other currencies is smooth and does not result in a sudden crash of the dollar where circuit breaker agreements are necessary, et cetera, VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 28 but after running trade deficit after trade deficit that are the most enormous of history, we ought to be expecting an eventual decline in the value of the dollar, and we hope it is not sudden. How is the Fed preparing for such a possibility? Finally, there is the controversy about mixing commerce in bank- ing. We have seen in Japan how that leads to the misdirection of capital and how it can impair the banking system. More important, just as importantly, we know that mixing bank- ing and commerce is wrong because it’s illegal, as we established in the bill that came through this committee. Yet, I’m troubled that this prohibition, logical as it is, between mixing commerce and finance, is being evaded in part through the device of saying well, any commercial activity is financial if the buyer needs financing. We are told that sellling homes or cars is a financial activity. I would say I’ve been paying the bank for this suit ever since, well, it’s been let out and let in again. I’m still paying for it on that cred- it card. We can argue that my tailor is engaged in a financial as well as a frustrating activity. In December, the Office of the Controller of the Currency issued several legal opinions. Many think that existing law allows banks to own real estate to accommodate their banking business, and now that seems to be interpreted to allow them to build luxury hotels, to develop residential condominiums for sale. This sounds like speculative real estate investment of the very type that brought down the savings and loans. Do you think the OCC is giving the banks too much freedom so as to create a risk to the deposit insurance system? I’m particularly concerned about a recent opinion that allows a national bank to own a 70 percent ownership stake in a wind mill farm, and that means that the deposit insurance fund is dependent upon which way the wind blows. I know that others have already asked you about the ILC loop hole, so I hope that you will be able to address the mixing of bank- ing and commerce and what steps the Fed should take to protect our financial system from both a violation of the spirit of Gramm/ Leach/Bliley and also from what has imperiled and really held back the growth of the Japanese economy as well as imperiling its finan- cial system. Chairman OXLEY. The gentleman’s time has expired. The gen- tleman from California, Mr. Royce. Mr. ROYCE. Chairman Bernanke, congratulations to you on your new position. In April of 2005, Chairman Greenspan delivered testimony at that time to the Senate Banking Committee outlining the Federal Reserve’s view on reforming regulation of the Nation’s three hous- ing GSEs, and as I recall at that time, you were a member of the Federal Reserve Board. I’d like to know if there are any notable differences between your views on GSE reform and the views presented by Chairman Green- span in April of 2005 in that Senate speech that he gave. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 29 Mr. BERNANKE. Congressman, as you point out, I was a member of the Board, and the testimony that Chairman Greenspan gave I believe was an official Board position. I was there during the evolution of these issues, during the staff presentations, during discussions. I had discussions myself with Chairman Greenspan. I find his economic arguments persuasive, in particular, the con- cerns about the portfolio, the risks they present to financial sta- bility and potentially to the taxpayer. I want to just also reiterate that I agree with Chairman Green- span that the GSEs do perform a very important service in securitizing mortgages and providing/creating a secondary market, a liquid secondary market for those mortgages. I have no vendetta against the GSEs by any means. I think they are very positive institutions and they do some very important things for housing in the United States. I am concerned, as Chairman Greenspan was, about the size of the portfolios and the risks that are inherent in trying to hedge them in a dynamic market with rapidly moving financial condi- tions. Mr. ROYCE. I agree totally with your assessment. Do you gen- erally agree with the Treasury Department’s GSE regulatory re- form recommendation that we have seen that calls on Congress to limit the GSE’s portfolio assets to those necessary for the GSEs to fulfill their statutory housing mission? Mr. BERNANKE. I do agree. The question is why they are allowing the portfolios to exist when they have as much inherent risk as they do. The question is how much of the portfolio is necessary to fulfill the mission. That is something that may require some judgment and analysis, but it seems clear it’s a much smaller number than currently being held by the large GSEs. Mr. ROYCE. Thank you. May it be that the rise in home owner- ship and the rise in housing wealth that went along with it over the past several years has enabled many consumers to dip into sav- ings from current income, and thus, maintain spending even in the face of these high energy prices, as there are some signs that hous- ing demand is slow, which you mentioned in your testimony, and the rise in home prices clearly are leveling off or starting to dip, in your view, how big of a risk to consumer spending from what might occur, a rapid downward adjustment in home prices, and are there possible offsetting factors in terms of how this will play out in the economy? Mr. BERNANKE. Our expectation is that if and when the housing market slows, that savings rates will tend to rise. We have built into the forecast, so to speak, some increase in personal savings. As home values grow more slowly, then consumers can rely less on the increase in equity as a source of wealth building and, there- fore, must save more out of their current income. Again, that’s to be expected. As I’ve indicated, our current expectation is that process will be gradual and is consistent with continued strong growth in the econ- omy. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 30 However, as I also indicated, the housing market and the con- sumer response to any changes in the housing market is one of the risks to the forecasts and one we will be monitoring closely as we try to assess the state of the economy in the coming year. Mr. ROYCE. Mr. Chairman, I yield back. Chairman OXLEY. The gentleman yields back. The gentle lady from California, Ms. Waters. Ms. WATERS. Thank you very much, Mr. Chairman. I’m pleased to be here with you, Mr. Bernanke. I welcome you to this com- mittee. We are going to miss Mr. Greenspan. No one talks like him, and we don’t want you to. I had a great relationship with him. He’s been to my district. I’m going to invite you. I want to continue this discussion this morning about rising in- equality in two ways. I’m going to talk about housing a little bit more. It’s been alluded to any number of ways this morning. I want to talk about the fact that many Americans are priced out of the mar- ket. They are not able to buy homes because of the rising cost. I am going to talk about this in relationship to affordable housing and what the Government can or cannot do. Some of the policies of this Administration are such that we don’t have support for low- or moderate-income housing that we thought we had, and the cuts that are being made will eliminate the oppor- tunities for first time home buyers and others to get into the hous- ing market. We are concerned about this iddur. I’m also concerned about the bubble. The fact is that some people are stretched to buy a house. It cost too much. They got the special product loans, interest only loans, et cetera. And what is that going to mean to the economy if in fact this bubble does burst? I’d like you to give us a little discussion about housing and hous- ing affordability in relationship to some of the things to which I’ve alluded and the rising interest rates. Secondly, I want to talk about investment in poor and minority communities. I used to have this conversation with Mr. Greenspan all the time. When I invited him to my district, it was to engage entrepreneurs and business persons and the financial services com- munity in conversation about investment in poor communities. We know we have things like the new markets initiative that’s been very helpful and could be even more helpful if in fact we could do more of that. What do you envision? What advice could you give us about how we could spur investment in these poorer communities, where in- vestment can be the only possibility for growing these communities and expanding opportunities for jobs, et cetera? Do you have any ideas about this issue? What can you advise us? What can you work on that would help to expand the idea of the new market tax credit initiative in order to grow these poor com- munities? Mr. BERNANKE. Congresswoman, I’m very much in favor of home ownership. I think it’s a positive thing that we now have close to 70 percent home ownership rates in this country. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 31 I think when people have their own home, it makes them more involved in their communities. It makes them more interested in participating in the democratic process. I’m very much in favor of supporting that. Over the recent years, financial markets have opened up to the extent that there now is a much more extensive housing credit market. There is more access than there was before. There still re- main problems. As you may know, the Federal Reserve’s analysis of Home Mort- gage Disclosure Act data suggests there are still differences in ac- cess and pricing between minorities and others in the housing mar- ket. It is still important for us to continue to make sure that there is fair treatment in those markets. There is always a tradeoff between giving people access and making sure they don’t take on more debt than they can sustain. If the housing market does slow down, we want to see how strong the mortgage market is and whether or not we will see any problems in that market. That’s an issue. I’d like to say my very first trip as a Governor of the Federal Re- serve was to Brownsville, Texas, to see how a set of non-profit or- ganizations were using funds provided under the Community Rein- vestment Act from banking institutions to re-develop or develop housing for immigrants to that area. It was a very interesting experience. It suggested to me that the financial institutions themselves also become more informed about low- and moderate-income communities, about immigrant commu- nities. They can find new opportunities there. In fact, those investments that the banks were making under the CRA through the non-profits in Brownsville were quite profitable. They were good for the banks. They were good for the immigrants who were buying homes, and good, I think, for our economy. I don’t want to comment specifically on fiscal programs to sup- port housing. Again, I think that’s something that really is up to Congress. From my perspective at the Federal Reserve, I’m certainly going to maintain an ongoing interest in the financial markets for low- and-moderate income people, making sure they are fair and open. Chairman OXLEY. The gentle lady’s time has expired. The gen- tleman from Connecticut, Mr. Shays. Mr. SHAYS. Thank you, Mr. Chairman, for being here and for re- sponding so thoughtfully to our questions. I want to know if you believe that we have primarily a revenue problem or a spending problem as it relates to the Federal budget. Mr. BERNANKE. The key problem is that the Congress at some point needs to decide what the appropriate size of the Federal Gov- ernment is. That is really the first essential question, and it’s a question based on values. Therefore, it is really the elected rep- resentatives that have to make that decision. Those Members of Congress who are in favor of low tax rates and continuing tax cuts have to accept also that in order for those low tax rates to be sustained, ultimately, they have to find savings on the spending side to avoid exploding deficits. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 32 Likewise, those who would like to see a more expansive role of the Government need to understand and accept that commensurate tax revenues are going to be necessary to support those activities. It’s not up to me to decide what the size of Government is— Mr. SHAYS. Do you think our tax rates are low? Mr. BERNANKE. They are relatively low compared to other indus- trial countries. They are not at a historical low. The current tax rate of 35 percent is higher than, for example, the 28 percent rate that was agreed upon— Mr. SHAYS. You are talking about rates. Are we not getting enough revenue? Mr. BERNANKE. The question is, compared to what? It’s a ques- tion of how big the Government is going to be. There is a deficit. I’d like to see it lowered, but it’s up to the Congress to decide whether that should be done by higher taxes, lower spending, or some combination. Mr. SHAYS. When the Congress lowered the dividends and capital gains tax, did we get more revenue from it or less? Mr. BERNANKE. I think most economists would agree that a well constructed tax cut does not lose as much revenue as a purely stat- ic analysis would suggest. In particular, the dividend and capital gains tax cut led to some increased realizations and, therefore, more revenue, or less revenue loss, at least, than a purely arith- metic analysis would suggest. Mr. SHAYS. When we talk about the size of the Government, I think of our Government in two ways. I think of the way Govern- ment spends money on entitlements. Do you call that the size of Government or do you call the size of Government how many em- ployees we have and so on? Mr. BERNANKE. I’m thinking of Federal outlays, which includes entitlements, because it’s the entire amount of outlays that has to be financed by tax revenues. Mr. SHAYS. We could have large entitlements, but that doesn’t increase the size of Government. That increases the budget of the Government. Correct? Mr. BERNANKE. If you like, I could say it’s the budget of the Gov- ernment that ultimately the Congress has to choose the size. Mr. SHAYS. In regard to inflation, what is the impact of dollars held overseas? Is there any impact? Mr. BERNANKE. I think the effect on inflation of dollars held overseas is modest to negligible. Clearly, in determining the domes- tic money supply, the Federal Reserve has to take into account the share of currency and other forms of money that are held abroad, but we do that, and we essentially offset those overseas holdings in order to achieve the domestic inflation objective that we are try- ing to reach. Mr. SHAYS. I’m not clear about that. How do you control the sup- ply of money overseas? Mr. BERNANKE. We don’t. We can’t directly control how much money is held overseas, but we can estimate how much is held overseas, compare that to the amount of money which has been issued, and, therefore, determine how much money is being held domestically. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 33 Mr. SHAYS. Are you concerned about counterfeiting overseas? Do you think it is a serious problem, a relatively serious problem, not all that serious? Mr. BERNANKE. I believe there is a joint report coming out soon by the Federal Reserve and some other agencies, which has found at least in a few cases, some fairly serious issues of counterfeiting. I’m not sufficiently familiar with that report or its contents to be very helpful at this point. Mr. SHAYS. Let me conclude by just making this comment. I’m very concerned about data security. I’ve been notified by my own bank that tens of thousands of records have been misplaced. I’m hoping that your office will be paying a tremendous amount of at- tention to this issue. Finally, I just want to thank you for your short answers, which gives us more time to ask questions. It is very appreciated. Thank you, Mr. Chairman. Chairman OXLEY. The gentleman’s time has expired. The gen- tleman from New York, Mr. Meeks. Mr. MEEKS. Thank you, Mr. Chairman. Both Mr. Chairmans. Let me just ask you real quickly as a follow up to some of the questions that Mr. Royce was indicating, talking about the lack of individuals with savings now and a possible cool down of the hous- ing market. My question to you is what effects will this have with the money that’s available for investment, and most importantly, in the short term, the short term interest rates? Mr. BERNANKE. Congressman, I would say in terms of capital in- vestment, there is currently plenty of funding available. Corpora- tions have retained a lot of these profits they have earned in recent years, and they have very liquid balance sheets. There have been actually relatively low rates of bank borrowing by corporations because they have sufficient internal funds to fi- nance their investment spending. Moreover, the general credit conditions still appear to be quite positive. Spreads are low. That is, bankruptcy risk appears to be relatively low. My sense is that we will continue to see strong growth in capital investment in the U.S. economy, and that is going to be beneficial both in terms of generating demand in the short run, but also in terms of expanding our capacity to produce and our productivity in the longer term. Mr. MEEKS. Short term interest rates? Mr. BERNANKE. I can’t comment directly on short term interest rates. Obviously, we are still 6 weeks away from the next meeting, and I will have to discuss the state of monetary policy with my col- leagues at that meeting. Mr. MEEKS. I want to ask you two quick questions both related somewhat to trade. One of the major concerns of the Federal Re- serve Board is to keep inflation under control, and according to the Bureau of Labor Statistics, the average annual rate of growth of import prices has been only 0.6 percent versus 2.2 percent for over- all consumer prices. My first question is what is the perspective on the role of free trade agreements in controlling inflation? My second question is VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 34 there has been growing concern about our trade deficit and current account deficit and its long term effects on our economy. However, as we say in the Financial Services Committee, finan- cial services has become increasingly a greater share of the U.S. GDP, with almost five percent experiencing a trade surplus of ap- proximately 2.5 to 1. Some like myself are concerned that trade agreements being ne- gotiated don’t focus enough on trade in services, particularly finan- cial services. My second question to you is are we coming up short in the liber- alization of trade in financial services? Mr. BERNANKE. With respect to your first question, I think free trade has moderated inflation to some extent because of the addi- tional competition, because, as you point out, with a stronger dol- lar, import prices have been moderate. It has been a positive factor. With respect to trade, I think there is enormous opportunity to improve trade or increase trade in services. The DOHA round, which is still ongoing, has been working somewhat sequentially. It’s been focused initially on agriculture trade, access, terrorists and the like, then on manufacturing, and trade in services has brought up the rear to some extent. In the United States’ case, we are net exporters of services. We are the primary producer of internationally traded services in the world. It’s very much in our interest, both bilaterally and multilat- erally, to try to increase trade in services and to work towards freer trade in financial services and other types of services as well. I endorse that sentiment. Chairman OXLEY. The gentleman’s time has expired. Ms. Kelly. Ms. KELLY. Thank you, Mr. Chairman. Chairman Bernanke, I welcome you here today, and you have been very patient with us. I’d like to bring up a topic. I unfortunately had to go to another meeting. I don’t know if it has been brought up yet. I’d like to ask you about something that your predecessor stated, and that is that markets can only work when participants in the market are not subject to attack and that in his view the market for terrorism in- surance should not exist without Government assistance because of the risk of a terrorist attack. I noticed in your testimony here today you don’t discuss unex- pected events that could affect the Treasury. The Treasury study last year confirmed that for high risk cities, they have lowered premiums and improved rates for terrorism in- surance. Since you did not address the question of high risk cities directly in your 2005 testimony on the subject, do you agree with Chairman Greenspan that for these high risk areas, Government provisions for the terrorism insurance market will be necessary for the fore- seeable future? Mr. BERNANKE. Congresswoman, I think it’s important to begin by noting that the Terrorism Risk Insurance Act does not con- template any attacks with costs exceeding $100 billion. Clearly, there are enormous events that could occur and we hope will never occur, but they could occur, in which there would be no plausible possibility that private insurance could cover that cost, VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 35 and, therefore, Congress and the Government would have to try to address the aftermath of that attack as best as possible. The more difficult question is what about attacks, still large, but nevertheless, more moderate in size, perhaps of similar size to the Katrina event, for example. Again, enormous, but still within the range of historical experience. My view is that the country is best served by as much as possible developing private sector insurance capability, to the extent that we can, develop capacity in terms of ability to risk rate, to write insurance and to provide reimbursement in the case of an attack. Should an attack occur, we would be better off in that we would have both the private sector insurance and Government resources to fall back on. Therefore, my view is that we should be working, as the last bill has done, to try over time to increase private sector participation in terrorism risk insurance. I leave open for now to what extent or how long Government par- ticipation will be necessary. I agree that beyond a certain point, there will be no alternative to having Government involvement. I do think we are moving in the right direction in trying to build private sector participation in this market by increasing the co- pays and deductibles and the like. Ms. KELLY. If I understand you correctly, by implication, you are saying that the presence of TRIA as sort of a carrot to the market would allow the market to further pick up some of the risk that otherwise would be borne by the Federal Government in the event of a terrorism attack. Do I understand that correctly? Mr. BERNANKE. My objective here is to continue to increase the capacity of the private sector to contribute to terrorist risk insur- ance and to create resources that will be available in case a major attack were to occur. I agree that the existing law is moving in the right direction in increasing private sector participation and, on the other hand, I’m comfortable with the fact that Government support still remains at this juncture. Ms. KELLY. If I understand you correctly, what you are saying is that having TRIA available so that the Federal Government is not the insurer of first resort is an important factor in allowing the private market to cover as much as possible prior to the Federal Government stepping in, in the event of a terrorism attack. Mr. BERNANKE. I think I agree with what you are saying, the point being that we want to have cooperation between the private and public sectors, with an increasing role for the private sector over time. Ms. KELLY. Chairman Bernanke, this committee has taken an active role in fighting terrorist use of our financial system. Working with Federal regulators, we have exposed Riggs Bank, the Arab Bank, violations of the law, and we have worked with other agen- cies to improve the effectiveness of examinations. Unfortunately, we have seen several cases of banks subject to Federal Reserve supervision who have been violating the law for years without being discovered, particularly, in the more recent case of ABM. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 36 I’d like you to explain to the committee, if you will, how you would strengthen the Federal Reserve’s ability to defend our finan- cial system against terrorists who want to use it for their advan- tage. I want to know if you think the Federal Reserve has enough staff resources and puts them into the enforcement of the BSA versus its other activities. I’m concerned especially about ABM delib- erately violating U.S. laws by trading with Iran for 7 years. I wonder if you would be willing to address that. Chairman OXLEY. The gentle lady’s time has expired. The Chair- man may respond. Mr. BERNANKE. I just agree it’s a very important issue and we are going to work harder and we are going to be particularly fo- cused on the banks’ internal mechanisms for making sure that their counterparties are legitimate. Chairman OXLEY. The gentle lady from California, Ms. Lee. Ms. LEE. Thank you, Mr. Chairman. Welcome, Mr. Chairman. Congratulations to you. Let me say a couple of things. First, I’m glad to hear you say that you recognize that a rise in inequality is a concern and a prob- lem, but you also indicated that part of this had to do with the fact that lower wage workers haven’t received a higher level of income, those at least who have no more education than a high school edu- cation. I think I heard you correctly, you don’t support an increase in the minimum wage. You indicated your policies would be very con- sistent to Chairman Greenspan. I believe that’s probably about where he was. I’m quite frankly very disappointed. I know you do support the tax cuts and making those tax cuts permanent, and it seems to me if you are really concerned about this rise in inequality, somehow you as our new Federal Reserve Chair would say something about increasing the minimum wage for very low wage workers. Secondly, part of this rise in inequality has to do with discrimi- nation in mortgage lending. If you look at the home ownership rates, you have approximately 70 percent nationwide with regard to the Caucasian population, yet you have 46 percent African American, 46/47 percent Latino. There is a huge disparity there. With Mr. Greenspan, we were trying to talk with him about how to make sure that financial in- stitutions provided more mortgage lending to African Americans and Latino’s. Right now, conventional loans, I believe probably most banks provide maybe one to two percent of their conventional loans to Af- rican Americans. That is just down right shameful. Yet, on the other hand again, going back to Mr. Greenspan and if you are going to be consistent with much of his policies and his work, I have to raise these issues with you. CRA, for example. Many of these banks that receive an A or B on their CRA ratings probably lend one to three percent of their mortgages to African Americans and Latino’s. I don’t know for the life of me how they can get an outstanding and satisfactory CRA rating, when again, they are not in good faith lending to minority communities. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 37 Finally, just with regard to prime loans and sub-prime loans, the data that came out in October of last year, we have a report, and Mr. Chairman, I’d like to put this in the record. Chairman OXLEY. Without objection. Ms. LEE. Thank you, Mr. Chairman. It indicated first of all, taken together, sub-prime loans make up about six percent of all loans to African Americans and Latino’s as opposed to two percent to all white borrowers. We looked at this and decided that FICO scores should be re- vised and possibly take into account rent, utilities, telephone serv- ice as a sign of creditworthiness. I’m wondering if you would work with us to help improve the scoring process so we can improve this inequality in mortgage lend- ing to minorities in our country. As you know, and you said earlier, home ownership is really the key to the accumulation of wealth. It’s the only way people can send their kids to college, start a small business, and yet you have huge, I mean massive discrimination in mortgage lending to people of color and to minorities in our country. Yet, these financial insti- tutions get off the hook each and every time. Chairman Greenspan wasn’t able to help us figure out a way to rectify this and close this gap. Maybe you can. Could you respond and tell us what you think we can do? Mr. BERNANKE. I will comment. Part of the discrepancy relates to the underlying discrepancies in wealth and income, which I agree are a serious problem. That affects people’s ability to afford homes. In some sense, part of the issue goes back to our earlier discussion about helping people build wealth and build income through training and through other methods. Ms. LEE. An increase in the minimum wage. Mr. BERNANKE. The minimum wage affects a very small number of workers actually. I don’t think it would affect a great majority of people that you are concerned about. Be that as it may, I just want to say that I do support very strongly fair lending. I will be actively involved in making sure that our fair lending policies are actively prosecuted. I would also agree with you on the inappropriateness in some cir- cumstances of using FICO scores for evaluating creditworthiness. I know some banks are experimenting with non-standard ap- proaches that take into account people’s relatively short credit his- tories, for example, or alternative backgrounds. I think that is good banking. I think it is good for the society and the Federal Reserve will work with banks to look at those kinds of alternative approaches. Chairman OXLEY. The gentle lady’s time has expired. The gen- tleman from New Jersey, Mr. Garrett. Mr. GARRETT. Thank you, Mr. Chairman, and thank you, Mr. Chairman. I appreciate your being with us on your maiden voyage before this committee. I echo Mr. Shays’ comments about the con- ciseness of your answers in a manner that we can actually under- stand. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 38 I will be interested as others will be just to see after we are all done in here, as we check the markets, to see how they will re- spond to all your answers as well. On that note, I don’t know if you saw the article in USA Today, I think it was earlier this week, regarding your predecessor and the impact that your predecessor continues as he goes out and speaks publicly and privately, and then I guess when he speaks privately, rumors swirl around as to exactly what he said privately, and I guess in some cases, allegations are that the dollar actually rose or failed because of his comments. I just wondered if you had a comment on that as to how the mar- kets are impacted by your comments and by your predecessor’s comments still to this day. Mr. BERNANKE. My only comment on Chairman Greenspan is that according to Government ethics rules and to FOMC rules, it’s permissible for a retired Governor to speak in public about the economy, so long as he or she does not divulge confidential infor- mation. I have no indication that he has violated that rule. I have no fur- ther comment on that. Mr. GARRETT. Getting to the questions on the GSEs, just a couple more points, I appreciate your comments as to the importance of them. I’m just curious, in your mind, whether you think that Fannie and Freddie are really the soundest and the best way that we have to assist homeowners in financing, or is there something else that Congress can do, as we always like to say, to level the proverbial playing field, to provide methods for S&Ls and banks and other fi- nancial institutions to get into the market on the same level field as Fannie and Freddie are right now to address the issues that have been already raised as far as increasing the housing market and to provide liquidity. Is there something else we could be doing aside from Fannie and Freddie? Mr. BERNANKE. I’d have to hear your specific suggestions. As I indicated before, Fannie and Freddie did a very important service to us, to the economy, to the country, by creating the secondary mortgage markets. They are no longer the only participants. Obvi- ously, there are now large financial institutions which are also in- volved in creating and servicing these markets. I think what they do is very valuable. I have no desire to— Mr. GARRETT. I’ll follow up with some of the other models that are out there. I would appreciate your comments as to whether Congress can explore some of these other avenues as well to either supplement or eventually go down the road to a different direction. Another thing that the House did, it passed this committee, and the House passed the GSE reform legislation. As you know, one of the aspects was what I will call the five percent tax or five percent diversion, always with the laudable goal of trying to provide rev- enue to those most in need in the housing market. The question on the other side of that equation comes, and this involves your concerns and mine as well, with regard to portfolio size and limitations. I think we are on the same page. I was fight- VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 39 ing for that when your predecessor was here, to try to put those stronger limitations in place. What is your comment on what the House has done in that area by diverting revenue from the normal revenue stream? Does this put an additional burden on the GSEs to basically go in the other direction that we would want them to into, and that is to increase the portfolio to make up for the lost income? Mr. BERNANKE. I’m afraid, Congressman, that is out of my pur- view. It’s really up to Congress to decide how they want to manage these kinds of funds. My main concerns are about financial stability and, therefore, about the fact that we have such a large portfolio which has to be hedged in a complicated dynamic fashion. Mr. GARRETT. Does it affect their financial stability if there is a pressure on them to increase their portfolio size? Mr. BERNANKE. I honestly don’t know the magnitude of the ef- fect. Mr. GARRETT. Changing subjects a little bit but keeping the whole area as far as your earlier comments with your concern, also mine, as far as whether it’s the size of the Government question, as you were saying, it’s actually the size of the budget that we have. I will be going down to Louisiana in a couple of days again to see what the situation is there now, 7 months or longer after the fact. Congress has already passed some legislation, appropriations for that measure. As you know, the Administration is talking about additional legislation. There are some proposals out there to go even broader, providing a framework for substantial additional monies for that area. Can you address if we go in those areas whether that acts as a positive or a negative drag on the economy as the additional size increases for expenditures of the Government for those recovery ef- forts? Chairman OXLEY. The gentleman’s time has expired. The Chair- man may respond. Mr. BERNANKE. Mechanically, and I’m not endorsing any par- ticular program for Katrina recovery, but building and reconstruc- tion do add to economic activity, and it’s one of the reasons why 2006 may be a bit stronger than we otherwise thought. Chairman OXLEY. The gentleman from Kansas, Mr. Moore. Mr. MOORE. Thank you, Mr. Chairman. Mr. Chairman, welcome to the committee. In a speech you gave last March of 2005 before the Virginia Association of Economists, you stated that reducing the Federal budget deficit is still a good idea. You said that reducing the deficit would reduce ‘‘debt obliga- tions that will have to be serviced by taxpayers in the future.’’ I have six grandchildren. A lot of us here have children and grandchildren whom I believe would be affected, as you have indi- cated, by what we do as a country in the future. I believe Congress should be doing what we can to relieve our children and grandchildren of the burdens we are imposing on them today. One way I think we can do that is to address the def- icit/debt issue, to reinstate a rule called pay/go. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 40 In 2002, the pay/go rule in Congress was allowed to expire. It has not been renewed. In fact, former Chairman Greenspan and a group in Congress called the Blue Dog Coalition, which believes in fiscal responsibility, has advocated reinstatement of pay as you go, pay/go rules, that would require Congress to pay for spending in- creases and revenue reductions. Should pay/go in your estimation be reinstated? Should it apply to new spending as well as new revenue reductions or tax cuts? Mr. BERNANKE. First, Congressman, I stand by my statement from my speech from last year. I think reducing the fiscal deficit is very important. Mr. MOORE. Good. Mr. BERNANKE. Doing so increases national saving and reduces the burden on our grandchildren. I’m sorry that I don’t feel it is appropriate for me to make rec- ommendations to Congress about their procedures. I do hope Con- gress will be thinking about the long-term implications of spending and tax programs so that we are looking not just at the very near term, but the very long term implications. I think that is very sensible. I think in my role as head of the central bank, I should not be involved in making specific rec- ommendations about your internal decision making process. Mr. MOORE. Are you aware of a pending request for an increase in the debt limit? Mr. BERNANKE. Yes, I am. Mr. MOORE. How much is that, sir, if you know? Mr. BERNANKE. Eight trillion plus. Mr. MOORE. It would take us up to eight trillion plus. It was at about $900 billion, the request for the debt increase is supposed to come by February of next year. Is that correct? Mr. BERNANKE. I don’t recollect exactly. Mr. MOORE. I believe about 4 years ago, our Federal debt in this country stood at about $5.7 trillion. Is that your recollection? Mr. BERNANKE. I don’t recollect exactly. Mr. MOORE. It is now, as you understand, $8.2 trillion. Is that correct? Mr. BERNANKE. Yes. Mr. MOORE. We are just digging ourselves a deeper and deeper hole. Is that correct? Mr. BERNANKE. The deficit is certainly adding to the national debt. The total debt includes a lot of debt which is held by trust funds and the like, so that the so-called debt held by the public is more in the vicinity of $4.5 to $5 trillion. Some of this debt is ac- counting money held within Government trust funds. Mr. MOORE. At some point in the future, taxpayers in this coun- try are going to have to make good on this. Isn’t that correct, sir? Mr. BERNANKE. That’s correct. I agree with you that we have a very serious long term fiscal problem and we need to begin to ad- dress that. Mr. MOORE. One way to address that would be to reduce sub- stantially the amount of deficit that we incur each year. Isn’t that correct? Mr. BERNANKE. That’s correct. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 41 Mr. MOORE. Would it be helpful in your estimation, Mr. Chair- man, if we were to go back to the way things were 20 plus years ago before Congress passed a law that allowed the unified budget to include not only tax revenues but Social Security revenues? Mr. BERNANKE. I think it’s important to make the distinction, which is not made so clearly now, between the current budget and the payroll contributions to social insurance. Mr. MOORE. I have a bill that in fact would do that and take So- cial Security revenues out of the unified budget. I approached one of my colleagues on the other side of the aisle, and I said I know you believe in fiscal responsibility, and I said you should be on my bill, and he said, Dennis, there’s one problem with your bill. I said what is that. He said it would make our deficits look even larger. I call that telling the truth to the American people, and I think we need to start doing that again. Thank you, Mr. Chairman. Chairman OXLEY. The gentleman’s time has expired. The gen- tleman from Ohio, Mr. Gillmor. Mr. GILLMOR. Thank you, Mr. Chairman. Let me ask you, in terms of what has been happening in housing, and some people think we have a housing bubble, some don’t. I think the Fed position is we don’t. One of the things that has been happening is a great prolifera- tion in zero percent down loans, adjustment of rate mortgages, and that was happening in a time of very low short term rates. Now, those are going up. Do you see any dangers to the system and what impact is this going to have on those borrowers? Mr. BERNANKE. Congressman, you are correct that the incidence of these so-called non-traditional mortgage products has been in- creasing. There are some customers for whom these products are appropriate, but there are also some customers for whom they are probably not appropriate. The Federal Reserve and the other banking agencies have issued guidance for comment to the banks, asking them first to re-think their underwriting standards, to make sure that when they make a loan of this type, the recipient is able to finance not only their first payment but also the payments that may come later if interest rates adjust, for example. Secondly, the guidance asks banks to be sure their disclosure to consumers is adequate so the consumers fully understand these complex financial instruments and understand what they are get- ting into. Third, that the banks themselves are adequately managing the risks inherent in making these kinds of loans. We are addressing these issues. These loans are quite popular in terms of new credit extensions. They remain a fairly modest por- tion of the outstanding mortgages. This goes back to a question that was asked earlier. I think the one area where they may pose some risks if the housing market slows down might be in the sub-prime area where they have been popular and it’s more likely in those cases that they are inappro- priate for the borrower. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 42 Mr. GILLMOR. Let me ask you. We have had a pretty good econ- omy for a couple of years after we came out of a recession, a fairly mild one, at the beginning of the decade. Since the tax relief package of 2003, growth in the GDP has gone up from about 1.3 percent before that to over four percent since then. I think a logical person would conclude that tax relief prob- ably had something to do with it. The tax relief was temporary. My question is if the tax relief ex- pires, which would amount to basically a tax increase at that point, what if any impact do you think that would have on the economy, jobs, and growth? Mr. BERNANKE. Congressman, I do agree, and I think most economists would agree that the tax relief earlier this decade was helpful in helping the economy recover from the recession in 2001. I am going to try to stick to the principle of not directly or indi- rectly endorsing specific tax or spending programs. I hope you will forgive me for that. Mr. GILLMOR. You’re forgiven. Mr. BERNANKE. Thank you. Mr. GILLMOR. I heard what I wanted to hear. One other question. We have talked a lot about the global sav- ings glut. I guess the question is, is this really a glut or is there a lack of investment demand? Certainly, that glut, the United States is not contributing to the savings glut. If you could comment on that, I would appreciate it. Mr. BERNANKE. Yes, Congressman. Perhaps the terminology ″savings glut″ was unfortunate. The issue is the amount of global savings relative to the amount of global investment opportunities. The most striking change in the past 10 or 12 years has been in emerging markets, particularly East Asia, which 10 to 12 years ago were large net borrowers on international capital markets, and now are even much larger net lenders. If you try to take apart the reasons for that change, it’s partly their very high rate of savings, but the change itself is due more to declines in investment outside of China. Part of the cause of this so-called global savings glut, I believe, is the financial crisis of the late 1990s which reduced in-flows of investment capital expenditure in some of these emerging market economies. The oil producers also are playing a role here because they are receiving all this oil money. They don’t have sufficient opportuni- ties at home for investment. Therefore, they, too, are recycling these funds into the global capital markets. Mr. GILLMOR. Has my time expired? Chairman OXLEY. Mr. Ford. Mr. FORD. Chairman Oxley, thank you. I know you indicated, Chairman Bernanke, and congratulations. I know they trained you well and you come highly regarded from just about everybody. I’m from Memphis, and we have a small banking center there. We like to think of it as a big banking center. And all of my sup- porters and friends and even opponents think very highly of you, so I congratulate you today. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 43 I guess you have indicated you’re not going to endorse particular tax packages or not, but if they did do one, would it be in the inter- est to look at some kind of AMT reform outside of—let me step back. Is AMT reform something that you think will allow you and the board, as you all make determinations about tightening or loos- ening a policy, would the AMT relief help as you move forward, or would it hinder, or is it hard to say? Mr. BERNANKE. Well, AMT reform is reducing revenues. Looking forward, we would factor that into our projections of Government spending and revenues. Relevant to some of the issues we were talking about before, with no other change being made, and I’m speaking here arithmetically, AMT reform is going to increase the deficit because it’s going to lower tax revenues. So that’s an issue. I’m not commenting on the AMT as a tax. I understand that many Congresspeople have considerable concerns about the AMT as a tax, and so it’s really your choice as to how you proceed with that tax. Mr. FORD. Let me ask you this. You’ve mentioned the deficit, then, and so forth, so in light of what Mr. Moore said, would that mean—I don’t want to put words in your mouth, but we’re going to probably have a vote here soon on raising the debt ceiling. Is that something Congress should do? Mr. BERNANKE. When Congress passes a spending act or a tax act, that has implications for the amount of debt. Arithmetically, that has implications for the amount of debt the Government is going to take on. And therefore, I think that the debt ceiling doesn’t really provide much additional value. The Congress ought to be contemplating the effects of its spend- ing and tax actions on the debt and the deficit as it goes along, with each determination, both in the short run and in the long run. Mr. FORD. In our most recent budget, or the budget that Con- gress is considering now, and Mr. Moore and I serve on the Budget Committee, in the President’s numbers, there was no inclusion of any monies for the war in Iraq and Afghanistan. If we do a budget, when Congress puts its budget together, would you recommend that at a minimum we put everything in there, so at least you’re working with either X deficit or X-plus deficit, at least you know what you’re working with, before your colleagues and you convene here in the near future? Would you recommend we include those numbers in the budget? Mr. BERNANKE. At the Federal Reserve, when we make forecasts of budgets, we try to make the most realistic forecasts we can, and we try to take into account all features of what Congress is likely to do, both on the tax side, say AMT, and on the spending side. So yes, clearly, good planning requires you to think hard about what you believe actual spending needs are going to be. Mr. FORD. Thank you. Let me ask you one or two other quick questions, Mr. Chairman, just as relates to some of the concerns that those in my district have about a variety of things. Despite an unemployment rate of 4.7 percent, both the employ- ment cost index and average hourly earnings suggest that labor VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 44 costs remain quite well behaved due to the strong productivity growth. Corporate profit margins remain robust, giving firms a cushion against price shocks and competition, sustaining a strong bias to- ward cost control that has short-circuited the field inflationary spi- ral. Is it simply fear of rising inflationary expectations rather than actual inflation that will drive further Fed tightening or other fac- tors? Mr. BERNANKE. Congressman, when we make policy, we have to take into account the fact that monetary policy works with a lag. It doesn’t affect the economy in a day or a week or a month. It has its effects over 6 months, a year, or 18 months. And so we have to think about the forecast. We have to think about how the economy is likely to evolve over the next year or two. In addition, inflation expectations are important as an inde- pendent factor because, as I was indicating earlier, when inflation expectations themselves, as measured by surveys, for example, are low and stable, the economy itself will be more stable when it’s hit by other kinds of shocks. So we do care about both inflation and inflation expectations. Mr. FORD. And finally, as Congress considers a variety of not only tax reform packages but even reform packages as relates to how we spend on pork spending here in the Congress or earmarks, as we like to call them, but the public calls them pork spending, you would recommend that as we look at spending and tax policies that we try our hardest—now let me say, I hate to put you on the record, Mr. Chairman, but I think it’s important for all of us here who like to spend and who like to cut taxes to understand that they have real implications as the debt continues to rise. Is that fair to say? If our policies cause the debt to rise, that has real implications on what you do and what you don’t do? Mr. BERNANKE. Increased deficits are a negative for the economy, certainly. Mr. FORD. Huge deficits are a negative for the economy? Mr. BERNANKE. Yes. Mr. FORD. So those who continue to cite the debt as a small per- centage of, or they cite it as 2.5 or 3.5, only 4.5 percent of all that we spend, you think the number itself, so 8 trillion versus this number compared to the economy, is as important as the percent- age of our overall spending? Mr. BERNANKE. Well, I think it is important to look at the per- centage of the deficit as a share of GDP because that gives some indication of how big it is relative to the size of the economy. The point I tried to make earlier is that my particular concern is about the long run obligations of the Federal Government on the entitlements side, in particular, which are going to be putting a lot of pressure on the Federal deficit and the Federal budget in the long run. In the short run, we need to begin to plan ahead for those contin- gencies, and that means trying to be as efficient as possible in our spending and tax policies in the near term, as well. Mr. FORD. Thank you, Mr. Chairman, for the indulgence. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 45 Chairman OXLEY. The gentleman from Georgia, Dr. Price. Mr. PRICE. Thank you, Mr. Chairman. And I welcome you, Mr. Chairman and wish you the very best in your new role, and I want to echo some others and thank you for the responsiveness that you have given this morning to your questions. There are some benefits to coming late in the questioning, and one of them is that oftentimes we have an opportunity to clarify the record. There have been some things said that I’d like to just get your comment on. It’s been said that the economic policies that we currently have are, quote, ‘‘not working for the average American,’’ unquote. Would you say that our economic policies are not working for the average American? Mr. BERNANKE. The economy as a whole has recovered very strongly from the slow period earlier this decade, and I think that’s very positive. We have strong GDP growth. We have low inflation. We have strong productivity growth. Compare our economy to many other industrial economies. We see that we’ve had a very good run. Mr. PRICE. All those things are positive for the average Amer- ican? Mr. BERNANKE. All those things are quite positive. The issue, the specific issue which we’ve been discussing is the fact that there has been some indication of increased inequality in wages and incomes, and a point I tried to make is that this is a relatively long-term— Mr. PRICE. Correct. Mr. BERNANKE.—feature of the economy that goes back probably at least to about 1980, when we began to see the increased return to skills and education leading to a greater— Mr. PRICE. I would agree. I would agree. It’s also been stated that we have as a Nation, quote, ‘‘disastrous trade policies,’’ unquote. Would you say that we had disastrous trade policies in place? Mr. BERNANKE. No, I wouldn’t say that. Mr. PRICE. Thank you. Mr. BERNANKE. I think we— Mr. PRICE. I want to go on because I’ve got some other questions. I appreciate that response. Regarding home ownership, it’s been stated by some folks on the other side that, quote, ‘‘There is massive discrimination,’’ unquote, in the provision of mortgages. It’s my understanding that home ownership for our Nation is at an all-time high, and that for comparable levels of wealth and in- come, do you believe that there’s, quote, ‘‘massive discrimination,’’ unquote, in the provision of home mortgages for those comparable levels of wealth and income? Mr. BERNANKE. I tried to make the point in my answer to that question that I thought a large part of the difference had to do with the differences in income and wealth between different groups in VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 46 the population, which in itself is an issue that, you know, we hope to address over time. Mr. PRICE. Indeed. Mr. BERNANKE. I don’t think that there is massive discrimina- tion, but I think that it does exist, and I think it’s important for the Federal Reserve and other agencies to look carefully and make sure that banks and other lenders obey the law in their mortgage extension. Mr. PRICE. Okay. Thank you. I want to switch gears, if I may, because I think it’s appropriate and important that you brought up the demographic changes that we have occurring in our Nation. And I think you said that those things needed to be addressed soon, and I would agree with that. Some have suggested in the area of Social Security that every- thing is fine, that we don’t need to do anything right now, that, in fact, we may not need to do anything until 2042 or 2052. What’s your view on the speed at which Congress should address the issue of Social Security reform? Mr. BERNANKE. I would just raise the point that people who are 35 years old today will not be retiring until 30 years from now, and the sooner we can address these issues and make whatever changes we are going to make, if we do make changes, the fairer it is to those people, because then they can better make their own plans, change their savings behavior, for example, so the sooner we can address these issues, the better. Moreover, from the point of view of financial markets and the like, the more confidence they have that Government is going to address these long-term deficits, probably the better the terms that we’ll be able to borrow on and the more confidence there will be in those markets. Mr. PRICE. Thank you. There are some proposals that we ought to price index Social Se- curity payments. Do you have any view as to that? Mr. BERNANKE. I don’t think I’ll go into that issue. Mr. PRICE. I want to switch to the savings rate. I have, as I know that you do, real concerns about our level of individual personal savings. Do you have a sense as to what the appropriate level is for per- sonal savings in terms of retirement security for an individual? Mr. BERNANKE. It depends very much on the person’s expecta- tions in retirement, when they expect to retire, will they continue to work, and the like. I mean, one of the things which makes all this so difficult to fore- cast is that lifestyles are changing. We no longer have people retiring to Florida 100 percent of the time necessarily. Many people continue to work part-time, or work longer. My predecessor worked a bit beyond age 65, for example. So the amount of savings that people, individuals, have to do de- pends a lot on their plans and expectations. I think that it’s arguable that a large share of the population is not saving enough to significantly augment Social Security and, therefore, to guarantee a comfortable retirement. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 47 Chairman OXLEY. The gentleman’s time has expired. Mr. PRICE. Thank you, Mr. Chairman. Chairman OXLEY. The gentleman from Texas, Mr. Hinojosa. Mr. HINOJOSA. Thank you, Mr. Chairman. Chairman Bernanke, thank you for coming before our committee to testify. I realize that many have discussed the issue of China’s yaun, the currency exchange rate, with you and that you’re likely more famil- iar with all the models and mechanics that go into it than I am. Some have likely expressed concern about the decision of the Chinese to create a controlled float of their currency based on a basket of certain foreign currency exchange rates, including the dollar, the Euro, and other currencies. Other Members may have expressed support for China’s decision, especially in light of what some have said to be its arguably unsta- ble banking system. I understand further that many U.S. institutions are taking cer- tain actions, such as making investments in China’s financial serv- ices sector, to bolster the Chinese banking system and its economy. However, in economics, there truly is no black and white, but only shades of gray. In light of that perspective, how do you think the economies of the U.S. and China will fare in the future? Are they as interdependent as many claim? If so, do you foresee any potential conflicts arising between these two countries in the near or distant future in light of China’s amazingly fast growth and its ever-increasing economic demand for raw materials, includ- ing iron, steel, and petrol? Chairman OXLEY. Congressman, as we’ve seen in earlier epi- sodes, such as the emergence of the Asian tigers or the emergence of Japan, when a new economic power comes into the global scene, it can produce lots of stresses and strains, and we have observed some of those stresses and strains. I think, though, that one of the stresses and strains that you al- ready alluded to is the competition for global resources. Certainly one of the reasons that oil prices have gone up as much as they have is the increased demand for petroleum products by China. I do believe that there’s an enormous amount of opportunity for cooperation between the United States and China in terms of trade, in terms of foreign investment, and I hope that will proceed positively, although I think I can safely predict there are going to be bumps in the road as these stresses and strains manifest them- selves. I hope we’ll continue to work positively with China and that when we have disagreements, that we’ll work through inter- national agencies like the World Trade Organization or others to try to resolve them as effectively as possible. Mr. HINOJOSA. Since 9/11, we have reduced the number of stu- dent visas from China and many other foreign countries, and yet when you combine China, India, and Taiwan, they’re producing about 700,000 engineers and technicians, and we’re only producing about 70,000. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 48 So this worries me because we don’t seem to have the mindset here in Congress to really invest heavily to be able to get more stu- dents into that pipeline in early years—third, fourth, fifth, sixth grade—so that they can get into those stem careers—science, tech- nology, engineering, math. And it worries me that we just continue to increase the amount that we’re importing from China and we’re falling behind in pro- ducing those engineers. What do you recommend to those of us who have a responsibility to correct the acute shortage of scientists and engineers that I’ve mentioned to you? Mr. BERNANKE. Congressman, a theme that’s come up a few times in this hearing is education, and I agree a lot could be done for American K-12 education and for universities, as well, and Con- gress has a role to play there, and I hope that you’ll continue to play a positive role in that area. On the number of engineers being produced, sometimes it’s a question of apples and oranges. I’m not sure that an engineer is an engineer is an engineer. There are obviously different levels of qualifications and skills. And I think the United States, while we have to always be care- ful and look to our position in the world, remains a technological leader in terms of our skills, in terms of our technology and our re- search and development, so that’s positive. I’d make one suggestion, or give one thought on the issue of engi- neers and scientists, which is that simply producing more engi- neers and scientists may not be the answer because the labor mar- ket for those workers will simply reflect lower wages or perhaps greater unemployment for those workers. Currently, there’s not an obvious shortage of scientists and engi- neers in terms of the labor market indicators. That is, wages for engineers are not rising more rapidly than other professionals. So I think one way to address this issue is to ask, are there ways in which the Government can support basic research and in some sense produce a demand side that strengthens the market, that therefore brings people into science and engineering because there are opportunities there, not simply creating a bigger supply, which will then compete and drive down the wages in that category. Chairman OXLEY. The gentleman’s time has expired. Mr. PRICE. Thank you, Mr. Chairman. Chairman OXLEY. The gentleman from New Mexico, Mr. Pearce. Mr. PEARCE. Thank you, Mr. Chairman. Chairman Bernanke, thank you very much. In the responses to inflationary pressures of energy, the idea of a supply increase, current supply increase of oil and gas, did not come up. Isn’t that the easiest way to stem the price? Mr. BERNANKE. Certainly. It is a way, certainly, to respond. And high prices in themselves of course provide an incentive to produce more supply. Unfortunately, a very large part of the world’s oil reserves are located in areas— Mr. PEARCE. In the U.S., we’re artificially restricting through regulation and through restriction of access to the outer continental shelf and the— VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 49 Mr. BERNANKE. I argued earlier for regulation that accomplishes its purposes, that’s sensible and predictable so that people will meet the standards being set but will not be arbitrarily delayed by ongoing port challenges, for example. Mr. PEARCE. You had mentioned the appropriate size of the Fed- eral Government was the function of Congress. Looking at Germany and the stagnation that they’ve had because it appears that there’s a relationship between the high percent of Government spending to GDP. What is the target range where an economy will stay vital and growing versus stagnant? Mr. BERNANKE. I don’t have a target range to give you. If you have a higher share of Government spending in the economy, I think a lot depends on how well the money is spent. Is it being spent in ways that promote growth, for example, by creating skills or supporting research? If it’s being spent in wasteful ways, obviously, that’s a heavy bur- den on the economy, not only because of the resources being di- rectly used, but because higher taxes in themselves will distort eco- nomic decisions and make the economy less efficient. Mr. PEARCE. Looking 10 years into the future, when we’re in the depth of the baby boom retirement and the number of skilled work- ers available, and again setting aside skilled versus unskilled on immigration, do you see enough reason that we’d need workers to come into the country, or do you think we can solve our internal problems with the people who are available in the next genera- tions? Mr. BERNANKE. Well, I think first of all that immigrants are an important source of energy, vitality, and work ethic, so I think im- migrants are very positive for the economy, and I wouldn’t make it an either/or proposition. I think we should allow legal immigrants, but I think we should also make sure that our own citizens are well educated, well pre- pared, and able to— Mr. PEARCE. But as far as the quantity of workers, you don’t have an opinion? Mr. BERNANKE. No. The economy grows along with the quantity of workers available, so if there are more workers, the economy will just be correspondingly bigger. Mr. PEARCE. There is speculation, Mr. Chairman, that you would encourage a transition from the dual mission of price stability and full employment mission of the Fed to a single mission of inflation targeting. Do you intend to lobby for that change or to encourage that change to occur? Mr. BERNANKE. Absolutely not, Congressman. I completely sub- scribe to the dual mandate of price stability and maximum sustain- able employment. The modest and incremental changes which I have discussed and which I will continue to discuss with my colleagues are intended solely to allow the Federal Reserve to meet both parts of its man- date more effectively and more efficiently. Mr. PEARCE. The idea of surpluses as far as the eye could see back at the end of the Clinton time, was that a real phenomenon or was that a fictitious phenomenon? VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 50 In other words, what we’ve heard testimony as the dotcom ramp- up and the associated capital gains off those stocks that were val- ued at zero and went very high, that the entire increase of reve- nues and projection of revenues was simply those imaginary in- creases which then deflated back down, and actually the revenues, when they sank, sank back to where they were consistent with the increase before—was that a fictitious thing or were those—should we have increased the size of our budget based on those surpluses? Mr. BERNANKE. The share of GDP that took the form of revenues in 2000 was about 21 percent, which was the post-war high, and certainly in retrospect, we can say that a good bit of that was due to the unsustainably high level of the stock market, in particular, capital gains, bonuses, and stock options, and the fact that firms did not have to contribute so much to their pension plans because their valuations were rising with the stock market and, therefore, they reported higher profits. So a significant portion of the tax collection clearly was related to the stock market boom of that period. Chairman OXLEY. The gentleman’s time has expired. The gentleman from New York, Mr. Crowley. Mr. CROWLEY. Thank you, Mr. Chairman. Thank you, Mr. Chairman, and welcome to the committee on the first of many, many visits to this room and before this committee. I have a question dealing with some of the legislative proposals being recommended by the President and Republican Congress with respect to the health insurance that’s provided to American workers and to their families. And I’d like to begin by pointing out some what I believe are very scary facts about the Bush administration and this Congress with respect to the care of American workers. The fact is that between 2000 and 2004, the number of Ameri- cans lacking health insurance grew by 6 million to almost 46 mil- lion Americans, and that number is growing; it is not shrinking. Another fact is that in 2004, the percentage of people with em- ployer-provided health insurance declined for the fourth year in a row; 3.7 fewer people had it in 2004 than had it in 2000. Now as a so-called remedy, the President, in the 2000 budget, is calling for the expansion of health savings accounts. The Administration’s budget would give greater tax breaks to people who shift health insurance plans with a high annual deduct- ible from $1,050 or more, compared to the $300 to $400 of deduct- ible found commonly among employer-sponsored insurance plans. At least 3 million people have high deductible health insurance, but this still represents a small segment of the about 195 million Americans with private health coverage. I believe the HSA plan would encourage employers to opt out of traditional health insurance plans they offer to workers and their families and place them with these HSAs, allowing workers to save under these plans for their own health care choices, albeit paying far, far more than they would in the annual deductibles that they have in their present plans, three or four times more. The Administration touts studies showing that HSAs would ap- peal to higher-income workers, as it allows individuals to accumu- late money tax free in accounts that they can take with them from VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 51 job to job, but studies also show that low-income and middle-in- come people have little if any leeway in their own budgets to accu- mulate or save money in HSAs. We can’t get them to save in bank accounts. And this is something that was reinforced in this year’s Eco- nomic Report of the President drafted by the Council of Economic Advisors, which you chaired until you assumed this new position. This report shows the U.S.A. has a negative savings rate, some- thing we haven’t seen since the Great Depression. So seeing the President’s plan for HSAs, which are based on workers saving money for their own health care, and your own council’s report that workers have a negative savings rate in our country, and that other tax incentives for savings have could you tell me how can workers, especially middle-income and lower-in- come workers, actually save the funds to create so-called health savings accounts when they haven’t taken advantage of IRAs and other savings mechanisms? Can you give us an example? Mr. BERNANKE. Congressman, first of all, let me just acknowl- edge the very important problem of the rising cost of health care. I mean, that is the underlying reason that the price of insurance remains high, why employers are either dropping plans or increas- ing the share that they require their employees to pay. So that is the underlying problem, and I urge Congress to make this a very high priority because it’s something that bears not only on the efficiency and competitiveness of our economy today, but ob- viously, through Medicare and Medicaid, it has an important impli- cation for our long-term fiscal stability. Unfortunately, as you’ve mentioned before, I had a different hat. I’ve changed hats. I’m now at the central bank. And I think again, as I’ve mentioned, in my current role, I’d like to stay away from endorsing, either directly or indirectly, specific plans. I guess a question I’m not really even sure of the answer to is exactly what the 3 million HSAs have been taking up. I don’t know precisely, but I don’t think that it’s been entirely upper-income people who have taken those up. I don’t know that— Mr. CROWLEY. I’m not asking you for an endorsement, Mr. Chair- man, for this plan or for any plan at this point in time. But what I’m asking for I guess is do you think it’s realistic if lower-income Americans and middle-income Americans are not tak- ing advantage of tax incentives to save right now, or fully taking advantage of them, how can we expect them to then now save for health care when they don’t have the resources to save for them- selves, for health care and a higher deductible than they are right now? I mean, where’s the incentive for them to do that? Mr. BERNANKE. My understanding of the President’s budget is that it includes tax credits and other assistance to lower-income people who— Mr. CROWLEY. If they’re not using those right now for other forms of savings, how are we to believe they’re going to use them for their own health? VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 52 I mean, it just goes to show they live paycheck to paycheck. How can they then therefore afford to pay for their health if they’re not even paying for their future? Chairman OXLEY. The gentleman’s time has expired. Mr. CROWLEY. I thank the chairman. Chairman OXLEY. The gentleman from Pennsylvania, Mr. Fitzpatrick. Mr. FITZPATRICK. Thank you, Mr. Chairman. Good afternoon, Chairman Bernanke, and welcome. I represent Southeastern Pennsylvania, including Bucks County, which is near to your old neighborhood, and we appreciate your service in this way. We also value education very highly. A number of questions today about education. I’m proud to see that, especially in the area of science, the na- tions of China and India are investing very heavily now, we’ve had that discussion, in science and technology and engineering. The New York Times journalist, Thomas Friedman, wrote a book called, ‘‘The World is Flat’’ which stands for the proposition that as we lose this race in education—science, technology, engineering, and math—this is not only bad for the economy, but it also may rise to the level of a national security threat. I was wondering if you shared that opinion. Mr. BERNANKE. I think it’s somewhat overstated at this point in time. The United States is still a far richer country than China, for ex- ample, and we still have a very substantial world leadership in technology and in high-tech skills and high-tech industries. Having said that, I agree absolutely that it’s important that we work hard to maintain that leadership, and that should take place through continued support of research and development, education, and all the things that you mentioned. Mr. FITZPATRICK. I appreciated your comments earlier that it’s important not just to train in these areas of science and technology but also to make sure that there are jobs available and there’s op- portunity and opportunity for wage increases in those areas. The President recently has made quite a number of comments about the need to invest in alternative fuels. Do you feel as though this new area, this new area of invest- ment, this area that we need to go to as a Nation, will provide op- portunity for scientists and engineers in the future here in Amer- ica? Mr. BERNANKE. There is a case, I think, for the Government to be involved in basic research, that is, research that private compa- nies would not find it in their interest to undertake because they would not feel able to capture the financial benefits of that re- search. Energy has been an area where the Government has played a very important role in developing new technologies, so my general answer is yes, but I would say that the Government’s role should be more at the upstream end, ant more basic levels, because more downstream, the corporations will have sufficient incentive from the market to implement these new technologies and to develop them. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 53 Mr. FITZPATRICK. Yes, sir, and I want to associate—I appreciate your comments earlier regarding technical education and commu- nity colleges. This is a town with a lot of programs, a lot of programs about education create at different times, and disparate kind of treatment of these programs. Do you have any—would you have any public policy suggestions on ways to better coordinate the way we here in the Nation’s cap- ital deal with funding education? Mr. BERNANKE. I can make one suggestion, which is that what we think about funding the student rather than the school, that is, that we provide individuals with the choice where they want to go and how they want to use money, rather than necessarily funding the institution. So in that respect, we utilize the market and choice as a way of creating competition among different schools and institutions. So that’s one strategy, a general strategy that one might con- sider. Mr. FITZPATRICK. Thank you, I appreciate that. I yield back. Chairman OXLEY. The gentleman yields back. The gentleman from Utah, Mr. Matheson. Congratulations to your constituent on a gold medal. Mr. MATHESON. We appreciate your acknowledging that, Mr. Chairman. Winter sports capital, you know. Chairman OXLEY. Yeah, we don’t have too many skiers in Ohio. Mr. MATHESON. You’re welcome to come and spend all the money in skiing in Utah that you want. Mr. Chairman, thank you and welcome to your first hearing be- fore the committee. I do want to reiterate what a couple of my colleagues said about the importance of getting our fiscal house in order, and I appreciate your comments on stating the case for why, over a prolonged pe- riod, continued deficit spending creates some concerns, and I en- courage you to be forceful on that. And while I don’t expect you to come up with a specific spending cut or tax issue or whatnot on that, I would suggest that Congress had budget enforcement rules in place they enacted in 1990; they expired at the end of 2001; they were an important structural com- ponent of what allowed us to get our arms—Congress to get its arms around what I thought was an out-of-control deficit and actu- ally move to a surplus, and I think that that would be something that I would suggest you might want to advocate for going forward, as putting in some of those structural components that help move us to more of a reasonable fiscal policy at the Congressional level. I think that would be real helpful if you would do that, and I want to associate myself with the comments of Mr. Moore, who raised those issues. A question I wanted to ask you is, I know the Federal Reserve has expressed, and some folks on this committee for that matter, have expressed concerns about the mixing of banking and com- merce, when the commercial entity is owned by a corporation. And I wanted to ask you about that issue in the context of many independent banks that are owned by businesspeople who also own other local businesses, commercial businesses, for example. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 54 Does the Federal Reserve’s concern about mixing banking and commerce extend to the common individual or family ownership of banks and non-financial commercial businesses? Mr. BERNANKE. I don’t believe so, as long as the businesses are legally separate. I may be mistaken, but that’s my understanding. Mr. MATHESON. But I am talking about common ownership in terms of a local bank and—so you’re not concerned about the mix- ing of banking and commerce with the same ownership? Mr. BERNANKE. I don’t think so, but I would like to think about it a bit more. Mr. MATHESON. Okay. I would encourage that, as we hear these discussions about banking and commerce, and obviously you’ve heard from other colleagues on the committee related to the indus- trial loan companies there may be a broader issue out there in other constituencies that, you know, those same discussions maybe should be looking at. And in terms of the industrial loan company discussions, you know, the state I’m from is the State of Utah. What I would suggest is that we have an even-handed approach in looking at this issue, in trying to make sure that when it comes to the information that is put out about the issue that it is accu- rate, and we can tone down some of the rhetoric. I think an even-handed approach of looking at this serves every- body, both this committee and the Federal Reserve and everybody in the best way possible, and I encourage the tone of that discus- sion to take on that. That would be my other suggestion for you, as you take your role as chairman. With that, Mr. Chairman, I yield back the balance of my time. Chairman OXLEY. The gentleman yields back. The gentleman from Georgia, Mr. Scott. Mr. SCOTT. Thank you. Thank you, Mr. Chairman. Mr. Chairman, I certainly want to welcome you to your new posi- tion, and you come with such great credentials from Harvard, MIT, Princeton. It seems like the only one you’re missing is the Wharton School of Finance at the University of Pennsylvania. Of course, that’s where I graduated from, but I won’t hold that against you, because you have the one sterling criterion, which is you’re a native of my home state of Georgia, so as a fellow Geor- gian, I welcome you. Let me start out by first of all reading something you said, which I think is very interesting, concerning your independence. You made a very, very good statement. You said in your hearings, you stated, ‘‘I will be strictly inde- pendent of all political influences and will be guided solely by my mandate from Congress and the public interest’’—which is very good. I want to give you this opportunity to begin that process. This deals with our tax relief package, the tax cuts, the perma- nency of tax cuts at a time of great uncertainty and great demands. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 55 You’re looking at one here who supported the tax cuts, the ear- lier tax cut relief because I thought they did well in stimulating the economy, and they did so. But permanency at a time when our fiscal health is in dire straits, at a time of great uncertainty—we don’t know what energy costs are going to be; we don’t understand and fully grasp the meaning of what the war on terror is going to be; we’ve not been able to adequately even respond to natural disasters like Katrina at a time when global warming says there are going to be more of these. In order to offset these tax cuts, we’re going to have to cut dire programs of the American people—Medicare, Medicaid, 45 mil- lion Americans have no health insurance at all; on top of that, we are borrowing 45 percent of our debt from foreign countries, over half of it from China, India, and Japan, at extraordinary interest rates in and of themselves, and that debt has gone, just to our for- eigners, from 1 to 20 trillion dollars in just the last 2 years. My point is, if you’re going to really respond to the mandate of Congress and the public interest, I urge you to speak independ- ently. When the President asks you, ‘‘Is this the time,’’ not whether tax cuts are good, not whether making them permanent is good, but given the crisis, the situation that our financial health is in, ‘‘This is not the time to make them permanent, Mr. President.’’ Would you do that? Mr. BERNANKE. I stand by my earlier statement that I’m going to be independent and nonpartisan, and I think making a specific recommendation as to a specific tax— Mr. SCOTT. Well, would you make the recommendations? Would you make the case? You are our number one economist. You are the person that we all look to for that advice. You can’t just sit there and say, ‘‘I’m not going to.’’ I mean, you’re not there to just sit on the middle of the fence and not do anything. Mr. BERNANKE. No, but— Mr. SCOTT. These are serious issues, and I believe that given your background and your interest—and I’ve read your background very thoroughly—I’m just urging you—and I’ll take back; I’m not going to put you on the spot, and I understand where you’re coming from on that. But I just urge you to use your position to speak to the critical nature of the financial health we’re in, that it would be foolhardy to make a permanent tax cut on issues at times when this Nation is in such a perilous state with our financial health and our debt and all the other things that I had mentioned. Now, before my time is up, I do want to go to another point that you talked earlier about, the dual mission of fighting inflation and growing employment. Those are the two dual missions of your mis- sion. And you spoke earlier about your affection for targeting inflation, or targeted inflation, and you said that that would not take away from the other side of the mission of employment. What I’d like to urge you to do is to target employment. If you’re going to have a targeting of inflation as a part of your portfolio as you come in, which is good, I urge you to have a targeting of em- VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 56 ployment, because again, let me just tell you or show you just a few of the statistics here, and I’ll be very brief— Chairman OXLEY. The gentleman’s time has expired. Will you wrap up? Mr. SCOTT. Yes, I will—that there are 37 million people who are classified as poor now that were not in 2000, and over that same period, there was a 24 percent increase in the number of families considered desperately poor, and that there is another burgeoning class of folks who have just given up, who are discouraged, and are not even seeking employment. We have a terrible problem in unemployment in this country. It is not a rosy picture. And what I urge to you would be, just as you target inflation, let’s have some targeting of employment. Chairman OXLEY. The gentleman from Alabama, Mr. Davis. Mr. DAVIS. Thank you, Mr. Chairman. Chairman Bernanke, welcome to the committee and thank you for being indulgent enough to stay past your allotted and appointed time. Let me come at Mr. Scott’s first question from a slightly different angle. As you’ve, I think, already figured out about Washington, D.C., most of our policy arguments tend to get reduced to very stark ei- ther/or propositions. People on my side of the aisle tend to be very skeptical of the tax cuts and tend to say that, all things being equal, we’d just as soon repeal them. People on the other side of the aisle say that the tax cuts in their entirety are indispensable to the health of the economy. There obviously is a middle ground in which a significant portion of the tax cuts would be retained, but there would be some adjust- ment in the marginal rates. For example, if my numbers are right, the average person earn- ing over $1 million gets roughly $103-105,000 in tax relief a year. You could shave that number down slightly by making a few ad- justments to the marginal rate go down to say 85 to 90. That per- son will still get a substantial tax cut. The budget would recoup enough money to altogether pay for the cost of some of the budget cuts that have been debated the last few years. I fully understand that your function is not to weigh into given disputes about policy choices, but let me ask you a broader ques- tion. Can we make marginal readjustments to the tax rate without doing violence to the economic recovery? Mr. BERNANKE. Again, if I may address the former question as well, I do think it’s very important for me to talk about the broad issues here, and I think again the fundamental issue is the size of the Government budget. Now, you asked me if you could make marginal changes to the tax. You can make marginal changes probably to anything. You could also make marginal changes to spending, of course, you know. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 57 And my point only is that while it’s up to me, I think, to point out the necessity of maintaining fiscal discipline over the long pe- riod, I just don’t want to be injecting myself into the specifics of how to do that. I think that’s Congress’s prerogative. Mr. DAVIS. And I fully agree with you and understand that, but I just want to isolate that point and don’t want to stretch out things by asking you to repeat it. But it seems you agree that of course, as with anything, you can make marginal changes without doing violence. That is not a minor observation in the context of these debates because, as you know, people on one side of the debate tend to say, ‘‘No, we need every single dime from these Medicaid cuts; we need every dime from these Medicare cuts; and we can’t forego one inch of the tax cuts because it would slow down the economy.’’ That’s the way the argument plays out. Let me ask you a secondary question. Mr. Frank asked you a number of questions earlier about the phenomenon of income and equality, and I understood you to en- dorse Chairman Greenspan’s observations that we have a problem in that area. Once again, we put it in context. There’s an interesting phe- nomenon that we see in our budget debates. It’s the phenomenon of cuts that are inconsequential as far as the deficit goes, but are enormously significant to the affected indi- viduals. Classic example: the Congress, by a very narrow margin a few weeks ago, approved a budget reconciliation package that saves about $3.5 billion worth of Medicaid, as you know, a fractional amount in a $2.9 trillion discretionary budget. At the same time, even that small amount it’s estimated will raise costs and premiums for 13 million Medicaid recipients. CBO estimates that the effect of that will be 60,000 people losing their Medicaid coverage. So the question that I would pose to you is, should we be con- cerned, or what’s your reaction to this phenomenon of budget cuts that are frankly inconsequential as far as the deficit goes but that could widen the economic inequality which you decry? Mr. BERNANKE. Well, every cut is going to be painful to some- body. I mean, it’s really, you know— Mr. DAVIS. But some could widen the inequality, couldn’t they? Mr. BERNANKE. I think that, again, without being too specific, I think the question is what is the best way to use the money, and there may be different programs that are more effective than oth- ers. Mr. DAVIS. But the last point, as my time runs out, you would acknowledge that some policy choices by the Congress could have the effect of actually exacerbating the income inequality which you were concerned about? Obviously, making poor people pay more for health care takes more of their discretionary income away and that could tend to widen the gulf between rich and poor. You would agree with that, I assume? VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 58 Mr. BERNANKE. There may be different ways of paying for a cut, though. There could be ways you could transfer from some other pro- gram, so— Mr. DAVIS. Right, but there are ways of paying for it that widen inequality. Mr. BERNANKE. This is why these are value judgments, and there’s no scientific way to answer your question. It’s up to the Congress to decide what are the priorities that we want to address, be it on the tax side or on the spending side. This is what the people have elected you to do, and clearly it’s your responsibility. Mr. DAVIS. Thank you— Chairman OXLEY. The gentleman’s time has expired. And batting cleanup, the gentleman from Missouri, Mr. Cleaver. Mr. CLEAVER. Thank you, Mr. Chairman. Mr. Bernanke, Mr. Chairman, do you support the seniority sys- tem in Congress that made me the last person to have the chance to discuss with you, and do you believe that it contributes to, let’s say, inflation of the bladder if— Go ahead, Mr. Chairman. Mr. BERNANKE. I’m very interested in hearing your question, sir. Mr. CLEAVER. I am extremely concerned about the debt, as I think many of my colleagues have expressed, with China, Japan, and the U.K. holding $1.3 trillion of that debt. What impact on the U.S. economy would take place if China made the decision that they would invest internally or in Europe rather than the U.S.? If they called in their debt, what happens to the U.S. economy? The Chinese hold like $255 billion of our debt. What happens if they call it in? Mr. BERNANKE. Congressman, China is not holding our debt be- cause they want to be nice to us. They’re holding it because they value the fact that this debt is being traded in deep, liquid, and safe financial markets, and so their own interest is in holding this debt. And despite occasional rumors of diversification and the like, generally speaking, there’s not been, as far as I know, any signifi- cant changes in the amount of debt, U.S. debt or U.S. dollar-de- nominated assets being held by China, and any sharp change really would not be in their interest to undertake. I think that the financial markets are really very deep and liquid for U.S. dollar assets. If you include not only U.S. Government debt, GSE debt, but also highly rated corporate debt, for example, the size of the market for high-rated U.S. dollar credit instruments is perhaps $40 trillion, something along those lines, which means that China is only hold- ing a few percentage points of that debt. So I’m not deeply concerned about this issue. I think that real- istic changes in China’s portfolio are not going to have major im- pacts on U.S. asset prices or interest rates. The issue is not so much the change in China’s portfolio. The issue really is the fact that we are consuming more than we are producing domestically. VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY 59 That means that foreign debt is increasing, and there may come a period or a time when foreigners are not willing to continue to add to their holdings of U.S. dollar assets, and that will in turn lead to perhaps an uncomfortable adjustment in the current ac- count. Mr. CLEAVER. That’s where I’m going. Mr. BERNANKE. Right. It has not so much to do with the portfolio choices in the short run. It’s really whether over the long period, are foreigners willing to keep financing our consumption, our imports. So I think it’s impor- tant, and we’re probably in agreement, I think, it’s important over a period of time for us to begin to bring down that current account deficit, and I think that a combination of increased U.S. national savings, greater demand in other countries, and more flexibility in exchange rates, put all together, will allow us over a period of time to bring the current account deficit down to a somewhat lower level. Mr. CLEAVER. This is my final point here. So if OPEC and China and whomever else made a decision that they would in fact discontinue buying U.S. paper, you’re saying that it would have little consequence on the U.S. economy right now, today? Mr. BERNANKE. You envision them selling everything they cur- rently own? You’ve got to sell to somebody. Mr. CLEAVER. Yes. Mr. BERNANKE. Somebody else has to hold those assets. No, I think it’s less to do with the dollar portfolio than it has to do with the fact that over a period of time, we have to rely on for- eign financing for the current account deficit. I don’t think that for- eigners will in some sense refuse to finance it, but they may charge a higher price, and that higher price in turn would feed back on the U.S. economy in ways that might be uncomfortable. Chairman OXLEY. The gentleman’s time has expired. Mr. CLEAVER. Thank you. Chairman OXLEY. Before dismissing our distinguished witness, the Chair notes that some members may have additional questions for the Chairman which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to the witness and to place his response in the record. Mr. Chairman, we have been most appreciative of your time and the quality of the responses that you gave to our committee. You can tell by the variety of questions from the members from all over the country that this is a worthwhile exercise and your participation is most appreciated. The committee stands adjourned. 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114 VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00118 Fmt 6601 Sfmt 6601 G:\DOCS\28024.TXT RODNEY 350.42082 115 VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00119 Fmt 6601 Sfmt 6601 G:\DOCS\28024.TXT RODNEY 450.42082 116 VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00120 Fmt 6601 Sfmt 6601 G:\DOCS\28024.TXT RODNEY 550.42082 117 VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00121 Fmt 6601 Sfmt 6601 G:\DOCS\28024.TXT RODNEY 650.42082 118 VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00122 Fmt 6601 Sfmt 6601 G:\DOCS\28024.TXT RODNEY 750.42082 119 VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00123 Fmt 6601 Sfmt 6601 G:\DOCS\28024.TXT RODNEY 850.42082 120 VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00124 Fmt 6601 Sfmt 6601 G:\DOCS\28024.TXT RODNEY 950.42082 121 VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00125 Fmt 6601 Sfmt 6601 G:\DOCS\28024.TXT RODNEY 060.42082 122 VerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00126 Fmt 6601 Sfmt 6601 G:\DOCS\28024.TXT RODNEY 160.42082

Ben S. Bernanke (2006, February 14). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20060215_chair_monetary_policy_and_the_state_of_the

@misc{wtfs_testimony_20060215_chair_monetary_policy_and_the_state_of_the,
  author = {Ben S. Bernanke},
  title = {Congressional Testimony},
  year = {2006},
  month = {Feb},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20060215_chair_monetary_policy_and_the_state_of_the},
  note = {Retrieved via When the Fed Speaks corpus}
}