Congressional Testimony

MONETARY POLICY AND THE STATE OF THE ECONOMY HEARING BEFORETHE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION FEBRUARY 24, 2010 Printed for the use of the Committee on Financial Services Serial No. 111–102 ( U.S. GOVERNMENT PRINTING OFFICE 56–766 PDF WASHINGTON : 2010 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) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\56766.TXT TERRIE HOUSE COMMITTEE ON FINANCIAL SERVICES BARNEY FRANK, Massachusetts, Chairman PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama MAXINE WATERS, California MICHAEL N. CASTLE, Delaware CAROLYN B. MALONEY, New York PETER T. KING, New York LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California NYDIA M. VELA´ZQUEZ, New York FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina RON PAUL, Texas GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois BRAD SHERMAN, California WALTER B. JONES, JR., North Carolina GREGORY W. MEEKS, New York JUDY BIGGERT, Illinois DENNIS MOORE, Kansas GARY G. MILLER, California MICHAEL E. CAPUANO, Massachusetts SHELLEY MOORE CAPITO, West Virginia RUBE´N HINOJOSA, Texas JEB HENSARLING, Texas WM. LACY CLAY, Missouri SCOTT GARRETT, New Jersey CAROLYN MCCARTHY, New York J. GRESHAM BARRETT, South Carolina JOE BACA, California JIM GERLACH, Pennsylvania STEPHEN F. LYNCH, Massachusetts RANDY NEUGEBAUER, Texas BRAD MILLER, North Carolina TOM PRICE, Georgia DAVID SCOTT, Georgia PATRICK T. MCHENRY, North Carolina AL GREEN, Texas JOHN CAMPBELL, California EMANUEL CLEAVER, Missouri ADAM PUTNAM, Florida MELISSA L. BEAN, Illinois MICHELE BACHMANN, Minnesota GWEN MOORE, Wisconsin KENNY MARCHANT, Texas PAUL W. HODES, New Hampshire THADDEUS G. McCOTTER, Michigan KEITH ELLISON, Minnesota KEVIN McCARTHY, California RON KLEIN, Florida BILL POSEY, Florida CHARLES A. WILSON, Ohio LYNN JENKINS, Kansas ED PERLMUTTER, Colorado CHRISTOPHER LEE, New York JOE DONNELLY, Indiana ERIK PAULSEN, Minnesota BILL FOSTER, Illinois LEONARD LANCE, New Jersey ANDRE´ CARSON, Indiana JACKIE SPEIER, California TRAVIS CHILDERS, Mississippi WALT MINNICK, Idaho JOHN ADLER, New Jersey MARY JO KILROY, Ohio STEVE DRIEHAUS, Ohio SUZANNE KOSMAS, Florida ALAN GRAYSON, Florida JIM HIMES, Connecticut GARY PETERS, Michigan DAN MAFFEI, New York JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel (II) VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\56766.TXT TERRIE C O N T E N T S Page Hearing held on: February 24, 2010 ............................................................................................ 1 Appendix: February 24, 2010 ............................................................................................ 63 WITNESSES WEDNESDAY, FEBRUARY 24, 2010 Bernanke, Hon. Ben S., Chairman, Board of Governors of the Federal Reserve System ................................................................................................................... 7 APPENDIX Prepared statements: Carson, Hon. Andre .......................................................................................... 64 Foster, Hon. Bill ............................................................................................... 65 Paul, Hon. Ron .................................................................................................. 67 Watt, Hon. Melvin ............................................................................................ 68 Bernanke, Hon. Ben S. ..................................................................................... 71 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Green, Hon. Al: Final Vote Results for Roll Call 681 on H.R. 1424 ........................................ 83 Bernanke, Hon. Ben S.: Monetary Policy Report to the Congress, dated February 24, 2010 ............. 87 (III) VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 K:\DOCS\56766.TXT TERRIE VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\56766.TXT TERRIE MONETARY POLICY AND THE STATE OF THE ECONOMY Wednesday, February 24, 2010 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to notice, at 10 a.m., in room 2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. Members present: Representatives Frank, Kanjorski, Waters, Maloney, Gutierrez, Velazquez, Watt, Sherman, Meeks, Moore of Kansas, Hinojosa, Clay, Baca, Lynch, Miller of North Carolina, Scott, Green, Cleaver, Bean, Klein, Wilson, Perlmutter, Donnelly, Foster, Carson, Minnick, Adler, Kosmas, Grayson, Himes, Peters; Bachus, Castle, Royce, Paul, Manzullo, Biggert, Miller of Cali- fornia, Capito, Hensarling, Garrett, Neugebauer, McHenry, Camp- bell, Putnam, Bachmann, Marchant, McCotter, McCarthy of Cali- fornia, Posey, Jenkins, Lee, Paulsen, and Lance. The CHAIRMAN. This is the semi-annual hearing held pursuant to the Humphrey-Hawkins Act. I should note that Mr. Hawkins is represented here in the fact that his successor in Congress is our colleague from Los Angeles, Ms. Waters. We are in the direct Hum- phrey-Hawkins’ succession here. This is the semi-annual hearing. As people know, the Chairman of the Federal Reserve testifies before both the House and the Sen- ate. He goes first here. Tomorrow, he goes to the Senate. This is one of those occasions when we can act first and have confidence that the Senate will in fact act second. We cannot al- ways make that assumption, unfortunately, but we can in this case, because all they have to do is sit there and listen. We will begin. Under the rules of the committee, each side will have 8 minutes. We want to move quickly. We have divided up the time according to each side’s decision. We will begin, and I will yield 21⁄ 2 minutes to my colleague from Illinois, Mr. Foster, to begin the statements. Mr. FOSTER. Thank you, Mr. Chairman. As a scientist, I have al- ways found that numbers are more illuminating than ideology and talking points, so on the chart that I believe will be displayed on the monitors in a moment, I have plotted some interesting numbers that I downloaded from the Flow of Funds Report that the Federal Reserve Web site updates each quarter. It shows that from July 2007 to March 2009, roughly the last year-and-a-half of the previous Administration, the net worth of households in the United States dropped by $17.5 trillion. (1) VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 2 Our economy is suffering from the aftermath of the largest de- struction of wealth in human history. Under Democratic leadership, since the passage of the stimulus and other important initiatives, this trend has been reversed. Our economy is now stabilized and household net worth has increased by more than $5 trillion. The $17.5 trillion of wealth destroyed in the last months of the previous Administration is so large that it is hard to get your arms around. Just how large is $17.5 trillion: $17.5 trillion is more than 1.5 times the entire U.S. national debt; $17.5 trillion is more than 1 year of the U.S. GDP, which is roughly $14 trillion; $17.5 trillion is more than $57,000 for every man, woman, and child in the United States; and finally, $17.5 trillion is about 200 times larger than the anticipated losses in Fannie Mae and Freddie Mac. Let’s talk for a moment about the return on investment of the stimulus. When the dust settles, the total cost to taxpayers of the stimulus, TARP, and the other emergency interventions in our economy will be roughly $1 trillion. In response, household wealth has rebounded by $5 trillion. I’m a businessman as well as a scientist and it seems to me that an investment of roughly $1 trillion that generates an increase in wealth of $5 trillion represents a pretty good return on investment. If I could have the next slide, let’s talk about job loss and unem- ployment. A year ago, over 700,000 jobs were being lost every month and the job losses were increasing by 100,000 more jobs lost each additional month. The economy was spiraling toward another great Depression. After the passage of the stimulus and the other emergency meas- ures to rescue our economy, job losses started decreasing promptly and job growth is said to turn positive by 2010. Unfortunately, job recovery always takes longer than people would like. Most downturns take 1 to 2 years, if you look at them in the stock market, and 2 to 3 years if you look at unemployment. That is just the way it is. It is very difficult for a reasonable person to look at this data and conclude that Democratic policies have not been effective at dealing with job loss. Finally, how did we get here? The CHAIRMAN. The gentleman’s time has expired. Mr. WATT. Mr. Chairman, might I yield him some of my time? The CHAIRMAN. Yes, does the gentleman want to yield 30 sec- onds? Mr. WATT. Yes, so he can finish. It is such a powerful statement he is making. The CHAIRMAN. I thank the gentleman from North Carolina. Mr. FOSTER. Finally, I would just like to make one last comment on how did we get here. It is important to understand that the $17.5 trillion of destruction of household wealth that our country just experienced was not the result of a normal business cycle. It was the result of an ideologically driven deregulation of the finan- cial markets. Most importantly, it will happen again if we do not understand and acknowledge what happened and take steps to prevent it from recurring. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 3 Thank you. I yield back. The CHAIRMAN. I thank the gentleman from North Carolina. The gentleman from North Carolina will have 2 minutes and 10 sec- onds. The gentleman from Texas is now recognized, the ranking mem- ber of the Subcommittee on Domestic and International Monetary Policy, for 3 minutes. Dr. PAUL. Thank you, Mr. Chairman. Welcome, Chairman Bernanke. I am interested in the suggestion that Mr. Volcker has made re- cently about curtailing some of the investment banking risk they are taking. In many ways, I think he brings up a very important subject and touches on it, but I think it is much bigger than what he has addressed. Back when we repealed Glass-Steagall, I voted against this, even though as a free market person, I endorse the concept that banks ought to be allowed to do commercial and investment banking. The real culprit, of course, is the insurance, the guarantee be- hind this, and the system of money that we have. In a free market, of course, the insurance would not be guaran- teed by the taxpayers or by the Federal Reserve creating more money. The FDIC is an encouragement of moral hazard as well. I think the Congress contributes to this by pushing loans on indi- viduals who do not qualify, and I think the Congress has some re- sponsibility there, too. I also think there has been a moral hazard caused by the tradi- tion of a line of credit to Fannie Mae and Freddie Mac and this ex- pectation of artificially low interest rates helped form the housing bubble, but also the concept still persists, even though it has been talked about, that it is too-big-to-fail. It exists and nobody is going to walk away. There is always this guarantee that the government will be there along with the Federal Reserve, the Treasury, and the taxpayers to bail out anybody that looks like it is going to shake it up. It does not matter that the bad debt and the burden is dumped on the American taxpayer and on the value of the dollar, but it is still there. ‘‘Too-big-to-fail’’ creates a tremendous moral hazard. Of course, the real moral hazard over the many decades has been the deception put into the markets by the Federal Reserve creating artificially low interest rates, pretending there has been savings, pretending there is actually capital out there, and this is what causes the financial bubbles, and this is the moral hazard because people believe something that is not true, and it leads to the prob- lems we have today because it is unsustainable. It works for a while, but eventually, we have to pay the price. The moral hazard catches up with us and then we see the disinte- gration of the system that we have artificially created. We are in a situation coming up soon, even though we have been already in a financial crisis, we are going to see this get much worse and we are going to have to address this subject of the mone- tary system and whether we want to have a system that does not guarantee that we will always bail out all the banks and dump these bad debts on the people, and that it is filled with moral haz- ard, the whole system is. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 4 When that time comes, I hope we come to our senses and decide that the free market works pretty well. It gets rid of these prob- lems much sooner and much smoother than when it becomes politi- cized that some firms get bailed out and others get punished. It is an endless battle. Hopefully, we will see the light and do a better job in the future. The CHAIRMAN. The gentleman from North Carolina is now rec- ognized for 2 minutes and 10 seconds. Mr. WATT. Thank you, Mr. Chairman. Over the last two breaks in August of last year and the Presi- dent’s break this year, Mr. Meeks, as chairman of the International Monetary Policy Subcommittee, and myself as chairman of the Do- mestic Monetary Policy Subcommittee have traveled and met with Central Bank governors, finance ministers and leaders in Tunisia, Rwanda, Zimbabwe, Senegal, Nigeria, Ethiopia, Botswana, and The Gambia, to try to figure out what impact this economic downturn is having on African countries. Today, we get a chance to hear the impact it is having on our own domestic economy and what we can do to try to address that impact. Against that backdrop, the question I would really like to have addressed today is what tools the Fed has in its tool kit to reverse the trends and spur job growth in the 12th District of North Caro- lina and elsewhere in America. I asked a similar question last year at the Humphrey-Hawkins’ hearing, and at that time, Chairman Bernanke vowed to take strong and aggressive action to halt the economic slide and improve job growth. One year later, unemployment has gotten worse, although there are small signs of recovery. Today, I hope to hear specifics on the Fed’s plan to spur job growth and meet the other half of this dual mandate, fostering maximum sustainable employment. If there are things Congress can and should do to help, we should be ready to assist with that agenda. With that, Mr. Chairman, I yield back and I will submit the rest of my statement for the record. The CHAIRMAN. There are a couple of 1-minute statements. The gentleman from Florida, Mr. Posey, and if she is ready next, the gentlewoman from Kansas, Ms. Jenkins. The gentleman from Florida is recognized for 1 minute for the Minority. Mr. POSEY. Thank you, Mr. Chairman. Chairman Bernanke, the Fed’s decision to raise the discount rate can be interpreted that the Federal Reserve will raise the Federal fund’s rate in the months ahead, which would suggest economic re- covery is under way, yet the road ahead seems difficult. The 2010 Economic Report of the President states ‘‘It will take a prolonged and robust GDP—I think they meant GOP—expansion to eliminate the jobs’ deficit that has opened up over the course of the recession.’’ A question specifically is what are you looking for, and once again, what is the plan? I do not see how recovery can be defined without reducing unemployment and expanding GDP. It would also VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 5 be helpful to know how optimistic the Fed is for GDP expansion in light of some of the job-killing policies coming out of Washington. For example, I recently learned the President’s budget would kill our human space exploration program and send our high-skilled jobs to Russia. Thank you, Mr. Chairman. The CHAIRMAN. The gentlewoman from Kansas for 1 minute. Ms. JENKINS. Thank you, Mr. Chairman. Over the past 18 months, the Fed has taken extraordinary steps to address the financial downturn. Last year, Chairman Bernanke spoke about the importance of reducing our deficit spending and making a real commitment to fiscal discipline. Today, the deficit exceeds 10 percent of GDP and as evidenced by the Administration’s budget proposal, they are not making such a commitment. Since joining this committee, my priority has been to protect the taxpayers by ending bailouts and preventing future taxpayer-fund- ed bailouts. I have concerns about TARP, and I am interested to hear how the Chairman intends to pull back on the increased liquidity with- out further disrupting our markets. I am also interested to learn if he believes a true economic recov- ery can occur with continued excessive deficits. I yield back the remainder of my time. The CHAIRMAN. The gentleman from New York will now be rec- ognized for 1 minute, and then we will get to the gentlemen from Minnesota and New Jersey. Mr. LEE. Thank you, Mr. Chairman. Chairman Bernanke, thank you for coming before the committee today. I know there will be a number of important issues that you will be raising over the course of your testimony, but I wanted to highlight just a few specific ones that I hope you can address dur- ing your discussion. It is important for us to hear your thoughts on the significant level of spending that is currently going on in this Congress. As you know, we just raised the debt ceiling by another $1.9 tril- lion, and whether you believe Fannie Mae/Freddie Mac, that expo- sure, should be factored into the debt ceiling that we currently live by. I am also increasingly concerned with discussions by rating firms in which the AAA rating that this country currently enjoys is in jeopardy and when and if do you think that will be downgraded. We simply cannot ignore what we are doing in terms of spending in this country and the impact it may have on us. I look forward to you replying to those through your testimony. The CHAIRMAN. I now recognize myself. I am told I have 2 min- utes and 50 seconds. I want to begin by responding to that last point. The notion that America will never not pay its debts is without any foundation. I frankly regard it as very irresponsible for anyone here to suggest there could ever be any such failure. Inviting the rating agencies without any fact or basis whatever to raise our interest rates would be a mistake. The rating agencies VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 6 have done enough damage. I do not doubt for one second that this Congress will fully fund any obligations we have internationally. Secondly, I did want to respond on bailouts. I understand the nostalgia some of my Republican friends have for the past Adminis- tration, which is when the bailouts happened. Every single activity of the Federal Government that is now going forward that is called a ‘‘bailout’’ was begun by the Bush Ad- ministration, in most cases, for very good reasons, but by the Bush Administration and its high economic officials, in some cases in conjunction with Congress, in other cases, on their own, without any congressional input, like Bear Stearns and the first part of AIG. I am not aware of any bailouts that were initiated since Presi- dent Obama took over in this Administration. Next, I want to talk about jobs. One of my Republican colleagues likes to ask, where are the jobs? I guess they all do. They tend to talk from the same notes. I do not know where they are. Maybe they are in Crawford. Here is the figure that we have on pages 18 and 19 of the Monetary Re- port. Non-farm private payroll employment fell 725,000 jobs per month on average from January to April 2009. I know it is the Re- publican view that everything bad in America started on January 21, 2009 and before that, everything was wonderful. No rational individual claims that the Obama Administration is responsible for things that happened in January, February, and April of this year. By November to January, 2009 and 2010, for which the Obama Administration can get some responsibility, and after the Economic Recovery bill was passed, we averaged a loss of 20,000 jobs per month. That means we got a positive swing of 700,000 jobs. Unfor- tunately, it is not the most important swing, which is to a plus. What that means is by these figures in the Federal Reserve, for the first 3 months of 2009, we lost 2.1-something million jobs, and in the last 3 months—November, December, January—we lost 60,000 jobs. The answer is 2.1 million jobs disappeared and have not yet come back because of the economy that the Obama Administration inherited. I do note that the Chairman twice notes the positive impact of the stimulus on the economy. There are a number of things, but both in his statements and in the Monetary Report, as he lists the reasons why the economy has gotten better, the stimulus is twice mentioned. It is possible to debate what was the best way to do the stimulus. Some people like to exaggerate the extent to which it was spend- ing, including some tax deduction—I think not too effective tax de- duction, but no sensible human being can deny the stimulus had a positive effect. The question is, going forward, can we improve on that positive effect. Now I recognize the gentleman from Minnesota for 1 minute. Mr. PAULSEN. Thank you, Mr. Chairman, for being here this morning as well. I have two issues of particular concern and hope- fully, you will be able to address them. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 7 The first is the lack of available credit for the small business community and the fear that if the Fed raises interest rates in the near term, it will further erode credit opportunities for small busi- ness and exacerbate that problem. I would like to hear about the potential of the Fed Reserve in- creasing rates in the near future and ensuring that credit for small businesses is going to be available for job growth. Second, the issue of the explosion of the deficit and the debt, and the warning signals are getting louder that our fiscal situation is putting increasing pressure on our bond rating. I would like your opinion on the long-term impact of not address- ing our debt as it relates to our bond rating, but more importantly, the impact it would have on our global competitiveness. Thank you and I do look forward to your testimony. The CHAIRMAN. The gentleman from New Jersey for the final minute. Mr. LANCE. Thank you for coming back to our committee, Chair- man Bernanke. Last week, like most of our colleagues, I was back home as part of the President’s Day District work period. As I traveled through- out New Jersey’s 7th Congressional District in northern and cen- tral New Jersey, I was speaking with constituents and meeting with small businesses, and I heard a common refrain, people are deeply concerned about the state of the United States’ economy. Most New Jerseyans believe we are still mired in a deep reces- sion and they are extremely concerned about job prospects and in- come worries. These concerns, which I believe exist across the Nation, will like- ly lead to curbed consumer spending for some time to come. I hope, sir, in your testimony to the committee this morning, you will address this issue and what the Fed intends to do moving for- ward to boost consumer confidence, which after all, constitutes 70 percent of our economic activity. Thank you, Mr. Chairman. The CHAIRMAN. Thank you. That concludes the opening state- ments. I thank all the members for adhering to the time limits. Mr. Chairman, we will not hold you to the 5 minutes. I think the economy probably deserves a 3 or 4 extra minutes this morning, so you take whatever time you think is necessary to tell us how you are going to fix everything. STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIR- MAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. BERNANKE. Thank you, Mr. Chairman. I will try not to abuse that. Chairman Frank, Ranking Member Bachus, and other members of the committee, I am pleased to present the Federal Reserve’s semi-annual Monetary Policy Report to the Congress. I will begin today with some comments on the outlook for the economy and for monetary policy, then touch briefly on several other important issues. Although the recession officially began more than 2 years ago, U.S. economic activity contracted particularly sharply following the VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 8 intensification of the global financial crisis in the fall of 2008. Con- certed efforts by the Federal Reserve, the Treasury Department, and other U.S. authorities to stabilize the financial system, to- gether with highly stimulative monetary and fiscal policies, helped arrest the decline and are supporting a nascent economic recovery. Indeed, the U.S. economy expanded at about a 4 percent annual rate during the second half of last year. A significant portion of that growth, however, can be attributed to the progress that firms have made in working down unwanted inventories of unsold goods, which have left them more willing to increase production. As the impetus provided by the inventory cycle is temporary, and as the fiscal support for economic growth will likely diminish later this year, a sustained recovery will depend on continued growth in pri- vate-sector final demand for goods and services. Private-sector final demand does seem to be growing at a mod- erate pace, buoyed in part by a general improvement in financial conditions. In particular, consumer spending has recently picked up, reflecting gains in real disposable income and household wealth and tentative signs of stabilization in the labor market. Business investment in equipment and software has risen significantly. And international trade—supported by a recovery in the economies of many of our trading partners—is rebounding from its deep contrac- tion of a year ago. However, starts of single-family homes, which rose notably this past spring, have recently been roughly flat, and commercial construction is declining sharply, reflecting poor fun- damentals and continued difficulty in obtaining financing. The job market has been hit especially hard by the recession, as employers reacted to sharp sales declines and concerns about credit availability by deeply cutting their workforces in late 2008 and in 2009. Some recent indicators suggest that the deterioration in the labor market is abating: Job losses have slowed considerably, and the number of full-time jobs in manufacturing rose modestly in January. Initial claims for unemployment insurance have contin- ued to trend lower, and the temporary services industry, often con- sidered a bellwether for the employment outlook, has been expand- ing steadily since October. Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce. Of particular concern be- cause of its long-term implications for worker’s skills and wages, is the increasing incidence of long-term unemployment; indeed, more than 40 percent of the unemployed have been out of work for 6 months or more, nearly double the share of a year ago. Increases in energy prices resulted in a pick-up in consumer price inflation in the second half of last year, but oil prices have flattened out over recent months, and most indicators suggest that inflation likely will be subdued for some time. Slack in labor and product markets has reduced wage and price pressures in most markets, and sharp increases in productivity have further reduced producers’ unit labor costs. The cost of shelter, which receives a heavy weight in consumer price indexes, is rising very slowly, re- flecting high vacancy rates. In addition, according to most meas- ures, longer-term inflation expectations have remained relatively stable. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 9 The improvement in financial markets that began last spring continues. Conditions in short-term funding markets have returned to near pre-crisis levels. Many (mostly larger) firms have been able to issue corporate bonds or new equity and do not seem to be ham- pered by a lack of credit. In contrast, bank lending continues to contract, reflecting both tightened lending standards and weak de- mand for credit amid uncertain economic prospects. In conjunction with the January meeting of the Federal Open Market Committee, Board members and Reserve Bank presidents prepared projections for economic growth, unemployment, and in- flation for the years 2010 through 2012 and over the longer run. The contours of these forecasts are broadly similar to those I re- ported to the Congress last July. FOMC participants continue to anticipate a moderate pace of economic recovery, with economic growth of roughly 3 to 31⁄ 2 percent in 2010 and 31⁄ 2 to 41⁄ 2 percent in 2011. Consistent with moderate economic growth, participants expect the unemployment rate to decline only slowly, to a range of roughly 61⁄ 2 to 71⁄ 2 percent by the end of 2012, still well above their estimate of the long-run sustainable rate of about 5 percent. Infla- tion is expected to remain subdued, with consumer prices rising at rates between 1 and 2 percent in 2010 through 2012. In the longer term, inflation is expected to be between 13⁄ 4 and 2 percent, the range that most FOMC participants judge to be consistent with the Federal Reserve’s dual mandate of price stability and maximum employment. Over the past year, the Federal Reserve has employed a wide array of tools to promote economic recovery and preserve price sta- bility. The target for the Federal funds rate has been maintained at a historically low range of 0 to 1⁄ 4 percent since December 2008. The FOMC continues to anticipate that economic conditions—in- cluding low rates of resource utilization, subdued inflation trends, and stable inflation expectations—are likely to warrant exception- ally low levels of the Federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. We have been gradually slowing the pace of these purchases in order to promote a smooth transition in markets and anticipate that these transactions will be completed by the end of March. The FOMC will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial mar- kets. In response to the substantial improvements in the functioning of most financial markets, the Federal Reserve is winding down the special liquidity facilities created during the crisis. On February 1st, a number of these facilities, including credit facilities for pri- mary dealers, lending programs intended to help stabilize money market mutual funds and the commercial paper market, and tem- porary liquidity swap lines with foreign central banks, were all al- lowed to expire. The only remaining lending program for multiple borrowers created under the Federal Reserve’s emergency authori- ties, the Term Asset-Backed Securities Loan Facility or TALF, is scheduled to close on March 31st for loans backed by all types of VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 10 collateral except newly issued commercial mortgage-backed securi- ties (CMBS) and on June 30th, for loans backed by newly issued CMBS. In addition to closing its special facilities, the Federal Reserve is normalizing its lending to commercial banks through the discount window. The final auction of discount-window funds to depositories for the Term Auction Facility, which was created in the early stages of the crisis to improve the liquidity of the banking system, will occur on March 8th. Last week, we announced that the max- imum term of discount window loans, which was increased to as much as 90 days during the crisis, would be returned to overnight for most banks, as it was before the crisis erupted in August 2007. To discourage banks from relying on the discount window rather than private funding markets for short-term credit, last week we also increased the discount rate by 25 basis points, raising the spread between the discount rate and the top of the target range for the Federal funds rate to 50 basis points. These changes, like the closure of most of the special lending facilities earlier this month, are in response to the improved functioning of financial markets, which has reduced the need for extraordinary assistance from the Federal Reserve. These adjustments are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the out- look for monetary policy, which remains about the same as it was at the time of the January meeting of the FOMC. Although the Federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary condi- tions to prevent the development of inflationary pressures. Not- withstanding the substantial increase in the size of its balance sheet associated with its purchases of Treasury and agency securi- ties, we are confident that we have the tools we need to firm the stance of monetary policy at the appropriate time. Most importantly, in October 2008, the Congress gave statutory authority to the Federal Reserve to pay interest on banks’ holdings of reserve balances at Federal Reserve banks. By increasing the in- terest rate on reserves, the Federal Reserve will be able to put sig- nificant upward pressure on all short-term interest rates. Actual and prospective increases in short-term interest rates will be re- flected in longer-term interest rates and in financial conditions more generally. The Federal Reserve has also been developing a number of addi- tional tools to reduce the large quantity of reserves held by the banking system, which will improve the Federal Reserve’s control of financial conditions by leading to a tighter relationship between the interest rate paid on reserves and other short-term interest rates. Notably, our operational capacity for conducting reverse re- purchase agreements, a tool that the Federal Reserve has histori- cally used to absorb reserves from the banking system, is being ex- panded so that such transactions can be used to absorb large quan- tities of reserves. The Federal Reserve is also currently refining plans for a term deposit facility that could convert a portion of de- pository institutions’ holdings reserve balances into deposits that are less liquid and cannot be used to meet reserve requirements. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 11 In addition, the FOMC has the option of redeeming or selling secu- rities as a means of reducing outstanding bank reserves and apply- ing monetary restraint. Of course, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on eco- nomic and financial developments. I have provided more discussion of these options and possible sequencing in a recent testimony. The Federal Reserve is committed to ensuring that the Congress and the public have all the information needed to understand our decisions and to be assured of the integrity of our operations. In- deed, on matters related to the conduct of monetary policy, the Federal Reserve is already one of the most transparent central banks in the world, providing detailed records and explanations of its decisions. Over the past year, the Federal Reserve also took a number of steps to enhance the transparency of its special credit and liquidity facilities, including the provision of regular extensive reports to the Congress and the public; we have worked closely with the Government Accountability Office (GAO), the Office of the Special Inspector General for the Troubled Asset Relief Program (SIG TARP), the Congress, and private-sector auditors on a range of matters relating to these facilities. While the emergency credit and liquidity facilities were impor- tant tools for implementing monetary policy during the crisis, we understand that the unusual nature of those facilities creates a special obligation to assure the Congress and the public of the in- tegrity of their operation. Accordingly, we would welcome a review by the GAO of the Federal Reserve’s management of all facilities created under emergency authorities. In particular, we would sup- port legislation authorizing the GAO to audit the operational integ- rity, collateral policies, use of third-party contractors, accounting, financial reporting, and internal controls of these special credit and liquidity facilities. The Federal Reserve will, of course, cooperate fully and actively in all reviews. We are also prepared to support legislation that would require the release of the identities of the firms that participated in each special facility after an appropriate delay. It is important that the release occur after a lag that is suffi- ciently long that investors will not view an institution’s use of one of the facilities as a possible indication of ongoing financial prob- lems, thereby undermining market confidence in the institution or discourage use of any future facility that might become necessary to protect the U.S. economy. Looking ahead, we will continue to work with the Congress in identifying approaches for enhancing the Federal Reserve’s trans- parency that are consistent with our statutory objectives of fos- tering maximum employment and price stability. In particular, it is vital that the conduct of monetary policy continue to be insulated from short-term political pressures so that the FOMC can make policy decisions in the longer-term economic interests of the Amer- ican people. Moreover, the confidentiality of discount window lend- ing to individual depository institutions must be maintained so that the Federal Reserve continues to have effective ways to pro- vide liquidity to depository institutions under circumstances where other sources of funding are not available. The Federal Reserve’s ability to inject liquidity into the financial system is critical for pre- VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 12 serving financial stability and for supporting depositories’ key role in meeting the ongoing credit needs of firms and households. Strengthening our financial regulatory system is essential for the long-term economic stability of the Nation. Among the lessons of the crisis are the crucial importance of macroprudential regula- tion—that is, regulation and supervision aimed at addressing risks to the financial system as a whole—and the need for effective con- solidated supervision of every financial institution that is so large or interconnected that its failure could threaten the functioning of the entire financial system. The Federal Reserve strongly supports the Congress’ ongoing ef- forts to achieve comprehensive financial reform. In the meantime, to strengthen the Federal Reserve’s oversight of banking organiza- tions, we have been conducting an intensive self-examination of our regulatory and supervisory responsibilities and have been actively implementing improvements. For example, the Federal Reserve has been playing a key role in international efforts to toughen capital and liquidity requirements for financial institutions, particularly systemically critical firms, and we have been taking the lead in en- suring that compensation structures at banking organizations pro- vide appropriate incentives without encouraging excessive risk-tak- ing. The Federal Reserve is also making fundamental changes in its supervision of large, complex bank holding companies, both to im- prove the effectiveness of consolidated supervision and to incor- porate a macroprudential prospective that goes beyond the tradi- tional focus on safety and soundness of individual institutions. We are overhauling our supervisory framework and procedures to im- prove coordination within our own supervisory staff and with other supervisory agencies and to facilitate more-integrative assessments of risks within each holding company and across groups of compa- nies. Last spring, the Federal Reserve led the successful Supervisory Capital Assessment Program, popularly known as the ‘‘bank stress test.’’ An important lesson of that program was that combining on- site bank examinations with a suite of quantitative and analytical tools can greatly improve comparability of the results and better identify potential risks. In that spirit, the Federal Reserve is also in the process of developing an enhanced quantitative surveillance program for large bank holding companies. Supervisory informa- tion will be combined with firm-level, market-based indicators and aggregate economic data to provide a more complete picture of the risks facing these institutions and the broader financial system. Making use of the Federal Reserve’s unparalleled breath of exper- tise, this program will apply a multidisciplinary approach that in- volves economists, specialists in particular financial markets, pay- ment systems experts, and other professionals, as well as bank su- pervisors. The recent crisis has also underscored the extent to which direct involvement in the oversight of banks and bank holding companies contributes to the Federal Reserve’s effectiveness in carrying out its responsibilities as a central bank, including the making of mon- etary policy and the management of the discount window. Most im- portant, as the crisis has once again demonstrated, the Federal Re- VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 13 serve’s ability to identify and address diverse and hard-to-predict threats to financial stability depends critically on the information, expertise, and powers that it has by virtue of being both a bank supervisor and a central bank. The Federal Reserve continues to demonstrate its commitment to strengthening consumer protections in the financial services arena. Since the time of the previous Monetary Policy Report in July, the Federal Reserve has proposed a comprehensive overhaul of the reg- ulations governing consumer mortgage transactions, and we are collaborating with the Department of Housing and Urban Develop- ment to assess how we might further increase transparency in the mortgage process. We have issued rules implementing enhanced consumer protections for credit card accounts and private student loans as well as new rules to ensure that consumers have meaning- ful opportunities to avoid overdraft fees. In addition, the Federal Reserve has implemented an expanded consumer compliance super- vision program for nonbank subsidiaries of bank holding companies and foreign banking organizations. More generally, the Federal Reserve is committed to doing all that can be done to ensure that our economy is never again dev- astated by a financial collapse. We look forward to working with the Congress to develop effective and comprehensive reform of the financial regulatory framework. Thank you, Mr. Chairman. [The prepared statement of Chairman Bernanke can be found on page 71 of the appendix.] The CHAIRMAN. Mr. Chairman, one of my colleagues, it may have been Mr. Paulsen or Mr. Lee, raised a question of lending to small business. I was pleased to note on page 13 of the Monetary Report, you cite the Federal financial regulatory agency, Conference of State Bank Supervisors’ statement telling the regulators in the field not to overdo it. That does not mean you think they are, but it does mean you recognize there is a problem. We call it the ‘‘mixed message problem’’ that we have. I am not going to take too much time now, but I would note we have a hearing on Friday on that subject, which had been pre- viously scheduled and snowed out. It is an all-day hearing on regu- lation. Governor Duke will be testifying. We appreciate your doing it. It is very important. We are getting everybody in the same room, the banks who say the regulators are being too tough on us, the regulators who say the problem is there is not any demand, and the borrowers who say the banks will not lend to us. We thought it was important to get everybody in the same room. It is an all-day hearing in corroboration with our colleagues on the Small Business Committee chaired by my colleague, Ms. Velazquez. I appreciate your mentioning that. We will be getting into that. I want to talk now about the central question of employment. Getting people back to work is important, socially most of all, but also for the overall economy. I was pleased to see you note on a couple of occasions, if you have a debate, you debate history, but it is part of a debate over policy as to whether or not an economic stimulus should take place. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 14 We do have a deficit. When we do stimulative things, it does in the short term add to the deficit, I would note, both by expendi- tures and by tax cuts. People have taken to talking about the total stimulus numbers as if it was all expenditures. About 30 percent of it was tax-cutting. People may or may not think that worked well. I was struck to note that in your statement, you say ‘‘Concerted efforts to stabilize the financial system together with highly stimu- lative monetary and fiscal policy,’’ and in the report in the very first paragraph, ‘‘The U.S. economy turned up in the second half supported by an improvement in financial conditions, stimulus from monetary and fiscal policies,’’ and then again on page 8, ‘‘A development that helped rebuild household wealth and household income was lifted by provisions in the fiscal stimulus package.’’ These are three references to the extent to which the stimulus package which this Congress adopted aided in reducing unemploy- ment and in stimulating the economy. That has become controversial because you have to do it again. Am I accurate in interpreting your comments as saying the stim- ulus, without saying it was the best possible way to do it, but the fact that the stimulus was adopted did contribute to the improve- ment we are seeing in economic activity? Mr. BERNANKE. Yes, Mr. Chairman. I think most economists would agree that the stimulus has created jobs relative to where the baseline would have been in the absence of the stimulus. Of course, we do not know what that alternative would have been, and therefore, it is very difficult to— The CHAIRMAN. We do know one alternative, which was to do nothing, because if people say the major thing was the deficit, there was nothing you could have done that would have been a short-term stimulative that would not have added to the deficit, whether it was tax reduction or something else. I know there are people who argue that if you do tax reduction, it means more revenue. I do remember your predecessor, Mr. Greenspan, asked by one of my Republican colleagues if it was not true that if you cut taxes, you could raise revenue overall, and he said that was theoretically possible but it had not happened in his lifetime. I do not think it has happened since then either. This is important. I say that for this reason: We should have a thoughtful debate about what to do next. When we are bogged down in a debate about whether we should have done anything, it is not very helpful. I appreciate your comments on that. Let me ask, at this point going forward, and I understand your primary responsibility is monetary policy, should we say that con- cerns for not increasing the deficit is so important that nothing fur- ther should be done that would have a fiscally stimulative effect? Mr. BERNANKE. Mr. Chairman, you know, that is really the con- gressional tradeoff that has to be made. Obviously, unemployment is the biggest problem we have, and if the Federal Reserve and the Congress can address that issue, we need to find ways to address that issue, but there are difficult tradeoffs. The CHAIRMAN. I appreciate that. I think we are aided by the fact that inflation is not now or in the near term seeming to be a problem. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 15 The last point I would make if you could comment, we hear this threat that the rating agencies might reduce our debt rating be- cause of the deficit. Do you think there is any realistic prospect of America defaulting on its debt in the foreseeable future? Mr. BERNANKE. Not unless Congress decides not to pay, which I do not anticipate. No, I do not anticipate any such problem. I do not anticipate any downgrade. Of course, there are real long-term budget problems that need to be addressed. The CHAIRMAN. I agree with that. If you can get enough risk pre- mium on treasuries, buy them. Now, the gentleman from Alabama. Mr. BACHUS. Thank you, Mr. Chairman. Chairman Bernanke, I think Chairman Frank mentioned the deficit in passing and the debt, and that is what I want to ask you about. Really, to me, that is the elephant in the room. Our debt is going to double in the next 5 years, triple in the next 10 years, and is fueled by historic deficits. I heard this morning on TV that we have in many cases across the United States this year, children and even adults who are kind of walking out on the thin ice, and they walk out maybe day after day, and they get some comfort that nothing happens. Thin ice is dangerous. I submit that this type of budget path is dangerous and the deficits we are running are dangerous. I would ask you, number one, I do not believe our present budget path is sustainable, so my first question to you is, is our budget path sustainable, and second, is there a need for what I would con- sider an urgent need for the Congress—you said it was up to the Congress to come up with a concrete plan to change that budget path, and do you believe there is an urgency in that? Mr. BERNANKE. Congressman, as to sustainability, you are talk- ing about the medium-term structural deficit that remains even after the economy is returned close to more normal levels of activ- ity, estimates of the structural deficit range from 4 percent by the OMB to up to 7 percent of GDP in some scenarios run by the CBO. Those numbers are above a sustainable level. I think in order to maintain a stable ratio of debt to GDP, you need to have a deficit that is 21⁄ 2 to 3 percent, at the most. I think yes, under current projections, we have a deficit and a debt that will continue to grow, interest rate costs will continue to grow. I do think it is very important that we begin to look at the path, the projectory of the deficit as it goes forward, and there could be a bonus there to the extent that we can achieve creditable plans to reduce medium- to long-term deficits, we will actually have more flexibility in the short term if we want to take other kinds of ac- tions. Mr. BACHUS. The current budget path is not sustainable, is it? Mr. BERNANKE. Given the numbers that the CBO and the OMB have projected, that is right. Mr. BACHUS. It may be upon us sooner than we think, is that a good analogy that I have used, of walking on thin ice? Mr. BERNANKE. Yes, sir. That is true. It is not necessarily just a long-term issue because it is possible that bond markets will be- VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 16 come worried about sustainability and we may find ourselves fac- ing higher interest rates even today, given that concern. Mr. BACHUS. Is it critical that we have a long-term plan and we have it now? Mr. BERNANKE. Yes, I think it is very important. I realize it is extremely difficult. I do not underestimate in any way how difficult it is. It is also difficult to address issues which are still a few years away. I understand that as well. It would be very helpful even to the current recovery to markets’ confidence if there were a sustainable creditable plan for a fiscal exit, if you will. Mr. BACHUS. If we do not address them now, I am not sure we can address them in an effective way 2 or 3 years from now or 4 or 5 years from now. Mr. BERNANKE. It will become increasingly difficult because the cuts you will need to make will be even sharper or the tax in- creases even sharper. Mr. BACHUS. I very much appreciate your testimony. I do believe you have addressed many of the concerns. I am happy that you mentioned the legislation that we passed in a bipartisan way has been an important tool. Thank you. The CHAIRMAN. The gentleman from North Carolina. Mr. WATT. Thank you. I wanted to welcome you back to the com- mittee. In response to a question that Chairman Frank asked, you made it clear that you do not want to meddle too much in what the Congress does on these things, and I am not going to ask you to stray over there. I am more interested in what I perceive to be as reading between the lines of what you said, that you think the Fed itself has used all the tools that are available to the Federal Reserve to help facili- tate job creation, actually probably more than would normally be done to facilitate job creation and create maximum sustainable em- ployment since you do not really have a lot of concerns about the other part of the dual mandate, which is price stability. Am I reading that correctly or are there other specific things that the Fed tool kit might allow the Fed to do to create the environ- ment for more job creation? Mr. BERNANKE. I think one set of tools that we have that we con- tinue to work on as regulators is to try to get credit flowing again. We know that small business lending is closely tied to job creation. We know there are problems with bank lending to small busi- nesses. I do not know if you want me to take your time to go through some of these things, but we are collecting more information. We are doing more consulting. We are trying to train our examiners. We are trying to do everything we can to make sure that credit- worthy small businesses can get credit and banks would be willing to take a second look at small businesses to make sure they have access to credit. Mr. WATT. I presume that will be the subject of testimony by folks at the Friday hearing primarily, so I will not ask you to elabo- rate more on that in this context. What other kinds of things in your tool kit might be considered or actually I guess maybe the question I should be asking is, are VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 17 the short-term consequences of anything you might use in your tool kit, the short-term benefits, worth the long-term consequences, or do you think the Fed really has done everything it should be doing other than trying to facilitate credit, as you just mentioned, in terms of monetary policy, the emergency steps you have taken? Are there other things you could prudently do, I guess is the question, to facilitate job creation? Mr. BERNANKE. As you point out, we have extremely accommoda- tive monetary policy with very low interest rates and also large purchases of securities to expand our balance sheet. That is a very accommodative supporting recovery, supporting job creation. The FOMC is going to have to continue to evaluate whether addi- tional stimulus would be necessary, depending on how the economy evolves. We will continue to look at that. Mr. WATT. You are kind of in the same posture that we are in on the other side, your policies are creating some stresses on your own balance sheet that over time might have some consequences and you have to get out of it, and what you are saying is we need to be looking at those long-term consequences of more debt and more deficits so that we have an exit strategy to get back to a more normal kind of fiscal policy at the same time you are getting back to a more normal monetary policy. Am I misstating that? Mr. BERNANKE. Not at all. One of the greatest challenges of the extraordinary policies that we have both taken is at some point, we want to return to a more normal stance, and finding a way out that is creditable and understandable and clear is very important for confidence. Mr. WATT. Thank you, Mr. Chairman. The CHAIRMAN. The gentleman from Texas, Mr. Paul. Dr. PAUL. I thank you, Mr. Chairman. The Federal Reserve Transparency Act, which has passed the House already, is some- thing that the Federal Reserve obviously has been opposed to, and one of the reasons they are opposed to it, as I understand it, is it would politicize monetary policy, which is not what the bill actually does. The other reason they give is that if Congress had any subtle in- fluence, they would inflate more than the Federal Reserve might want to. It is sort of ironic, the Federal Reserve kept interest rates too low for too long and the consensus now in the financial commu- nity is that is true, interest rates are still down at 1 percent, hard- ly could the Congress influence the Federal Reserve in a negative way by causing them to inflate even more. There has been a cozy political relationship between Congress and the Federal Reserve, although the Congress has been derelict in their responsibilities to perform oversight. When it comes to debt, the Fed is there. They can monetize the debt and keep interest rates low. The Congress can keep spending and get re-elected. They do not have to raise taxes so the Fed can act as a taxing authority. You print the money, dilute the value of the money. Prices go up and price inflation is a tax. When people pay a lot more for their medical care than they used to, they ought to think about the inflationary tax. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 18 Also, the Fed accommodates the Congress by liquidating debt, by debasement of the currency, the real value of the money goes down, the real debt actually goes down. In many ways, the Congress and the Fed do have a pretty cozy political relationship. I would like to get to more specifics on the transparency bill be- cause it has been reported in the past that during the 1980’s, the Fed actually facilitated a $5.5 billion loan to Saddam Hussein, who then bought weapons from our military industrial complex, and also that is when he invested in a nuclear reactor. A lot of cash was passed through and a lot of people supposed it was passed through the Federal Reserve when there was a provi- sional government after the 2003 invasion. That money was not ap- propriated by the Congress, as the Constitution said. Also, there have been reports that the cash used in the Water- gate scandal came through the Federal Reserve. When investiga- tors back in those years tried to find out, they were always stonewalled, and we could not get the information. My question is, you object to this idea that I would say give us 6 months, after 6 months, we could find out what we are doing, but what about giving you 10 years? Would you grant that the American people deserve to know whether the Federal Reserve has been involved in this, and what kind of shenanigans they are involved in with foreign countries and foreign central banks, and find out possibly you are working now to bail out Greece, for all we know. Would you grant that after 10 or 15 years, the American people deserve to know? It seems if the Fed was not involved with this at all, it would be to your advantage to say no, we do not do stuff like that. Why could we not open the books up 10 years back and find out the truth of these matters? Mr. BERNANKE. Congressman, the specific allegations you have made, I think, are absolutely bizarre, and I have absolutely no knowledge of anything remotely like what you just described. As far as the 10 years, after 5 years, we produce complete tran- scripts of every word said in the FOMC meetings. You have every word in front of you. Dr. PAUL. Can we get the results of every agreement, every loan made, every single thing to foreign governments? Mr. BERNANKE. Yes, sir. Dr. PAUL. There has been a lot of information, when this came out in the early years, they did have an effort and the Federal Re- serve never participated in this. It is easily covered up. I think eventually, because the system is not viable and that it is this cozy relationship, that we will get to the point where some- thing will have to be done about this financial system, so as long as we continue to do this, this cover up, and quite frankly, I do not believe that the real effort to facilitate some of these things that have been done in the past would become available to us because it is in the interest of the Federal Reserve to make sure that the people do not know. Right now, today, is it quite possible, have you talked with any international groups about possibly participating in a bailout of Greece? VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 19 Mr. BERNANKE. I have not. Dr. PAUL. The Federal Reserve under the law is capable of doing this. Is it not correct that the Fed can buy debt of other nations, and under the Monetary Control Act of 1980, is that not permis- sible? Mr. BERNANKE. Yes, that is true, but we have no plans whatso- ever to be involved in any foreign bailouts or anything of that sort. Dr. PAUL. If they did, it certainly would be to our advantage to know about it. I yield back. The CHAIRMAN. The gentleman’s time has expired. I recognize the gentleman from Pennsylvania. This committee will look into the allegations that under Presi- dents Reagan and Nixon, the Federal Reserve was engaging in those activities, and the gentleman said during the 1980’s, the Fed- eral Reserve lent money to Saddam Hussein and during Watergate, they did this, and I agree we should look into what might have happened under those two Presidencies. The gentleman from Pennsylvania. Mr. KANJORSKI. Thank you, Mr. Chairman. Mr. Chairman, I am not going to take all of my time, because I know we have the inter- est of the other committee members. I am particularly interested in some of the communications we have had recently on the commercial real estate problem. Could you give us your assessment of what that potential problem is today and where it can grow and if there is any actions we in the Congress should take in anticipation of getting a second hit in the economy? Mr. BERNANKE. Congressman, it remains probably the biggest credit issue that we still have. Yesterday, Chairman Bair talked about a big increase in the number of problem banks, a great num- ber of those banks are in trouble because of their commercial real estate positions, both because the fundamentals, shopping center vacancies, things of that sort, have been worsening, and because of problems in financing, there are a lot of troubled commercial real estate properties, and they are causing problems for a lot of banks, particularly small- to medium-sized banks. We are watching that very carefully. The Fed has done a couple of things here. We have issued with the other agencies guidance on commercial real estate, which gives a number of ways of helping. For example, instructing banks to try to restructure troubled commercial real estate loans and making the point that commercial real estate loans should not be marked down just because the col- lateral value has declined. That depends on the income from the property, not the collateral value. We have also had this TALF program, which has been trying to restart the CMBS, commercial mortgage-backed securities market, with limited success in quantities, but we have brought down the spreads and the financing situation is a bit better. We are seeing a few rays of light in this area, but it does remain a very difficult category of credit, particularly for the small- and medium-sized banks in our country. Mr. KANJORSKI. Is there anything that you would suggest that the Congress get involved with or this committee now in anticipa- tion of any problems that may occur? VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 20 Mr. BERNANKE. I do not have a specific suggestion. I would be happy to think about that. Mr. KANJORSKI. Thank you, Mr. Chairman. I yield back my time. The CHAIRMAN. The gentleman from Texas, Mr. Neugebauer. Mr. NEUGEBAUER. Thank you, Mr. Chairman. Mr. Chairman, congratulations on your reappointment. I want to go back to page nine of your testimony where you said that the Federal Reserve has been playing a key role in inter- national efforts to tighten capital and liquidity requirements for fi- nancial institutions, particularly systemically critical firms. Can you give me an idea of who you think the international sys- temically risky firms are? Mr. BERNANKE. One of the issues that we will have to address, for example, if the regulators agree there should be additional cap- ital on systemically risky firms, then the question will be how to identify those firms. Presumably, we will look at things like their size, their com- plexity, their interconnectedness, and the kinds of services they provide to the financial system. We have not addressed that question. We do not have a list or anything like that. It is also possible we might want to do it in kind of a gradated way so that the bigger and more complex the firm, the more capital it needs to hold, as protection for the system, so we do not have the ‘‘too-big-to-fail’’ problem that Congressman Paul was talking about. Mr. NEUGEBAUER. I also heard you say you are now going back internally and looking within your organization as to what are the things we missed, what should we have been looking at, and mov- ing forward. I think one of the questions—I hear almost all of your former col- leagues keep using the word ‘‘capital,’’ and I truly believe if you want to regulate the financial entities, capital is the primary way to do that. Looking forward, what is going to be the appropriate leverage level that we should allow our large financial institutions to have so they will have a shock absorber moving forward? Some of these entities were leveraged, 30, 40, big numbers. As the Federal Reserve Chairman, primary regulator for many of these entities, what is the appropriate leverage? Mr. BERNANKE. Congressman, everybody agrees with what you just said, which is more capital is needed. The Federal Reserve rep- resenting the United States has been working with other countries, the Basel Committee and in other contexts, to try to develop new standards. We have implemented a few of them. For example, for market trading. At this point, we have not completed the whole process of developing higher, more stringent capital standards for large firms. A proposal has been put forward which is now being tested. Banks are being asked to evaluate how much capital they would have to hold under these more stringent standards, so we can get a sense of what the implications would be for the leverage ratio. I do not know that number yet. We are trying to figure out what will be safe. It would depend on the composition of the assets the bank has. The riskier the assets, the more capital you should have. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 21 We are working to try by the end of 2010 to have a very concrete proposal that each country would then have to decide whether to adopt or not. Mr. NEUGEBAUER. You would agree the standards we had before evidently did not work? Mr. BERNANKE. Clearly, they did not. I would add the liquidity issue also, that during the crisis, many banks were technically well-capitalized, but they did not have enough cash on hand to meet the run that was coming on them. Higher liquidity is also a part of this. Mr. NEUGEBAUER. One of the concerns I have is in some of these entities, I have seen some deleveraging, but I have not seen a lot of deleveraging. I am wondering if it is not better sooner rather than later for the Fed to develop these guidelines and standards and start asking the entities that you are regulating to start ponying up either more capital or deleveraging their balance sheets because certainly the American taxpayers do not want another round of this. Do you have a time line in mind where we could anticipate hear- ing that the Fed is taking action to increase the capital standards or setting some new capital standards? Mr. BERNANKE. As I said, I think around the end of the year we will have some formal standards, but we have been very much in- volved in pushing banks to raise more capital. That was one of the outcomes of the stress test we did last spring, that U.S. banks raised a very substantial amount of capital, and that has been very helpful in restoring confidence for the bank- ing system. Mr. NEUGEBAUER. Are you concerned about what is going on in the European Union right now with Greece and some of the other countries within the Euro, their levels of debt, are those countries going to have to step in and back them up, and the implications of what the disruption within the European Union might impact the United States? Mr. BERNANKE. There are very serious challenges there involving not only fiscal issues but competitiveness issues because of the sin- gle exchange rate. We have talked to the European Union leaders. They are obvi- ously very focused on getting this problem solved. They are work- ing closely with Greece, which has proposed a substantial fiscal consolidation. We are keeping an eye on it. The Europeans, of course, it is most relevant to them and they are most exposed to those problems. They are very focused on trying to get them under control. The CHAIRMAN. The gentlewoman from California. Ms. WATERS. Thank you very much. I would like to thank Chair- man Bernanke for being here today. Starting with your discussion on page four, ‘‘In addition to clos- ing its special facilities, the Federal Reserve is normalizing its lending to commercial banks through the discount window,’’ and you go on to talk about your new Federal funds rate and discussion about why you have done this, and encouraging banks to go to the private market for investments. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 22 You say further in this discussion that these adjustments are not expected to lead to higher financial conditions for households and businesses. The last thing I heard before I came here this morning was a prediction by some of the analysts on television that in about one month, we can expect there will be an increase in interest rates on mortgages and home loans. Everybody that I talked to really believes that this change that you have made in the Federal funds rate is what is going to trigger that. Is that true? Did you give any thought to this? How can you guarantee that it will not? Mr. BERNANKE. Congresswoman, it is not the Federal funds rate, it was the discount rate, the rate at which we lend on a special overnight basis to banks, we cut that very low because of the finan- cial crisis. We wanted to make sure that banks had access to lots of liquid- ity in case there was a run on the banks. Now that there is easy access to private markets, they do not need that kind of help any more, so we have just slightly reduced the subsidy we are giving to banks. It has nothing to do with the Federal funds rate or the overall stance of monetary policy. It has to do with normalizing our ex- traordinary support for the banks and the financial markets. We do not anticipate that action having any implications— Ms. WATERS. Let’s be clear. The change that you have made, no matter how slight it is, at the discount rate, will increase the amount they have to pay for their loans, the banks; is that right? Mr. BERNANKE. It is a very small amount in terms of the amount they borrow. Ms. WATERS. I understand that. What I am trying to understand is, is there a connection between the increase in the amount of money they have to pay and household interest rates? Mr. BERNANKE. I do not think there is any material— Ms. WATERS. Can you assure us that will not happen? Mr. BERNANKE. I think it is extremely unlikely, and if it were to happen, we would look at it. I do not think there is any connection. Ms. WATERS. What I am worried about is you still have a lot of mortgages out there, adjustable rate mortgages, with 3 percent margins on them. If in fact this is going to trigger an increase, we are going to have more foreclosures because the interest rates are going to be higher. That is what I am worried about. The predictions are that we have not seen the end to these fore- closures, that with the loans that were extended, people are going to be more at risk. I do not want to see the interest rate increase on these adjustable rate mortgages. Mr. BERNANKE. There is no linkage between adjustable rate mortgages and the discount rate. It is linked to the Federal funds rate, which we have said we anticipate will be at an unusually low level for an extended period. Ms. WATERS. I want to be clear for this committee that the ac- tions you have taken have no connection to the possibility of an in- crease in the household interest rates, we do not have to worry about that; is that right? Mr. BERNANKE. The reason we took the action was again to re- duce the subsidy that we are giving to a small number of banks— VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 23 Ms. WATERS. When you reduce the subsidy, that means they have to pay more money; is that right? Mr. BERNANKE. I do not think there will be any effect on con- sumers. Ms. WATERS. I beg your pardon? Mr. BERNANKE. I do not expect any effect whatsoever on con- sumers. Ms. WATERS. You do not expect them to pass on that cost to the consumers? Mr. BERNANKE. No, because it is very small, and I do not think it will affect it. Ms. WATERS. Let me just ask, you talked about the 10 percent unemployment rate. That does not really reflect what is happening in poor rural communities and African-American communities and in Latino communities where the unemployment rates are up as high as 16.9 percent in African-American communities and even higher in some of these poor rural communities. When you describe this jobless recovery, I think it would be im- portant to talk about these communities that are not represented by the 10 percent description that you give. What do you have to say about that and is there anything you can recommend that we could do to deal with this problem? Mr. BERNANKE. You are absolutely right that minority commu- nities in particular have much higher unemployment rates than the overall average, and that is a terrible problem. Monetary policy cannot really do much about those distinctions. I think those are issues that Congress needs to address if you are inclined to do so. I can only agree with you that it has not only short-term implica- tions in terms of family income and so on, as I talked about in my testimony, it has long-term implications for skills, for workforce at- tachment, for wages and employability. It is a very long-term problem. I can only agree with you 100 per- cent that it needs to be addressed. The CHAIRMAN. The gentlewoman from West Virginia. Mrs. CAPITO. Thank you, Mr. Chairman. Welcome, Mr. Chair- man, back to our committee, and congratulations on your re- appointment. The CHAIRMAN. Will the gentlewoman suspend for a minute? Mrs. CAPITO. Yes, I will. The CHAIRMAN. Someone has his or her microphone on and we are getting these rumbling noises. Would members please make sure to shut their mikes off unless they are speaking? Sometimes, they pick up these noises. Thank you. The gentlewoman has 5 minutes, she can start from scratch. Mrs. CAPITO. Thank you. On page three of your testimony, you talk about contrasting larger lending institutions with smaller lending institutions, and you say bank lending continues to con- tract, reflecting both tightened lending standards and weak de- mand for credit and uncertain economic prospects. My question is that I have heard from our community bankers that they have the capital to lend but they are getting conflicting messages from regulators. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 24 How can we ensure prudent lending and capital levels while working with these institutions but to expand on the question, too, they have the capital to lend, but creditworthy customers are not the ones coming in the door looking for expansion of their business because they lack confidence in where the economy is now, where we will be a year from now. That is my first question. Thank you. Mr. BERNANKE. Well, there are two separate issues there. It’s true that because the economy is weak that some borrowers are not in the market for credit and that’s one of the reasons why bank lending is down. The other issue, though, which I think you began with is that in situations where there is a creditworthy borrower who would like credit, we want to make sure that they get credit and we have been very focused on that issue. Mrs. CAPITO. But haven’t had the results that— Mr. BERNANKE. Well, we have been working on it very hard. We have, for example, increased substantially our information-gath- ering so that we can make an assessment of how many loans are turned down, what is the rate of loss on small loans versus large loans. We added questions to the National Federation of Independent Businesses Survey asking small firms about their experience with borrowing and so on. So we are trying very hard. We have also our reserve banks around the country currently having a series of summit meetings with community leaders, devel- opment organizations, small business lenders, and small companies to try to figure out what the problems are. So we are actively going out and learning about the situation the best we can. It’s very difficult because there will be some cases where tighter standards are justified because of the weakness of the economy and the weakness of the borrower’s condition. We just want to make sure that when there is a creditworthy borrower that they can ob- tain credit. Mrs. CAPITO. Well, thank you for addressing that. I think it’s ex- tremely important in the smaller communities, more rural commu- nities and States of that nature. My second question is a completely different question. We have lost four million jobs and—but over the longer span of time we have picked up four million jobs, government jobs, and when I went on the recovery.gov Web site to see where jobs were created or re- tained according to that site, in my 2nd Congressional District the largest zip code was the State capitol, implying and reasonably so, that these were State jobs that are being retained or created. My question is in a larger sense what do you—how do you feel this will impact our economy if this trend continues, and for me it’s a source of concern because it seems like our private sector manu- facturing jobs, as they move down, our government jobs obviously to me that says it’s more government, more government spending, more government obligations. Mr. BERNANKE. Well, actually, we have lost somewhere in the vi- cinity of seven to eight million jobs on net, including government jobs, since the beginning of the recession. So obviously the total employment is very significantly down. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 25 Some of those government jobs are bureaucrats. You’re thinking of those kinds of jobs, but two of the industries that have actually added jobs during the recession are health and education and many teachers are technically government employees. So some of that may be showing up from those particular areas which are growing very quickly. But certainly, as a general proposition, we want the private sec- tor to be healthy and to be supporting the overall economy and we don’t want to create too much overhead of government jobs that are not productive in some direct sense. Mrs. CAPITO. Thank you. The CHAIRMAN. The gentlewoman from New York, the Chair of the Joint Economic Committee. Mrs. MALONEY. Thank you. Thank you so much, Mr. Chairman. Thank you very much, Mr. Chairman, and congratulations on your renomination, and I believe we have been very fortunate to have at the helm during this financial crisis a scholar, a professor who has dedicated his life work primarily to studying the Great Depres- sion, writing about it, and I believe the Fed came forward with many creative unconventional responses to help us move out of this crisis. I also want to thank you for your leadership on many consumer issues that are important to this committee and to this Congress. The CARD Act, the Credit Cardholders’ Rule that helps consumers, will put billions back into consumers’ hands and the rule that came from the Fed was incredibly helpful in putting a clear logic forward and helping us win passage in this House, also the rule on over- draft is very welcomed and very important to consumers. In the Credit Card Bill of Rights, one of the items that will be enacted in August 22nd is the Federal Reserve’s reaction and anal- ysis about charges that may be too onerous and how you would make them fair, and could you comment on what your work is in that area, when you intend to have that ready for us to see, and how you intend to approach this challenge? Mr. BERNANKE. We anticipate having those rules out very short- ly, in a few weeks, and you will be able to give us your views on them at that time. We wanted to be sure to get them out in time so that the law would go into effect as Congress dictated and so there will be no delay in the implementation of these rules, even though they have been a couple of weeks later than we expected in getting them out. So we are working to have a comprehensive set of rules that will give a set of criteria, in particular if someone’s interest rate has been raised for some reason because they’re perceived as being a greater risk and 6 months later the condition has been corrected, we are looking at the rules under which the interest rate ought to be returned to the normal or the previous level. That’s one of the issues that we’re considering. But we anticipate having those out very shortly and we don’t ex- pect any delay in the implementation. Mrs. MALONEY. As we dig our way out of this recession and we are definitely trending in the right direction, the month that Presi- dent Obama took office, the last month that the former President was in the office, we lost well over 770,000 jobs. This past month, VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 26 under President Obama, we lost 18,000 jobs. We’re definitely trending in the right direction. The Fed is now looking at ways to really move back to a normal economy and some people—one article I was reading last night felt that you should invest more in Treasury notes as opposed to other actions that you’re taking. Could you comment on the steps you’re taking to really move our financial institutions and our total economy into the proper func- tioning expanding economically and other ways to help the people of America? Mr. BERNANKE. Yes. We have two broad sets of policies, roughly speaking. One was a set of special facilities, lending facilities that were intended to stabilize our financial system which obviously was extremely disrupted by the crisis. Those facilities have been quite successful. They have helped stabilize the money market mutual funds, commercial paper market, the repo market, many other im- portant financial markets. With the improvement and stabilization of those markets, we have been shutting those down. So many of them were shut down on February 1st and this was a question Congresswoman Waters asked about the discount rate and so on. So we believe that, as those financial markets are normalizing, we can begin to reduce that source of support. The other approach, the other policy, set of policies we have is monetary policies intended to support the recovery which includes the low interest rates and the purchases of mortgage-backed securi- ties and treasuries. Those remain at a very accommodative level. It is true that we will stop buying new mortgage-backed securi- ties at the end of this quarter, but we will continue to hold one and a quarter trillion dollars of agency mortgage-backed securities and that taking that off the market itself will keep mortgage rates below what they otherwise would be. So we believe that there will still be stimulus coming from our holdings of those securities as well as our low interest rates. So we think the economy as opposed to the money markets, for example, still requires support for recovery. Mrs. MALONEY. Well, we are trending in the right direction. My time is up. Thank you for your public service. Mr. BERNANKE. Thank you. The CHAIRMAN. The gentleman from California, Mr. McCarthy. Mr. MCCARTHY OF CALIFORNIA. Thank you, Mr. Chairman. Mr. Chairman, I believe across this country, everywhere you go, jobs is Number 1. You have referred to that and also to the deficit. I want to follow up on both those topics, but I want to go back to what my colleague from West Virginia was talking about, four million more jobs in government than in manufacturing. You talked about that, but you cannot sustain that if the taxpayers are paying for that and the lack of manufacturing, how you would be able to grow. You talked in your testimony here of unemployment being at 10 percent. In my State, it is higher. In my congressional district, it’s higher. Throughout the Central Valley in California, there are some places at 40 percent unemployment. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 27 But even a stronger telling in there, you said 40 percent of the unemployed have been out of work 6 months or more, nearly dou- ble from a year ago. Now you did say these government jobs, there are some bureaucrats, but there’s—the growth was in education and in healthcare, but there has to be some commonsense because if you go down the road here, the Federal Government, there are more than 100,000 people who work there who make more than $100,000. The money is probably better used inside the classroom. But I’m trying to find where there are some ways that we can create jobs quickly with low cost, rolling back regulation, but you said in your testimony here, you talked about the international, that the international was recovering—if I state it right within there, you say, ‘‘International trade supported by the recovery in the economies of many of our trading partners is rebounding from its deep contraction of a year ago.’’ Now there are three trade agreements that are sitting here, Pan- ama, Colombia, and South Korea. The President has said that if you increase U.S. exports by 1 percent, it would create over 250,000 jobs and hence change the jobs we are creating from gov- ernment to others. Do you agree that 1 percent, and they say with these three trade agreements it would give you that 1 percent, would it create 250,000 new jobs? Mr. BERNANKE. I don’t know that number. I would have to look at that number, but certainly opening up trade creates opportuni- ties for us to export and that ought to create jobs. I’m quite sure it would. Mr. MCCARTHY OF CALIFORNIA. And it would not cost anything more but it would create jobs that weren’t government-related? Mr. BERNANKE. It ought to improve the division of labor between our different countries. Each country can be more productive, should raise our standard of living, and I expect would create jobs, as well. Mr. MCCARTHY OF CALIFORNIA. If I could just touch base on what our ranking member talked about earlier because we have had many discussions with you and your past profession, the study of former countries and some of their downfalls. The national debt and the budget deficit, you have told us time and time again that you cannot sustain a budget deficit over 21⁄ 2 to 3 percent of GDP, and you stated that earlier and I wrote down a few words that you refreshed. You said if we were able to get a fiscal exit from this, it would actually help the current recovery, is that correct? Mr. BERNANKE. Yes. Mr. MCCARTHY OF CALIFORNIA. Looking at the current budget that is proposed, does that reflect the commitment of changing the growth curve of our budget deficit or our national debt? Mr. BERNANKE. Well, as I said earlier, the projections of 4 to 7 percent deficits from 2013 to 2020 and increasing after that, I think everyone would agree, including the President, that is not sustainable and that we need to address those numbers and get them down in the out-years. Mr. MCCARTHY OF CALIFORNIA. I heard you say that, and I’m try- ing to say here as a Member of Congress looking at a budget today, VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 28 hearing your words that you have told us time and time again and every economist says it, that you cannot sustain this, watching our national debt of GDP go up almost to the highest level outside of World War II, especially at the end of this decade to be 77 percent. What do we do today? Your quote earlier said, ‘‘would help the current recovery if we were able to sustain that.’’ So looking at the current budget, does it give us the change needed in any shape or form? Mr. BERNANKE. Well, it’s not sufficient to look at this year’s budget, if that’s what you mean. I mean, you have to look at the next 10 years and— Mr. MCCARTHY OF CALIFORNIA. Yes. But we’re sitting in a place where we vote where we look today. We all see 10 years and where it’s going. We all realize that this is putting us in a place that gives us great hardship. So our actions have to be now and your com- ment says it helps the current recovery if we take action, as well. So the current budget that I see does not give us that, and I’m asking you, do you see it as helping us in this fiscal crisis or does it expand the deficit further? Mr. BERNANKE. I think it would be helpful for the current situa- tion if the Congress and the Administration could provide a plan which shows how the deficit will fall to this 21⁄ 2 and 3 percent level, at least, over the next 10 years. I don’t know exactly which programs, what taxes, what changes you would make, that’s cer- tainly up to Congress, but even a strong effort would be probably good for confidence. Mr. MCCARTHY OF CALIFORNIA. It would be good for the future but even be good for the recovery. I’m not asking you to pick de- partments. Mr. BERNANKE. It would increase confidence, lower expected tax rates, and lower real interest rates. The CHAIRMAN. The gentleman’s time has expired. Mr. MCCARTHY OF CALIFORNIA. I thank you, Mr. Chairman. The CHAIRMAN. And we’re trying to be fairly strict on the time because we have a vote coming up and I understand that Chair- man Bernanke needs to be—we have assured him that he’ll be out by 2 o’clock. So the gentleman from Illinois is recognized. Mr. MANZULLO. Thank you. Congratulations on your re-election, Mr. Chairman. You got reappointed, but you had to get elected, just like we do. It was a vote count. Chairman Bernanke, the FDIC reported yesterday that bank lending in 2009 fell by 7.5 percent or $587 billion, $587 billion, and the Wall Street Journal, its headline today said it was epic, the de- cline. There’s a chart behind. Why is bank lending falling so dramatically? It has fallen, I be- lieve, because we’re forced to hold greater capital reserves, given the rising default rates on commercial real estate. Up on the committee room TV now is a chart from the most re- cent Congressional Oversight Panel report which shows the value of delinquencies on CRE loans has increased 700 percent since the first quarter of 2007. You’ll notice from the chart behind you, Mr. Chairman, that if the trend continues, the rate of CRE loans will soon be literally off that chart. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 29 The dramatic increase in delinquencies to me is really approach- ing a tsunami, threatening our local communities and banking sys- tem. It’s estimated to peak between 2011–2012 with over $300 bil- lion in CRE debt expected to mature each year. As you know, the CRE market is huge. It’s $3.5 trillion of the total debt. It’s about $1.7 trillion held by banks and thrifts. Much of this debt is held by community banks across the country that have survived the first part of the tsunami, the mortgage default crisis, but now are being threatened by this one. The FDIC yesterday informed us that they’re adding 450 banks to the Troubled Bank List, more than doubling the number from the start of 2009. Many are small lending institutions that have in- vested in their communities for decades. Chairman Bernanke, I just held a hearing January 21st on the epidemic of bank failures focusing on the failure and seizure of a great Chicago community institution, Park National Bank. I would rather not have more hearings in the coming year on the autopsies of what have been rather good banks. I want to focus on how we can help these good banks and how we’re getting back to lending. So how much do you think of the coming tsunami of these loans, $1.7 trillion held by our local banks, loan defaults are going to harm our communities and local banks, and what have you done about it and what future plans do you in- tend to make about it? Mr. BERNANKE. Well, it is a serious problem and as I mentioned earlier, the commercial real estate losses, loan problems are prob- ably the biggest threat at this point to our smaller and regional banks and, as you point out, if those banks have their capital de- pleted or if they go out of business, that’s going to affect the supply of credit and so that affects our economy, as well. So that’s a very important problem. I think, from the Federal Reserve’s point of view, there are basi- cally two kinds of things we can do. First of all, we can support the economy and as the economy strengthens, that makes people go shopping in shopping malls or willing to—new employment fills up office buildings and so on and that helps solve that problem and so obviously we’re trying to support the recovery. The other thing we can do is to try to work directly in the mar- ket for CRE and we have done some things along those lines. We have had this program called the TALF which has been successful in getting the interest rates on commercial mortgage-backed securi- ties down somewhat, reduced those spreads. We have issued guidance on commercial real estate loans where we are trying to work with banks so that they can restructure trou- bled loans so they can continue to be performing, perhaps at a re- duced level, but continue to be providing income. So we’re looking for those kinds of solutions. Those supervisory approaches and monetary policy approaches, those are our two main tools. Mr. MANZULLO. Your program that you mentioned is going to end in June. Are you going to renew the program? Mr. BERNANKE. In June. Well, we will be evaluating the situa- tion. There is progress being made in those markets. As I said, the VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 30 spreads have come down quite a bit and some deals are being done outside of the Federal Reserve’s program. Mr. MANZULLO. I appreciate all that you’re doing with the regu- lators, but, you know, the Park National Bank that we referred to really lost its shirt with Fannie and Freddie. The Federal Reserve and everybody said buy it, we’re going to give you extra credit if you do it, and they did and now they’re out of business because they followed the recommendations of many of our government fi- nancial regulatory institutions. So I really think that we shouldn’t underestimate the coming tsunami of this debt in commercial real estate. I hope that the ac- tions that we take are going to fill those office buildings, but I would like to have more discussion with you about other steps that I think we take, other than hoping that what we’re doing is going to fill those office buildings. Mr. BERNANKE. We’re following it very closely. Mr. MANZULLO. Thank you. The CHAIRMAN. The gentleman’s time has expired. The gen- tleman from Delaware, Mr. Castle, is recognized. Mr. CASTLE. Thank you, Mr. Chairman. Chairman Bernanke, like many others here, probably all of us, I’m very concerned about the job situation in the United States and we can argue politically whether the Stimulus Program has worked well or not. Mr. Zandi, an economist, yesterday indicated that the jobs that were created were probably to some degree temporary in that we funded governments so they could keep on employees for a period of time and various capital projects that will expire at some point or another. So we still have a continuing problem, and I have had a couple of job fairs in my State and I have been surprised both at the number of people who have come out for that and the back- grounds of some of these people. It’s not the usual unemployed, it’s people with college degrees, even graduate degrees, who are unem- ployed at this point. I see that the lending by banking institutions has fallen by some 7.5 percent in 2009, and my question to you is, is there anything that you as the head of the Fed or the Fed itself or us as Members of Congress could be doing to help with the employment cir- cumstance? My further question is what is happening in this whole bank lending? I mean, we have put a lot of—we, being both the TARP Program and the Federal Reserve, have put a lot of money into banking institutions, primarily larger banking institutions, and the theory was that they’re the ones who are going to lend to the other commercial banks who would then lend to the business people on main streets throughout America and that somehow seems to have not connected. The lending is down for a lot of the reasons you’re talking about, the commercial real estate issues and various aspects like that which I understand, but what is it that we could do to make sure that the lending does pick up so that jobs can be created and, per- haps as an economist beyond even the Federal Reserve, what else should we be doing differently or considering doing in terms of helping with employment, by we meaning Congress and the Fed- eral Reserve? VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 31 Mr. BERNANKE. Just to comment quickly on the TARP money, there were two objectives of the TARP money. One was to stabilize the banks and the second was to give them capital on which to base their lending. Unfortunately, the politics was very bad, as you know, and the public and the Congress have stigmatized that money and the banks therefore have done the best they can to pay it back as quickly as possible and so basically all the big banks have paid back their TARP money now and so it’s no longer avail- able to provide support for credit. So that’s unfortunate. Another thing I would just like to mention is that ironically, one of the reasons that we lost so many jobs is that American firms were incredibly efficient in reducing their costs in the depths of the crisis. Many other countries were not as effective at cutting costs and what we found here is that we have had enormous increases of productivity, which bodes well for the long-run, but obviously in the short-run, means that there have been more job losses than otherwise would have been the case. It’s partly for that reason that it’s hard to judge how quickly jobs are going to come back. It may be that firms have already cut to the bone and they cannot get any further reductions in their costs and as growth comes back, as we’re seeing, they’ll be forced to bring back workers more quickly than we now anticipate. So that’s something to be looking for. From the Fed’s point of view, I have already mentioned that our jobs program consists of support of monetary policy and our super- visory policies to try to get credit flowing. From Congress’ point of view, there are a range of possible fiscal actions. Again, I hesitate to try to recommend specific ones, but I’m sure you know the menu of things that you could do which could create jobs. But, you know, unfortunately, there’s no silver bullet here. Mr. CASTLE. Well, I realize there’s no silver bullet. I just would hope that the Fed would continue to monitor very carefully the banking institutions— Mr. BERNANKE. Of course. Mr. CASTLE. —and what they’re doing with the money they get and either return of capital on the repayment of loans or the issuance of lending out to other banks. Let me ask a different question. Have Fannie Mae and Freddie Mac served their purpose? They are very expensive to this govern- ment at this point and the business of packaging mortgages and being able to sell them off could be done perhaps differently than that and, you know, this goes back—maybe this is a question I should have asked 10 years ago, I suppose. But the bottom line is that should we be looking at some dif- ferent way of dealing with the financing of mortgage structures in this country or do you still believe that they serve that basic pur- pose and we should leave them intact, even if they have the prob- lems they seem to have? Mr. BERNANKE. The Federal Reserve, I think, was one of the more vocal commenters on Fannie and Freddie for many years and we were very concerned about their stability and whether they had enough capital to support those large portfolios they had and it turned out they didn’t and we’re paying the cost of that right now. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 32 I think we would be very cautious about supporting a return to the existing structure where you have this potential conflict be- tween private shareholders and the public objectives. I think there are alternatives and I provided some of them in a speech I gave a year-and-a-half ago and would be happy to provide you, which would be a more stable long-term solution, including ei- ther a privatization approach with government guarantees or a public utility approach. Those are two options that you could con- sider. The CHAIRMAN. Time has expired. We were going to have a hear- ing on March 2nd on that very subject. I had to postpone it because there was a major hearing on the fishing industry in my district and I had to fish or cut bait, so I’m going fishing, but also it turned out we had originally thought that would be a day in which there had been votes the day before. It is a day in which there are not votes until that evening and members expressed a lot of interest in it. We will, on the next available hearing day, have a full hearing on exactly that topic and so, Mr. Chairman, we will be looking for an elaboration of those views, but we had the hearing set for March 2nd on precisely the topic the gentleman asked, not just Fannie and Freddie Mac but its interaction with the FHA and Ginnie Mae and the Federal Home Loan Bank and all of the var- ious strains of housing financing. So we’ll get the rest of that an- swer within 10 days at the latest. The gentlewoman from New York, the Chair of the Small Busi- ness Committee, who will be co-presiding on Friday on a hearing on this recurring important topic of how do we get loans flowing to small businesses which she’s been focused on, the gentlewoman from New York. Ms. VELAZQUEZ. Thank you, Mr. Chairman. Chairman Bernanke, you know, you quite well said that economic recovery is tied to jobs creation and we all know that job creators in our country are small businesses, and if you talk to any member in this panel sitting here, they will tell you that each one of us know some creditworthy borrowers who can’t access lending and and we know that we have put together all these tools to incentivize lending and we see to- day’s Wall Street Journal with that title about lending, the sharp- est decline since 1942. And I know that your answer to me is going to be, well, that is not under my purview, but if we have tried all these tools and are not producing the success in terms of easing or getting credit flow- ing again for small businesses, even the loan guaranty by SBA, we have seen 50,000 less loans this year compared to last year and we increased the loan guaranty from 75 to 90, we reduced the fees paid by borrowers and lenders. So my question to you is, do you think that there is a time, given this economic crisis, for the Federal Government to play a more ag- gressive role in direct lending in a temporary basis? Mr. BERNANKE. First, let me just say that this is a Federal Re- serve concern because we are bank regulators and I won’t go through the list again, but we are trying to get more information to try to make sure that the creditworthy borrowers are able to get credit and we consider it very important. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 33 Indeed, one of the reasons that we value our bank supervisory role is because it provides us with that information and gives us that ability to understand what’s happening in that very important market. In terms of policy, I think there are a number of things that can be done. You mentioned the SBA. There’s a proposal to provide capital to small banks that make small business loans. Ms. VELAZQUEZ. That would be TARP money that has been stig- matized by Congress and by the people in this country. So if it didn’t work before, for example, when the secondary market was— we tried to unlock the secondary market by creating under Treas- ury small business lending facility and it didn’t work, they didn’t make one loan, if it didn’t work then, why do you think it’s going to work now? Mr. BERNANKE. You may be right. But I do know that the pro- posal is to try to put some distance between the TARP Program and this alternative program, but whether that works or not, I don’t know. But there certainly are some things that you could look at and we will continue to look at it from the perspective of supervision. Ms. VELAZQUEZ. Okay. Mr. Chairman, you mentioned your con- cern about real estate losses, and my question to you is if your— the Central Bank is currently in the process of winding down the TALF Facility and without the TALF, what will the Fed do in the event that instability returns in the CRE or small business mar- kets? Mr. BERNANKE. Well, the purpose of the TALF was not really to solve the whole CRE problem. Its purpose was to try to get the commercial mortgage-backed securities market going again. I guess it’s a little bit of an overstatement to say that it’s going again, but we are getting some deals there and the spreads have come in and so that issue has been somewhat reduced in terms of the concern. I think the real concern at this point is that the fundamentals for hotels and office buildings and malls and so on are quite weak and that’s why the loans are going bad and really the only solution there is, first, to strengthen the economy overall and, second, to help banks deal with those problems, work them out. Ms. VELAZQUEZ. Mr. Chairman, today it has been reported that 25 percent of all mortgage borrowers were underwater, 11 million families in this country. What is the Fed doing to encourage stability in the housing sec- tor that is so tied to economic recovery in the long term? Mr. BERNANKE. Well, this is a little bit out of our ballpark, but we did work with Congress and the Treasury in developing the HOPE for Homeowners Program, for example, which has really not met expectations at this point. The structure of that program was to give principal reductions, principal forgiveness. So the main pro- gram right now, the HHM Program, is about affordability as op- posed to principal reductions. So right now, there’s not a major program. I think the Treasury’s Mortgage Program is considering some pilot programs that would include principal reductions. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 34 The CHAIRMAN. Mr. Chairman, I’m going to have to—because you didn’t have a lot of time, we would like the rest of that answer in writing. That’s a topic to which we will be returning— Mr. BERNANKE. Okay. The CHAIRMAN. —and if you want to elaborate in writing on that, we will ask you to do that. Mr. BERNANKE. All right. The CHAIRMAN. The gentleman from California, Mr. Royce, is now recognized. Mr. ROYCE. Thank you, Mr. Chairman, and, Mr. Bernanke, I watched and listened with interest to the opening statements here and let me explain one thing. Since January of 2007, since every spending bill originates in the House, since January of 2007, we have had Democratic majorities in the House and in the Senate and I was a critic, as you might recall, of Republican spending in 2005 and in 2006, but since 2007, it has been explosive and because every spending bill originates in the House, I think there is some confusion on the part of the public in terms of where the spending comes from, how it originates. To me, when I first reviewed the Administration proposal, some- thing that struck me was the fact that at no point anywhere in the future does the Administration expect our Nation to have a bal- anced budget. As we look forward on this graph, at no point, ac- cording to its own numbers and presuming an economic recovery, do they expect this to change. As a matter of fact, the deficits are expected to spike dramati- cally in 2020. It goes up dramatically in this budget, and I think the failure to operate within our means is plunging our Nation deeper and deeper into debt, something which you see when we talk about the interest expense quadrupling to $840 billion by 2020. It’s going to be the fourth largest budget item. So as you said, Chairman Bernanke, budget deficits, when you’re speaking about of this magnitude, as far as the eye can see are simply unsustainable. I think that eventually it occurs to those of us who have been a part of this process that the window to address this problem before it spirals out of control is closing very quickly. I’m afraid there is a lack of urgency here and here’s what I want- ed to ask you. First, would you agree that this plan put forward by the Administration is not sustainable and, second, would you concur that in the past, the Federal Reserve has stepped forward, has tried to give direction to Congress very forcefully? And I remember with respect to Fannie Mae and Freddie Mac, the warnings that came from the Fed where Congress was told you are risking a systemic collapse of the financial system if you don’t do something about the overleveraging, the arbitrage that’s going on there, the 100:1 leverage, the fact that you have put mandates, Congress has put mandates on these institutions to buy subprime and Alt-A loans. This is a systemic risk. Now Congress ignored that, but the fact that you forcefully did that did at least alert a lot of people who otherwise wouldn’t have been aware of it. What can you do now in your capacity in order to call it—and this is my second question—in order to call attention to the sever- ity of this? I say this because Mr. Hoenig with the Kansas City Fed VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 35 recently said that, ‘‘the most dire of the three options is for the Fed simply to print more money,’’ in this speech he gave knocking on the Fed’s door. That threatens hyperinflation. So what can be done to really get this point across? Thank you, Chairman Bernanke. Mr. BERNANKE. Well, first, let me say that we’re not going to be monetizing the debt, but I think everyone understands the basic arithmetic here, that if deficits go on at 3, 4, and 5 percent of GDP and that picture, if you extend it beyond 2020, would probably get worse because entitlement spending, aging society and so on, that you’ll get increasing interest payments and it will spiral out of con- trol and the CBO will give you the same results. Again, it’s very easy for me to say this because I don’t have to grapple with these difficult problems, but it is very, very important for Congress and the Administration to come to some kind of pro- gram, some kind of plan that will credibly show how the United States Government is going to bring itself back to a sustainable po- sition. Mr. ROYCE. And this plan is not it, I take it? Mr. BERNANKE. Assuming that those numbers are appropriate, I mean the forecasts are very difficult to make, but assuming they’re appropriate, no, it’s not. Mr. ROYCE. The CBO numbers, as you’ve said earlier, it just is not going to pencil out. Mr. BERNANKE. That’s right, and so it’s a very difficult challenge, but it’s not something that’s 10 years away because it affects the markets today and the longer you wait, the harder it’s going to be to change— Mr. ROYCE. Can you take the message on the road? The CHAIRMAN. We don’t have time for another question. We have votes. I think we can get two more in, and I now recognize the gentleman from California for 5 minutes, and then there will be one other, and then we can go vote. The members who want to vote obviously can go vote now. The gentleman from California. Mr. SHERMAN. The gentleman from California, Mr. McCarthy, talks about trade agreements and I would agree with him that if we had genuine free trade that might produce jobs, but so far our trade agreements have given us malignantly-unbalanced trade and I don’t think that helps our job situation. Chairman Bernanke, I’m going to lay out a few reasons that have been put forward why you might want an easier monetary policy, both short-term and long-term, and get your response. The first of these is that monetary easing short term can help stimulate the economy at zero increase to our national debt and in fact reduces our debt because it reduces our borrowing costs where- as we in Congress are considering fiscal stimulus which, of course, does increase the national debt. The second is that there is a stickiness in cutting certain nomi- nal payments, particularly wages, and so if we had a modest 3, 4, even 5 percent inflation rate, that in effect solves that problem or allows for the solution of that problem without cutting a nominal amount. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 36 The third is that your predecessor used to come to Congress and say that the CPI was overstating the inflation rate. So if you’re tar- geting for 2 percent inflation rate as measured by the CPI, you were really targeting for a 1 percent inflation rate, as he thought it ought to be calculated. And then, finally, you have the recent IMF economist report say- ing that central bankers ought to aim for a higher inflation rate so that in bad times they had more monetary tools. When you start with low interest rate and low inflation and then you try to stimu- late the economy, you can’t go below zero. So the first question is, are you currently pedal to the metal? I see the statements coming out that talk about increasing the dis- count rate and those very statements can have a slight effect, more than a slight effect of reducing monetary easing, taking your—the accelerators—I realize a lot of talk about accelerators in the other room here, but easing up on the accelerator a bit and then your discussion here of the clear statement you’re not going to monetize the debt also is a little less than absolute pedal to the metal. So short term, are you or should you be pedal to the metal? Longer term, should we be aiming for a somewhat higher inflation rate, given the report of the IMF? Mr. BERNANKE. Well, we were clear that the higher discount rate was not intended to tighten monetary policy and, in fact, if you look at the market, there is no expectation. It did not engender any expected increase in monetary tightness. So that was successful in that regard. We do have a very stimulative monetary policy, as you know. We will continue to evaluate that. It’s a committee decision. Certainly, if the recovery begins to falter, we’ll have to look at that very seri- ously. With respect to the inflation rate, I understand the argument and it’s not without its appeal, but it carries certain risks obvi- ously. If the Federal Reserve says we’re going to raise inflation to 4 percent, how do we know that later it won’t go to 5 or 6 or 7 per- cent? Mr. SHERMAN. Well— Mr. BERNANKE. It took a long time to get inflation down to 2 per- cent. Mr. SHERMAN. Mr. Chairman, I’m going to try to squeeze in one more question. Obviously, if you say two, that’s a slippery step to- ward four. If you say four, that’s a slippery slope toward six. The second is the role of the credit unions. We’re in a cir- cumstance where we have taken taxpayer money and injected it into the capital of the banks, but as a matter of the Federal Gov- ernment, we have prohibited—the Federal Government has prohib- ited credit unions from raising alternative capital in the private market, not taxpayer money. We are begging the banks to make loans, particularly under $250,000. The credit unions are beginning for the right to make loans of under $250,000 and not count it against their limit on business lending. They’re telling me that they could make another $10 billion in small business loans, create 100,000 jobs, at no cost to the Federal Treasury at all, and with high capital standards and VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 37 even higher capital standards if we let them raise alternative cap- ital. Should we be relying more on credit unions, giving them these tools to get us out of this recession, not that this one thing would get us out? Mr. BERNANKE. Well, as you know, credit unions are tax-favored because they have certain restrictions on their activities and the banks would complain obviously that if they’re allowed to do every- thing banks can do, why are they tax-favored? So I think that’s the trade-off that Congress has to — The CHAIRMAN. The gentleman’s time has expired. There’s only time for the witness. If members are going to ask complicated ques- tions with 10 or 15 seconds, don’t expect a lot of back and forth. Does the witness wish to complete his answer? Mr. BERNANKE. No. The CHAIRMAN. It’s not a mandate. Mr. BERNANKE. This is the issue about the tax treatment of cred- it unions. The CHAIRMAN. The gentleman from Illinois, Mr. Manzullo, will be our last witness. We will break. We will come back very prompt- ly. The Chairman has agreed to stay till 2 o’clock. We can get some more questions in. The gentleman from Illinois. Mr. MANZULLO. Thank you, Mr. Chairman. Chairman Bernanke, the district I represent has somewhere between 1,500 and 2,000 factories, it’s highly industrialized, and the Institute for Supply Management is up now, above 50, for the 6th month, 7th month in a row. As I talk to my manufacturers, it’s the same choke point. I talk to the regulators. They say that the regulatory standards have not been tightened. I talk to the banks. The banks say they can’t lend because of the regulators. If we want to create jobs, as stated in NAM’s new study with the Milken Institute, John Ingram, the president of NAM, said, ‘‘The new report makes a powerful case that manufacturing can lead the U.S. into a renewed era of growth. It’s critical that we accelerate our economic recovery and create jobs for the benefit of manufac- turers.’’ I have manufacturers that are ready, willing, and able to hire employees. They have orders, substantial orders. They can’t get capital in order to make their new product, and in some cases, the buyers are going overseas to buy the product. We have a choke point in credit. It’s a super, super, super crisis. These are existing borrowers. They are people with very, very low debt to equity ratio. They are prime borrowers, many in the food processing industry, which has seen an uptick in this economy, begging for credit, and they come to me and ask, why has the gov- ernment created more and more programs out there when all we need is a simple operating loan or equipment loan as we had be- fore? What is the answer? What can I tell them, besides we have been invited to come out to our district and talk to them personally and individually and perhaps help the banks out? VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 38 Mr. BERNANKE. Well, part of the issue here is, of course, there is more than one regulator and next time, please ask who the regu- lator is. If it’s the Federal Reserve, I would like to hear from you and I’ll be happy to talk to you about it. We at the Federal Reserve understand that, and we should all understand, we don’t want banks to make bad loans. If a borrower is not financially able to manage the loan, we don’t want to make that loan, but you’re talking about situations where you say the borrower is creditworthy. In that situation, we want the bank to make the loan. I have answered a number of questions about steps we have taken to gather more information, to have meetings and to train our examiners to focus on this exact point. So we are very, very fo- cused on trying to keep that in balance. Mr. MANZULLO. I know you are, Mr. Chairman. The problem is that it’s simply not getting through and it’s not your fault, and I don’t think it’s the fault of the regulators there either because ev- erybody is skittish because of the economy, but the problem is we’re at the beginning of a real recovery, not make-up jobs for the dumb Stimulus Bill, not creating government jobs, but the creation of real jobs of people in manufacturing going back to work and ex- porting and many of these are highly-paid union jobs. They just can’t get the money and they’re creditworthy. It doesn’t make sense for us to have all this debt, all these pro- grams, people ready to go, they’re creditworthy, but they can’t get the money in order to make the product to create the jobs. Mr. BERNANKE. I would be happy to hear more details and try to figure out what’s going on because we are working very hard to make sure that’s not the case in banks that we supervise. Mr. MANZULLO. Is it possible, Mr. Chairman, that you could meet personally with some of these people? Mr. BERNANKE. Certainly. Mr. MANZULLO. I’ll take you up on that. Thank you, sir. The CHAIRMAN. The committee will be in recess. I intend to come back as soon as I can. It’s the third vote. It shouldn’t be too long. Any member who wants to ask questions, if they’re here, we’ll call on them. [recess] The CHAIRMAN. The committee will reconvene, and the gen- tleman from New York, Mr. Meeks, will be the next questioner. And the committee will be in order. Someone please shut the door. The gentleman from New York. Mr. MEEKS. Thank you, Mr. Chairman. It is good to see you, Chairman Bernanke, and congratulations on your reappointment, and thank you for your service. My question—and I’m trying to focus more around real estate and the housing industry, I know some of which you deal with and some of which you do not based upon some of the questions, but it is to me—most Americans, it is their largest investment that they will ever make—is in their home. And in listening to some of your testimony earlier, and I know that by, I guess, March 31st, you are scheduled to end the Fed’s program to buy more mortgage-backed securities from Fannie Mae and Freddie Mac-backed debt, and I guess there is pressure to VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 39 tighten up. And the last time the tightening took place, I think it was about 33 months ago, after the recession began and foreclosure rates were 4 times lower than they currently are. And there are signs, from what you are saying now, of growth. But my first question is, is it a little premature to consider tight- ening today because—will that kill the incipient housing recovery by tightening today and then hurting the housing market? Mr. BERNANKE. We will still continue to hold $1.25 trillion of mortgage-backed securities, plus additional agency debt, and we think that is going to continue to keep mortgage rates down. There are a lot of differences of view about how much mortgage rates might go up after the end of this program. So far, we haven’t seen much, so I think we need to look and see if there is a big reaction, if it does affect the housing market. It may not be a significant re- action, so we are going to continue to watch that. Mr. MEEKS. We have seen that, for example, also—and I think especially in California, to a degree in New York also, and other places—I have talked quite frankly to some friends of mine. But in California where they have no recourse laws, we find that where banks are unwilling to write down the principal—and I know you talked about the HOPE program and writing down, but it seems now banks are not willing to write down principal. A lot of it was simply walking away. And then that is causing a difficulty on the banks and especially the small and community banks, and thus we heard about banks that may be closing as a result, espe- cially the smaller community banks. So I was wondering if there are any steps that the government, the Federal Government, can take or the Fed can take to help banks—or to encourage banks, I should say, to write down prin- cipal on homes that are now underwater, which is to me one of the biggest drags on the economy overall also. Mr. BERNANKE. We found in our research that the combination of being underwater and then having loss of income due to loss of a job and so on—those two things are very high predictors of de- fault. So right now, the main programs for mortgage restructuring are the Treasury’s programs under the TARP, the so-called HAMP program, which is an affordability program. My understanding is that they are going to be looking at alternative pilot programs that will take different approaches. And of course we also have the HOPE for Homeowners, which has the principal write-down ele- ment. So I think this is really an area for Congress, but clearly there is a lot of interest in the Administration and Congress to reduce the number of foreclosures, which remains very, very high. Mr. MEEKS. Yes, because what is happening is a lot of individ- uals that I know, homeowners in my district who are struggling to pay their mortgage, they are actually paying it, but they are under- water. And then they go back to the banks to have it refinanced and try—but then they are so far underwater, nobody will give them a loan, so now they are nervous and some of them have inter- est rates that can reset high and they won’t be able to afford them. And then we get back in—just as you talk about moving in the right direction, then we get back into a foreclosure problem where more and more people are going into foreclosure. And I think that VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 40 if we could do something earlier on to prevent that, that would be, I think, a smarter way to go. Mr. BERNANKE. Well last year, in part because of our program of buying MBS and bringing mortgage rates down, there were mil- lions and millions of refinances, which got people into better shape. And I believe that Fannie and Freddie will refinance some people who are underwater if they meet other criteria. The CHAIRMAN. The gentlewoman from Illinois. Mrs. BIGGERT. Thank you, Mr. Chairman, and thank you for being here, Chairman Bernanke. You have heard it several times today, but small businesses can’t get credit, and obviously they need it. And I understand you are not the only regulator, but one of the issues which I would appre- ciate your view on is that the community banks are being asked to reassess commercial real estate loans, devalue then because of FASB’s mark-to-market accounting rules, and subsequently can’t get the credit. Even though these are performing loans; they are not in any problem. But the result is that commercial loans are being called in, lines of credit are being cut off, and creditworthy small businesses can’t get credit. Do we need to reassess, expand, and—or do something with FASB’s accounting rules again? Regulators’ implemented im- plementation doesn’t seem to make much sense. Mr. BERNANKE. Congresswoman, we and the other regulators just recently issued a guidance for banks on commercial real estate which explains how to restructure a loan which is in trouble, makes the point that a loan which is paying, but has a reduced col- lateral value should not be considered impaired under most cir- cumstances. And it has been well regarded because the guidance provided a number of concrete examples about how to deal with troubled loans. So we have made a very concerted effort, I think a well-regarded effort, to help banks deal with the CRE problems. Now if the loans are bad, then clearly there is going to have to be some write-down. Mrs. BIGGERT. This is where the loans are performing. The cus- tomer is paying the loan off, but they say ‘‘Well, in the next year, it probably won’t be good, so you should revalue it now.’’ This has happened in my community. And then on top of having the FDIC coming in with this assessment in December, they can’t work with it with the capital that— Mr. BERNANKE. Again, we are not requiring banks to write down loans just because the collateral value has declined. Mrs. BIGGERT. Okay. Then you said in response to Mr. Castle’s question, there is a memo of things Congress can do for job cre- ation, and my constituents need jobs. Can you give me three exam- ples of the menu that you talked about? Mr. BERNANKE. Well, I think Members would disagree, but just to give you three examples, you could provide funding for State and local or infrastructure type spending, which would have some job impact. Other Members might prefer tax cuts for corporations to make them more competitive. A third possibility would be to adopt one of these programs to try to encourage small banks to make small business loans, like the one that the Treasury has proposed. So those are three very different types of programs, and I know dif- VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 41 ferent Members have different preferences, but there are many dif- ferent things that you could consider. Mrs. BIGGERT. Okay. And one of them might be trade agree- ments? Mr. BERNANKE. Of course, details matter, but I think in general, open trade creates a lot of opportunities and there certainly are a lot of firms in the United States that rely heavily on exports. And indeed, manufacturing has been leading the recovery so far, and part of that is because they have been able to take advantage of export markets. Mrs. BIGGERT. Then lastly, when implementing the so-called Volcker Rule that has been recently proposed by the Administra- tion which would seek to limit, or in some cases eliminate, propri- etary trading at financial institutions, would this reduce liquidity, would it add to the volatility in the capital markets, or is it a good thing? Mr. BERNANKE. First of all, we all agree that we don’t want banks to take excessive risks when they have a safety net from the government. So the question is, then, how do you control those risks? The Volcker Rule might be appropriate. You have to be careful that you don’t inadvertently prevent good hedging, which actually reduces risks, or that you don’t prevent market making, which is good for liquidity. One possibility is that—if you were to go in this direction would be to give some discretion to the supervisors to de- cide whether a set of activities is so risky or complex that the firm doesn’t have the risk management capacity or the managerial ca- pacity to deal with it and then give the supervisors the authority to ban that activity. So there might be ways to do it using super- visors. The CHAIRMAN. The gentlewoman’s time has expired. Mrs. BIGGERT. Thank you. The CHAIRMAN. I recognize the gentleman from Kansas and ask for 10 seconds to say that the amendment to the House bill em- bodies precisely the approach that the Chairman just recommended with regard to proprietary trading, and it is in our bill. The gentleman from Kansas. Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. And Mr. Chairman, the economist Mark Zandi testified yesterday that policy uncertainty is playing a role in the business commu- nity’s lack of confidence. It will be 2 years next month since the financial crisis started in full with the failure of Bear Stearns, and Republicans and Demo- crats have been in agreement of the key principles of financial reg reform, including increased consumer and investor protections, strong oversight of derivatives and executive compensation, new dissolution of authority to safely unwind the next AIG while pro- tecting tax payers, stricter capital and leverage standards, and a financial reg structure that monitors systemic risk. The House re- cently passed a strong bill that accomplished all of these principles, in my judgment, that the Senate is now considering. And we need to eventually reform housing finance after considering the best ideas and the ways to do that. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 42 Mr. Chairman, will uncertainty increase or decrease in the busi- ness community if Congress delays these important reforms, or should Congress enact these reforms into law this year, now, so businesses know what the rules of the road will be? Won’t that en- courage investment and hiring in your judgment? Mr. BERNANKE. Clearly, Congress has to take the time it needs to deliberate, but I agree with your basic premise that if there is excessive delay, it will create uncertainty about what the regula- tions are going to be, how much capital will be required, and so on, and that makes banks more reluctant to lend, for example. Mr. MOORE OF KANSAS. Thank you, and one last thing. My col- league from Illinois, Mrs. Biggert, just asked you a question about commercial real estate, and I want just a little different, I think, than her question. I am concerned about the commercial real estate market—I think all of us are—and what impact that is going to have on the economic recovery. The Congressional Oversight Panel for TARP issued a report this month expressing concern that a wave of commercial real estate loan losses over the next 4 years could jeopardize the stability of many banks, especially community banks, which I think really are not responsible for what we have seen in this whole situation. In the report, they say, ‘‘A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.’’ Mr. Chairman, I heard your response to Mrs. Biggert. Is there anything else that you can suggest or that Congress should look at to minimize the negative impacts of the commercial real estate cri- sis? Mr. BERNANKE. I think one thing that would help would be just the general improvement in the economy, and that is one reason why the Federal Reserve has been using accommodative policies. And some of the ideas you have just raised about reducing uncer- tainty and trying to stimulate growth, those are the kinds of things that would lead back to having people go to the mall or having peo- ple be employed and housed in an office building. So that is one, obviously, direct way. I don’t have another good suggestion for you, but I would be happy to talk to you about it. Mr. MOORE OF KANSAS. Thank you so much, Mr. Chairman. I yield back my time. The CHAIRMAN. The gentleman from Texas, Mr. Hensarling. Mr. HENSARLING. Thank you. Chairman Bernanke, I want to follow up on a question that one of my colleagues had that I am not sure I heard a precise answer to. I think the question was a variant of, what is the level of desir- able or necessary leverage within the banking system on a macro- economic level to hopefully ensure we don’t repeat what we have just been through? Clearly, there are those within Congress who believe in artificial limits to the size of financial institutions, who believe that Federal regulators should have power to prohibit certain credit offerings. But some of us believe that hopefully out there is a proper applica- tion of risk-based application of capital and liquidity standards that would hopefully, perhaps, lead to a more prudent leveraging within our economy. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 43 But the question is, from your perspective, on a macroeconomic level, what is the amount of leverage the system can handle a cycli- cal downturn? Mr. BERNANKE. That is not an easy question to answer. Mr. HENSARLING. That is why I asked you. Mr. BERNANKE. It is not a single number, because as you men- tioned in your question, first of all, it is risk-weighted. It depends on the mix of assets. As you know, we currently have the 8 percent requirement under Basel II. I think we want to, first of all, in- crease the risk weights so that there is more protection against risky assets, number one. Second, we want to make sure the cap- ital is of higher quality that is more common equity and less subor- dinated debt instruments, for example. And third— Mr. HENSARLING. Mr. Chairman, if I could. I understand that, but does the question defy an answer? Is it possible to quantify on a macroeconomic basis? Mr. BERNANKE. I’m sorry. It is certainly possible, but we are cur- rently engaged in a very elaborate process with the Basel com- mittee and other colleagues around the world to try and determine that number. We don’t have a single number yet that we can give you. Mr. HENSARLING. And Mr. Chairman, when might we expect that number from on high? Mr. BERNANKE. The objective is to have it by the end of this year. Mr. HENSARLING. Thank you. Mr. Chairman, you answered sev- eral questions. Clearly, you believe, as do many others, that the Nation is on an unsustainable fiscal path, and I think you have de- scribed quite eloquently, as have other prominent economists, the dire consequences associated with that. I don’t think I quite have the lyrics right, but I’m reminded of a country and western song that says something along the lines of, everybody wants to go to heaven, they just don’t want to go now. So we have so many people who claim they want to do something about this problem, but with one exception offered by Congressman Ryan of Wisconsin, I haven’t seen any plans put on the table. Taking default off the table, because it is totally unacceptable, assuming for the moment we do not achieve any level of spending discipline we haven’t been able to achieve in previous decades, I’m under the impression we cannot grow our way out. I don’t have the number at my fingertips. I think I have seen at least some studies suggesting we would have to have double digit economic growth for the next 3 decades to grow our way out. Can we grow our way out of this problem? Mr. BERNANKE. I don’t think so, not in the medium term. Mr. HENSARLING. Okay. If we can’t grow our way out, you have said repeatedly you do not intend to monetize the debt, although there are a number of people within our economy who think you are already doing that. We will leave that subject to a different time and place. That unfortunately leaves, under my hypothetical, tax increases. I have seen studies that show that if we only try to solve this prob- lem on the tax side, that number one, just over the next 10 years of the President’s budget window, we would have to increase in- VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 44 come taxes roughly 60 percent. Have you seen similar studies? Has the Fed researched this? Mr. BERNANKE. That sounds like the right order of magnitude. Mr. HENSARLING. Okay, and my children, who are young, accord- ing to a CBO analysis, we would see tax brackets go—10 would have to go to the 25 percent bracket, 25 to 63, 35 percent bracket to 88. It is fairly dire. So have you modeled what would happen to the economy if we indeed had tax increases of this magnitude? Mr. BERNANKE. I don’t know the exact numbers, as I said, and obviously forecasting is difficult, so I don’t want to put too much weight on any single number. But I think you and I would agree, I think most people would agree, that a big increase in marginal tax rates is going to be counterproductive from a growth perspec- tive. Mr. HENSARLING. I hope I can slip this in, in the seconds I have left. Recently Alan Meltzer wrote an op-ed in the Wall Street Jour- nal, and my guess is that you are familiar with it, that asked the question how much one might have to pay on the interest on the bank reserves. I’m not sure you have—I haven’t seen you answer that question publicly and I want to give you that opportunity. Mr. BERNANKE. We think— The CHAIRMAN. We are into the deficit now, so if you can give a brief answer, otherwise it will have to be in writing. Mr. BERNANKE. We think that the interest rate we pay on re- serves will bring along with it the Federal funds rate within tens of basis points. Not a tremendous difference. Mr. HENSARLING. Thank you, Mr. Chairman. The CHAIRMAN. You can elaborate in writing. The gentleman from Texas, Mr. Hinojosa. Mr. HINOJOSA. Thank you, Mr. Chairman. Chairman Bernanke, welcome, and thank you for coming to visit with us and give us an update. I represent the 15th Congressional District of Texas, and I refer to it as deep south Texas. We are along the Texas-Mexico border, and our county is about 750,000 people and it has the highest con- centration of—about 89 percent Hispanics. Hidalgo County is one of the poorest. I’m going to preface my question by saying our area was plagued by a double digit unemployment for about 35 years before I came to Congress. And to give you an idea, in December of 1990, the un- employment rate was much higher than Detroit, Michigan, is today. It was 29 percent. In January of 1996, when I came to Con- gress, it was 24 percent. The unemployment rate dropped over the 14 years that I have been in Congress. In April 2008, it was 6 per- cent. So even though we have seen an improvement, and today even though it is 11 percent, it is very close to the national aver- age. So what do we do to try to bring it back down to 6 percent when the banks tell me—the community banks and the large banks say that they are lending money, but there is no proof that there is be- cause so many businesses have closed, so many signs for rent, buildings that are now empty and spaces that are empty? Then we get the credit banks representatives coming to visit me and say that they want us to support their mission statement to expand it VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 45 so that they can lend money to small and medium-sized businesses. And I’m torn between supporting that idea. I heard the President say just recently that there was going to be $20 billion from the TARP money being repaid to us in Federal Government available to make money available to the small and medium businesses. Tell me, what is the answer for regions like mine, very poor, very large, and that we can’t seem to have access to capital? Mr. BERNANKE. I know you are asking the questions, but I would like to hear some time how you got the unemployment rate down the way you described it. Again, I think if I’m not mistaken, the Treasury is proposing to provide capital to CDFIs, Community Development Financial Insti- tutions, which are banks or other institutions, which make more than 60 percent of their loans to low- and moderate-income commu- nities. I think that is a very constructive thing to do. So that is the kind of vehicle that could bring capital into a lower-income commu- nity using TARP money, essentially. Mr. HINOJOSA. Would you support the idea that our chairman of the Small Business Committee, Nydia Velazquez, has proposed, and that is that there be more direct loans instead of being bank loans through the Small Business Administration? Mr. BERNANKE. I think that is really up for Congress to decide. I think you need to investigate. Her view, she said earlier today, was that going through the banks would not work because they wouldn’t take the TARP money. Whether that is true or not, I don’t know. So I’m sorry, I don’t have a recommendation, and I think Congress is going to have to look at those two options. Mr. HINOJOSA. One of the sectors that helped us bring the unem- ployment down was the housing, the construction of both retail businesses and residential. What is your projection for things to turn around for that sector so that they can help us bring that un- employment back down to the 6 percent that I have a goal to do? Mr. BERNANKE. Unfortunately, the construction was probably overinflated for a period, and now it is quite weak. I wouldn’t con- jecture to see a big return of construction, either of residential or commercial, for some time. We still have a lot of unsold homes, for example, a lot of high vacancy rates, and also high vacancy rates in commercial real estate, so there is not, at this point, a lot of de- mand for new construction. Mr. HINOJOSA. My last question— The CHAIRMAN. No, your time has expired, I’m sorry. Mr. HINOJOSA. Thank you Mr. Chairman. The CHAIRMAN. The gentleman from North Carolina. Mr. MCHENRY. That is on how that affects— Mr. BERNANKE. The different mechanisms to the extent that the fiscal thrust is expansionary, it creates some additional growth that would potentially affect Federal Reserve policy, except we are at the zero bounds, so we are not responding too much there. One risk that I have described is that if there is a long-term loss of confidence in the long-term capacity of the government to bal- ance its affairs, that could raise interest rates today, which would have a drag effect on the economy. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 46 Another possibility, which I think is relatively unlikely, but is certainly possible, is that if there is a loss of confidence again in the government’s ability to achieve fiscal stability, that the dollar could decline, which would have potentially inflationary impact on the economy. There are a number of different channels through which large deficits or unsustainable deficits could affect the current economy. Mr. MCHENRY. I have heard various economists say that a deficit of 3 percent of GDP over the long time is sustainable and anything beyond that is unsustainable. Is that fairly accurate? Mr. BERNANKE. That is roughly right. The idea here is if you have a growing economy, you can run deficits and still maintain a flat ratio of debt to GDP, which is a sustainable situation. Normally, that would involve having what is called a primary deficit, that is deficit excluding interest payments from about zero. Normally, that would involve about 2.5 percent to 3 percent of a total deficit, including interest payments. Mr. MCHENRY. Beyond that, it could have a destabilizing effect on the dollar and obviously interest rates on top of that? Mr. BERNANKE. If protracted. I mean for one year, it does not necessarily have a big impact. If it looks to be going on indefinitely, certainly. Mr. MCHENRY. In terms of liquidity in the system right now, are we still facing deflationary pressures? Is that a part of your consid- eration in the months ahead? Mr. BERNANKE. Right now, we do not see deflation as an immi- nent risk, and neither do the financial markets, which seem to have inflation expectations of around 2 percent or a little higher. There are scenarios in which they would become more of a concern. Right now, we do not see that as an imminent risk. Mr. MCHENRY. In terms of tax rates and financial regulatory policies and those larger issues, could we see a scenario where be- tween high corporate and personal income taxes that we have an outflow of capital to lower tax regimes around the world, is this a concern for our long-term growth, price stability, and full employ- ment? Mr. BERNANKE. Certainly. In some sense, the cost of large defi- cits is that tax rates in the future are likely to be somewhat higher. As I was talking to Mr. Hensarling, that can be bad for growth in lots of different ways. One possibility is that it makes the country uncompetitive, rel- ative to other countries in terms of their tax costs of production, although there are exchange rates and other factors that would af- fect that. Clearly, very high tax rates tend to make a country less produc- tive. Mr. MCHENRY. Over a 25- to 50-year horizon, you said over the medium term, we cannot grow our way out of this structural budg- et deficit, to Mr. Hensarling’s point, over the long term, is that going to be possible or is it going to require a period of spending? Mr. BERNANKE. Nobody really knows for sure, I want to empha- size. We are an aging society. The fraction of the population that is working is going to be going down for a long time, and at the VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 47 same time, the number of people who are going to be requiring Medicare and other types of assistance is going to be rising. Barring very sharp changes in our growth rate in productivity, I do not think that would be very likely; no. Mr. MCHENRY. Thank you. The CHAIRMAN. The gentleman from Texas. Let me say we will be able to accommodate all the members here now. The gentleman from Texas. Mr. GREEN. Thank you, Mr. Chairman. I thank Chairman Bernanke for appearing and congratulations again on your being reappointed. Chairman Bernanke, I would like to make a comment, and I may want you to say a word, but I am not sure that I do until I finish. Sometimes, I have to wait until I finish to know what I am going to say. When we talk about the TARP, we sometimes confuse it with let’s just use the terms that the public can relate to, the bank bail- out, we sometimes confuse it with a stimulus. The bank bailout was an initiative proposed under the Bush Administration. My be- lief is that the President himself supported this initiative and in fact made public comments in support of it. When it was finally passed, because it did not pass on the first vote, but when it passed on its second vote, it was a bipartisan pas- sage. It was supported by 91 Republicans. I think sometimes this is lost in the translation, that 91 Repub- licans supported it. As a matter of fact, we had about 10 Repub- licans, friends of mine, and this is not to demean them, I just want to get the facts straight, 10 friends of mine who sit on this very committee supported it. This is not in any way demeaning, just to have it as a statement of fact. What I would like to do, Mr. Chairman, with your consent and permission and without any objection, is submit the final vote re- sults, the roll call vote, if you will, on this piece of legislation. May I submit this for the record? The CHAIRMAN. So ordered, without objection. Mr. GREEN. Thank you very much. A simple ‘‘yes’’ or ‘‘no’’ will suffice. Is what I stated correct saving the vote count, I do not ex- pect you to know this, but the fact that it was a bipartisan effort and the TARP is separate and apart from what we call the ‘‘stim- ulus?’’ Mr. BERNANKE. Yes. Mr. GREEN. Thank you. With reference to trade, I think we do ourselves a disservice when we discredit legitimate positions that are made by what we call ‘‘the other side.’’ I think there is some good in trade. In fact, I believe we ought to have trade. ‘‘Free trade’’ is a term of art. ‘‘Fair trade’’ is a term of art. The question becomes for some how will the trade impact not only the exports from our country but also imports in that sometimes jobs will occur in countries wherein you can get workers for pennies a day, whereas in this country, it is going to cost you dollars per day to get a worker, and there seems to be the notion that this can influence where the busi- nesses will locate jobs and hence, by locating them in places where VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 48 they have pennies per day, they are in fact in a sense taking the jobs from this country, from the United States. That is the concern. I think we have to try to find a balance that accommodates everyone when it comes to this concern. I respect the fact that we can import and export and these exports will cre- ate jobs here in this country. Is this a fair statement to say there is a balance we have to try to strike? Mr. BERNANKE. The point that you are making, which is correct, is that trade does not necessarily benefit everybody. It might make some people better off, and in particular, people with low skills who are competing implicitly with low-skilled workers around the world might be made worse off. Some people have attributed some part, perhaps not a large part, but some part of increased inequality to increasing trade. That is a concern. I think most economists would say the right solution is not to block trade because trade creates a lot of wealth, but rather to find other ways to help low-income people, low-skilled people acquire skills or otherwise make themselves better off. Mr. GREEN. Would you agree that one of the things that we might do is try to help those countries where they have people working for pennies per day that may not have labor standards that people of goodwill would agree with? We might also try to in- fluence what they do if we trade with them. It would not cause me as a person, a human being, to feel good about an effort that would cause persons to work for pennies a day and allow me to benefit when they are working under conditions that are less than tolerable by my standards. Mr. BERNANKE. It is a very hard question. Certainly, you want to have humane conditions. Low income is a fact of life in poor countries and sometimes trade is an opportunity to better yourself. Mr. GREEN. I agree. We have a balancing test with this as well. I see that my time is up. I did not get to the real question I had for you, but I will get to you next time. Thank you, Mr. Chairman. The CHAIRMAN. The gentleman from Minnesota, and as he be- gins, I would ask the gentleman from Idaho to come and assume the Chair so I can go talk about fishing and we will be able to take the last three members. I thank the Chairman for his indulgence and I also want to thank the members. I think it has been a thoughtful and civil hear- ing, which I appreciate being able to do. Mr. PAULSEN. Thank you, Mr. Chairman. Chairman Bernanke, we have had a lot of discussion earlier and I was gone for part of it, I know we discussed mostly about the deficit, the national debt and the effect of long-term borrowing in terms of the Federal Re- serve’s policies. Let me ask this, some have made claims that taking steps to put our fiscal house in order, to right ourselves right now, could itself be stimulative in some effect. What impact would implementing policies that are more focused on the long term have on the short-term dynamic, if we just thought more about the long term going forward thinking as op- VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 49 posed to dealing with the short-term challenges that we do face right now with our economy? Mr. BERNANKE. It is possible that a persuasive, creditable long- term plan for fiscal balance would be stimulative today by lowering interest rates and perhaps increasing investment because people would not be worried about high taxes, for example. It is certainly possible a good plan would actually pay off in the present, not just in the future. Mr. PAULSEN. Let me ask you this, does the large budget deficit right now, does it really impair the Fed’s ability to either stabilize prices or ensure long-term growth? Mr. BERNANKE. No, I do not think so. I think we do have to rec- ognize, I want to be clear, given the depth of the recession, the fact that revenues have fallen from the normal 19 percent of GDP to 15 percent, given the payments to the unemployed and so on that are obviously important during a deep recession, it is not sur- prising that we have a deficit this year. I do not think any reason- able policy could eliminate that deficit this year. The answer to your question is no, I do not think so, but clearly, a long-term unsustainable policy would have bad consequences. Mr. PAULSEN. How does the large Federal balance sheet that you opened up a little bit with your testimony and talked about a little earlier impede your ability to set interest rates? Mr. BERNANKE. Are you talking about the Federal Reserve’s bal- ance sheet? Mr. PAULSEN. Correct. Mr. BERNANKE. If we had no other tools, it would create a prob- lem because with so many reserves in the system, such a large sup- ply of reserves, you would not be able to raise the Federal funds rate, which is the price of reserves. However, as I described in my testimony, we have a number of tools, including interest on reserves and various ways of draining reserves that will allow us to raise interest rates at the appropriate time, notwithstanding the fact that we have the large balance sheet. Mr. PAULSEN. How long do you think it will be before the Federal funds rate becomes the benchmark again for overnight lending, and how tested are these tools that you have to employ or you plan on employing in the near future, I guess? Mr. BERNANKE. None of them have been completely tested. We have not been in this situation before. On the other hand, we have a belts-and-suspenders kind of situation here. We think the inter- est rate on reserves by itself could be used to tighten policy and there are good economic reasons to think so. Beyond that, we have these additional tools that would allow us to drain reserves, just to make doubly sure. In fact, beyond that, although we do not anticipate selling any of the assets on our balance sheet in the near term, if we abso- lutely had to, that would be another way to reduce the size of the balance sheet. Mr. PAULSEN. Okay. Thank you, Mr. Chairman. Mr. MINNICK. [presiding] The Chair recognizes the gentleman from North Carolina for 5 minutes. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 50 Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. My questions are also about how to encourage lending. I am sure as a scholar of the Great Depression, you know the Reconstruction Fi- nance Corporation did not start out with a direct lending program. They only resorted to that when they could not persuade banks to lend, when they tried to lend to banks for the banks to lend in turn, that did not work. They tried to buy preferred stock in banks so banks could have additional capital. That did not work. It was only then that the Reconstruction Finance Corporation began direct lending, and 20 years later, when the program was ratcheted down, it had turned a slight profit. It does appear it is possible to lend even in a bad economy with proper underwriting. I am sure I am in a distinct minority in this committee in think- ing that it was probably a mistake to—we were probably better off having mark-to-market rules for accounting, that it is better to know what is on a bank’s books, to have an accurate idea of the assets and of the liabilities. I was also skeptical a year ago about the stress test, that would be seen as a rigorous test, a real measure of the sovereignty of banks. I have been surprised at the amount of capital that has gone into those 19 banks. A couple of questions. To what extent was that the result of in- vestors getting confidence to cause the stress test, because they did feel reassured their books were accurate, and to what extent was that because investors became convinced that the government was not going to allow any of those 19 institutions to fail, that they were too-big-to-fail? Second, with respect to community and regional banks, it does not appear that capital is flowing into community and regional banks in the same way they flowed into those 19 bigger banks. Do you agree it is important they have additional capital? Are they trying to acquire it? Is that because of the skepticism about what is really on their books? Do they have accurate books or are their books being cooked somewhat? To what extent because they are too small to fail and investors know they may in fact lose their entire investment in a way they cannot possibly lose their entire investment at the bigger banks? Mr. BERNANKE. It is my belief, first of all, on the stress test, I think that the revelation of information, the fact that the govern- ment showed what the underlying evaluations were and what the potential credit risks were, that cleared up a lot of the uncertainty in the market and that is why so much capital flowed in. I think the alternative that it was a ‘‘too-big-to-fail’’ issue would not work because there was not really a change in that respect, and in any case, when a ‘‘too-big-to-fail’’ institution comes under stress, the shareholders can definitely lose money, as they did in many of these big banks. I do think the stress test was quite successful in that respect in providing this information to the markets. I think it is hard to distinguish two explanations for why the re- gional banks have raised less, some of them have raised some cap- ital. Part of the problem is they are in fact—regional banks and smaller banks—more exposed to commercial real estate, which right now is the more stressful area, so therefore, it is not a ques- VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 51 tion of information, but a question of the fact that some of those banks are facing that highly stressed situation. Surely, we are advising and supporting capital raises, particu- larly of common equity, by banks of all sizes, and some of the 19 banks were in fact big regionals, and some of them have been able to raise capital and pay back. Mr. MILLER OF NORTH CAROLINA. Is there a confidence among in- vestors that the books of the regional and community banks are ac- curate, that their assets are properly valued? Mr. BERNANKE. I have not heard anything to the contrary. I guess you would have to ask the investors. To respond to your earlier point, I think mark-to-market can be very useful in terms of information, but I think for banks, which have long-term loans on their books, often it is very difficult, be- cause there is no liquid market, it is very difficult to get an accu- rate price of what a long-term loan might be worth, and even a large commercial real estate loan might be very hard to price accu- rately. For capital and regulatory purposes, I think you do need to look at the hold to maturity prices as well as the mark-to-market prices. Mr. MILLER OF NORTH CAROLINA. I will yield back the little bit of time I have left. Mr. MINNICK. The gentleman from New Jersey, Mr. Lance, for 5 minutes. Mr. LANCE. Thank you very much, Mr. Chairman. Good after- noon to you, Chairman Bernanke. Was the Federal Reserve consulted before the Administration an- nounced its proposal about $100 billion in taxes on banks across the country? Mr. BERNANKE. I think there were some technical discussions. You are talking about the financial responsibility fee? Mr. LANCE. Yes. What are your views, Mr. Chairman, on the im- position of that amount of money on banks across America? Mr. BERNANKE. I think in terms of whether or not to impose a tax on the banks, that is obviously a fiscal matter, and Congress has to decide about that. I do think it is important that it be im- posed in a way that it does not have unintended consequences. One issue which has arisen is that imposing the tax on non-de- posit liabilities could have some negative consequences for the repo market, as an example. If you want to impose the tax and many do, you just want to be sure to do it in a way that does not create unintended con- sequences. Mr. LANCE. My point of view is that the tax should not be im- posed because the banks by and large have paid back their TARP funds with interest, and those that are still outstanding, General Motors and AIG, would not be liable, as I understand it. I have a concern that it would lead to even less lending than is now the case. Does the Federal Reserve Board have a position on that aspect of what might occur as a result of imposition of these taxes? Mr. BERNANKE. You are correct that the large banks have paid back the TARP, and in fact, I think it is important to say that the financial part of the TARP, even including AIG, is not that far in VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 52 the red at this point. I think there is a very good chance the tax- payers are going to come out whole in this entire process, which is an important thing to recognize. Mr. LANCE. Yes. The rhetoric of the President when announcing this was in direct relationship to the fact that funds were used for TARP and they are being paid back. I just have the greatest con- cerns that this would mean less lending than would otherwise be the case. Mr. BERNANKE. I believe one reason for the proposal is the law requires that the President make a proposal on how to recoup the TARP money, and the TARP technically does include not only the auto losses, but the mortgage modification program as well. Mr. LANCE. Thank you, Mr. Chairman. Another area you note in your testimony, that more than half of the fourth quarter GDP growth was due to restocking of inventories. I do not think that can continue without demand for goods of those inventories. In my opening remarks, I talked about consumer confidence and the report others have cited. Today’s figures with a lack of con- sumer confidence, what do you believe might be the most effective way the Federal Reserve moving forward could instill even greater consumer confidence in such a large percentage of our economy? Mr. BERNANKE. I think the confidence issues, particularly the number we saw yesterday, are tied pretty strongly to the labor market situation. Mr. LANCE. Yes. Mr. BERNANKE. All the things we have talked about from the monetary policy side, lending, from whatever actions Congress wants to take on the employment side, I think those are the issues that will create stabilization in the labor market, and that in turn is one of the keys to consumer confidence. Mr. LANCE. I thank you. A statement, not a question, Mr. Chair- man. I think consumer confidence is at the heart of restoring the economy, getting more people working in America since it is such a large percentage of the overall economy, and I am deeply con- cerned about any bank tax as suggested by the President’s proposal because I think it would lead to less lending by banks and what we need in this country is more lending, not less. Thank you. I yield back the balance of my time. Mr. MINNICK. The Chair recognizes the gentleman from Illinois, Mr. Foster, for 5 minutes. Mr. FOSTER. Thank you. In this week’s Economists magazine, there was an interesting article on Canada and the situation they are in, where they are seeing an incipient housing bubble re- emerge. They have kept interest rates very low for the same reasons we are doing, to try to restart industrial and business spending, and because if this persists for a long time, some of that money is going to leak out and could make a housing bubble. China is also facing similar problems where they have re- sponded, as has Canada, by actually increasing the amount of money you have to put down on a real estate investment, an in- vestment, as opposed to one you live in. I was wondering do you have contingency planning? Are there tools available that you are thinking of in case you keep interest VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 53 rates low for an extended period of time, and all of a sudden, in regions of the United States, this starts to show up as a local or national real estate bubble? Mr. BERNANKE. We are monitoring that very carefully. It is obvi- ously very difficult to know if there is a bubble, particularly in the early stages. Our best assessment right now is there is not any ob- vious level in U.S. economy. If there was a bubble, then the re- sponse probably would depend on which asset it was, what part of the economy it was. My view is that in the longer term, when possible, you want to address those kinds of systemic risks through regulation and su- pervision rather than through monetary policy, but if there were not appropriate tools, and you are right, there are some countries where they can vary the loan to value ratio as a policy tool, which I think— Mr. FOSTER. It is a very valuable handle that we have not used in this country yet and maybe we should look abroad and think about using that. Mr. BERNANKE. Given that we do not have that tool, we would have to see what tools we did have. Mr. FOSTER. Do you feel that you do not have that tool? You have had the ability to set nationwide mortgage origination standards since the early 1990’s, is my understanding. The question is if you just said okay, everyone, 5 percent down, 8 percent down. Mr. BERNANKE. Our standards are based on a finding of unfair and deceptive practices. Mr. FOSTER. You feel you need additional authority, legislative authority? Mr. BERNANKE. I think so, particularly if you wanted to make a rapid change, because these processes take a long time, rulemakings and so on. Mr. FOSTER. As you know, I am an enthusiast for actually look- ing into this as a way of stabilizing our economy against future, es- pecially real estate, bubbles. We had some testimony from our snow-canceled hearing by a gentleman called Richard Koo from Nomura Securities Institute, and he talked about what he called a ‘‘balance sheet recession.’’ He said there was a qualitative difference between normal busi- ness circumstances where businesses respond to a lower interest rate by actually expanding operations, and a situation where after the bursting of a bubble that was fueled by deficits and so on, that you behave differently. If you are terrified you are insolvent, then a lower interest rate does not interest you, except in helping you pay off your debt fast- er. I was wondering if you think that is a valid point of view and really if there is an element to that. He made the comparison also of Japan 15 years ago and the United States today. I was wondering if you would comment on that. Mr. BERNANKE. I think there is some validity. I think that is an interesting perspective. In fact, my own research when I was an academic addressed some of those issues as well. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 54 It does not mean that monetary policy, for example, is impotent because, for example, lower interest rates can improve balance sheets by lowering interest costs or raising asset values. It is a dif- ferent mechanism through which monetary policy has its effects and through which the business cycle operates. Mr. FOSTER. Finally, if you are paying interest rates on reserves, does that have a big effect on the profitability of the Fed? In case no one else has thanked you, I want to thank you for the $50 bil- lion and some you returned to the Treasury. Maybe what we need actually are more Federal reserves, and not fewer, if we could rep- licate you. Mr. BERNANKE. It would reduce the profitability a little bit be- cause we would have a higher cost of funds, but since we are mak- ing 4 percent-plus on the MBS, we still have quite a bit of margin there. It would still be a positive cash flow. Mr. FOSTER. Thank you very much. I yield back. Mr. MINNICK. The Chair recognizes the gentlewoman from Min- nesota for 5 minutes. Mrs. BACHMANN. Thank you. I appreciate that, Mr. Chairman, and thank you so much also for coming, Mr. Chairman. One thing that constituents have continued to ask me about is if we are any closer to an audit of the Federal Reserve and know- ing what the overnight loans are, the collateral requirements, who is getting the loans, and are we any closer. I get that question asked almost everywhere I go, where are we at in terms of auditing the Fed. Mr. Paul had a bill— where are we at with that, and what is the response of the Federal Reserve? Mr. BERNANKE. In my testimony today, in my written testimony, I made a proposal that we would be glad to support complete au- dits of all the emergency facilities and all aspects of those facilities with disclosures of the names of the borrowers with an appropriate delay. All of that, we are very supportive of. Our concern with Mr. Paul’s bill and similar bills is that the word ‘‘audit’’ is not just a financial term, it is also a policy evalua- tion term. As written, his bill will allow the Congress to ask the GAO to come in and essentially determine whether they thought the Federal Reserve had made a mistake in its interest rate policy or not. We think that would be inconsistent with the very important principle that Congress should not be managing monetary policy, that the Federal Reserve should be independent in making its mon- etary policy decisions. We think that would actually have very bad effects on markets. Mrs. BACHMANN. Would the American people be able to know what overnight loans are made, who they are made to, what the collateralization is, would we have that information? Mr. BERNANKE. We are happy to provide some information on that. Mrs. BACHMANN. Define ‘‘some.’’ Mr. BERNANKE. There are two classes of loans. There are a whole bunch of programs that were established under emergency authori- ties. These are now being shut down. We essentially are offering VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 55 full transparency on all those programs, including the names of the borrowers. There is another program which is pretty small in size, but is very important, called a ‘‘discount window.’’ The discount window, we think it is very important to keep the names of the borrowers confidential, and the reason is the banks will only come to the dis- count window in a period of crisis or panic, and if they believe their names will be revealed, that would indeed intensify the crisis or panic, and therefore, the whole purpose of the discount window, to try to eliminate financial panics, would be severely damaged. We are concerned about that. Mrs. BACHMANN. Mr. Chairman, was the discount window open to private investment banks prior to March 2008? Mr. BERNANKE. The loans to investment banks were made through an emergency facility and we are opening that. Mrs. BACHMANN. Was the first time that was opened by the Fed- eral Reserve, the Federal Reserve’s discount window, was that in March of 2008 or had the Federal Reserve opened that up prior to that time? Mr. BERNANKE. The discount window is for banks only. The lend- ing we did to investment banks, we did through an emergency fa- cility, which was opened in March 2008, and which we are offering now complete transparency on. Mrs. BACHMANN. You are saying there are two discount win- dows? Mr. BERNANKE. One of them was an emergency one, which has already been shut down. Mrs. BACHMANN. The other discount window that is available to banks, that is obviously open, that information, you are saying, we could not have access to? Mr. BERNANKE. I am concerned that public release of the names of the borrowers would in fact severely damage the function of the discount window, which is to allow liquidity to be put into the sys- tem during a period of financial panic. Mrs. BACHMANN. Another question that I wondered if you could address would be on the GSEs, with Freddie and Fannie, and it ap- pears we may have an attending risk up to $5 trillion. Those are some figures we are hearing, that we are looking at potentially $400 billion directly, but we may have exposure up to $5 trillion. What are we doing really to limit that risk? It does not seem there has been any appreciable reform of the GSEs, Freddie and Fannie, and it seems like if anything, we are making that situation worse by raising the levels of loans that people can have access to. What are we doing to protect taxpayer risks? Mr. BERNANKE. The Federal Reserve for a very long time warned the Congress about the risks of Fannie and Freddie, that we be- lieved they did not have enough capital for their portfolios, and in fact, that has turned out to be the case. The government’s exposure is a couple of billion dollars, which obviously is a large amount of money. Mrs. BACHMANN. You hold toxic assets on your books now, right? Mr. BERNANKE. Very little. Mrs. BACHMANN. What amount is that? VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 56 Mr. BERNANKE. About 4 or 5 percent of our balance sheet, about $100 billion. Mrs. BACHMANN. About $100 billion? Mr. MINNICK. The gentlewoman’s time has expired. Mrs. BACHMANN. Mr. Chairman, thank you. Mr. MINNICK. The Chair recognizes the gentleman from Colo- rado, Mr. Perlmutter. Mr. PERLMUTTER. Thank you. Mr. Chairman, thank you again for appearing. Thank you for the stamina, because you and I are gen- erally the last guys in the room. I do want to thank you for being a pretty steady hand during a very difficult time, and the way I would describe it is we had a heart attack, this economy, this financial system had a heart at- tack in September 2008. There were a lot of consequences, but we are convalescing now, or we went through a heck of a storm, it is still kind of raining, but not nearly as hard as it was. I would like to first turn your attention to your slide number 27, and if we could pull up the other slide on unemployment, job loss. You are looking at your 27 as well as Mr. Foster’s slide on job loss. Do you see that? In your 27, it is more pronounced because the scale is a little dif- ferent than what he has. Just a sharp drop and then a sharp rise. The loss of unemployment changes dramatically beginning in early 2009. To what do you attribute that? Mr. BERNANKE. As you pointed out, in the fall of 2008, the world economy essentially had a heart attack and the firms started drop- ping employees very quickly. There was a sharp contraction of glob- al trade, a sharp contraction of global economic activity. We had minus 6 percent growth in the fourth quarter of 2008 and the first quarter of 2009. Through a variety of policies, including I would give a lot of cred- it to Federal Reserve policy, but of course, you can consider me bi- ased, the economy stabilized in the second quarter, and has been growing since then. It was the stabilization—this is the change. This is the number of losses. When the economy stabilizes, then losses begin to shrink very dramatically. That is what we have seen. We have not yet, of course, seen any actual increases in employment. Mr. PERLMUTTER. Just looking at the glass-half-full for a second, we were in free fall in terms of jobs. We were just losing jobs at a rate we had not seen. I am not sure we have ever seen job loss at that rate, including in the 1930’s. We have reversed that. I would credit monetary policy, the Federal Reserve, also fiscal policy as coming out of this Congress. My friends on the other side of the aisle, for a while, they were picking on where are the jobs. Well, we have a graph to show they are coming back, which is up there on the wall as well as your slide 27. Now they have moved onto the next thing, which is the debt. We are not out of the woods yet on jobs, are we, sir? Mr. BERNANKE. No. Mr. PERLMUTTER. Part of our debt problem is there was a con- traction in the revenues stream to the United States of America. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 57 Mr. BERNANKE. That is right. Mr. PERLMUTTER. I was kind of listening to a couple of their points. Mr. Hensarling gave us the words from his song, everybody wants to go to heaven, they just do not want to go now. It re- minded me of sort of the corollary of that is, John Kaines, who said we are all dead in the long run. We have to take care of today and today is jobs. We have to put people back to work. I think there has been a complimentary set of policies that are trying to reverse that job loss and to move peo- ple into jobs. My question to you is, how are we getting credit, the smaller banks, community banks, so we can get it to small businesses? That is the big complaint I hear. I think that is where we will get the next surge or we will get a surge of employment, if we can get small businesses really running strong again. How do we do that? Mr. BERNANKE. On the first point, I am not advocating and I do not think anyone is advocating trying to balance the budget this year or next year. Obviously, there has been a big drop in reve- nues, a lot of extra expenses. The issue is trying to have an exit strategy, try to find some years down the road a sustainable fiscal path that will give con- fidence that we can in fact exit from this extraordinary situation. I have talked, as you know, a good bit about getting lending going again and talking about supervisory efforts that we are doing. I think it is worth noting that there was a poll this morning the NFIB put out and asked small firms what their most important problem is. We got an answer which we have seen before which is only 8 percent said credit was their most important problem. The majority of them think weak demand, the weak economy, is the most important problem. This is not a complete answer to your question, but I do think as we get the economy moving again and strengthening, that is going to make banks more willing to lend and it is going to bring good borrowers to the banks to get credit. I think just strengthening the economy is going to be a big help. It is important for us as supervisors, and I have mentioned, for ex- ample, the various new efforts we are making to get feedback, to get data, to do analyses, to try to make sure our examiners are tak- ing a balanced perspective and are not blocking loans to good cred- itworthy borrowers. We do not want to make loans to borrowers who cannot pay back, but we do want to make loans to those who are creditworthy. That is an important objective we can continue to work on. Mr. PERLMUTTER. Thank you. Mr. MINNICK. The gentleman’s time has expired. The Chair rec- ognizes the gentleman from New Jersey, Mr. Garrett, for 5 min- utes. Mr. GARRETT. Perhaps your last questioner for the day. Thank you for being here. Thank you for staying so long. I appreciate the chance to ask you a couple of questions. The Fed is talking about pulling back on the purchase of mort- gage-backed securities. Some experts when they hear that suggest if that does happen, that one of the consequences of that might be VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 58 that interest rates will go up some degree. How much, is the ques- tion. If that were to occur, the question then is, what happens to Fannie, Freddie, and the GSEs? Some speculate that if they go up a significant amount or a certain amount, that could have a dev- astating impact upon their losses at the end of the day. My first question to you is, considering all that, would it be pru- dent then for the GSEs today to try to as quickly as possible start to shrink down the size of their portfolio, and if so, then what sort of time frame would be necessary in light of what you project on potentials for interest rates going up? Mr. BERNANKE. First, we are interested to see what the effect is going to be on mortgage rates. So far, the evidence suggests it will be a modest effect, which would not have a big impact. If you are talking about interest rate risks for the GSEs, I do believe they are mostly hedged by holding treasuries and other securities. I do not know how much a modest increase in mortgage rates would affect their balance sheet. I do not think it would be cata- strophic in any case. As you know, the arrangements under which Fannie and Freddie were put under conservatorship involved a gradual reduction over time. Mr. GARRETT. Pretty slow. Mr. BERNANKE. Pretty slow, in their portfolios. I was asked ear- lier about what is the right long-term solution for Fannie and Freddie. That obviously needs to be worked out. Many possible out- comes would involve not having a substantial portfolio, so there would have to be a transition into that. Mr. GARRETT. Working that out, Secretary Geithner is over at the Budget Committee, and that is where we were earlier today, we have a chart over there that shows how much taxpayer money has gone out the window, so to speak, on all the programs, and pro- grams you folks have been working on actually pale in comparison if you saw the red lines we see over at Fannie and Freddie, with the $200 billion and the $400 billion, whether or not you put them on budget or not. We have a blueprint, if you will, from the Administration, as to where we should go on the regulatory reform. We do not have any blueprint for this. What sort of time frame should we try to come up with for some solution on this? By the next 6 months, 9 months? A year? Mr. BERNANKE. I hope so. Chairman Frank said earlier that he had scheduled a March 2nd hearing on the issue. Whether it has been changed, I am not sure. Clearly, you need to be talking about it. Mr. GARRETT. I know we have an election year. Before the elec- tion, I would hope to have this resolved. Is that where you would like to come from on this, if you could? Mr. BERNANKE. The sooner you get some clarity about what the ultimate objective is, the better. Of course, you do not necessarily have to get there by the end of the year. It is going to take some time to make a transition. Mr. GARRETT. At least get the plan in place so there is certainty. Mr. BERNANKE. Right. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 59 Mr. GARRETT. Let me change the subject, with regard to bonds and the Fed issuing bonds. I know there was new authority to the Fed at the end of last year for you to pay interest in reserves, and there was talk about the Fed actually issuing bonds. Then there was a proposal as far as you were creating something called a ‘‘term deposit facility.’’ If I understand it correctly, that would allow a 6-month period of time for the short-term bonds, which is very similar to just reg- ular short-term bond issuance, with the main difference that unlike a bond, the term deposit cannot be traded on the marketplace; right? First of all, do you have authority to do that? Mr. BERNANKE. Yes, because it comes under our authority to pay interest on reserves. We cannot sell those deposits to anybody, only to banks who have reserves with us. It is not an open thing; you and I could not purchase them. Mr. GARRETT. Do you see that in any way coming up to the edge as far as the authority, as far as the Fed being able to issue bonds as skirting the spirit of the law as to what the Fed should be doing when it comes to issuing bonds? Mr. BERNANKE. No. Congress very appropriately gave us the au- thority to pay interest on reserves and this is what this would be, only the reserves would be in these accounts. I do not see any issue with it. I would add, this does not answer your question, but I would add that every central bank in the world, major central bank, has these kinds of authorities, and they are very important for managing short-term interest rates in a period like the present. Mr. GARRETT. Going back to the beginning part of the question, the initial discussion, at least by some, as far as having the author- ity to issue bonds that would be just widely circulated or sold in the marketplace— Mr. BERNANKE. So-called Fed bills. Mr. GARRETT. Where are you with regard to that? Mr. BERNANKE. We are not proposing that now. Mr. GARRETT. Okay. Thank you. Mr. MINNICK. If the Chairman has just a few more moments, I would like to ask a couple of questions. During the Reagan Administration and dealing with the problem of commercial bank lending, which we are going to have a hearing on as the chairman said on Friday, in dealing with a similar situa- tion, the Reagan Administration adopted a policy they called ‘‘for- bearance,’’ which was a temporary reduction in the capital require- ments at the discretion of regulators in order to permit banks that were scraping against the very minimum capital levels in the ap- propriate circumstance to continue to lend. Do you have an opinion as to the efficacy and appropriateness of that kind of a policy, and if you think it has merit, is it something we should consider in the present circumstance? Mr. BERNANKE. There are general ideas about setting up a sys- tem that would allow capital requirements to vary over the busi- ness cycle, during weak periods, that you could run down some cap- ital, for example. VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 60 Those so-called countercyclical capital requirements, and those are being discussed. They might be actually a useful innovation. There is quite a bit of danger, I think, with the forbearance idea because if you begin to allow capital to fall arbitrarily, according to short-run objectives, you might find yourself with the govern- ment having to pay a lot of money to bail out banks that have failed because they did not have enough capital. It is a very delicate issue. I think you are better off if you are going to go that way having a system in place that allows for cir- cumscribed variation over the business cycle and the amount of capital the banks have to hold. A buffer during the good times, they can run it down during the bad times. Mr. MINNICK. Some variability, depending on the cycle. Would you leave the discretion to institute that variability with the bank regulators or would you provide some legislative side bars? Mr. BERNANKE. I think the legislation is probably already ade- quate. It gives the authority to the regulators to set capital stand- ards. I think the regulators could do it through a rulemaking proc- ess. You used the word ‘‘discretion.’’ Again, I would not create a sys- tem where the regulators could arbitrarily say at any given time you can reduce your capital. I think there ought to be a set of rules that explain exactly how that would happen over time. Mr. MINNICK. Is implementing such a process that wearing your hat as a bank regulator you have seriously contemplated or would contemplate in this circumstance? Mr. BERNANKE. Yes. That is being considered in international fo- rums and there are examples around the world, like in Spain, where systems like that seem to have been helpful during the cri- sis. Mr. MINNICK. Looking at the other side of financial institutions, balance sheets, one of the complaints I am certain we are going to hear on Friday from commercial banks is that the bank examiners are valuating assets based on the last distressed sale and those values are substantially below current market replacement costs, even discounted for the time anticipated to sell. Do you think there would be merit in providing guidance by reg- ulators that you could use replacement value discounted to sale as an appropriate valuation for purposes of bank examiner examina- tions? Mr. BERNANKE. There is guidance to appraisers in general. I sus- pect that the principle would be to use true comparables, which would involve not just distressed sales, but other properties as well. I think the main principle would be not to focus on distressed sales as representative of the value of a property. Mr. MINNICK. Thank you, Mr. Chairman. The gentleman from California has just arrived. We are going to declare him the last speaker and get you out by 2:00 as promised. The Chair recognizes the gentleman from California, Mr. Camp- bell, for 5 minutes. Mr. CAMPBELL. Thank you. Thank you, Chairman Bernanke. I am last and perhaps least as well. Two questions. One is the public sector, governments at all lev- els, currently represent, I believe, about 36 percent of GDP, which VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 61 is a high since World War II. Governments at all levels are in some trouble. One could say they are overleveraged. You spoke earlier about the unsustainability of the current debt at the Federal level. My home State of California is obviously in deep fiscal trouble and has been for a long time, and so are many States and local communities. I have a concern about the public sector kind of being in a posi- tion that the private sector was in a few years ago, as being over- leveraged, overextended, too much debt, too much spending, and actually the public sector being one of the drags and problems on the economy in the near future. Your thoughts on that? Mr. BERNANKE. We have talked in this hearing quite a bit about debt and deficits. I do believe it is very important. It is probably inevitable to have large deficits in the middle of a deep recession, given the loss of revenues and so on. It is very important to develop a creditable plan for restoring deficits to a sustainable level in the medium term, which I would define to be 3 or 4 years out, and that would mean getting deficits down to something on the order of 3 percent or below, to maintain a stable ratio of debt to GDP. That is very important to maintain confidence in the debt of the sovereign. Some countries around the world are having some dif- ficulty with that right now. We certainly want to make sure that in the future some time, we will not be put into a situation where our interest payments are so large that it is very difficult for us to make those payments. Mr. CAMPBELL. Right, and State and local governments have similar problems. They either have to raise taxes, reduce what they are doing, or both as well. Mr. BERNANKE. That is right. Mr. CAMPBELL. One more and final question for you is about Fannie Mae and Freddie Mac. If interest rates were to go up broad- ly, let’s say by not 25 basis points, but 200 basis points or some- thing like that, what is the impact? Are they not carrying a lot of interest rate risk and what is the impact on their bottom line and since they are now taxpayer-owned entities, government-owned entities, what problems do we face there? Mr. BERNANKE. Mr. Garrett had a similar question. I think I would recommend that you talk directly to the regulator of Fannie and Freddie, but my understanding is they have hedged a good bit of that risk so that they would not be deeply hurt if there was a change in interest rates. To get an exact answer, you really ought to talk to Mr. DeMarco, who is the acting regulator. Mr. CAMPBELL. Okay. Thank you, and thank you for everything. I yield back my time. Mr. MINNICK. The Chair would like to thank Chairman Bernanke for his professionalism, for his time, and for the expertise with which you are carrying out your duties in this very important time for the country. We appreciate you being here. The Chair also notes that some members may have additional questions which they may wish to submit in writing. Without objec- VerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE 62 tion, the hearing record will remain open for 30 days for members to submit questions to this witness and to place his responses in the record. The hearing is adjourned. 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Ben S. Bernanke (2010, February 23). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20100224_chair_monetary_policy_and_the_state_of_the

@misc{wtfs_testimony_20100224_chair_monetary_policy_and_the_state_of_the,
  author = {Ben S. Bernanke},
  title = {Congressional Testimony},
  year = {2010},
  month = {Feb},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20100224_chair_monetary_policy_and_the_state_of_the},
  note = {Retrieved via When the Fed Speaks corpus}
}