Congressional Testimony

MONETARY POLICY AND THE STATE OF THE ECONOMY, PART I HEARING BEFORETHE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION JULY 22, 2010 Printed for the use of the Committee on Financial Services Serial No. 111–147 ( U.S. GOVERNMENT PRINTING OFFICE 61–851 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 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\61851.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 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\61851.TXT TERRIE C O N T E N T S Page Hearing held on: July 22, 2010 ..................................................................................................... 1 Appendix: July 22, 2010 ..................................................................................................... 47 WITNESSES THURSDAY, JULY 22, 2010 Bernanke, Hon. Ben S., Chairman, Board of Governors of the Federal Reserve System ................................................................................................................... 6 APPENDIX Prepared statements: Paul, Hon. Ron .................................................................................................. 48 Bernanke, Hon. Ben S. ..................................................................................... 49 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Bernanke, Hon. Ben S.: ‘‘Addressing the Financing Needs of Small Businesses,’’ dated July 21, 2010 ................................................................................................................ 58 ‘‘Monetary Policy Report to the Congress,’’ dated July 21, 2010 .................. 78 Written responses to questions submitted by Representative Foster .......... 128 (III) VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 K:\DOCS\61851.TXT TERRIE VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\61851.TXT TERRIE MONETARY POLICY AND THE STATE OF THE ECONOMY, PART I Thursday, July 22, 2010 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to notice, at 9:32 a.m., in room 2128, Rayburn House Office Building, Hon. Barney Frank [chair- man of the committee] presiding. Members present: Representatives Frank, Waters, Maloney, Gutierrez, Watt, Meeks, Moore of Kansas, Clay, McCarthy of New York, Baca, Miller of North Carolina, Scott, Green, Cleaver, Bean, Moore of Wisconsin, Klein, Perlmutter, Donnelly, Foster, Minnick, Adler, Driehaus, Peters, Maffei; Bachus, Castle, Royce, Paul, Biggert, Hensarling, Garrett, Neugebauer, Price, McHenry, Put- nam, Marchant, McCotter, Posey, Jenkins, Lee, Paulsen, and Lance. The CHAIRMAN. The hearing will come to order. Let me just say before we start, I have a list on the Democratic side of Members who did not get to ask questions of the Chairman in February. And I will begin, in seniority order, with those who did not get a chance to ask, and then we will go to others. We will be having a continuation of this hearing at 1:30, with comments from other economists about the economy. And, with that, I will begin the 5 minutes. It is very important that we get the views of the Chairman of the Federal Reserve, whom, we should note, is an important point of continuity in economic policy. And, as has been the case with pre- vious Federal Reserve Chairs, for people who lament that there is not more bipartisanship, etc., Mr. Bernanke is in the tradition of Chairs of the Federal Reserve—certainly his predecessor—who bridge Administrations. And the Administrations have had very different views in a number of areas. Mr. Bernanke was a very high-ranking policy official in the Bush Administration, and he has continued and, in fact, been reappointed in the Obama Administra- tion, obviously. The question now is, how do we pursue policies that will allow us to continue the progress that has recently clearly been made in the economy, but in the most recent period, the last couple of months, has slowed down and hasn’t been as vigorous as we would like? I think there is a fairly general agreement that the American economy began to recover slowly in 2009 from a long and deep re- cession and a financial crisis. That is what confronted the Obama (1) VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 2 Administration when it took office. GDP growth turned positive in the latter half of the year 2009. Financial markets normalized. Major credit markets began to function smoothly after an extended period of paralysis and turmoil. For most of 2010, economists have said a moderate recovery was well under way. But there is a growing risk that this could be stunted or undercut by the effects of a new crisis. Clearly, I think those are the facts. The President inherits a very severe recession, worse than he had realized, than many had real- ized. The efforts taken in both the fiscal and monetary areas, in my judgment, with great cooperation, begin to work. In the latter half of 2009, as I said, we began to get growth. That is after the eco- nomic recovery bill was passed and after other things happened. The financial markets became more normal. The credit markets started to function smoothly after the worst disruption in a very long time. And, in 2010, things are going well. We had significant job creation in the spring of 2010. And then things began, not to go backwards—we are not into a double dip, by any means—but the rate of recovery from that deep recession has slowed down. So the question is twofold: Why? And what can we do about it? Obviously, you can’t decide what to do about it until you decide on why. One explanation I have heard from some of my colleagues is that tax increases have been the problem. One of the things that I think ought to be very clear is that, from January of 2009, when the Obama Administration took office, and including in the economic recovery bill, taxes in America have been lowered by over $200 bil- lion. The economic recovery bill itself included significant tax re- ductions. And I am netting out now the refundable credits. I am not talking about those. I am talking about actual reductions. We had the home-buyer tax credit. So there has clearly been a signifi- cant reduction, in the hundreds of billions, in the amount of taxes collected. We were, as I said, according to what I think is a general agree- ment, we began to turn around in 2009, and in 2010, a moderate recovery was under way. It was beginning to produce job growth that was beginning to bite into the unemployment. And then it slowed down, and the question is, why? One thing is clear to me from the chronology: that there is at least a coincidence in time between this hesitation—not a drop, but a slower rate of growth than we were hoping, and the crisis in Eu- rope. And we know that the world has become very interconnected economically. The crisis that began with Greece and that spread, to great concerns in Europe, clearly is of the time period that pre- cedes a slowdown here. And that, of course, is very much a difficult issue for us, because I think there is a very good argument that the progress I have been describing, beginning in 2009, in the latter half, and then into a recovery in 2010, was, to some extent, slowed down by exogenous factors—debt crises in Europe. I do believe that the Administration and the Chairman of the Federal Reserve played a major role here with his colleagues in trying to help Europe cope with that, not out of a sense purely of compassion, but out of a sense of enlightened self-interest. And I VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 3 think it is clear that the European crisis was beginning to have negative effects on us, and it was therefore a good idea—and I dif- fer with some of my Republicans colleagues there who were critical of this intervention. So that is the question I want to address today: What caused us to lose some steam, not to go backwards? And what can we do to overcome that? The gentleman from Alabama is now recognized for 5 minutes. Mr. BACHUS. Thank you, Mr. Chairman. Mr. Chairman, today’s hearing comes a day after the signing of the most far-reaching government intervention into America’s fi- nancial system in nearly a century. But it also comes at a precar- ious time for Americans. The economic recovery is anemic, at best. Recent data from private economists and the Fed show we are in an extended period of weak recovery and with some risk of a worse prospect, and that is a double-dip recession. I would disagree with you on the causes of this continued eco- nomic downturn. I believe the spendthrift anti-business and anti- job economic policies of this Administration and of the Democrat- controlled Congress have not delivered on the extravagant prom- ises we heard from the President when he signed the stimulus bill, but that the staggering amount of money that we are spending on government programs is jeopardizing both our short- and long-term economic future. It is simply pushing the risk further out into the future, to the detriment of not only confidence in our economy today but a bleaker economic future for our children and grand- children. Rather than growth, we have an unacceptably high unemploy- ment rate that is likely to rise further as the census winds down. We have created jobs, but those jobs are in Washington, not in the private sector. And as Chairman Bernanke said yesterday, we need job creation in the private sector. Yet, we are facing the expiration of significant tax cuts, which, I think, Chairman Frank, you would agree will contract the econ- omy. The last thing you want to do during a slow economic period is to raise taxes. But we have not addressed that. Rather than a housing recovery—and that is despite a number of government intervention programs—we have had a brief tax- incentivized rise in sales that has now stalled. And recently, we have had our 16th month in a row of foreclosure filings that total more than 300,000 a month. Rather than the healthy economy that President Obama, Speak- er Pelosi, and Leader Reid promised, we have a fiscal outlook that is downright alarming. Chairman Frank mentioned tax cuts. What he didn’t mention is that we are spending money we don’t have and we have to borrow. Rather than Ronald Reagan’s ‘‘shining city on the hill,’’ we are in a debt ditch. And we have a national debt that—the average child born today, before they graduate from elementary school, they will be in a country that faces a worse debt situation than Greece faces today. Rather than economic incentives, this Congress has responded with policies that have largely paralyzed investments, by large businesses as well as small businesses. And I think particularly VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 4 small businesses are paralyzed by the Democrat policies that create even more uncertainty and prevent them from investing in growing and hiring new employees. That is true with ‘‘Obamacare.’’ It is true with our energy policies. And it will prove true with some of the provisions in our financial regulatory bill, particularly those that were passed over our protest. This Administration and the Majority in the Congress have told the American people that this steroid-enhanced spending would solve our economic problems. Well, it hasn’t. They said if the United States spent hundreds of billions of dollars, millions of jobs would be created and businesses would grow. Even Christina Romer, the President’s economic advisor, says this isn’t true. So far, the only real growth we have witnessed is in our debt and our deficits, and in a size that is already bloating Washington bu- reaucracy. The 2,300-page regulatory bill, the Frank-Dodd bill that the President signed yesterday, mandates hundreds of new Federal regulations and injects massive new uncertainty in an already-frag- ile economy and will only accelerate these damaging trends. If you take time to listen to the American people— The CHAIRMAN. The gentleman’s time has expired. Mr. BACHUS. —they are concerned about the debt and job cre- ation, not the need for more government spending. Thank you, Mr. Chairman. The CHAIRMAN. The gentleman from North Carolina, the chair- man of the Subcommittee on Domestic Monetary Policy, is recog- nized for 3 minutes. Mr. WATT. Thank you, Mr. Chairman. And welcome back, Chairman Bernanke. I want to build on both what the chairman and the ranking member have said, but I want to do it is a much, much more fo- cused way, I think. Because while I am aware that half of the Fed’s real mandate is combating inflation and fostering stable prices, my real concern today is about the other half of the dual mandate. I am very concerned about unacceptably high unemployment. So my focus is, what specifically can the Fed due to curtail high unemployment? And what would you suggest that we, as elected of- ficials, do to accomplish this objective? And I will also be pursuing that with this afternoon’s panel. Many experts say that the U.S. economy needs to add more than 125,000 jobs per month just to keep up with population growth and 250,000 jobs per month to begin actually reducing the unemploy- ment rate. Recent job growth has fallen well short of these num- bers, and in many districts many people have simply given up look- ing for work and are no longer counted in unemployment statistics. And that is certainly true in my congressional district. So I would like to hear specifically about the various tools in the Fed toolbox to reduce unemployment. In what order or sequence should these tools be used? What are the costs and benefits of spe- cific programs or activities to combat high unemployment? At the last several Humphrey-Hawkins hearings, we have con- sistently questioned the Fed about how it plans to address high un- employment and job growth throughout the United States. And at these hearings, Chairman Bernanke has vowed to take ‘‘strong and VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 5 aggressive actions to halt the economic slide and improve the job growth.’’ Although there is some job growth, it is not nearly enough. Today, I hope to hear the details on specific things that we can do to spur job growth. And, with that, Mr. Chairman, that is the single focus of my in- quiries today: jobs, jobs, jobs, jobs, jobs. And I guess it covers all of those things that the chairman and the ranking member have talked about. But that is my single focus today, Mr. Chairman. I yield back. The CHAIRMAN. The gentleman from Texas, the ranking member of the Domestic Monetary Policy Subcommittee, is now recognized for 3 minutes. Dr. PAUL. I thank the chairman. I welcome Chairman Bernanke to our hearing. Yesterday, Mr. Bernanke, you said that the economic outlook re- mains unusually uncertain. And a lot of people would certainly agree with you on that. And, yet, the free-market economists don’t find it unusual. They find it was predictable; they expected it. And they are also making predictions that current policies are not going to solve our problem. We have had 2 years at a chance to take care of this with the usual fiscal and monetary answers. And in the course of these past 2 years, we spent $3.7 trillion. In that period of time, the real GDP essentially hasn’t moved, and unemployment is a disaster. Yester- day, you even mentioned we lost 8.5 million jobs, and the real rate, of course, is much higher. Free-market economists say it is over 22 percent. And even the BLS says it is at least 16 when you count everybody. But so far, we don’t see any good signs of anything happening. But of this $3.7 trillion we spent, it is interesting to note that it is almost identical to the number that our national debt went up. And I guess it shouldn’t be too surprising. So we pumped in $3.7 trillion, and that is both fiscal and monetary, and we end up with more unemployment. And the most anybody can say is, ‘‘If we hadn’t done that, we would have lost even more jobs.’’ And I think that is a pretty weak answer for the policies that we have today. But just putting a pencil to this, it is interesting to note that, if we had taken this $3.7 trillion and put that to these 8.5 million people who lost their jobs, you could have given them $435,000 per individual. I would think that is not a good result, and it is a gross misallocation of resources. So the more we pump in, the more we bail out, the more the unemployment goes up. Today’s statistics weren’t very helpful. So something is wrong with this type of stimulus. And it just be- hooves me to wonder, which way are we going? When are we going to stop and think that maybe we are not on the right course? We can look at more current statistics in the last month or 2 and say, ‘‘Oh, everything is on its way up.’’ But, quite frankly, if you have been unemployed, and unemployment is getting worse, they are not waiting for a double-dip; they have been in one big dip. And the fact that there are a few statistics that show that there has been a bump in the financial markets, it really doesn’t reassure the peo- ple. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 6 So, I am looking for the day that we look at the fundamentals, looking at our monetary policy, looking at our fiscal policy, and just wondering, how did we get in this mess? And someday, I would also like to suggest that the people who were right on this for the past 10 years—knew about the bubble, warned about the bubble, said this was coming—I don’t even know why we just don’t talk to them and say, how were you guys right, and what have we been doing wrong? I yield back. The CHAIRMAN. The Chairman is now recognized to give his statement. And, Mr. Chairman, please do not feel constrained by the 5 min- utes. You are the only witness, and we have nothing else to do this morning, so you take what time you need. STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIR- MAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. BERNANKE. Thank you. Chairman Frank, Representative Bachus, and members of the committee, I am pleased to present the Federal Reserve’s semi- annual ‘‘Monetary Policy Report to the Congress.’’ The economic expansion that began in the middle of last year is proceeding at a moderate pace, supported by stimulative monetary and fiscal policies. Although fiscal policy and inventory restocking will likely be providing less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should help sustain growth. In particular, real consumer spending appears to have expanded at about a 2.5 percent annual rate in the first half of this year, with purchases of durable goods increasing especially rapidly. How- ever, the housing market remains weak, with the overhang of va- cant or foreclosed houses weighing on home prices and construc- tion. An important drag on household spending is the slow recovery in the labor market and the attendant uncertainty about job pros- pects. After 2 years of job losses, private payrolls expanded at an average of about $100,000 per month during the first half of this year, a pace insufficient to reduce the unemployment rate materi- ally. In all likelihood, a significant amount of time will be required to restore the nearly 8.5 million jobs that were lost over 2008 and 2009. Moreover, nearly half of the unemployed have been out of work for more than 6 months. Long-term unemployment not only im- poses exceptional near-term hardships on workers and their fami- lies, it also erodes skills and may have long-lasting effects on work- ers’ employment and earnings prospects. In the business sector, investment in equipment and software ap- pears to have increased rapidly in the first half of the year, in part reflecting capital outlays that had been deferred during the down- turn and the need of many businesses to replace aging equipment. In contrast, spending on nonresidential structures, weighed down by high vacancy rates and tight credit, has continued to contract, though some indicators suggest the rate of decline may be slowing. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 7 Both U.S. exports and U.S. imports have been expanding, reflect- ing growth in the local economy and the recovery of world trade. Stronger exports have, in turn, helped foster growth in the U.S. manufacturing sector. Inflation has remained low. The Price Index for Personal Con- sumption Expenditures appears to have risen at an annual rate of less than 1 percent in the first half of the year. Although overall inflation has fluctuated, partly reflecting changes in energy prices, by a number of measures underlying inflation has trended down over the past 2 years. The slack in labor and product markets has damped wage and price pressures, and rapid increases in produc- tivity have further reduced producers’ unit labor costs. My colleagues on the Federal Open Market Committee and I ex- pect continued moderate growth, a gradual decline in the unem- ployment rate, and subdued inflation over the next several years. In conjunction with the June FOMC meeting, Board members and Reserve Bank presidents prepared forecasts of economic growth, unemployment, and inflation for the years 2010 through 2012 and over the longer run. The forecasts are qualitatively simi- lar to those we released in February and May, although progress in reducing unemployment is now expected to be somewhat slower than we previously projected and near-term inflation now looks likely to be a little lower. Most FOMC participants expect real GDP growth of 3 to 3.5 per- cent in 2010 and roughly 3.5 to 4.5 percent in 2011 and 2012. The unemployment rate is expected to decline to between 7 and 7.5 per- cent by the end of 2012. Most participants viewed uncertainty about the outlook for growth and unemployment as greater than normal, and the major- ity saw the risk to growth as weighted to the downside. Most par- ticipants projected that inflation will average only about 1 percent in 2010 and that it will remain low during 2011 and 2012, with the risk to the inflation outlook being roughly balanced. One factor underlying the committee’s somewhat weaker outlook is that financial conditions, though much improved since the depth of the financial crisis, have become somewhat less supportive of economic growth in recent months. Notably, concerns about the ability of Greece and a number of other euro-area countries to manage their sizable budget deficits and high levels of public debt spurred a broad-based withdrawal from risk-taking in global financial markets in the spring, resulting in lower stock prices and wider risk spreads in the United States. In response to these fiscal pressures, European leaders put in place a number of strong measures, including an assistance pack- age for Greece and 500 billion euros of funding to backstop the near-term financing needs of euro-area countries. To help ease strains in U.S. dollar funding markets, the Federal Reserve reestablished temporary dollar liquidity swap lines with the ECB and several other major central banks. To date, drawings under the swap lines have been limited, but we believe that the ex- istence of these lines has increased confidence in dollar funding markets, helping to maintain credit availability in our own finan- cial system. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 8 Like financial conditions generally, the state of the U.S. banking system has also improved significantly since the worst of the crisis. Loss rates on most types of loans seem to be peaking, and, in the aggregate, bank capital ratios have risen to new highs. However, many banks continue to have a large volume of trou- bled loans on their books, and bank lending standards remain tight. With credit demand weak and with banks writing down prob- lem credits, bank loans outstanding have continued to contract. Small businesses, which depend importantly on bank credit, have been particularly hard-hit. At the Federal Reserve, we have been working to facilitate the flow of funds to creditworthy small businesses. Along with the other supervisory agencies, we issued guidance to banks and exam- iners, emphasizing that lenders should do all that they can to meet the needs of creditworthy borrowers, including small businesses. We have also conducted extensive training programs for our bank examiners, with the message that lending to viable small businesses is good for the safety and soundness of our banking sys- tem as well as for our economy. We continue to seek feedback from both banks and potential bor- rowers about credit conditions. For example, over the past 6 months, we have convened more than 40 meetings around the country of lenders, small-business representatives, bank examiners, government officials, and other stakeholders to exchange ideas about the challenges faced by small businesses, particularly in ob- taining credit. A capstone conference on addressing the credit needs of small businesses was held at the Board of Governors in Washington last week. This testimony includes as an addendum a summary of the findings of this effort and possible next steps. The Federal Reserve’s response to the financial crisis and the re- cession has involved several components. First, in response to the periods of intense illiquidity and dys- function in financial markets that characterized the crisis, the Fed- eral Reserve undertook a range of measures and set up emergency programs designed to provide liquidity to financial institutions and markets in the form of fully secured, mostly short-term loans. Over time, these programs helped to stem the panic and to restore nor- mal functioning in a number of key financial markets, supporting the flow of credit to the economy. As financial markets stabilized, the Federal Reserve shut down most of these programs during the first half of this year and took steps to normalize the terms on which it lends to depository insti- tutions. The only such programs currently open to provide new li- quidity are the recently reestablished dollar liquidity swap lines with major central banks that I noted earlier. Importantly, our broad-based programs achieved their intended purposes with no loss to the taxpayers. All of the loans extended to the multi-borrower facilities that have come due have been re- paid in full, with interest. In addition, the Board does not expect the Federal Reserve to incur a net loss on any of the secured loans provided during the crisis to help prevent the disorderly failure of systemically significant financial institutions. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 9 A second major component of the Federal Reserve’s response to the financial crisis and recession has involved both standard and less conventional forms of monetary policy. Over the course of the crisis, the FOMC aggressively reduced its target for the Federal funds rate to a range of zero to one-fourth percent, which has been maintained since the end of 2008. And, as indicated in the statement released after the June meeting, the FOMC continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and sta- ble inflation expectations, are likely to warrant exceptionally low levels of the Federal funds rate for an extended period. In addition to the very low Federal funds rate, the FOMC has provided monetary policy stimulus through large-scale purchases of longer-term Treasury debt, Federal agency debt, and agency mort- gage-backed securities. A range of evidence suggests that these purchases helped improve conditions in mortgage markets and other private credit markets and put downward pressure on longer- term private borrowing rates and spreads. Compared with the period just before the financial crisis, the sys- tem’s portfolio of domestic securities has increased from about $800 billion to about $2 trillion and has shifted from consisting of 100 percent Treasury securities to having almost two-thirds of its in- vestments in agency-related securities. In addition, the average maturity of the Treasury portfolio nearly doubled, from 3.5 years to almost 7 years. The FOMC plans to return the system’s portfolio to a more nor- mal size and composition over the longer term. And the committee has been discussing alternative approaches to accomplish that ob- jective. One approach is for the committee to adjust its reinvestment pol- icy—that is, its policy for handling repayments of principal on the securities—to gradually normalize the portfolio over time. Cur- rently, repayments of principal from agency debt and MBS are not being reinvested, allowing the holdings of those securities to run off as the repayments are received. By contrast, the proceeds from ma- turing Treasury securities are being reinvested in new issues of Treasury securities with similar maturities. At some point, the committee may want to shift its reinvestment of the proceeds from maturing Treasury securities to shorter-term issues, so as to gradually reduce the average maturity of our Treas- ury holdings toward pre-crisis levels while leaving the aggregate value of those holdings unchanged. At this juncture, however, no decision to change reinvestment policy has been made. A second way to normalize the size and composition of the Fed- eral Reserve’s security portfolio would be to sell some holdings of agency debt in MBS. Selling agency securities, rather than simply letting them run off, would shrink the portfolio and return it to a composition of all Treasury securities more quickly. FOMC participants broadly agree that sales of agency-related se- curities should eventually be used as part of a strategy to nor- malize the portfolio. Such sales will be implemented in accordance with a framework communicated well in advance and will be con- ducted at a gradual pace. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 10 Because changes in the size and composition of the portfolio could affect financial conditions, however, any decisions regarding the commencement or pace of asset sales will be made in light of the committee’s evaluation of the outlook for employment and infla- tion. As I noted earlier, the FOMC continues to anticipate that eco- nomic conditions are likely to warrant exceptionally low levels of the Federal funds rate for an extended period. At some point, how- ever, the committee will need to begin to remove monetary policy accommodation to prevent the buildup of inflationary pressures. When that time comes, the Federal Reserve will act to increase short-term interest rates by raising the interest rate it pays on re- serve balances that depository institutions hold at Federal Reserve banks. To tighten the linkage between the interest rate paid on reserves and other short-term market interest rates, the Federal Reserve may also drain reserves from the banking system. Two tools for draining reserves from the system are being developed and tested and will be ready when needed. First, the Federal Reserve is put- ting in place the capacity to conduct large, reverse repurchase agreements with an expanded set of counterparties. Second, the Federal Reserve has tested a term deposit facility, under which in- struments similar to the certificates of deposit that banks offer their customers will be auctioned to depository institutions. Of course, even as the Federal Reserve continues prudent plan- ning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognize that the economic outlook re- mains unusually uncertain. We will continue to carefully assess on- going financial and economic developments, and we remain pre- pared to take further policy actions, as needed, to foster a return to full utilization of our Nation’s productive potential in a context of price stability. Last week, the Congress passed landmark legislation to reform the financial system and financial regulation, and the President signed the bill into law yesterday. That legislation represents sig- nificant progress toward reducing the likelihood of future financial crises and strengthening the capacity of financial regulators to re- spond to risks that may emerge. Importantly, the legislation en- courages an approach to supervision designed to foster the stability of the financial system as a whole, as well as the safety and sound- ness of individual institutions. Within the Federal Reserve, we have already taken steps to strengthen our analysis and supervision of the financial system and systemically important financial firms in ways consistent with the new legislation. In particular, making full use of the Federal Reserve’s broad ex- pertise in economics, financial markets, payment systems, and bank supervision, we have significantly changed our supervisory framework to improve our consolidated supervision of large com- plex bank holding companies. And we are enhancing the tools we use to monitor the financial sector and to identify potential sys- temic risks. In addition, the briefings prepared for meetings of the FOMC are now providing increased coverage and analysis of potential risk to VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 11 the financial system, thus supporting the Federal Reserve’s ability to make effective monetary policy and to enhance financial sta- bility. Much work remains to be done, both to implement through regu- lation the extensive provisions of the new legislation and to develop the macroprudential approach called for by the Congress. However, I believe that the legislation, together with stronger regulatory standards for bank capital and liquidity now being developed, will place our financial system on a sounder foundation and minimize the risk of a repetition of the devastating events of the past 3 years. Thank you. I would be pleased to respond to your questions. [The prepared statement of Chairman Bernanke can be found on page 49 of the appendix.] The CHAIRMAN. Thank you, Mr. Chairman. We will be working closely with you in the implementation of the legislation just signed. There is a series of important decisions to be made, and we expect to be working closely with you. I want to return now to the central theme, I think, which is: Why are we now seeing a slowing down of the rate of recovery? Not any kind of reversal. And, again, there were two explanations. One we heard from my colleague, the ranking member, which is—and I have heard this from other Republicans—the problem was that we spent too much. They used to say we taxed too much. But the fact is, taxes are inar- guably down since the Obama Administration began. Rates have been reduced in a number of ways. But the argument is, well, it was big spending. And people blamed, to some extent, the recovery. But here is the problem: I think the following statement is abso- lutely clear. The economy began to slowly recover in 2009 from a long and deep recession and financial crisis. GDP growth turned positive in the latter half of the year after the passage of the eco- nomic recovery bill. Financial markets normalized, major credit markets began to function after an extended period of paralysis and turmoil before 2009. For most of 2010—we are now talking well over a year, to some extent, after the recovery bill passes—economists have said a mod- erate recovery was well under way. Here is the key: There is a growing risk that this budding recovery could be stunted or even cut by the effects of a ‘‘new crisis.’’ The recovery bill could hardly be a new crisis in the middle of 2010. The policies that had been adopted couldn’t have been part of a new crisis. The relevance of this is that I have just read verbatim from a re- port issued by the Republican members of the Budget Committee on May 27th of this year. It is the Republican members of the Budget Committee, under the signature of Mr. Ryan, who said, ‘‘For most of 2010, economists have said a moderate recovery was well under way, but there is a growing risk from the effects of a new crisis.’’ And, again, I don’t think the recovery bill passed in the spring of 2009 was a ‘‘new crisis’’ in late May of 2010. So we have agree- ment that the policies were being productive. And it is hard to be- VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 12 lieve what was said here by the Republican caucus of the Budget Committee and argue that. And there is an alternative explanation, unfortunately, that is both chronologically and I think analytically sound, and that is the European crisis. I read from your own report, Mr. Bernanke—and I don’t mean to challenge you on this, but on page 1, you say, ‘‘Largely because of uncertainty about the implications of developments abroad, the participants in the Open Market Committee indicated greater con- cern about the downside risk to the economic outlook than they had at the time of the April meeting.’’ You and the Republican Budget Committee caucus, on this issue at least, seem to be in agreement. In the May meeting, or the early June meeting, you saw this problem. You attributed it, according to this report, to the problems that were going on elsewhere. Let me turn to page 2: ‘‘Domestic financial conditions generally showed improvement through the first quarter of 2010, but the fis- cal strains in Europe and the uncertainty they engendered subse- quently weighed on financial markets. As a result, foreign and do- mestic equity prices fell,’’ etc., etc. And then finally, on page 3: ‘‘In late April and early May’’—you and the Republican Budget Committee are remarkably in sync on this analysis of the situation, up until now—concerns about the ef- fects of fiscal pressures in a number of European countries led to increases in credit spreads on many U.S. corporate bonds, declines in broad equity price indexes, and a renewal of strains in some funding markets.’’ So the point is very clear. The Republican Budget Committee statement is that, in the months after the adoption of the recovery bill, the extraordinary efforts that were quite responsibly done, I think, by the Fed, the other policies of this Congress and this Ad- ministration, here is what they—they didn’t say it is causal, but here is the chronology: We began to slowly recover. Growth turned positive in the latter half of the year, 2009, after these things had happened. And then, by 2010, for most of 2010—this is written in late May, this thing I am quoting from—things were getting better. And then there was a new crisis. So one argument is that the new crisis was apparently the recov- ery bill, which, having been passed in the spring of 2009, suddenly occurred to people in May of 2010. They hadn’t noticed it. I don’t know what they were doing. But that occurred to them. I don’t think anyone would think that was a new crisis. Frankly, I think we have a burst of honesty here on the part of my Republican colleagues, which they may regret, and I don’t see any reason that they should, in which they say it was a new crisis. They acknowledge that the consequence, or at least—forget the consequence—the aftermath, the chronological following of these policies were things were getting better and better and better, and then a new crisis hit. And I think that you correctly say here that the new crisis were these exogenous effects in Europe. My time has expired. The gentleman from Alabama is recognized for 5 minutes. Mr. BACHUS. Thank you, Mr. Chairman. And I appreciate your answers to the chairman’s questions. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 13 Mr. BERNANKE. Thank you. The CHAIRMAN. If the gentleman would yield, it is in the book. Mr. BACHUS. Oh, okay. Thank you. The American Economic Review, which was just published, has an article by Christina Romer and her husband, David Romer. Of course, she is the chief economic advisor to the President. She says, ‘‘Tax increases are highly contractionary. Tax cuts have large and persistent positive output effects.’’ Would you agree with that? Mr. BERNANKE. I know the paper. I think it is a very interesting paper. I would have to say, in fairness, that there is a lot of uncer- tainty about the effects of fiscal actions. But I would agree with the general proposition, that tax cuts have short-term aggregate de- mand effects, and they can be beneficial to growth if they are well- structured in the longer term. Mr. BACHUS. What about the tax cuts that are due to expire at the end of this year? Should they be continued? Mr. BERNANKE. There are a lot of different issues involved there, Congressman Bachus, but— Mr. BACHUS. How about the income tax increases that will occur if we don’t extend the— Mr. BERNANKE. As I said, there are a number of different issues there. There are considerations of efficiency and growth and the re- lationship between the incentives generated by that, which I know is debated and will continue to be debated. But there are also issues of both short-term stimulus and long-term budget stability. In the short term, I would believe that we ought to maintain a reasonable degree of fiscal support, stimulus for the economy. There are many ways to do that. This is one way; there are other ways, as well. In the longer term, I think we need to be taking steps to reassure the American people and the markets that our fiscal situation is going to be well-controlled. That means that if you extend the tax cuts, you need to find other ways to offset them. Mr. BACHUS. You have to raise taxes or cut spending or a com- bination. Is that correct? Mr. BERNANKE. The arithmetic is very clear. To get the deficit down, you have to have either more revenues, less spending, or both. Mr. BACHUS. Do you think our approach ought to be cutting spending, that it would result in immediate more confidence in the economy? Mr. BERNANKE. I think all options need to be on the table. We need to look at all the programs for their merits, both in terms of their short-term stimulative effects and also in terms of how well they would support growth in the long term. Mr. BACHUS. Should we increase taxes, as the Democrats are now talking about a VAT tax? Mr. BERNANKE. Again, the broader issue is that I believe we should maintain our stimulus in the short term, and we need to take steps to improve our fiscal situation in the longer term. There are many ways to do that. As you know, I am reluctant to take po- sitions on specific tax and spending measures. I am sure you can understand my position on that. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 14 Mr. BACHUS. Right. Sure. Mr. BERNANKE. But my broad view is that we need to think both about the short term and the long term, about both stimulus and growth, and that all of these measures have implications for each of those— Mr. BACHUS. Okay. Let’s talk about the short term. In February, I asked you, is the current budget path sustainable, and you said, no, it is not. Or, actually, I said, ‘‘So the current budget path is not sustainable, is it?’’ You said, ‘‘Given the numbers at CBO and OMB, that is right.’’ Mr. BERNANKE. That is correct. Mr. BACHUS. It is actually worse today than it was then, is it not? Mr. BERNANKE. I believe so, yes. Mr. BACHUS. And you urged the Congress in pretty clear terms, in answer to my follow-up questions, that we should come up with a credible, immediate plan for a sustainable fiscal exit. Is that cor- rect? Mr. BERNANKE. I think it is very important to try to demonstrate that we are committed to a medium-term consolidation and sta- bilization of our fiscal situation. Mr. BACHUS. And you also said it would become increasingly dif- ficult if we postpone that because the cuts you will need to make will be even sharper and the tax increases will be even greater. Mr. BERNANKE. That is right. Mr. BACHUS. So I would like to note for the record that we have done absolutely nothing in that regard. I think you would agree. Mr. BERNANKE. Yes. Mr. BACHUS. Thank you. The CHAIRMAN. The gentleman from North Carolina. I would just take 10 seconds to say that I feel like I am in ‘‘The Wizard of Oz’’ road show here, because the straw is falling over me when my colleague said that the Democrats are talking about a VAT tax. This is a phantom of their imagination. There is no pro- posal for it. There is no support for it. And it is just a straw man they are waving around. The gentleman from North— Mr. BACHUS. Let me say this. Thank you, Mr. Chairman. The CHAIRMAN. The gentleman from North Carolina is recog- nized. Mr. BACHUS. Let me take 10 seconds to say I appreciate that— The CHAIRMAN. No, we won’t just talk without being recognized. If the gentleman asks unanimous consent for 10 seconds— Mr. BACHUS. I ask unanimous consent for 10 seconds. The CHAIRMAN. Without objection, it is so ordered. Mr. BACHUS. Let me say that I appreciate your assurance that we are not considering a VAT tax. Thank you. The CHAIRMAN. You are welcome. The gentleman from North Carolina. Mr. WATT. Thank you, Mr. Chairman. Chairman Bernanke, on page 2 of your summary that you gave, you say inflation has remained low, and underlying inflation has even trended down. So that is the one half of this dual mandate VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 15 that I mentioned in my opening statement. I want to go back to the other half. Further down on that same page, you say that there is going to be a gradual decline in the unemployment rate. And now you are expecting, as opposed to in February and May, that reducing unem- ployment is now expected to be somewhat slower than previously projected. And then you mentioned some things that you have done to com- bat that on page 3, to deal with the Greece situation and to facili- tate lending. And then you talk about the things that you have done to directly respond to the stimulus on page 4 and 5 of your testimony. I guess what I am trying to get to now is a more directed focus on the unemployment situation. And to kind of go back to the ques- tions that I raised in my opening statement: What are the addi- tional tools that the Fed has in its toolbox to reduce unemploy- ment? What are you doing to use those tools? And what sugges- tions do you have as to what we ought to be doing in the short term to reduce unemployment? Or is there anything we can do in the short term to reduce unemployment? Now, I am well aware of what Mr. Bachus has had to say about the longer-term consequences. But most of my folks are struggling right now, today, unemployed in the short term, and most of my constituents will worry about the longer term the year after next and the year after that and further down the road. They want a job right now. And what I am trying to figure out is what we can do to stimu- late job creation, if anything—what you are doing and what you suggest we do. Those are my two questions. Mr. BERNANKE. Thank you. Let me just say first that I entirely agree with you that the labor market situation is unsatisfactory; that it is incredibly important that we get the unemployment rate down and get people back to work. It is important not just for their sake but for the future of our economy, because people who are out of work for a long time lose skills and become less connected to the labor market. So I ab- solutely agree with your priorities on that. I think it is worth mentioning very briefly, just to be clear, that to address this issue, the Federal Reserve has been extremely ag- gressive. And we have brought our interest rate down close to zero. We have committed to an extended period. We have taken extraor- dinary actions to stabilize financial markets. And we have pur- chased $1.5 trillion of securities— Mr. WATT. And I acknowledged all of that. So what I want to know, going forward, is what can we do? Mr. BERNANKE. Yes, I am coming to that. And that has indeed eased financial conditions quite consider- ably, where mortgage rates are about 4.5 percent, corporate bond rates are very low, etc., Treasury yields, and so on. Now, as I said in my remarks, ‘‘We remain prepared to take fur- ther policy actions, as needed, to foster a return to full utilization of our Nation’s productive potential in a context of price stability.’’ We are ready, and we will act if the economy does not continue to VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 16 improve, if we don’t see the kind of improvements in the labor mar- ket that we are hoping for and expecting. Now, what can we do? We have certainly utilized our principal tools, our most obvious conventional tools anyway, and so we would have to step into new areas. I do believe that there are things we could do, and we are considering all options. Those include our communication, communicating to the public our intentions about future policy ease or future policy action, perhaps in a context of some conditionality or a framework that will help clarify our will- ingness to maintain policy support for the economy. We can lower the interest rate we pay on excess reserves, which is currently only a quarter of a percent, but does have a bit of scope to be lowered. And we can do things to expand our balance sheet further to buy additional securities. Now, the effectiveness of these actions would depend in part on financial conditions. If financial conditions become more stressed, as would happen presumably if the economy began to weaken, I think those steps would be more effective, relatively speaking. But— The CHAIRMAN. All right. Mr. BERNANKE. —we are certainly going to continue to look at those— The CHAIRMAN. I have made up to my colleague for the time I intruded, but the expanded time has now expired. The gentleman from Texas, Mr. Paul. Dr. PAUL. I thank the chairman. The chairman mentioned a little while ago about my emphasis on spending, and I want to just clarify something. I am not opposed to spending; I am just opposed to government spending. I want the people to spend. I want them to spend a lot more money. But, in the past, I have often approached economics and mone- tary policy from a constitutional viewpoint. And, quite frankly, I don’t get very far on that. So I don’t want to push that, which is disappointing. And a lot of times, I mention the business cycle, coming from a free-market perspective, indicating that low interest rates will encourage malinvestment and cause financial bubbles. And I haven’t gotten very far on that. But today, I want to approach it slightly differently, from a moral viewpoint, and see if there is any concern of yours in this regard. Back in 2002, you gave a speech, and you said that the people know that inflation erodes the real value of government debt, and therefore that is in the interest of the government. And I can un- derstand this, because the real debt goes down if you can erode the value of the money. But, to me, there is a moral component to this, because you are depreciating the currency, you are devaluating the currency. And I always thought that the purpose of government would be to pro- tect the value of the currency, and that people do suffer from this. So, to me, I think that it is not fair because the people, the holders of debt, are cheated in many ways. But also there is a moral component, too, when you fix and ma- nipulate interest rates, that those who save—that old-fashioned idea that people should save and put money in the bank and they VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 17 have their CDs and they feel responsible, they want to take care of themselves and their elderly and they have CDs—all of a sud- den, they get 1 or 2 percent, where the market would say they are getting 6 or 7 or 8 percent. That, to me, means that they are being cheated, as well. And, also, you have emphasized and you have always had a con- cern about deflation. I think of deflation more of being a monetary phenomenon than prices going down, but your definition is, as prices drop, you are having deflation. And you don’t like that. And you have made attempts to distinguish different reasons for prices going down. But, generally speaking, prices going down is helpful. This helps poor people. Why shouldn’t we welcome prices going down so that people can compete and go in and buy things, rather than pro- tecting profits or the businessman or high labor costs or whatever? The market is supposed to protect the consumers. So, to me, I see there is a moral component to that. Could you comment on these remarks? Mr. BERNANKE. Certainly. And I think you raise some good points. On protecting the bondholder, half of the Federal Reserve’s man- date is price stability. And inflation is very low. And so, people holding bonds are making real returns. That is, nominal interest rates are above inflation. And that is one of the reasons to try and maintain stable prices, which is what we are doing. With respect to fluctuations in interest rates, nominal interest rates are not determined by the market alone, because you need to have some kind of monitoring system. Now, of course, that could be a gold standard. There are many different ways to structure your monetary system. Our current system is a central bank-ori- ented system, as you know. And the variations in nominal interest rates reflect the monetary policy that we take. But what I am try- ing to argue here is that, no matter what kind of system you have, there is going to be some policy component to interest rates, not just a free-market component. On deflation, there had been periods where deflation has not been harmful. In the 19th Century, there are some examples where high productivity brought down prices, and that was good. But, re- member, if prices are falling, wages may also be falling. And the real question is, what is happening to wages relative to prices? In the 1930’s, obviously a case where a very sharp deflation was counterproductive and helped cause deep— Dr. PAUL. Right. And I might respond also, the point you make about the latter part of the 19th Century, when it was beneficial, we were also on a gold standard, too. And maybe that should make a strong point. A very quick question. Is there a point where you might say, ‘‘Maybe my theories are wrong and I have to change my course?’’ Or will you pursue this for 5 more years or 10 more years? What would it take to make you reassess your basic fundamental premise? Mr. BERNANKE. Pursue what? I believe that it is not practical to go to a gold standard. I think we have to stay with a central bank. But certainly we are modifying our views on the financial system VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 18 and on monetary policy, reflecting what has happened in the last few years. And I certainly believe, as Keynes once said, when the facts change, I change my mind. Dr. PAUL. But there is nothing that would come across and say this system is failing; that if we don’t get the economy moving, maybe just spending and inflating and increasing the balance sheet doesn’t work. What if the unemployment rate, even according to government statistics, goes up to 20 percent and we are worse off 2 years from now? Wouldn’t you say, maybe we have messed up? The CHAIRMAN. The gentleman’s time has expired. Next on the list of people who haven’t asked questions is the gen- tlewoman from New York, Ms. McCarthy. Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. Mr. Bernanke, I am going to actually put my questions into writ- ten form to send to you. With that, I yield the balance of my time to the chairman. The CHAIRMAN. I thank the gentlewoman. And I would now like to pursue the point I was making, Mr. Bernanke. You note that, as of April, there was a more optimistic view and that it became, not a negative one or a pessimistic one, but an uncertain one. In the monetary report, I cited three passages where you cite the events in Europe that began with the Greek debt crisis. And I should note that you do note here that, in a coordinated way, with our participation, there has been a somewhat effective response to that crisis. It hasn’t gone away, but at least you dealt with the short-term effects, while the longer-term effects need to be dealt with. But do you agree—or, let me just ask you: What role did the cri- sis that began with the Greek debt crisis and roiled much of Eu- rope and the euro zone, what effect did it have on what is going on in the economy here and on your estimates of that? Mr. BERNANKE. It certainly did have some negative effect. The increased financial concerns led to declines in the stock market, in- creased credit spreads, and was one of the reasons why we marked down our outlook for the U.S. economy. That is absolutely right. First, I think that situation is improving and confidence has been coming back, in part because of the Federal Reserve’s support for the dollar funding markets. There have been a few other things we have seen in the data, such as weakness in the housing market after the end of the tax credit. And, of course, the labor market has been disappointing in the last couple of months. But, again, our baseline scenario is that, as the effects of the Eu- ropean financial crisis pass, that we will continue to see moderate growth in the economy. The CHAIRMAN. That is encouraging, because I did read a pas- sage which said essentially that things are going well. Again, let us remember the Republican Budget Committee conclusion. Things began to turn around in the latter half of 2009 after the passage of the Recovery Act, after other interventionist policies; that the credit markets stabilized; the financial institutions turned to nor- mal. By 2010, a moderate recovery was under way, and then we hit a kind of a glitch in April and May not in a negative sense, but VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 19 in a slowdown. You are telling us now that you think—one major contributor to that was the European crisis, which now appears to be dealt with at least in a way that would reduce its negative ef- fects. Has that been an accurate way to put it? Mr. BERNANKE. That is correct. The CHAIRMAN. Are there other causes? You gave some indicia of the slowdown in the housing market, the job market clearly not being as good in May and June as it was in March and April. But are there other causes in addition to the European—are there other policies or other factors that you think might have contributed to the slowdown? Mr. BERNANKE. It is very difficult to forecast exactly what growth is going to be, but the broad contour of recovery in the labor market has been pretty much what we have been saying it would be since the last time I was here. The CHAIRMAN. So the one sort of exogenous event that intruded on that was the European debt crisis? Mr. BERNANKE. That is right. Although, as I said, some of the data had been a bit disappointing, we so far don’t have any basis to radically change our basic outlook. The CHAIRMAN. The other is that in the passage I read, it said, for most of 2010, economists have said a moderate recovery is under way. There is a growing risk that this budding recovery could be stunted or even undercut by the effects of a new crisis. Other than the European situation—this was written in May, about the time of that—is there another crisis that you foresee that could be stunting our growth, realistically? Mr. BERNANKE. I am not aware of any specific threat, no. The CHAIRMAN. I thank you. I now recognize the gentleman from Texas, Mr. Neugebauer. Mr. NEUGEBAUER. Thank you. And thank you, Mr. Chairman, for being here today. When you look back at the crisis, some people blame the Fed. They say that the unprecedented low interest rates led to excessive speculation and leverage, and that the crisis was precipitated by that. Others have looked at what the Fed and the Treasury have done to bring the liquidity crisis under control. And I would say that probably there is agreement that the liquidity crisis has been abated. Then there are those who say that we are right back now with a Fed that has very low interest rates. We have seen unprece- dented actions by the Federal Government, spending at levels that are unprecedented, and with fairly muted results. I noticed that in your remarks, you said there was a 2 percent increase in sales. When I talk to retailers and other people, the in- crease in sales has come at very discounted prices and very small margins in order to move some of the inventory. Some folks say that one of the reasons that the market has not returned is because the life support system is still in place, and it has created a huge amount of uncertainty in the marketplace. In fact, when I talk to businesses large and small across the country, they say, we just really don’t know what to do in this environment. We see uncertainty about the tax structure, uncertainty about the cost of energy, uncertainty about really what you are going to do and what the Federal Government is going to do. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 20 So the question that I have is, what is the Chairman to do? In other words, we have thrown money at this problem. We have had unprecedented actions on the Fed. You have interest rates at zero. Some of my colleagues are calling to throw another wad of money at this problem. But quite honestly, unemployment is—we have lost 2.5 million jobs since the stimulus program. We have an un- precedented number of people out of work. At what point in time do we say maybe the marketplace just has to work itself through this, and that the Fed and the Federal Government need to just kind of be still for a while and let normal market forces come into play? Markets are designed for cleansing. They award efficiency, and they punish inefficiency. But we have stepped in and let the gov- ernment start picking winners and losers, and, in effect, abated what would be normal market forces. And I think there are many of us who are frustrated with that process and wonder what is the—in fact, one of the questions that just popped up on my Facebook page was when is the government going to stop all of this nonsense and really let the market forces work themselves through? Mr. BERNANKE. Speaking for the Fed, we are not interfering with market forces. We are just trying to provide some support through accommodative financial conditions to give the private sector the opportunity to invest and grow, and that is where growth is going to come from. More generally, certainly both the Fed, the Treasury, the Con- gress, and everyone should try to focus on growth-oriented policies. It is important to take steps, including control the fiscal deficit, that will support longer-term growth, which will increase con- fidence in the present, and to do what we can to reduce uncertainty about policies and about the economy. So, for example, the Federal Reserve is engaged in negotiating new capital standards for our banking system, and I think it is very important for us to get clarity on that as soon as possible so the banks can plan and feel free and comfortable going back to lending. So I agree that trying to reduce uncertainty is a useful thing. Mr. NEUGEBAUER. One of the things, Mr. Chairman, that I hear, and when you look at, I think, even some of the charts that come from the Fed, is that bank lending to individuals and companies is going down; and when you look at the assets on a lot of the balance sheets of banks, the holding of Federal securities is actually up. And one of the things that I believe is happening today is there is an arbitrage today of, I think, banks being able to borrow at a very, very low interest rate and basically reinvest that money in treas- uries or mortgage-backed securities issued by Fannie and Freddie. So there is really not a lot of incentive to bring new capital to the marketplace. Mr. BERNANKE. I don’t think that is true. We are actually very careful to tell the banks not to do that, because it is actually a risky thing to do. If you are taking very short-term money and in- vesting in longer-term securities, it is true that you can make some money in the short term, but you are always risking capital losses, VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 21 which could be quite dangerous. So we pay a good bit of attention to the interest rate risk that is assumed by the banking system. I think the reason banks aren’t lending is either because lending requires capital, and they aren’t sure about how much capital they have or will need, or because they feel that either the risks in the economy or the lack of creditworthy borrowers is constraining their opportunities to make good loans. But as the economy improves, I am sure they will return to the credit markets. The CHAIRMAN. The gentleman from Missouri Mr. Cleaver. Mr. CLEAVER. Thank you, Mr. Chairman. Chairman Bernanke, the question I have is somewhat parochial, but what do you think will happen to all the consumer call centers? We have the Comptroller with a call center in Houston. The Fed, has a call center in the Kansas City Fed office. And my assumption is there will be another call center for the new Consumer Financial Protection Bureau. Don’t you think that all of the call centers ought to be combined and moved to Kansas City? Mr. BERNANKE. Are you talking about consumer complaint call centers? Mr. CLEAVER. Yes. We have two now. You have one. The Comp- troller has one. Mr. BERNANKE. I will have to look into that for you. I imagine that with the new Bureau, that the Bureau will take primary re- sponsibility for consumer complaints. But on this issue, I would be happy to look into it for you. Mr. CLEAVER. All right. The other question, I introduced earlier this year H.R. 4178 with support from all of the members on this committee, bipartisan sup- port. And the purpose of that legislation was to authorize the es- tablishment of qualified tuition programs currently called 529s. In Missouri—and I am sure it is the same around the country—most persons who had invested in their children’s education lost up to 50 percent of their investment, so a lot of kids who were going to go off to college next month are going to be in trouble. And the way I would want this to operate is to be operated as bank products and not as securities. And my question is, in such towns as these, do you think allow- ing a 529 savings delivery mechanism in addition to the current one would be an appropriate way to allow consumers to choose to level risk, their own risk, as they are trying to prepare for their children’s college education? Mr. BERNANKE. Improving access to the 529 programs and giving consumers some flexibility in how they want to invest their money seems like a sensible idea. The only concern I would raise, and it probably is not enough to overturn your point, is that the more that these programs are utilized, the States and localities lose tax revenue. But again, that is a decision they have made about pre- sumably supporting these college accounts. So I think given that you have those accounts, giving people flexibility about how to hold their assets seems like a reasonable idea. Mr. CLEAVER. Okay. I have no further questions, Mr. Chairman. I yield back the balance of my time. The CHAIRMAN. The gentleman from California, Mr. Royce. Mr. ROYCE. Thank you, Mr. Chairman. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 22 Chairman Bernanke, the last session that we had with the Con- gress, you had made mention of these deficits in the outyears. And I think your argument was trillion-dollar deficits going forward that aren’t addressed leave us in a position where economically it is unsustainable. The question that I would have is your counterpart in Europe, the head of the central bank in Europe, has been advancing a no- tion that private firms, their spending and saving decisions, take government action into account; and therefore, efforts to cut exces- sive debt will then increase private spending by reducing that un- certainty that is out there. The reason I think it becomes such an important question is be- cause we now know for the first time that among nonfinancial firms in the United States, there is $2 trillion worth of basically hoarding going on, money just sitting there, maybe because of un- certainty or for what other reason. And at the same time, we have these historically unprecedented debt levels as we look forward. And I was going to ask you if you think there is some justifica- tion to that argument. What he was advancing was this thought that if we could deal with this debt and reduce this uncertainty, then capital would be brought back into play. Capital would go to the highest and best use. There would be more job creation; that this itself would be a signal which would then translate into eco- nomic activity that would get people back to work, and that loom- ing debt and the failure to address it, short term and long term, was part of the problem that our economy has faced today. Could I ask you about your thoughts on that? Mr. BERNANKE. Of course. I think that the deficits that we have for 2010 were necessary and reflected the need to support the economy and support the fi- nancial system in this crisis. It is not even feasible to really rein in the current deficit, and I wouldn’t recommend it. But I think on the broader principle that your concern is related to the medium term to the next 10 years, the next 20 years, that anything we can do to show the public, the corporations and the markets that we are serious about bringing our unsustainable debt trajectory under control, I believe that would be positive. It would contribute to con- fidence. It would be helpful conceivably, but in the short run. But again, I think we have to keep in mind that fiscal policy should be thought of as a trajectory, as a long-term problem and not just the current year. So we are looking for long-term solutions. Mr. ROYCE. Right. And that brings me to my second question, which is, to what degree do you think that these firms, these non- financial firms that are hoarding cash, to what extent do you think that is because they see that skyrocketing debt out there, they see the future out there, and at the same time, they have this expecta- tion, apparently, of future tax increases? And the element of this that I am interested in is that projected are these increases in public spending. We have had for agency budgets, for department budgets double-digit increases in govern- mental spending. And to the extent that continues to go up—we know there is some adjustment out there in the market. For exam- ple, census workers. We see that the market discounts for that, and they look at the employment numbers, and they automatically de- VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 23 duct that, and then there is that concern. So to what extent is that a factor? To what extent to you think firms are hoarding because of the skyrocketing debt? Mr. BERNANKE. We certainly hear a lot from firms in our gath- ering anecdotes and so on that uncertainty in general is a con- straint on their activities, on their expansion. They cite the fiscal deficit, but they also cite policy uncertainty. They also cite eco- nomic uncertainty, because we don’t know exactly where the econ- omy is going to be. It is very hard, frankly, to know how big those effects are. Mr. ROYCE. But let me ask you this: Canada, in 1993, had a similar deficit to GDP. They had a severe problem. They went through a severe cost-cutting eventually in the public sector as the way to sort out their finances, and in 3 years, they converted that deficit into a surplus. Their economy grew 41 percent as a result. The CHAIRMAN. I am afraid there won’t be time for an answer because the time has expired. Let me just announce, on our side, I am going to go to the two remaining Members who haven’t asked questions, Ms. Moore and Ms. Bean. Actually I have it backwards; Ms. Bean and then Ms. Moore. And we will begin with those who—oh, I am sorry. It was Mr. Scott’s turn. I apologize. Mr. Scott, then Ms. Bean, Ms. Moore, and then we will go, given who is here, to the Members who did ask questions the last time. So, Mr. Scott is now recognized. Mr. SCOTT. Thank you, Mr. Chairman. Welcome, Mr. Chairman. It is good to have you back. I want to talk and focus on unemployment and jobs. I have al- ways been a bit concerned that we have not moved as aggressively, as passionately on the unemployment, on the jobs situation during this downturn as we have on Wall Street and bailing out these companies. You have a dual mandate, making sure we have stable prices, moderate interest rates, but maximum employment. And I have not seen the aggressiveness on the part of the Fed to respond to that part of its mandate on maximum employment. So I would like for you to just explain step by step what the Fed is doing in terms of jobs, in terms of unemployment, and why cannot we have mas- sive injections into various parts of our economy where the need is greatest? Let me just share with you the latest statistics as broken down: Adult men, unemployment 9.9 percent; Asian Americans, 7.7 per- cent; Whites, 8.6 percent; and African Americans, 15.4 percent. And you have this kind of disparity. It appears to me that there needs to be a sense of urgency to apply some remedies in the area of greatest need. My other point is that during the Depression, when President Roosevelt responded to this, he understood that in order to create the jobs, we have to get money flowing into that area to the people who are most likely going to spend it. So it seems to me that the answer to the crisis in unemployment is to get money into that area where it is needed the greatest, where, in turn, they are going to send it right back into the economy, which would produce other jobs. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 24 I know the American people see a very definitive move to re- spond to this phase of the crisis of our economic downturn, jobs and unemployment, that even come close to matching. Just rapid con- cern. Secretary Paulson, our Secretary of the Treasury, came in here with a piece of paper, a paragraph: Give us $750 billion right now. Let us get it up to Wall Street. And but by the grace of God, most of us, some of us, jumped on that. But we kind of slowed it down. Where is that energy? Where is that urgency to get jobs for the American people? Mr. BERNANKE. First, Congressman, I absolutely agree with you that unemployment is the most important problem we have right now, and we take the dual mandate extremely seriously. I would respectfully disagree that we haven’t been doing anything or have not been urgent. We have pushed monetary stimulation to the highest point in American history. We have zero interest rates. We have tripled our balance sheet. We have taken very strong steps. Mr. SCOTT. Mr. Chairman, may I just ask you if you could ex- plain what you just said, monetary, and how that relates to cre- ating jobs? Mr. BERNANKE. It relates to what the Federal Reserve can do, which is to try to make financial conditions more conducive to growth and investment. So Americans are seeing 4.5 percent mort- gage rates instead of 6.5 percent. We have helped other interest rates go down. We have supported growth in that respect. Those are the things that monetary policy can do. You referred to FDR and putting money into projects and so on. That is fiscal policy, and that is Congress’ prerogative. The Federal Reserve simply doesn’t have the tools or the ability to do that. What we can do is make financial conditions as supportive of growth as we can, and we are certainly interested in doing that. Mr. SCOTT. Where do we need to improve in terms of what the Fed is doing? What more can the Fed do? It is clear whatever we are doing is not enough. We almost have to create 125,000 jobs every month just to sustain the rate with the growing population. We have to create 250,000 jobs every month just to even keep the decline. And if you go back to December 2007, we have 8 million less jobs than we do today. So I am just simply saying— The CHAIRMAN. The gentleman’s time has expired. The gentleman from Delaware, Mr. Castle. Mr. CASTLE. Thank you, Chairman Frank. Chairman Bernanke, let me start with this: With respect to the Stimulus Act, the recovery bill, whatever one wishes to call it, obvi- ously jobs were saved, jobs were created by that to some degree. The jobs saved are primarily, in my judgment, a lot of the govern- mental jobs in which State and local governments received funding and saved teachers or whatever it may be. The jobs created were, in many instances, patchwork-type things, like fixing up highways or whatever it may be. Have you or has anybody that you know of studied the bottom- line aspect of those jobs today? Most of that happened last year at some point or another. And it is my belief that a lot of those jobs were just saved temporarily or were created on a temporary basis, and they are not a continuation as far as our overall structure of the economy is concerned and our need for economic recovery be- VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 25 yond the immediate stimulative effect. Or maybe the argument is it was just to be a stimulative effect, and nobody would argue that it would create jobs on a permanent basis. Mr. BERNANKE. As you know, it is intrinsically very difficult to get an exact count— Mr. CASTLE. I know that. Mr. BERNANKE. —because we don’t know what would have hap- pened in the absence of the program. So economists use models and other ways in trying to estimate what the effect has been. The CBO gave a very broad range of estimates, between 1 mil- lion and 3.5 million jobs, which is a very wide range. But it encom- passes what most private sector economists have estimated, and it encompasses what the Federal Reserve has estimated, which is somewhere in the middle of that range. So there has been some job creation, but we will know over time as we are able to do more studies and look back at the data in terms of how the economy evolved. In terms of the breakdown between government and private, I don’t have that at hand. Certainly, a significant part of that job creation was in the private sector because of indirect effects, spend- ing and the like. And as far as jobs in the government are con- cerned, of course many of those jobs are providing essential serv- ices, like education and so on. So I wouldn’t completely discount those jobs by any means. But you raise a good point, which is that it is very difficult to know how big the effect was, and certainly we would like to have a more precise estimate to judge whether additional policies would be useful. Mr. CASTLE. And my point is really the permanency of it. It seems to me a lot of this was temporary, and maybe it had some stimulative effect there, but I question if that money has actually produced jobs that are still in existence today. You don’t need to respond to that, but that is the point. Let me go on to another subject. We haven’t had a lot of discus- sion about housing here today. Housing is still in the doldrums, I hear at home and I read about around the rest of the country. And I am concerned about Fannie Mae and Freddie Mac and their fu- ture and where they are going. There has been huge indebtedness with respect to that. I have heard arguments that before they were created and banks held their own loans, etc., they didn’t have these kinds of problems. I just don’t quite know where we are going. Do you have any thoughts about—and we didn’t do this in the recent financial regu- lation legislation we had. The statement was that we will do this afterwards. Do you have any thoughts about the need and how to address these mortgage giants that do have a dominant effect in our housing industry? Mr. BERNANKE. Yes. I think it was almost 2 years ago I gave a speech on the subject and laid out some options. I would be happy to send that to you. I agree it is very important to address this current situation that is not sustainable. Basically, the two broad approaches would be to break up and privatize the companies, perhaps supported by a gov- ernment insurance program for their mortgages that they would VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 26 pay for. The alternative would be to make them more like govern- ment utilities and have them just provide services under full gov- ernment control rather than having shareholders the way Ginnie Mae does. So those are the two broad options. We are sort of half-fowl, half- horse at this point. You need to go one direction or the other. But clearly, this is something we need to take on pretty soon. I guess I would take this opportunity to add that this was an area where the Federal Reserve for many years warned of prob- lems and insufficient capital, and clearly that problem did come to pass in the crisis. Mr. CASTLE. Yes, unfortunately. My time is going to run out, but I may submit a question in writ- ing about the interest rates on the debt, which concern me in terms of potential increases in the future. I will submit that in writing. Thank you, Mr. Chairman. The CHAIRMAN. The gentlewoman from Illinois, Ms. Bean. Ms. BEAN. Thank you, Mr. Chairman. Thank you, Chairman Bernanke, for being before us here today. It is always an honor to have you here, to hear from you directly about not only past policy from the Federal Reserve, but to get an informed perspective on your direction taking us forward as that informs what we do in terms of congressional action. I guess in follow-up to what—actually, before I follow up on what Congressman Castle said, my first question is relative to access to credit. In the addendum which you provided, there seemed to be some support for what the Senate is considering that we passed in terms of the Small Business Lending Fund that could inject $30 billion of capital to community banks based on the level of lending they do, and the discount rate would adjust accordingly. Do you have any thoughts about how important that might be? And also maybe specifically, they are also considering a 504 amendment to the SBA program that would address the commercial real estate market, number one. The second thing is, given economic conditions and that we did move not only following your own Federal actions, but congres- sional actions, in the economy from one where we had 800,000 jobs being lost per month, GDP was at a negative six quarter over quar- ter, a year later—now a year and a half later, we have created a half-million private sector jobs over the last 6 months. GDP is now at 3 percent, but there was a 12-point shift in the following year following the Recovery Act. So there is some—we don’t know, was it all your policies, congressional policies, obviously some combina- tion thereof? And as we move forward, we want to look at the mul- tiplier effect of what worked best, to do more of that, and on what did we not get a good return on those congressional investments? So had there been no Federal intervention, either your policy or ours, given the modeling that you use, where would GDP be today had we not acted in concert from what your modeling shows? And given that is not the reality, which is, I think, a good thing for our economy, what are those things you would suggest we do more of? And my last question, and I do want to give you an opportunity to speak, is a concern about wages. You talked about depressed wages. And certainly over the last decade, there has been a decou- VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 27 pling of GDP growth without wage growth. And I want to know how concerned you are about that, given that consumer spending really drives our economy, and that lack of disposable income limits it. What is your concern, and what do you think the causes are? Is that global competition? Is that health care costs that, even though salaries are increasing, but premiums are going up in terms of the employee portion, people have less to take home? What are your thoughts on those things? Thank you. Mr. BERNANKE. Thank you. As you noted, we had a lot of meetings with people on small busi- ness credit access, and there was a lot of support for more action from the government in this area. There was a lot of support for the capital to small banks, who do make a lot of the loans to small businesses, and there was a lot of support for further extensions or enhancements to the SBA’s authorities. I would just make the general point that small businesses create a lot of the gross jobs in our economy. It is very difficult for them to expand in our current circumstances. And even more so than the existing small businesses, we are particularly short of funding for startups and new firms and growing firms. You asked about what we should be doing. I think this is one area that would be very important to look at, as we are doing at the Federal Reserve with our supervisory policies and the like. You asked about modeling. First, in terms of the fiscal policy, I answered a similar question just a moment ago. Most economists, most modeling exercises suggest that the fiscal efforts created an additional 1 to 3 million jobs relative to where we would have been absent that. And in my own view—and I think it has been sup- ported by others as well—is that the monetary policy actions, which got down interest rates and helped stabilize the financial system, were also very important in turning the economy around. There is still a lot to be done. I mentioned small business. I have mentioned in previous responses rationalization of both the short- term and long-term fiscal situation. I think unemployment is a major area. This is an area for Congress. But one of the key issues is the fact that the long-term unemployed lose their skills, or their skills become irrelevant to the new economy. Thinking about effec- tive ways to work with the private sector or with universities, jun- ior colleges, and the like to enhance skills, I think, would be very important. And that ties directly to your last question about wages. Wage share of GDP has not dropped all that significantly. What has hap- pened is that wages have become more unequal. We all know the difference between big bonuses on Wall Street and wages that peo- ple get working in a retail store. And there I think that one very important component has to be improving our education. The CHAIRMAN. The gentlewoman’s time has expired. Ms. BEAN. Thank you, Mr. Chairman. The CHAIRMAN. The gentleman from Texas, Mr. Hensarling. Mr. HENSARLING. Thank you, Mr. Chairman. And I would say for your benefit and for your comments, when you said that no one on your side of the aisle was considering a VAT tax, The Hill reported October 9th of last year, ‘‘A new value-added tax is on the table to VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 28 help the United States address its fiscal liabilities, House Speaker Nancy Pelosi said Monday night.’’ So either the Speaker is nobody, or she has retracted her statement. I can’t find any retraction. If you have, I would encourage you to set the record straight and sub- mit that retraction to our committee. Chairman Bernanke, welcome to you. I have a few quotes I would like to read you and have you react to them. The first quote comes from the CEO of Verizon, the head of the Business Round- table, which represents, as you know, big employers in our Nation: ‘‘By reaching into virtually every sector of economic life, govern- ment is injecting uncertainty into the marketplace and making it harder to raise capital and create new business.’’ Bill Dunkelberg, chief economist at the NFIB, who represents small employers in America: ‘‘It is not just expectations on the tax rates per se, but just the cost of carrying labor under the health care bill, the promise and heavy discussion on a VAT, the deficits scare us to death. Everything that Congress seems to be thinking about is not helpful for small business.’’ Tom Donohue, president of the Chamber of Commerce that rep- resents both big and small employers: ‘‘Look at the tax costs in the health care bill and the tax costs in the capital markets bill, and they add up to hundreds of billions of dollars. It is a fundamental uncertainty that is holding businesses back.’’ Next, one of the most often cited economists by my Democratic colleagues, Dr. Mark Zandi, chief economist at Moody’s, as reported in Bloomberg said, ‘‘Companies have been holding back on hiring. Banks aren’t sure how much extra capital regulators will require them to set aside. Power companies are waiting to see if govern- ment caps carbon emissions, and human resource departments are still parsing the impact of the 10-year health care overhaul Con- gress passed in March.’’ My last quote and my first question: ‘‘Uncertainty is seen to re- tard investment independently of considerations of risk or expected return. Introduction of uncertainty can be associated with slack in- vestment, resolution of uncertainty with an investment boom.’’ Do you know who wrote those words? And, yes, it is a trick question. Mr. BERNANKE. I am sure it was I who wrote those words. My 1979 Ph.D. thesis was on uncertainty and investment. Maybe it wasn’t me. I don’t know. Mr. HENSARLING. My research said 1980, but that is a very good memory, Mr. Chairman. Do you agree or disagree with yourself? Mr. BERNANKE. First of all, I think that was an excellent thesis. And the notion that firms making long-term commitments, whether it is to employment or to capacity expansion or new business lines, obviously are concerned about the environment and about uncer- tainty. Mr. HENSARLING. Do you believe it is a significant impediment to job growth today? Mr. BERNANKE. This may sound like a dodge, but I can’t really quantify it. I hear a lot from businesses. But if you look at the facts, it is mixed. What you see is that firms are holding a lot of cash. That is true. It is also true they are not hiring very much. On the other hand, their investment in equipment and software has been pretty robust, so there are mixed signals there. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 29 I am sure there is some effect there, and I think it is important. We don’t need to measure the effect to take the lesson that what- ever we can do to reduce uncertainty— Mr. HENSARLING. Mr. Chairman, if I could, one Member’s opin- ion—and certainly in speaking anywhere from Fortune 500 CEOs all the way down to small business people in the Fifth District of Texas, when you speak that the Federal Reserve is prepared to perform other policy actions, frankly, whether you quit paying in- terest on bank reserves, whether you go from tripling your balance sheet to quadrupling it, quintupling it, you can set up negative real interest rates at the discount window, you can print money, and you can throw it out of airplanes, but this is not a challenge of monetary policy, Mr. Chairman. The problem is here with the United States Congress and the United States President. Now, I can’t go back and relitigate legislation that I disagree with, but I would hope that we could work together to try to render out some of the uncertainty that has been created that I believe the Federal Reserve itself says that public companies are sitting on al- most $2 trillion of cash and cash equivalents, sitting on the side- lines, sitting in the stands, and not being in the playing field to create jobs. The CHAIRMAN. The gentleman’s time has expired. The gentleman from Missouri, Mr. Clay, is now recognized. Then, it will be the gentlewoman from Wisconsin. Mr. CLAY. Thank you, Mr. Chairman. And thank you, Chairman Bernanke, for being with us today. Based on how important consumer spending and consumer con- fidence is to the economy, what political ideology do you believe would work to stimulate the economy, such as tax cuts to stimulate the economy versus job creation and spending efforts, such as the American Reinvestment and Recovery Act? Do you have sugges- tions for a private sector stimulus program? Mr. BERNANKE. I have a general comment which I have already elucidated a bit and a more specific one. In general, I think that maintaining the current level of fiscal support is important because the economy is still quite weak. At the same time, in the medium and longer term, we have an unsustainable fiscal trajectory, and we need to address that in order to maintain the confidence in the markets. So it is a two-pronged element as far as overall fiscal pol- icy is concerned. Now, the fact that we are in a mode of stimulus now doesn’t mean that what we do doesn’t matter, that the particular choice of tax cuts or spending programs is irrelevant. You still want to look at every program and try to judge how effective it is and will it pro- vide support for long-run growth. And some of the areas I have talked about have been training for workers and for the unem- ployed, support for small businesses. These are areas that would be productive, but it is up to Congress to look very carefully at not only what you are in principle trying to address, but make sure that those programs are effective and well-designed. Mr. CLAY. Chairman Bernanke, the House of Representatives passed H.R. 4380, the U.S. Manufacturing Enhancement Act of 2010, yesterday. What effects to the U.S. economy do you expect if this legislation becomes law? VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 30 Mr. BERNANKE. I haven’t had a chance to view those implica- tions. Mr. CLAY. On another subject, the Federal Reserve will soon take up the responsibility of the Federal Consumer Protection Board. How do you envision you all coming on line as far as being the pro- tector for the American consumer, and how quickly do you think that will be up and running? Mr. BERNANKE. Congressman, to be clear, although the new Bu- reau will be housed in the Federal Reserve and be budgetarily sup- ported by the Federal Reserve, it will be completely independent of me, of the Board, and of the Federal Reserve. It will be acting as a separate agency. We have two immediate concerns. One is during the transition period to continue to protect consumers and take actions necessary to make sure that financial products are fair and well explained. And our other responsibility is to work with the Treasury through the transition, moving our capacity, moving employees and so on to the new Bureau. But where we are going here is from a situa- tion where the Fed was writing these rules to one where within 6 months or a year, the independent Bureau will be responsible, not the Federal Reserve. Mr. CLAY. So you don’t envision any interaction between— Mr. BERNANKE. Oh, sorry. We will have substantial interaction in various contexts. For example, through the Financial Oversight Council, the Stability Oversight Council is one way. And bilat- erally, I hope that we will work effectively with this bureau to make sure that we are cooperating. And the Fed will retain the ability to do examinations of consumer compliance for smaller insti- tutions. We will retain consumer affairs and community affairs de- partments that will try to reach out and understand what is going on with consumers. So we have a lot to talk about, and we will want to work with them, but again, the principle rulewriting authorities will be trans- ferred to this new Bureau. Mr. CLAY. And it is kind of uncharted waters, wouldn’t you say, as far as this new responsibility of the Consumer Protection Board and really putting front and center consumer protections for Ameri- cans? Mr. BERNANKE. Obviously, the goal of the Congress was to create an effective protector of consumers. Mr. CLAY. Thank you very much. The CHAIRMAN. The gentleman from New Jersey. Mr. GARRETT. Just to preface my remarks, if you would consider New Jersey for your next call center as well. I would just like to be in the running with the other Members. Mr. BERNANKE. Any particular district, sir? Mr. GARRETT. We are open. If I heard you correctly to Randy’s comment that the Fed is not actively involved in interfering with the free market? Mr. BERNANKE. Uncategorically. But the basic idea of monetary policy is to provide broadly supportive financial conditions and to allow investment decisions and the like to be made by the free market. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 31 Mr. GARRETT. Because when you go out and you purchase $1 tril- lion worth of widgets, you are involving yourself with the free mar- ket because you are affecting the price of those widgets for every- body else. Mr. BERNANKE. We didn’t buy any widgets. Mr. GARRETT. You didn’t buy any widgets, but you bought over $1 trillion worth of GSE debt. So you are affecting that market to a substantial effect. And to that point, normally under normal circumstances on the Fed’s balance sheet, what you have on there is—normally treas- uries that are on there, secure treasuries, or if you had anything else that are on there, I assume you would have some sort of a re- purchase agreement for those securities that are on your balance sheet. Now, of course, around two-thirds that are in there are GSE debt, right? Mr. BERNANKE. Correct. Mr. GARRETT. So right now, those are guaranteed. Whether they are a sovereign debt or not, we still don’t know. But they are guar- anteed by the U.S. Government. But they are only guaranteed until when; 2012, right? After that, Congress, in its wisdom, may make another decision on that. And at that point in time, you may be holding on your balance sheet, two-thirds of your balance sheet, something that is not guaranteed by the Federal Government. First of all, do you have a repurchase agreement on those with anyone? Mr. BERNANKE. I don’t know what you mean by ‘‘repurchase agreement.’’ We own those securities. Mr. GARRETT. We own those securities, right. There is no repur- chase agreement outside. You own them. So after 2012, if they are no longer guaranteed, is it fair to say that you may at that point in time actually engage in fiscal policy because you basically are creating money at that time—and I know you would agree that it would be an unconstitutional role for the Fed to engage in fiscal policy. So where will you be at 2012 if they have to take a haircut on those because they are no longer guaranteed? Mr. BERNANKE. First, from the government’s perspective, the Federal Reserve would lose money, which the Treasury would gain. There would be no net change to the overall position of the U.S. Government. Secondly, the Federal Reserve Act explicitly gives— Mr. GARRETT. How would we gain? How does the Treasury gain? Mr. BERNANKE. If there is a bad mortgage, and it requires $10 to make it good, if the Treasury refuses to do that, then the Fed loses $10. So one way or the other, the government is going to lose $10. But I will just say two things. One is that I think— Mr. GARRETT. But if you didn’t purchase them in the first place, then it would just be a total—then what would have occurred? It would not have been the creation of that $10. Now that you pur- chased them, you have—in essence, and we don’t back them up, you will have created that additional $10. Mr. BERNANKE. I hope that doesn’t happen because I think it is very important for financial stability and confidence that we— Mr. GARRETT. Let us have a hypothetical that it does happen. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 32 Mr. BERNANKE. Then the Fed would lose money there. But let me just point out that we did not invoke any emergency or unusual powers to buy those agencies. It is explicitly in the Federal Reserve Act that we can buy treasuries or agency securities. So we did not do anything unusual there. Mr. GARRETT. Normally when you—and what status were they when you bought them? Were they in conservatorship at that point? Mr. BERNANKE. Yes. Mr. GARRETT. Is it your normal practice for the Fed to buy agen- cy securities when they are in conservatorship? Was that ever done before? Mr. BERNANKE. It has never been in conservatorship before. Mr. GARRETT. There you go. So the normal practice was not what was followed here. It just seems to me that we may have gone down a different road than we have ever gone down in U.S. history, where the Federal Reserve has engaged in buying a security that is not Treasury, that is not guaranteed by the full faith and credit of the United States for its lifetime, nor is there any repurchase agreement from any other entity that you have a trade with that agreement with, and that the Fed, in essence, could have basically created money at that point if the Federal Government does not guarantee them. At least, that could be the situation we find our- selves in in 2012, if we find ourselves not guaranteeing them; is that correct? Mr. BERNANKE. Again, we were able to do that under the law with no extraordinary circumstances. And I will add, just for your interest, that the Federal Reserve is extremely constrained in this respect compared to other central banks. Other central banks can buy corporate bonds and a variety of other things, which we don’t do, of course. The CHAIRMAN. The gentleman’s time has expired. The gentlewoman from Wisconsin is recognized for 5 minutes. We are going to have some votes. The Chairman is here until 12:30. There are only two votes. So Members will please come back if they want to ask questions. Ms. MOORE OF WISCONSIN. Thank you very much, Mr. Chairman. I am particularly appreciative of your efforts to renew lending to small businesses. So I was rather interested in your testimony about the 40 meetings that you have had around the country and the capstone conference and addressing the credit needs of small businesses. You indicate in your testimony that you have issued guidance to supervisory agencies and to bank examiners empha- sizing that banks should do all that they can to meet the credit- worthy borrowers. But they have indicated to me, and, indeed, in your addendum to this testimony, that they feel that a lot of the bank examiners and supervisory agencies are arbitrary and even capricious in their requirements for their lending. What sort of powers or authority exist within the guidance, the so-called guidance, that you have given them, for them to be less arbitrary in their standards? Mr. BERNANKE. The guidance is very clear about the need to bal- ance appropriate prudence with making sure that creditworthy bor- rowers can access credit. And we have tried to make the guidance VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 33 as clear as possible by giving a whole bunch of examples of dif- ferent situations and how the examiner ought to treat that situa- tion. The examiners are employees, and we have done numerous training sessions to make sure that they are doing what they are supposed to be doing. And I hope that they are. What we have been trying to do now is get as much feedback as possible, and that is part of what those 40 meetings we did were about. We have also done additional things, like do surveys of the banks and the like. Ms. MOORE OF WISCONSIN. I understand. Now, I know that part of lending is very subjective, so there is character, there is history. And so some of our banks, small banks, that do business in rel- atively low-income communities feel that they are particularly hard-pressed to make these loans. And I am just wondering if the guidance includes those standard kinds of subjective evaluations. Mr. BERNANKE. The standards apply to all banks. Several things we learned from our meetings; first of all, that the SBA has been very constructive in supporting small business lending. And, of course, they have the ability to guarantee loans, particularly those in low- and moderate-income communities. The other area in which I would recommend further discussion is the CDFIs, the Community Development Financial Institutions, which are particularly good at finding creditworthy opportunities in low- and moderate-income communities, and they have worked ef- fectively with banks to make good loans. And we had quite a bit of input from CDFIs and from banks in our— Ms. MOORE OF WISCONSIN. Thank you, Mr. Bernanke. I also wanted to follow up on a line of questioning that was raised by Mr. Royce and others on the other side regarding the cou- ple trillion dollars of hoarding on the part of financial institutions. You indicate in your testimony that eventually you will have to withdraw extraordinary monetary policy accommodations, and in- terest rates will, of course, have to rise from your like zero interest rates now. So I just wanted the opportunity while you are here today to sort of—first of all, have these institutions said that they are concerned about making investments because they are concerned about the cost of money, and that perhaps being one of the chief culprits in the hoarding? What is it that you can do or that we could do to sort of shake some of this money loose? Mr. BERNANKE. The hoarding that was referred to was not finan- cial institutions, but other types— Ms. MOORE OF WISCONSIN. Right, not financial institutions. But I am sort of using that and sort of asking you to speculate whether or not your withdrawal of the monetary policy accommodations might, in fact, be—there was a suggestion that you are going to have to do it. Might that be a cause of some of the hoarding in fi- nancial and nonfinancial institutions? And what can we do to reas- sure folks, sort of deflate the fear of inflation? Mr. BERNANKE. We will do that at the time when the economy is recovering and inflation is becoming an issue on the radar screen. Right now, we have talked about maintaining our accommo- dation for an extended period. The CHAIRMAN. The gentleman’s time has expired. Ms. MOORE OF WISCONSIN. It was yellow when you gaveled. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 34 The CHAIRMAN. No, it was getting red. The gentlewoman has 3 more seconds. Ms. MOORE OF WISCONSIN. So, in other words—was important. The CHAIRMAN. The time has expired. The gentleman from Flor- ida. Ms. MOORE OF WISCONSIN. Thank you for my time, sir. Mr. PUTNAM. Thank you, Mr. Chairman. I would love to take up the concern on small business lending as well. There has been a debate raging for some time now about whether it is a matter of an absence of creditworthiness or overly aggressive and overreactionary bank examiners that were tight- ening credit to small businesses. It would appear to me, based on your testimony on page 4 and the addendum, that there is at least a tacit admission on the Fed’s part that it was overly aggressive bank examiners that were implicitly and explicitly contracting small business credit. Do you have a comment on that? Mr. BERNANKE. There is a natural tendency for examiners to be conservative because they don’t want to be held responsible if a bank were to fail. But it has been the point of view of the Federal Reserve not just in this crisis, but going back to the 1990’s and pre- vious periods that it is important to take a balanced approach. We have heard, as you have heard, complaints from banks that exam- iners were too unreasonable or too tough, and we just want to be sure that we do everything we can to make sure there is a bal- anced approach being taken. Mr. PUTNAM. It was reported today that, as a result of the re- cently passed Wall Street reforms, the asset-backed securities mar- kets have effectively seized up, for lack of a better term; that un- certainty over the liability provisions concerning the rating agen- cies have frozen that marketplace. Can you comment on that and address what impact that may have in terms of the ripple effect throughout the economy and credit and liquidity markets? Mr. BERNANKE. The issue, as I understand it, is that because of the liability exposure, that credit rating agencies have declined to have their ratings attached to ABS issuance, which has had some effect on the salability of the ABS. This is an SEC issue, and I think it is important for the SEC, and I would be happy to work with them in any way that they see fit to try to find alternative solutions to address this problem. But it is an issue that needs to be looked at, because, as I understand it, it does inhibit somewhat the sale of ABS. Mr. PUTNAM. That inhibition, as you call it, which has resulted at least in an impaired efficient market. There is a precedent where the Fed implemented the TALF facility when the asset— when the ABS market froze up earlier. Can you envision a scenario where that may be required again as a result of this legislation? Mr. BERNANKE. I think it would be better to find some kind of solution that works so that investors can get the information they need when they buy the ABS. I don’t think the Fed’s intervention would be very useful on that. Mr. PUTNAM. And then finally, Mr. Chairman, given the accom- modative position that you have taken, that the Fed has taken, in an effort to continue to maintain low rates and other tools at your disposal, given that we are at zero or near zero rates, if there were VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 35 an EU issue, some type of sovereign default or perceived sovereign default, that spread the contagion to American markets, as we have seen in the volatility of the past several months, that led to a true double-dip recession, what tools remain at your disposal in that eventuality of a double dip? What tools remain in your kit to address that situation? Mr. BERNANKE. First, if there is contagion in markets, we would want to see which markets and what the nature of the problem was. And we could conceivably—although I don’t think this is going to be likely or necessary—reintroduce some of the programs that were used to end the panic and restore normal functioning in those markets. With respect to the broader economy, as I was discussing with Congressman Watt and others, although we have lowered interest rates close to zero, as you note, and expanded our balance sheet, I think there are additional steps we could take, and we are evalu- ating those possibilities in the contingency that we would need them. And those include our communication about our policy, our framework, which may increase confidence in our willingness to support the economy. It includes reductions in the IOER, interest on excess reserves, and the steps we could take to expand our bal- ance sheet further. The CHAIRMAN. Let me announce we are going to get to a vote soon. Mr. Peters, Mr. Maffei, Mr. Marchant, Mr. Klein, and Mr. Donnelly, who have a right on our side to ask questions and have been here, I intend to make sure they can ask questions. We will break when we have to vote. We will come back, and I think we can finish that. I don’t intend to recognize any Democrats other than the four who have been here. If there is another Republican who comes up, and I am asked to do that, we can work that out. But I hope we would honor the commitment of those who have al- ready been here. We will now proceed with Mr. Klein. Mr. KLEIN. Thank you, Mr. Chairman. And, Mr. Chairman, thank you for being here. Obviously, this is a very important time for us to continue these discussions, and we know that the Federal Reserve plays an important role in helping our monetary policy. I want to just reinforce for all the comments that have been said about small business lending and the reaction that they are getting from a lot of banks locally, and we again need to get the Federal Reserve and the FDIC to get this straightened out, because a year and a half of conversations with Sheila Bair and a lot of others with good intentions of saying the right things here in Washington are still not translating in many ways to local communities where small businesses, which are the lifeblood of our community, are having difficult times with small business loans—I don’t mean SBA loans, but just general small business loans—of getting those ac- complished. An area that I want to have some conversation with you, though, is there is a continuing discussion, since many of us believe that in order to have a competitive banking system, that you have lots of choices. And there has been a big concern about consolidation of the largest banks through acquisition and a lot of other things, and VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 36 that the role of smaller banks and regional banks—and that the policies over the last number of years have squeezed smaller banks because of access to either no interest or very low interest for larg- er banks, and smaller banks are not getting access to that. We tried through the House to take some money and put it aside and incentivize small business lending through smaller banks. Can you give us some specific ideas of what we can do to help the com- petition or the availability of credit and cash to banks so they can have more availability to make lending available to small busi- nesses? Mr. BERNANKE. First, on the competition issue, the Federal Re- serve is charged with making sure the competition is adequate whenever we approve a merger. And our approach has been to look at local banking areas and to make sure that retail customers have plenty of choices in terms of their local banking services, or that small businesses have adequate choices in terms of their bor- rowing. So we do pay attention to that, and the financial reform bill in- cludes additional restraints on the share of total liabilities that any large firm can have. So there are some things in place to address the competition issues. And, indeed, I think during this crisis, it has been quite interesting that where a number of the larger banks, because of their various problems, have pulled back to some extent, particularly in smaller communities, small banks have stepped up and made more loans. Mr. KLEIN. If they have a balance sheet available to them. Mr. BERNANKE. Absolutely. Mr. KLEIN. That is where the necessity of giving them at least equal access to low-interest cash to make loans. Mr. BERNANKE. We had an attempted policy, the TARP policy, which did put capital into banks of all sizes. That has been a stig- matized policy. It has not been effective because of that reason. In terms of funding from the Federal Reserve, we loan to all banks, directly or indirectly, at the same interest rate. So the low- cost funds that are available to large banks are also available to smaller banks. I think that from Congress’ point of view, there are some indi- vidual programs that could be done, and those include some of the things that you are talking about now to encourage small business lending, for example. The other thing I am sure you hear is that small banks complain all the time about regulatory burden. And there are some elements of the financial reform bill, but just more broadly, I think it is im- portant to recognize that small banks find it much more difficult to comply with complex regulations, and, where possible, we need to simplify or reduce those burdens for smaller banks. Mr. KLEIN. I agree. I am not here to say we want banks of any size to be making anything other than prudent loans. Obviously, there were pendulum swings here. Now it has become very dif- ficult. But over and over, I just keep hearing from business people and from banks that $200,000 loans, $100,000 loans, million-dol- lars loans, are just hard to come by. By the way, there are large banks, and I can just speak for south Florida, that are saying, no, if you don’t do this, this, and this, they VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 37 are not going to lend to you. And there are very few choices out there. So I believe very strongly in the vibrancy of large, medium, re- gional, small opportunities, and it has not played out that way in an effective way. So we need more initiative, more activity, more suggestions. If you can take it upon yourself to talk to Congress and the public—I appreciate the small business meetings around the country, but, again, we are just not seeing the necessary reac- tion. Mr. BERNANKE. We will continue to do that. But I would just point out that a lot of what you were just describing in many cases is the bank’s own decision about what kind of loans they want to make and not the examiners constraining them. Mr. KLEIN. I acknowledge that. But, again, there is a lot of dif- ficulty. The human factor; who wants to be the examiner to be the last one to sign off on the next bank who fails? I get that. Again, I think there is way too much of that one side. I think we need to come back to the middle, and a strong message needs to be deliv- ered. Thank you. The CHAIRMAN. The gentleman from Texas. Mr. MARCHANT. Thank you, Mr. Chairman. Mr. Bernanke, earlier in your testimony you testified that as the mortgage-backed securities or agency-backed securities mature and are being paid off, you are not reinvesting in similar. But as the treasuries are rolling off, you are reinvesting those, and you are re- investing them in similar maturities. What would you say the weighted average maturity of your security portfolio is? Mr. BERNANKE. The treasuries are about 7 years weighted aver- age maturity, and the agency debt I am not precisely sure, but I think it is around 4 years. Mr. MARCHANT. So under this current policy, unless you make a decision to do otherwise, within 4 years, the agency debt will have rolled off the books. Mr. BERNANKE. Not entirely, because it is distributed over a range. Some is shorter, some is longer. But there would be substan- tial reductions over the next 4 or 5 years even if we don’t sell any- thing. Mr. MARCHANT. And so with interest rates at historical lows—I think last week was the 2-year or 5-year hit its lowest rate ever? But almost every day, some of the securities are hitting their low- est rate ever, and there is a tremendous amount of demand for those treasuries. What would be the effect of the Federal Reserve not replacing the treasuries that are rolling off the books? Mr. BERNANKE. It would probably have a modest effect in terms of increasing the yields on treasuries. Mr. MARCHANT. So it would have the effect of raising the yields on treasuries because you are applying some buying pressure. Mr. BERNANKE. Exactly. Mr. MARCHANT. And at this time, that is an acceptable policy to put any pressure whatsoever? Mr. BERNANKE. As we have discussed, we believe that the econ- omy continues to need monetary policy support, and this is one measure that we have to keep overall rates low and to provide sup- port for the recovery. In addition, the amount of treasuries that we VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 38 currently hold is more or less identical to what we held before the crisis, and so there is no real need in terms of the long-term nor- malization of our portfolio to reduce that significantly. Mr. MARCHANT. When you began this policy, the 10-year rate was near 4 or has been above 4. It is now—I think yesterday got down to 2.86. Is that the range, generally speaking, where you feel like the Fed needs to be in those instruments? Mr. BERNANKE. We don’t have a target interest rate. Much of what has happened to the yield is not really related to the Fed, at least not directly to our purchases. It is related to things like ex- pectations of inflation, of growth. And the demand for treasuries is a safe haven, which has been increased with the European crisis and the like. So a lot of factors affect the yield. We don’t have a particular target, but all else being equal, a lower yield tends to be somewhat supportive of recovery. Mr. MARCHANT. One last question. On page 7—and I think what was reported widely yesterday in the newspapers, out of this entire paper, was the phrase that ‘‘we also recognize that the economic outlook remains unusually uncertain.’’ Is there some distinction in the word ‘‘unusually’’ versus the last report that you gave? Mr. BERNANKE. I don’t know. As I report in my testimony, we have a quarterly survey of our members of the committee, the FOMC, asking them for their forecast, but also asking them wheth- er they think the amount of uncertainty in their forecast is higher or lower than usual. And a majority of the respondents said that they thought uncertainty was higher than usual. And I was re- sponding to that observation. It certainly is an unusual time, and many factors are at work, including factors in financial markets. And so forecasting is perhaps a bit more difficult than it would be under average circumstances. Mr. MARCHANT. Thank you very much. The CHAIRMAN. The gentleman from Indiana. We will break after his questions, and we will then return. We will have Mrs. Biggert, Mr. Peters, and Mr. Maffei. The gentleman from Indiana. Mr. DONNELLY. Thank you, Mr. Chairman. Mr. Chairman, thank you for being here. One of the business people in my district had a line of credit, pretty significant, and they came to him and said, we have to cut you in half. So at the end of this year, we need you to be at this point. And he had—business is going fine, things are going well. They said, out of prudence on their side. Now, what he had in his plans was continued expansion, contin- ued growth. He spent the following year laying people off, selling off pieces in order to get to that point. I have talked to him a num- ber of times, and he said, I have lost faith in everything you are trying to do because of the fact that I have a good business that is working well, and instead of—you say you want to create jobs, and instead of creating jobs, what we have done is forced him to lay people off—or I shouldn’t say what we have done, but what has happened because of the credit line reduction. And so, how do we restore the faith of that business person? What do you say to him, Mr. Chairman? VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 39 Mr. BERNANKE. In terms of the specific case, it would be impor- tant to know more. It could just be that the bank disagreed with his assessment. Mr. DONNELLY. No, I understand that. But this is a common complaint of the small business community. Mr. BERNANKE. It is a common complaint. Again, I think it is be- cause banks have tightened their standards. And part of that was appropriate because some of the lending before the crisis was not well managed. And the general weakness of the economy and de- cline in collateral values and so on makes some borrowers who were previously good risks no longer such good risks. And that is why banks have become tighter in their lending. That being said, as I have emphasized today, it is very important that if a borrower is truly creditworthy, that they get access to credit. And the best thing I can do and the Federal Reserve can do is make sure that Federal Reserve examiners are only one of a number of agencies that look at banks, but also make sure our ex- aminers are taking an appropriately balanced position, which is on the one hand we want banks to be prudent and make good loans, but, on the other hand, excessive conservatism, restriction is not constructive. So if the customer’s bank is telling him or her that examiners, or particularly Federal Reserve examiners, are the problem, we would like to hear about that, either from the borrower or the bank itself, who could be in touch with the Federal Reserve through the local district or the Board. Mr. DONNELLY. Because what we want to do is obviously—I know how hard the efforts are being made to get this squared away. We want to impart that to the business community, to this fellow, that, hey, your faith that you should have is justified, that we are working on this, that the examiners are getting squared away. And I know you have put them through almost, for want of a better way to put it, examiner boot camp as to what you are look- ing for, what you are not looking for. How do you expect that to work out over the next year? Mr. BERNANKE. We have gone beyond the point of issuing guid- ance and doing training to try and get feedback and evaluation. We have done baseline studies of several hundred banks in terms of how they deal with troubled commercial real estate properties. And we looked at how they acted and what their procedures were prior to guidance we put out. Now, we can go back and survey them sub- sequent to our guidance, our training, and see if there has been a change in their behavior. If there hasn’t, we want to understand why. So we are doing our best now to get feedback; get feedback, try to adjust, see how that works. Again, we have an ombudsman at the Board of Governors, and every Reserve Bank has people who are there to talk to banks or borrowers, and I hope that they will get back in touch with us. Mr. DONNELLY. Where do you expect us to be 6 months from now in terms of small business lending, if one of our small businesses are saying, Mr. Chairman, what am I going to be looking at 6 months from now? VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 40 Mr. BERNANKE. I think there are hopeful signs. We survey banks about their standards, and they have stopped tightening standards for small businesses, and we are beginning to see some little bit of improvement. So we are turning around. I think it is going to be better. It is still tight, but it is not getting worse, and that is the first step towards improvement. The CHAIRMAN. The committee is now in recess, and we will come back, and there are at least three Members who have a right to question. We will go until 12:30. I will ask the Chairman to stay. But there are only two votes, and we should be back in 20 minutes or less. [recess] The CHAIRMAN. Questions will resume. The questioning will begin with the gentlewoman from Illinois, Mrs. Biggert. Mrs. BIGGERT. Thank you, Mr. Chairman. And thank you, Mr. Chairman, for being here and waiting for our voting, those pesky votes. It seems like the Federal spending and our deficit, it is a vicious circle. The consumer can’t get credit. The small businesses can’t get credit. The bankers have the uncertainty; they are afraid there will be more assessments. And the regulators are going to be put into regulation. So it just seems like there is just a circle, and who is going to break out of it and kind of start the ball rolling so that we are going to able to get back on track. We had an Oversight and Investigations Subcommittee hearing in May, and we heard from a number of witnesses who said—it was pretty scary. It was on debt. They said that we have maybe 1, probably 2 years at most, to get our fiscal house in order, or we could end up at the tipping point, which means we probably could be like Greece. Could you give us the top maybe three rec- ommendations as to how we can change that? How we can cut spending and move and get out of this circle and start the ball roll- ing again? Mr. BERNANKE. Congresswoman, I really can’t pick specific pro- grams or tax programs to recommend. As you know, there is a com- mission which is supposed to report later this year, and I know they are working hard to come up with some suggestions. You do have really three timeframes. In the very short term, I think that although the deficit is very high, that it is probably nec- essary to support the current recovery. But in the immediate term, say, from 2013 to 2020, the deficit-to-GDP ratio, depending on whose estimate you look at, is between 4 and 7 percent. That is too high. We need to get it down to 2 to 3 percent. And that is what the Commission has been charged with. In the longer term, I think we are inevitably going to have to look at entitlements, because there some large unfunded liabilities there, and we need to continue to find ways to continue to provide the services and meet promises we have made to Americans, but to find ways to do it without breaking the bank. So, there are really three time periods to look at. But the specific choices, obviously, are up to Congress, and you have to look at a lot of criteria to do that. Mrs. BIGGERT. Do you agree that we only have a couple of years really to turn this around? VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 41 Mr. BERNANKE. I don’t think anybody has any objective basis for saying how long we have. I think the question is what signal are we sending to the markets in particular. If the markets become convinced tomorrow that the United States doesn’t have the polit- ical will or ability to address these problems at some point, then that could be the tipping point. Alternatively, if we are making steady progress and showing we are committed to it, we could have quite a bit of time. But it is important to begin to address these things soon because, for no other reason, to give people adequate warning if you are going to make any changes in programs. Mrs. BIGGERT. At this same subcommittee hearing, I asked the GAO to supply to our committee their analysis of Fannie Mae and Freddie Mac’s use of leverage, since this is what this was on, and earlier this month, we did receive the report. I would like to ask that this report be submitted into the record. The CHAIRMAN. Without objection, it is so ordered. Mrs. BIGGERT. And I think we just gave your staff a copy of this. But there is something in here that is troubling, and it is the ratio of the total on-balance sheet assets to equity for both these enter- prises generally have exceeded 20 to 1, and reaching a high of 44 to 1 for Fannie Mae and then 34 to 1 for Freddie Mac. And then, they looked at the measure increased steadily for Freddie Mac and slightly for Fannie Mae before the recent crisis. This was at the end of 2007, they were at 68 to 1 for Fannie Mae and 81 to 1 for Freddie Mac. This was adjusted for off balance. If you would take a look and get back to me, I would appreciate it. The CHAIRMAN. The gentleman from Michigan, Mr. Peters. Then, we will go to, according to the list I have, Mr. McHenry, Mr. Maf- fei, and that will probably be it for the morning. We gave the Chairman until 12:30. Mr. Peters? Mr. PETERS. Thank you, Mr. Chairman. Thank you, Chairman Bernanke, for being here today. I appre- ciate your testimony. I reviewed some of the media accounts of your testimony yester- day, and I was particularly struck by a headline in the Washington Post which says: ‘‘Bernanke Says Fed Would Act If Necessary To Boost Economy.’’ I can tell you that I represent a district in the State of Michigan, and we believe that the economy definitely needs to be boosted, given the fact we have consistent, persistent, very high unemploy- ment, currently over 13 percent. I believe that we need to be taking action and need to continue to be focused on that. And I understand in your testimony that you were reviewing— and I heard today about three different options that are available to you to continue to be easing to get more money into the system. But I want to focus on one in particular, and that is the reducing interest payments on reserves. As I understand it, this is a fairly new policy from 2008 that allowed the Federal Reserve, as a result of congressional action, to pay reserves, particularly on excess re- serves, which is different, and that policy option, I think, is intrigu- ing in the fact that, to me, it seems like an outstanding option for us to use now. First, it certainly has a stimulative effect in the VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 42 short run. It provides, in my mind, incentives to banks to lend as opposed to keep those reserves at the Fed; get them out and lend and invest in the private sector. This is certainly going to help our economy grow. Second, I think it also helps us deal with our medium- and long- term deficit issues. According to statistics released by the Federal Reserve on July 15, 2010, depository institutions had just over $1 trillion in excess reserves. This means right now we are paying about $2.5 billion in interest payments. And dropping that rate to zero, given the fact that money would go back to the Treasury for deficit reduction, seems to me would immediately result in about $2.5 billion for deficit reduction. And it also likely, if those assets move into treasuries—instead of being in reserves, buying treas- uries to be in safe, secure assets—that trillion dollars will also drive interest rates down further and also could reduce the expense that the Treasury has to finance the current deficit that we have right now. Now, as far as I am aware, there are a few things that will both stimulate growth and reduce the Federal deficit. It seems to be a pretty good combination. Why wouldn’t the Federal Reserve—why are you not acting to reduce these excess reserves to zero right now? Mr. BERNANKE. I will answer your question, but let me first point out for everyone that we are paying one-fourth of 1 percent. So it is obviously a very, very low rate of interest. Mr. PETERS. On a lot of money, though. Mr. BERNANKE. A lot of money, that is correct. The rationale for not going all the way to zero has been that we want the short-term money markets like the Federal funds market to continue to function in a reasonable way, because if rates go to zero, there will be no incentive for buying and selling Federal funds overnight money in the banking system. And if that market shuts down, people don’t operate in that market, it will be more difficult to manage short-term interest rates when the Federal Reserve be- gins to tighten policy at some point in the future. So there is really a technical reason having to do with market function that has mo- tivated the 25 basis point interest on reserves. That being said, it would have a bit of effect on monetary policy conditions, and we are certainly considering that as one option. Mr. PETERS. You are saying reducing it to zero would shut down the money markets. Why is it still an option if that is the case? What would change in the future that you would say, well, now we would eliminate the interest on these excess reserves? You didn’t pay interest on reserves in the past. So this is a new policy. Mr. BERNANKE. We didn’t pay interest on the reserves in the past because we have so many reserves in the system, without this particular provision of interest on reserves, the market rate would be essentially zero. In the past, we didn’t have to pay interest on reserves to get the rate above zero because we didn’t have an ex- cess supply of reserves. We could control the amount of reserves in the system. So in the past, we have never seen interest rates this low before. One of the concerns about going all the way literally to zero is it would affect the functioning of this market. Now, again, that is VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 43 one of the reasons we are looking into this with some care. But, again, I take your point. It certainly is an option, and it would have a small benefit for the Treasury as well. Mr. PETERS. You give three options. This was one of the three. How would you rank those three options? I realize you are still evaluating. How would you prioritize them? Mr. BERNANKE. It is difficult to do that because it depends a lot on the details. The balance sheet options could involve something like just not letting the mortgage-backed securities run off anymore versus actually buying new securities. Those different options in- volve many specific choices. The CHAIRMAN. The time has expired. Mr. Chairman, can we get 5 more minutes out of you? In that case, I am going to recognize the gentleman from North Carolina for 7 minutes, because he is going to share his time with the gen- tleman from Georgia. And then, the last 5 minutes will go to the gentleman from New York. So the gentleman from North Carolina is now recognized for 7 minutes, and he will be able to yield some time to the gentleman from Georgia. Mr. MCHENRY. Thank you, Mr. Chairman. And thank you, Chairman Bernanke, for your testimony and for your additional time as well. As the ranking member began this discussion today, and a dis- cussion of the tax rates going up at the end of this year, 2001 and 2003 tax cuts expiring, and to that extent, I wanted to ask you about a recent piece in the Wall Street Journal by Art Laffer that suggests that businesses aware of the impending tax increases would be completely rational if they acted ‘‘to shift production and income out of next year into this year, to the extent possible.’’ As a result, he suggested that ‘‘income this year has already been in- flated above where it otherwise should be, and next year, 2011, in- come will be lower than it otherwise should be.’’ Do you agree or disagree with this—with Dr. Laffer? Mr. BERNANKE. We are talking about income tax, right? Not cor- porate taxes. But for income taxes, there would be some incentives to try to move not necessarily the activity, but at least the income, when you get paid, from next year to this year. That is right. Mr. MCHENRY. Do you think that effect will have an adverse im- pact on economic growth? Mr. BERNANKE. It could involve a little bit of, as you say, some income shifting from next year to this year. I don’t know how much it would fundamentally affect underlying growth. The broader issues are the change in tax rates long term and the effects on the deficit. Mr. MCHENRY. So in the short term, it could impact economic ac- tivity. Mr. BERNANKE. I didn’t read this column, but the argument that you could make is that if people really expect the rates to go up at the end of this year, then some of the income you are seeing this year is actually a little bit of an artificial boost created by the shift- ing of income from next year to this year. I think the lesson that might be there is that we shouldn’t take completely seriously the reports of increased profits and production this year. VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 44 Mr. MCHENRY. Okay. In terms of economic uncertainty, with ramifications of fiscal policy on this side—and I understand that there are two sides to the house, and you only want to comment on the side that you are in charge of in terms of fiscal monetary easing—but does the fiscal policy of this Congress, or Congress, pe- riod, impact your assessments of economic growth going forward? Mr. BERNANKE. You are referring to uncertainty issues, and I think those are real. There are a number of sources of those, in- cluding both economic, political, and other sources. The long-term fiscal stability does have very significant consequences. It depends a lot on how bond market investors anticipate what the Congress will eventually do. Right now, apparently there is pretty good con- fidence in the U.S. Government in the sense that yields are pretty low. It is possible, though, that at some point in the future—it could be soon—that there will be a loss of confidence in the will and ability of Congress to manage its medium-term fiscal deficits, in which case you could see yields going up, which would be a neg- ative for recovery and growth. And so at some point, there will be a cost to growth from exces- sive deficits. Whether it is near term or long term, it is hard to tell, but it is an issue that needs to be addressed. Mr. MCHENRY. Thank you. With that, I yield the balance of my time to my colleague from Georgia. Mr. PRICE. Mr. Chairman, thanks again for your testimony and visiting us today. I want to follow up on the uncertainty as it relates to small busi- ness, the tax rates for small business. One of the items that you have at your disposal, as you mention, is communication. I assume that communication is to provide some certainty to markets and to investors and the economic system. Would it not be helpful as well to have Congress provide some certainty of communication to the American people and to the economic system? Mr. BERNANKE. The Federal Reserve tries to provide as much clarity as possible. One of the reasons we can’t be perfectly clear is because the economy is hard to predict. Mr. PRICE. What about certainty in communication from Con- gress? Mr. BERNANKE. I was going to say that it is difficult to provide perfect certainty, but anything that can be done to create more clarity about policy goals, objectives, and plans is certainly going to be helpful. Mr. PRICE. The uncertainty that is currently out there in the business world about what Congress is going to do with corporate tax rates, with individual rates as it relates to small business and Subchapter S corporations, is a challenge for job creation; is it not? Mr. BERNANKE. Uncertainty is a negative for investment and job creation. As I said earlier, I don’t know how big the effect is. But the lesson we take from that, and again, speaking in the context as a regulator, it is important to try to achieve clarity as quickly as you can. Mr. PRICE. The Dodd-Frank bill that was adopted and signed into law yesterday expands significantly the resolution authority that you have. I wonder if you might—and the solution that we put VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 45 on the table would have ended bailouts. We believe that the Amer- ican people are sick and tired of bailouts, the intervention of the Federal Government. And the Dodd-Frank bill persists in actually codifying bailouts. So I wonder if you might be able to tell us, with the resolution authority that is now defined, how much would it have cost the taxpayer for Lehman to be bailed out? Mr. BERNANKE. First of all, we are all sick and tired of bailouts, and the Federal Reserve, I think, particularly so. The objective of the legislation—and, by the way, it is the FDIC and not the Fed that would lead the resolution of a large, systemically critical fi- nancial firm—is to wind it down in a way that is not damaging to the broader financial system and to the economy. Mr. PRICE. How much would it have cost? Mr. BERNANKE. The way the law is structured, it shouldn’t cost anything, because the FDIC can borrow money from the Treasury temporarily. But the law requires that all money be eventually paid by the financial firms. Mr. PRICE. And if it is unable to do that, the taxpayer is on the hook for— Mr. BERNANKE. Again, I believe that it would be no cost. Mr. PRICE. The balance. Mr. BERNANKE. I believe there would be no cost. The CHAIRMAN. The gentleman’s time has expired. The gentleman from New York, Mr. Maffei, will be our last ques- tioner. Mr. MAFFEI. Thank you, Mr. Chairman. Chairman Bernanke, if one looks, as you have in your testi- mony—one looks at the basic U.S. economy, we do see some recov- ery, recovery slower than any of us would like, but I think we do see some recovery. The first quarter GDP was estimated to in- crease 2.7 percent. Not as much we want, but still 2.7 percent. And that follows a 6.6 percent in the second—I am sorry, 5.6 in the quarter before that. And we have seen at least three quarters cor- porate profits before tax increased $137 billion in the fourth quar- ter of 2009, and over $215 billion in the first quarter of 2010. We are seeing some downtick in the unemployment rate, again, slower than we would like. In the meantime, though, we seem to have everyone telling us that the economy is in horrible shape. And certainly Republicans, even in the questioning to you today, listed all sorts of reasons why we might have a double dip, and asked you to be prepared for that kind of double dip. We see the cable news outlets and talk radio— talk radio in particular—talking about how bad the economy is, recommending that we buy gold. We see the financial papers talk about deflation. And even you, you look so down here in this pic- ture published by Roll Call. Clearly, we need to get you a vacation or something. My question is, is there any good news out there, or are we right to be this depressed? Mr. BERNANKE. Certainly, there is a lot to be concerned about, including a very high rate of unemployment, but there are some positive signs. Clearly, we have made a huge amount of progress since the depth of the financial crisis in terms of stabilizing finan- VerDate Nov 24 2008 10:34 Nov 24, 2010 Jkt 061851 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\61851.TXT TERRIE 46 cial markets and getting the banking system back on its feet, which in turn is helping the economy recover. We had a very sharp recession at the end of 2008, beginning of 2009. Since the middle of last year, the economy has been growing. And the Federal Reserve expects a moderate recovery to go for- ward, with declining unemployment. Inflation is very low. Produc- tivity gains are very strong. Profits are up, as you point out. So there certainly are some positive steps. Our recovery, though it is not nearly as strong as we would like, is stronger than many other industrial countries around the world. That being said, we can hardly be satisfied when the unemploy- ment rate is over 9 percent. And I think that is the main source of the concern. Mr. MAFFEI. I completely agree. When we did look at the revision of the last quarter, it came from consumer consumption and busi- ness spending, which were not as high. Is it possible that to a cer- tain extent, the sluggishness of this recovery is becoming a bit of a self-fulfilling prophecy? In 1996, Chairman Alan Greenspan warned of irrational exu- berance. Is it possible that we are in irrational pessimism; that, yes, things are not as good as they need to be, we need to keep doing better, but that continuing to sort of trash the economy, if you will, or downplay the fact that we are in some modest recovery is becoming the self-fulfilling prophecy itself? Mr. BERNANKE. There is a bit of that. The consumer sentiment numbers are derived in part from the questions asking people, have you seen news about the economy on television; and they say, yes, bad news I have seen in the media. And that in turn is used to interpret consumer buyer decisions and the like. So, yes, I think there is some self-fulfilling prophecy element to business cycles in general, but clearly the best way to overcome that is to get the fundamentals strong, and then people will begin to see improvements, and their views will improve as well. Mr. MAFFEI. And maybe, we will smile a little bit more. Mr. BERNANKE. The media don’t always choose the most flat- tering pictures. Mr. MAFFEI. I never understand, because when you move even a little bit, they take lots of pictures of you. So, that is my question. Certainly seeing you in person, you look a lot more chipper than this. Mr. BERNANKE. Thank you. Mr. MAFFEI. Thank you for your work, Mr. Chairman. Thank you. I yield back. The CHAIRMAN. The hearing is concluded. Mr. Chairman, I thank you very much for your willingness to lis- ten and your forthrightness in dealing with the committee. The hearing is now recessed, and we will reconvene the second part of this hearing at 1:30 to second-guess the Chairman. 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Ben S. Bernanke (2010, July 21). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20100722_chair_monetary_policy_and_the_state_of_the

@misc{wtfs_testimony_20100722_chair_monetary_policy_and_the_state_of_the,
  author = {Ben S. Bernanke},
  title = {Congressional Testimony},
  year = {2010},
  month = {Jul},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20100722_chair_monetary_policy_and_the_state_of_the},
  note = {Retrieved via When the Fed Speaks corpus}
}