[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE
STATE OF THE ECONOMY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
JULY 18, 2012
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-145
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
James H. Clinger, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
July 18, 2012................................................ 1
Appendix:
July 18, 2012................................................ 51
WITNESSES
Wednesday, July 18, 2012
Bernanke, Hon. Ben S., Chairman, Board of Governors of the
Federal Reserve System......................................... 7
APPENDIX
Prepared statements:
Paul, Hon. Ron............................................... 52
Bernanke, Hon. Ben S......................................... 54
Additional Material Submitted for the Record
Schweikert, Hon. David:
U.S. Senate letter regarding PCCRAs.......................... 62
Bernanke, Hon. Ben S.:
Monetary Policy Report to the Congress, dated July 17, 2012.. 66
Written responses to questions submitted by Representative
Cleaver.................................................... 126
Written responses to questions submitted by Representative
Hurt....................................................... 127
Written responses to questions submitted by Representative
McCarthy................................................... 130
Written responses to questions submitted by Representative
Paul....................................................... 132
Written responses to questions submitted by Representative
Schweikert................................................. 134
MONETARY POLICY AND THE
STATE OF THE ECONOMY
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Wednesday, July 18, 2012
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the committee] presiding.
Members present: Representatives Bachus, Hensarling, Royce,
Lucas, Paul, Manzullo, Jones, Biggert, Miller of California,
Garrett, Neugebauer, McHenry, Campbell, Pearce, Posey,
Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy,
Hayworth, Renacci, Hurt, Dold, Schweikert, Grimm, Canseco,
Fincher; Frank, Waters, Maloney, Watt, Sherman, Capuano, Clay,
Lynch, Miller of North Carolina, Scott, Green, Perlmutter,
Donnelly, Carson, Himes, and Carney.
Chairman Bachus. This hearing will come to order. We meet
today to receive the semi-annual report to Congress by the
Chairman of the Board of Governors of the Federal Reserve
System on monetary policy and the state of the economy.
Pursuant to committee rule 3(f)(2), opening statements are
limited to the chair and ranking minority member of the full
committee, and the chair and ranking minority member of the
Subcommittee on Domestic Monetary Policy and Technology, for a
period of 8 minutes on each side. Without objection, all
Members' written statements will be made a part of the record.
I now recognize myself for 5 minutes for the purpose of
making an opening statement. We are honored to have Federal
Reserve Chairman Ben Bernanke before us today. Thank you,
Chairman Bernanke, for appearing before our committee once
again, and for your dedicated service to the country.
As we meet this morning, we continue to find our Nation on
a path that is fiscally and economically unsustainable. And
some in the Senate, Chairman Bernanke, apparently believe that
only you can do something about it. Since the economy is bad
and unemployment is high, one of those Senators pointedly told
you yesterday that you have to get to work. That leads to an
important question: Who is ultimately responsible for the state
of our economy? We once had a President who had a sign on his
desk in the Oval Office that said, ``The buck stops here.'' I
will amend that to say the buck stops with the President of the
United States and with Congress, who are the elected leaders of
this country.
The President and Congress are the ones who have created
America's spending-driven debt crisis by hitting the gas when
what was needed was someone stomping on the brakes, and more
importantly, the need for reform of our entitlements. Some in
the Senate may want to duck responsibility, but the truth is
the Federal Reserve cannot rescue Americans from the
consequences of failed economic and regulatory policies passed
by Congress and signed by the President. The Chairman of the
Fed cannot save the economy when those elected leaders decide
they are prepared to send our country over a fiscal cliff, as
one of those elected leaders in the Senate declared earlier
this week.
Chairman Bernanke has warned Congress and the
Administration time and time again that without action, growing
deficits and the debt will erode our prosperity and leave the
next generation of Americans with less opportunity. To avoid
this fate, we must start taking action now to tame Washington's
appetite for spending, and more importantly, as Chairman
Bernanke has said, tackle the difficult but necessary long-term
restructuring of our entitlements.
The House, to its credit, has had the courage, in this
hyperpartisan attack atmosphere, to begin the long-term
process; the Senate has not. So I would like to take this
opportunity to tell the Senate that it is time for them to go
to work. Our economy is hobbled not only by our deficits and
debt, but also by the cumulative weight of Washington
overregulation. This committee hears constantly from private
sector witnesses who tell us the regulatory burdens being
placed on them are, as one small town banker witness said,
slowly but surely strangling their ability to do business and
create jobs. This is not to argue we don't need regulations.
Reasonable regulations provide clear rules of the road for
businesses and protect consumers.
Businesses need certainty and to know what to expect. They
don't have it under the present regulatory regime.
Unfortunately, job creators will tell you that reasonable and
clear rules aren't what they are getting from Washington right
now. Instead, they tell us the regulators do not coordinate
their actions, and the result is businesses are subjected to
confusing and often conflicting rules. While many in Washington
attack Wall Street and big corporations when they call for more
regulation, the reality is the burden of Federal red tape falls
disproportionately on small businesses and the small community-
based financial institutions that lend to them.
As the Small Business Administration reports, it costs
small businesses 36 percent more per employee to comply with
Federal rules than large companies. This has driven a
consolidation which is evident in our financial services
industry. And because small businesses are the engine of job
growth in our economy, we can hardly blame the Fed when
policies passed by this Congress and signed by the President
result in regulatory overkill that makes it harder for small
businesses to thrive and hire.
Instead of more regulations, Congress and the President
need to do more to eliminate the government roadblocks that
stand in the way of small business success and job creation.
The President recently said that entrepreneurs and small
businesses aren't successful on their own; they can succeed
only with the help of the government. That is akin to saying
that Apple Computer is a success because of the person who
built Steve Jobs's garage. Small businesses succeed in this
country in spite of the government, not because of it.
Chairman Bernanke, I know all of us look forward to your
testimony and the discussion that we will have today. Again, I
thank you for being here, and I yield to the ranking member.
Mr. Frank. I appreciate that. I am always struck by the
ability of my Republican colleagues to engage in a kind of
duality of the mind with regard to Federal spending. I listened
to the chairman talk about the need to rein in spending, and
note that we are going to be given a bill today to vote on that
will increase military spending beyond what the President has
asked for.
There is this curious notion that somehow military spending
is very different from all other government spending. People
who tell us how government spending never creates a job become
the most militant Keynesians when it comes to military
spending, even though a very large percentage of it is spent
overseas. We will be asked today to continue a subsidy to NATO
so that the wealthy nations of western Europe can continue to
spend very little on their military, so that they in turn can
have lower retirement ages than we have here in America, and we
will then be telling Americans that we have to cut back on
their Social Security and their Medicare.
Note when my Republican friends say ``entitlement,'' they
mean Social Security and Medicare. And I am proud of those.
While we can make them more efficient, I am not prepared to
maintain more and more military spending at their expense.
Next, I want to comment on what Chairman Bernanke has told
us. And I want to begin by noting that when people look for
bipartisanship, it is striking the degree of partisan criticism
I have heard from Republicans of Chairman Bernanke, who is
single-handedly the most bipartisan institution in Washington.
He was appointed 3 times to important economic positions by
George Bush: first, to the Federal Reserve Board of Governors
in 2002; second, to be Chairman of the Council of Economic
Advisers in 2005; and third, to be Chairman of the Federal
Reserve.
It does appear that when Mr. Bush had an important economic
appointment to make, he said, get me the usual suspect, which
was Chairman Bernanke. And I think that is very important,
because he is genuinely bipartisan, and therefore, I look at
his analysis of the economy. And it has very little do with the
very partisan caricature we hear.
I read the economic report, the Monetary Policy Report;
there is a basic statement that our economy has been recovering
from the terrible crisis brought about by the complete absence
of regulation and consequent, unchecked irresponsibility by
some financial institutions, obviously not all, and we are told
that it is slowed down by a number of factors. The most
important, according to the way it is presented here, is what
is going on in Europe. Nothing that we have done is
responsible. In fact, the Federal Reserve has tried to be
helpful in alleviating the situation in Europe, drawing again
partisan criticism from the Republicans for their cooperation
with the ECB to ease that situation to our benefit. We are told
that there is a problem because there is uncertainty about the
tax and spending policies. But those are wholly bipartisan. By
the way, I voted against the bill that included the sequester.
I think we can substantially cut military spending, but
sequestering is a stupid way to do it.
A better way to do it would be to tell western Europe they
are on their own, to stop figuring that we have to win a
thermonuclear war with a now nonexistent Soviet Union. But the
fact is that the uncertainty that Chairman Bernanke talks
about, our bipartisan Republican and Democratic-appointed top
economic official, is an uncertainty that is bipartisan and has
nothing to do with regulation. And I listen to this complaint
about regulatory uncertainty. Apparently, maybe there is a part
of the Monetary Policy Report I haven't read. I don't see a
word in here that says that financial reform or other forms of
regulation are part of the problem. It does talk about some
other things that are part of the problem, for example, the
cutback in hiring and construction by State and local
governments. And that is a direct preference of the
Republicans.
We began in 2009, when we had a President and a Democratic
Congress, to provide funding so State and local governments
could continue to be economically active in the face of the
crisis that had hit them. We were told by our Republican
colleagues that was government spending; it didn't create jobs.
Apparently, you couldn't shoot anybody with it. And if you
can't shoot anybody with something, or if you can't send it to
an overseas base, it has no job creation impact, so they only
do it for the military. But in fact, if State and local
governments had not been forced to cut back, unemployment would
now be below 8 percent, even if they had been able to hold
even.
We have lost about 15 percent of the jobs created in the
private sector by cutbacks in the public sector. So again, as I
read this, there are discussions of what is causing a recovery
slower than we want it to be. None of them have to do with what
my Republican colleagues have said. And again, this comes from
Chairman Bernanke, who was, as I said, was appointed 3 times to
important economic positions by George Bush, a man with whom I
sometimes disagree, but whose integrity and intellectual
honesty ought to be unquestioned. Unfortunately, in this
hyperpartisan atmosphere, to quote the chairman, it sometimes
isn't.
Chairman Bachus. I thank the ranking member. Before
recognizing Dr. Paul for his statement, I want to note that
this may be his last committee meeting with the Chairman of the
Federal Reserve. Throughout his time in office, Dr. Paul has
been a consistent and strong advocate for sound monetary
policy. And his leadership on the committee, especially during
these hearings when we have had the Federal Reserve Chairman up
here before us, have certainly made the hearings more
interesting and provided several memorable YouTube moments.
Mr. Frank. Mr. Chairman, could I ask unanimous consent just
to say that having served for a long time with Ron Paul, with
whom I agree on on a number of issues, I am very pleased that I
was able to serve one term with him as the chairman, because
there were times during our joint service when despite his
seniority, I thought he would never get to it. So I am glad
that he finally achieved that chairmanship that he should have
had long ago.
Chairman Bachus. Thank you. And let me note that my
statement didn't talk about Democrats and Republicans.
Mr. Frank. Mr. Chairman, if we are going to debate it, I
know you talked about the Administration and Obama, and I think
most people know what party he is in.
Chairman Bachus. All right. Thank you. For the record, we
do know that. Thank you. Dr. Paul for 3 minutes.
Dr. Paul. Thank you, Chairman Bachus. And welcome, Chairman
Bernanke. I appreciate your comments, Chairman Bernanke and
Ranking Member Frank. I am delighted to be here today, but I
just want to refresh a few people's memories. I was first
elected to Congress in 1976 in April in a special election. And
the biggest bill on the docket at that time was the revamping
of the IMF. There was a major crisis going on from the
breakdown of the Bretton Woods agreement, and they had to
rewrite the laws. They wanted to conform the laws with what
they had been doing for 5 years. And that was a major piece of
legislation. But it was only a consequence of what was
predicted in 1945, because when 1945 established that Bretton
Woods, it was predicted by the free market economists that it
wouldn't work, that it would fail.
This whole idea that they could regulate exchange rates and
deal with the balance of payments totally failed. And so, they
had to come up with something new. And 1971-1976 is that
transition period. Those same economists at that time said this
was an unworkable system, too, and it would lead to a major
crisis of too much debt, too much malinvestment. It would be
worldwide. It would be worse than anything because it would be
based on the fiat dollar globally, and many of the problems we
have domestically would be worldwide.
That certainly has been confirmed with the crisis that we
are in, and it has not been resolved yet. We are still
floundering around, and we still have a long way to go.
I have, over the years, obviously been critical of what
goes on in monetary policy, but it hasn't been so much of the
Chairman of the Federal Reserve, whether it was Paul Volcker or
Alan Greenspan or the current Chairman; it has always been the
system. I think they have a job that they can't do because it
is an unmanageable job. And it is a fallacy, it is a flawed
system, and therefore we shouldn't expect good results.
And generally, we are not getting results. Policies never
change. We say the same thing. No matter what the crisis is, we
still do more of the same. If spending and debt was the
problem, spending more and in greater debt and have the Fed
just buy more debt doesn't seem to help at all. And here we are
doing the same thing. We don't talk about the work ethic and
true productions and true savings and why this excessive debt
is so bad for us. We talk about solving a worldwide problem of
insolvency of nations, including our own, by just printing
money, and creating credit.
The Fed, in the last 4 years, tripled the monetary base,
and it has $1 trillion more money sitting there, and the banks
are sitting with trillions of dollars. Just the creation of
money doesn't restore the confidence that is necessary. And
until we get to the bottom of this and restore the confidence,
I don't think we are going to see economic growth. This whole
idea that you have the job of managing money, and we can't even
define the dollar--nobody has a definition of the dollar; it is
an impossible task.
So I have hoped in the past to try to contribute to the
discussion on monetary policy and the business cycle and why it
benefits the rich over the poor, and so far, my views have not
prevailed. But I have appreciated the opportunity, and I
appreciate this opportunity to have served on the Financial
Services Committee.
Chairman Bachus. Thank you. Thank you, Dr. Paul. The
gentleman from Missouri, Mr. Clay, is recognized for 3 minutes.
Mr. Clay. Thank you, Mr. Chairman. And let me thank
Chairman Bernanke for appearing at today's hearing. Let me also
publicly thank our subcommittee chairman, Dr. Paul, for his
honorable service in Congress and to his country. As you know,
the Humphrey-Hawkins Act charges the Federal Reserve with a
dual mandate: to maintain stable prices, which I understand we
have positive news about; and full employment, which is what I
would like to talk about today. Full employment means everyone.
Currently, the national average unemployment rate is 8.2
percent.
Chairman Bernanke, this has decreased compared with when
you were here a year ago, when it was 9.1 percent.
Unfortunately, the unemployment rate for African Americans is
much higher. For African-American males, it is a too-high 14.2
percent. 12.7 million people in the United States want to work,
but cannot find a job. That is down from last year's 14
million. But too many of those 12.7 million are African
Americans. Nonfarm payroll employment is continuing to rise by
80,000, but too few of those who are getting jobs are African
Americans. Average hourly earnings for all private nonfarm
employees rose to $23.50 over the past 12 months, but not for
enough African Americans.
Consumer food prices have risen slightly, but consumer
price inflation has decreased overall, and energy prices have
decreased too. But if you are out of work, you cannot pay your
electric bill even if it is slightly lower than it was last
year. The disparity in the unemployment between the national
average and African Americans is unacceptable, and we have to
do more to solve it. Mr. Chairman, it is important to put
everyone back to work in this country. But as we look at
policies and strategies that will continue the improvement in
job numbers, be aware that we as a Nation are only as strong as
the weakest link.
So let's make sure we don't leave behind a large and
important part of our communities. And I look forward to your
statement and continuing this important and ongoing discussion.
Mr. Chairman, I yield back.
Chairman Bachus. Thank you, Mr. Clay. Before I recognize
Chairman Bernanke, let me say that because the Financial
Stability Oversight Council on which the Chairman serves is
meeting today at 1 p.m., the Chair will excuse Chairman
Bernanke at 12:45, so that he can fulfill his important
obligation with that Council. The Chair also announces that in
order to accommodate questioning of Chairman Bernanke by as
many Members as possible, we will strictly enforce the 5-minute
rule.
Members who wait until the final seconds of their 5 minutes
to begin asking their questions to the Chairman should be
advised that they will be asked to suspend when the red light
comes on so that we can allow all Members to be recognized. I
have often said that our freshman class and sophomore class are
some of our more capable Members, and I want them to have an
opportunity to ask questions.
Chairman Bernanke, your written statement will be made a
part of the record, and you are now recognized for a summary of
your testimony.
STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you, Chairman Bachus, Ranking Member
Frank, and members of the committee. I am pleased to present
the Federal Reserve's semi-annual Monetary Policy report to the
Congress. Let me begin with a discussion of current economic
conditions and the outlook, and then I will talk a bit about
monetary policy. The U.S. economy has continued to recover, but
economic activity appears to have decelerated somewhat during
the first half of the year. After rising at an annual rate of
2.5 percent in the second half of 2011, real GDP increased at a
2 percent pace in the first quarter of this year, and available
indicators point to a still smaller gain in the second quarter.
Conditions in the labor market improved during the latter part
of 2011 and early this year, with the unemployment rate falling
about a percentage point over that period. However, after
running at nearly 200,000 per month during the fourth and first
quarters, the average increase in payroll employment shrank to
75,000 per month during the second quarter.
Issues related to seasonal adjustment and the unusually
warm weather this past winter can account for a part, but only
a part, of this loss of momentum in job creation. At the same
time, the jobless rate has recently leveled out at just over 8
percent. Household spending has continued to advance, but
recent data indicate a somewhat slower rate of growth in the
second quarter. Although declines in energy prices are now
providing support to consumers' purchasing power, households
remain concerned about their employment and income prospects
and their overall level of confidence remains relatively low.
One area where we see modest signs of improvement is housing.
In part, because of historically low mortgage rates, both new
and existing home sales have been gradually trending upward
since last summer, and some measures of house prices have
turned up in recent months as well.
Construction has increased, especially in the multi-family
sector. Still, a number of factors continue to impede progress
in the housing market. On the demand side, many would-be buyers
are deterred by worries about their own finances or about the
economy more generally. Other prospective home buyers cannot
obtain mortgages due to tight lending standards, impaired
creditworthiness, or because their current mortgages are
underwater, that is, they owe more than their homes are worth.
On the supply side, the large number of vacant homes,
boosted by the ongoing inflow of foreclosed properties,
continues to divert demand from new construction. After posting
strong gains over the second half of 2011 and into the first
quarter of 2012, manufacturing production has slowed in recent
months. Similarly, the rise in real business spending on
equipment and software appears to have decelerated from the
double digit pace seen over the second half of 2011 to a more
moderate rate of growth over the first part of this year.
Forward-looking indicators of investment demand, such as
surveys of business conditions and capital spending plans,
suggest further weakness ahead.
In part, slowing growth in production and capital
investment appears to reflect economic stresses in Europe,
which together with some cooling in the economies of other
trading partners, is restraining the demand for U.S. exports.
At the time of the June meeting of the Federal Open Market
Committee, or FOMC, my colleagues and I projected that under
the assumptions of appropriate monetary policy, economic growth
will likely continue at a moderate pace over coming quarters
and then pick up very gradually.
Specifically, our projections for growth in real GDP
prepared for the meeting had a central tendency of 1.9 to 2.4
percent for this year, and 2.2 to 2.8 percent for 2013. These
forecasts are lower than those we made in January, reflecting
the generally disappointing tone of the recent incoming data.
In addition, financial strains associated with the crisis in
Europe have increased since earlier this year, which, as I
already noted, are weighing on both global and domestic
economic activity.
The recovery in the United States continues to be held back
by a number of other headwinds, including still tight borrowing
conditions for some businesses and households and, as I will
discuss in more detail shortly, the restraining effects of
fiscal policy and fiscal uncertainty. Moreover, although the
housing market has shown improvement, the contribution of this
sector to the recovery is less than has been typical of
previous recoveries. These headwinds should fade over time,
allowing the economy to grow somewhat more rapidly and the
unemployment rate to decline toward a more normal level.
However, given that growth is projected to be not much
above the rate needed to absorb new entrants to the labor
force, the reduction in the unemployment rate seems likely to
be frustratingly slow. Indeed, the central tendency of
participants' forecasts now has the unemployment rate at 7
percent or higher at the end of 2014. The committee made
comparatively small changes in June to its projections for
inflation. Over the first 3 months of 2012, the price index for
personal consumption expenditures rose about 3.5 percent at an
annual rate, boosted by a large increase in retail energy
prices that, in turn, reflected the higher costs of crude oil.
However, the sharp drop in crude oil prices in the past few
months has brought inflation down.
In all, the PCE price index rose at an annual rate of 1.5
percent over the first 5 months of this year, compared with a
2.5 percent rise over 2011 as a whole. The central tendency of
the Committee's projections is that inflation will be 1.2 to
1.7 percent this year, and at or below the 2 percent level that
the Committee judges to be consistent with its statutory
mandate in 2013 and 2014. Participants at the June FOMC meeting
indicated that they see a higher degree of uncertainty about
their forecasts than normal, and that the risks to economic
growth have increased. I would like to highlight two main
sources of risk. The first is the euro-area fiscal and banking
crisis, and the second is the U.S. fiscal situation. Earlier
this year, financial strains in the euro-area moderated in
response to a number of constructive steps by the European
authorities, including the provision of 3-year bank financing
by the European Central Bank. However, tensions in euro-area
financial markets intensified again more recently, reflecting
political uncertainties in Greece, and news of losses at
Spanish banks, which in turn raised questions about Spain's
fiscal position and the resilience of the euro-area banking
system more broadly. Euro-area authorities have responded by
announcing a number of measures, including funding for the
recapitalization of Spain's troubled banks, greater flexibility
in the use of the European financial backstops, and movement
toward unified supervision of euro-area banks. Even with these
announcements, however, Europe's financial markets and economy
remain under significant stress, with spillover effects on
financial and economic conditions in the rest of the world,
including the United States.
Moreover, the possibility that the situation in Europe will
worsen further remains a significant risk to the outlook. The
Federal Reserve remains in close communication with our
European counterparts. Although the politics are complex, we
believe that the European authorities have both strong
incentives and sufficient resources to resolve the crisis. At
the same time, we have been focusing on improving the
resilience of our financial system to severe shocks, including
those that might emanate from Europe. The capital and liquidity
positions of U.S. banking institutions have improved
substantially in recent years, and we have been working with
U.S. financial firms to ensure that they are taking steps to
manage the risks associated with their exposures to Europe.
That said, European developments that resulted in a
significant disruption in global financial markets would
inevitably pose significant challenges for our financial system
and for our economy. The second important risk to our recovery,
as I mentioned, is the domestic fiscal situation. As is well
known, U.S. fiscal policies are on an unsustainable path, and
the development of a credible medium-term plan for controlling
deficits should be a high priority.
At the same time, fiscal decisions should take into account
the fragility of the recovery. That recovery could be
endangered by the confluence of tax increases and spending
reductions that will take effect early next year if no
legislative action is taken. The CBO has estimated that if the
full range of tax increases and spending cuts were allowed to
take effect, a scenario widely referred to as the ``fiscal
cliff,'' a shallow recession, would occur early next year, and
about 1\1/4\ million fewer jobs would be created in 2013. These
estimates do not incorporate the additional negative effects
likely to result from public uncertainty about how these
matters will be resolved.
As you recall, market volatility spiked and confidence fell
last summer in part as a result of the protracted debate about
the necessary increase in the debt ceiling. Similar effects
could ensue as the debt ceiling and other difficult fiscal
issues come into clearer view toward the end of the year. The
most effective way that Congress could help to support the
economy right now would be to work to address the Nation's
fiscal challenges in a way that takes into account both the
need for long-run sustainability and the fragility of the
recovery. Doing so earlier rather than later would help reduce
uncertainty and boost household and business confidence.
Finally, on monetary policy, in view of the weaker economic
outlook, subdued projected path for inflation, and the
significant downside risk to economic growth, the FOMC decided
to ease monetary policy at its June meeting by continuing its
Maturity Extension Program, or MEP, through the end of this
year. The MEP combines sales of short-term Treasury securities
with an equivalent amount of purchases of longer-term Treasury
securities. As a result, it decreases the supply of longer-term
Treasury securities available to the public, putting upward
pressure on the prices of those securities and downward
pressure on their yields, without affecting the overall size of
the Federal Reserve's balance sheet. By removing additional
longer-term Treasury securities from the market, the Fed's
asset purchases also induced private investors to acquire other
longer-term assets such as corporate bonds and mortgage-backed
securities, helping to raise their prices and lower their
yields, and thereby making broader financial conditions more
accommodative.
Economic growth is also being supported by the
exceptionally low level of the target range for the Federal
funds rate from zero to one-fourth percent and the economy's
forward guidance regarding the anticipated path of the funds
rate.
As I reported in my February testimony, the FOMC extended
its forward guidance in January, noting that it expects that
economic conditions, including low rates of resource
utilization and a subdued outlook for inflation over the medium
run, are likely to warrant exceptionally low levels for the
Federal funds rate at least through late 2014. The Committee
has maintained this conditional forward guidance at its
subsequent meetings. Reflecting its concerns about the slow
pace of progress in reducing unemployment and the downside risk
to the economic outlook, the Committee made clear at its June
meeting that it is prepared to take further action, as
appropriate, to promote a stronger economic recovery and
sustained improvement in labor market conditions in a context
of price stability. Thank you, Mr. Chairman. I would be happy
to answer your questions.
[The prepared statement of Chairman Bernanke can be found
on page 54 of the appendix.]
Chairman Bachus. Thank you, Chairman Bernanke. Next week,
the House will be voting on Dr. Paul's bill to audit the
Federal Reserve. Would you please give us your views on the
legislation?
Mr. Bernanke. Yes. Thank you. I absolutely agree with Dr.
Paul that the Federal Reserve needs to be transparent and it
needs to be accountable. I would argue that at this point, we
are quite transparent and accountable. On monetary policy,
besides our statement, besides our testimonies, we issue
minutes after 3 weeks, we have quarterly projections, I give a
press conference 4 times a year. There is quite a bit of
information provided to help Congress evaluate monetary policy,
as well as the public. Also, very importantly, the Federal
Reserve's balance sheet, its finances, and its operations are
thoroughly vetted. We produce an annual financial statement
which is audited by an independent external accounting firm. We
provide quarterly updates and a weekly balance sheet. We have
an independent Inspector General (IG.)
We have additional scrutiny imposed by the Dodd-Frank Act.
And very importantly, and this is, I think, the crux of the
matter, the U.S. Government Accountability Office, the GAO, has
extensive authority, broad authority to audit essentially all
aspects of the Federal Reserve. And the Federal Reserve accepts
that, and is cooperative with the GAO's efforts.
There is, however, one important exception to what the GAO
is allowed to audit under current law, and that specifically is
monetary policy deliberations and decisions. So what the audit
of the Fed bill would do would be to eliminate the exemption
for monetary policy deliberations and decisions from the GAO
audit. So in effect, what it would do is allow Congress, for
example, to ask the GAO to audit a decision taken by the Fed
about interest rates.
That is very concerning because there is a lot of evidence
that an independent central bank that makes decisions based
strictly on economic considerations, and not based on political
pressure, will deliver lower inflation and better economic
results in the longer term.
So, again, I want to agree with the basic premise that the
Federal Reserve should be thoroughly transparent, and
thoroughly accountable. I will work with everyone here to make
sure that is the case. But I do feel it is a mistake to
eliminate the exemption for monetary policy and deliberations,
which would effectively, at least to some extent, create a
political influence or political dampening effect on the
Federal Reserve's policy decisions. Thank you, Mr. Chairman.
Chairman Bachus. Thank you. I will note that bill did not
come before the Financial Services Committee, which surprised
me. Throughout your tenure as Chairman, you have warned this
committee and others about the dangers of the U.S. fiscal
position, the annual deficit, and the growing national debt.
And now, we are facing what you call correctly a fiscal cliff
next January.
I mentioned in my opening statement the need for long-term
restructuring of our entitlements. And as the ranking member
said, I was talking about Medicaid, Medicare, and to a lesser
extent, Social Security. Would you tell us why you are
concerned about the fiscal cliff, what will happen to the
economy if we don't do anything to address it, and what long-
term strategies Congress should be thinking about as we address
these issues?
Mr. Bernanke. Certainly. Thank you. First, I think there is
very little disagreement that the U.S. fiscal situation is not
sustainable. Under current law, deficits will continue to grow,
interest will continue to accumulate, and ultimately we will
simply not be able to pay our bills. So it is very important
over the long term to make decisions collectively about tax and
spending policies that will bring our fiscal situation into a
more sustainable configuration.
Now that, I should add, is very much a long-run
proposition. Many of the issues that affect our long-term
fiscal sustainability are decades rather than months or
quarters in the future. And therefore, I think--I would just
suggest, if I might, that in looking at these issues, we might
want to go beyond the 10-year window which is usually the basis
for fiscal decisions, and at least consider implications of
actions for even longer horizons.
So it is very important for fiscal stability, for financial
stability, for Congress to provide a credible plan for
stabilizing our long-term fiscal situation as soon as possible.
That is a long run proposition, however. And the way the
current law is set up, we are going to have a very, very sharp
contraction in the fiscal situation, increased taxes, and cuts
in spending, that are very dramatic and that occur almost
simultaneously on January 1, 2013.
As I discussed in my remarks, and as the CBO has documented
in some detail, if that all happens, it will, no doubt, do
serious damage to the recovery, and probably will cost a
significant number of jobs. It is not essential to do it that
way. I think the best way to address this is to attack the
long-run fiscal sustainability issue seriously and credibly,
but to do it in a more gradual way that doesn't have such
negative effects on the recovery. And I think both of those
goals can be met simultaneously, recognizing that it is not
politically easy. But I believe that is the correct broad
approach for addressing our fiscal situation.
Chairman Bachus. Thank you. The ranking member is
recognized for 5 minutes for questioning.
Mr. Frank. Mr. Chairman, you say on page 6 that we should
address the fiscal challenges in a way that takes into account
both the need for long-range sustainability and the fragility
of the recovery. There are some in the Congress who have been
arguing that it is very important in the appropriations we are
now voting on for the fiscal year that begins in a couple of
months that we substantially reduce what we are committed to
spend. Is that what you are warning us against when you talk
about the fragility of the recovery? Is it the timing issue,
that we should not be trying to do this in the immediate next
fiscal year, but put into place a longer-term situation?
Mr. Bernanke. I am talking about the collective impact of
the tax increases and the spending cuts, which together come
something close to 5 percent of GDP, which would, if it all hit
at the same time, be very negative for growth. It is important
to combine a more gradual approach with, of course, a longer-
term plan to address sustainability.
Mr. Frank. Let me ask you, you have been doing a great deal
with your colleagues to try to provide an impetus to economic
growth, at least an offset to the headwinds I think would be
the way to put it. A number of people from the beginning of
your efforts to do this, quantitative easing and the twist and
all the other ways that you have been trying to make more money
available, have warned that you were risking inflation, and
some have said that this might worsen our fiscal condition
because you might be losing money. You are aware of the
criticisms. This many, I don't know, a couple of years into
this, what is the record? Were you wrong?
Mr. Bernanke. No, we are not wrong. I have a collection of
op-eds and editorials from 2008 and 2009 about immediate
hyperinflation which is right around the corner, collapse of
the dollar, those sorts of things. None of that has happened.
None of that is going to happen. The Federal Reserve is
responsibly using monetary policy to try to support the
recovery.
We are very cognizant of our responsibility for price
stability, and we have the tools to withdraw the policy
stimulus at the appropriate time. But markets, for example as
reflected in interest rates and inflation-adjusted Treasury
securities, suggest that markets are quite confident that
inflation will remain low.
Mr. Frank. Thank you, Mr. Chairman. I will share with you
an insight that I am sure you have already figured out for
yourself. But being able to say, ``I told you so'' is one of
the few pleasures that improves with age. And you are certainly
entitled to do that with the people who were crying wolf. Part
of the problem though, was it was ideologically motivated, some
of this criticism. That is there are people, and we have
legislation that has been introduced, they are holding it off
until after the election because they don't want to, I think,
be seen supporting it too popularly, but people will advance it
if they can, which would cut in half your dual mandate.
You are mandated by the law under which you appear today to
be equally concerned about price stability and employment. And
there are some who argue that is inconsistent, and that you
have, in fact, been distracted from your focus on price
stability by this equal mandate on employment.
I believe, by the way, that is part of what people are
trying to get at with the audit. Because as you say, we have
put into the law already auditing of all your financial
transactions, any activity you have with a private company will
sometimes be public. I believe this is part of an effort to
undermine the dual mandate indirectly. They will try do it
directly if they can later. Have you found any inconsistency
between the two parts of the mandate? Has the concern for
employment, which I admire you for showing, interfered with
your ability to bring about price stability?
Mr. Bernanke. As you noted, inflation is low. It is in fact
a little bit below our 2 percent target, so there has not been
an evident inconsistency. And I think the dual mandate has
served us well, and we do have the ability to address both
sides. That being said, we will do of course whatever Congress
tells us to do.
Mr. Frank. But have you found any inconsistency in meeting
both aspects of the dual mandate?
Mr. Bernanke. Generally speaking, no. In particular, low
inflation does contribute to healthy employment in the longer
term. So, they are complementary in that respect.
Mr. Frank. And your efforts to help the economy overcome
the headwinds have not led to any inflation?
Mr. Bernanke. No.
Mr. Frank. Another argument we have seen is that it is
regulation that is slowing things down. You talked about the
headwinds. I notice you did not mention the committee meeting
you are about to go to as one of those headwinds. Having talked
to us about the headwinds, in your judgment the financial
reform legislation that we passed, is that one of the
headwinds?
Mr. Bernanke. I wouldn't want to rule out regulatory and
tax factors as part of the uncertainty. There are a lot of
uncertainties in the economy.
Mr. Frank. I don't mean in theory; I mean the one that we
have adopted.
Mr. Bernanke. It is possible that some of these regulations
have some impact on the cost of credit, but there has been a
lot of analysis that suggests that the benefits in terms of
reducing the risk of a financial crisis are extremely large,
and that whatever costs are involved are worthwhile.
Mr. Frank. I thank you. I hope, with that analysis from our
bipartisan appointee here, that some of my colleagues who
preach the virtues of benefit cost analysis will not ignore its
benefits as you have just mentioned them. Thank you, Mr.
Chairman.
Chairman Bachus. Thank you. Dr. Paul for 5 minutes.
Dr. Paul. Thank you, Mr. Chairman. I had a question
prepared, but I think I better follow up on the question you
asked Chairman Bernanke dealing with the audit of the Fed.
Because when the Fed talks about independence, what they are
really talking about is secrecy, not transparency. And it is
the secrecy that I don't like and that we have a right to know
about.
What the GAO cannot audit, and I believe it would be the
position of the Chairman, is it cannot audit monetary policy.
And you expressed yourself on monetary policy. It would not be
able to look at agreements and operations with foreign central
banks and governments and other banks, or transactions made
under the direction of the FOMC, discussions or communications
between the Board and the Federal Reserve system related to all
those items.
It is really not an audit without this. It is still
secrecy. And why this is important is because of what happened
4 years ago. It is estimated that the amount of money that went
in and out of the Fed for the bailout overseas was $15
trillion. How did we ever get into this situation where
Congress has nothing to say about trillions and trillions of
dollars bailing out certain banks and governments through these
currency swaps?
And the Chairman has publicly announced that he is
available, there is a crisis going on in Europe, part of this
dollar crisis going on that has been building. It is unique to
the history of the world of monetary policy. And we stand
ready. Who stands ready? The American taxpayer, because we are
just going to print up the money. As long as they take our
dollars, we will print the money and we will bail them all out
and we are going to destroy the middle class. The middle class
is shrinking. The banks get richer, and the middle shrinks,
they lose their houses, they lose their mortgages.
The system is biased against the middle class and the poor.
So I would say that if we protect this amount of secrecy, it is
not good policy and it is not good economics at all, and it is
very unfair. But my question is, Mr. Chairman, whose
responsibility is it under the Constitution to manage monetary
policy? Which branch of government has the absolute authority
to manage monetary policy?
Mr. Bernanke. The Congress has the authority, and it has
delegated it to the Federal Reserve. That is a policy decision
that you have made.
Dr. Paul. Yes, but they can't transfer authority. You can't
amend the Constitution by just saying we are going to create
some secret group of individuals and banks. That is amending
the Constitution. You can't do that, and all of a sudden allow
this to exist in secrecy. Whose responsibility is it for
oversight? Which branch of government has the right of
oversight?
Mr. Bernanke. Congress has the right of oversight. And we
certainly fully accept that, and we fully accept the need for
transparency and accountability. But it is a well-established
fact that an independent central bank will provide better
outcomes. There is no constitutional reason why Congress
couldn't take over monetary policy. If you want to do that, I
guess that is your right to do it. But I am advising you that
it wouldn't be very good from an economic policy point of view.
Dr. Paul. Yes, but if it is allowed to be done in secret,
this is the reason why I want to work within the system. What I
want to say is Congress ought to get a backbone. They ought to
say we deserve to know, we have a right to know, we have an
obligation to know because we have an obligation to defend our
currency. It is the destruction of the currency that destroys
the middle class. There is a principle in free market banking
that says if you destroy the value of currency through
inflation, you transfer the wealth from the middle class and it
gravitates to the very wealthy. The bankers, the government,
the politicians, they all love this. It is a fact that the
Federal Reserve is the facilitator. You couldn't have big
government--if everybody loves big government, loves the Fed,
because they can finance the wars and all the welfare you want.
But it doesn't work, and it eventually ends up in a crisis. It
is a solvency crisis, and it can't be solved by printing a
whole lot of money.
So I think the very first step is transparency, and for us
to know. We have a right to know. And you may be correct in
your assumption, at least I am sure you believe this, but maybe
I should be talking to the Congress that we should stand up and
say, yes, we demand to know. Trillions and trillions of dollars
being printed out of thin air, and bailing out their friends.
They stand ready to do it. The crisis is just, as far as I am
concerned, my opinion is it is in the early stages. It is far
from over. We are in deep doldrums, and we never change policy.
We never challenge anything. We just keep doing the same thing.
Congress keeps spending the money. Welfare expands
exponentially. Wars never end. And deficits don't matter. And
when it comes to cutting spending, Republicans and Democrats
get together and say, oh, no, we can't really cut. And if we do
cut, we just cut proposed increases.
Mr. Frank. Mr. Chairman, regular order. Regular order, Mr.
Chairman.
Dr. Paul. And you stand there and facilitate it all.
Chairman Bachus. Thank you, Dr. Paul. Congressman Clay for
5 minutes.
Mr. Frank. Can we get the answer in writing to that
question, Mr. Chairman?
Mr. Bernanke. May I just comment, Congressman Paul, your
objections are to the structure of the system, as you
mentioned. But all of the actions we took during the crisis,
the swaps, all of those things are fully disclosed. It is not a
question of information. It is a question of whether or not you
want to give the Fed those powers. If you don't want to, of
course, Congress has the right to take them back.
Mr. Clay. Thank you.
Mr. Frank. Will the gentleman yield me 10 seconds?
Mr. Clay. I yield to the ranking member.
Mr. Frank. Just to mention that, in fact, in the financial
reform bill, I think unanimously, while there were some
differences, we repealed Section 13(3) of the Federal Reserve
Act, which was the single biggest grant of power to the Federal
Reserve to lend any money it wanted if it thought there was a
chance to do it. It was the AIG loan. So in fact, this
Congress, in 2010, made a substantial reduction in the Federal
Reserve's authority.
Mr. Clay. Chairman Bernanke, the national unemployment rate
is 8.2 percent, lower than it was a year ago. And as I said, it
is important to put all Americans back to work. But I am
troubled by the large disparity between the unemployment rate
in the country at large and that of African Americans, which is
at 8.2 percent versus 14.2 percent. I think that is a national
crisis. Mr. Chairman, to what do you believe this large
difference can be attributed?
Mr. Bernanke. It is a tragedy and a problem, of course. It
is a long-standing difference. I don't know how to parse the
difference. Some of it is educational and other differences,
some of it is discrimination. It is hard to say how much. Age
and other demographic factors play a role. Unfortunately, this
is not something monetary policy can do much about. We can only
hope to address the overall state of the labor market and hope
that a rising tide will lift all ships, so to speak. But
clearly, African Americans remain disadvantaged in education,
in wealth creation, and in opportunity. And those are issues
that collectively I hope we can address.
Mr. Clay. Do you think there is anything that the Federal
Reserve, along with Congress, can do to address it?
Mr. Bernanke. Again, the Federal Reserve's monetary
policies are limited. We have a variety of things that bear on
this indirectly, such as our Office of Minority and Women
Inclusion, which tries to help ensure that in our own
employment, we have full diversity. Financial literacy programs
that try to help people in lower- to moderate-income
communities achieve a better level of savings and wealth. But
more broadly, I think to really address these questions, issues
of mobility and education, skills, et cetera, are more a
function of congressional and State and local efforts than the
Federal Reserve.
Mr. Clay. Thank you for your response. Can the Federal
Reserve institute a monetary policy that is strong enough to
avoid a double-dip recession?
Mr. Bernanke. At this point, we don't see a double-dip
recession, we see continued moderate growth. But we are very
committed to ensuring, or at least doing all we can to ensure
that we continue to make progress on the employment side. And
we have stated that we are prepared to take action as needed to
try to make sure that we see continued progress on employment.
Mr. Clay. In another area of the economy, how will the
Federal Reserve expansion of asset rates for stimulating the
economy succeed when many individuals have liquid assets that
may lose value?
Mr. Bernanke. You are talking about various monetary
policies of the FOMC?
Mr. Clay. Yes.
Mr. Bernanke. Our monetary policies actually generally
increase asset values, broadly speaking. The concern has been
raised, and I fully understand it and sympathize with it, that
low interest rates penalize people who live off the interest
earnings of their investments or their savings. And again, I
fully appreciate that concern. My response, at least in part,
is that if we are going to have good returns on savings and
investment overall, we need a healthy economy. And if we raise
interest rates prematurely and cause the economy to go into
recession, that is not going to be an environment where people
can make a good return on their retirement funds or their other
investments.
Mr. Clay. If the United States were to announce it was
moving to a gold standard, what would you expect to happen to
the price of gold? And how difficult would that make it for the
country to fix the value of currency in terms of the price of
gold?
Mr. Bernanke. That is a very complex question. I think
there is an issue about whether, at least at current prices,
there would be enough gold to set up a global gold standard.
But there are more fundamental issues with the gold standard
than that which I have addressed on other occasions. And in
particular, a gold standard doesn't imply stability in the
prices of the goods and services that people buy every day. It
implies a stability in the price of gold itself.
Mr. Clay. Thank you for your response. I yield back.
Chairman Bachus. Thank you. Let me advise the Republicans
on the committee that Mr. Hensarling and Mr. Jones, because of
the questioning lineup, go first, and then under the Greenspan
rules, Mr. Manzullo and Mr. Fincher, if they are here. And
then, we will resume with Mr. Royce. So at this time, I
recognize Mr. Hensarling, the vice chairman.
Mr. Hensarling. Thank you, Mr. Chairman. Good morning,
Chairman Bernanke. You are clearly here before us because of
your dual mandate. And speaking of maximizing employment,
clearly the Fed took a number of dramatic actions in 2008, some
of which I consider proper, some of which I still question.
2008 was 4 years ago. I think it is an inescapable conclusion
that we have seen the greatest monetary and fiscal stimulus
thrown at an economy in our history, and what do we see but 41
months of 8 percent-plus unemployment, 14.9 percent real
unemployment, if we look at those who have left the labor force
and those who are seeking full-time employment. We have anemic
GDP growth, probably half of what it should be by historic
standards. And my interpretation of your testimony is you are
predicting much of the same. Why shouldn't the American people
come to the inescapable conclusion that we have either had a
profound failure of monetary policy or a profound failure of
fiscal policy, and which is it?
Mr. Bernanke. I don't think it is the case that there has
been no progress. In the last quarter of 2008 and the first
quarter of 2009, we almost had a collapse in the economy, a
tremendous increase in unemployment. The unemployment rate went
about 10 percent. Now, it is true that the recovery has been
slower than we would have liked. But clearly, we have made
progress in unemployment and in job creation.
Mr. Hensarling. Isn't it true that if you look at the 10
post-war recessions, we are in the midst of the slowest,
weakest recovery of all?
Mr. Bernanke. There is some evidence that financial crises
lead to recessions that are slower to mend. We also had a
housing boom and bust, which is also a major factor. So there
have been a number of reasons that are consistent with
historical experience why the recovery should be slower than
average.
Mr. Hensarling. Okay, let me move on since you don't agree
with the premise of that question. You at least acknowledged in
the question from the gentleman from Missouri, I think you used
the phrase, there are limits to what monetary policy can
achieve. I would like to explore those limits for a moment.
Again, when I look at QE1, QE2, I think we are in our
second Operation Twist--and, again, I think it is hard to
conclude that we have--that, again, we have seen the greatest
monetary stimulus in the history of the country. Obviously, you
have a rather unique balance sheet today with asset-backed
securities. And, yet, your new data reveals that public
companies are sitting on $1.7 trillion of excess liquidity,
banks have $1.5 trillion in excess reserves.
And so I am trying to figure out, what is it that--on the
Federal Reserve menu, what would two more Operation Twists and
two more QEs, even if you supersized them, achieved that
haven't already been achieved?
Mr. Bernanke. First, I think that the previous efforts did
have productive effects. QE1, for example, was followed a few
months later by the beginning the recovery in the middle of
2009. And QE2 came at a time when we were seeing increased risk
of deflation, which was eliminated by the QE2--
Mr. Hensarling. Then why is all this capital, Mr. Chairman,
sitting on the sidelines? And you putting in more to excess
reserves, how is that improving our economy?
Mr. Bernanke. The excess reserves are not the issue. The
issue is the state of financial conditions. And we are still
able to lower interest rates, improve, broadly speaking, asset
prices, and that provides some incentive.
Now, if I might--
Mr. Hensarling. Are we not essentially in a negative real
interest rate environment already?
Mr. Bernanke. Let me just agree with you on the following,
that monetary policy is not a panacea, it is not the ideal
tool. Part of the problem is that we hit the zero lower bound,
so we can't use the usual practice of cutting short-term
interest rates. So I would like to see other parts of the
government--
Mr. Hensarling. In the very limited time I have, Mr.
Chairman, I have to tell you, when I am speaking to either
Fortune 50 CEOs, world-class investors, small business people
in east Texas, here is what I hear: number one, uncertain
Federal regulation and certainly harmful Federal regulation is
crushing jobs; number two, the threatened single largest tax
increase in U.S. history; number three, a Nation on the road to
bankruptcy; and number four, rhetoric out of this President
that vilifies success in the free enterprise system. And
monetary policy is not going to solve that problem.
Chairman Bachus. Thank you.
Mr. Capuano?
Mr. Capuano. Thank you, Mr. Chairman.
Chairman Bernanke, first of all, I want to thank you for
your steadfast commitment to taking action as you deem
appropriate. I am not any different than anybody else; I
haven't agreed with everything you have done. But--and today is
another day of it, where everybody gets to criticize everything
you have ever done for the last 10 years. And I may take my
shot here or there, but I just want to say thank you for not
giving up, thank you for not withering under this. We still
need you and the Fed to be actively involved, even if there are
things you do with which I disagree.
There are so many things I would like to talk about, but in
5 minutes, I can't do it. So I think I am going to talk a
little bit first about the Libor situation.
For me--and I am not asking for a decision. I know it is
not technically some of the things you are--but one of the
things I have heard from the fiscal crisis of 2008 is that so
many people walked away scot-free, that the general public
thinks that we, the whole government, turned our back on any
potential wrongdoing.
And in this particular situation, if it turns up that our
largest banks in the world repeatedly, intentionally lied in
order to manipulate the market, do you think it is appropriate
for them to be held accountable?
Mr. Bernanke. Of course.
Mr. Capuano. Either civilly or criminally, whatever might
be--and I am not asking you to make a judgment, but--
Mr. Bernanke. Let me just--
Mr. Capuano. --if others make a determination that is
appropriate, would you think that is an appropriate--
Mr. Bernanke. Currently, there are any number of
enforcement agencies, including the Department of Justice, the
CFTC, the SEC, and foreign and State regulators looking at
this, and I am sure that they will apply the law appropriately.
Mr. Capuano. Because I would appreciate and I think the
American people would appreciate it very much if somebody who
intentionally lied to manipulate a worldwide market on
something that affects every one of our daily lives will be
held accountable.
I want to shift a little bit to the fiscal cliff item. And,
again, I am not asking you to tell us what to do. I respect the
difference of opinion. But this whole fiscal cliff thing is
revolving around, give or take, $450 billion, $500 billion that
will be shifted around, give or take, January of next year.
That is round numbers, round dates. Five hundred billion
dollars--the Fed itself changed the fiscal situation in this
country for over a trillion dollars in a matter of less than a
year between 2000 and 2008. And to suggest that $500 billion in
an economy that is $15 trillion is going to change the dynamics
of the world, I think it is a little concerning to me.
But I guess I would like to ask, if it is not going to be
$450 billion, $500 billion--and I am not asking you to tell me
whether it should be tax cuts or spending cuts--what is a
number, do you think, a general number--to me, that looks like
approximately 3 percent of the economy. I think you said 5
percent. Whatever the number is, what do you think is an
acceptable number either in tax cuts or tax increases or
spending cuts to shift?
Because we are not going to maintain the status quo. We are
going to do something. That something may, of course, be the
reaction of doing nothing. But something will change. And I am
just wondering, what is a number that you think will not
dramatically throw us off this cliff?
Mr. Bernanke. First, the Federal Reserve's actions are
buying and selling securities, not spending and taxing. They
are very different.
The CBO says that the fiscal cliff is on the order of 4 to
5 percent of GDP, and that big a shift would have a significant
effect on real activity in employment. So I am in favor of an
aggressive plan over a period of time. The $4 trillion number
gets tossed around sometimes over the next decade; I am in
favor of that.
And I can't give you a specific number for the short term,
but I think there ought to be a more gradual approach. I am not
saying that you shouldn't consolidate the budget; I just don't
want it all to happen on 1 day, essentially.
Mr. Capuano. As I understand this, it may happen in 1 day,
but it won't impact in 1 day, like everything else. Federal
spending doesn't end that day; we have obligations that we have
to continue. Sequestration cuts aren't going to happen like
that. Tax increases, I don't all of a sudden give the Federal
Government $3,000 more that day; it is a slow, gradual item
over a year.
So I think that some of the fiscal cliff thing really needs
a dose of reality. I am asking you this because, up until now,
I have seen you as a person of reality and a conservative
approach toward the real impact of whatever we do.
Mr. Bernanke. The CBO estimates that it would cost 1\1/4\
million jobs next year, and I don't think that is an
unreasonable estimate.
Mr. Capuano. Oh, no, I understand. I have read the CBO
report. I know exactly what they say. At the same time, the CBO
is one source, and you are another. You are not telling me you
fully embrace everything the CBO says in that report?
Mr. Bernanke. I am just saying that order of magnitude, in
terms of jobs and GDP, seems reasonable to me.
Mr. Capuano. I don't think everybody would like that, but
there is a serious question. See, I would argue with the CBO
report on other issues, but they are not here today; you are.
It is unrealistic to think that nothing is going to happen.
Either we are going to do nothing, which will mean tax
increases, which will mean massive spending cuts, or we will do
something. We probably will not do everything; probably not
kick the ball down the road and just extend all of the tax cuts
and get rid of sequestration altogether. We are going to do
something in the middle.
The question is, what is in the middle that is a reasonable
number?
Chairman Bachus. Thank you.
Mr. Capuano. I am not looking to jeopardize the economy,
and--
Chairman Bachus. Thank you, Mr. Capuano.
Mr. Capuano. --I guess I am just looking for some guidance.
Mr. Bernanke. I don't have a magic number. I just think you
should take a smoother approach to obtaining fiscal
sustainable.
Chairman Bachus. Thank you.
Mr. Jones?
Mr. Jones. Mr. Chairman, thank you very much.
And, Chairman Bernanke, thank you for being here.
I want to say, two of my worst votes in 18 years were the
Iraq war--we didn't have to go to Iraq--and the repeal of
Glass-Steagall. And if I was not going to yield my time, I
would ask you about reinstating Glass-Steagall. I think I will
write you a letter with that question, sir.
But at this time, because he is one of my dearest friends
and I supported him for the Republican nomination to be
President of the United States, I yield my time to Dr. Ron
Paul.
Dr. Paul. I thank the gentleman from North Carolina.
I wanted to make a very brief statement about our previous
discussion about the Audit the Fed bill. That bill has nothing
to do with transferring who does monetary policy. It is
strictly a transparency bill. Monetary policy reform, I
believe, will come, but that is another subject. This is just
to know more about what the Federal Reserve is doing.
Mr. Chairman, one of your key points that you have made
through your academic career as well as being at the Fed has
been the need to prevent deflation. Would you agree with that?
Mr. Bernanke. Generally, yes, sir.
Dr. Paul. Right. And you argue that the depression was
prolonged by the Federal Reserve not being able to reinflate.
So, in that sense, I think you really have achieved--you have
had the chance--you were put in a situation that you alone
didn't create. It is, as far as I am concerned, the system
created it and other managers helped create this. And there was
this, what I see as a natural tendency to deflate and liquidate
and clear the market. And under your philosophy, you say we
can't allow this to happen, we have to prevent it. And I would
say you have done a pretty good job. The monetary base has been
tripled, and in the last 12 months I think M1 has grown about
16 percent, M2 over 9 percent. So it seems to be like the
monetary system, the monetary numbers are still growing.
But the pricing houses--everybody knows there is a bubble.
I like to believe that the free-market economists knew about it
and other predicted it; others did not. But the prices soared
up, everybody knows there was a bubble, and then they
collapsed. When those prices of houses collapse, do you call
that deflation?
Mr. Bernanke. No. Deflation is the price of current goods
and services. So, inflation doesn't capture house prices. It
includes the house or the rental--
Dr. Paul. Okay. And I think one of the problems even
getting a full-fledged discussion out is sometimes the
definition of words, about what ``inflation'' and ``deflation''
means. Because as far as I am concerned, deflation is when the
money supply shrinks, and inflation is when the money supply
expands. But just about everybody in the country, especially
the financial markets, and the way I think the conventional use
of inflation is the CPI. And I think it is a lousy measurement.
Because if it is the money supply increase, if prices going
down of houses is not deflation, I wonder why it is that
inflation is measured by the CPI going up rather than the money
supply going up.
Our argument is that once you distort interest rates and
increase the supply of money, you end up with this gross
distortion that is demanding some correction. So I would--I
have worked on this for years, and we are not going to solve it
today. The definitions would be much better if we--if prices of
houses going down is not deflation, then CPI going up shouldn't
be inflation.
But we have had trouble for 5 years. The monetary system,
you say this is not the be-all and end-all. You can't solve
every problem with monetary policy. We have had this for 5
years, and we are still in a mess.
Is there ever a time--let's say we go 5 more years and we
have the same problems but much worse--you might say, I have to
reassess my philosophy on monetary policy, or do you think it
will be the same no matter what kind of crisis? Can you foresee
any kind of problem that we would have that would cause you to
reassess your assumptions?
Mr. Bernanke. I can't conjecture what specifically, but of
course, yes. I am evidence-based; I look and see what happens
and try to draw conclusions from that. Certainly.
Dr. Paul. The definitions, obviously, to me are very, very
important. And if we don't come to this conclusion and we use
these terms--inflation demands corrections, and the market
wants to correct. So this is why we believe that we are going
to have perpetual doldrums and finally have a big one.
Do you consider this recession that we are facing today
something that is significantly different since 1945? Much
worse and different in any way?
Mr. Bernanke. Yes, because of the financial crisis, yes.
Mr. Frank. Regular order.
Chairman Bachus. Thank you. Thank you, Dr. Paul. That was a
double dose you got. So that was pleasantly unexpected, I
guess.
Mr. Miller?
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
Chairman Bernanke, Mr. Capuano has already asked you about
the need for accountability if Libor was, in fact,
systematically gamed. But we frequently hear, with respect to
whatever the latest scandal is and certainly with respect to
the conduct that led up to the financial crisis, that the
conduct might have been unethical, it might be objectionable,
but it probably wasn't illegal, it certainly wasn't criminal,
and that the fault was with Congress in not passing tougher
laws, for having passed weak laws.
And I have no stake in defending the laws passed by
Congress before I got here, but I have read the transcript of
the telephone conversation between an employee of the New York
Fed and the Barclays trader, and I have examined the criminal
fraud statutes. Several transcripts show that Barclays admitted
they were filing false reports. They were not filing an honest
interest rate. But one transcript sort of set out why. They
said that the Financial Times had done a chart that showed that
Barclays was consistently paying a higher rate. Folks thought
that meant that the other banks knew something about Barclays
that was not generally known. And Barclays' stock went down,
their shares went down. And he said that was why they were not
filing an honest rate. They were filing a rate that would be
kind of like everybody else's, so that it wouldn't call
attention to them, like the attention that the Financial Times
had called to them, and it wouldn't affect their shares.
The definition of fraud appears to be willful intent--
providing false information with the willful intent to deceive.
It can be words or acts or the suppression of material facts,
again, with intent to deceive. A material fact is one that
someone, a shareholder or an investor, would attach importance
to in determining whether or not to sell and in determining the
price at which to sell those shares.
With respect to the Barclays shares, presumably the traders
and many Barclays executives held a substantial number of
Barclays shares. They probably had options to buy Barclays
shares. They probably were paid bonuses in Barclays shares. So
it appears that Barclays was providing information they knew to
be false. They were providing information that they knew would
affect the share price. They provided it with the intent of
affecting the share price. And they personally benefited from
the effect on the share price of having provided false
information.
What is missing there? What does Congress need to do? If
that does not meet the definition of criminal fraud, how does
Congress need to change the law?
Mr. Bernanke. I would recommend--the Federal Reserve is not
an enforcement agency. This is currently under the purview of
the Department of Justice--
Mr. Miller of North Carolina. Right.
Mr. Bernanke. --and other enforcement agencies.
Mr. Miller of North Carolina. But at the time of those--
Mervyn King, the Governor of the Bank of England, and Secretary
Geithner are now in a dispute over exactly what Secretary
Geithner told him. But there doesn't seem to be any dispute
that there was no referral to a U.S. Attorney for criminal
prosecution.
Why was there not a referral for criminal prosecution?
Mr. Bernanke. As I understood, what the information came
across was not quite as explicit as you characterized. It was
more, sort of, market chatter about--
Mr. Miller of North Carolina. No. That is directly from the
transcript of a conversation between a Barclays employee, a
Barclays trader, and an employee of the New York Federal
Reserve.
Mr. Bernanke. The Barclays trader was based in New York and
was talking about rumors and things that he had heard. He
didn't have explicit information.
But the point, the real point, the relevant point and the
important point is that the Federal Reserve Bank of New York
did inform the appropriate authorities, and it briefed all of
the financial regulators, who, in turn, undertook
investigations which began about the same time, including
especially the CFTC investigation.
Mr. Miller of North Carolina. You said yesterday that you
did not know, that no one at the Federal Reserve, the New York
Fed knew the reports that Barclays was filing false information
to affect the Libor rate because it affected their derivative
positions, presumably interest rate swaps. There are many
reports that there are many banks under investigation.
Obviously, that conduct would be much more effective if it was
done in concert rather than independently. But it wouldn't make
sense to act in concert and it wouldn't really be effective
independently if their derivatives position were all over the
place.
Is there examination now into whether the derivatives
positions, the interest rate swap positions of the various
Libor banks, in fact, moved in concert?
Mr. Bernanke. The CFTC is looking at that kind of issue.
That is not under our jurisdiction. The investigations from
other agencies are addressing those questions.
Chairman Bachus. Thank you.
Mr. Manzullo?
Mr. Manzullo. Thank you for coming, Chairman Bernanke.
What role does uncertainty in the marketplace have to do
with our financial recovery?
Mr. Bernanke. I think uncertainty is--as I have mentioned
once or twice in this venue, my Ph.D. thesis was about the
effects of uncertainty on investment decisions and suggested
that it would impede decisions that would be hard to reverse
later when information became available.
So I am sure uncertainty is playing some role. I think
where there is some disagreement is on the relative weights of
different kinds of uncertainty. No doubt, regulatory and tax
uncertainty are part of the broad set of issues that are
concerning investors and entrepreneurs. We hear that a lot in
our anecdotes. There is also, though, general uncertainty about
the recovery itself. Will the recovery be sustained or not? In
order to be confident about hiring people, for example, you
like to have greater confidence that, in fact, your sales will
be--
Mr. Manzullo. What you are hearing is also what I am
hearing. But I am also hearing from a lot of small business
people who have around 50 people that they are going to fire
people to get below 50 so they are not covered by the
President's health care. I could tell you story after story of
small manufacturing facilities that are--they are going to fire
people because they are not going to tolerate having to put up
with the Affordable Health Care Act. And even one major
employer back home in Rockford, Illinois, simply told his
employees, ``I am going to offer you no more health care. I
will pay the $2,000 fine because I am well over 50.''
Those businesspeople have money. Large corporations have
money. And have you heard about the uncertainty out there with
the businesspeople over the President's Affordable Health Care
Act and the impact that that has on the recovery?
Mr. Bernanke. We get lots of anecdotes. The Reserve Bank
Presidents from around the country come to the meeting and talk
about what they are hearing from their contacts, and contacts
frequently cite various kinds of uncertainty, including
regulatory uncertainty. As I said, though, it is hard to judge
whether there is a small factor or a large factor.
Mr. Manzullo. From what I can tell, it is a very large
factor. I spend most of my time in this place working on
manufacturing issues. And couple that uncertainty with the weak
orders coming from the EU, which I think is our second-largest
trading partner besides Canada, and the Institute for Supply
Management is now below 50. It dropped, I think, a dramatic 6
points just in 1 month.
If the manufacturing sector isn't going to lead the
recovery, what will?
Mr. Bernanke. I noted in my remarks that manufacturing
seems to have slowed somewhat. And part of it is the global
economic situation--
Mr. Manzullo. Demand.
Mr. Bernanke. --demand, slowing in European and Asia. And
that was part of my earlier point. There are multiple factors
involved here.
One sector which is doing a little better is housing, and
over time that will be a contributing factor. But it is true,
as Mr. Hensarling pointed out, for example, that growth has
been slow, and part of the reason is that following a financial
crisis, some of the factors that normally lead to a strong
recovery, like a housing recovery or extension of credit, have
been affected to some extent by--
Mr. Manzullo. What I have been seeing is that those
manufacturers involved in mining, oil, and gas exploration,
anything dealing with energy, they are actually expanding
because they see the need for that. And banks are lending based
upon that. But the massive uncertainty in the manufacturing
sector, the fact that companies are unwilling to make decisions
is, as you said, compounding everything.
I met with a bunch of European Union parliamentarians
yesterday. They believe--of course, it is in their best
interest to say so, but I really believe that they think that
things are stabilizing in Europe. Your opinion of that?
Mr. Bernanke. I don't think they are close to having a
long-term solution that will solve the problem. And until they
find those long-term solutions, we are going to continue to see
periods of financial market volatility, I think.
Mr. Manzullo. Okay. Thank you.
I yield back.
Chairman Bachus. Mr. Scott, I guess. No--
Mr. Scott. Thank you, Mr. Chairman. I want to--
Chairman Bachus. --Mr. Carson. I am sorry.
Mr. Carson?
Mr. Carson. Thank you, Mr. Chairman.
Chairman Bernanke, in previous testimony before this
committee, you have mentioned that one of the best ways to
strengthen our labor force is to improve the quality of
education, especially in disadvantaged areas suffering from
persistent unemployment and underemployment.
Some encouraging news that I found in the new monetary
report is that consumer debt has shrunk. It is not clear to me
whether our U.S. savings rate is increasing in proportion to
the decrease in consumer debt. But I am very interested in your
assessment on the role of financial education, particularly for
young people and especially students. The disturbing aspect to
me of current consumer debt is the alarming increase of student
loan debt.
Do you believe, sir, that investments in financial
education can help strengthen our economy? And are there any
successful models or programs that you see as being effective
in this area?
Mr. Bernanke. The Federal Reserve is very committed to
financial education and economic education more generally. I
mentioned yesterday that I am, later this summer, going to
meet, on video, with teachers from all over the country who are
doing financial education to talk about different approaches
and the value of that.
It is clearly very important. The crisis showed that many
people made bad financial decisions, and that hurt not only
them but also hurt the broader economy. So it is extremely
important. At the same time, I think on the other side of the
ledger it is important that we make sure that financial
information, such as credit card statements and the like are
understandable, that they are not full of legalese and small
print and those kinds of things. So there are really two sides
to it.
So, yes, that is very important. There is still a lot of
work going on about trying to figure out what works in
financial education, and I would say that the record is mixed.
One of the things that we have learned, I think, is that
financial education should be introduced in school, in high
schools and so on, but it is also important to have a lifelong
opportunity. And many folks don't pay much attention to these
issues until the time comes for them to buy a house or make
some other big financial decision, and that is when they are
most likely to listen carefully and absorb those lessons.
Mr. Carson. Thank you, sir.
I yield back.
Chairman Bachus. Thank you.
Mr. Fincher for 5 minutes.
Mr. Fincher. Thank you, Mr. Chairman.
Privileges to the lowest-ranking Member, myself: I am close
to the action. So thank you for coming in today.
To the chairman's opening question, Chairman Bernanke,
about auditing the Fed, none of us are challenging--I am not
challenging the transparency that you have given to us in
seeing what is happening. But moving forward to the future, not
the past, the ranking member's opening comments about playing
politics, most of--I know the freshman class, we are not here
to play politics. This is about trying to prevent--or hopefully
build a better America than we have now. And auditing the Fed,
to most of the American people, seems like something that is
responsible if the political games wouldn't be played.
Can you just kind of comment? Are you that opposed to
auditing the Fed?
Mr. Bernanke. Very much so, because I think the term
``audit the Fed'' is deceptive. The public thinks that auditing
means checking the books, looking at the financial statements,
making sure that you are not doing special deals and that kind
of thing. All of those things are completely open. The GAO has
complete ability to address all the things we did during the
crisis. All of our books are audited by an outside, private--
Deloitte & Touche, a private auditor. We have an Inspector
General. If there is anything that Congress wants to know about
our financial operations, all they have to do is say so.
The one thing which I consider to be absolutely critical,
though, about the bill is that it would eliminate the exemption
for monetary policy in deliberations. And the nightmare
scenario I have is one in which some future Fed Chairman would
decide, say, to raise the Federal funds rates by 25 basis
points, and somebody in this room would say, ``I don't like
that decision. I want the GAO to go in and get all the records,
get all the transcripts, get all the preparatory materials, and
give us an independent opinion on whether or not that was the
right decision.''
And I think that would have a chilling effect and would
prevent the Fed from operating on the apolitical, independent
basis that is so important and which experience shows is much
more likely to lead to a low-inflation, healthy-currency kind
of economy.
Mr. Fincher. Is there anything that could be done, any kind
of compromise, in your opinion, that needs to be done, any more
than it is being done now?
Mr. Bernanke. I think everything in the bill is basically
fine except for getting rid of this exemption for monetary
policy deliberations and operations. I think that is the part
that is critical. And it has nothing to do with our books. That
is the thing I hope to convey.
Mr. Fincher. Okay.
The second question: Since the financial crisis of 2008,
the Federal Reserve has put into play several measures to help
stimulate an economic recovery, like quantitative easing,
Operation Twist, et cetera. Do you see these measures as
temporary solutions to stimulating the economy, or would the
Federal Reserve continue these measures on a more permanent
basis?
Some of us fear that we are just dumping tons of money into
the economy, and that sooner or later, with the low interest
rates, that things are really going to spin out of control when
we do have a recovery.
Mr. Bernanke. They are, of course, temporary.
The economy grows in the long run because of all kinds of
fundamental factors: the skills of the workforce, the quality
of the infrastructure, how effective the tax system is,
research and development, all of those things. Monetary policy
can't do much about longer-term growth.
Mr. Fincher. Right.
Mr. Bernanke. All we can try to do is try to smooth out
periods where the economy is depressed because of lack of
demand. And because of the financial crisis, the economy has
been slow to reach back to its potential, and we are trying to
provide additional support so the recovery can bring the
economy back to its potential.
But in the medium- and long-term, monetary policy can't do
anything to make the economy healthier or grow faster except to
keep inflation low, which we are committed to doing. Things
like education, infrastructure, R&D, Tax Code, all those
things, obviously, are the private sector and Congress, not the
Federal Reserve.
Mr. Fincher. Do you fear--last question--that when the
economy starts to turn and move--and it is going to move,
hopefully when Washington can add certainty and stability and
give confidence back to the American people that we are not
going to mess things up--there is so much money out there, that
this thing is going to really go and inflation is going to be a
huge problem?
Mr. Bernanke. No, it will not. We know how to reverse what
we did. We know how to take the money out of the system. We
know how to raise interest rates. So it will be a similar
pattern to what we have seen in previous episodes where the Fed
cut rates, provided support for the recovery, and then when the
economy reached a point of takeoff where it could support
itself on its own, then the Fed pulled back, took away the
punchbowl. And we can do that and we will do that when the time
comes.
Mr. Fincher. Thank you, Chairman Bernanke.
Chairman Bachus. Mr. Himes for 5 minutes.
Mr. Himes. Thank you, Mr. Chairman.
And, Chairman Bernanke, thank you for being with us, and
thank you for your efforts and work over the course of the last
several years to stabilize our economy.
Mr. Chairman, I read very closely and listened to your
testimony on the things that are holding back our recovery and
read that monetary policy report here. And I want to just dwell
on them for a minute or 2. I saw financial strains associated
with Europe, still-tight borrowing conditions, the restraining
effects of fiscal policy and fiscal uncertainty, and the
housing market are the four that you highlighted.
Presuming that we are not, in the near term, going to do a
lot about number one and number four, I want to explore with
you still-tight borrowing conditions and whether there is
anything that Congress could do to assist in that. I know you
are hesitant to sort of make prescriptions to the Congress, and
I understand that. But, of course, the Federal Reserve has been
pretty clear in their message that monetary policy alone is not
enough, so I am going to explore that a little bit with you.
In the report, you say that still-tight borrowing
conditions are a result of uncertainty in the economic outlook
and high unemployment. You did not mention uncertainty
associated with Dodd-Frank and the rule-writing process and the
new regulations. Can I assume from that omission that you, the
Federal Reserve, does not believe that that regulatory
uncertainty is, in fact, a material cause of still-tight
borrowing conditions? And if it is material, should we be doing
something about it?
Mr. Bernanke. There are a lot of reasons for the problem.
Part of it is on the demand side, that borrowers are
financially impaired from the crisis and they are not as
creditworthy or as attractive to lenders as they were earlier.
There are other various factors, including, for example,
concerns that banks have about having mortgages put back to
them if they go bad, et cetera. So there is a lot of
conservatism in lending right now, as well.
I don't think I would say that there was no effect of
financial regulatory policy on any of this. For example, as we
try to develop rules for mortgage lending, for mortgage
securitization, there is still uncertainty about what the
playing field will look like when the private-sector
securitization market comes back or if it does come back--
Mr. Himes. No, no, I understand, Mr. Chairman. I am sorry
to interrupt, but, again, my question wasn't was there no
effect; it was, was it material? I happen to think that the
reforms in Dodd-Frank, many of them are terribly, terribly
important, and there are obviously things that we will need to
change over time.
I am really, sort of, looking for materiality. Because,
frankly, you don't mention it in the report. If you were to say
that, no, it is a material effect on credit availability, I
might rethink my position.
Mr. Bernanke. I think it is partly on us, the regulators,
more than on Congress, in that some of these things have not
been resolved one way or the other. A number of people have
talked about uncertainty. If we can move to provide clarity
about how the regulations will be written and so on, I think
that will be helpful.
And I certainly agree that the benefit of financial reform,
which is to reduce the threat of another financial crisis, is
extremely important to take into consideration.
Mr. Himes. Thank you.
The second question: In your second reason for headwinds
here, ``the restraining effects of fiscal policy,'' I wonder if
you could elaborate on what you mean by ``the restraining
effects of fiscal policy.'' How is that providing a headwind to
our economic recovery?
Mr. Bernanke. Broadly speaking, fiscal policy both at the
Federal and the State and local level is now contractionary--
that is, pulling demand out of the system rather than putting
it in. And you can see that most clearly at the State and local
level, where tight budgets over the last few years have meant
that at the same time that we are trying to increase employment
in the country as a whole, that, of course, many people are
being laid off by the State and local governments.
So I am not making a judgment about that. Obviously, they
have fiscal issues they have to deal with. But it is just a
fact that fiscal tightening, particularly at the State and
local level, has been something of a drag on the recovery in
the last few--
Mr. Himes. Can I conclude from all that, though, that your
achieving your mandate of full employment, were we to abide by
the policies suggested by some in this institution for more
severe austerity now, can I conclude that if we pursued that
policy, it would actually not be helpful toward full
employment?
Mr. Bernanke. Again, what I have been advocating is sort of
a two-part policy, one which makes strong and credible steps
toward achieving sustainability over the medium term, over the
next decade, while avoiding sharp cliffs and sharp contractions
in the near term, yes.
Mr. Himes. Last question, drawing on your experience as an
economist: There is all sorts of debate around here about the
things that we might do--extending safety net programs,
unemployment insurance, tax cuts, tax cuts for middle-class
families, tax cuts for the wealthy, infrastructure investment.
Each of these things, each of these fiscal policies have
different multiplier effects, more positive impact on the
economy.
Chairman Bachus. Okay--
Mr. Himes. I wonder if you might just relatively rank the
multiplier effects of those four initiatives that I just laid
out.
Mr. Bernanke. No, I think that would come too close to
advocating the different approaches. And each of these things
has not only multiplier effects but it has different costs, it
has different benefits to the economy, different philosophies
about the size of government and so on. So I think,
unfortunately, that is a congressional prerogative to figure
that out.
Chairman Bachus. Thank you.
Mr. Himes. Thank you, Mr. Chairman.
Chairman Bachus. Mr. Royce for 5 minutes.
Mr. Royce. Thank you.
Chairman Bernanke, looking out on the horizon, on the long
road ahead of us, there are two studies that seem to indicate
the same thing: one recently that came out of the IMF which
indicated that a 10-percentage-point fall in the debt-to-GDP
ratio typically leads to output rising by 1.4 percent; and a
similar conclusion coming from the other direction from Rogoff
and Reinhart who say in their paper, ``Growth in a Time of
Debt,'' that debt burdens above 90 percent are associated with
1 to 2 percent lower median growth going forward.
Our entitlement obligations will consume all of the average
post-war projected tax revenue in a few decades, if we just
look at the studies that, frankly, you have shared with us.
Will we be able to see strong sustainable economic growth
without addressing our entitlement obligations, which you have
labeled ``unsustainable'' in terms of the way they are
currently set to compound?
Mr. Bernanke. On current law, healthcare expenditures are
expected to rise very substantially, to the extent that they
would be crowding out other parts of the government or,
alternatively, requiring significant tax increases. So if you
want to avoid those outcomes, it is important to find ways to
reduce expenditure. I hope that it can be done in ways that
don't involve worse health care but just involve a more
efficient delivery of health care.
Mr. Royce. Would you like to make any other observations in
terms of the deficits or the size of the debt as you look 10
years out, 15 years out?
Mr. Bernanke. Again, the CBO has done many analyses which
show that our fiscal path is unsustainable, even if we avoid
some kind of crisis at some point. While I don't necessarily
buy exactly into the 90 percent number and so on, I think it is
pretty clear that a high level of debt to GDP, both because of
future tax obligations, high interest rates, is going to impede
growth, all else equal.
Mr. Royce. And that will impact employment in the future.
Let me go to another question, regarding Basel III. I think
it is a step in the right direction, but at the end of the day,
capital is the ultimate buffer that stands between the taxpayer
and the systemically risky institutions, right? So under Basel
III, my concern is that it continues to rely on internal risk
models at financial institutions when you set the capital
levels, the requirements there. I don't mind those being used
internally for purposes, but to use that to set the capital
levels--if I may quote your former colleague, Alan Blinder, he
says that, prior to the crisis, these models were gained, is
the argument he is making, to avoid raising additional capital.
And, of course, what that means is that they had excessive
leverage.
And if you look at the Basel committee study: ``Capital
levels in American banks employing the internal ratings
approach would experience a capital reduction of 7 to 27
percent. Those adhering to the standardized approach typically
used by the smaller banks would experience a 2 percent increase
in capital demands.'' So we have a recent study which found 83
percent of institutional investors want to get rid of model
discretion.
Mr. Chairman, given the history of the gaming of these
models in setting capital levels, and given that institutional
investors are demanding to move away from model discretion, are
you comfortable with continuing to use these models in setting
capital calculations? If you just look at the minimum leverage
ratio, are you comfortable with that 3 percent level of Tier 1
capital to total assets, or a 33-to-1 total leverage there?
Mr. Bernanke. Right. So the overall system has been
strengthened quite a bit with the international leverage
ratio--more capital, higher-quality capital, buffers, liquidity
rules, and so on. So I think it is a stronger system.
Your point is well-taken. For those models to be
worthwhile, they need to be validated and they need to be good.
The Federal Reserve and the other regulators don't just let you
use whatever model you want; they have to be approved and
validated by the regulators. And I believe that is an
adequate--
Mr. Royce. But the argument I am making is that the only
way to guarantee that doesn't happen is to focus on the old-
fashioned minimum leverage ratio--
Chairman Bachus. Thank you.
Mr. Royce. --which, under Basel III, is far too low.
Chairman Bachus. Thank you, Mr. Royce.
Mr. Carney?
Mr. Carney. Thank you, Mr. Chairman.
Chairman Bernanke, thank you for coming in today. By the
time you get to me, many of my questions that I have have
already been addressed. So I would like to just go back to some
of the things that were in your statement and in your report,
just to confirm my understanding.
Since I get it that the Fed is doing everything it can,
with respect to monetary policy, to address the employment part
of your dual mandate--is that correct?
Mr. Bernanke. We can continue to evaluate the situation,
evaluate the outlook, look at the tools that we have, and we
are committed to make sure that we continue to have improvement
on employment. But I don't want to imply that we have done
everything we can. We may do more in the future.
Mr. Carney. So there is more that you might do?
Mr. Bernanke. It is certainly possible that we will take
additional action if we conclude that we are not making
progress toward higher levels of employment.
Mr. Carney. Thank you.
And there seems to be little reason for concern on the
price stability side at the moment.
Mr. Bernanke. For now, inflation seems to be well in check.
Mr. Carney. And you also said that progress has been made
in terms of the recovery, but unemployment is still too high,
and the recovery has stalled and is not as strong as maybe you
had hoped at this point.
Mr. Bernanke. The recovery has decelerated recently. It is
sort of a pattern we have seen for the last few years, that
things seem to be stronger in the beginning of the year and
then the slowdown around spring, spring and summer. So we will
try to assess whether this is just a temporary slowdown or
whether something more fundamental is happening. Again, we are
committed to doing what is necessary to make sure the recovery
continues and employment continues to grow.
Mr. Carney. At one point, you said that two big risks to
economic growth were the European situation and the effects of
the U.S. fiscal policy, the so-called fiscal cliff. And in part
of your response to that, you said that the most effective
thing that Congress could do would be to address the fiscal
cliff. And I think you said the sooner we did that, the better.
What do you mean by that, the sooner we did that, the
better?
Mr. Bernanke. One of the issues--and this is not explicitly
accounted for in the CBO study--is that, even putting aside the
effects on activity of the fiscal cliff, as time passes, as we
get closer to the end of the year, we are likely to see
increased uncertainty both in financial markets and among
people who are making investment and hiring decisions about
what programs will be in place, which ones will not, what the
tax rates will be, and those kinds of things.
Mr. Carney. So certainty and confidence are a big part of
that, right?
Mr. Bernanke. Absolutely.
Mr. Carney. And I know--I am going to try not to ask you to
suggest things that we should be doing, because I know you
won't answer those questions. But I would like to ask you once
to go back to the question that Mr. Capuano left you at, which
is really a sense of what ``gradual'' means. Can you describe
that numerically in some kind of way, as opposed to
prescriptively in terms of policy?
Mr. Bernanke. I think there is a range that--people would
have different views about whether you should be more proactive
or just avoid the cliff.
Mr. Carney. Right, right, right.
Mr. Bernanke. There is a range of views there.
Mr. Carney. So when you say more proactive, in terms of
maybe stimulating?
Mr. Bernanke. Some folks would want to do more fiscal
activity.
Mr. Carney. Right.
Mr. Bernanke. There are different views. What I am taking
here is a sort of do-no-harm kind of approach and say that you
just want to avoid the impact of the cliff.
Mr. Carney. Have we learned anything from the European
response? Have they taken through the requirements that the
eurozone have imposed on some of the members' fiscal policies
that probably aren't the best?
Mr. Bernanke. I think we have learned that sharp fiscal
contractions can slow economic activity. We are seeing that in
a number of countries. That is not to say that they have any
choice. In the case of Greece, for example, they don't have
many options about cutting back on their fiscal deficits. But
we have seen countries that have very sharply contracted their
fiscal positions experiencing recessions at the same time.
Mr. Carney. I only have time for one more question. So, two
of the big issues that are in our fiscal situation--and you
have talked about healthcare spending, that is the biggest part
on the spending side, and of course tax policy. Is certainty
more important than the underlying policy or as important?
The Affordable Care Act was intended and will--projections
are it will reduce costs in the long term but will create a lot
of uncertainty in the short term. Similarly on tax policy. I
see my time is running out. Do you have a thought on that?
Mr. Bernanke. Whenever you can have clarity about your
policy intentions--and this applies to the Federal Reserve,
too--it is going to be better.
Mr. Carney. Thank you.
Mr. Lucas [presiding]. The gentleman's time has expired.
The Chair now recognizes himself.
Mr. Chairman, press reports have indicated--and let's
return to Libor for just a moment--that the New York Fed first
learned of possible rigging of Libor in 2008. However, when the
CFTC announced the enforcement action and the $200 million fine
against Barclays in June, they said the interest rate rigging
continued sporadically well into 2009.
Chairman Bernanke, did anyone at the New York Fed inform
the Federal Reserve in Washington, D.C., of potential rigging
in 2008?
Mr. Bernanke. Let me be clear. There are two types of
behaviors that the CFTC has identified. One is manipulation of
the rate by derivatives traders for short-term profit. That
information has only recently come to light; none of that was
known in 2008-2009.
What the Federal Reserve heard about in 2008 had to do with
banks that were members of the panel, the Libor panel, possibly
underreporting their borrowing costs in order to avoid
appearing weak in the market. This was information that was
about that time becoming generally known. There were media
reports in April of 2008, for example, talking about widespread
chatter in the markets about that kind of behavior.
So that was understood, and it was understood that part of
the problem was the structural problems with the Libor system.
And so, the New York Fed took two kinds of steps. One was to
inform all the relevant regulators what it had learned. But it
also took steps to try to make improvements in how Libor is
collected and calculated.
Mr. Lucas. And you can understand the perspective of myself
and the Agriculture Committee, since literally thousands of
those derivative contracts, which fall under the jurisdiction
of the committee, were settled potentially using those what now
appear to be rigged rates. The impact is very relevant.
So can I take your answer to say, therefore, that someone
from the Federal Reserve did, indeed, tell the CFTC about this
potential issue in 2008?
Mr. Bernanke. Absolutely. As was released in the materials
on Friday, the New York Fed made presentations to the
President's Working Group, which includes the CFTC, the SEC,
the Fed, and the Treasury. It made separate presentations to
the Treasury. And it communicated with British authorities
about the issues of how to strengthen Libor and address this
underreporting problem.
Mr. Lucas. Thank you, Mr. Chairman.
And, with that, surprisingly enough, I will yield back the
balance of my time and recognize the gentlelady from
California, Ms. Waters, for 5 minutes.
Ms. Waters. Thank you very much.
Thank you for being here, Chairman Bernanke. There is so
much all of us would like to discuss.
As I recall, in the past year since the passage of Dodd-
Frank, we can see that major U.S. banks have managed to make
themselves profitable again, but really, the scandals still
keep coming, and public trust in the integrity of the financial
system, I think is at an end. That is why I have been
advocating for the swift implementation of the Wall Street
reform law, strong enforcement of existing law, and for
adequate funding for our regulators.
But as I did last week at another hearing of this
committee, I just want to remind us all, in just the last 2
years we have seen the robo-signing of foreclosure documents,
the robo-signing of credit card judgments, billions of dollars
of put-back lawsuits over mortgage-backed securities, the
failure of two major Futures Commission merchants, municipal
bond bid rigging, alleged energy market manipulation, money
laundering now for drug cartels, the losses of the ``London
Whale,'' and the bungling of the Facebook initial public
offering. And this is just a partial list.
And it is capped off by what might be the most far-reaching
scandal of all, Libor manipulation. One commentator, Andrew Lo,
a professor at MIT, has noted that this Libor fixing scandal
dwarfs by orders of magnitude any financial scam in the history
of the markets.
I guess in all of this, let me just ask, as it relates to
Libor, what are you going to do about primary dealers who we
find have been involved in manipulating the information in
order to look better? You have that responsibility; you
determine, do you not, who the primary dealers are?
Mr. Bernanke. We determine who the primary dealers are. We
don't necessarily regulate them.
This particular issue is now under heavy coverage by the
CFTC, the DOJ, the SEC, and authorities from other countries as
well. And I am sure that they will follow through with every
company involved.
Ms. Waters. As I understand it, the New York Fed may not
regulate primary dealers, but they do set out business
standards and technical requirements for primary dealers, and
they can fire a primary dealer at any time. Are any going to be
fired, do you know?
Mr. Bernanke. If there are questions raised about the
integrity and competence of a primary dealer, yes. It could
happen, certainly.
Ms. Waters. Okay. That is good to know.
Let me just segue into something that perhaps you had not
anticipated. Out in California, we have a number of cities that
are filing bankruptcy, and a lot of this has to do with the
housing crisis and the problems that they have. San Bernardino
is one, of course, and Stockton, and some time ago, it was
Vallejo.
In San Bernardino, they had some interesting discussions
about how to use eminent domain in order to keep people in
their homes. From what I can understand, they would access the
properties through eminent domain, and then they would pay the
fair market value. But the fair market value is different than
the mortgage agreement because they are now underwater. They
would keep people in their homes and, of course, try and
stabilize the housing.
But what do you think about that?
Mr. Bernanke. I think it raises legal issues that I am just
not qualified to comment on. It is a very difficult set of
problems that they are facing, and I am very sympathetic to
their attempts to try to address it, but whether this is a good
vehicle or not, I am not qualified to answer the question.
Ms. Waters. Do you believe that these cities are taking
action because they are just basically tired of waiting for us
to solve the problems of the housing crisis? There is one thing
that I think you were involved in with the OCC, and it had to
do with the mitigation process for dealing with some of the
issues of getting information out to some of the people who had
been harmed and getting them compensated up to $125,000, I do
believe, but only 8 percent returns?
Former Chairman Frank and I have met with the OCC, and they
talked about coming up with new outreach-type programs, et
cetera. Have you been in discussion with them about what you
could do to do better outreach and get more people involved and
responding?
Mr. Bernanke. We have. We have been trying really hard,
done a lot of advertising, Web-based, social-media-type
communications. We have taken the GAO commentary and tried to
incorporate that. But, most recently, I understand, we are
trying to make a more community-based approach to reach out to
churches and African-American groups and the like and trying to
get their assistance as well, as well as home mortgage
counselors. Yes, we are trying to address that.
Mrs. Biggert [presiding]. The gentlelady's time has
expired.
I recognize myself for 5 minutes.
Chairman Bernanke, could you just talk a little bit about
the differences between insurance and banking, as the Federal
Reserve looks at it?
Mr. Bernanke. Sure.
For insurance companies that either own a thrift or should
one become designated as a nonbank systemically important firm,
the Federal Reserve would have consolidated supervision over
those insurance companies' responsibilities.
We recognize there are differences between insurance
companies and banks, so a couple of differences in the way we
would manage that. One would be, of course, that the insurance
companies themselves, the insurance subs, will continue to be,
as I understand it, will continue to be regulated by the State,
State authorities, and be subject to the insurance company
regulatory and capital requirements. The Federal Reserve will
impose capital requirements at the holding company level to
make sure that overall the company is well-capitalized. But
even in doing that, we will try to take into account
differences between insurance companies and other types of
firms. So, for example, there are certain types of assets that
insurance companies have, like not fully guaranteed accounts
that some of their customers might have, and we are looking to
give those different capital treatments.
So there will be a lot of similarities, admittedly, at the
holding company level, but we recognize insurance companies
have both a different composition of assets and a different set
of liabilities. And appropriate regulation needs to take that
into account.
Mrs. Biggert. Okay. I think that there have been other
Federal regulators that have either signaled or taken action to
allow State insurance regulators to continue to do their job,
regulating insurance.
There is concern, I think, with the Fed plan that, how are
you going to relate to the companies that maybe have only 1
percent or 2 percent of their assets as part of a thrift or a
savings and loan, when 98 to 99 percent of their assets are in
insurance?
Mr. Bernanke. As I said, we will try to take into account
the differences. Insurance companies have many of the same
assets that banks do and, therefore, share the credit and
market risks that banks have. And so, for those kinds of
assets, it could be appropriate to have similar capital
requirements for insurance companies and banks.
But in those cases where there are distinctive differences,
then I think we need to try and accommodate that the best we
can, consistent with the Collins Amendment and other rules in
Dodd-Frank.
Mrs. Biggert. That brings up--you have the June 7th 800-
page proposed capital rules that intend to regulate insurance
companies as well as the banks. So do you think there will be a
good distinction between those two?
And I am also concerned about the fact that it is a 90-day
comment period. Do you think that will be extended for some of
these companies to have to come in and really--
Mr. Bernanke. If the comment period is insufficient to get
a full response from the public, we certainly can consider
extending it.
Mrs. Biggert. Okay. And there is a question then of, do you
think that the Federal Reserve has the statutory flexibility to
recognize the insurance risk-based capital and leverage
requirements? There is the Collins Amendment, and then there is
Dodd-Frank, which I think goes through with that. But does the
Collins Amendment then prevent a difference?
Mr. Bernanke. My understanding, and I will be happy to
follow up with you on this, is that we have to meet certain
requirements at the holding company level. So at the holding
company level, there will be a lot of overlap between the
regulation of a bank holding company and a thrift holding
company. But again, my understanding is that we will not try to
impose bank-style capital requirements on individual insurance
subs, and that those can still be subject to the State capital
requirements.
Mrs. Biggert. Okay. I thank you. The gentlelady from New
York is recognized for 5 minutes.
Mrs. Maloney. Thank you, and thank you for your public
service. I would like to note that the Consumer Financial
Protection Bureau issued its first enforcement action today,
ordering a financial institution to pay a fine for what the
agency described as deceptive marketing tactics related to
credit card products. I wanted to publicly thank you for your
leadership and this Congress' leadership on credit card reform,
and note that it is good to see that consumers have an agency
speaking up and fighting for their protections and financial
products.
The Libor problem, really, is readily solvable if we use a
different index, one that is objective, public, readily
verifiable, and manipulation-resistant by any single bank. So I
would like to ask you what are your favorite alternatives to
Libor? And have you relayed that to Mr. King at the Bank of
England? And if so, what was his response?
Mr. Bernanke. As I discussed yesterday, I think there still
are problems with the current Libor system because it doesn't
always reflect an actual market transaction. And the Federal
Reserve Bank of New York made some recommendations for reform
which have not been fully adopted. So one strategy would be to
switch to a market-based indicator. The Federal Reserve has not
come out in favor of a specific one. But a number of
possibilities include repo rates, the so-called OIS index, and
even potentially Treasury bill rates, for example.
So there are a number of possible candidates. I have not
addressed this issue to Governor King. I have talked to Mark
Carney, who is the governor of the Bank of Canada, who is the
head of the Financial Stability Board, which is an
international body which looks at issues pertaining to
regulation and financial stability. And that body is going to
be looking at the Libor controversy, implications for financial
stability, and possible ways to move forward. So that will be
one international effort to look at alternatives.
Mrs. Maloney. Okay. Why is the American economy doing
better than Europe's? The Europeans seem to be more focused on
debt, and working towards austerity, and austerity in their
public policy instead of stimulating the economy. And what role
do you think stimulating the economy with monetary stimulus and
fiscal stimulus, what role do you think that played in the
American recovery, which is better so far than the European
one?
Mr. Bernanke. Yes. The U.S. recovery is somewhat
disappointing, of course, but it has been stronger than some
other areas. In Europe, they are facing a number of challenges,
mostly related to the structural problems associated with the
common currency and with the structure of the eurozone. So a
number of factors contributed to the slowdown in the economy.
One of them is the fact that a number of countries, which are
under a lot of pressure from markets, are severely cutting
their fiscal positions. And that is contributing to the slowing
economic activity. But in addition to that, their banking
system is having problems, and credit has become very tight in
some countries. Moreover, all of the issues related to the
possible default of various countries, or the risks borne by
financial institutions have led to a lot of volatility in
financial markets, which has also been a negative factor. So
they really are facing a lot of headwinds there, and it is
quite a difficult situation.
Mrs. Maloney. I am especially worried about the efforts of
some of my colleagues on the other side of the aisle to limit
the Fed's ability to use monetary stimulus. Long-term
unemployment is really high, and I am worried that we don't
have enough tools to combat it. And don't you believe that the
long-term unemployment would be even higher if the Fed had
raised the Federal funds rate and not purchased government
securities?
Mr. Bernanke. I am quite confident of that. We haven't had
the recovery we would like, but certainly, monetary policy has
contributed to growth and reduction of unemployment in the last
3 years.
Mrs. Maloney. And I would like to hear your comments on
positive signs that you see in the latest U.S. economic data.
Mrs. Biggert. The gentlelady's time has expired.
Mr. Bernanke. I note housing is one area.
Mrs. Biggert. The gentleman from California, Mr. Miller, is
recognized for 5 minutes.
Mr. Miller of California. Thank you, Madam Chairwoman.
Welcome back, Chairman Bernanke. It is good to have you here.
In your testimony, you cited low demand and high inventory for
houses throughout the country. In California, it is kind of an
interesting process. We are kind of going the other way.
Inventories overall in California are down to about 3.5 months,
down from 4.2 months in May, which is a really good trend. In
fact, in the Inland Empire, which was hit very, very hard, San
Bernardino County, it is actually down to about 40 days.
It is nice to go into a real estate office and actually see
lists of buyers instead of lists of homes for sale. What do you
think we can do to keep this trend going? Because I don't
believe the economy is going to come back until the housing
market recovers.
Mr. Bernanke. As you say, there is improvement in the
market as a whole, and particularly in some areas. I am not
sure that this low inventory situation will persist, because
there is a pretty big backlog of houses that are in the
foreclosure process that may come onto the market. And that
will be an issue.
We provided a working paper earlier this year that
discussed some of the issues in housing. For example, in order
to keep down that inventory, one strategy is to undertake
programs that convert REO, real estate owned by banks and other
owners, to rental properties. And the GSEs are running a
program like that, which has some promise. It is important to
do what we can to avoid foreclosure, obviously, where it is
possible. Or if that is not possible, to give people a way,
through deed-in-lieu or short sales or other mechanisms, to get
out of their home and to sell it and to avoid a lengthy
process.
Access to credit remains a very significant problem. It is
hard to point to specific things that can be done. But one
thing I think is promising is that the GSEs, as I understand
it, are considering changes in their practices that will reduce
the concerns that banks have about so-called put-back risk, so
that when banks make a mortgage loan and sell the mortgage to
Fannie Mae or Freddie Mac, there is a substantial risk that if
the mortgage goes bad, if there is any kind of problem with
documentation or anything else, that they will get that
mortgage back and be liable to the--
Mr. Miller of California. I like that.
Mr. Bernanke. There are a number of areas where we could
hope to see improvement in the housing market, but
unfortunately, there is no single solution. And to some extent,
just economic recovery more generally is going to drive the
housing market.
Mr. Miller of California. There is a concern about what we
are doing. FHFA has developed a pilot program with Freddie and
Fannie to sell their REOs on a bulk sale. You saw that program,
they are doing a pilot program on it.
Mr. Bernanke. That is right.
Mr. Miller of California. And the problem I have with that
is they are doing it in the Inland Empire, which has a 40-day
supply of homes. When they sent the letter out, there was a
group of us in our area, 19 of us who represent that region,
who wrote a letter objecting to it. And they said, well, these
houses have been on the market. When we saw the data, 70
percent of the homes have never even been listed. And my
concern is, why would we do that? If we bulk sell them, we are
going to sell them for less than market value. If we sold them
in the traditional foreclosure process, you would get more
money listing with a REALTOR and selling them out. But we are
actually going to cost the taxpayers money starting a pilot
program in a part of the country that has a very low amount of
homes listed.
Why would we do that? It doesn't make any sense when we
should--I agree there are probably some parts of the country
where maybe there is a high inventory level and you need to
bulk sale them out. But why would they pick the one area of the
country that is starting to recover? Maybe it is because the
house prices are so depressed. But you are bulk selling them
out, costing taxpayers money. Why would we do that?
Mr. Bernanke. I am not sure it is costing taxpayers money.
I hope not. I think one of the reasons they would be doing that
is in order to make REO to rental programs work, you want to
have a large number of houses close together, foreclosed homes
close together so that they can be managed by rental--
Mr. Miller of California. But if you sell them off in bulk,
you are going to sell them for less than market value, the way
they are selling them off.
Mr. Bernanke. But more quickly and with less cost.
Mr. Miller of California. But if you have a 40-day supply
of inventory, my argument is that there are probably places
where 7 months is considered normal. We have a 40-day supply of
inventory. And Freddie and Fannie are bulk selling those
through FHFA at a reduced price, when those houses could be
listed and sold.
Mr. Bernanke. That is a good point. I hadn't heard that
before. And I would urge you to talk to Ed DeMarco about that.
Mr. Miller of California. I did. And the response from Mr.
DeMarco was that, ``We are afraid we would lose credibility by
not selling them now that we have bid them out.'' And my
response was, ``I am concerned with losing credibility by
costing the taxpayers money selling homes in a region that has
no inventory and an abundance of buyers.'' I just think that is
something somebody should talk about when you are in meetings.
Mr. Bernanke. Okay. Thank you.
Mr. Miller of California. Thank you, sir.
Mrs. Biggert. The gentleman's time has expired. The
gentleman from Georgia, Mr. Scott, is recognized for 5 minutes.
Mr. Scott. Thank you very much, Madam Chairwoman, and
welcome, Chairman Bernanke. It is good to have you here. I want
to talk about what I think is the core of our issue now dealing
with especially unemployment, and that is a very serious
paralysis of partisanship that has basically hijacked this
Congress. And I say that because I think that you all have done
pretty much what you can do. You have reached in the Fed your
point of what you call zero lower bound, where you can't go any
further with your interest rates.
And everything that we have done here, we talked about, for
example, the policies that we made, nowhere is the economy more
impacted than health care. The whole issue was the rising costs
of that. We passed a health care bill. And that bill has a
direct impact on unemployment and employing people. For
example, in there we have the Medicaid expansion, which will
bring in another 18 million individuals. And most importantly,
it will have an extraordinary impact on job creation,
maintaining jobs, and other jobs.
Most critical, you find on basically a partisan basis,
already those States that have the most to lose, that have the
highest rates of uninsured and have the highest rates of
unemployed are saying they are going to turn away billions of
dollars in Medicaid that will go directly to their largest
employers, which are the hospitals. One-third of all the
hospitals in this country are facing closure, which means
rising unemployment. And so there has to be--what message can
you give the Nation and the Congress here on how we can get our
act together and how devastating this partisanship--just we
will deny the unemployed, we will deny this in these States
strictly because of partisanship. How serious is this to this
country?
Mr. Bernanke. Unemployment is an enormous problem. It
represents not only wasted resources; it represents hardship.
And given the large number of people who have been unemployed
for 6 months or more, there are a lot of people who will never
really come back to the labor force, or if they do, they will
have lost their skills and will not be as employable as they
were before. So the costs are very, very high. The Federal
Reserve is, as you say, doing our best to try to help the
economy recover and put people back to work. But monetary
policy isn't a panacea; it doesn't have all the tools that
could be used. And so, I would urge Congress to work together
as much as possible to address this. It is a very serious
problem. And it is not just a temporary cyclical problem, the
long-run unemployed could affect our labor force for many, many
years because of their loss of skills.
Mr. Scott. Let me get to the other point because I know my
time is shrinking, thank you very much. But let's talk about
what we can do in the future. We have sequestration coming up,
for example. How can we formulate our policy dealing with
sequestration to shorten and lessen the impact on unemployment?
Let's look at defense, for example. We have 50 percent
arbitrary we are going to cut. Can we not have some indication
of how devastating this is going to be in employment,
particularly with many of our defense industries which have
huge, huge plants, with huge numbers of employees?
And what impact will sequestration have not just in cutting
our defense capabilities, but in employment? Can we not have a
direction or leadership where we would be very careful as we
move forward with sequestration to make sure we have less of an
impact of how that will put people out of work?
Mr. Bernanke. I cited the CBO number of 1\1/4\ million jobs
from the fiscal cliff would be lost, or fewer created than
otherwise. So there is a big employment implication. On the
other hand, it is very important not just to forget about the
long run, we have to make sure we are addressing our long run
issues of fiscal sustainability. And so, what I have been
recommending is a combination of more moderate fiscal
retrenchment in the shorter term to respect the fragility of
the recovery, but combined with serious and credible actions,
to address fiscal unsustainability in the longer term.
Mr. Scott. And very quickly, the other shoe that we have
that will drop is the ending of the Bush tax cuts. What is your
advice on which way we should go in that direction as far as
having a lessening impact on unemployment?
Mr. Bernanke. I can't advise on specific tax cuts and
spending. But in looking at the package overall--
Mrs. Biggert. The gentleman's time has expired.
Mr. Bernanke. --I am concerned about the contraction of the
entire program.
Mrs. Biggert. The gentleman from New Jersey, Mr. Garrett,
is recognized for 5 minutes.
Mr. Garrett. I thank the chairwoman. So ever since 2009, we
have been hearing that the Fed is sort of out of bullets. But
we could also argue that you and your colleagues have been
pulling the trigger quite a bit since that time, whether it is
with 3 rounds of quantitative easing, with 6 years of interest
rates being almost 0 percent, balance sheet still stands almost
triple its normal size. It is obviously safe to say that we
have been, we are, and we continue to be in uncharted
territory. Now, through all this, you normally come and you
defend yourself on these policy decisions by arguing the
counterfactual, that is to say, that things could have been a
lot worse had we not taken these actions. But before we go down
that line of argument, or discussion, you have to think about
where things really are.
With the recent decline in interest rates where we are in
the market today, is that the result of what the Fed is doing
or is that the result of the marketplace? The real return out
there on a 10-year Treasury is roughly negative 5 percent,
right? Is that a function of the Fed's action keeping the rates
down or is that a function of the market in general? And if it
is an action in response to the Fed, then the question would
be, what is the appropriate rate that we should have in the
market? And if the appropriate rate is where the Fed is trying
to keep it and where you have said you are going to keep it for
the next foreseeable future, the next couple of years, down
near zero, isn't that actually discouraging investment by
individuals and businesses at the same time?
If I know as a businessman or individual that the interest
rates are going to be this low for this year and next year and
beyond, maybe I put off those investment decisions to a later
date. So some of these decisions may actually have a negative
side to them. In other words, maybe there is a counterfactual
to your counterfactual. Maybe there is a risk inherent in the
policies that you have taken. And I will close on this: The Fed
involves itself all across the economy. You fix the Fed's fund
rate; you manipulate the yield curve via Operation Twist; you
essentially monetize our national debt; you manipulate the
mortgage market along with every other part of the credit
market via quantitative easing; you attempt to manipulate the
stock market and the prices there through the portfolio balance
channel; you involve yourself in every aspect of the economy.
There is not a price in the marketplace that is not
subsidized in one sense or another by the Fed. Yesterday at the
hearing--I listened to the tape of the hearing--you said you
had more bullets that you could pull. You said that there is a
range of possibilities, buying Treasuries, MBS, using a
discount window, employing additional communication tools,
commit to holding rates below even through 2015 or beyond,
cutting the rate the Fed pays on excess reserves. So these are
all additional bullets that continue to push us into uncharted
territory.
What I would ask is, is the Fed being as transparent in all
these things in going forward on the downside of all these, on
the downside of accommodation? Particularly, what I would say
is the failed accommodation. How does QE3 create a single job?
Yes, it props up the commodity markets; yes, that is great for
those in the commodity market area. But if I am on the other
side of that trade, if I am the individual like an airline that
is buying these commodities, I may be laying off people. Is
there enough transparency in that area to say what the
downsides are in the failed portions of your policies?
Mr. Bernanke. Some years ago, we provided research that
showed, based on models and analysis, how easing financial
conditions, lowering interest rates--and by the way, it is
minus half a percent I think, not minus 5 percent--
Mr. Garrett. Yes, minus .5 percent.
Mr. Bernanke. --increases spending and investment,
increases the incentive for spend and invest, and that provides
extra demand and helps the economy recover. It is certainly not
a panacea, it is certainly not without costs and risks which I
have talked about, and I agree with that. But I think on the
whole, there is evidence that it has provided some support for
the recovery. It is not the only solution, but it has had a
positive effect.
Mr. Garrett. My time is limited. I would ask if you could
come back to us and just indicate, have you made any mistakes
in any of these areas, where you would have liked to seek other
actions that you should have taken? And I will ask maybe if you
could give us that in writing. But I will just close in the
last 30 seconds on the situation with regard to Libor. I saw
your testimony in the Senate hearing yesterday. In essence, you
said you knew about it in 2008. You said the entire world and
the media knew about it in 2008. You sort of point the finger
over at London, and said you made some suggestions over to them
what they should be doing on this. Isn't there some action both
the New York Fed and you could have taken? Aren't there some
recommendations that you could have made for Dodd-Frank over
the last 4 years when that was coming forward? Isn't there
something that you could have done as far as regulations,
perhaps with regard to how banks report their information to
Libor, perhaps with regard to the requirements in our banks
here, perhaps setting up firewalls with regard to the offices
within there that they--couldn't you have done something?
Mrs. Biggert. The gentleman's time has expired.
Mr. Garrett. Can I have an answer to what he could have
done?
Mr. Frank. The rule has been that you ask a question. We
have people--
Mrs. Biggert. The gentleman's time has expired. The
gentleman from North Carolina, Mr. Watt, is recognized for 5
minutes.
Mr. Watt. Thank you, Madam Chairwoman. And let me do three
things quickly. First of all, I want to apologize for not being
here for your testimony, Chairman Bernanke. Unfortunately, I
had a hearing on intellectual property in the subcommittee on
which I am the ranking member, in the Judiciary Committee. So,
I couldn't be here.
Second, I want to follow up on Congresswoman Waters'
encouragement to be more aggressive in the outreach on these
real estate settlements. There is money there. It seems to me
that there is a built-in disincentive for the lenders to go and
find the people because they get to keep the money if they
don't find the people. So somebody needs to be more
aggressively reaching out, even to the point of sending people
door to door to find these folks who would be eligible to get
the relief. So I want to encourage that. And we will do more
encouragement offline on that.
Third, I want to pick up on Mr. Garrett's point and take
the counter position. I want to express my thanks to you for
shooting all of these bullets. Because if I hear what Mr.
Garrett is saying, he would prefer that the Fed be as
dysfunctional as Congress has been, and that nothing be done,
and that the economy just be allowed to collapse, which I think
would have been the result had not the Fed taken some
significant actions. And I think you point that out on the
bottom of page 5 and the top of page 6 of your abbreviated
testimony when you say the important risk to our recovery is
the domestic fiscal situation.
As is well known, U.S. fiscal policies are on an
unsustainable path. Development of a credible medium-term plan
for controlling deficits should be a high priority. And you
paint, unfortunately, kind of a doomsday scenario if Congress
does not act because--and you lay out the significant dilemma
that we are in, because we need to be spending short term to
stimulate the economy, keeping tax rates low short term to
stimulate the economy, yet we need to be more fiscally
responsible.
You can't both spend and keep taxes low without increasing
deficits. That is unsustainable. And I guess I am expressing my
belief that Congress doesn't seem to be up to that task. Lay
out that scenario. I don't want to get you in the politics of
this, but talk to us a little bit more about the delicate
balance short term about what we ought to be doing versus long
term about what we ought to be doing. And maybe at least edify
the public about how difficult these choices are going to be,
both short and long term.
Mr. Bernanke. Certainly. They are very difficult choices.
If Congress only allows the fiscal cliff to happen and doesn't
do anything else, it is actually kind of counterproductive
because higher taxes mean that people won't have income to
spend. Less spending by the government means layoffs in the
defense industries, for example. So it will slow the economy
and actually mean that tax revenues will be less than expected.
And the benefits in terms of deficit reduction will be smaller
than really was anticipated. And we will see a slower economy
and less job creation.
At the same time, if you simply push everything off without
any additional comment, then there is the risk that people will
become concerned that Congress has no intention ever of
addressing the deficit. And you could see, for example,
concerns in the bond market about that.
So it is a difficult balancing act, but it is a
recommendation that has been made not just by the Fed and the
CBO, but the IMF and pretty much every sort of nonpartisan
fiscal authority, which is to mitigate, moderate the extent of
the fiscal cliff in the short term, avoid destabilizing the
weak recovery, but at the same time, work together to establish
a framework and a plan, and a credible plan that will, over
time, over the 10-year window, and even beyond that, will bring
our fiscal situation into balance.
Mrs. Biggert. The gentleman's time has expired. The
gentleman from Texas, Mr. Neugebauer, is recognized for 5
minutes.
Mr. Neugebauer. Thank you, Madam Chairwoman. And Chairman
Bernanke, I want to thank you. Your office was very responsive
the other day when we sent you a letter in reference to the
Libor issue. I think we will be sending you an additional
letter today or tomorrow. One of the things that is kind of
interesting to me, 16 banks, I think, report in the Libor
dollar index, it would be difficult for just one bank to
influence that index, wouldn't it?
Mr. Bernanke. Generally, yes.
Mr. Neugebauer. So it had to be more than one bank
underreporting or not accurately reporting their borrowing.
Would you say that is correct?
Mr. Bernanke. The reason the banks, some of them apparently
underreported during the crisis, was not to affect the overall
Libor rate necessarily, but rather, because these numbers are
reported publicly, they wanted to avoid giving the impression
that they were weak and others were strong.
Mr. Neugebauer. But if one bank is reporting differently
than the other ones, obviously it wouldn't influence the
overall index?
Mr. Bernanke. If they were in the top four or the bottom
four, they would be cut out.
Mr. Neugebauer. That is right. So when the Fed first
learned about this, you had some correspondence with the Bank
of England, but three domestic banks were involved. Did anybody
say, I wonder if anybody else is doing this? Or was all of your
focus just on Barclays?
Mr. Bernanke. Our focus wasn't on a specific bank. Barclays
is, after all, a British bank, and not supervised by the
Federal Reserve. Our focus was on the general phenomenon. And
the New York Fed did two basic things: to inform the relevant
regulators here and in the U.K. about this problem so that they
could look at it; and to try to address the structural problems
in Libor, which were, as you were indicating, incentivizing
banks to lowball their rate information. So it was approached
as an overall problem.
Mr. Neugebauer. Are you familiar with the term ``price
fixing?''
Mr. Bernanke. Of course.
Mr. Neugebauer. So price fixing, if a bunch of us are in
the carpet business and we all get together and we decide that
we are going to sell carpet at this price, then that is price
fixing, right?
Mr. Bernanke. Yes.
Mr. Neugebauer. So if money is a commodity and pricing of
money is a function of that, wasn't this almost price fixing on
Libor?
Mr. Bernanke. It may be. But as you pointed out, there are
two issues. One is did the individual reporting, misreporting
affect the overall Libor? And it may or may not have. And I
think that needs to be investigated. The other is that, in some
cases, there were no transactions taking place. So during the
crisis, there were mostly just overnight transactions, and yet
the banks were asked to report what they would have to pay for
money a year out. And so a question is whether or not they
were, in fact, misreporting or whether they were simply shading
their estimate in some way. So I think there is a question--I
think the details need to come out. And we don't have enough
details yet to know whether this was deliberate price fixing or
whether there was another interpretation.
Mr. Neugebauer. I think the thing that is kind of alarming
to some of us is the fact that given how widely used that index
is throughout our economy, from just about every area of the
financial community, that I felt like the New York Fed's
response was a fairly lukewarm response to if, in fact,
somebody was manipulating this rate, that could have huge
implications. Now, it depends obviously whether you would have
benefited from that or if you were penalized from that, whether
you were on the buy side or the sell side. But can you explain
why you thought--why the Fed thought that wasn't a big deal?
Mr. Bernanke. I am sure that the Fed thought it was a big
deal. The information was widely known. It was reported in the
press. And the British Bankers' Association is not subject in
any way to U.S. policy. So it was hard to directly affect the
calculation of Libor. But surely, it is a very big deal. It
affects lots of different financial contracts. And as I
mentioned in my comments yesterday, I think that one of the bad
effects of all this is that it is going to further erode
confidence in financial markets and in financial instruments.
Mr. Neugebauer. Thank you, Chairman Bernanke.
Mr. Bernanke. Thank you.
Mrs. Biggert. The gentleman yields back. The gentleman from
Texas, Mr. Green, is recognized for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman. And thank you,
Chairman Bernanke, for being here today. I would like to yield
most of my time to you, because I have something that I would
like for you to respond to. I find that we have some very
credible people who make some incredible statements. And one of
the statements that causes a good deal of consternation is that
we are now doing worse than we were in 2009, that the economy
is in worse shape today than it was in 2009.
Now, I can give my opinion on it, but I don't think that it
will have the impact that a person of your stature, your
standing would have. And I am begging that you, if you would,
juxtapose the auto industry with the auto industry today with
2009, financial services, lending in general. Just please, if
you would, so that we can bring some clarity to what I believe
is an incredible statement. Kindly do so.
Mr. Bernanke. Nobody is satisfied with where we are today,
of course. But there certainly has been significant improvement
since mid-2009, when the recovery began. We have had economic
growth now for about 3 years. The unemployment rate has fallen
from about 10 percent to about 8 percent. Obviously, not as far
as we would like, but still in the right direction. Banks are
much stronger and have much more capital than they did a couple
of years ago. Manufacturing is much stronger, has improved
considerably, particularly in autos, as you mentioned. We have
seen important steps in the energy area in terms of U.S.
production and conservation. The housing market, which was
completely dead in 2009, is still not where we would like it to
be, but is moving in the right direction.
So clearly, there has been improvement. I recognize that
many Americans will still feel that the situation is not
satisfactory, but it is going in the right direction.
Mr. Green. Would you say that it is not worse than it was
in 2009, Chairman Bernanke?
Mr. Bernanke. Clearly not.
Mr. Green. It is not currently?
Mr. Bernanke. Not by all the criteria I just mentioned.
Mr. Green. Yes, sir. And I just want to restate a couple of
things. We were about to lose the auto industry. We now have
the auto industry, and it is coming back. We were about to lose
a good portion of the financial services industry. Larger banks
were about to go under. They are now stabilizing. AIG was about
to go under. We lost Lehman. And it now is better than it was,
obviously not what it was prior to the decline. And it just
amazes me that credible people will make such incredible
statements. And that adds fuel to this flame of confusion that
is engulfing us.
People want to have someone with credibility to speak truth
about the conditions. And it is just amazing that this line of
logic seems to have some degree of credibility in certain
circles. Now, if you would respond, just for the record, is the
auto industry in better shape now than it was in 2009?
Mr. Bernanke. It is producing more cars and is more
profitable, yes.
Mr. Green. Is the banking industry in better shape now than
it was in 2009?
Mr. Bernanke. Yes, it is more profitable, has more capital,
and is making more loans.
Mr. Green. Is the economy in the main in better shape now
than it was in 2009?
Mr. Bernanke. Again, it is not where we would like it to
be, but many parts of the economy have improved, yes.
Mr. Green. All right. Now, my next line of questions will
have to do with something that we refer to as structural versus
cyclical. You can't solve structural problems if you use
cyclical solutions, generally speaking. And it is difficult to
ascertain what amount of what we are dealing with is structural
as opposed to cyclical. Do you have some sense of how much of
what we are trying to, for want of a better term fix, what we
are trying to fix is structural as opposed to cyclical?
Mr. Bernanke. That is widely debated, and it is hard to
know for certain. But I guess my view, and the view of many
economists, is that a good bit of our unemployment problem, for
example, remains cyclical, which means it can be addressed in
principle by monetary and fiscal policies. But structural
problems are probably increasing, and in particular, the very
long-term unemployed, the problem is, the risk is they will
over time become unemployable, and that they will contribute
therefore to a structural issue.
Mr. Green. Thank you. I yield back.
Chairman Bachus. Mr. McHenry for 5 minutes.
Mr. McHenry. Thank you, Mr. Chairman. Chairman Bernanke,
thank you so much for being here today, and thank you for your
service to our government and our people. I certainly
appreciate that. Now, with quantitative easing, do you think
there is a limit to how much quantitative easing that can be
used? And do you think we are approaching that limit right now?
Mr. Bernanke. There is certainly a theoretical limit, which
is the fact that the Federal Reserve can only buy Treasuries
and agencies, and moreover, quantitative easing typically
involves buying longer-term Treasuries and agencies, as opposed
to bills, for example. So there are finite amounts of that
available. And moreover, beyond a certain point, if the Federal
Reserve owned too much, it would greatly hurt market
functioning, which would have the effect of reducing the
efficacy of the policy. So I wouldn't say that we are at that
point yet, but ultimately, there would be some limit to how
much you could do, yes.
Mr. McHenry. So there is some limit?
Mr. Bernanke. Yes.
Mr. McHenry. But we are nowhere close to approaching it is
what you are saying?
Mr. Bernanke. I don't have a number for you. But we still
have some capacity at this point, yes.
Mr. McHenry. Okay. Now, there is a separate question. You
said that you have a target inflation number, sort of ideal.
And what is that?
Mr. Bernanke. Two percent.
Mr. McHenry. Okay. Now, would the Fed be comfortable with
an inflation rate a little higher than that? Maybe 3 percent?
Mr. Bernanke. I don't know what you mean by
``comfortable.'' If for whatever reason, for example, in the
last few years, we have seen oil price shocks which have driven
inflation up to 3 percent or higher, that is not a good
situation. And it is our objective in that case to try to move
inflation gradually down back to 2 percent. So if you are
asking would we target 3 percent, would we seek to get 3
percent, the answer is no.
Mr. McHenry. Are you more comfortable with 3 percent or 1
percent? A little higher or a little lower? What are you more
comfortable--
Mr. Bernanke. I think both of those are concerns. Both are
concerns because 3 percent, of course, means that we are moving
towards a more inflationary situation, but 1 percent is closer
to the deflation range, which is also not healthy for the
economy.
Mr. McHenry. Okay. The reason why I am trying to get at
this is because there has been a lot of discussion that with a
little higher inflation rate, a belief--now, I don't subscribe
to this--but a little higher inflation rate that it, de facto,
reduces debt burdens and perhaps could spur spending and the
perception, more of the perception of less debt and actually
the impact of it. And that might spur the economy. It is more
consumer spending. Do you think that is desirable or not
desirable?
Mr. Bernanke. I recognize that some people would advocate
that we set an inflation target, say at 4 percent, and maintain
that for a number of years. I don't think, first, that we could
do that without losing control of the inflation process.
Second, I am very skeptical that it would increase confidence
among businesses and households and increase economic activity.
I think it would create a lot of problems in financial markets
as well. So I don't think that is a strategy that has a lot of
support on the Federal Open Market Committee.
Mr. McHenry. So a lower inflation rate, the target
inflation rate of around 2 percent, the Fed would have more
control than perhaps a higher inflation rate?
Mr. Bernanke. Because we have maintained inflation near 2
percent for a long time, and there is a lot of confidence in
the financial markets that the Fed will keep inflation close to
2 percent.
Mr. McHenry. Okay. So it is confidence, but also Fed
capacity?
Mr. Bernanke. The issue is that we currently have very
well-anchored inflation expectations. People are strongly
accustomed to 2 percent inflation. If we were to say 4 percent,
first would be the issue of getting there. Could we get there?
And could we get there with some accuracy? But beyond that,
people would say, if they said 4 percent, why not 6 percent,
why not 8 percent? So in the short run at least, it is not at
all clear that people would be confident that this new target
of 4 percent would, in fact, be stable and sustainable.
Instead, they would wonder where inflation is going to be in
the medium term.
Mr. McHenry. So right now, in order to--with the Fed
contemplating more easing, and then you also have the question
of liquidity in the marketplace, making sure that Fed policy
enables more liquidity in the marketplace, we also see Europe
running counter to that, right? The woes of Europe are making
the markets less liquid. Does the Volcker Rule--do you have a
concern about the timing of the Volcker Rule that would rein in
liquidity?
Mr. Bernanke. We are paying close attention to issues
related to market liquidity and market making, which are exempt
activities under the Volcker Rule. In any case, the Volcker
Rule doesn't come into effect for a couple more years. So I
would say that is not a first order issue right now.
Mr. McHenry. Thank you.
Chairman Bachus. I am now going to recognize Mr.
Perlmutter. And let me say this, we have a hard stop at 12:45.
So if you want all the time, you can have it. Mr. Pearce would
like a minute, if you can work that out.
Mr. Perlmutter. I will be quick. Chairman Bernanke, thank
you for being here, thank you for maintaining a steady hand
through all of this, whether it was kind of the collapse on
Wall Street or some of the clashes that we have here in
Congress ideologically that don't give the economy some of the
fiscal tools that I think would also help continue to improve
our economic situation.
And so I want to ask a couple of specific questions and
then see where we are. Can we talk a little bit about Basel III
for a second, because it came up in a conversation yesterday
with a medium-sized bank that we have back in Colorado. In
Dodd-Frank, we established some lower limits as to a lot of the
regulations that go in place. And I think either it was a $10
or $15 billion-sized institution, and if you were above it, you
had many more things that you had to do, whether it is dealing
with derivatives or the like. And as I understand it now, these
Basel III regulations, that could potentially become worldwide-
type regulations, are going down to a half a billion dollars,
$500 million. And it would take into consideration lots of
smaller banks. And they are fearful that this will really dry
up their capital and make it very difficult for them to
continue to operate. Can you comment on that?
Mr. Bernanke. Yes. Certain parts of Basel III are being
proposed to go down to smaller banks, some of the risk weights,
for example, some of the basic capital definitions. And the
idea here is to try to make sure that small banks as well as
large banks are well-capitalized. But I think it is important
to note two things. First, many of the aspects of Basel III do
not apply to small banks. They simply are--first of all, things
like derivatives books and things of that sort just aren't
relevant to small banks. And there are other rules such as the
international leverage ratio which applies only to the largest
internationally active banks.
Mr. Perlmutter. But I want to impress on you, if I could, I
would like you to take this away, say you are a smaller
Colorado bank, you are generally going to have loans on
shoppettes and real estate and some home loans and some small
business loans. And in my opinion, it wasn't the smaller banks
that led us into the deep recession that we suffered in 2008
and 2009. And I would just ask you, as Chairman of our central
bank, to make sure that we don't penalize--we were pretty tough
in some of the Dodd-Frank regulations that we passed to make
sure that the banking system had some restraints, didn't just
run amok, that there was capital, and there were certain things
that had to be watched closely. But I would ask you, sir, to
just keep an eye on that, if you would. My last question, and
then I will turn it over to Mr. Pearce, is can you describe for
us what has happened with the liquidation of the assets that
were in Maiden Lane one, two, and three?
Mr. Bernanke. They basically have been sold off, and the
Federal Reserve and the government and the taxpayer received
all their money back with interest and additional profits
beyond that. So it has all been sold back into the marketplace.
Mr. Perlmutter. So we pretty much liquidated it all or do
we hold any of it?
Mr. Bernanke. We have a little bit left, but we have paid
off the loans. So we are, from now on, whatever we sell is pure
profit.
Mr. Perlmutter. All right. Thank you. Mr. Chairman, I will
yield back.
Chairman Bachus. Thank you. And Mr. Pearce for 1 minute.
Mr. Pearce. I thank the gentleman for his consideration.
Mr. Chairman, thank you for your service. I am looking at page
4, where you talk about the great risks to us financially. And
I assume that is because of their size and because of the
underfunding of them. But when I look at that size, I consider
the pension systems. And just yesterday, the California pension
system said that they only got a 1 percent rate of return.
Their projection, in order to be solvent, is up in the 7\3/4\.
Maybe just in that one system, the $500 billion shortfall now
just on the teachers. And then that is the smaller of the two.
Nationwide, maybe a $3 trillion shortfall. I didn't see that,
but I do see Spain talked about, and yet Spain is only $1
trillion exposure. Could you kind of tell us what the risk is
associated with the unfunded pensions?
Mr. Bernanke. Low interest rates do put some stress on
pension funds and life insurance companies for the reasons that
you described. I think our goal, basically, is to get the
economy strong enough that returns will rise and that things
will normalize over time. Obviously, pension funds can't be
underfunded forever. But if the economy strengthens and returns
go back to a more normal level, then these underfunding
problems will not disappear, of course, but they will be
mitigated.
Mr. Pearce. Thank you, Mr. Chairman. I yield back.
Chairman Bachus. Thank you. Chairman Bernanke, the
committee appreciates your testimony today. And you are
dismissed.
I am going to ask the audience to remain in your seats
until Chairman Bernanke and his staff exit.
Mr. Schweikert is recognized for a unanimous consent
request.
Mr. Schweikert. Mr. Chairman, I request unanimous consent
to place a letter into the record. It is just some concerns and
wanting some additional visibility on the PCCRAs, the premium
capture reserve accounts, and where we are going on that
policywise.
Chairman Bachus. Without objection, it is so ordered.
The Chair notes that some Members may have additional
questions for Chairman Bernanke, which they may wish to submit
in writing. Without objection, the hearing record will remain
open for 30 days for Members to submit written questions to
Chairman Bernanke and to place his responses in the record.
This hearing is adjourned.
[Whereupon, at 12:49 p.m., the hearing was adjourned.]
A P P E N D I X
July 18, 2012
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