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SEN. EDWARD KENNEDY (D-MA): Thank you very much, Madame Chairman.
Mr. Bernanke, thank you for being here.
We have seen, in the recent weeks, the widespread breakdown in the financial market that's resulted in leaving 7.4 million Americans unemployed, 2 million families at risk. And they are looking to all of us, to you and to us, for action. And I think that's very much what this committee is about today.
Now, if you look at where we are and where we've come over the period of these past few years, since this president took office, the dollar has lost a third of its value, the federal debt has skyrioted (sic) by nearly $4 trillion, our debt to foreign investors has increased by a trillion dollars. The stock market has grown at only 2.5 percent each year since 2001, far lower than the 7.5 percent returns it averaged since 1968. It's lost 2.7 trillion (dollars) in value just since last May. And finally, this crisis has wiped 2.7 trillion (dollars) in home values in this past year alone. And we could lose as much as 8 trillion (dollars) before the crisis -- over.
So I frequently hear from my constituents who see their hard- earned savings being wiped out. Now I'm reading in the papers, in The Wall Street Journal yesterday, that talks about older workers are being forced to put off their retirement because of losses in the values of their home, retirement savings.
What can we do to respond to the staggering loss of the nation's wealth? And how can working families cope with their lost savings and wealth, especially those closer to retirement?
MR. BERNANKE: Well, Senator, the more immediate question is the financial crisis, which you asked about. The financial crisis, I think, is the unwinding of what was an excessive credit boom in the years up through the middle of last year. For a variety of reasons, global interest rates were quite low, and that generated strong efforts to reach for yield, as it was said, and so there was a of risk-taking. There was a lot of financial innovation. And the result, I think, was some unsustainable investment, some unsustainable asset creation.
We've seen the unwinding of that. That is, in some ways, positive. But on the other hand, the contraction of credit and the restriction of financing that we've seen associated with that has slowed the economy and has had adverse effects on families, as you indicate.
We are trying to find a financial stability. The Fed is working the best we can to stabilize the economy and to stabilize the financial system.
From the point of view of the Congress, obviously long-term budget stability and budget balance, wise use of public resources is important. And in the shorter term, as I indicated in a couple of previous questions, I think the critical area right now is housing. The housing market over the boom was too large, and it is retracing. That retracing has had implications both for the real economy and also for the financial markets. There are areas, I think, where Congress could be helpful on the housing front, to reduce foreclosures and to make it possible for people to acquire new homes who are qualified to do so. Those are some of the --
SEN. KENNEDY: Well, the -- and thankfully we have a good team that's working on the housing, and we -- they expect to have some announcements in the next day or so.
But let's go on to the -- to your response. What are we going to tell the states? The states are in a critical situation. They're faced with either cutting back in terms of services or increasing taxes. Either is a disaster in terms of -- cutting back in terms of Medicaid or states increasing taxes, which is obviously counterproductive. What are you suggesting that you're going to do to help assist the states? And what are you suggesting that we do to try and be a partner, to try and help and assist the states so they're not going to have the results of either reduction and significant reduction in terms of services or also in terms of the taxes?
MR. BERNANKE: Senator, what the Federal Reserve is going to do is try to meet our mandate of establishing a strong, growing economy with high employment and price stability.
SEN. KENNEDY: Well, that's been everyone's goal.
MR. BERNANKE: That's --
SEN. KENNEDY: I mean, we've got -- we want to hear -- I mean, I've listened to those since I have arrived, been a member of this committee. I mean, we all are interested in that, and we've seen that done. We did that under President Clinton. We had it under President Kennedy. That is the desire. But we have seen that we're not there now, and just the desire -- people want to know now, today. They're going out. They're facing these kinds of closes (sic) in their mortgages and in their homes, and they want to know what to do. The desire to have price stability and economic growth isn't going to satisfy them when they go home tonight. I'm asking what we ought to be doing to try -- what's your position with regard to the states?
Are you going to provide help and assistance to the states so that they do not have to cut back in terms of services and do not have to cut back?
MR. BERNANKE: On the states, from the Congress's point of view, you're going to have to make a decision about whether you want to provide assistance to the states that also affects the federal budget position. That's a decision that's up for the Congress --
SEN. KENNEDY: Yeah, but what's your recommendation? Should there be fiscal help and assistance? What's your position?
MR. BERNANKE: That's the Congress's --
SEN. KENNEDY: What's your recommendation? We have monetary and fiscal policy. You have responsible in monetary. Congress does -- but in fiscal policy. But you have to have some position --
MR. BERNANKE: No, sorry.
SEN. KENNEDY: -- in terms of the economic crisis that we're facing. You're not prepared to tell us whether to try and provide help and assistance to the states, that the administration believes we ought to use the fiscal policies that are available to the administration and to the Congress to try and help assist families, working families?
MR. BERNANKE: I'm all in favor of assisting people, but sir, but it's your Congress's decision --
SEN. KENNEDY: And you don't have a recommendation?
MR. BERNANKE: No, sir.
SEN. KENNEDY: Let me ask you, just finally. Toys and drugs are regulated. A great many other kinds of factors are regulated. Shouldn't we make sure that financial products are safe for consumers? Should we consider having a new agency that's going to review unsafe financial products on the market?
MR. BERNANKE: Senator, it's extremely important. The Treasury blueprint, for what it's worth, has an agency in it that would do that. In the current situation, Federal Reserve has responsibilities along those lines. We have just recently taken a number of steps in that direction.
SEN. KENNEDY: Well, let me ask you. To take unsafe financial products off the market, do you have that authority now? e
MR. BERNANKE: We have some authorities. We have authority to regulate terms of lending on mortgages, and we have set up a new set of rules which would eliminate many of the abuses and problems that we've seen in that area. We also have authorities relating to credit cards within banks, and we are addressing that issue on a number of fronts as well.
SEN. KENNEDY: Well, my time is just about up. Are you suggesting that we ought to have strengthened power and authority to be able to reduce -- to eliminate these dangerous financial arrangements that threaten the well-being of the consumer? Do we need that? Do you need it?
MR. BERNANKE: I don't know if we need additional authorities, but we are certainly using the authorities we have to address those problems.
SEN. KENNEDY: My time is up, Mr. Chair.
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