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Public Statements

Hearing Of The Joint Economic Committee-The Economic Outlook For The United States

Witness: Ben Bernanke, Chairman, Board Of Governors, Federal Reserve System

Chaired By: Rep. Carolyn Maloney

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REP. MALONEY: The meeting will come to order. And I want to welcome Dr. Ben Bernanke, the chairman of the Federal Reserve, and thank him very much for his testimony today. And in appreciation of his time, I'd like to put my opening statement in the record, so that we have more time for questions with the members, and recognize the ranking minority member for two minutes.

SEN. SAM BROWNBACK (R-KS): Thank you very much, Madame Chairman.

Welcome, Chairman Bernanke. Delighted to have you here, and very pleased that you could join us in reporting to Congress. You've got a lot to report on. I mentioned to you in the anteroom, I appreciated very much your presentation on "60 Minutes" recently and the assuring sense that you put in front of the public. I think the public needs to hear you, and needs to hear you in a reassuring sense.

I do have a quick statement that I wanted to make -- and I'll have my full statement put into the record -- but on two points that I have deep concern. One is your thoughts about the projected tax increases into the economy and its impact, or the discussion of that and its impact now, of what that is and its impact overall. And the second -- and this one is one that we talk about amongst the members, and the public certainly is a great deal right now -- is that the possibility of looking at the bottom of this recession towards the end of the year, as you and many other economists are talking about, that we are creating a government debt bubble that we're going to have to deal with in a massive way, the way we've had to deal with the housing debt bubble.

And I've got the numbers here that I've been looking at; deeply concerned about. We had the head of the President's Council of Economic Advisers in last week, and we were talking about that very issue in both -- well, certainly in our fiscal policy, but also with the monetary policy, of the amount of funds that have been put forward. Are we creating a government debt bubble?

And finally, one other thought that I'm going to be asking you about is Chairman Hoenig out of Kansas City has been putting forward the concept that "too big has failed" -- the policy of too-big-to-fail has failed -- and that we need to get in a regularized system for our big banks, that if they are insufficiently capitalized, if they cannot continue, that they should be allowed to fail in an orderly fashion. And I really do, will -- and will be seeking your thoughts and comments on that.

Welcome to the committee. Delighted you're here.

Thank you, Chairman.

REP. MALONEY: And the chair -- (audio break).

REP. KEVIN BRADY (R-TX): Thank you, Madame Chairwoman. Pleased to join in welcoming Chairman Bernanke today.

There are a lot of questions related to the financial-rescue plan and to America's perilous budget situation. Recently released minutes of the Federal Open Market Committee indicates that staff has reduced its projections for economic growth for the second half of 2009, for 2010. Think it underscores concerns this committee has raised that the administration's optimistic economic projections may truly hide the deficit and understate its true cost.

One question: When is the Congress going to acknowledge that current fiscal trends are simply unsustainable? Last week's Financial Times reported the IMF now estimates U.S. losses on toxic assets will be $1.9 trillion over the next five years. The recently adopted Congressional budget resolution ignores these costs entirely in setting budget policy for this year. How expensive will the bank cleanup be? And will it -- costs be hidden from taxpayers?

There's widespread agreement that sustained recovery can't occur without an effective bank cleanup in place. Administration's put forward a financial-rescue plan. Many of its components are troubling. The special inspector general, Neil Barofsky, last week testified before this committee that many of the safeguards on accountability, on protecting the new public-private investment program against vulnerabilities and conflicts of interest, collusion, money laundering, so far have been ignored by Treasury. Will Treasury recognize these problems and move quickly to correct them?

There are -- a number of actions that the Fed has taken, frankly, has bewildered many of my constituents and left them wondering how the policies will affect their economic well-being. Small businesses in Texas report that many are having a tough time finding affordable credit because regulators are pressing banks to avoid risk, and in fact, creating a downward spiral. Has the pendulum swung too far in this direction?

We're looking at a number of actions. The downward debt deflation default spiral -- Federal Reserve has expanded its balance sheet by 127 percent, from $946 billion last September to over $2 trillion last week.

While this explosive growth does not pose an immediate inflationary danger, the Fed will need to begin contracting its balance sheet when the economy begins to recover. What is the Federal Reserve's exit strategy to wind down and submerge the credit facilities and reduce excess bank reserves to prevent higher inflation?

There are a number of questions to be asked and answered today. Look forward to visiting with the chairman. These are important times. Thank you.

REP. MALONEY: Thank you very much.

Dr. Ben Bernanke is the chairman and member of the Board of Governors of the Federal Reserve. Dr. Bernanke also serves as chairman of the Federal Open Market Committee, the system's principal monetary policy-making body. Before his appointment as chairman, Dr. Bernanke was chairman of the President Council of Economic Advisers from June in 2005 to January in 2006.

From 1994 to 1996 Dr. Bernanke was the Class of 1926 Professor of Economics and Public Affairs at Princeton University. He was the Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs, and chair of the Economics Department at the university from 1996 to 2002.

Dr. Bernanke had been a professor of economics and public affairs at Princeton since 1985. He has published many articles on a variety of economic issues, including monetary policy and macroeconomics, and he is the author of several books and two textbooks. He received a B.A. in economics in 1975 from Harvard University and a Ph.D. in economics in 1979 from MIT.

Thank you very much, and we recognize you for as much time as you may consume. Thank you.

MR. BERNANKE: Thank you. Thank you very much.

Chair Maloney, Vice Chairman Schumer, Ranking Members Brownback and Brady, and other members of the committee, I am pleased to be here today to offer my views on recent economic developments, the outlook for the economy and current conditions in financial markets.

The U.S. economy has contracted sharply since last autumn, with real gross domestic product having dropped at an annual rate of more than 6 percent in the fourth quarter of 2008 and the first quarter of this year.

Among the enormous costs of the downturn is the loss of some 5 million payroll jobs over the past 15 months. The most recent information on the labor market -- the number of new and continuing claims for unemployment insurance through late April -- suggests that we are likely to see further sizable job losses and increased unemployment in coming months.

However, the recent data also suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing. Consumer spending, which dropped sharply in the second half of last year, grew in the first quarter. In coming months, households' spending power will be boosted by the fiscal stimulus program, and we have seen some improvement in consumer sentiment.

Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market and the declines in equity and housing wealth that households have experienced over the past two years. In addition, credit conditions for consumers remain tight.

The housing market, which has been in decline for three years, has also shown some signs of bottoming. Sales of existing homes have been fairly stable since late last year, and sales of new homes have firmed a bit recently, though both remain at depressed levels. Although some of the boost to sales in the market for existing homes is likely coming from foreclosure-related transactions, the increased affordability of homes appears to be contributing more broadly to the steadying in the demand for housing.

In particular, the average interest rate on conforming 30-year fixed-rate mortgages has dropped almost one-and-three-quarter percentage points, since August, to about 4.8 percent.

With sales of new homes up a bit and starts of single-family homes little changed, from January through March, builders are seeing the backlog of unsold new homes decline, a precondition for any recovery in homebuilding.

In contrast to the somewhat better news in the household sector, the available indicators of business investment remain extremely weak. Spending for equipment and software fell, at an annual rate of about 30 percent, in both the fourth and first quarters. And the level of new orders remains below the level of shipments, suggesting further near-term softness in business equipment spending.

Recent business surveys have been a bit more positive. But surveyed firms are still reporting net declines in new orders and restrained capital spending plans.

Our recent survey of bank loan officers reported further weakening of demand for commercial and industrial loans. The survey also showed that the net fraction of banks that tightened their business lending policies stayed elevated, although it has come down in the past two surveys.

Conditions in the commercial real estate sector are poor. Vacancy rates for existing office, industrial and retail properties have been rising. Prices of these properties have been falling. And consequently the number of new projects in the pipeline has been shrinking.

Credit conditions in the commercial real estate sector are still severely strained, with no commercial mortgage-backed securities having been issued in almost a year.

To try to help restart the CMBS market, the Federal Reserve announced last Friday that recently issued CMBS will in June be eligible collateral for our Term Asset-Backed Securities Loan Facility or TALF.

An important influence on the near-term economic outlook is the extent to which businesses have been able to shed the unwanted inventories that they accumulated, as sales turned down sharply last year.

Some progress has been made. The Bureau of Economic Analysis estimates that an acceleration in inventory liquidation accounted for almost one-half of the reported decline in real GDP in the first quarter. As stocks move into better alignment with sales, a reduction in the pace of inventory liquidation should provide some support to production later this year.

The outlook for economic activity abroad is also an important consideration. The steep drop in U.S. exports that began last fall has been a significant drag on domestic production. And any improvement on that front would be helpful.

A few indicators suggest again quite tentatively that the decline in foreign economic activity may also be moderating. And as has been the case in the United States, investor sentiment and the functioning of financial markets abroad have improved somewhat.

As economic activity weakened, during the second half of 2008, and prices of energy and other commodities began to fall rapidly, inflationary pressures diminished appreciably. Weakness in demand and reduced cost pressures have continued to keep inflation low so far this year.

Although energy prices have recently risen some, the personal consumption expenditure price index for energy goods and services in March remained more than 20 percent below its level a year earlier. Food price inflation has also continued to slow, as the moderation in crop and livestock prices has been passing through to the retail level. Core PCE inflation, which excludes food and energy prices, dropped below an annual rate of 1 percent in the final quarter of 2008, when retailers and auto dealers marked down their prices significantly. In the first quarter of this year, core consumer price inflation moved back up, but to a still-low annual rate of 1.5 percent.

We continue to expect economic activity to bottom out, then to turn up later this year. Key elements of this forecast are our assessments that the housing market is beginning to stabilize and that the sharp inventory liquidation that has been in progress will slow over the next few quarters. Final demand should also be supported by fiscal and monetary stimulus. An important caveat is that our forecast assumes continuing gradual repair of the financial system. A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall. I will provide a brief update on financial markets in a moment.

Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes.

In this environment, we anticipate that inflation will remain low. Indeed, given the sizable margin of slack in resource utilization and diminished cost pressures from oil and other commodities, inflation is likely to move down some over the next year relative to its pace in 2008. However, inflation expectations, as measured by various household and business surveys, appear to have remained relatively stable, which should limit further declines in inflation.

As I noted, a sustained recovery in economic activity depends critically on restoring stability to the financial system. Conditions in a number of financial markets have improved in recent weeks, reflecting in part the somewhat more encouraging economic data. However, financial markets and financial institutions remain under considerable stress, and cumulative declines in asset prices, tight credit conditions, and high levels of risk aversion continue to weigh on the economy.

Among the markets that have recently begun to function a bit better are the markets for short-term funding, including the interbank markets and the commercial paper market. In particular, concerns about credit risk in those markets appear to have receded somewhat, there is more lending at longer maturities, and interest rates have declined. The modest improvement in funding conditions has contributed to diminished use of the Federal Reserve's liquidity facilities for financial institutions and of our commercial paper facility.

The volume of foreign central bank liquidity swaps has also declined as dollar funding conditions have eased.

The issuance of asset-backed securities, or ABS, backed by credit card, auto, and student loans, all picked up in March and April, and ABS funding rates have declined, perhaps reflecting the availability of the Federal Reserve's TALF facility as a market backstop. Some of the recent issuance made use of TALF lending, but lower rates and spreads have facilitated issuance outside the TALF as well.

Mortgage markets have responded to the Federal Reserve's purchases of agency debt and agency mortgage-backed securities, with mortgage rates having fallen sharply since last fall, as I noted earlier. The decline in mortgage rates has spurred a pickup in refinancing as well as providing some support for housing demand. However, the supply of mortgage credit is still relatively tight, and mortgage activity remains heavily dependent on the support of government programs or the government-sponsored enterprises.

The combination of a broad rally in equity prices and a sizable reduction in risk spreads in corporate debt markets reflects a somewhat more optimistic view of the corporate sector on the part of investors, and perhaps some decrease in risk aversion. Bond issuance by nonfinancial firms has been relatively strong recently, but still, spreads over Treasury rates paid by both investment-grade and speculative-grade corporate borrowers remain quite elevated. Investors seemed to adopt a more positive outlook on the condition of financial institutions after several large banks reported profits in the first quarter, but readings from the credit default swap market and other indicators show that substantial concerns about the banking industry remain.

As you know, the federal bank regulatory agencies began conducting the Supervisory Capital Assessment Program in late February. The program is a forward-looking exercise intended to help supervisors gauge the potential losses, revenues and reserve needs for the 19 largest bank holding companies in a scenario in which the economy declines more steeply than is generally anticipated. The simultaneous comprehensive assessment of the financial conditions of the 19 companies over a relatively short period of time required an extraordinary coordinated effort among the agencies.

The purpose of the exercise is to ensure that banks will have sufficient capital buffer to remain strongly capitalized and able to lend to creditworthy borrowers even if economic conditions are worse than expected. Following the announcement of the results, bank holding companies will be required to develop comprehensive capital plans for establishing the required buffers. They will then have six months to execute those plans, with the assurance that equity capital from the Treasury under the Capital Assistance Program will be available as needed.

I will conclude with just a few comments on Federal Reserve transparency.

The Federal Reserve remains committed to transparency and openness, and in particular to keeping the Congress and the public informed about its lending programs and balance sheet. As you may know, we have created a separate section of our website devoted to providing data, explanations and analyses bearing on these topics and related issues.

Recent postings include the annual financial statements of the 12 Federal Reserve banks, the Board of Governors, and the limited liability companies created in 2008 in response to risks to the financial system, as well as the most recent reports to the Congress on our emergency lending program.

Earlier this year I asked Vice Chairman Kohn to lead a review of our disclosure policies, with the goal of increasing the range of information that we make available to the public. The group has been making substantial progress, and I am pleased to say that we'll soon be adding to the website material that provides the information requested in the Dodd-Shelby Amendment to the recent budget resolution.

Specifically, we will be adding new tables that provide information on the number of borrowers under each program, and more information on the details on the credit extended, including measures of the concentration of credit among borrowers.

In addition, we will be providing monthly information on the collateral that is being taken under our various lending programs, including breakouts by type of collateral and by ratings categories. And we will be supplementing information provided on the valuation of collateral for the Maiden Lane facilities and the commercial paper credit facility.

Finally, we will be providing additional information on the extent of our contracting with private firms with respect to our lending programs, as well as on the terms and natures of such contracts. Over time, we expect to continue to expand the range of information on our website as our review of disclosure practices proceeds.

Thank you. I'd be pleased to respond to your questions.

REP. MALONEY: Thank you very much for your -- thank you very much for your testimony. And my basic question is, is there any good news? Can you elaborate more? You mentioned in some interviews that you were seeing green shoots for recovery in the economy. And has the recent report on real GDP for the first quarter of 2009 changed your views on the economy?

MR. BERNANKE: Chair Maloney, as you know, the numbers -- the headline numbers for GDP growth in the fourth and first quarter were very negative, both minus 6 percent at an annual rate. But I think a bit of good news was in the composition of growth in the first quarter. As I mentioned in my testimony, about half of the decline in GDP in the first quarter represented the liquidation of excess inventories, and as inventories are worked down, then firms will be able to increase their production to meet what looks to be some stabilization in final demand.

And so we are hopeful that the very sharp decline we saw beginning last fall through early this year will moderate considerably in the near term, and that we'll see positive growth by the end of the year.

REP. MALONEY: Can you explain why the results of the stress tests were delayed?

MR. BERNANKE: Yes. This was a very comprehensive exercise, unprecedented in its scale and scope. The three federal oversight agencies collaborated very closely, working through the entire portfolios, the reserving practices and the earnings of the 19 largest banks in the country.

So it was a very extensive and detailed exercise. After we completed our first set of data, we took the data back to the banks. And we gave them opportunity not to negotiate but to point out where there were misunderstandings, communication problems, data issues and so on, which we as an appropriate measure agreed to look at.

We have reviewed those data. We have looked at the numbers. We have looked at the assumptions. And we have now satisfied ourselves that the data we have are accurate reflections of the financial conditions of those banks.

REP. MALONEY: The IMF estimates that U.S. banks will require an additional capital of between 275 billion and 500 billion, depending on the leverage requirements from the regulators.

Do you agree with these IMF estimates? And there are several independent rating organizations, financial organizations, that have come up with large amounts, 500-700 billion.

Do you agree with these numbers?

MR. BERNANKE: Well, I'm not ready to predisclose the results of the test that will come out on Thursday afternoon. But I would point out that while banks have certainly sustained substantial losses, both the last few years and going forward, they have also taken significant writedowns. They have reserves. And there are substantial earning capacities. So there are a number of offsets that will help to make up those losses.

And finally of course, to the extent that there are banks that need capital, our hope is that many of them will be able to raise that capital, through either private equity offers or through conversions and exchanges of existing liabilities, to strengthen their capital bases. So I would say that number overestimates the call on the government going forward.

REP. MALONEY: And do you think the amount of capital will be available, from the private sector, to shore up these banks and to --

MR. BERNANKE: I've looked at many of the banks. And I believe that many of them will be able to meet their capital needs, without further government capital, through either issuance of new capital or through conversions and exchanges, or through sale of assets and other measures that would raise capital.

REP. MALONEY: Well, as a last result, the federal government would be an access to capital. We have roughly, I believe, 110 billion left from the 700-billion TARP program. Do you estimate that we might need more than what's remaining, in the TARP program, the 110 billion?

MR. BERNANKE: Well, I would leave that to the administration. I think they've just recently indicated that they don't think there's a near-term need.

REP. MALONEY: That would be terrific.

My time has expired.

SEN. BROWNBACK: Thank you, Chair.

And welcome.

I want to talk about a couple areas and ask you -- in the fields that we had mentioned. The administration is likely to need to borrow around $2 trillion this year, just for this year's operating. And I mentioned to you about a government debt bubble that we're looking at. I'm sure you have concerns about that. Do you -- are there signals that you're looking at and considering, as to whether or not this is occurring or is not occurring, on a government debt bubble?

MR. BERNANKE: Senator, it's -- U.S. government debt is bearing yields which are, I think, indicative of confidence. The relatively low yields that we see on 10-year and even 30-year debt suggests that investors in those securities, first of all, appreciate the liquidity and safety of those securities, and, secondly, that they are confident that the U.S. will have low inflation and fiscal stability in the long term.

Having said that, it's imperative on all of us, as the policymakers, particularly the Congress, which is responsible for fiscal policy, to make sure that we do achieve the necessary stabilization that will allow deficits to come down, that will allow us to deal with those issues. So there's confidence in the market that we'll deal with these problems, and we must fulfill that confidence and address those issues.

SEN. BROWNBACK: Well, maybe -- what sort of signals will you be looking for from the marketplace to start unwinding the Fed position that you're in, perhaps to guide us a little bit of what signals we should be looking for from the marketplace for us to start unwinding this debt position?

MR. BERNANKE: Certainly. Well, first, many of the programs, particularly the short-term lending programs that we have, have been priced in such a way that they're not particularly attractive when markets are closer to normal. And in fact, we've already seen that a number of our liquidity programs, like the term securities lending facility, commercial-paper facility and others, are just seeing reductions in demand from the private sector. And so those short-term facilities are shrinking on their own, and that's a good sign that demand for that short-term liquidity is either diminishing or is being replaced by private-sector liquidity.

Otherwise, the task for us is very similar to any recovery, which is to try to address, as best we can, where we think the economy's going over the next few quarters, and to try to achieve a balance in financial conditions that will be consistent with our mandate to achieve both price stability and maximum (employment/deployment ?).

So we'll have to continue to make our forecast do the best we can, and we will certainly be withdrawing liquidity and financial accommodation in an appropriate way to make sure that we both achieve recovery, that we don't snuff out recovery too early, but, on the other hand, that we don't have to deal with inflation in the longer term.

SEN. BROWNBACK: You mentioned on -- us being responsible to maintain the market confidence. Do you have a thought on considering tax increases at the present time by the Congress?

MR. BERNANKE: Well, in the near term, we have to worry about spending power, certainly.

In the longer term, I think it's very important that Congress make sure that the deficits are not excessively large. Different members of Congress will have different views. I think the main thing is that you be consistent. If you want to increase spending, then you have to be willing to accept the tax increases and the consequences that may have for growth and efficiency. If you want to have low taxes, then you have to be willing to accept and find program cuts that will match the two.

So, you know, I think the main thing is that people will understand they need to be consistent between their preferences on revenues and spending.

SEN. BROWNBACK: "Too big to fail" has been challenged by some Fed chairmen -- one in Kansas City and in other places. Do you think we need to amend that, or allow some of the big financial institutions to go through an orderly restructuring process?

MR. BERNANKE: Well, Senator, "too big to fail" has been sometimes called a policy or a doctrine. It's not a policy. It's a problem. It's a huge problem. It has arisen because the -- we do not have a good way -- we do not have adequate powers, legal powers, to safely wind down a large financial holding company or bank holding company with many divisions, many companies, subsidiaries, many complex interactions with the financial markets.

There's a very strong contrast between the powers we have for, say, a small bank, where the FDIC can come in and wind it down in an orderly way, versus the lack of powers we have for dealing with non- banks, including holding companies, insurance companies like AIG, or investment banks like Lehman Brothers. So for about a year, I have been asking Congress to come up with a resolution regime that would allow us to address the safe and sound unwinding of a troubled large financial institution.

Under current law, to allow one of these companies to go into a disorderly bankruptcy is enormously disruptive and would damage not only the company itself, of course, but also the whole financial system and the economy. So I'm very much in favor of taking strong steps to end "too big to fail," and I've given a number of speeches on that subject; but certainly one prerequisite for doing that is having a resolution regime that will allow us, in a way analogous to what the FDIC does, to come in and safely wind down a large company.

SEN. BROWNBACK: Thank you very much.

Thank you, Chair.

REP. MALONEY: Thank you very much. And I just want to add that the Financial Services Committee is working on legislation such as the chairman described for legal powers to wind down large holding companies.

Mr. Cummings is recognized for five minutes.

REP. ELIJAH CUMMINGS (D-MD): Thank you very much, Madame Chair. And thank you, Mr. Bernanke, for your testimony and for your service.

If the Federal Reserve or the Department of the Treasury, or both, are directing firms to acquire other firms, or to take other specific actions, how can we avoid concluding that the firms are, at least to some degree, nationalized? What was the involvement of the Federal Reserve with Bank of America's acquisition of Merrill Lynch? And did you or, to your knowledge, did Henry Paulson push the Bank of America CEO, Ken Lewis, not to discuss the details of the merger?

MR. BERNANKE: Let me address your question about Bank of America and Merrill Lynch, because it's very important.

So I received a letter from Chairman Kucinich and Representative Towns of the House Oversight and Government Reform Committee asking exactly the question you asked, and I replied to them in a letter last week, where I stated that absolutely not -- that I absolutely did not in any way ask Mr. Lewis to obscure any disclosures or to fail to report information that he should be reporting.

In that letter, I offered to that committee, and I have subsequently offered both to the House Financial Services Committee and the Senate Banking Committee, full access to all papers, documents, notes related to those meetings and to the Bank of America/Merrill Lynch transaction, that will support my unconditional assertion that in no way did I ever ask Mr. Lewis to fail to disclose necessary information.

I would add, finally, on that subject that the meetings that -- where we met -- the meeting where we met with Mr. Lewis was attended by quite a few supervisory and legal staff, including the general counsel of the Federal Reserve, and he was, of course, very alert to make sure that everything that happened in the meeting met all necessary legal requirements.

REP. CUMMINGS: Well, as a member of the Oversight and Government Reform Committee, we'll follow up on that. And I appreciate your answer.

And then can you get to the first part of my question?

MR. BERNANKE: The first part of the question had to do with nationalization.


MR. BERNANKE: Yes. So it is the case that the government obviously has some ownership of a number of financial institutions. I don't know -- nationalization means different things to different people. I think our view is that we don't want substantial government ownership to be a long-term situation. And what we want to do is to make the firms take actions that are necessary to move towards a situation where they no longer rely on government support.

Now, we have a number of tools to do that. First, supervisory tools. The supervisors have considerable latitude to take steps to require changes in management, to require sales of assets, restructuring of businesses, or other steps as needed to raise capital and to strengthen their business plans. And likewise the Treasury, through its ownership rights, can also establish policies and make requirements.

So we have plenty of tools. We wouldn't have, really, substantially greater tools under a different legal regime, I think. The issue here, though, is to find ways for exit, to find ways to get firms out of a situation where they're dependent on government capital. And we are hopeful that that could be done over the next few years.

REP. CUMMINGS: The New York Times editorial page ran two very interesting columns yesterday. First Paul Krugman, one of my favorites, argued that defensive actions by the families and businesses, like increased household savings and wage cuts to prevent job losses, put downward pressure on consumer spending and keep the economy depressed.

Only continued drastic stimulus actions, he argued, can break this cycle.

Second, Allan Meltzer wrote that the Federal Reserve had sacrificed its independence by subordinating concerns over inflation and engaging in fiscal policy normally left to the legislative branch and becoming, quote, "the monetary arm of the Treasury," unquote. Do you agree with Mr. Krugman? And if so, what measures are most important moving forward?

And as far as Dr. Meltzer is concerned, Dr. Meltzer clearly evaluates the Federal Reserve from a historical perspective. How do you respond to his claim about the Fed's independence? Is there historical precedent for the current level of outstanding Federal Reserve credit?

MR. BERNANKE: Well, Congressman Cummings, I hope you appreciate the irony of, on the same page, two distinguished economists, one worried about inflation, the other one worried about deflation.

REP. CUMMINGS: I found that very interesting.

MR. BERNANKE: I think that suggests the difficulty of the situation we're in, to try to navigate between the Scylla and Charybdis of these two risks.

We are very committed to price stability. We have recently provided projections which suggest how we plan to approach medium-term price stability and given information about what we think inflation ought to be in the medium term. And we firmly believe that we will be able, after stimulating the economy, to help it recover from this very difficult financial and economic situation we're in, come to a situation where we are -- emerge with sustainable growth and price stability. And we are spending enormous amounts of time planning that, thinking about our exit strategy and so on.

I would also take great exception to the notion that the Fed has sacrificed its independence. I would make two comments on that. The first is that the critical element of Fed independence is monetary policy. And monetary policy has remained completely independent of all other government institutions. We have not sought advice or input on any aspect of monetary policy. That remains completely independent, and it will remain independent.

On other aspects, I think it is important, during a period of crisis, for the major parts of the government to work together. I think the American people would like to see the Federal Reserve and the Treasury working together, and in past financial crises there has been a good bit of cooperation.

At the same time, the Fed and the Treasury recently issued a joint statement clarifying that there are distinct and different roles for the Fed and the Treasury, and in particular the taking of credit risk, the making of credit decisions are the Treasury's province. And importantly, we talked also about the need for a resolution regime once again, so that the Fed would not get stuck into these situations like we are with AIG, which was a really undesirable outcome, I'd -- for the first to admit, but was necessary because we had no well- structured resolution regime.

So we have tried to put out a clear statement of where we think the line is, and we continue to maintain our independence and will -- particularly in the area of monetary policy, where it's particularly important.

REP. CUMMINGS: Thank you very much.

REP. MALONEY: Mr. Brady is recognized for five minutes.

REP. BRADY: Great.

Thank you, Mr. Chairman.

A lot of private capital is sitting on the sidelines. Neither administration has yet successfully removed toxic assets from bank balance sheets. Given that, you know, how do you expect these stress- test banks to recapitalize? How much do you think is a fair ratio between private and -- capital and government sources?

MR. BERNANKE: Well, our approach will be to ask the banks to go first to private sources. And as I said before, I think that many of them will be able either to raise new equity capital to convert existing forms of capital into common equity, or to sell assets or take other measures that will allow them to recapitalize themselves without any -- or without substantial Treasury capital. So that will be our first priority.

And it will -- remains to be seen how receptive the markets will be and what they'll be able to accomplish. But I do think that there will be significant opportunities for capital-raising outside the government's programs.

REP. BRADY: Do you think it will be a majority from private sources?

MR. BERNANKE: I think it'll be significant. I -- it's hard for me really to say at this point, because it depends on the market's reception of what the banks propose to do.

REP. BRADY: Removing those toxic assets is real key to the economy. New proposal, public-private investment program: Last week the special inspector general for TARP and those programs identified a number of vulnerabilities and recommended both transparency, as you do, in the current bailout dollars, but also putting in place ahead of time some basic safeguards to deal with collusion, conflict of interest, money laundering -- just basic -- again, to build consumer confidence and also investor confidence in those. Are you aware of the spector (sic) -- inspector general's recommendations? And do you support them?

MR. BERNANKE: Yes. I am quite aware, and I think they're very constructive. The place that they're most relevant to the Federal Reserve is in the TALF program that I mentioned, because it uses TARP capital, and the special inspector general for TARP had a number of suggestions. We have worked with his office.

We believe that that program -- nothing is perfect. There's always a possibility of some problem. But we believe that we have taken substantial steps both to protect the taxpayer from credit loss and to protect the system from any kind of abuse or illegal activity. We'll continue to work with the special inspector general and make sure that we are -- in all of our programs -- protecting the taxpayer.

REP. BRADY: Treasury has not yet adopted many of those recommendations. Would you urge them to move quickly on that?

MR. BERNANKE: I would leave it to them to discuss what their concerns are. I don't really know what the issues are that they're raising. But obviously we're all interested in making sure that the appropriate safeguards are in place.

REP. BRADY: With the cost of the deficits running unprecedented -- high in this country, there's some concern about what additional costs would come about because of the whole financial-rescue efforts. Last week, International Monetary Fund estimates that those costs to U.S. taxpayers over the next five years will be $1.9 trillion.

Do you see that estimate as too high or too low?

MR. BERNANKE: I don't know what that includes. But if it means to include financial --

REP. BRADY: It included all from the Fed actions to the loan guarantees to the non-standard capitalization.

MR. BERNANKE: So from the Fed, we don't expect to lose any money. From the Treasury, there's some risk in their investments. But those numbers are -- I have not idea what they refer to.


What is, as we move forward -- what do you see as the Federal Reserve's exit strategy, to wind down its emergency credit facilities and reduce the excess bank reserves, to prevent higher inflation?

MR. BERNANKE: Congressman, we have spent a lot of time on this. I just want to assure you that we made all our meetings into two-day meetings. And we spent the whole first day reviewing our balance sheet, our programs, and thinking very heavily and extensively about exit strategy.

We have a plan in place. We are trying to strengthen and improve it. Some of the components are, first, that many of the short-term programs will either wind down naturally or can be wound down. That's about up to a trillion dollars of balance sheet that can be wound down through that process.

Secondly, very importantly, Congress gave us, last year, the ability to pay interest on reserves. By paying interest on excess reserves, banks will hold their reserves with the Fed. That will allow us to raise interest rates, even if excess reserves remain very substantial in the system. So that tool itself will be a very powerful tool.

Third, we're looking at what's called reverse repurchase agreements, which essentially would allow us to finance, on a short- term basis, some of our asset holdings with non-bank investors, such as securities dealers or others. That would drain excess reserves from the system and also have the same effect.

Fourth, Treasury deposits at the Fed drain reserves, excess reserves, from the system, as they have done, last year for example. And finally if necessary, we can always sell some of our assets into the market.

So we have a number of options. The exact timing and sequencing remains to be seen. We're looking at that. We hope to release more information about that. But we do believe that we have all the tools that we need, to exit, to help this economy get back to a sustainable growth path but also to ensure that we come out of this with price stability.

REP. BRADY: All right.

Thank you, Chair.

REP. MALONEY: Thank you.

And the chair recognizes the vice chair for five minutes.

SENATOR CHARLES SCHUMER (D-NY): Thank you, Madame Chairperson. I want to thank you for the outstanding way that you have conducted not only this hearing but your tenures thus far, as chairman of the JEC. And I look forward to working together on many more issues.

Today, I want to focus on issues that effect -- on one of the issues that affects the economic well-being of American families, and an issue that I worry has been overlooked in our focus understandably on preserving the health of global credit markets and large financial institutions.

I'm talking about consumer credit. I'm very concerned we haven't done enough to stop some of the same predatory behaviors that got us into this mess in the first place. American families should not suddenly find their economic well-being threatened by capricious and indefensible decisions of their credit card companies.

Originally, as you know, Mr. Chairman, even before you were chairman, I used to think disclosure was enough. Now even the Fed agrees that disclosure is no longer enough, because the credit card companies always find ways around it, and engage in awful practices. I've heard from an increasing number of my constituents that interest rates on their accounts have doubled or tripled overnight, without any misconduct on their part. Now is not the time for credit card companies to arbitrarily turn American families into a cash spigot.

So two weeks ago, Senator Dodd and I wrote to you to urge you to use your emergency authority to put the Federal Reserve's new credit card rules into place immediately. In a letter that you sent me yesterday -- right here -- you declined to do so. I believe that the Federal Reserve's failure to protect consumers from these outrageous rate increases is unconscionable.

And Mr. Chairman, while I have applauded you for some of the actions you've taken in this area, I have to tell you that the decision does a disservice to you and the Federal Reserve. It's been one of the weak -- consumer protection, in my judgment, long before you were there, has been a weak point in the Federal Reserve. You've acted swiftly to use your emergency powers to steady teetering financial institutions; it is fair to ask why you won't -- the same powers to aid American families who are at just as great a risk.

So I have three -- well, two questions, but just one other comment. What about the family that has a $10,000 balance -- that's the average balance -- and has had its rate go from 7 to 23 (percent)? That's -- we've heard of that. Every one of us has heard of that kind of jump. That would mean that their monthly payment would go from $58 a month to $192 a month, not even accounting for compounding the interest over the course of the year. That's -- that's just outrageous, from a family that would have a rough time affording it. So I'd ask you how you answer that family.

Two other questions, and then I'll finish and let you conclude. By all accounts, arbitrary credit rate increases are on the rise. In other words, the companies are doing more of this now. And the feeling is they're doing more of it because they know your rules will go into effect for a year and a half. So that doesn't seem right. And isn't it the same problem at the heart of our economic crisis -- the regulatory systems putting financial institutions over consumers -- that's allowing this to happen for the next year and a half?

And finally, and maybe most importantly, the original purpose of the Fed's 18-month in -- delay in effective new date of the credit- card rules was to give the banks time to, quote, "redesign their systems, make changes to their operations."

This strikes me as nonsense. If the banks needed to redesign their systems to make more profit, wouldn't take them a year and a half. You know that and I know that. They're very capable of moving up their timetables when they need to. And it just -- I've asked a few people, why would it take a year and a half? And nobody can figure that out, why.

So how do the benefits of prolonging the suffering of consumers outweigh the costs of forcing these banks to immediately improve predatory credit-card practices?

Those are my three questions, and I say that as somebody who respects you and admires you but is very frustrated about this issue and was disappointed in your answer to Senator Dodd and me.

MR. BERNANKE: Well, Senator, I'm frustrated as well. And I don't think our positions are as far apart as you seem to think.

First of all, we did pass, of course, very extensive changes in disclosures and regulation, which included among them a virtual ban on the issue we're talking about, which is retroactive interest-rate increases on existing balances.

We can question the exact amount of time we left to -- for them to restructure their business plans and so on, but that was the intention, and I note that Congress is also putting delays into their proposed credit programs.

SEN. SCHUMER: Not as long. The --

MR. BERNANKE: I'm very concerned -- let me just --

SEN. SCHUMER: Excuse me, but the congressional delays are not close to as long as yours.

MR. BERNANKE: I -- I'm -- let me come back to that. I'm very concerned, as you are, about the reports that you're hearing about increases in rates on -- retroactive ones, particularly when they're not associated with some credit event, some action taken by the consumer. And we are, I assure you, looking carefully into that to try to understand how extensive it is and how important it is.

Now, we have here a quandary, though, which is the following, which is that we could move up the date on which this prohibition is effective. My question that I think we need to think through is would that be good for consumers or not. If we moved it up, the obvious response of the companies would be, first, to raise rates preemptively so that it would happen faster, and secondly -- because I do believe they do need some time to think through how to restructure their business model so that they can put out credit to riskier consumers in a way that they find profitable -- I think that their short-term response would be just to cut a lot of people off.

So from the perspective of consumers, my -- you know, my real quandary is, how can we best help consumers in a way that doesn't just create, you know, worse problems in the market? And that's the issue that I -- that I'm still grappling with.

REP. MALONEY: (Off mike.)

SEN. SCHUMER: Okay. My time is up, but I think you could figure out a better way than the one you've chosen.

REP. MALONEY: Thank you.

Okay. Representative Campbell.

REP. JOHN CAMPBELL (R-CA): Thank you, Madame Chairwoman and Mr. Chairman.

If you determine in the stress test that will be released later this week that a bank needs additional capital, and if its plan that you describe in your opening statement is either determined not to be workable or in that six-month period there a bank is unable to execute their plan, unable to raise the capital they'd thought from the sources they thought, what then?

MR. BERNANKE: Then they would have to avail themselves of the Treasury's backstop, which -- of which the terms and conditions have been put on the Treasury's website, a so-called mandatory convertible preferred type of equity, which is initially preferred equity but can be converted to common as needed to meet common ratios.

REP. CAMPBELL: So they would be required to get that additional capital through that venue if there were not an -- if they were unable to raise it from --

MR. BERNANKE: Yes. This is a supervisory exercise, and supervisors have the right to require that banks meet certain capital standards. If the banks cannot meet those standards in the private market, which is our strong preference, then they have to take government capital to meet those standards.

REP. CAMPBELL: Okay. You're doing a stress test on the 19 largest banks. What about bank 20 through 50 or 20 through 60 or whatever?

MR. BERNANKE: It's not our intention to do stress tests on additional banks. Those banks, however, will have access, as I understand it -- and of course I have to defer to the Treasury in all details -- but my understanding is that those banks will have access to the -- all the same capital programs that are available to the top 19.

REP. CAMPBELL: So it won't necessarily be a case where bank 22 would fail under a scenario where bank 18 would not because it would have access to --

MR. BERNANKE: No, every bank will -- well, let me -- I don't know all the details of the Treasury's plan, and of course there are issues related to the smallest banks, which are not publicly traded and so on, which we already saw with the capital purchase program, the first round of capital. But the intention of the Treasury, as I understand it, is to make capital available to all banks.

REP. CAMPBELL: Okay. I want to switch to talking about the program under which the Federal Reserve is buying Treasury bills now, which I believe $300 billion -- I don't know how much you've bought so far or what's going on. But I wanted to ask you about that program, which I think is akin to a company buying back its own stock.

You've talked about the interest rates and the longer term. Is that your plan? Is that your objective, is to try and keep the longer-term Treasury bill interest rates down? How would you get out of this program? And I don't think you -- it's been done since the '60s, I believe. So can you talk a little bit about that?

MR. BERNANKE: No, the Federal Reserve and other central banks regularly buy and sell government debt in open market operations, and we've been doing that for many years. We purchased -- we announced a plan to purchase $300 billion in order to try to provide broader liquidity and try to help private credit markets. That's our objective. And we are -- we think it's been beneficial, because we've seen improvements in mortgage markets and corporate bond markets and so on. We are not trying to target a particular interest rate. Again, our objective is to provide more liquidity to the system and to help private credit markets. And I think that it has had some benefit.

REP. CAMPBELL: Okay. It's not something, though, you've done to this kind of degree for a long time, correct?

MR. BERNANKE: That's true. That's true. But again, we routinely transact in Treasuries; that's our primary asset that we buy and sell. And we've added to that of course GSE securities as well.

REP. CAMPBELL: Is this something you would expect to continue at a larger volume, as was mentioned by some of my colleagues here, as the government sells more and more debt as the deficits increase?

MR. BERNANKE: Well, again, our objectives are nothing to do with the government's debt per se. Our objectives have to do with strengthening private credit markets. And those decisions will have to be made by the FOMC as we look at the state of the economy and try to adjudge the efficacy of the very steps that we've taken.

REP. CAMPBELL: Okay. Quick question about AIG, in my remaining moments. I believe a few months ago there was about $1.6 trillion of assets left in the financial products division, which were trying to be wound down. Are you aware of or can you report on the process of winding that down?

MR. BERNANKE: I don't have precise numbers for you, but we understand that it's imperative to wind that financial products division down as quickly as possible, and we've looked into a number of alternatives, including using outside consultants and so on, to wind that down as quickly as we can.

REP. CAMPBELL: Is AIG going to need more capital from the government because of losses on that portfolio?

MR. BERNANKE: I do not know. They have not yet -- as far as I understand, they have not yet taken up the $30 billion backstop line that the U.S. Treasury provided in March.

REP. CAMPBELL: Okay, and the final question: In September, October, we -- many of us, I believe you and I, believed that we were near -- I'll use the term collapse -- of the financial system. Are -- have we dodged that bullet? Are we past that? Or is there a scenario under which that fear and panic could return?

MR. BERNANKE: Well, one can never predict anything with certainty, but I think that we're in far better shape today than we were in September and October. And while I know there are many critics of the TARP -- and I understand the criticisms, and there are many issues -- I do believe that the availability of that capital helped us dodge what would have been a truly cataclysmic collapse of the global banking system, which would have had terrifically bad effects on the U.S. economy. So it was very important at that time. I think we've made a lot of progress. The financial markets are still fragile; we don't want to take anything for granted. But we have, I think, come a long way since last fall.

REP. CAMPBELL: Thank you, Mr. Chairman.

REP. MALONEY: (Off mike.)

REP. LORETTA SANCHEZ (D-CA): Thank you, Madame Chair, and thank you, Chairman Bernanke, for being before us again today.

My questions are sort of intertwined. I -- you know, I was one of those that didn't vote for the TARP, for all probably the reasons that we've seen come to bear. But I did vote for the stimulus package, and a lot of us took a deep breath as we voted $800 billion, hopefully to get out into the markets, so that people would keep jobs and maybe we'd create some jobs.

And then we passed an omnibus bill for the current budget, which was an increase over the previous spending. And President Obama's new budget that's come to the Congress of course has been criticized for being such a large number. Part of it of course was that we put the true war spending into it, an increase.

But the Congress sort has been looked at like we're spending a lot of money, but when I turn around and look at what the Treasury and what the Fed has been doing with policy -- and there's now, I think, 28 programs between the two of you, many of them under your jurisdiction -- I count almost about $3 trillion worth of money sort of hanging out there, being moved around, et cetera, some of that, I think, sitting in banks as reserves, maybe, against a commercial real estate problem that I want to ask you about too.

But a lot of these banks have been sitting on money. And that criticism has been that money isn't getting out and the small and medium-size businesses are having that credit crunch. But then if that money comes flooding out, we have the problem of possible inflation shooting up.

So there's a lot of money out there, much of it put out, and I understand why, by you, in trying to manage that. I guess my question back to what was alluded to, by two or three of the members who have already asked, how do we -- how do we manage that? How do we rein that in?

How do we make sure that the banks don't all of a sudden open up the lending spout, which we've been all decrying to happen, and yet at the same time see this inflationary impact?

I think it's important for Americans to try to understand this large chunk of money or monetary policy actually that is creating possibly even more money than the Congress has put out.

MR. BERNANKE: So thank you for the question. I'd first like to draw a very strong distinction between the fiscal spending and the Fed's lending programs.

Our lending programs are just that. They're lending programs. And they are, with the exception of some of the things involved, with AIG and that kind of thing, which is less than 5 percent of our balance sheet, the whole bulk of all those programs are very safe. They will be repaid with interest.

We are making money for the Treasury.

(Cross talk.)

REP. SANCHEZ: I'm not worried about that repayment per se. I'm more worried about --

MR. BERNANKE: There's a difference between spending money and then lending it out and getting it back with interest.

(Cross talk.)

REP. SANCHEZ: But if it all floods at the same time --

MR. BERNANKE: Exactly. So that's the question Mr. Campbell asked me about, I believe, which is that, how do we make sure that the monetary base contracts, at the appropriate time, to make sure that there's no inflation, after the recovery begins? And as I indicated, we have a whole set of tools that we will use.

Those include winding down the short-term lending programs, which happens automatically to some extent and which we can do anytime we choose. None of them is longer than three months in duration.

Secondly we do have this very important power of being able to pay interest on reserves. If we want to raise the federal funds rate to, say, 2 percent, just to make up an example, and we pay 2 percent on reserves to banks, why would they lend it out at less than 2 percent? So that would allow us basically to raise interest rates to 2 percent.

Beyond that, we have a whole bunch of other tools that we can use. And I just want to assure the American people that we are very focused, like a laser beam, if I may, on this issue of the exit and of making sure that we have price stability, in the medium term, and that we are working very hard to make sure that while, on the one hand, it's very important for us to provide a lot of support for this economy, right now, because it needs support, but at the same time, you know, we understand the necessity of winding this down in an orderly way, at the appropriate moment, so that we will not have an inflation problem on the other side.

It was also mentioned -- The New York Times, where you had one article about inflation and one about deflation. There's risks on both sides, and we're trying to manage this as -- as well as we can.

REP. SANCHEZ: The commercial real estate market, have you been watching that? And do we still have -- do we see the impact as what we saw on residential real estate? And I'll end with that.

Thank you, Madame Chair.

MR. BERNANKE: Well, I don't think the commercial real estate market got out of -- as out of line, in terms of prices and so on, as the housing market did, but it is currently weakening. As I mentioned in my testimony, rents are down, vacancies are up, and a lot of commercial real estate owners are having difficulty refinancing their debt or obtaining new financing for new projects.

In particular, one of the main sources of commercial real estate financing is the CMBS, commercial mortgage-baked securities market, where lenders can securitize those loans into the -- into the secondary market. So among those programs that you mentioned, the Fed is trying to get the financial system working again. And we have included just now commercial mortgage-backed securities in our so- called TALF program, which we hope will get investors interested, back into this market, and get it going again. I think that's very important to address the fact that there's a large amount of CRE refinancing coming due in the next year or two, and we need to have that market functioning so that that can happen smoothly.

So there is a problem there, both from the banks' perspective and from the economy's perspective, and we are doing what we can to try to address it.

REP. MALONEY: Thank you, Mr. Chairman.

Mr. Paul?

REP. RON PAUL (R-TX): Thank you, Madame Chair.

And welcome, Chairman Bernanke. I have a couple of questions, but first I want to mention that I find it awfully frustrating at times when we always talk about inflation and we only talk about the prices: We have prices under control and there's no inflation. We have to realize that the monetary base, the liquidity was doubled in a few short months. To me, there's a lot of inflation out there. It's already inflated. We're in the midst of inflation. Because the prices haven't gone up doesn't mean we don't have the distortion.

And it was that system that gave us the financial bubble: the artificially low interest rates, the mal-investment and all the mistakes made. And now we're trying to correct all that by doing the very, very same thing. So I think some day we're going to have to address this somewhat differently because I'm not very optimistically -- optimistic that we can solve our problems with more spending and more borrowing and more inflation in order to solve those -- those problems.

But you answered this question several times, and I want to bring it up again. And that has to do -- when will some of this liquidity be drained? And I don't think the answers you've given are very specific, and I don't expect that I will get a more specific answer, but I'm going to try.

What if we have a situation where prices are -- which is, you know, not the best measure of inflation -- but let's say the Consumer Price Index and the PPI's going up 8 to 10 percent, and there's no economic growth.

Where are you then? Because that's not impossible. It's happened. It's happened in our history, happens throughout the world. It's a common thing. It's -- puts you behind -- between the rock and a hard place.

If you drain, interest rates go up, the economy further crashes. If you don't, you have the explosion. Can you give me an idea what you precisely would do if you faced a situation where prices were going up 10 percent with no economic growth?

MR. BERNANKE: Well, I think that's an unlikely scenario. But we certainly would have to take steps to ensure price stability, because if inflation gets out of control, we know that has very adverse effects on the economy, both in the medium and long term. And so we would obviously have to address that.

REP. PAUL: Which means you would have to raise interest rates --

MR. BERNANKE: And it's exactly -- I'm sorry, sir -- exactly the same problem that is always faced by monetary policy, which is, you know, in a recovery, when the economy's starting to grow but has not yet gotten very far, perhaps, and unemployment is still above where you'd like it to be, you know, you have to take away the punch bowl, as someone once said, in order to avoid the inflation risk.

REP. PAUL: See, I see this as the real problem, because we practice economic planning through manipulation of money and credit. Socialism always fails because they don't have a pricing structure. Interventionism and inflationism fails because we don't have a free- market pricing system of money, the interest rates. Therefore, it fails. It comes to a conclusion. And inevitably, it leads to a more socialized economy.

Just witness what we're talking about: taking over companies, taking over insurance companies, taking over banks. This is -- this has been the prediction of the free-market economists, and yet we continue down this path of socializing our entire economy.

But I do want to address one other subject, and it has to do with transparency. And you said you have made a commitment to transparency and openness, which is very good. And there's a lot of us that want that, and I have dealt with that and have legislation, 1207, dealing with that.

But in a real sense -- I know what you're doing here, but, you know, the code really protects you from telling us some of the things we'd like to know. For instance, in seventy -- 1978, when the GAO was given the authority to audit the Fed, it put the exclusions in there: "but you can't ask these questions." Precisely -- if I wanted to know about all your agreements and discussions with foreign central banks, with foreign governments, with international financial organizations, you have no obligation, and you haven't volunteered to do this.

So is there a way that you would -- since you're moving in this direction -- move and consider supporting a position where Congress has the right to know these very, very crucial, vital issues dealing with their money? I mean, everything you do deals with their -- value of their money. Would you ever be open to a repeal of some of those provisions?

MR. BERNANKE: Yes, I would. Now, let me be specific. We have many programs where we lend money, we take collateral, we have -- and we obviously are repaid.

We have -- I just want to assure you, first of all, that we have very substantial oversight and controls. We have -- besides internal divisions, which monitor these things, we have an independent IG.

And we have an external auditing company, a private company, which provides audits every year and has given us a clean bill of health on all our financial controls, all level of Sarbanes-Oxley requirements.

That being said, if Congress needs more information, about the operations that we are doing, exactly how we manage our collateral, how we manage our lending, those sorts of things, I think, we can talk to you about providing more information about that and if necessary working with the GAO.

Where I would be very careful, where I'd like to be just very clear, there's been some discussion of the GAO, quote, "auditing" monetary policy. I don't know what that means.

But I certainly would resist any attempt to dictate, to the Federal Reserve, how to make monetary policy. It's the independence of monetary policy which is crucial to the maintenance of price stability and economic growth in this country. And that would not be acceptable.

But if it's an issue of making sure that we're appropriately managing our systems and doing what we say we're doing, in terms of our lending, I think, you know, we want to be open. We want you to understand that we're taking every precaution to protect the taxpayer.

REP. PAUL: Of course, the policy is the only thing that really counts.

REP. MALONEY: (Off mike.)

REPRESENTATIVE VIC SNYDER (D-AR): Thank you, Madame Chair.

Welcome, Mr. Chairman. When Senator Schumer brought up his issues about credit cards, there's probably not too many advantages of the mail stacking up at home when we're up here this week, for a week at a time. But a couple weeks ago, I went home. And I had one of these announcements, from my bank, that my credit-card percentage was going up.

But delightfully it also arrived a day or two later, was from the same bank, because of my high credit score, an opportunity to get a credit card, which I thought was kind of an indication of where these banks are at. But it doesn't mean anything, except that it enabled me to go down, with righteous indignation, to my bank.

Mr. Chairman, in your written statement, you say the following. Quote, "The steep drop in U.S. exports that began last fall has been a significant drag on domestic production. And any improvement on that front would be helpful."

I know it's not in your lane of activity. But some of us, particularly from agricultural states, just do not understand why the new administration has not changed the restrictions on agricultural sales financing to Cuba.

I mean, it is now legal to sell agricultural products to Cuba. If there was a modernization of the financing transaction rules, which the Bush administration put in, it would be worth several hundred billions -- millions a year to American exporters, which I think is your goal. It would be helpful right now and a good signal on trade.

I wanted to ask you. You had mentioned several times, in the discussion, about institutions that are too big to fail. They're only too big to fail if they can't be, in their failure, orderly -- in an orderly fashion taken care of. And you referred to your suggestions for a resolution regime.

Have you put out something written? I was with a group of folks that had met with you some weeks ago. And we thought you were going to forward to us some written proposal.

Is there a written proposal that you have --

MR. BERNANKE: There's proposed legislation, yes.

REP. SNYDER: There's proposed legislation.

That you have put out, from you?

Is there something you've put out? Because the chairwoman has made mention of it.

MR. BERNANKE: Yeah, yes. Yes. And the Treasury also has put out -- proposal --

REP. SNYDER: Specific --

MR. BERNANKE: -- very similar.

REP. SNYDER: And I'm -- I suspect you saw this. As I heard your -- was looking through last night your impressive bio, I saw the April 27th Business Week that says, "What good are economists anyway?" And then the answer came out -- it was brought home in this morning's Washington Post, in which it talks about the Fed's $1.17 trillion in what they referred to as "unprecedented intervention."

Continuing the discussion you had with Representative Paul, if you were sitting on this side looking at you -- because none of us up here understand your business. I mean -- so that's the answer to "what good are economists anyway." I can't talk about economists in general, but we have put tremendous value on you and on your skills. Should we be concerned about this dramatic increase that has occurred as part of what you refer to as helping us avoid a, quote, "truly cataclysmic collapse"? Should we be concerned that one person has that kind of power?

MR. BERNANKE: Well, you certainly should take a strong interest in it, and I certainly don't blame you for that.

And I've made every effort -- I -- just recently, I have made several -- and after this -- after this testimony I'm going to go for lunch to meet with a group of senators to go through our balance sheet and our programs and try to answer all their questions. And so I -- we owe it to you to make sure you understand what we're doing and why we're doing it and what the results are.

But our sense is that this is a crucial -- this is an unusual, extraordinary time. We've used powers we haven't invoked since the 1930s. We've done that because we've thought it was necessary to help protect the U.S. economy in a time of extraordinary financial crisis. We've done so in a responsible way, using powers that the Congress gave us, in the pursuit of the congressional mandate for full employment and price stability.

We are happy -- I'm happy to meet with you individually and go through with you every program and talk to you about what the purposes are. So, you know, I fully understand your interest, and you should be interested. And I'm more than happy to make myself available to help you understand what we're doing and, if you have concerns, to try to address them.

REP. SNYDER: I went on your website this morning and just looked over one of the descriptions of one of the agreements you had with a financial institution, and you -- it seems like you apparently have an executive-pay provision with all or most of these deals. Is that correct? At least the one that I looked at, it did. It said it had to be approved by -- apparently by you.

My question is, as you've heard these debates over the last several months about executive pay -- and I have voted against several of these in the House -- do you have any concerns that as our populist spirit takes over in terms of sending a signal we don't like some of these bonuses, that in fact we may be driving some of these institutions from participating in a process which -- in your words, we're trying to avoid a truly cataclysmic collapse?

MR. BERNANKE: I don't think the American people object to high pay per se. I think they object to high pay which is not tied to performance. So that's the question. And I think that's the concern people have about some of the pay that's being -- has been given out on Wall Street recently, obviously, given the many failures that we've seen there.

My perspective and the perspective of, I think, the financial regulatory community towards executive compensation is that it should be structured in such a way, first, that it ties closely remuneration to actual measurable performance, number one; and, secondly, that it's not structured in a way that induces unnecessary or excessive risk- taking.

So we are working in the Federal Reserve on supervisory guidance or other types of -- of rules that will ask -- or tell banks to structure their compensation, not just at the very top level, but down much further, in a way that is consistent with safety and soundness; which means that payments, bonuses and so on should be tied to performance and should not induce excessive risk. I think that's the important thing.

Now, of course, we are required by Congress to follow through on certain executive compensation restrictions for 13.3 recipients and for TARP recipients, and of course we obey those rules. But my philosophy on this is that we should think about the structure of compensation and make sure that it's achieving its appropriate objective.

REP. SNYDER: All right. Thank you, Mr. Chairman.

Thank you, Madame Chair.

REP. MALONEY: Congressman Burgess?

REP. MICHAEL BURGESS (R-TX): Thank you, Madame Chair.

Thank you, Chairman, for being here with us this morning. In your testimony -- and I apologize for being late -- but as the economic activity weakened during the second half of 2008, prices of energy and other commodities began to fall rapidly, inflationary pressures diminished appreciably. If indeed the green shoot theory is correct and we are beginning to emerge into a period of recovery, what do you see is the effect of rising prices during that recovery?

MR. BERNANKE: Well, if our --

REP. BURGESS: What do we do when prices begin to rise?

MR. BERNANKE: If our forecast is correct, then we'll start to see some economic growth, but it'll be slow at first and there'll still be a lot of unemployment and slack in the economy. We don't expect, therefore, commodity prices to rise very much, and we don't expect to see much inflation. So our forecast -- despite the green shoot theory, our forecast is still for inflation to remain quite contained for the next couple of years.

REP. BURGESS: Well, you referenced yesterday's New York Times, and I wasn't going to bring it up, but since you did --

MR. BERNANKE: Someone on the panel did.

REP. BURGESS: Let's -- let's look at a couple of the things that were talked about. I mean, you made the point, I think, to Representative Snyder -- or maybe it was Representative Paul -- that independence -- that it's critical to have the independence of the monetary policy. But a question was raised in The New York Times yesterday -- not doubting the knowledge or technical ability of the Federal Reserve, the writer doubted the commitment of the administration and the autonomy of the Federal Reserve, thinking that the Fed has sacrificed its independence to become the monetary arm of the Treasury.

And further quoting from the article by Alan Meltzer, independent central banks don't do what this Fed has done; they leave such fiscal actions to the legislative branch -- that would be us. They leave such fiscal actions to the legislative branch. By that same token -- well, let me move on.

The central bank was made independent expressly so it could refuse to finance deficits. Is there a political consensus that the much larger Obama deficits will not pressure the Fed to expand reserves to buy Treasury bonds? And how would you respond to Alan's writing?

MR. BERNANKE: Well, I will recap a few points I made earlier, which is that I think that close cooperation of the authorities -- the Fed and the Treasury in particular -- in a situation of extreme financial crisis and risk to the system is necessary, and that the American people would want to see their government working collaboratively to try to solve those problems. And so we've done that, both with the previous administration and with this administration, so there's no political aspect to it.

That being said, we understand there are important lines of distinction between what the Fed does and what the Treasury does, and the Treasury understands that as well. And we issued recently a joint statement which tried to delineate those lines. And in particular, one of the key principles is that nothing that we do to support the financial markets or work with the Treasury must in any way compromise the independence of monetary policy, which is the critical element and which is what is going to allow us to make sure we have price stability and will allow us not to monetize deficits but only to take policy actions needed to achieve sustainable employment and price stability, which is our objective.

REP. BURGESS: Well, the -- and I think Representative Snyder brought up the point from the article this morning, and then that separation of fiscal policy and monetary policy -- when he says, "Who needs economists?" well, we do, because we don't understand that distinction. But it does seem as if we are getting to a point where the Fed is monetizing the debt.

Let me just move on to another aspect. And it came out earlier, and I think you just reaffirmed that there was activity last fall that, in your opinion, was necessary. Interest of full disclosure, I voted against that both times. I also voted against the stimulus package in February. I had a lot of people back home ask me -- they didn't think it was right what we did in October, but if you want to stipulate that that was necessary because of an unprecedented occurrence in our credit markets, why was it not necessary to give that time to work before then adding a like amount of money to that in the stimulus package? Is there -- was there a disconnect on the part of Congress with reality, or were we just spending money to spend money at that point?

MR. BERNANKE: Well, those two packages have very different purposes. I think to achieve the successful recovery, we have to do two things. One is to get the economy going again, and the fiscal policy -- I mean, I'm not going to get into the details of it. I'm sure people can differ on various aspects of it. But the objective of the fiscal policy was to get economic activity and jobs going again.

The purpose of the stabilization act last fall that you mentioned was to -- specifically was to stabilize the financial system, which is the other critical element of recovery. So they had very different purposes, different structures. Again, the program from last fall is made up of asset purchases and loans, and I think a very substantial part of that will be recovered, perhaps even all of it. So they're very different programs with different objectives.

REP. MALONEY: The gentleman's time has expired.

Congressman Hinchey is recognized for five minutes.


And thank you, Chairman Bernanke, for your statement today and the very firm answers to the questions that you've received.

I would like to just emphasize something that Senator Schumer said, about the interest rates on credit cards, and what a big problem that is causing and increasing, for low-and-middle-income working Americans. The credit card interest rates are going up for a lot of people, in the range of 30 percent and higher, in some cases, even 41 percent.

But I would like to emphasize in that context that we have introduced legislation here, myself and others, in the House and in the Senate, which would put a cap on interest rates, on credit cards. And I think that's something that should be done. And if you would like to comment on that, I would appreciate it.

The main problem that we're facing, I think, in this economy, is the downturn in the gross domestic product and how that GDP has been declining. Just in the recent information that we have, the GDP has gone down 6.1 percent, in the first quarter of this year, 6.3 percent in the last three months of last year.

And one of the reasons for that is because the GDP is driven by low-and-middle-income working Americans; more than 70 percent of it driven by working Americans, and whether they spend and how they spend. What we've seen is employee wages in the private sector increase only 0.2 percent in the first quarter of this year. And that's a record low, a record low. We've never seen anything like that before.

At the same time, household debt as a percentage of income, household debt as a percentage of income, is the highest it's been since the 1930s. This is just another way in which the economic conditions we're facing now are so similar to the conditions of that Depression, back then, in the 1930s.

One of the things that we did, with the stimulus bill, in addition to putting money back into this economy, to generate jobs and to address the needs that have been so neglected, for decades, one of the other things that we did, in that so-called stimulus bill, that investment program, was to provide tax relief for 95 percent of Americans, by a $400 rebate in the context of that stimulus bill and also an adjustment in the alternative minimum tax.

I wonder if you have any thoughts about what either the Federal Reserve or both the Federal Reserve could be doing and what we should be doing here, what we should be doing, in addition to this so-called stimulus bill that we've passed, which is now having significantly positive effects. And those positive effects will increase over time.

What else is it that we should be doing here, in this Congress, to generate this income, this economy rather?

MR. BERNANKE: Well, there are a lot of things you might consider. But personally I would think it would be very important, for the Congress, to focus on getting the financial system fixed. And there are two elements to that.

One is, as I've already mentioned, this resolution regime, that we can find a way to address too-big-to-fail, to deal with companies that are, on the one hand, in danger of failing, but are so large and interconnected that their failure would endanger the entire financial system and the economy.

And the second, closely related to that, which is part of the deal, I think, is to look again at financial regulation to make sure that our financial system is better regulated and we can avoid problems like this in the future.

On the fiscal policy, you have taken some strong actions. I'm eager to see -- you know, they -- they're just beginning to kick in. I'm eager to see what effects they'll -- what effects they'll have.

REP. HINCHEY: Okay. Well, let me then ask you just one other question. One of the things that we're facing is the significance of the TARP bill, which was very questionable when it was presented here -- by many of us, at least -- presented by Secretary Paulson, back when it came through.

Now we have SIGTARP, which is overseeing the way in which that TARP bill is being handled. And that is very -- I think very absolutely necessary, because of the huge amount of money that is being pushed out there, instead of some of that money being put into the hands of working Americans, stimulating their economy, which would drive the gross domestic product up more effectively.

Nevertheless, this TARP program is continuing. So I would wonder if you could answer one or more of these questions: Requirements that we would require the Treasury to account for all taxpayer funds that are used in the TARP program; to require recipients of funds under the capital assistance program to report how they use those funds; and require strong oversight, accountability and conflict-of-interest provisions for the public-private investment program.

MR. BERNANKE: Well, first, on the Treasury having to account for its use of funds, of course they should do that. They do provide detailed information on all the loans and investments that they make on their website, as far as I understand it. If there are things that -- other things they should do -- again, they should be providing as much information as possible about how they're using the money to the American people.

I think in principle it's good to ask banks to account for how they use the money, but there are some problems in practice, which, of course, is that money is fungible. If I may use an analogy, if a taxpayer called you up and said, I don't want my money being used for, say, defense -- and how would you say that -- you know, all the money goes into one big pot. It's kind of hard to exactly explain to that person where their money is really going, in some sense. The purpose of the TARP money is to create capital which is then supporting other activities -- lending and other activities.

On oversight and conflict of interest, I could hardly disagree with you on that. Clearly we want to make sure there's no fraud or other problems related to any of these programs. I would mention that we've had a lot -- we, the Federal Reserve, have had a lot of contact with SIGTARP over the TALF, which uses TARP capital, and we are working hard to make sure that they're comfortable with all of the safeguards that we're taking to avoid any such conflicts of interest or fraud.

REP. HINCHEY: Thank you.

REP. MALONEY: Thank you. The gentleman's time has expired.

Senator Casey.

SEN. ROBERT CASEY (D-PA): Madame Chair, thank you very much for this hearing. And Chairman Bernanke, thank you for your testimony, your presence here and your public service.

I wanted to focus on two areas. One is on jobs and the job picture, the unemployment rate, and the data that we see a lot of and try to, as best we can, make sense of it, and then secondly a question about the perception that the American people have as to where our economy is now and where we'll -- where it will go.

First, with regard to the unemployment numbers, we all -- we've heard the number of 5 million -- more than 5 million jobs lost.

The rate, as you know, nationally was 8 (percent) -- in February it was 8.1 (percent); March, 8.5 (percent); one projection in April at 8.9 (percent). We'll see if that is borne out by the data.

In Pennsylvania we've had -- fortunately, unlike our past over many decades, where we would run ahead of the national rate, we've been behind, thank goodness. But it's still far too high. We've gone from a rate of 7-1/2 (percent) in February to 7.8 (percent) in March, and we don't know what April will bring. But the March number in Pennsylvania translates into just a couple hundred jobs under 500,000 unemployed. So even in a state where the rate seems relatively low, it's a huge number of people unemployed.

There have been a number of projections about the rate for '09 and '10. In fact, even for 2010 the blue chip number, I guess, is 9.4 (percent) -- the projection, anyway, for 2010 -- CBO at 9 (percent).

I guess all of that as a predicate for where do you think the rate's going to go, or do you have a sense of where it could go in 2009 and '10? And maybe the simplest way to ask is it -- will it go to 10 in 2010? And what's your sense of that as --

MR. BERNANKE: Well, as I mentioned in my testimony, the loss of jobs and the deterioration of the labor market is one of the most distressing aspects of this whole episode. We've already seen about 5 million jobs lost.

The forecast we have is for the economy, in terms of growth, to begin to turn up later this year, but initially not to grow at the rate of potential, which means that unemployment and resource slack will continue to rise into 2010.

We think that the unemployment rate will probably peak early in 2010 and then come down relatively slowly after that. Currently we don't think it's going to get to 10 percent. We're somewhere in the 9s, but clearly that's way too high.

It's -- the issue of reemployment is complicated by the fact that part of what's happening, besides having a recession, of course, is that our economy is adjusting to the changes in the sectoral composition. We -- we're going to have fewer investment bankers and fewer construction workers, probably, in the future, because those sectors got very large, and those people will find work in new areas. So there's going to be some reallocation of labor among different sectors, which is going to affect the rate of reemployment as well.

I would just like to comment that several people have expressed concern about inflation. It's very hard for serious inflation to take off when you have this kind of slack in the economy. And Mr. Hinchey mentioned wages. Wages are growing even more slowly, which is also not suggestive of inflation, certainly. So it's these slack conditions projected for a period which has allowed us -- or I think required us -- to take the aggressive approach that we have to try to get this economy moving again.

But I agree with you, it's a serious problem. And even when the economy begins to grow, it'll take a while for unemployment to come back to an acceptable level.

SEN. CASEY: And I guess that assessment of -- a lot of what you testified to this morning is consistent with what I've heard in Pennsylvania, sometimes directly from people who are employers, but also people who often interact with employers and get a sense of it.

For example, on page 4, where you say, in the middle of the second full paragraph, we expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly -- in other words, not a spike, not a turning point that will lead to a dramatic change -- that seems very consistent. And also, the caveat that you have on page 4 of assuming continual -- continuing gradual repair of the financial system.

I guess all of that -- and I know I'm just about out of time, but in terms of a backdrop for this question: The American people, whether they're stressed immediately with the loss of a job or a house, or whether they're observing but nervous and concerned about the future, they've been hit with a torrent, or an avalanche, of data. And I guess, in light of all that data and sometimes the confusion of it for all of us, and in light of this argument that so many of us make, which is, yes, we see signs of recovery -- maybe just flickers here and there -- but the job numbers or the unemployment rate will lag -- what do you tell people?

In other words, do you say don't get too focused on the unemployment rate, that that won't tell the whole picture? Or what do you say to people who are looking for signs of hope but don't want to be overly optimistic, when the signs of hope are juxtaposed with high unemployment numbers? I mean, just a -- I know it's a tough question to answer in terms of advice or guidance for people.

MR. BERNANKE: I have two very different comments. One has to do with the nature of our labor market, which is that our labor market is extraordinarily dynamic. So when you see a thousand jobs lost in an area, it could well be the result of 4,000 being created and 5,000 being terminated. So even in a period like this, there are many, many, many new jobs being created, new industries, new businesses and so on. So there are opportunities for people. And particularly during periods like this, you sometimes see remarkable innovations in business models and technology and so on. So it's not the case that there are no opportunities. There are opportunities.

The second thing I would say is that Americans are very good at being adaptable.

And we have, in particular, for example, a very diverse educational system that includes not just K-12 and college but includes junior community -- junior colleges, community colleges, technical schools, adult education, apprenticeship programs, all kinds of things. And so there are lots of opportunities for people to retool as necessary, if they think their job isn't coming back in that particular area.

So that's -- building that human capital is something that people should do and can do, knowing that if they have the skills they will find opportunities.

SEN. CASEY: I'm out of time. Thank you very much.

REP. MALONEY: The chairman has indicated he has to leave at 12, so we have time for a few additional questions, for another round.

First of all, I want to publicly acknowledge and thank you for your leadership in coming forward with rules to crack down on abusive, unfair, deceptive, anti-competitive practices by the credit-card industry. This was an area I had been working on in years. I had a bill that cracked down on the most abusive practices -- retroactive interest-rate increases -- and, going forward, giving notice so consumers could get out of the credit card and go to another card, putting competition in the system.

It was not until you came out with similar rules that greatly reflected the bill that I had authored that the momentum gathered in Congress to pass it last year. And the rule change you put in place in December gave us the additional momentum to pass a very strong bill last week.

Originally I had an enforcement 30 days after passage. It went to the committee, and the committee voted to keep with the July 2010 date of the Federal Reserve. That can be changed in the Senate. We did accept an amendment of mine to put into effect immediately, or within 30 days after the rules are put into effect, the notice that -- a 45-day notice so that consumers can at least move to another card, get out of an abusive system where they are jacking unfairly the interest rates, increases.

But I truly believe that you played a very brave and important role in helping this adjustment in our economy. It was a very, very difficult bill to pass, and your leadership was -- is greatly appreciated by me and, I'm sure, the consumers in our country.

I want to talk to you about -- one of the options for banks is to convert the TARP shares into common equity, boosting government ownership in those companies. And how much influence will the government seek in the day-to-day operations of such decisions as credit allocation, management, the governance, board seats, mergers, acquisitions, asset sales? Do you see government being dominant or passive in this transformation?

MR. BERNANKE: Well, first, it's obviously not our intention or desire to have long-term government ownership of banks. It's not desirable. It's not efficient. It's not good for the economy.

And so the top priority will be to get banks on a path where they can pay back and get out of the situation where they're partially owned by the government. And so whatever actions are needed to achieve that, the supervisors, with the support of the Treasury, will work with the banks to raise capital, to sell assets, do whatever they need to do.

So that's the top priority. In that respect, it's not a hands-off policy, because we want to make sure they're taking the steps necessary to emerge from this situation.

In terms of day-to-day management, I think, the Treasury may well want to set broad policies, for example, on lobbying or dividend payments or things of that sort, which is appropriate. But it's not really a good idea for the government to try to manage day-to-day business decisions. And for that purpose, you know, we have to have management there that we think is effective and let them make those decisions.

So again the bottom line is, yes, we have to be active, in the sense of making sure the banks are working towards strengthening themselves and have appropriate broad policies. But we certainly don't want to be involved in day-to-day operations.

REP. MALONEY: How concerned should common stockholders by that the stress test results will require fresh capital infusions for some of the banks? It's been a preliminary report that 10 banks will need cash infusions.

What impact is that going to have on stockholders? How concerned should they be?

MR. BERNANKE: Well, I can't preview the results, which will come out on Thursday afternoon. Our hope is that this program will, on the one hand, provide a lot of information, to the markets, that will restore confidence in the banks.

That's a very important part of this whole process, letting people see what is on the banks' balance sheets, and that that will be part of the healing process that will make these banks able to be more profitable and more effective in the future. So I'm hopeful that in the medium term, at least, that both investors and borrowers will benefit from this.

REP. MALONEY: Well, the transparency definitely builds more confidence. And with confidence comes more capital.

What additional steps do you see the federal government taking? For example, if the IMF numbers are higher than the TARP money that we have and the access to capital, do you see any other initiative to raise government money, if it is so needed?

What other steps do you see if any?


REP. MALONEY: Let me say, you have definitely not been boring. During this crisis, you've been incredibly innovative, coming out with many other ideas of how to approach challenges.

So what's next, if we need it, the help?

MR. BERNANKE: I look forward to a long period of boredom. (Laughter.)

REP. MALONEY: I think the country would like a little boredom too.

MR. BERNANKE: Yes, we all would.

On the bank situation, I think, it should be very clear that what the assessment is trying to achieve is to make sure that banks have not just minimal capital but more than minimal capital; that they are strongly capitalized and that they are strongly capitalized, even if the economy gets worse than we currently think it will.

So our hope and expectation is that this will provide enough capital for the banks to be healthy and to provide the important support, to the economy, they need to provide.

So I don't have, at this moment, any future plans I can share with you or that I know.

REP. MALONEY: My time has expired.

Ranking Minority Member Senator Brownback.

SEN. BROWNBACK: Thanks, Chairman.

I get from my banks all the time that the regulators are on them way too much with the capital that they have -- and they -- I'm talking here about -- these are local banks, regional banks, really, throughout the state. They really feel like that they're under the gun and that it is harming the overall economy, what's taking place, particularly if they're involved in any sort of real-estate investment, whether it's home loans or commercial properties -- that they are being hammered. And they believe it's unfairly so, and they believe it's also very harmful on the economy, what's taking place.

I know you've heard this from some other members, but I want to really drive this point, because what I've seen taking place in these downturns before is that the regulators -- maybe they get overly blamed for it, but it certainly seems like they have a big impact on when the recovery happens by what they will allow on credit standards and by what the banks believe they will allow on credit standards.

And I think they're harming the length or the viability of the recovery right now, from what I'm hearing across the state, from both bankers and what I'm hearing from anybody associated with any real- estate business. I don't know if you have a response to that, but I would really hope you watch that very carefully, because I think it's going to hurt us from recovering strong.

MR. BERNANKE: Senator, I do have a response, which is that there's always this tension between making sure the banks are making sound -- safe and sound loans, because we don't want to have them lose money, versus making sure that credit is sufficient.

We -- just want to call your attention to the -- the regulators put out a joint statement in November called "Lending to creditworthy borrowers," which had a number of components, but the thrust was that it's very important for examiners, when they're in the bank, to -- on the one hand, they have to make sure that loans are safe and sound and are appropriately underwritten and so on. But on the other hand, it's good for banks to make loans to creditworthy borrowers, to maintain their customer relationships and so on. And excessive conservatism by the examiners can be destructive, as you comment.

So we issued that statement, and we have -- at least in the Federal Reserve -- we have made efforts through training programs and examination manuals and so on to try to communicate to our examiners in the field that we really need them to take that more balanced approach.

Now, I hear from bankers exactly what you're saying, so I'm sure we're not always successful, although in some cases maybe they're -- you know, maybe they're underestimating the risk of some of the things they want to do. But it clearly is an issue, and we are very much attentive to it.

SEN. BROWNBACK: They're -- it's been particularly harmful on commercial real estate, and that's the very weak part that you were noting in the economy now anyway. And I just -- I don't know if everybody didn't quite get the memo across the country or what the case is.

Another question that I get from a number of people is, how do we get the private capital back out into the market and working?

And it just seems like it's really been scared and it's on the sidelines. So that you're putting a lot of money into the system, but there's not as much velocity that needs to take place with the money.

Do you see things that need to be done there? Or do you have questions about what it's going to take to get the private capital back working into the marketplace?

MR. BERNANKE: Well, we've -- we and the Treasury and others have taken steps to try to get these markets going again, and I think we're seeing some fruits now. As I talked about in my -- in my testimony, we've seen some issuance of asset-backed securities, which was not there for a long time. We're seeing a pretty healthy corporate bond market. We are expecting that with our banking assessment program that we'll see some equity coming into the banking sector. So clearly, we're not normal yet, but we are seeing some improvement in terms of money coming off of the sideline.

SEN. BROWNBACK: One thing I get asked by a number of people is concern about foreign purchases of our debt and that we're very dependent upon that, particularly from the Chinese. Is that something that you're concerned about, about the level of U.S. government debt being purchased by foreign borrowers, particularly by the Chinese, and whether or not they will back off from purchasing of our foreign debt at some time here in the near future?

MR. BERNANKE: Well, I don't think there's any prospect of any big shift in portfolio preferences of foreign investors right now. The U.S. debt is very liquid, very safe, and there's a big demand for it, frankly. In fact, during the crisis there was a lot of purchases of debt by foreigners, because they thought that was the safest asset around.

I think the -- I do think there are two issues. One is that the acquisition of U.S. debt by foreigners does reflect our trade deficit, our current account deficit, which I have argued is part of the reason for this whole crisis, because all of the money flowing in at relatively low interest rates stimulated a lot of lending which -- some of which didn't turn out to work out so well. So that's part of the problem.

And then, of course, we have issues related to the fiscal outlook, where we need to make sure that we keep the confidence of not just foreign investors but domestic investors as well, by providing a fiscal play-in for stabilizing our debt level going forward.

So I think we'll be fine, but we do need to address both the current account and the fiscal deficits as part of our overall macro policies.

SEN. BROWNBACK: Thank you.

REP. MALONEY: The gentleman's time has expired.

The chair recognizes herself for 30 seconds. Following up on the ranking member's question, what would happen if some of our foreign partners failed to buy our debt, as some have threatened? What would happen to our economy if we were not able to sell that debt?

MR. BERNANKE: Well, it would -- it would cause interest rates to go up, for example. So it would have effects on our economy. But again, I don't foresee this as being a likely near-term situation, because the demand for our debt remains strong, so long as people have confidence in the policies of the U.S. government. And that's -- that's the key issue.

REP. MALONEY: The chair recognizes Mr. Cummings for five minutes.

REP. CUMMINGS: Mr. Bernanke, Chairman, I've listened to you, every syllable that you've said here, very carefully. And I think about all of my constituents, many of whom have lost their savings -- which they're never going to get back, by the way -- their homes, their health care, their jobs. And I'm wondering, what can you say to them? Because what's happening -- I want to follow up on some of the things that Senator Casey said. People are feeling like everybody's running to the rescue of Wall Street, with a fire engine and hoses and making sure that the fire's put out, but they see themselves being consumed by the fire and people saying, well, wait a minute, we'll take care of Wall Street and we'll get to you later on.

And we, I think, fully understand that there are certain things that have to be done so that we -- we see the connection between making sure Wall Street is safe and sound, but at the same time, those folks are looking at you right now saying -- I mean, they're probably almost on the edge of their seats saying, "Tell me something so that I can continue to have some hope."

And I'm just -- I mean, what do you have to say to them?

MR. BERNANKE: Well, an analogy I've used before, which your fire metaphor suggested, is, suppose you have a neighbor who smokes in bed in the house next door and sets fire to his house. Well, you could punish him by not calling the Fire Department, I suppose, but if your house is next door, you're going to catch fire too, so you're better off calling the fire department, putting out the fire, and then later on fixing the fire code, making sure it doesn't happen again.

That's what's happening with Wall Street. If Wall Street burns, it's going to -- we've already seen the effect it has on the economy.

REP. CUMMINGS: Yeah. Well, then you're going right where I want you to go.


REP. CUMMINGS: In other words --

MR. BERNANKE: Uh-oh. (Laughter.)

REP. CUMMINGS: No. No. In other words, the people want -- I mean, many of them want the fire put out, but they're saying, "Hey, we're on fire too; what about us?" You follow what I'm saying?


REP. CUMMINGS: It's not that they -- that's why I said we all understand you've got to deal with Wall Street; but when it came to the issue like with what Mr. Schumer mentioned, the whole credit card issue, and the chairwoman mentioned, they're looking at these things and saying, "Well, Mr. Chairman Bernanke, we see you racing over there, but hey, what about us?"

MR. BERNANKE: Well, on credit cards, you know, I think we could have a legitimate discussion about the right tactics. I raised some issues about the problems it might cause if we move that interest rate rule up to the near term.

REP. CUMMINGS: But I'm talking about in general, can we do more for them?

MR. BERNANKE: But in general, in general, as you know -- and Chair Maloney was just kind enough to mention it -- we've taken very strong actions on credit cards. We've eliminated a lot of the worst practices, and we hope to make a much better credit card market going forward. We've taken similar actions on mortgages, as well. So consumer protection is critically important. We are committed to it.

It makes for better markets. It's part -- problems in consumer protection are part of the reason we're in this mess in the first place, like in the subprime market, for example. And going forward, we need to pay a lot of attention to that. So I'm a hundred percent with you on that.

REP. CUMMINGS: One of the things that you said which I thoroughly agree with is that there are some instances where jobs are being eliminated, but jobs are being created. And that -- there's a company in my district called WellDoc that I visited just about two weeks ago, basically that -- which has become very innovative by using cell phones to help people control their blood-pressure medication regimen. This -- I mean, they are booming with contractual opportunities.

And I'm wondering, is there anything that you see that the Obama administration might be able to do, or we may be able to do, to encourage innovation? Because the president has often talked about innovation and how that would lead to more jobs, but it sounds like that's one of the things that we almost have to do. Because like you said, we're losing jobs in some areas that will probably never come back -- some of them.

So -- and is -- are you satisfied with all the things that the president is doing -- and I think he's doing his very, very best -- but I mean, are you satisfied that he's using all the tools at his -- that he might have available? And are -- do you suggest anything else?

MR. BERNANKE: Well, I mean, the -- there are a number of ways to approach this, some of which are addressed. Education is obviously critical. We want to train more students with science and math capability. That's obviously very important. There are reviews and thinking about the patent laws and those sorts of things that make those more effective.

One issue that comes up -- and I know it's -- is not -- very popular one, but I'll raise it anyway -- which is that I think our immigration laws discriminate pretty heavily against highly talented scientists and engineers who want to come to this country and be part of our technological establishment. I think if you allow more people with high skills, high technical skills, to come here, you'd keep companies here, you'd have more innovation here and you'd have more growth here. So I think that's -- although I know that's controversial, I think that's something to think about.

An area which has been hurt somewhat by the financial crisis is venture capital. That's important. That's still operating, but I hope, as the financial sector recovers, we'll see more venture-capital money available for new startups that support technology. So there are a lot of different things that Congress and the administration can do, and I know the president has addressed the -- certainly some of these issues.

REP. CUMMINGS: Thank you very much.

REP. MALONEY: Mr. Brady, Congressman Brady.

REP. BRADY: Thank you, Madame Chairman. Thank you for holding this hearing.

You note in your testimony the impact of decreased export sales on the U.S. economy. There is a -- I think a growing knowledge that it's no longer enough just to buy American; we have to sell American products and services throughout the world, and that is playing an increasing -- important part of our economy.

Some of our U.S. companies can access those markets from here. Many find, to be competitive and to meet the consumer demand, they have to engage in other countries. When they do, they discover that the U.S. is one of a very few nations that have a worldwide taxing system versus a territorial local taxing system. And so we've put in place over the years a number of elements to try to keep businesses competitive -- for example, allowing them to deduct the foreign taxes that they pay in that country, or not tax them until they repatriate, bring back those dollars or dividends here to the United States.

Yesterday the president unveiled a international tax reform package that severely limits those deductions on double taxation and would tax immediately much of that income. It is under the claim of closing corporate loopholes and tax evasion, all of which we support, but I believe there are significant unintended consequences to that type of effort.

There is a distinction between tax evasion and tax competitiveness. I don't want you to weigh in on tax policy; I've learned you're not going to anyway. But there are some, I think, who want to rush this legislation through. And given the embarrassment of the AIG -- of bonus legislation and other examples where Congress has rushed to a judgment, given the complexity of the international tax code, given the competitiveness issues, is it important for Congress to thoroughly examine all of these international tax proposals to make sure that we thoroughly understand what the impact could be both on jobs here at home and our ability to compete overseas?

MR. BERNANKE: Well, Congressman, it's hard to disagree that any complex bill should receive thorough consideration. I trust -- tax law is very complex, certainly, and I hope that the appropriate committees will look at this very carefully.

REP. BRADY: Do you see our international -- the way we tax internationally on the global system -- do we see that -- do you see that as a challenge as we compete internationally?

MR. BERNANKE: As a general rule, I think we need to think about international competitiveness as we look at our corporate tax policies. But I don't have any comment on the specific proposals from yesterday. I have -- as you say, I don't want to comment on tax policy anyway, and I really haven't had a chance to review it in any case.

REP. BRADY: Well, I'm not asking you to. I just -- I'm trying to get your advice on how Congress ought to look at a very complicated system, one that probably rivals our financial system in its complexity, but has huge impacts on our jobs here at home.

Thank you, Mr. Chairman. Thank you, Madame Chairman.

MR. BERNANKE: Certainly.

REP. MALONEY: Thank you.

And Congressman Snyder, five minutes.

REP. VIC SNYDER (D-AR): Thank you, Madame Chair.

And Mr. Chairman, thank you for staying close to the noon hour here. I appreciate your comments, by the way, that you said earlier in response to a question about the fungibility of money. I think that just because a special inspector general makes a recommendation doesn't necessarily mean it's the best way to go about ensuring the success of some of these institutions.

I would think we would want all their products to be doing well, not just the ones that they would say specifically to put TARP funds into. And that's, I think, the bigger issue. This money is fungible.

I wanted to ask -- so much of your activity has been with an eye to, of course, the international markets. There was some apprehension, perhaps not as great now, that protectionism may rear its head as we're going through this. What's your view on what you're seeing or hearing from around the world?

MR. BERNANKE: Well, I'm heartened by the international commitment to avoid protectionism. It was a big element of the G-20 meetings in London for example, and in the G-7 meetings and G-20 meetings we just had in Washington.

So it's very, very important to avoid protectionism. It's important, if possible, to make continued progress on the World Trade Organization talks.

But it's an -- you know, it's going to be a concern, because people are going to be looking for scapegoats, and sometimes imports are part of that. So I think it is very important for all of us.

We learn from history that, you know, if we start to block imports, others will do the same, and we'll just all be poorer as a result. And so maintaining a free and flexible trade system, I think, is very important.

REP. SNYDER: You have talked about the need for us to repair our financial system regulation -- regulatory system. You've -- you're always very precise in your words, as anyone in your job would be. But you referred to -- you called for the gradual repair. Why do you use the word -- "gradual repair" of the financial system?

MR. BERNANKE: Well, that was just a -- that's referring to the healing taking place in markets. And that was just referring to our expectation that there won't be an overnight recovery; that it's going to take time for markets to return to normal, for new instruments, you know -- we want to see, perhaps, that there will be restructuring of securitization instruments and so on, banks to rebuild their capital, investors to regain confidence and so on.

So we expect it to take some time. We hope to see continued progress. If it's faster, that's great, but we expect it to be gradual.

REP. SNYDER: So your expectation is there would not be some grand golden tablets coming from on high that says, "This is the regulatory system for the future; let's all adopt it"? It will be more improvements -- legislation here, regulation there, more legislation as months and years go by?

MR. BERNANKE: My use of the word "repair" was referring to the conditions in markets, not so much to regulation per se.

REP. SNYDER: All right.

MR. BERNANKE: But I do think that good new regulation will be helpful, but it's so complex, and there's so many issues to be decided, I don't expect, you know, that'll happen in the next few months. I'm sure it's going to take a while for the Congress to come to a satisfactory agreement on this.

REP. SNYDER: You -- in response to another question earlier, you talked about your independence and who you get advice from or don't seek advice from. There is no legal obstruction, is there, from you seeking advice from anyone that you want to.

I mean, I would assume that you can pick up the paper and read federal reports and hear what Secretary Geithner is thinking and hear what, you know, financial ministers around the world are thinking. There's no restrictions on who you could pick up the phone and call and say, "What do you think about such and such?"

MR. BERNANKE: Well, I continually talk to people in Washington and around the world about how they see the economy and, you know, what they -- what their concerns are, and obviously we want to learn as much as possible. But I want to be very clear that, you know, that we make the decision based on our own assessment, our own information --


MR. BERNANKE: -- and without recourse or concern about political considerations.

REP. SNYDER: Thank you, Mr. Chairman. Thank you, Madame Chair.

REP. MALONEY: And now, Congressman Burgess.

REP. MICHAEL BURGESS (R-TX): And thank you, Chairman, for staying with us.

Just one follow-up from a hearing we had a couple of weeks ago. Thomas Hoenig, the president of the Federal Reserve, came in and testified and raised some important questions regarding banks that are too big to fail, and he highlighted the fact that some of these institutions that are too big to fail are in fact now blocking our path to recovery. And yet we continue to try to pump funds in to try to turn them around. And in fact, at that hearing we discussed the need to allow the failure to occur to remove the blockage that's caused by these institutions.

And we're going to have the results of the stress test revealed at some point -- presume this week.

You know, and just the stress tests themselves have the potential to adversely affect the banks involved, and we all recognize that and recognize why you've been so careful with the release of that information. But providing an additional six months' time to recapitalize stressed institutions seems to ignore the points raised by the president of the Kansas Federal Reserve, President Hoenig.

And potentially we're just moving this problem further, further down the road. And what if six months is not enough time for them to recapitalize? Do we then just postpone having to deal with the problem of having these banks that are -- need to fail still being propped up?

MR. BERNANKE: Well, again, the first recourse that they will have over the six months is private-sector capital, and that's going to be an interesting test to see what they can do, with the government capital as a backstop.

I don't disagree at all with President Hoenig's basic premise, which is that "too big to fail" is a big problem, and that companies that fail should be allowed to go bankrupt. I agree with that in principle.

The problem is that -- as I've tried to explain, is that our current laws do now allow a safe and sound unwinding of one of these companies, which is something we've learned to our great regret and chagrin in this episode. And I don't think we have the tools now to do it today or tomorrow, but I do think that, going forward, there's a number of steps we can take, not just a resolution regime, but other things we can do to strengthen our system, so that if a firm does fail, the system as a whole will still remain resilient.

So I agree a hundred percent; we've got to solve this problem. I don't think we -- that means we can start letting firms fail tomorrow, but we've got to take a number of important steps so that in the future, whenever we come to this kind of situation in the future, that there will be a safe and sound way to unwind a failing firm and it doesn't bring down, you know, big parts of the financial system with it.

REP. BURGESS: Let me ask you a question. The only experience that I can draw and -- is that that I endured back in the late '80s in the state of Texas. We lost all the savings and loans overnight. Our oil prices collapsed overnight. Real estate prices followed them down. Loans were suddenly undercapitalized -- loans that our businesses had were undercapitalized, and we either had to come up with a lot of capital or we failed. Families had to tighten belts and do without.

I just don't see that occurring to that degree currently. And I guess my question is, contractions occur as a part of the normal course of an economy, and if we have a contraction of the economy that we don't allow to occur, like these banks that are too big to fail that we're propping up, and we don't allow the contraction of the economy to occur, are we in fact setting ourselves up for buying more pain later down the road by not allowing the economy the opportunity to right itself?

Very painful what we went through in Texas, and I would not minimize that. I wouldn't wish that on anyone. But we got through it, and we had 25, 30 years of sustained economic growth in the area, and really we were about a year behind the rest of the country on the advent of the recession because of some of what -- the effect of the energy prices last summer.

So I'm just -- just that as a general question to close us out.

MR. BERNANKE: Certainly. That's -- I understand your point very well, but there is a critical difference between the bank or savings and loan in Texas and a multinational holding company or insurance holding company today, which is that we have a good set -- Congress put together in 1991 the FDICIA Act, and there's a whole bunch of regulatory action, corrective action. There's a whole bunch of rules which allow the FDIC or, in the old days, the savings and loan corporation to come in and, in a well-designed way, seize the bank, pay off the depositors, sell the assets, do that all in a way which is understood and which is orderly and doesn't create a broader crisis.

And of course I should say that only applied -- the FDIC had only applied this to relatively smaller firms in most cases.

The trouble is, we do not have a comparable system for dealing with these very complex large multidimensional financial holding companies, and it's exactly that kind of system that I'm asking for. If we can get a system like that, then we can address the problem exactly the way you would like to -- us to address it.

REP. BURGESS: But -- and again, you point out that's an enormously complex undertaking. I was a little taken aback from President Obama's speech a week ago when he said we would have that -- he would sign that bill before the end of the year. To best of my knowledge, no one's actually working on that yet. So that's one of those things -- like you told Congressman Brady, that requires an enormous amount of thought and careful evaluation throughout the process.

So I hope, with some of the things we'll do in this committee, that we can shed some light on that process as well.

Thank you, Mr. Chairman.

REP. MALONEY: The gentleman's time has expired. And I'd like to thank Chairman Bernanke for testifying today and giving us a stronger understanding of the economic outlook. (Striking gavel.) And the meeting is adjourned.

MR. BERNANKE: Thank you.

REP. MALONEY: Thank you.

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