U.S. Congress Joint Economic Committee Hearing - The Economic Outlook

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REP. HINCHEY: Well, thank you very much, Mr. Chairman.

And good afternoon, Chairman Bernanke. It's always a pleasure to see you. And I apologize to you and our chairman for not being here on time, for being late. I'm sorry I missed the early part of this hearing. But I again want to express my appreciation to you, not just for being here but for all the things that you're doing.

Recently, I had an opportunity to have a conversation with the secretary of the Treasury, Secretary Paulson. And we talked about the economic circumstances. And I asked him what he thought about the prospect for a recession.

I thought that, in fact, we were in recession, and I have thought that for some time now. He responded by saying no, he didn't think we were in recession, nor did he think we were heading that way.

But I understand, based on what I've heard recently, that you think that there is that prospect, that we seem to be heading in that direction. And I think that that is also, that statement is also, strengthened on the basis of what's been done in terms of reducing the interest rates.

And I think that the reduction in interest rates, and other actions that have been taken by the Federal Reserve, have resulted in the lack of a strong decline in the stock market. And I think that recently your actions once again have begun to strengthen that market up a little bit again.

But I think that that is likely to be temporary. I'm very much concerned about what is going to happen over the longer term, like over the course of the next several months.

Do you share that concern over the course the last several months?

MR. BERNANKE: Well, let me be precise about what I said about our view of the forecast.

We're currently in a period of slow growth that began in the fourth quarter of last year. We expect it to continue through the first half of this year. It's possible, not certain but possible, that the first half of this year will be slightly contractionary.

That doesn't necessarily mean there's a recession, because it would depend on the circumstances. And the NBER makes those determinations well after the fact. At this point, we are expecting better growth in the second half of the year, in part because of the monetary and fiscal stimulus, which is already in the pipeline.

So that's kind of the outline that we have currently. Of course, it's very provisional. We're going to see how things evolve. But there's no question that the first half of 2008 is a slow period for the economy.

REP. HINCHEY: I think that it's very typical of the Federal Reserve to focus its attention on the larger aspects of the financial market and to deal with issues such as the one that you've dealt with recently, which is preventing the financial collapse of Bear Stearns, which evidently it was about to engage in if it hadn't been for your intervention and the way that that happened.

And I think that that had a positive effect on the market. But what concerns me is my personal interaction with people and the way in which the economic circumstances are affecting the average person across the country -- middle-income working-class Americans.

The credit card debt has gone up dramatically, something above 11 percent, close to 12 percent now, and it's increasing. It's going up even more as time goes on. The personal bankruptcy rate has gone up something in the neighborhood of 15 percent just in the last month or so.

All of this is being driven by a number of things, including the cost of living and the downturn in income for working people. And as we all know, the gross domestic product, at least two-thirds of it, is driven by consumer spending.

And if consumer spending continues to be affected as it has, and the evidence indicates bankruptcy, credit card debt, decline in income, increase in the cost of living, it seems to me that the gross domestic product is going to be severely affected. We haven't really addressed that problem. We haven't really focused on that aspect of the economic circumstances.

It seems to me what has been done has an element of superficiality to it. It looks at the top, but it doesn't deal with the base. And I think that this is something that we need to do. And I, of course, appreciate your opinions, your views on these things, and I would be deeply grateful to you for telling us what you think about what we should do to help the gross domestic product, middle- income people, what's going to happen if that continues to drop the way that it has. And all the indications are that it will.

MR. BERNANKE: Congressman, I absolutely share your concerns about the average person's situation in terms of their income, in terms of the cost of living. I think that's really what we're all here for. That's what the Federal Reserve is about. That's what Congress is trying to achieve, improvements in the standard of living.

I think it's useful to try to separate the short term and the long term. Part of my reason for thinking that growth will be somewhat better going forward is that we have taken some pretty strong efforts to stimulate the economy, including both monetary and fiscal policy. I have some hope that the financial situation will begin to improve and the housing market will begin to at least stop declining in the way it has been. And all those things together suggest some improvement later this year.

As I indicated earlier, in terms of what Congress can do, I think as far as the near term is concerned that housing markets should be the focus because that's where the center of the problem is.

In terms of the long run, I don't want to -- I know it sounds like cliches, but our long-run economic health depends vitally on things like people acquiring adequate skills. My wife is a teacher, and she's been trying to start a school for inner-city kids. She's very concerned about the dropout rates and about the low skill levels of people who don't get enough education. I share that concern. I think it's incredibly important.

I think it's very important for us to try and improve our energy situation. There are ways that we can do that. So there are a number of things we can do to try to improve our long-run prospects, and we should be operating both on a short-run and on a long-run time frame simultaneously as best we can.

REP. HINCHEY: Yeah, I appreciate that and I think you're absolutely right, but I don't see it being done. We're not doing anything that addresses the issues that you just raised. The issues that are being addressed by the Federal Reserve, and to some extent appropriately, are the ones that we talked about and which have gotten a great deal of attention across this hearing. But the fact of the matter is, what's driving the economy is sinking down. I think we're in a recession now. I think we've been in a recession for some time. And I think that that recession is going to continue to get worse.

The housing situation that we're confronting is not what's driving the recession; it is a function of the recession. It is a result of the other recessionary aspects of the economy, the driving down of the ability of the average person to deal with their economic needs on a regular daily, weekly basis.

So I don't think it's important for us to think that the economic downturn that we're experiencing is being driven by the decline of the housing market. The economic downturn is driving the housing market down. That's -- it's a function of a downturn, not the activity that's driving it. So I don't think we should be confusing ourselves about what's really happening here.

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REP. MAURICE HINCHEY (D-NY): Thank you very much, Mr. Chairman.

And once again, thank you, Mr. Chairman.

I think especially it's impressive, the innovation that you expressed in stepping into the Bear Stearns situation. As you just said, this is something that has never been done before, the way that you engaged it in this particular circumstance, and I think that if you hadn't, then there would have been a likely serious impact on the economy in very obvious ways, including the stock market generally. So that was -- in that sense, I think, a very good thing that you did.

But I continue to be deeply worried about the future. And my sort of analysis is -- but it's more of a guess, basically, is that this economy is going to continue to get worse, and that six months from now, we may see it in a very, very bad situation. And I say that based upon what's happening to the average people in the economy and the difficult circumstances that they're experiencing and the evidence that pops up day after day.

For example, the recent indication of the dramatic increase in food stamp use. And that, of course, is driven by the rise in the cost of food. So more and more people are using food stamps. That seems to be -- not just at a level now, it seems to be continuing to go up. So that just is another indication of how so many families in this country are finding themselves in very difficult and very, very challenging and dangerous circumstances.

And the impact on this inflation is something that is basically not being driven internally. It's being driven externally -- the price of energy and the price of food, driven externally. So we have a hard time really addressing that unless we begin to be creative, like, you know, new alternative energy sources and things like that, which we're being very casual about. We should be much more aggressive about that. And it just shocks me continually that that casuality (sic) continues to exist there. But the basic problem we're facing, and which needs to be addressed -- I think more by the Congress than by the Federal Reserve, but with the Federal Reserve and with the Federal Reserve's advice -- is to deal with the economic circumstances that are being confronted by the average family across the country.

And those two prices are going to continue to go up, given every indication. And if they do, the cost of living is going to continue to go up and the quality of life in our country is going to continue to go down.

And as that goes down, it's going to have a direct, major impact on the growth of the economy. And at some point it may hit very, very hard.

So I would appreciate the ability to work with you, to get some advice from you, to get some insight additionally, over that which we already have, into what is exactly happening here.

And if you would be kind enough now maybe to express some of that to us, I'd be very grateful.

MR. BERNANKE: Well, Congressman, first of all, I'd be happy to meet with you individually, if you'd like.

You point to a very important problem, which is that globally traded commodities, including energy, food and many other things, like metals, for example, for a variety of reasons, including the increased demand among the emerging markets, those prices have gone up a lot.

That's a huge challenge to us as an economy. On the one hand, it's inflationary; it creates those pressures. On the other hand, it reduces standards of living and affects consumer spending. That causes the economy to tend to slow. So that's the most difficult challenge that the Federal Reserve faces, certainly, is to deal with those kinds of shocks.

I wish I had a simple answer for you. In the longer term, the one small silver lining in $100 oil is that lots of alternatives become economically feasible, or economically profitable. And over a period of time, I think many of those alternatives, particularly if Congress supports with research and wise regulatory policy and so on, that they'll become available and will make a difference.

Unfortunately, many of these alternatives have long lead times, and we can't expect to have them available within a year or two. And so we're in a period right now where we're essentially having to deal with the implications of very high energy costs while hoping and waiting for alternatives to become available. So it's a difficult period.

And I hope that I don't convey a lack of sympathy. I certainly understand the problems that people are facing, and everything we do is an attempt to try to improve the welfare of the average American.

REP. HINCHEY: Yes, I understand that and I very much appreciate it.

The conversation that you and I had back in November at the hearing included the issue of stagflation, which is an issue that peculiarly confronted this economy several decades ago. And it seems to me, the closer I look at it over a period of time, the more likely that we're going to be confronted with that problem again, because the two elements of it are very much in force.

The cost of living is going up. It's not always shown in the inflation rate, but the fact is that the cost of living is going up dramatically, and it's likely to improve. This forecast of $4 a gallon of oil (sic) by the summer, if that happens, that's going to be a very, very tough one to deal with.

And at the same time that the economic circumstances, the income, spending ability of middle-income, lower middle-income working class Americans continues to be stagnant and/or declining. So it seems to me that this is a real problem, and that we're going to have to be really creative and effective in trying to deal with it.

So if there's any response that you would like to give to that, I would be deeply grateful to you.

MR. BERNANKE: I agree; it's a very, very tough challenge. I think we need to think hard about our energy policy. We need to make sure that there's adequate research. We need to make sure that alternatives which meet environmental requirements and other requirements are sensibly regulated, are allowed to be used if they are effective and meet environmental requirements. And we need to encourage both private and public efforts to find alternatives. So I think that's very important, again.

And unfortunately, it's not going to happen in the next six months. It's going to take some time, but I do believe that, at this price, that there are a lot alternatives -- including conservation, of course -- to crude oil.

REP. HINCHEY: Well, I don't think those things, those issues, are going to address this issue in the way that it needs to be.

We need to come up with something much more effective, much more strong than what we've come up with so far.

Thank you very much.

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