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Hearing of the House Financial Services Committee - Monetary Policy and the State of the Economy

Location: Washington, DC

Hearing of the House Financial Services Committee - Monetary Policy and the State of the Economy





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REP. FRANK: (In progress) -- remarks with the chairman here, the protocol is eight minutes on each side. I will begin with five, and then the chairman, the newly established chairman of the Monetary Policy Subcommittee, Domestic Monetary Policy, Mr. Watt, will have a three-minute statement.

I want to talk about the context in which we operate. I was very pleased that the president yesterday, I thought very thoughtfully, explained the dilemma we have; namely, that we have to get the credit system functioning again and we do not have the option of sending all of the current people in that system to the gallows, as much as some people would like that to happen, or to simply say the system has been too flawed and must be junked and let's start from scratch. We simply cannot start from scratch.

To restore the credit system, which has been a bipartisan effort going back to the previous administration -- and this committee has worked, I think, fairly constructively, although with allowances for some differences, with both administrations, with the Federal Reserve, which has been a point of continuity -- there is no option, obviously, other than to work with the existing system. That has a political drawback, and we are in an electoral context.

I have to say when people tell me they don't want something to be done with political considerations, my response is they should not ask 535 politicians to do it. That's inherent in the nature of our society, and it is a good thing, not a bad thing. The fact that we bring to these deliberations the concerns of the people we represent -- their angers, their fears, their optimism, whatever -- that's what makes this the country that it is.

And none of us, I think, want to apologize for that, or retreat from it. There are more and less responsible ways to deal with that, but it's a good fact of our system.

We have an unhappiness on the part of all the citizens who are suffering deeply from the consequences of mistakes which most of them didn't make -- some did; there are people who took out loans they shouldn't have taken out; there are people who have been irresponsible in other ways. But fundamentally, people are now being victimized for things for which they are not to blame.

And they see us -- by "us," I mean the federal government, the Bush administration, the Obama administration, members of Congress -- doing things from time to time that appear to be benefitting precisely the people at whom they are angry because they made mistakes. And the point, of course, is that you cannot reconstitute a system without doing some things that will redound to the benefit of the people in that system.

Now, efforts are being made to minimize the unnecessary benefit. The consensus appears to exist on both sides about restraining compensation and lavish expenditures. There was a large degree of agreement -- not quite as broad a consensus -- that something should be done to reduce foreclosures. There is a requirement, that I think it is, again, more broadly shared, that we want to urge people who receive federal help to re-lend and to lend in certain sectors. But the president made the point yesterday, very thoughtfully, that anger has to be channeled, and we have to express the anger in ways that put some restraints on some of the actions but do not prevent us from working to get the current system back on its feet.

Now, there's one aspect of that that I want to address. It's not the main subject of this hearing perhaps, but we do have the Humphrey- Hawkins Bill before us. I think it is clear that one of the factors that contributes to the political difficulties in the broader sense, in the sense that in a democracy you've got to have electoral -- you've got to have popular support -- one of the things that contributes to this difficulty is the absence of a social safety net and the perceived, and I believe real, unfairness of the distribution of our wealth.

It's most recently come up in the form of people at the top of the economic pyramid being very critical of protectionism. We have had lectures that we should not give in to the instinct to try to favor American-made products and American jobs. I have to say to my friends who argue that, that those arguments by themselves will not work very much in the absence of a broader social safety net. As long as the American people feel that they do not fairly participate on the whole in the benefits of trade, for example, and that people in the lower end and middle end -- that they don't fully participate in the benefits, you cannot talk them out of their opposition.

If people really want to help us get to a situation in which we can go forward with trade properly conducted -- which I agree is very good for the economy -- then help us get a health care system, as the president talked about. If we do not do a better job of seeing that both the benefits and the costs of this sort of economic change and globalization -- if that is not more fairly shared on both the positive and negative sides, the opposition that people are decrying to a number of things going forward will increase.

The gentleman from Alabama is recognized, I believe for two minutes.

REP. SPENCER BACHUS (R-AL): (Off mike) -- Paul.

REP. FRANK: Oh, I'm sorry. The gentleman from Texas, Mr. Paul, is recognized for two minutes.

REP. RON PAUL (R-TX): Thank you, Mr. Chairman.

Yesterday, a report came out that said that the consumer confidence index was down to 25. Sometimes I think that might be overly optimistic. But nevertheless, I think that vote of confidence really is a reflection on our financial system, our monetary policy, our spending policies here in Congress. And then they see it in the economy.

But it is fundamental for us to understand this, because if we think we can patch a system up that failed, it's not going to work. We have to come to the realization that there is a sea change in what's happening -- this is an end of an era -- and that we can't reinflate the bubble.

Just as we devised a new system of Bretton Woods in '44, which was doomed to fail -- it failed in '71 -- and then we came up with the dollar reserve standard, which was a paper standard; it was doomed to fail, and we have to recognize that it has failed.

And if we think we can reinflate this bubble by artificially creating credit out of thin air and calling it capital, believe me, we don't have a prayer of solving these problems. We have a total misunderstanding of what credit is versus capital. Capital can't come from the thin-air creation by a Federal Reserve system. Capital has to come from savings. We have to work hard, produce, live within our means. And what is left over is called capital. This whole idea that we can recapitalize markets by merely turning on the printing presses and increasing credit is a total fallacy.

So the sooner we wake up to realize that a new system has to be devised, the better. Right now, I think the central bankers of the world realize exactly what I'm talking about, and they're planning. But they're planning another system that goes one step further, to internationalize regulations, internationalize the printing press.

Give up on the dollar standard, but tell -- but we have to be very much aware that that system will be no more viable. We have to have a system which encourages people to work and to save. What do we do now? We're telling consumers to spend and continue the old process. It won't work.

REP. FRANK: The gentleman from Delaware, Mr. Castle, is recognized for two minutes.

REP. MIKE CASTLE (R-DE): Thank you, Mr. Chairman and Ranking Member Bachus. And I want to thank you for holding today's hearing, and to thank Chairman Bernanke for once again providing his expertise for this panel.

Since the onset of the economic downturn, the Federal Reserve and the Treasury have provided enormous amounts of financial assistance, $1.4 trillion and $350 billion respectively, in an effort to stabilize our financial system while theoretically freeing up credit for small businesses, car buyers, home buyers and even students. However, reports have highlighted that financial institutions are still troubled and that access has not trickled down to consumers in need.

Although the Fed recently launched a website providing a detailed description of the tools they have employed in an effort to restore our economy, I remain interested in knowing how the liquidity provided by the Fed is, in turn, being used by the institutions in need of this assistance. Are we reaching the goal of freeing up credit? Are the institutions more stable? Is the credit-card industry facing the same turmoil as a result?

A lack of understanding of exactly how these funds are used is just one of the problems that arise as a result of the lack of oversight and checks and balances over the Federal Reserve's recent extraordinary activities. I believe more attention to this issues is necessary to fully understand the effectiveness of the federal government's efforts in reducing the economic crisis, and I believe these questions should be answered before the Federal Reserve is vetted for any future role as a systemic risk regulator.

And I yield back the balance of my time.

REP. FRANK: The gentleman from North Carolina, the chairman of the Domestic Monetary Policy Subcommittee, is recognized for three minutes.

REP. MEL WATT (D-NC): Thank you, Mr. Chairman.

In ordinary times during my tenure on this committee, this semi- annual hearing has focused almost exclusively on the Fed's use of interest rate changes to impact economic activity, stimulate job creation and control inflation. However, these are not ordinary times, and it's obvious that short-term concerns about inflation have largely given way to some concern about the prospect of deflation and the short, intermediate, even long-term concerns about employment and job growth.

The act mandates the Fed to take steps to achieve maximum employment. While some economists subscribe to the notion that there is a, quote, "natural" rate of unemployment of around 4.5 percent; and it always stunned me to hear former Fed Chairman Greenspan profess that unemployment of less than 5-1/2 to 6 percent would almost surely lead to inflation; I dare say that there are no economists who are not concerned when they see the national unemployment rate meet and exceed the rate that has long been so prevalent in many minority communities.

These are clearly perilous times. It's important to remember that beyond the headlines of mass layoffs and rising unemployment rates, real people are impacted. These are people who have real hopes, dreams and aspirations to provide for their families and contribute to their communities. They can't reach these aspirations without jobs.

Against this backdrop, the sole question I really want addressed today is, what additional tools does the Fed have to stop escalating unemployment and to spur new jobs and the creation of new jobs. In the February 18th speech, Chairman Bernanke vowed to take strong and aggressive action to halt the economic slide and improve job growth. Today I hope to hear specifics on the Fed's plans and on whether there is anything else Congress can and should be doing to help.

I look forward to the chairman's testimony to address these difficult questions, and I yield back.

REP. FRANK: The gentleman from Texas, Mr. Hensarling, is recognized for two minutes.

REP. JEB HENSARLING (R-TX): Thank you, Mr. Chairman.

To state the obvious, our countrymen are hurting, and the latest unemployment figures are alarming. Last night our president said we must understand how we arrived at this moment. Our country is in economic turmoil principally because of federal policies -- undoubtedly noble in intent -- that incented, cajoled, blessed or mandated that financial institutions loan money to people to buy homes that they could not afford to keep.

Instead of lifting up the economic opportunities of the borrower, federal policy helped bring down the lending standards of the lenders.

For those who wanted to roll the dice with the government duopoly of Fannie and Freddie, Lady Luck left the building, and too many Americans lost their homes and lost their dreams.

Now, Congress, as part of an ill-fated remedy, has passed the single-most-expensive spending bill in our nation's history, and will vote on yet another bloated spending bill today. Together, at a time when American families are struggling to pay their bills, these two legislative bills will cost the average American household over $13,000 apiece and place our nation deeper into unconscionable debt.

History shows that no nation can borrow and spend its way into prosperity. A previous secretary of Treasury said, quote, "We are spending more money than we have ever spent before, and it does not work. After eight years, we have just as much unemployment as when we started, and an enormous debt to boot." The quote, of course, is from President Franklin Roosevelt's Treasury secretary, Henry Morgenthau. His words were spoken in May of 1939.

When Japan experienced a real-estate meltdown similar to ours in the early '90s, its government enacted 10 stimulus bills, raising their per-capita debt to the highest level of any industrialized nation. For their -- for their efforts, they experienced the "Lost Decade": No economic growth, no new jobs, an economy dependent on the central government in Tokyo, and the human misery associated with going from the second-highest per-capita income in the world to the 10th.

I hope that we in Congress can learn from these examples.

I yield back the balance of my time.

REP. FRANK: The gentleman from New Jersey, Mr. Garrett, for the final two minutes.

REP. SCOTT GARRETT (R-NJ): And I thank the -- Chairman Frank. So -- also, thanks to Chairman Frank for his comments with regard to addressing the current crisis first and then looking at the Federal Reserve situation.

I join my colleagues, and certainly understand the depths of the financial/economic crisis facing this country, but I'm also concerned about the unintended consequences of some of the recently enacted and proposed policy responses.

For example, President Obama recently announced a $75-billion foreclosure-prevention plan. Now, a lot of folks out there, including the -- more than 90 percent -- mortgages, are wondering why their tax dollars should go to help pay someone else's mortgage when they're stretching their dollar as best they can just to pay what -- their own bills.

But beyond those fundamental fairness concerns, I'm also concerned about the effectiveness of these proposals. As Professor Robert Shiller, who is the coauthor of the Case-Shiller housing index -- and he was someone who actually pointed out the housing bubble before many others were talking about it -- he has said in recent days that although housing prices have fallen about 25 percent from the peak, they are still way too high when compared to their historical levels. In fact, they've only fallen a little more than a -- halfway back to their historical trend.

And if that's the case, I'm worried that the administration proposals will only delay the inevitable, a full correction of the marketplace, while saddling future generations with tens of billions of dollars of additional debt.

See, delaying the outset on the true bottom seems to me has other unintended consequences. Not until we reach the bottom will we begin to provide certainty on the value of so-called toxic mortgages found on the balance sheets. This uncertainty surrounding the value of these assets is one of the main contributors to the downward spiral. So the sooner we reach this certainty, the better.

And I can anticipate the response from some will be that we don't want to have an overreaction, overcorrection, in the marketplace.

Well, my response to that response will be that various actions may well do just that by negatively affecting credit availability, capital infusion and pricing mechanisms as well. So I'd be curious to hear your response to that, and I look forward to your -- rest of your testimony.

REP. FRANK: Mr. Chairman, you may proceed. Take whatever time you need. And obviously any supporting documents will be in the record. We take note of the submission of the monetary policy report, which was part of the record here. And please go ahead.

MR. BERNANKE: Thank you, Mr. Chairman.

Chairman Frank, Representative Bachus and members of the committee, I appreciate the opportunity to discuss monetary policy and the economic situation, and to present the Federal Reserve's monetary report to the Congress.

As you are aware, the U.S. economy is undergoing a severe contraction. Employment has fallen steeply since last autumn, and the unemployment rate has moved up to 7.6 percent. The deteriorating job market, considerable losses of equity and housing wealth and tight lending conditions have weighed down consumer sentiment and spending. In addition, businesses have cut back capital outlays in response to the softening outlook for sales as well as the difficulty of obtaining credit.

In contrast to the first half of last year, when robust foreign demand for U.S. goods and services provided some offset to weakness in domestic spending, exports slumped in the second half as our major trading partners fell into recession and some measures of global growth turned negative for the first time in more than 25 years. In all, U.S. real gross domestic product declined slightly in the third quarter of 2008, and that decline steepened considerably in the fourth quarter. The sharp contraction in economic activity appears to have continued into the first quarter of 2009.

The substantial declines in the prices of energy and other commodities last year and the growing margin of economic slack have contributed to a substantial lessening of inflation pressures. Indeed, overall consumer price inflation measured on a 12-month basis was close to zero last month. Core inflation, which excludes the direct effects of food and energy prices, also has declined significantly.

The principal cause of the economic slowdown was the collapse of the global credit boom and the ensuing financial crisis, which has affected asset values, credit conditions, and consumer and business confidence around the world. The immediate trigger of the crisis was the end of housing booms in the United States and other countries and the associated problems in mortgage markets, notably the collapse of the U.S. subprime mortgage market.

Conditions in housing and mortgage markets have proved a serious drag on the broader economy both directly, through their impact on residential construction and related industries and on household wealth, and indirectly, through the effects of rising mortgage delinquencies on the health of financial institutions. Recent data show that residential construction and sales continue to be very weak, house prices continue to fall, and foreclosure starts remain at very high levels.

The financial crisis intensified significantly in September and October. In September, the Treasury and the Federal Housing Finance Agency placed the government-sponsored enterprises, Fannie Mae and Freddie Mac, into conservatorship, and Lehman Brothers Holdings filed for bankruptcy. In the following weeks, several other large financial institutions failed, came to the brink of failure, or were acquired by competitors under distressed circumstances.

Losses at a prominent money market mutual fund prompted investors, who had traditionally considered money market mutual funds to be virtually risk-free, to withdraw large amounts from such funds. The resulting outflows threatened the stability of short-term funding markets, particularly the commercial paper market, upon which corporations rely heavily for their short-term borrowing needs. Concerns about potential losses also undermined confidence in wholesale bank funding markets, leading to further increases in bank borrowing costs and a tightening of credit availability from banks.

Recognizing the critical importance of the provision of credit to businesses and households from financial institutions, the Congress passed the Emergency Economic Stabilization Act last fall. Under the authority granted by this act, the Treasury purchased preferred shares in a broad range of depository institutions to shore up their capital bases. During this period, the FDIC introduced its Temporary Liquidity Guarantee Program, which expanded its guarantees of bank liabilities to include selected senior unsecured obligations and all non-interest-bearing transactions deposits. The Treasury, in concert with the Federal Reserve and the FDIC, provided packages of loans and guarantees to ensure the continued stability of Citigroup and Bank of America, two of the world's largest banks.

Over this period, governments in many foreign countries also announced plans to stabilize their financial institutions, including through large-scale capital injections, expansions of deposit insurance, and guarantees of some forms of bank debt.

Faced with a significant deterioration in financial-market conditions and a substantial worsening of the economic outlook, the Federal Open Market Committee continued to ease monetary policy aggressively in the final months of 2008, including a rate cut coordinated with five other major central banks.

In December, the FOMC brought its target for the federal funds rate to an historically low range of 0 to 1/4 percent, where it remains today. The FOMC anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

With the federal funds rate near its floor, the Federal Reserve has taken additional steps to ease credit conditions. To support housing markets and economic activity more broadly, and to improve mortgage-market functioning, the Federal Reserve has begun to purchase large amounts of agency debt and agency mortgage-backed securities. Since the announcement of this program last November, the conforming fixed mortgage rate has fallen nearly 1 percentage point.

The Federal Reserve has also established new lending facilities and expanded existing facilities to enhance the flow of credit to businesses and households. In response to heightened stress in bank funding markets, we increased the size of the Term Auction Facility to help ensure that banks could obtain the funds they need to provide credit to their customers. And we expanded our network of swap lines with foreign central banks to ease conditions in interconnected dollar funding markets at home and abroad.

We also established new lending facilities to support the functioning of the commercial-paper market and to ease pressures on money-market mutual funds. In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with the Treasury to announce the Term Asset- Backed Securities Loan Facility, or TALF. The TALF is expected to begin extending loans soon.

The measures taken by the Federal Reserve, other U.S. government entities, and foreign governments since September have helped to restore a degree of stability to some financial markets. In particular, strains in short-term funding markets have eased notably since the fall, and LIBOR rates, upon which borrowing costs for many households and businesses are based, have decreased sharply.

Conditions in (sic) commercial-paper market also have improved, even for lower-rated borrowers, and the sharp outflows from money- market mutual funds seen in September have been replaced by modest inflows. Corporate risk spreads have declined somewhat from extraordinarily high levels, although these spreads remain elevated by historical standards. Likely spurred by the improvements in pricing and liquidity, issuance of investment-grade corporate bonds has been strong, and speculative-grade issuance, which was near zero in the fourth quarter, has picked up somewhat.

As I mentioned earlier, conforming fixed mortgage rates for households have declined. Nevertheless, despite these favorable developments, significant stresses persist in many markets. Notably, most securitization markets remain shut, other than that for conforming mortgages, and some financial institutions remain under pressure.

In light of ongoing concerns over the health of financial institutions, the secretary of the Treasury recently announced a plan for further actions.

This plan includes four principal elements: First, a new capital assistance program will be established to ensure that banks have adequate buffers of high-quality capital, based on the results of comprehensive stress tests to be conducted by the financial regulators, including the Federal Reserve. Second is a public-private investment fund in which private capital will be leveraged with public funds to purchase legacy assets from financial institutions. Third, the Federal Reserve, using capital provided by the Treasury, plans to expand the size and scope of the TALF to include securities backed by commercial real estate loans and potentially other types of asset- backed securities as well. And fourth, the plan includes a range of measures to help prevent unnecessary foreclosures.

Together, over time these initiatives should further stabilize our financial institutions and markets, improving confidence and helping to restore the flow of credit needed to promote economic recovery.

The Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and balance sheet. For example, we continue to add to the information shown in the Fed's H.4.1 statistical release, which provides weekly detail on the balance sheet and the amounts outstanding for each of the Federal Reserve's lending facilities. Extensive additional information about each of the Federal Reserve's lending programs is available online. The Fed also provides bimonthly reports to the Congress on each of its programs that rely on the section 13(3) authorities.

Generally, our disclosure policies reflect the current best practices of major central banks around the world. In addition, the Federal Reserve's internal controls and management practices are closely monitored by an independent inspector general, outside private-sector auditors, and internal management and operations divisions, and through periodic reviews by the Government Accountability Office.

All that said, we recognize that recent developments have led to a substantial increase in the public's interest in the Fed's programs and balance sheet. For this reason, we at the Fed have begun a thorough review of our disclosure policies and the effectiveness of our communication. Today I would like to highlight two initiatives.

First, to improve public access to information concerning Fed policies and programs, we recently unveiled a new section of our website that brings together in a systematic and comprehensive way the full range of information that the Federal Reserve already makes available, supplemented by explanations, discussions and analyses. We will use that website as one means of keeping the public and the Congress fully informed about Fed programs.

Second, at my request, Board Vice Chairman Donald Kohn is leading a committee that will review our current publications and disclosure policies relating to the Fed's balance sheet and lending policies. The presumption of the committee will be that the public has a right to know, and that the nondisclosure of information must be affirmatively justified by clearly articulated criteria for confidentiality, based on factors such as reasonable claims to privacy, the confidentiality of supervisory information, and the need to ensure the effectiveness of policy.

In their economic projections for the January FOMC meeting, monetary policy makers substantially marked down their forecasts for real GDP this year relative to the forecast they had prepared in October.

The central tendency of their most recent projections, for real GDP, implies a decline of 0.5 percent to 1.25 percent over the four quarters of 2009.

These projections reflect an expected significant contraction, in the first half of this year, combined with an anticipated gradual resumption of growth in the second half.

The central tendency for the unemployment rate, in the fourth quarter of 2009, was marked up to a range of 8.5 percent to 8.75 percent. Federal Reserve policymakers continued to expect moderate expansion next year, with a central tendency of 2.5 percent to 3.25 percent growth, in real GDP, and a decline in the unemployment rate, by the end of 2010, to a central tendency of 8 percent to 8.25 percent.

FOMC participants marked down their projections for overall inflation, in 2009, to a central tendency of 0.25 percent to 1 percent, reflecting expected weakness in commodity prices and the disinflationary effects of significant economic slack.

The projections for core inflation also were marked down, to a central tendency bracketing 1 percent. Both overall and core inflation are expected to remain low over the next two years.

This outlook for economic activity is subject to considerable uncertainty. And I believe that overall, the downside risks probably outweigh those on the upside.

One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected.

Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing.

To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action, to stabilize financial institutions and financial markets.

If actions taken by the administration, the Congress, and the Federal Reserve are successful, in restoring some measure of financial stability, and only if that is the case, in my view, there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.

If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the salutary effects of the steep decline in energy prices since last summer and the better alignment of business inventories and final sales, as well as the increased availability of credit.

To further increase the information conveyed by the quarterly projections, FOMC participants agreed in January to begin publishing their estimates, of the values to which they expect key economic variables to converge over the longer run, say, at a horizon of five or six years, under the assumption of appropriate monetary policy and in the absence of new shocks to the economy.

The central tendency for the participants' estimates, of the longer-run growth rate of real GDP, is 2.5 percent to 2.75 percent. The central tendency for the longer-run rate of unemployment is 4.75 percent to 5 percent. And the central tendency for the longer-run rate of inflation is 1.75 percent to 2 percent, with the majority of participants looking for 2 percent inflation in the long run.

These values are all notably different from the central tendencies of the projections for 2010 and 2011, reflecting the view of policymakers that a full recovery of the economy, from the current recession, is likely to take more than two or three years.

The longer-run projections for output growth and unemployment may be interpreted as the committee's estimates of the rate of growth, of output and unemployment that are sustainable, in the long run in the United States, taking into account important influences such as trend growth rates of productivity and the labor force, improvements in worker education and skills, the efficiency of the labor market, at matching workers and jobs, government policies affecting technological development or the labor market and other factors.

The longer-run projections of inflation may be interpreted, in turn, as the rate of inflation that FOMC participants see as most consistent with the dual mandate given to it by the Congress -- that is, the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability.

This further extension of the quarterly projections should provide the public a clearer picture of the FOMC's policy strategy for promoting maximum employment and price stability over time. Also, increased clarity about the FOMC's views regarding longer-run inflation should help to better stabilize the public's inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low.

At the time of our last Monetary Policy Report, the Federal Reserve was confronted with both high inflation and rising unemployment. Since that report, however, inflation pressures have receded dramatically, while the rise in the unemployment rate has accelerated and financial conditions have deteriorated. In light of these developments, the Federal Reserve is committed to using all available tools to stimulate economic activity and to improve financial market functioning.

Toward that end, we have reduced the target for the federal funds rate close to zero, and we have established a number of programs to increase the flow of credit to key sectors of the economy. We believe that these actions, combined with the broad range of other fiscal and financial measures being put in place, will contribute to a gradual resumption of economic growth and improvement in labor market conditions in a context of low inflation. We will continue to work closely with the Congress and the Administration to explore means of fulfilling our mission of promoting maximum employment and price stability.

Thank you, Mr. Chairman.

REP. FRANK: Thank you, Mr. Chairman. At a future date, I will ask you if we can continue a very important discussion in public, which you reached at the end, which is the notion that the central tendency of these major statistics should be published. The question of the dual mandate, the question of whether or not we are well served by more precision, or at least more specificity, those are important questions.

And the question of inflation targeting and the dual mandate interrelation -- and I want to thank you, because I know there's been a lot of -- it's important for the notion of inflation targeting. And I think what you have put forward here is a thoughtful advancement of this, without fully broaching that issue which remains to be talked about. This is not inflation targeting, but it's a sensible set of measures.

In particular, one of the things I will be asking you guys to address -- and I think this is very important -- you talk about the central tendency of unemployment at 4-3/4 (percent) to 5 percent. You also talk about the factors -- growth rates in productivity, improvements in worker education and skills, the efficiency of the labor market, government policies affecting technological development of the labor market. I know you agree that these are factors that are within our control, if we do them well. What that means is that if we got a focused set of policies, it's possible to bring down that 4-3/4 (percent) to 5 percent unemployment rate, without having an inflationary effect. And I say that's, I think, one of our goals going forward, is to talk about how we can improve the employment picture in non-inflationary ways.

But for now, I want to talk about, obviously, the current crisis. And the question of foreclosures has come up. And I was struck by your point -- you've made it before -- that it was the granting of mortgages, particularly sub-prime mortgages -- that should not have been granted, that the borrowers shouldn't have taken out and the lenders shouldn't have made, that was the single most prominent cause of the current crisis. Is that a fair description?

MR. BERNANKE: It was an important trigger, Mr. Chairman. There was a very broad-based credit boom that went through many different sectors, but the subprime crisis was the trigger that set things off.

REP. FRANK: What -- why did we get this? I think, you know, to fix it in the future, we have to get some sense of why it happened. Is there -- what -- what led us to a situation where so many subprime loans were made that shouldn't have been made?

MR. BERNANKE: Mr. Chairman, the -- as I said, there was a broader credit boom, and the causes of that have been under much dispute. My own view is that an important factor was the tremendous flows of capital into the United States and other industrial countries, which gave financial institutions the feeling that money was very -- was essentially free, and that the demand for credit products was very high. And that led them to a whole range of practices --

REP. FRANK: Was -- was a related aspect of that, Mr. Chairman, that you no longer needed to have primarily depositor funds to make these loans? Because depositor funds tend to be more carefully handled, it seems to me, in our system, through regulation. And the new -- (so it was ?) -- the capital you're talking about were less subject to those kinds of rules.

MR. BERNANKE: That capital looked for different ways to find investment vehicles. And the originate-to-distribute model, which involved lending and then selling off the loans down a chain without an -- sufficient checks and balances, was part of the problem. And at the front end of the subprime market, obviously, there was very poor underwriting and excessive optimism about house prices.

REP. FRANK: Thank you. Then -- so then the question is, what -- you know, what should we do about it? And there are arguments that say we should not intervene to try and slow down the foreclosure rate through public policy.

One of the arguments against that -- and I know it's not the only one -- is the moral hazard argument. That is that if you absolve people from the serious consequences of their own misjudgments, they may make those misjudgments again. One of the things I think people are overlooking is that when we talk about stopping this from repeating itself, we're not simply relying on people having had a bad feeling about it, but we are talking about rules and laws that will make it impossible.

Would you discuss briefly -- in 1994, Congress gave the Federal Reserve authority which went unused for a while but which you invoked, I guess, in 2007. (Would you close ?) by talking about the extent to which the policies you have put forward with regard to regulating some of this lending in the future alleviate the moral-hazard issue?

MR. BERNANKE: Yes, Mr. Chairman. As you know, we have -- under HOEPA, we have set up a set of rules for mortgage lending that --

REP. FRANK: HOEPA's the 1994 statute.

MR. BERNANKE: -- that's correct -- that apply to all lenders, not just bank lenders, and require certain standards of underwriting documentation, escrow and other practices we believe, if properly enforced -- and we're working together with state authorities and others to make sure they will be enforced -- would be a very important check on bad lending practices.

REP. FRANK: Thank you, Mr. Chairman. Let me just add for the information -- this committee, as members know -- actually, earlier, the gentleman from Alabama and I and others tried to work on something; we were not successful, for a variety of reasons. But in 2007, this committee did pass a statute that would embody much of what you talk about.

Many of us think that we should continue to do that.

I would just let people know, it's my intention to have this committee mark up such a bill before the April break, precisely along the lines that the chairman was talking about, probably going a little further in some areas.

The gentleman from Alabama.

REP. BACHUS: Mr. Chairman, I'm going to yield my five minutes to the gentleman from South Carolina, Mr. Barrett.

Before I do, let me just simply say this, Mr. Chairman: I believe there's substantial private capital sitting on the sidelines. I think the challenge is to get that committed. And I believe because of some of the fits and starts in government policy, what seems to be the lack of consistency, it's created uncertainty. And I would just simply urge a greater certainty and consistency in what government policies and actions will be going forward. I think that will be a tremendous help.

REP. JAMES GRESHAM BARRETT (R-SC): I thank the gentleman for yielding.

Welcome, Mr. Chairman. We're going to make you an honorary member -- I don't know if you'll like that or not -- but as many times you've been here.

I want to kind of pick up where the chairman left off in his line of questioning. You talked about not necessarily the only factor but one of the factors is a lot of these home loans were made to people that can't necessarily afford them. And we've gotten in a bind. There's some proposals going around now, Mr. Chairman, about judges rewriting these contracts. Give me some feedback on those. I mean, is this a bad thing, if you've got people that can't make their payments initially and we're going to rewrite them again and they still can't afford them? I mean, kind of give me your thought on some of these policies that are being batted around.

MR. BERNANKE: Well, I can talk about them broadly in terms of effectiveness, but let me address, I think, the narrow question -- the moral hazard question that you're concerned about.

REP. BARRETT: Yes, sir.

MR. BERNANKE: I think, as the chairman pointed out, part of the issue was mortgages that should not have been made in which lenders did not exert sufficient responsibility. In that respect, there is some case, I think, to try and unwind the adverse effects of that on the borrowers.

For some borrowers, presumably they knew what they were getting into, and that raises the issue that many Americans say: Well, I was responsible, you know, in my mortgage. Why should I help somebody who was not?

It's hard to know what the relative importance of those two factors is. But what I would say is that from a public policy point of view, that large numbers of foreclosures -- and we're looking at 2.4 million foreclosure starts in 2008 or more -- are detrimental not just to the borrower and the lender but to the broader system. And we've seen, for example, the effects of clusters of foreclosures on communities. It reduces asset values, reduces tax revenues and has much broader socio-economic effects.

The effect on the housing market -- and I do believe that there is a risk. I understand very much the point Mr. Garrett made earlier about getting the housing values down to their fundamental prices, and I agree a hundred percent that that needs to be done. But the tremendous problems in the mortgage market together with supply of housing being put on the market by foreclosures, those two things, together with psychological and other factors, put us in real danger of driving house prices well below the fundamentals, which would be detrimental both to financial stability and to macroeconomic stability.

So I think there is in many of these situations a case where we have to trade off the short-term moral hazard issues against the broader good, and to think, going forward, in terms of regulation or other practices and also private-sector practices, how we can avoid these problems in the future.

REP. BARRETT: And I know in your statement, Mr. Chairman, you talked about inflation, and you didn't seem to be too concerned. I am concerned. I think the amount of money that the Fed has put into the money supply, the economy -- I think sooner or later that's going to start to percolate a little bit. So kind of tell me, forward thinking, what's your plan to kind of take this money out now, once things get going, so inflation doesn't become a problem.

MR. BERNANKE: Yes, sir. As you point out, we don't expect inflation to be a problem for the immediate future, for the next couple of years, at least, given the various conditions we're seeing. It is very important for us, once the economy begins to recover -- and as usual, the Fed would have to begin to tighten policy -- it's very important for us to begin then to unwind our monetary expansion. We have thought about that very carefully. We're spending a lot of time in our FOMC meetings thinking through how we would do that in each case.

We have -- I won't go through all the details; I've talked about them in some length in some speeches recently -- but many of our lending programs are very short-term in nature. They could be quickly unwound. Some of them rely on our 13(3) authority, which is an emergency authority which must be unwound when conditions normalize.

We also have other tools, such as our ability to pay interest on reserves, which will help us raise interest rates, even if we don't get the amount of money outstanding back down as quickly as we otherwise would like.

So we are quite confident that we can raise interest rates, reduce the money supply, and do that all in a timely way to avoid any inflationary consequences.

I'd point out, in terms of precedent, that the Japanese, with their quantitative easing, tremendously increased the money supply for a long period, and they're still suffering from deflation. So there's no necessary connection. As long as policy is unwound at an appropriate time, which we're certain we can do, that will be a good guarantee against the inflation risk.

REP. BARRETT: Very quickly, Mr. Chairman -- my time's --

REP. FRANK: (Strikes gavel.) No, I'm sorry. We don't have time for another question. Your time has expired.

The gentleman from Pennsylvania.

REP. PAUL KANJORSKI (D-PA): Thank you very much, Mr. Chairman.

Mr. Chairman, last night, of course, the president gave the State of the Union Address, and I thought for the first time he covered two major points that were important to my constituents and many of the people I talk to across the country. And I'm going to talk about you having the opportunity today perhaps to do the same thing. The president not only described the seriousness of the economic problem that we have, but he went on to address the solution to that problem. And it put it in context that people no longer should think, if they listened to his address last night, that this is just an ordinary recession or ordinary times.

As you recanted (sic) in your opening statement, you talked about those fateful days in September. And I remember them quite well, and there's a lot of misinformation and disinformation about what happened. And I think I remember either you or Secretary Paulson saying that when you step away from the precipice and you didn't fall over, many people don't believe that you were in risk of falling over. But I think all of us know that that risk was very present between the 15th of September and, say, the 24th of September, when you appeared before this committee and gave some of the descriptions of the problems.

I think it would be very helpful if you could concentrate on describing those events of that fateful week, how close we came, what actions you recommended and this Congress took to avert that disaster that some of us called a meltdown or destruction of our economic system, so that the American people will begin to realize that you already have been victorious in some respects; that we didn't go over the edge; that you now have a plan, together with the administration, over a long period of time of a year, 18 months or two years, that should bring about recovery.

Now, would you take the opportunity o spell out that week and your success and Secretary Paulson's success in saving --

MR. BERNANKE: Mr. Kanjorski -- (inaudible). The financial crisis intensified quite severely in September. It was sparked in turn, to some extent, by weakening of the global economy. That crisis --

REP. FRANK: (Sounds gavel.) All those pagers have a shut-off. Please use them.

Go ahead.

MR. BERNANKE: That crisis involved the increased pressure on a number of financial institutions, including, as you know, Lehman Brothers, AIG and others. And we were quite concerned that there was going to be a large number of failures that would be extraordinarily dangerous to the world financial system and to the world economy. Secretary Paulson and I came to the Congress and we presented what at the time was viewed as being a very scary scenario about the potential risks to the world economy if the financial situation was allowed to get out of hand.

In retrospect, I think in some ways we were a little bit too optimistic. The power of financial crisis on global economic activity has been extraordinary. We have seen, in my visits to emerging markets, they say, "Well, you know, on Tuesday things were fine; on Thursday suddenly there was just a change in the atmosphere and there was an enormous impact."

So the financial crisis has had a very powerful impact on the world economy and it's still continuing.

Now, in September and October, we came very, very close to a global financial meltdown, a situation in which many of the largest institutions in the world would have failed, where the financial system would have shut down, and, in my view, in which the economy would have fallen into a much deeper and much longer and more protracted recession.

Fortunately, the Congress acted -- obviously very quickly and under a lot of political controversy -- acted to provide the Troubled Asset Relief Program and that funding and the other supports. That funding, together with the FDIC and Fed actions, was able to stabilize our banking system. We've not had a major financial failure since Lehman in mid-September.

Similar actions were taken around the world, by the British, the Europeans an many other countries, to stabilize their banking system. We have obviously had a very difficult time. The recession is serious. The financial conditions remain difficult.

But I do quite seriously believe that we avoided, in mid-October, through a global coordinated action and the wisdom and foresight of the Congress, in providing the necessary funds, a collapse of the global financial system, which would have led us into a truly deep and very protracted economic crisis.

REP. KANJORSKI: Thank you, Mr. Chairman.

REP. FRANK: We will have to go vote. I plan to move this as quickly as possible. I may not make all the votes. We have a 15 and two 5s. I would urge people, if you want to make a quick vote on the second 5, come back.

We're going to keep this thing going. I'll go vote on the first one, because we're going to have a later vote coming up. And I want to maximize members' chances to do this.

The gentleman from Oklahoma, Mr. Lucas, is now recognized for five minutes. Oh, I'm sorry, Mr. Paul for five minutes. I misread my card here.

Mr. Paul.

REPRESENTATIVE RON PAUL (R-TX): Thank you. I have two quick points I want to make.

I want to restate the point I made earlier, about credit not really being capital. And I think that's an important point to make, because we work on the illusion that if we can create credit units at the Federal Reserve System, inject them into the banking system, we have capital. And I maintain that capital only can come from hard work and savings. And I think that's an important distinction.

Also --

REP. FRANK: Will the gentleman suspend?

If members are leaving to vote, please do it quietly, out of consideration for the members who are asking questions. Let me repeat. To my colleagues leaving the room, please hold your conversations till you leave.

The gentleman may continue.

REP. PAUL: Also I wanted to make a point about the definition of inflation. You talked about inflation being under control. But to me, and free-market economists believe inflation is the increase in the supply of money and credit. And sometimes it leads to higher prices in an unpredictable fashion.

And therefore if we concentrate only on the prices, then we don't look at the real culprit. And the culprit is the increase in the supply of money and credit. And obviously that is sky-high right now, when you think about what's happened in the past year.

If increasing the supply of money and credit and low interest rates was a panacea, we should have seen some results. But in the past year, we have done a lot to stimulate the economy. Not much has happened.

In that last 12 months, the national debt has gone up $1.5 trillion. And if you add up what we have spent, in the Congress, plus what you have injected and guaranteed, it's over $9 trillion. And nothing seems to be helping.

But I think our problems started a lot sooner than just last year. I believe they really started in the year 2000. And we were able to, with the help of the Federal Reserve and some housing programs, to reinject and to once again inflate the bubble. But the market really never recovered.

True job growth never existed in the past eight or nine years. And now we're suffering the consequences, because it's a failed policy and it's not working at all. And we don't change anything.

If we got into this trouble because we had no interest rates, getting businessmen and savers to do the wrong thing, just doing more of the wrong thing continuously, I can't see how this is going to be helpful.

My question to you, Mr. Chairman, is this. What will it take for you to say, to yourself, could I be wrong? You know, what if I'm mistaken? You know, how long is this going to go on, $9 trillion?

What if, say, in five years from now we're in a deep, deep slump with your definition of inflation? What if we have high prices going and the economy is very, very weak and unemployment is high? Would you say to yourself, then, boy, maybe I really messed up; maybe I was on the wrong track; maybe the free-market people were right; maybe Keynes was wrong? Would you ever consider that or are you absolutely locked in to your beliefs?

MR. BERNANKE: I am always open to changing my mind when the facts change, absolutely.

I mean, first I'll agree with you about credit and liquidity. The Federal Reserve has the capacity to provide liquidity against -- short-term lending against collateral. We cannot provide capital. We understand the distinction. And that's why the TARP and these other programs have been important.

Obviously, the best kind of capital is private capital, and that's the objective, is to get the financial system in a condition that private capital will come back in. I would view one very important mark of success would be that private capital was coming off the sidelines, as Congressman Bachus mentioned, and back into the financial system.

In terms of the overall approach, I think I do have some historical evidence on my side. There have been many, many examples in the past of financial crises having very substantial negative effects on the economy. The economy has not recovered in many of those cases until the financial situation was stabilized. We know, broadly speaking, what's needed. We need clarity about the asset positions of the banks. We need sufficient capital. We need sufficient liquidity. We need to take other steps to ensure regulatory oversight, as appropriate.

We are working along a -- we're not completely in the dark. We're working along a program that has been applied in various contexts -- obviously, not in identical contexts -- in other countries at other times. And so we're not -- we're not making it up. We know, broadly speaking, what needs to be done. Now, of course, if it doesn't work, we'll have to ask ourselves why not and to address it with other approaches. But we do have a plan here, and I think it's going to work if it's applied consistently.

REP. PAUL: But you don't think there's any point where you might say maybe we went the wrong direction? I mean, what would happen for you to do that?


REP. PAUL: Is there anything?

MR. BERNANKE: I'm telling you, Congressman, I don't believe we'll have an inflation problem in terms of consumer prices. If that turns out to be wrong, then I will concede that.

REP. PAUL: Yeah, some people -- excuse me -- some people think the Depression ended when World War II started. And, of course, others believe it never ended till the end of the World War II when all the bad debt and the malinvestment was liquidated and consumer demands returned.

Do you adhere to the fact that the Depression ended --

REP. FRANK: (Strikes gavel.) The gentleman's time has expired.

REP. PAUL: You used up some of my time, remember?

REP. FRANK: Who did? They start when you start.

We will break for the vote. We will come back as soon as possible. Members who are in line to -- anybody who's back here -- I'll try to get back very quickly and I'll start recognizing members.



REP. FRANK: Mr. Chairman, thank you for putting up with this intermittency here and we go to the Democratic side, Mr. Scott, by virtue of being the only Democrat here besides me is now recognized for five minutes.

REP. DAVID SCOTT (D-GA): Thank you, Mr. Chairman.

Mr. Bernanke, first, let me commend you on an excellent job you're doing in a turbulent time.

I'd like to start off if you could talk about the nationalization issue of our banks and if you could update us on the status of the situation with Citigroup. Could you give us an assessment of where we are within the government's participation and investment in Citigroup? Could you share with us the situation that is developing in reference to preferred and common stock? And could you talk about it in reference to nationalization? Is this the start of it? And what constitutes nationalization? And would we consider Citigroup as an example of nationalization as we need it now to move our financial system towards greater stability? And is this a pattern of things to come within our banking industry?

MR. BERNANKE: Well, Congressman, let me talk about this in the context of the capital assistance plan that the Treasury has announced and the supervisory review, which we are about to begin undertaking. The purpose of that review is to ascertain whether banks, the largest banks, the 19 largest banks with assets over $100 billion, whether they have sufficient capital and sufficient high quality capital to meet the credit needs of their customers even in a stressed scenario, that is an economic scenario, which is worse than even the weak scenario that most private forecasters are currently anticipating.

So we will be doing along with the other regulators, we'll be doing an assessment of all these banks to try to figure out how much capital they would need to meet even that weaker scenario. The banks will then have, they'll be told how much capital they need, if any. Some will not need any capital, but some will and they will have an opportunity up to six months to go out and raise capital in the private sector if they can. If they cannot, then the government will offer them a convertible preferred security, which begins life as a preferred stock, which does not have any voting rights, but as losses accrue and if it becomes necessary to maintain the quality of capital, then the banks would convert that preferred stock into common. Once it becomes common, then, of course, it has voting rights like other shareholders do.

In the case of Citi, you know, we will see how their test works out and we'll see what evolves if they, in fact, have to convert even the existing preferred into common then there could be a more substantial share of ownership of Citi by the U.S. Government.

But what I'd like to clarify and I tried to say somewhat yesterday is that I think that this debate over nationalization kind of misses the point. There's really two parts to the government program, the first is to ensure stability and ability to lend and that involves supervisory review and providing enough quality capital so the banks will have the capital bases they need in order to make loans. But the other part is to use the already very substantial powers that we have through the supervisory process, through the TARP, you know, through any ownership that there is through these shares to make sure that banks do not just sit there, that they don't misuse the capital, they don't continue taking excessive risk that instead that they do whatever restructuring is needed, new board, new management if needed, whatever changes are needed to bring that bank into condition of viability.

So there's not -- doesn't seem to be any need to do any radical change, rather we can use the tools we have to make sure that those banks are behaving in a way which is both good for business in terms of long-term viability, but is also supporting the economy in terms of lending going forward.

REP. SCOTT: So I want to get this straight, are you saying that what we're doing with Citigroup and what will come let's say by the end of this week or the beginning of next week and we look at Citigroup as it is next week this time, would that be an example, an illustration of nationalization of a bank?

MR. BERNANKE: I don't think so. Nationalization to my mind is when the government seizes the bank, zeroes out the shareholders and begins to manage and run the bank and we don't plan anything like that. It may be the case that the government will have a substantial minority share in Citi or other banks, but again, we have the tools between supervisory oversight, shareholder rights and other tools to make sure that we get the good results we want in terms of improved performance without all the negative impacts of going through a bankruptcy process or some kind of seizure, which would be, I think, disruptive to the markets.

MR. FRANK: The gentleman from Oklahoma.

REP. FRANK LUCAS (R-OK): Thank you, Mr. Chairman.

Chairman Bernanke, most of the focus of the credit crisis has been centered on the nation's largest banks and biggest businesses, but there's a whole segment of the financial industry out there that's not received that much attention and that's rural America where literally we have hundreds of thousands of farms and ranches and small businesses that are located out in the countryside in small towns, small cities, communities. While the major banks have been a presence in rural America, some kind of define them as a fair weather friend; in fact, it's the small, independent community banks who are the center of credit availability in most of these communities.

Would you touch for a moment on the health and the status of these institutions? Are they suffering some of the same problems as the major facilities? Are they in a different set of circumstances? Would you expand on that for just a moment?

MR. BERNANKE: Certainly. So the Federal Reserve, of course, supervises many small banks, so we have a lot of knowledge and a lot of experience with these banks. We've always valued the contribution that they make, what the small bank does, what the community bank does is that it has the local knowledge, local contacts and local information and builds the local relationships that allow it to make loans that a large bank may not be able to make and to support small business and agriculture and other activities.

So we think the small banks are and community banks are critical to our system. We are very happy that they're there and we believe they will continue to be important to the system. Some of them, clearly, will suffer in this crisis; it depends very much on the decisions they've made. It's true that small banks didn't get involved for the most part in subprime lending for example. Some do hold though concentrations of commercial real estate and other types of real estate assets, which may lose value under the current circumstances. So some will be in stress and we have had some closures as you know. But on the other hand there is, as you point out, an opportunity also to the extent that large banks are withdrawing from some of these communities and are reserving credit availability to the large customers. There's a new opportunity for some of these banks to reestablish relationships and to come back in and to support the local economy.

So I'm glad they're there and I think they will be very constructive.

REP. LUCAS: Is it fair to say that by the very nature of what their asset bases made up of, deposits, that they have not suffered from some of the same credit seizure problems perhaps as the bigger institutions? And I know that with the downturn in the economy, you have to have a demand for loans, as well as the ability to make loans for the transactions to be consummated.

MR. BERNANKE: Generally speaking, the small banks are very well capitalized. They typically have higher capital ratios than the large money-centered banks and that is standing them in good stead and many of them are in very good condition, and as I said, I expect them to be very helpful in providing credit to local communities.

There are some small banks that are under stress, having to do mostly with their real estate loans in distressed areas, so I can't say that the entire sector is completely without problems, but certainly that many of the banks are very well capitalized or healthy, some have taken TARP funds, some have not, but whatever the case may be, they do have, I think, the resources to play a very constructive role in helping the economies get through this period.

REP. LUCAS: I think it's fair to say from my perspective, of course, that those financial institutions that have been prudent and cautious who have a different makeup in their balance sheet, certainly, as we address the needs and the challenges of the institutions that need the attention and focus across the country, let's hopefully not craft either in Congress or by policy at the regulatory institutions, let's not craft policies that penalize the 6,000 or 7,000 who have been very good stewards in the same of straightening out the problems that do exist. Just an observation, Mr. Chairman.

MR. BERNANKE: I agree.

REP. LUCAS: Thank you, Mr. Chairman. I yield back.

REP. FRANK: The gentlelady from California.

REP. MAXINE WATERS (D-CA): Thank you very much, Mr. Chairman. Let me thank Mr. Bernanke for being here today.

Mr. Bernanke, you have indicated in your testimony that you have done a number of things; you have taken a number of steps. First, you outlined on page two that Congress passed the Emergency Economic Stabilization Act, which created the TARP and then you mentioned that during this period the Federal Deposit Insurance Corporation introduced this temporary liquidity guarantee program which expanded its guarantees for bank liabilities and then Treasury in concert with the Federal Reserve and FDIC, provided packages of loans and guarantees to ensure the continued stability of Citigroup and Bank of America.

You mentioned here that the Federal Open Market Committee basically eased the monetary policy very aggressively so that money is very cheap, zero to a quarter percent and then you talk about to support housing markets and economic activity more broadly to improve market function in the Federal Reserve has begun to purchase large amounts of agency debt and agency mortgage-backed securities and then you talk about having established new lending facilities to support the functioning of the commercial paper market and to ease pressures on money market funds and then you go into a little discussion of the TALF.

Let me just deal with your participation in all of this. How much money do you have the authority to spend? And where do you get it from?

MR. BERNANKE: Well, we don't spend it, we lend it.

REP. WATERS: You get rid of it.

MR. BERNANKE: And so -- and our lending and I want to emphasize is very short-term, it's collateralized and generally speaking, it makes a profit that we return to the Treasury.

REP. WATERS: Yeah. I just want to know how much do you have authority to deal with. Where does it come from?

MR. BERNANKE: The authority comes with our ability to do open market operations. We are able, for example, GSC purchases, take that for an example, our open market operation authority allows us to buy and sell agency securities. If we go out and buy agency securities for $1 billion, say, that $1 billion becomes an asset on our balance sheet. To pay for that, we credit the bank of the seller with a $1 billion deposit at the Fed and both the assets and liabilities of the Fed go up by $1 billion.

So essentially what we're doing is creating bank reserves and the bank reserves provide the cash needed to make those loans.

REP. WATERS: How much have you injected in all of this limited description that you gave us since September and October?

MR. BERNANKE: Well, before the crisis began our balance sheet was about $900 billion and now it's --

REP. WATERS: I can't hear you. How much?

MR. BERNANKE: Before the crisis began, our balance sheet was about $900 billion and now it's about $1.9 trillion, so we've injected about $1 trillion in cash lent to mostly financial institutions on a short-term basis, but also to the commercial paper market --

REP. WATERS: So this is money in addition to the TARP and the guarantees that were given by FDIC, et cetera, et cetera, et cetera.

MR. BERNANKE: It is an addition, but it is not an expenditure and it is returned with interest.

REP. WATERS: Who has returned money with interest so far based on the money that you have lent since September or October?

MR. BERNANKE: All the loans we make -- as you know, about five percent of our balance sheet is involved in the rescues that got involved like AIG, for example. Let me put that to the side for just a moment. The other 95 percent of it is short-term lending, collateralized lending for the most part to financial institutions, commercial paper issuers and others.

REP. WATERS: So how much interest have you received since September and October?

MR. BERNANKE: I don't have a number, but we give to the Treasury every year tens of billions of dollars.

REP. WATERS: So you're about to introduce a lot more money under the TARP? Is that right?

MR. BERNANKE: That's correct.

REP. WATERS: And how do you determine whether or not this money has been effective? You kind of allude to having stabilized some of these markets, but we don't have any proof of it. How are you going to get more proof? How are you going to come to us and say, this is effective?

MR. BERNANKE: There's a good bit of evidence, ma'am. In the case that you're referring to, the TALF, which is intended to try to free up asset-backed securities markets, we haven't lent a single dollar yet, but in anticipation of that, we've already seen the interest rates on auto loans and credit cards and other asset-backed securities come in and we are having an impact. We've seen the mortgage rate --

REP. WATERS: What do you mean the interest rates on credit cards?

REP. FRANK: Out of time, another question. Finish the answer.

MR. BERNANKE: I'm sorry, the cost of financing auto loans, credit cards, consumer loans, student loans, all those things have already begun to improve and that should be passed through to consumers and help expand the economy.

REP. FRANK: The gentleman from Delaware.

REP. MIKE CASTLE (R-DE): Thank you, Mr. Chairman. Chairman Bernanke, sort of following up on that same line of questioning, I'm also very concerned if you listen to speeches on either side of the aisle here, you know they're all concerned about this money getting to Main Street and not Wall Street, so to speak, and everyone is concerned about the banks, and obviously, you've done a lot of lending to major financial institutions, as well as major banking institutions, as well as other financial institutions. But in dealing with, say, Citigroup and Bank of America and maybe the JP Morgan Chase, Bear Stearns connection, do you actually track or have a methodology for tracking how that money is being used, not just the actual lending et cetera, but what is happening to those banking institutions? I've heard you say and you just said in answer to the previous questions that you see greater activity in terms of car loans and mortgages, et cetera.

Is there a true methodology for this that you at the Fed have? And if so, is that being issued publicly? To me, we need good news out there about money going out to Main Street and I haven't necessarily seen it and it doesn't mean it's not happening and I'm just wondering what, if anything, you are doing or planning to do in that area.

MR. BERNANKE: Certainly, well I mentioned this Web site and we're providing more and more analysis and information. I think I need, once again, to distinguish very strongly between the rescue efforts like Bear Stearns and the other 95 percent of what we do. On the rescue efforts as Congressman Kanjorski indicated before, I believe, that by taking those necessary steps, we avoided a much more serious financial meltdown and catastrophic consequences for the global economy.

I will want to say though that it was with great reluctance and great unwillingness that we got involved in those things. In other countries, the government has been able to do it without the central banks' involvement, we would much prefer to have a system in the United States, a resolution regime or some other set of rules by which the government can intervene where necessary under financially unstable conditions to stop the collapse of systemically critical firms without the involvement of the central bank or with limited involvement.

So we did what we had to do there because we felt it was necessary for stability, but we are very happy if we can find a way not to be doing that anymore.

On the -- on the lending side, as I said, we -- we are looking -- we do evaluate the effects. We look at the functioning of the markets. We look at volumes. We look at maturities. We look at interest rates. And the simple indicators all suggest that these methods have gone beyond the normal monetary policy and are effective. You know, the --

REP. CASTLE: Is that being made public? Did the website do that, or is --

MR. BERNANKE: Well, certainly, and I talked about it in my testimony. We have seen sharp declines in LIBOR, which affects the rates that people with adjustable-rate mortgages pay. We have seen sharp declines in commercial paper rates, which affect both high- quality and medium-quality commercial borrowers. We have seen stability in money market mutual funds, which many people have investments in. And we've seen -- even without the issuance of any loans yet, we've seen improvements in the funding costs for credit cards, consumer loans, student loans and small-business loans. So we do believe that we're having a benefit.

It used to be the view that once you got the interest rate to zero, the Fed was stuck. But we have found ways to go beyond that and to improve the economy -- strengthen the economy for average people with new methods.

REP. FRANK: The gentleman will suspend. Please freeze the clock. I'm going to stay here. Members can go vote. We're going to keep going. It's a motion to proceed. I will not characterize its importance, but we're going to keep going. So members -- I would advise members go, come back. I'd like to keep going. So we will now resume with Mr. Castle. Anybody who goes and votes, if you're back here, we'll get you -- we'll call you in that order.

Mr. Castle --

REP. CASTLE: Thank you.

REP. FRANK: -- you resume with the full amount of time remaining for you.

REP. CASTLE: Chairman Bernanke, I'm also concerned about the toxic assets. I mean, that was the original premise under which we created and voted for the TARP program, and yet nothing seems to have fundamentally happened in that area. Is there a plan to deal with that? Should it have been done sooner? You know, where does all that stand at this point?

MR. BERNANKE: Yes, sir. It's a very good question.

I believe that -- I do believe that taking toxic assets off the banks' balance sheets is an important component of creating the clarity needed for private capital to come back into the banks. It's true that the TARP I did not do that, mostly because of the crisis that Congressman Kanjorski talked about, that required immediate injections of capital to stabilize the system. However, the current Treasury plan unveiled by Secretary Geithner has a(n) explicit component which will use public-private partnerships to buy assets in specific categories. And so that will be part of the multi-pronged plan to provide capital, provide supervisory clarity, and to take assets off balance sheets. So that is very much under way, and I anticipate that the Treasury will be providing more detail in the coming -- in coming days and weeks.

REP. CASTLE: Thank you, Mr. Chairman.

And I yield back the balance of my time, Mr. Chairman.

REP. FRANK: The gentlewoman from New York, Ms. Maloney. Again, tell members, go vote, come back; we'll be still here. It's only one vote.

REP. CAROLYN MALONEY (D-NY): Thank you very much for your testimony and your superb work during this financial crisis.

Last night, during President Obama's address to the joint session of Congress, one of his statements that got great support from both sides of the aisle was when he said that the bank bailout program -- (microphone shuts off) -- is not about helping banks -- is not about helping -- (inaudible) -- not about helping banks --

REP. FRANK: You may have kicked it up. Move to that mike.

REP. MALONEY: -- (chuckles) -- is not about -- I'm just going to talk -- is not about helping banks --

REP. FRANK: No, the -- (inaudible) -- recorder. Please move to that chair.


REP. FRANK: We have a recorder who's listening on the tape. An extra 15 seconds. Go ahead.

REP. MALONEY: One of his comments that got a great deal of support on both sides of the aisle was that his -- the bank bailout was not about helping banks, it was about helping people. And I would like to hear your best case on that statement.

Also, since time is limited, I'd like to place in the record and give you a series of letters that have come to me with questions on certain aspects -- systemic risk, exactly where the TARP money is going, whether or not it addressing systemic risk, but one in particular from economist and Nobel laureate Joseph Stiglitz. And he says that we have to devise clear rules about when we will bail out institutions and when we will not. And I'd like to ask you at what point does a financial institution move from "too big to fail" to "too big to save."

And many of your statements yesterday before the Senate were reassuring to many, but you testified that you did not feel that any institutions needed to be nationalized -- financial institutions in our country -- that they were stable and economically viable. Some of my constituents wrote and asked exactly what is your definition of "nationalization," and again, is -- what is the marker or guidelines between "too big to save" and "too big to fail."

REP. FRANK: Without objection, the documents the gentlewoman alluded to will be put in the record.

Mr. Bernanke.

REP. MALONEY: Thank you.

MR. BERNANKE: Thank you. So the point about the need to protect banks in order to protect the public, I think, is a very good one. We have enormous experience with banking crises, and we know that their effects on the real economy, as we've just seen, can be very bad.

Unfortunately, as someone put it, you can't save the banking system without saving banks. So we do have to intervene to try to stabilize the banks, and that's critical to do.

As I've already discussed, I think that the intervention in October prevented a collapse of the global banking system, which would have had extremely severe effects on the global economy and would have taken a very, very long time and much more money to get out of.

And so I think the first accomplishment of the Congress's approval of the TARP funding was to avoid that absolutely catastrophic situation.

Beyond that, the capital that has been distributed to banks has been reducing the pace of deleveraging, of selling off loans, and allowing them to stabilize their credit extensions. And as we go forward, particularly as the Fed begins to work on non-bank credit sources like asset-backed securities, we will see improving loan availability.

The Treasury plan includes a number of ideas about regular reports, baselines, analyses that the banks receiving TARP funds will have to provide to give some indication that, in fact, they are using the extra capital they have to support new lending. And so we will be getting evidence on that as best we can, although it's always going to be difficult to get a very precise reading.

I think of -- with respect to nationalization, I think of nationalization as being a -- a takeover of the banks system, or of banks, by the government.

REP. MALONEY: One hundred percent?

MR. BERNANKE: One hundred percent: zeroing out stockholders and then putting the government in charge of running an institution. I don't think we want to do that; I don't think we need to do that. We may have government ownership shares in some of the banks -- and we will, of course, as government owns shares.

But as I've said before, I -- I've -- do not in any way support letting the banks do what they want or continuing as zombies or just not doing their appropriate role in the economy. But I think we have the tools, short of those Draconian measures, to make sure that banks return to viability and to extending credit to the public.

With respect to choosing when to prevent the failure of a systemically critical institution, we are making those judgments as we go along. Obviously, we're in the middle of a financial crisis. The bar is going to be lower today than other times. I very much am in favor of creating a systematic regime for making those determinations and for addressing those situations in the future.

REP. MALONEY: Does Congress --

REP. FRANK: (Gavels.) The gentleman -- (gavels) -- the gentleman from California.

REP. EDWARD ROYCE (R-CA): Thank you, Mr. Chairman.

And I'd like to ask you, Chairman Bernanke -- as we've seen in recent months, institutions posing a systemic risk can come from any number of sectors within our economy. They can come from investment banks or commercial banks or the insurance sector or government- sponsored enterprises.

As you know, with respect to the insurance sector, we presently have a regulatory structure comprised of 55 individual state regulators without any federal oversight. And I'd like to ask, in your opinion, as someone likely to be integrally -- integrally involved in mitigating that systemic risk as we go forward, is it logically -- logical for us to have a newly created macro-prudential regulator coordinating with 55 individual regulators? Or should the systemic risk regulator have a federal companion to work with, as they do in banking or in securities?

MR. BERNANKE: Well, the issue of the option of a federal charter for insurance is a complex one, and there are a lot of issues involved. But to cut to the bottom line, I think that it would be a useful idea to create a -- a federal option for insurance companies, particularly for large, systemically critical insurance companies.

And in general, I believe that holding-company-level supervision of large systemically critical institutions is very important. We did not have effective holding company supervision in some of the cases where we've had problems, so I do believe that an optional federal charter would be a direction worth giving serious consideration.

REP. ROYCE: Thank you, Mr. Chairman. I've got a second question, and that's, during the stimulus debate, the Congressional Budget Office projected that the federal government is going to need to issue ($)2 trillion worth of Treasury bonds in the coming months. Now, the bond market in the past has not seen anything like that over such a short period of time. And I guess the estimate is during the next two years you might have ($)4-1/2 trillion of U.S. debt that would be issued.

Foreign buyers today absorb, I think, about ($)200 billion a year of the treasuries that -- and you know, that's a useful contribution, if the deficit is ($)459 billion. But if it climbs up, you know, towards ($)2 trillion, my question to you is, then the annual purchases would be about a tenth, and would domestic investors be able to bridge that gap? It looks unlikely, from what I've read on this. So who would be there to buy up the debt? And I'd ask if you're concerned that those parties, you know, just won't be there in the future?

This is part of my concern about the Japanese model, in terms of trying to handle this through spending stimulus. I think they put about ($)1.3 trillion out there and, at the end of the day, they just accumulated more debt, but it cost them a decade of stagnant economic growth. Could I have your response on that, Mr. Chairman?

MR. BERNANKE: Well, Congressman, you're certainly right to be concerned about the debt and the deficits. In terms of the short term, the global market for U.S. debt seems to be accepting of this issuance. Rates are not high, and liquidity is good. Generally speaking, the -- even though there's greater supply, there's also greater demand, because U.S. treasuries are viewed as a safe investment in a world where there are not very many safe investments left.

That being said, as I have emphasized and as the president emphasized last night, we certainly cannot continue to borrow at this rate or to run deficits at this rate. And it's going to be essential as the economy recovers that we bring the deficit down and that we get ourselves back to a more fiscally balanced situation.

REP. ROYCE: Well, even if you were able to inverse the savings patterns of Americans -- and get it up to, let's say, 8 percent, instead of zero, a year -- that probably would only be about ($)800 billion right there of additional savings. So you'd have to go elsewhere, wouldn't you, for the borrowing that we're talking about?

MR. BERNANKE: Yes, but you have global financial markets on the order of $100 trillion and there will be capacity in those markets to absorb debt in the short run, but only if investors believe that the U.S. is on a sustainable fiscal path -- which, obviously, trillion- dollar deficits as far as the eye can see would not be -- would not be sustainable.

REP. ROYCE: Thank you, Mr. Chairman.

REP. FRANK: The gentleman from Kansas.

REP. DENNIS MOORE (D-KS): Thank you, Mr. Chairman.

Mr. Chairman, in these difficult times, when my constituents are anxious and frustrated with the state of our economy, transparency is very important, and it's important to communicate what actions we're taking to protect U.S. taxpayers.

I appreciate the steps the Fed have recently announced, and you've mentioned in your testimony, to increase transparency. Another important issue that came up at our O&I hearings yesterday was a potential oversight blind spot that may exist at the Fed.

In particular, I have a concern that there's a lack of oversight of TARP funds that pass through the Fed. And I understand that the Fed's TALF program will use TARP funds to lend up to $1 trillion to thaw consumer lending markets.

The acting comptroller general, Gene Dodaro, yesterday expressed concern of the GAO's ability to oversee TARP funds passing through the Fed. He said, quote, "There may be some limitations in our ability to provide that type of oversight," end quote, adding that's a concern of his. What oversight powers does the GAO and the SIGTARP have over TARP funds that pass through the Federal Reserve programs like TALF?

Independence of the Federal Reserve is very important, and that is true. Independence is important for the Fed. But when the Fed invokes emergency powers through Section 13.3 of the Federal Reserve Act and greatly expands its balance sheet, what are your thoughts about adding emergency oversight authorities of the Fed to better track the use of TARP funds?

MR. BERNANKE: Congressman, I'm frankly not aware of any limitations on the inspector general or GAO in terms of that evaluation.

The issuers of the ABS that will be sold under the TALF are subject to the same compensation restrictions and all the other rules that apply to any TARP recipient. We have set up a system of -- where firms have to certify and be audited to the fact that they are meeting both the rules of the TARP and that they are correctly representing the assets that they are putting into these ABS.

We've taken a number of steps to safeguard the taxpayer, to protect both the Fed and the Treasury from credit risk in this program. And I don't want to take all your time, but I can certainly go through them. And in particular, we have -- we believe we have addressed all the specific issues that the inspector general raised. But if there are remaining issues, I've met with Mr. Barofsky in various contexts, and I'd be happy to go through it with him.

Part of the reason we've delayed the issue with the -- sorry, the initiation of this program is that we've wanted to make sure that all our legal and procedural steps had been -- had been taken. And we are absolutely committed to making sure that we meet all the requirements that will protect the taxpayer.

REP. DENNIS MOORE: Thank you very much, Mr. Chairman.

REP. WATT: Mr. Hensarling is recognized.

REP. JEB HENSARLING (R-TX): Thank you, Mr. Chairman.

And Chairman Bernanke, welcome once again. I'd like to add my voice to that of the chairman and the ranking member and say that, although it is our responsibility to ask you tough questions, it doesn't mean that we do not appreciate your service. It does not mean we necessarily second-guess your judgment in exigent circumstances where we don't have all the facts. But certainly, as members of Congress, we reserve the right to do so.

First question I have, Mr. Chairman, is I have a very strong preference -- as we try as a nation to work out of our economic turmoil, I have a strong preference for the use of voluntary capital of investors over involuntary capital of taxpayers. Although I don't have any statistical evidence, I've spoken to many individuals and firms within the investment community, and the word that keeps on coming up over and over and over is "certainty."

"We need certainty. We need certainty. We need certainty in legislation; we need certainty in regulation."

Now, I'm under the impression there are billions if not trillions of dollars sitting on the sideline, but until policymakers in Congress put out a program and says, "This is the program," people are still trying to figure out am I going to get bailed out, is my competitor going to get bailed out, is my customer going to get bailed out?

And I suppose in that vein, I'd like for you to comment generally -- and unfortunately, there's a two-part question here, but specifically I think you have embraced -- at least in your testimony on the Senate side you said something along the lines that the plan recently announced by Secretary Geithner would be quite helpful in stabilizing our economic situation. And I don't try to read too much into one-day swings in the market, but it was a bad one day when that was announced, because I think the market viewed it as a non- announcement. And I heard one critic call it a $350 billion in search of a program.

So the specific question would be, do you have details of the program that the rest of us do not have, or do you believe that the market simply doesn't understand the clarity with which -- and precision in which it was presented? So there's a general and a specific question somewhere in there, Mr. Chairman.

MR. BERNANKE: Thank you, Congressman.

On the uncertainty issue, I think we shouldn't lose sight of the fact that the fundamental source of the crisis is the collapse of the credit boom and the fact that banks and financial institutions are losing enormous amounts of money. Given the enormous losses, given the weakness of the economy, it would be surprising if investors felt that the situation was a safe one for them to be investing in.

Having said that, I agree with you that more certainty in policy the better, sooner the better, will be good for bringing more private capital back into the system. And I do believe that the Treasury program is an important step in that it is a comprehensive program. It has different components that, taken together and executed properly, I think will be very helpful in stabilizing the banking system and making it more attractive for private capital to come in.

Your question, though, is, was the plan that was announced a few weeks ago -- was that a fully formed plan. Obviously, it was not. It was a broad proposal, a conceptual proposal, which the Treasury put out to indicate the direction it wanted to go and to invite discussion with Congress and with the public. It was not entirely specific, obviously, and more details are being released as soon as the Treasury can do so.

The Treasury, frankly, is understaffed, and the Federal Reserve and other agencies have been working with them as best we can to try to get the details together. Obviously, I've been in many discussions and so I have some idea where these things are going, and I find the directions very promising. But I'm not at this point able to tell you much, because I'm still waiting, obviously, for the final decisions and for the Treasury to make those announcements. But there is, of course, a great deal of work being done to flesh out the general ideas that were presented initially.

REP. HENSARLING: Chairman Bernanke, we all know that those who do not learn the lessons of history are condemned to repeat them. And fortunately for the nation, we know that you are an astute student of economic history, particularly our own Depression but also Japan's lost decade.

I have a copy of a speech that you gave, before the Japanese Society of Monetary Economists, back in May of '03, where you talk about the economic principle of Ricardian equivalence.

And in that speech, you said, in short, to strengthen the effects of fiscal policy would be helpful, to break the link between expansionary fiscal actions today and increases in the taxes that people expect to pay tomorrow.

You also indicated that the government's annual deficit, speaking of Japan's government's annual deficit, is now 8 percent of GDP and is a serious concern. Moreover an aging Japanese population will add to these budgetary concerns.

Are you in a position to comment on its application to our situation today?

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

(Cross talk.)

REP. HENSARLING: Perhaps we could get that in writing, at a later time, Mr. Chairman.

MR. BERNANKE: The deficits have significant consequences. And one of the consequences is the concerns about the future servicing costs of those deficits. I agree with that.

REP. HENSARLING: Thank you, Mr. Chairman.

REP. WATT: I will recognize myself for five minutes. I was going to skip over and go to Mr. Capuano. But I'll follow on Mr. Hensarling's line, because one of the things that I think is important for us to do is to focus on exactly what has been done, as a means of the public and the market's understanding the totality of what's been done.

And I note, on page seven of your testimony, that you make the following statements. If the actions taken by the administration, the Congress, and the Federal Reserve are successful, in restoring some measure of financial stability, and only if that is the case, in my view, there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.

And you were quoted yesterday on the Senate side as saying something similar to that, although a lot more basic when it was reported in the newspaper. I take it that the totality of the congressional actions is TARP, the stimulus, the second tranche of TARP, what we're contemplating doing with bankruptcy reform.

The administration's role is how it actually administers the monies that we've authorized and appropriated, on the congressional side. And the Fed's role is the trillion or so dollars, in increased assets on your balance sheet, and the multiplier effect that is associated with that, because a lot of it is guarantees and allows lenders to do other things.

I guess the question I have is the same one that I asked in my opening statement: Are there other things that you contemplate that Congress can and should reasonably be considering at this point? Not to comment on the merits or lack of merits. And -- except for flushing out, as Mr. Hensarling has indicated, the specifics of the proposal, what other tools does the administration have, and what other tools does the Fed have? Or is it sufficient, in your view, what has already been done at this point?

MR. BERNANKE: In terms of the immediate crisis, I think that we're on the right track. We've taken a lot of constructive steps. I just ask for Congress to provide support, provide oversight, and as these programs go forward, if they need additional support, to consider that. But we don't know yet whether they will or not. So I think --

REP. WATT: That might be in the form of additional funds.

MR. BERNANKE: Exactly.

REP. WATT: Okay.

MR. BERNANKE: So I think that we are making good progress in terms of the immediate crisis, but there's a lot of work for Congress to do in terms of going forward. You know, I think part of this is we want to guarantee -- at least to assure the public that this is not going to happen again, and give some confidence that that's not going to happen again.

So there is important work to be done. We've talked several times today about a resolution regime for large, systemically critical firms. But regulatory reform that will begin immediately to try to improve risk management, to try to reduce systemic risks, I think those steps would be confidence-inspiring, and that Congress should -- I would advocate that Congress would begin looking at those very soon.

There are a few technical things. The Federal Reserve -- the Treasury and the Federal Reserve would like to work with Congress on ways in which the Fed can better control the money supply, given the amount of lending it's doing. Those are issues we can talk about separately. But broadly speaking, I think support for the program that's currently going on to arrest the financial crisis and then addressing going forward the changes in the structure of the financial and regulatory systems that we're going to need to assure future stability.

REP. WATT: But as far as you're concerned, the things that we have put in place already are the things that are reasonably appropriate to the severity of the situation right now.

MR. BERNANKE: In terms of the immediate crisis, yes.

REP. WATT: Thank you.

REP. KANJORSKI (?): Ms. Biggert is recognized.

REP. JUDY BIGGERT (R-IL): Thank you, Mr. Chairman.

And thank you, Chairman Bernanke, for being here.

I understand that the Federal Reserve and Treasury has -- have announced that TALF will be extended to CMBS.

And I've heard -- or many market participants have raised concerns that TALF only includes new and recently originated loans; when the CMBS has seen virtually no market activity in the last year, and that institutions don't have the balance sheet capacity for new land or refinancing to qualify under TALF.

Given this reality, doesn't there need to be a catalyst, whether in or outside of TALF, to address the legacy assets -- you know, the outstanding issuance and balance sheet capacity issues before TALF can be truly effective?

MR. BERNANKE: Congresswoman, on -- we will be focusing on newly issued asset-backed securities, but they could be backed by refinances, for example. So they need not be loans to finance new construction. They could be loans to finance ongoing ownership or management of commercial real estate property. So I do think we will address that problem in the sense that loans that are refinanced, for example, and then resecuritized would be eligible for the TALF.

REP. BIGGERT: Okay. So let's say they're -- they don't have the balance sheet capacity or the certainty of a secondary market. Have you considered some form of bridge financing or guarantee assistance to give institutions a window to start commercial lending?

MR. BERNANKE: Well, I believe that the -- the TALF program -- and let me emphasize that we will be doing a lot of talking with market participants. We will hear all these issues and we will listen and respond to them.

I believe the TALF program plus our measures to provide liquidity to the financial institutions are an important contribution towards stability in that market. But I would mention again that part of the Treasury program is an asset purchase facility that would buy even Legacy assets which have not been recently issued or rated from institutions. So between those two things, I think we have a pretty comprehensive plan. But I just want to reassure you that, just as we did with the first round of TALF, we will consult closely with market participants and we will make adjustments as needed to ensure that it's an effective program.

REP. BIGGERT: Yeah. But when there's been no market activity in the last year, how are they going to be -- it would have the refinancing then?; there wouldn't be any new or originated loans?

MR. BERNANKE: Well, then it would be -- yes. It would be -- there is market activity in terms of new construction and new projects still going on, but in addition, refinances and existing properties that are resecuritized would be, as I said, eligible.

REP. BIGGERT: But well -- and I see is that CMBS lending went from 240 billion (dollars) in 2007 to 12 billion (dollars) in 2008, which is really, you know, historically low.

MR. BERNANKE: It's practically zero now. And you put your finger on the problem. People talk a lot about credit availability, and part of it is the banking system, certainly. But the biggest part of it is the drying up of the securitization markets, not just for CMBS but for a whole variety of other types of credit. And the Fed has been focused on trying to get those markets going again, setting them up in such a way that when markets begin to recover that the private sector will come back in.

But for the time being, with no activity, the Fed wants to be there to try to help credit flow.

REP. BIGGERT: Okay. Well -- and you're going to expand (help ?) to about, what, $1 trillion?

MR. BERNANKE: The -- this is a joint Treasury-Federal Reserve program, and our agreement was to move towards $1 trillion, considering CMBS and possibly other asset-backed securities following that, yes.

REP. BIGGERT: Do you think that such loans would increase the percentage of risky assets that you hold -- the Federal Reserve would hold?

MR. BERNANKE: We've gone through a number of steps to ensure that we are well protected financially, including keeping the assets simple; requiring that they be purchased by private-sector parties who have a strong interest in making sure they're properly valued; putting on a haircut so that we lend at only 5 to 15 percent below -- the amount we lend is 5 to 15 percent below the -- what the bar -- what the purchaser paid for them; and other protections, including, of course, the capital being provided by the Treasury, which is the first loss position. But our anticipation is that, from the Federal Reserve's point of view, that the credit risks are quite low.

REP. BIGGERT: Thank you. I yield back.

REP. WATT: Mr. Ackerman?

REP. GARY ACKERMAN (D-NY): Thank you, Mr. Chairman.

Thank you for providing leadership during these very perilous times, Mr. Chairman.

I spent part of the break reading nursery rhymes to one of my three very young grandchildren, and I got to the page about "This little piggy went to market, and this little piggy stayed home." And before I started reading it, I was struck with fear. What if my grandson started asking questions? Was it a good time for that little piggy to go to market? Was the little piggy who stayed home a lot smarter? What if he heard that after they did away with the uptick rule a bunch of other little piggies actually ate the market? And was there really a market to go to?

And I figured, you're the country's most important economist, and maybe I would ask you some of those questions that I was afraid to answer before I turned to Mary Had a Little Lamb real quick.

The uptick rule has wreaked havoc, in the view of many of us. Should that not be restored? And the second question I'd like you to ask (sic) is about mark-to-market. If there is no market, how can you have mark-to-market? If the market is based on as much today as emotion, how can we put so many companies in peril of existing when there is no market to mark to and the market is so artificial relative to the real value of so many companies that are now jeopardized?

And if so many of the structured packages that are out there in the financial community contain mixed products, some of which have to be mark-to-market and some of which don't, how does somebody make a decision as to whether or not to invest?

I was hoping you could share some of your thoughts with us, because I obviously think that mark-to-market is a disaster and that we have to restore the uptick rule.

MR. BERNANKE: Well, those are very good questions and obviously very pertinent. On the uptick rule, obviously that's an SEC responsibility. I know that they've been looking at it and thinking about it. The traditional literature on this doesn't seem to find much effect of the uptick rule, but I have to concede that in the kinds of environment we've seen more recently, that it may have had some -- it may -- if it had been in effect, it might have had some benefit. So the SEC is looking at that.

REP. ACKERMAN: Restoring it would have some benefit?

MR. BERNANKE: Restoring it -- that's my understanding. But obviously it's their decision and they'll have to make a determination whether it's beneficial. On the --

REP. ACKERMAN: But we need -- no, the reason I'm asking is you're a smart guy, and we need smart people to weigh in and give us some guidance. Some of us have legislation and we're asking a lot of smart people what they think of the notion.

MR. BERNANKE: Well, the SEC is, of course, responsible for this and they have a lot of experts and they are looking at it very carefully. My sense is that it's worth looking at. And I would say that to the new chairwoman, if she asks me about it.

The second is the mark-to-market issue. It's a very difficult question. Of course, I think in principal we always want to make sure that firms are valued as accurately as possible. You know, it's good for investor confidence that they think they're seeing the true value of the underlying -- of the underlying firm. And certainly for many assets which are actively traded, for example, we want to know what the market value is, as opposed to some historical or book value. And that's what mark-to-market accounting was about it.

However, it is absolutely the case that under certain circumstances, when you have markets where the asset is not traded or is very thinly traded that it's very difficult to use market information to judge what the appropriate value is. And that makes the mark-to-market approach very difficult to execute in a sensible way.

And I don't have any answers for you. I don't think we should junk the system. I think we do need to do what we can to provide good transparent information to investors. But I would also support the efforts that SEC and FASB are doing to look at mark-to-market and to try to provide reasonable advice about how to value assets where there is no market.

REP. ACKERMAN: But let me -- let me just finally -- if I might just finally say, Mr. Chairman, that there -- you know, some of these little piggies are big piggies and they weren't investors. And the uptick rule is connected to the mark-to-market, in that these people, out of sheer greed sold companies --

REP. WATT: The gentleman's time is expired.

REP. ACKERMAN: -- driving down the real value of the companies on the market, but the value of the company was really there, creating a completely artificial system which is going to ruin our whole financial system and investors' confidence.

REP. WATT: Mr. Garrett is recognized for five minutes.

REP. SCOTT GARRETT (R-NJ): Thank the chairman. And thank the chairman as well.

Before I begin, I'll just reiterate a point that I raised the last time you were here, and that was, to your point of transparency, we would like to get as much information as possible. Back in the first week of December, we sent a letter to you listing some -- a number of questions to be answered, and I just bring that to your attention again.

We need to move on some of these issues. You say we need to look to regulatory reform and the like. We need all the information as possible, if you could just check with your office --

MR. BERNANKE: You've not received a reply?


MR. BERNANKE: I -- after some concerns about this, I've asked staff to try to put a one-month limit on reply times, and so, clearly that has not been met in this case, and I will check up on the situation.

REP. GARRETT: Okay. I see your staff shaking -- do they think that we received a reply?

MR. BERNANKE: I don't know.

REP. GARRETT: They think we did. That we did? Okay. If not, I appreciate it.

I appreciate the gentleman from New York raising the questions I was about to ask, so I'll just give a sliver on that question on mark to market. The folks who support mark to market would say, "Well, we already have that provision in the law right now. It allows for the flexibility to make these determinations." But what we know is in practice it just does not occur. And so that's why we need probably more push, if you will, in order for them to change the -- not just the advice, but the actual practice to get to, you know, a sound judgment rule.

Let me go to what was in my opening comment, which you touch upon; I appreciate that. Pushback always is, on this issue -- when we say, well, foreclosure is the problem, why should my homeowner subsidize the guy across the street?" And the answer always is, as you alluded to as well, "Well, because his foreclosure is going to affect me and my street as well."

Well, if you look to -- I mentioned Professor Shiller's comment -- study on this. He said in his study that the impact on foreclosures, on pries, while negative and can be significant, is quite small in magnitude. In other words, referring to the fact, as you well know, that this foreclosure problem that we have nationally is really centered in four or perhaps five states. He says even under extremely pessimistic scenarios, house prices likely would climb only slightly or remain essentially flat in response to foreclosures like those predicted in '08-'09. This suggests that home prices are quite sticky.

And in an article written by -- to give credit where credit is due -- Alan Reynolds, they make point of the fact that "Foreclosure can be a personal crisis but it is not a national crisis," meaning that, for example, foreclosures on mean average is one home in every 466, but in the state of Vermont, for example, it's one in 51,906.

All this suggests that maybe what I'm doing in my state of New Jersey is basically subsidizing those people in the other states and that it is not something we should be asking everyone to (foreclose ?). Can you respond?

MR. BERNANKE: Well, the evidence on the effect of foreclosures on national home prices is somewhat contentious, but there certainly are good economists, including Mr. Shiller and others, who think that the effect on the national home price -- the effect of national home prices is not very large. The example you gave of being across the street, though, there's very strong evidence that the neighborhood is affected, if not the entire economy.

REP. GARRETT: Well, actually -- I'll interrupt -- something I just heard from an expert the other day on that point is it's not necessarily foreclosures on your street, but abandoned properties in your street which will have the more significant impact.

MR. BERNANKE: True. True.

Another issue which we've confronted is that we often see that the foreclosure decision is made by a servicer, rather than the original lender, and the servicer's incentives may often be to proceed to foreclosure even if in some broad economic sense there would be an efficiency gain from negotiating some kind of restructuring agreement. So that's another possible area where there may be an inefficiency in the market's arrangements.

But you know, I agree that there's controversy on these issues.

REP. GARRETT: Yeah. And one area that the president seems to focus on is those properties that are underwater and that they're the most difficulty to go into, and the notes from Mr. Allen's (sp) article is that over -- the other 40 states have a below-average percentage of homes that are less than -- their mortgages are underwater. So again, when we talk about these things in the larger picture, it sounds like a national crisis, but we really have to pin them down.

One last point, just totally off this page. Definition of what "nationalization" is -- I appreciate what your answer is on that. You -- I believe you said that we will have substantial influence as a minority holder in this, which could, I guess, go to executive compensation, perhaps? Yes?


REP. GARRETT: Yes. Dividend distribution, I presume, whether or not --

MR. BERNANKE: Well, dividend -- let me just be clear. We can make strong suggestions about dividends, for example, just from a supervisory perspective.

REP. GARRETT: Right. How about other aspects, as hiring practices? Can that be something that you would be able to use in -- your powers to (direct ?)?

MR. BERNANKE: The supervisors of the TARP -- the ownership would allow the government to require policies of various kinds relating to compensation, relating to hiring and so on. I think it's very, very important -- I think you would agree with me on this -- that we don't want the government involved at the level of business operations, making loans, making those kinds of decisions. But at the level of overall business planning, dividends, things of that sort, I think, as a shareholder and as a supervisor, there's a legitimate basis for that.

REP. FRANK: (Strikes gavel.)

REP. GARRETT: Thank you.

REP. FRANK: Well, because time has expired, and because we are at a point of agreement between you and the gentleman from New Jersey, I think it's propitious to move on.

The gentleman from California.

REP. BRAD SHERMAN (D-CA): Thank you, Mr. Chairman. I'd want to pick up on what Mr. Ackerman said. We do need the uptick rule, and as to mark-to-market, does it make sense to mark to market once- marketable securities that are no longer marketable while refusing to ever mark to market those loans that have never been marketable? To mark to market that which is no longer marketable while not marking to market that which has never been marketable seems paradoxical, at best.

As to what Maxine Waters was talking about, you do have under Section 13-3 unlimited power to lend money in terms -- unlimited quantity of money that you can lend on security that the Fed finds adequate. You've indicated that so far you've expanded your balance sheet only a trillion dollars, but I hope you world provide for the record a list of the commitments that the Fed has made that could go well beyond that and the guarantees the Fed has issued in addition to amounts loaned.

The New York Times, for one, is saying that government actions, chiefly the Fed, add up to over $8 trillion. And it would be interesting to be able to compare their reports with your analysis of the risks the Fed has taken and the loans the Fed has made or anticipates making.

As to nationalization, it seems like the ghost of Eugene Debs is amongst us, until you actually look. "Nationalization" is probably a term that would be used for what we're going to do for those banks that would otherwise be in bankruptcy or receivership.

Now, with regular bankruptcy or receivership, only FDIC deposits are made safe by the government. In contrast, "nationalization" seems to be a code word for bailing out the bondholders, which would cost hundreds of billions or trillions of dollars. And in that way, nationalization is a slogan that could be used to say, oh, my God, we on Wall Street hate it, it's terrible, it's left-wing, but it's really a way to bail out the bondholders of those banks that have failed so badly that we've given up on bailing out the shareholders.

I would hope that anything approaching nationalization means that we go through receivership, we -- and then we give a -- you know, there's the reductions of the unsecured creditors, and then maybe we take over the bank or maybe we don't. But the idea of using the term "nationalization" to justify bailing out bondholders seems counterintuitive, and probably a mistake.

As to AIG, you know, there are reports that they have a fourth- quarter loss. How -- I'd like you to answer for the record how certain you are that the Fed has not lost any money on the AIG transactions you've engaged in so far. And then, do you think that there is adequate security somewhere in AIG to allow you to make relatively risk-free additional advances to that entity?

As to the stress test, I hope that you would respond for the record why you're going to use tangible equity capital, rather than Tier One capital. And more importantly, given the severity of economic problems that we've had over the last -- more than a year, I think, why was this stress test not something being done by the bank regulators? Why is it something that the new administration is doing? I would think stress testing is what you do every day.

I hope that we have time for an oral response to my last question -- relates to your efforts to urge the banks not to pay dividends. Congress, Treasury and the Fed have all begged and implored the banks on the issues of compensation, perks and dividends. And the issue is then, "Why are we begging? Why are we imploring? Why are we embarrassing them? Why aren't we telling them what to do?"

Are you prepared to go beyond asking the banks not to pay dividends, to say that you will not engage in future transactions with banks that have federal money and that still pay dividends? And when I say transactions, I mean the new transactions of this post-September world, not the ordinary business you were doing in 2007.

MR. BERNANKE: The -- excuse me, the regulators jointly issued in November a statement on lending to creditworthy borrowers, which addressed a number of these issues, including dividends, and which said that we would be reviewing policies about dividends with respect to capital adequacy and the like.

And I think your point is very well taken, that firms that need -- particularly need government assistance or have -- are short capital, you know, should be paying little or no dividends. And that's certainly an appropriate policy. We'll be looking at that very seriously.

REP. FRANK: The gentleman from Texas.

REP. RANDY NEUGEBAUER (R-TX): Thank you, Mr. Chairman.

I want to cover a couple of bases here. First of all, on your swap lines, is that number at about a half trillion now? Is that -- is that pretty close? I looked at that the other day.

MR. BERNANKE: That's about right, yes.

REP. NEUGEBAUER: Could you furnish me a list of the countries that you are involved in swap lines with?

MR. BERNANKE: Yes. We -- that was -- in a recent testimony, I gave that list. But yes.

REP. NEUGEBAUER: Could I have it? And is Ukraine one of those countries?





And -- because a number of these countries, obviously, you know, their creditworthiness is -- is falling. And are you concerned in any that the U.S. arrangement with these entities could be in jeopardy, where you could lose money?

MR. BERNANKE: We are not. We are not. We have not been involved with wide members. We've dealt mostly with industrial countries that -- with which we have a lot of confidence.

REP. NEUGEBAUER: Thank you for that, and I'll look forward to that list.

It has been publicized that this -- you're going into a stress test on the banks, and some people are talking about what will be the best way to evaluate the conditions of these banks. And tangible common equity seems to be coming up is maybe that is a better indication.

One of the things that I have done today is dropped a bill that would preclude the Treasury or the Fed from buying common stock. If we're going to make -- put taxpayers at risk, they should be in a preferred equity position and not be diluted by being made a common shareholder. But I understand that there is some discussion where there's some thinking that you would actually -- for example, in Citibank, that you're thinking about buying common shares there. How do you justify that?

MR. BERNANKE: The Federal Reserve is not going to -- has no authority and is not going to be buying any common shares.

REP. NEUGEBAUER: But as a part of the TARP program, is the Treasury thinking about that?

MR. BERNANKE: As the -- the Treasury has already discussed this in their initial rollout, and -- which is that they proposed to be issuing convertible preferred securities, which are initially preferred, but if the stress test shows or as time goes by and losses accumulate and the bank needs more common equity as part of its overall capital structure, that that preferred share -- those preferred shares would be converted into common.

REP. NEUGEBAUER: Why would we do that?

MR. BERNANKE: Well, on the one hand, we need that to strengthen the banking system so that they will -- you know, they will be able to make loans and support the economy.

In terms of government protections of taxpayers, obviously, the terms under which they're converted and the other aspects of that, including voting rights, will be relevant to that. The Treasury, I believe, is working on features that will make the shares attractive from an investment perspective as well as a financial stabilization perspective.

REP. NEUGEBAUER: But I don't understand why we would put the American taxpayers' dollars at the bottom of the food chain. In other words, if we're going to beef up the capital, and we've made substantial capital infusions into these entities, why we would now move away from some of the protection that's enjoyed, by the preferred, to a common equity, I mean, can you -- I'm having trouble following that logic. Can you --

MR. BERNANKE: Well, it's simply the concern that the private, sorry, the preferred equity shares have reached their limit in usefulness and that in order to provide enough, quote, "high-quality capital," these companies need more common equity.

REP. NEUGEBAUER: Well, but, I mean, I think, the question is, if you're -- depending on what standard that you're using, and if you're using a standard that's not giving those entities credit, for the equity that we've already put into those entities, isn't that somewhat self-defeating?

MR. BERNANKE: No. Our standards, our regulatory standards include the preferred stocks from the government as tier-one capital. But there are two considerations. One is that our rules also specify that the "preponderance," quote, of tier-one capital should be common.

That's one consideration. That's in our existing rules. But secondly the markets have also shown a very strong preference for common, in terms of trusting the capital bases of these banks. And so those two considerations have played into these determinations. But I leave it to the Treasury to further explain and explain how they're going to provide protections.

REP. NEUGEBAUER: Here's the problem If you go in and you do a stress test, on a large bank, and you have a determination -- this banks fails the stress test -- and you go and put taxpayers' money in, as additional common equity, how in the world do you think they're ever going to attract any additional capital?

MR. BERNANKE: Because the amount of capital that goes in will, first of all, be enough to make the bank well capitalized, not only well capitalized but have enough capital that they'll be able to stay well capitalized, even in a more adverse economic scenario than is currently expected by private forecasters.

So that's the first thing. The second thing is that once the banks are stabilized, then other measures, including for example the asset purchase program, will take some of these hard-to-value assets off their balance sheets.

Those two things together ought to make banks more attractive to private investment. As the private investment comes in, there are provisions which will allow the public investment to be replaced by the private investment.

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

The gentleman from New York.

REP. MEEKS: Thank you, Mr. Chairman. And for the purpose of asking a question, I'm going to yield 30 second to Mr. Adler.

REP. ADLER: I thank the gentleman.

With respect to TALF 2, do you anticipate including commercial auto leasing, auto fleet leasing in the TALF 2? I'm sure you're aware that there may be 900,000 cars and light trucks that are included in this sort of fleet leasing arrangement. I think it's a critical part of our economy.

MR. BERNANKE: I don't know the answer to that. We can certainly look at it.

REP. ADLER: I appreciate that. Thank you so much.

I yield back the time.

REP. MEEKS: Thank you.

Mr. Chairman, let me just ask you a quick question on international monetary policy for a second. Who do you think should be responsible for providing surveillance of systemic risk for the international economy?

MR. BERNANKE: Well, we have international institutions like the IMF, for example, which has expertise in financial matters, which does for example what's called an FSAP, a Financial Stability Assessment Program.

It goes in different countries and tries to assess the strength of their financial systems, their regulatory systems and the like. The United States is currently about ready to undergo one of those FSAP programs.

But it's -- and we have -- in addition, we have a number of international organizations like the Financial Stability Forum and the Basel Committee where supervisors and regulators from around the world come together and discuss international issues, international regulatory issues and so on. But it's -- even though there's a great deal of international cooperation and coordination, certainly we don't have any kind of central authority that has the ability to require a country to make specific changes. We -- it's more of a cooperative attempt to come together on certain principles.

REP. MEEKS: So I know that in the fall the G-20 meeting delegated most of our guests to the Financial Stability Forum. And I think, you know, the IMF should play a role, but -- and with the various institutions, looking at maybe a division of labor with each institution having some responsibilities, something they come to -- even though -- even if it's informal, because the key is to have some kind of international regulation. Otherwise, even what we do here, our markets could be affected unless there's some kind of sense of cooperation.

MR. BERNANKE: That's a very good point. And everything we do -- as Congress goes forward and looks at our -- at regulatory reform in the United States, we have to be sure that it's consistent and coherent and matches up with international regulations, if only because our firms are international, our markets are international.

The Financial Stability Forum, the IMF and other international bodies have been very useful in doing evaluations of the crisis, diagnosis of the crisis. And at a minimum, we should look at their recommendations as we make our own decisions.

REP. MEEKS: Now, I think that you've mentioned in prior speeches that the United States could benefit from expanding the Fed's oversight authority to include nonbank financial entities. And my question, then, what are the pros and cons of creating a microprudential supervisor for the United States?

MR. BERNANKE: First, I think it should be a very high priority for the Congress as we go forward to make sure that a financial crisis like this never happens again. And there are a number of things that can be done in that direction. That includes, for example, improving our regulatory oversight of the largest, most systemically relevant institutions. It includes strengthening our financial infrastructure, the ways -- the methods by which CDS and other kinds of derivatives are traded. It involves improving our regulation to reduce the pro- cyclicality inherent in our capital regulation, perhaps in our accounting rules, as some members have already discussed.

So there are a number of things that we could do to try to reduce the exposure to -- of the system to a crisis in the future absent what you're talking about, a macroprudential regulator. And I think we should do all those things.

That being said, I think there is some benefit to moving in a direction whereby some body or a group of bodies would have an ability to look at the system as a whole instead of looking only at each individual institution in isolation to try to establish or determine emerging threats or risks that might be a problem for the system as whole. So I think there is a reason to be looking at that.

The Federal Reserve has a long-standing role in financial crisis management.

And I think we would very likely want to be involved in some way in that process, but specifically how that would be structured or who would be doing it, those are issues I think the Congress needs to address.

REP. MEEKS: Would there be any countries, for example, that we could look to, or you would look to, for models of the -- for the reform?

MR. BERNANKE: Well, a number of countries have taken steps in that direction. Just to give one simple example, the Spanish banking supervisor instituted a capital -- bank capital system which allows for more accumulation of capital during good times, to have it be available to run down during bad times. And that seems to have helped their banking system throughout this crisis. So there are a number of different steps that you -- that have been modeled by different countries that we could look at.

There is not, to my knowledge, any country that has a full- fledged macro-prudential supervisor, but there's been a great deal of discussion about what that would involve and what are the components of such a system.

REP. MEEKS: Thank you.

REP. FRANK: We're going to go until the next vote. The chairman has agreed to stay -- has agreed to actually stay till 2, but we'll probably have a vote around 10 after or quarter after, and it would not make sense to stay after that, so we'll go into the first vote. Everybody here should be able to get a question in (his ?) five minutes.

The gentleman from Texas, Mr. Hinojosa.

REP. RUBEN HINOJOSA (D-TX): Thank you, Mr. Chairman.

Chairman Bernanke, thank you for coming to visit with us and inform us. I think I can understand your likely frustration when you hear that people want to nationalize the banking system. And I've heard from a lot of small community bankers calling in this morning and wanting some clarification so that I say that in most cases they don't redefine nationalization -- which can be tricky, and maybe we can discuss that.

But let me go back to history and say that in 1933, in the wake of the 1929 stock market crash and during the nationwide commercial- bank failure and the Great Depression, the president signed into law the Glass-Steagall Act. That act separated investment entities and commercial banking activities. At the time, improper banking activity, or what was considered overzealous commercial-bank involvement in stock market investment, was deemed the main culprit of the financial crisis of that time.

According to that reasoning, it seems to me, commercial banks took on too much risk with depositors' money. Additional and sometimes nonrelated explanations for the Great Depression evolved over the years, and many questioned whether that Glass-Steagall Act hindered the establishment of financial-services firms that can equally compete against each other.

When Congress passed Gramm-Leach-Bliley, last few years, it negated the Glass-Steagall Act by allowing banking and securities and insurance companies to operate in affiliation with each other under the organization form of financial holding companies. The -- that act permitted financial holding companies like financial subsidiaries of banks to engage in a variety of activities not previously allowed to banks or companies owning banks. Under the act, you and the Treasury Department, which contains the Office of the Comptroller, have authority to issue regulations expanding activities for financial holding companies and the financial-services entities, respectively.

So that leads me, then, to my question to you, Chairman Bernanke. In light of the current financial crisis which we're in, which numerous banks have received considerable capital infusion from the government, would you agree that we need to revisit Gramm-Leach-Bliley to determine if we should reinstate the Glass-Steagall separation of banking and commerce?

MR. BERNANKE: Congressman, I would first observe tangentially that there were separate standing investment banks in this crisis which didn't do very well. In a way, it was in some ways fortuitous that they were able to become bank holding companies, become part of banking -- more consolidated systems.

I think that we need to look very hard at our system, and I think everything should be on the table. We should talk about all these issues. My own sense, though, is that the holding company structure can be made to work but we do need to take more seriously than we have the idea of a consolidated holding company supervisor; that although that position was there in practice, in principle, and the Federal Reserve had that responsibility for bank holding companies, we need a stronger oversight from the top that looks at the overall firm -- looks at the risks being taken by the overall firm and not just a firm-by-firm type of analysis.

So I guess my bottom line is, yes, let's look at everything. Second, I think, though, that a holding company form can be made to work; but third, if we do that, we need to make sure that we have strong holding company supervisors who are looking at the entire firm and are aware of the risks to the entire firm.

REP. HINOJOSA: In the calls that I received this morning from commercial bankers -- or rather not commercial, but what we call community banks, those that have less than 25 billion (dollars) in assets, are saying that some of them took money that was available here in that first batch of money that we lent out, but that the vast majority of it went to the 25 mega-size banks. So they simply feel that people like you and our chairman need to speak up for community banks so that they're not thrown into the same big mess that the big megabanks have gotten into.

Thank you.

MR. BERNANKE: I understand.

REP. FRANK: The gentleman from Michigan, Mr. McCotter.

REP. THADDEUS MCCOTTER (R-MI): Thank you, Mr. Chairman.

I'd like to pick up where my colleague from Michigan, Mr. Peters, had raised the issue of the TALF and how it would or would not help the American auto industry. I guess that there is some concern that because the AAA credit rating standard that you're trying to apply to people who qualify under the TALF, that the automakers might not. I was wondering if you could assuage me of many concerns that I may have that auto financing will not be covered by that.

MR. BERNANKE: The first portion of the TALF, which is going into operation very soon, includes certainly auto loan asset-backed securities and also floor plan loans for dealers.

I'm not sure about this auto leasing question that was -- that was asked. We do require AAA securities, but remember that a AAA security can be a senior tranche of a security which has different layers of seniority. So it should still provide substantial support to auto loans, and therefore to help the customers of the auto companies to be able to purchase vehicles. So it's our belief that we will be -- through this program, we'll be helping the automobile industries through -- by providing credit to customers. But we will, obviously, look at that again, if necessary.

I would mention, also in our commercial paper program, again, we have an A1/P1 top credit rating requirement. But our intervention in that market at least has -- has occurred at the same time as a significant improvement in commercial paper rates for even A2/P2 borrowers. And so there, too, I think some help is being given.

REP. MCCOTTER: Yes, I appreciate that, because the concern is with the financing the dealers get to purchase the cars from the manufacturers. And so I just want to be clear, with the TALF going forward.

And I don't want to sandbag you with an article you haven't been able -- might not have been able to read yet, but the Wall Street Journal article today has caused grave concern back home in Michigan and amongst the auto industry that the TALF would not help dealers to refinance, to be able to purchase, get credit to go purchase the cars from the manufacturers; which as you know, at the time that the federal government, outside of the reserve, is trying to deal with the bridge loans to the auto industry, would be a death knell to them.

So I just want to make sure that in the process that I'm hearing, is that we with the Fed will be doing everything it can to assist the extension of credit to both consumers and the dealers.

MR. BERNANKE: Well, let me assure you that what we have been doing, as I mentioned before, is consulting closely with the participants in these markets. And where we have found that there are barriers to participation that we could do something about, we have done so. And we will -- we will look at this again, as well.

REP. MCCOTTER: I appreciate that. And finally, and so the AAA credit rating that has been reported as being required, which is a requirement that you would impose as the Federal Reserve, is one of those obstacles that could be removed?

MR. BERNANKE: Well, given the concerns of some of your colleagues about credit risk, I'm not sure about that. But I would like to point out that -- again, that you don't have to have all AAA credit -- AAA underlying assets -- to get a AAA credit rating, if you take, say, a more senior tranche of the asset-backed security. So it does not rule out making loans even to weaker credit histories.

REP. MCCOTTER: Well, I appreciate that. I just want to make sure that we're aware of the obstacle that we're concerned about. And as for credit risks, I understand that, too. And the worst thing we could do for any type of credit is to increase the foreclosure crisis by putting a whole lot of men and women that are working in the auto industry out of their jobs and out of their homes.

So it would seem to me that I have registered with you my concern that you do everything you can to remove any obstacle to the auto industry's survival through the TALF program.

REP. FRANK: The gentleman from Massachusetts, Mr. Lynch.

REP. STEPHEN LYNCH (D-MA): Thank you, Mr. Chairman.

And thank you, Mr. Chairman. We learned in the February report from the TARP oversight panel that the banks that had received TARP money in exchange for their assets had actually overstated the value of those assets that they held and had sold in return for TARP money by about a third. The total was about $78 billion that the American taxpayer overpaid for what the banks said they had.

And this goes to a number of issues. It goes to the mark-to- market or mark-to-make-believe argument, if we're going to allow these banks to value their own assets, according to their own model. And it also goes to the reassurances that we're hearing from you, to a certain degree, and also from Sheila Bair that these banks are adequately capitalized.

Obviously if the assets they hold are not worth what they say, it's going to affect their capitalization rate, and if the assets were proven to be, like in this previous report from the oversight committee, valued at far less than what they stated, then those banks, if it's as big a spread as 33 percent, as what we're seeing here, that would affect whether or not these banks are indeed adequately capitalized.

I'm just wondering, in your assessment, are you accepting the banks' own opinions of the values of these assets, or are we digging through, like Mr. Barofsky and Mr. Dedaro (sp) and Ms. Warren are, on the oversight panel, going through there and digging and looking at some of these exotic derivatives that -- CDOs, whatever they're holding there as assets, in order to get a firm sense of what the values are? Are we doing that?

MR. BERNANKE: Of course we're doing that, but let me address first that question about the $78 billion.


MR. BERNANKE: There was not a purchase of assets. There was no overvalued assets being sold. What happened was, of course, was that the government made preferred stock investments in the banks. And we know what we have. They're investments in the banks. They pay a certain dividend. They pay a reasonable dividend.

Now that calculation was based on the following analysis, which was, if the government had matched the same terms as the best deal that had been gotten by anybody in recent weeks or months, you know, how much better a deal could the government have gotten? And they concluded that if the government had negotiated like Warren Buffett, maybe they could have gotten a better deal. In that sense, the government didn't get all it could.

But as that report also acknowledged, the government's program wasn't just about making the best possible financial deal; it was also about having a broad-based program that would be accessible to lots of banks, that would bring financial stability, that would be easy to get out of when the time came.

So the idea that there was some kind of fraud here, I think, is entirely wrong. There was no misrepresentation.

REP. LYNCH: Well, you need to take that up with the Oversight Committee, sir, because I spoke to them all yesterday, before -- I sit on another committee, Oversight Committee. And the direct and straight assessment that they made, in that report, and confirmed yesterday was that the taxpayer had indeed overpaid and that the assessed value by these banks, of those assets, was overstated.

That's the way, and I tested them on this. And they did nothing to dissuade me from believing --

MR. BERNANKE: Their own report says that there were other issues to be considered, which they did not take into account in making that evaluation. But let's just --

REP. LYNCH: All right. Let's leave that aside.

MR. BERNANKE: On the other issue, obviously we have to rely to some extent on a bank's systems and information in evaluating their asset values. There's no way around that. But we certainly test very hard their methodologies. We do sample testing of different assets. And so we're doing all we can, to make sure that their evaluations are accurate. And of course besides the supervisors, they have auditors and others who are looking at their analysis.

And one of the purposes, of this supervisory review that we're undertaking right now, is not only to make sure we have a tough evaluation of asset positions, both under the mainline scenario and under the stress scenario, but to make a special effort to make sure that the different regulatory agencies, the different institutions are valuing in a consistent way, so there won't be any distinction between those who are more aggressive and those who are less aggressive in marking down their assets.


In closing, I just want to say, Mr. Chairman, I appreciate you coming here. But from the sound of President Obama's remarks last night, it sounds like the financial service industry is coming back for more money. And the risk appetite here, based on what we've seen in this last round, is not very high. So you know, credibility means a lot here.

Thank you, Mr. Chairman. I yield back.

REP. FRANK: The gentleman from Illinois, Mr. Manzullo.


Chairman Bernanke, I appreciate your perseverance and also your candor. And I want to thank you for the service that you're lending, to our country, at this very difficult time.

I've got a dry-erase board in my office where I've identified seven choke points on the flow of credit getting through to the hands of the consumers. And some of those are -- involve even overnight money, from large banks to community banks, where they're now charging larger fees and requiring collateral that was never required before.

FHA -- (inaudible) -- now require, through their lenders, FICO scores, which were never required before. It was otherwise based upon good lending standards. The people that put out the FICO scores, the three companies; if there's an error, it can take 60 to 90 days to correct the error, if at all. And it's one problem after the other.

And now we've got community banks who are experts at lending, in the community, have taken a look at whether or not they should take TARP money. But the requirements are so onerous and so restrictive that they have ready, willing, eligible people willing to lend to, that they're not going to take the TARP money.

I met this past week with a retailer. Assets are four-to-one. And the regular bank says, "that's it, we no longer do asset-based lending."

I have a manufacturing company with orders that wants to expand and they money can't get through.

And so we have all these chokepoints where it's being forced from the back to the large banks, and now to some community banks, but it's not breaking loose, Chairman. And I know that's what you want to do. And I don't know where to start on this, but we're asking your advice because now we're way down to the consumer end on it.

And have you taken a look at the FICO score errors and how that's -- for example, how that's keeping people from -- from otherwise qualifying?

MR. BERNANKE: On the errors, no, that's not really our domain.

REP. MANZULLO: I know. But it's a plug to the work that you're doing.

MR. BERNANKE: We are working -- as I have talked about today, we are working at all levels to try to free up the credit stream, from cutting interest rates to working on the ABS markets to lending to banks to our examination process to try to make sure that there's appropriate balance between caution and lending to creditworthy borrowers.

Some of this, frankly, is the rebound from a period where credit standards were too loose.


MR. BERNANKE: And we've seen some tightening, but obviously we need to make sure credit's available or the economy's not going to recover.

REP. MANZULLO: The other question is community banks back home are really complaining over a tightening of lending standards by the regulators to long, long-time customers, people who have never been in default. And what we see is a whole new group of people are really being injured, the people who never had the problems in the first place. And have you -- have you ever thought about meeting with the -- with the regulators, including yourself, to see if there's a reason why there's -- a reason as to maybe there's too much in unreasonable regulations going on now at that end?

MR. BERNANKE: Absolutely. It's always been a problem in downturns that examiners want to be cautious. They don't want to, you know, allow risky loans because they're afraid what -- you know, that the bank would lose money. But at the same time, that cuts off credit that could otherwise be flowing.

REP. MANZULLO: But they're being -- they're being overcautious now.

MR. BERNANKE: They could be overcautious.

REP. MANZULLO: And the money's not coming through --

MR. BERNANKE: We have taken -- we have taken explicit action on this front. In November, there was a joint statement by the four federal regulators about lending to creditworthy borrowers, and emphasizing that the safety and soundness of the banking system depends on long-term profitability as well as on short-term caution, and long-term profitability includes maintaining good credit relationships with creditworthy borrowers, and supporting a broad economy -- supporting the broad economy so that it'll be healthy and produce a good economic environment with the banks.

REP. MANZULLO: I'll follow up --

MR. BERNANKE: But we are -- we are -- we have talked to all of our supervisory staff. We are communicating with our examiners. I urged feedback if this is happening because we are determined that the examiners should do a fair balance between appropriate caution, safety and soundness -- which is essential, of course -- but not to deny unreasonably credit to good, creditworthy borrowers, particularly long-standing customers.

REP. MANZULLO: (To Rep. Frank.) Can I ask one more question, Chairman?

REP. FRANK: (Off mike) -- time.


REP. FRANK: The gentleman from Massachusetts. We'll be able to fit everybody in because we have a vote. Gentleman from Massachusetts.

REP. MICHAEL CAPUANO (D-MA): Thank you, Mr. Chairman.

Chairman Bernanke, first of all, thank you for doing this all day. And I apologize; I've had to come in and out, I haven't heard all the questions, so some of the questions might be redundant.

I'd like to go back to actually at the beginning of the hearing, when you talked about who -- what caused -- what was the trigger, I think was the term used. And I agree with you: borrowers who borrowed more than they should, lenders who gave it. But I also want to add one more thing, that I actually think, in the final analysis, the people who were put there to prevent that very thing from happening, namely the regulators, across the board fell down. If the regulators had done their job, in my opinion, they would have been able to choke off most of the funding that was made available through these incredibly leveraged and highly complex financing mechanism; and they could have done something about the credit-rating agencies basically lying; they could have done something about the accounting mechanisms that were made up; they could have done something to stop banks from creating these subsidiary corporations that didn't exist on their books somehow. So I agree with you that the borrowers and the lenders were both responsible, but so were the regulators. They weren't anyplace to be seen.

A few weeks ago, you were here on some other issues, and we talked about your marriage to the Treasury Department. And I will tell you that, right now, the marriage doesn't seem to be going so well from my end of the world, for the very simple reason that, three weeks later, I still don't have a clue what they're talking about for their bad asset bank, whatever they're going to call it. I guess the new term now is, what, "legacy assets"? It's a good term. Whoever made it up, give him a raise, because it sounds much better than "toxic assets." But from what I understand, it's the same thing. And I would encourage you to go back and tell your partners please, at some point, maybe we should know what they're doing, maybe America should know what they're doing. That might help, at least with their plan.

And the next issue I want to talk about -- and again, I think you did talk about it with others, and I apologize if it's redundant. But nonetheless, it's important to me. As I understand it, with this capital asset program, there is some discussion now about swapping out what is currently our preferred position, that basically only puts us at risk if the bank completely goes sour -- guaranteed income, et cetera, et cetera, first in line -- with swapping that out for a position with common voting stock? Now, I'm not sure I have any -- there are no details that I'm aware of, but these are all based on news reports and on your joint statement. But if that's true -- and then on top of that, increasing our position to a 40-percent position? If I understand that correct, that would put us in a weaker position, open taxpayers to a much riskier position, without having the ability to then change management or to do anything. A minority position of 40 percent gives us nothing. And it strikes me that if you want to put more capital into the bank, go ahead and do it. You already have the facilities to do it. You've done a great job creating new ones. But to swap us out for a common position I think runs counter to everything we've discussed here. And I'm just wondering, am I missing something? And if so, please clarify it.

MR. BERNANKE: Well, first, the details of the instrument are still being worked on, should be available shortly, and that will describe how, you know, their -- what protections the taxpayer will be getting in this particular instrument. A lot depends on the details, obviously.

In terms of the controls, though, as I've noted, if there is -- even if there is 40 percent or less government ownership, we still have numerous tools to make sure that the banks are moving in the right direction in terms of taking necessary steps to return to viability and return to ability where they can lend. So for example, you mentioned management. We already have considerable power as supervisors to insist that management or the board be changed if it's -- if it's not performing well.

So --

REP. CAPUANO: But how do you -- if we have to take a 40 percent position in a huge bank, please tell me what the definition of failed management is.

MR. BERNANKE: We would have -- if we have a 40 percent position of a bank, we would obviously have a great deal of influence on management, on board, on policies, on structure, on capital structure, all those elements. So it will not be a case of give them the money and go away.

It will be a case of --

REP. CAPUANO: At some point, if it's 40 percent, I mean, when does it make sense to either go to 51 percent and I know the word nationalization and nobody wants to talk about it and I actually think it's a misnomer if you want the truth. It's not a word I'm interested in using because it doesn't mean anything to mean. But at 49 percent for the sake of discussion, isn't just easier to have the FDIC come in and do what they do and to have you do what you do in the normal course of events? At some point, it no longer becomes an investment, it becomes -- they're on life support and that's, to me, strikes me as us, you, whoever, for some reason just stopping short of what's necessary.

MR. BERNANKE: Well, I don't think we want to let large institutions fail --

REP. CAPUANO: I agree. I agree.

MR. BERNANKE: So we want to do it in a way if we think that the firm can be strengthened and can be made viable and can become part of the recovery, part of the solution, I think that's what we ought to do and the difference between 49 percent and 51 percent is not that great in my opinion. I think, in any case, with a minority ownership share, with the supervisory authorities and the like, we can take very strong steps to make the banks improve their situation.

REP. CAPUANO: Thank you, Mr. Chairman.

REP. FRANK: Thank you, Mr. Chairman. As you work out the specifics of this marriage with Treasury, remember, my colleague like me is from Massachusetts, we give you more leeway in doing marriages than some other places.

The gentleman from North Carolina.

REP. JONES: Thank you, Mr. Chairman.

You mentioned earlier, I think, in response to Mr. Lynch's questions or spoke of the stake we got in Goldman and the appearance that Berkshire Hathaway, Warren Buffett did much better in his negotiations than we did.

On its face, getting a 40 percent stake in a common share stake in a company for $45 billion when a company has a current market capitalization of $10 (billion) to $12 billion, it doesn't sound like a very good deal there. If there's an explanation for that, could I get that in writing while it's really a much better deal that nit appears on its face?

Mr. Chairman, I am not reflexively anti-government or pro-market, I am a Democrat. I think there are some things that government does well that markets do poorly or don't do at all. Valuing securities is not one of those. That really is the core competency of markets and it's something that government generally doesn't do at all, but one of the stated reasons, probably the principled stated reason for the Paulson plan last September and October for buying troubled assets was establishing a market for them.

Is that going to be part of the rationale for the public-private partnership to take troubled assets off books?

MR. BERNANKE: Yes, precisely. That is a difficult challenge and we want to make sure that the prices of the assets that are purchased reflect true market values that are not overpaid. So the idea behind the public-private partnership would be that there would be both public and private money involved and that the pricing decisions would be made by private sector specialists, not by public bureaucrats.

REP. JONES: What do we bring to that partnership other than just a contribution of capital? Are we going to be guaranteeing assets?

MR. BERNANKE: No. One of the key contributions is that we're providing financing. One of the problems today is that there may be many investors out there saying, well, there's great bargains in terms of assets that I could buy, but nobody will lend me money to give me leverage to buy these assets and hold them for a period of time until they recover.

So if the government is willing to provide longer term lending or leverage, then there are many investors who presumably would be willing to buy under those circumstances who are unwilling to buy without the credit, without the lending they need to finance those purchases.

REP. JONES: I look forward to hearing the details. There was a quick discussion of mark to market. The current mark to market rules -- if there's an active market; we use that price to value assets. If there's not, there's a fair amount of leeway that we can use or the financial institutions can use -- computer models, can assume a hold to maturity.

Isn't that essentially the same analysis that the stress test will do, projecting in different economic scenarios what happens to the bank? Isn't that the same thing --

MR. BERNANKE: Well, the stress test will use the same GAAP accounting that all other evaluations use, that is, mark to market accounting for those mark to market assets, accrual accounting for accrual assets. What's unusual and different about the stress test is that it's a coordinated analysis across 19 major institutions at the same time, which will look not only at the projected losses, the projected outcomes under the main line or baseline scenario, but also at the outcomes under a so-called stress scenario or situation where the macroenvironment is worse than anticipated to make sure that there's sufficient buffer for the banks to be able to lend even in that worse scenario.

REP. JONES: But that projection of different -- what happens in different economic circumstances, isn't that exactly the same as the model that values assets?

MR. BERNANKE: Well, it's part of it; it could be part of it, that's right. There are a lot of things that go into valuing assets, including many details about the nature of the assets and who underwrote and so on --

REP. JONES: The Fed is one of our leading safety and soundness regulators and have that jurisdiction for all members of the Federal Reserve Board, which is pretty much every bank in America. In addition, you've taken $2 trillion in assets as security, as collateral. Are we not doing that already? Are we not doing that already as part of safety and soundness or part of looking at the value of assets as collateral?

MR. BERNANKE: Yes, of course, we're valuing assets. What's new about the assessment process that we're undertaking here is primarily that we're doing it consistently across all of these institutions so that investors will get a sense, both of what these firms look like in the stress scenario, but also a sense of comparing among firms under a comparable scenario.

REP. JONES: If banks are insolvent, can you offer any argument, rationale based on economics or on ethics why shareholders or rather taxpayers should bear that loss instead of shareholders and creditors?

MR. BERNANKE: It's a complicated question, but one problem that we have is we don't have a bankruptcy system that would allow us to wind down a big global institution in a safe way that won't be incredibly disruptive to financial markets and to the economy, and so what we need to do is find a way to do that can involve all of the necessary restructuring, all of the necessary steps, but without the financial implications of a disorderly bankruptcy of a global financial institution.

REP. FRANK: The gentleman from Indiana.

REP. CARSON: Thank you, Mr. Chairman.

Mr. Chairman, my colleagues and I hear from constituents every time we go home about the barriers our constituents face, who are on the verge of foreclosure; they try to work out programs with servicers to modify their loans. In January, the Fed announced a program to modify mortgages obtained from JP Morgan, AIG, Bear Stearns, that are now held by the Federal Reserve.

Under the details released, Mr. Chairman, the plan states that if the Federal Reserve holds the subordinate, but not the senior mortgage, the Fed will work with the servicer or the senior mortgage to modify the loan. The question for me becomes two things, sir, how does the Fed anticipate working with servicers that have so far been unresponsive to constituents and even congressional offices who try to reach out on their behalf? And secondly, what tools do you plan to use, sir, to bring about meaningful mortgage modifications on the subordinate mortgages for homeowners?

MR. BERNANKE: Well, we've already been working and we've already had some loans modified. We have been doing outreach for the borrowers, which is one of the big issues and we have been contacting the servicers and when I say we, in many cases, it's our agent on our behalf because we don't directly manage the mortgages to try to find solutions for delinquent borrowers.

So we're addressing some of the same issues that every owner of mortgages is facing. I should say that, you know, if the administration's plan is followed through, then there would be a uniform approach for all government-owned and other classes of mortgages that fall under that plan. So we at the Federal Reserve, we would conform to the administration's set of rules and criteria. Among the elements of that plan are bonuses, money paid to servicers to try to make sure they have enough manpower, resources, to reach out to borrowers, to reach out to other lien holders and to undertake the work necessary to complete restructuring to avoid preventable foreclosures.

So we would be going into the same program that the administration has lay forth for the purpose of consistency, but we have instructed our agents to take those steps wherever possible and we've had some early success in getting mortgages modified.

REP. CARSON: I yield back the balance of my time, Mr. Chairman.

MR. FRANK: The gentleman from Minnesota.

REP. PAULSEN: Thank you, Mr. Chairman and Chairman Bernanke.

I was just curious and I'll ask this question. Recognizing that we and the market have been having difficulty valuing assets on major banks on the balance sheets, you know, my constituents and I certainly have heard a lot about the whole issue of mark to market accounting recently about the suspension potentially of that accounting mechanism as a possible method of addressing the banking crisis.

Could you just discuss maybe from your perspective some of the pros and the cons of why mark to market might be a good idea to suspend or regarding implementation of the policy and for what period? Just some thoughts on that.

MR. BERNANKE: Certainly. As I discussed earlier, the basic idea of mark to market accounting is very attractive, the idea that wherever there are market values determined in free exchange, that those market values should be used in valuing assets so that investors would have a more accurate sense of what the institution is worth. So that's the principle and it's a good principle in general.

Going very back to the beginning of this change in the accounting rules, however, the Federal Reserve had reservations about the fact that some assets such as individual CNI loans for example don't trade frequently in markets, and therefore, much more difficult to value on a mark to market basis. This problem has become much more severe recently because many assets that were at one point traded in markets now no longer are because those markets have dried up or illiquid or not functioning in any serious way.

So we've heard a lot of concern about our assets, are some assets being misvalued at too high or too low based on the use of mark to market modeling or mark to market asset evaluations.

There's no simple answer to that question. I don't think that there's any real appetite among the accounting authorities, for example, for suspending mark to market accounting because there's still a great deal of valuable information in the market values that is useful to investors, at the same time, the accounting authorities have recognized that the mark to market principles don't work very well for some assets in situations with liquid assets, liquid markets and they have promised to issue guidance. They've issued some guidance about how to address those situations.

So I think it's important for them to continue to think about appropriately advising banks about how to value assets that are not frequently traded and how those valuations ought to appear on the income and balance sheet statements of the banks.

So some real challenges there and I think the accounting authorities have a great deal of work to do to try to figure out how to deal with some of these assets, which are not traded in liquid markets. But I don't see a suspension of the whole system as being constructive because there is a great deal of information in valuing many of these assets according to market principles.

REP. PAULSEN: Well, Mr. Chairman, that helps me from the perspective of someone who is a mathematics major and understands what's necessary for accounting purposes that it's a difficult situation if you did go back on it and I think this is going to be a conundrum for the committee or for us as we continue to deal with new circumstances and the new situation and we're in an unchartered territory and so I hope that this is something this committee is going to be able to look at with thoughtfulness in terms of doing it in the right manner and the right way so that we're being more prospective looking down the road.

Thank you very much.

REP. FRANK: Thank the gentleman. Finally, Mr. Green, if any members are listening our staff is here, don't bother coming.

Mr. Green.

REP. GREEN: Thank you, Mr. Chairman and thank you Chairman Bernanke.

I have been in and out today. I have the honor of also serving on Homeland Security and Chairwoman Napolitano has appeared before Homeland today, so its been an exciting day to say the very least.

I have a couple of questions. The first has to do with the stock market. For whatever reasons, the stock market seems to be the asset test for the strength of the American economy. I would like if you can to tersely comment on this and tell me to what extent should we rely on the stock market, which is an international market? To what extent do you think we should rely on it as an asset test for the strength of the economy?

MR. BERNANKE: Well, the stock market is one important financial indicator; it's not the only indicator. There are credit markets, for example, which are telling somewhat different stories than the stock market in some cases, I mean, some of them have shown some improvement in the last few months.

With respect to the stock market, it is important because it does reflect the profit expectations of a large number of firms, and therefore, it's closely tied to expectations about the economy. That being said as you point out, a large share of the profits that are being reflected in stock prices are not U.S.-based, they're foreign based, so that obscures the connection just a bit. And secondly, the risk appetite of investors changes over time and right now, standard measures of the risk premium that investors are charging to hold stocks are at very high levels relative to anything we've seen in recent decades, suggesting that part of the reason the stock prices have fallen so much and are so low is that investors are just very skittish about holding any risky assets and have moved in a very substantial way towards the safest assets like Treasury securities.

So I think, at least, in part, the stock values reflect not so much the fundamentals in the sense the long-term profitability of the economy, but they also reflect investor attitudes about risk and uncertainty, which right now are at very high levels.

REP. GREEN: Thank you. Next question has to do with credit default swaps. I know that we have made substantial investments in AIG, but the credit default swaps have not been dealt with in their entirety.

Can you give me some indication as to where you think we're headed with the credit default swaps?

MR. BERNANKE: Certainly. From our perspective and from the perspective of the financial system, one of the main concerns about credit default swaps was counter-party risk, that you would sign one of these agreements with another party, think you had protection against some form of credit risk and then the counter-party would fail or be unable to make good on their promises, and that's a way in which failure in one company could be transmitted to failure in other companies and you could have contagion in the financial system.

So the Federal Reserve has been working for some time to try and strengthen the clearing and settlement trading systems under which CDS are traded, going back to even before the crisis, the New York Fed was very much involved in trying to improve the efficiency of the trading process.

Now, going forward, though, I think, it's very important that where possible move CDS and some other over-the-counter derivatives, not in all cases, but where possible and where appropriate to central counter-parties, that is to organizations that stand between the two sides of the bargain and control the credit risks so that if one side defaults, the collective of participants in the central counter-party make that good so that we don't have the transmission of credit losses from one counter-party to the other.

The Federal Reserve and the other regulators in the United States, as well as European regulators have been very active on this front and we have a number of firms in the U.S. which have proposed to open central counter-parties for CDS, as well as some in Europe and we expect to have those in place very soon.

REP. GREEN: One final question, Mr. Chairman. This has to do with the mark to market. If we bifurcate the instruments into performing and non-performing and mark to market those that are in default, as well as those that are about to be sold, those that are not in default, not about to be sold, separate them and mark them to market only if they go to default or are about to be sold.

Does that help to resolve the question?

MR. BERNANKE: It wouldn't in an accounting perspective because even -- if you have a large number of alt-A mortgages for example, your experience shows that a certain number of those are going to default after a certain period of time and even if you have some which are relatively new and haven't defaulted yet, you know there's going to be some loss experience there and there's going to be some percentage that are going to go bad and the usual practice would be to make some allowance in advance, even though if none of them have actually defaulted yet, you know some of them will and so you take some provisions against that.

So you don't want to assume zero loss just because you haven't had a default up to date.

Thank you, Mr. Chairman.

REP. FRANK: Time has expired. The chairman has been gracious with his time in the midst of the interruptions and the hearing is adjourned.

REP. BERNANKE: Thank you.

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