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34–673 PDF 2007

MONETARY POLICY AND THE STATE

OF THE ECONOMY, PART I

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

FEBRUARY 15, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–3

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MARSHA BLACKBURN, Tennessee 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

February 15, 2007 ............................................................................................ 1

Appendix: 

February 15, 2007 ............................................................................................ 61

WITNESSES 

THURSDAY, FEBRUARY 15, 2007

Bernanke, Hon. Ben S., Chairman, Board of Governors of the Federal Reserve 

System ................................................................................................................... 7

APPENDIX 

Prepared statements: 

Neugebauer, Hon. Randy ................................................................................. 62

Waters, Hon. Maxine ........................................................................................ 64

Bernanke, Hon. Ben S. ..................................................................................... 71

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hon. Ben S. Bernanke: 

Board of Governors of the Federal Reserve System, Monetary Policy 

Report to the Congress, dated February 14, 2007 ..................................... 81

Responses to questions submitted by Hon. Ruben Hinojosa ........................ 112

Responses to questions submitted by Hon. Albio Sires ................................. 115

(1)

MONETARY POLICY AND THE STATE OF THE 

ECONOMY, PART I 

Thursday, February 15, 2007

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Barney Frank [chairman of 

the committee] presiding. 

Present: Representatives Frank, Kanjorski, Waters, Maloney, 

Gutierrez, Watt, Ackerman, Sherman, Moore of Kansas, Capuano, 

Hinojosa, Clay, McCarthy, Miller of North Carolina, Green, Cleaver, Bean, Moore of Wisconsin, Davis of Tennessee, Sires, Hodes, 

Ellison, Klein, Mahoney, Wilson, Perlmutter, Murphy, Donnelly, 

Wexler, Marshall; Bachus, Baker, Pryce, Castle, Royce, Lucas, 

Paul, Gillmor, Jones, Biggert, Shays, Capito, Feeney, Hensarling, 

Garrett, Pearce, McHenry, Campbell, Bachmann, and Roskam. 

The CHAIRMAN. Today’s hearing of the Committee on Financial 

Services will come to order. This is the semi-annual hearing that 

we have on the Humphrey-Hawkins Act, with testimony by the 

Chairman of the Board of Governors of the Federal Reserve System, Hon. Ben S. Bernanke. Chairman Bernanke will be testifying 

on the state of the economy and discussing the Federal Reserve’s 

2007 Monetary Policy Report to the Congress. Under the procedures, Chairman Bernanke alternates between the House and the 

Senate. This is done twice a year—once a year, the chairman goes 

to the Senate first, and once a year, he goes to the House first. 

Since, in this rotation, he went to the Senate first, one assumes 

that there will be no opportunities to game the stock market today. 

Those all happened yesterday, so people can stay through the 

whole hearing. Reporters won’t have to leave to run to report to the 

wire services so people can hysterically overreact to the Chairman’s 

perfectly sensible statements, which, of course, is the pattern. Although I know people who are in the market explain that they are 

not overreacting themselves—they are, in fact, reacting to other 

people’s overreaction—the consequences are the same. 

I say that because, in the interest of being able to have rational 

policy discussions unconstrained by irrelevant factors, I just would 

plead with people not to read excessively into what the Chairman 

says, and not to read excessively into what we say. We ought to 

be able to have rational conversations about the important topic of 

today’s hearing without the overreactions. And I would say, since 

that may not be possible, as far as I am concerned, people overreact at their own peril. And I don’t think the Chairman or anyVerDate 0ct 09 2002 18:40 May 02, 2007 Jkt 034673 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\34673.TXT HFIN PsN: TERRIE
2

body else should be held accountable because people engage in this 

form of anticipatory hysteria. 

As to the subject at hand, and under the rules, there will be four 

opening statements—by myself, the ranking member of the full 

committee, the chairman of the Subcommittee on Domestic and 

International Monetary Policy, and the ranking member of the subcommittee—and the Chairman has very graciously agreed to stay 

until 2 p.m. I am deeply appreciative of this. 

This is a very large committee. We will take one 15- to 20-minute 

break, and members can gauge appropriately. And we will be able 

to accommodate more of the members if we can. Mr. Chairman, 

again, I appreciate your willingness to do this. 

I will be asking the Chairman about some of the specifics of his 

testimony, and of the areas particularly relevant to monetary policy, but I want to begin with an expression of disappointment, not 

in Chairman Bernanke, but in the business community and many 

of my conservative colleagues. I believe that we are at a very sensitive point in the making of economic policy in this country. 

There is, on the part of the business community and many of its 

supporters, the view that a full embrace of globalization—of technological change, essentially of public policies that allow capital to be 

fully mobilized and fully mobile, and able to be employed to its best 

use—is in the best interests of society as a whole. 

For some time now, until fairly recently, that was the governing 

policy in the United States, and in much of the rest of the world. 

That has now come to an end, I believe temporarily, perhaps for 

a long temporary period, because increasingly, average citizens, in 

America and in other countries, have come to doubt that the 

growth that results from this policy of entirely free capital to move 

to wherever it finds its best return, people have come to doubt that 

this is in their interest. Indeed, there are a large number of people 

throughout the world who believe that they are being hurt by this. 

And in consequence, we are at a policy deadlock. I think people 

should understand that the chances of an extension of trade promotion authority going through are quite slender at this point, unless there is some change in the attitude of many who are its advocates. 

My own view is that if they were, in fact, to come to an agreement in the Doha Round, that the resulting agreement—if they 

reach it as they currently talk about it—wouldn’t pass the House 

of Representatives. There is resistance, in my view unfortunately, 

to the general approach that the President took on immigration. 

In almost all of the important areas in which—and let me just 

say, this committee reported out earlier this week on a voice vote 

a bill for foreign investment, and there was a paradox. Because if 

you talk to the people in the business community, as the ranking 

member and I, and the former chairman of that subcommittee, and 

others involved in that, if you talked to them, they were, on the 

whole, pleased with the result because it was better than they had 

expected. 

If you read some of the business press, they were concerned that 

it was too restrictive. Well, that is an example of where we are. It 

is a bill that was more restrictive than some might have liked on 

3

foreign investment, but better than some people expected reflecting 

this mood. 

So I want to reiterate what I said earlier. Many of us are prepared to work towards policies that are pro growth, that do take 

advantage of what you have when capital is allowed to reach its 

best level and find its greatest return, when technology can be fully 

taken advantage of, but only if we put in place public policies that 

make sure that is more fairly shared, and in particular, that reverse the tendency which the Chairman has acknowledged, and I 

appreciate that, and which the President has acknowledged, that 

inequality has been growing. 

As I said before, inequality is an essential part of a capitalist 

economy—no one is trying to get rid of it, at least no one sensible. 

But it can also become excessive to the point where it is socially 

harmful and economically beyond what is needed for the capitalist 

system. 

We are at that point. We are at a point where there is an excessive amount of inequality in this economy. And it is growing, and 

not just in this economy. I recently read an article which said that 

in the last set of state elections in India, every chief minister who 

was seen as pro foreign was defeated in terms of the economy. So 

there is a worldwide concern. We see in Latin America where an 

anti-democratic left is threatening the democratic left in part because of this economic unhappiness. 

I don’t see any recognition of that. I regret that. But people who 

will continue to resist trying to do something about healthcare or 

trying to do something about the right of employees to join unions, 

even something as minimalist as the minimum wage should not be 

surprised when they run into absolute resistance to other things 

which they will argue are good for the economy. 

With that, I call on the ranking member. 

Mr. BACHUS. Thank you, Mr. Chairman, and I appreciate you 

holding this hearing. And Chairman Bernanke, thank you for your 

report. As you can see, on this committee, we share the same concerns, but we have different views on how to address those concerns and different philosophies. And as you come before us today, 

we are interested in your insights regarding not only monetary policy but also the state of the economy, and as the chairman specifically mentioned, global competitiveness and trade and issues of 

that nature. 

Of course, when we talk about differences of philosophy—as the 

chairman and I have—on how to approach these issues, how one 

perceives the state of the economy greatly depends on one’s point 

of view. 

From my perspective, the economy appears strong and vibrant, 

and absent some unforeseen shock, likely to remain so. When I look 

at your report and the supporting economic data, I see vigorous 3.4 

percent growth. I see low unemployment of 4.6 percent and inflation of 2.5 percent. 

And in a society where opportunity awaits anyone who uses their 

talents and efforts to improve the standard of living for their family—opportunities are there, educational opportunities, and work 

opportunities, that is what I see from your report. I see 71⁄2 million 

new jobs created since 2003. 

4

I see a structurally sound economy performing as well as it did 

in the 1990’s in what we now know is an artificial economic bubble. 

Currently, I see strong 2.2 productivity increases and record 

stock market levels not fueled by unrealistic dot.com speculation, 

but by globally competitive businesses. 

I also see most Americans benefiting from the stock market 

growth through individual stock ownership and retirement funds. 

In this environment, claiming that record corporate profits do not 

benefit most Americans—as some on this committee do—is not a 

valid argument. 

Others have a different perspective. You have heard the chairman’s perspective. And they see another reality. Some on this committee believe that the best way to create jobs and promote economic growth is through aggressive trade restrictions and barriers. 

While I recognize the need to help those economically displaced 

or as the chairman says, hurt, by global forces beyond their control, 

economic experience does not lead me to the conclusion that protectionism or isolationism is an appropriate response. 

Some think we need to somehow mandate the elimination of income disparities. While I share the exasperation of the chairman 

over some of the outrageous CEO compensation recently reported, 

I believe our corporate governance system works and that shareholders will correct these abuses without Government interference. 

I believe education, not government attempts to redistribute income, is the proven route to improve wages for all workers. 

Chairman Bernanke, the members of this committee, Republicans and Democrats alike, respect your experience, your judgment 

and your obvious commitment to keeping America’s economy strong 

and competitive. We all share a goal of doing that and doing what 

is best for American workers. We appreciate you being here and 

look forward to hearing your comments. 

The CHAIRMAN. The gentleman from Illinois, the chairman of the 

Subcommittee on Domestic and International Monetary Policy is 

recognized. 

Mr. GUTIERREZ. Thank you, Mr. Chairman. And thank you, 

Chairman Frank. Chairman Bernanke, I think it is safe to say that 

you and I have different backgrounds and that we bring disparate 

perspectives to the table when dealing with economic and monetary 

issues. But after taking over the chairmanship of the Monetary 

Policy Subcommittee, I am getting a sense of the significant and 

daunting task that you face. 

You should rest assured, however, that I will be here over the 

next 2 years, along with 443 Members of the House and 100 Members of the other body, to second-guess your every move. 

When it comes to economic and monetary policy, we are entering 

a very crucial and complex period, especially for the Federal Reserve and its mandate of maximum employment, stable prices, and 

moderate long-term interest rates. 

For example, the housing boom has taken a substantial downturn. Energy prices have climbed and we are facing some serious 

issues about our long term energy security. Some economists warn 

the threat of inflation is on the horizon. Yet others appear less worried about inflation than the rising mortgage delinquencies and 

foreclosures effecting a wider economy. 

5

The two major Asian currencies are undervalued, and the U.S. 

trade deficit is at record highs, while accusations of currency manipulations are frequently leveled against both China and Japan. 

And perhaps most important of all, we face a huge Federal deficit 

at a time when baby boomers are reaching retirement age and 

healthcare costs are at an all time high. 

While I am anxious to hear from you, Mr. Bernanke, what concerns me most is retirement insecurity. When it comes to kitchen 

table issues, retirement insecurity is the obstacle for many American families. The U.S. economy is now producing over $13 trillion 

a year. But many American families are struggling just to maintain 

their living standards and they are up against stagnating wages, 

diminishing healthcare, and retirement benefits that are just disappearing. 

More and more families are living paycheck-to-paycheck with 

very little in their bank accounts or none at all, and paying higher 

interest rates and more fees than they should. And hanging over 

their heads is retirement. 

I know, Chairman Bernanke, that you have publicly addressed 

the related issues of retirement insecurity, the budget deficit, and 

the looming retirement of 78 million baby boomers on several occasions. But from what I have heard and read, you have approached 

the problem only in terms of entitlement reform. Entitlement reform is needed. No question. But this is not just an issue of entitlement reform. The skyrocketing cost of healthcare are not just going 

to disappear if we reduce entitlement spending. The costs will just 

be shifted to already strapped family budgets. Many baby boomers 

are simply not financially ready for retirement. If we substantially 

cut healthcare, and Social Security spending for the baby boomer 

generation, many will face healthcare crises that will drive them 

into bankruptcy. 

The correlation between rising healthcare expenses and personal 

bankruptcy filings is well-documented. And merely moving these 

expenses from the public sector to the American families, in my 

opinion, is not good for long-term economic growth. We need more 

than entitlement reform to give Americans retirement security. I 

would like to hear your views on this today. 

Clearly, no single political party and no single body, the Fed, the 

Congress, or the Administration, has the answers to the problems 

we face. We must work together. And I look forward to an open 

frank dialogue with the Federal Reserve, my subcommittee counterpart, Dr. Paul, and the Treasury Department on all these issues. 

And I yield back the balance of my time. 

The CHAIRMAN. The gentleman from Texas, the ranking member 

of the subcommittee. 

Dr. PAUL. Thank you, Mr. Chairman, and welcome, Chairman 

Bernanke. I am very pleased to be here today as the ranking member. In the midst of a great optimism of monetary policy and how 

the economy is doing, I still have some concerns. And of course, one 

of my long-term goals has always been to emphasize maintaining 

the integrity of the monetary unit, rather than looking superficially 

at some of our statistics. But I also share the concern of the chairman of the committee of our responsibilities for oversight and your 

6

interest as well, Chairman Bernanke, on having the transparency 

that I think we all desire. 

Transparency in monetary policy is a goal we should all support. 

I have often wondered why Congress has so willingly given up this 

prerogative over monetary policy. 

Congress, in essence, has ceded total control of the value of our 

money to a secretive central bank. Congress created the Federal 

Reserve, yet it had no constitutional authority to do so. We forget 

that those powers not explicitly granted to the Congress by the 

Constitution are inherently denied to the Congress, and thus, the 

authority to establish a central bank was never given. 

Of course, Jefferson and Hamilton had that debate early on and 

the debate seemingly was settled in 1913. But transparency and 

oversight are something else, and they are worth considering. Congress—although not by law—essentially has given up all its oversight responsibilities over the Fed. 

There are no true audits. Congress knows nothing of the conversations, the plans, and the action taken in concert with other 

central banks. We get less and less information regarding the 

money supply each year, especially now that we don’t even have access to M3 statistics. 

The role the Fed plays in the President’s secretive working group 

on financial markets goes essentially unnoticed by Congress. The 

Federal Reserve shows no willingness to inform Congress voluntarily about how often the working group meets, what action it 

takes that affects the financial markets, or why it takes these actions. 

But all these actions directed by the Federal Reserve alter the 

purchasing power of our money, and that purchasing power is always reduced. The dollar today is worth only 4 cents compared to 

the dollar that the Federal Reserve started with in 1913. This has 

significant consequences on our economy and our political stability. 

All paper currencies are vulnerable to collapse and history is replete with examples of great suffering caused by these collapses, 

especially to the Nation’s poor and middle class. 

This can lead to political turmoil as well. Even before a currency 

collapses, the damage done by a fiat system is significant. Our 

monetary system insidiously transfers wealth from the poor and 

the middle class to the privileged rich. Wages never keep up with 

profits on Wall Street and the banks, thus sowing the seeds of class 

and discontent. 

When economic trouble hits, free markets and free trade are 

often blamed, while the harmful effects of a fiat monetary system 

are ignored. 

We deceive ourselves that all is well with the economy and ignore the fundamental flaws that are a source of growing discontent 

among the various groups. Few understand that our consumption 

and apparent wealth is dependent on a current account deficit running at approximately $800 billion a year. 

This deficit shows that much of our prosperity is based on borrowing rather than a true increase in production. Statistics show 

year after year that our productive manufacturing jobs continue to 

go overseas. This phenomenon is not seen as a consequence of the 

7

international fiat money system where the U.S. Government benefits as the issuer of the world reserve currency. 

Government officials consistently claim that inflation is in check 

at barely 2 percent, but middle class Americans know that their 

purchasing power—especially when it comes to housing, energy, 

medical care, and school tuition—is shrinking much faster than 2 

percent per year. 

Even if prices are held in check in spite of our monetary inflation, concentrating on the CPI statistics distracts from the real 

issue. 

We must address the important consequences of the Fed manipulation of interest rates. When interest rates are artificially low, 

below market rates, insidious malinvestment, and excessive indebtedness inevitably brings about the economic downturns that everyone dreads. 

We look at GDP figures and reassure ourselves that all is well. 

Yet a growing number of Americans still do not enjoy the high 

standard of living that monetary inflation brings to the privileged 

few. Those who benefit the most are the ones who get to use the 

newly created credit first— 

The CHAIRMAN. The gentleman’s time has expired. If the gentleman will come to a conclusion. 

Dr. PAUL. I will yield back. 

The CHAIRMAN. I will now turn to the Chairman. And he is recognized for his opening statement. 

Thank you. 

STATEMENT OF HON. BEN S. BERNANKE, CHAIRMAN, BOARD 

OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. BERNANKE. Chairman Frank, Representative Bachus, and 

other members of the committee, I am pleased to present the Federal Reserve Monetary Policy Report to the Congress. Real activity 

in the United States expanded at a solid pace in 2006, although the 

pattern of growth was uneven. 

After a first quarter rebound from weakness associated with the 

effects of the hurricanes that ravaged the Gulf Coast in the previous summer, output growth moderated somewhat on average 

over the remainder of 2006. Real Gross Domestic Product is currently estimated to have increased at an annual rate of about 23⁄4

percent in the second half of the year. 

As we anticipated in our July report, the U.S. economy appears 

to be making a transition from the rapid rate of expansion experienced over the preceding several years to a more sustainable average pace of growth. 

The principal source of the ongoing moderation has been a substantial cooling in the housing market which has led to a marked 

slowdown in the pace of residential construction. 

However, the weakness in housing market activity and the slower appreciation of house prices do not seem to have spilled over to 

any significant extent to other sectors of the economy. 

Consumer spending has continued to expand at a solid rate, and 

the demand for labor remains strong. On average, about 165,000 

jobs per month have been added to nonfarm payrolls over the past 

8

6 months. And the unemployment rate, at 4.6 percent in January, 

remains low. 

Inflation pressures appear to have abated somewhat following a 

run-up during the first half of 2006. Overall, inflation has fallen in 

large part as a result of declines in the price of crude oil. Readings 

on core inflation—that is inflation excluding the prices of food and 

energy—have improved modestly in recent months. Nevertheless, 

the core inflation rate remains somewhat elevated. 

In the five policy meetings since the July report, the Federal 

open market committee, or FOMC, has maintained the Federal 

funds rate at 51⁄4 percent. So far, the incoming data have supported 

the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation. 

However, in the statement accompanying last month’s policy decision, the FMOC again indicated that its predominant policy concern is the risk that inflation will fail to ease as expected, and that 

it is prepared to take action to address inflation risks, if developments warrant. 

Let me now discuss the economic outlook in a little more detail 

beginning with developments in the real economy and then turning 

to inflation. I will conclude with some brief comments on monetary 

policy. 

Consumer spending continues to be the mainstay of the current 

economic expansion. Personal consumption expenditures, which account for more than two-thirds of aggregate demand, increased at 

an annual rate of around 31⁄2 percent in real terms during the second half of last year, broadly matching the brisk pace of the previous 3 years. 

Consumer outlays were supported by strong gains in personal income reflecting both the ongoing increases in payroll employment 

and a pickup in the growth of real wages. 

Real hourly compensation, as measured by compensation per 

hour in the nonfarm business sector deflated by the personal consumption expenditures price index, rose at an annual rate of about 

3 percent in the latter half of 2006. 

The resilience of consumer spending is all the more striking, 

given the backdrop of the substantial correction in the housing 

market that became increasingly evident during the spring and 

summer of last year. 

By the middle of 2006, monthly sales of new and existing homes 

were about 15 percent lower than a year earlier, when the previously rapid rate of house price appreciation had slowed markedly. 

The fall in housing demand in turn prompted a sharp slowing in 

the pace of construction of new homes. Even so, the backlog of 

unsold homes rose from about 41⁄2 months’ supply in 2005 to nearly 

7 months’ supply by the third quarter of last year. 

Single family housing starts have dropped more than 30 percent 

since the beginning of last year. And employment growth in the 

construction sector has slowed substantially. 

Some tentative signs of stabilization have recently appeared in 

the housing market. New and existing home sales have flattened 

out in recent months. Mortgage applications have picked up. And 

some surveys find that homebuyers’ sentiment has improved. 

9

However even if housing demand falls no further, weakness in 

residential investment is likely to continue to weigh on economic 

growth over the next few quarters as homebuilders seek to reduce 

their inventory of unsold homes to more comfortable levels. 

Despite the ongoing adjustments in the housing sector, overall 

economic prospects for households remain good. Household finances 

appear generally solid. And delinquency rates on most types of consumer loans and residential mortgages remain low. The exception 

is subprime mortgages with variable interest rates for which delinquency rates have increased appreciably. 

The labor market is expected to stay healthy. And real incomes 

should continue to rise, although the pace of employment gains 

may be slower than those to which we have become accustomed in 

recent years. 

In part, slower average job growth may simply reflect a moderation in economic activity. Also, the impending retirement of the 

leading edge of the baby boom generation, and an apparent leveling 

out of women’s participation in the workforce, which had risen for 

several decades, will likely restrain the growth of the labor force 

in coming years. 

With fewer job seekers entering the labor force, the rate of job 

creation associated with the maintenance of stable conditions in 

the labor market will decline. 

All told, consumer expenditures appear likely to expand solidly 

in coming quarters, albeit a little less rapidly than the growth in 

personal incomes if, as we expect, households respond to the slow 

pace of home equity appreciation by saving more out of current income. 

The business sector remains in excellent financial condition with 

strong growth in profits, liquid balance sheets, and corporate leverage near historical lows. Last year, those factors helped support 

continued advances in business capital expenditures. 

Notably, investment in high tech equipment rose 9 percent in 

2006. And spending on nonresidential structures such as office 

buildings, factories, and retail space increased rapidly through 

much of the year after several years of weakness. 

Growth in business spending slowed toward the end of last year, 

reflecting mainly a deceleration of spending on business structures, 

a drop in outlays in the transportation sector where spending is notably volatile, and some weakness in purchases of equipment related to construction and motor vehicle manufacturing. 

Over the coming year, capital spending is poised to expand at a 

moderate pace, supported by steady gains in business output and 

favorable financial conditions. Inventory levels in some sectors, 

most notably in motor vehicle dealers and in some construction-related manufacturing industries, rose over the course of last year 

leading some firms to cut production to better align inventories 

with sales. Remaining imbalances may continue to impose modest 

restraints on industrial production during the early part of this 

year. 

Outside the United States, economic activity in our major trading 

partners has continued to grow briskly. The strength of demand 

abroad helped spur a robust expansion in U.S. real exports, which 

grew about 9 percent last year. The pattern of real U.S. imports 

10

was somewhat uneven partly because of fluctuations in oil imports 

over the course of the year. On balance, import growth slowed in 

2006 to 3 percent. 

Economic growth abroad should further support steady growth in 

U.S. exports this year. Despite the improvements in trade performance, the U.S. current account deficit remains large, averaging 

about 61⁄2 percent of nominal GDP during the first three quarters 

of 2006. 

Overall, the U.S. economy seems likely to expand at a moderate 

pace this year and next with growth strengthening somewhat as 

the drag from housing diminishes. 

Such an outlook is reflected in the projections that the members 

of the Board of Governors and presidents of the Reserve Banks 

made around the time of the FOMC meeting late last month. The 

central tendency of those forecasts—which are based on information available at that time and on the assumption of appropriate 

monetary policy—is for real GDP to increase about 21⁄2 to 3 percent 

in 2007, and about two- or three-quarters to 3 percent in 2008. 

The projection for GDP growth in 2007 is slightly lower than our 

projection last July. This difference partly reflects an expectation 

of somewhat greater weakness in residential construction during 

the first part of this year than we anticipated last summer. 

The civilian unemployment rate is expected to finish both 2007 

and 2008 around 41⁄2 to 43⁄4 percent. 

The risks to this outlook are significant. To the downside, the ultimate extent of the housing market correction is difficult to forecast and may prove greater than we anticipate. 

Similarly, spillover effects from the developments in the housing 

market onto consumer spending and employment and housing related industries may be more pronounced than expected. 

To the upside, output may expand more quickly than expected if 

consumer spending continues to increase at the brisk pace seen in 

the second half of 2006. 

I turn now to the inflation situation. As I noted earlier, there are 

some indications that inflation pressures are beginning to diminish. 

The monthly data are noisy, however, and it will consequently be 

some time before we can be confident that underlying inflation is 

moderating as anticipated. 

Recent declines in overall inflation have primarily reflected lower 

prices for crude oil, which have fed through to the prices of gasoline, heating oil and other energy products used by consumers. 

After moving higher in the first half of 2006, core consumer price 

inflation has also edged lower recently reflecting a relatively broadbased deceleration in the prices of core goods. That deceleration is 

probably also due, to some extent, to lower energy prices, which 

have reduced costs of production, and thereby lessened one source 

of pressure on the prices of final goods and services. 

The ebbing of core inflation has likely been promoted as well by 

the stability of inflation expectations. 

A waning of the temporary factors that boosted inflation in recent years will probably help foster a continued edging down of 

core inflation. 

In particular, futures quotes imply that oil prices are expected to 

remain well below last year’s peak. 

11

If actual prices follow the path currently indicated by futures 

prices, inflation pressures would be reduced further as the benefits 

of the decline in oil prices from last year’s high levels are passed 

through to a broader range of core goods and services. 

Nonfuel import prices may also put less pressure on core inflation particularly if price increases for some other commodities, such 

as metals, slow from last year’s rapid rates. But as we have been 

reminded only too well in recent years, the prices of oil and other 

commodities are notoriously difficult to predict. And they remain a 

key source of uncertainty in the inflation outlook. 

The contribution from rents and shelter costs should also fall 

back following a step up last year. The faster pace of rent increases 

last year may have been attributable in part to the reduced affordability of owner-occupied housing which led to a greater demand 

for rental housing. Rents should rise somewhat less quickly this 

year and next reflecting recovering demand for owner-occupied 

housing as well as increases in the supply rental units. But the extent and pace that of that adjustment is not yet clear. 

Upward pressure on inflation could materialize if final demand 

were to exceed the underlying productive capacity of the economy 

for a sustained period. The rate of resource utilization is high, as 

can be seen in rates of capacity utilization above their long term 

average, and most evidently, in the tightness of the labor market. 

Indeed anecdotal reports suggest that businesses are having difficulty recruiting well-qualified workers in certain occupations. 

Measures of labor compensation—though still growing at a moderate pace—have shown some signs of acceleration over the last 

year, likely, in part, as the result of tight labor market conditions. 

The implications for inflation of faster growth in nominal labor 

compensation depend on several factors. Increases in compensation 

might be offset by higher labor productivity or absorbed by a narrowing of firm’s profit margins rather than passed on to consumers 

in the form of higher prices. In these circumstances, gains in nominal compensation would translate into gains in real compensation 

as well. Underlying productivity trends appear favorable. And the 

markup of prices over unit labor costs is high by historical standards, so such an outcome is certainly possible. 

Moreover, if activity expands over the next year or so at the moderate pace anticipated by the FOMC, pressures in both labor and 

product markets should ease modestly. That said, the possibility 

remains that tightness in product markets could allow firms to 

pass higher labor costs through to prices, adding to inflation and 

effectively nullifying the purchasing power of at least some portion 

of the increase in labor compensation. Thus, the high level of resource utilization remains an important upside risk to continued 

progress on inflation. 

Another significant factor influencing medium term trends in inflation is the public’s expectations of inflation. These expectations 

have an important bearing on whether transitory influences on 

prices, such as those created by changes in energy costs, become 

embedded in wage and price decisions, and so leave a lasting imprint on the rate of inflation. 

It is encouraging that inflation expectations appear to have remained contained. The projections of the members of the Board of 

12

Governors and the presidents of the Federal Reserve Banks are for 

inflation to continue to ebb over this year and next. In particular, 

the central tendency of those forecasts is for core inflation—as 

measured by the price index for personal consumption expenditures 

excluding food and energy—to be 2 to 21⁄4 percent this year and to 

edge lower to 13⁄4 to 2 percent next year. But as I noted earlier, 

the FMOC has continued to view the risk that inflation will not 

moderate as expected as the predominant policy concern. 

Monetary policy affects spending and inflation with long and 

variable lags. Consequently, policy decisions must be based on an 

assessment of medium term economic prospects. At the same time, 

because economic forecasting is an uncertain enterprise, policy 

makers must be prepared to respond flexibly to developments in 

the economy when those developments lead to a reassessment of 

the outlook. 

The dependence of monetary policy actions on a broad range of 

incoming information complicates the public’s attempts to understand and anticipate policy decisions. Clear communication by the 

central bank about the economic outlook, the risk to that outlook, 

and its monetary policy strategy, can help the public to understand 

the rationale behind policy decisions and to anticipate better the 

central bank’s reaction to new information. This understanding 

should, in turn, enhance the effectiveness of policy and lead to improved economic outcomes. 

By reducing uncertainty, central bank transparency may also 

help anchor the public’s longer term expectations of inflation. Much 

experience has shown that well-anchored inflation expectations 

help to stabilize inflation and promote maximum sustainable economic growth. 

Good communication by the central bank is also vital for ensuring appropriate accountability for its policy actions, the full effects 

of which can be observed only after a lengthy period. 

A transparent policy process improves accountability by clarifying how a central bank expects to attain its policy objectives and 

by ensuring that policies are conducted in a manner that can seen 

to be consistent with achieving those objectives. 

Over the past decade or so, the Federal Reserve has significantly 

improved its methods of communication, but further progress is 

possible. As you know, the FOMC last year established a subcommittee to help the full committee evaluate the next steps in 

this continuing process. Our discussions are directed at examining 

all aspects of our communications and have been deliberate and 

thorough. These discussions are continuing and no decisions have 

been reached. My colleagues and I remain firmly committed to an 

open and transparent monetary policy process that enhances our 

ability to achieve our dual objectives of stable prices and maximum 

sustainable employment. 

I will keep members of this committee apprised of developments 

as our deliberations move forward. I look forward to continuing to 

work closely with the members of this committee and your colleagues in the Senate and the House on the important issues pertaining to monetary policy and the other responsibilities with 

which the Congress has charged the Federal Reserve. Thank you. 

I would be happy to take questions. 

13

[The prepared statement of Chairman Bernanke can be found on 

page 71 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Chairman. I have to say that 

when you say you would be happy to take questions, you were 

somewhat more persuasive than when your predecessor used to say 

that. 

And I will apologize in advance to the media, because you have, 

I think, over the past months in particular, said some very reasonable things from my standpoint, so I have less to complain about 

than they might have hoped, I am sure, in Karl Rove’s eyes, so 

they should not lose heart. 

I particularly want to begin by thanking you for the very appropriately nuanced discussion of wages. It has troubled me for some 

time, and particularly when I read some of the financial pages, 

that there is a good news, bad news story. The good news is that 

profits are up; the bad news is that wages are up. And wages are 

too often written about as if they were simply a constraint on prosperity. 

I particularly appreciate on page 7 of your testimony where you 

note that an increase in wages, certainly to the level of productivity, should not be a problem, and that in general, there is nothing automatic about a rise in wages leading to inflation. 

It depends on the impact on prices. And in that context, I especially welcome your noting that not only the underlying productivity trends appear favorable—and this is in your discussion of 

wages and inflation. Underlying productivity trends appear favorable and the markup of prices over unit labor costs is high by historical standards. 

I hope this is widely noted, your statement that, in fact, it would 

not appear to be wage driven pressure to raise prices, because as 

you note, the markup of prices over cost in this regard is high by 

historical standards. 

I would add you did not cover that, it was not in your topic, that 

there has also been a reduction in the tax burden. So we ought to 

be clear that this simplistic notion that if wages go up, that is 

going to cause inflation, is not the case, and that, in fact, there is, 

as you say, and I appreciate this, some reason, some room for legitimate wage increases to be absorbed without that being inflationary. 

Now, there is, however, some bias still in the way we talk about 

things. And I did note that there was great relief that you apparently indicated yesterday that it is unlikely that you will be presiding over increases in interest rates in the future. But as I read 

your report, it seems to me that frankly, the question ought to be 

whether or not there are decreases. In the Monetary Policy Report, 

on the first page of your—let me read two statements: ‘‘On balance 

growth of real Gross Domestic Product appears likely to run slightly below that of the economy’s potential over the next few quarters, 

and then to rise to a pace around that of the long run trend.’’ 

Next paragraph. ‘‘Regarding inflation increases in core consumer 

prices are expected to moderate on balance over the next 2 years.’’ 

In other words, the prediction is, economic growth below the economy’s potential for a while, and then reaching potential but not 

going above it. 

14

Similarly, ‘‘inflation is going to moderate an economy performing 

somewhat’’, not enormously, but ‘‘somewhat below potential tending towards potential and inflation that is expected to moderate.’’ 

I suppose that would be an argument for balance if nothing 

changes. But I don’t see how we get a concern of inflation as the 

major concern here. 

And as you say, well, but you’re still worried more about inflation and the sense is, stop him before he raises again, but no likelihood of a drop. 

I don’t understand why this shouldn’t make it at least as likely 

as a drop. Again, we have an economy that is running below potential and we have moderating inflation. Why is that not at least an 

equal chance for there to be a reduction in the time ahead? 

Mr. BERNANKE. Mr. Chairman, first of all, policy is going to respond to new information. We are going to be continually reassessing our outlook and responding appropriately as we see the 

economy evolving. Policy also has to respond to risks. There are 

risks in both directions. On the real side, I talked about housing 

as a downside risk, but there is also some upside risk. 

We have seen very strong consumer spending numbers. We have 

seen some strong income growth which suggests that the economy 

may be stronger than we think. It is possible. And in a sense, aggregate spending may exceed our capacity and put pressure on 

product markets, and that would be a concern. 

The other issue is on inflation. We have had a period where inflation has been above where we would like to see it as far as consistency with price stability is concerned. 

In order for this expansion to continue in a sustainable way, inflation needs to be well-controlled. If inflation becomes higher for 

some reason, then the Federal Reserve would have to respond to 

that by raising interest rates. That would not contribute to the continued— 

The CHAIRMAN. I understand that, Mr. Chairman, but you know, 

I am a little puzzled—you tell me that your report says production 

below potential rising to potential. But then you say, well, you 

think it might be more than you think. I mean, if you think it 

might be more than you think, why didn’t you think it? It does 

seem to be a little odd for you to say that here is what I think, 

but I also think it might be worse than I think. 

That is literally double-think. 

And what particularly concerns me, I read those two sentences, 

production now below potential, and prediction only to get to potential not above it, and inflation moderating, and I don’t see how that 

computes with, as I noted earlier, the FOMC has continued to view 

the risk that inflation will not be moderated as the predominant 

policy concern. 

I can understand it being a concern. I don’t understand how, 

given this, it outweighs the other. 

And let me say in that regard, and I more or less stick to time 

limits, I appreciate your discussion about transparency on—and 

your discussing this. And I do want to—let me point—there he is. 

When I came to Congress, in 1981, the open market committee 

was, from the standpoint of publicity, the closed market committee 

because it did not even announce on the day of the vote what the 

15

vote was. And that gentleman up there, Mr. Gonzalez of Texas, 

crusaded, I think, effectively and appropriately, for some transparency. We have much more. 

Here is my concern. When you talk about changing the way you 

communicate uncertainty, here is the problem. It is easier for you 

to be certain about what you want the interest rate to be than 

about what you want employment to be, because you have more 

control of one than the other. I admire the desire for more transparency. I express my concern that procedure and substance may 

intermix here and that the argument for greater certainty can become—and you say we have the two objectives, stable employment—stable prices and employment. 

But one of those might—I appreciate the fact that you have two 

children and you love them both. But I am afraid that one of them 

might get a little bit more for Hanukkah than the other if we are 

not careful. So I do want to ask that we be kept involved in this 

process. 

But I also want to reiterate from the standpoint of what I talked 

about before from the social health of this country—and I will 

close. I know there are people saying that the economy is very 

good. Let me be partisan for a minute. I say to my Republican 

friends, keep telling the American people how good the economy is, 

because the disparity between what you tell them is happening and 

what they feel themselves makes them even angrier. 

But if inflation is the predominant concern, given your own statements, it seems to me that you have made an argument that it 

ought to be at least balanced; that is troubling to me. 

Mr. BACHUS. Thank you. Chairman Bernanke, the chairman 

mentioned the economy and our different perspectives and our 

viewpoints. The chairman and others have said that all these 7.5 

million new jobs that have been created are all low-income workers. They are not higher paying jobs. I notice that the Bureau of 

Labor statistics job data that was released just yesterday indicates 

that job creation was roughly distributed across the income spectrum. 

Can you tell me why there is a perspective and whether it is true 

that this viewpoint that all these new jobs are low income, when 

I say that the recovery is benefiting the middle class and the creating higher paying jobs? 

Mr. BERNANKE. Well, in terms of the distribution of jobs, as I 

mentioned in my testimony, there is an enormous demand for highly skilled workers and of high-paying jobs. And the constraints on 

the highest paying jobs, for example in manufacturing, is not the 

demand but the supply. Firms can’t find workers of sufficient qualifications in many different areas. So there certainly has been job 

creation at the high level as well as throughout the distribution of 

wages. 

Mr. BACHUS. So the economy is, in fact, creating so many highly 

paid, skilled jobs that there simply is not the workforce to fill those 

jobs? 

Mr. BERNANKE. As I have indicated recently, I think one of the 

major constraints in our economy and one of the sources of concern 

about equality and inequality has to do with educational differentials. And the more that we can help people acquire sufficient skills 

16

so that they can be eligible for those high-paying jobs, the better 

off we are going to be. 

Mr. BACHUS. Thank you. 

The chairman said he was more pleased with you than he has 

been in the past. And I am sure that he read the same article I 

read in The American Banker, where it was titled that you had endorsed the GSE housing fund—that the affordable housing fund 

that the chairman put forward. 

When I saw your testimony I didn’t see that in it at all. But let 

me ask you this question. There is a philosophical debate going on 

in this committee about the creation of these funds, government 

control, government mandate, government-directed funds. There 

really are two of them. One that has gotten all the publicity is the 

affordable housing fund, to which the GSE’s will be required to pay 

a portion of their revenue. 

And members of this committee, at least Republican members, 

we see this as an added cost to low- and middle-income homeowners. Now, I think across the—I will call this the divide, across 

the divide, there is an agreement that the GSE’s could do a better 

job on their affordable housing mission. But we are very skeptical 

that if you take money that is designated to provide liquidity for 

people to buy homes, you either increase the cost of that home, of 

that home mortgage, or the availability of that home mortgage, and 

we think there is a better way than a government-dictated plan. 

Clearer maybe than that is the other proposal that has achieved 

almost no publicity, and we had a spirited debate in this committee 

2 days ago, is that my Democratic colleagues are endorsing an insurance company’s funding of a community reinvestment fund. 

Massachusetts created such a fund in 1998 where insurance companies are directed to pay a part of their income into a fund which 

the, I guess the State of Massachusetts, directs into affordable 

housing or community investment projects. 

And we debated that because we Republicans felt that when we 

pay our premiums to an insurance company, we want that money 

to be invested at the highest possible return so that claims can be 

paid. We feel like the proper role of an insurance company is not 

to take our money, an insured’s money, and invest it in some community’s project, we feel that the proper role for them is to pay 

claims. 

So I just ask you, first of all, would you clarify your remarks over 

in the Senate, or is there any clarification needed, and do you have 

any unease over the creation of more government funds of this nature, and the cost on American homeowners or any of us who pay 

premiums to insurance companies? 

Mr. BERNANKE. Congressman, the story was misreported, and 

you misunderstand my position. I did not address the affordable 

housing fund, either pro or con. The concern that the Federal Reserve has had for a long time about GSE’s is the potential for their 

portfolios to create systemic risk in our financial system. I should 

say that we very much support the GSE’s housing mission, and we 

believe, in particular, that the securitization function contributes to 

liquidity in the mortgage market. Again, our concern is about the 

portfolios and their enormous size and the complex derivative exercises that are needed to maintain the balance of those portfolios. 

17

My comment was one that built on suggestions that Chairman 

Greenspan had made in previous testimonies, which was that one 

way to limit the growth of the portfolios, but also to achieve the 

stated public purpose of the GSE’s was, in some way, to anchor the 

portfolios in the public purpose, which is affordable housing. 

According to OFHEO, only about 30 percent of the portfolios are 

related in any way to affordable housing. So I think what I would 

like to see would be the portfolios to be more directly connected to 

a public purpose, perhaps holding affordable housing mortgages or 

another way, more directly promoting affordable housing rather 

than acquiring all different kinds of assets that are not related to 

affordable housing. 

Mr. BACHUS. Thank you. 

The CHAIRMAN. The gentleman from Pennsylvania. 

Mr. KANJORSKI. Mr. Chairman, welcome to the committee. It is 

fascinating to listen to the discussion, and obviously long-ranging, 

but I have a few questions in regard to the emphasis in the public 

press over the last several months on executive salaries and what 

the appropriate response would be to them. 

First of all, I would like your opinion as to how they rate on that 

scale of fair or unfair—whether or not they should be subjected to 

oversight, and if subjected to oversight, should they be subjected to 

some curative action by the Congress? In particular, we are looking 

at the U.K.’s shareholders’ rights approach and their ability to give 

advisory opinions on executive packages. 

If you can summarize, in some way, your views and what the effect of that would be, positively or negatively on the market and 

the economy, it would be most appreciated. 

Mr. BERNANKE. Thank you. I think it is very important for shareholders to be aware of compensation packages that CEO’s are receiving. So if they are displeased, they can register that displeasure 

through the directors or through selling stock. So I strongly support disclosure efforts. The Securities and Exchange Commission 

recently built on the efforts of the exchanges, the NYSE, for example, in requiring more extensive disclosure of compensation packages on details. I think that is a very important step in the direction of making sure that shareholders have full information so they 

can make appropriate decisions about whether these packages are 

in the interest of the company or not. 

Mr. KANJORSKI. Do you have any opinion as to the United Kingdom’s approach of actually enacting advisory opinions expressed by 

shareholders and whether or not that has had any positive effect 

on the reduction of some of these packages and/or other shareholders rights, litigation, and other things that may have been 

modified? When you look at the numbers, the U.K. is significantly 

lower than the American market. We are wondering whether that 

is something that has been reviewed by the Federal Reserve? 

Mr. BERNANKE. In general, the CEO salaries are lower in Europe 

than the United States, and, to some extent, it is a puzzle why that 

is the case. I think there are a lot of reasons for it. But certainly, 

one thing we want to be sure we are doing is ensuring good disclosure and good oversight. 

I don’t really have an opinion on the advisory council. I think we 

should be sure that the compensation decisions are being made in 

18

a disinterested independent way, and that the directors who are involved in compensation are independent, and not subject to the influence of the management. 

Mr. KANJORSKI. Very good. If you rate on a scale of what is economically fearful in our society today, particularly the domestic 

economy, what would be the greatest fear that you have? 

Mr. BERNANKE. There is a set of issues that are interconnected, 

having to do with savings and deficits and current account and so 

on. We are a low-saving society in general, and we are facing a demographic transition which will mean that a much larger share of 

our population is of retirement age or outside the workforce. That 

is going to pose enormous challenges to our fiscal budget. It is also 

going to pose enormous challenges to our economy as a whole, because with fewer workers, we need to have more capital, more savings, and more preparation for the economy to be able to absorb a 

larger number of retired workers. Related to that, of course, is the 

increase in medical care costs which also puts pressure on fiscal 

policy. 

So the fiscal issues in the low savings rates, which also contribute to the current account deficit, I think are at the center of 

the issues we should be concerned about. We really need to address 

our savings issues and the implications of the demographic transition that we are seeing not very far in the future. 

Mr. KANJORSKI. What role should Congress or the government 

play in that? 

Mr. BERNANKE. The government needs to address both the fiscal 

implications of aging—certainly a part of that is the cost of medical 

care, which is a big part of the economic cost of aging—and also 

of the fiscal burden. And to the extent that outside of the fiscal 

arena we can find ways to encourage savings more broadly, and 

asset-building, I think that would be very constructive. 

Mr. KANJORSKI. So you see a very positive role for government 

to play? 

Mr. BERNANKE. Good policies would certainly be helpful, yes. 

The CHAIRMAN. The Chair wants to announce, in recognizing 

members, that the two parties follow different patterns, and the 

Chair is accepting the ranking member’s suggestions. So you may 

notice some disparity. We go by seniority; they go by, I guess, when 

members arrive. 

I want to explain that part because a recent analysis of what I 

am thinking made a great deal of the fact that a certain witness 

will be testifying tomorrow, and the witness is the choice of the 

gentleman from Texas. So I realize that people may not be fully 

aware of what we are doing. 

Next on the list is the gentleman from Louisiana. 

Mr. BAKER. I thank the chairman. 

Chairman Bernanke, following up in some measure on the course 

relative to problems of significance going forward, there are undoubtedly negative effects of the inversion in the workforce, where 

we have more people retired, and less people working. 

At the same time, though, there has been an offsetting growth 

that has been, frankly, surprising to me at the number of investors 

in equities over the last 2 decades. I was particularly struck by the 

fact, according to the mutual fund industry, that in households 

19

with aggregate annual incomes of less than $35,000, 31 percent 

hold mutual fund holdings. What it triggers for me is an understanding by working families that for their long-term financial security, they need to be invested in the markets. 

Now, we can debate whether it is index investing, whether or not 

actively managed is good or not. The bottom line is, if you are 

going to do something beyond your earnings from salary, investing 

in overall economic growth is a very sound policy, particularly for 

the younger and newer entries into the workforce. 

There are now issues, I believe, in international competitiveness 

that are overhangs that cause concern, whether it be potential for 

class action litigation, whether it is the wage—excuse me, the tax 

rates here as contrasted with those in Europe, and there seems to 

be certainly an outflow of manufacturing-type employment to other 

countries, leaving us with a more technology-based economy going 

forward. 

Having said all of that, it seems that with the percentage of Federal spending in 1956 at—20 percent of Federal spending was on 

Social Security and related entitlements; today we see that crossing 

over 60 percent. Given your comment and concern as to the biggest 

problem facing us, how do we provide for retirement security for 

working families? 

It seems most Americans have figured that out; they need to be 

in the markets. Isn’t it time for this Congress to really seriously 

consider voluntary, not saying mandated requirement, but voluntary flexibility and directing your Social Security or retirement 

savings into market-invested, market-based investments? It would 

seem to me that the sooner we get out or away from these enormous entitlement obligations with the inversion in the workforce 

and the expectations of most people to retire at age 65, that there 

isn’t a way out of this morass without allowing people to share in 

the overall economic prosperity of this Nation through some sort of 

equities investment. 

If we don’t do that, what is the solution to the retirement problem we face? 

Mr. BERNANKE. I think it is very valuable for people to have the 

opportunity to own an account, to have some exposure to investment even if it is in index funds which you point out, so that people 

have the pride of knowing that they are providing for their own retirement. So I think it is a very good idea to encourage people to 

begin to build wealth, and to begin to hold assets. 

As you know, the Social Security aspect of this is a very complex 

debate. The diverting of funds the way you describe has some of 

the benefits of giving people the opportunity to have control over 

their own accounts, but it also doesn’t really directly address the 

long-term imbalance on the fiscal side of the spending and revenues of the Social Security system. 

Another approach, which is related and might work better without addressing the Social Security concern directly would be to 

have add-on accounts where people would have the option to put 

in additional moneys that could be invested in— 

Mr. BAKER. If I may before my time expires, just as a quick follow-up, the rate of return, though, on the Social Security investment is currently so low that if you were to divert any portion of 

20

that into an active investment account, the yield would be so much 

greater than what you currently earn—and I know of your concern 

that current earnings are paying current retirees’ benefits. I believe 

with the proper managed investment account over time, you could 

pay those current retirees’ benefits and still have a yield sufficient 

left as a net margin that would beat the current rate of return for 

a Social Security recipient. In essence, we can accomplish both 

goals with a very carefully managed investment. 

Mr. BERNANKE. I understand that position has been espoused. I 

think just one concern is that the historical outperformance of equities relative to bonds may reflect to some extent the higher riskiness of stocks. To some extent it is a risk premium, and you 

know— 

Mr. BAKER. But there has never been a 10-year period when the 

market didn’t beat Social Security. 

The CHAIRMAN. It is a very deep issue about why equities have 

performed better than bonds. But if you look at stock markets in 

czarist Russia, they wouldn’t look so good today. The United States 

has been very successful. We have had a growing economy. We 

have succeeded in escaping the Depression and World War II and 

so on. So in that respect our stock market may not be representative of the world’s equities in some sense. 

It is a very difficult question. I would only make the point that 

you cannot assume that equities will pay the high rate of return 

in the future that they have in the past. There certainly is some 

risk to that. 

The gentlewoman from California. 

Ms. WATERS. Thank you very much, Mr. Chairman. I would like 

to thank Chairman Bernanke for being here this morning. 

It is always good to have you before this committee discussing 

the important economic issues of the day. I worked to prepare a 

statement last evening, but I have decided not to read that statement because my staff just gave me this morning, remarks by 

Chairman Ben S. Bernanke on the level and distribution of economic well-being. 

I just read it. I am extremely moved by your remarks, and I do 

think that you have taken a rather complicated issue and helped 

to remove it from simply a discussion of you either have education 

or you don’t, you either are going to make it, pull yourself up by 

your bootstraps, kind of the government has no responsibility for 

that. 

It is not that simple. And you talk about opportunity and ensuring a fairness and opportunity, but not guaranteeing any outcomes, 

and you talk about the responsibility of the individual, but in this 

discussion it was quite expansive. 

I watched the closing of a Goodyear plant in Los Angeles when 

I first ran for office, and I saw people who had worked at that 

plant for 20, or 25 years who paid taxes, sent their kids to school, 

and had mortgages, suddenly out of a job, and I watched men go 

to the bar across the street from the plant for the next 5 or 6 years 

and just drink themselves into oblivion—not being retrained, unable to get jobs because of their age, etc. You kind of allude to that. 

You also talk about the importance not only of formal education, 

K through 12, but also the other opportunities in our society for job 

21

training, the community colleges. You even allude to and talk a little bit about preschool, and of course, I am from Head Start. Having taught and worked in Head Start, I think that is extremely important, building self-esteem and certain kinds of values at an 

early age. 

But I would like to hear you talk a little bit more about policy 

implications. Aside from that which you alluded to, you know, education through job training, etc., do you think there is room for perhaps tax incentives to corporations and businesses that do on-thejob training to make sure that people are trained for real jobs that 

are sustainable? 

I would like to hear a little bit more about what you think we 

could do with public policy to close this growing income and wage 

gap. You discussed the superstars and CEO’s and globalization and 

trade and all of that, and the bottom line is, there is this growing 

wage and income gap. What other policy possibilities can you share 

with us for helping to close this gap? 

Mr. BERNANKE. Thank you for taking the time to read my 

speech. I know it wasn’t a short set of remarks. 

The broad point I am trying to make in those remarks is that 

I believe that technology and trade, which are tremendously important forces for American economic growth, unfortunately have the 

side effect that they sometimes cause dislocations, like the one you 

were just describing, and I think it is very important that we not 

respond to those dislocations by saying, ‘‘Well, we are going to stop 

trade, we are going to stop technological improvement.’’ That is 

really doing more harm than good, I think. 

So then the logical consequence is, if we want to protect people 

and help them deal with these dislocations, and we don’t want to 

stop the processes that generate growth in our economy, we have 

to find other ways to help people adjust and adapt. And I talked 

about a number of general approaches in my remarks. 

I do sincerely believe that what you know and what you can do 

is critical, that training—not just K–12 education, but all kinds of 

training—community colleges, junior colleges, online courses, training on the job—all those things are critical to getting people the 

skills they need so they will be in demand and be able to find good 

work when changes in the global economy mean that their Goodyear plant has shut down. 

I also indicated in my remarks that we could perhaps reduce 

some of the anxiety about job loss if we didn’t tie all benefits so 

directly to employment. So, for example, I think it is an issue that 

healthcare is so directly tied to employment. 

Ms. WATERS. Portability of healthcare? 

Mr. BERNANKE. Portability of health insurance would be, I think, 

a positive development. It would reduce the anxiety that people 

face when they worry about their jobs, and indeed, some of the 

anxiety which I hear a great deal about may be less what has actually happened than what people fear may happen. It is the insecurity rather than the actual outcome so far that people are worried 

about. So I think there are, you know, a number of general things 

we should try to do. 

Now, one thing I also said in my remarks is that solving this 

problem is very, very difficult. How exactly we can make sure that 

22

training programs work effectively instead of just wasting money 

is very difficult. Finding the best way to make health insurance 

portable; there are lots of ways to approach it, but it is difficult. 

So I turn it back to you, unfortunately. I think the Congress is 

going to have to think hard about the best ways to address these 

things, but they need to think about them. 

Ms. WATERS. Mr. Chairman, I would like to ask unanimous consent to submit these remarks for the record. 

The CHAIRMAN. Without objection. 

The gentleman from Texas, Mr. Paul. 

Dr. PAUL. Thank you, Mr. Chairman. 

I would like to pursue the issue of the current account deficit. It 

seems like almost all economists express concern, some worry 

about it, but I can’t find anybody who tells us that we should totally ignore it. And we do now borrow approximately $800 billion 

every year. We have a foreign debt of several trillions of dollars, 

and to me it represents an imbalance which is the consequence of 

the monetary system and presents a potential problem for us. Likewise, I see that potential problem in the number of derivatives out 

there. There is one figure that says there are $236 trillion of derivatives, and it seems like very few people understand exactly 

what that means, and it certainly is so huge and diverse. I don’t 

even think the Congress that we have that is always anxious to 

regulate everything has offered a scheme for regulating derivatives 

because, quite frankly, I don’t think they are capable of doing that. 

Foreigners now own 43 percent of our debt, approximately twice 

as much as the Fed has been required to borrow. And one of the 

questions I have is how much pressure would it put on you if—I 

guess in even a theoretical sense, what if they didn’t buy any of 

our debt, and all of a sudden you had to deal with that problem? 

Right now, there is a sign that maybe they are buying less. We 

have heard rumors and innuendos in the media and hints from 

China that, yes, they are not going to be buying as much, and yet 

there hasn’t been really a crisis. There has been no panic, and we 

know there is self-interest on their part to maintain the dollar because they hold so many. 

But in many ways I think we get a free ride. We get to export 

our dollars. We don’t have to monetize them here. We get to export 

our inflation, but it potentially has a problem for us if all of a sudden they buy less, and these dollars come home or these dollars go 

into goods and services. 

Also the other concern that I have that I would like you to address is the subject of the revaluation of the yuan. I understand 

you and Secretary Paulson went over to China to put pressure—

at least the media presented it that way—put pressure on them to 

increase the value of the yuan and decrease the value of the dollar 

in relationship, which in reality, it seems to me, would put pressure on our interest rates and push our interest rates up and raise 

our prices. And some people have reported that couldn’t possibly be 

our policy where we would deliberately want to do that. And then 

again, it would put more pressure on—I know it is an artificial arrangement right now. 

But in some ways what the Chinese have done is they have revived the old Bretton Woods standard of fixing their currency to 

23

our dollar, and some people look longingly to the Bretton Woods 

days where we worked with fixed exchange rates. Of course, there 

were different conditions then. 

But if you would, if you would address both what our position is 

with the Chinese yuan as well as what happens if they significantly—if the foreigners, especially Japan and China, start to buy 

a lot fewer dollars and how that would affect your policy. 

Mr. BERNANKE. Thank you. You are correct that we are to some 

extent dependent on capital inflows to support the trade and current account deficits we currently have. The current demand for 

U.S. assets from abroad both from public and private sources remains strong, so there doesn’t seem to be any immediate concern 

that will not continue. However, there is a risk sometime in the future that there would be less demand for dollar assets, and that 

could cause some movements in currency and bond markets that 

might be disruptive. And for that reason I have advocated, as many 

others in Congress have, that we have tried gradually to move our 

current account deficit down to a more sustainable level. 

The way to do that essentially, it is a very complex subject, but 

essentially the current account deficit arises because of 

asymmetries in the saving investment balance here and abroad. In 

the United States we have a decent rate of investment, including 

construction of new homes, but relatively low saving rates, and 

that difference we have to borrow abroad, whereas in many other 

countries in East Asia, and among oil producers and the like, they 

have an excess of saving over investment, and they are lending us 

that difference, and that is why the capital flows are moving from 

abroad to the United States. 

The way to adjust that, over time, is to create a better balance 

of savings and investment both in the United States, which would 

be through primarily greater saving, but also abroad by creating 

more reliance on domestic demand for growth. So, for example, in 

China there is a long-term plan, which we support, to try to reduce 

the reliance of the economy on exports and increase its reliance on 

domestic consumption, thereby reducing their savings rate to a 

more appropriate level, which also increases the living standard of 

their people. So I think with that process we can move gradually 

toward a greater balance. 

With respect to the yuan, I think there are several reasons to 

move towards greater flexibility in the yuan, and I described them 

in a speech I gave in China. First, China is a very large country, 

and it should at some point have an independent monetary policy 

of its own rather than being tied to the United States. In order to 

do that, they have to have a flexible currency. 

Secondly, the flexibility of the yuan is needed to accomplish this 

rebalancing from export orientation to domestic demand that I was 

referring to earlier. 

And thirdly, yuan appreciation and flexibility makes some contribution to helping us to rebalance the current account deficit we 

currently have, although I think the larger force quantitively would 

be the rebalancing of demand from exports towards domestic demand in China. 

The CHAIRMAN. The gentlewoman from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

24

And welcome back, Chairman Bernanke. Many of my colleagues 

have been quoting ‘‘American Banker.’’ I would like to show you 

‘‘The Hill.’’ There you are on the cover. It says your testimony 

sparked a stock price rally, and the Dow is up 87 percent, and 

there is great optimism for our economy, and I hope you are right. 

I hope the stock market is right. 

But regrettably, some of my constituents are not feeling optimistic. They feel that the economic expansion has not ended up in 

their take-home pay, and some are very concerned about losing 

their homes, and I share that concern. They are concerned about 

the rising rate of mortgage defaults and home foreclosures. In my 

district employment is high and stable, yet I am being told that 

foreclosures are at rates that are up by an order of magnitude—

they have jumped up dramatically from what they were last year. 

Some of my colleagues tell me that they are experiencing the same 

thing in their districts around the country, and they are being told 

that homeowners are losing their homes in very stable neighborhoods, and some say that this is due to various causes such as unemployment. Yet in my district and others where employment is 

high, and in some other areas, it is due to the decline in the housing market. 

But many also ask whether certain mortgage products, particularly in the subprime market, have contributed to this foreclosure 

crisis or challenge. In particular, many point to the so-called 2/28 

ARM’s, and some have described them—and I quote—as an inherent predatory product. And as you have told me and others, these 

2/28 ARM’s are 80 percent of the subprime market. 

Recently the Fed wrote back to Senator Dodd, taking the position 

that in its recent guidance on nontraditional mortgages, they did 

not extend to 2/28 for similar projects. And since these are what 

many people think is the problem, my question is why is the Fed 

not addressing the 2/28’s and issuing guidance for what many people feel is the main problem in the foreclosure rates and the loss 

of homes of many people? 

You eloquently have said many times that homeownership leads 

to participation in our economy and increased wealth for Americans, yet if you are losing your home, it is leading you to a personal 

crisis, and if it continues, we will be facing a tremendous crisis in 

our economy and in our districts. And now for your comments on 

whether or not the Fed plans to extend guidance to the 2/28 

subprime project, products. 

Mr. BERNANKE. You are correct, Congresswoman. There has been 

a surge in delinquencies and foreclosures, particularly—as I mentioned in my testimony—in subprime lending with variable rates, 

rates that adjust with short-term interest rates, and that is a concern to us. We certainly have been following it carefully. It is obviously very bad for those who borrow under those circumstances, 

and it is not good for the lenders either, who are taking losses. 

We have tried, together with the other banking agencies, to address some of these concerns. We recently issued a guidance on 

nontraditional mortgages, which had three major themes. The first 

was that lenders should underwrite properly, that is, they should 

make sure that borrowers had the financial capacity to pay even 

when rates go up, and not simply underwrite based on the initial 

25

rate but also deal with the possible payment shock. Secondly, that 

lenders should give full disclosure and make sure that people understand the terms of the mortgages they are getting into. And I 

would add that the Federal Reserve provides a number of documents, booklets, and descriptions that are required to be included 

along with mortgage applications for adjustable rate mortgages. 

And thirdly, and this is more on the issue of the lenders rather 

than the borrowers, that lenders should make sure they appropriately risk manage these exotic mortgages, which we don’t have 

much experience with, so some caution is needed in managing 

them, as we are now seeing. So those, I think, are very good principles, and I think we would stand by those principles. 

Now the question has arisen whether the 2/28’s, 3/27’s are covered by this guidance, and I think the answer is yes and no. The 

guidance as written refers to specific types of mortgages, including 

those that have negative amortization, that is, the amount owed 

can actually go up for a period, which is not usually the case with 

2/28’s and 3/27’s. So in that respect, those types of mortgages were 

not, you know, literally included in that initial guidance. 

We, the Federal Reserve, along with the other banking agencies, 

are currently preparing a clarification to the initial guidance which 

will say that these same principles apply also to mortgages of this 

type that have variable rates, and particularly those that are of a 

subprime nature. But I would just say now that I hope that in our 

guidance, in our supervision, that we have conveyed to lenders that 

those three principles, good underwriting, good disclosure, and good 

risk management, are broad, good business principles, and they 

should be applying those to all mortgages they make. 

Mrs. MALONEY. My time is up, but, Mr. Chairman, can I just ask 

when will this guidance be up? Because it is very important. What 

is the time frame for my constituents? 

Mr. BERNANKE. Very soon, very soon. 

The CHAIRMAN. The gentlewoman from Ohio. 

Ms. PRYCE. Well, thank you, Mr. Chairman. 

Welcome, Mr. Bernanke. It is great to have you here. I would 

like to actually discuss for a moment the cost of healthcare in this 

country, it is definitely one of the major concerns when I talk to 

business and industry in my district. It certainly drives up the cost 

of doing business in our country. Certainly not the only thing, regulation, litigation and other factors, but it is more important because 

it affects families everywhere. 

The greatest problem is that people just can’t find health insurance that they can afford; therefore, they don’t get the medical 

treatment that they need. And it occured to me, and many others 

that one of the reasons for this is because there is really no consumer factor in healthcare in this country. We don’t shop for our 

benefits. We take what our insurance companies provide for us. 

Market forces seem to work very well in all other aspects of our 

society. Is this what is wrong with our healthcare delivery system, 

this lack of market force, so to speak? And as I am sure you are 

aware, the President has proposed a very ambitious healthcare 

plan designed to provide enhanced tax benefits to individual purchasers, and I assume that is so that more people will purchase insurance, more people will shop for insurance, and therefore they 

26

will pay more attention to their healthcare needs, and it would 

bring healthcare more in line with how we make other purchases 

in this country. 

I just would like to know if you think that would be a good way 

to go, how it might affect international competitiveness, and then, 

of course, your thoughts on portability. I assume you made mention 

in response to Mrs. Maloney, or I guess it was Ms. Waters, that 

pensions and healthcare should be portable, and if you have time 

on my time, would you further your response? Thank you. 

Mr. BERNANKE. Congresswoman, you are correct in pointing out 

a very serious, serious problem, and I think you are also correct 

that one of the main reasons why healthcare is so expensive in the 

United States has to do with the fact that we are always buying 

it with somebody else’s money and not with our own money. We 

have a system where technology is advancing rapidly, where our 

ability to do new and sophisticated tests, and provide new and sophisticated drugs, and new procedures is advancing rapidly. In 

most industries, new technologies save costs, but not in medicine 

because of third-party payment, and the doctor and the patient are 

not making a cost-based decision. The cost efficiency is not perhaps 

what it should be. 

Now, one approach to this is to increase market forces in the determination of what test to order and what costs and how much to 

shop and so on. There are ways to do that. The health saving accounts, for example, create a catastrophic coverage, ask for a catastrophic coverage, and ask people to save money within this account to buy coverage for medical care below the catastrophic level. 

Some people may be uncomfortable with having to make those 

kinds of decisions, so an alternative is to have competition between, 

say, HSA catastrophic plans and other types of medical management, HMO’s, PPO’s, traditional insurance and the like. By creating more competition, I think there would be some benefits. 

But, again, it is a complex subject. There are a lot of other things 

we could do. I think we could increase transparency in terms of 

hospitals and doctors letting us know what they charge, what their 

quality is, and improving information technology in healthcare, 

which I think would reduce errors and create more consistency 

across the country. We currently have very big differences in the 

cost of managing a certain kind of condition in different parts of 

the country. More uniformity and more best practice would help reduce costs as well. So I think markets could have a useful role to 

help reduce, or at least control, the cost. 

Portability is a difficult question. One approach to portability is 

to have insurance companies insure workers rather than insure 

employers, so to speak. That would require somehow creating different kinds of pools rather than employer-based pools. You need 

pools in order to share risk, and there are some issues associated 

with that. 

The main alternative would be to give people the ability to take 

their policy from their current employer and then move over to another employer with the same policy. These are all things we 

should be looking at, but none of them is a really simple problem 

because in each case we want to make sure that people are buying 

as part of the pool, a risk pool, rather than buying on an individual 

27

basis where, if they are ill or have a preexisting condition, they 

won’t be able to afford insurance. 

Ms. PRYCE. Thank you very much. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. 

Welcome, Chairman Bernanke. I am over here. I happen to like 

your predecessor. The problem is I didn’t understand a thing he 

ever said. So you are a breath of fresh air in the sense that, whether I agree with you or not, at least you are speaking in English, 

and I can understand what you are saying. And I especially want 

to thank you for your response to Ms. Waters’ question. 

Let me follow up quickly on Mrs. Maloney’s question, because I 

am not clear, and I hope you can answer this question just with 

a yes or a no answer. Does the guidance that the underwriting—

the guidance that you are issuing regarding 2/28 and 3/27 mortgages require that those mortgages be underwritten to the fully indexed rate just like you do with traditional mortgages, or does it 

not? 

Mr. BERNANKE. This is a joint guidance. We are still working on 

it with the other banking agencies. We have not yet determined 

that. 

Mr. WATT. But the one that you put out previously, did it require— 

Mr. BERNANKE. Yes. 

Mr. WATT. So if it were the same, it would require— 

Mr. BERNANKE. Same principle, yes. 

Mr. WATT. Okay. The increase in foreclosures is a serious problem, and one of the concerns we have is that the Fed has never 

adopted a final rule under its authority under the truth and lending act to prohibit practices or acts that it found to be unfair or 

deceptive or designed to evade the purposes of HOPA over the entire class of mortgage loans. There has never been a real rule on 

these things, and I think that is one of the things that is putting 

pressure on us to be more aggressive in having a Federal predatory 

lending standard, or at least a Federal predatory lending floor. 

I am wondering whether you view that as a problem, and maybe 

I could just get you to discuss with me why the Fed has never used 

that more aggressive, unfair, deceptive trade practices language to 

be more aggressive in this area in light—and especially in light of 

the increasing number of foreclosure that we are experiencing. 

Mr. BERNANKE. Congressman, we have found that it is very difficult to write rules in advance that strike out entire practices 

under all circumstances. We find it is more effective to be flexible 

and work on a case-by-case basis. It is one of these things like, 

‘‘You know it when you see it.’’ 

And so what we have done rather than write specific rules, is to 

work with the FDIC to develop a set of principles, and there has 

been much talk lately about principles-based regulation. One of the 

principles on which we are making these decisions provides guidance to the banking agencies for implementing to take action 

against unfair and deceptive acts and practices, and we believe 

that set of principles provides full authority for not only us, but 

also the OCC and other agencies to take actions to prevent unfair 

and deceptive acts or practices. So, for example, the OCC has reVerDate 0ct 09 2002 18:40 May 02, 2007 Jkt 034673 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\34673.TXT HFIN PsN: TERRIE
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cently taken substantial action, I think it was a credit card case, 

based on this, and they were not inhibited from taking those actions because of any lack of rulemaking. Again, whether an act is 

unfair and deceptive depends often frequently on the context and 

circumstances. 

Mr. WATT. Can I just interrupt you long enough to ask you to 

comment on whether you think we need a Federal predatory lending statute? 

Mr. BERNANKE. I think good progress has been made in trying 

to understand how to distinguish predatory lending from legitimate 

subprime lending. That is always the challenge. How do you define 

the rules in a way to address predatory lending without driving out 

legitimate subprime lending? And what we have seen lately is that 

a number of States, and your own State, North Carolina, has been 

one of the pioneers there, have introduced legislation which have 

moved the ball forward in terms of achieving that objective. And 

I was very pleased to see that because I think the States are good 

laboratories. They can really try out different things, and we can 

see what works and what doesn’t work. 

At some point when we understand well enough how to distinguish between predatory and legitimate lending, probably a Federal standard would be a good idea because it would eliminate the 

many differences across States and make it more costly for lenders 

to lend on a national basis. I don’t really have a good judgment as 

to whether the States have reached a point where we feel, you 

know, we are ready to do that, but at some point we should really 

consider— 

Mr. WATT. In the meantime should we be talking about a Federal floor as opposed to a preemptive stand? 

Mr. BERNANKE. I have no objection at all to your discussing those 

issues. I think the question is making sure that you are making a 

clear distinction between predatory— 

The CHAIRMAN. I would ask the gentleman to yield. I just want 

to say, first of all, the question he raises is a very important one 

that is widely—is of great concern to the civil rights community. 

I will say a couple of things, if I could, because this is really essential. 

First, the State versus Federal has been complicated by the very 

strong preemptions of State law issued by both the Office of the 

Comptroller of the Currency and the Office of Thrift Supervision. 

So part of the problem we face is that some of those State laws 

that we agree are good ideas don’t reach, for instance, operating 

subsidiaries of national banks. So the argument for me being at the 

State level would have been stronger if it hadn’t been for those preemptions. 

Secondly, with regard to the rule—and the gentleman’s question 

is one many feel strongly about. I understand your argument that 

you can still reach these after the fact, but some people feel, and 

I am inclined to agree with them, that there might be a greater deterrent effect if there was to be some rulemaking. It is one thing 

to go to people’s rescue after the fact, but it does seem to be a proliferation here, and that is why we think we may need more. But 

we will be continuing this discussion. 

Mr. WATT. I yield back, Mr. Chairman. 

29

The CHAIRMAN. The gentleman from California. 

Mr. ROYCE. Thank you, Mr. Chairman, and thank you, Chairman 

Bernanke. 

This committee has been debating GSE reform now for some 

time, I think for about 4 years now. Surprisingly, while debating 

reform with Fannie Mae and Freddie Mac, we have not heard testimony from the Federal Reserve on this topic, and we are going to 

re-engage in this debate next month, and I was wondering if you 

would be willing to come up and to testify as to the Federal Reserve’s view on GSE reform. I think it would be very helpful for 

all of us. 

Mr. BERNANKE. The Federal Reserve has testified in the past, I 

believe. I believe Chairman Greenspan has testified, but if that is 

not the case— 

Mr. ROYCE. He has testified as to the subject, but I am thinking 

about the hearings we are going to hold specifically on GSE reform. 

And that was my question as to whether you might testify on that. 

Mr. BERNANKE. We would be very interested in having our perspective heard on this issue. 

Mr. ROYCE. I hope the committee leadership can accommodate 

you on that. 

I also wanted to say that it is not just New York that has grown 

quite concerned about the disadvantage competitively that our capital markets face and the flight of capital. I think all over the 

United States, people are getting worried. We saw the BloombergSchumer report, and then the Committee on Capital Markets Regulation report that came out, and they have really stressed this 

issue. 

And I also noticed last November, the late Dr. Milton Friedman 

said this, and I would just like to read it quickly. He said, ‘‘Sarbanes-Oxley is very unfortunate. It tells every entrepreneur in 

America, don’t take risks, that is not what we want. The function 

of the entrepreneur is to take risks, and if he is forced not to take 

risks and spend on accountants rather than products, the economy 

is not going to expand or grow.’’ 

And then also the same month, Alan Greenspan said that most 

of Sarbanes-Oxley is, ‘‘a cost creator with no benefit I am aware.’’ 

And he went on to say that regulatory and statutory, statutory 

changes need to be made as well if we are going to move forward. 

And he concluded with something that I thought was rather forceful. He said, ‘‘I hope it happens before the whole financial system 

walks off to London.’’ 

It seems to me that Dr. Greenspan and others were concerned 

that the regulatory climate will not only deter investment in the 

country, but that it is also going to suppress future entrepreneurship and suppress innovation. And I was going to ask you because, 

you know, if they are correct, that could have a very harmful effect 

not only on future U.S. productivity, but as a result of that will reduce the potential standard of living gains in this country. 

And so, Chairman Bernanke, do you share the concerns of Dr. 

Greenspan and Dr. Friedman on this issue? 

Mr. BERNANKE. Let me say this: I think it is very important that 

as we try to achieve the objectives of greater clarity and transparency in corporate governance and internal controls and so on 

30

that we do it at the lowest cost we can, and I think that it is a 

good development that the Public Company Accounting Oversight 

Board along with the SEC has recently promulgated for a comment 

a new audit standard which would be less ‘‘checking of the box’’ 

and more focused on the major concerns of the company, and also 

that would take into account the size and complexity of the company, so we wouldn’t be putting these costs on the smaller companies. I think that is an important step in the right direction. I 

would be curious to see how that goes. 

More generally, you know, as a regulator, I think it is very important that we have to achieve the objectives that Congress gives 

us, and there are some very important ones, but we also need to 

do the best we can to minimize the cost and unnecessary burden 

created by those regulations. 

Mr. ROYCE. But going back to my question, and quoting former 

Chairman Greenspan again, he spoke to the regulatory changes 

that you spoke to, but he also spoke to statutory changes that he 

thought were necessary. And that very much concerns us going forward in terms of whether or not we addressed these recommendations made by the Bloomberg-Schumer report or made by the Committee on Capital Markets Regulation report. 

Mr. BERNANKE. We are continuing to monitor the application and 

effectiveness of Sarbanes-Oxley. I am not prepared at this point to 

call for any specific legislation changes. I would like to see how the 

audit standard works. 

Mr. ROYCE. Well, in the meantime, to paraphrase Dr. Greenspan, 

hopefully it will happen before the financial system walks off to 

London, because as I read the papers every week, that egress, that 

exit, is becoming more and more pronounced, and we have an arithmetical increase not just of capital flight, but also a resistance 

of companies coming into the public market in the United States. 

Capital is basically avoiding our capital markets with very dire 

consequences, I think, in the long term, to the standard of living 

here in the United States and our competitive position. 

Mr. Chairman, thank you. 

The CHAIRMAN. Thank you. 

The gentleman from California. 

Mr. SHERMAN. I would like to comment first on the gentleman—

the other gentleman from California, and that is that we have in 

our capital markets kind of a one-size-fits-all approach. You are either a private company, or you are so public that your statements 

are so good that if widows and orphans want to put 100 percent 

of their net worth into your stock, it is entirely legal to do so. We 

might want to explore some intermediary category where the 

amount of disclosure does not meet full-blown Sarbanes-Oxley on 

the one hand, and investment, while publicly traded, is only among 

highly accredited investors who are investing less than 1 percent 

of their net worth. I think as long as—to be a public company, you 

have to be a company that I want my mother to, legally at least, 

be able to put 100 percent of her net worth in means that you are 

going to have to meet a very high standard. 

I have a number of questions for you. One is to respond to that, 

and I will lay out a few others, and you will probably have to reVerDate 0ct 09 2002 18:40 May 02, 2007 Jkt 034673 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\34673.TXT HFIN PsN: TERRIE
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spond for the record, Mr. Bernanke. But if I talk fast, maybe you 

will be able to comment orally. 

The first is, you have talked about the problem of income 

inquality. Do you know of any systematic economywide approach 

with a near-term effect to deal with such income inequality other 

than making our tax system more progressive? 

Second, we have a lot of smart, educated young people. They go 

and get college educations, but they only have the slightest information about which careers will be in demand by our economy. 

Should we publish an official guide that is forward-looking, that 

uses our best economic resources to project for the guidance of 

young people what careers will be in demand in the decades to 

come? 

Third, over in the Senate you talked about your concern that the 

ILC loophole could be used to mix banking and commerce. I wonder 

if you have an equal concern—I hope you have an equal concern—

about the exploitation of other loopholes that combine real estate 

brokerage with banking, or auto sales with banking, or any kind 

of sales with banking on just on the pretext that the sale—that the 

consumer needs financing. And I hope that you are as strong at 

preventing bankers from getting into commerce as you are in preventing commercial firms like Wal-Mart from getting into banking. 

Last year we talked about the need for certain—my perceived 

need for an emergency plan to be available to deal with a precipitous decline of the dollar. You responded to me in the letter of 

April 25, 2006, noting that from 1985 to 1988, we had a roughly 

40 percent decline in the value of the dollar, and the sky did not 

fall. But do you think that the risk of a 40 percent decline in the 

U.S. dollar in 4 weeks, rather than 4 years, is so remote that we 

shouldn’t think about it, or are you just confident that our society 

and the world trading system could adjust to it? Or should we be 

doing some planning, given that we have had another year since 

we have talked last of record trade deficits? 

Finally, the New York Fed processes dollar transactions. We recently stopped two Iranian banks from having access to that 

through U-turn transactions. What would be the effect if we prevented all Iranian banks from having such access? I ask for you to 

comment from a technical monetary policy, you know, banking regulatory policy. Obviously we have other venues to talk about, 

whether that would be a good approach in negotiating with Iran. 

Or could we cause significant concern in Tehran if we didn’t stop 

at the two banks, but went with all Iranian banks in banning their 

access to transactions through the Fed? Do you have any other 

comments? 

Mr. BERNANKE. I can respond quickly to a few. Multiple standards for Sarbanes Oxley is an interesting idea, but I would note 

that the audit standard that allows size and complexity to be a consideration does to some extent do that. 

On income inequality, this is a very long-term trend. At least 

since the 1970’s, and according to some measures from the 1950’s, 

we have been seeing this trend, and I don’t think there is any really good way to reverse it overnight. I think it is going to be a slow 

progress. 

32

Mr. SHERMAN. Although a more progressive income tax system 

would do a lot to change the ultimate flows of income, or do you 

disagree? 

Mr. BERNANKE. It would not do so without some cost to incentives and the like. 

On official guides to future skills, I think the best thing we can 

do for young people is to make sure they have good general analytical skills, and that they are not—it has turned out well for us that 

we don’t necessarily put kids in the eighth grade— 

Mr. SHERMAN. So if we had lots of people with good analytic 

skills— 

The CHAIRMAN. I’m sorry. We don’t have time for further questioning. I will give the gentleman 30 seconds. 

Mr. SHERMAN. Please continue. 

Mr. BERNANKE. I would focus on general problem-solving skills 

that are most flexible. 

On real estate brokerage, the Federal Reserve and the Treasury 

have never had an opportunity to make a determination about 

whether this fits under the Gramm-Leach-Bliley law. Congress has 

not permitted us to go ahead with that, and so we have had an opportunity to look at it. 

With respect to financial crises, I would just say that the Federal 

Reserve takes financial crisis management extremely seriously, and 

we have made a number of efforts to improve our monitoring of the 

financial markets to study and assess vulnerabilities, and to 

strengthen our own crisis management procedures and our business continuity plans. And, I hope we never have another financial 

crisis, but should one ever occur, we want to be well prepared for 

that. 

I would have to get back to you on the Iranian question. 

The CHAIRMAN. Thank you. 

The gentleman from Connecticut. And the Chair will announce 

that the Chairman has been very gracious to agree to give us until 

2 p.m.—we will take a break for about 15 minutes at noon. So the 

gentleman from Connecticuit will—after his questioning and answers, we will take a 15-minute break. 

Mr. SHAYS. Thank you for being here. 

I want to kind of agree with Congressman Watt. I thought the 

responsibility of the Fed Chair was to speak in tongues, so I have 

been a little shocked that I can actually understand you. The only 

other person I have trouble understanding is sometimes the chairman when he gets excited. 

I want to ask you, I think of ourselves as a consuming Nation 

that drives our economy, and yet I wrestle with the fact that we 

talk about how we should save. Now, I am a consumer. The only 

savings I have is my house and my Thrift Savings Plan. Should I 

feel guilty? 

Mr. BERNANKE. It is not a question of feeling guilty. The question 

you want to ask yourself is, are you well prepared for retirement? 

Mr. SHAYS. Well, really what I am trying to say is if I want my 

country to be stable, are we asking Americans to stop consuming 

and to save? What are we asking them to do? 

Mr. BERNANKE. Well, I think the issue is at the national level. 

Your question is at the individual household level. At the national 

33

level, low rates of savings create the need to borrow from abroad, 

and it does have some risks involved. The most direct way to address savings is to try to improve the saving of the government sector. 

Mr. SHAYS. What confuses me is that we are trying to get consumers to consume so that our economy moves forward. So I just 

wonder how you would wrestle with that, and how do you wrestle 

with it? 

Mr. BERNANKE. There is no inconsistency. In short-term business 

cycle dynamics, consumer spending can drive growth. But over a 

longer period, if people save more, then that can be replaced by 

higher, stronger investment spending, for example, and that would 

be a desirable way to go. 

Mr. SHAYS. Okay. With regard to tax cuts, I believe that dividends and capital gains in particular have had a huge impact in 

getting us to have constant growth since we have lowered these 

rates. I am concerned that my Democratic colleagues are going to 

allow these tax rates to go up. I am interested to know your opinion. 

Mr. BERNANKE. I think most economists would say that lower 

dividend and capital gains tax rates have efficiency gains. They are 

providing centers for saving. They reduce distortions in capital 

structure. They allow retained earnings to be circulated back into 

the capital markets, and there are many other areas where I think 

they contribute to efficiency in the economy. 

As always, with any tax measure, there are competing considerations of revenue and progressivity and so on. And as you know, 

given my position as the head of a nonpartisan central bank, I can’t 

really take positions on specific measures. 

Mr. SHAYS. Well, okay. It just seems to me that you can give us 

advice as to whether or not you believe that continuing these low 

rates will contribute to a stronger economy. And if you don’t think 

that, then you should tell us. If you think that letting them go up 

will not impact our economy, you should tell us that. I think that 

is a fair question. 

Mr. BERNANKE. Well, let me say this, which is that there needs 

to be a balance between spending and taxes. So I think that welldesigned lower taxes can contribute to a stronger economy. But 

there is also a responsibility to make sure that the spending is 

commensurate with that. 

Mr. SHAYS. Right. 

Let me get to the next one. When I am encouraged to refinance 

my house and pay 2 percent to 3 percent, you know, and then you 

look at the fine print, and you are paying 7 percent or more. So 

I see this, and think that—well, I am not following them. I think 

a lot of people are. What is the role of the Fed to try to address 

that issue, if any? 

Mr. BERNANKE. The size of the cost to refinancing? 

Mr. SHAYS. The incredible amount of effort to get consumers to 

basically use their homes, thinking that they are only going to pay 

a 2 percent or 3 percent rate, when in actual effect they are going 

to pay 7 percent or 8 percent. They have to pay it. They just don’t 

have to pay it each year. 

Mr. BERNANKE. Adjustable-rate mortgages and the like. 

34

Mr. SHAYS. Adjustable rates, but where they actually pay less 

each year, less than the rate they are being charged. 

Mr. BERNANKE. Those are option ARM’s and so on. Those have 

negative amortization. 

Mr. SHAYS. I shouldn’t have said it that way. But the bottom line 

is that I am scared many people are just going to fall into that 

trap. 

Mr. BERNANKE. I share your concern. As I was discussing earlier, 

our nontraditional mortgage guidance is very clear that lenders 

should, first of all, make sure people understand what it is they are 

signing, what they are getting involved in, and secondly should underwrite in such a way that if the borrower stays in that mortgage 

and rates go up, then the borrower will be able to make the payments and not be foreclosed. 

Mr. SHAYS. Thank you. I yield back. 

The CHAIRMAN. We will now take a 15-minute recess. 

[Brief recess] 

The CHAIRMAN. We are going to convene a minute early, but the 

next person on our list here is from Kansas, Mr. Moore. Would 

someone please close the doors—thank you—and Mr. Chairman, we 

appreciate, again, your giving us all this time. 

The gentleman from Kansas is recognized for 5 minutes. 

Mr. MOORE OF KANSAS. Thank you. 

Mr. Chairman, thank you and welcome to the committee, and I 

appreciate your coming here and taking our questions. 

I want to follow up on kind of an area at least that the gentleman from Texas asked you about, and that was our debt as a 

Nation and what that is going to do to future generations in our 

country. 

I have seven grandchildren, and I am very concerned that we are accumulating a debt in this country that presently stands at $8.7 

trillion. I understand it has gone up approximately $3 trillion in 

the past 6 years, and I was at the White House about 6 weeks ago, 

and I had a chance to talk with the President. I said, Mr. President, I am not pointing a finger at your Administration, and saying 

it is your fault, because this goes back 25 years, 30 years, but 

through a process of borrowing and accumulating debt, interest on 

our national debt now stands at $8.7 trillion, and as I think Mr. 

Paul pointed out, over 40 percent of our debt is held by foreign nations. 

Should we, as a Nation, be concerned about that much debt? 

Should we, as a Nation, be concerned about the fact that more than 

40 percent of our debt is held by foreign nations? If for any reason, 

whatever reason, foreign nations decide to sell off our debt, what 

impact, if any, would that have on interest rates in our country? 

Mr. BERNANKE. The Federal debt that I am most concerned 

about is sort of the implicit debt, the debt associated with our 

promises to future retirees for Social Security and Medicare. If we 

were to stop here in some sense, it would not be quite so bad. The 

amount of government debt held by the public currently is about 

37 percent of the GDP, which is fairly normal across industrial 

countries, lower than some in fact, but the situation is going to get 

a lot worse as we have retirements of the baby boomers and so on 

and medical care costs go up. 

35

According to the Congressional Budget Office, in the immediate 

scenario, by 2030, the debt, instead of being 37 percent of GDP, 

will be 100 percent of GDP, and the deficit will be 9 percent of 

GDP instead of being a little under 2 percent as it is this year. So, 

if we allow things to continue, the debt interest cycle will continue 

to build up, and we will hurt our fiscal position to the detriment 

of our children and grandchildren. 

On the issue of holding the treasury debt, the reason that foreign 

countries hold our debt is, for the most part, because they find it 

beneficial to themselves to have ownership of this very safe, liquid, 

and convenient form of assets, and I find it unlikely that anywhere 

in the foreseeable future there will be a major sell-off of any kind. 

If there were to be some sell-off, there would probably be some 

short-term effects, but— 

Mr. MOORE OF KANSAS. What kind of short-term effects, Mr. 

Chairman? 

Mr. BERNANKE. We would have movements in the asset financial 

markets, responding to the sale of the treasuries and other securities. 

Mr. MOORE OF KANSAS. Would interest rates respond to the sale 

of securities? 

Mr. BERNANKE. The impact effect of large sales of treasuries 

would be to raise interest rates, yes, but over a longer period of 

time, I believe interest rates are determined by fundamentals, by 

Federal Reserve policy, and I would also point out that the ownership, say, by the Chinese, of dollar-denominated assets is less than 

5 percent of all of the fixed-income dollar assets in the world, even 

though it is a larger share, as you point out, of the treasury market. So I do not consider that to be a major concern. 

As I mentioned earlier in response to a question, there could 

come a point where foreign investors become less willing to accumulate more of our debt and would begin to drive up interest rates, 

and in order to avoid that contingency down the road, we should 

probably be trying to bring our current account down gradually 

over time. 

Mr. MOORE OF KANSAS. Well, I understand, and I appreciate the 

fact that you, I am sure, feel a responsibility not to alarm people 

by any statements you might make, but my concern again is if foreign nations decide for whatever reason to sell off our debt, that 

is going to—there is the old law of supply and demand in effect, 

and if foreign nations are not going to hold our debt, that means 

that we are going to have to finance that, and I would think that 

would cause interest rates to go like this. 

I remember 30 years ago there was a guy named Jimmy Carter, 

who was President of the United States. We had interest rates 

going up to 12-, 14-, 16 percent. That would be absolutely devastating for our Nation right now, and I am not trying to be an 

alarmist here. I just do not want to see us get in a position where 

anything like that happens again to our country, because that 

would be devastating, I think, for small businesses, for consumers, 

for people in this country, and that is my concern, I guess. 

One more question. Oh, we are out of time. Sorry. 

Mr. Chairman, thank you very much. 

The CHAIRMAN. Would the Chairman like to respond? 

36

Mr. BERNANKE. No. 

The CHAIRMAN. Well, then we will take one more question. 

Mr. MOORE OF KANSAS. Okay. I understand that you all have a 

rule that says that the presidents of your banks have to retire at 

a certain age. 

Is that consistent with what some people are saying, that because of life expectancy going up that we should require people to 

retire at a certain age? 

Mr. BERNANKE. We have thought it valuable to have some turnover there. We do not have quite the same pressures that the private market would have, you know, with leadership in a company, 

so we think that getting new leadership is beneficial, but if there 

are concerns I would be certainly willing to ask our committees to 

look at that. I have found, basically, that there has been a reasonable amount of turnover in the sense that people do not stay so 

long as to stagnate, but they stay long enough that their knowledge 

and experience can accumulate. 

The CHAIRMAN. Of course, they could always retire, rest for a few 

years, and then run for the Senate. 

The gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman, and Chairman 

Bernanke, thank you for your patience. 

To some extent, I would like to follow up a bit on a line of questioning from my colleague from Kansas, and I know that his commitment to the long-term fiscal health of our Nation is a very sincere one. We sometimes come about it in different ways, but I know 

his commitment is sincere. 

I was reviewing testimony you gave before the Senate Budget 

Committee recently on entitlement spending, and you have alluded 

to it today. I have had the occasion now to hear from the heads of 

OMB, GAO, CBO, and the Secretary of the Treasury, and there 

seems to be consensus among all of them that the number one fiscal challenge we face as a Nation is the pace of growth in entitlement spending. 

Would you concur in that assessment that it is, indeed, our number one fiscal challenge? 

Mr. BERNANKE. Yes, or, more broadly, how to deal with the aging 

of the population. 

Mr. HENSARLING. You spoke earlier about the percentage of debt 

to GDP by 2030, and you mentioned, I guess, the challenges of trying to, without entitlements, reform the level of spending decreases 

or tax increases, some combination of the two. I think I heard you 

say before we are not going to grow our way out of this challenge, 

is that correct? 

Mr. BERNANKE. That is correct. 

Mr. HENSARLING. If Congress ignored any entitlement spending 

reforms and chose no other offsets within the Federal budget, using 

2030 as our guideline—it is kind of a good placeholder for the next 

generation—have you looked at models on what type of tax burden 

would be necessary to be placed on our people to balance the budget, say, in 2030? 

Mr. BERNANKE. Well, the projection would be that in 2030 the 

entitlement programs would be about 15 percent of GDP, which 

means that the entitlement programs and interest on the debt toVerDate 0ct 09 2002 18:40 May 02, 2007 Jkt 034673 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\34673.TXT HFIN PsN: TERRIE
37

gether would be something about our total budget today. So increases would have to be related to how much additional spending 

you would have. If you want to keep nonentitlement spending constant, you would have to raise tax rates approximately 6 or 7 percentage points of GDP, from about 18 percent now to about 25 percent of GDP, with no other changes in order to retain about the 

same deficit. 

Mr. HENSARLING. The Comptroller General has previously testified that if that happens, in his opinion, we are on the verge of 

being the first generation in our Nation’s history to leave the subsequent generation with a lower standard of living, less opportunity. 

Would you agree with that assessment? 

Mr. BERNANKE. Those are very high tax rates, and they would 

have adverse effects on growth. 

Mr. HENSARLING. Changing subjects, Mr. Chairman, the debate 

about trade versus protectionism is as old as our Republic is. It is 

a debate that has certainly reared its head again in our Congress, 

many believing that somehow present trade policies have negative 

impacts on low income. I recently saw some Bureau of Labor statistics figures that indicate, within the last 5 years, the price of durable goods have dropped 8.7 percent, appliances 6.5 percent, toys 

25.8 percent, and televisions 55.4 percent. Low-income people in 

the Fifth Congressional District of Texas, whom I represent, buy 

televisions, toys, durable goods, and appliances, and last I looked, 

each of these had a very heavy trade component. 

If trade barriers were erected, might the cost of these actually go 

up instead of decrease, and might that have a detrimental impact 

on low-income Americans? 

Mr. BERNANKE. Certainly. Yes, I agree. 

Mr. HENSARLING. That was such a quick answer that I was not 

ready for the next question. 

Mr. BERNANKE. Well, I can elaborate. 

Mr. HENSARLING. No. I think I will quit while I am ahead, Mr. 

Chairman. I think I will quit while I am ahead. 

To the extent that I have any time left, subprime lending—you 

mentioned that there is a great challenge in figuring out the difference between predatory and subprime. I believe the world works 

off of incentives. 

Are subprime lenders incented to actually take back the collateral, to take back the house, to repossess it, particularly since, I 

think you testified, we are now in a softening real estate market, 

and if that is not the incentive structure might the competitive 

marketplace help ameliorate what we are seeing as far as some of 

the high foreclosure rates? 

Mr. BERNANKE. To some extent, that is correct. It is certainly the 

case that subprime lenders, certainly the legitimate subprime lenders, are not looking to have foreclosures. It is bad for their business—they lose money—and we have seen some failures of small 

lenders, and we have seen credit default swaps that measure the 

risk of subprime mortgages, those spreads widen considerably, and 

so, clearly, it is not in the interest of lenders to make bad loans. 

Mr. HENSARLING. I am out of time. Thank you for your testimony. 

38

The CHAIRMAN. The gentleman from North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman, and 

Mr. Chairman. 

Mr. Chairman, I also read your remarks in the Greater Omaha 

Chamber of Commerce that Ms. Waters spoke of. She said she was 

very moved in reading it. I am not sure I have ever really been 

moved by a speech by an economist, but I have found a fair amount 

to agree with in what you have said, and there were things that 

we had discussed earlier when you testified here before and, actually before that, things that—topics about which I had questioned 

Chairman Greenspan earlier. 

You talked about the widening inequality, that between 1979 and 

2006 the wages of the people who are right in the middle had gone 

up by a total of 10.5 percent, the people in the bottom quintile, the 

bottom 20 percent, 4 percent, and those in the top quintile had 

gone up 34 percent, that the share of after-tax income for the top 

1 percent had almost doubled as a percentage of all wages, all compensation from 8 percent to 14 percent over a slightly lesser period 

of time, and that even within that 1 percent there was a widening 

inequality. 

I asked you then about what programs we could get at, and you 

mentioned education again and specifically community colleges, 

life-long learning, job training, how to make sure that our workers 

have the skills to be personally responsible for increasing productivity so they might be compensated better. In the President’s most 

recent budget, all line items for career and technical education in 

2007 were $1.312 billion, and in the proposed budget it is $617 million. So it is being cut by more than half. 

Does that show a commitment—is that what we need to be doing 

if we do recognize income inequality as a significant problem for society? 

Mr. BERNANKE. One point I tried to make in my remarks was 

that solving these problems of retraining and job search in life are 

difficult, and people may differ on how best to accomplish it. I do 

not know from your numbers whether there were offsets in other 

programs or different approaches—I simply do not know—but I 

think there is a legitimate debate among all of us about what are 

the most cost-effective, effective ways, to help people overcome the 

skills gap so that they can get better work. 

Mr. MILLER OF NORTH CAROLINA. Actually, Mr. Sherman mentioned a systematic economic approach to approaching income inequality. I think before, I just asked if you could name any program that addressed anything Congress was doing and the President was doing that seemed to be addressing economic inequality, 

growing differences in income, and you mentioned specifically education. That was what you talked about. 

If we are serious about closing economic inequality, isn’t that exactly what we should be looking to, making a real commitment to 

job training, to adult education, to education from pre-kindergarten 

all the way through life-long learning? 

Mr. BERNANKE. I think we should, but I do not want to support 

or attack any specific program because there are many approaches 

to doing it. The President will, no doubt, reply that he has the No 

39

Child Left Behind Program, which is an attempt to increase the 

quality of schools. 

Mr. MILLER OF NORTH CAROLINA. Which has also been funded at 

much less the level than what was promised, dramatically less, and 

actually the very programs within No Child Left Behind that are 

most clearly directed at closing achievement gaps are the very programs that have been cut the most. 

Chairman Bernanke, you also, in your speech in Omaha, talked 

about the kind of superstars in the world economy and how much—

given what the economy is like now, relatively small differences in 

ability or in appeal from the very, very best and people who are 

just very, very good but not the very, very best—resulted in dramatic differences in income, and then you also mentioned CEO pay 

and said that in many cases CEO’s who had failed spectacularly, 

who had appeared to have crashed and burned, had still done very 

well or were still compensated at breathtaking levels, and in earlier testimony you said that European CEO’s appeared to be paid 

significantly less than American CEO’s. 

Are European companies doing significantly less well because 

they do not have the superstars? Is there anything that suggests, 

really, that there is a difference based upon skill level between 

American CEO’s and European CEO’s? 

Mr. BERNANKE. I have not really studied that. I think that there 

are some CEO’s in Europe who are paid lower levels, and probably 

there are fewer in sort of the same league as the American CEO’s. 

I think it is very important that boards of directors take shareholder interests very seriously when they make these compensation 

decisions, and that they try to attract the very best talent, and that 

they pay in a way that will motivate good performance. 

The CHAIRMAN. The gentleman from New Jersey. 

Mr. GARRETT. Thank you, Mr. Chairman, and thank you, Mr. 

Chairman, for your testimony today. I appreciate your spending the 

time with us. 

I would like to go back and begin my questioning with a topic 

that is of great importance to me, and we have already touched on 

it, at least with one series of questioning, and that is dealing with 

GSE reform. 

On the one hand, I am pleased to see that the Administration is 

taking what I would say is a slightly tougher tone, if you will, on 

pushing for a brighter line test between what is appropriate and 

what is inappropriate between the primary and the secondary markets and what the GSE’s are involved in. That is on the positive 

side. 

On the negative side, from my position, I have seen something 

of a softening with the Treasury stance with regard to portfolio 

limitations, which I believe should be a true concern to us. I know 

that there are ongoing negotiations, if you will, between the Treasury and our esteemed and gracious chairman behind us to try to 

reach a compromise on this issue, and as part of the negotiations 

there is consideration of what has been dubbed the MTI, the mortgage tax increase, better known as the ‘‘Housing Fund,’’ and I 

would be curious to have your take on an aspect of that. 

I raised a similar question to you when you were here before the 

committee a year ago and new on board, but I know since that time 

40

you have had an opportunity to get into the weeds a little bit more 

on this topic. You have already testified here and before other committees with regard to the importance of the housing market in 

general to our boom in the economy that we have had and the 

slight slowness of the housing market and what impact that could 

have on the overall economy. 

My first question to you is: What additional impact could we see 

if we did have a tax, if you will, on that marketplace by having a 

fee or an assessment on the GSE’s for this new Housing Fund, or 

the MTI? 

Mr. BERNANKE. So you are arguing that the Housing Fund would 

raise the cost of mortgages because we are putting a tax on the 

GSE’s? 

Mr. GARRETT. Yes. Well, we know the corporations in general do 

not pay their taxes in one way or another. The cost of doing business is not borne by the business but is passed on to the consumers 

in one sense or another. 

Here, the business that it is being passed on is to the low- and 

moderate-income homeowner who is trying to get into the market, 

which is the whole idea behind GSE’s. 

Mr. BERNANKE. Well, I have not done any analysis of that particular issue. 

I would reiterate what I said before, which is I think, that it is 

important for the GSE’s to support affordable housing. The way I 

would recommend it would be to tie their portfolios to affordable 

housing products, for example, by holding MBS that are based on 

affordable housing mortgages, for example. That would seem to be 

a direct way to both create some limits, some limitation on the rapidity of the expansion of their portfolio, while still having a direct 

impact on the affordable housing. 

I have not taken a position on the Housing Fund, and I am 

afraid, if I do so, it will be portrayed as a change in position, because the Fed is focused very much on the safety and soundness 

and the systemic risk implications of the portfolios, and I think 

that is where the Federal Reserve needs to keep its focus. 

Mr. GARRETT. Do you agree with my basic economic assessment 

that when you have a corporation such as GSCR or any corporation 

in general that the taxes that we assess on them are not borne, in 

essence, by them, but it has to be passed on to someone? 

Mr. BERNANKE. Well, it could be passed on to the shareholders 

in terms of a lower share price. That is another possibility. So I 

would have to think about the incidence of that. 

Mr. GARRETT. And, of course, the economic philosophy to that is, 

when you put a cost onto the share price of a company where they 

have to get their investments from, that impacts upon the economy. We can go into that. 

Can you elaborate a little bit more on the portfolio idea that you 

were talking about? I am limited in my time here. Are you suggesting that you allow them to increase the—or have an increase 

in the portfolio size of those holdings for the low- and moderateincome portfolios, and if that is the case, doesn’t that go beyond 

what the GSE’s were intended for—or what the portfolios were intended for in the first place? They were just for securitizing the 

41

loans, and they were just there to be in and out, if you will. Why 

would we need that to occur? 

Mr. BERNANKE. I think the ideal situation would be one in which 

the portfolios did exactly what you said. They were to be the weigh 

station for securitized mortgages, and they would contain mostly 

liquid assets for the purpose of purchasing mortgages and then 

selling them back to the market. 

Mr. GARRETT. Right. 

Mr. BERNANKE. I would like to see a bill. I think we need to have 

a strong regulator in this arena, and we need to find some way 

that we can limit the growth of the portfolios. As a practical matter, I think that restricting portfolios to mortgages related to affordable housing might be an appropriate compromise and an appropriate approach that would provide some limitation, but the 

Federal Reserve has always been concerned about the size of portfolios. It never has found a substantial benefit to homeowners from 

large portfolios. 

Mr. GARRETT. Does the Treasury have the authority— 

The CHAIRMAN. Gentlemen, we are into the timing. 

The gentleman from Missouri. 

Mr. CLAY. Thank you, Mr. Chairman, and thank you for holding 

this hearing. 

Mr. Bernanke, welcome. I represent the First Congressional District of Missouri, which is comprised of north St. Louis City and 

north St. Louis County. 

Continuing with the same line of questioning as the gentleman 

from New Jersey about housing, in my district, and in many other 

districts across the country, we have a tremendous housing crisis. 

This must be addressed, and it must be done with urgency, especially when it comes to affordable housing. 

What changes in housing policy can be made that the United 

States can better foster an urban housing policy that puts people 

in homes in the inner cities so that they can build wealth through 

ownership and pass it on to future generations? What are your 

ideas on this, and what is your approach to this housing crisis? 

Mr. BERNANKE. Well, I recently had the opportunity to visit Anacostia in the District of Columbia and to see some of the projects 

going on there, and we saw the actions of community development 

financial institutions, CDFI’s, who have worked together with 

banks, private investors, and with government sources to finance 

some very impressive projects, some new apartments, and some social centers for the community, with very good results, and I think 

that collaboration that we saw with the CDFI’s, managing together 

with some nonprofit institutions, other nonprofit institutions, and 

private sector input, is a very promising approach to this. 

Mr. CLAY. It sounds like we have to be creative in order to rebuild our inner cities and to come up with creative concepts so that 

people can take ownership of their neighborhoods, of their communities. It sounds like that is what you are saying, and you promote 

those policies. 

Mr. BERNANKE. Ownership is very important because people then 

feel they have a responsibility for their community and for their 

home, and it is also valuable to try to develop a community, not 

house by house but in a broader sense, because unless you have a 

42

retail area and a school and a social area and other amenities, the 

house property values are not going to justify the cost. So you need 

to build a neighborhood rather than just an individual house. 

Mr. CLAY. Thank you for that response. Let me shift over to a 

worker issue. 

Yesterday, DaimlerChrysler, throughout the United States and 

particularly in St. Louis, announced plans that will affect approximately 1,300 jobs at our Fenton plant in St. Louis County. They 

are losing an entire shift which makes the minivans. There have 

been other massive layoffs by the other automakers. Additionally, 

these corporations are trying to do away or drastically reduce legacy cost, healthcare, retirees’ benefits, and pensions. Many of these 

employees have lost benefits that were promised them in exchange 

for working their careers at their workplace. They earned them, 

and now, as they approach retirement, they are not there. 

Do you have new approaches or plans for long-term employee 

healthcare, retirement benefits and pensions, and how do we address the problem facing our industrial workers in the automobile 

industry and manufacturing sector? We can include the airline employees and many other workers throughout this economy in that. 

What new systems will we put in place to replace these traditional 

safety nets that they have worked for and depended on all of their 

lives? What solution do you think we should be putting in place, 

and what are your thoughts on this? Could you elaborate? 

Mr. BERNANKE. Well, first, if firms make promises to workers 

with respect to retirement benefits or healthcare benefits, we 

should make sure that those promises are kept. The recent legislation on pensions that Congress passed tried to toughen up the requirements for funding pensions, tried to make them more transparent, and to increase the premium paid to the Pension Benefit 

Guarantee Corporation. Those kinds of measures can help ensure 

that companies will not renege on the promises that they have 

made to their workers, so that is very important. 

I would say, more generally, that we need to diversify, to have 

more than one source of retirement security. Some people rely on 

defined benefit pensions. We need to expand access to defined contribution plans like 401(k)s and other kinds of private savings, and 

then there is, of course, Social Security, which we want to make 

sure is on a sustainable, long-term path. So if we put all of those 

things together, you can help people finance a reasonable retirement. 

The CHAIRMAN. The gentlewoman from West Virginia. 

Mrs. CAPITO. Thank you, Mr. Chairman. 

I have a question. You mentioned in your opening statement that 

there has been a large amount of consumer spending. We see a lot 

of credit card debt by individuals, a lot of higher education loan 

debt for young people coming out of college, also into the professions, medical school. 

How are people going to be able to overcome this debt when the 

wages are only rising a certain percent? Do you see this as a longterm problem that seems to be concentrated—I mean, if you are a 

college student, you can get a credit card like that and run it up 

to the maximum quite quickly and pay $20 a month, probably, for 

43

the rest of your life. What kind of problem do you think that presents to our economy? 

Mr. BERNANKE. Well, the incidence of delinquencies and bankruptcies for the economy as a whole remains quite low. Because the 

job market is pretty good and incomes have gone up, wealth has 

gone up, the stock market is up, and so on. Most families, many 

of them, have home equity built up and have been able to manage 

their finances pretty effectively, and as I said, we have not seen 

any significant increase in financial stress in the broader economy. 

Now, there are pockets of problems, as I mentioned already several times, such as the variable rate subprime mortgage area. I 

think there are a number of approaches. The one that the Federal 

Reserve is particularly involved in is disclosures. We are responsible for Regulation Z, which implements the Truth in Lending Act, 

and it includes such things as the famous Schumer Box and other 

things that show to potential credit card applicants what are the 

terms, you know, what are the fees and so on. 

We are in the process now of completely reworking Reg Z for 

credit cards, for revolving debt, and we anticipate going out with 

a proposed rule in the next couple of months, and we have worked 

very hard on that. In particular, one thing we have done—people 

find it very difficult to understand the legalese that they see in the 

credit card applications, the credit card contracts, and yet of course 

the legal information has to be there. Otherwise, it is not a legitimate contract, and so the challenge is to create disclosures that 

meet the legal standards but that are also understandable, and so 

we have gone out and done a lot of consumer focus group testing 

and those kinds of things to try to find disclosures that will actually work in practice, and we hope that these new disclosures we 

are going to put out for comment in just a couple of months will 

be helpful in helping people understand, you know, the terms and 

conditions of credit cards and make them use them more responsibly. 

Mrs. CAPITO. Well, I will look forward to that, and I think it is 

an excellent idea, and I think that it is difficult when you turn it 

over and look at the fine print. I am admitting to not reading my 

credit card disclosures as closely as I should. 

I do not often mention it, but I am from the State of West Virginia, and it is very reliant on coal, and the energy production is 

extremely vital to our State economy, but we also have a population that is very sensitive to gas prices, to the price of healthcare, 

to all of the things that hit your pocketbook immediately. 

When you look at the long term, what do you see in terms of—

and I know, in some of your statements, you sort of exclude the energy prices. Is that because of the volatility of that or, in trying to 

move from nonreliance on foreign sources of oil, do you think we 

are ever going to make an impact on the pocketbook of the individual citizen? 

Mr. BERNANKE. Well, in the short term the demand for oil is inelastic; that is, it does not respond much to price changes, and so 

when there are fluctuations in the demand for oil, you get these big 

spikes and movements in oil prices, and we have seen quite an increase in oil prices in the last few years, as you know. Over the 

longer term, higher oil prices actually have a benefit, which is that 

44

they encourage conservation, and they encourage alternative supply sources. Coal, of course, is actually a very promising source. It 

is, of course, a traditional source of energy, but assuming we can 

find ways to address the environmental implications—and there 

are many promising directions there—coal could be a very big part 

of our energy diversification in the future. 

So my expectation is that as long as the markets are allowed to 

work, together with some support for research and development 

from the Government, together with clear and effective regulation, 

that we will solve our energy problems and that solution is going 

to come not just from one single magic bullet; it is going to come 

from a wide variety of different alternative sources, including, I 

think, coal. 

Mrs. CAPITO. Thank you. 

Do I have time for one more? 

The CHAIRMAN. You do. Go ahead. 

Mrs. CAPITO. I have one more quick question, and this is sort of 

an educational question for me. 

When I read your statistics and I see the large, you know, macro 

view that you have, living in a small State that has fluctuations 

always sort of at the bottom end of the economic scale in terms of 

per capita income, we always feel in small States that sometimes 

all of the statistics that we read are sort of driven by New York, 

California, Florida, and Texas. 

When you are formulating your data that you bring before us, 

what kind of considerations do you make for smaller States or does 

just the population number drive all of your statistics? 

Mr. BERNANKE. Well, we see a lot of State data, for example, unemployment rate data by State, but the other important thing 

about the Federal Reserve is that it is a Federal—that is, a regionalized—system, and as I am sure you know, we have 12 Reserve 

Banks around the country— 

Mrs. CAPITO. Right. 

Mr. BERNANKE. —and one of the most important elements of our 

monetary policy meetings is when we go around the table and ask 

each Bank president from each part of the country what is going 

on in your State, what is going on in your region, what is going 

on in various industries, various sectors, and various geographic 

areas within your Federal Reserve district; that gives us an awful 

lot of detailed information about what is happening in different 

parts of the country. This is a very large, diverse economy. The aggregate statistics really cover up a huge amount of heterogeneity 

in terms of economic activity and developments in the economy. So 

we pay a lot of attention to regional information in trying to understand what is happening in the economy. 

Mrs. CAPITO. All right. Thank you. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLEAVER. Thank you, Mr. Chairman, Mr. Bernanke. 

We are very likely going to have as a part of the upcoming elections a great deal of divisive language based on people’s concerns 

about immigration, and in June of 2006, 500 American economists, 

including 5 Nobel laureates, signed an open letter on immigration 

and sent it to President Bush and to Members of Congress, and in 

that letter we are reminded, sir, that we are a nation of immiVerDate 0ct 09 2002 18:40 May 02, 2007 Jkt 034673 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\34673.TXT HFIN PsN: TERRIE
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grants, and it talks about the economic benefits of immigration and 

speaks to the power of immigration to strengthen America and to 

lift the poor out of poverty, and the consensus reached is that most 

Americans, contrary to what is being said on the nightly news, benefit from immigration, but there is one portion of the letter that I 

think is extremely significant, and if you do not mind, I will just 

read from the letter: 

‘‘Immigrants do not take American jobs. The American economy 

can create as many jobs as there are workers willing to work so 

long as labor markets remain free, flexible and open to all workers 

on an equal basis.’’ 

Now, shortly after this letter was sent to us, Jack Kemp, George 

Shultz, Jeane Kirkpatrick, and 30 other non-liberals, including the 

former RNC Chairman, signed a separate open letter on immigration, and it embraced Ronald Reagan’s view of allowing open, sensible immigration, and they go on to recite Reagan’s quote from 

Winthrop about the city on the hill. 

Now, the statistics support these letters, and recent studies show 

that since 1980, immigrants have boosted the U.S. GDP by $10 billion per year, and during the 1990’s, when the labor force grew by 

16.7 million workers, 38 percent of those workers were foreignborn. In other words, at a time when U.S. unemployment was hitting record lows, immigrants filled 4 out of every 10 jobs. Now, in 

January of 2000, your predecessor, Chairman Greenspan, commented that easing restrictions on immigration would go a long 

way in solving labor shortages. 

Now, without going on, I am more interested in finding out 

whether or not you believe that immigration has a positive or a 

negative impact on our economy. Do you share in the philosophy 

of the 500 economists, and what do you think should be done with 

regard to the American workforce and immigration? 

Mr. BERNANKE. Well, it is certainly true, as they say, that immigrants built the country. All of my grandparents were immigrants, 

and they came and they had new lives, and they contributed to our 

economy. So immigrants have played, historically, a very important 

role in U.S. economic development. 

I agree with you that they do not take jobs, and the labor market 

does adjust to the number of people available to work. We have had 

a lot of immigration. The unemployment rate is quite low. It is 

somewhat more controversial. Do they affect wages? One concern 

that some people have had is that because many of the more recent 

immigrants have relatively low skills that they compete, to some 

extent, with low-skilled workers in the United States and may have 

some effect on their wages. Most estimates are that those are pretty small effects, but there may be some effects. So I certainly agree 

that immigrants have played a big role. They continue to play a big 

role, and we need to have a national policy on that. 

I think I would stop short of recommending a specific program. 

This is a very tough issue and one I think Congress really has to 

take the lead on about how many people and under what conditions we admit, but it is certainly the case today that immigrants 

are playing a major role in our economy. There is no question 

about that. 

46

The CHAIRMAN. If the gentleman would yield, could I just ask: 

Would it also have implications—you have talked about the decline 

in the labor rate participation. Would it also have implications for 

our ability to deal with the entitlement issue? 

Mr. BERNANKE. It goes in the right direction, but the CBO has 

done some simulations that suggest even fairly large increases in 

immigration, say from 1 million to 2 million, would not solve the 

problem by any means, but it does go in the right direction. 

The CHAIRMAN. It alleviates it. 

Mr. BERNANKE. Yes. 

The CHAIRMAN. I thank the gentleman. 

Mr. CLEAVER. Mr. Bernanke, have you seen the movie, ‘‘A Day 

Without Mexicans?’’ 

Mr. BERNANKE. I have seen it, yes. 

Mr. CLEAVER. Would you recommend that for all Members of 

Congress and for people running for public office? 

Thank you very kindly. 

The CHAIRMAN. Did you say, ‘‘A Day without Questions?’’ 

Mr. CLEAVER. ‘‘A Day without Mexicans.’’ It is a new motion picture that— 

The CHAIRMAN. The gentlewoman from Minnesota. 

Mrs. BACHMANN. Thank you, Mr. Chairman, and thank you, Mr. 

Chairman, for being here before this committee. 

I have appreciated your responses to the questions, and in particular, my colleague, Mr. Hensarling from Texas, had asked you 

about the entitlement problem that we will be having, and that is 

where my question is going as well. He had mentioned the Comptroller General and some of the comments that the Comptroller 

General had made. One of those that really captured my attention 

was the statistics that he gave that already our Federal Government’s net liabilities exceed $43 trillion or about $350,000 for every 

full-time worker in the United States. 

Without fundamental changes and absent any movement by the 

Congress on changes in our entitlement, I am just wondering, Mr. 

Chairman, do you believe that there is any plausible amount of tax 

increases that could possibly deal with the coming crisis in our entitlement programs? 

Mr. BERNANKE. Well, the tax increases would have to be quite 

large. The Congressional Budget Office has done some simulations, 

assuming 25 percent tax increases, which do not quite solve the 

problem. So it would have to be a pretty large increase in taxes to 

solve it. 

Mrs. BACHMANN. And that is something that, I think, haunts all 

of us as we are looking toward the future, especially toward 2030. 

We are concerned about that. I appreciate your response on that. 

My next question deals with a happier subject of productivity, 

and that is something where the United States has been phenomenal in the area of productivity. You are quite familiar with 

the President’s economic report that noted that between 2000 and 

2005, here in America, we had a productivity increase of about 3 

percent, which far outpaced the productivity growth levels in the 

other G7 nations. Whereas many of them suffered a slowdown in 

productivity growth, the United States, in fact, accelerated and is 

at an enviable level. 

47

I am just wondering, sir, if you have insight into perhaps what 

some of the factors are that led to this remarkable productivity 

growth given that Western European nations as well as the other 

G7 nations have the same access to technological improvements as, 

say, the broad capital markets that we have. I am just wondering 

if you could state for this committee why we have seen better results here in the United States than we have seen in the other G7 

countries. 

Mr. BERNANKE. That is an issue that has received a lot of attention. It is a good puzzle why we have gotten differential results. I 

think the answer is the interaction of the technologies and the economic system. 

To go back to themes we have already addressed today, technology creates change, and the system has to be able to adapt to 

change in order to make full use of the technology, and in the 

United States the combination of very deep capital markets which 

have been able to fund new start-up firms or venture capital support for entrepreneurial activities and a flexible labor market 

which has allowed for changes in the way people work and the distribution of workers across industries and across occupations has 

allowed these new innovations, these technological innovations and 

information communication technologies not only to lead to increased productivity within the narrow sphere of high technology 

industries but to spread out through the whole economy and to increase productivity in financial services, in retailing, in wholesaling, and in manufacturing. 

As firms have been able to apply effectively these technological 

innovations, in some countries there is a great deal of rigidity in 

the structure of labor and product markets, and those rigidities 

have prevented the technological innovations from being applied as 

effectively or as quickly as in the United States. 

Mrs. BACHMANN. Thank you. 

My final line of questioning goes to the legislation that Congress 

may very soon pass, and that would be the increase in the minimum wage. We are looking at increasing perhaps at the level of 

40 percent minimum wage in the upcoming bill. 

First, I am wondering if you could estimate how close we are currently to full employment here in the United States. I know, in 

Minnesota, we have just enjoyed wonderful low levels of unemployment. I think, for 2 months last summer, we were the job creators 

for about 10 percent of all new jobs across the country. We have 

a wonderfully strong, diverse economy. 

I was wondering first if you could comment, sir, on where you believe we are at in terms of full employment in this country, and 

second, I was wondering if you could share with us what your opinion would be on the impact of raising the minimum wage on employment. First, at the level that we are looking at now to go to 

$7.25, there were comments made by one of our United States Senators that he may be introducing a bill in perhaps 6 months to 

raise that minimum wage up to over $9 an hour. 

So, if you could, just comment on the impact of raising the minimum wage on employment and where you believe we are at in 

terms of full employment now. 

48

Mr. BERNANKE. On the full employment issue, I do not know precisely where full employment is or whether we have reached it or 

not. I do know that the economy has come a ways in the last few 

years in increasing the utilization of underutilized resources. The 

unemployment rate has come down. Capacity utilization has gone 

up, and so we are certainly closer than we were a year or two ago, 

and, indeed, as you point out, in some areas labor markets are 

pretty tight and skilled workers have a lot of opportunities for 

work. 

On the minimum wage, economists generally agree that a higher 

minimum wage will have an adverse effect on employment of lowskilled workers, but they disagree extremely on how big that effect 

would be. Some are saying it would be very small. Others are saying it would be more significant. So I can only say that probably 

there will be some employment effect, but it is very difficult to 

know how big it would be. Given that a relatively small number 

of workers today are at the Federal minimum wage, in part because State minimum wages or many of them are higher than the 

Federal minimum wage, I do not think that the employment implications of the proposed bill for the Nation as a whole would be very 

significant one way or the other. 

Mrs. BACHMANN. And— 

The CHAIRMAN. We are over time. 

Mrs. BACHMANN. Thank you. 

The CHAIRMAN. The gentleman from Tennessee. 

Mr. DAVIS OF TENNESSEE. Mr. Chairman, thank you very much. 

I have a comment and then a question. 

We hear a lot about undocumented workers in our country, and 

we hear between 12 million and 15 million working today who may 

or may not have legal documentation to indicate that they are actually here working as authorized by the certain laws that we have 

in this country, and then I hear that we have 41⁄2 percent unemployment. The 41⁄2 percent unemployment means we have roughly 

6 million people in this country not working—is that about right?—

135 million people working. 

So, if we were to round up those 15 million undocumented workers and send them back wherever they came from, would we have 

a deficit of 9 million employees to work in America’s job market? 

What would that do to our economy? 

Mr. BERNANKE. Well, it is certainly true that where we are today 

is that there are a lot of immigrant workers, many of them undocumented, who are working in various industries ranging from manufacturing to agriculture to leisure and hospitality and construction 

and other areas, and if they were all to leave immediately then 

there would be obviously a disruption in those industries and labor 

shortages in those industries. 

Mr. DAVIS OF TENNESSEE. I ask that mainly to make a point. 

We have a lot of folks out here today who have a lot of ideas 

about America’s economy, and we have a lot of ideas about some 

of the comments that have been made by many about the illegal 

immigration situation. 

My real question to you is this: As I go back from about the 

1970’s, late 1960’s, up through about right now, we have gone from 

having a balance of trade in our favor to where we have gradually 

49

gone to a whole other level, over $700 billion for the last 2 or 3 

years in deficits in trade. Now that means that we are sending 

$700-some billion more out of America’s economy to other nations 

of the world that are holding that money. They are our dollars. It 

is a part of our capital assets of this country that is showing that 

up, and when I look at that, I get kind of frightened at it, and I 

look at the district that I represent and I see a Saturn plant in 

Spring Hill that has temporary layoffs, perhaps, and I fear that 

they may become more permanent than temporary, those 5,000 or 

6,000 jobs that we may be losing. The Carrier Corporation just left 

my district. 

So when I look at my Congressional district, which is the fourth 

most rural in America, this great booming economy that we seem 

to have throughout America does not exist in my district, and it 

does not exist I believe, perhaps, in most rural areas of America. 

As to the trade deficits and the budget deficits that we continue 

to elevate, are we just looking for a train wreck to happen, and are 

we sitting here in Congress kind of like Nero did in Rome as it 

burned, doing nothing about it? How do we stop this bleeding of 

huge deficit spending? Because we have seen us grow from 18.5 

percent in a gross domestic spending percentage of government to 

about 20 percent in the last 5 or 6 years. We have seen an increase 

in spending, a dramatic increase, and our revenues have gone down 

to fund government as the Congress for the last 5 or 6 years has 

seen fit to spend. 

So, in essence, there are two or three problems that I have, and 

I think it is hurting a lot of the more rural areas and maybe not 

the more urban areas, but we have lost 3 million industrial jobs. 

We are no longer producing. In export and production, we are consuming someone else’s production. So how do the trade deficits, the 

budget deficits impact us, and when will we be in a situation where 

we no longer enjoy the great economy supposedly that we have, 

and when will it become a threat even to the world economy if that 

does happen? 

Mr. BERNANKE. That is a very wide-ranging question. I think I 

would like to separate that into two issues. One is the trade aspect, 

and the other is the budget/current account deficit issue. 

On trade, as I have discussed several times today, trade can create painful dislocations, painful changes. Competition from abroad, 

movements of firms out of the country, can cause people to lose 

jobs, and that is a serious problem. On the other hand, trade also 

creates a lot of benefits to the country. It creates a lot of jobs both 

in terms of exports, and in terms of transplants. Like you mentioned Saturn. Well, there are also transplanted auto firms that 

hire Americans here in the United States, and as someone mentioned here, it does allow Americans to purchase goods and services 

at a lower price than they otherwise would. So there are disruptions caused by trade. There are also a lot of benefits from trade, 

and one of the messages I have been trying to convey is that the 

right solution is not to stop trade or to block trade but, rather, to 

try to find ways to help people adjust or to retrain as necessary to 

deal with these very real—and I take them very seriously—dislocations and problems that arise because of this changing, dynamic 

economy we have. 

50

A somewhat different question is about the trade deficit and the 

current account deficit, and to some extent, it is related to the 

budget deficit in the sense that, as I have indicated, the current account deficit reflects the fact that our savings rate is low relative 

to our investment, and therefore we have to borrow the difference 

abroad. In order to mitigate that situation over time, we need to 

raise our national saving, and that could be done either in terms 

of private saving or it could be done in terms of reducing budget 

deficits or increasing surpluses at both the Federal and the State 

and local government levels. That is going to take some time. I 

think, you know, we do not have to solve this problem overnight, 

but we should be, I think, working to reduce the current account 

deficit over time and at the same time that we continue to allow 

trade and technology to help our economy grow more quickly. 

Mr. DAVIS OF TENNESSEE. We have actually tripled our budget— 

The CHAIRMAN. I am sorry. The gentleman’s time is up. We cannot ask a new question. 

The gentleman from Delaware. 

Mr. CASTLE. Thank you, Mr. Chairman. 

Chairman Bernanke, I thank you for being here. I would also 

like to thank you for the cooperation of the Federal Reserve in the 

new dollar gold coin which we passed through this particular committee. I happen to be the sponsor of it. I think this is the issuance 

date today, as a matter of fact. Although we did something with 

the Treasury and the Mint people with George Washington and the 

Statue of Liberty on the other side, but your acquisition of $300 

million is a nice start. We hope to make some $5 billion. So this 

is something that actually produces revenue for the U.S. Government. 

Going to a subject I want to ask you a question about, though, 

this committee, in a bipartisan way, passed the Sarbanes-Oxley Act 

in 2002, and you have heard, I am sure, a lot of criticism on that 

law—and I have read about it—and some praise of it one way or 

another, but they talk about the rising cost of regulation, and this, 

according to some people, is creating an incentive for firms to be 

listed on foreign markets or to withdraw from public markets altogether. We have more private capital and that kind of thing going 

on in the United States of America now, and there are other measures besides Sarbanes-Oxley that are attributed with those problems. 

In your opinion, has rising regulatory costs or other regulatory 

blocks of some kind or another weakened the international competitive position of our stock exchanges, and do they pose a threat 

to our competitiveness in the future? 

Mr. BERNANKE. To some extent, the declining relative position of 

the American exchanges reflects the natural growth and development of exchanges abroad, in London, in Asia and so on, and as 

those economies, those exchanges become larger, more efficient, 

and deeper; that is actually not a bad thing because it gives, for 

example, American companies more alternatives for raising money. 

On the other hand, to the extent that business is being driven 

offshore by high regulatory costs, which was the conclusion of these 

two recent studies on capital market competitiveness, then that is 

a problem and we need to begin to address those costs. 

51

The Sarbanes-Oxley issue that you raised earlier has been cited 

by a number of these studies, and the SEC and the Public Company Accounting Oversight Board have recently issued a new audit 

standard which will attempt to reduce the costs of implementing 

Sarbanes-Oxley’s Section 404 on internal controls and, in particular, to make it more focused on the most important matters 

rather than on trivial matters and also more appropriate for smaller and less complex firms. So I think that is going to be an important step in reducing that particular set of costs. 

There are many other issues, some of which Congress could address—issues of tort reform and litigation, the CFIUS bill about 

foreign investment coming to the United States, and striking the 

appropriate balance there between keeping a flow of foreign investment into the United States versus appropriate national security 

considerations. The Federal Reserve is working on the Basel II 

bank capital accord regulation, and we are working on that, and we 

want to make sure that does not put American banks at a capital 

disadvantage in the capital markets. 

So it is certainly important for us across a whole variety of regulatory areas to try to keep those costs down and to keep working 

to reduce the burden of regulation on American public companies. 

Mr. CASTLE. Well, thank you. I do not mean to speak for our 

chairman or ranking member here, but I think these issues are of 

great importance to this particular committee. So, hopefully, we 

can be kept informed. 

Changing subjects, I am looking at page 2 of your testimony in 

which it says that the Federal Open Market Committee has maintained Federal fund rates, etc., of 51⁄4 percent, and it says that, 

more or less, the risk of inflation is not overwhelming at this point. 

Then it goes on to say—and again, you have indicated this—the 

‘‘predominant policy concern is the risk that inflation will fail to 

ease as expected and that it is prepared to take action to address 

inflation risks if developments warrant.’’ I suppose I should have 

learned this in Economics 101, but in addition, if there is an addition to dealing with interest rates, are there other things that the 

Federal Open Markets Committee can do with respect to that 

issue? 

Mr. BERNANKE. No. That is the basic tool. 

The CHAIRMAN. If the gentleman would yield. 

Mr. CASTLE. I yield. 

The CHAIRMAN. He said he could not speak for me, but he just 

asked essentially the same question I asked. So, on those two questions about the congruity of those two statements, I agree with the 

gentleman. 

Mr. CASTLE. And I also apologize for being absent and not here 

when you asked, Mr. Chairman. I had a good reason for it, though. 

The CHAIRMAN. Submit it in writing. 

Mr. CASTLE. I have last year introduced legislation about transparency in hedge funds. I am concerned about hedge funds. You 

answered this yesterday in Senate testimony and basically indicating that the liquidity of hedge funds could be very important. I 

don’t have a problem with that either, but I do have a problem in 

terms of what hedge funds could do with respect to commodity 

markets and a variety of things they get into because of the enorVerDate 0ct 09 2002 18:40 May 02, 2007 Jkt 034673 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\34673.TXT HFIN PsN: TERRIE
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mity of it and the number of them that have opened in recent years 

and where they are going. 

I am not one who looks for overregulation or overtransparency, 

if there is such an expression, but I think proper transparency is 

in order. I would like your thoughts, if you could, about where we 

are with respect to hedge funds, and what do you think the role 

of the—regulatory role or perhaps our committee role in this area 

should be. 

Mr. BERNANKE. Well, the approach that regulators have taken 

since the report of the President’s Working Group after the LTCM 

crisis has been a market-based approach, an indirect regulation approach, whereby we put a lot of weight on good risk management 

by the counterparties to the hedge funds such as the prime dealers, 

the lenders, as well as the good oversight of the investors, the institutions and so on that invest in hedge funds. And we found that 

is a very useful way to control leverage and to provide market discipline on those funds. 

The original report of the President’s Working Group also suggested disclosures, and that never went anywhere in Congress, and 

I think part of the problem was it was difficult to agree upon what 

should be disclosed and what would be useful. The hedge funds are 

naturally reluctant to disclose proprietary information about their 

trading strategies and approaches, and their positions change very 

quickly, and so therefore position information can be overwhelming 

and perhaps not very useful. 

I think it is important to continue to think about hedge funds. 

They certainly play an important role in our financial system. Exactly, you know, what a disclosure regime would look like, though, 

is not yet clear to me how that best would be organized. 

The CHAIRMAN. The Chair is about to recognize the gentleman 

from Minnesota. I do want to thank the Chairman. It is the first 

time in my memory that freshman members of this extremely large 

committee are able to ask questions because—I appreciate the 

chairman being around because we are going to be able to accommodate our four remaining members, but the ranking member had 

one very specific brief question he wanted to ask, and if there is 

no objection, I will recognize him for that. 

Mr. BACHUS. Mr. Chairman, this is more of a concern. Governor 

Susan Bies recently announced her retirement. I am very concerned about that in that she was expert on not only risk management, but on Basel, and I felt like under her leadership we made 

tremendous strides in Basel. She had real banking experience with 

a regional bank. And with Mark Olsen gone, too, I am just concerned that as that process goes forward—you know, he has a community banking background—that we had people who were bankers that we deal with as this process goes forward, because those 

are two major losses. 

Mr. BERNANKE. We will miss Governor Bies, as well. She was an 

extraordinary colleague and very, very knowledgeable about banking matters, as you indicate. 

I think we will have good continuity. We have the skills at both 

the Board level and at the staff level to continue to move forward 

effectively with Basel II. And we will, of course, wait for the President to nominate two people to the Board. 

53

The CHAIRMAN. I would like to say to the Chairman that I hope 

that you can, in fact, bring the Basel process to a conclusion and 

I never have to think about it again for about 6 years. 

The gentleman from Minnesota. 

Mr. ELLISON. Thank you, Mr. Chairman. 

And thank you, Mr. Chairman. 

Mr. Chairman, in your remarks on page 2, you noted that real 

hourly compensation rose at an annual rate of about 3 percent in 

the latter half of 2006. 

Could you describe how the longer period of time, for example, 

over the past 10 or, say, 15 years, what have real wages looked 

like? 

Mr. BERNANKE. I don’t know the exact number over the last 10 

years, but there has been a pattern, we have seen this time and 

we saw before, in the late 1990’s, when productivity picked up 

quickly during that period in the late 1990’s, real wages lagged behind productivity for a while, and then they began to catch up to 

it. 

I think in the current episode a couple of things have been at 

work. One is that the labor market remains somewhat weak even 

after the recession ended in 2001. A second concern has been the 

oil price increases, given nominal wage increases, modest nominal 

wage increases, when oil prices go up so much that it takes away 

from the buying power of real wages. And then thirdly I think it 

is, again, somewhat normal for real wages to catch up later in the 

business cycle to—and particularly when there have been periods 

of increased productivity growth as we have seen in the last 3 

years. 

So I am encouraged to see this increase in real wages. Barring 

new shocks, new increases in oil prices, I would think we would see 

further increases in real wages going forward. And I would just add 

that the 3 percent number is for the whole nonfarm business sector, but you get about the same number for average hourly earnings for production workers, which is more representative of the 

broader middle of the middle distribution. 

Mr. ELLISON. I am encouraged by the increase in real wages, too, 

since the middle of 2006, but I have heard people describe the real 

wages over the longer period, maybe 20 years or so, as flat. And 

so I don’t know if that conflicts with what you are saying or if it 

is—or if what you are saying is more descriptive of more recent 

events. 

Mr. BERNANKE. The behavior of real wages depends on the skill 

levels. I have some discussion of this in this speech that Representative Waters referred to on inequality. Over the last 25, 30 years, 

we have seen really modest increases in real wages for those with 

less than a high school education, much more significant increase 

in real wages for those who have a college education or better, and 

intermediate increases for high school graduates. So it depends 

very much on where you are in the wage scale. 

Mr. ELLISON. Thank you. 

I want to ask you a little about loans. What is your best prescription or recommendation to fix what I would generally describe as 

predatory loans? And I am not only referring to the mortgage market, but what could also—some phenomena in the credit card area? 

54

It sounds like what you are saying what we need is more disclosure 

to the consumer. Did I understand your views accurately on that? 

Mr. BERNANKE. Well, I indicated that it is very difficult. And I 

am not just trying to hedge here, because we want to eliminate 

predatory and abusive lending, but we don’t want to shut down the 

legitimate subprime market. And that is sometimes a difficult task, 

and that is why I was praising some of the State efforts that represent good experiments along those lines. 

So approaching that I think involves disclosure, it may involve 

barring certain practices as well. The Federal Reserve, I should 

say, is very much involved in trying to control predatory lending. 

We are responsible for the Home Mortgage Disclosure Act. We recently added information requirements there on pricing so we can 

find out whether pricing is varying across, for example, minorities 

and nonminorities. We are responsible for the Home Ownership 

Equity Protection Act and other things, Regulation Z. So we are 

very much involved in that from the Federal level. 

But again, I think there is still a lot of creativity we can see at 

the State level to try to understand better how to address this 

problem. 

Mr. ELLISON. Thank you, Mr. Chairman. I only have 5 minutes. 

So is the proposal—the rule proposal regarding regulation Part D, 

is that basically a rule—do you anticipate that rule focusing on disclosure, or will it include barring certain practices? 

Mr. BERNANKE. Did you say Regulation Z? 

Mr. ELLISON. Yes. 

Mr. BERNANKE. Yes. That is part of the Truth in Lending Act. 

By nature of the act, it is focused on disclosures, and it will be focused on short-term credit like credit cards. 

Mr. ELLISON. Do you have any views on things like universal default? This is a credit card practice I am sure you are familiar with. 

If you default, if you are late on one credit card, a credit card company you are not late on can jack up your rate. Do you have any 

views on that practice and how Congress might approach that kind 

of phenomena? 

Mr. BERNANKE. That is a difficult one. We don’t want to rule out 

the possibility that when someone’s creditworthiness drops for a 

variety of reasons, that their creditors get that information and use 

it. 

However, I think some of the concern about universal default 

provisions is that people don’t get enough warning or notice that 

this condition is going to kick in. So that might be one direction 

to go, which is to increase the amount of warning that consumers 

get when their credit histories deteriorate and when that may affect their pricing and their credit cards. 

Mr. ELLISON. Thank you. 

The CHAIRMAN. The gentleman from Illinois. 

Mr. ROSKAM. Thank you, Mr. Chairman. 

Mr. Chairman, I am a new Member of Congress and a new member of the committee, and I appreciate the detailed questions that 

my colleagues have asked. I guess I would ask a broader question, 

and that is, you know, it seems to me that economic strength and 

weakness, success and failure is mysterious in a lot of ways, and 

it is difficult for somebody outside of this arena to gaze in and realVerDate 0ct 09 2002 18:40 May 02, 2007 Jkt 034673 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\34673.TXT HFIN PsN: TERRIE
55

ly discern all the factors that go into a good, successful mix. And 

I realize there is really nobody who can do that. 

But for purposes of this committee and future committees that 

have this responsibility of oversight for you, Mr. Chairman, and the 

Fed, what are the things that you are responsible for? What are 

the tools that you have at your disposal? And can you sort of, and 

maybe in an Econ 101 sort of fashion, in the remaining 4 minutes 

just break that down and say, look, maybe start—these are the 

things that we frankly have no influence over, that are just off the 

table. I think that would help me and maybe some other members 

of the committee in the future. 

Mr. BERNANKE. Well, the Federal Reserve has multiple responsibilities. The one that is best known is our responsibility for monetary policy, which we use to pursue the Congressional mandate of 

price stability and maximum sustainable employment. 

It is important that the Federal Reserve be independent and be 

able to make independent decisions about interest rates in order to 

preserve the credibility of the central bank. However, it is also important that Congress exert oversight over the Federal Reserve to 

make sure that we are following our stated mission, and that we 

are pursuing coherent and rational plans. 

The other areas include banking supervision, where we are involved in developing the new capital accord, providing various guidances and regulations together with the other banking agencies, 

and there we are more like the other agencies in terms of the kinds 

of responsibilities we have. 

We have considerable responsibility in the consumer protection 

area—that has come up a lot today—for various regulations that 

provide disclosures to consumers on credit cards, on mortgages, and 

that provide some tools to address predatory lending, or high-cost 

lending. And there, like other agencies, we are given instruction by 

the Congress, by the law, in terms of what the Congress wants us 

to achieve and with what instruments. And then it is our job to implement the regulations that will most effectively accomplish 

Congress’s goals. 

So we have a range of activities, all of which fall into the underside of Congress obviously. 

The CHAIRMAN. I thank the gentleman. The Chair will now exercise his prerogative. We have four Members left who haven’t asked 

questions. We have about a half hour. That is going to be the end 

of it. So I will go to the gentleman from Colorado, the gentleman 

from Ohio, the gentleman from Indiana, and the gentlewoman from 

Wisconsin. Anyone who is within the sound of my voice or whose 

staff is here, don’t bother to show up because we are going to end 

it at this. And the gentleman of Ohio is recognized—I am sorry the 

gentleman from Colorado. 

Mr. PERLMUTTER. Thank you, Mr. Chairman, and Chairman 

Bernanke, thank you for your stamina and patience. I have several 

questions. 

The CHAIRMAN. What about mine? 

Mr. PERLMUTTER. Well, yours has been remarkable, Mr. Chairman. Thank you. 

On page 2 of your report, you say that consumer spending continues to be the mainstay of the current economic expansion. 

56

Where are we on consumer debt? I mean, have you seen a trend 

in that, and can you tell me where we are? 

Mr. BERNANKE. Consumer debt has risen quite a bit. It is rising 

more slowly recently mostly because home mortgages aren’t rising 

as quickly due to the flattening out of prices and the slower 

amount of home purchase. 

Generally speaking, though, as we said in the testimony, households are in reasonable financial shape. Offsetting their debt is an 

increase in wealth; the stock market is up. House prices over the 

last few years have gone up a lot, and so many people have a considerable amount of equity in their home. And moreover, the 

strength of the labor market means that the job availability, incomes, wages are also pretty strong. So for the larger part of the 

population, finances seem reasonably good relative to historical 

norms. 

Now, of course, there are always some people who are having 

problems, and as I noted in testimony, there are some sectors, notably the subprime lending sector, where we were seeing some distress, and we are watching that very carefully. 

Mr. PERLMUTTER. So no alarm bells in the trend of consumer 

debt, because I guess my perception has been that we have had significant increase to consumer debt really as compared to over the 

last 10 years, and that there have been some concerns about that. 

Mr. BERNANKE. There have been increases in consumer debt. 

There have been even larger increases in consumer assets, and so 

our wealth has grown. Our wealth is now at the highest level ever. 

So, again, for most people there is a reasonable balance between 

assets and liabilities. 

Again, there are some pockets of concern, but I don’t think that 

at this point that they have significant implications for the behavior of the overall economy, although we obviously have to watch the 

individual sectors. 

Mr. PERLMUTTER. Okay. Any exact pro or con by the recent 

changes in the Bankruptcy Code now that we have had a year, 

year-and-a-half under our belts? And, you know, if you don’t, if it 

is too early to tell, then that is fine, too. 

Mr. BERNANKE. It is a bit early to tell. We saw a big spike in 

bankruptcy filings in advance of the law because people, if they 

were thinking of going bankrupt, they wanted to get that done before the law change. Since then we have seen a moderate rate of 

bankruptcy, I think somewhat lower than in the past, but whether 

that is due to the change in the law or just to generally good financial conditions in the last few years is hard to say. Again, we have 

seen, for example, very few delinquencies in consumer credit or in 

mortgages outside the subprime market, so there has been a generally good credit situation in the last couple of years, and that 

seems to be reflected in a relatively low rate of bankruptcies. 

Mr. PERLMUTTER. Speaking of the subprime market, last week 

the bottom kind of fell out of that market, or there was a tremendous drop in that market. Has that leveled off? I haven’t read anything since Friday, but it seems there was a tremendous loss of 

value in that market. 

Mr. BERNANKE. There have been a few small companies that 

have gone out of business, and others that have lost money. NowVerDate 0ct 09 2002 18:40 May 02, 2007 Jkt 034673 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\34673.TXT HFIN PsN: TERRIE
57

adays, mortgages are not just made and held by individual firms, 

they are then securitized and sold into the general financial markets. And so we can look at financial market prices and see what 

the market more broadly thinks is happening in this area. And the 

value of subprime-mortgage-backed securities has dropped pretty 

significantly, suggesting that financial market investors are concerned about the loss probabilities in this area. 

Mr. PERLMUTTER. My last question, I had a number of organizations, interest groups, approach me on the issue of banks getting 

into the real estate business as opposed to remaining in the lending 

business. Does the Fed have an opinion on that, or do you have an 

opinion on that? 

Mr. BERNANKE. The Federal Reserve is charged, along with the 

Treasury, in determining whether allowing banks to enter the real 

estate brokerage business is consistent with Gramm-Leach-Bliley. 

However, the Congress every year has essentially forbidden that 

consideration, so we have not yet had an opportunity to consider 

whether, based on the law, that should be allowed, so we have not 

had the opportunity to try to evaluate that. 

Mr. PERLMUTTER. Do you have an opinion on it, or if the answer 

is no, it is premature, that is fine. 

Mr. BERNANKE. Since I am charged with making a determination, it would certainly be inappropriate for me to speak about it 

until such time as I have a chance to look at the information and 

data. 

The CHAIRMAN. The gentleman from Ohio. 

Mr. GILLMOR. Thank you, Mr. Chairman, and also thank you, 

Mr. Chairman, for spending so much time with us. 

I want to touch on the question of ILC’s. As you know, a lot of 

retail firms are trying to make an end run around the banking 

laws. Chairman Frank and I have had legislation in now for three 

Congresses. In the past you have always—also your predecessor, 

Mr. Greenspan, made comments in favor of closing that loophole. 

Would that still be your opinion? 

Mr. BERNANKE. Yes, it would. 

Mr. GILLMOR. Let me ask you another question regarding the 

economy, which has been generally good by all historical standards 

and when you have a good economy for a long time, you have low 

interest rates, thank goodness. We are all happy to see that. You 

see some of the economic commentators talking about whether it 

is time for the Fed to take the punch bowl away, and I guess my 

question is while the party is still going good economically, do you 

think we are still sober enough to leave the punch bowl there? So 

my question is what are you going to do with the punch bowl? 

Mr. BERNANKE. We are going to conduct monetary policy so as 

to satisfy the chairman and meet our congressionally mandated responsibility for maximum employment and price stability. 

Mr. GILLMOR. Thank you. 

One other question, and I don’t know if you are familiar with 

this recent report, but many of us are worried about America’s 

global competitiveness, and the World Economic Forum recently released its Global Competitiveness Report in which the United 

States dropped from first to sixth. 

58

I guess my question is, do you agree with that assessment and 

the recommendations made therein? 

Mr. BERNANKE. First, I think that notion of competitiveness between countries is a little bit deceiving. It is not quite the same as 

GM and Ford. Any country that is successful in increasing its productivity will increase its wages and living standards independent 

of whether other countries are doing the same. 

I have looked at that report. It seems to me that the change in 

ranking is based on relatively small changes in the numbers. Some 

macroeconomic factors like our savings rate have entered into that 

calculation. So I don’t take that in particular as an alarm bell. I 

don’t think it is particularly significant, but, as always, we need to 

find ways to improve our macropolicies, improve our regulatory 

policies, and keep the country as productive and efficient as possible. 

Mr. GILLMOR. Thank you very much, Mr. Chairman, and thanks 

again for spending so much time with us. 

Mr. BERNANKE. Thank you. 

The CHAIRMAN. And thanks to the gentleman from Ohio for dropping in. 

Mr. GILLMOR. I was on the Floor, Mr. Chairman. 

The CHAIRMAN. The gentleman from Indiana. 

Mr. DONNELLY. Thank you, Mr. Chairman. 

Thank you, Chairman Bernanke. 

My district has Chrysler plants, Delphi plants, and small manufacturers, the heartland of this country, and in your testimony you 

talked about painful changes that are taking place. What the people of my district have asked me to tell you is that the changes are 

even more painful when the competition isn’t fair. And we see 

China manipulating their currency, having no labor standards, no 

environmental standards, and intellectual piracy. And I guess my 

question to you, Mr. Chairman is do you see this as unfair competition, and if so, why do we let this continue? 

Mr. BERNANKE. Well, I have spoken about the yuan, about the 

Chinese currency, and I think that it is undervalued. And I think 

that the Chinese ought to allow it to be more market-determined, 

that they should move in that direction. 

I also think that we should continue to work with them to enforce their intellectual property rights and to make sure that both 

sides are living up to trade agreements. 

So going forward, I agree that trade agreements need to be enforced, and intellectual property rights are important, and we 

should continue to apply pressure to China on those issues. 

Mr. DONNELLY. I appreciate that. There is a feeling back home 

and on my part that the Chinese don’t take us seriously in that respect—that we talk and we talk and we talk, and while we talk, 

more jobs leave my district from manufacturers who have shaved 

every corner they can, who have put in all the computer integration they can, and they see product coming into this country at 

costs they can’t even touch to manufacture. 

And so there is a feeling that you are the home team, our Treasury Secretary, he is the home team. He was over in China recently, 

and there is a dispiritedness both on Republicans and Democrats, 

this is bipartisan, that the home team has walked away. Our own 

59

coaches have left us on the field all by ourselves. And so when I 

go back and say, well, they are talking, my manufacturers laugh 

and say, well, they will talk us until our doors are closed. So what 

do I tell them about that, Mr. Chairman? 

Mr. BERNANKE. The Chinese have recognized that the large trade 

surplus is, in fact, a problem for them as well, and they understand 

that there is a risk of reaction, protectionism perhaps, and they 

have made it part of their official economic plan to try to reduce 

the trade surplus that they currently have. 

Greater exchange rate flexibility is part of the way to do that, 

but in addition, the Chinese are currently trying to increase the reliance of their economy on domestic consumption, domestic spending, and reduce reliance on exports. If they can make that adjustment towards a domestically driven economy, reduce their export 

reliance, that will help more, I think, even than some other measures to create a better global balance. So that is one step that they 

are taking. 

I would also say in terms of our conversations in discussions with 

the Chinese that I think that while the exchange rate is a very, 

very important issue, there is a wide range of issues that we as 

Americans have to discuss with the Chinese including issues of 

trade; you mentioned intellectual property rights and trade agreements, but things like the environment. For example, I think there 

is a lot of mutual benefit if, for example, we were able to provide 

equipment and technology to the Chinese to help them clean up 

their air, that would be beneficial to both parties. Similarly energy 

security is another interest we have in common. 

So another way to look at this is that, yes, we have to keep working on the exchange rate, but we also have a lot of other things 

that we need to be talking about, and I think it is important to 

keep that conversation going. 

Mr. DONNELLY. And I guess I would ask you to discuss with the 

Chinese when you talk to them, and the Secretary of Treasury 

when he talks to them, that the folks back home who are running 

these shops, who are supplying families with the money to purchase their home, and we have increasingly high foreclosures back 

home, have said to me, Joe, we sent you there to do something 

about this, and if the Treasury Secretary and the Fed and the 

President aren’t willing to do it, then we are looking to Congress 

to step up and take the steps necessary to make this a fair 

ballgame, again because they feel it is a rigged game, and our team 

won’t step up for the people at home. 

Thank you very much, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from Wisconsin. 

Ms. MOORE OF WISCONSIN. Well, thank you very much, Mr. 

Chairman, and thank you very much, Mr. Chairman, for your patience here today. 

Thank you, Mr. Chairman. I did have an opportunity to review 

your testimony before the committee, and I do want to thank you. 

I have a reached some conclusions, which I guess I want to sort of 

vet with you. 

As others have mentioned, you mention several times in your testimony that consumer spending continues to be the mainstay in the 

current economic expansion, and you also seem to indicate that the 

60

resilience of this consumer spending is important towards sustaining our economic growth. 

You also indicate that increase in people’s compensation accounts 

for this, and that our higher labor productivity and perhaps a narrowing of corporate profits might offset the higher labor productivity and that narrowing—I am sorry—profit margins of companies might prevent higher prices from occurring, and people might 

experience a real higher compensation. 

A couple of questions come to mind when I review this testimony. 

First of all, I guess I want to ask you if you account for this stronger gain in personal income as many of us do, foresee that it is all 

aggregated kind of at the top, that this increase in consumer 

spending is a very narrow number of consumers, and that imposes 

some kind of risk unless we spread the purchasing and consumer 

spending power a little bit broader. 

And secondly, leading into that sort of executive compensation, 

if we were to—again, if we are depending—if our economy is depending on consumer spending, wouldn’t it be better if we sort of 

spread the wealth a little bit and, in keeping with your testimony, 

resist raising prices by narrowing corporate prices, profits? 

Mr. BERNANKE. Well, as I discussed, there has been a long-term 

trend toward increased inequality in the United States that has 

been going on for a long time, but it is certainly an issue. I think 

most recently there has been some improvement just in terms of 

general earnings in the broader economy. I mentioned the statistic 

of the average hourly earnings which are for production workers, 

so that does not exclude the top 20 percent of wage earners, and 

that has grown recently at a pretty reasonable pace. So I think 

that real wage gains currently are going to help support consumption spending. But I agree that we want to see a broad-based consumption in order to make this sustainable. 

Ms. MOORE OF WISCONSIN. I am glad that you mentioned, because there seems to be a lot of resistance toward things like raising the minimum wage. I think we talk a lot about minimum-wage 

workers, but there are people who don’t make the minimum wage 

that could benefit and would spend if they had more so-called disposable income. And I think your testimony really contributes a 

great deal to the discussion of how important it is to support our 

economy through elevating people’s wages, and that is what I took 

away from your testimony. Thank you. 

Mr. BERNANKE. Thank you. 

Ms. MOORE OF WISCONSIN. I yield back, Mr. Chairman. 

The CHAIRMAN. I thank the gentlewoman, and I want to thank 

the Chairman, and I want to say that I thank the members of the 

committee. This has been a very thoughtful discussion. I appreciate 

the Chairman. I think these are issues that we will continue to 

talk about. And the hearing is adjourned. 

[Whereupon, at 1:50 p.m., the hearing was adjourned.] 

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A P P E N D I X

February 15, 2007

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