S. HRG. 111–1098 

ECONOMIC AND BUDGET CHALLENGES 

FOR THE SHORT AND LONG TERM 

HEARING 

BEFORE THE 

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

March 3, 2009–ECONOMIC AND BUDGET CHALLENGES FOR THE 

SHORT AND LONG TERM 

( 

Printed for the use of the Committee on the Budget 

S. HRG. 111–1098 

ECONOMIC AND BUDGET CHALLENGES 

FOR THE SHORT AND LONG TERM 

HEARING 

BEFORE THE 

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

March 3, 2009–ECONOMIC AND BUDGET CHALLENGES FOR THE 

SHORT AND LONG TERM 

( 

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COMMITTEE ON THE BUDGET 

KENT CONRAD, NORTH DAKOTA, Chairman 

PATTY MURRAY, WASHINGTON JUDD GREGG, NEW HAMPSHIRE 

RON WYDEN, OREGON CHARLES E. GRASSLEY, IOWA 

RUSSELL D. FEINGOLD, WISCONSIN MICHAEL ENZI, WYOMING 

BILL NELSON, FLORIDA JEFF SESSIONS, ALABAMA 

DEBBIE STABENOW, MICHIGAN JIM BUNNING, KENTUCKY 

ROBERT MENEDEZ, NEW JERSEY MIKE CRAPO, IDAHO 

BENJAMIN CARDIN, MARYLAND JOHN ENSIGN, NEVEDA 

BERNARD SANDER, VERMONT JOHN CORNYN, TEXAS 

SHELDON WHITEHOUSE, RHODE ISLAND LAMAR ALEXANDER, TENNESSEE 

MARK WARNER, VIRGINIA LINDSEY O. GRAHAM, SOUTH CAROLINA 

JEFF MERKLEY, OREGON LAMAR ALEXANDER, TENNESSEE 

MARY ANN NAYLOR, Majority Staff Director 

DENZEL MCGUIRE, Minority Staff Director 

(II) 

C O N T E N T S 

HEARING 

Page 

March 3, 2009–Economic and Budget Challenges for the Short and Long 

Term ...................................................................................................................... 1 

STATEMENTS BY COMMITTEE MEMBERS 

Ranking Member Gregg .......................................................................................... 2 

Senator Wyden ......................................................................................................... 1 

WITNESSES 

Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal 

Reserve System......................................................................................................... 3, 9 

QUESTIONS AND ANSWERS 

Questions and Answers ........................................................................................... 46 

iii 

ECONOMIC AND BUDGET CHALLENGES FOR 

THE SHORT AND LONG TERM 

TUESDAY, MARCH 3, 2009 

U.S. SENATE, COMMITTEE ON THE BUDGET, Washington, DC. 

The Committee met, pursuant to notice, at 10:03 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Ron Wyden, pre- siding. 

Present: Senators Wyden, Murray, Nelson, Cardin, Sanders, 

Whitehouse, Warner, Gregg, Grassley, Bunning, Crapo, Cornyn, 

Graham, and Alexander. 

Staff present: Mary Ann Naylor, Majority Staff Director; and 

Denzel McGuire, Minority Staff Director. 

OPENING STATEMENT OF SENATOR WYDEN 

Senator WYDEN. The Budget Committee will come to order this 

morning. Our Chairman, Senator Conrad, who unquestionably 

knows more about the budget and the fiscal matters than anybody 

in my view in the Senate, is not able to be here today, Chairman 

Bernanke. But he did want me to convey that he is looking forward 

to talking with you in detail about the issues that we are going to 

explore this morning on another occasion. 

Mr. Chairman, we thank you very much for coming. The public 

always pays attention to what you have to say, and I think it is 

right to begin this morning by asking what do the American people 

want to hear from you at this critical time. I believe the American 

people want you to be brutally honest about the true extent of our 

economic challenges and confident that the solutions to these chal- lenges are being put in place. I think it is fair to say they are not 

tuning in for more bad news. Americans are not glued to their tele- visions hoping to learn about something else that has gone wrong. 

CNBC does not have record ratings because anybody wants to see 

the market continue to go down. Rather, I suspect they are all 

watching for the opposite. They are looking for hope. They want to 

be confident. They want to believe that there are solutions being 

put in place that are going to work. 

Americans certainly have confidence in the American dream, the 

dream of a land with opportunity for each according to ability and 

achievement. But right now, as Warren Buffett said recently, ‘‘it is 

much better to be a financial cripple with a Government guarantee 

than a Gilbraltar without one.’’ 

Just yesterday, after it was reported that AIG lost $62 billion 

last quarter, an estimated $460,000 per minute, the Federal Gov-

(1) 

2 

ernment offered AIG yet another check. How is this rewarding ability and achievement? Right now, small businesses across the country who have played by the rules and paid their bills on time cannot get a line of credit while AIG seems to have an open spigot for 

taxpayer money. 

Now, Mr. Chairman, I share your view that stabilizing the financial sector is a necessary component of a sustainable recovery. But 

so is confidence. And to earn the confidence of the American people, 

in my view there needs to be an injection of openness, accountability, and, most of all, a sense of fairness. 

You are in charge of the program that is supposed to get consumer and small business lending going again on Main Street. It 

seems to be slow getting off the ground while AIG, as we have just 

learned in the last day or so, seems to be getting pledges of money 

almost overnight. Nothing can increase confidence like rewarding 

hard work and know-how on Main Street. Giving those who have 

earned the opportunity to get credit to grow again, which is what 

Main Street is all about, is critical. 

The Federal budget is an opportunity to provide more honesty 

about the economic challenges ahead and set in place policies that 

will generate the confidence needed to get investors back in the 

marketplace. We are looking forward to working with you on 

crafting just such a budget. 

Let me now recognize our friend, the Ranking Minority Member, 

Senator Gregg. 

OPENING STATEMENT OF SENATOR GREGG 

Senator GREGG. Thank you, Senator Wyden, and thank you, Mr. 

Chairman, for attending this hearing today. 

I think Senator Wyden as Acting Chairman has touched at the 

core of one of the primary issues I am interested in, which is the 

question of confidence. Whether or not the economy recovers depends in large part on confidence of the American people in the 

value of their homes and in the fact that they will keep a job, confidence of those people who buy our instruments that our debt is 

solid and sound, confidence that our currency is strong. And I think 

there are questions out there that have been raised by the budget 

that has been presented to us by the administration relative to the 

ability to build on that confidence. I am going to be interested in 

hearing your reaction to that. 

The budget as it is proposed essentially nationalizes all income 

over $250,000, nationalizes health care, nationalizes student loans. 

We are in the process of nationalizing our banking system. And, in 

addition, it creates a national sales tax on the production of energy. 

While creating this massive expansion in the size of Government, 

it proposes that we have a debt as a percentage of GDP which will 

go to almost historic levels during any time in the post-World War 

II period—67 percent of GDP. 

In the short run, one can accept the fact that debt is going to go 

up significantly because of the need to address this economy with 

liquidity that only the Government can put into it. But in the long 

run, one has to ask: How can this country sustain a debt-to-GDP 

ratio of 67 percent, deficits of over 3 percent, or as far as the eye 

3 

can see, and expect to maintain the value of the dollar or the abil- ity of people to come and buy our debt? 

There are two core issues here: The first is how we get the econ- omy out of the hole that it is in, and that means stabilizing the 

markets, that means stabilizing the financial industry, and at the 

bottom of that is stabilizing real estate and also stabilizing the loan 

structure around general consumer activity. You set up the TALF 

proposal, which is a prospective attempt to do that. My question re- mains for you: How are we going to do it for the bad debt that is 

still on the books? 

Second, there is the issue of the long-term debt of the United 

States. The fact that we are moving into a period where the babyboom generation is retiring and will be close to full retirement at 

the end of this Presidency, should this President be re-elected. 

There is a tsunami of debt headed at us—$66 trillion of unfunded 

liability. It will essentially overwhelm the capacity of our children 

to pay it and the ability of this Nation to sustain it. And unless 

we move forward on addressing it, I suspect it will cause the inter- national community to question the value of our currency and the 

ability of us to sell them our debt. And I am interested in knowing 

your thoughts on that. 

So I appreciate your coming here today. We are obviously in a 

period of extreme distress as a Nation from a fiscal standpoint, and 

our people are suffering. They are losing jobs, losing homes, won- dering where they are going to be next week, next year, relative 

to their financial house. And we really look to the Fed as our rock 

in this exercise, and you have done very well so far in very trying 

times. But we need your advice and counsel as we go forward. 

Thank you, Mr. Chairman. 

Senator WYDEN. Thank you, Senator Gregg. 

Mr. Chairman, we welcome your statement. We will make your 

prepared statement a part of the record in its entirety, and after 

your statement, we are going to have a vote at 11:30, so I think 

we are going to have 5-minute rounds of questioning from Sen- ators. 

Mr. Chairman, welcome. 

STATEMENT OF HONORABLE BEN S. BERNANKE, CHAIRMAN, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. BERNANKE. Thank you, Senator Wyden, Senator Gregg, and 

members of the Committee. I am pleased to be here today to offer 

my views on current economic and financial conditions, the Federal 

budget, and related issues. 

Over the past 18 months, the global economy has experienced a 

period of extraordinary turbulence. The collapse of a global credit 

boom, triggered by the end of housing booms in the United States 

and other countries, and the associated problems in mortgage markets, had led to a deterioration of asset values and credit conditions 

and taken a heavy toll on consumer and business confidence. 

The financial crisis intensified considerably in the fall. In the 

United States, the Government-sponsored enterprises Fannie Mae 

and Freddie Mac were placed into conservatorship, and Lehman 

Brothers Holdings and several other large financial institutions ei- ther failed, nearly failed, or were acquired by competitors under 

4 

distressed circumstances. Losses at money market mutual funds 

led to large withdrawals by their investors, and those outflows un- dermined both the stability of short-term funding markets, particu- larly the commercial paper market, and confidence in wholesale 

banking markets. 

In early October, the loss of investor confidence in financial insti- tutions around the world raised the prospect of an international fi- nancial collapse, an event that would have been devastating for 

global economic prospects. Using authorities granted by the Emer- gency Economic Stabilization Act, on October 14th the Treasury 

announced a plan to inject $250 billion in capital into U.S. financial 

institutions. The Treasury’s actions were complemented by the 

Federal Deposit Insurance Corporation’s expansion of bank liability 

guarantees and by the expansive provision of liquidity by the Fed- eral Reserve. Together with similar measures in other countries, 

these steps averted a collapse and restored a degree of stability to 

the financial system. Nevertheless, the cumulative effect of the fi- nancial stress was to precipitate a sharp downturn in economic ac- tivities around the world. 

The Federal Reserve responded forcefully to the significant dete- rioration in financial market conditions and the substantial wors- ening of the economic outlook by continuing to ease monetary pol- icy aggressively late last year. By December, the Federal Open 

Market Committee had brought its target for the Federal funds 

rate to a historically low range of 0 to 1/4 percent, where it remains 

today. The FOMC anticipates that economic conditions are likely to 

warrant exceptionally low levels of the Federal funds rate for some 

time. 

With the Federal funds rate close to zero, the Federal Reserve 

has focused on alternative tools to ease conditions in credit mar- kets. We have established new lending facilities and expanded ex- isting facilities that aim to enhance the flow of credit to businesses 

and households. We increased the size of the Term Auction Facility 

to help ensure that banks could obtain the funds they need to provide credit to their customers. We expanded our network of swap 

lines with foreign central banks to help ease conditions in global 

dollar markets that were spilling over into our own funding markets. 

We established facilities to promote the functioning of money 

market mutual funds and the commercial paper market, and we introduced—in fact, today a new announcement—the Term Assetbacked Securities Loan Facility, or TALF, which is designed to facilitate the renewed issuance of consumer and small business 

asset-backed securities. 

In addition, to improve the functioning of the mortgage market 

and to support housing markets and economic activity more broadly, the Federal Reserve has begun to purchase large amounts of 

agency debt and agency mortgage-backed securities. 

The measures taken since September by the Federal Reserve, 

other U.S. Government entities, and foreign governments have 

helped improve conditions in some financial markets. In particular, 

strains in short-term funding markets have eased notably since 

last fall, and the London Inter-Bank Offered Rate, or LIBOR, 

which influences the interest rates faced by many U.S. households 

5 

and businesses, has decreased sharply. Conditions in the commercial paper market also have improved, even for lower-rated borrowers, and the sharp outflows from money market mutual funds 

in September have been replaced by modest inflows. 

In the market for conforming mortgages, interest rates have fallen nearly 1 percentage point since the announcement of our intention to purchase agency debt and agency mortgage-backed securities. 

Corporate risk spreads have also declined somewhat from extraordinarily high levels, although bond spreads remain elevated 

by historical standards. Likely spurred by the improvements in 

pricing and liquidity, issuance of investment grade corporate bonds 

has been strong, and speculative grade issuance, which was near 

zero in the fourth quarter, has picked up somewhat more recently. 

Nevertheless, significant stresses persist in many markets. For example, most securitization markets remain closed, and some financial institutions remain under pressure. 

As I noted, the ongoing stresses in the financial markets have 

been accompanied by a sharp contraction in economic activity. 

After edging down during the summer, real GDP is reported by the 

Commerce Department to have declined at an annual rate of 6.2 

percent in the fourth quarter of last year, with nearly every major 

category of final sales contributing to the drop. 

The recent near-term indicators show little sign of improvement. 

Businesses shed 600,000 jobs in January, about the same pace of 

job loss as in November and December, and the unemployment rate 

jumped to 7.6 percent. Moreover, the number of claims for unemployment insurance has moved higher since mid-January, suggesting that labor market conditions may have worsened further in 

recent weeks. In reaction to the deteriorating job market, the sizable losses of equity, and housing wealth and the tightening of 

credit conditions, households have continued to rein in their spending. Home sales and new construction have continued to decline despite lower mortgage rates, reflecting the uncertain economic environment and the expectation of many potential buyers that home 

prices have further to fall. 

The manufacturing sector has also deteriorated further so far 

this year. Manufacturing output fell sharply again in January, 

bringing the rate of capacity utilization to its lowest level in the 

post-World War II period. Orders and shipments of durable goods, 

which dropped in the fourth quarter, fell markedly further in January, and most survey-based measures of business conditions are at 

or near record low levels. 

Given the weak economic environment, many businesses have 

apparently cut back their plans for capital expenditures significantly. Moreover, exports, which had provided a welcome offset to 

the weakness in domestic demand through the middle of 2008, fell 

sharply in the final months of last year, and the incoming news 

suggests a widespread contraction in activity abroad. 

Despite the considerable decline in final demand in the United 

States, businesses have managed to trim their inventories in recent 

quarters. Still, with sales anticipated to remain poor for a while 

longer, many businesses are carrying more inventories than they 

6 

desire and consequently are likely to cut production further in the 

months ahead. 

Meanwhile, overall consumer price inflation has slowed consider- ably, primarily because of the steep drop in energy prices in the 

second half of last year. The PCE price index was up just 0.7 per- cent in January from its year earlier level, after having risen 3.5 

percent over the preceding 12-month period. Core PCE price infla- tion, which excludes the direct effects of food and energy prices, 

has also slowed, decreasing to 1–1/2 percent for the 12 months end- ing in January, from 2–1/4 percent in the year earlier period. Wide 

margins of economic slack and reduced cost pressures suggest that 

inflation is likely to remain quite low over the next couple of years. 

Although the near-term outlook for the economy is weak, over 

time a number of factors should promote the return of solid gains 

in economic activity in the context of low and stable inflation. The 

effectiveness of the policy actions taken by the Federal Reserve, the 

Treasury, and other Government entities in restoring a reasonable 

degree of financial stability will be critical determinants of the tim- ing and strength of the recovery. 

If financial conditions improve, the economy will be increasingly 

supported by fiscal and monetary stimulus, the beneficial effects of 

the steep decline in energy prices since last summer, and the better 

alignment of business inventories and final sales, as well as the in- creased availability of credit. 

As you are well aware, the Congress recently passed a major fis- cal package which is aimed at strengthening near-term economic 

activity. The package includes personal tax cuts and increases in 

transfer payments intended to stimulate household spending, in- centives for business investment, Federal grants for State and local 

governments to reduce their need to cut services or cancel building 

projects, and increases in Federal purchases. By supporting public 

and private spending, the fiscal package should provide a boost to 

demand and production over the next two years, as well as miti- gate the overall loss of employment and income that would otherwise occur. 

That said, the timing and magnitude of the macroeconomic effects of the fiscal program are subject to considerable uncertainty, 

reflecting both the state of economic knowledge and the unusual 

economic circumstances that we face. For example, households confronted with declining incomes and limited access to credit might 

be expected to spend most of their tax cuts. But then, again, 

heightened economic uncertainties and the desire to increase precautionary saving or pay down debt might reduce households’ propensity to spend. 

Likewise, it is difficult to judge how quickly funds dedicated to 

infrastructure needs and other longer-term projects will be spent 

and how large any follow-on effects will be. The CBO has constructed a range of estimates of the effects of the stimulus package 

on real GDP and employment that appropriately reflects these uncertainties. According to the CBO’s estimates, the effect of the 

stimulus package on the level of real GDP at the end of 2010 could 

range from about 1 percent to a little more than 3 percent relative 

to a baseline forecast that does not include a stimulus. They estimate that these effects on output would leave the corresponding 

7 

unemployment rate between one-half percentage point and 2 per- centage points lower at the end of next year than in the baseline 

forecast. 

The goal of the fiscal package is not just to provide a one-time 

boost to the economy, but to lay the groundwork for a self-sus- taining, broad-based recovery. Historical experience strongly sug- gests that without a reasonable degree of financial stability, a sus- tainable recovery will not occur. Although progress has been made 

on the financial front since last fall, more needs to be done. 

As you know, in response to ongoing concerns about the health 

of financial institutions, the Treasury recently announced plans for 

further steps to ensure the strength and soundness of the financial 

system and to promote a more smooth flow of credit to households 

and businesses. The plan would use the remaining resources appro- priated to the Treasury under the Emergency Economic Stabiliza- tion Act, approximately $350 billion, and also involve additional 

spending to support the activities of Fannie Mae and Freddie Mac. 

Whether further funds will be needed depends on the results of the 

current supervisory assessment of banks, the evolution of the econ- omy, and other factors. The administration has included a place 

holder in its budget for more funding for financial stabilization 

should it be necessary. 

Unfortunately, the spending for financial stabilization, the in- creases in spending and reductions in taxes associated with the fis- cal package, and the losses in revenues and increases in income 

support payments associated with the weak economy will widen the 

Federal budget deficit substantially this year. Taking into account 

these factors, the administration recently submitted a proposed 

budget that projects the Federal deficit to increase to about $1.8 

trillion this fiscal year and to remain around $1 trillion in 2010 

and 2011. 

As a consequence of this elevated level of borrowing, the ratio of 

Federal debt held by the public to nominal GDP is likely to move 

up from about 40 percent before the onset of the financial crisis to 

more than 60 percent over the next several years—its highest level 

since the early 1950s in the years following the massive debt buildup during World War II. 

Of course, all else equal, this is a development that all of us 

would have preferred to avoid, but our economy and financial markets face extraordinary challenges, and a failure by policymakers 

to address these challenges in a timely way would likely be more 

costly in the end. We are better off moving aggressively today to 

solve our economic problems. The alternative could be a prolonged 

episode of economic stagnation that would not only contribute to 

further deterioration in the fiscal situation, but would also imply 

lower output, employment, and incomes for an extended period. 

With such large near-term deficits, it may seem too early to be 

contemplating the necessary return to fiscal sustainability. To the 

contrary, maintaining the confidence of financial markets requires 

that we begin planning now for the restoration of fiscal balance. As 

the economy recovers and resources become more fully employed, 

we will need to withdraw the temporary components of the fiscal 

stimulus. Spending on financial stabilization also must wind down. 

If all goes well, the disposition of assets acquired by the Treasury 

8 

in the process of stabilization will be a source of added revenue for 

the Treasury in the out-years. Determining the pace of fiscal normalization will entail some difficult judgments. In particular, the 

Congress will need to weigh the costs of running large budget deficits for a time against the possibility of a premature removal of fiscal stimulus that could blunt the recovery. We at the Federal Reserve will face similar difficult judgment calls regarding monetary 

policy. 

As I mentioned earlier, the President has recently submitted a 

budget, and it proposes an ambitious agenda, including new initiatives for energy, health care, education, and tax policy. These are 

all complex policy issues in which the specific design of each program is as important as the budgetary amount allocated to it. The 

Congress will have considerable work in evaluating how to proceed 

in each of these areas. 

As part of that evaluation, it will be critical to consider the formidable challenges and tradeoffs needed to simultaneously achieve 

an economic and financial recovery, fiscal responsibility, and program reforms that accomplish their desired goals effectively and efficiently. In particular, policymakers must remain prepared to take 

the actions necessary in the near term to restore stability to the 

financial system and to put the economy on a sustainable path to 

recovery. But the near-term imperative of achieving economic recovery and the longer-run desire to achieve programmatic objectives should not be allowed to hinder timely consideration of the 

steps needed to address fiscal imbalances. Without fiscal sustainability, in the longer term we will neither have financial stability 

nor healthy economic growth. 

Thank you for your attention. I am happy to take your questions. 

[The prepared statement of Mr. Bernanke follows:] 

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18 

Senator WYDEN. Mr. Chairman, thank you. 

Colleagues, if we all stick to five minutes, we will have a chance 

to get everybody’s questions in, and we are going to adhere to that. 

Mr. Chairman, at what point will the taxpayer no longer be on 

the hook for the massive AIG failure? What is the end game for 

American taxpayers? 

Mr. BERNANKE. Well, Senator, first of all, the AIG situation is obviously a very uncomfortable one for me as well as for you. We took 

those actions because we felt that, first of all, the failure of the 

world’s largest insurance company with millions of policy holders, 

thousands of derivatives and credit insurance counterparties, and 

a huge number of other interactions with other financial firms 

would be devastating to the stability of the world financial system. 

And if there has been any doubt about the power of financial stress 

to affect the real economy, I hope that it has been removed at this 

point. And so an important consideration in our actions certainly 

was to try to preserve financial stability. 

Second, of course, we now have, of necessity and regrettably, a 

significant public investment in the company. Our belief was that 

to allow the company to fail at this juncture, putting aside its huge 

adverse effects on the financial system and on the economy, would 

have greatly also impaired the ability of the Government to recover 

the investments that have already been made in the company. 

The actions we have taken will help to stabilize the company, 

will maintain its credit rating, will allow it to continue its process 

of spinning off and selling its constituent non-core companies, will 

allow it to continue to strengthen its core companies within the 

United States. 

We do not know for sure what the future will bring. We do not 

know how the financial system will evolve or how the economy will 

evolve. But I do think that this does give us the best chance both 

to achieve financial stability and as well to ultimately recover most 

or all of the investments that the public has made in AIG. 

Senator WYDEN. AIG has given the counterparties $20 billion. 

Those people could be just about anybody in the world. Why won’t 

the Fed disclose who those are? 

Mr. BERNANKE. Well, first, in terms of disclosures, I think it is 

very important that we be as open and as transparent as possible, 

and as I have indicated last week in my testimony, HumphreyHawkins testimony, the Fed has set up a committee, headed by 

Vice Chairman Kohn, that is going to review all of our disclosure 

policies and try and ascertain what types of information we can 

disclose without adversely affecting policy effectiveness, for example. 

The fact is, though, that the counterparties of AIG, life insurance 

owners, purchased financial insurance. They made legal, legitimate 

financial transactions. They have normally—under normal conditions they would have a presumption to privacy about their commercial decisions. So that is a consideration we have to take into 

account. 

But we understand your concern, and we want to make sure that 

we provide all the information that is needed to make good public 

policy judgments. 

19 

Senator WYDEN. Mr. Chairman, essentially taxpayers have been 

kept in the dark on this AIG issue. They are looking at this massive infusion of money. They cannot figure out who is being rescued 

and why they are being rescued, and there has been virtually no 

accountability with respect to where the money is going. 

I have asked you what the end game is. You said the situation 

is evolving. I have asked you why we cannot disclose the 

counterparties. It could be anybody, as far as I can tell, in the 

world, and you say you are studying it. 

I just hope that in the days ahead the Fed is going to come clean 

as to why this is so essential. I think this is setting a precedent. 

AIG is not an investment company. It is an insurance company. Insurance companies in Oregon do not take these kinds of risks, and 

people want to know how we got into this situation and specifically 

what is being done to turn it around. 

Mr. BERNANKE. I would like to address that. May I, Senator? 

Senator WYDEN. Sure. 

Mr. BERNANKE. I think if there is a single episode in this entire 

18 months that has made me more angry, I cannot think of one 

than AIG. AIG exploited a huge gap in the regulatory system. 

There was no oversight of the Financial Products Division. This 

was a hedge fund, basically, that was attached a large and stable 

insurance company, made huge numbers of irresponsible debts, 

took huge losses. There was no regulatory oversight because there 

was a gap in the system. 

We were then forced—we had no choice but to try to stabilize the 

system because of the implications that the failure would have had 

for the broad economic system. We know that failure of major financial firms in a financial crisis can be disastrous for the economy. We really had no choice. And I share your concern, I share 

your anger. It is a terrible situation. But we are not doing this to 

bail out AIG or their shareholders, certainly. We are doing this to 

protect our financial system and to avoid a much more severe crisis 

in our global economy. 

Senator WYDEN. My time has expired. I have got more questions 

on this point. 

Senator Gregg. 

Senator GREGG. Thank you, Mr. Chairman. 

I accept and I suspect most of my colleagues accept the fact that 

we have to significantly expand the size of the Government as we 

try to get out of this hole that we are in, and that is why some of 

us have been tolerant and have not even in any way expressed any 

sort of negative view of the fact that there is going to be a budget 

deficit this year which is staggering, because it is an acceptable 

event—not an acceptable event. It is an event which we are going 

to have to tolerate due to the fact that we are trying to use the 

Government liquidity to basically float the economy. 

But what really concerns me is that as I look at this budget proposal, beyond the initiatives which are aimed at trying to get the 

economy stabilized—TARP; your TALF, which is obviously Fed 

funds mostly; the stimulus package, which I did not agree with its 

direction, but I agreed with the concept—there is in this budget a 

massive movement of the Government to the left; in other words, 

20 

a massive expansion of the size of the Government, along with a 

massive expansion of the tax burden of the Government. 

After that is all said and done, four years from now when one 

certainly hopes, presumes, and expects that we will be beyond 

these dire economic situations, we will be looking at a Government 

which is taking up 22 percent of the gross national product, has a 

67-percent ratio of publicly held debt to GDP, and no end in sight. 

And, in fact, it continues to work its way up, with deficits running 

at 3 to 4 percent minimum, from 2013 to 2019, which is the end 

of the window for this budget. 

Can we tolerate that size Government in the face of the fact that 

we know we still have not paid for and we still have coming on top 

of that the cost of the baby-boom generation, which will drive the 

cost of Government up to probably 30 percent of GDP if it is al- lowed to go forward without any restraint? What is the effect of 

that type of explosion in the size of the Government on the ability 

of us to sell our debt and the value of our currency? 

Mr. BERNANKE. Well, Senator, first you are absolutely correct 

that the near-term deficit is primarily due to the current emer- gency. For the current year, most of it is due to the financial sta- bilization costs, the fiscal stimulus package, and the losses of reve- nues, which is very important, because of the weakness of the econ- omy. 

Going forward, the President has proposed a number of ambi- tious programs, as I mentioned, in a wide variety of areas. I think 

it is going to be up to Congress to figure out in terms of the sub- stance of those programs whether they are achieving the social and 

other objectives that Congress wants to achieve. That is really not 

my place to—— 

Senator GREGG. But your place is to protect the value of the dollar and protect the ability of—— 

Mr. BERNANKE. I was about to—my concern here, as I expressed, 

was that there needs to be fiscal sustainability. If Government 

spending is higher, it needs to be recognized that that will involve 

higher taxes in order to maintain a close, reasonable balance be- tween revenues and outlays. That does have some implications for 

efficiency of the economy. 

I think those things and trying to restore sustainability in the 

near term need to be taken into account as part of the number of 

issues that you look at as you consider the whole range of ramifica- tions of these policies. 

I would add that I agree with you that we have to recognize that 

coming down the pike here are the implications of the graying pop- ulation and increased costs of health care, which in turn will affect 

entitlement spending and will lead to a very large longer-term bur- den in the budget. And as I have said on numerous occasions, I 

think addressing those entitlement issues in an effective way is an 

incredibly important issue for this Committee. 

Senator GREGG. Well, let me ask it a different way. If we do not 

act as a Government on the issue of the long- term fiscal tsunami, 

as I and Chairman Conrad have described it, which is the retire- ment of the baby-boom generation and the massive explosion in 

costs that they will put on the burden of our children, are we going 

to be able to say to the international community who is buying our 

21 

debt and financing our house that our dollar is strong and our debt 

is saleable with the resilience it has had over the last few—say 

over the last 10 years? 

Mr. BERNANKE. Well, Senator, the CBO, for example, has done 

simulations which show that in 2030 under current laws, Medicare, 

Medicaid, and Social Security alone would take up about 16 per- cent of GDP, which is pretty close to non- interest spending—it is 

pretty close to the entire Federal non-interest budget. So it is clear 

that in order to get control of the overall budget situation, we are 

going to need to look at entitlements. If we do not get a sustainable 

fiscal situation and deficits continue in large amounts for a long pe- riod, then it will become more difficult to sell our debt, and interest 

rates will rise, and they will be counterproductive. 

So I think we need to think about what programs we want to in- troduce and how we want to go forward, but there is unfortunately 

the necessary corollary that we have to find ways to pay for what 

we are spending. 

Senator GREGG. Thank you, Mr. Chairman. 

Senator WYDEN. I thank my colleague. 

Senator Murray. 

Senator MURRAY. Thank you, Mr. Chairman. 

Let me go back to the question of AIG, because we were all very troubled by the announcement of $61 billion or more in losses last 

quarter and yesterday $30 billion in additional assistance. The jus- tification for that, I am hearing, is the systemic risk AIG continues 

to pose and the fragility of markets today and the cost to the tax- payer of Government inaction, and that is a quote. I am really 

troubled by the manner in which we are dealing with AIG because 

of the risk exposure to the taxpayer, which is growing dramatically. 

And I wanted to ask you a couple of questions. 

How does the Federal Reserve work with the Treasury to identify 

those firms that do pose a ‘‘systemic risk’’? How do we say that? 

What is the definition? 

Mr. BERNANKE. Well, there are several criteria. One is firms that 

are very large and interconnected in the system. Second, a lot has 

to do with counterparty positions. This was something where AIG 

was, as I said, particularly egregious. They took all these large bets 

where they were effectively ‘‘insuring the credit positions’’ of many, 

many banks and other financial institutions. Their failure would 

have caused all of those losses to be transmitted throughout the 

banking system and would have had very adverse effects on the 

banking system as well as on other insurance companies. 

So we looked at the interactions with other financial firms, potential for contagion, the size of the company relative to the overall 

system. In this case, we are dealing with the largest insurance 

company in the world. Its failure would have sent shock waves 

through the entire insurance industry. 

I would like to raise yet another deficiency in our system. I mentioned before the failure of oversight with respect to the financial 

products of AIG. Another problem which I called attention to on a 

number of occasions is that, unlike, say, the FDICIA program, 

which allows the FDIC to resolve a failing bank, we have no structure, no legal and regulatory structure that allows us to resolve in 

a safe and sound way a large financial international conglomerate. 

22 

And we are much better off, frankly, trying to resolve it within the 

context of continued operation than to allow it to fail and all the 

chaos that would occur following a bankruptcy. 

Senator MURRAY. So you are saying there would be a real risk 

to just everyday average families? How would you define that? 

What would we see? 

Mr. BERNANKE. Well, we have already seen the stresses we saw 

in September. In September, we saw AIG and Lehman and other 

financial firms under great pressure. That pressure, together with 

a buildup of credit contraction in the previous months, is the main 

reason why the last quarter has been one of the worst in many, 

many years and why the recession, which was mostly focused in 

the United States, has now become global. So the direct effects on 

jobs, on income, on asset values, stock values are direct and imme- diate and very, very powerful. 

Senator MURRAY. Well, it is hard to understand for a lot of families when they keep seeing things get worse and we are still pouring money there, but I appreciate that response. 

Let me go to something you mentioned in your testimony, and 

that is the TALF. I am hearing from a lot of businesses on a daily 

basis in my home State who are really struggling to get credit, and 

it is causing, you know, a bigger problem all the way across the 

board. 

You mentioned the TALF. Can you describe for us what the current status of this is and how it is going to help just small businesses in our home States? 

Mr. BERNANKE. Yes. Although there has been a lot of talk about 

banks and their ability to lend, in fact, for many types of credit, 

non-banks, securitization markets, are the main source of funding, 

and those markets have largely closed down. And so by restoring 

and restimulating activity in securitization markets, we hope to get 

credit flowing for a number of different critical areas. 

So the TALF, we put out an announcement this morning which 

gives the first dates, and there will be money lent under the TALF 

in March. The first $200 billion of the program is aimed at consumer, small business, and student type credit. It will allow money 

to flow into those areas, and we hope it will be successful not only 

in directly providing credit for those crucial areas, but stimulating 

other activity and other people to come into the market and to increase lending in those critical areas. 

Going forward, in conjunction with the Treasury’s plan, we are 

prepared to go up to $1 trillion of new credit, with the next area 

we are going to look at being commercial mortgage-backed securities. We know right now there is a looming crisis in commercial 

real estate whereby owners of shopping malls, hotels, rental properties, and many other types of buildings are unable to refinance 

or to pay for new construction because the CMVS, the 

securitization market, is completely shut down. By using the TALF 

to provide credit and to stimulate the reopening of that market, we 

hope to do a lot to—— 

Senator MURRAY. So will our businesses or students who are get- ting financial aid begin to see that immediately? 

Mr. BERNANKE. They should begin to—in fact, when we announced the TALF, even before we put out a dollar, the spreads on 

23 

the asset-backed securities came in, suggesting that interest rates 

were already coming down and that liquidity and availability was 

already improving. So we should see immediate benefits to students, to credit cards, to small businesses, to consumer loans. 

Senator MURRAY. Within days. 

Mr. BERNANKE. I think we have already seen some benefits, and 

we will be putting out money this month. 

Senator MURRAY. OK. 

Senator WYDEN. The time of the gentlelady has expired. 

Senator Bunning. 

Senator BUNNING. Thank you. I am going to followup the temporary Chairman’s attack on AIG. 

Mr. Chairman, AIG is approximately about 78 percent owned by 

the Federal Government presently. What has changed? What has 

changed from when we—did you examine when you went in all the 

aspects of what could happen before you put in the first tranche 

of money? And you and the Treasury and the New York Fed and 

others were sitting at the table when this decision was made. How 

could you have put in the first money knowing full well that you 

were going to wind up with approximately a 78-percent equity 

stake in the company? You could not possibly have put the first 

penny in if you knew, in fact, it would be over almost $200 billion—it is not $200 billion. It is a little less. But $200 billion, and 

we are not at the end. 

So how are the American people going to have any confidence in 

the people running the ship? 

Mr. BERNANKE. Well, in terms of the decision to put the money 

in, as I said, I am very angry about the situation. I am sorry that 

there were these gaps in regulation and in the financial resolution 

regime. I remain—— 

Senator BUNNING. But there is—excuse me. I am going to interrupt you because I have got 5 minutes. There is an entity that was 

in charge of running and overseeing AIG, and that is the New York 

State Insurance Commissioner. Are you telling us that they did not 

do their job? 

Mr. BERNANKE. I am telling you they did not have the capacity 

to deal with a global insurance company whose failure would have 

devastated the financial system. 

Senator BUNNING. But isn’t that the regulator of AIG? 

Mr. BERNANKE. No. They regulate the insurance companies, not 

the conglomerate. There is a difference. They did not have any authority over the Financial Products Division, as far as I know. 

Senator BUNNING. Well, the Financial Products Division is one of 

the real problems. That is why we went in in the first place. 

Mr. BERNANKE. That is right. 

Senator BUNNING. Go ahead. 

Mr. BERNANKE. And so as I said, again, with great regret and 

trepidation, we made the decision because we felt there was no alternative. Throughout the restructuring, we have tried to do everything we can to make sure that the main focus of the company— 

we are not trying to make this company profitable again for the 

benefit of shareholders. Every objective we have is to make the 

company viable enough that it can sell itself off, sell off its non-core 

24 

businesses, and repay the taxpayers as soon as possible. And that 

has been our objective. 

Senator BUNNING. But when you went in there, you did not touch 

their casualty and property insurance—I mean, that is the only 

profit center in AIG presently. 

Mr. BERNANKE. No. We took an 80-percent ownership share, and 

the loan the Fed made was a senior lien on the entire value of the 

entire company, including all—— 

Senator BUNNING. In other words, casualty and property are in 

included. 

Mr. BERNANKE. Yes. 

Senator BUNNING. OK. Just in a reply to Senator Murray’s statement, in this morning’s announcement you said that the TALF 

would only accept ratings from three of the largest rating agencies—the three agencies that have been wrong so many times during the last decade. Why do you refuse to take ratings from other 

agencies? And why do you keep rewarding failure? 

Mr. BERNANKE. Well, Senator, we have been very attentive to the 

idea here of making sure that the Fed does not take any credit 

losses, and so we have taken five or six different steps. I do not 

want to take all your time. One of them is to work with the credit 

rating agencies. These are relatively simple assets. These are not 

complex CDOs or anything like that. And we have worked with 

them and looked at their models, and we are comfortable that they 

can rate these ABS in an appropriate way. And we have many 

other protections as well, including haircuts and so on. 

We are willing to look at other agencies, but we just want to 

make sure that there is wide agreement among the credit raters 

that these are safe assets. 

Senator BUNNING. But aren’t they the same three rating agencies 

that got us in—that caused problems? 

Mr. BERNANKE. There have certainly been major problems and 

failures in the credit rating agencies, and the regulators and the 

industry have been working hard to try and improve that perform- ance. But you are absolutely right. That was a serious issue. 

Senator BUNNING. And continues to be one. And my only final 

statement on AIG is that we are no better off now. You may think 

we are. Your agencies, the Fed and New York Federal Reserve 

Bank, and the Treasury may think we are better off. But the bot- tom line is that the Fed and the Treasury will leave the door open 

for more bailouts in the future. 

Senator WYDEN. The time of the gentleman has expired. 

Senator BUNNING. Thank you. 

Senator WYDEN. Senator Cardin. 

Senator CARDIN. Thank you, Mr. Chairman. 

Let me first agree with our Ranking Republican member about 

the concern on the long-term deficits and where are we when we 

get out of this recession and what type of a burden will this country have and what type of investments have we made to prevent 

a reoccurrence of this type of economic disaster. 

Where I disagree with the Ranking Republican is that the Presi- dent’s budget deals with two of the major concerns that this Nation 

should have addressed many years ago: one, energy independence 

and dealing with our energy in a way that we can control our own 

25 

economy and energy; and the other with health care, with the 40-

some million Americans who have no health insurance and the bur- den they are to our system. It seems to me it is going to be very 

difficult for us to figure out a way to reform the Medicare system 

if we do not reform the health care system. And the President at 

least has presented a budget that deals with both energy and 

health care and, unlike the previous administration, has put for- ward the way in which it is budget neutral so it is not adding to 

the budget deficit, but in a way helps us deal with the budget in 

the future. 

And, yes, I am sure it is going to be controversial, and a lot of 

us will have differences of view as to how we should do this. But 

our President at least has put these issues on the table, which I 

think would make us a stronger Nation economically if we deal 

with both energy and health care at this time. 

Our Ranking Republican then mentioned the word ‘‘nationaliza- tion’’ several times, so let me talk a little bit about nationalization. 

I am against nationalizing our financial institutions. I hope we do 

not have to do that. I do not think we should do that. But some 

believe we de facto have already done that with the type of invest- ments that the Government has made in major financial institu- tions, taking basically equity positions, imposing significant restric- tions on their operations. But the concern is have we done this in 

a way that is more costly to the taxpayer and less effective in get- ting the results that we want. 

So have we really—how do we explain the fact that there is so 

much Government involvement, and yet the credit markets are still 

in many cases frozen? Has the Government really used its leverage 

appropriately, or has it gone too far? 

Mr. BERNANKE. Well, there are many dimensions to the Government involvement, and as I mentioned, in many of the credit markets activities by the Fed and others have shown some benefits. 

With respect to the banking system, clearly we have not sta- bilized that situation. The Treasury has a plan which it intends to 

execute. It is a comprehensive plan in that it includes supervisory 

assessment; it includes new capital; it includes taking bad assets 

off the balance sheet; it includes foreclosure mitigation and other 

steps as well. So it is a more broad-based, comprehensive plan, but 

it has not yet been executed. 

The Federal Reserve is working closely with the Treasury to try 

and get that done. We also do not think that nationalization is ei- ther warranted or necessary. But we are prepared, even as—and 

I think the American people have a right to expect that as public 

money goes into institutions, particularly where there is a substan- tial ownership share, that there will be very close supervisory over- sight to make sure that: a) the banks are not taking excessive 

risks; b) that they are taking steps necessary to restructure them- selves and to restore themselves to viability and health; and, c) 

that they make appropriate credit decisions and are lending to help 

support the economy. And so those are the things that we plan to 

do. 

Senator CARDIN. You have indicated that the current tools may 

not be enough and referred to the President’s budget as having a 

place holder for additional resources if they become necessary. Give 

26 

us your realistic assessment as to what we should be planning on. 

We have not seen the results, I think, that we had anticipated 

when the TARP legislation was passed last year. 

Should we be planning that we are going to have to infuse additional Federal credit beyond that which is already authorized? And 

do we need to consider additional tax cuts or spending in order to 

stimulate the economy? 

Mr. BERNANKE. Senator, I just do not have a number for that. 

It is going to depend on our assessments. It is going to depend on 

the evolution of the financial system and the economy. And I think 

it is more appropriate for the administration to make their judgment about how much more they want to do and in what form. And 

I am sure they will be coming forward with whatever request they 

might have. But I cannot really give you a number at this juncture. 

Senator CARDIN. Well, you know, I respect your caution there, 

but we need the best advice. Clearly, if we go back and look at the 

advice that was given to us last fall, the results are not where we 

thought we would be. And I think some of us are concerned that 

the influx of money to AIG and elsewhere, will we get the results 

that we anticipate? 

Mr. BERNANKE. I think we will eventually get results. I think 

that continued attention to these issues, a more comprehensive approach, we will eventually stabilize the system. When we stabilize 

the financial system, I think we will see marked improvement in 

the economy, and it will illustrate the point I have been trying to 

make, that the financial stability issues—which I realize are remote to many people on Main Street—are really intimately tied to 

the overall success of the economy. 

Senator CARDIN. Thank you. 

Senator WYDEN. I thank my colleague. 

Senator Graham is next? 

Senator GRAHAM. Thank you, Mr. Chairman. 

I am trying to ask Senator Gregg’s question a little bit differently. Is there any outer limit on the Federal Government’s ability to borrow money? 

Mr. BERNANKE. Certainly there are outer limits. 

Senator GRAHAM. What are they? And how close are we to them? 

Mr. BERNANKE. Well, it is hard to judge in any kind of explicit 

way since we do not know. I mean, countries have clearly—for 

short periods of time have clearly had very high levels of debt. The 

United States had more than 100 percent debt-to-GDP ratio during 

World War II. The Japanese during their financial crisis raised the 

debt-to-GDP ratio above 100 percent. But clearly that is not a 

healthy situation. It is one in which interest payments can become 

a very important part of the Government’s outlays. 

We have been over the years bringing our debt-to-GDP ratio 

down to about 40 percent. Now we are going to see a jump to 60 

or 65 percent. We need to be, I think, looking for what is called a 

‘‘primary deficit‘‘—that is, the deficit excluding interest payments— 

at somewhere close to balance. That would be sufficient to stabilize 

our debt-to-GDP ratio. I think that would be a good objective. 

It is very hard to know how much higher the debt-to-GDP ratio 

could be before the international financial markets begin to balk. 

27 

And so I think the prudent thing to do is to try and maintain sta- bility of the debt-to-GDP ratio. 

Senator GRAHAM. Has there always been a buffer zone between 

reality and this magical place? And is there a buffer zone today? 

Mr. BERNANKE. Well, as I think the recent experience is showing, 

confidence and expectations are critical, and I think the markets 

will be quite able to absorb, for example, the large amount of 

issuance we are seeing in the next couple of years if there is a rea- sonable expectation and confidence in the same markets that the 

United States is serious about getting its budget position under 

control in the longer term. 

Senator GRAHAM. There are some projections that exist that in 

2050 the debt-to-GDP ratio will be 300 percent. What kind of effect 

would that have if that became a reality? 

Mr. BERNANKE. Well, I do not think that is going to happen. It 

cannot happen because things would break down before then. 

Senator GRAHAM. Something has to change for it not to change. 

Mr. BERNANKE. That is right. 

Senator GRAHAM. For it not to happen, right, something has to 

change? 

Mr. BERNANKE. Something would change. Whether it was either 

change in policy or change in the willingness of the lenders to fi- nance the debt. 

Senator GRAHAM. What would a zombie institution be in your 

definition? 

Mr. BERNANKE. The term ‘‘zombie institution’’ was used fre- quently in the context of the Japanese situation where there were 

banks that essentially kept their bankrupt customers on life sup- port for long periods, did not insist on repayment or restructuring, 

were not making new loans, were not doing anything to make 

themselves healthy, raise new capital or to restructure themselves. 

That is what I would call a zombie institution. 

I do not think that any major U.S. bank is currently a zombie 

institution. They are all lending, they are all active, and they are 

all viable. 

Senator GRAHAM. Is AIG a zombie institution? 

Mr. BERNANKE. AIG is in a very difficult place. It has lost a lot 

of money, and it was a good company, a strong insurance company 

that was ambushed by the Financial Products Division and other 

bad financial debts. 

Senator GRAHAM. If AIG is not a zombie institution, who would 

be? 

Mr. BERNANKE. I do not know of any large zombie institutions 

in the U.S. financial system, and our idea with AIG is, in fact, to 

allow it to stabilize and to become profitable enough to repay the 

obligations it has to the United States. 

Senator GRAHAM. And the reason we are continuing to stabilize 

is because the downside of it failing is so enormous. Is that correct? 

Mr. BERNANKE. Yes, Senator. Unfortunately, that is the case. 

Senator GRAHAM. Would it be worth $1 trillion to avoid failure? 

Mr. BERNANKE. I do not think we are going to come remotely 

close to that, but I think that the costs of the financial crisis in 

mid-September—— 

Senator GRAHAM. Would it be worth half a trillion dollars? 

28 

Mr. BERNANKE. In the mid-September crisis, which included AIG, 

Lehman, and other things, I would put the costs of that to the U.S. 

and world economies in the multiple trillions. 

Senator GRAHAM. So literally it would be cheaper to put $2 tril- lion in and then let it fail? 

Mr. BERNANKE. No. I think what is happening here is that we 

are—over time we have been doing what we can to break the com- pany up, to get it into a saleable position, and to try to de-fang it. 

We have done a lot, for example, to take off some of these dan- gerous counterparty positions that would create the contagion. So 

we are doing all we can to make it, you know, a safer institution 

as well as trying to get it to stabilize. 

Senator GRAHAM. Once we administer the stress test to the 

major banks, will we have more information as to whether or not 

future capitalization is warranted? 

Mr. BERNANKE. What we will learn from that, Senator, what we 

are learning from those assessments will be how much, if any, additional capital is needed—— 

Senator GRAHAM. I have only got 15 seconds. My question basically is: Will we ever know in this country whether or not we are 

repeating the Japanese mistake? Do you have any test out there 

to let us in Congress know that we are throwing good money after 

bad when it comes to certain institutions? 

Mr. BERNANKE. The Japanese mistake was not acting quickly 

enough or aggressively enough, and I think that is not our problem. 

Senator GRAHAM. OK. 

Senator WYDEN. The time of the gentleman has expired. 

Senator Sanders. 

Senator SANDERS. Thank you, Mr. Chairman. Welcome, Mr. 

Chairman. 

We have spent a lot of time in Congress talking about the $700 

billion TARP bailout, which I voted against, as it so happens. Not 

a whole lot has been talked about with regard to the $2.2 trillion 

that the Fed has lent out. Now, I find it absolutely extraordinary 

that—I wrote you a letter and I said: Hey, who did you lend the 

money to? What were the terms of those loans? How can my con- stituents in Vermont get some of that money? Who makes the deci- sions? Do you guys sit around in a room? Do you make it? Are 

there conflicts of interest? 

So my question to you is: Will you tell the American people to whom you lent $2.2 trillion of their dollars? Will you tell us who 

got that money and what the terms are of those agreements? 

Mr. BERNANKE. We explained each of programs. In terms of the 

terms, we explained the terms exactly. We explained what the collateral requirements are. We explained what the—— 

Senator SANDERS. To whom did you explain that? 

Mr. BERNANKE. It is on our website. 

Senator SANDERS. OK. 

Mr. BERNANKE. So all that information is available and our com- mercial paper program—— 

Senator SANDERS. And who got the money? 

Mr. BERNANKE. Hundreds and hundreds of banks, any bank that 

has access to the U.S. Federal Reserve’s discount—— 

Senator SANDERS. Can you tell us who they are? 

29 

Mr. BERNANKE. No, because the reason that is counterproductive 

and will destroy the value of the program is that banks will not 

come to the—— 

Senator SANDERS. Isn’t that too bad? 

Mr. BERNANKE. Sorry? 

Senator SANDERS. In other words, isn’t that too bad, they took 

the money but they do not want to be public about the fact that 

they received it. We heard a whole lot about AIG. They are on the 

front pages. 

Mr. BERNANKE. These are very—— 

Senator SANDERS. Now, I have got banks and I have businesses 

in the State of Vermont who are in a lot of trouble—not banks. Our 

banks, by the way, are doing pretty well. Now, how do these guys 

who are honest business people get it? Do you have to be a large, 

greedy, reckless financial institution to apply for these moneys? 

Mr. BERNANKE. There is no subsidy. There is no capital involved. 

There is no gift involved. It is a collateralized, short-term liquid 

loan that is both over-collateralized and is recourse to the company 

itself. We have never lost a penny doing it. 

Senator SANDERS. And how can other institutions get those loans 

as well? 

Mr. BERNANKE. According to the law, we are supposed to be lending to depository institutions. We—— 

Senator SANDERS. Well, let me just say this, Mr. Chairman. I 

have a hard time understanding how you have put $2.2 trillion at 

risk without making those names available, those institutions public. And we are going to introduce legislation—today, by the way— 

to demand that you do that. It is unacceptable to me that that goes 

on. 

Mr. Chairman, one of the issues that bothers me very much is 

that for many, many years, some of us were concerned about deregulation. Some of us were very concerned about where the economy was going. We did not hear much coming from the Bush administration who told us over and over again that the fundamentals of the economy were sound. We did not hear much from the 

Fed. 

Now, looking back, do you think that maybe there was a problem 

there that you did not raise some alarms out there and say we 

have got a problem when trillions of dollars are being floated 

around the world in a deregulated, non-transparent way? When 

you heard people talking about the fundamentals of the economy 

being sound, how come you did not raise an alarm? 

Mr. BERNANKE. Well, there was a massive credit crisis, and it 

has been true that our regulatory system and our financial supervisory system did not succeed in preventing those impacts. And I 

think it is very important that we—— 

Senator SANDERS. Did not succeed in preventing them. Let’s take 

it another way. Do you think that the repeal of Glass-Steagall was 

a tragic mistake? 

Mr. BERNANKE. No, I do not think so. But I do think we need 

to have much more effective holding company and oversight supervision, and I strongly support a strong program of regulatory reform going forward. 

30 

Senator SANDERS. Mr. Chairman, in my State people ask me how 

it could be that you are providing loans at almost zero interest 

rates to large financial institutions who are then charging con- sumers 25 or 30 percent interest rates on their credit cards. Do you 

think that that is acceptable? Or do you think that those institu- tions that are receiving help from the Fed should substantially cut 

those interest rates? 

Mr. BERNANKE. With respect to credit cards, we have been work- ing actively in that area in a couple dimensions. One is that credit 

availability will be enhanced by our TALF program, which I have 

just announced—— 

Senator SANDERS. No, but you are not answering my question. 

Should a financial institution that is being bailed out by taxpayers 

charge those taxpayers 25 or 30 percent interest rates when they 

are receiving—— 

Mr. BERNANKE. Well, you need to address that to the Treasury, 

because it is the TARP that is providing help to failing or damaged 

firms. The Federal Reserve lends to healthy firms on a 

collateralized basis—— 

Senator SANDERS. Last question—— 

Mr. BERNANKE [continuing]. With high liquidity. 

Senator SANDERS. Last question. Many, again, of my constitu- ents—and I think people all over this country—are wondering why 

the CEOs of these large financial institutions who have been ex- tremely greedy, reckless, and maybe have engaged in illegal behav- ior have not been fired so that we can work with people that want 

to really reform the system. Should the CEOs of the financial insti- tutions that have led us into this deep, deep recession be fired? 

Mr. BERNANKE. Well, pay and job tenure should depend on performance, and those which have performed poorly should lose their 

jobs. 

Senator SANDERS. Are any of them—— 

Mr. BERNANKE. Many have lost their jobs. 

Senator SANDERS. Most of the major guys are still holding their 

positions. 

Senator WYDEN. Senator Alexander. 

Senator ALEXANDER. Thank you, Mr. Chairman. Thank you for 

being here today. 

The Federal Reserve Board’s balance sheet is something we talk 

about, and maybe do not understand very well. The Fed has com- mitted since October more than $2 trillion, as I understand it, in 

its various enterprises, which is collateralized, and you expect to 

recover the $2 trillion or so, and you just said you have never lost 

a penny doing it. But the fact is that about 5 percent of it is Bear 

Stearns or AIG until yesterday, and now it must be a little higher—maybe it is not, but it was until yesterday. And we hear pro- posals to get bad assets out of banks with the Federal Government 

putting up $100 billion and maybe the Fed leveraging $1 trillion. 

So my question is a little like Senator Graham’s question about 

debt. What are the outer limits of our ability to use the Federal Reserve Board’s balance sheet for these various activities? And what 

are the risks? 

Mr. BERNANKE. Senator, that is a good question. Let me first say 

something about the balance sheet. It is a little under $2 trillion. 

31 

About a quarter of it is treasuries that we hold, so that is not real- ly lending except to the Government. About half of it is short-term 

liquid lending to banks. As we were discussing with Senator Sand- ers, that is done on a collateralized, short-term basis. There is 

some money in a commercial paper program that we have had that 

has had a good bit of success in reducing commercial paper rates 

in that market. And there is some money for the GSE purchases 

we have done, which have brought down mortgage rates. So we 

have been working actively to try to improve general credit condi- tions. 

As you point out, about 5 percent of our balance sheet is devoted 

to the Bear Stearns and AIG—— 

Senator ALEXANDER. If I may interrupt just a minute to specify, 

the first risk is that you do not get your money back. You think 

you will. The second risk would be that the more money you print, 

the more likely we have inflation down the road. 

Mr. BERNANKE. Senator, that is absolutely correct. So you are absolutely right that in order for us to begin to raise interest rates 

and begin to stabilize the economy, at that time when the economy 

begins to grow again, we are going to have to shrink the balance 

sheet. And we are very comfortable—we are watching that very, 

very carefully. It is very important. We spend about half of our 

time at FOMC meetings looking at the balance sheet and trying to 

make that evaluation. But as I mentioned, about half the balance 

sheet, about $1 trillion alone, is in very short-term lending. And 

then we have several hundred billion dollars of commercial paper, 

which is no longer than three months. So a lot of this can be just 

run off and allow the balance sheet to shrink back down. 

Senator ALEXANDER. So you have got some room in terms of— 

well, I guess as I am hearing you, you plan to get your money back 

by heavy collateralization, and you are watching inflation over a 

long time. The reason I ask, I was Governor in the early 1980s 

when in Tennessee unemployment was 11 percent, inflation was 14 

percent, and interest rates reached 20 percent because of different 

circumstances. 

But let me take that in my remaining time to ask you another 

question. We had very good testimony here in this Committee from 

a panel that basically said there might be $2 trillion in toxic assets 

that need to be taken off the financial institutions’ books. I sense, 

although I do not think the Senator from Vermont is part of this 

consensus, that there is a growing consensus that we need to fix 

the banks. Eisenhower said, ‘‘I will go to Korea.’’ I would like to 

hear President Obama say, ‘‘I will fix the banks.’’ 

What does he need to do to fix the banks? And how much are 

we going to have to cough up to help him do that? And if it takes 

$2 trillion, how much do we have to capitalize that effort? How 

much leverage can the Federal Reserve Board lend to it? Are we 

going to have to, as testimony was said here, if it is $2 trillion, that 

we need to capitalize it, in their words, ‘‘as much as you can,’’ and 

they then said three, four, five, six hundred billion more dollars in 

order to get the toxic assets out of the banks? 

Mr. BERNANKE. Senator, the Treasury’s plan has, I think, the 

three key elements for stabilizing the banks. That is supervisory 

review, making sure we know what is there and making sure that 

32 

the banks are strong enough; that is capital provision, which is 

what the Capital Assistance Program is about; and the third is tak- ing bad assets off the balance sheets. And there are various ways 

of doing that. The Treasury has talked about some kind of publicprivate partnership where the private sector would help determine 

the prices. The question is: How do you leverage up the TARP 

money—— 

Senator ALEXANDER. Right, but my last—— 

Mr. BERNANKE [continuing]. Financing, and let me just quickly 

say that there are different ways to do that, and some of them do 

not involve the Fed. For example, the FDIC could guarantee liabil- ity—— 

Senator ALEXANDER. I understand, Mr. Chairman, but doesn’t 

someone need to step forward and say, ‘‘I will fix the banks,’’ and 

I will do A, B, and C, the same way President Eisenhower said, ‘‘I 

will go to Korea,’’ to build the kind of confidence back in our financial system that Senator Gregg was talking about? 

Mr. BERNANKE. I agree we need to fix the banks, and we need 

to fix the financial system. If we can do that, we will get a good 

recovery. 

Senator ALEXANDER. Thank you, Mr. Chairman. 

Senator WYDEN. I thank my colleague. 

Senator Whitehouse? 

Senator WHITEHOUSE. Thank you, Chairman. Welcome, Mr. 

Bernanke. 

On the long-term front, we are looking at $50, $60 trillion worth 

of unfunded liabilities; i.e., we see the obligation coming, we have 

not set aside a nickel to pay for them. Those seem to be the real, 

as the former Comptroller General said, ‘‘swamp the ship of state’’ 

problems. If we get through this financial problem with $7 trillion 

spent, that is one-fifth of the $35 trillion liability we own just for 

the Medicare slice of the health care tsunami that is bearing down 

on us. 

You spoke about this at Chairman Baucus’ Finance Committee 

event earlier, and I would like to sort of reprise those thoughts 

now. 

There are two ways we can go about solving this problem. We 

can wait until it is really upon us, and then we can apply the traditional fiscal solutions of throwing people off of their coverage, 

thinning out the benefits, paying providers less, or raising taxes to 

bring the fiscal cost of the system into balance. 

Before I ask you about that, there is a second way, which is actually intervene in what is an astonishingly overpriced, underperforming, complex, and wasteful health care system and design 

ways to actually bring down the cost, which, as many studies and 

experiments have shown, can be done while improving the quality 

of health care dramatically. And in this area, there are things like 

investing in health information infrastructure and investing in 

quality improvement in ways that save cost and investing in prevention in ways that save cost and in reforming the payment system so that it is sending appropriate signals for the kind of system 

that we want. 

I see those as two very distinct choices. My worry is that the latter series, the more humane series, the reform series of options 

33 

take time to implement, and if we goof off and fiddle and let this 

moment pass, then we are left with that other set. We are left with 

throwing people off their coverage, thinning out the benefits, pay- ing providers still less, and raising taxes. 

Looking at that second group, what do you think is the actual 

long-term viability in terms of solving our problem of resort to that 

fiscal toolbox of throwing people off the coverage, thinning out the 

benefits, cutting provider payments, and raising taxes? 

Mr. BERNANKE. Well, that is both very difficult to do and a very, 

you know, unattractive way to go, obviously. 

Senator WHITEHOUSE. Even if we did it, would it last long? 

Mr. BERNANKE. Well, just to give you a sense, you mentioned 

these very large, unfunded obligations for Medicare. Those obligations are calculated assuming that medical costs grow at a rate 1 

percent faster than per capita income. In fact, historically that has 

been 2 to 2.5 percent. So even those projections assume a considerable improvement in the rate of cost control in the U.S. 

So I think it is very important, both in order to get a rational 

system and to get one that people can get used to and we can learn 

by experience how to make it work better, I think it is very important that we address these issues now. And, frankly, in terms of 

the long-term entitlement issues, the medical issue, which has multiple dimensions—it involves cost. It also involves access. It involves quality. Those are very, very tough problems. I do think 

that—— 

Senator WHITEHOUSE. You said ‘‘now.’’ Can I ask you, in my re- maining minute, to talk a little bit about how urgent that ‘‘now’’ 

is? Is that just we should do it now? Or is there real pressure on 

us to get—— 

Mr. BERNANKE. Well, I was asked this question at the Senate Finance Committee, and he asked me when we should start, and I 

said 10 years ago. So I think it is very urgent that we look at these 

issues and make some tough decisions, I mean, the general public 

policy decisions about choices that have to be made about what 

kind of health care system we want to have and how we want to 

structure it. 

Senator WHITEHOUSE. Let me make just one observation and 

then close. I know what you are trying to do. I appreciate the ef- forts that you make to shore up the institutions that direct our fi- nancial system. You are concerned about the shock waves, as you 

have said, through the insurance industry from the AIG failure. 

You are concerned about devastation in the financial services in- dustry from the credit collapse. 

Just from Rhode Island’s perspective, I submit that the Rhode Is- land business community, the small business community in par- ticular, is suffering shock waves itself, that our neighborhoods are 

suffering devastation themselves. And the more that what we are 

doing focuses on these big institutions, the more it looks as if the 

masters of the universe who made this mess are not truly being 

held accountable, and the less people at home see some real difference, the more challenging it is going to be for us as a democracy to not only solve this problem but to have the public good will 

necessary to solve the health care problem, necessary to solve the 

climate change problem stacked up behind that. 

34 

If you blow all of the public’s good will solving this problem, we 

are in serious trouble on the health care and the climate change 

and other troubles. So I would urge you to bear that in mind. 

Senator WYDEN. I thank my colleague. 

Senator Grassley. 

Senator GRASSLEY. Let me preface my question, before I read it, 

that sometimes the work of the Federal Reserve comes up at my 

town meetings, and, you know, you cannot go in depth into what 

you do, and I probably do not know everything you do. But I try 

to explain that you can have irresponsible Republican Congresses, 

you can have irresponsible Democratic Congresses, and if they 

overspend, eventually it is going to bring about inflation. And I see 

the work of the Federal Reserve as a counterweight to Congress to 

explain in a non-political way, maybe correcting mistakes that poli- ticians ought to know more to do but do not do. 

So my question is this: If Congress would adopt nearly the 

Obama budget, it would add trillions to the Federal debt. Because 

investors covet the relative security of Treasury’s securities during 

times of crisis, the Treasury is able to attract all the money it 

needs while paying extremely low interest rates on newly borrowed 

money. However, the day will come when those securities will ma- ture. To retire that debt, the Treasury will need to float new debt 

at what is almost certainly going to be a higher rate of interest. 

Question: Is the Federal Government setting itself up for a new 

long-term crisis as the cost of maintaining the Federal debt ex- plodes in the years to come? 

Mr. BERNANKE. Well, Senator, I should start off by saying that 

it is not my place or my standing to evaluate the specific programs 

that Congress is looking at. They are going to have to make a lot 

of tough decisions about how you want to go with health care, how 

you want to go with global warming, education—all those very big 

issues that are very important to the American people. 

My position here is simply to talk about the fiscal implications, 

and I think it is important. I realize that we have enormous deficits in the very short term. I am afraid that they are unavoidable 

given the need to get the economy back on a recovery path. But we 

do have to look forward. Even as we make plans to change our 

health care system or make other changes, we have to make sure 

that in the medium term we have a fiscal position that will allow— 

and I use as a rule of thumb, say, the debt-to-GDP ratio not to be 

growing so that when can assure ourselves that we will be able to 

finance those debts at a reasonable rate and not impose excessive 

burdens on our children and grandchildren. 

Senator GRASSLEY. Well, do you have a benchmark that you 

throw out for percentage of national debt to GDP or annual deficit 

to GDP? 

Mr. BERNANKE. Well, there is no magic number, but I would 

hope that given that we are going to be above 60 percent, I hope 

that we do not go higher than that. I would like to see us try to 

come back down gradually over time. 

Senator GRASSLEY. Again, back to the budget issues, because I 

think what we do and how you react to what we do, particularly 

if the things we do are inflationary, I will ask this question: Presi- dent Obama’s fiscal year 2010 budget assumes the recession will be 

35 

shallower and the recovery will be stronger than most private 

economists forecast. The administration forecasts 3.2 percent 

growth for calendar year 2010. That seems to me to be a little opti- mistic. I hope, of course, the optimism matures. Some people say 

it is rosy. 

How likely is it that the administration is right and most every 

private economist is wrong on this issue, what the growth is going 

to be next year? 

Mr. BERNANKE. Well, it is true that the administration’s forecast 

is a little bit more optimistic than, say, the Fed’s projections or the 

CBO projections. Part of that might be the timing of when that 

forecast was made. The recent news has been on the negative side. 

But I think it is important to understand that these forecasts are 

not precise. There is a lot of uncertainty. So I think that their num- bers, although they are on the more optimistic side of the forecast 

that have been made, are certainly within the range of uncertainty 

that all of us face in trying to forecast the economy. 

Senator GRASSLEY. Would you say the same thing about the un- employment rate’s peaking in the second quarter at 8.2 percent? 

Compared to private economists’ forecasts that I have seen, this 

sounds surprisingly low. Do you share the administration’s opti- mistic outlook for unemployment? 

Mr. BERNANKE. Well, we have a projection for 2009 of between 

8.5 and 8.75 percent. That is our estimate for the fourth quarter. 

So we have a somewhat higher estimate. As I said, these things are 

hard to predict with precision. 

Senator GRASSLEY. Thank you, Mr. Chairman. 

Senator WYDEN. Thank you, Senator Grassley. 

Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. Thank you, Mr. 

Bernanke. I have got lines of questioning. 

One, you hear, obviously, a lot of concern from all of us about 

some of the excesses that have come out of the financial markets. 

I start with the premise that over the last decade, under the guise 

of financial innovation, the banks and financial institutions have 

tried a lot of new products that in theory were supposed to help 

us better price risk, but in reality ended up causing more systemic 

risk. And, you know, a classic case—and I know a number of my 

colleagues have raised this point—AIG, a pretty good insurance 

company, until you suddenly layer on an exotic Financial Products 

Division out of London selling products into Europe with slews of 

credit default obligations that were not even hedged, that we are 

having to pick up the fallout from. 

I guess on a going-forward basis we are going to try to at least 

put some regulatory umbrella over all of these actions, but I have 

got a two- part question. 

One, the normal theory, at least recent theory, I think, around 

regulation has been, well, put some regulations and at least give 

transparency. But will that be enough in a market that seems to 

be overly financially engineered? And at some point, do we actually 

need to look at the underlying value of some of these new devices 

and whether there is an actual societal value, whether they accomplish anything other than simply creating a fee structure for the 

banks or the financial institutions? And is oversight and trans-

36 

parency enough? Or will we potentially need bright-line prohibi- tions about some of these products going forward? Point one. 

And point two, question two is: Even if we get it right in this 

country—back to my colleague from Kentucky’s questions about the 

commissioner in New York. If the commissioner in New York did 

not have the ability to oversee the activities of AIG that were tak- ing place in London, can we ever get to enough of a domestic-only 

regulatory scheme to get it right? And are we going to need to look 

at some type of international regulatory oversight that actually has 

got teeth? 

So transparency and traditional regulation versus bright-line 

prohibition around some of these products and how we assess these 

products. And then even if we do get it right in this country, how 

do we take that on an international stage? 

Mr. BERNANKE. Well, Senator, on new products, I think that 

there would be cases where safety and soundness and systemic stability would say that the regulators should prohibit a product, that 

it either is perhaps excessively difficult or deceptive from the perspective of a consumer, or it embodies risks that are not, you know, 

productive in terms of the overall system. So I think there would 

be situations in which you would want to prohibit certain products 

or at least insist on design changes and other protections for certain products. 

Senator WARNER. And let me just interject there, because my 

concern is that even if we get it fixed, we are going to be chasing 

yesterday’s products while the financial engineering tools are going 

to continue to be creating the next generation of problems, and we 

have got to somehow find a regulatory framework to get ahead of 

that. 

Mr. BERNANKE. I think that confidence in financial engineering 

has gone down quite a bit, and we need to be very——careful and 

make sure that the products that are being created are serving a 

real purpose and are not simply some kind of arbitrage for regula- tion or avoiding oversight. 

With respect to international, we are working very hard—there 

is an international community involving the Basel Committee, the 

Financial Stability Forum, the IMF, and many other organizations 

that do work to try to harmonize and work together. As you know, 

the G–20 are meeting in London in about a month. So it is very 

important to have coordination among the major regulators. 

I have not heard too much serious discussion of a transnational 

regulator because of the political and sovereignty issues that raises. 

But I do think that close cooperation—which we have had at the 

Federal Reserve for some time. We work very frequently with other 

national regulators, do simulation exercises and so on. 

Senator WARNER. Cooperation that might extend at some level to 

at least common standards. I am not advocating some international 

regulator. 

Mr. BERNANKE. There is a great deal of interest in common 

standards in capital regulation, in accounting, in a whole variety 

of other areas. 

Senator WARNER. Let me just move from this macro to perhaps 

a smaller, much smaller piece of the problem, and I am very anx- ious to see the implementation of the TALF. I am concerned that 

37 

it has taken this long, and I think it has great potential. But the 

sooner we get it rolled out, the better. 

You have talked about how it will have benefits to consumers, 

small businesses, and students. One area that I keep hoping that 

the Fed or Treasury will press on is the not total freezing up but 

the concerns in the municipal markets. You know, we see that in 

school-based systems that are trying to go out and get their school 

bonds floated, housing agencies trying to get their housing bonds 

floated, States in terms of transportation bonds. I would hope that 

you would continue to look at using TALF to try to free up a little 

bit and bring our municipal markets back into some kind of a tra- ditional form as well. 

Senator WYDEN. The time of the gentleman has expired, and we 

are going to see how many questions we can get in. I think I have 

Dr. Bernanke until noon, and the vote may be going a little later, 

so we are going to try and see if we can get a few more questions 

in. 

Dr. Bernanke, in the budget and throughout the debate about 

how to strengthen our fragile economy, both sides of the aisle are 

now proposing to use the Tax Code to advance various social objectives. I believe that it is more pro-growth to start cleaning out the 

Tax Code, to go and clean out some of those loopholes that are 

being added at the rate of almost three for every working day, and 

use that money to hold down rates and keep progressivity. 

We are going into the tax reform debate certainly next year. Isn’t 

it more pro-growth to start cleaning out the tax loopholes and 

using that money to hold down rates? 

Mr. BERNANKE. Senator, I think most tax economists would 

agree with what you said. There, first of all, is the issue of com- plexity. People spend something like 20 to 30 hours of their time 

just filling out their tax form. But beyond that, the general rec- ommendation from tax economists is that you should limit deduc- tions and keep the overall rate as low as possible. 

It is certainly important that the Government have ways of stimulating certain types of activities, but often that can be done 

through an appropriation process rather than through a tax break. 

Senator WYDEN. I am going to show you my fair flat tax, because 

it has got a one-page 1040 form. The people at Money Magazine 

filled out their taxes on it in something like 40 minutes. We are 

going to be asking for your counsel as we go to this tax reform de- bate on the Finance Committee, because I think if you look at this 

debate, both sides are essentially proposing adding a whole truck- load of additional loopholes. And I personally think we ought to be 

going in the opposite direction, so I appreciate your comment. 

The second area deals with another disclosure question. My 

sense is on the banking issue a big part of the solution is that you 

have got to dimension the problem. In other words, people today 

cannot get a sense about whether they ought to be sending invest- ment dollars to the private banking system and the like because 

they do not know what the real troubled assets are on the books. 

What is it going to take to flush out the scope of the problem of 

these troubled assets on the banks’ books? It is a disclosure question. I want to be clear I am interested in the disclosure part of 

it. What is it going to take to get disclosure on this? 

38 

Mr. BERNANKE. Well, just very quickly, you know that we are 

doing the supervisory assessment, which is supposed to try to get 

a sense of how much capital these banks would need, how much 

hole they need to fill in order to be well capitalized even in an ad- verse environment. 

It is a difficult problem, Senator, because many of these assets 

are very complex and, therefore, opaque. But, in addition, even 

simple assets are hard to value these days because they depend so 

much on the future movements of the economy. I mean, if you do 

not know what is going to happen to house prices, how do you 

value a mortgage? So it is very difficult. 

So we are doing all we can to try and improve disclosure. That 

is part of the program that Secretary Geithner talked about. But 

it is also one of the reasons why you like to, if possible, get some 

of these assets off the balance sheets of the banks because that cre- ates more transparency for the remaining portion of the bank. And 

that is better for attracting investment from the private sector. 

Senator WYDEN. I know it is complicated. There is no question 

about it. I know it is opaque, and I have sat in the Finance Com- mittee, and I have heard experts say that. But that is why we have 

you there. That is what we have you there to give us some sense 

of what the dimensions of this problem are. And so I hope we are 

going to see that quickly because I do not think we can go onto the 

other debates. I have never heard about anybody coming up with 

a solution for a problem if they cannot dimension the nature of the 

problem. We have got to get that addressed more quickly. 

Mr. BERNANKE. We are working to dimension it. We are using 

GAAP accounting. A lot of this is an accounting issue. How do you 

account for complex assets which have uncertain cash-flows? 

Senator WYDEN. I want to make my last question one that I 

think is a basis for optimism. I have told you, I think, that we want 

brutal honesty from you and we want a reason to be confident. And 

I think that the history of dealing with tough times—you look, for 

example, at the fact that Silicon Valley essentially was created in 

the middle of a recession in the 1970s. You had major tech compa- nies come out of the 1980s. So innovators can prosper in tough 

times. And I think I would like you to close at least my ques- tions—Senator Graham and others have questions—by telling us 

why you think that innovators can succeed in these kinds of tough 

times. I think there are opportunities for innovators. There have al- ways been opportunities for innovators, and that is what the Amer- ican dream has been all about. 

So for purposes of my questions, close this on a positive note and 

tell us why innovators ought to feel that they can still go out in 

the marketplace and succeed like they have done again and again 

in tough time. 

Mr. BERNANKE. Well, I think that is absolutely true, and confidence in the U.S. economy is one reason why the dollar has actually done relatively well compared to some other currencies. 

Recently at the Federal Reserve, we had an organization of ven- ture capitalists, and they said yes, there were some difficulties now 

raising money and so on, but they are still very active in starting 

new firms in the health sciences, in energy, and all number of dif- ferent areas. They have a long-term perspective. They believe that 

39 

technological opportunities abound everywhere, and they have a lot 

of confidence that the U.S. is the place where entrepreneurship and 

technical innovation can lead to the profits that stimulate entrepre- neurial activity. 

So, you know, I believe that technological progress will continue, 

be very strong, and I think the American people—I realize people 

have raised a number of concerns people have, politically and oth- erwise. But I do think the American people in the past have shown 

an excellent ability to respond to adversity, and I believe that is 

going to happen this time and that we are going to see a much 

stronger economy not that far in the future. 

Senator WYDEN. Senator Graham. 

Senator BUNNING. Oops. 

Senator WYDEN. Oh, excuse me. 

Senator BUNNING. That is all right. 

Senator WYDEN. My apologies to my colleague. 

Senator BUNNING. My colleague that travels with me. 

Senator WYDEN. I welcome the Senator from Kentucky asking 

questions next. 

Senator BUNNING. Thank you. 

Last week, you told the Banking Committee that you did not bail 

out Lehman Brothers because you did not have the authority. Yet 

you found a way to create a Commercial Paper Funding Facility 

which requires no real collateral. So how is it you can make loans 

from unsecured commercial paper to AIG at the same time it is 

getting TARP funds, yet you could not find a way to save Lehman 

Brothers? 

Mr. BERNANKE. Well, with respect to the Commercial Paper Fa- cility, after a lot of evaluation, the legal counsel determined that 

the charging of a higher interest rate as well as allowing for the 

option of collateralization satisfied the requirements. We lent only 

to AAA credits, and we had no difficulty in terms of credit in that 

facility. 

With respect to Lehman Brothers, there was just no equivalent 

collateral. There was nothing to make a huge loan against that 

would allow us to get repaid. And we just did not have the legal 

authority to make that loan. 

Senator BUNNING. You mentioned AAA credit. By whose ratings 

were they AAA? 

Mr. BERNANKE. Well, by the credit rating agencies. 

Senator BUNNING. The same people that have failed miserably in 

rating AAA, and we got into the big problem in the housing market 

because the collateralization of those loans are rated AAA by the 

same agencies? 

Mr. BERNANKE. You are right, Senator, but—— 

Senator BUNNING. Thank you. This is not to be detrimental, but 

Richmond Fed President Lacker dissented from the most recent 

Fed statement because he thought buying long-term treasuries is 

a better way to expand the balance sheet than targeted facilities. 

In particular, he said targeted programs move credit away from 

other worthy borrowers, amount to fiscal policy, increase moral 

hazard, and might be hard to unwind. 

You obviously did not agree with his views because you voted the 

other way. Why didn’t you agree? 

40 

Mr. BERNANKE. Well, I think you have to solve the problem you 

have got, and the problem we have got is not lack of liquidity or 

lack of purchases of treasuries. The problem we have got is that 

so many of our critical credit markets are not functioning properly. 

The securitization market is not functioning, the mortgage market. 

If we want to help the economy grow again, we have got to get 

those markets working. 

The programs we have done are not credit allocation because 

they are very broad based. The TALF is addressing a wide range 

of assets, and we are leaving to the private sector the decision to 

which assets to bring to the TALF. 

The mortgage market is a very broad-based market, and it af- fects the whole economy, so I think—and as far as getting out of 

it is concerned, I already discussed earlier the unwinding process. 

I think we will be able to do that. So I think you have to solve the 

problem you have got, not the problem you have not got. 

Senator BUNNING. OK. Then the problem we got is we have a 

problem with our banks, particularly our money market banks, 

which you say are not under stress; or if they are under stress, 

they are solvent. There are a lot of us who look at the same data 

that you look at and say most of those banks, particularly 

Citigroup and others—can you imagine Citigroup selling for $1.50 

a share? Now, does that mean that the market has miscalculated 

the value of that? Or is really Citigroup under more stress than the 

Fed realizes? 

Mr. BERNANKE. Citigroup is certainly under stress, but our belief 

is that it has enough capital; it meets the criteria for being well 

capitalized; it has got a plan for restructuring. And we are going 

to work intensively with Citigroup to make sure that it is stable 

going forward. Not to say it does not need strengthening, not to say 

that other banks do not need strengthening. I did not mean to say 

that banks were not under stress. I do not think I said that. 

But—— 

Senator BUNNING. No, you said they were not being nationalized, 

is what you said. 

Mr. BERNANKE. They are not being nationalized. But they cer- tainly need—they received assistance, and that assistance, I hope, 

will be the start of a process that makes those banks able to raise 

private capital. 

Senator BUNNING. Last question. When will you accept the 

money that they want to give back—some banks do—under TARP? 

Mr. BERNANKE. Well, that is a Treasury decision, but as far as 

I know, they have no objection to taking money back if the banks 

want to give it back. But that is Treasury determination. 

Senator BUNNING. That is a Treasury determination even though 

you were sitting in on the meetings when TARP was created? 

Mr. BERNANKE. Well, I was sitting there, but TARP is a Treasury 

program, and the Treasury has authority over those sorts of issues. 

Senator BUNNING. But isn’t there an agreement that requires the 

regulators to agree to take the money back? 

Mr. BERNANKE. Well, if a bank needs that capital to be safe and 

sound, then the regulators might not let them give it back. That 

is right. But I thought you were thinking about many small banks 

around the country that took that money—— 

41 

Senator BUNNING. No. I was specifically thinking of JPMorgan 

Chase. 

Mr. BERNANKE. Well, if a bank has taken a lot of capital and 

wants to return it, it needs to either replace it with private capital 

or show that it meets all the standards without that capital. 

Senator BUNNING. Thank you. 

Senator WYDEN. The time of the gentleman has expired. 

Senator Whitehouse. 

Senator WHITEHOUSE. Thanks again, Chairman. 

Mr. Bernanke, during the course of this hearing, we have heard 

a number of my colleagues express real dismay about the amount 

of additional borrowing that is going to be required to address what 

I think all responsible economists concede is a fiscal emergency 

that the country is in, or certainly would be in without this. 

As I recall, at the end of the Clinton administration, we had a 

budget in surplus, and we were headed by most estimates, includ- ing CBO’s, to be a debt-free Nation. And then for 6 years before 

control in Congress changed, you had Republicans controlling the 

House, the Senate, and the White House. And during that time, ac- cording to our projections, if you take the difference between the 

CBO-projected budget on the day they took office and where things 

actually went, it is a $7.7 trillion difference, a $7.7 trillion hole 

that I refer to as the ‘‘Bush debt’’ and that many of my colleagues 

supported at the time. We had a Vice President who was at the 

time saying deficits do not matter. And now we hear these expres- sions of dismay about lending to solve this crisis from people who 

did not seem to mind when $7.7 trillion in debt was being run up 

to finance tax cuts for the rich, to finance a war in Iraq, and other 

things. 

Tell me, had we not gone that route, had we started—let’s not 

even give credit for the projections that would have taken us into 

an actual national debt-free position. Let’s just say we had zero na- tional debt when we went into this crisis instead of the trillions 

and trillions of national debt that were run up, what would our position be in responding to this crisis had we started at zero instead 

of—what is it now, $9 trillion? 

Mr. BERNANKE. Well, I think it is evident that you start with 

lower debt, then you have more debt capacity, and it is easier to 

raise money from both domestic and foreign lenders. I think one of 

the features of the President’s budget, which I think is interesting 

and constructive, is that it includes, for example, as I understand 

it, some general provision for disasters and things of that sort. It 

recognizes the uncertainties that we do face in a normal budgeting 

process. 

So I can only agree with you that one of the benefits of keeping 

a low debt-to-GDP ratio and maintaining near balanced budgets 

under normal circumstances is that you have the flexibility to re- spond to a Katrina or to something like this, which is many times 

larger. 

Senator WHITEHOUSE. Looking back, do you believe it was pru- dent as a Nation to have run up, as I calculate it, the $7.7 trillion 

in debt during those 6 one-party years? 

Mr. BERNANKE. It is a very complicated calculation, Senator, and 

I cannot do it all here, but I think the tax revenues in the late 

42 

1990s were partly not sustainable. They came from the stock mar- ket boom, and we know now that was not sustainable. So I think 

the idea that we would be debt free, I think that was somewhat 

exaggerated. 

It is true that the revenue-to-GDP ratio did fall in the early part 

of the Bush Presidency. It did come back up to something closer to 

historical averages. So it is a complicated issue, but I do agree that 

in thinking about the future and recognizing that there are unan- ticipated emergencies that can occur, whether they be natural dis- asters or financial disasters or whatever, it is a good idea to have 

some fiscal capacity in reserve. We have got countries around the 

world now that really cannot do fiscal policy because they have not 

got the debt capacity to do it. 

Senator WHITEHOUSE. Thank you. 

Senator WYDEN. I thank the Senator. 

Senator Graham. 

Senator GRAHAM. Thank you. 

Mr. Chairman, have you read the article—I think it was written 

yesterday—by James Baker, the former Treasury Secretary, ‘‘How 

Washington can prevent ‘zombie banks’ ’’? 

Mr. BERNANKE. Yes, sir. 

Senator GRAHAM. What did you think of that? 

Mr. BERNANKE. I understand the idea that going in and national- izing the banks and just taking care of them once and for all is 

very attractive. I understand that. 

Senator GRAHAM. I do not think he—well, let me put it in con- text. Here is where I am at. I want to do what is responsible. I 

want outcomes. I park my ideology here. I am a conservative Re- publican, and there are a lot of things that I think we should do 

that the administration is not doing. But we are all in this one lit- erally together. So I voted for the TARP funds. And you are going 

to back to South Carolina to be honored this weekend—and con- gratulations, by the way. That is a big honor that they are bestow- ing upon you because you are a native of my State. 

I am having to explain to people, you know, we are $200 billion 

into AIG with no end in sight, and it would be helpful—I think I 

can take away from your testimony that the consequences of letting 

AIG just collapse uncontrolled would be a lot more to the country 

and to the public than $200 billion. Is that a fair statement? 

Mr. BERNANKE. Absolutely. 

Senator GRAHAM. This idea that you are too big to fail, that does 

not set well with me, and I do not think it sets well with a lot of 

people. How do you feel about the term ‘‘too big to fail’’? 

Mr. BERNANKE. I think it is an enormous problem. I think we 

have learned it is a bigger problem than we thought it was, and 

I would say that dealing with the ‘‘too big to fail’’ problem should 

be a top priority as we go forward and do reforms. 

Senator GRAHAM. Well, I believe that once we administer the 

stress test with these banks, we are going to know more than we 

know now. And my concern is: When do we throw good money after 

bad? I have supported the capitalization programs, but I at least 

would like to keep on the table—we own 36 percent of Citibank 

now. Is that correct? 

Mr. BERNANKE. Yes, sir. 

43 

Senator GRAHAM. OK. Why did we convert preferred shares to 

common stock? 

Mr. BERNANKE. Well, that decision was made for a variety of rea- sons, but among them is that the markets seem to believe—and 

with some reason—that common equity is better quality capital 

than preferred stock. 

Senator GRAHAM. Well, Citibank is at $1.22 today. It has not had 

much of an effect, has it? 

Mr. BERNANKE. It certainly has not caused the stock price to go 

up. 

Senator GRAHAM. From a South Carolina taxpayer point of view, 

and any other State, Virginia included, has the taxpayer been dis- advantaged by losing the preferred status, potentially? 

Mr. BERNANKE. I do not think necessarily that is the case, because it depends on the terms of conversion. 

Senator GRAHAM. Or we have given up interest, right? 

Mr. BERNANKE. Right, but it depends on the terms of conversion 

between the preferred and the common. May I—Senator, if I ask 

your indulgence, I would like to challenge the Congress to give us 

a framework where we can resolve a multinational, complicated financial conglomerate like Citigroup, like AIG, or others, if that became necessary. We do not have that framework, and, therefore, we 

have to work within the constraints of what we have. 

Senator GRAHAM. Right. I understand. Now, when it comes to a 

big organization like—we are into this thing 36 percent the Federal 

Government owns. I do not know where nationalization, socialism, 

and capitalism begins or ends anymore. I mean, I think that is— 

I mean, obviously we are doing things that no one likes, whether 

you be a moderate, conservative Democrat, whatever you would 

like to call yourself, Senator Warner—you seem to be a good guy— 

or a conservative Republican from South Carolina. We seem to be 

in uncharted territory. Do you agree with that? 

Mr. BERNANKE. I certainly agree, but I also want to emphasize 

that even though we are not formerly nationalizing any bank or in- stitution, we are exerting plenty of control to make sure that they 

take the steps necessary to become viable? 

Senator GRAHAM. That is my point. Call it what you like, and, 

you know, I got a lot of pushback when I mentioned leaving that 

option on the table, because when you look at the amount of money 

we are putting into the banks and the amount of control we have 

over how much you get paid and what decisions you make, we are 

pretty much running the damn thing, for lack of a better word. And 

there may come a time, at least in my mind, where it would be bet- ter to take them over quickly, sell off the good parts, and better 

manage the bad parts than it would be to continually capitalize. 

Does that make sense to you as a limited option in the future if 

this continued path does not work? 

Mr. BERNANKE. As a possible option in the future, as an abstract 

option. But I reiterate that we do not have the tools to do that. 

Senator GRAHAM. Right. I understand. But the choice that all of 

us have is to sit on the sidelines and watch all this money go into 

these systems, and nothing seems to be changing. And the one 

thing I want you to understand—you are so much brighter than I 

am about this, but I do have some common sense. The public has 

44 

just about had it with this continuous capitalization. And I think 

they would tolerate, if the bank is never going to perform after 

hundreds of billions of dollars, just to take it over, find a way to 

break it up, sell off the good parts and better manage the bad 

parts, like we did with the RTC a long time ago. 

I just want to let you know that as a conservative Republican, 

I am parking my ideology, but we have a political problem, both 

of us, both sides of the aisle. Do not underestimate how hard it is 

going to be for you and others to continue to print money to solve 

this problem. 

Senator WYDEN. Point well taken, from my judgment. 

Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. I want to add that 

I think Senator Graham has put his finger on part of the problem. 

A lot of this is around semantics of what words we use, not the 

practical outcome. And I think the Senator from South Carolina 

raises a very good point. 

I want to come back to my two lines, and I know I am the last 

on the line, but back on our AIG situation, I understand why you 

all had to act last year. And I understand all the ramifications, I 

believe, of the total failure and an unstructured failure of AIG. 

But what still kind of makes me concerned is I believe that a lot 

of these counterparties that bought these CDOs and CDSs were 

coming out of the London operation, in effect renting AIG’s AAA 

status to take their less than AAA instruments and elevate them. 

At some point in this process, they should have been doing some 

level of credit analysis as well about what AIG was doing and the 

fact, for example, that they were not even hedging—AIG was not 

even putting any kind of conservative downside hedges on these 

sales that they made. And I guess it just irks me a bit that we, 

the American taxpayers, are still basically asked to continue to totally bail out all these counterparties when at some point I just— 

and I understand the structural concerns, but there ought to be 

some haircut taken by these folks at some point in this process. 

And I would just like to hear your reaction to that. 

Mr. BERNANKE. Well, I think, you know, the ramifications are 

just so complex that there are so many counterparties and so many 

different types, we have tried to de-fang the thing by taking some 

of the CDOs and other things off the balance sheet. But beyond the 

counterparties, you have got millions of insurance contracts. You 

have got millions of stable value wraps on 401(k)’s and all kinds 

of other financial instruments. So are you going to begin to—are 

you going to haircut everybody who has a life insurance policy? 

Senator WARNER. Well, the insurance policy holder, though, did 

not make the determination that they were going to go out and 

purchase the CDO to try to improve their credit rating. At some 

point here, some marginal haircut on some of these counterparties. 

Mr. BERNANKE. Once again, we are back into this legal question, 

which is unless the company is in bankruptcy, we cannot default 

to counterparties. We do not have a way of safely putting the company into bankruptcy. 

To respond to Senator Graham, AIG is effectively under our control. We are breaking it up. We are doing it to repay. But we are 

doing it within the legal context of an ongoing firm because bank-

45 

ruptcy is just not a good option given how complex and inter- national this company is. 

Senator WARNER. But, in effect, what we are saying is con- sequently folks who bought these instruments should have been 

doing some level of credit analysis of what AIG was selling who did 

not do that credit analysis and are going to still come out whole 

for their lack of appropriate due diligence or responsible behavior. 

Mr. BERNANKE. I am as unhappy as you are about that, Senator. 

I just do not know what to do about it. 

Senator WARNER. Let me just in my remaining one moment come 

back again. I got my pitch in about the muni markets. My time ran 

out, and I have yet to hear, though, from you or Secretary Geithner 

there is recognition of the problem, and the fact that, again, from 

a job creation standpoint and a creditworthiness standpoint, the 

fact that these are public entities, they are creditworthy, they are 

projects that have been scrubbed, they are ready to go to market, 

the fact that the spreads are still at unreasonably high levels. I 

just would again encourage you, and I would ask you to please 

make some comment on whether you think the TALF or any other 

instrument could be used, either from a backstop standpoint or 

from going into the markets and starting to purchase some of these 

muni bonds to jump-start the area. 

Mr. BERNANKE. I could not really give you a full assessment 

without doing the analysis. Let me tell you why we have not put 

that ahead of CMBS and some of the other private sector instru- ments. Part of it is just that we know that the fiscal program, the 

Congress does have substantial help for States and localities, and 

it seems more natural for the Congress to be providing that kind 

of support. And our 13(3) authority, which has been talked about 

so much, in fact excludes lending to municipalities and States. 

Senator WARNER. I understand. 

Mr. BERNANKE. And, therefore, it is a bit beyond, I think, the intent of Congress. So we are certainly aware of those situations. We 

think there has been some improvement in the muni market. It is 

very important. We agree it is very important. 

Senator WARNER. But do you believe the TALF falls out—-your 

13(3) does not extend to TALF since TALF seems to be a hybrid? 

Mr. BERNANKE. I do not want to say categorically because there 

might be some way to—particularly since there are certain cat- egories. We are allowed, for example, to buy very short-term mu- nicipal debt even without 13(3) as part of our regular open market 

operations. 

Senator WARNER. Well, just as I have asked Secretary Geithner, 

and I would ask and would love to hear back, perhaps offline, what 

tools are available out there to jump-start this market. 

Mr. BERNANKE. OK. 

Senator WARNER. Thank you, Mr. Chairman. 

Senator WYDEN. Before we lost the Senator from Virginia, who 

does know something about markets because he has been successful in them, I want to note the nature of the exchange you just had 

with the Chairman on the counterparties issue. 

The Senator from Virginia has said—and I am sure others are 

going to suggest this as well—that these counterparties ought to 

take a haircut, that they ought to, in effect, have some kind of con-

46 

sequence. And, by the way, we do not even know who these 

counterparties are. They could be anybody in the world. The Chairman’s response to the Senator from Virginia said, well, I do not 

really know what to do about it. 

Well, I proposed something today. I think we ought to be disclosing at a minimum who these counterparties are. They are not 

being disclosed. The American people are in the dark on this issue, 

and I think it is time for some sunlight. And I very much want to 

work with you on this, Mr. Chairman, because I think that the 

public really wants to know why are these people so important. 

Why are they so important? Why do they play such a fundamental 

role in the American economy? And it is part of this debate. The 

reason that AIG has gotten this money is because they are ‘‘systemically important.’’ I think the small businesses that Senator 

Warner and I represent, we think they are systemically important. 

These small businesses seem like collateral damage in all of this 

while AIG and the large powerful interests seem to get money very 

quickly. 

So I thought that the exchange that you just had with the Senator from Virginia certainly highlighted this debate, he had an 

idea. He came in with a specific suggestion with respect to 

counterparties. You said you really did not know what ought to be 

done. And I want to leave this hearing with the comment that I 

think we know what needs to be done. I think these interests ought 

to be disclosed. 

So let us give you the last word. You have been very patient, by 

the way, with your time this morning, taken a lot of questions, a 

lot of rounds. We will give you the last word. 

Mr. BERNANKE. Yes, I would like to say something about the 

American public’s reaction, and I understand why people are angry. 

And as I said, I have been very angry at a number of circumstances. I am generally a pretty even-tempered kind of person. 

It is not fair that money is going to big corporations. We are in a 

situation, though, where we need to stabilize the financial system. 

If we do not stabilize the financial system, we have no hope of getting the economy back to a normal state. 

Once that fire is put out, then we need to think very hard as a 

country how we are going to make sure this does not happen again, 

and I will be the first person to work with the Congress to make 

sure we find strong measures to avoid this ever happening again. 

But right now, if we do not do what is necessary to stabilize the 

financial system, the consequences for people on Main Street will 

be quite adverse. 

Senator WYDEN. Mr. Chairman, you have been very generous 

with your time, and the Senate Budget Committee is adjourned. 

[Whereupon, at 11:55 a.m., the Committee was adjourned.] 

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