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MONETARY POLICY AND THE

STATE OF THE ECONOMY, PART II

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

FEBRUARY 27, 2008

Printed for the use of the Committee on Financial Services

Serial No. 110–93

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

February 27, 2008 ............................................................................................ 1

Appendix: 

February 27, 2008 ............................................................................................ 51

WITNESSES 

WEDNESDAY, FEBRUARY 27, 2008

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

System ................................................................................................................... 6

APPENDIX 

Prepared statements: 

Paul, Hon. Ron .................................................................................................. 52

Bernanke, Hon. Ben S. ..................................................................................... 53

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bernanke, Hon. Ben S.: 

Monetary Policy Report to the Congress, dated February 27, 2008 ............. 63

Castle, Hon. Michael: 

Letter from former Federal Reserve Chairman Alan Greenspan, dated 

July 22, 2003 ................................................................................................. 113

(1)

MONETARY POLICY AND THE 

STATE OF THE ECONOMY, PART II 

Wednesday, February 27, 2008

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

The committee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Waters, 

Maloney, Gutierrez, Watt, Sherman, Meeks, Moore of Kansas, 

Capuano, Hinojosa, Clay, McCarthy of New York, Baca, Lynch, 

Miller of North Carolina, Scott, Green, Cleaver, Bean, Davis of 

Tennessee, Sires, Ellison, Klein, Mahoney, Wilson, Donnelly; Bachus, Pryce, Castle, Royce, Paul, Jones, Biggert, Shays, Miller of California, Capito, Feeney, Hensarling, Garrett, Pearce, Neugebauer, 

Price, McHenry, Campbell, Putnam, Bachmann, Marchant, and 

McCarthy of California. 

The CHAIRMAN. The hearing will come to order. First, I would 

like to note that last summer we saw the passing of the co-author 

of the Humphrey-Hawkins bill, Congressman Gus Hawkins. He 

was a Member of the House who had a very distinguished career. 

He was the predecessor of our colleague from California, Ms. Waters. But the significance of his achievement in structuring that 

bill, and in particular, giving equal weight to two very important 

mandates, the need to combat inflation and the need to maintain 

adequate employment—I think recent events have shown that to be 

quite wise. 

I contrast what I think has been the good performance of our 

Federal Reserve in meeting our needs with a performance that I 

think has caused more difficultly in Europe in the European Central Bank where they have only the single mandate. So I want to 

pay again tribute to the wisdom of Gus Hawkins and to the fidelity 

with which the Federal Reserve under this Chairman has carried 

out what can be a complicated and sometimes—it’s a relationship 

with some tension. 

We meet today under the usual circumstances. For many years 

past, I have focused on the problems of income inequality in our 

society and the question about how we promoted growth without it 

adding to inequality. Both the current Chairman and his predecessor acknowledged that those were issues and expressed views 

about how to deal with them. We have from time to time convened 

when we were in the midst of a downturn, whether or not it is a 

recession is a somewhat academic discussion. That we are in a sigVerDate 0ct 09 2002 17:27 May 30, 2008 Jkt 041184 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\41184.TXT TERRIE
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nificant downturn with a very chancey near-term future is indisputable. 

What is interesting is the extent to which this is a very different 

kind of downturn. We don’t have the classic cycle where there were 

excesses, too much inventory, etc. We are in a downturn, maybe a 

recession, maybe about to become one, in which the single biggest 

cause was excessive deregulation. The failure to understand that a 

vibrant, free enterprise system needs as a partner a public sector 

that understands how the market works, supports it, helps create 

the conditions in which the free market can flourish, but also provides a set of rules that diminish abuses. 

That this current downturn was caused by abuses in the loan 

market for residences is fairly clear. In the report, the Monetary 

Report that the Chairman presents, on page 3, part 2, ‘‘The economic landscape after the first half of 2007 was subsequently reshaped by the emergence of substantial strains in financial markets in the United States and abroad, the intensifying downturn in 

the housing market and higher prices for crude oil. Rising delinquencies on subprime mortgages led to large losses on related 

structured credit products.’’ Skipping over, ‘‘Consequently, in the 

fourth quarter, economic activity decelerated significantly, and the 

economy seemed to have entered 2008 with little forward momentum.’’ 

This is relevant for a number of factors. Yesterday in the hearing 

we had preparatory to this one, the very distinguished economist, 

Alice Rivlin, a former Vice Chair of the Board of Governors, said 

this year in your hearing, monetary policy will not be as important. 

It will be somewhat down on the list. And I think that is accurate. 

In the classical recession we have had, the role of monetary policy 

is fairly clear. Here we have this problem that the normal tools we 

use, including a stimulus package, which in its detail pleased no 

one, and was therefore able to pass, and I think will on balance be 

constructive in helping deal with the shortfall, and we have seen 

a reduction in interest rates. That is, monetary and fiscal policy 

have been as stimulative as you can expect in this time. And I support both of those directions, but they are not enough. 

We are faced with the need to deal with a very serious structural 

problem, the continuing flood of foreclosures. And this committee 

will be considering measures to deal with that. Let me note that 

in the absence of the subcommittee chairman, and given the significance here, I’m going to take the 8 minutes that we have. And I 

apologize to my colleagues, but not so much. 

We have a structural set of issues to deal with. And in this case, 

relying on fiscal and monetary policy alone won’t be enough. Because unless we can deal with the specific structural problem 

caused by the deregulation more than anything else, and caused by 

excesses in the private sector, we will not be able to effectively deal 

with this situation. And in fact, if we were not to deal with this 

in a structural manner by trying to deal with foreclosures and with 

property on which there have been foreclosures, we would put too 

much of a strain on fiscal and monetary policy. 

It would not be appropriate to rely only on fiscal and monetary 

policy. So we will be trying in a variety of ways, and we have been 

talking to regulators, and I appreciate the cooperation we have gotVerDate 0ct 09 2002 17:27 May 30, 2008 Jkt 041184 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\41184.TXT TERRIE
3

ten from staff at the Federal Reserve and the other Federal regulatory agencies. We may in the end have some differences, but 

there has been a cooperative effort to try and figure out how to deal 

with that. 

What is clear is that the ideology of deregulation is a large part 

of the cause of the problems we are in today. Indeed, in the mortgage market, it is clear. If you look at mortgages originated by the 

regulated entities, the deposit-taking institutions, subject to bank 

regulation, they have performed much better than those that came 

with very little regulation. 

And it wasn’t simply that. What basically happened was that 

securitization, which has been a great blessing and a great multiplier of our ability to do things, replaced the lender-borrower discipline. We were told by the private sector that they had ways of 

replacing that, so that we would have a good deal of responsibility. 

We had risk management and quantitative models, and a whole 

range of other things. It turns out, when enough bad loans are put 

into the system because of the absence of the lender-borrower discipline, i.e., I’m not lending you the money unless I know you’re 

going to pay me back, that some of these techniques did not contain the damage; they spread it. 

And the consequence has been a very serious, worldwide problem 

wherein the most significant economic troubles since at least 1998, 

and in America it is probably going to have more of a negative impact than then, and the single biggest cause was a failure for regulation to keep up with innovation. And of course it has had international consequences as well. We have a new export in America 

that had a big impact on the rest of the world—bad mortgages, 

which we exported and which caused economic problems elsewhere. 

So as we deal with this situation, it is important for us to continue to monitor monetary policy. We have already acted in the fiscal area. I believe that the Chairman and the Federal Reserve has 

acted appropriately with regard to monetary policy, but they could 

not be enough, given the cause of this. And what we need first of 

all is to deal with the problems that we have seen because of the 

failure to regulate, and we have to do something about the cascade 

of foreclosures that we still face, or we do not easily pull out of this 

problem. And we have to, once we have dealt with that, this committee will begin to work on that, think in cooperation with the 

regulators and the financial community and others what we do 

going forward so that we do not lose the virtues of securitization 

but we are able to diminish some of its abuses. 

The gentleman from Alabama. 

Mr. BACHUS. I thank the chairman. Chairman Frank, I appreciate you holding this hearing on monetary policy and the state of 

the economy. And I thank you, Chairman Bernanke, for being here 

today and for your service to the country. 

You testified last July concerning the state of the economy and 

monetary policy. At that time we had a problem in one segment of 

our economy, and that was subprime lending. And as we all know, 

since that time, because of what we sometimes refer as interconnectedness of the markets, it has mushroomed into a full-blown 

credit crisis. We have unemployment inching up, although it is still 

at historic lows. It is still very good. We have factory orders and 

4

durable goods showing weaknesses, some weaknesses in retail 

sales, and obviously we are concerned about our credit card and 

auto lending markets because of the credit crunch. 

While economic activity and growth have clearly slowed, and 

while any threats to our economy should not be minimized, I don’t 

believe anything has transpired over the past 7 months that distracts from the competitive strength of U.S. businesses and their 

innovativeness, and the productivity of American workers still remains very high. I think our workers are unrivaled in the world 

as far as their abilities and their productivity. 

Moreover, productive steps by the Federal Reserve and other regulators, combined with responses from the private sector and the 

natural operations of the business cycle, I believe will help ensure 

that the current economic downturn is limited in both duration and 

severity. I believe your aggressive cuts in the Fed funds rates and 

the recently enacted stimulus package will help. Although I believe 

it may not have the effect that many claim, I do believe that it does 

serve as a tax cut for millions of hardworking Americans, and it, 

too, will help. 

And all of those should begin to have a positive effect on our 

economy, I believe, by this summer—and I would be interested in 

your views—laying the groundwork for a much stronger second half 

of 2008 and sustainable growth in 2009. At that point, I believe the 

Fed’s primary challenge, and we saw it, I think last week and this 

week, with the CPI and the PPI numbers, your challenge will shift 

from avoiding a significant economic downturn to containing inflationary pressures in our economy. 

Particularly when I go home, people talk to me about the hardship of high gas prices. That’s something that I’m not sure any of 

us have much control over, short term. Long term, there are obviously things, including nuclear power that I have said many times 

we need to take full advantage of. 

One lesson we have learned from the subprime contagion is just 

how highly interconnected our financial markets are. The chairman 

in his opening statement mentioned a lack of regulation. We have 

a system of functional regulation where different regulators function in different parts of the market. I’m not sure that part of our 

problem is not that this sometimes almost causes overregulation, 

but there may be gaps in the regulation. And I wonder if that is 

in fact the case, there may be areas where the regulation needs to 

be strengthened or regulation needs to be coordinated better between different regulators, both State and Federal. 

As painful as the process and the challenges we have, I think it 

is pretty evident that we have faced our problems and that we are 

solving them. I think what we have done is far preferable to the 

kind of decay and denial that mark the Japanese response to their 

financial turmoil in the 1990’s. And it’s the reason I continue to 

have great confidence in the resilience of the American economy. 

Chairman Bernanke, in closing, let me say there is perhaps no 

other public figure in America who has been subjected to as much 

Monday morning quarterbacking as you have over the last 7 

months. But I believe on balance, any objective evaluation of your 

record would conclude that you have dealt with an exceedingly difVerDate 0ct 09 2002 17:27 May 30, 2008 Jkt 041184 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\41184.TXT TERRIE
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ficult set of economic circumstances with a steady hand and sound 

judgment. 

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

The CHAIRMAN. And next, the ranking member of the subcommittee, the gentleman from Texas, Mr. Paul, for 3 minutes. 

Dr. PAUL. Thank you, Mr. Chairman. I ask unanimous consent 

to submit a written statement. 

The CHAIRMAN. Without objection, the gentleman and any other 

members of the committee who wish to submit written statements 

will be allowed to do so. There will be no need for further requests. 

We will have general leave for everybody. 

Dr. PAUL. Thank you. 

The CHAIRMAN. And Chairman Bernanke’s full remarks will be 

submitted as well. 

Dr. PAUL. Welcome to the hearing this morning, Chairman 

Bernanke. Obviously, the world, and especially we in this country, 

have come to realize that we are facing a financial crisis, and I 

think very clearly it is worldwide. That of course is the first step 

in looking toward solutions, but I would like to remind the committee and others that there were many who anticipated this not 

a year or two ago when the crisis became apparent, but actually 

10-plus years ago when this was building. 

The problem obviously is in—the major problem is obviously in 

the subprime market, but, you know, in the last—in one particular 

decade, there was actually an increase, in $8 trillion worth of value 

in our homes, and people interpreted this as real value, and $3 trillion was taken out and spent. So we do live in an age which is 

pushed by excessive credit, and I think that is where our real culprit is. 

But traditionally, when an economy gets into trouble, and they 

have inflation or an inflationary recession, the interpretation is always that there is not enough money. We can’t afford this, we can’t 

afford that. And the politics and the emotions are designed to continue to do the same thing that was wrong, that caused our problem in the first place; that is, it looks like we don’t have enough 

money. So, what does the Congress do? They appropriate $170 billion and they push it out in the economy and think that’s going to 

solve the problem. We don’t have the $170 billion, but that doesn’t 

matter. We can borrow it or we can print it, if need be. 

But then again, the financial sector puts pressure on the Fed to 

say, well, there’s not enough credit. What we need to do is expand 

credit. But what have we been doing for the past 2 years? You 

know, it used to be that we had a measurement of the total money 

supply, which I found rather fascinating, and still a lot of people 

believe it’s a worthwhile figure to look at, and that is M3. Two 

years ago, the M3 number was $10.3 trillion. Today it is $14.6 trillion. In just 2 years, there has been an increase in the total money 

supply of $4.3 trillion. 

Well, obviously, if you pump that much money into the economy 

and we’re not producing, but the money we spend comes out of borrowed money against houses, where the housing prices are going 

down, and that is interpreted as increasing our GDP, I mean, it 

just doesn’t make any sense to come back and put more pressure 

on the Congress and on the Fed to say what we need is more inflaVerDate 0ct 09 2002 17:27 May 30, 2008 Jkt 041184 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\41184.TXT TERRIE
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tion. Inflation is the problem. That has caused the distortion. That 

has caused the malinvestment, and that is why the market is demanding the correction in the malinvestment and the excess of 

debt which is not market-driven. 

The CHAIRMAN. The Chair will announce the procedure for questions. There is obviously a great deal of interest in questioning the 

Chairman, or making speeches to him. And what we will do since 

we have a larger committee than any of us wanted, except perhaps 

for the most junior members, we will begin— 

Mr. BACHUS. —with an opening statement, his opening statement? 

The CHAIRMAN. Yes, but I’m going to just announce the procedures before we get to that. We are going to have the members’ 

questions after the statement in order of seniority on our side. We 

will pick up at the next hearing later in the year where we left off. 

The minority is apparently also going to be doing that, so we’re 

going to begin with some members who weren’t able on their side 

to talk later, and then we will go in their order. 

The Chairman has given us 3 hours, and we appreciate it. I am 

going to have to hold members pretty closely to the 5-minute rule. 

Any last thought when the 5-minute bell hits can be completed, but 

fairly quickly, because we do have all this interest. 

And with that, Mr. Chairman, please. 

Mr. BERNANKE. Thank you, Chairman Frank, Ranking Member 

Bachus, and other members of the committee. I am pleased to 

present the Federal Reserve’s monetary policy to Congress. 

Mr. WATT. Mr. Chairman, we are having a little trouble hearing 

down— 

The CHAIRMAN. Could you pull the microphone closer? 

Mr. BERNANKE. How’s that? In my testimony this morning, I will 

briefly review the economic situation. Is that okay, Mr. Chairman? 

Mr. BACHUS. I would just pull it a lot closer. 

STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Mr. BERNANKE. Okay. In my testimony this morning, I will briefly review the economic situation and outlook, beginning with developments in real activity and inflation, and then turn to monetary 

policy. I will conclude with a quick update on the Federal Reserve’s 

recent actions to help protect consumers in their financial dealings. 

The economic situation has become distinctly less favorable since 

the time of our July report. Strains in financial markets, which 

first became evident late last summer, have persisted, and pressures on bank capital and the continuing poor functioning of markets for securitized credit have led to tighter credit conditions for 

many households and businesses. 

The growth of real gross domestic product held up well through 

the third quarter despite the financial turmoil, but it has since 

slowed sharply. Labor market conditions have similarly softened, 

as job creation has slowed and the unemployment rate, at 4.9 percent in January, has moved up somewhat. 

Many of the challenges now facing our economy stem from the 

continuing contraction of the U.S. housing market. In 2006, after 

7

a multiyear boom in residential construction and house prices, the 

housing market reversed course. Housing starts and sales of new 

homes are now less than half of their respective peaks, and house 

prices have flattened or declined in most areas. Changes in the 

availability of mortgage credit amplified the swings in the housing 

market. 

During the housing sector’s expansion phase, increasing lax lending standards, particularly in the subprime market, raised the effective demand for housing, pushing up prices and stimulating construction activity. As the housing market began to turn down, however, the slump in subprime mortgage originations, together with 

the more general tightening of credit conditions, has served to increase the severity of the downturn. Weaker house prices in turn 

have contributed to the deterioration in the performance of mortgage-related securities and reduced the availability of mortgage 

credit. 

The housing market is expected to continue to weigh on economic 

activity in coming quarters. Home builders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace 

of their building activity further, which will subtract from overall 

growth and reduce employment in residential construction and in 

closely related industries. 

Consumer spending continued to increase at a solid pace through 

much of the second half of 2007, despite the problems in the housing market, but it appears to have slowed significantly toward the 

end of the year. The jump in the price of imported energy, which 

eroded real incomes and wages, likely contributed to the slowdown 

in spending, as did the declines in household wealth associated 

with the weakness in house prices and equity prices. 

Slowing job creation is yet another potential drag on household 

spending, as gains in payroll employment averaged little more than 

40,000 per month during the 3 months ending in January, compared with an average increase of almost 100,000 per month over 

the previous 3 months. However, the recently enacted fiscal stimulus package should provide some support for household spending 

during the second half of this year and into next year. 

The business sector has also displayed signs of being affected by 

the difficulties in the housing and credit markets. Reflecting a 

downshift in the growth of final demand and tighter credit conditions for some firms, available indicators suggest that investment 

in equipment and software will be subdued during the first half of 

2008. Likewise, after growing robustly through much of 2007, nonresidential construction is likely to decelerate sharply in coming 

quarters as business activity flows and funding becomes harder to 

obtain, especially for more speculative projects. 

On a more encouraging note, we see few signs of any serious imbalances in business inventories, aside from the overhang of unsold 

homes. And, as a whole, the nonfinancial business sector remains 

in good financial condition with strong profits, liquid balance 

sheets, and corporate leverage near historic lows. 

In addition, the vigor of the global economy has offset some of 

the weakening of domestic demand. U.S. real exports of goods and 

services increased at an annual rate of about 11 percent in the second half of last year, boosted by continuing economic growth 

8

abroad and the lower foreign exchange value of the dollar. 

Strengthening exports, together with moderating imports, have in 

turn led to some improvement in the U.S. current account deficit, 

which likely narrowed in 2007 on an annual basis for the first time 

since 2001. 

Although recent indicators point to some slowing of foreign 

growth, U.S. exports should continue to expand at a healthy pace 

in coming quarters, providing some impetus to domestic economic 

activity and employment. 

As I have mentioned, financial markets continue to be under considerable stress. Heightened investor concerns about the credit 

quality of mortgages, especially subprime mortgages with adjustable interest rates, triggered the financial turmoil. However, other 

factors, including a broader retrenchment in the willingness of investors to bear risk, difficulties in valuing complex or illiquid financial products, uncertainties about the exposures of major financial 

institutions to credit losses, and concerns about the weaker outlook 

for economic growth, have also roiled the financial markets in recent months. 

To help relieve the pressures in the market for interbank lending, the Federal Reserve, among other actions, recently introduced 

a term auction facility through which pre-specified amounts of discount window credit are auctioned to eligible borrowers. And we 

have been working with other central banks to address market 

strains that could hamper the achievement of our broader economic 

objectives. These efforts appear to have contributed to some improvement in short-term funding markets. We will continue to 

monitor financial developments closely. 

As part of its ongoing commitment to improving the accountability and public understanding of monetary policymaking, the 

Federal Open Market Committee, or FOMC, recently increased the 

frequency and expanded the content of the economic projections 

made by Federal Reserve Board members and Reserve Bank presidents and released to the public. The latest economic projections, 

which were submitted in conjunction with the FOMC meeting at 

the end of January, and which are based on each participant’s assessment of appropriate monetary policy, show that real GDP was 

expected to grow only sluggishly in the next few quarters, and that 

the unemployment rate was seen as likely to increase somewhat. 

In particular, the central tendency of the projections was for real 

GDP to grow between 1.3 percent and 2.0 percent in 2008, down 

from 2.5 percent to 2.75 percent as projected in our report last 

July. FOMC participants’ projections for the unemployment rate in 

the fourth quarter of 2008 have a central tendency of 5.2 percent 

to 5.3 percent, up from the level of about 4.75 percent projected last 

July for the same period. 

The downgrade in our projections for economic activity in 2008 

since our report last July reflects the effects of the financial turmoil on real activity and a housing contraction that has been more 

severe than previously expected. 

By 2010, our most recent projections show output growth picking 

up to rates close to or a little above its longer-term trend, and the 

unemployment rate edging lower. The improvement reflects the efVerDate 0ct 09 2002 17:27 May 30, 2008 Jkt 041184 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\41184.TXT TERRIE
9

fects of policy stimulus and an anticipated moderation of the contraction in housing and the strains in financial and credit markets. 

The incoming information since our January meeting continues 

to suggest sluggish economic activity in the near term. The risks 

to this outlook remain to the downside. Those risks include the possibilities that the housing market or the labor market may deteriorate more than is currently anticipated, and that credit conditions 

may tighten substantially further. 

Consumer price inflation has increased since our previous report, 

in substantial part because of the steep run-up in the price of oil. 

Last year food prices also increased significantly, and the dollar depreciated. Reflecting these influences, the price index for Personal 

Consumption Expenditures increased by 3.4 percent over the four 

quarters of 2007, up from 1.9 percent in 2006. Core price inflation, 

that is, inflation excluding food and energy prices, also firmed toward the end of the year. The higher recent readings likely reflected some pass-through of energy costs to the prices of consumer 

goods and services, as well as the effect of the depreciation of the 

dollar and import prices. 

Moreover, core inflation in the first half of 2007 was damped by 

a number of transitory factors; notably, unusually soft prices for 

apparel and for financial services, which subsequently reversed. 

For the year as a whole, however, core PCE prices increased by 2.1 

percent, down slightly from 2006. 

The projections recently submitted by FOMC participants indicate that overall PCE inflation was expected to moderate significantly in 2008, to between 2.1 percent and 2.4 percent, the central 

tendency of the projections. A key assumption underlying those 

projections was that energy and food prices would begin to flatten 

out, as was implied by quotes on futures markets. In addition, diminishing pressure on resources is also consistent with the projected slowing in inflation. 

The central tendency of the projections for core PCE inflation in 

2008 at 2.0 percent to 2.2 percent was a bit higher than in our July 

report, largely because of some higher-than-expected recent readings on prices. Beyond 2008, both overall and core inflation were 

projected to edge lower as participants expected inflation expectations to remain reasonably well anchored and pressures on resource utilization to be muted. 

The inflation projection submitted by FOMC participants for 

2010, which range from 1.5 percent to 2.0 percent for overall PCE 

inflation, were importantly influenced by participants’ judgments 

about the measured rates of inflation consistent with the Federal 

Reserve’s dual mandate, and about the timeframe over which policy 

should aim to attain those rates. 

The rate of inflation that is actually realized will of course depend on a variety of factors. Inflation could be lower than we anticipate if slower-than-expected global growth moderates the pressure on the prices of energy and other commodities, or if rates of 

domestic resource utilization fall more than we currently expect. 

Upside risks to the inflation projection are also present, however, 

including the possibilities that energy and food prices do not flatten 

out, or that the pass-through to core prices from higher commodity 

10

prices and from the weaker dollar may be greater than we anticipate. 

Indeed, the further increases in prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggests slightly greater upside risks to the projections of both overall and core inflation than we saw last month. 

Should high rates of overall inflation persist, the possibility also exists that inflation expectations could become less well anchored. 

Any tendency of inflation expectations to become unmoored, or 

for the Fed’s inflation-fighting credibility to be eroded, could greatly complicate the task of sustaining price stability and could reduce 

the flexibility of the FOMC to counter shortfalls in growth in the 

future. Accordingly, in the months ahead, the Federal Reserve will 

continue to monitor closely inflation and inflation expectations. 

Let me turn now to the implications of these developments for 

monetary policy. The FOMC has responded aggressively to the 

weaker outlook for economic activity, having reduced its target for 

the Federal funds rate by 225 basis points since last summer. As 

the committee noted in its most recent post-meeting statement, the 

intent of those actions has been to help promote moderate growth 

over time and to mitigate the risk to economic activity. 

A critical task for the Federal Reserve over the course of this 

year will be to assess whether the stance of policy is properly calibrated to foster our mandated objectives of maximum employment 

and price stability in an environment of downside risk to growth, 

stressed financial conditions, and inflation pressures. 

In particular, the FOMC will need to judge whether the policy 

actions taken thus far are having their intended effects. Monetary 

policy works with a lag. Therefore, our policy stance must be determined in light of the medium-term forecast of real activity and inflation as well as the risks to that forecast. Although the FOMC 

participants’ economic projections envision an improving economic 

picture, it is important to recognize that downside risks to growth 

remain. The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance 

against downside risks. 

Finally, I would like to say a few words about the Federal Reserve’s recent actions to protect consumers in their financial transactions. In December, following up on a commitment I made at the 

time of our last report in July, the Board issued for public comment 

a comprehensive set of new regulations to prohibit unfair or deceptive practices in the mortgage market under the authority granted 

us by the Home Ownership and Equity Protection Act of 1994. 

The proposed rules would apply to all mortgage lenders and 

would establish lending standards to help ensure that consumers 

who seek mortgage credit receive loans whose terms are clearly disclosed and that can reasonably be expected to be repaid. 

Accordingly, the rules would prohibit lenders from engaging in a 

pattern or practice of making higher priced mortgage loans without 

due regard to consumers’ ability to make the scheduled payments. 

In each case, a lender making a higher priced loan would have to 

use third-party documents to verify the income relied on to make 

the credit decision. For higher priced loans, the proposed rules 

11

would require the lender to establish an escrow account for the 

payment of property taxes and homeowners insurance, and would 

prevent the use of prepayment penalties in circumstances where 

they might trap borrowers in unaffordable loans. 

In addition, for all mortgage loans, our proposal addresses misleading and deceptive advertising practices, requires borrowers and 

brokers to agree in advance on the maximum fee that the broker 

may receive, and certain practices by servicers that harm borrowers and prohibits coercion of appraisers by lenders. We expect 

substantial public comment on our proposal, and we will carefully 

consider all information and viewpoints while moving expeditiously 

to adopt final rules. 

The effectiveness of the new regulations, however, will depend 

critically on strong enforcement. To that end, in conjunction with 

other Federal and State agencies, we are conducting compliance reviews of a range of mortgage lenders, including nondepository lenders. The agencies will collaborate in determining the lessons 

learned and in seeking ways to better cooperate in ensuring effective and consistent examinations of, and improved enforcement for, 

all categories of mortgage lenders. 

The Federal Reserve continues to work with financial institutions, public officials and community groups around the country to 

help homeowners avoid foreclosures. We have called on mortgage 

lenders and servicers to pursue prudent loan workouts, and have 

supported the development of streamlined, systematic approaches 

to expedite the loan modification process. 

We have also been providing community groups, counseling agencies, regulators and others with detailed analyses to help identify 

neighborhoods at high risk for foreclosures so that local outreach 

efforts to help troubled borrowers can be as focused and as effective 

as possible. We are actively pursuing other ways to leverage the 

Federal Reserve’s analytical resources, regional presence, and community connections to address this critical issue. 

In addition to our consumer protection efforts in the mortgage 

area, we are working towards finalizing rules under the Truth in 

Lending Act that will require new, more informative, and consumer-tested disclosures by credit card issuers. Separately, we are 

actively reviewing potentially unfair and deceptive practices by 

issuers of credit cards. Using the Board’s authority under the Federal Trade Commission Act, we expect to issue proposed rules regarding these practices this spring. 

Thank you. I would be very pleased to take your questions. 

[The prepared statement of Chairman Bernanke can be found on 

page 53 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Chairman. Let me just announce 

to members, we have one vote apparently on a procedural matter. 

We will break for that vote, and members who want to start going 

back—leaving now and coming back, we want to minimize the disruption. We are going to ask the Chairman to give us a few more 

minutes, but we are going to move promptly. I will ask my questions and then we may get in one more set. Members who want to 

can go and come back, and we may preserve continuity. 

Mr. Chairman, I have been here—it’s my 28th year, and it’s 

taken me that long to hear the following words, I think, from a 

12

Federal Reserve Chairman, ‘‘Finally, I would like to say a few 

words about the Federal Reserve’s recent actions to protect consumers in their financial transactions.’’ That is a very significant 

change for the better, and it’s particularly relevant, because it is 

the absence of this kind of approach that brought us to where we 

are today. 

You outlined things that you were doing under the Home Ownership and Equity Protection Act, and you correctly noted it was 

passed in 1994. It has taken until your chairmanship for this to be 

done, and I think we are seeing—and I don’t ask you to comment 

on this—a reversal. I found Mr. Greenspan’s response in the 1990’s 

on monetary policy to be a very thoughtful one, when he resisted 

those who said as unemployment dropped below 5 percent and 

down into 3.9 percent, that somehow that automatically meant inflation. He resisted that. He was quite correct. 

But in another area, I think he erred, and that is his view that 

regulation was almost never required. And when you have no regulation whatsoever, what the Chairman, your predecessor, often told 

us was that I have two options, whether it was the stock market 

effervescence or exuberance, whether it was the subprime, I can either deflate the entire economy or I can let the problems continue. 

I appreciate that in two areas you have mentioned today, and we 

aren’t going to obviously to agree on all the specifics, you have gone 

beyond that. And I think, as I said, that is essential. 

I note you say to reinforce the point about this being a very different kind of a recession—or going to be a recession. I don’t want 

to impute to you the view that we’re in a recession because I’m not 

going to be responsible for the nervous people at the stock market 

who overreact when you twitch your nose. So—but the problems we 

now have are different. And as you note, there is no inventory overhang. What is interesting is, as you note, the extent to which the 

rest of the economy is in pretty good shape, but the regulatory failures and the consequent abuses have caused this very broad-scale 

problem. As you say at the bottom of page 2, we see very few signs 

of any serious imbalances in business inventories aside from 

houses. As a whole, the nonfinancial business sector remains in 

good financial condition. 

That makes this an unusual economic problem. It puts constraints on your ability to deal with it, and it makes it clear, we 

cannot either deal with the current problem or deal with a potential repetition without getting into sensible regulation. So we look 

forward to working with you in that regard. 

I also appreciate your reiterating the importance of worrying 

about the downside in unemployment. As you note, the central 

tendency is 5.2 to 5.3 percent, and you are then talking sensibly 

about downside risks being more likely to that. In other words, 

we’re talking about edging back up close to 6 percent unemployment. If 5.3 percent is the central tendency, and the downside risks 

in employment are the greater ones, then we have to very careful. 

So let me now just finally say, and I don’t ask you to comment 

on what I said, but going forward, what is your view—you have 

talked about the problems with what you have called the originate 

to distribute model. Is that an area in which working together you 

think that regulators, the Congress need to adopt—is it possible for 

13

us to come up with rules that can preserve the great benefits of 

securitization and give us a better chance of diminishing the 

abuses? 

Mr. BERNANKE. Yes, Mr. Chairman. I think the originate to distribute model and securitization have a lot of value. It allows borrowers to have essentially direct access to capital markets, but the 

recent experience shows we need to do some work on it, both the 

private sector and in collaboration with supervisors and regulators. 

We need to have more responsibility and accountability at the point 

of origination. We need to have better information and clarity 

about what securitized products contain. If we do those things, I 

think we can restore this market. But for the moment, as you 

know, it’s very dysfunctional. 

The CHAIRMAN. Well, I appreciate that. Because one of the points 

you mention, one of the problems we have now is the lack of confidence on the part of investors. And I think this is the case, as I 

think was the case with much of Sarbanes-Oxley, everybody agrees 

on, I think, almost all of it, appropriate rules can be pro-market, 

because they can instill in investors a confidence that they otherwise didn’t have. We have a kind of an investors’ strike now. We 

have, as we’re going to talk about next week, municipalities offering 100 percent guarantees, in my judgment, full faith and credit 

general obligation bonds, paying an unfair risk premium. So, it 

does seem to me that if we work together, we can give the investors 

more confidence, and that’s part of getting us back into the operation. Would you comment on that? 

Mr. BERNANKE. Well, I certainly agree that we need to work together, that regulators are trying to evaluate what we’ve learned 

from this experience and trying to see what we can do better in the 

future. Industry is doing the same thing. We want to make sure 

that any rules and regulations we adopt are wise and achieve their 

objectives and don’t impose excessive costs. But clearly, we want to 

look back at this experience and try to learn what the lessons are. 

The CHAIRMAN. Thank you, Mr. Chairman. The gentlewoman 

from Illinois. 

Mrs. BIGGERT. Thank you, Chairman Bernanke, for your continued efforts to keep our economy growing. And I’d like to thank you 

for the Federal Reserve’s thorough analysis of the debt level of the 

American families and for promulgating rules relating to high cost 

mortgages and credit cards. 

As you know, this committee continues to address issues related 

to the mortgages and to the credit cards, and I have concerns about 

some of the legislation before this committee that may cause a further tightening in the credit market. So I would like to just ask you 

a couple of questions based on credit cards. And based on the Fed’s 

recent surveys and studies, what do consumers need to know to 

make informed decisions about their credit cards? 

And could you just describe briefly the Regulation Z and what 

you believe it will do to help consumers better understand the 

terms of their credit card agreements? And when do you anticipate, 

I think you said this spring, that the regulation will be finalized? 

And, finally, can you discuss actions that the Fed plans to take and 

when to crack down on unfair and deceptive practices of bad actors 

in the credit card industry? In 2 minutes, probably. 

14

Mr. BERNANKE. Yes, I will. The Reg Z regulations are still out 

for comment. We are receiving comments, which we are going to review very carefully. But the intent of Reg Z was to provide clearer 

disclosure so people could understand what their credit card account involved. In particular, we have created a new Schumer Box, 

as it is called. It has new information about fees and penalties and 

provides more information to the consumer about the terms and 

conditions of their account. 

In addition, we propose to lengthen the period of time over which 

a consumer must receive notice before there is a change in terms 

of their credit card. These disclosures have been consumer tested. 

We have used companies to go out and use actual consumers to see 

what works, how much they recall, how much they understand. 

And we think there will be a substantial improvement in terms of 

allowing people to understand what is involved in their credit card 

accounts. 

We are beginning, as I mentioned, to look at some practices 

under the Unfair and Deceptive Acts and Practices rules. We anticipate setting out a proposal for comments within a couple of 

months, this spring, to address some issues that the disclosure 

rules themselves cannot address. The final release of both sets of 

rules will probably take place later this year. If possible, to minimize burden on the industry, would be to release the Reg Z disclosures and the new rules on unfair and deceptive acts and practices 

at about the same time, if possible. So I don’t have a specific date 

yet for that release. 

Mrs. BIGGERT. My concern is always that sometimes what we do 

would restore credit, or make it impossible for consumers to have 

the credit if it is limited. So it would make all consumers, not just 

the ones who are having the credit problems, have to take responsibility for the payments in that effect would restore credit. Do you 

think the things that you are doing will have any effect on that? 

Mr. BERNANKE. We are very sensitive—both in the credit card 

rules and also in the mortgage rules—that these markets are important. We don’t want to create a chilling effect. We don’t want 

to shut down these markets. We just want them to work better 

and, in particular, we think it’s important for consumers to have 

a better understanding of what it is they’re buying when they purchase products in these markets. 

Mrs. BIGGERT. If you had to say two things, what would consumers need to know to make informed decisions, would be the 

most important? 

Mr. BERNANKE. Well, they certainly need to know the interest 

rate and how it varies over time and what that means to them in 

terms of payments. And they also need to understand other kinds 

of penalties or other fees that might occur if they violate certain 

conditions or other things occur. So they need to have a good understanding, not only of how they use a credit card for example, 

but also what the cost might be so they can make an informed 

judgment. 

Mrs. BIGGERT. Thank you. I yield back. 

The CHAIRMAN. Mr. Kanjorski has gone to vote and is on his way 

back. I am going to go vote now, so we may have a break of less 

than 3 or 4 minutes. 

15

As soon as he comes back, he will resume the questions. And I 

am assured this is the only vote until 4 p.m., so you will be out 

of here before this happens again. 

[Recess] 

Mr. KANJORSKI. [presiding] The committee will come to order. 

Mr. Chairman, we now have the opportunity to seize control of 

this committee and do as we will. So, we should get started on all 

the serious problems that face us. Now, I am going to take my 

questions now so that we can save your time and the committee’s 

time to get to the precious facts. 

Mr. Chairman, I listened to your statement in regard to your 

plans to correct some of the foibles within the subprime mortgage 

market, how we deal with reserving money for taxes, etc. As you 

know, this committee has sent and passed through the House a 

subprime bill that contains as a portion of it my bill or all of my 

bill, which deals with appraisals, deals with escrow reserve accounts, etc., and greater servicing powers on lenders. 

Yesterday—I think it was yesterday—I had the opportunity to 

talk with Attorney General Cuomo in New York. He has apparently entered into an agreement with Fannie Mae and Freddie 

Mac, not quite to the level of our legislation, but in the area of 

tightening up the rules and regulations on appraisals. He tells me 

that they were sort of inhibited from moving through with the 

agreement because some of the Federal regulators have not given 

their approval. 

He particularly cited, of course, the regulator for Fannie Mae and 

Freddie Mac. I then proceeded to call and ask him. I do not understand the concern. He said that he is going to look into it within 

the next week, and get back to me with a response. I think he intended to talk to you, as a principal regulator of the banks, and to 

others. I would appreciate it if you would really look at that matter. I think your proposed regulations are very good, and our bill 

is very good. 

But, if in the meantime we can get an agreement with the people 

who write 83 percent of the mortgages in this country, Fannie Mae 

and Freddie Mac, it would seem to me that we would go a long way 

in stemming some of the problems that we are having in the marketplace. Even though that agreement would fast be surpassed by 

your regulations or our legislation, I do not think that we should 

be particularly egotistic about whose idea is implemented or put 

forth. I think we ought to just try and work surgically to stop these 

problems. Do you agree? 

Mr. BERNANKE. Well, you know, I hope that our regulations are 

going to take a good, positive step. I am not familiar with all the 

details of the Cuomo/Fannie agreement. I am in close communication with Mr. Lockhart, the regulator. And I continue to discuss 

issues with him, but I can’t really comment on that specific proposal. 

Mr. KANJORSKI. Well, of course, I am interested. Your regulations 

will take months to clear all the barriers, get all the comments, 

will it not? 

Mr. BERNANKE. No, sir. I think we will have those out before I 

appear before you again in July. 

16

Mr. KANJORSKI. Before July? I think July is months away. Is 

that right? 

Mr. BERNANKE. Yes, sir. 

Mr. KANJORSKI. Now, there is this other thing, you know, that 

I am a little disturbed about, and, to be honest, I have not totally 

lost faith in the regulators, but I am starting to. As Mr. Frank indicated, it seems to me, all of us should look at some introspection 

here and maybe take some responsibility—I do not want to say 

blame or fault—for the problem we are in right now. But, certainly 

we did not quite fulfill our functions. 

In August, when there was a breakdown in the securitized market on subprime loans, I was led to believe by regulators in the Executive Branch that they thought everything was pretty much 

tightened up and most of all that we would not have a cross-contamination into other securities markets and other problems, and 

that it was going to be put back together and we would not see 

that. 

Then in December, of course, other thunderish shocks hit us, 

more came in January, and now it seems weekly that some financial entity that we have all relied on that would not be subjected 

to these crash problems now is. For example, just 2 weeks ago, it 

was the student loan bonds that were not selling. Last week, it was 

the auction rate securities that failed and jumped from 4 percent 

to 20 percent, in some cases. This week it is the variable rate demand notes that are failing to have a market because the banks 

will not come in and play their role of specialist and provide that 

market. 

Would you say that this would represent in the credit market a 

metastization of the problem, that it has spread and it is spreading 

rather wildly and quickly, and that we should come up with some 

game plans to do something other than the stimulus demand that 

we had out there 2 or 3 weeks ago? 

Mr. BERNANKE. Well, Congressman, as I mentioned in my testimony, the subprime problem was a trigger for all this, but there 

were other things that then began to kick in, including a pull-back 

from risk taking, concerns about valuation of these complex products, issues about liquidity and so on which, as you say, caused the 

problem to spread throughout the system. 

Right now, we are looking at solutions. The Federal Reserve, for 

example, is engaging in this lending process trying to reduce the 

pressure in the short-term money markets. I think, very importantly, the private sector has a role to play. I would encourage, for 

example, banks to continue to raise capital so they would be well 

able to continue to lend. They also need to increase transparency, 

to provide more information to the markets so the market could 

begin to understand what these assets are and what the balance 

sheets look like. 

Mr. KANJORSKI. On that point, Mr. Chairman, wasn’t it quite 

clear to the Federal Reserve that maybe we didn’t have the transparency in all these securities that were broken into various 

tranches? It seems to me, 6 months later, that most banks still 

don’t know what their exposures are. Wasn’t that apparent to the 

regulators? Maybe we should have come forth with some regulatory 

authority to require these things be broken out in inventories? 

17

I have to tell you I am astounded that major banks in this country and around the world are still saying we do not know what our 

exposure is. That is sort of scary to me. They backed it up periodically on a month-to-month basis coming out and announcing more 

failures on their part and more losses than they had anticipated. 

When will we get to the endpoint? What do we have to do? 

Doesn’t the Federal Reserve, the present regulator, have enough 

authority to demand that nothing be done that’s so clouded that 

you can’t understand what your obligation would be or quickly 

come up with what your exposure would be? Don’t we have the capacity to do that? 

Mr. BERNANKE. Well, there were two sets of issues in this case. 

The first was that many investors took the credit rating agencies 

ratings as all the information they needed. They didn’t do initial 

analysis, so they just looked at the rating. They didn’t look at what 

was in these structured credit products. We are now looking at that 

situation much more carefully. The credit rating agencies are reviewing their own procedures. And, clearly, investors now understand they need to look at more details than just the credit rating. 

Another issue is that with the markets being relatively illiquid—

in many cases quite illiquid—it can be very hard to evaluate what 

even a straightforward mortgage is worth. With the economy 

changing, with mortgages and other assets not trading on a liquid 

market, it makes it more difficult for the banks to evaluate what 

their holdings are and that’s a problem going forward. 

Going forward, the approaches, I think, involve working with the 

SEC and the accounting authorities and so on to try to find better 

ways of disclosure, more transparent approaches to disclosure, and 

also to take measures to ensure this drying up of liquidity doesn’t 

happen again. There’s enough liquidity in markets so that price 

discovery can take place and we can value what these assets are 

worth. 

Mr. KANJORSKI. Thank you very much, Mr. Chairman. 

I note that I ran away with my time. The chairman is about to 

come and remove me physically from the chair. Let me recognize 

Mr. Miller. 

Mr. MILLER OF CALIFORNIA. Thank you very much. It’s good to 

have you here again. If you’d like to say something really good 

about the economy, those stockholders would really love it. 

But, short of that, I remember the first time you testified. My 

questions were associated with the housing market, and there 

didn’t tend to be that big a concern back then, but I think things 

have changed. And we’ve tried to do a lot from our side raising, 

conforming in high cost areas and GSEs and FHA. And you’ve lowered the basis points about 225 basis points to try to stimulate the 

economy. 

It has done a good job of lowering cost of funds to lenders, but 

from mid-January, we are looking at the opposite when it comes to 

mortgage rates to people who wanted to buy a house. They 

shouldn’t be going up. 

Could you address that? 

Mr. BERNANKE. Well, mortgage rates are down some from before 

this whole thing began. But we have a problem, which is that the 

spreads between, say, Treasury rates and lending rates are widVerDate 0ct 09 2002 17:27 May 30, 2008 Jkt 041184 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\41184.TXT TERRIE
18

ening, and our policy is essentially, in some cases, just offsetting 

the widening of the spreads, which are associated with various 

kinds of illiquidity or credit issues. 

So in that particular area, you are right. It has been more difficult to lower long-term mortgage rates through Fed action. We 

are able, of course, to lower short-term rates and they do have implications. For example, resets of existing mortgages affect the ability of banks and others to finance their holdings of assets. So I 

think we still have power to influence the housing market in the 

broader economy, but your points are well taken. A lot of what we 

have done has been mostly just to offset the tightening of credit 

that has arisen because of the financial situation. 

Mr. MILLER OF CALIFORNIA. I am looking at lending since about 

January 24th has raised about 56 basis points to the consumer. 

Yet, your cost to the lenders are down considerably based on what 

CDs are being, you know, sold out today, and such. 

Mr. BERNANKE. That’s true for even the conforming mortgages 

like Fannie and Freddie mortgages. 

Mr. MILLER OF CALIFORNIA. Do you see a benefit and a help to 

the industry? I do in what we have done in raising and confirming 

in high cost areas there, but people couldn’t get lower-rated GSEs 

when they sell their home or they’re buying a home than they 

could before. 

What impact do you see that having in the long term? 

Mr. BERNANKE. In the jumbo? 

Mr. MILLER OF CALIFORNIA. Yes, us being able to get a Freddie 

and Fannie at the $700,000 range. 

Mr. BERNANKE. Well, I think we are going to have to see. It is 

going to take a bit of time for them to get geared up to accept those 

kinds of mortgages, and there has been a ruling by the bond association that they can only securitize those jumbo mortgages in separate instruments and not mix them in with the conforming mortgages. And that will perhaps reduce the liquidity. 

So it remains unclear how much benefit will come from this; 

however, my understanding is that Fannie and Freddie are committed to doing a significant amount of securitization of these 

jumbo mortgages. And we would certainly encourage them to raise 

capital to allow them to do more and to securitize more of both conforming and jumbo securities. Of course, at the same time, I hope 

that Congress will continue to push forward on getting a comprehensive reform that will make these entities safe and sound for 

the future. 

Mr. MILLER OF CALIFORNIA. Yes. On January 17th, you presented your near-term economic outlook to the House Budget Committee. In that outlook you indicated the future market suggests 

the new prices will decelerate over the coming year. However, since 

then, all prices have reached record highs in nominal terms. 

If oil continue to remain at its current levels, thereby adding further pressure on the overall inflation, it may be more difficult for 

the Feds to cut interest rates; and, if that were the case, what option do you have beyond cutting interest rates? 

Mr. BERNANKE. Well, the oil prices rose in 2007 by almost twothirds. It was an enormous increase and put a lot of pressure, obviVerDate 0ct 09 2002 17:27 May 30, 2008 Jkt 041184 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\41184.TXT TERRIE
19

ously, directly on energy products and is also feeding through into 

air fares and other energy intensive goods and services. 

Oil prices are very volatile. They’ve moved around a lot in the 

last month or so, but the end-of-year futures markets have oil 

prices about $95. Oil prices don’t have to come down to reduce inflation pressure; they just have to flatten out. 

Mr. MILLER OF CALIFORNIA. But if they don’t flatten out? 

Mr. BERNANKE. Well, if they continue to rise at this pace it is 

going to create a very difficult problem for our economy, because 

on the one hand it is going to generate more inflation, as you describe, but it is also going to create more weakness because it is 

going to be like a tax. It is extracting income from American consumers. So if that happens, it will be a very tough situation. We 

are going to have to make judgments looking at the risk to both 

sides of our mandate and make those judgments at that time. 

But I think it is relatively unlikely that we will see the same 

kinds of enormous increases in energy prices this year that we 

have seen in 2007. 

Mr. MILLER OF CALIFORNIA. So you feel confident your projection 

of a decrease in the long-term throughout the year will come true; 

that you project this point that you see oil decreasing as the year 

progresses? 

Mr. BERNANKE. Well, we don’t know what oil prices are going to 

do. It depends a lot on global conditions, on demand around the 

world. It also depends on suppliers, many of which are politically 

unstable or in politically unstable regions or have other factors that 

affect their willingness and ability to supply oil. 

So there’s a lot of uncertainty about it, but our analysis combined 

with what we can learn from the futures market suggests that we 

should certainly have much more moderate behavior this year than 

we have. But, again, there’s a lot of uncertainty around that estimate. 

The CHAIRMAN. The gentlewoman from New York, the chair of 

the Financial Institutions Subcommittee. The gentlewoman from 

New York? 

Mrs. MALONEY. It’s my turn? 

The CHAIRMAN. The gentleman from Illinois. We will get back to 

you. Sorry. 

Mr. GUTIERREZ. Let me just follow up. So over the last 6 months, 

you have taken actions to reduce the cost of money, and in January, I called my daughter and told her to go and get a mortgage 

around the 15th. I think I gave her good advice, Mr. Chairman. I 

said go and lock it in for as long as you can. She is going to buy 

her first home. Because it was like 51⁄2 percent, and I said, ‘‘Now 

is the time, honey.’’ 

And then I checked the Wall Street Journal and it’s like 6.38 percent. What happened? I’m sorry, I didn’t quite—if money costs 

less—if the money is cheaper—why are mortgages increasing over 

the last, I don’t know, 45 days? 

Mr. BERNANKE. Well, again, I don’t necessarily want to try to explain fluctuations over short periods of time; financial markets 

move back and forth. But a couple of things have happened. There 

has been some back-up in longer-term Treasury rates—the safe 

long-term rates. But, again, I think a big part of the story is that 

20

even as the Fed has lowered interest rates, and as the general pattern of interest rates has declined, the pressures in the credit markets have caused greater and greater spreads, particularly for risky 

borrowers. 

And that to some extent—I would say not entirely by any 

means—offset the effects of our easing. Our easing is intended in 

some sense to respond to this tightening of credit conditions, and, 

I believe we have succeeded in doing that. But there certainly is 

some offset that comes from widening spreads, and this is what’s 

happening in the mortgage market. 

Mr. GUTIERREZ. I just find it—I’m not the economist that you 

and others are—but I just found it so surprising to watch. Because 

it hasn’t had the same kind of relationship in the past as I have 

seen what the Fed does. And then I see what the market does. Because it is very substantial. A 30-year mortgage, I mean, between 

51⁄2 and 61⁄2 percent—it’s huge, a lot bigger than between 41⁄2 and 

51⁄2 percent. The amount of money you pay on a 30-year mortgage 

really is substantial. 

So we will talk some more about how we continue to deal with 

that. I want to take a step back from the macroeconomic discussion 

for a moment and discuss a regulatory issue. As you know, under 

our current regulatory scheme, there is no lead Federal regulator 

to oversee money remitters or the money service business industry. 

What we have is kind of a patchwork of State and Federal regulations. At the Federal level, we have FinCen monitoring money 

laundering reporting requirements in the Federal Trade Commission with jurisdiction over consumer issues. Last year, I held a couple of hearings in my subcommittee with consumer groups and others to weigh in on the issue. 

The consumer groups were unanimous in support for a stronger 

Federal regulatory scheme with a lead regulator. Because of the account discontinuance problem, the industry sees the benefit of having a single-lead regulator, where the stakeholders differ as to 

which regulator should take the lead. 

Most agree the Federal Reserve will play a substantial role, if 

not a lead role, because the Federal Reserve’s ACH system and its 

experience with Director Mexico program. But some have advocated creating a new Federal agency for this purpose. Do you believe the Federal Reserve would be the appropriate lead regulator 

for the remittance industry? If not, why not? And is there an agency that is in a better position to monitor the industry; and, should 

we be looking at creating an entire—or should we be looking at creating entirely? 

Do you think you should lead? Do you think there is a better 

agency? Or do you think we should create something new? Because 

in the hearings it becomes quite clear that financial institutions 

are going to keep backing away, and as they do, it’s going to get 

harder to get money to people who earn less here back to the very 

needy ones who really need it, and every nickel counts. What do 

you think, Mr. Chairman? 

Mr. BERNANKE. Well, as you point out, the money remittances 

are currently regulated by States, by the FTC and so on. And I 

think, as in some other areas, the State regulation varies in terms 

of its aggressiveness and quality. I am not sure the Federal ReVerDate 0ct 09 2002 17:27 May 30, 2008 Jkt 041184 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\41184.TXT TERRIE
21

serve is the right agency. Our expertise is in banking. This is quite 

a different industry, with many small operators. 

We have taken a somewhat different approach, which is to encourage banks and other federally-regulated institutions to offer remittance services and to try to attract people interested in that to 

come into the banking system. The advantage of doing that is, first, 

banks can often offer better, cheaper services. 

But, in addition, people who are ‘‘unbanked’’—that is, they are 

not part of the regular banking system—through this particular 

service may become more comfortable with banks, may begin to 

have a checking account, a savings account, credit and so on. So 

that has been our approach. It is to encourage banks in their own 

interest, and also through CRA motivation and other ways, to try 

to reach out and bring remittances into their operations. 

Mr. GUTIERREZ. Well, let me just suggest that because the 

MoneyGrams, the Western Unions, and the large ones, which have 

many facilities, I agree they should be banked. But in the interim 

period, they have all of these facilities throughout the neighborhoods and they have facilities in the nations which receive the 

money; that is, they have a disbursement level in the nations 

where we should have more conversation about how we take that 

private sector so they are not so fearful anymore as large financial 

institutions won’t back them up but are backing away. 

Mr. BERNANKE. Congressman, it is worth discussion and Congress really needs to think about this. 

The CHAIRMAN. The gentleman from Texas, Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

I want to turn my attention a little bit. You mentioned in your 

testimony a little bit about the dollar and the fact it has increased 

our exports, because American goods are more competitive. But, at 

the same time, it swings the other way in the fact that it raises 

prices. It has an inflationary impact on the American consumer. 

I believe one of the reasons that oil is $100 a barrel today is because of our declining dollar. People settled oil in dollars and I 

think a lot of them have obviously just increased the price of the 

commodity. And so I really have two questions. One is, what do you 

believe the continuing decline of the dollar is? 

What kind of inflationary impact do you think that is going to 

have? And then secondly, as this dollar declines, one of the things 

that I begin to get concerned with is all of these people who have 

all of these dollars have taken a pretty big hickey over the last 

year or so and continue to do that. 

At what point in time do people say, you know, we want to trade 

in dollars and other currencies, and what implication do you think 

then that has on the capital markets in the United States? 

Mr. BERNANKE. Well, Congressman, I always need to start this 

off by saying that the Treasury is the spokesman for the dollar, so 

let me just make that disclaimer. We obviously watch the dollar 

very carefully. It is a very important economic variable. 

As you point out, it does increase U.S. export competitiveness 

and, in that respect, it is expansionary. But it also has inflationary 

consequences, and I agree with you that it does affect the price of 

oil. It has probably less effect on the price of consumer goods or finVerDate 0ct 09 2002 17:27 May 30, 2008 Jkt 041184 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\41184.TXT TERRIE
22

ished goods that come in from out of the country, but it does have 

an inflationary effect. 

Our mandate, of course, is to try to achieve full employment and 

price stability here in the United States, so we look at what the 

dollar is doing. We think about that in the context of all the forces 

that are affecting the economy, and we try to set monetary policy 

appropriately. So, we do not have a target for the dollar. What we 

are trying to do is, given what the dollar is doing, figure out where 

we need to be to keep the economy on a stable path. 

With respect to your other question, there is not much evidence 

that investors or holders of foreign reserves have shifted in any serious way out of the dollar at this point, and, indeed, we have seen 

a lot of flows into U.S. Treasuries, which is one of the reasons why 

the rates on short-term U.S. Treasuries are so low, reflecting their 

safety, liquidity, and general attractiveness to international investors. So we have not yet seen the issue that you are raising. 

Mr. NEUGEBAUER. One of the other questions that I have, and 

just as your thought is, you know, the U.S. economy is based on 

encouraging the consumer to consume as much as he possibly can. 

In fact, the stimulus package that we just passed the other day, 

$160 billion, was really by and large the same to the American people go out and spend. 

And this consumption mentality, away from any kind of a savings mentality, concerns me. That means the economy is always 

going to be a lot more volatile, because there is not much margin. 

And a year ago, people were testifying for this. Don’t worry about 

the low savings rates, because people had these huge equities in 

their homes, so that was compensating for the lack of savings in 

the United States. 

But now, we see some reports, the valuation of real estate, 10, 

12, 15 percent, and the savings rates add to zero and negative. 

Does that concern you long-term, that we are trying to build an 

economy on people to use up every resource that they have? 

Mr. BERNANKE. Yes, Congressman. I think in the long term we 

need to have higher saving, and we need to devote more toward investment and foreign exports than to domestic consumption. That 

is a transition we are going to have to make in order to get our 

current account deficit down, in order to have enough capital and 

foreign income to support an aging population as we go forward the 

next few decades. 

The stimulus package is going to support consumption in the 

very near term. But there is a difference between the very short 

run and the long run. In the very short run, if we could substitute 

more investment, more exports, that would be great. But since we 

can’t in the short run, a decline in total demand will just mean 

that less of our capacity is being utilized. We will just have a weaker economy. 

So that is the rationale for the short-term measure, but I agree 

with you that over the medium and long-term, we should be taking 

measures to try to move our economy away from consumption dependence, more towards investment, more towards net exports. 

The CHAIRMAN. The gentlewoman from New York, Ms. Maloney. 

Mrs. MALONEY. Thank you very much, and welcome, Mr. 

Bernanke. 

23

New problems in the economy are popping up like a not-veryfunny version of Whack-a-mole, as Alan Blinder, a former Vice 

Chair of the Fed, recently observed, and yesterday’s news was no 

exception with their wholesale inflation soaring consumer confidence falling and home foreclosures are spiking and falling sharply. 

Added to this, many people believe that the next shoe to fall will 

be credit card debt, which is securitized in a very similar way as 

the subprime debt. And, as you know, the Fed has a statutory 

mandate to protect consumers from unfair lending practices. But 

there is a widespread perception that the Federal Reserve and Congress did not do enough or act quickly enough to correct dangerous 

and abusive practices in the subprime mortgage market. 

Many commentators are now saying that credit cards will be the 

next area of consumer credit where over-burdened borrowers will 

no longer be able to pay their bills. We see a situation with our 

constituents where many responsible cardholders, folks who pay 

their bills on time and do not go over their limit, are sinking further and further into a quicksand of debt, because card companies 

are raising interest rates any time, any reason, retroactively, and 

in some cases quite dramatically—30 percent on existing balances—and there are very, I’d say scary, parallels between the 

subprime mortgage situation and what is now happening with 

credit cards. 

In your response to Chairwoman Biggert’s question on what the 

most important thing a consumer needs to know about their credit 

card you responded, and I quote: ‘‘Consumers need to know their 

interest rate and how it varies over time.’’ 

You also mentioned that it is important for consumers to know 

how their interest rate works. I have introduced legislation with 

Chairman Frank and 62 of our colleagues that would track your 

proposed changes to Regulation Z to always give consumers 45 

days notice before any rate increase. But it would also give consumers the ability to opt out of the new terms by closing their account and paying off their balance at existing terms. 

Would you agree that this notice and consumer choice would 

allow consumers to know their interest rate and how it varies over 

time and how it works? 

Mr. BERNANKE. Congresswoman, first of all, I agree. It is very 

important to protect consumers in their dealings with credit cards. 

As you mentioned, we have put out Reg Z revisions for comment, 

and includes this 45-day period. 

Within the Reg Z authority, we could not take that second step 

that you mentioned, but as I mentioned in my testimony, we are 

currently looking under a different authority, which is the FTC, 

Unfair Deceptive Acts and Practices Authority, at a range of practices including billing practices. 

And we will hope to come up with some rules for comment within 

the next few months. So we are looking at all those issues and we 

will be providing some proposed rules. 

Mrs. MALONEY. Well, I congratulate you on your efforts in this 

area. It is very important. Would you agree that regulation of credit cards and credit card practices beyond disclosure, beyond Reg Z 

is necessary? 

24

Mr. BERNANKE. If there are circumstances in which the actions 

of the credit card issuer are essentially impenetrable by the consumer, or the consumer doesn’t understand and can’t be expected 

to understand the action. Or if the actions of the credit card issuer 

are in fact literally different from what was promised, that is essentially taking different actions specified in the contract. Certainly in both of those cases one would surely say that further action other than just pure disclosure would be needed. 

Mrs. MALONEY. And as you said to Ms. Biggert, you believe substantive corrections of credit card practices can be done without restricting access to credit or restricting consumer spending? 

Mr. BERNANKE. Again, I think it is important for people who 

have credit card accounts or any other form of credit to understand 

what it is that they are buying, like buying any other product. If 

you are buying a credit card account, you should know what it is, 

how it works, and then you can make a reasoned choice. 

Mrs. MALONEY. Thank you. 

The CHAIRMAN. The gentleman from Georgia. 

Mr. PRICE OF GEORGIA. Thank you, Mr. Chairman. 

Mr. Chairman, we appreciate you being here again today and we 

know that monetary policy certainly is a balancing act and you 

have a difficult challenge balancing things. I find it interesting 

today that some members who are now upset with the current situation were the same ones who were clamoring the most in years 

past for an expansion of credit. 

And so I think it may be that those individuals as we clamp 

down on credit are those who will then be clamoring for us to open 

it up again in the relatively near future. So it is indeed a balancing 

act. The Federal Government has come under significant indictment by some for its lack of regulation and I am interested in what 

degree you believe there is responsibility for our current situation 

that is due to the lack of regulation. 

Mr. BERNANKE. Well, as I mentioned to the chairman earlier, I 

think appropriate regulation combined with market forces can provide the best results. I think regulation can often be helpful in situations where there is an asymmetry of information or knowledge, 

where the one side of the transaction is far more informed than the 

other side. So, for example, if you have two investment banks doing 

an over-the-counter derivatives transaction, presumably they both 

are well-informed and they can inform that transaction without 

necessarily any government intervention. 

In the case of consumer credit, though, I think there can be circumstances when the products are very complicated, and it is important to help make sure that there are disclosures and practices 

so that the consumer can understand properly what it is that they 

are buying. As I said to Congresswoman Maloney, the market 

works better if people understand what the product is. And so I 

think there are circumstances when regulation can be helpful. 

We also, of course, supervise banks because the government insures deposits, and, therefore, we want to make sure that they are 

acting in a safe and sound way as well. 

Mr. PRICE. Is overregulation possible or harmful? 

Mr. BERNANKE. Of course it is possible. As I said in a recent 

speech, whenever we do regulation, we need to think about the cost 

25

and benefit of that regulation, and make sure there is an appropriate balance between them. And as we have done regulations on 

mortgage lending, I believe, for example, that subprime mortgage 

lending, if done responsibly, is a very positive thing and can allow 

some to get homeownership who might otherwise not be able to do 

so. There is plenty of evidence that people can do subprime lending 

in a responsible way. 

So in doing our regulations, we wanted to be sure that we didn’t 

put a heavy hand on the market that would just shut it down and 

make it uneconomic. We want to help consumers understand the 

product, but we don’t want to censure the market. 

Mr. PRICE OF GEORGIA. Sure. Would you agree with the statement that excessive deregulation is the single greatest cause of the 

challenge that we currently find ourselves in? 

Mr. BERNANKE. Well, I think there were mistakes in terms of 

regulation and oversight. But I think there also were private sector 

mistakes as well. 

Mr. PRICE OF GEORGIA. A lot of other situations going on. 

Mr. BERNANKE. There are a lot of factors involved. 

Mr. PRICE OF GEORGIA. The stimulus package that Congress recently passed, many of us were concerned about it being temporary 

and having questionable effect, truly to stimulate the market, the 

economy, in the long-run. And if we think about the housing situation currently, I think there are two basic options available. One 

is to try to stimulate housing purchase through some tax policy. 

And the other is to increase the liability of the taxpayer for becoming the natures mortgage banker. 

Do you have a sense about which road we ought to head down? 

Mr. BERNANKE. Well, I don’t generally comment on specific tax 

or spending programs. I think what the Fed is trying to do right 

now is encourage the private sector, the servicers and the lenders, 

to scale up their efforts to address this tidal wave of foreclosures 

that otherwise would occur. And I also have discussed the modernization of FHA to provide a vehicle for refinancing of some of 

these mortgages and supported reform of GSE oversight as another 

mechanism. 

So those are the things that currently Fed Reserve has been talking about. 

Mr. PRICE OF GEORGIA. Having the taxpayer be the sole holder 

of the nation of mortgages, though, is probably not a wise idea. I 

want to get to my last question, the final question about oil prices 

and crude. It has been suggested that increasing domestic production is not necessarily helpful in decreasing the cost of oil to our 

Nation, but wouldn’t you say that in fact increasing domestic production or increasing refining capacity, all of that helps decrease, 

puts downward pressure on the cost of gas sat the pump and would 

be helpful? 

Mr. BERNANKE. Increasing supply generally lowers the price, so 

I think that’s correct. But in these circumstances, Congress has to 

weigh the benefits of more oil supply against other considerations, 

including environmental issues and the like. 

Mr. PRICE OF GEORGIA. Thank you. 

The CHAIRMAN. The gentlewoman from California. 

26

Ms. WATERS. Thank you very much, Mr. Chairman, for holding 

this hearing, and I thank Chairman Bernanke for once again being 

here and helping us to understand his vision for how we deal with 

our economy, and, of course, we are all pretty much focused on the 

subprime crisis, because I think we all understand the role that it 

is playing in our economy—the negative role that it is playing in 

our economy at this time. 

Yesterday, Mr. Bernanke, we had some economists here testifying before this committee, and there was some discussion about 

the role of regulatory agencies, and some discussion about public 

policymakers and whether or not we were going to overdo it and 

come up with new laws that may prove to be harmful to the overall 

industry and thus the economy. 

And let me just say that I think that you have been very forthcoming in talking about some missed opportunities maybe early on, 

you know, with maybe what could have been done based on information that regulatory agencies should have known about, should 

have had access to, should have acted on. So that is behind us, but 

I am concerned about voluntary efforts by the financial institutions 

who have some role in responsibility in the subprime crisis. 

For example, I held a hearing where Countrywide said that it 

had made 18 million contacts, had done 60,000 workouts, and out 

of that, there were 40,000 loan modifications. This other coalition 

called HOPE NOW said they had done 545,000 workouts, 150 loan 

modifications, and 72 percent of these were what we found, that 72 

percent of these were kind of repayment plans and they were not 

real modifications. Now we are trying to act on the best information. And here we have these voluntary efforts that are representing to us that they are making these contacts. They are 

doing these workouts, and we look at this. We don’t see it in our 

communities. We don’t have people who are saying that they got 

a workout that made good sense and that they had been contacted. 

How can you help us if we are to have any faith in voluntary efforts at all and not get so focused on trying to produce laws that 

will do some corrections? How can you help us with determining 

whether or not this information we are getting is true; whether or 

not they are doing these workouts; whether or not they are doing 

this outreach. 

What do you do to track this voluntary effort? 

Mr. BERNANKE. Well, Congresswoman, you are quite right that 

the information has been very mixed. They did a whole bunch of 

different surveys. They haven’t been comparable. We don’t necessarily know exactly what is going on. I think one of the benefits 

of the HOPE NOW alliance is that they are trying to get a more 

comprehensive and more systematic data collection so we will know 

better how many people are being helped, how many are not, what 

the form of the help is, and so on. 

So I do think that the first requirement for a good policy here 

is to know exactly what’s happening, and I agree with you absolutely on that. I also have some sympathy for your point that many 

of the actions being taken are very temporary, like a temporary 

payment plan or perhaps a forgiveness of a couple of payments, 

and that kind of thing. 

27

In many cases the only solution that is going to be enduring is 

a more sustainable mortgage or some kind of restructuring or 

modification. And I do think that we need to encourage the private 

sector to do a greater share of modifications and restructurings in 

order to solve the problem rather than just to put it off for a few 

months. I think that is very important. 

In addition, I believe the Federal Housing Administration, the 

FHA, could be helpful in that respect, if it had more flexible products and more flexibility to refinance mortgages coming from the 

private sector to create again a sustainable solution for people in 

difficulty. 

Ms. WATERS. We are willing and prepared to do the legislative 

work. Again, we have relied on a lot of voluntary efforts. And I 

guess my question to you is, are we going rely on these voluntary 

efforts to continue to strengthen their product, their work, or is 

there some way that you can have in your office someone or someones who can trace, follow, and dissect and determine whether or 

not these voluntary efforts are real? 

Mr. BERNANKE. Well, again, Congresswoman, I think the lead on 

the data collection is coming from HOPE NOW, but we also get our 

own data from some of the private suppliers of loan information, 

for example. So we are doing a good bit of analysis at the Fed, and 

we are looking for alternative solutions. But, quite frankly, finding 

solutions that will be focused and help the right people, at a reasonable cost, is very difficult. 

The CHAIRMAN. The gentleman from Delaware. 

Mr. CASTLE. In recent testimony over in the Senate, and responding to the Senator from my State, Senator Carper, you indicated 

that Regulation Z might be out by opening day of baseball season. 

It was unclear to me as to whether everybody understood when 

opening day of baseball season is. I believe it is March 30th, which 

is about a month away. 

But this is not important. What is in it is obviously very important, but it is not important to have it out in terms of what we are 

doing here. Congresswoman Maloney indicated that she has already introduced legislation which is very extensive, which may go 

substantially beyond where Regulation Z may be, with respect to 

credit cards and the issuance thereof and what can be done under 

those contracts, and some of her points may be well taken, and 

some may not be well taken. And I think until we see and compare 

it to Regulation Z, we’re not going to really be able to make that 

decision. 

My question to you is, can you be more specific or can you reaffirm or do you know for sure when the date of opening season of 

baseball is? Or whatever. I’d just like to get some sense of where 

this is coming from. 

Mr. BERNANKE. I thought it meant opening day of football season. I’m sorry. I did misspeak in that answer, and we corrected the 

answer with Senator Carper. 

The reason for the delay is that as mentioned, we are going to 

be doing another set of rules related to the Unfair Deceptive Acts 

and Practices under the FTC Act. Those should be out, I hope, in 

the spring. I don’t have an exact date, but not too far in the future, 

and that would give the public a chance to look at and comment 

28

on these rules that relate to some of the issues that Congresswoman Maloney was talking about. We would then do a comment 

period and review those comments. It is our belief that because 

there would be some interaction between the Reg Z rules and the 

UDAP rules, in order to minimize the cost for the industry, we 

would probably be better off releasing both of them somewhat later 

this year. 

So the opening day is probably closer to where we would be releasing the proposed UDAP rules rather than when we will be having the final Reg Z rules. I apologize for that. 

Mr. CASTLE. So Reg Z may be closer to the World Series, or 

something of that nature? Would that be a correct statement? 

Well, I think it’s a matter of some concern to us. I hope you understand as your people go about their work, and they have to do 

their work correctly, how important that it that we have that in 

order to formulate legislation or determine where we are on legislation. 

Along those lines, let me ask you another question. In July of 

2003, your predecessor, Chairman Greenspan, sent me a letter, 

which I will submit for the record, expressing deep skepticism 

about legislators’ attempts to limit creditors’ use of information regarding borrowers’ payment performance with other creditors when 

pricing risk. Risk-based pricing, as this practice is commonly called, 

lowers the price of credit for some and provides access to otherwise 

unavailable credit to many. 

Mr. Chairman, do you share Mr. Greenspan’s view of that? I 

quote from the letter, ‘‘Restrictions on the use of information about 

certain inquiries or restrictions not considering the experience of 

consumers in using their credit accounts will likely increase overall 

risk in the credit system, potentially leading to higher levels of default and higher prices for consumers?’’ 

Mr. BERNANKE. Well, as a general rule, in the same way that 

riskier credit leads to higher interest rates in the mortgage market, 

you would expect the same thing would happen in the credit card 

market, and so reasonable attempts to measure the risk of the borrower, I think, are appropriate and could be reflected in interest 

rates. 

We will be looking at the specific measures taken and the specific 

approaches taken when we look at these practices under the UDAP 

authority, but as a general matter, one would expect a higher rate 

to be charged to a risky borrower. 

Mr. CASTLE. Thank you, Mr. Chairman. Let me ask a question 

on a different subject. We don’t have time to go into a lot of details, 

but what we have seen both in the House of Representatives and 

in the United States Senate is a series of proposals concerning the 

mortgage problems. One of these is a proposal in the Senate that 

gives bankruptcy courts the ability to revise mortgage terms. Over 

here we have had a suggestion to suspend litigation for a period 

of time after we pass legislation to allow the banks to reform mortgages. There are other suggestions of having lump sums of money 

go the various States, who could then use it to help alleviate the 

problems of the mortgage companies. 

29

Some of this may be beyond your typical perspective, but do you 

have any thoughts or ideas on any of that kind of legislation, either 

good or bad, that you can share with us? 

Mr. BERNANKE. Well, I certainly welcome and commend you and 

Chairman Frank and others for thinking about these issues. They 

are the very, very difficult ones. As I said, we have been thinking 

about them a lot at the Federal Reserve and discussing them with 

Congress, with the Treasury, and others. At the moment I don’t see 

a clear and obvious additional set of steps that can be taken beyond what’s happening now, other than, as I mentioned, FHA modernization, GSE reform. 

But we are certainly open to the possibility, and we continue to 

look at alternatives, but I don’t have an additional one to recommend at this point. 

Mr. CASTLE. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much. I will now recognize Mr. 

Meeks for 5 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. 

It is good to be with you, Chairman Bernanke. You know, sometimes you get some of these conditions, and you do one thing and 

it helps, you do something else and it hurts. And such is the situation that I think that we are currently in. 

It seems to me that if you move aggressively to cut interest rates 

and stimulate the economy, then you risk fueling inflation, on top 

of the fact that we have a weak dollar and a trade deficit. You 

know, you have to go into one direction or the other. Which direction are you looking at focusing on first? 

Mr. BERNANKE. Congressman, I think I’ll let my testimony speak 

for itself in terms of the monetary policy. I just would say that we 

do face a difficult situation. Inflation has been high, and oil prices 

and food prices have been rising rapidly. We also have a weakening 

economy, as I discussed. And we have difficulties in the financial 

markets and the credit markets. So that is three different areas the 

Fed has to worry about—three different fronts, so to speak. 

So the challenge for us, as I mentioned in my testimony, is to 

balance those risks and decide at a given point in time which is the 

more serious, which has to be addressed first, and which has to be 

addressed later. That is the kind of balancing that we just have to 

do going forward. 

Mr. MEEKS. So you just move back and forth as you see, and try 

to see if you can just have a— 

Mr. BERNANKE. Well, policy is forward-looking. We have to deal 

with what our forecast is. So we have to ask the question, where 

will the economy be 6 months or a year down the road? And that’s 

part of our process for thinking about where monetary policy 

should be. 

Mr. MEEKS. But let me also ask you this. The United States has 

been heavily financed by foreign purchases of our debt, including 

China, and there has been a concern that they will begin to sell 

our debt to other nations because of the falling dollar and the concerns about our growing budget deficits. Will the decrease in shortterm interest rates counterbalance other reasons for the weakening 

dollar, enough to maintain demand for our debt? And if that happens, what kind of damage does it do to our exports? And I would 

30

throw into that because of this whole debate currently going on 

about sovereign wealth funds—and some say that these sovereign 

wealth funds are bailing out a lot of our American companies—so 

is the use of sovereign wealth funds good or bad? 

Mr. BERNANKE. Well, to address the question on sovereign 

wealth funds, as you know, a good bit of funding has come in from 

them recently to invest in some of our major financial institutions. 

I think, on the whole, that has been quite constructive. The capitalization, the extra capital in the banks, is helpful because it makes 

them more able to lend and to extend credit to the U.S. economy. 

The money that has flowed in has been a relatively small share of 

the ownership or equity in these individual institutions, and in 

general has not involved significant ownership or control rights. 

So I think that has been actually quite constructive, and again 

I urge banks and financial institutions to look wherever they may 

find additional capitalization and allow them to continue normal 

business. 

More broadly, we have the CFIUS process, as you know, where 

we can address any potential risks to our national security created 

by foreign investment, and I think that is a good process. Otherwise, to the extent that we are confident that sovereign wealth 

funds are making investments on an economic basis and for returns—as opposed for some other political or other purpose—I 

think it is quite constructive, and we should be open to allowing 

that kind of investment. 

Part of the reciprocity is that it has allowed American firms to 

invest abroad as well, and so there is a quid pro quo for that. 

Mr. MEEKS. What about the first part of my question? 

Mr. BERNANKE. I don’t see any evidence at this point that there 

have been any major shifts in the portfolios of foreign holders of 

dollars. We do monitor that to the extent we can, and so far I have 

not seen any significant shift in those portfolios. 

Mr. MEEKS. Thank you. 

The CHAIRMAN. The gentleman from Alabama. 

Mr. BACHUS. Thank you. Chairman Bernanke, have the markets 

repriced risk? Where do we stand there? You know, we talked 

about the complex financial instruments. 

Mr. BERNANKE. That is an excellent question. Part of what has 

been happening, Congressman, is that risk perhaps got underpriced over the last few years, and we have seen a reaction where 

risk is being now priced at a high price. It’s hard to say whether 

the change is fully appropriate or not. Certainly part of the recent 

change we have seen is a movement towards a more appropriate, 

more sustainable, pricing of risk. 

But in addition, we are now also seeing concerns about liquidity, 

about valuation, about the state of the economy, which are raising 

credit spreads above the normal longer-term level, and those increased spreads and the potential restraint on credit are a concern 

for economic growth. And we’re looking at that very carefully. 

Mr. BACHUS. Are investors making a flight to simplicity, or are 

they getting better disclosures, or is there a role that, say, the Federal Reserve plays on seeing that those disclosures are there or are 

other regulators? 

31

Mr. BERNANKE. Well, we do work with the SEC and the accounting board and FASB and others to make sure that the accounting 

rules are followed, and I know they’re being looked at and revised 

to try to increase disclosure. The Basel II Capital Accord also has 

a Pillar 3, which is about disclosure. So more disclosure is on the 

way and is a good thing. 

And we continue to encourage banks and other institutions to 

provide as much information as they can to investors, and I think 

that’s a very constructive step to take. It’s not the whole answer, 

though, at this point. Relatively simple instruments like prime 

jumbo mortgages, for example, are not selling on secondary markets, less because of complexity and more just because of uncertainty about their value in an uncertain economy. 

Mr. BACHUS. One thing you didn’t mention in your testimony is 

the municipal bond market, and the problem with bond insurers. 

Would you comment on its effect on the economy and where you 

see— 

Mr. BERNANKE. Yes, Congressman. The concerns about the insurers led to the breakdown of these auction rate securities, which 

were a way of using short-term financing to finance longer-term 

municipal securities. And a lot of those auctions have failed, and 

some municipal borrowers have been forced, at least for a short period, to pay the penalty rates. So there may be some restructuring 

that is going to have to take place to get the financing for those 

municipal borrowers. 

But as a general matter, municipal borrowers have very good 

credit quality, and so my expectation is that with a relatively short 

period of time, we’ll see adjustments in the market to allow municipal borrowers to finance at reasonable interest rates. 

Mr. BACHUS. Yes. In my opening statement, I mentioned that we 

have a functional regulator system, where we have different regulators regulating different parts of a market, which we now know 

is very interconnected. Do you think there are gaps in the regulatory scheme today that need to be addressed? Maybe the bond insurers may be an example where we did have State regulation, but 

it didn’t appear that they were up to the task. 

Mr. BERNANKE. The bond insurer’s problem was a difficult one to 

foresee. I mean, first of all they were buying what were thought to 

be high-quality credits, and secondly they do have some sophistication of their own, doing some evaluation. So that was a difficult one 

to anticipate. 

In general, I think even though we have many regulators, there’s 

a very extended attempt of regulators to work together in a collegial and cooperative way, and at the Federal Reserve we certainly 

try to do that. As I mentioned, we work with the SEC and the OCC 

and FDIC, and the like, and will continue to do that. 

One area where sometimes there have been, I think, some coordination problems is between the Federal and the State regulators, 

and we saw some of that in the mortgage lending issues in the last 

couple of years. We have undertaken a pilot program of joint examinations, working with State regulators. The idea is to try to improve even beyond where we are now in terms of our information 

sharing and coordination with those State regulators, and that is 

32

what we are trying to do. But that is sometimes an area where the 

communication may not be as good as in some other areas. 

Mr. BACHUS. Let me ask one final question. You are a former 

professor, and I think the phrase is ‘‘financial accelerator.’’ What 

that means is that there are problems in the economy called sentiment problems; there is a lack of confidence. Is negative sentiment 

a part of what we’re seeing now? I know I was in New York, and 

the bankers there said there were a lot of industries who were just 

waiting because of what they were reading in the paper, as much 

as anything else, to invest. 

Mr. BERNANKE. Well, there is an interaction between the economy and the financial system, and it is perhaps even more enhanced now than usual in that the credit conditions in the financial 

market are creating some restraint on growth, and slower growth 

in turn is concerning the financial markets because it may mean 

that credit quality is declining. And so this financial accelerator or 

adverse feedback loop is one of the concerns that we have and one 

of the reasons why we have been trying to address those issues. 

Mr. BACHUS. Thank you. 

The CHAIRMAN. Thank you. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. Welcome, Chairman 

Bernanke. In the 108th Congress, Congressman Brad Miller and I 

introduced the first predatory lending bill as H.R. 3974. In the 

109th Congress, we introduced it in 2005 as H.R. 1182. The regulators weren’t paying much attention to this, say minimizing the 

significance of it, and it took a crisis to finally get a bill passed. 

My concern is that looking finally at the last page of your testimony, you finally reached the credit card part of the equation, one 

paragraph, and my concern is that a lot of people who are seeing 

their credit dry up on the mortgage side are getting more and more 

credit on the credit card side, and that could portend potentially a 

similar kind of effect in the credit card market as we have seen in 

the mortgage market. 

Now I have not yet signed on to Ms. Maloney’s bill, because we 

are still looking at it, but I have been meeting with industry participants, and one of the things that they have said is that we 

should give them more time for the regulator to do more. That is 

the same argument that we were hearing back in 2004 and 2005 

and 2006: Give the regulators more time. 

And I asked them, does the regulator have enough authority to 

really do anything if they were inclined to do something? And it appears to me from page 9 of your testimony, the one paragraph we 

have, the only authority you appear to have is the Federal Trade 

Commission Act, or the Truth in Lending Act, which is a disclosure 

act. Actually the Truth in Lending Act is the one that is under 

your authority, which is a disclosure statute. I’m not even going to 

get into the issue that Ms. Maloney raised, do you think we need 

to do something, but tell me what authority the regulators would 

need, what authority would you need to be more aggressive in this 

area, as we were trying to get the Fed to be in 2004 and 2005 in 

the mortgage area? 

Even if you were inclined to be more aggressive, if you didn’t 

have the authority, you really couldn’t do it, and one of the concerns I’m seeing is that disclosure won’t do everything. Unfair and 

33

Deceptive Trade Practices won’t do anything if both of those things 

are required. Some things are unfair that are not necessarily deceptive. 

What kind of additional authority should we be considering giving to the Fed or to somebody, some regulator if it’s not the Fed, 

and to whom in this area? 

Mr. BERNANKE. Well, Congressman, as you pointed out, we have 

two different authorities. We have the Reg Z Truth in Lending authority, which is disclosure authorities, and we have already put 

out a rule for comment. It was a very extensive rule that involved 

consumer testing and several years of efforts to put together. I 

think that proposal is going to improve disclosures a lot. 

But we also have this Unfair Deceptive Acts and Practices authority, which allows us to ban—not just failure to disclose—but allows us to ban specific practices, which are unfair or deceptive for 

the consumer, and I think— 

Mr. WATT. So you a’re interpreting that ‘‘or’’ to be an ‘‘or’’ rather 

than an ‘‘and.’’ 

Mr. BERNANKE. Yes. 

Mr. WATT. That’s a good— 

Mr. BERNANKE. That’s right. Yes. 

Mr. WATT. Okay. 

Mr. BERNANKE. So we are able to address certain practices of 

billing, rate setting, rate changing and so on, and in terms of the 

delay issue, as I mentioned earlier, we will have some rules under 

this authority out for your examination, and for public comment, 

sometime this spring, just a few months from now. 

So you will see what we’re able to do with that, and you’ll have 

to make your decision whether or not more action by Congress is 

needed. 

Mr. WATT. Thank you, Mr. Chairman. My time has expired and 

I— 

The CHAIRMAN. Thank you. The gentleman from Texas, a ranking member of the subcommittee. 

Dr. PAUL. Thank you, Mr. Chairman. Chairman Bernanke, earlier you were asked a question about the value of the dollar, and 

you sort of deferred and said, ‘‘You know that is the Treasury’s responsibility.’’ I always find this so fascinating, because it has been 

going on for years. 

Your predecessor would always use that as an excuse not to talk 

about the value of the dollar. But here I find the Chairman of the 

Federal Reserve, who is in charge of the dollar, in charge of the 

money, in charge of what the money supply is going to be, but we 

don’t deal with the value of the dollar. 

You do admit you have a responsibility for prices, but how can 

you separate the two? Prices are a mere reflection of the value of 

the dollar. If you want to control prices, then you have to know the 

value of the dollar. But if you are going to avoid talking about the 

dollar, then all you can do then is deal with central economic planning. 

You know, if we stimulate the economy, maybe there will be production and prices will go down, and if prices are going up too fast 

you have to bring on a recession. You have to try to balance these 

things, which I think is a totally impossible task and really doesn’t 

34

make any sense, because in a free market if you had good economic 

growth you never want to turn it off, because good economic growth 

brings prices down just like we see the prices of computers and cell 

phones, those prices come down where there is less government interference. 

But you know the hard money economists who have been around 

for awhile, they have always argued that this would be the case. 

Those who want to continue to inflate will never talk about the 

money, because it isn’t the money supply that is the problem, it is 

always the prices. 

And that is why the conventional wisdom is, everybody refers to 

inflation as rising prices, instead of saying inflation comes from the 

unwise increase and supply of money and credit. When you look at 

it, and I mentioned in my opening statement that M3, now measured by private sources, is growing by leaps and bounds. 

In the last 2 years, it increased by 42 percent. Currently, it is 

rising at a rate of 16 percent. That is inflation. That will lead to 

higher prices. So to argue that we can continue to do this, continue 

to debase the currency, which is really the policy that we are following, is purposely debasing, devaluing a currency, which to me 

seems so destructive. 

It destroys the incentives to save. It destroys—and if you don’t 

save, you don’t have capital. Then it just puts more pressure on the 

Federal Reserve to create capital out of thin air in order to stimulate the economy, and usually that just goes in to mal-investment, 

misdirected investment into the housing bubbles, and the NASDAQ 

bubble. 

And then the effort is once the market demands the correction, 

what tool do you have left? Let’s keep pumping—pump, pump, 

pump. And it just is an endless task, and history is against you. 

I mean, history is on the side of hard money. If you look at stable 

prices, you have to look to the only historic, sound money that has 

lasted more than a few years, fiat money always ends. 

Gold is the only thing where you can get stable prices. For instance, in the last 3 to 4 years, the price of oil has tripled, a barrel 

of oil went from $20 to $30 up to $100 a barrel. And yet, if you 

look at the price of oil in terms of gold it is absolutely flat, it is 

absolutely stable. So if we want stable prices, we have to have stable money. 

But I cannot see how we can continue to accept the policy of deliberately destroying the value of money as an economic value. It 

destroys, it is so immoral in the sense that what about somebody 

who saved for their retirement and they have CDs. And we are inflating the money at a 10 percent rate, their standard of living is 

going down and that is what is happening today. 

The middle class is being wiped out and nobody is understanding 

that it has to do with the value of money, prices are going up. So 

how are you able to defend this policy of deliberate depreciation of 

our money? 

Mr. BERNANKE. Congressman, the Federal Reserve Act tells me 

that I have to look to price stability, which I believe is defined as 

the domestic price—the consumer price index, for example—and 

that is what we aimed to do. We looked for low domestic inflation. 

35

Now you are correct that there are relationships obviously, between the dollar and domestic inflation and the relationships between the money supply and domestic inflation. But those are not 

perfect relationships, they are not exact relationships. And given a 

choice, we have to look at the inflation rate, the domestic inflation 

rate. 

Now I understand that you would like to see a gold standard for 

example, but that is really something for Congress, that is not 

my— 

Dr. PAUL. But your achievement, we have now PPI going up at 

a 12 percent rate. I would say that doesn’t get a very good grade 

for price stability, wouldn’t you agree? 

Mr. BERNANKE. No, I agree. The more relevant one, I think, is 

the consumer price index, which measures the price consumers 

have to pay. And last year that was between 31⁄2 and 4 percent. 

I agree that is not a good record. 

Dr. PAUL. And PPI is going to move over into the consumer heading as well. 

Mr. BERNANKE. And we are looking forward this year, trying to 

estimate what is going to happen this year, and a lot of it depends 

on what happens to the price of oil. If oil flattens out, we will do 

better, but if it continues to rise at that rate in 2007, it will be 

hard to maintain low inflation, I agree. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. We face significant challenges in the housing market that have led in part to 

serious problems in the credit markets and our larger economy. 

Some of these problems begin as a result of predatory lending practices, which reached epidemic proportions in recent years, and took 

millions of dollars from American households of the equity in their 

homes and undermining the economic vitality of our neighborhoods. 

Approximately 1.8 million subprime borrowers will be facing resetting adjustable rate mortgages over the next couple of years, unless the government or the lending industry helps them modify the 

terms of their loan in some other form. 

I don’t support a government bailout for all these homeowners, 

particularly for wealthy investors and speculators who borrowed 

against the equity in their homes, betting on profits from a soaring 

housing market. But I do believe we need to make a strong effort 

to help lower-income homeowners, who were the victims of predatory lenders, refinance in order to stay in their homes. 

If foreclosures, Mr. Chairman, continue to rise, what impact do 

you believe this will have or could have on the economy in the next 

couple of years? 

Mr. BERNANKE. The high rate of foreclosures would be adverse 

to the economy. Obviously, it hurts the borrowers, but it also hurts 

their communities if there are clusters of foreclosures. And it hurts 

the broader economy, because it makes the housing market weaker 

and that has effects on the whole economy. 

So clearly, if we can take actions to mitigate the rate of foreclosure, do workouts and otherwise modify loans or find ways to 

help people avoid foreclosure, I think that is certainly positive. 

Mr. MOORE OF KANSAS. Thank you, sir. Some believe that we 

should enact legislation that would amend the bankruptcy code to 

allow judges to modify the terms of a loan on a debtor’s principle 

36

residence in chapter 13 in order to provide relief to these homeowners. This would essentially treat primary residences in a similar way to credit cards under the bankruptcy code. In 1978, Congress created this exemption in the bankruptcy code with the intent of encouraging homeownership by providing certainty to mortgage lenders that terms and conditions of the loan were secure. 

Do you believe that changes in the bankruptcy code to make primary residence lending more akin to credit cards will place up our 

pressure on mortgage interest rates and what effect could this have 

on investor confidence and mortgage-backed securities market in 

the broader economy? 

Mr. BERNANKE. Well, I think the proposed changes to the bankruptcy code have some conflicting effects. On the one hand, they 

might help some people who could appeal to the bankruptcy code 

in order to— 

Mr. MOORE OF KANSAS. Could you get a little closer to the microphone sir, please, thank you. 

Mr. BERNANKE. The proposed change to the bankruptcy code 

would have conflicting effects. I think it would help some people. 

On the other hand, it would probably lead to concern about the 

value of existing mortgages and probably higher interest rates for 

mortgages in the future. And so it is a very difficult trade-off. 

The Federal Reserve did not take a position on the previous 

bankruptcy code changes— 

Mr. MOORE OF KANSAS. I understand. 

Mr. BERNANKE. —and I think we are going to leave this one to 

Congress to figure out the appropriate trade-off. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. 

Mr. CHAIRMAN. Next, we have the gentleman from California. 

Mr. ROYCE. Thank you, Mr. Chairman. I wanted to ask Chairman Bernanke a question. To date, the U.S. banking system, I 

think, has handled the stress originated in the housing sector. But 

I think this is a result of these institutions being adequately capitalized prior to the turmoil that we found ourselves into. 

And given the ability of these institutions now to adequately 

handle that stress with existing leverage ratio requirements, I wondered if it caused you to rethink your attitude toward implementation of Basel II? 

Mr. BERNANKE. No, Congressman, I still think Basel II is the 

right way to go, because Basel II relates the amount of capital that 

banks have to hold to the riskiness of their portfolio. So, if done 

properly, risky assets require more capital, and that allows for better risk management and greater safety. 

Now, it is certainly true that some of the lessons we learned from 

this previous experience require us to go back and look at Basel II 

and see, for example, if there are changes that might need to be 

made. But that is one of the beauties of the system; it is a broad 

set of principles and can be adapted when circumstances change, 

as we have seen in the last couple of years. 

But we look at banks across the country and try to decide why 

some did well and some did poorly. The ones who did well had really strong risk management systems and good company-wide controls for managing and measuring risk. And that is the central idea 

behind Basel II. 

37

Mr. ROYCE. But they were also very well capitalized. 

Mr. CHAIRMAN. Stop the clock on the gentleman from California. 

There are three votes coming up. The first one is a general vote. 

Anyone who feels the need to vote on the general can go, but we 

are going to keep going. 

There will then be two further votes, which I think members 

won’t want to miss. And at that point, when the general vote is 

concluded, and the next vote starts, we will just let the Chairman 

go. Anyone who wants to, though, can stay. We will have another 

couple of hours of questions. 

I plan to stay. I will leave once we get the call for that second 

vote, and we will all run over there. So the gentleman will resume 

at this time, and members who wish to stay will be called on 

through the general vote and then we are going to have adjourn 

the hearing. The gentleman from California. 

Mr. ROYCE. Thank you again, Mr. Chairman. I wanted to continue with another question, Chairman Bernanke, and that has to 

do with the success of our country’s economy. I think, to a certain 

measure, it is based on an economic model that has a solid foundation in terms of free and flexible markets, and respect for the sanctity of a contract for the rule of law. 

And understanding this Chairman Bernanke, do you believe it is 

in the best interest of our economy for the government to begin rewriting contracts between two private parties? And let’s say for a 

minute, should Congress end up setting a precedent and grant the 

authority to change the terms of a contract, do you believe that this 

could potentially have a negative impact on the flow of capital that 

then comes into the housing market? 

Mr. BERNANKE. I agree the sanctity of contract is very important. 

It shouldn’t be rewritten unless there is evidence of fraud or deceit, 

or other problems in the contract itself. 

Mr. ROYCE. And there are several studies, I have seen economists arguing that we could see a 2 percent increase in home loans, 

because banks would face increased uncertainty of future revenue 

if loans could be rescinded. And basically, the economists are looking at the prospect of a judge undermining existing contracts as a 

result of such a law. 

And that is one of the reasons I think mortgage debt has always 

been treated differently than other types of debt, it was to encourage lower rates on a less risky investment. And so these lower 

rates are dependent upon the ability really of the lender to recover 

collateral, and that would be a heavy price to pay. 

The last line of questioning that I wanted to pursue with you is one on the estimates that have the deficit rising to $400 billion or 

more in the coming year. I think a lot of us were concerned about 

that $152 billion stimulus package. I voted against it because of my 

concern for what it would do, piling up the deficits. 

And you know now, we understand that in the Senate, they are working on a second bill, maybe in the $170 billion range without 

any offsetting spending cuts. And I just ask, are you concerned we 

may be headed toward the scenario that you described to the Senate Budget Committee when you testified earlier this year? 

You said at that time you know something to the tune of ‘‘a vicious cycle may develop in which large deficits could lead to rapid 

38

growth in debt and interest payments, which in turn adds to subsequent deficits.’’ And you said, ‘‘ultimately a big expansion of the nation’s debt would spark a fiscal crisis, which could be addressed 

only by very sharp spending cuts tax increases, or both should such 

a scenario play out.’’ 

If we didn’t have the policy changes here in Congress to do something about those deficits and thus I ask you about the magnitude 

of the deficits that we are running up with the stimulus package 

and now a second one being organized in the Senate. Your response 

please, Mr. Chairman? 

Mr. BERNANKE. Congressman, when I discussed whether the 

stimulus package should be undertaken, I emphasized it should be 

temporary and not affect the structural long-term deficit. I do think 

that there are serious issues with the long-term structural deficit, 

and they relate primarily to the aging of our society and therefore 

to entitlements and medical costs. 

And I stand by what I said to the Senate Budget Committee that 

it is very important to attack all those issues. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Mr. CHAIRMAN. The gentleman from Texas, Mr. Hinojosa. 

Mr. HINOJOSA. Thank you, Chairman Frank. Chairman 

Bernanke, I want to follow up on what Congressman Kanjorski 

touched on briefly in his questions. As chairman of the Subcommittee on Higher Education, I am concerned about the impact 

that the current crisis in the housing market is having on the liquidity of the overall marketplace, especially on student college 

loans. 

I have talked to banks who say that they are lending money to 

students and then they package the loans but are having difficulty 

placing them in the marketplace. Do you believe that we should 

have some contingency plans to ensure access to college student 

loans and what should those plans include? 

Mr. BERNANKE. Congressman, I believe about 80 to 85 percent of 

the student loans are federally backed or insured in some way. And 

to my knowledge, those securities are, or soon will be marketed 

normally. And so I don’t expect that part of the market, which is 

a big part of the market, to have any sustained problems. 

With respect to the so-called private label student loans, there 

has been some withdrawal from that market, partly because Congress reduced the subsidy, I believe, to those lenders. And certainly, the most recent episode has made it more difficult to market 

or securitize some of those loans. So there may be some disruption 

in that market, but I do think that this is a category of loans that 

has generally performed pretty well, and I expect to see that come 

back in the near future. 

I am not sure what else to suggest other than to encourage 

banks to continue to find new ways to market those loans. Again, 

most of that market is federally insured already, and I think those 

loans are going to be fine. 

Mr. HINOJOSA. The last question I would ask is, in today’s newspaper, the Washington Post talks about the, I think they’re called 

appraisers who are forced by someone to falsely increase their appraisal value of properties, and what that is doing of course is 

causing the homeowner to pay such high taxes and also to, in my 

39

opinion, contribute to the current crisis in housing market. What 

are your recommendations for us to stop that and to get to what 

are realistic appraisals instead of what I just described? 

Mr. BERNANKE. Well, the Federal Reserve has tried to address 

that issue. For banks which we directly supervise, we have had a 

longstanding set of rules about working with appraisers to make 

sure they are not given incentives to overestimate the value of a 

property, for example. 

In our HOEPA regulations, which are out for comment, which I 

discussed briefly in my testimony, we include some new rules that 

would prohibit any lender, not just a bank, from explicitly or implicitly coercing an appraiser to overestimate the value of a property. So we are trying to address that in our rules. 

I’m not sure whether additional Federal action would be needed. 

My hope is that these steps will address the problem. 

Mr. HINOJOSA. Thank you. I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman, and again welcome, 

Chairman Bernanke. At a recent appearance before the Joint Economic Committee, you were quoted as saying, ‘‘A net increase in 

taxes that was substantial would probably not be advisable because 

of its effect on aggregate demand.’’ In the same appearance, which 

I think was late last year, you also said, ‘‘A large increase in net 

taxes would tend to be a drag on consumer spending and the economy through a number of different channels.’’ My question is, Mr. 

Chairman, from your perspective, how do you define substantial? 

And how to you define large in the context of tax increases? 

Mr. BERNANKE. Well, I don’t have a number in mind, but I’m 

sure there are small changes that can be made to the tax code. But 

in the current environment—where consumers are under a lot of 

pressure and the economy is slowing down—a tax increase that 

was a significant fraction of a percent of GDP, for example, would 

be a drag on the consumer, and our demand would have adverse 

short-term demand effects. 

Mr. HENSARLING. Well, let me try this one on you, Mr. Chairman. As you know, presently the alternative minimum tax—Congress has a tendency to do what we all know is a 1-year patch—

but the AMT is still alive and well. If we don’t patch it beyond a 

year, we have 25 million taxpayers who will pay an average of an 

extra $2,000 in taxes. Would that qualify as a substantial increase, 

in your opinion? 

Mr. BERNANKE. My assumption is that Congress will either patch 

it or find some alternative solution. But— 

Mr. HENSARLING. Well, the chairman of the Ways and Means 

Committee has proposed an alternative that represents a $3.5 trillion tax increase over the next 10 years. Coupled with the expiration of tax relief that was passed in 2001 and 2003, 90 percent of 

all Americans would have their taxes raised. In your opinion, 

would that qualify as a substantial tax increase? 

Mr. BERNANKE. Congressman, there are two issues. What I was 

referring to earlier was that in the very short term, higher taxes 

would offset some of the effects of this fiscal stimulus package that 

we’ve seen. In the longer term, I agree that low taxes tend to promote economic efficiency and economic growth, but they have to 

40

balanced against the need for revenue for government programs 

that Congress may want to undertake. That is what Congress’s 

principal job is, to figure out how much taxation is needed to support worthwhile programs. 

So that is a decision for Congress. 

Mr. HENSARLING. Mr. Chairman, in today’s testimony you said, 

‘‘The vigor of the global economy has offset some of the weakening 

domestic demand and that U.S. export should continue to expand 

at a healthy pace, providing some impetus to domestic economic activity and employment.’’ Would that be a rough translation that in 

today’s economy, trade is good? 

Mr. BERNANKE. I think trade is always beneficial, but right now 

net exports are a positive source of demand and jobs and are helping to keep our economy stronger. 

Mr. HENSARLING. Would you be concerned, as there are I believe 

five, maybe six free trade agreements that are still pending in Congress that Fast-Track authority has expired, and that at least two 

major presidential candidates that I’m aware of have called for reducing trade with our major trading partners, Canada and Mexico? 

Might that be a bad thing for the economy? 

Mr. BERNANKE. I don’t know the details or concerns people might 

have on individual agreements, but as a general matter, I think 

that open trade is beneficial to the economy. There may be dislocations that occur because of trade, and a better way to address those 

dislocations is to help those people directly rather than to shut 

down the trading mechanism. 

Mr. HENSARLING. There has been some discussion—I see my time 

is running out—on proposed credit card legislation. Certainly I 

guess for the first time in almost a quarter of a century the Fed 

is undertaking a soup-to-nuts review of Regulation Z. You’ve been 

quoted before in budget committee, where I also served, that more 

expensive and less available credit seems likely to be a source of 

restraint on economic growth. If the credit card legislation that 

might be considered by Congress—and I’m not speaking of any specific bill—but if it had the net impact of causing credit card companies to increase credit cost for millions of Americans and cut off access to credit for millions of other Americans, would that be a 

source of concern to you? 

Mr. BERNANKE. Well, it is important for people to know what it 

is they are buying. They need to have enough information to make 

a good decision, shop properly, and to get the product they think 

they are getting. So that is important. 

Onerous regulations, though, that reduce credit availability 

unconnected with the issues of disclosure, for example, would be 

negative in the current environment. 

Mr. HENSARLING. I am out of time. Thank you. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLAY. Thank you, Mr. Chairman. 

Chairman Bernanke, I represent Missouri, and in my district 

over the last few years, we have experienced tremendous job losses, 

most notable among them being the losses associated with the demise of Arthur Anderson, the moving of the Ford automobile assembly plant, a transfer of over 2,000 white-collar jobs due to the 

BRAC realignment, and there are many more examples. And the 

41

repercussions of the housing crisis are beginning to be catastrophic. 

As a result of these factors, we have many families who work more 

hours than before for less money, and their liabilities did not 

change. 

We have an economic stimulus package that is to be put in effect 

in the near future. What is being done and what can we realistically expect in the matter of job creation during and beyond the 

dispersement of the stimulus package? And what can we do to gain 

back the jobs lost over the last decade? 

Mr. BERNANKE. Well, there are two separate issues here. First, 

there’s the issue of the unemployment rate as it varies over the 

business cycle, and we project some increase in that unemployment 

rate as the economy has slowed down. The Federal Reserve is trying to balance off its various mandates, including full employment, 

and that will certainly be one of the things we’re trying to achieve. 

We hope that any unemployment generated by the current episode 

will be transitory and we project that it will come back down over 

the next couple of years. 

The other set of issues has to do with structural changes arising 

from trade and technology and all kinds of other changes that our 

economy has. Frankly, I think that we have to be careful about trying to prevent change. That’s part of a growing, dynamic economy 

to have change and development. 

The best solution over the longer term really, I would say, is twofold. The first is skills, having a skilled work force that is adaptable and can find opportunities wherever they may be. And secondly, ways to make it easier for people to move between jobs or 

deal with temporary periods of unemployment. For example, helping to make health insurance or pensions portable between jobs, or 

otherwise helping people make those transitions. 

So I think what we want to do is, on the one hand, preserve a 

dynamic economy, but on the other hand, we want to help people 

adapt and be prepared for that dynamic economy. 

Mr. CLAY. Do you see much promise in green technology and the 

creation of jobs in that sector? 

Mr. BERNANKE. Well, green technology will no doubt create jobs, 

but I think the right considerations are: Is this a cost-effective way 

of achieving the environmental objectives that society has? And we 

don’t want to undertake projects that are not very beneficial just 

to create jobs. We want to look for projects that are effective at 

achieving their objectives. 

Mr. CLAY. Yes, but haven’t we learned that a robust economy 

only for the wealthiest 2 to 10 percent isn’t good for the country, 

and that we ought to be looking at ways to turn the economy 

around by creating jobs? 

Mr. BERNANKE. I have talked about inequality and the concerns 

that raises, and there are a number of ways to address that. But 

I think the most important is through skill development. 

Mr. CLAY. And so you would go through skill development other 

than assisting new technology and assisting new industries in getting on line? 

Mr. BERNANKE. Well, there’s a case for the government to support very basic research, but in the case of applied research, genVerDate 0ct 09 2002 17:27 May 30, 2008 Jkt 041184 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\41184.TXT TERRIE
42

erally speaking companies have plenty of incentives to undertake 

that. 

Mr. CLAY. Okay. Thank you so much. 

The CHAIRMAN. The gentleman from Connecticut. 

Mr. SHAYS. Thank you, Mr. Bernanke. I’d like to cover three 

areas if I could: Rating agencies; denomination of oil; and the 

spread of interest and you’re lowering rates and interest rates for 

homeowners going up. 

First off, have the rating agencies made themselves irrelevant? 

Have they destroyed their brand? And are they going to be an organization we listen to in the future? 

Mr. BERNANKE. The rating agencies perform a very important 

function, and clearly there have been problems in the last few 

years. They are doing internal reviews and reforms, but we are also 

looking at it—in fact, on an international basis—to figure out ways 

to make that work better. 

Mr. SHAYS. Is there a concern that in order to gain credibility, 

that they’re going to overstate the future liabilities and just accelerate the reduction of wealth by their looking and devaluing holdings? 

Mr. BERNANKE. Do I think they’re going to be too aggressive in 

terms of downgrading? 

Mr. SHAYS. Yes. 

Mr. BERNANKE. I hope that they don’t do that, because that 

would be unconstructive. I hope that they make fair evaluations 

and try to address the actual credit risk associated with each asset. 

But there is a bit of risk there, I agree. 

Mr. SHAYS. Okay. Let me just ask you in regards to—I look at OPEC and I see $100 a barrel, but then I realize that from their 

standpoint, it’s like we’re at $50 or $60. Is there a concern that you 

have that they will go to look at the Euro to value their oil per barrel, and if so, what would be its impact? 

Mr. BERNANKE. The price of oil is set in a global market and responds very quickly to changes in supply/demand as well as currency changes. I’m not aware of any imminent plan to change the 

currency denomination of oil, but I don’t think it would make a 

major difference to the U.S. economy. 

Mr. SHAYS. What I used to look at, though, is I would say, you 

know, OPEC, the price is so high that they are causing tremendous 

dislocation throughout the world. But from their standpoint, 

they’re saying, you know, we’re not getting that much more. And 

I’m wondering, have you had dialogue with OPEC about this issue, 

or with folks indirectly about this issue from overseas? 

Mr. BERNANKE. Whether they price it in dollars, euros, or something else, the exchange rate is known, and so they can always calculate the value. I don’t think they misunderstand the fact that 

they are getting a very high price for their oil. 

Mr. SHAYS. Let me just ask you, in regards to, you’ve already 

talked about the spread, the Fed rate, and banks which are private 

institutions setting mortgages higher—we had a hearing yesterday 

that was rather depressing and made me want to buy gold—and 

the bottom line was: We increased the supply of housing exceeding 

demand, which really accelerated our just trying to have people 

buy homes, who shouldn’t have. And the question is: Does this inVerDate 0ct 09 2002 17:27 May 30, 2008 Jkt 041184 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\41184.TXT TERRIE
43

credible excess supply of housing negate what you’re trying to do 

in lowering interest rates? 

Mr. BERNANKE. Well, the housing market is correcting for that 

reason, and house prices are declining. But at some point the market will stabilize, and demand will come back into the market. Construction, which is already down more than half, will begin to stabilize, and then subsequently prices will begin to stabilize. That’s 

what we’re looking forward to. 

Mr. SHAYS. Well, when do think they will stabilize? 

Mr. BERNANKE. It is very difficult to know and we have been 

wrong before. But given how much construction has come down already, I imagine that by later this year, housing will stop being 

such a big drag directly on GDP. Prices may decline into next year, 

but we don’t really know. The useful thing to appreciate, I guess, 

is that as house prices fall, they are self-correcting in a way because part of the reason that prices peaked and began to come 

down was that housing had become unaffordable. The median family couldn’t afford a median home. 

As prices come down and incomes go up, you get more affordability and therefore more people come into the market. 

Mr. SHAYS. Thank you very much. Thanks for your generosity 

and for spending time here. 

Mr. BERNANKE. Thank you. 

Mr. MILLER OF NORTH CAROLINA. [presiding] The gentleman 

from Massachusetts, Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman, and Chairman Bernanke. 

I want to go back for just a second. I know that Mr. Meeks asked 

you about these sovereign wealth funds, and I appreciate your response that currently right now it’s not a big number. Although I 

think there are reports that there are about $3 trillion in assets 

right now in these sovereign wealth funds, probably more than the 

hedge funds and private equity funds combined. 

And notwithstanding some of the help, as you have noted, they 

have given in terms of stabilizing some of the effects of the 

subprime fallout, there is a growing concern, not only here in this 

Congress on both sides of the aisle, and also hearing it from the 

EU commissioner, President Sarkozy, that number one, there’s 

very little transparency in terms of the operation of these government-controlled funds. 

Number two, there is the fear, unrealized thus far, that these 

government-controlled funds could invest for political purposes instead of a straight return on investment. And what I’m hearing 

from my colleagues and what we’re hearing from the EU and some 

others is that a sort of protectionist response is coming forward, 

and I don’t necessarily think that is a good thing in the long term 

in terms of a response to this type of investment by sovereign 

wealth funds. But you’ve been dealing, from your testimony, you’ve 

been dealing with some of these central banks. We’re having a 

hearing on this next week, but we won’t have the benefit of your 

counsel. What do you think in terms of your dealings with these 

central banks, might be an appropriate response that could head 

off some of the, I think, short-view, narrow-view protectionist responses to the sovereign wealth funds activities? 

44

Mr. BERNANKE. Well, I hope the sovereign wealth funds understand and appreciate that it is in their own interest, if they want 

to have access to advanced economies like the United States, that 

they be sufficiently transparent as to inspire confidence that their 

motives are economic and not political or otherwise. 

So we have been encouraging that in discussions and international meetings, for example. And their reply is, ‘‘Well, if you’ll 

be open to us, we’ll be open to you.’’ And I think that’s where we 

need to be heading. 

The international agencies, like the International Monetary Fund 

and the OECD, are working on developing codes of conduct that 

both the sovereign wealth funds and perhaps the recipients of sovereign wealth fund monies may wish to adopt, that determine the 

transparency, the governance, the behavior of these funds, and the 

behavior of the host countries. And I do think there is a mutual 

benefit for us to work together to make sure that, on the one hand, 

they are, in fact, investing on an economic basis, and, on the other 

hand, that we are receiving that investment in an open way. 

Mr. LYNCH. And you’re suggesting these would be—I know the 

discussion right now is voluntary codes of conduct, which would 

work on our side because we have a number of, I think, self-governing aspects, but those aren’t necessarily shared in a lot of these 

other central banks. Is there any proposition out there to have 

something that might have some teeth beyond the simple voluntary 

adoption? 

Mr. BERNANKE. I think at this point we are making good 

progress with conversations and discussions, international meetings, and I’m hopeful that this will work itself out. 

Mr. LYNCH. All right. Fair enough. 

Mr. Chairman, I know you have a shortage of time, so I am going 

to yield back. 

Mr. MILLER OF NORTH CAROLINA. Thank you. The gentleman 

from New Jersey, Mr. Garrett. 

Mr. GARRETT. I thank the gentleman for yielding, and I thank 

the Chairman for being here. 

I would like to preface my question to the Chairman today by 

first of all voicing my strong concerns with the plan that has been 

put out recently by the leadership of this committee and others, 

that would allow the Federal Housing Administration to purchase 

over 1 million homes over a 5-year period. The conservative cost 

projections in the committee’s budget and the review’s estimates 

that this would at the very least have the Federal Government in 

the house-buying business to the tune of $15 billion, and this is on 

top of another proposal that is being worked on right now that 

would provide as much as $20 billion in the forms of loans and 

grants, maybe a combination of the two, for the purchase of foreclosed or abandoned homes at or below the market values. 

Now, there is some justification that has been put out on this in 

the press by them, that says that there’s some public mention that 

a similar proposal to this was enacted back in the 1930’s during 

the Depression to help distressed homeowners and families. And I 

know we’ve heard testimony today and recently, experiencing the 

rough economic times and the slower-than-expected economic 

growth, maybe even a recession now or in the future. But based on 

45

what I’ve read and heard, including the witnesses that have come 

before the committee, I haven’t heard anyone saying that we’re 

anywhere near a Depression. 

So this leads me, Chairman, to this question. If we’re going to 

go and consider such Depression Era ideas as these during these 

economic downturns, what could we possibly consider if the economy grows even worse than it is today? 

Mr. BERNANKE. Well, you surprised me there. I thought you were 

going to ask me about this particular program. 

Mr. GARRETT. Well, I know your response usually when we ask 

for particular programs, what your response is. 

Mr. BERNANKE. Well, it depends on the circumstances. It depends on why the economy is worsening and where the problem is. 

My attitude is that we need to be flexible and address the situation 

as it arises. It is very hard to conjecture in advance how you will 

respond to a situation that will have many dimensions to it. 

In respect to the particular program you mentioned, I think it is 

worthwhile to be thinking about possible approaches one might 

take if the housing situation were to get much worse. At the moment, I think that the remedies I would support are expanded private-sector activities, FHA modernization, GSE reform. 

Mr. GARRETT. But we don’t have to go as far as this until that 

date comes when things get worse? 

Mr. BERNANKE. I don’t think we’re at that point, but I do think 

it’s worthwhile to keep thinking about those issues. I think that 

are a lot of difficulties, practical difficulties. How would you, for example, determine who to help? How would you ensure that the 

loans that you bought were not the bad apples in the barrel? There 

are a lot of difficult, technical problems. 

The Federal Reserve is working on issues like this just to try to 

understand how these things might work. Again, my attitude is 

that we need to be thinking about different alternatives and preparing for contingencies, but at the moment I am satisfied with the 

general approach that we’re currently taking. 

Mr. GARRETT. I appreciate that. You know, it sometimes seems 

like Congress is like that old axiom about old generals, that they’re 

always just fighting the last war, as we go into the next battle. Is 

that the case with regard to regulations as well, that no one really 

predicted, most people didn’t really predict where we are right now, 

a couple of years ago, or 2 or 3 years ago? So could we get maybe 

the worst of both worlds if we go in this direction that some are 

talking about, that we get: (a) the regulations that will maybe 

tighten the credit market too much on the one hand; and (b) we’re 

still not going to predict what the brilliant minds on Wall Street 

are going to come up some way to do an end-run around it anyway? 

Mr. BERNANKE. Well, there is a certain tendency to fight the last 

war in all areas of effort. But, as this episode has found areas of 

weakness and problems, we need to do our best to address them, 

and do our best to be alert to new problems that might crop up in 

other unforeseen areas. 

Mr. GARRETT. And just to close, the two gentlemen raised the 

issue about the dollar and the falling value there, the old axiom in 

there is, you know, inflation comes when too many dollars are 

chasing too few goods. So far, what we’ve done on the fiscal side 

46

of this is basically throw more dollars into it with a stimulus package, and my two questions to you are: One, does that do anything 

to actually change the mind set of creditors as far as their lending 

practice as a short-term lending like that? Does that really change 

their actual lending practices. And two, with the overall dollar 

value, there was an article in the Wall Street Journal today by 

David Ranson, I believe it is, which looks to say as far as the CPI 

and the way that we’re evaluating the value of these things, that 

they’re really backwards-looking and not forwards-looking, and 

that maybe we need to change the structure as to how we looked 

and measured the CPI and some of these valuations as well, in addition. 

Mr. BERNANKE. Well, I think the Bureau of Labor Statistics does 

a reasonably good job of measuring consumer prices, and that’s the 

index that we’re looking at. 

What was your, sorry, your first question was? 

Mr. GARRETT. Well, the first question is, you know, maybe we’re 

looking at this again backwards-looking to some extent, by throwing more dollars into the system. One is—we do it one way by 

throwing dollars through fiscal. You do it the other way by loosening up credit. Isn’t that just chasing more dollars after we’re not 

producing any more goods? 

Mr. BERNANKE. Again, the concern is that the economy will be 

producing less than its capacity, that there will be insufficient demand to use the existing capacity of the economy—that is the definition of economic slow-down. So, monetary policy and fiscal policy 

can be used to address that problem. 

I don’t think it would change the practices of lenders, but it 

might make them somewhat more confident that the economy 

would be stronger and make them a little bit more willing to lend. 

Mr. GARRETT. I appreciate it. 

Mr. MILLER OF NORTH CAROLINA. The gentleman’s time has expired. 

I now recognize myself. Mr. Chairman, I know that before you 

had this job, you were the CEO of the Princeton Economics Department. 

Mr. BERNANKE. That’s correct. 

Mr. MILLER OF NORTH CAROLINA. And I wanted to pursue a 

question that Mr. Moore of Kansas asked you. He said that there 

was legislation now pending that would treat home mortgages and 

bankruptcy the same way credit card debt was treated. I don’t 

know of any legislation like that. There is, however, legislation 

pending in both the House and the Senate that would make the 

treatment of home loans and bankruptcy the same as any other 

form of secure debt, including debt on investment property, mortgages on investment property, mortgages on vacation property, car 

loans, boat loans, loans on a washer and a dryer, or debt secured 

by any other asset. 

You said that you thought one result might be changing the 

bankruptcy law, higher interest rates. And in fact the opponents of 

that legislation have made some pretty dire predictions that no 

lender would lend with less than 20 percent equity, that they 

would make more than an 80 percent loan and the interest rates 

would go up a point and a half or two points, two and a half points. 

47

But they have not produced any kind of economic analysis to support that. I know one member who has said that they offered to 

let him see—they had an analysis, they’d let him see it privately, 

which sounded more the way you got offered to look at dirty pictures in the old days, not how you looked at economic analysis. 

A couple of weeks ago, there was a Georgetown study by a fellow 

named Levitan, that compared the terms of availability of mortgage lending in places in the United States at the same time that 

had different laws in effect. Between 1978 and 1994, the courts in 

different parts of the country interpreted the bankruptcy laws differently, interpreted whether mortgages could be modified differently, so in some parts of the country they’re being modified fairly freely, in some not at all. 

And the result of that study was that there was no real difference in the terms of availability of credit, and estimated that if 

there was any real difference at all, it might be 0.1 percent of an 

interest rate. Are you familiar with any economic study—and 

again, I assume that I’m correct that the way economists do things 

is they publish, they let others look at their factual assumptions, 

follow their logic, and how they reach their conclusions; I think at 

the Ph.D. level that’s called ‘‘peer review‘‘; in 8th-grade math class 

we called that ‘‘showing your work.’’ It’s the same concept. Are you 

familiar with any economic analysis that shows a substantial difference in the availability or terms of credit, based upon how mortgages are treated in bankruptcy? 

Mr. BERNANKE. Well, elementary analysis would suggest that if 

the security or the collateralization was less, there would be more 

of a risk premium of some kind, although it is hard to judge how 

much. I am not familiar with the study you mentioned, but I would 

be really interested to see it. 

Mr. MILLER OF NORTH CAROLINA. Okay. Does that sound like a 

valid basis for a study for a prediction is if one part of the country 

had in effect the law as legislation would make it, another part of 

the country had law in effect at the same time as what the law is 

now to compare the terms of availability of credit in those two 

areas? 

Mr. BERNANKE. That is an interesting approach. I think you 

would have to make sure that you were controlling for other factors, like regional and other differences, that might also be affecting the rates. 

Mr. MILLER OF NORTH CAROLINA. Okay. I also asked the Congressional Research Service to look at—before 1978 the law, bankruptcy law is treated, secured or mortgages on investment property 

and mortgages on homes exactly the same. Neither one could be 

modified in bankruptcy. 

After that, at least in some parts of the country, they could not—

it remained the same for home mortgages, and it became—it could 

be modified as to investment properties. 

I asked them to look at terms of availability of credit before and 

after 1978 for investment property versus home mortgages. And 

the conclusion was that if anything credit became more available 

for investment properties after 1978. There was an increase in 

mortgage lending, above that for home lending and the terms and 

48

credit, the terms and availability, the term seemed to be about the 

same. 

But it concluded that it was probably not the result of changes 

in the law, it was that there were so many forces in effect that it 

was almost impossible to identify any change. Does that sound correct? 

Mr. BERNANKE. I don’t know that study either. I think it would 

be interesting to see the difference in terms and availability between primary residences and investment properties today. I think 

there probably would be some difference at this point. But it would 

be worth evaluating that more carefully. 

Mr. MILLER OF NORTH CAROLINA. Okay. But there are several 

times when the law has changed, and the law has been different 

in one place or another. Another difference is the State law is on 

anti-deficiency, on deficiency judgements. Several States, including 

the world’s 5th largest—in California have anti-deficiency statues. 

All the evidence is that the terms and availability of credit is 

really no different. Does that suggest, is that a valid basis to conclude that there is not a substantial change in the terms of availability of credit from changes in the bankruptcy laws? 

Mr. BERNANKE. Well first of all, I think that taking this empirical approach is very worthwhile. This is the kind of thing that can 

be useful in providing information, but I really can’t comment on 

the quality of the studies you mentioned without looking at— 

Mr. MILLER OF NORTH CAROLINA. Right, well I know that you 

haven’t seen the study. It was a Georgetown University study. It 

was, it had foundation funding. It looked like an academic study, 

it had footnotes, it had charts. It had all those things that you expect of academic studies. 

And I understand that you haven’t reviewed it, but does the 

basis of the analysis sound like a legitimate basis generally? 

Mr. BERNANKE. It is an interesting approach to the issue. 

Mr. MILLER OF NORTH CAROLINA. And you don’t know of any 

study that shows that there is a basis for conclusion that there is 

a substantial point and a half difference in interest rates? 

Mr. BERNANKE. I have not reviewed any, no. 

Mr. MILLER OF NORTH CAROLINA. Okay. The gentleman from 

Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman, and I thank the chairman and ranking member for holding this hearing. Chairman 

Bernanke, it is good to see you again. You have had a very difficult 

job, and because time is of the essence, I will have but one question 

that may have a follow-up or two to it. 

There has been much talk about freezing interest rates for some 

period of time; one notion is freezing them for approximately 5 

years. Would you give us please your thoughts on what the results 

will be, freezing the interest rates for some period of time, approximately 5 years. My suspicion is that you might cover whether this 

would cause a shift in investment to other areas, if you would 

please. 

Mr. BERNANKE. Well, the idea of the freeze is to find a strategy 

by which lenders can work out larger numbers of loans. They are 

facing an unusual situation. Usually each loan, each foreclosure, 

49

each delinquency, is different; it depends on personal circumstances. 

Here we have a situation where literally hundreds of thousands 

of families or individuals may be facing foreclosure based on broad 

macroeconomic phenomenon—basically the decline in house prices 

and concerns with subprime lending. And the issue is, are there 

ways to be more efficient in working out loans and at larger scale? 

A freeze, which is what has been suggested by the HOPE NOW 

approach, is one way to do that. That could be a way to get more 

time to work out those loans. Again, it is a voluntary approach that 

they have come to through discussion. It doesn’t address by any 

means all people in this situation. For example, there are a lot of 

loans that default even before the interest rate resets. 

Mr. GREEN. Let me intercede for just a moment. If we had a 

mandatory freeze, what would be the impact, please? 

Mr. BERNANKE. I don’t know what the quantitative impact would 

be, frankly. Again, it would help some people. There are others who 

are delinquent even prior to the reset or who have other reasons 

to be delinquent. 

Mr. GREEN. Without talking about, if we can, the persons who 

might benefit directly from the freeze, let’s talk about investors. 

Would it create any sort of shift in investments from mortgages to 

some other form of investments? 

Mr. BERNANKE. Well, this goes back to the question I was asked 

earlier about contracts, and I think that it would be a fairly substantive step to re-write the existing contracts. And Congress 

would have to give that very serious consideration, because it 

would affect the valuation of the mortgages and behavior of investors. 

Mr. GREEN. Thank you very much, Mr. Chairman. I yield back 

so that you may leave in a timely manner. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Green, and 

thank you, Mr. Chairman. I think Chairman Frank promised to 

have you out by 1 p.m. You are getting 40 seconds extra, and if we 

both stay in our jobs for a really, really long time, I may sit here 

some time for your future testimony. 

Mr. BERNANKE. Thank you. 

Mr. MILLER OF NORTH CAROLINA. We stand adjourned. 

[Whereupon, at 1:00 p.m., the hearing was adjourned.] 

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