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38–392 PDF 2007

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

FIRST SESSION

JULY 18, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–52

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

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

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

July 18, 2007 ..................................................................................................... 1

Appendix: 

July 18, 2007 ..................................................................................................... 51

WITNESSES 

WEDNESDAY, JULY 18, 2007

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

System ................................................................................................................... 8

APPENDIX 

Prepared statements: 

Marchant, Hon. Kenny ..................................................................................... 52

Price, Hon. Tom ................................................................................................ 53

Putnam, Hon. Adam H. .................................................................................... 55

Waters, Hon. Maxine ........................................................................................ 57

Bernanke, Hon. Ben S. ..................................................................................... 65

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Monetary Policy Report to the Congress, submitted by the Board of 

Governors of the Federal Reserve System, dated July 18, 2007 ............... 76

Succeeding in the Global Economy: A New Policy Agenda for the American Worker, submitted by the Financial Services Forum, dated June 

26, 2007 .......................................................................................................... 107

Bachus, Hon. Spencer: 

Additional information requested from Chairman Bernanke ....................... 169

Neugebauer, Hon. Randy: 

Responses to questions submitted to Chairman Bernanke ........................... 171

Price, Hon. Tom: 

Responses to questions submitted to Chairman Bernanke ........................... 173

(1)

MONETARY POLICY AND THE 

STATE OF THE ECONOMY, PART II 

Wednesday, July 18, 2007

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

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

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

the committee] presiding. 

Present: Representatives Frank, Kanjorski, Maloney, Gutierrez, 

Watt, Meeks, Moore of Kansas, Hinojosa, Clay, Baca, Lynch, Miller 

of North Carolina, Green, Sires, Hodes, Ellison, Klein, Wilson, 

Perlmutter, Murphy; Bachus, Baker, Pryce, Castle, Royce, Paul, 

Gillmor, Manzullo, Shays, Capito, Garrett, Pearce, Price, Davis of 

Kentucky, McHenry, Campbell, Putnam, Bachmann, and Roskam. 

The CHAIRMAN. This is the semiannual Humphrey-Hawkins 

hearing. I do want to mention before the time starts, let me tell 

the timekeeper, there is one sort of general thing I want to take 

note of. This is, as people know, the Humphrey-Hawkins bill 

named for its authors, Senators Hubert Humphrey and Gus Hawkins. A month from today will be Gus Hawkins’ 100th birthday. He 

couldn’t be with us today, but we know he is aware of the hearing. 

His successor in Congress will be with us, the gentlewoman from 

California, Ms. Waters. But we did want to take note of this very 

significant accomplishment and wish Gus a very happy birthday as 

we his observe his birthday one month in advance with this very 

important part of his legacy. 

Now, beginning my statement, I want to express my appreciation 

for the part of the statement that deals with consumer problems. 

This a very important step forward. And I want to say that I think 

there have been some partially inaccurate stories in the press. It 

appears to me there is some unhappiness with the Chairman over 

consumer inactivity. In fact, I have historically been concerned 

about the Fed’s failure to do that, and particularly their failure to 

use the authority they have had under the Federal Trade Act to 

spell out unfair deceptive practices. But this is something that well 

pre-dated the Chairman and that he is, in fact, addressing. 

And so I do not think it is appropriate for people to impute this 

unhappiness to him. As I read the report, and sort of the last 3 or 

4 pages of the report were about this consumer issue, it became 

very clear to me that this is not ‘‘Uncle Alan’s semiannual report.’’ 

We think that we are moving forward on this. I do, however, want 

to, in my statement, address the economic issue, the macroeconomic issue. Obviously the subprime and some issues are ecoVerDate 0ct 09 2002 11:48 Nov 15, 2007 Jkt 038392 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\38392.TXT HFIN PsN: TERRIE
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nomic. I appreciate the Chairman’s reemphasis in his opening remarks of the Fed’s commitment to the dual mandate to dealing 

both with inflation and the need to restrain inflation and to maximize employment. But Mr. Chairman, we have an honest intellectual difference here. I must say I think this is an instance of cultural lag. That is, I believe that the single most pressing economic 

issue facing the country today is the excessive and growing inequality. 

And I want to read from a report issued under the auspices of 

Don Evans, President Bush’s first Secretary of Commerce and a 

close friend of the President, the head of the Financial Services 

Forum, a 3-member panel that he commissioned, including Grant 

Aldonas, who was a high ranking Commerce Department official 

with trade responsibilities under President Bush, and Matthew 

Slaughter, immediate past member of the Council of Economic Advisors. And here on page 7, we have copies of this report available, 

and I think this is essential, this is a report put out by Secretary 

of Commerce Evans: Two of the three authors were high ranking 

economic officials of the Bush Administration, this Bush Administration. 

‘‘From the mid-to-late 1970’s to the mid-to-late 1990’s, the real 

and relevant earnings of less skilled Americans was poor relative 

to both economy-wide average productivity gains and also the earnings of their more-skilled counterparts. And since around 2000 the 

large majority of American workers has seen poor income growth. 

Only a small share of workers at the very high end has enjoyed 

strong growth in incomes. The strong U.S. productivity growth of 

the past several years has not been reflected in broad growth in 

wage and salary earnings.’’ That is a fact that we need to accept. 

It is reinforced. Some statistics can be used in other ways, and people sometimes do averages, but I would call people’s attention to 

the footnote on page 6 of the Monetary Policy Report that Chairman Bernanke has submitted. 

Let me read the footnote: ‘‘According to the published data, real 

disposable personal income rose at an annual rate of 43⁄4 percent 

in the first quarter of this year. However, a substantial part of the 

increase occurred because the Bureau of Economic Analysis added 

$50 billion at an annual rate to its estimate of first quarter wages 

and salaries in response to information that bonus payments and 

stock option exercises around the turn of the year were unusually 

large. Because the BEA did not assume that these payments carried forward into April real disposable personal income fell sharply 

in that month.’’ By the way, the figure that is given by that largely 

Republican panel on economic growth, which I talked about, is that 

about 3.8 percent of the population has seen real growth in income 

in these past 6 years and the rest have not, and some have seen 

a real erosion. That includes, by the way, people’s college education. 

Education does not appear to be the talisman that dissolves this. 

Here is our problem: The resentment that is generated by that is 

a significant problem in America today. A couple of weeks ago, the 

immigration bill blew up noisily. Trade promotion authority expired very unnoisily, not only not with a bang, not even with a 

whimper; it just went away. In neither case, in my view, were the 

3

defeat of those two measures, whether people liked them or not, 

due to problems and issues intrinsic to those measures. The key 

factor was the anger on the part of that large percentage of Americans who were not seeing any of the increase in wealth being distributed to them who say, ‘‘No, we are not going forward.’’ 

I think, in some cases, the anger was displaced at the wrong 

enemy, but the anger is there. My problem, Mr. Chairman, is that 

the report and the proposal, in some ways, will make this worse. 

Here’s where we are. The report and your statements say that you 

expect us to grow slightly below trend for the rest of this year and 

next year, the trend being 3 percent of growth, and we are in the 

2-plus percent. I do want to say semantically that when we are projected to be somewhat below growth, the answer is near trend. 

When we are above it, it says above. While mere trend means 

below trend. At the same time, you predict an increase in unemployment. Not a huge one, but up into the 43⁄4 range. You know, 

that softness in the labor market is one of the things that will 

erode real wages. The only time we got real increases in real wages 

for the large number of people in the population was in the late 

1990’s when unemployment went to 3.9 percent. We hit a very 

tight labor market, because we have had an erosion of institutions 

that help labor in this country, as Peter Temin and Frank Levy 

pointed out in their MIT paper, which we have available. So we are 

really dependent on a high level of overall growth. 

You also predict, so you say, growth below trend—a slight increase in unemployment and you expect inflation to moderate. But 

in fact, in an odd phrase, you say the real danger is that inflation 

will fail to moderate as you expect it to. So your lack of confidence 

in your expectation says that the likeliest thing you ought to do is 

to raise interest rates and slow things down. That is you see the 

major danger is inflation. 

If you see the major danger is inflation at a time when inflation 

appears to be stable, and inflation expectations and the concept important to you appear to be fairly well-anchored for the long term, 

and we appear to be growing at somewhat below trend, not a huge 

amount, but below trend, and unemployment is going to go up, at 

best, we are going to continue this problem. You do note, and I appreciate this, that historically profits greatly increase, greatly exceed wages. Let me read the exact, and I give myself an extra 

minute to read this. I will make up for it in my questioning. But 

there is a specific reference to the fact that given historic trends, 

there is room for wages to go up and profits still would be in very 

good shape without it having an inflationary impact. 

And so with that, with wages having lagged significantly for 

years, with a very small percentage of the population having gotten 

any real increase in the last 5 years, with inflation predicted to be 

stable, with growth predicted to be below trend by a little bit, unemployment predicted to rise, even as the labor force drops, which 

means slower job growth, you say the main concern is inflation. I 

think that is cultural lag. I would have understood that better 

some time ago. But given the social—and, by the way, I would 

throw in here the savings rate. People omit the absence of a savings rate. 

4

When only 3.8 percent of the population has gotten any real increase in their wages, in their take-home pay in the last 5 years, 

what is it that people expect them to save, cancelled stamps? People can’t save money if at the end of the month they don’t have 

any, if their wages have not come up. So with all that, the conclusion that the main danger facing us now, or the more important 

one, is inflation, troubles me, because I think, at best, this current 

situation of increasing inequality, with all of its negative social, 

economic, and political consequences, stays as is and could get 

worse. I now recognize the gentleman from Alabama. 

Mr. BACHUS. I thank the chairman, and Chairman Bernanke, 

thank you for your support and continued strong and wise stewardship of our Nation’s monetary policy. As I said when you appeared 

before this committee in February, there is a difference of opinion 

on the strength of the economy. I would like to review some of the 

facts, which I think are hard to argue with. First of all, economic 

growth is robust, as illustrated by 132,000 new jobs created in 

June alone, and as you say in your testimony, 850,000 since the 

start of the year—over 8 million new jobs created since August of 

2003. Unemployment remains low. Despite higher oil prices, and 

really it is something I am going to mention later in my remarks, 

oil has gone from $50 to $75 a barrel just from the middle of January. 

And despite the rise in energy cost, inflation is under control following the 2.4 percent in February 2, 2007, and 1.9 percent in May. 

While it has slowed recently, productivity has averaged 2.8 percent 

growth since 2001, well above the average productivity growth experienced in the 1970’s, 1980’s, or 1990’s. Real wages have shown 

a healthy increase over the past year. And are supporting concerned strong consumer spending, even in the face of declines in 

real estate values in many areas of the country. The stock market 

continues to deliver superior returns to investors. This economic 

success story is a result of sound economic policies pursued, I believe, by this Republican Administration, by our Treasury Department, and by the Federal Reserve. 

They are also a testament to the hard work and innovation of 

American businesses and workers who comprise the American 

economy. Chairman Bernanke, I believe you deserve a great deal 

of credit for the performance of the economy as well. Instead of 

micromanaging monetary policy, you have held an absolutely 

steady hand for a year now balancing the tension between modest 

upside inflation risk and modestly slower growth. 

No one has summarized your tenure at the Fed better than The 

New York Times. In a June 25th story, less than a month ago, they 

said this, ‘‘Could an ivy league academic like this ever have street 

credibility?’’ The answer is clear: yes, yes, and yes again. The same 

article also observed that the economy today is pretty much exactly 

where Mr. Bernanke hoped it would be one year ago. Economic 

growth has slowed slightly, gradually reducing inflationary pressures. And while job creation has slowed, unemployment remains 

low at 4.5 percent. That is The New York Times. 

Before I conclude my remarks, Mr. Chairman, I would like to 

bring your attention to two topics of particular interest to members 

of this committee. First, as you know, Chairman Frank and I are 

5

both concerned over the recent turmoil in the subprime lending 

market. Just last week, Representatives Gillmor, Pryce, Miller, 

LaTourette, Capito, and I introduced legislation on this subject. Developing a consensus solution to this problem, while determining 

the Fed’s proper role in regulating the mortgage industry, are priorities for Members on both sides of the aisle. 

The committee would benefit from your thoughts on the current 

state of the subprime mortgage market and its potential impact in 

the larger economy. And second, Mr. Chairman, the Fed, it has 

often been said, has a dual mandate, and that is price stability and 

full employment. While that mandate has certain factors that are 

more subject to management and control than others, there is one 

wild card, possibly two, when you talk about core inflation and 

then backing out energy and food. The wild card to me, and the 

disturbing factor in our economy, is energy cost over which the 

Federal Reserve has very little short term or long term influence. 

As I said earlier, the price of oil, if you go back to July of last year, 

$75, where it is today, but we have gone down to $50 a barrel and 

back up to $75. Some people say we will get relief because there 

may be an economic slowdown in China or India or Europe and 

that may bring us relief, but that would not be good for the economy. So we get in a situation where China is growing at 11 percent. Their energy demands are growing. And U.S. manufacturing, 

in fact, the largest contributor to job loss in this country over the 

last 10 years is the high cost of energy. And yet this Congress, for 

10 years—for a year or two we have talked about the subprime situation. 

I would tell colleagues on both sides of the aisle, for 10 years, we 

have been talking about our dependency on foreign oil, we have 

been talking about the high cost of energy, we have talked about 

its devastating impact on employment and on manufacturing, but 

yet we have done nothing. China is building a new nuclear power 

plant every week. With every plant they bring online, they reduce 

the cost of energy and increase their competitiveness over us. Mr. 

Chairman, I believe that Congress’ failure over many years to address this energy cost has created and will continue to create real 

problems for the Federal Reserve as you try to cope with both price 

stability and full employment, because I think the high cost of energy is a wild card over which you have no control. And it is my 

greatest concern, and I am sure it is a great concern to you moving 

forward. 

Let me conclude by saying that members—both Republican and 

Democrat—on this committee respect your experience, your judgment, and your obvious commitment to keeping America’s economy 

strong and competitive. We appreciate you being here and look forward to your comments. 

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

Domestic and International Monetary Policy Subcommittee, is recognized for 3 minutes. 

Mr. GUTIERREZ. Thank you, Chairman Frank, and good morning, 

Chairman Bernanke, and welcome back. I think you will hear some 

of the same major themes from this side of the aisle that you heard 

in February. There is good reason for this, I believe. I can tell you 

that when I go back to my district and meet with middle class and 

6

lower middle class working Americans, they just aren’t feeling the 

benefits of a growing economy. Jobs can be found, but they aren’t 

necessarily steady, well-paying jobs. And those who have steady 

work are facing stagnant wages. So much of the discussion I am 

hearing from economists about inflationary concerns caused by rising labor costs just don’t ring true with many workers, at least not 

in my district. More than tangible concerns, many of my constituents just feel uneasy about their economic security. Of course, 

these are the same families who are feeling the crunch of rising 

health care costs and increasing costs of education, all the while 

trying to save for retirement. It is not just that these families are 

living paycheck-to-paycheck; it is that they have little or no savings, and in some cases, no bank accounts at all, so they pay higher 

interest rates and more fees for basic financial services than they 

should. I raise the issue of inequality, Chairman Bernanke, because I believe economic inequality is a product of monetary policy 

choices. And I believe that inequality is inside the scope of the Federal Reserve’s ‘‘dual mandate.’’ Yesterday, Chairman Frank assembled an excellent panel of economists that he referred to earlier in 

a hearing held before the committee on the dual mandate. One of 

the economists who testified, James Galbraith, recently completed 

a study on whether the Federal Reserve has observed the dual 

mandate. One of the findings of the study is that inequality in pay 

or earnings, especially in the manufacturing sector, does react to 

rate setting decisions of the Federal Reserve, and that in the statistical sense monetary policy causes inequality. 

I would like you to respond to Mr. Galbraith’s assertions and discuss whether or not the Federal Open Market Committee considers 

economic inequality issues as a factor in setting our monetary policy. I thank you and I yield back the balance of my time. 

The CHAIRMAN. The gentleman from Texas, Mr. Paul, the ranking member of the subcommittee. 

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

Bernanke. I share your concern for the inequality that has developed in our country. I think it is very real, I think it is a source 

of great resentment, and unfortunately, I think it is one of those 

things that puts a lot of pressure on Congress to increase the 

amount of government programs and government spending, which 

I do not think is the answer. I believe the inequality comes specifically from the type of currency we have. When there is a deliberate 

debasement of a currency, it is predictable that the middle class is 

injured, the poor are hurt, and there is a transfer of wealth to the 

wealthy, and until we understand that, I do not believe we can 

solve this problem. 

And if we resort to continued monetary inflation and more government programs, we will only make this inequality worse. This 

is exactly the opposite of what happens when you have a sound 

currency and free markets, because it is the sound currency and 

free markets which creates the middle class and creates prosperity 

and allows the best distribution of this wealth. Inflation is a monetary phenomenon. It comes from the Federal Reserve system. The 

Federal Reserve has tremendous pressure put on them, because almost everybody wants low interest rates, except if you happen to 

be a saver, then you might not like artificially low interest rates. 

7

But, of course, that contributes to the lack of savings, which is another problem that we have in this country. We concentrate on inflation by implying, and everybody casually accepts that inflation 

is a price problem. But the prices that go up are one of the consequences of inflation. Inflation causes malinvestment, it causes excessive debt, and it causes financial bubbles that we have to deal 

with. But we have a lot of information today available to us to 

show that there is a lot of monetary inflation going on. 

For instance if you look at MZM, it is growing at almost a 9 percent rate. M3 is no longer available to us from official sources, but 

private sources tell us it is growing at a 13 percent rate. Of course, 

we can reassure ourselves and say that the CPI is growing at a 2.6 

percent rate. But if you go back to the old method of calculating 

the CPI, closer to what the average person is suffering, and one of 

the reasons why there is inequality going on, is it is growing at 

over a 10 percent rate. 

The fact that the dollar is weak on the international exchange 

markets cannot be ignored. For instance, in just 6 months, the Canadian dollar increased 11 percent against our dollar. This should 

stir up some concerns. But one concern that I have, that I think 

is causing more problems and keeps us from coming to a solution, 

is the divorce between the exchange value of a dollar on the international exchange markets and the effort to lower the value of a 

dollar in order to increase exports, which can only be done through 

inflation, at the same time, believing that we can have stability in 

prices at home, because that is a disconnect that is not possible. 

If we strive for a lower dollar in exchange markets, we will have 

price increases here at home and we have to deal with it. I yield 

back. 

The CHAIRMAN. Thank you. Mr. Chairman, I appreciate, as I 

said, the comments and the efforts you are now undertaking regarding subprime, and we will work more with those. I will be talking not much about those this morning, but I do want to acknowledge that is a significant advance, and we look forward to working 

together. I also want to comment, I was just reading my clips as 

they come in, and I had one commentary saying that the difference 

between us was that I continued to believe in the Phillips Curve, 

and you do not. And I don’t. In fact, one of the things that I have 

credited Chairman Greenspan for was in the 1990’s ignoring those 

who told him that if unemployment dropped below first 6 percent, 

then 51⁄2 percent, then 5 percent, and then 41⁄2 percent, it would 

be inevitably inflationary. It seems to me that this whole notion of 

a nonaccelerating inflation rate of unemployment turned out only 

to be a lagging indicator of unemployment. 

As unemployment dropped, people dropped that rate, but it never 

had that prediction. I think we were dealing with the real economy, 

and here are the issues, but here is my concern: It is on the inequality issue, which I think has become a significant political 

problem, and I assume you were not happy to see trade promotion 

authority die. My guess is that you thought we should have some 

form of an immigration bill. And again, I would stress, I don’t 

think that the solution to either of those problems is intrinsic to 

those problems. It is the sea in which they have to survive that has 

turned against them. We know what the numbers are in inequality. 

8

What troubles me a little bit is that in the report, and I do remember in previous reports references to wages, there are no wage 

indexes in here. There are compensation indexes, which as you acknowledge, and we know, include pensions and include healthcare. 

But given what you expect to go forward, let me ask you, for I 

think it is one of the most important predictions, going forward do 

you see any abbreviation of this trend of the distribution of wealth 

being as concentrated as it now is. It is documented in the report 

that I assume you are familiar with that Don Evans put forward, 

where 3.8 percent of the population has gotten real wage increases 

in the last 5 years. Do you see any abbreviation of that trend going 

forward? 

Mr. BERNANKE. Well, I have discussed this issue in a number of 

contexts. I think that in order to alleviate— 

The CHAIRMAN. I apologize. You haven’t given your opening 

statement yet. And you can comment now if you want to. I was 

wondering why the time hadn’t started yet. If this had been my 

first hearing, I could explain that mistake a little bit easier. No 

good explanation comes to mind. You can comment now or just do 

your opening statement and come back to it. 

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

SYSTEM 

Mr. BERNANKE. I will do my opening statement. Thank you. 

Chairman Frank, Ranking Member Bachus, and members of the 

committee, I am pleased to present the Federal Reserve’s Monetary 

Policy Report to the Congress. As you know, this occasion marks 

the 30th year of semiannual testimony on the economy and monetary policy for the Federal Reserve. In establishing these hearings—Mr. Hawkins and Mr. Humphrey were mentioned—the Congress proved prescient in anticipating the worldwide trend toward 

greater transparency and accountability of central banks in making 

monetary policy. Over the years, these testimonies and the associated reports have proved an invaluable vehicle for the Federal Reserve’s communication with the public about monetary policy, even 

as they have served to enhance the Federal Reserve’s accountability for achieving the dual objectives of maximum employment 

and price stability set forth by the Congress. 

I take this opportunity to reiterate the Federal Reserve’s strong 

support of the dual mandate. In pursuing maximum employment 

and price stability, monetary policy makes its greatest possible contribution to the general economic welfare. 

Let me now review the current economic situation and the outlook beginning with developments in the real economy and the situation regarding inflation before turning to monetary policy. I will 

conclude with comments on issues related to lending to households 

and consumer protection, topics not normally addressed in monetary policy testimony, but in light of recent developments deserving 

of our attention today. 

After having run at an above-trend rate earlier in the current 

economic recovery, U.S. economic growth has proceeded during the 

past year at a pace more consistent with sustainable expansion. 

Despite the downshift in growth, the demand for labor has reVerDate 0ct 09 2002 11:48 Nov 15, 2007 Jkt 038392 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\38392.TXT HFIN PsN: TERRIE
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mained solid with more than 850,000 jobs being added to payrolls 

thus far in 2007 and the unemployment rate having remained at 

41⁄2 percent. The combination of moderate gains in output and solid 

advances in employment implies that recent increases in labor productivity have been modest by the standards of the last decade. 

The cooling of productivity growth in recent quarters is likely the 

result of cyclical or other temporary factors, but the underlying 

pace of productivity gains may also have slowed somewhat. To a 

considerable degree, the slower pace of economic growth in recent 

quarters reflects the ongoing adjustment in the housing sector. 

Over the past year, home sales in construction have slowed substantially and house prices have decelerated. Although a leveling 

off of home sales in the second half of 2006 suggested some tentative stabilization of housing demand, sales have softened further 

this year, leading the number of unsold new homes in builders’ inventories to rise further relative to the pace of new home sales. Accordingly, construction of new homes has sunk further, with starts 

of new single family houses thus far this year running 10 percent 

below the pace in the second half of last year. 

The pace of home sales seems likely to remain sluggish for a 

time, partly as a result of some tightening and lending standards 

and the recent increase in mortgage interest rates. Sales should ultimately be supported by growth in income and employment, as 

well as by mortgage rates that—despite the recent increase—remain fairly low relative to historical norms. However, even if demand stabilizes as we expect, the pace of construction will probably 

fall somewhat further as builders work down the stocks of unsold 

new homes. Thus, declines in residential construction will likely 

continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over 

time. 

Real consumption expenditures appear to have slowed last quarter following two quarters of rapid expansion. Consumption outlays 

are likely to continue growing at a moderate pace, aided by a 

strong labor market. Employment should continue to expand, 

though possibly at a somewhat slower pace than in recent years as 

a result of the recent moderation in the growth of output and ongoing demographic shifts that are expected to lead to a gradual decline in labor force participation. Real compensation appears to 

have risen over the past year, and barring further sharp increases 

in consumer energy costs, it should rise further as labor demand 

remains strong and productivity increases. 

In the business sector, investment in equipment and software 

showed a modest gain in the first quarter. A similar outcome is 

likely for the second quarter, as weakness in the volatile transportation equipment category appears to have been offset by solid 

gains in other categories. Investment in nonresidential structures, 

after slowing sharply late last year, seems to have grown fairly vigorously in the first half of 2007. Like consumption spending, business fixed investment overall seems poised to rise at a moderate 

pace, bolstered by gains in sales and generally favorable financial 

conditions. Late last year and early this year, motor vehicle manufacturers and firms in several other industries found themselves 

with elevated inventories, which led them to reduce production to 

10

better align inventories with sales. Excess inventories now appear 

to have been substantially eliminated and should not prove a further restraint on growth. 

The global economy continues to be strong. Supported by solid 

economic growth abroad, U.S. exports should expand further in 

coming quarters. Nonetheless our trade deficit, which was about 

51⁄4 percent of nominal gross domestic product in the first quarter, 

is likely to remain high. 

For the most part, financial markets have remained supportive 

of economic growth. However, conditions in the subprime mortgage 

sector have deteriorated significantly reflecting mounting delinquency rates on adjustment rate loans. In recent weeks, we have 

also seen increased concerns among investors about credit risk on 

some other types of financial instruments. Credit spreads on lower 

quality corporate debt have widened somewhat and terms for some 

leveraged business loans have tightened. Even after their recent 

rise, however, credit spreads remain near the low end of their historical ranges and financing activity in the bond and business loan 

markets has remained fairly brisk. 

Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007 with growth then strengthening a bit in 2008 to a rate close to the economy’s underlying 

trend. Such an assessment was made around the time of the June 

meeting of the Federal Market Committee by the members of the 

Board of Governors and the presidents of the Reserve Banks, all 

of whom participate in deliberations on monetary policy. The central tendency of the growth forecast, which are conditioned on the 

assumption of appropriate monetary policy, is for real GDP to expand roughly 21⁄4 to 21⁄2 percent this year and 21⁄2 to 23⁄4 percent 

in 2008. The forecasted performance for this year is about 1⁄4 percentage point below that projected in February, the difference being 

largely a result of weaker than expected residential construction 

activity this year. The unemployment rate is anticipated to edge up 

between 41⁄2 and 43⁄4 percent over the balance of this year and 

about 43⁄4 percent in 2008, a trajectory about the same as the one 

expected in February. 

I turn now to the inflation situation. Sizable increases in food 

and energy prices have boosted overall inflation and eroded real incomes in recent months, both unwelcome developments. As measured by changes in the price index for personal consumption expenditures (PCE inflation), inflation ran at an annual rate of 4.4 

percent over the first 5 months of this year, a rate that, if maintained, would clearly be inconsistent with the objective of price stability. Because monetary policy works with a lag, however, policymakers must focus on the economic outlook. Food and energy prices 

tend to be quite volatile, so that, looking forward, core inflation 

(which excludes food and energy prices) may be a better gauge than 

overall inflation of underlying inflation trends. Core inflation has 

moderated slightly over the past few months, with core PCE inflation coming in at an annual rate of about 2 percent so far this year. 

Although the most recent readings on core inflation have been favorable, month-to-month movements in inflation are subject to considerable noise, and some of the recent improvement could also be 

the result of transitory influences. However, with long-term inflaVerDate 0ct 09 2002 11:48 Nov 15, 2007 Jkt 038392 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\38392.TXT HFIN PsN: TERRIE
11

tion expectations contained, futures prices suggesting that investors expect energy and other commodity prices to flatten out, and 

pressures in both labor and product markets likely to ease modestly, core inflation should edge a bit lower, on net, over the remainder of this year and next year. The central tendency of FOMC 

participants’ forecast for core PCE inflation—2 to 21⁄4 percent for 

2007 and 13⁄4 to 2 percent in 2008—is unchanged from February. 

If energy prices level off as currently anticipated, overall inflation 

should slow to a pace close to that of core inflation in coming quarters. 

At each of its four meetings so far this year, the FOMC has 

maintained its target for the Federal funds rate at 51⁄4 percent, 

judging that the existing stance of policy was likely to be consistent 

with growth running near trend and inflation staying on a moderating path. As always, in determining the appropriate stance of 

policy, we will be alert to the possibility that the economy is not 

evolving in the way we currently judge to be the most likely. One 

risk to the outlook is that the ongoing housing correction might 

prove larger than anticipated with possible spillovers onto consumer spending. 

Alternatively, consumer spending, which has advanced relatively 

vigorously, on balance, in recent quarters, might expand more 

quickly than expected; in that case, economic growth could rebound 

to a pace above its trend. With the level of resource utilization already elevated, the resulting pressures in labor and product markets could lead to increased inflation over time. Yet another risk 

is that energy and commodity prices could continue to rise sharply 

leading to further increases in headline inflation, and if those costs 

pass through to the prices of nonenergy goods and services, to higher core inflation as well. Moreover, if inflation were to move higher 

for an extended period and the increase became embedded in 

longer-term inflation expectations, the reestablishment of price stability would become more difficult and costly to achieve. With the 

level of resource utilization relatively high and with the sustained 

moderation in inflation pressures yet to be convincingly demonstrated, the FOMC has consistently stated that upside risks to 

inflation are its predominant policy concern. 

In addition to its dual mandate to promote maximum employment and price stability, the Federal Reserve has an important responsibility to help protect consumers in financial services transactions. For nearly 40 years, the Federal Reserve has been active 

in implementing, interpreting, and enforcing consumer protection 

laws. I would like to discuss with you this morning some of our recent initiatives and actions, particularly those related to subprime 

mortgage lending. 

Promoting access to credit and to home ownership are important 

objectives, and responsible subprime mortgage lending can help to 

advance both goals. In designing regulations, policymakers should 

seek to preserve those benefits. That said, the recent rapid expansion of the subprime market was clearly accompanied by deterioration in underwriting standards, and in some cases, by abusive lending practices and outright fraud. In addition, some households took 

on mortgage obligations they could not meet, perhaps in some cases 

because they did not fully understand the terms. Financial losses 

12

have subsequently induced lenders to tighten their underwriting 

standards. Nevertheless, rising delinquencies in foreclosures are 

creating personal, economic, and social distress for many homeowners and communities, problems that likely will get worse before 

they get better. 

The Federal Reserve is responding to these difficulties at both 

the national and the local levels. In coordination with other Federal 

supervisory agencies, we are encouraging the financial industry to 

work with borrowers to arrange prudent loan modifications to avoid 

unnecessary foreclosures. Federal Reserve banks around the country are cooperating with community and industry groups that work 

directly with borrowers who are having trouble meeting their mortgage obligations. We continue to work with organizations that provide counseling about mortgage products to current and potential 

homeowners. We are also meeting with market participants—including lenders, investors, servicers, and community groups—to 

discuss their concerns and to gain information about market developments. 

We are conducting a top-to-bottom review of possible actions we 

might take to help prevent recurrence of these problems. First, we 

are committed to providing more effective disclosures to help consumers defend against improper lending. Three years ago, the 

Board began a comprehensive review of Regulation Z, which implements the Truth in Lending Act (TILA). The initial focus of our review was on disclosures related to credit cards and other revolving 

credit accounts. After conducting extensive consumer testing, we 

issued a proposal in May that would require credit card issuers to 

provide clearer and easier-to-understand disclosures to customers. 

In particular, the new disclosures would highlight applicable rates 

and fees, particularly penalties that might be imposed. The proposed rules would also require card issuers to provide 45 days’ advance notice of a rate increase or any other change in account 

terms so that consumers will not be surprised by unexpected 

charges and will have time to explore alternatives. 

We are now engaged in a similar review of the TILA rules for 

mortgage loans. We began this review last year by holding four 

public hearings across the country during which we gathered information on the adequacy of disclosures for mortgages, particularly 

for nontraditional and adjustable rate products. As we did with 

credit card lending, we will conduct extensive consumer testing of 

proposed disclosures. Because the process of designing and testing 

disclosures involves many trial runs, especially given today’s diverse and sometimes complex credit products, it may take some 

time to complete our review and propose new disclosures. 

However, some other actions can be implemented more quickly. 

By the end of this year, we will propose changes to TILA rules to 

address concerns about mortgage loan advertisements and solicitations that may be incomplete or misleading and to require lenders 

to provide mortgage disclosures more quickly so that consumers 

can get the information they need when it is most useful to them. 

We already have improved a disclosure that creditors must provide 

to every applicant for an adjustable rate mortgage to explain better 

the features and risks of these products, such as ‘‘payment shock’’ 

and rising loan balances. 

13

We are certainly aware, however, that disclosure alone may not 

be sufficient to protect consumers. Accordingly, we plan to exercise 

our authority under the Home Ownership and Equity Protection 

Act (HOEPA) to address specific practices that are unfair or deceptive. We held a public hearing on June 14th to discuss industry 

practices, including those pertaining to prepayment penalties, the 

use of escrow accounts for taxes and insurance, stated income and 

low documentation lending, and the evaluation of a borrower’s ability to repay. The discussion and ideas we heard were extremely 

useful, and we look forward to receiving additional public comments in coming weeks. Based on the information we are gathering, I expect that the Board will propose additional rules under 

HOEPA later this year. 

In coordination with the other Federal supervisory agencies, last 

year we issued principles-based guidance on nontraditional mortgages, and in June of this year, we issued supervisory guidance on 

subprime lending. These statements emphasize the fundamental 

consumer protection principles of sound underwriting and effective 

disclosures. In addition, we reviewed our policies related to the examination of nonbank subsidiaries of bank and financial holding 

companies for compliance with consumer protection laws and guidance. 

As a result of that review, and following discussions with the Office of Thrift Supervision, the Federal Trade Commission, and 

State regulators, as represented by the Conference of State Bank 

Supervisors and the American Association of Residential Mortgage 

Regulators, we are launching a cooperative pilot project aimed at 

expanding consumer protection compliance reviews at selected nondepository lenders with significant subprime mortgage operation. 

These reviews will begin in the fourth quarter of this year and will 

include independent State-licensed mortgage lenders, nondepository mortgage lending subsidiaries of bank and thrift holding companies, and mortgage brokers doing business with or serving as 

agents of these entities. The agencies will collaborate in determining the lessons learned and in seeking ways to better cooperate 

in ensuring effective and consistent examinations and improved enforcement for nondepository mortgage lenders. Working together to 

address jurisdictional issues and to improve information sharing 

among agencies, we will seek to prevent abusive and fraudulent 

lending while ensuring that consumers retain access to beneficial 

credit. 

I believe that the actions I have described today will help address the current problems. The Federal Reserve looks forward to 

working with the Congress on these important issues. Thank you, 

Mr. Chairman. 

[The prepared statement of Chairman Bernanke can be found on 

page 65 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Chairman. And sometimes you 

do get a second chance not to screw up, which I apparently have, 

and I can ask my questions at an appropriate time with the parties. Let me just ask two questions. The monetary report on page 

2, and although unit labor costs in the nonfarm business sector 

have been rising, the average market for prices or for unit labor 

costs is still high by historical standards, an indication that firms 

14

can potentially absorb higher costs, at least for a time, through a 

narrowing of profit margins. That is where wages have gone, to 

some extent, in higher profit margins. 

And then in the Don Evans, Grant Aldonas, Matthew Slaughter, 

Robert Lawrence report, here is their summary on page 36 in the 

Financial Services Forum, during this period, 2000 and 2005, an 

astonishingly small fraction of workers, just 3.4 percent, was an 

educational group that have enjoyed any increase at all in mean inflation adjusted money earnings. Those with doctorates and JDs, 

MBAs and MBs, in contrast to earlier decades, even college graduates and those with nonprofessional masters degrees, 29 percent 

of workers suffered declines in mean real earnings. So the question 

is, is there anything in sight that would alleviate this situation? 

Mr. BERNANKE. First, we have seen some recent increases in real 

wages over the last year. Average hourly earnings are up more 

than a percentage point. Secondly, I think that part of what has 

happened in the last few years has been the effective energy prices 

which have risen rather rapidly and absorbed a good bit of buying 

power from consumers. Over the longer period of time, people with 

greater education—college education and so on—have been seeing 

real increases in their incomes, and I expect that to continue. But 

many of the points you raise about inequality I would be happy to 

address, but I do think that we will see improvement. 

The CHAIRMAN. Well, I am troubled by kind of a complacency 

there, Mr. Chairman. First of all, yes, they went up some in the 

first quarter and went down in the second quarter according to 

your report, real wages. Second, you said, well, it is fuel. Well, 3.4 

percent of the people, what, are they flying around on broomsticks? 

I mean, the fact is that it is not everybody. There is a real inequality here. The 29 percent who had college degrees and masters degrees have suffered real declines in the mean there over the last 

5 years. I have to say, I know that education is always the answer. 

I am struck again. This is a report put forward by some very 

thoughtful Republican members of the Bush Administration in 

which they essentially say education is greatly exaggerated as a 

near-term improvement. 

And they point out there is a generational issue. But part of the 

problem with education is that some people were educated 10 and 

15 years ago and they were told, well, learn these software skills, 

learn these other skills, and many of those jobs are now either 

outsourced directly, or because of the threat of outsourcing, they 

are subject to competitive pressures that hold it down. And then 

it does seem to me what you talk about going forward, is inflation 

a greater danger to you than a continuation of this trend? I predict 

you are going to see this continued gridlock. Are there no things 

you think we should be able to do to try and reduce this trend of 

inequality than just sit and hope? 

Mr. BERNANKE. No, Mr. Chairman. I have discussed some of 

these issues. First, the trend of inequality is not something in the 

last 5 years. We have seen this for at last 30 years, if not more. 

The CHAIRMAN. But it has gotten worse in the last 5 years. 

Mr. BERNANKE. Well, again, I think that part of what you are 

seeing just in the last few years is the disproportionate effects on 

lower income people. 

15

The CHAIRMAN. No, no, Mr. Bernanke, that simply is not true. 

We are talking about the 29 percent in the last 5 years, the 29 percent of the population with college graduates and masters. I think 

there is a cultural lag here. This is Don Evans’ report; 29 percent 

of the population in those groups with college degrees and masters 

have suffered real declines in the last 5 years. They are not lower 

income people. 

Mr. BERNANKE. I would like to look at those data, but the fact 

is that over the last few decades, and this is the kind of thing you 

need to look at over a long period of time, we have seen a substantial spreading apart of incomes, which is key, in part to education, 

not entirely, but is key, in part to education. 

The CHAIRMAN. What do we do about it? 

Mr. BERNANKE. There are several things we can do about it. 

First of all, the Federal Reserve can maintain a strong and stable 

economy, which we intend to do, and that will be helpful. But more 

importantly, there are several elements. First, I think the reference 

to education is a little bit too pessimistic because it refers, I believe, to sort of K–12 type education, which takes a very long time 

to work. 

The CHAIRMAN. No, they are talking about higher education. 

Mr. BERNANKE. And higher education. But there are many other 

forms of skill acquisition. There is short-term job training, there 

are vocational schools, and so on. We are hearing in the field that 

finding someone with plumbing skills or welding skills or who can 

put lines on a telephone pole is very difficult, and they command 

high wages. 

The CHAIRMAN. Well, my time has expired. I just want to say 

that I would urge people to read this report. And I think, first of 

all, debunking by Mr. Slaughter who served on the Council of Economic Advisors, I believe under your chairmanship, along with you 

as a colleague, Grant Aldonas, they say that education is a good 

thing, but being made to tow too much weight. But here is the 

problem, even with education. Getting people that education requires, to a great extent, some public participation. We can’t expect 

the private sector to pay for this out of what it does. And this is 

another factor. As long as we have the current situation in which 

government is considered to be a bad thing, etc.—let me put it this 

way: The way in which we finance education in the country today, 

particularly beyond K–12, reinforces inequality, it doesn’t alleviate 

it. So yes, education properly done could do this. But kind of oh, 

well, that is the way the world is and we will just have to hope 

for the better, is a problem. The notion that a stable economy, and 

this is where I think, again, we have a fundamental difference, yes, 

I would like to see a strong, stable economy. That is a necessary 

condition for diminishing inequality. But it is clearly an insufficient 

condition, and in the absence of any recognition of that, you are 

going to continue to see the kind of gridlocking in which trade promotion and immigration and other issues don’t go anywhere. I just 

urge people who want to see us move in this direction to help us 

diminish inequality, or you will have continued economic gridlock. 

The gentleman from Alabama. 

Mr. BERNANKE. Mr. Chairman, if I can just respond very quickly. 

In my remarks in March on inequality, I talked a little bit about 

16

education and training. I talked about other policies as well, such 

as helping people move between jobs and other types of policies, 

more affordability of health insurance. 

The CHAIRMAN. I appreciate that. In fairness, could we have a 

hearing, perhaps, in which you might come and talk about this? 

Mr. BERNANKE. Certainly. 

The CHAIRMAN. Thank you. 

Mr. BACHUS. Thank you, Mr. Chairman. The chairman of the 

committee talked about how he was troubled by complacency. I am 

also troubled by complacency, and every member of this committee 

ought to be troubled by complacency. But it is not in the Federal 

Reserve. The Chairman of the Federal Reserve has come in here 

this morning, as many other people have said to us, that the rise 

in energy and food cost are impacting the poor and middle class 

and it is one of the chief reasons for income inequality. The National Association of Manufacturers recently said that high cost of 

energy is a cap on the wages of blue collar workers. And yet this 

Congress, for 10 years, has failed to turn to the cheapest form of 

energy, which would give relief for every American’s electric bill, 

heating oil bill and everything, and that is nuclear energy; 86 percent of the energy produced in France at a much lower cost than 

most of our electricity is nuclear. France has done it, India and 

China are building a nuclear power plant every week—I mean, 

every week, I think it is, or every month, one comes on line. 

We can reduce the cost of not only energy costs, which the Chairman has said, he says right here, food and energy costs have eroded real incomes. And it hits us, he said, the poor and the middle 

class are the worse. The biggest component and the biggest contributor of the rise in food cost is the cost of energy, and one of the 

things we are doing, which does give us some relief, we are taking 

corn and turning it into ethanol. So whether that is good or bad, 

it is resulting in an increase in the cost of food. Fertilizer, the biggest component of fertilizer is energy, and it is the biggest component in producing food. 

So if any of us are concerned about, and I am, and I think we 

all are concerned about the poor and the high cost of their gas bills, 

their electric bills, their heating and oil bills, we will pass a bill 

next month, if not this month, and we will do away with all this 

regulatory and legal burdens that have prevented us from decades 

from building a nuclear power plant, and have cost millions of 

American jobs, mostly blue collar workers, their ability to exist and 

stay in their community. 

Visit some of the communities in Pennsylvania and Ohio and you 

will see the result of us standing and not doing anything about nuclear power. Mr. Chairman, I am going to change subjects. As I 

said in my opening statement, one of your biggest challenges has 

been created by the government’s inability to address energy concerns, and you said that the wild cards are energy and food, and 

the biggest wild card in food is energy. This committee and this 

Congress has within its bull’s-eye, as you probably read, private 

pools of capital, hedge funds and venture capital private equity 

funds. Would you like to address some of the benefits of private 

pools of capital, and if we do drive those private pools of capital offshore, what detrimental effects it may have on us? 

17

Mr. BERNANKE. Certainly Congressman. Private pools of capital—hedge funds—raise a whole range of issues. I am not going to 

address them. But they certainly do provide some important benefits, and these include providing some ability to share risks. We 

now take risks and share them, so that they are held by lots of different people and not just by the banking system, for example. 

They provide a good deal of liquidity to help markets work more 

efficiently. And private equity in particular, plays an important 

role in the market for corporate control. 

We need to have a mechanism whereby poorly run companies’ 

weak managements are subject to being taken over, replaced and 

their companies improved. When it is working right, at least, private equity, as LBOs in the past, helps to serve that function. 

So they serve some positive functions. They raise many issues of 

financial stability and the like, making sure that their 

counterparties are paying appropriate attention to their risks and 

the like. And we discussed some of the President’s Working Group’s 

principles. But they certainly are a benefit to the economy. 

Mr. BACHUS. Thank you. 

My last question is this: When we looked at the subprime lending problem last year, we found that probably about 3 percent of 

the brokers and actually, also, not only brokers, but mortgage 

bankers, people who worked for nationally regulated bankers—

about 3 percent of them caused about 90 percent of the mischief 

and the fraud, and they will lose their licenses in one State. Then 

they go to another State, and they set up shop, and they are really 

creating havoc. These are basically—to me, they are criminals, and 

they are inflicting a tremendous amount of pain. Would you like to 

comment? 

I introduced a bill, along with several of my colleagues, which 

called for a national registration and licensing standard for all 

mortgage originators. Would you like to comment on that, or on the 

legislation we introduced? 

Mr. BERNANKE. Yes, sir. I will talk about the registration. 

I do think there is an issue about brokers who lose their licenses, 

who perform badly in one area, and then simply move to a new 

State. The Conference of State Bank Supervisors had been trying 

to develop a database essentially so they could provide information 

to each other. 

I think that, one, we should seriously consider some Federal licensing or at least some kind of Federal database that will allow 

States to know if a new broker who is coming into the State has 

some kind of previous problems in another location. 

Mr. BACHUS. Would you look at the national registration and licensing provisions that we have introduced and maybe get back 

with us on any recommendation? Thank you. 

The CHAIRMAN. Thank you. 

Now, to explain the order here, this being a very large committee, not everybody gets to ask questions, especially if they wait 

until opening statements have been given, so I am going to go to 

the list of members on our side who did not get to ask a question 

the last time, by seniority, and then get back to the others. The 

first of those is the gentleman from Texas, Mr. Green. 

18

Mr. GREEN. Thank you, Mr. Chairman. I thank you for your judicious approach in managing the committee, and I am honored to 

associate myself with your comments, and I also thank the ranking 

member. 

Mr. Chairman, thank you for visiting with us today. I would like 

to visit with you very briefly about a crisis that continues, and it 

seems to go unabated, notwithstanding cyclical and temporary factors; notwithstanding excess inventories and the lack thereof; notwithstanding core inflation; commodity prices, whether they increase or flatten; notwithstanding energy prices and how they impact the economy; headline inflation, core inflation. 

We have a crisis, in my opinion, and we consistently find that 

one segment of our society has an unemployment rate that is always twice that of another segment of our society. White unemployment is, as of June 2007, 4.0 percent. Black unemployment is 

8.5 percent. Poverty among whites is 10.4 percent. Poverty among 

blacks is 25.6 percent. This is not something that is anomalous. It 

occurs consistently. There is a trend that is easy to track, and we 

consistently find that black unemployment is always twice that of 

white unemployment and is likely to be twice that of the national 

unemployment. The trend is there. The poverty trend is there. 

The question that I have for you is similar to the one that the 

chairman posed, but it relates to this segment of society, and the 

question is: Do you see a change in this trend? Is it possible for 

us to have African American employment to achieve parity with 

white employment? Is this trend going to continue? 

Mr. BERNANKE. Well, I am hopeful to see improvement over time. 

There have been some improvements in terms of the average family income, in terms of the share of minorities who are what would 

be called the ‘‘middle class.’’ 

Mr. GREEN. Because my time is limited, what must we do to 

change this trend so that we can achieve the parity that we really 

want in this country? 

Mr. BERNANKE. You are a bit beyond my area of specialization, 

Congressman, but, again— 

Mr. GREEN. Well, if I may, though, Mr. Chairman, let me just 

say this now. You have talked about how we can impact employment generally speaking, and you have talked about how we can 

impact poverty generally speaking. Now, we have this one segment 

of society that is consistently higher than all other segments of society. Surely there must be some intellectual thought that you have 

to help us with this segment of society as well. 

Mr. BERNANKE. Certainly, I was going to, at the risk of repeating 

myself, talk about the importance of training and skills, making 

sure young people have the opportunity to learn job-qualifying 

skills, to finish school. A lot of young, minority teenagers are out 

of school and have very high unemployment rates. We need to 

make sure that there is equal opportunity for both young people— 

Mr. GREEN. Let us focus on the equal opportunity, because I 

think that you and I may find some agreement here, Mr. Chairman. By the way, I admire you and respect you greatly, but as to 

the equal opportunity aspect of it, as the chairman has so eloquently put it, the way we fund higher education beyond the 12th 

grade promotes unequal opportunity in education because those 

19

who have the ability to acquire the education can achieve educational parity. Those who do not will not. There are still some systemic things that have to be addressed when we talk about achieving this parity in education, so how we do this is becoming a part 

of the debate that we have to contend with. 

Mr. BERNANKE. Congressman, my wife is a high school teacher; 

she teaches in the D.C. public school system. She has been working 

for some time with minority students, and her objective is to work 

with students to get them into college. Many of them have parents 

who are single parents who have never been to college. 

Mr. GREEN. Mr. Chairman, if I may, listen, I hope to meet your 

wife, I am sure she is a lovely lady, but that will not help me with 

where I am trying to go. 

Mr. BERNANKE. I am trying to explain that there is a whole mix 

of educational issues, social issues, opportunity, making sure that 

the opportunities that exist are open to everybody in a free way 

that does not discriminate, making sure that everybody has an opportunity to gain skills and education. That is the kind of society 

we want. I recognize that we do not have it yet. I think we need 

to work in that direction. Monetary policy can try to— 

Mr. GREEN. One other question quickly. Would you be amenable 

to attending an event—I will not say ‘‘hearing’’—but an event 

wherein you talk about—just as you talk about how you impact 

poverty and unemployment in society in the main, how we can deal 

with this one segment of society that for 300 years has consistently 

been at this level of inequality as it relates to employment, as it 

relates to poverty, as it relates to opportunity. Would you be amenable to such a thing? 

Mr. BERNANKE. Yes, sir. I have been consistently available to 

talk about community development issues, about minority issues, 

and I think this is extremely important for our society. 

Mr. GREEN. Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. The ranking member tells me he is also going to 

follow the policy of giving preference to the people who did not get 

to ask questions, this being a larger-than-it-needs-to-be committee, 

and so we now recognize the gentleman from North Carolina, Mr. 

McHenry, for 5 minutes. 

Mr. MCHENRY. I thank the chairman. 

Chairman Bernanke, I am certainly glad to have you here. It 

seems your presentation today is largely about residential real estate. You mentioned that declines in residential construction will 

continue to weigh on economic growth over the coming quarters. 

Do you have any words for Congress—at a time when lending 

standards have been tightened—on whether or not we should further tighten lending with additional rules and regulations on the 

mortgage marketplace? 

Mr. BERNANKE. Well, I think there is a balance. I have discussed 

this in a number of speeches. I do believe the legitimate subprime 

lending in particular helps expand homeownership. It helps expand 

access to credit. At the same time, it is very important that we protect those who are possibly subject to abusive or to fraudulent lending, so we have to draw a fine line. We have to make sure we find 

ways to prevent the bad actors, the abusive lending, while preserving this market, which is an important market, both for the 

20

sake of those people who would like to borrow and to become homeowners, and also for the broad sake of our economy in maintaining 

the demand for housing. 

So it is really a case-by-case issue, but it is very important to try 

to walk that fine line between protecting consumers adequately by 

making sure that we do not shut down what is, I think, essentially, 

a valuable market. 

Mr. MCHENRY. Can the Federal Reserve and the regulatory bodies within the Federal Government adequately address those concerns? 

Mr. BERNANKE. Congressman, I think I really need to leave that 

for the Congress to determine. We hope that we are taking steps, 

the steps I have outlined today, and we are prepared to take additional steps if necessary. I believe it will go some distance towards 

resolving some of these concerns. However, Congress may feel they 

need to take additional steps, and I think that is really up to the 

Congress to decide. 

Mr. MCHENRY. Last month, the Federal Trade Commission had 

a very interesting new study on mortgage disclosures—you mentioned mortgage disclosures in your presentation—and it concluded 

in this study that current disclosures fail to convey key mortgage 

costs to many consumers, and in the study they found that about 

a third of consumers cannot identify their interest rate, whether it 

is prime, whether it is the prime and subprime marketplace; half 

could not correctly identify the loan amount; two-thirds could not 

recognize that they would be charged a prepayment penalty; and 

nearly nine-tenths could not identify the total amount of upfront 

charges. 

Do you believe that changes in mortgage disclosures can help the 

marketplace so that individuals can decide for themselves? If they 

have those clear and upfront pieces of information, can they better 

decide for themselves? 

Mr. BERNANKE. We think good disclosures are a critical part of 

a well-functioning market. We have had a series of hearings, and 

we have gotten exactly the same comment that you were just saying, which is that many borrowers simply do not understand all of 

the details of their mortgage. They do not get the information in 

a timely way. They do not understand the basics of what they need 

to know. So, as I mentioned, we are currently doing a complete 

overhaul of Regulation Z disclosures for mortgages. In particular, 

one thing we have found is that it is really essential to have real 

consumers look at these disclosures, because lawyers can write 

down these disclosures and say, ‘‘This looks fine to me.’’ If you give 

it to a real consumer, they will not know what to do with it. 

So one of the things we consider to be very important—and we 

have found this to be very helpful in our credit card disclosure 

work—is to do focus groups, consumer testing, to make sure, and 

to test people afterwards to see what they remember and what 

they understand, and to make sure those disclosures are effective. 

So I do not think there is any shortcut to getting good disclosures. 

You really have to make sure that the people can understand them. 

Mr. MCHENRY. Can that largely be done through the regulatory 

structure? 

21

Mr. BERNANKE. Yes. As I said, we are currently undertaking 

that, and I hope that we will produce a good result that you will 

see, and you can make your own judgment. 

Mr. MCHENRY. Well, Congress is targeting policy pursuits when 

it comes to the equality of outcome as opposed to, really, the equality of opportunity in this country. You speak of ensuring that we 

have solid employment as well as low inflation. Now, Congress has 

actually had a great focus on income inequality and the disparities 

in income in this country. Should the focus be more on eliminating 

poverty and offering opportunities to move up the income ladder, 

or should it be focused on the top and ensuring that we pull down 

those top income numbers to ensure greater equality? 

Mr. BERNANKE. The fact that there are some very wealthy people 

does not necessarily make me or you worse off if they are creating 

value. You know, I am a baseball fan. I like to watch Alex 

Rodriguez, and I do not particularly care that he earns a lot more 

money than I do. But we do need to make sure that people 

throughout the income scale have opportunities to raise their own 

standards of living and to make progress in our society. That is 

why I have advocated the principle of trying to give people opportunity through education, through skills, and through support during periods of transition between jobs to make them more productive and more able to deal with the disruptions that come with a 

globalized economy. 

Mr. MCHENRY. Touching on that, expanding on that in my final 

question here, as to the taxation of capital gains and Congress’ discussion now on taxing partnerships, do you believe that a lower 

capital gains tax that is lower than income rates is good for investment and strengthens our economy and growth in this country and 

helps lead to lower unemployment rates? 

Mr. BERNANKE. Congressman, I think I could talk about the pros 

and cons on this, but as you know, I am trying to avoid taking positions on specific tax and spending measures on the grounds that 

the Federal Reserve needs to maintain its nonpartisan status. So 

I am sorry. I really cannot give you a good answer on that one. 

The CHAIRMAN. The gentleman from Illinois. 

For 15 seconds, if I could, I would like to say when energy costs 

are blamed for the fact that real incomes are going down, I do want 

to congratulate the corporate sector. They have apparently found a 

way to insulate profits from the impact of energy costs, because, as 

noted in the report here, and as we have seen, profits have gone 

way up. So, while energy costs appear to have this terrible impact 

on college graduates’ real incomes, somehow the corporate sector 

has managed to avoid that. 

I think, in fact, energy costs are being given much more blame 

than credit, and there are institutional other factors, and the soaring profit sector is a bigger, I think, explanation of the stalled 

wages. 

The gentleman from Illinois. 

Mr. BACHUS. Would the gentleman yield just so I could respond? 

The CHAIRMAN. Well, it is the gentleman from Illinois’ time. 

Mr. BACHUS. Okay. 

The CHAIRMAN. The gentleman from Illinois. 

Mr. GUTIERREZ. Thank you very much. 

22

Welcome back, Chairman Bernanke. 

Just a side note, as Chairman, when you get together with the 

Governors, you might want to take a look at what I feel is going 

to be a real looming crisis, and that is for our generation of college 

kids today, because there is not a week that goes by that my 

daughter does not get another credit card. Worse yet, now she is 

getting loans to take a vacation, and to get a laptop. I mean, you 

should see the stuff that is coming in the mail. Fortunately, she 

has a very fiscally responsible dad who has taught her about 

money and monetary policy, at least I hope so, until I get the credit 

card bill in the mail. 

Very seriously, I really fear this can get out of hand, especially 

with the rising costs of how young people are going to manage their 

college. I would hate to see the next generation in such debt, but 

no matter what monetary policy you come up with, we are not 

going to be very helpful to them. 

Chairman Bernanke, at the February hearing, in response to a 

question from my good friend Congressman Cleaver regarding the 

positive role that immigrants have played and continue to play in 

our economy, you comment briefly on immigration reform. You 

state, ‘‘So I certainly agree that immigrants have played a big role, 

they continue to play a big role, and we need to have a national 

policy on that. This is a very tough issue, and I think Congress 

really has to take the lead about how many people and under what 

conditions we admit, but it certainly is the case today that immigrants are playing a major role in our economy. There is no question about that.’’ 

I appreciate your response, and agree with you in many respects, 

and I am not trying to play ‘‘gotcha’’ here by asking you to endorse 

any particular panacea—you just answered the last question in 

that regard—but I would like for you to expand a little bit on part 

of your answer from February. 

Specifically, do you think that the uncertainty with respect to the 

availability of a vibrant workforce created by Congress’ failure to 

act on immigration reform has a negative impact or could have a 

negative impact on our economy? 

Mr. BERNANKE. Well, as you know, the immigrant workforce is 

very important in some industries—construction, agriculture, and 

others. Some of them are seasonal, and I think the employers in 

those industries are interested in knowing where the workforce is 

coming from, and would like to have some clarity. But I understand 

that one of the key issues here is that many of the concerns about 

immigration go beyond purely economic considerations, and I understand that. 

So, within the economic sphere, as I said in February, immigrants do play a very substantial role in our workforce, and they 

represent a significant portion of the growth of our workforce. They 

are very important in some industries, and, from an economic point 

of view, we need to recognize that role they play. 

Mr. GUTIERREZ. We deported 160,000 undocumented workers 

from the United States last year, in the last 12 months. At that 

rate, it would take us about 65 years to ‘‘rid ourselves’’ of the 12 

million undocumented as some would wish to do. But let us just 

say that we could do a better job, and that we could do it in 5 

23

years. What do you think the economic impact would be on our 

economy if we just, all of a sudden ‘‘rid ourselves’’ of 12 million 

workers in our economy? 

Mr. BERNANKE. Well, I do not think it is very surprising to say 

that would be a fairly disruptive event if it happened very quickly. 

As I said in February, I do think it is important for Congress to 

think through how many immigrants they would like to have and 

under what conditions, because it is important to try to create 

some certainty and some ability to forecast what workforces are 

going to look like. 

Mr. GUTIERREZ. Mr. Bernanke, I want to focus a minute on what 

I believe is an ongoing currency misalignment or manipulation by 

China and the effect of this practice on the American economy. 

The American workers’ currency undervaluation by China is 

reaching critical mass. For over 10 years, China has fixed the exchange rate by intervening in currency markets. Economists estimate that the yuan is undervalued by at least 9.5 percent and as 

much as 54 percent. In the past, even you, Mr. Chairman, have 

characterized this undervaluation as a subsidy for exports from 

China. Suffice it to say, we cannot compete with this ongoing government subsidy, especially with our largest trading partner. 

In 2006, the U.S. gross trade deficit with China rose almost 15 percent, nearly $233 billion, a record high. Meanwhile, because 

China’s government must buy U.S. dollars to keep the value of the 

yuan low, China holds more in foreign exchange reserves than any 

country in history. The latest tactic used by U.S. and third-party 

officials to try to convince China to allow its currency to fluctuate 

is to explain to the Chinese that doing so will benefit their own 

economy; that is, the Chinese economy. 

If you were to have a one-on-one meeting with your counterpart 

at the People’s Bank of China, what arguments would you use to 

convince him or her that it is in the best interest of China and 

makes good economic policy for China to allow their currency to 

fluctuate? 

Mr. BERNANKE. Congressman, I have had that meeting on a couple of occasions. I do think that it is in China’s interest to allow 

their currency to float, to appreciate. There are two principal reasons why it is in their own interest. 

The first is that without a flexible exchange rate, they are unable 

to run an independent monetary policy. They are having some 

issues right now with a bit of inflation and some massive price 

changes that may reflect excess liquidity in their system, and that 

is a potential problem down the road. 

The other reason that it is in their interest to adjust the currency 

is one you already alluded to, which is that the level of the currency essentially distorts the economy and puts more resources into 

the export sector. In China right now, less than 40 percent of total 

GDP goes to domestic household consumption. They need to reorient their economy towards producing more for the domestic market 

and being less oriented to the external market, and changing the 

value of the currency is one step to doing that. 

I think, in addition to currency change, though, that they ought 

to take additional structural measures to try to encourage domestic 

consumption so that, even at a given value of the exchange rate, 

24

the economy would be more focused on domestic demand rather 

than on the global market. 

Mr. GUTIERREZ. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from New Mexico. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Thank you, Chairman Bernanke. 

It is a positive report of our economy and on the world economy 

in general. On page 5, you make a statement that if energy prices 

level off, if anticipated. I will now ask you what would cause you 

to anticipate the prices to level, what factors? 

Mr. BERNANKE. Well, we approach this at the Federal Reserve 

on, essentially, two levels. First, we try to do a fundamental supply-and-demand analysis and try to look at how we expect demand 

to grow not only in the United States, of course, but in emerging 

markets around the world, and where we see supply emerging in 

OPEC and outside of OPEC, and try to make some sense of where 

that market is going. 

Another very important piece of information is the futures markets. Investors, in dealing with NYMEX and with other futures 

markets, put their money where they think the price of oil is going 

to be at various horizons going out to 6 or more years. Those futures markets have been wrong in the past. They have underestimated the increase in oil prices that we have seen, which is one 

reason why we are very cautious about them. But over long periods 

of time, they are probably about the best source of information we 

have about where the markets see energy prices going. Those energy markets currently see oil prices remaining high, but leveling 

off over the next couple of years to the point where, if that actually 

happens, overall headline inflation would be about the same as 

core inflation. 

Mr. PEARCE. I would note that the National Petroleum Council 

met just yesterday—these are inside industry experts—and they 

forecast that supply will be very tight and that prices will be high, 

trending higher, and then I think that we are doing things—I have 

seen the bill that we have marked-up in the Committee on Resources that would begin to limit access internally to Federal lands 

and to also slow the process down so that our supplies internally 

are beginning—will collapse. 

I will tell you that, as a life-long member of the oil industry and 

growing up in an oil town that already—because of the things that 

we are doing here, that as to the remedial work on the wells that 

keeps the production curve steady instead of declining, it is beginning to shut down. That utilization of equipment is beginning to 

lag nationwide, but also, specifically, in the remedial area, and so 

you have to anticipate that there might be some clouds on the horizon in that forecast and then the effect. 

Now, there are about three pages of your report from about the 

bottom of page 6 on where we are dealing with the subprime market, and some portion of that is a difficult market. My question is 

as to the worst-case scenario: I am wondering why we have so 

much attention on the subprime market. 

If the entire market collapsed—let us take the worst, worst, 

worst-case scenario—how much effect would that have on our economy? I would like that answer in kind of the context of, recently, 

25

Dow Chemical announced, because of high energy prices, that they 

are building a $22 billion facility in Saudi Arabia, another $8 billion facility in China, and together, 10,000 jobs are going to those 

places. Those would be high-six-figure jobs here, and yet they are 

building. 

So my question is that 30 percent of your report is about 

subprime, and the addressing of things that we should be addressing, but I am not sure that 30 percent of our time should be addressed versus the effect of high energy prices. 

Could you give me some understanding of those two factors? 

Mr. BERNANKE. Well, the Federal Reserve has multiple roles, and 

the primary purpose of this hearing is to talk about monetary policy in the economy, and that is normally the only topic I would 

cover. In this case, though, the Federal Reserve also has some regulatory roles in reference to subprime mortgage markets in particular, and I thought this would be a useful opportunity to update 

this committee on some of the actions we are taking specifically in 

this particular market. 

The concerns are in terms of what the effects of tightened lending standards might be on the housing demand, for example, which 

is one of the factors affecting the growth of the overall economy. 

But the main concerns I was addressing in the latter part of my 

testimony were really the maintenance of legitimate subprime 

lending and the protection of consumers from abusive practices. 

Mr. PEARCE. I appreciate that and hope that we do more of that. 

I think there are factors that are going to have a potential upset 

to our economy that would be important to get your perspective of, 

and that is the cost of energy long term seems to me to be the 

greatest threat to our economy, and with the National Council saying supply is limited and price is high, I would hope that we could 

get input on that also. But I appreciate your work, and again, it 

is a good report. I appreciate that. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

The gentleman from Texas. 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

Chairman Bernanke, thank you for giving us an update on the 

economy of the United States and abroad and for giving us an opportunity also to ask some questions that are of concern to us. I 

hope that in this brief time that we have, I can address housing, 

the NADBank, immigration, and possibly the college student loan 

industry as it refers to the for-profit entities. 

This week the House of Representatives passed two of my rural 

housing bills, authorizing funding for the Housing Assistance 

Council and the Rural Housing and Economic Development Program. I introduced those two bills in my capacity as chairman of 

the Congressional Rural Housing Caucus to improve the affordability and the availability and the quality of housing in rural 

America. 

What data can you share with us as to the economic wellbeing 

of rural America, and what types of Federal policy changes do you 

recommend to improve their livelihood? 

Mr. BERNANKE. Well, one suggestion that I will just put out for 

consideration is that the Congress is looking at farm support bills, 

26

and the payments are made to individual farmers on different 

crops. 

Certainly one way to think about supporting the farm economy 

is less through direct payments to individual farmers and more to 

supporting the broader infrastructure of the rural economy—irrigation, land preservation, erosion, roads, some of the things you have 

been talking about—to make the rural economy healthier and 

stronger more generally. I think that would be one thing to consider under the general rubric of the agricultural bill. 

Mr. HINOJOSA. I agree with you because, in my district, I have 

seen that we give out about 7,500 checks a year as subsidies, and 

10 percent of the biggest farms in our district receive 80 percent 

of the total amount of money given by the Federal Government. So 

I agree with you. 

The second question refers to Mexico and to the fact that it is 

the United States’ second leading trade partner. This is especially 

visible on the border in my congressional district in south Texas. 

The communities along the Mexico-U.S. border have faced great 

burdens on their infrastructure due to such trade growth. 

Do you support an increase in resources for the NADBank to 

support local projects such as wastewater treatment facilities, roadways, and bridges to address this regional challenge? 

Mr. BERNANKE. Congressman, I am afraid I have not really had 

a chance to evaluate that particular issue. 

I do know that there is an awful lot of economic activity along 

the border there, and my very first trip as a member of the Board 

of Governors some years ago was to Brownsville. I saw a building 

there of some new colonias and the cooperation between Mexicans 

and U.S. citizens. So I think that is a very vibrant area, and I hope 

that its infrastructure is well-served, but I am afraid I do not know 

enough about your specific proposal. 

Mr. HINOJOSA. Yes. I may want to point out to you that the Administration zeroed out the amount of money for the BEC Board, 

which is the one that receives the applications for those entities 

that are asking for assistance, even though the North American 

Free Trade Agreement has caused us to increase our trade with 

Mexico so much, and yet this Administration failed to allow some 

money so that the NADBank could continue to do what it was intended to. 

The third question is on immigration, and I want to say that 

since immigration reform appears to be set aside by the Senate, at 

least for now, what strategies for increasing the labor force must 

be pursued to meet the future needs of United States’ businesses? 

If immigrants are not encouraged to be employed as legal workers 

or are not brought in as temporary employees, what alternatives 

must we pursue to make sure we have enough workers for all of 

our industries, especially agriculture, construction, manufacturing, 

hotels, restaurants, and landscaping? Those are areas where we 

are hurting from not having enough employees. 

Mr. BERNANKE. Well, there are two ways, essentially, to increase 

the effectiveness of our labor force. One, of course, is to improve the 

skills and training of U.S. citizens and bring more people into the 

labor force here. The issues concerning the immigration bill notwithstanding, I do not think anyone is arguing that we should not 

27

have a legal immigration policy, and bringing in people with the 

appropriate mix of skills can be productive and useful for the economy. 

In particular, currently there is something of an imbalance between low-skilled and high-skilled workers, and I think it would be 

beneficial to our economy to allow additional high-skilled workers 

as well as some of the workers whom you were alluding to, working 

in agriculture and the like. 

Mr. HINOJOSA. I agree with you that we ought to spend more 

money in retraining and in helping our own folks here in the 

United States to be able to fill those jobs and to possibly increase 

the amount, but when the government and the Administration took 

10 years to raise the minimum wage, you can see why it is difficult 

to get people to take those jobs. 

So, again, I thank you for coming to speak to us. 

I yield back. 

The CHAIRMAN. The gentleman from California, Mr. Campbell. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

Oddly enough, Chairman Bernanke, I have a series of economic 

questions for you. 

I believe I am correct in characterizing that about 6 months ago, 

you said that you thought one of the greatest risks to economic 

growth would be a hard fall in the residential housing market. You 

have said that today some of our slow-down in growth is largely 

attributable to that sector. 

How would you assess the risk of a hard fall in that market at 

this point? What are the risks to that happening, or what are the 

opportunities for its not happening? 

Mr. BERNANKE. Well, we think it remains a risk. 

It is important to understand that even should demand begin to 

stabilize—and it has shown signs at times of stabilizing—we have 

what you might call an ‘‘inventory problem.’’ That is, homebuilders 

have a large number of unsold homes. So, even if demand were to 

stabilize, homebuilders would have to continue to cut back on construction in order to eventually bring those inventories into line. So 

that would, of course, reduce economic activity. It might have some 

impact on the construction employment and so on. 

The related concern in terms of the downside risk is that, in 

order to clear out those inventories, we might start seeing falling 

prices, and for many people the equity in their homes is their 

major financial asset. So, the question is whether price declines, 

moderate price declines, have any significant impact on consumer 

spending? 

The evidence so far is that there really has been no spillover that 

we can see. We are certainly watching for any potential impact of 

changes in housing values on consumers and on their moods, attitudes, sentiments. It is part of what we are doing, and we are following that market very closely. 

Mr. CAMPBELL. Are there any policy actions we should be considering in that regard, or is the best policy action to do no harm? 

Mr. BERNANKE. I think that there is an adjustment correction 

going on. The housing market expanded to very high levels of production. Despite the fact that we are off 30 percent in terms of construction this year from the peak, we are at levels that were 

28

reached in the late 1990’s, for example, so the housing market is 

still producing more than 1 million homes a year. 

So I think we have to watch very carefully what is happening. 

We need to make sure our mortgage markets are functioning well 

and so on. But I think this is a process that is going to have to 

work its way out, and it has been working its way out, and we will 

be watching it as it does. 

Mr. CAMPBELL. Okay. The dollar has been falling on currency 

markets of late, but our trade deficit has not. Why is that occurring, and are you concerned about either trend? 

Mr. BERNANKE. Well, the dollar is the responsibility of the Treasury. We do not comment on the dollar. We simply take the dollar 

as given, and make monetary policy as best we can given the performance of the dollar. 

The trade deficit actually has shown some signs of looking a bit 

better. That has been disguised, to some extent, by the fact that 

oil prices have gone up so much. And so the oil import bill has 

risen, but other components of our net trade balance do seem to 

have stabilized somewhat, and there are some encouraging signs in 

that direction. 

As I alluded to in my earlier comment about the Chinese currency, I think that relying entirely on exchange rate changes to improve the trade balances is a mistake. It is important that there 

be structural changes that affect the ratio of domestic and foreign 

demand that different economies are relying on so—particularly in 

China—that they make changes that will allow a greater portion 

of their output to be devoted to domestic consumption, domestic demand. Whereas, here in the United States, we save more in order 

to rely less on imported capital. 

So exchange rates notwithstanding, I think some changes in the 

balance of saving and investment—and the changes in the balance 

of domestic versus foreign production—need to take place in order 

to move us in the direction towards a better balance. 

Mr. CAMPBELL. On the inflation front, you talked about the energy versus the core inflation rate and that you expect, based on 

futures contracts, energy and food price increases to soften to some 

degree. 

If that does not occur, at what point does that become a concern 

for you? 

Mr. BERNANKE. Well, first of all, we are unhappy with inflation, 

including energy and food prices running higher than we would 

like, so it is already a concern in that respect. 

Looking forward, I think the real issue for us is, if there are temporary bursts in prices of food and energy, will those higher prices 

somehow get embedded in the long-run, underlying trend of inflation. There are a couple of ways in which that could happen. One 

would be if say, higher crude costs, materials costs, were passed 

through by producers into the higher prices of other consumer 

goods, for example. The other possibility would be if consumers, 

having seen for many years very high increases in their food and 

energy costs, began to lose confidence in the Federal Reserve and 

to worry that inflation would be higher in the future. Their expectations of inflation would begin to move upward. Once that happens, it is much more difficult to keep inflation low, because people 

29

are building into their wage and price decisions higher expectations 

of inflation. 

So there are some concerns there, and it is part of the reason 

why I think we do have to be quite vigilant on inflation at this 

juncture. 

Mr. CAMPBELL. Thank you. I am not out of questions, but I am 

out of time. 

The CHAIRMAN. The gentleman from New Jersey. 

Mr. SIRES. Thank you, Mr. Chairman. 

Thank you, Mr. Bernanke, for being here with us today. I just 

want to follow up on the housing issue. 

I represent a district that is across from New York, the northern 

part, the Jersey City area, which has seen a boom of housing over 

the last few years. With that, the prices really went up high. A lot 

of people had to resort to subprime lending to get housing, and it 

created a lot of jobs, a lot of good-paying construction jobs. I do not 

know whether this is regional, but I have seen the prices of the 

houses not really going down when we are losing a lot of those jobs 

that were created. I would just like to know the impact on these 

construction jobs. 

I know that approximately 10 percent of the jobs created in this 

country are through construction. What effect is this going to have 

on the economy? Do you see it as regional? Because I know they 

are going to—I have friends in Florida, and they are going through 

the same process, the same things where good-paying jobs are 

being lost. Do you see this trend changing? I know mortgages are 

getting tighter. Subprime is very difficult to get. Home equity loans 

to create these jobs are impossible in some cases. 

Do you see this trend changing anytime soon? 

Mr. BERNANKE. Congressman, first of all, you are quite right that 

there is a very strong regional component in the housing market. 

Florida is an example where there is quite a bit of weakness. There 

are other parts of the country that are doing better—where prices 

are still rising and where the real estate markets are pretty 

healthy. So it does depend a lot on where you are. 

We would expect, as the residential real estate market adjusts 

towards a more sustainable level, that there would be some loss of 

residential construction jobs, but there are some offsets. In particular, the nonresidential construction offices—commercial real estate, factories—are growing at a very rapid pace, and a lot of the 

labor that has left residential construction has been absorbed by 

nonresidential construction. 

In addition, we are seeing increases, for example, in home improvement. People are saying, well, we cannot move because of the 

housing market. We are just going to redo our kitchen. That has 

also proved to be a source of employment. 

So, although the official statistics have some puzzles, frankly, 

they so far do not show a significant decline in construction employment, and partly for those reasons that I have just described. 

Mr. SIRES. But these other jobs that people are taking are not 

as good, obviously, as the jobs that were in the construction field. 

Mr. BERNANKE. Well, again, many of the construction workers 

are finding construction work, but in nonresidential or in home improvement-type sectors. 

30

Mr. SIRES. Not as well-paying as those jobs. 

Mr. BERNANKE. I think it varies. Some of the specialty contractors who are building apartment buildings or who are building office buildings and the like are pretty well-paid, and those are pretty productive jobs. 

Mr. SIRES. I know the lending rate seems to have stabilized. Do 

you see any changes downward for the future? 

Mr. BERNANKE. Well, in terms of the mortgage rate, a lot depends on what the bond market does, and, as you know, the Federal Reserve does not have perfect control over the bond market. 

Mr. SIRES. Thank you very much. 

The CHAIRMAN. The gentleman from Texas. 

Dr. PAUL. Thank you, Mr. Chairman. 

I find it rather ironic that the Federal Reserve has complete control over the money supply, yet it is the Treasury that is supposed 

to protect the value of the dollar. It seems like you have a little 

bit of responsibility for the value of the dollar as well. 

I have a question about the GDP. In the first quarter, our GDP 

did not do so well; it was less than 1 percent. Our population 

growth averages about 1.5 percent. So, if we have total wealth divided by the population, we actually have negative growth. Could 

this not be a part of the explanation as to why some people feel 

there is inequality and that they are not doing as well in the economy? Wouldn’t this explain some of the concerns that we have? 

Mr. BERNANKE. Well, Congressman, that was, of course, a single 

quarter, and there were a number of temporary factors that held 

down GDP growth in the first quarter, including the liquidation of 

the inventory overhang, which I mentioned before, a swing in our 

trade balance—a temporary swing—and a temporary decline in 

Federal defense spending. All of those things have been reversing 

now, so I think we will be seeing in the second quarter something 

closer to a 3 percent growth. Between the first half of the year 

overall, it will be a more healthy rate of growth. 

Dr. PAUL. We have a savings rate which is negative, and if we 

had true capitalism, this would be very, very serious because we 

would have no savings and no capital to invest. Today, with our 

monetary system, we resort to other means. We can create credit 

and money out of thin air, and it acts as capital by stealing value 

from the existing currency, and we have been doing that for a long 

time, so the process can continue, but it literally is inflation. Also, 

we can resort to borrowing overseas, and we are permitted, because 

we have the reserve currency of the world, to export our inflation, 

and that seems to be a free ride for us as well. 

How long can we fool the world? How long can we continue with 

the current account deficit of 6 percent? If our productive jobs are 

going overseas—and like the gentleman mentioned earlier about 

more jobs going overseas—eventually, this is going to catch up with 

us. 

Is it conceivable that we could live on capital formation by the 

creation of money and credit out of thin air? If that is the case, we 

would never have to go to work again if that is true. It seems like 

we really have to go to work. We really have to save, and we really 

have to invest, and we really have to get these jobs back. But I see 

so many of our problems as a consequence of a monetary system 

31

that discourages savings and encourages a free ride for us because 

there is still a lot of trust for the dollar, although that trust is 

going down every day. I think we have to face up to the consequences of what this might mean to us. 

Mr. BERNANKE. Well, first, our national savings includes corporate savings as well as household savings. If you put those together, you get a positive number, so there is some net savings 

going on in the United States. 

Congressman, you are absolutely right that we are also relying 

pretty heavily on borrowing from abroad, which is our current account deficit. I think that is sustainable for a while because foreigners seem quite interested in acquiring U.S. assets. We have 

very deep and liquid financial markets. However, I also agree with 

you that that is not a long-term, sustainable situation by any 

means, and we need to be working to try to bring that current account deficit down over time. 

In answer to a previous question, I talked a bit about the importance of a structural change—increasing savings here in the United 

States, increasing attention to domestic demand with our trading 

partners. 

Dr. PAUL. You did say in your talk that the predominant policy 

concern was inflation, which is encouraging that there is a concern. 

Of course, once again, inflation is a monetary phenomenon, and we 

have to deal with it. War sometimes is not healthy for a currency 

or for keeping prices down, at least inflation. It is hard to find 

throughout all of history when war did not create price inflation because, even in ancient times, countries resorted to clipping coins 

and diluting values or whatever—they inflated the currency—because people do not generally like to pay for the war. Yet, in the 

1970’s, we had consequences of guns and butter. Now we are having guns and butter again, and we are having consequences, and 

it just looks like we may well come to a 1979/1980. 

Do you anticipate that there is a possibility that we will face a 

crisis of the dollar such as we had in 1979 and in 1980? 

Mr. BERNANKE. The Federal Reserve is committed to maintaining low and stable inflation, and I am very confident we will be 

able to do that. 

Dr. PAUL. So you are not answering whether or not you anticipate a problem. 

Mr. BERNANKE. I am not anticipating a problem like in 1979 and 

in 1980, no. 

Dr. PAUL. With your fingers crossed, I guess. Okay. 

Thank you. 

The CHAIRMAN. The gentleman from New Hampshire, Mr. Hodes. 

Mr. HODES. Thank you, Mr. Chairman. 

Chairman Bernanke, I am glad to see you here. Chairman Frank 

and the staff made available to us the Financial Services Forum report to which he referred. I want to follow up on some of the questions that arise from reading that report and from reading your 

monetary policy report. 

The Financial Services Forum report talks about—and you will 

have to pardon me, this is their word—the astonishing ‘‘skewness’’ 

of U.S. income growth. They point out that, since the year 2000, 

U.S. corporate profits have nearly doubled, and say that in recent 

32

years the large majority of American workers has seen poor income 

growth. Indeed, 96.6 percent of Americans are in educational 

groups whose mean total money earnings have been falling, not rising, since 2000. Only a small share of workers at the very high end 

has enjoyed strong growth in incomes. The strong U.S. productivity 

growth of the past several years has not been reflected in wage and 

salary earnings, and instead, it has accrued largely due to the 

earnings of very high-end Americans and to corporate profits. 

The New York Times reported the other day that 5 percent of the 

wealth of this country is concentrated in the hands of 15,000 families. In a large sense, given that productivity is up, and you talk 

about the continuing expansion of the economy, and you predict at 

least moderate growth in the economy, we are seeing the rich get 

richer, the poor get poorer, and the middle class get squeezed. 

How can productivity and expansion serve as accurate measures 

of the true strength of an economy when what the Financial Services Forum reports to be happening is, in fact, happening? 

Mr. BERNANKE. Well, in the past I have taken a view very similar to what Chairman Frank advanced, which is that I do believe 

that globalization, technological change, those factors, do make our 

country richer. But there is essentially a political problem if the 

majority of the population does not feel that they, personally, are 

benefiting from that, and so we need to pay attention to how— 

Mr. HODES. Can I just stop you for a moment? 

It is not about what people feel. If these statistics are correct, almost 97 percent of Americans are going backwards in terms of 

their real wage income growth, while, at the very top, things are 

getting better, and corporate profits are up. So it is more than a 

feeling, isn’t it? 

Mr. BERNANKE. I do not want to dispute the study. I am sure 

they have picked some period of time and have looked at it. I do 

not think that is a good characterization of the last few decades, 

for example. 

For example, if you take the families with children and look at 

the middle quintile—so that is sort of a typical middle-class family—the real income of that family is about 30 percent higher today 

than it was in 1980, and about 15 percent higher than it was in 

1995, and about 5 percent higher than it was in 2000. 

There are many different ways to cut these data, and I absolutely agree that there is increased inequality, and that we are not 

seeing gains as large as we would like in the middle. But characterizing 97 percent as falling backwards is not really a fair representation of the trends in the United States over the past decade 

or two. 

Mr. HODES. Assuming that these figures are accurate, and that 

since the year 2000 there has been this astonishing skewing of 

growth for those at the very top as compared to those in the middle 

or in the lower rungs, what role do you think tax policy since the 

year 2000 has played in the skewing of that picture? 

Mr. BERNANKE. I think tax policy is not the major factor. Empirically, the major factors are technological change, which particularly 

favors people with high sets of skills, and to a lesser extent 

globalization. I think that most of the research points to that. Over 

33

time, of course, the tax system is progressive, but it has not offset 

these other factors which have made incomes more unequal. 

Mr. HODES. What are the long-term implications for an economy 

if this trend continues, where the rich get richer and corporate 

profits go up, but real incomes for the rest fall? 

Mr. BERNANKE. Well, as I was indicating before, what a superstar baseball player makes does not necessarily affect me. But even 

putting that aside, it is important that the mass of people see improvements in their living standards. That is very important, and 

I know of no other approach other than trying to make our economy more productive for the broad swath of society, and that involves research and development, education, saving—it involves 

doing all of the things that make an economy strong. Congress has 

a tremendous role here in making good economic policies that will 

strengthen our economy and will allow the benefit of that economic 

growth to be spread more widely. 

Mr. HODES. Thank you very much. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from Ohio. 

Ms. PRYCE. Thank you, Mr. Chairman. 

Thank you, Mr. Chairman, for the time you take with us in these 

Humphrey-Hawkins marathons twice a year. You are very gracious. I know you are required to do it, but thank you for doing it 

so graciously. 

I also want to thank you for the initiatives the Fed has taken in 

terms of consumer protections, especially in my State of Ohio, with 

the mortgage problems that we are having. Your attention to that 

is critical and very, very much appreciated. So thank you for that. 

I would like you to talk a little bit today to us about the extent 

and the impact of the use of credit or the overuse of credit, as Mr. 

Paul might refer to it, in our country. I am particularly interested 

in credit card debt, but you can go beyond that if you would like, 

because I think that this committee will be addressing some of 

those issues in the fall. 

We would love to have some of your guidance in terms of consumer protections when it comes to things like data breaches. In 

my home State of Ohio, we have had major financial institutions, 

universities, retailers—even our own State government has had 

just a series of terrible breaches in data and has the identity theft 

issues that go along with those things. Credit is a wonderful convenience, and credit is one thing that is keeping our economy 

healthy or unhealthy, as the case may be in your perspective. 

How can we better address the issue of data breaches and securing people’s information in every way we use it when the use of 

credit is so pervasive and is on the Internet? 

Mr. BERNANKE. Thank you. 

On the general issue of credit, there is sort of a paradox where, 

on the one hand, we want people to have access to credit. Credit 

allows you to buy a home much earlier than you otherwise could, 

for example. But as I was discussing with Congressman Paul, there 

is a very low savings rate, and we would like people to save more 

and to build more wealth. 

In particular, as to the discussion we were having on inequality, 

the inequality in wealth-holding is much more severe than the inVerDate 0ct 09 2002 11:48 Nov 15, 2007 Jkt 038392 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\38392.TXT HFIN PsN: TERRIE
34

equality of income, because many people just simply do not build 

wealth in terms of acquiring financial and real assets. So that is 

very important. 

Specifically, and as to the two things you mentioned on the credit 

cards, as I said, we have just put out a very extensive set of new 

disclosures. We believe that they will help people understand the 

terms of their card, so they are not surprised by unexpected fees 

and penalties, and we are prepared to take additional steps. Congress has given us and other regulators a good bit of power to try 

to make sure that credit cards are marketed in an honest way and 

that people understand what their accounts are about. So we want 

to proceed along those lines, and Congress will have to judge 

whether they need to take additional steps. 

On the issue of data breaches, we have a model that you might 

want to look at. The Gramm-Leach-Bliley law of 1999 instructed 

the Federal regulators to develop a set of data breach policies for 

depository institutions, banks essentially, which we have done. 

So we have a set of rules, a set of principles, which, of course, 

promote safeguarding of information—methods of doing that—and 

also give some advice under what circumstances notification is 

needed. If there is a trivial problem, maybe it is not necessary to 

notify the public. If there is a serious breach of security, then obviously the public needs to know about it. So that exists. I might suggest that in drawing up legislation for the broader market, you 

might take a look at some of the things we have learned in the 

banking agencies. 

Ms. PRYCE. Let me ask you one specific question that seems to 

be the subject of some controversy. How do you feel about the consumer’s ability to freeze their credit? Do you think that will have 

any impact on our economy? Do you think technology is at a place 

where that can be turned off and on at will? Do you have any opinion at all on freezing? 

Mr. BERNANKE. If a consumer wishes either to prevent access to 

their credit records or prevent additional credit charges being 

made, that seems perfectly reasonable to me. I am not aware of 

any particular technological problems, but I could be unaware of 

something. I am not sure. But certainly, the consumer should have 

some control, significant control over their credit records, and preventing unwanted access is certainly part of that. 

Ms. PRYCE. Thank you very much. 

The CHAIRMAN. The gentleman from Florida. 

Mr. MAHONEY. Thank you, Mr. Chairman. Thank you, Mr. Chairman, for being here today. I appreciate you coming before us. First, 

a general question, and then a couple of specific questions on debt. 

Yesterday, the Dow hit a milestone mark of 14,000, which is not 

a question of benefit to the haves and have-nots; it is a good thing. 

We appreciate the fact that the market has hit this high for those 

investors in this country. It is a very positive statement. But at the 

same time, we know that there are many people in the country who 

are still struggling. They may or may not be investors. 

There is still a big portion of our country that is not invested in 

the market, and whether it is relating to energy costs or food costs 

or the staples that impact people’s day-to-day lives, we know that 

these are things that are at their gut level impacting them. I think 

35

one of the questions that we keep looking at is why is it that some 

of these gains in large business sectors or the market side are not 

translating into the middle class, if you will. And I know that we 

look at unemployment being low. I am from Florida. And in Florida 

we do, as you mentioned, have a softening of the real estate sector, 

which has had a big impact. We also have a lot of hospitality jobs, 

which traditionally are relatively low wage jobs in large quantities. 

So even unemployment figures don’t always tell the whole tale 

when people are getting paid minimum wage or relatively small 

numbers. What can be done in terms of monetary policy, if there 

is anything, to help the middle class, or people who are in a small 

business, or trying to get an upper hand in trying to benefit from 

an economy that through the Wall Street public security side is 

doing very well, but maybe in the small business, private closely 

held businesses or people that are workers are just not accomplishing as much? 

Mr. BERNANKE. Well, in terms of monetary policy, I react to a 

comment that Chairman Frank made earlier, which is that, on the 

margin, good monetary policy can do a bit about inequality. I notice 

that when the poverty reports are issued periodically, they show 

the recession periods and the expansion periods of the economy—

because poverty tends to rise during recessions, as you might 

espect. And therefore to the extent that the Fed can maintain a 

stable economy—low inflation, sustainable expansion—there is a 

modest benefit in terms of income for the poor and for the middle 

class. But I think that to make real changes—real differences in 

terms of across groups differences—you need to have structural 

changes, changes in behavior. 

We know, for example, that the Federal Reserve manages the 

Survey of Consumer Finances, which is the leading source of information about wealth holdings. You mentioned stocks before—across 

the population—and what we find there is that a very large fraction of the population really has almost no savings. It is a paycheck-to-paycheck situation. Now, obviously, it is hard to save 

when your income is low or irregular. But there certainly should 

be opportunities for low- to moderate-income people to build some 

wealth, to gain financial literacy, to learn how to get a checking 

and savings account. And helping people do those kinds of things 

could be one way of improving their situation. I have referred many 

times to skills, and I do believe that it does not require a Ph.D. to 

get a good-paying job. There are a lot of what we used to think of—

and still think of—as blue-collar type jobs that are now paying 

pretty good salaries given the supply and demand. So that is another important dimension of this. But from a monetary policy perspective, our main goal is trying to maintain maximum employment price stability in a stable economy as best we can. 

Mr. MAHONEY. As we go through this, we may want to continue 

to have these discussions with your Board and with Congress as 

far as what policies. We can promote some of its communication 

and promotion of educational understanding of savings. That is a 

segue to a second question; in your speech today, you mentioned 

that consumer spending has advanced vigorously over the last 

number of quarters. Sort of looking at the trend over the last number of years, savings have been going down, as you have said. 

36

Many people during this boom of real estate started with a lot of 

home equity loans, taking equity out of their home to support consumer spending, building up more debt that way. And now with 

the real estate market in many parts of the country very flat, interest rates having gone up, adjustable rates, that is not available for 

many people, so they have debt on top of that. And then a lot of 

the consumer spending is on the backs of more consumer debt in 

terms of credit cards. Congresswoman Pryce mentioned that as 

well. Again, what impact do you see that having on the long-term 

basis of the stability of the economy when people are borrowing 

more and more and more and not saving? And again, what can we 

do through your offices or through the Congress? 

Mr. BERNANKE. Well, one of the reasons that the personal saving 

rate declined, and actually has gone negative, is that capital gains 

in an individual’s house, stocks, or any other assets are not counted 

as part of saving. It is only the part of one’s income that you set 

aside out of current income that is counted as saving. Part of the 

reason that people saved less over the last decade or so is precisely 

because home values and stock values went up. People felt wealthier. Maybe they didn’t feel they had to put aside part of their income and spent out of their wealth. Therefore we had negative saving rates. As you point out, though, the stock market has still gone 

up this year, but housing prices are flattening out. To the extent 

that house prices no longer generate home equity gains that they 

have in previous years, consumers won’t be able to tap that source 

of spending power. 

Mr. MAHONEY. And the costs have gone—I know in many parts 

of the country, between insurance and mortgage rates and everything else, the net amount has. 

Mr. BERNANKE. So, they will have to begin to save more out of 

their current income, and that might lead to some increase in the 

household saving rate. In the short-run, we don’t want consumption to drop too quickly because it is a huge part of the demand 

that drives our economy. But over our medium term horizon, we 

do want to see more saving, and that would be a positive thing. 

Mr. MAHONEY. Thank you. 

The CHAIRMAN. The gentleman from California. 

Mr. ROYCE. Thank you very much, Mr. Chairman. We discussed 

that since 2000, we have seen stagnant wages for low skilled workers. Well, supply and demand are a reality, and certain business 

interests on the right want low skilled labor because it will drive 

down wages. They want more low skilled labor in the country. On 

the other end of the spectrum, there are those who believe in open 

borders for the disadvantaged. But the result of the policy is that 

until we have enforcement against illegal immigration, wages will 

lag. They are going to lag if you have massive illegal immigration 

of low skilled wages in the United States. You can’t expect anything else to happen if you have 20 million people here illegally 

other than to have the pressures of supply and demand force down 

wage rates. 

Indeed that has happened since—well, for the last decade. To encourage monetary inflation, shifting to that subject, is to encourage 

a return of the boom and bust in a business cycle and to abandon 

a stable monetary unit. That is what I think the effect would be 

37

if we move towards the direction that didn’t attempt to really control inflation. 

Now, Chairman Bernanke, as you know, in the past decade we 

have also seen unprecedented growth in the mortgage industry. If 

you went back to the 1960’s, there was very little movement back 

then in home ownership rates until the development of technology 

and tools such as risk based pricing, which allowed lending institutions to more accurately calculate the risk associated with potential 

borrowers. As a consequence of that, in 2004, the home ownership 

rate went up to just under 70 percent, hitting record highs. Much 

of this growth which we had not seen in the decades prior was in 

a sector of the population which was previously locked out from obtaining mortgages, therefore, they rented instead of owning homes. 

For the most part, they had blemished credit, and they benefited 

greatly from the transformation in the industry as a result. As you 

know, the subprime lending market has come under tremendous 

scrutiny. Some believe we should rush to legislate. I believe we 

should approach this topic with tremendous caution. While deceptive lending practices should be prevented, I believe effective disclosure is the proper anecdote. Expanding liability to include secondary market participants for abusive loan originations would be 

a misguided policy. My fear is that if we overlegislate, which we 

have been known to do, it will prompt a credit crunch for Americans. 

I believe that the availability of credit has been good for consumers, by and large. The economy has benefited as a result, and 

any potential solution to concerns that have arisen should be very 

closely scrutinized. 

So Chairman Bernanke, I would like to get your thoughts on this 

issue and whether you believe an ill-conceived legislative fix will 

have any potential unintended consequences. Lastly, as you know, 

the outflow of capital from our markets has been discussed at 

length over the last few months. Much of the debate is centered 

around two major burdens faced by our public companies. One is 

cumbersome regulation and the prevalence of securities class action 

lawsuits. The threat of overregulation and overlitigation has 

caused many companies to reconsider listing on our public markets. 

This has resulted in a growth in the amount of capital in a private 

equity and hedge fund industry. 

So my second question, Chairman, is if our private equity and 

hedge fund industries are subjected to a sharp increase in regulation and taxation, what do you believe will be the end result? 

Thank you. 

Mr. BERNANKE. Earlier, we mentioned the 30th anniversary of 

the Humphrey-Hawkins Act. Thirty years ago was also the creation 

of the Community Reinvestment Act (CRA), the premise of which 

was to address the fact that banks were not lending in certain 

neighborhoods—there was red lining—and that it was important to 

extend credit to low- and moderate-income people. The development of the subprime lending market made that feasible to a significant extent. And I agree with you that legitimate, well-underwritten, well-managed subprime lending has been constructive. It 

does give people better access to credit and better access to home 

ownership. 

38

Moreover, regulations should take care not to destroy a legitimate part of this market, even as we do all that we can to make 

sure that bad actors are not taking unfair advantage or confusing 

or misrepresenting their product to people who are essentially 

being victimized by them. 

So it is our challenge—and we take it very, very seriously—to 

provide regulation and disclosures that will allow this market to 

continue to function, but at the same time to eliminate some of the 

bad aspects that we have seen in the last couple of years. 

The CHAIRMAN. The gentleman from Connecticut, Mr. Murphy. 

Mr. MURPHY. Thank you, Mr. Chairman, and thank you, Mr. 

Chairman, for coming here today. I want to spend just a few minutes on a subject that within, we think, the next 5 or 10 years is 

going to account for about $1 out of every $5 spent in this economy, 

and that is health care spending. We talked a lot about food and 

energy costs today, and that is probably in part because they tend 

to rise and fall with some degree of drama, and they tend to get 

some headlines in the newspapers. But the fact is what we have 

seen in health care spending is a very slow but steady growth in 

the rate of our GDP that is dedicated to health care spending going 

from about 8 percent in 1980 up to bordering on 16 to 17 percent 

today. 

There seem to be two schools of thought, and I probably fall in 

the first one, but I would like to get your thoughts on this, Mr. 

Chairman. The first is that this is a very dangerous trend with $1 

out of every $5 being spent on health care spending; that is less 

money available to our economic sector for growth, and less money 

available to consumers for discretionary spending. On the other 

hand, as opposed to the increases in spending in energy and food 

costs, that money is generally almost completely being recycled 

back into our own economy rather than with energy costs and food 

costs. Much of that money is going outside of the United States 

economy. 

So that is a very broad way of asking what your thoughts are 

and how troubling you believe the trend is towards more of our 

GDP and more of our economy being dedicated to health care 

spending. 

Mr. BERNANKE. Well, there have been interesting studies about 

the cost-benefit of this extra spending that we have been doing. 

The general view is that the money we have spent on things like 

improving recovery from heart attack, on mental illness, and on 

some other major categories of disease has been worthwhile in that 

the benefits of life expectancy, productivity, and so on does exceed 

the cost. That being said, it is not inconsistent to say that we probably could achieve the same health outcomes at a lot less cost if 

we had a more efficient system. 

Of course, this is a huge issue about how to achieve greater efficiency. I would like to point out that this has become extremely important, not just to the share of GDP issue as you mentioned, but 

also as a fiscal matter—as Medicare and Medicaid become huge 

portions of Federal spending, and also as a generational matter, as 

we have become an increasingly older society and young people are 

responsible for the maintenance of the retired. To the extent that 

older people require additional medical care, that care is becoming 

39

more and more expensive and puts a heavy burden on the younger 

generation. So there are some important reasons. While health care 

is a wonderful thing and is certainly worthwhile, there are very 

good reasons to improve the efficiency of the system. 

Mr. MURPHY. I certainly appreciate your thoughts on that. I 

share your view that we can get very similar, if not better, outcomes for less money spent within the system. The last related 

question is in regard to global competitiveness in relation to the 

costs being borne by American businesses on health care costs 

versus competitors in other countries who simply aren’t required to 

bear the burden of providing health care for their employees. Do 

you, as you look at the future outlook of American competitiveness, 

worry about the burden that American businesses have to bear regarding health care costs? 

Mr. BERNANKE. Well, there is some complexity to that issue because, even in a society where government provides health care, 

corporations still have to pay taxes to support that. So, it isn’t free. 

That being said, the more resources are unnecessarily consumed by 

health care—as opposed to the part which is valuable—clearly lowers the overall productivity of our society and the lower our living 

standards will be in the long run. So, it is a first-order issue to 

make sure that our health care system is delivering good outcomes, 

but at a reasonable cost. 

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

The CHAIRMAN. The gentleman from Delaware. 

Mr. CASTLE. Thank you, Mr. Chairman, and thank you, Chairman Bernanke. I would like to go to something that you have in 

your written comments, and you also spoke about orally when you 

spoke, and that is inflation. I am afraid maybe I didn’t understand 

inflation as well as perhaps I thought I did coming in here. But you 

talk about core inflation here, which apparently excludes food and 

energy prices. And there is also a reference to an annual inflation 

rate of 4.4 percent in the first 5 months of this year. I don’t know 

if that does include the food and energy. 

Mr. BERNANKE. Yes. 

Mr. CASTLE. Apparently it does. Why are food and energy excluded from core inflation? And when you speak generally about inflation, or giving the rate such as 4.4 percent, are you generally 

giving a noncore inflation and giving inflation including energy and 

food? I mean, energy is a major component of virtually every household in this area, but also there is a lot of major businesses in the 

country as well. I realize it is subject to short-term happenings, 

and obviously food prices are also subject to short-term weather 

events and other things. There may be some logistical problems in 

terms of inflation. But it just seems to me to exclude them from 

any form of inflation measurement would not be correct. 

And my follow-up to that question, if you can answer at the same 

time, is should we be concerned that persistently elevated food and 

energy inflation might presage an increase in that core inflation, 

since it is already not included there. 

Mr. BERNANKE. The dual mandate says price stability, it doesn’t 

say price stability without energy and food. The Federal Reserve is 

concerned about the overall inflation rate, that is our long-term objective in the sense of maintaining price stability. But there are 

40

some technical issues involved in achieving that. In particular, 

when oil prices rise sharply, as they have in the last few months, 

there is really not much the Federal Reserve can do in a short period of time to reverse that. Rather, what we have to do is look forward 1 to 2 years, which is the horizon over which monetary policy 

has its effect. And so we really have to ask ourselves, what is the 

underlying trend of inflation going forward? 

What is the best forecast of inflation going forward? Because energy and food prices have been so volatile up and down historically, 

the core portion, which excludes energy and food, is sometimes a 

better indicator of where sort of the trend of inflation is going to 

be a year or 2 from now. So, it is not that we think core inflation 

is more important in itself, or rather we think it is an important 

indicator of the underlying inflation trend. 

So by paying attention to core inflation, we are, in a way, saying 

that this is how we hope to maintain stability in overall inflation 

over the horizon in which the monetary policy can be effective. It 

is a concern, as I mentioned in my remarks, if energy and food 

prices rise a lot and you have very high overall inflation. It is a 

concern that the public will begin to expect higher inflation. That 

will, perhaps, then creep into core inflation and raise the inflation 

trend, which we don’t want to happen. So we pay attention not only 

to core inflation, we also look at inflation expectations as an indicator of what people think is the longer term behavior of inflation. 

Mr. CASTLE. I want to change subjects here, but I hope that because something that has volatility wouldn’t necessarily be excluded from the inflationary rates, as far as I am concerned. I want 

to ask you about where you are with Regulation Z. I don’t know 

if Regulation Z is going to be the answer. As far as credit card 

plans are concerned, this obviously is what you, the Fed, look at 

in terms of the disclosures of what should be in there. It is the first 

comprehensive review of Regulation Z since, I think, 1980 or 1981, 

something like that. We have had a hearing on that here. And I 

know that you have issued your initial statement and comments 

being made. What have you learned in the comments and when do 

you expect to finalize the rule? Are you at a comfort level to resolve 

some of the concerns that I think most of us on this committee 

have with the credit card industry? 

Mr. BERNANKE. We issued the Regulation Z rules on credit cards 

in May for comment. It was a very comprehensive review of all the 

regulations applying both to credit cards and to other revolving 

credit. The comment period is open until October. After that we 

will move as expeditiously as possible to issue a final rule that will 

apply to credit card issuers. We are also, as you know, doing a complete overhaul of Regulation Z as it applies to mortgage lending. 

We have had a series of hearings on that. 

We are also, as we did with credit cards, going to do consumer 

testing to make sure that people can understand the disclosures. 

That is going to take a while. It will probably be next year in 2008, 

as we come to some conclusions on that. But in a nearer term, in 

order to address some of the current issues in the subprime mortgage market, we have taken off a few elements that we think we 

can move on more quickly relating to solicitation and advertising 

of mortgages and when you have to give information to consumers, 

41

how quickly you have to make those disclosures. So there is some 

element to that that we think we can move up. The full Regulation 

Z on mortgage lending, however, is going to still take a while because of the need to do consumer testing. 

Mr. CASTLE. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Massachusetts. 

Mr. LYNCH. Thank you, Mr. Chairman. 

The CHAIRMAN. I very much appreciate the Chairman staying 

with us. After 21⁄2 hours, you are entitled to call something a rehash when it is. We have, I think, four members left who haven’t 

asked questions. That should take us about 20 or 25 minutes, and 

that will give us time to finish the hearing. So if you can accommodate that, we would appreciate it. 

Mr. LYNCH. Thank you, Mr. Chairman. I will try to be brief. I 

do want to go back to an issue that Mr. Royce and others have 

talked about, the subprime mortgage problems that we have been 

having. In your own remarks, Mr. Chairman, you mentioned that 

the subprime mortgage sector has deteriorated significantly, the 

conditions there, and that reflecting mounting delinquency rates on 

adjustable rate loans continue to be a growing problem. You also 

note that one risk to the economic outcome is that the ongoing 

housing correction might indeed prove larger than originally anticipated with possible spillovers into the consumer spending area. 

And in addition, you made remarks that the recent rabid expansion of the subprime market was clearly accompanied by deterioration underwriting standards, and in some cases, by abusive lending 

practices and outright fraud. And while we all agree that promoting access, as you have noted, to credit and to homeownership 

are important objectives, we do, in my opinion, need to do something more concrete, not only going forward. And I appreciate that 

I know you worked with some other Federal supervisory agencies 

to issue a principles-based guidance and nontraditional mortgage 

regulation, and that in June, you issued a supervisory guidance on 

subprime lending going forward. 

But I do want to note that in Massachusetts, this is just one example that I throw out there, Governor Deval Patrick instituted a 

moratorium working with mortgage lenders in Massachusetts, instituted a moratorium on foreclosures and a coordinated workout 

process for some of those folks that were harmed because of the, 

as you have noted, abusive lending practices and in some cases outright fraud. 

And I was wondering, is there anything—it is sort of a two-part 

question. One, are we doing anything going forward more significantly and more specific than described in your general guidance, 

and are we looking at all at possibilities working—I know you are 

working with the States—are we looking at any ways to maybe 

hold those people harmless or to mitigate the damage that might 

have been done because of abusive lending practices or that fraud? 

Mr. BERNANKE. Well, in terms of workouts, our supervisory letter 

emphasized to the banks and other lenders that we encourage 

them to look for loan modifications. Foreclosure involves a considerable financial loss to the lender as well as to the borrower. In many 

cases, it is economically beneficial to both sides to try a loan modification, and we encourage firms to do that. We have also been 

42

looking at whether there have been some artificial barriers to doing 

modifications. 

For example, we have looked at some of the accounting rules that 

may serve effectively to make it more difficult to do modifications. 

We have also looked at some of the legal agreements involved in 

the securitization of mortgages, the pooled service agreements. So 

I think there are ways to facilitate this modification process by 

looking at some of the legal and accounting barriers that stand in 

the way. I think one thing that we should be a little careful about 

is not rewarding lenders for making bad loans. We don’t want to 

get into a bail-out where lenders who have made bad loans find 

themselves essentially getting paid off. 

So, what we need to do is work with borrowers to try to get these 

loans changed. A couple of things that we have observed, in many 

conversations with the industry, with consumer groups, and the 

like, is, first, one of the most basic things that a borrower can do 

is to call their lender since lenders often find that the borrower will 

not get in touch with them until they are well into the delinquency 

situation. If you see your rate about to reset several hundred basis 

points in the next 6 months, and you think that is going to be a 

serious problem, then you probably should talk to your lender in 

advance to get more time to work that out. The other thing is that, 

unfortunately, lenders are very reluctant to do sort of mass restructuring. It is a very labor intensive, loan-by-loan kind of process, 

and we don’t really see a way around that, except to try to provide 

support, encouragement, counseling and the like, to facilitate this 

process. 

Mr. LYNCH. Lastly, turning to another issue. We talked a lot this 

morning about the deplorable savings rate here in the United 

States. And from our own example here in the Congress, we have 

a Thrift Savings Plan where there is a match. I know a lot of employers have incentivized savings among employees. Is there not 

some model out there that we could use to expand that across the 

Nation to incentivize people to save with that match maybe? Certainly it is doable. I think if we created incentives for employers 

in the Tax Code, treated them more favorably if they set up these 

matched savings plans within their companies, I think that we 

could do great things for the United States and reduce our reliance 

on foreign investment and reduce our foreign borrowing. We could 

do a lot more for our citizens if we just induced that behavior. I 

am wondering if you had any thoughts on that? I yield back. 

Mr. BERNANKE. Just a couple. The pension bill that was passed 

by Congress recently had a provision that allows employers to create savings plans with an opt-out provision. That is, the employee 

is put into the savings plan unless they explicitly request to be let 

out. There is a lot of research which suggests that with that optout approach, most people will stay in the saving plan, and you actually get very significant effects that way. I have a couple of other 

thoughts. First, one might consider using the existing Social Security system. There was a big debate here in Congress about 

carveout accounts. Something that might be less controversial, possibly, would be an add-on account, whereby individuals had a 

chance through their payroll taxes to contribute to an independent 

account that would be in their name. 

43

Finally, I think it is probably worth taking a look at the long list 

of savings programs and incentives that now exist in our Tax Code 

and in our government policy. They are quite confusing and sometimes somewhat contradictory, so there might be some benefits to 

simplifying our savings programs in a way that people can understand better and provide more explicit incentives for saving. While 

I think there are some things to do, the truth is, we have never 

found the magic bullet to induce the public to save a good deal 

more. 

The CHAIRMAN. The gentleman from New York. 

Mr. MEEKS. Thank you Mr. Chairman. Chairman Bernanke, 

thank you. I first want to make sure that I associate myself with 

many of the comments of my colleagues, a concern about the growing disparities that are taking place here between those who have 

and have not and the middle class and the pains that they are feeling. And as a result, folks are trying to figure out what is the best 

way to do it. Some have suggested that maybe we should take a 

pause in pursuing trade and investment legalization with some of 

our trading partners. So my first question, I am going to go in two 

areas, and this area is, would there be any economic benefits or 

losses to the United States if, in fact, we did take a short pause 

in pursuing trade legalization and investment with some of our 

trading partners? 

Mr. BERNANKE. I think it would be very costly economically to do 

that, both because there are many benefits to expanding trade investment and because if you interfered with existing trade investment relationships, that could be very disruptive. The main concern about trade is that, even if it provides general benefits to the 

economy, there are some people who are worse off because their 

company or their plant shuts down because of foreign competition. 

I think a better approach, rather than blocking trade, would be to 

try to assist those who are displaced to find new work, to get retraining—and this could apply to communities as well as individuals—to help them overcome the problems created by this dynamic 

change in the economy. So that would be my preferred approach, 

rather than just shutting down what has been for the economy, as 

a whole, a very beneficial direction. 

Mr. MEEKS. I heard the gentleman talk earlier about the trade 

assistance program currently; as we know, it doesn’t work, and it 

hasn’t been working. So I think that to the degree that we could 

use all of the mires as possible to come up with something that 

does, in fact, work. That is clearly what we have in place now. And 

it goes even bigger in trade, I think, because also people are losing 

jobs because of efficiency and technology. 

In fact, we probably lose a lot of jobs in regards to the technology 

that is being created today, and so we need something for the displacement of all workers. And what we have today is not working, 

and we have to figure out something better. Otherwise the anxiety 

that individuals have will roll over to trying to do something that 

could be what you described, a disastrous situation. That is why I 

think we need to all focus on all levels in that regard. My other 

question in that particular area is foreign investment in the United 

States. It seems that it is growing. And my question to you is, do 

44

you think that it will continue to grow and how important is foreign direct investment for the United States economy? 

Mr. BERNANKE. It will continue to grow. We have, as you know, 

a very large current account deficit, which means that our investment here in the United States greatly exceeds our own saving, so 

we are borrowing a great deal of money from foreigners. A lot of 

that borrowing is taking the form so far of selling treasury bills 

and other kinds of fixed income instruments. But in the future, I 

think it is quite likely that we will see more and more foreign direct investment coming from abroad. Generally speaking, I think 

foreign direct investment (FDI) is positive for the economy. We are 

already the major recipient, the largest recipient in FDI in the 

world. Transplants that come, like the automobile transplants, provide jobs, they bring new technologies, and they bring managerial 

talent. There are also investments that don’t move quickly in a financial sense. There are permanent kinds of investments. So I 

think they are beneficial. The Congress has recently, of course, just 

revised the CFIUS program to address whatever issues there may 

be of national security. It is really up to Congress to make sure you 

are satisfied with the provisions to ensure that acquisition of U.S. 

assets by foreigners doesn’t interfere in any way with national security. 

But putting aside that issue, I think there is a substantial benefit to be had by having foreigners invest in our country, provide 

jobs here, provide capital, and provide technology for the United 

States. 

Mr. MEEKS. Let me go into another area. I only have time for one 

question, although I have many. With what is now becoming 

known in issues of managed funds, hedge funds, private equity, my 

question is related to, for example, the collapse of the long-term 

capital management where there was this concern about how exposed the banking system was to LTCM. And so my question is, 

do you feel that currently we have adequate regulatory safeguards 

in place to make certain that say, for example, the collapse of a few 

major hedge funds won’t create a systematic risk for all of the 

banking industry? Do we have enough in place currently? 

Mr. BERNANKE. Well, you can never be too careful. We always 

have to keep alert and on top of the situation. But the President’s 

Working Group on Financial Markets recently issued a set of principles which argues that the best way to discipline hedge funds and 

other pools of capital is through market discipline. 

What that means is that it is incumbent on the investors and on 

the counterparties and the creditors who work with those hedge 

funds to assure themselves that the risks, the leverage associated 

with the funds, is not excessive. From the supervisor’s or the regulator’s point of view, it is our job to make sure that the investment 

banks who are dealing with the hedge funds are in fact managing 

their risks adequately and are getting sufficient information to protect themselves in case there are problems in a hedge fund. So, I 

think that is the right approach. It is not a laissez-faire approach. 

It does require that the supervisors and the regulators to look very 

carefully to make sure that the banks and investment banks are 

doing due diligence in their dealings with these pools of capital. 

But it seems to be the best approach that preserves financial staVerDate 0ct 09 2002 11:48 Nov 15, 2007 Jkt 038392 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\38392.TXT HFIN PsN: TERRIE
45

bility while allowing these pools of capital to perform the positive 

functions that they perform in the economy. 

The CHAIRMAN. Thank you. Let me just take 10 seconds. I appreciate the answer, Mr. Chairman. It just occurred to me—it is one 

of the questions that we ask. Are all the counterparties subject to 

some regulation? That would be the question. 

Mr. BERNANKE. Not private investors. 

The CHAIRMAN. And should there then be something—I mean, if 

the main protection is to ensure that the counterparties, etc., are 

under the supervision, is there a problem with unsupervised 

counterparties? Do they reach a level where that could be a problem? 

Mr. BERNANKE. Well, it is less a question of making sure the 

hedge funds don’t fail. I mean, some of them are going to fail and 

that is not necessarily a bad thing. It is a question of making sure 

that the major institutions are secure in case there are problems. 

The CHAIRMAN. The gentlewoman from California. 

Ms. WATERS. Thank you Mr. Chairman. I would like to thank 

you again for holding this hearing. And I would like to thank you 

for all of the work that you have put into getting the Chairman 

over here today to make sure that we honor the work of Gus Hawkins, my predecessor. He is responsible basically for, as was described, the 30th year of semiannual testimony on the economy and 

monetary policy by the Federal Reserve. The Humphrey-Hawkins 

Act was basically established by him. And the goals, as I understand it, that had been established a year before Humphrey-Hawkins is what Mr. Hawkins focused on and that should be a part of 

these semiannual hearings. 

So thank you for recognizing that in your testimony. And let me 

just say that I have been very pleased about some of the speeches 

that you have made and the focus that you have placed on income 

equality. I would like to note that you certainly have been talking 

about this issue. I really want to cover several things today. I 

found myself feeling a little bit uncomfortable because as we talk 

about income equality, and we all know and feel that something is 

going on here, and that the gap is growing, what I don’t find is any 

real steps or answers to deal with it. I was talking with my colleagues here a little bit earlier about the ways in which the income 

of the average person is just going out the window. We have all 

this new technology, as well as new products in our lives with incredible fees. What an average family is paying for telephone service now probably has been quadrupled based on the home had one 

telephone with an extension. Now everybody has a cell phone and 

you have to pay Internet charges. You have late fees; and you have 

to pay all these extraordinary banking fees if you don’t use a teller; 

and on and on and on. But I hear no discussion of these issues. 

And someone brought up even the amount of money that we are 

paying for health care, etc. You continue to talk about it in a traditional way and you talk about the increased costs of energy and 

food. But what about all of the new expenditures that the average 

family is confronted with today? I want you to talk about that. 

Second, on subprime mortgages, why is it that it has taken so 

long to know what was happening, and so many people have been 

hurt? Even the answers that you are giving us such as disclosure 

46

are not adequate. And then you are talking about going back and 

taking a look at prepayment penalties, the use of escrow accounts 

for taxes and insurance, stated income, and low documentation and 

no documentation loans. The advocacy groups have been talking 

about this for years now. 

Why has it taken us so long to be of any real assistance to the 

average citizen out there? It is not enough, I think, to just talk 

about disclosure. First of all, why did it take us so long to find out 

what was going on in the subprime market? And why can’t you just 

come forward and say that there really should never be any no documentation loans? Why not even take a look at interest only loans 

and the resetting of the loans? Those are some problems that it 

shouldn’t take us another 2 years while people continue to be hurt. 

Why can’t we speed up the process and know in advance about 

these trends and at the time that these practices are being put into 

play, why can’t we know sooner than later? With that, I would just 

give you an opportunity to comment on it. 

Mr. BERNANKE. Well, on the first part of your comments, there 

are many issues that affect a consumer’s budget: energy; health 

care; a whole variety of items. Each one of these things is a big and 

complex problem. There is not a single solution. We are just going 

to have to address them piece by piece. So we talked about energy, 

we talked about health care, we talked about other aspects of the 

cost of living. Let me turn, though, to your very good question 

about subprime. 

First, there always have been some concerns about these practices; you are correct about that. But there was a period that lasted 

perhaps less than a year—late 2005, early 2006—when there was 

just a tremendous sea change, a deterioration in underwriting and 

its standards. That came about because of the confluence of a number of different events, including this huge demand for high-yield 

mortgage securities from Wall Street, the expansion of lenders outside the banking system where they are closely regulated, financial 

innovation, new kinds of products. An important factor was the fact 

that with high house prices, people were stretching for affordability. All those things came together at the same time and underwriting standards really deteriorated pretty quickly. 

And we have seen that of mortgages written in 2006, with many 

of them the first payment doesn’t get made; they get returned within a few months. So, something seems to have changed in late 2005 

and early 2006. We were very active early on in providing guidance 

on best practices, on doing disclosure work, on doing fair lending 

reviews and so on. But it is clear, having seen some of these recent 

developments and asking my staff to do a top-to-bottom review, it 

does seem clear we need to take additional steps, which I have 

talked about today, and they include not just disclosure, but the 

rules. 

And among the rules we are considering are addressing low doc 

loans, escrow, some of these other prepayment penalties, and some 

of these other things you have mentioned. Some of these things 

have already appeared in our subprime mortgage guidance, which 

a lot of the States have adopted for their own, so a lot of these 

things are going to be put in place more quickly. But in terms of 

the rulemaking process, there are obviously some procedural steps 

47

that we have to take. We have to go through a full process of getting commentary and the like, and we can’t go faster than that. 

Ms. WATERS. Do you have any suggestions for legislation for us? 

We would move it a little bit faster if we understood it a little bit 

better and knew what to do. 

Mr. BERNANKE. I would be happy to talk about you about it, Congresswoman. There are a number of different bills that have already been introduced, as you know, with many different aspects. 

I mentioned earlier the point about a national registration of mortgage lenders that are not bank lenders. You could, of course, if you 

wished, achieve some of the rules that we are trying to do through 

the rulemaking process more quickly, potentially through legislation. A very, very tough issue is the enforcement issue, because 

most of the lenders outside of the banking system are State-licensed. Some of the States are very good at enforcement, others 

have less resources. The question is what to do about that. 

Our approach has been to work more closely with the States and 

hope that we can get everybody working effectively together. So 

that is another question that you might want to be thinking about. 

The CHAIRMAN. Thank you. One of the things you just said was 

one of the causes of this phenomenon was we are only looking for 

a high yield. It was sort of an interesting thing where the need for 

the high yield created a product. I mean, it goes counter to being 

told, oh, we needed to do this to meet the housing need. There is 

almost a perversion of what ought to be the way the system works. 

Mr. BERNANKE. That is how markets work. People look for profit 

opportunities. 

The CHAIRMAN. Right. But when that leads to the creation of—

it undercuts the justification. The argument has been, oh, no, this 

is just a response to the demand for housing. And you are now 

talking about a somewhat different approach, which doesn’t mean 

you do away with it all together, but it affects how we deal with 

it if there is sort of an artificiality in the product driven by the demand. The gentleman from North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Chairman 

Bernanke. There have been several members who have asked 

about income inequality. Mr. Hodes asked a series of questions that 

were very like the questions I have asked of you in your previous 

appearances before this committee. You said that in the last 5 

years the middle quintile of American families, in answer to Mr. 

Hodes, had increased, I think, real income had increased by 5 percent, is that right? 

Mr. BERNANKE. The data I have is, I believe, if I recollect it correctly is the middle quintile of families with children. 

Mr. MILLER OF NORTH CAROLINA. Right. The middlest class. 

Mr. BERNANKE. So of the five quintiles, the one in the middle. 

Mr. MILLER OF NORTH CAROLINA. The middlest. 

Mr. BERNANKE. Yes. 

Mr. MILLER OF NORTH CAROLINA. Now, Mr. Castle asked you 

questions about core inflation versus total inflation. Are you backing out of income growth core inflation or total inflation? 

Mr. BERNANKE. Total inflation. 

Mr. MILLER OF NORTH CAROLINA. The information that I have is 

that from November of 2001 until May of 2007, the wages of proVerDate 0ct 09 2002 11:48 Nov 15, 2007 Jkt 038392 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\38392.TXT HFIN PsN: TERRIE
48

duction workers, which is about 80 percent all workers, had increased 17.28 percent and total inflation had increased 17.22 percent, which is barely treading water. Is that an incorrect number? 

Mr. BERNANKE. That could be correct. I don’t know the exact 

number. But the real wages have not grown very much in the last 

5 or 6 years, that is true. 

Mr. MILLER OF NORTH CAROLINA. Okay. That is total inflation? 

Mr. BERNANKE. Yes. 

Mr. MILLER OF NORTH CAROLINA. What are you backing out? 

Mr. BERNANKE. If you have multiple family workers, for example, 

who change the number of hours they work, or if they have investment income of some kind. 

Mr. MILLER OF NORTH CAROLINA. What are you backing out this 

inflation rate? 

Mr. BERNANKE. I am totaling the CPI inflation rate. 

Mr. MILLER OF NORTH CAROLINA. Then I am looking at very different numbers. 

The CHAIRMAN. Will the gentleman yield? You are talking about 

wages? 

Mr. BERNANKE. I am talking about income. 

The CHAIRMAN. So if a second member of the family goes to 

work, it is going up. I think that is the explanation? 

Mr. MILLER OF NORTH CAROLINA. That may be the explanation 

then. But income wages are not keeping up with inflation or barely 

keeping up. 

Mr. BERNANKE. That is true. 

Mr. MILLER OF NORTH CAROLINA. In your discussion with Mr. 

Castle, and in your testimony, you gave the explanation for why 

core inflation doesn’t really include energy costs and food costs because traditionally those are the most volatile costs and that you 

would see more fluctuation than you would long-term trend. Is that 

generally the explanation for not including energy costs and food 

costs? 

Mr. BERNANKE. Again, it is not that we don’t care about it. We 

drive, we eat, we understand that inflation involves all prices, not 

just those that are not volatile. But the nature of monetary policy 

is, if we want to address inflation, there is nothing we can do today 

that is going to affect today’s oil price. We have to affect inflation 

over a period of 1 to 2 years, and therefore we have to ask ourselves where is inflation going. 

Mr. MILLER OF NORTH CAROLINA. But my question is, do you 

really believe the increases we have seen in energy costs is simply 

a fluctuation and not long-term? Aren’t the pressures that have 

pushed gasoline prices to $3 a gallon or more at the pump a longterm here to stay, the permit, not a fluctuation? Don’t you really 

believe—and in your testimony, you gave the reason for the increase in food costs as being the cost of grains because grains are 

now being used for fuel production. Isn’t that permit, is that really 

a fluctuation? 

Mr. BERNANKE. The best guess is that food and energy prices, or 

at least energy prices, will stay high. The question, though, is 

whether they will keep rising at the pace that they have been rising. As best we can tell, as best as futures markets suggest, while 

they may remain high, they will not continue to rise at the same 

49

pace. Now, that is a very uncertain judgment. I discussed in my 

testimony that this is one of the risks that we are examining. One 

of the things that could happen to make inflation more of a problem would be if energy prices in fact did continue to rise at the 

pace they have in recent years. 

Mr. MILLER OF NORTH CAROLINA. I have more questions, but I 

want to move on to subprime lending. Many people have asked 

about subprime lending. When I have asked in the past about 

subprime lending, it has been a pretty lonely effort. The concerns 

about subprime lending are not new for many of us. I introduced 

a predatory mortgage lending bill 4 years ago, 41⁄2 years ago, when 

I first came to Congress, and I dearly wish that Congress had enacted that legislation because we would not have seen the spike, 

the disastrous spike in foreclosure rates and the default rates that 

we have. There has been more discussion in the press about the 

spike in foreclosures in the subprime market has affected the stability, what it has done to hedge funds that hold portfolios than 

there has to how it affects the families who have lost their homes. 

You have talked some about the importance of homeownership, 

equity in homes, to the wealth of no class families. The information 

I have: there were about 900,000 residential foreclosures in 2005; 

1.2 million foreclosures last year; and there will be 1.5 million foreclosures this year. As you have said, based upon the change in underwriting last year, it is going to explode the year after that and 

the year after that. What is that doing to the wealth, to the life 

savings of families who are now facing foreclosure? 

Mr. BERNANKE. We have numbers which are a bit lower than 

yours, but I agree that the number is high and rising. It depends 

very much on individual circumstances. Frankly there are a few 

cases of investors who just walked away from a condo which they 

no longer thought was worth holding onto. But there are cases also 

of families who have refinanced, taken equity out of their home and 

now, given the situation, they will lose their home and some of the 

accumulated equity. 

Certainly, for some families, there is going to be an adverse financial impact. There is also a concern, which I am very aware of, 

that there are certain communities in neighborhoods where if you 

have a lot of foreclosures within a square mile, the values of the 

other homes go down and so there is kind of a neighborhood effect 

as well. So yes, there are implications of this for financial markets 

because there are significant financial losses. But there are obviously also very important implications for household wealth building and for communities. 

Mr. MILLER OF NORTH CAROLINA. The adverse financial consequence you refer to for a middle-class family who loses their 

home to foreclosure, they fall out of the middle class and into poverty and probably will never climb out for the rest of their lives. 

The CHAIRMAN. I thank the members and I thank the Chairman. 

This has been very useful for us. I appreciate the endurance of 

Chairman Bernanke, and we will continue all of these conversations at a later date. 

[Whereupon, at 1:00 p.m., the hearing was adjourned.] 

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A P P E N D I X

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