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FEDERAL RESERVE PERSPECTIVES 

ON FINANCIAL REGULATORY 

REFORM PROPOSALS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

OCTOBER 1, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–83 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

October 1, 2009 ................................................................................................. 1 

Appendix: 

October 1, 2009 ................................................................................................. 55 

WITNESSES 

THURSDAY, OCTOBER 1, 2009 

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

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

APPENDIX 

Prepared statements: 

Garrett, Hon. Scott ........................................................................................... 56 

Bernanke, Hon. Ben S. ..................................................................................... 58 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bernanke, Hon. Ben S.: 

Written responses to questions submitted by Representative Bean ............ 68 

Written responses to questions submitted by Representative Foster .......... 69 

Written responses to questions submitted by Representative Miller ........... 71 

(1) 

FEDERAL RESERVE PERSPECTIVES 

ON FINANCIAL REGULATORY 

REFORM PROPOSALS 

Thursday, October 1, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 9 a.m., in room 2128, 

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

the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Waters, 

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

Hinojosa, Baca, Lynch, Miller of North Carolina, Scott, Green, 

Cleaver, Ellison, Klein, Wilson, Foster, Carson, Speier, Minnick, 

Kosmas, Grayson, Himes, Peters, Maffei; Bachus, Castle, Royce, 

Manzullo, Jones, Biggert, Miller of California, Capito, Hensarling, 

Garrett, Price, McHenry, Campbell, Bachmann, McCotter, Posey, 

Jenkins, Lee, Paulsen, and Lance. 

The CHAIRMAN. The hearing will come to order. The photographers will disburse. 

This hearing convenes with Chairman Bernanke. We had a hearing earlier with the regulators. We had Treasury Secretary 

Geithner, and then we had the other regulators, the bank regulators. We were not able to have Chairman Bernanke at that time 

because the Federal Open Market Committee was meeting. And so 

this now completes the—oh, I don’t know—30th or 40th round of 

hearings that we have had in general. 

We will be proceeding to more legislative hearings. We had one, 

as members know, yesterday on consumer affairs, and then Mr. 

Kanjorski convened one on various aspects of the Capital Markets 

Subcommittee’s jurisdiction, including the rating agencies. 

We will be going forward on Tuesday with a hearing on a draft 

that will be released today on enhanced investor protections and 

market integrity protections for the SEC. It will deal with requirements of hedge funds and private equity and other pools of capital 

to register. 

Let me say in advance, because I like to avoid flurries, if there 

can be, we on the Majority side, and I believe members on the Republican side as well, are fully supportive of the law of venture 

capital, and we do not plan to treat venture capital the same way 

we treat hedge funds. There are, obviously, definitional differences. 

But I think members will see in the draft an appropriate regard 

for the role of venture capital, and we are working in consultation 

2 

with people in the venture capital field. I do not think there will 

be anything in there that they will regard as hindering them and 

that will interfere. 

Otherwise, there will be significant increases in consumer protections in terms of registration requirements, in terms of duties imposed on broker dealers, etc. That will be a legislative hearing, but 

this is the last of the hearings in which we will hear in general 

from the regulators. 

Mr. Bernanke, we welcome you, and, as I noted previously, this 

is probably, I guess, the 39th time in this Congress that we have 

had representation from senior members of the Federal Reserve, 

yourself more than anyone else, but the Vice Chair and other members of the Board of Governors, Ms. Duke, for instance, and Mr. 

Cohen and Mr. Alvarez and others. So we appreciate it. 

I now want to begin the clock, please. I will take 4 minutes. The 

gentleman from North Carolina will take 4 minutes. We have an 

8-minute time rule for Cabinet-level people. 

I want to talk about what seems to be an anomaly in some of 

the discussion on the Consumer Protection Agency. The Federal 

Reserve has been subject to a lot of criticism, much of which I 

think has been unfair, because I think they stepped in at the request of, first, the Bush Administration, and now the Obama Administration to fill some gaps. 

Going forward with the support of Chairman Bernanke and others, we will be filling some of those gaps so that the role that the 

Federal Reserve has played over the past year will change—not 

that this is a criticism of what they did, although people don’t have 

to agree with every aspect of how they did it—but it is a recognition that there are better structural ways to do it. It is the not the 

Federal Reserve’s fault that it was the only institution that could 

do certain things. That means we will be putting some limitations, 

as the Chairman has agreed should be done, not, as you know, that 

is necessary for us to go forward, but it is helpful when we can be 

working in a cooperative way on the powers under section 13(3). 

We will make explicit that auditing will be fairly complete, with a 

couple of exceptions that protect market integrity. 

We have had debate and will have further debate about exactly 

what the role of the Federal Reserve will be in systemic risk regulation. There were some, myself included, who earlier this year 

thought the Federal Reserve would have a larger role than it looks 

like it will have, that it will be part of a conciliar structure. 

But there was one area which I am puzzled by. Because many 

of those who have been the most vociferous in their criticism of the 

Federal Reserve are resisting the bigger shift of power away from 

the Federal Reserve currently on the table, and that is in the consumer area. Those who object to the creation of a Consumer Protection Agency and insist on leaving consumer protection exactly 

where it now is statutorily, perhaps putting those who now have 

the power, the Federal bank regulators, into some kind of conciliar 

structure, but essentially leaving that distribution of power in 

place, are the great defenders of the Federal Reserve’s power. Because the largest loser of authority when we take consumer affairs 

away from the existing bank regulators and put it in the consumer 

agency is the Federal Reserve. 

3 

We don’t do that out of criticism of them, although I must say, 

prior to Mr. Bernanke, the record of the Federal Reserve on consumer protection was dismal. There has been an improvement, although I do know that in every case, actions taken by the Federal 

Reserve in the consumer area followed actions that were initiated 

in Congress, and in particular this committee, once we became the 

Majority in 2007. That is true with credit cards, it is true with 

subprime mortgages, it is true with overdrafts, and it is true with 

formulating a code of unfair and deceptive practices. 

But the fact is that if you look at the current arrangement of 

power involving consumer protection in terms of mortgages under 

HOEPA, in terms of credit cards, in terms of overdrafts, the largest 

single agency in the bank regulator field doing consumer protection 

is the Federal Reserve. And those who resist taking consumer protection powers and putting them into a separate agency are de 

facto the greatest defenders of the Federal Reserve power now 

around. Because we have a consensus on auditing, I believe. Some 

details might be debated. We have a consensus on limiting the 

powers under 13(3). I think we will have a consensus on the role 

or a very large degree of agreement on its role in systemic risk. 

So the one issue that now appears to be debated between us is, 

do we leave the Federal Reserve with the single largest chunk of 

consumer protection powers or do we move it, as I think is appropriate, to a better agency? 

The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. 

First of all, Mr. Chairman, let me respond to say that we do not 

object to consumer protection being removed from the Federal Reserve. What we do object to and what we strenuously think would 

be a mistake is what you do with consumer protection, and that is 

you vest it in a new government agency and you give it tremendous 

power not only to protect the consumer, but you also give it power 

to design financial products. You give it power to dictate terms on 

financial agreements. You give it power to limit choice. You give it 

power to restrict competition. And by giving it the power to approve new products, you completely stifle innovation. 

America didn’t get to be the largest economy in the world, 3 

times bigger than the next biggest economy, by taking away individual choice, by stifling innovation, and by putting government in 

the business of managing financial services and making choices for 

both institutions and individuals. 

So I am sorry that we have had a miscommunication, but our objection is that you have a tremendous shift of responsibility from 

individuals and institutions to the government. 

We also object and, Chairman Bernanke, we have strenuously 

objected to something else, and that is vesting in the Federal Reserve the right to bail out individual non-bank financial institutions. We believe that the FDIC has the power to resolve banks 

through their statutory authority, but we think that is to protect 

depositors and not to protect the bank, its shareholders, or to protect it from risky investors. 

Now in the remaining time I have left, let me tell you something 

else that we have a great unease about. 

4 

I believe it was in March of last year, not September, that I had 

conversations with you and Secretary Paulson; and at that time, 

you actually expressed tremendous concern about the overextension 

of debt and of leverage. And I think there was a real concern on 

the part of a lot of people, whether this deleveraging and constriction of debt could be done in an orderly way. So there was some 

forewarning of what we saw in September, I think, starting with 

Bear Stearns. 

But, I am not sure that even until this very day we have identified exactly what caused the events of last year and how to address 

it. Instead, we have had, almost with light speed, the Obama Administration propose a sweeping change in financial regulation, 

which includes and continues to include as late as this month the 

possibility that the Treasury would spend a trillion dollars to bail 

out another non-bank financial institution. 

Chairman Volcker—former Chairman Volcker—said he had extreme concern over that. He felt like it was a mistake; and we, as 

Republicans, do, too. We simply do not believe the government 

ought to be in the bailout business of nonfinancial—non-bank financial institutions. 

The CHAIRMAN. The gentleman’s time— 

Mr. BACHUS. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from North Carolina is recognized for 4 minutes. 

Mr. WATT. Thank you, Mr. Chairman, and welcome back, Chairman Bernanke. 

I want to first express delight at the change of just some basic 

things related to the Federal Reserve under your chairmanship. I 

quite often tell the story that after being on this committee ever 

since I came to Congress and seeing it have jurisdiction over the 

Federal Reserve, not only did I not understand anything the former 

Chairman said in his testimony, but I couldn’t tell my constituents 

where the Federal Reserve was located until you became the Chairman of the Federal Reserve and invited a number of us over to a 

discussion with you. That, in and of itself, was an indication to me 

that it was a new day at the Federal Reserve, and I would have 

to say that since that time, there has been an ongoing willingness 

to open the Federal Reserve from the mystique that both the language and the appearance the Federal Reserve had under the prior 

Chair and the actual operations of the Federal Reserve. 

And in that connection, I want to compliment the witness, Mr. 

Alvarez, who is sitting behind you, whom you sent to the last hearing about the proposed bill that Mr. Paul has authored regarding 

the audit of the Federal Reserve. I think we made substantial 

progress toward putting information in a public record based on 

that hearing that will both educate the public about what the Federal Reserve does and the changes that have been made in transparency and accountability at the Federal Reserve and what needs 

to be done legislatively as part of regulatory reform to memorialize 

that in legislation. And I think we will come to a resolution that 

I am honored to say that the Chair has given me the primary authority for in my subcommittee. So I think we are going to work 

through a resolution of that. 

5 

I hope we can also work through a resolution in regulatory reform of this whole consumer protection issue. Because I think there 

are some things in your testimony this morning that when I get 

back to question you about will help us really put that issue in perspective in a much more public and transparent way. And so I welcome you back to this hearing and I look forward to working with 

you on both the audit issue and on the consumer protection issue, 

as well as the systemic risk and other issues that we are trying to 

resolve during this regulatory reform debate. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas is recognized for 2 

minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Over the past couple of weeks, the media has been replete with 

1-year anniversary stories of historic bailouts or economy recovery 

actions by our Federal Government. Before deciding on how we 

best proceed with financial markets reform, we would do well to 

learn the lessons of the good, the bad, and the ugly. 

First, the good: Within months of intervention, there is no doubt 

that credit spreads returned to more normal levels. Equity markets 

have clearly risen appreciably, and the panic we felt last September has subsided. 

Then, the bad: Our economy continues to contract in the face of 

massive government intervention. Too much private capital remains on the sidelines. After the passage of the Administration’s 

$1.2 trillion stimulus bill, 3 million of our fellow countrymen lost 

their jobs, and our Nation suffers from the highest unemployment 

rate in a quarter of a century. And I remind all there is no such 

thing as a jobless recovery. No jobs, no recovery. 

And finally, the ugly: This orgy of spending has brought our Nation its first trillion dollar deficit, and our national debt will triple 

in the next 10 years. According to the Special Inspector General for 

the TARP program, the taxpayer is now on the hook for up to $23.7 

trillion or $202,940 per household. 

The government’s continued bailouts of Fannie Mae, Freddie 

Mac, AIG, Chrysler, GM—the list goes on—now hamper our economic recovery and threaten to institutionalize us as a ‘‘bailout nation’’ with no visible exit strategy in sight. 

There remains a huge difference between adding emergency liquidity to a panicked financial system and bailing out individual 

non-bank firms fortunate enough to be designated ‘‘too-big-to-fail.’’ 

Under the latter policy, the big get bigger, the small get smaller, 

the taxpayer gets poorer, and our children get saddled with the 

mother of all debts. 

Clearly, there is a better way. Reforms are needed. But the best 

way to end taxpayer bailouts is to end taxpayer bailouts. 

The CHAIRMAN. The gentleman from New Jersey is recognized for 

2 minutes. 

Mr. GARRETT. I thank the chairman for holding this hearing, and 

I welcome Chairman Bernanke back again to the committee. 

I note in the Chairman’s testimony you continue to advocate that 

the Federal Reserve should be given authority for consolidated 

oversight for all ‘‘systemically important financial institutions.’’ 

And, quite candidly, I do have a number of concerns about this proVerDate Nov 24 2008 16:46 May 05, 2010 Jkt 055809 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\55809.TXT TERRIE
6 

posal, many that I have expressed before. Among them, first of all, 

specifically designating institutions as systemically critical leads to 

unfair competitive agendas, disadvantages, increased moral hazard, 

and makes it more likely such institutions will be considered ‘‘toobig-to-fail.’’ 

Secondly, the Federal Reserve already has consolidated supervision over many of the large bank holding companies, including 

Citi and Bank of America, which the Federal Government has 

pumped billions of dollars into due to the fact that such consolidated supervision apparently failed in the past. 

Furthermore, Fed policy itself—that is, keeping interest rates too 

low for too long, primarily before you were here—was one of the 

major factors leading to this crisis. 

I am not alone in my concerns about the Fed as a systemic regulator. There seems to be a universal distaste for the Fed in such 

a role on the Senate Banking Committee. Such a political reality 

would seem to make it less likely that the House would confer such 

new powers on the Fed either. And as has been stated previously, 

rather than give the Fed additional powers, Republicans on the 

committee have proposed as part of a reform plan that the powers 

of the Fed be focused primarily on monetary policy and others be 

reduced. 

So preventing future taxpayer-funded bailouts is a primary aim 

of the GOP plan and is also the primary aim of a piece of legislation I plan to introduce later today that will call for raising the 

minimum downpayment for the FHA loans as well as a study to 

examine what is an appropriate leverage ratio for the FHA. There 

have been increasing reports of a likely necessity of a taxpayerfunded bailout for the FHA, and this legislation aims to implement— 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. GARRETT. I appreciate your comments on that. 

The CHAIRMAN. I want to begin, Mr. Bernanke, with some of the 

issues of history that were raised. 

It was—the gentleman from Texas listed the bailouts he has 

found damaging: Fannie Mae; Freddie Mac; AIG; the automobile 

companies; and the banks, all of which were, of course, initiated by 

the Bush Administration. And I do think it is appropriate to note 

that the Obama Administration inherited all of these. It has carried some out more or less in a number of cases. But every single 

one of those was initiated by the Bush Administration, suggesting 

that it was not part of some ideological agenda but a reaction to 

reality. And, indeed, much of what we are talking about today was 

first articulated by Secretary Paulson in April of 2008. 

So that doesn’t make them right or wrong. It ought to make 

them nonpartisan. 

Secondly— 

Mr. BACHUS. Mr. Chairman, your time has expired. Now if you 

want to give additional time— 

The CHAIRMAN. Excuse me. I am in my 5 minutes. 

Mr. BACHUS. You have an opening statement of Chairman 

Bernanke. 

The CHAIRMAN. Oh, I forgot about that. I apologize. You are quite 

right. 

7 

So I will take whatever time I used in that opening statement, 

and it will be deducted from my 5 minutes, and the Chairman is 

recognized. 

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

SYSTEM 

Mr. BERNANKE. Thank you. 

Chairman Frank, Ranking Member Bachus, and other members 

of the committee, I appreciate the opportunity to discuss ways of 

improving the financial regulatory framework to better protect 

against systemic risk. 

In my view, a-broad based agenda for reform should include at 

least five key elements: 

First, legislative change is needed to ensure that systemically important financial firms are subject to effective consolidated supervision, whether or not the firm owns the bank. 

Second, an oversight council made up of the agencies involved in 

financial supervision and regulation should be established, with a 

mandate to monitor and identify emerging risk to financial stability across the entire financial system, to identify regulatory gaps, 

and to coordinate the agencies’ responses to potential systemic 

risks. To further encourage a more comprehensive and holistic approach to financial oversight, all Federal financial supervisors and 

regulators—not just the Federal Reserve—should be directed and 

empowered to take account of risks to the broader financial system 

as part of their normal oversight responsibilities. 

Third, a new special resolution process should be created that 

would allow the government to wind down a failing systemically 

important financial institution whose disorderly collapse would 

pose substantial risks to the financial system and the broader economy. Importantly, this regime should allow the government to impose losses on shareholders and creditors of the firm. 

Fourth, all systemically important payment, clearing, and settlement arrangements should be subject to consistent and robust 

oversight and prudential standards. 

And fifth, policymakers should ensure that consumers are protected from unfair and deceptive practices in their financial dealings. 

Taken together, these changes should significantly improve both 

the regulatory system’s ability to constrain the buildup of systemic 

risks as well as the financial system’s resiliency when serious adverse shocks occur. 

The current financial crisis has clearly demonstrated that risk to 

the financial system can rise not only in the banking sector but 

also from the activities of other financial firms—such as investment banks or insurance companies—that traditionally have not 

been subject to the type of regulation and consolidated supervision 

applicable to bank holding companies. To close this important gap 

in our regulatory structure, legislative action is needed that would 

subject all systemically important financial institutions to the same 

framework for consolidated prudential supervision that currently 

applies to bank holding companies. Such action would prevent financial firms that do not own a bank but that nonetheless pose 

8 

risk to the overall financial system because of the size, risks, or 

interconnectedness of their financial activities from avoiding comprehensive supervisory oversight. 

Besides being supervised on a consolidated basis, systemically 

important financial institutions should also be subject to enhanced 

regulation and supervision, including capital, liquidity, and riskmanagement requirements that reflect those institutions’ important roles in the financial sector. 

Enhanced requirements are needed not only to protect the stability of individual institutions and the financial system as a whole 

but also to reduce the incentives for financial firms to become very 

large in order to be perceived as ‘‘too-big-to-fail.’’ This perception 

materially weakens the incentive of creditors of the firm to retrain 

the firm’s risk-taking, and it creates a playing field that is tilted 

against smaller firms not perceived as having the same degree of 

government support. 

Creation of a mechanism for the orderly resolution of systemically important non-bank financial firms, which I will discuss 

later, is an important additional tool for addressing the ‘‘too-big-tofail’’ problem. 

The Federal Reserve is already the consolidated supervisor of 

some of the largest, most complex institutions in the world. I believe that the expertise we have developed in supervising large, diversified, interconnected banking organizations, together with our 

broad knowledge of the financial markets in which these organizations operate, makes the Federal Reserve well suited to serve as 

the consolidated supervisor for those systemically important financial institutions that may not already be subject to the Bank Holding Company Act. In addition, our involvement and supervision is 

critical for ensuring that we have the necessary expertise, information, and authorities to carry out our essential functions as a central bank of promoting financial stability and making effective 

monetary policy. 

The Federal Reserve has already taken a number of important 

steps to improve its regulation and supervision of large financial 

groups, building on lessons from the current crisis. On the regulatory side, we played a key role in developing the recently announced and internationally agreed-upon improvements to the capital requirements for trading activities and securitization exposures; and we continue to work with other regulators to strengthen 

the capital requirements for other types of on- and off-balance 

sheet exposures. 

In addition, we are working with our fellow regulatory agencies 

toward the development of capital standards and other supervisory 

tools that will be calibrated to the systemic importance of the firm. 

Options under consideration in this area include requiring systemically important institutions to hold aggregate levels of capital 

above current regulatory norms or to maintain a greater share of 

capital in the form of common equity or instruments with similar 

loss-absorbing attributes, such as ‘‘contingent’’ capital that converts 

to common equity when necessary to mitigate systemic risk. 

The financial crisis also highlighted weaknesses in liquidity risk 

management at major financial institutions, including an overreliance on short-term funding. To address these issues, the Federal 

9 

Reserve helped lead the development of revised international principles for sound liquidity risk management, which had been incorporated into new interagency guidance now out for public comment. 

In the supervisory arena, the recently completed Supervisory 

Capital Assessment Program (SCAP), properly known as the stress 

test, was quite instructive for our efforts to strengthen our prudential oversight of the largest banking organizations. This unprecedented interagency process, which was led by the Federal Reserve, 

incorporated forward-looking, cross-firm, aggregate analyses of 19 

of the largest bank holding companies, which together control a 

majority of the assets and loans within the U.S. banking system. 

Drawing on the SCAP experience, we have increased our emphasis on horizontal examinations, which focus on particular risks or 

activities across a group of banking organizations; and we have 

broadened the scope of the resources that we bring to bear on these 

reviews. 

We are also in the process of creating an enhanced quantitative 

surveillance program for large, complex organizations that will use 

supervisory information, firm-specific data analysis, and marketbased indicators to identify emerging risk to specific firms as well 

as to the industry as a whole. This work will be performed by a 

multidisciplinary group composed of our economic and market researchers, supervisors, market operation specialists, and other experts within the Federal Reserve System. Periodic scenario analysis will be used to enhance our understanding of the consequences 

of the changes in the economic environment for both individual 

firms and for the broader system. 

Finally, to support and complement these initiatives, we are 

working with the other Federal banking agencies to develop more 

comprehensive information-reporting requirements for the largest 

firms. 

For purposes of both effectiveness and accountability, the consolidated supervision of an individual firm, whether or not it is systemically important, is best vested with a single agency. However, 

the broader task of monitoring and addressing systemic risks that 

might arise from the interaction of different types of financial institutions and markets, both regulated and unregulated, may exceed 

the capacity of any individual supervisor. Instead, we should seek 

to marshal the collective expertise and information of all financial 

supervisors to identify and respond to developments that threaten 

the stability of the system as a whole. This objective can be accomplished by modifying the regulatory architecture in two important 

ways. 

First, an oversight council—composed of representatives of the 

agencies and departments involved in the oversight of the financial 

sector—should be established to monitor and identify emerging systemic risks across the full range of financial institutions and markets. Examples of such potential risks include: rising and correlated risk exposures across firms and markets; significant increases in leverage that could result in systemic fragility; and gaps 

in regulatory coverage that arise in the course of financial change 

and innovation, including the development of new practices, products, and institutions. 

10 

A council could also play useful roles in coordinating responses 

by member agencies to mitigate emerging systemic risks, in recommending actions to reduce procyclicality and regulatory and supervisory practices, and in identifying financial firms that may deserve designation as systemically important. 

To fulfill its responsibilities, a council would need access to a 

broad range of information from its member agencies regarding the 

institutions and markets they supervise; and when the necessary 

information is not available through that source, they should have 

the authority to collect such information directly from financial institutions and markets. 

Second, the Congress should support a reorientation of individual 

agency mandates to include not only the responsibility to oversee 

the individual firms or markets within each agency scope of authority but also the responsibility to try to identify and respond to 

the risks that those entities may pose, either individually or 

through their interactions with other firms or markets, to the financial system more broadly. These actions could be taken by financial supervisors on their own initiative or based on a request 

or recommendation of the oversight council. 

Importantly, each supervisor’s participation in the oversight 

council would greatly strengthen that supervisor’s ability to see 

and understand emerging risk to financial stability. At the same 

time, this type of approach would vest the agency that has responsibility and accountability for the relevant firms or markets with 

the authority for developing and implementing effective and tailored responses to systemic threats arising within their purview. To 

maximize effectiveness, the oversight council could help coordinate 

responses when risks cross regulatory boundaries, as will often be 

the case. 

The Federal Reserve already has begun to incorporate a systemically focused approach into our supervision of large, interconnected 

firms. Doing so requires that we go beyond considering each institution in isolation and pay careful attention to interlinkages and 

interdependencies among firms and markets that could threaten 

the financial system in a crisis. For example, the failure of one firm 

may lead to runs by wholesale funders of other firms that are seen 

by investors as similarly situated or that have exposures to the 

failing firm. These efforts are reflected, for example, in the expansion of horizontal reviews and the quantitative surveillance program that I discussed earlier. 

Another critical element of the systemic risk agenda is the creation of a new regime that would allow the orderly resolution of 

failing, systemically important financial firms. In most cases, the 

Federal bankruptcy laws provide an appropriate framework for the 

resolution of non-bank financial institutions. However, the Bankruptcy Code does not sufficiently protect the public’s strong interest 

in ensuring the orderly resolution of a non-bank financial firm 

whose failure would pose substantial risks to the financial system 

and to the economy. Indeed, after the Lehman Brothers and AIG 

experiences, there is little doubt that we need a third option between the choices of bankruptcy and bailout for those firms. 

A new resolution regime for non-banks, analogous to the regime 

currently used by the FDIC for banks, would provide the governVerDate Nov 24 2008 16:46 May 05, 2010 Jkt 055809 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\55809.TXT TERRIE
11 

ment the tools to restructure or wind down a failing systemically 

important firm in a way that mitigates the risks to financial stability and the economy and that protects the public interest. It also 

would provide the government a mechanism for imposing losses on 

the shareholders and the creditors of the firm. Establishing credible processes for imposing such losses is essential to restoring a 

meaningful degree of market discipline and addressing the ‘‘too-bigto-fail’’ problem. 

The availability of a workable resolution regime also will replace 

the need for the Federal Reserve to use its emergency lending authority under 13(3) of the Federal Reserve Act to prevent the failure of specific institutions. 

Payment, clearing, and settlement arrangements are the foundation of the Nation’s financial infrastructure. These arrangements 

include centralized market utilities for clearing and settling payments, securities, and derivative transactions, as well as the decentralized activities through which financial institutions clear and 

settle transactions bilaterally. While these arrangements can create significant efficiencies and promote transparency in the financial markets, they also may concentrate substantial credit, liquidity, and operational risks and, absent strong risk controls, may 

themselves be a source of contagion in times of stress. 

Unfortunately, the current regulatory and supervisory framework for systemically important payment, clearing, and settlement 

arrangements is fragmented, creating the potential for inconsistent 

standards to be adopted or applied. Under the current system, no 

single regulators is able to develop a comprehensive understanding 

of the interdependencies, risks, and risk-management approaches 

across the full range of arrangements serving the financial markets 

today. 

In light of the increasing integration of global financial markets, 

it is important that systemically critical payment, clearing, and settlement arrangements be viewed from a systemwide perspective 

and that they be subject to strong and consistent prudential standards and supervisory oversight. We believe that additional authorities are needed to achieve these goals. 

As the Congress considers financial reform, it is vitally important 

that consumers be protected from unfair and deceptive practices in 

their financial dealings. Strong consumer protection helps preserve 

household savings, promotes confidence in financial institutions 

and markets, and adds materially to the strength of the financial 

system. We have seen in this crisis that flawed or inappropriate financial instruments can lead to bad results for families and for the 

stability of the financial sector. In addition, the playing field is uneven regarding examination and enforcement of consumer protection laws among banks and non-bank affiliates of bank holding 

companies on the one hand and firms not affiliated with banks on 

the other. Addressing this discrepancy is critical both for protecting 

consumers and for ensuring fair competition in the market for consumer financial products. 

Mr. Chairman, Ranking Member Bachus, thank you again for 

the opportunity to testify in these important matters. The Federal 

Reserve looks forward to working with the Congress and the Administration to enact meaningful regulatory reform that will 

12 

strengthen the financial system and reduce both the probability 

and the severity of future crises. 

Thank you. 

[The prepared statement of Chairman Bernanke can be found on 

page 58 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Chairman. 

I apologize again for my outburst, and I begin with 4 minutes 

and 30 seconds. I used up 30 seconds before the gentleman from 

Alabama correctly interrupted me. So make that 4 minutes and 30 

seconds, please. 

Just to recap, the need to intervene in the economy was regrettable. I think it was caused by past failures. But we do want to 

note that every item that the gentleman from Texas mentioned as 

a regrettable bailout was initiated by President Bush and his advisors, carried on by President Obama. Our job is to try and prevent 

this, we think, from happening again. 

One other historical reference I want to make to the Chairman, 

and I think it is fair to note again, we are trying to get bipartisanship. The Chairman has been a high economic official appointed 

first by President Bush to a couple of positions and now by President Obama. There has been reference to the economic recovery 

plan. It was noted in what would seem to me to be fairly simplistic 

economics, the plan was passed, but even after the plan passed, unemployment went up. The assumption that a plan being passed 

could instantly undo things that had been built into the economy 

seems to me questionable. But I would—like you said before, what 

is your estimate of the employment impact of the economic recovery plan that was passed earlier this year, Mr. Chairman? 

Mr. BERNANKE. Mr. Chairman, I don’t have an immediate number for you. 

Part of the issue here I think is only about 20 percent of the 

monies that were appropriated have been put into the system, and 

I think it still remains to be seen what the net effect will be. The 

estimated employment impact is very difficult because you have to 

compare it to what would have been the case in the absence. Of 

course, that is very difficult. 

I do believe that fiscal policy can have positive effects on growth 

and employment based on a large literature looking at previous 

episodes, the effects on consumer spending on State and local 

spending and the like. But I would have to concede that at this 

point, again because it is early in the process and because it is difficult to assess the counter factors. 

The CHAIRMAN. But the report did mention a number of areas 

where you thought it had some positive impact. 

Mr. BERNANKE. Yes, based on our analysis, which largely reflects 

studies of previous episodes, there is a presumption that we saw, 

for example, in the last—in the early 2000’s that consumers did respond to income transfers by increasing spending over a period of 

time. 

The CHAIRMAN. Let me move on. I appreciate that, and we do 

have more to be spent. 

I want to respond to the ranking member’s denial of my assertion 

that the Republicans want to leave full consumer power to the Federal Reserve; yes, they do. The proposal to create a consumer agenVerDate Nov 24 2008 16:46 May 05, 2010 Jkt 055809 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\55809.TXT TERRIE
13 

cy takes more powers from the Federal Reserve than from the 

other agencies. And the counter has been to leave the powers 

where they are and to perhaps enhance their enforcement. So the 

largest defense of existing Federal power, Federal Reserve power 

that we now have, is coming from those who oppose a consumer 

protection agency. 

Now the gentleman from Alabama said he objected to some other 

things which are not in the bill that we circulated last week. We 

are not talking about doing some of those things. I think they were 

interpretations of the Administration’s bill. We have already substantially rewritten it to talk about what we are talking about. 

But, again, let’s be very clear. The position that the Republicans 

have talked about, as I understand it, is to leave consumer protection with the bank regulatory agencies, not to separate, as they 

say, safety and soundness and consumer protection. Of the bank 

regulatory agencies—the FDIC, the Comptroller of the Currency, 

the Office of Thrift Supervision, and the Federal Reserve—more 

consumer protection statutes are lodged in the Federal Reserve 

than anywhere else; and if you preserve that status quo, you preserve the powers of the Federal Reserve. 

I have seen no proposal from my Republican colleagues that 

would in any way diminish the consumer protection powers of the 

Federal Reserve. They say we want the Federal Reserve to concentrate only on monetary policy, but under their approach, the 

Federal Reserve would continue to be the major consumer protector 

of all of the other Federal agencies. 

I think that is a mistake, and that is why we have proposed a 

change. If there is a proposal to diminish the very large repository 

of Federal Reserve consumer powers, I haven’t seen it yet, and I 

would look forward to it. The notion even of a council, which was 

proposed by the witness the Republicans asked us to have the 

other day, it would be a council of the existing Federal regulators; 

and he said they would retain their power. So that is where we are. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you. 

Chairman Bernanke, I guess you didn’t know you were being invited to a debate between the chairman and me. I would like to get 

back to your testimony. 

I think, as you know, what the Republicans have proposed is consolidating financial regulation within a single agency and not bifurcating safety and soundness from consumer protection. You have 

actually, in a letter to me on July 29th, agreed that bifurcation had 

tremendous risk. Am I correct in that regard? 

Mr. BERNANKE. I think there are some costs to separating enforcement and rule-writing. 

Mr. BACHUS. Thank you. 

And the chairman, also, although I am not sure he has read our 

plan—what we have proposed is very similar to what Senator Dodd 

and Senator Warner in the Senate have proposed, and that is consolidation of some of the bank supervision. 

Now, Chairman Bernanke, as you have heard from Mr. Hensarling and others, we are deeply concerned over the Obama Administration’s failure to abandon an option to use taxpayer money 

to bail out ‘‘too-big-to-fail’’ non-bank financial institutions. I am 

14 

sure you are aware or are you aware that former Chairman 

Volcker expressed his strong concern for that, also? Do you share 

our concern that you do create, as I think Mr. Garrett said, moral 

hazard and also the question of fairness— 

And I will end with this. There are too many questions. 

But, as you know, you probably heard Secretary Geithner say he 

wouldn’t take a trillion dollar intervention off the table. I would 

ask you to maybe start with that and work back. Would you endorse his statement? 

Mr. BERNANKE. Let me address the key issue which was raised 

by Mr. Hensarling. I do not in any way support ‘‘too-big-to-fail.’’ I 

think it is a huge problem. I think whatever we do must address 

that problem. Big companies must be allowed to fail, but they must 

be allowed to fail safely so they don’t bring down the system. 

So I see the resolution regime, for example, as having three objectives. 

Objective number one is to avoid damage—collateral damage to 

the broad financial system, and for that reason some flexibility is 

needed for the Treasury or whomever is running that to bridge to 

a new company or take whatever actions are needed to intervene 

at that point. 

I think there are two other objectives. The second one is to get 

rid of ‘‘too-big-to-fail.’’ And for that purpose, I think the ability to 

wind down the firm should be there; and I think we ought to make 

it a very, very strong presumption that whenever there is an intervention that not only shareholders but also creditors lose money. 

And that will create the market discipline that will take away the 

biggest advantage of being ‘‘too-big-to-fail’’. 

And then the third objective is to protect taxpayers. I want to 

stress very strongly that I do not support government or taxpayer 

investments such as TARP as a means of preventing these failures. 

What I propose is something similar to what we have now for the 

FDIC, which is that, even if there are short-term extensions of 

credit from the government, that ultimately the full cost will be 

borne either by the creditors of the company or by the rest of the 

industry. 

So, I do very much want to address your concerns. At the same 

time, I do think that we need to have a system for avoiding chaos. 

The Lehman Brothers failure is still not resolved. There is still an 

enormous amount of monies tied up and confusion and uncertainty 

about claims, and that is just because the bankruptcy process can’t 

deal with this in an orderly way. 

Mr. BACHUS. Let me close by asking this. The Consumer Protection Agency, the chairman said today that we were talking about 

pure vanilla products. He said he has taken that off the board. 

The New York Times, in an editorial on September 30th, says 

the agency still has the ability to create incentives that would encourage the provisions of plain vanilla products, including charging 

reduced oversight fees to firms that offer simpler loans. Do you 

agree with the provision where the Federal Government would actually tax or charge fees if banks did not offer plain vanilla services 

or plain vanilla products? 

Mr. BERNANKE. Congressman, I addressed this in an earlier testimony; and the point I made was that there is some case for vaVerDate Nov 24 2008 16:46 May 05, 2010 Jkt 055809 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\55809.TXT TERRIE
15 

nilla products which relates to what behavioral economics says 

about the ability of consumers to deal with very complicated processes or products. But I did also say I thought the basic design 

ought to come from the firms. The agency should not be designing 

the products. 

I think I would add also that simplicity is sometimes in the eye 

of the beholder. One-size-fits-all doesn’t always work. There may be 

some products that are simple and appropriate for some but not 

necessarily for all consumers. 

The CHAIRMAN. The gentleman from Pennsylvania. 

Mr. KANJORSKI. Thank you, Mr. Chairman. Welcome back, 

Chairman Bernanke. 

And, first, may I take the opportunity to congratulate you. From 

what I have heard, you have now determined that you are not supportive of greater powers for the Federal Reserve but would prefer 

the council in systemic risk regulation. Is that a reasonable conclusion from what you have said? 

Mr. BERNANKE. Well, only that there is not really a change. We 

have supported—I think there has been some misunderstanding. 

We have never supported, and the Administration has never supported, a situation in which the Fed would be some kind of 

untrammeled superregulator over the entire system. That was 

never contemplated. 

The original Administration proposal proposes a council, and we 

support the council. We think it has a very valuable role to play. 

And we think that underneath the council, each of the agencies, including the Fed but also the SEC and others, should be looking at 

the systemic implication of their actions and working together 

through the council to look at the whole system. So we have never 

objected. 

Mr. KANJORSKI. Well, whether I interpreted it correctly or not, 

anyway, congratulations. I think we are on a course to now perhaps put together something that can be accomplished here. 

The only thing that I did not hear you talk about is a factor that 

came to our attention when we held the hearings on General Motors, Ford, and Chrysler. The testimony was quite clear there, and 

including the foreign manufacturers, that they all concluded that 

if we allowed Chrysler to fail it would cause systemic risk and 

bring down all of the other automobile industry because of the 

intertwined nature of their dealers and their suppliers; and that 

was a major consideration in what the Congress did in supporting 

the bailout of General Motors. 

Now my question is, I heard you only talk about financial institutions in relationship to systemic risk. Does that mean you see no 

other systemic risk in our system beyond the financial institutions? 

Or is it because that happens to be the flavor of the day and we 

should wait until there is a failure or systemic risk in other industries? 

Mr. BERNANKE. Well, no doubt the failure of the auto companies 

would have been disruptive, particularly in the areas where employment is concentrated in that area; and it was particularly troublesome given the state of the general economy when these decisions were made. But I would draw a strong distinction I think between financial institutions, particularly large, complex, interVerDate Nov 24 2008 16:46 May 05, 2010 Jkt 055809 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\55809.TXT TERRIE
16 

national, interdependent financial institutions and any other kind 

of firm. I think only those large financial institutions have the ability to bring down the entire global system. So the failure of Lehman Brothers affected not only the United States economy but 

every economy in the world. 

Now, clearly, damage would have been done by other kinds of 

firms, but I would personally—my focus is on financial firms. 

Mr. KANJORSKI. I understand that is your specialty and that is 

your focus, but are you having someone do analysis and study to 

find out whether we should worry, for instance, about the world energy problem or transportation, particularly aircraft, where we 

have very limited manufacturers? What would happen to the world 

if there were a failure in one of those industries? Is that something 

we should think about or worry about? 

Mr. BERNANKE. Well, we should certainly think about it. But if 

you look at the airline industry, for example, every major airline 

has been through bankruptcy at one point or another. And it has 

been a process— 

Mr. KANJORSKI. I am probably a little bit more worried about the 

manufacturers than the operators. I realize there are just really a 

few left in the world; and if there were failure there, it could be, 

I would think, systemic. 

Mr. BERNANKE. There are tough questions there. I guess I 

would—it is not just a question of specialization. Unfortunately, financial crises, booms and busts are a long-standing problem of capitalism; and they have, I think, a special role in the broader— 

Mr. KANJORSKI. I agree. And that being the case, are you planning to come forth with a proposal to the Congress of how not only 

we can have a systemic regulator that can identify ‘‘too-big-to-fail’’ 

but how we start winding them down and preventing them from 

getting that large? Are we going to go into an industrial plan or 

financial plan in America where we—once identified, we establish 

a way of taking these institutions down to a controllable size where 

their failure would not cause systemic risk? 

Mr. BERNANKE. I don’t think it’s possible to reduce all financial 

institutions to a size so small that there would not be any systemic 

consequences without losing some very substantial benefits of 

international financial flows, for example. 

I think the best way to do this is by making it costly, removing 

the advantages of being ‘‘too-big-to-fail.’’ So, on the one hand, by increasing the oversight regulation capital requirement, making it 

less profitable, ‘‘too-big-to-fail,’’ and making it much more constrained; and, on the other hand, by having the resolution authority which would tell the creditors that they will lose money if this 

company fails and, therefore, they will not benefit the company by 

providing resources or funds at below-market rates. 

So I think those two things will remove a lot of the incentives 

that the firms have to become too large and that they will naturally tend to shrink. 

The CHAIRMAN. The gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Chairman Bernanke, yesterday, we had a hearing in our committee on the CFPA that many of us view as a financial services 

product approval agency. The language that we have seen from our 

17 

chairman still would allow this agency to have sweeping draconian 

powers to outlaw financial products that it subjectively believes to 

be ‘‘unfair or abusive.’’ Again, fairly subjective terms. 

As part of that hearing, we heard testimony from the U.S. Chamber of Commerce. They submitted a study they did, and let me 

quote from that: ‘‘The CFPA credit squeeze would likely result in 

business closures, fewer startups, and slower growth. Overall, this 

would cost a significant number of jobs that would either be lost 

or not created.’’ 

As you have viewed the CFPA, even through the Administration’s White Paper or to the extent you have knowledge of the 

chairman’s bill, could the CFPA indeed lead to further job losses 

or did the Chamber of Commerce just get it wrong? 

Mr. BERNANKE. Well, I think would depend on the execution. 

I will make two comments. The first is that the Federal Reserve, 

in our consumer regulation, works within a statutory context, a set 

of laws, TILA, TISA, others that define the parameters of what we 

are supposed to do, and we do things in the context of what Congress has told us is the appropriate set of objectives and constraints. So that is how we operate. I think there should be a statutory context for whatever agency is making those decisions. 

It is always the case, though, in making specific decisions about 

trying to balance the benefits of protecting consumers versus the 

cost of restraining credit availability—and I will just speak for the 

Federal Reserve—which is that in our efforts we have brought together not only lawyers and experts on the minutia of consumer 

law but economists and financial people and so on to try to look 

at the full implications for the credit markets of the decisions we 

have taken. I would say it would be important for the agency to 

take that view as well. One mechanism I think is that the board 

of this agency should include some other agencies, which I believe 

is the plan. But it is important to balance those two— 

Mr. HENSARLING. Is the summary of that answer ‘‘maybe?’’ 

Mr. BERNANKE. It depends. It depends on how— 

Mr. HENSARLING. We will turn it into a two-word answer. 

Clearly, you are familiar with the incredible financial commitment of the taxpayer to the Government-Sponsored Enterprises, 

Fannie Mae and Freddie Mac. I believe that the Fed has purchased 

roughly $130 billion of their debt; another roughly $700 billion of 

their MBS; and I think FHFA and the Treasury is up to about 

$100 billion. So we are looking at almost $1 trillion of taxpayer 

commitment here. 

The legislation that the Administration and the Democratic Majority has brought before us is almost silent on the issue of any reforms for the GSEs. And the legislation before us will apparently 

regulate pawn shops and payday lenders. To the best of my knowledge, they had no role in our economic turmoil. 

Many economists believe that Fannie and Freddie were central 

to our economic turmoil. I don’t believe pawn shops and payday 

lenders have taken any taxpayer funds, and now we are looking at 

an almost $1 trillion commitment. 

In your testimony, you said that your reform, any reform agenda, 

should include at least five key elements. If our reform agenda is 

silent on reforming Fannie and Freddie, did we meet your test? 

18 

Mr. BERNANKE. I think, in the near future, we need to have a 

plan for Fannie and Freddie. I didn’t include it because I was focused essentially on the Treasury’s proposal and on the systemic 

risk aspects. But you are absolutely right; I think the GSEs need 

to be discussed in the near term. Not just for systemic risk reasons, 

but because we have a lot of uncertainty about housing and what 

is going to happen to the housing structure, housing finance system. So I hope that in the very near future, and I believe that is 

the intention, I hope in the very near future, we will have some 

proposals on that. 

Mr. HENSARLING. In the small time I have remaining, could you 

discuss the pros and the cons? What might the Federal Reserve 

look like if it was strictly engaged in monetary policies? We did 

achieve some version of the resolution authority that you seek, and 

the Federal Reserve retains its 13(3) powers, otherwise shedding 

its responsibilities for bank supervision, consumer protection, payment systems and the like. Might that be good or bad public policy 

and why? 

Mr. BERNANKE. That would make us look very much like the 

Bank of England and some other central banks that have been 

brought back to monetary policy-making. I think the experience of 

the recent crisis is that, and this is the case in the U.K., that the 

fact that the bank did not have the information it needed about the 

crisis, about what was happening in the banking system and so on, 

was a real drawback in terms of the ability of the Central Bank 

to help stabilize the system. So, of course, you could have a central 

bank that was focused only on monetary policy, absolutely. But I 

think that it is very important for the Central Bank to have the 

information, the expertise, the insight about the banking system in 

order to both make better monetary policy and to be able to play 

an appropriate role whenever there is a crisis. 

Mr. HENSARLING. Thank you. 

Mr. KANJORSKI. [presiding] The gentleman’s time has expired. 

The gentlelady from California, Ms. Waters. 

Ms. WATERS. Thank you very much. 

Mr. Bernanke, I am very pleased that you are here with us once 

again. And I would like to thank you very much for your responsiveness to the requests that we have made to you several times 

and the discussion that we had at the recent ALC that was sponsored by the Congressional Black Caucus. I really do appreciate 

that. 

Let me just say that I believe that the presentation that you 

have made here this morning, where you discussed your agenda for 

reform and pointed out the five key elements, makes a lot of sense. 

I just want to ask about the oversight council. You talk about the 

oversight council being able to monitor and identify emerging risk 

to financial stability across the entire financial system. And I wondered if this would include taking a close look at credit default 

swaps, naked credit default swaps in particular, because I consider 

them a risk to the stability across the entire financial system. 

And I am focused somewhat on the fact that the taxpayers, in 

bailing out AIG, had to pay for that gamble to Goldman Sachs and, 

I don’t know, maybe some others. How would you deal with that? 

19 

With this council, how would you see the potential for risk to the 

system that is presented by these transactions. 

Mr. BERNANKE. I think that credit default swaps are an almost 

perfect example of the kind of thing that the council would be focused on. The CDS market cut across so many different jurisdictions. AIG was under the AG of the Office of Thrift Supervision. 

Some of the clearing mechanisms were not regulated at all. The 

New York Fed was trying informally to get them working better 

since they were regulated. You had the SEC and the CFTC involved in that process to some extent. Partly it was an issue of 

bank regulation, because banks were also involved in these transactions, and they were not adequately capitalized to do that. So it 

is a classic example of something that went across a whole bunch 

of different areas in which no one regulator had a holistic view of 

what was going on. 

And I think this would be a really good example of how by sitting 

today in a serious way and having a staff and reviewing developments, issues, new instruments, new markets and so on, that this 

is the kind of thing where maybe working together, it might have 

been—you know, of course we are human beings and we won’t be 

infallible, but there would have been a much better chance of identifying it earlier in this kind of council context than the way the 

system we currently have. 

Ms. WATERS. As you know, I do not share the opinion of many 

who work in this whole financial services industry about regulation 

of any product that comes on the market. I believe that there are 

some products that are just too risky and should be eliminated. 

They just should not be there. Have you ever thought about how, 

perhaps, we could identify such risk and say, this just can’t work, 

we just can’t do this? 

Mr. BERNANKE. The Federal Reserve has taken this position. For 

a very long time, the Fed was focused on transparency and disclosures on the theory that if people could read the information, that 

they would make good decisions. But, for example, in our recent 

credit card work, which became the basis for a lot of the legislation 

here, we identified through consumer testing and other kinds of 

means that there were a number of practices and products and so 

on that did not benefit the consumer and which could not reasonably be understood by a typically educated consumer to understand 

the full implications of what that practice was. And based on that, 

we said that in some cases transparency is not enough, and we employed the Unfair or Deceptive Acts or Practices provisions simply 

to ban those practices. 

So I think, in situations where there is no benefit to the consumer and where disclosures are not adequate, there are grounds 

for banning a product or a practice. And the consumer agency or 

whomever is in charge would look at that, and the council could 

look at those thinks as well. 

Ms. WATERS. I am very pleased to hear that. And I thank you 

very much. 

I yield back the balance of my time. 

The CHAIRMAN. The gentleman from California. 

Mr. ROYCE. Thank you. 

20 

Chairman Bernanke, I have a question for you. Last month, the 

Federal Housing Administration acknowledged that a new audit 

that HUD did there found that the FHA’s cash reserve fund is rapidly depleting. It might drop below the congressionally mandated 

2 percent by the end of the year. And so the leverage there, the 

ratio was 50 to 1 for FHA. And it will soon have a smaller capital 

cushion than Bear Stearns had on the eve of its crash. At 50 to 1, 

it is about halfway to where Fannie Mae and Freddie Mac were at 

100 to 1 leverage ratio. And the delinquency rate for the FHA is 

now above 14 percent, so that is about 3 times higher than unconventional mortgages. 

In many respects, the reason for this financial deterioration is 

that the FHA is underwriting record numbers of high-risk mortgages. Between 2006 and the end of next year, the FHA’s insurance 

portfolio will have expanded to $1 trillion from about $410 billion. 

The FHA’s very low, I would say absurdly low, 3.5 percent downpayment policy in combination with other policies to reduce upfront 

costs for new home buyers means that the home buyers can move 

into their government-insured home with an equity stake of about 

2.5 percent. So, in essence, the private market for loans with little 

or no money down has shifted onto the books of the Federal Government. 

Are you concerned with the long-term consequences of this trend 

and the rapidly deteriorating capital cushion of the FHA? And are 

you confident this will not turn into another Fannie-Freddie situation, which could have been easily prevented had we listened to the 

Fed in 2004 and 2005, but ends up costing taxpayers billions of dollars? I remember when the Fed came to us in 2004 and said, we 

need to be able to regulate for systemic risk, the leverage is 100 

to 1. Basically, what you are doing in government is that the Congress has forced us into a position where half of the portfolio has 

to be subprime and Alt-A; this represents a systemic risk. We need 

the ability for the regulators to slowly bring down this overleveraging and bring down the portfolio size by giving us the ability 

to regulate for systemic risk. Are you worried that we are going 

through that kind of a cycle again here? 

Mr. BERNANKE. Well, I should say first that we don’t directly 

evaluate the FHA’s position, and I think they disagree somewhat 

with this outside view, and so I won’t try to adjudicate between 

that. But it is true that the FHA de facto has replaced the riskier 

part of the mortgage market. It has a very high share now of new 

mortgages because it is the only source of mortgages where 

downpayments can be less than basically 20 percent. And so it is 

providing mortgage access to a large number of people who could 

not otherwise buy homes. 

So I guess you have two conflicting public policy goals here. On 

the one hand, it is providing support to the housing market and 

housing homeownership. On the other hand, clearing, I think it is 

fair to say, that given the low downpayments, there is certainly 

greater risk of loss there, which would be ultimately borne by the 

taxpayer, than under a policy of higher downpayments and higher 

FICO scores and so on. So I think that is a tradeoff that Congress 

has to look at. 

21 

Mr. ROYCE. Let me ask you another question. Some economists 

are arguing that the Fed not only lost control, but its policy actions 

have unintentionally become procyclical—encouraging financial excesses instead of countering the extremes. And this gets to the 

point that has been argued by many economists. In fact, Friedrich 

Hayek won the Nobel Prize in 1974 for arguing that artificially low 

interest rates lead to the misallocation of capital and the bubbles 

which then lead to bursts. Looking back, do you agree that the negative real interest rate set by central banks from 2002 to 2006 had 

a dramatic impact on the boom and the subsequent bust, especially 

when you take into consideration what was already an inflating 

housing bubble with the drastic steps taken by the Federal Government to encourage less creditworthy borrowers to get into loans 

they could not afford? Do you think those combinations could have 

had an impact on that boom-bust? 

Mr. BERNANKE. We are actually looking very carefully at this 

question because it is very important for policy going forward, and 

I think we need to keep an open mind. Having said that, I think 

that the very strong way you stated it is probably an overstatement. I think there are a lot of reasons to think that there were 

other factors involved in the housing boom and bust besides monetary policy. And I would say secondly that a strong, well-regulated 

financial system should not have been crashed by an increase and 

decrease in house prices. I think the failures of regulation, supervision and oversight allowed this to become as big a deal as it was. 

So I think that is a very high priority right now. 

The CHAIRMAN. The gentlewoman from New York. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Chairman, what are some considerations that a systemic 

regulator should look for to determine what activities and what institutions should be subject to its oversight? 

Mr. BERNANKE. So, again, we may be talking about a coordinated 

effort of the systemic risk council, the Fed and so on, so it is not 

clear exactly how that process would work. But there are a number 

of considerations, not just size. For example, what is called interconnectedness, the number of counterparties the firm has around 

the world, the complexity of its operations, whether it provides critical services like providing market making or other utilities to the 

financial system. So there are a lot of considerations you would 

take into account. 

Ms. VELAZQUEZ. Is it conceivable that private equity funds, firms 

or venture capital funds could fall under a systemic risk regulator? 

Mr. BERNANKE. Well, my view at this point is that I would not 

think that any hedge fund or private equity fund would become a 

systemically critical firm individually. However, it would be important for the systemic risk council to pay attention to the industry 

as a whole and make sure that it understood what was going on 

so there wouldn’t be kind of a broad-based problem that might cut 

across a lot of firms. 

Ms. VELAZQUEZ. As we continue to see fallout from this recession, 

one result has been even greater consolidation in the banking and 

financial sector. Our largest banks are now bigger than ever, and 

events from the past year have demonstrated that some financial 

institutions are indeed ‘‘too-big-to-fail.’’ What steps could a sysVerDate Nov 24 2008 16:46 May 05, 2010 Jkt 055809 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\55809.TXT TERRIE
22 

temic regulator take to mitigate the continued concentration of risk 

in a few very large institutions? 

Mr. BERNANKE. Well, this was a very undesirable side effect of 

the steps we had to take to protect the system in the short run. 

And as I was discussing earlier, I think it is extremely important 

to address this ‘‘too-big-to-fail’’ problem, and I see several ways to 

do that. One would be, again, to—in the recognition that these 

firms if they fail threaten not only their own stability and their 

own creditors, but the whole system—I think they should be subject to extraordinary oversight, including higher capital and liquidity requirements, tougher risk-management rules, and basically 

stronger supervision. 

Secondly, one of the big concerns about these large firms is that 

as ‘‘too-big-to-fail’’ firms, they are not subject to the discipline of 

the market because lenders do not believe that the firm would be 

allowed to fail. I think that has to be eliminated and fixed. I would 

not be satisfied with any resolution authority that did not have a 

strong presumption and a strong mechanism for allowing these 

firms when being taken over by the government to impose significant losses on not only shareholders but also creditors. 

I guess a final comment is that the Federal Reserve, in approving mergers and the like, looks at the monopoly issues and the concentration issues. And our view is that at least in retail services, 

those are most important at the local level rather than at the national level. So we always examine whenever there is a merger or 

expansion of a company, we always look at each of the market 

areas, SMSAs and try to make sure that there is not a domination 

of that region by one or two companies. 

Ms. VELAZQUEZ. Mr. Chairman, I would like to go again back to 

my first question about institutions and activities where you said 

that, depending on size, but that is kind of vague. What do you 

have in mind in terms of size? Or when you talk about risks how 

much risk? And when you talk about interconnectedness, if that 

means to 5, 100, 1,000; I am not clear on that. 

Mr. BERNANKE. Well, there has been some research in the Fed 

system and elsewhere trying to lay out criteria. But to some extent, 

there would have to be a set of principles that the Congress would 

enumerate in terms of what we would be looking at. One of the 

issues is that which firms are systemically critical may depend to 

some extent on the state of the broad economy. So, for example, it 

might have been possible to let certain firms fail if the rest of the 

economy had been in a healthy condition and the financial system 

in a healthy condition. But in a situation where we are in a panic 

and a recession and so on, that may lower the bar in some sense. 

So I can’t give you precise numbers. I do think we would owe the 

Congress some careful studies of what the considerations would be, 

recognizing that they might change over time depending on the 

state of the economy and the state of the financial system. 

Ms. VELAZQUEZ. Thank you. 

The CHAIRMAN. The gentlewoman from Illinois. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

And thank you, Chairman Bernanke, for being here. During the 

previous hearings I have asked you about the status of the Fed’s 

work with HUD on harmonizing RESPA and TILA efforts. So I 

23 

think it is particularly important to ensure that the consumers 

have simplified information disclosures. How are things going with 

that task? 

Mr. BERNANKE. We agree with you 100 percent on that, and we 

have been trying to work this out for some time. We have recently, 

as you may know, released some new rules on mortgage disclosures, yield spread premiums and some of these related issues 

which bear on the documents that consumers sign when they take 

out a mortgage. And we are in conversations now with HUD, and 

I think there is a lot of good will on both sides, to try to come to 

some agreement that will allow us to eliminate duplication and to 

create a more consistent set of rules between the two institutions. 

So we are trying, we are in conversations. It has taken a long time 

because the commitment has waxed and waned, but we are working very hard to do that and we hope to have some results. 

Mrs. BIGGERT. Do you think that you will finalize the regulations 

before RESPA takes effect? 

Mr. BERNANKE. We will try to do so. I can’t promise. 

Mrs. BIGGERT. Under the proposed legislation, the CFPA is given 

authority to write RESPA and TILA rules. If you finalize the rules, 

if this new agency were to come into effect, I worry then that the 

new agency would probably start all over again and look at those 

rules. 

Mr. BERNANKE. Well, that would be up to the new agency. If they 

thought that the rules that were in existence were not adequate for 

some reason, they would obviously have the right to do that. If I 

were running this new agency, I would try to address what I perceived as the biggest gaps and not revisit a lot of old rulemakings, 

but that would be up to that person. 

Mrs. BIGGERT. Thank you. 

If Congress overreacts to this crisis and overregulates, for example, with derivatives regulation, requiring all customized and 

standardized transactions to be conducted on an exchange, could 

U.S. businesses and jobs move overseas? 

Mr. BERNANKE. I think in general, it is very important not to 

overreact but to create, maybe not more regulations, but smarter 

regulations, is the way I have put it before. On the case you are 

talking about, I think there is a case from both market efficiency 

and from systemic safety to use clearinghouses of central counterparties for standardized contracts. But at the same time, I think 

there is also scope for leaving a part of the industry in a more bilateral or noncustomized basis. I think there is a good economic 

reason for that. And so an appropriate balance between those two 

things would be welcome. 

Mrs. BIGGERT. I hope we don’t overreact as we have in some 

other cases. 

there is one other issue that I have heard some concerns about, 

and that is with the CFPA, that there is fear that every company 

really will be included under that. And I know you talked about the 

statutory authority that you have for dealing with the issue. But 

every company that has any financial transaction at all, even a 

plumber or a baker or whatever, would be under this regulation. 

Do you believe that could happen or would there have to be legislation to make sure what is actually defined? 

24 

Mr. BERNANKE. I think the legislation would define that. I understand the chairman has dropped that from his current version of 

the bill. But certainly the Federal Reserve does not have that kind 

of authority, so it would have to be specifically granted to the new 

agency. 

Mrs. BIGGERT. Thank you. 

I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. 

Chairman Bernanke, let me just make this opening comment because sometimes we send subtle messages that obviously are unintended, and I have two this morning that kind of reinforce the concern that I have been expressing throughout this process. 

You talked about five different areas that you wanted to comment on. You gave us five sentences on consumer protection, and 

then you referred, in response to a question, to the minutia of consumer laws. We keep sending this message to the public that this 

whole issue of consumer protection is secondary to everything else 

that we are here involved with. And we need to be very careful 

about that. 

I am not looking for a response from you, but five sentences on 

consumer protection when everything else that we talked about 

this morning gets substantially more space is just not a good message to send. Referring to consumer laws as the minutia of consumer protection laws is just not a good message to send. 

Now, let me get to the real question. On page 9, you make this 

comment on consumer protection: ‘‘The playing field is uneven regarding examination and enforcement of consumer protection laws 

among banks and non-bank affiliates of bank holding companies on 

the one hand and firms not affiliated with banks on the other 

hand. Addressing this discrepancy is critical both for protecting 

consumers and for the other parts of the system.’’ Now, my question is, Mr. Hensarling was asking about these non-banks. What 

are the non-bank parts of this that we are referring to? Let’s get 

some of those on the record. 

Mr. BERNANKE. Sure. But first I just have to say that— 

Mr. WATT. No, no. That was not intended to draw a response 

from you, Mr. Bernanke, and I have a limited amount of time. 

Mr. BERNANKE. I disagree with your implication on that. 

On non-bank firms, there are many firms that are not— 

Mr. WATT. Such as? 

Mr. BERNANKE. Mortgage companies, consumer finance companies, brokers. 

Mr. WATT. Check writing, check cashing? 

Mr. BERNANKE. Yes. 

Mr. WATT. Payday loans? 

Mr. BERNANKE. For example. 

Mr. WATT. Okay. And if we give the regulation on the consumer 

side to a Consumer Protection Agency of those and we retain the 

regulation of consumer issues in other regulators with the regulated banks, tell me how that doesn’t do exactly what you just described here as a problem. I don’t understand that. Tell me that. 

25 

Mr. BERNANKE. There is a big problem that currently exists, and 

it would be hard to fix, which is that many types of companies are 

State-chartered and are supervised by the States. 

Mr. WATT. All right. So it is okay to create, to have a consumer 

protection agency that deals with the States, but it is not okay to 

have a consumer protection agency whose sole primary—they come 

to work every day looking at consumer issues, and it is not okay 

when some other Federal agency is involved, is that what you are 

saying? 

Mr. BERNANKE. No, not at all. I am just saying that— 

Mr. WATT. Now, let me just go back and ask this question. You 

coordinate with other agencies on safety and soundness. Other 

agencies do safety and soundness on various institutions. But they 

don’t come back and answer to the Federal Reserve, right? 

Mr. BERNANKE. We coordinate very closely. 

Mr. WATT. You coordinate very closely. And we presume that this 

consumer protection agency would coordinate very closely, too. 

They would be on this council that you keep referring to, wouldn’t 

they, if we created this agency? 

Mr. BERNANKE. Yes, and we certainly would coordinate with 

them. 

Mr. WATT. Okay. So how is that any different than the coordination that would take place on safety and soundness? Why is it terrible to put this responsibility on the consumer protection agency 

and allow it to coordinate when there is a conflict? 

Mr. BERNANKE. Because there are different issues here. Currently, the OCC does both consumer compliance and safety and 

soundness— 

Mr. WATT. They aren’t doing much consumer compliance, I can 

tell you that. 

Mr. BERNANKE. Well, in theory at least, they are supposed to do 

consumer compliance and safety and soundness for a bank, but 

they do both, and this would break it up. That is all. 

The CHAIRMAN. The gentleman from New Jersey. 

Mr. GARRETT. Thank you, Mr. Chairman. 

Just a couple of questions on areas I know are outside of your 

regulatory area, but goes to the macroeconomic. One Mr. Royce 

brought up before; he gave you all the stats and what have you, 

the dire prediction with regard to the FHA. And I just want to 

delve into that just a little bit more. I heard your answers on that. 

I mean, what some of us are suggesting, the legislation I threw 

out at the very beginning, is to say that maybe we should treat 

them with some of the same requirements that we are asking the 

rest of Wall Street and the rest of the financial markets to have 

some skin in the game and to have proper capital level rate aspects 

and also leverage ratios. 

I think from your answer, you are saying, well, there are two 

issues here. What does Congress want to do with regard to housing 

and getting that going on the one hand, but what do you want also 

to do to protect, which is your job in part, to protect the taxpayer? 

How should we or how can we come down on the one side without 

harming the other side? 

Mr. BERNANKE. Well, first, the difference between the FHA and 

the GSEs is the GSEs had private debt and private shareholders, 

26 

and that made it more complex in terms of the overall financial 

system. 

I think it is undeniable that the FHA loans, because of the low 

downpayments and so on, are riskier than other mortgages being 

made and therefore have greater chance of loss, which would be 

made up by the taxpayer. And that tradeoff is your tradeoff in 

terms of what you think is worth—you know, what risk you think 

the government should be willing to take in order to support the 

housing market and homeownership. You made the same decision 

on things like in first-time home buyers tax credit. You know, it 

is a cost to the government, but it supports the housing market. 

I don’t know how to tell you that. 

Mr. GARRETT. Can we do it in a way, do you think, by just raising it up just a smidge—our bill would say 5 percent down—without having a dramatic impact? 

Mr. BERNANKE. I don’t know how much effect it would have. 

That would require more study. I think it is the same tradeoff, 

though. You can make the conditions tougher and tougher, and 

that reduces the risk to the taxpayer, absolutely, but it also reduces the number of people who can get mortgages. 

Mr. GARRETT. Another area outside of yours but on the macro 

issue is the FDIC and the other issues. I don’t have to tell you 

what they are facing right now, and one of their proposals I am 

reading about is going to the banks and saying, help us out here. 

The same sort of dilemma there, isn’t it, is that the banks are 

going to push back and say, well, if you are asking us to do that, 

we just are not going to be able to make as many—our capital level 

is going to go down; we are going to have a harder time of it, and 

we are not going to be able to make the loans. So where is the 

tradeoff in that situation? 

Mr. BERNANKE. Well, the FDIC has some tough choices because 

they are trying to replenish the fund without creating a ‘‘procyclical 

effect,’’ that is, without hurting the banking system in a way at a 

bad time when we want the banking system to be lending. The solution they have, as I understand it, is that even though there 

would be prepayments by the banks, that those prepayments would 

be treated as assets on the bank balance sheets, and therefore capital would not, at least in the a regulatory sense, be affected. And 

that is the solution they have chosen. 

Mr. GARRETT. I thought I was reading it that way, but I wasn’t 

really sure, quite honestly, that they were going to treat it that 

way. And if you treat it that way, then really what you are doing, 

aren’t you, is just like getting a loan from the bank, because you 

are really not taking the assets off the balance sheet of the bank? 

Mr. BERNANKE. It is like making a loan. 

Mr. GARRETT. It is like making a loan. And so, really, instead, 

the way I think of it is, instead of the FDIC coming back to Congress or using that line of credit that they have taking a loan from 

the American public; instead, they are saying, we are going to sort 

of kick the can down the road and just borrow it from the banks 

instead and spread it over to them. Is that the right way to interpret it? 

Mr. BERNANKE. It is a loan from the banks, but it is not a loan 

that requires capital to back it up. And therefore, in that sense, it 

27 

doesn’t crowd out other lending. But there are no good solutions 

there, and I know the FDIC has really struggled with the right approach. 

Mr. GARRETT. But my understanding, is that a correct analysis 

of it? It is just a loan from them, and it is really just—and one way 

of looking at it is they are really sort of creating money at the same 

time because you are able to count that dollar twice: once when the 

FDIC is able to take it and hand it over to this bank over here, 

I am bailing you out with that one, which is what they want to do 

with it; and the second time, they are going to count that dollar 

when it is still sitting in the original bank that loaned the money 

because they are still going to be treating it as capital in that bank 

so they can loan it out to somebody else. So you are really counting 

that dollar twice, aren’t you? 

Mr. BERNANKE. Well, I don’t think it is creating money technically, but it is basically a loan from the banking system to the 

FDIC which will have to be replaced eventually by actual assessments on the rest of the banking system. 

Mr. GARRETT. And I can’t see the clock. Speaking on the actual 

assessment, really quick on the aspect of the resolution authority 

and who actually pays, I still haven’t gotten a clear picture on who 

actually would pay if, heaven forbid, you have this next scenario, 

and then you assess it out to everybody. Can you tell us who that 

would be? How broad is the group of banks that you would be going 

after or financial institutions that you would actually assess, and 

is there potential that they would just not be large enough to pay 

because it is small? 

Mr. BERNANKE. I think, to answer quickly, there are a lot of unresolved issues that we need to talk about. I think it should be fairly broad. It should be the financial industry. But it should exclude 

insured deposits, which are already assessing the size of liabilities 

that you are going to tax in some sense, you should exclude those 

which are already paying deposit insurance premiums. 

The CHAIRMAN. The gentleman from New York, Mr. Meeks. 

Mr. MEEKS. Thank you, Mr. Chairman. 

Mr. Chairman, let me ask, I think what we have to get right is 

this resolution, a resolution authority, and it is absolutely key. And 

just listening to some of the testimony yesterday, some of the rating agencies, for example, it became abundantly clear to me that 

they would rate everybody triple-A because they just felt the government would bail everybody out. But if we get this resolution authority correct, then everyone will know that the government will 

not bail these folks out. And I think that is absolutely one of the 

most critical pieces that we have to work on to make sure that we 

get right. 

That being said, you know, what I have been also focused on and 

concerned about when we deal with resolution authority, for example, the Lehman Brothers situation with all of the money that is 

caught up in the U.K. So how and what do we do when we come 

up with a resolution authority to deal on capital firms like Lehman 

who have operations headquartered in various places of the world 

so that if they go into bankruptcy, the process can be quick, transparent and efficient? I am not hearing how we are really going to 

do that in this regard. 

28 

Mr. BERNANKE. That is an excellent, very important question. 

And you are absolutely right; it is much tougher than a lot of these 

bank resolutions because of the global nature. There are companies 

who are in the 120 countries around the world. There are some 

working groups in international bodies which are looking at the 

cross border issues. And I think what we need to do is have some 

international agreements or at least some working frameworks 

that explain how we are going to work together to address this. If 

we don’t do that, then what will happen is that every country will 

ring-fence the assets of the bank or the failing institution within 

their country, and ultimately, we may have a situation where every 

country will demand its own capital requirements for the subsidy 

within its own country, and that would be a very inefficient way, 

no doubt, to run the system and no doubt will reduce the global financial flows in an important way. 

So you have your finger on a very important issue, and we need 

to keep working on that. But it is something that has to be done 

in collaboration with our major partners, particularly those like the 

U.K. and Europe. 

Mr. MEEKS. Do you know of any dialogue that has begun, anything where people are talking? I know that we just finished G– 

20. Is that part of that conversation? 

Mr. BERNANKE. Yes. This is being discussed in a lot of contexts, 

including, as I said, some working groups within the bank regulator groups that meet internationally. 

Mr. MEEKS. And also, I know that President Obama and other 

leaders are calling for a more stable and sustainable global trade 

system, where countries like China and Germany are less dependent on export-driven growth, and the United States is less dependent on cheap international capital to finance their deficit-driven 

consumption. 

Now, there is talk of the IMF playing a more crucial role in monitoring global trade balances in global financial institutions. But 

given the strong incentives to sustain the system as it is, however 

unsustainable and volatile it is in the long run, how do we get 

there from here? How do we—you know, I don’t understand; how 

do we get there? 

Mr. BERNANKE. It is a difficult problem, and we haven’t made 

much progress in 15 years, basically. The IMF was given the authority to counsel, you know, to look at the situation in different 

countries and make recommendations, but with no binding power. 

And that didn’t really have much effect on getting a more balanced 

growth across different countries. 

It has also been an issue for bilateral discussions. In the strategic economic dialogue with China, for example, it has been a central issue that we have discussed. I wasn’t part of the G–20 meetings in Pittsburgh last week, but my understanding is there was 

discussion of sort of a peer review system whereby countries would 

agree to let other countries evaluate whether or not they were 

making progress. If that is the case, that would perhaps strengthen 

the mechanism, but it is a very important issue. 

Mr. MEEKS. Let me just get this question in really quick because 

of the big issue that is starting to happen in New York, and that 

is dealing with commercial real estate. Could you give us a quick 

29 

update on the state of the commercial real estate market and 

whether it would be a drag on the recovery going forward, or is it 

another potential systemic risk crisis brewing? And which parts of 

the market do you expect would be the most affected by any pending crises in the commercial real estate area? 

Mr. BERNANKE. Commercial real estate remains a very serious 

problem. It depends, to some extent, as you point out, by category. 

Construction loans, for example, are particularly weak. Within 

other categories, you know, hotels and office buildings and apartment buildings, there are differences in the situation. But we are 

concerned both because the fundamental is weakening and because 

the financing situation is bad. 

For example, the commercial mortgage-backed securities market 

is still not really open. It could provide a source of a lot of stress, 

particularly for small and regional banks that have a very heavy 

concentration in commercial real estate. So we are working hard to 

work with the banks. And we have, as you know, our TALF program which is going to try to restart the commercial mortgagebacked securities. 

Mr. MEEKS. A crisis brewing? 

Mr. BERNANKE. I hesitate to answer. I don’t think so, but we will 

have to watch it carefully. 

Mr. WATT. [presiding] The gentleman from Georgia, Mr. Price. 

Mr. PRICE. Thank you, Mr. Chairman. 

Welcome once again, Chairman Bernanke. I appreciate you joining us today. 

I want to follow up on the old issue of tier-one financial institutions. I think the American people are sick and tired of governmental bailouts. I think that we need to respond to that concern 

and fear and anger on the part of the American people and assure 

them that there won’t be any more. Secretary Geithner said that 

there will be no fixed list for companies that will be bailed out. Are 

you in agreement with that? 

Mr. BERNANKE. Well, there is nobody more sick and tired of bailouts than me. I think the way the system has to be set up is that, 

when there is a resolution, as we have been discussing, that people 

lose money and that the company can be wound down, but done so 

in a safe way. 

As far as tier-one is concerned, the idea there would be to—if you 

do that, if you designate firms, and there may be other ways to do 

it—that those would be the firms that would be subject to particularly tough capital liquidity and other requirements to make their 

failure and bailout much less likely. But we don’t want any bailouts. We want to have a system that puts the cost on the industry 

and allows creditors— 

Mr. PRICE. The question is, do you agree or disagree with the 

Secretary of the Treasury that there should be no fixed lists of companies that would be ‘‘too-big-to-fail?’’ 

Mr. BERNANKE. That is a change, I think, from the Administration’s earlier position. I have no problem with sort of a sliding scale 

in the sense that the largest firms have— 

Mr. PRICE. Should there be a fixed list of companies that are 

identified? 

30 

Mr. BERNANKE. I am willing to say ‘‘no,’’ except I have one concern, which is that outside of bank holding companies, if there are 

firms which are systemically critical and they are not designated 

as systemically critical, how do we know that they received special 

attention, that is my question. 

Mr. PRICE. The concern that I have is that if we are going to 

identify tier-one financial holding companies as being somehow 

special, and we are going to say that we are not going to identify 

companies that are ‘‘too-big-to-fail’’ so that they have an unfair advantage in the market, aren’t those two statements contradictory? 

Mr. BERNANKE. No, because what I am saying is that no company—you can have a tier-one company, which means they get 

tougher oversight, but it is still not ‘‘too-big-to-fail’’ because we will 

have methods to make sure that the problem of ‘‘too-big-to-fail’’ is 

no longer with us because we will have ways of winding those firms 

down, and they will fail. 

Mr. PRICE. Let me just urge you to carry your disgust for bailouts to having no more bailouts, and we would support you on that. 

I want to follow up on the comments about the FDIC and the 

comments made by Mr. Garrett. It does seem to me as well that 

they are counting a dollar twice; the prepayment that the FDIC is 

now requiring, and then continuing to use that dollar on their 

books for assets. Is that not some kind of accounting gimmick? 

Mr. BERNANKE. Well, the banks would have to make this payment at some point in the future anyway, so they are agreeing to 

make the payment earlier. So, essentially, from now until the time 

where they would actually have to make the assessment, they are 

essentially making a loan to the FDIC. 

Mr. PRICE. But they can still use that dollar for other aspects of 

their own private business, correct? 

Mr. BERNANKE. Yes. 

Mr. PRICE. So they are counting it twice. Now, my concern about 

all of that is, and I think that is probably not the wisest thing to 

do, but you have said that you would like to use the model of the 

FDIC for your own resolution authority. Isn’t that a flawed model 

to begin with? 

Mr. BERNANKE. No, I don’t think so. You know, an alternative, 

the FDIC made a decision about how they wanted to fund this. Of 

course, an alternative would have been to borrow from the Treasury and pay the Treasury back with interest. 

Mr. PRICE. Wouldn’t that have been more honest, more open? 

Mr. BERNANKE. They made the decision based on what they 

thought would be the least negative effect on the banking system, 

and I don’t want to second guess that. 

Mr. PRICE. Any time I can count a dollar twice on my books, if 

I were allowed to do that by law, that would be a wonderful, wonderful thing, but it certainly wouldn’t be more healthy for the economy. 

There was discussion about the banning of products. There are 

products out there that—in fact, a statement was made there are 

some products that are just too risky. You talked a lot about process in that, the transparency that Americans ought to be able to 

receive when they are evaluating a product, but you never talked 

about a product that was too risky. Are you willing to say that 

31 

there are—well, are you willing to identify a product that is too 

risky? 

Mr. BERNANKE. No-doc loans. 

Mr. PRICE. And so how long does that list get? 

Mr. BERNANKE. Well, it depends on what the industry is proposing. But the criteria would be that here is a product that is not 

in the consumers’ interest and that— 

Mr. PRICE. Is it the government’s role to determine what is in the 

consumer’s interest? 

Mr. BERNANKE. In some cases, I think that we have—for a long 

time, the Federal Reserve believed that transparency and disclosure was all that was needed, and we have been very much proponents of that point of view. But I do think there are some circumstances where the benefits to the consumer are overwhelmed 

by the complexity and other aspects that just are not worth whatever benefits. 

Mr. PRICE. Mr. Chairman, I would just suggest that there continues to be a process question as opposed to a product question. 

The CHAIRMAN. If people ask you a question, it has to get answered later. They can’t come back again. We have a lot of members who deserve consideration in having the time observed. 

The gentleman from Illinois. 

Mr. GUTIERREZ. Mr. Bernanke, it is good to see you here again 

this morning. 

Mr. Chairman, this week, the FDIC passed another special assessment on our Nation’s banks to help shore-up the Deposit Insurance Fund. It is true that most of the losses to this Fund have been 

the result of failures of small lending institutions. These community banks have also suffered from severe decreases in the values 

of housing and commercial real estate markets caused by loans financed by some of the largest banks in our system. 

I have legislation in front of the committee, H.R. 2897, and I 

would appreciate if you could take a look at it and kind of write 

us a note back on your more expansive opinion on it. I would appreciate that. And it would require the riskiest banks in our financial system to pay more, not only into the Deposit Insurance Fund, 

but also into the systemic risk fund. My goal is to create a more 

efficient pricing regime that would disincentivize banks from becoming or remaining ‘‘too-big-to-fail.’’ What are your recommendations for creating a system that would prevent or discourage banks 

from becoming ‘‘too-big-to-fail’’ and what relationship do you think 

they should have to paying into a fund? Do you think there should 

be differences? 

Mr. BERNANKE. Well, I discussed a number of methods to avoid 

‘‘too-big-to-fail,’’ and not to repeat, but to include tougher supervision and regulation and being subject to this resolution regime. 

But you point out another dimension, which is the assessments 

that would go into the fund either for deposit insurance or for paying for any intervention that does occur. The FDIC currently riskadjusts the premiums that they charge to banks for deposit insurance. Perhaps it is time to revisit that. Maybe they are not sufficiently differentiated, I don’t know. It certainly is always worth 

considering that. And I think the same principle would apply to assessments for addressing the special resolution regime, those type 

32 

of interventions, of firms that are larger, more risky, more interconnected, presumably would pay disproportionately relative to 

small banks, for example. So I think that would be a sensible approach. 

Mr. GUTIERREZ. Thank you. Then I would appreciate it if you and 

your staff could review it, because it is one of the ways I am looking at making sure—it is kind of like if you—I just kind of thought 

when I get my insurance, if I was speeding or drinking and I had 

risky behavior in terms of driving my car, I am going to pay more 

in insurance. And it seems to me that we have seen different kinds 

of behaviors on different components of our financial system. And 

maybe everybody should not pay the same. So I would like to see 

how we can do that. 

Just one other question. So, you know, I have—you know the 

Federal Reserve, you are the Chairman. You have these huge responsibilities. You come with this wealth of knowledge to the job 

that we appreciate as a public servant. And although you have all 

of these wonderful responsibilities, right, and this wonderful talent 

that you bring to the job, I would just like to ask you, what do you 

think about what we should be looking at in terms of compensation 

and executive compensation of people. Do you think this Congress 

should do anything about it? How do you look at it? Because there 

is a lot of anger out there as they look at large financial institutions and executive compensation. Can you give me your sense? I 

went through Europe. And as I went from city to city, it was in late 

August with Mr. Kanjorski, and we were talking to the EU members. And it was the most important thing that they were bringing 

up. Can you give us your view? 

Mr. BERNANKE. Well, as you may know, the Federal Reserve is 

about to issue guidance for comment on executive compensation, 

which will apply not only to the top, you know, 5 or 10 executives, 

but way down into the organization to traders or anybody whose 

activities can affect the risk profile of the company. We view this 

as a safety and soundness issue. And that is what we have heard, 

in fact, even from the institutions themselves. They believe that 

the incentive structures affect safety and soundness. 

So I think there are two principles: first, that the structure of executive compensation should not be such as to incentivize excessive 

short-termism or risk-taking; and second, that there be a reasonable connection between actual performance and pay. The American people don’t care if a star baseball player gets paid a lot of 

money as long as he earns the money. The same applies, I think, 

in the financial sector. But they are upset if somebody earns a lot 

of money and their company fails. So, from a safety and soundness 

perspective, it is important that there be those appropriate links 

between performance and pay. 

The Federal Reserve is following some international standards 

that have been set forth by the Financial Stability Board, which is 

a group of more than 20 countries that looks at these issues. And 

again, we are looking at the structure of pay, not so much absolute 

amounts, but how pay is structured and how pay and performance 

are related. So that is our approach. 

33 

And also there are issues related to transparency which we are 

working on with the SEC. I don’t know whether Congress wants 

to do additional things, but we are addressing that question. 

The CHAIRMAN. The gentlewoman from Minnesota. 

Mrs. BACHMANN. Mr. Chairman, thank you. 

I just wanted to note for the record that at the beginning of this 

hearing, the chairman had said not once, but twice, that President 

Obama had inherited the current financial mess that we are dealing with now. And while that is true, that is true also of every 

other President who has ever been here. But also, it is true that 

in the case of Senator Obama, he supported all of the spending initiatives, all of the bailouts, and all of the stimulus plans while he 

was Senator as well. 

So this is an ongoing effort that this committee can again look 

at and try and turn around for the better of our country in the future. 

And so on with my question to Mr. Bernanke. On Monday, the 

president of the World Bank, Robert Zoellick, said, ‘‘The United 

States would be mistaken to take for granted the dollar’s place as 

the world’s predominant reserve currency. Looking forward there 

will increasingly be other options to the dollar.’’ 

I found this statement astounding when I heard him make it on 

Monday. A statement of this magnitude should concern everyone, 

I think, because replacing the dollar’s favored role in the global 

marketplace with another country’s currency or with a new international currency of some sort would be devastating to the soundness of our dollar and to our Nation’s currency and our economy. 

Mr. Zoellick also claimed that the value of the dollar will depend 

heavily on U.S. choices. He asked, ‘‘Will the United States resolve 

its debt problems without a resort to inflation? Can America establish long-term discipline over spending and its budget deficit?’’ 

And I would note that, Mr. Bernanke, I heard you say before 

that you are very concerned about inflation; you are not willing to 

invite inflation. I derive great comfort from your statement saying 

that. 

But I do think that Mr. Zoellick’s comments are very serious 

questions that he is asking. And I think that Congress just needs 

to act to address our Nation’s long-term budget deficit. 

That is why I joined with my colleague Paul Hodes, a Democrat, 

I was one of 7 joining with 21 Democrats in a letter that stressed 

our concern about the lack of TARP transparency and the billions 

of tax dollars that will remain at risk under the program because 

we believe that no more funds should be used for the bank bailouts. 

I would like to get your comments on Mr. Zoellick’s comments. 

Also, the fact that this isn’t just the first time. I think, last week, 

the UN came out and called for a new international currency to replace the dollar. China has. Russia has. Brazil has. South America 

has. It is a new refrain. It is almost like every day there is another 

article. 

And I think, at this point now, in light of the comments that 

were made on Monday, we should take this very seriously. So I 

would like you to respond to that. 

Also another question I have for you, Mr. Bernanke, under the 

chairman’s proposal, the consumer protection authority will be 

34 

transferred from other regulatory agencies to the CFPA, including 

authority from the CTF. Section 4 and 5 of the Act provides the 

commission with jurisdiction only over persons, partnerships, or 

corporations organized to carry on business for their profit or that 

of their members, which means that the FTC can’t currently regulate nonprofits for unfair and deceptive practices. 

So here is my question: Would the CFPA have broad authority 

to regulate all entities that provide a financial service or product 

regardless of their tax status, meaning if they are nonprofit? And 

here is my specific concern in light of what we have seen in the 

last couple of weeks. For example, it is my understanding that 

ACORN provides education service and financial advice to consumers. So would ACORN then be regulated under the CFPA? Because this is on ACORN’s Web site. They are a national nonprofit 

housing organization that opened HUD-certified Fannie Mae-approved housing counseling offices across the United States. And 

here is a quote from their Web site: ‘‘ACORN housing provides oneon-one mortgage loan counseling, first-time home buyer classes and 

helps clients obtain affordable mortgages through our unique lending partnerships. We look at your savings and credit history to see 

if you qualify for a mortgage. We can help you with credit problems 

and to create a downpayment savings plan. When you qualify, we 

can help arrange a mortgage with lower interest rates, lower 

downpayments, and lower settlement costs than what banks usually offer.’’ 

It seems to me, Mr. Bernanke, from what ACORN claims, that 

they would come under this CFPA. And I am wondering if you 

would comment on that. 

So if you would first comment for me on Mr. Zoellick’s comments, 

what your feelings are about replacing the dollar’s international 

currency of potentially a new currency. And then if you would comment also on whether or not, in your opinion, ACORN would be 

covered by the new CFPA. 

The CHAIRMAN. Well, I would just point out, there are only 3 seconds remaining. 

Mrs. BACHMANN. If I could have my time reclaimed, so that my 

time—will this come from my time, Mr. Chairman? 

The CHAIRMAN. No, your time has—there were only 3 seconds 

left in your time when you got to him. I can let him go on for a 

little while, but I don’t think he can give full answers to both questions. This practice of going right up to the end and then taking 

another minute or two is unfair to other members. I will give Mr. 

Bernanke 30 seconds to answer as much as he can and then answer the rest in writing. There were only 3 seconds left to answer 

two big questions when the gentlewoman yielded to him. 

Mr. Bernanke, for 30 seconds. 

Mr. BERNANKE. I agree with two things Mr. Zoellick said. The 

first is, I believe he said that there is no immediate risk to the dollar; it is a relatively long-term issue. I also agree with him, though, 

that if we don’t get our macro house in order, that will put the dollar in danger, and that the most critical element there is long-term 

fiscal stability, which you referred to. 

I can’t answer your second question. I don’t know what the legal 

status of that is. I just don’t know. 

35 

The CHAIRMAN. The gentleman from Kansas is recognized. 

Mr. MOORE OF KANSAS. Mr. Chairman, ‘‘too-big-to-fail,’’ I don’t 

know if you had a chance to review the recent proposal offered by 

President Tom Hoenig and his colleagues at the Kansas City Fed. 

But I would like your views on it, either now or in writing, if you 

would as soon as possible, sir, after the hearing. Their proposal on 

resolution authority lays out more explicit rules than the Administration’s proposal of how a large financial institution like Lehman 

Brothers or AIG could be resolved so the debt holders, shareholders, and management would be held accountable before taxpayers step in. As we think of ending ‘‘too-big-to-fail,’’ would providing more clarity on resolution authority to all stakeholders create the right mix of incentives to put pressure on these firms to behave responsibly and not get overleveraged and keep to a manageable size? And what about the question of making public the tierone list? I know some people argue that making it public will create competitive disadvantages. But doesn’t the marketplace really 

already know more or less who these large firms are? 

Mr. BERNANKE. There are two elements of the Hoenig proposal. 

I can reply in writing in more detail, but there are two with which 

I fully agree. One is, and I have said before, one is that there 

should be a very strong presumption that a failing firm, that the 

creditors of a failing firm will lose money; that should be known 

in advance. There should be a strong commitment to doing that. 

And that will be a very important way of reducing the ‘‘too-big-tofail’’ problem. 

The other is that the taxpayer should not bear this cost, that it 

should be borne by the industry. So if you do those two things, then 

I think that dangers of naming a firm as a tier-one firm, which 

would not be acceptable if you didn’t do those things because you 

would be memorializing ‘‘too-big-to-fail,’’ but if you do those things, 

then I think that the tier-one designation is not nearly so worrisome. 

Mr. MOORE OF KANSAS. And Mr. Chairman, what steps could be 

taken to ensure Federal bank regulators do their job on consumer 

protection? FDIC Chairman Sheila Bair proposed that the CFPA 

could be given back-up authority where they could intervene caseby-case if they saw lack of enforcement by bank regulators. Another idea I might suggest is a stronger use-it-or-lose-it authority 

requiring bank regulators to either enforce consumer protection 

laws or lose that authority. After being graded by the CFPA or the 

GAO, if a bank regulator fails to fully enforce consumer protection 

laws, should they lose that authority to CFPA, would this use-itor-lose-it approach ensure regulators do a better job? 

Mr. BERNANKE. I am not sure that the use-it-or-lose-it approach 

makes sense in the sense that the agency—what check would there 

be on the agency making that determination? One direction would 

be back-up authority, I guess, where if the agency was unsatisfied 

with a specific resolution, that it could do that. But that would require them to have the resources and the information to do that. 

Mr. MOORE OF KANSAS. Thank you, sir. 

I yield back my time, Mr. Chairman. 

The CHAIRMAN. Would the gentleman yield to me then his remaining time? I just want to make a couple of points. 

36 

First, Mr. Bernanke, you correctly, I think, talked about banning 

some products, but I think we ought to expand on the rationale. 

For instance, you talk about no-doc loans. My own view is we do 

not ban things totally, primarily for consumer protection. I am in 

favor of letting people be stupid in a number of other areas. The 

problem is that, in some of these areas, there is a spill-over to the 

system, that the problem with no-doc loans was not simply an individual within that position, but those accumulate into a systemic 

position. So I think, as we talk about whether or not you prohibit 

certain practices, the argument for doing that gets stronger when 

there is a systemic overlap. Is that an accurate assessment? 

Mr. BERNANKE. Yes, and that is why you would want to have 

this as part of the systemic risk council. 

The CHAIRMAN. Second, I do want to address a couple of the 

fears of the gentlewoman from Illinois because I don’t like it when 

things are put out there and people get nervous. The gentlewoman 

from Illinois said she hoped there would be no banning of OTCs. 

I know of no proposal to do that. There is zero chance of it happening. No one is talking about it. The legislation that we are raising doesn’t do that. The chairman was correct that you try to get 

it as much sanitized as possible. No one is talking about banning 

the over-the-counter efforts. 

And finally, I did want to respond to the gentleman from California, who is not here, Mr. Royce, who said that Congress led to 

Fannie and Freddie being 50 percent in Alt-A and subprime. Actually, it was the Bush Administration that did that in 2004. The 

Bush Administration promulgated that. As was noted in an amendment offered by the gentleman from Texas, Mr. Hensarling, and 

adopted by the House, the Bush Administration in 2004 ordered 

Fannie and Freddie to go from the 40s into 54 percent, I think from 

42 percent to 54 percent, and specifically to give some loans to people below the median, and I, for one, objected. 

The gentleman from Florida, Mr. Posey. 

Mr. POSEY. Thank you, Mr. Chairman. 

Mr. Bernanke, I will just follow up a little bit on the line that 

the Congresswoman from Minnesota was discussing. I had read the 

same comment by the IMF president. And I hope that you and I 

can both agree that the ultimate consumer protection would be for 

us to have a strong dollar, and then Americans would have faith 

in their currency, and their purchasing power would not be eroded 

by the stealth tax known as inflation. Do you agree with that? 

Mr. BERNANKE. Absolutely. 

Mr. POSEY. Question number one would be what you think the 

impact on Americans, and I mean the average guy on the street, 

the average family, the retiree, the investor, what the impact 

would be on the dollar if it were to lose its currency of choice as 

some of these other world leaders are calling for now? You know, 

the Russian president is calling for a super currency. If China and 

South America and everybody went along with that, what do you 

think the impact would be on our country? 

Mr. BERNANKE. Well, it would weaken the dollar, clearly, and we 

would have to watch for any inflationary consequences from that. 

But, again, I want to reiterate that I don’t see this as a near-term 

37 

risk so long as we as a country take the appropriate steps to manage our fiscal position and keep inflation low. 

Mr. POSEY. I hope we will. We know that Secretary Geithner will 

to go to China to give them some reassurance. And I think they 

are also calling for this alternative currency. It is not just Russia, 

and it is not just South America, but China is also very interested. 

And of course, you know the role they play in buying our paper, 

and that can be pretty devastating. 

What do you think the United States should do in response to 

the concerns that they have? How are we going to give them assurances that we are not going to start going to an inflationary level 

that would spur them forward? 

Mr. BERNANKE. Well, there are two key issues, I think. One is 

inflation, and the Federal Reserve is responsible for inflation. We 

are confident that we can manage our policies to support the economy without inducing inflation in the medium term. So we will— 

we are committed to low inflation, and we believe—we fully believe 

that we have the tools and the political will necessary to achieve 

that. 

The second issue is about foreign borrowing, which is the current 

account and trade deficit. As someone mentioned earlier, we need 

to have a better balance whereby the United States saves more, 

imports less, and other countries, including China, rely more on 

their domestic demand rather than exports for their growth. And 

so that is a mutual process where both sides have to accommodate 

that. 

But from our perspective, the best way we have to raise our national saving rate over the medium term is to manage our fiscal 

position, because the government deficit is a net subtraction from 

our national saving. By reducing the deficit, we increase our national saving. 

So that, again, I think that this year and next year, given the 

state of the economy and all the things that have happened, I don’t 

think that a budget balance is just at all feasible. But certainly, 

over the medium term, we need to have a credible plan for returning to budget discipline. 

Mr. POSEY. And the next question was going to be, what is the 

plan? 

Mr. BERNANKE. Well, obviously, that is Congress’ responsibility, 

fortunately for me. Certainly I would say that, as you look at these 

very important issues relating to health care, which are incredibly 

important and affect people’s lives in many ways, that as part of 

that, you take a close look at health care costs, which are a very 

big part of the expected expansion of the deficit, particularly a decade from now. 

Mr. POSEY. Very good, thank you very much. 

The CHAIRMAN. The gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

There is a thinking on Wall Street that $700 billion was necessary and may be needed in some future emergency as well that 

we put $700 billion or some much larger amount at significant risk. 

And there is a thinking on Wall Street that Congress cannot be 

trusted to grant extraordinary powers in some future crisis, and so 

we need to modify the statutes now, so that the Executive Branch 

38 

can deploy $700 billion or $1.7 trillion or whatever it is at significant risk. 

Section 13(3) has been discussed here. In your testimony, you indicate that if there was proper resolution authority, that could replace section 13(3). Do I understand it correctly that if we get resolution authority right, you don’t need 13(3) or should there be two 

separate avenues by which the Executive Branch can deploy hundreds of billions of dollars? 

Mr. BERNANKE. If the resolution authority is passed and is a 

workable plan, then I don’t think the Fed would need to have 13(3) 

authority for the purpose of rescuing failed firms. I think there 

might be other contexts where it might be useful, but in the context of bailing out firms, no. 

Mr. SHERMAN. What statutory restriction would you want on section 13(3) since you are saying it shouldn’t be repeale? How would 

it be restricted? 

Mr. BERNANKE. The Federal Reserve should not be empowered to 

use the 13(3) authority to prevent the failure of a financial firm. 

Mr. SHERMAN. But to perhaps prevent a systemic problem for the 

economy, it might end up also putting hundreds of billions of dollars at risk for some other purpose? 

Mr. BERNANKE. Well, we have other programs, for example, when 

we stepped in to stabilize the commercial paper market, which 

wasn’t directed at any individual firm but which was very helpful 

to the economy as a whole. 

Mr. SHERMAN. Looking at 13(3), we have discussed the idea of 

limiting the dollar amount that you could spend; perhaps facetiously, we discussed $12 trillion. As you know, section 13(3) basically allows you to loan money to anyone as long as there are unusual and exigent circumstances. And the key phrase in 13(3) is 

that you be secured to the satisfaction of the Federal Reserve 

Bank. 

To your credit, you have testified that secured to the satisfaction 

of the Federal Reserve Bank is not some illusory requirement, but 

instead is the equivalent of Triple-A rated investment. Your General Counsel testified last week to a somewhat lesser standard, and 

who knows who will be holding your position or his in the years 

to come. 

From your General Counsel’s testimony, I would gather that 

some future Administration might well extend hundreds of billions 

of dollars of credit under 13(3) and feel that they were adequately 

secured as long as they are more likely than not to be repaid. That 

is a junk bond standard. 

And since we don’t know who is going to hold your position in 

the future and I can’t question them, would you oppose legislation 

that would define what ‘‘secured to the satisfaction of the Federal 

Reserve Bank’’ meant to say that those voting would have to believe that there was a 99 percent chance that the Federal Government was going to be fully repaid? 

Mr. BERNANKE. We are certainly open to discussing that. I would 

just like to point out that the only case where it has been in any 

way risky has been in these individual bailouts, and I would like 

to get rid of those. I think that is a step in the right direction. 

39 

Mr. SHERMAN. I would point out we have been blessed to have 

you at the Federal Reserve. If someone with the attitude towards 

statutory construction that we have seen in other parts of the Executive Branch were in charge of the existing 13(3), they never would 

have had to have brought TARP to the Floor of the House; 13(3) 

could have fully financed the full $700 billion, but not on your 

watch. It would have to be on the watch of someone with an aggressive approach to statutory construction. We have seen that aggressive approach at the Treasury Department, and we better modify the statutes, unless we can assure that all of your successors 

will be as conservative in their statutory interpretation as you have 

been. 

You talk about section 1204 not costing the taxpayer money. The 

provision for that involves an assessment on institutions as low as 

$10 billion to repay the cost of bailing out a systemically significant 

firm. I would think that would mean that the medium-sized banks 

are hit two ways. First, their bigger competitors get some sort of 

implicit Federal guarantee of some help to competitors, and if it 

ever comes to pass, they are the ones who pay for it. 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. SHERMAN. I ask you to respond for the record. 

The CHAIRMAN. We have a vote. 

We can go to Mr. Paulsen. I intend, on the Democratic side, we 

will come back, and those members who are here will be recognized 

for a while until we finish up, but no new members will be recognized. So on the Democratic side, we will begin with Mr. Hinojosa. 

Those members who were here will get to ask questions as long as 

you can stay. I will yield to my Republican colleague as to who he 

wants us to recognize on his side. 

And the gentleman from Minnesota is now recognized. 

Mr. PAULSEN. Thank you, Mr. Chairman. 

Chairman Bernanke, yesterday, we heard from bankers and the 

members of the financial services industry in general. They still 

have indicated now the current problems with consumer financial 

protection was due primarily to a lack of focus by regulators like 

the Federal Reserve. 

Apart from the recent credit card regulations that had been released, 800-and-some pages, what is the Federal Reserve doing 

right now to sort of refocus, if you will, its efforts and duties on 

consumer protection efforts more specifically? 

Mr. BERNANKE. Well, first of all, we have had, in the last 3 or 

4 years, we just had a huge number of rulemakings that we have 

put out in the mortgage area, in the credit card area. We have one 

coming out on overdraft protection. We have just done something 

on student loans. So we have been extremely active, and so we 

have really elevated our focus on this area. And we have strengthened the leadership of the division to make this a very effective 

part of our activities. 

I have made some suggestions in the past; if the Congress wanted to strengthen the focus of the Federal Reserve further on these 

matters, there would be various ways to do that. For example, the 

chairman should be required to testify on consumer matters the 

same way I testify on monetary matters. 

40 

Another thing that would be useful, we currently have a Consumer Advisory Council which by law consists of both the industry 

folks and the consumer advocates. The consumer advocates feel 

this is unfair because the bankers have several other councils and 

several other forums for meeting with the Federal Reserve, and we 

can’t change that because of the legislation. One possibility would 

be to create a stronger Consumer Advisory Council to meet with us 

periodically and evaluate what we are doing. 

There are other ways to do it, such as a regular program of hearings and so on. And we are interested and willing to make institutional changes that would strengthen our commitment if that is the 

direction the Congress wants to go. 

Mr. PAULSEN. So just to follow up then, if the Federal Reserve 

is refocusing its efforts in this manner and you are looking at the 

council potentially, from your perspective then, is the CFPA really 

necessary as being proposed by the Administration, to have that 

specific CFPA organization? 

Mr. BERNANKE. Well, you know, I think the issue which Congress 

has to make a judgement about is the reason that—I think the motivation behind the CFPA is the concern that the Federal Reserve 

has not been sufficiently focused on this issue. And I certainly concede that, until recently, we have not done what we should have 

done in this area. So that is the concern. 

I think that is Congress’ judgment about whether the Federal 

Reserve could be sufficiently focused, and I think we are very competent. We have the skills and the mix of talents and experience 

to do a good job here. And I think the issue is essentially the confidence that Congress has in our focus going forward. 

I personally think we can do that, and we would be willing to 

strengthen the institutional factors that affect our focus, but I understand the concerns, and I think Congress will have to make that 

judgment. 

Mr. PAULSEN. And Mr. Chairman, earlier you had mentioned, 

and I believe, Congress often does not look at things until they are 

brought to our attention. But you said you would be okay, it would 

be valuable if the Federal Reserve or someone from the Fed came 

to testify to Congress or to us periodically on consumer protection 

as opposed to just monetary policy. 

Mr. BERNANKE. Yes, by statute, as is the case with monetary policy. 

Mr. PAULSEN. And if I could just switch gears then. 

Let me ask another question, the Federal Reserve’s approach to 

managing monetary policy in advance of the last two recessions, if 

you go back in time, seems to be a little bit unstable. In other 

words, by waiting for an asset bubble to build up and then rescuing 

the economy after the bubble bursts, you know, it appears that you 

can create other problems. 

And just maybe give some comments on, why can’t the Federal 

Reserve show a little bit more restraint in the monetary policy in 

advance when we are faced with what looks like a risky asset bubble coming down the pike? Would it ultimately be better to protect 

job loss or inflation down the road if we are able to—it is not often 

popular, for instance, to do it, but is that going to make more sense 

41 

than—given the recent experience we have had recently, does that 

make more sense to look more in advance on that? 

Mr. BERNANKE. In principle, it would be great. But there are two 

practical problems that we have to try to confront. One is actually 

identifying the bubble. And when the policies in question were taking place in 2003, 2004, there really was substantial disagreement 

among experts about whether this was a bubble and how big it 

was. 

The other problem is that by using monetary policy, which is a 

very blunt tool, to try to pop bubbles, you may have a side effect 

of having bad effects on the rest of the economy, because you can’t 

just target one sector. 

That is why, even though, as I say, I am open-minded about the 

role of monetary policy in bubbles, in affecting bubbles, I do think 

that the first line of defense needs to be a stronger regulatory system that would, on the one hand, prevent excessive build-ups of 

risk in the first place; and if they do pop and if there is a problem 

like that, would make the system strong enough that it wouldn’t 

create such an enormous crisis as we have seen recently. 

The CHAIRMAN. Last question, the gentleman from Texas, Mr. 

Hinojosa, and then we will return and start right away. The gentleman from North Carolina will be the Chair. 

The gentleman from Texas. 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

And I thank you also, Chairman Bernanke, for coming to speak 

with members of our committee. 

At a recent congressional hearing at which Secretary of the 

Treasury Timothy Geithner testified, I noted that I met with Treasury Assistant Secretary for Financial Institutions Michael Barr, 

and we discussed some of the concerns that I have with the proposed Consumer Financial Protection Agency we have been debating for quite some time. 

During that conversation, I expressed some concern about the 

negative impact the CFPA as proposed would have on the local 

economies across the country, and the negative impact it would 

have on community banks, regional banks, and credit unions. Community banks and regional banks and credit unions played no significant role in the current economy crisis, both domestic and global. 

And Secretary Barr stated that Treasury wants a level playing 

field. Therefore, he stated, that Treasury wants to put all financial 

institutions in the same box and wants all those institutions to be 

examined and enforced by the CFPA. I think that the community 

banks, the regional banks, and the credit unions should be exempted from the CFPA umbrella. Thus, tell me, what are your conclusions on exempting those groups that I mentioned from the CFPA 

umbrella? 

Mr. BERNANKE. Well, I don’t think I would want to exempt fully 

any lender, including non-bank lenders, from appropriate consumer 

protection laws. That would invite those practices to migrate out of 

the big banks to other institutions. 

But on the enforcement side, the Federal Reserve takes what we 

call a risk-focused approach, jargon for saying that we put more resources where there are greater dangers. So we would spend a lot 

42 

more time in a national credit card company, for example, than we 

would in a local community bank that makes standard consumer 

loans or mortgages, for example. 

So I do think it would be appropriate to have some differences 

in the level of intensity of enforcement, depending on the nature 

of the business and the kinds of risks that are inherent in the products that the company is involved with. 

Mr. HINOJOSA. Thank you for sharing your thoughts with me. 

My time has expired, and I yield back. 

The CHAIRMAN. The hearing will recess. And I appreciate the indulgence of the Chairman. 

We will return on our side with questions from Mr. Clay, Mr. 

Scott, Mr. Green, Mr. Cleaver, Ms. Speier, Mr. Minnick and Ms. 

Kosmas if they wish to do so, and I will be guided by my colleagues 

on the other side. The hearing is recessed. 

[recess] 

Mr. WATT. [presiding] The hearing will come back to order. 

The chairman has asked me to preside in his absence, and I 

think the next person to be recognized is the gentleman from California, Mr. Miller. 

Mr. MILLER OF CALIFORNIA. Thank you. 

Mr. Chairman, it is good to have you back. 

I am glad you decided to stay and were reappointed. I think you 

are doing a very difficult job, but I think you are doing the best 

anybody could do in this country. 

I would be interested in your comments, and we talked about, 

you said you are trying to increase the national savings rate on the 

part of individuals and such, which is a goal. I believe you said 

that earlier. Yet I am looking at what is happening with the banks. 

The interest rates are so low that people are saying, I have to find 

some better investment for my money rather than putting it in a 

savings account. And then, on the other hand, banks aren’t lending 

money still. It is an unusual anomaly we have. It is not as bad as 

it was last September when they stopped lending to each other. 

But for individuals with good credit, they are having trouble even 

going out and getting a loan to keep a business operating. How do 

you see those in conflict with each other? 

Mr. BERNANKE. Well, it is first certainly true that we are better 

off than we were with the system in crisis. It is also true that the 

banks have not returned to normal lending by any means. I think 

the low interest rates do have positive effects on the economy, for 

example, operating through other markets, like the mortgage market or the corporate bond market. 

But getting the banking system back into a lending mode is very 

important. We continue to work with the banks to encourage them 

to raise equity so they have sufficient capital to support their lending. We have provided them with an enormous amount of liquidity 

so they are able to have the funds to lend. We are encouraging 

them to lend, in that going back to November, the bank regulators 

had a joint statement encouraging banks to lend to creditworthy 

borrowers as being in the interest both of the banks and of the 

economy. And we continue to try to follow up on all those things. 

In addition, as you may know, we have some programs, including 

the Term Asset-Backed Securities Loan Facility, which is trying to 

43 

open up sources of funding from the capital markets, for example, 

for consumer loans and small business loans. I would add, I guess, 

that there are also some efforts taking place from the Treasury to 

support small-business lending. It is a difficult problem, but we are 

trying it attack it in a number of fronts. Just to conclude, I would 

say that it is true that as long as the banks are as reluctant to lend 

as they are, to some extent, it weakens the effect of our stimulative 

policies. 

Mr. MILLER OF CALIFORNIA. You recall last September, we were 

having a very lengthy debate, and you and I had some conversations requiring the $700 billion to going to buy mortgage-backed securities, which we approved the first $350 billion. But it seems like 

we went through a tremendous amount of debate to make that decision; yet the Federal Reserve last week decided to buy a trillion 

and quarter dollars of mortgage-backed securities. And your previous comments, we have talked about the Fed’s role in injecting 

liquidity in the marketplace and being able to fight inflation as 

needed, but you can’t do that with assets you are buying. They are 

not liquid. Unless you are going to have a barn sale and just get 

rid of them for liquidity, how can you justify those two? They seem 

to be— 

Mr. BERNANKE. Well, the purchases of the asset-backed securities? 

Mr. MILLER OF CALIFORNIA. How do you justify the ability to do 

that when we were requested to authorize the Treasury to do that 

originally? 

Mr. BERNANKE. Well, under open-market operations, we normally transact in these markets. We buy and sell both treasuries 

and agencies; we are authorized to do that. And given the situation 

we are in with interest rates close to zero, it is now becoming a recognized approach of monetary policy to expand assets and a balance sheet as an additional way of providing support to the economy. And I think it is justified, not only narrowly by the authorizations for open-market operations but by the mandate that Congress 

gave us to try to maximize employment and achieve price stability. 

These are the only tools we have to try to achieve those objectives. 

I want to assure you that we have every means of exiting from the 

situation and avoiding inflation, even if we do not sell any of these 

assets. 

Mr. MILLER OF CALIFORNIA. You can do it in other ways, then. 

Mr. BERNANKE. I am sorry? 

Mr. MILLER OF CALIFORNIA. You can do it in other ways. 

Mr. BERNANKE. Yes. 

Mr. MILLER OF CALIFORNIA. HVCC, as you recall, we passed a 

new policy, Congress did, that is the ability of appraisers to appraise local units and such. We changed it. And the Federal Reserve, you went through a lengthy process regulating on appraisals 

recently, and you determined that they could do certain things, and 

certain requirements were made. Do you support the current policy 

because it seems to be having a very negative impact on the valuation of homes in a given industry today? 

Mr. BERNANKE. Well, we have policies that try to create adequate 

independence of the appraiser. 

44 

Mr. MILLER OF CALIFORNIA. You did that. I think your policies 

you approached it with were good, but we decided to go a different 

direction, and that is my problem, the direction we went. 

Mr. BERNANKE. Could I answer that in a letter? 

Mr. MILLER OF CALIFORNIA. You sure may, sir. 

Mr. WATT. The gentleman’s time has expired. 

Mr. MILLER OF CALIFORNIA. I would appreciate that. 

Mr. WATT. The gentleman from Missouri, Mr. Clay, is recognized. 

Mr. CLAY. Thank you, Mr. Chairman. 

And thank you, Mr. Chairman, for being back here with us. I 

just want to cover one area, consumer protection, that I would like 

your insights on. What do you think is best for consumer protection, given the record of the Federal Reserve, given the record of 

other regulatory agencies that kind of dropped the ball in the last 

decade on consumer protection? Are you one who advocates expanding the authority of the Federal Reserve to actually, I guess, 

put some teeth into consumer protection or beef-up consumer protection, or do you think we need a separate Federal agency? 

Mr. BERNANKE. Well, Congressman, I continue to think that the 

debate here has to do with the Congress’ view about whether or not 

a new agency is needed in order to sufficiently prioritize consumer 

protection. In other words, I think many of those who support a 

new agency feel that the Federal Reserve does not place sufficient 

priority or attention on this topic. I have tried to point out that 

while I certainly agree that the Federal Reserve did not do enough 

in this area for many years, that in the past 3 years or so, we have 

been quite active and aggressive in this area. And I think we have 

been very effective and made use of our particular strengths and 

economics and finances to compliment our consumer protection authorities. 

But I am not going to tell Congress or I wouldn’t presume to tell 

Congress what to do. I think it is Congress’ decision whether they 

think that the Federal Reserve’s commitment can be made sufficient, or if not, then presumably you want to have a new agency. 

I think that is the issue. 

Mr. CLAY. Well, going along those lines of thinking, then, how 

does the Federal Reserve repair the damage that has been done to 

communities like the one I represent which had a disproportionate 

number of subprime loans when really the consumer probably 

should have had a prime loan, but yet now it has caused them to 

go into foreclosure? It has damaged those communities. Now you 

have all of these vacant properties sitting there destroying those 

communities. How can the Federal Reserve at least help repair 

that damage? 

Mr. BERNANKE. Well, in several ways. First, again, I agree that 

we didn’t do enough at an earlier stage, but over the last 3 years 

or so, we have put some tough rules in place in a variety of areas. 

We are also trying to address the situation through other mechanisms. 

To give one example, we have a partnership with NeighborWorks 

America where we are trying to work to help stabilize communities 

where there have been a lot of foreclosures. We recognize foreclosures hurt not only the borrowers; they also hurt the community 

and the broader housing market for that matter. So we are doing 

45 

the best we can in the current situation to try to address the problems. 

If Congress decides they want to leave it with the Fed, I think 

we would have to take steps to reassure Congress that we would 

in fact, even beyond my tenure and into the future, have sufficient 

commitment to this area, and I have suggested some ways of doing 

that, including, as I mentioned, mandatory testimony by the Chairman, various kinds of review processes, strengthening the Consumer Advisory Council, and other things that can be done just to 

assure Congress that the Fed will not repeat the mistake and let 

this ball drop, as you put it. 

Mr. CLAY. Thank you for your response, Chairman Bernanke. 

Mr. Chairman, may I yield the rest of my time to my friend from 

Georgia, Mr. Scott? 

Mr. WATT. Mr. Scott is next, but he can use the rest of your time, 

too. 

Mr. CLAY. Thank you. 

Mr. WATT. Thirty seconds. 

Mr. SCOTT. So that means I have 5 minutes and 30 seconds when 

I come. I will come back to that. 

Mr. WATT. You just used the 30 seconds. 

The gentleman from Delaware, Mr. Castle. 

Mr. CASTLE. Thank you, Mr. Chairman. 

And Chairman Bernanke, I would like to concentrate on your 

written testimony, which I have here, in which you indicate an 

oversight council made up of the agencies involved in financial supervision regulations should be established. And then you say further on, in the same paragraph of the first page of your testimony, 

all Federal financial supervisors and regulators, not just Federal 

Reserve, should be directed and empowered to take account of risk 

to the broader financial systems as part of their council oversight 

and responsibility. 

Then, on page 5, you mention first an oversight council, same 

thing, composed of representatives of the agencies and departments 

involved in the oversight of the financial sector should be established to monitor and identify emerging systemic risk across a full 

range of financial institutions and markets. 

I am not sure I understand. I think I understand here what you 

are saying; I am not totally sure what you said before or where we 

are on this. I think what you are saying here is we should have 

a council made up of all regulators who would make decisions with 

respect to systemic risk. Is that correct? 

Mr. BERNANKE. To coordinate the regulators to monitor the system, to look for gaps, a variety of things to try to be the oversight 

of the whole system, but of course, I think each individual agency 

would also have a responsibility within their own sphere to look 

out for potential problems. 

Mr. CASTLE. With respect to that council, do you have any ideas 

about the structure of it? Are you saying the Federal Reserve 

should be the head of it, and the others should be on it? Or just 

a general counsel, a separate person being the head of it? 

Mr. BERNANKE. The Administration proposed that the Treasury 

be the permanent Chair, and we are fine with that. 

46 

Mr. CASTLE. So the permanent Chair, with the other regulators 

on it? 

Mr. BERNANKE. Yes. 

Mr. CASTLE. Is what you are talking about? 

Mr. BERNANKE. The Treasury would be the Chair, and the other 

major regulators would be on the council. 

Mr. CASTLE. Yes. 

And apart from what the White House said, what is your argument, if there is one, for the Treasury being the head of it versus, 

say, you or another regulator or somebody independently from the 

outside? I am not saying it is wrong— 

Mr. BERNANKE. Obviously, because the Treasury has the broadest responsibilities for the economy in general, has the broadest responsibilities for any fiscal implications and financial implications, 

and frankly because the Treasury would probably be better placed 

to mediate any differences among agencies that might arise for 

whatever reason. 

Mr. CASTLE. Has this been your position consistently from the 

beginning of the proposal of the systemic risk? 

Mr. BERNANKE. It has, yes. My position has not changed at all. 

Mr. CASTLE. Okay. Do you disagree with what some of the other 

regulators, Comptroller Dugan and Chairman Bair, have been saying about this? 

Mr. BERNANKE. I think there are two parts here. I think one 

question is whether, underneath the systemic regulatory council, 

should the Federal Reserve be the consolidated supervisor of the 

large financial holding companies? And my impression, based on 

conversations and also based on the testimony at the end of July, 

where I was here with the other regulators, is that there is pretty 

broad support—I know for—well, I think it is very broad support 

for the Federal Reserve playing that role as the supervisor of these 

large financial firms. 

I think there is a bit of difference about exactly where the authorities of the Systemic Risk Council would end and where the authorities of the individual agencies would begin. And I think they 

are within the range of negotiation, but our position has been that, 

for the purposes of both expertise, accountability and responsibility, 

that the council should not be involved in micromanaging any part 

of the system; rather it should be a broad, take a broad perspective, 

which brings together the perspectives of the individual regulators. 

So I would not at this point recommend the Systemic Risk Council 

get into the weeds of setting detailed capital requirements, for example. 

Mr. CASTLE. I think I agree with you, but I know enough to know 

I don’t really understand it completely. I would hope that you and 

the Administration and all the regulators could sit down and work 

out something of which we could have unanimity. I don’t think 

there is any disagreement at all on this committee that we need 

some sort of a Systemic Risk Council, regardless of what it is and 

who heads it, the way it is organized. 

The details are beginning to confound us a little bit. I would hope 

that we would get good guidance from you since there seems to be 

unanimity of opinion about where we should go, but I think it is 

a very, very important subject as far as the future of the financial 

47 

world is concerned. So, hopefully, we can resolve it soon. I appreciate your testimony on that. 

I yield back, Mr. Chairman. 

Mr. WATT. The gentleman yields back. 

The gentleman from Georgia is recognized, Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Welcome again, Chairman Bernanke. There are two constitutional statute requirements for the Federal Reserve, one of which 

is monetary policy controlling inflation. The other one, which we 

don’t touch upon enough, is unemployment and employment, which 

is a charge. You gave your assessment of how well the economy is 

doing when you said that you believe the recession is very likely 

over. Those are your comments. I want you to review your statements in light of the fact that we have ravaging, ravaging, staggering unemployment rates right now. 

The major systemic risk to our economy is not within the credit 

markets right now, not within Wall Street or the banks; it is these 

individuals who are losing record numbers of jobs every single day. 

They can’t pay their mortgages; 26,000 every week are getting into 

foreclosures now. Unemployment levels are staggering at the rate 

of 11.5 percent in my home State of Georgia. And in many other 

States, it is really at double digits, and across the country now it 

is hovering right at 10 percent. 

So I think it would be very important to examine what I consider 

the weak link in the Obama Administration’s response to this economy. There is no clear-cut jobs policy. There is no direct mission 

to deal with this problem of rising unemployment. Our only answer 

to it has been, we throw whatever has been out there for the stimulus; that depends on local and State governments to create. But 

there is nothing there. There is no manpower training act, as it responded to in the 1960’s and 1970’s. There is no National Recovery 

Act that Franklin Delano Roosevelt responded to in the Depression. 

What are we going to do to address this issue of rising unemployment, particularly in view of the fact that it is your second or your 

other charge of responsibility to the Federal Reserve? 

Mr. BERNANKE. Well, Congressman, first, I would ask you to read 

my whole statement. The question that I answered in public was 

to say that technically the recession may be ending in the sense 

that the economy is no longer falling and is starting to come back. 

However, I was very clear that unemployment remains very high 

and is a continuing problem and that the growth is unlikely to be 

fast enough to bring it down at the pace we would like to see. And 

so I completely agree with everything you just said. 

In terms of our mandate, which I agree is both price stability and 

maximum employment, of course, that explains why we are currently not only having our interest rate close to zero, but we are 

using extraordinary additional tools, as I was talking about before, 

about the acquisition of mortgage-backed securities and so on to try 

to stimulate the economy and get people back to work. We think 

that is very important, consistent with maintaining price stability 

as well. 

Obviously, there are a lot of ways to address unemployment from 

a fiscal perspective. Unemployment insurance is one of course. I 

guess one point I would make at least to bring to your considerVerDate Nov 24 2008 16:46 May 05, 2010 Jkt 055809 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\55809.TXT TERRIE
48 

ation, is one of the real concerns that I have is, not only is unemployment high, but the number of people who have been out of 

work for 6 months or a year is really exceptionally high. And folks 

who are out of work for that long tend to lose skills. They tend to 

lose attachment to the labor market. And even when the economy 

comes back, they may either not be able to find work or they may 

not ever become a regular part of the labor market again. 

So I think there is certainly some scope for trying to ensure that 

people who do want to come back to work and who have been out 

of work for a time, that they keep their skills fresh, that they have 

additional education or training. I can see that as being particularly important in a situation like now when unemployment is both 

so high and unemployment spells are so lengthy. 

Mr. SCOTT. Would you agree that we should approach this serious unemployment and joblessness problem in this country with 

the same energy, policy directive, and legislative directive to address this issue as we have done in previous downturns in the 

economy? I mean, unemployment now is 10 percent. It is devastating in many other parts of the country, particularly in the 

Midwest. It just seems to me that we ought to get packages of tax 

incentives of tax cuts to businesses that we know will stimulate the 

economy, direct training acts and job training acts in which we can 

get money directly into the hands of the unemployed to begin to get 

retrained for these positions. 

I think that the laissez-faire attitude that we have while we 

throw this up to Wall Street and the big banks to unfreeze the 

credit and we kind of look at that, I would just hope that, and I 

have such great respect for you and your knowledge, and moving 

in this area that you could use your position and your charge in 

this unemployment area to put greater emphasize to this Administration to do more direct action to address the unemployment problem. 

Mr. WATT. The gentleman’s time has expired. 

I know he was entitled to 30 seconds more, but we just got an 

e-mail saying that there are going to be 3 more votes shortly. So 

I want to try to get to the other members who haven’t been recognized. 

Mr. Manzullo is recognized. 

Mr. MANZULLO. Thank you, Mr. Chairman. 

Chairman Bernanke, thank you again for coming and spending 

a good portion of time with us and for your availability outside of 

the hearings. I have a couple of questions. 

First of all, with regard to the oversight council, I think it is on 

page 2 of your testimony, made up of the agencies involved in financial supervision and regulation, and the mandate is to monitor 

and identify emerging risks to financial stability across an entire 

financial system, identify regulator gaps and coordinate agencies’ 

responses to potential systemic risks. I guess another word for systemic risk is moral hazard. To me, a moral hazard is a teetotaler 

with a beer. But I—even without this group, this is something that 

is has gone on any way; isn’t that correct? 

Mr. BERNANKE. Well, for example, we have had the President’s 

Working Group, which is also a group of regulators. But I would 

have to say that the focus on the system as a whole is lacking. 

49 

Mr. MANZULLO. Right. 

Mr. BERNANKE. For example, this council, unlike the President’s 

Working Group, would have its own dedicated staff and would have 

more regular meetings and be very focused, perhaps writing reports and so on, on the gaps in the system leading to systemic risk. 

Mr. MANZULLO. At this point, I know from prior testimony and 

visiting with other groups, you are already doing this as part of 

your job. 

Mr. BERNANKE. We are moving very much in that direction. 

Mr. MANZULLO. Right. 

Mr. BERNANKE. But the Federal Reserve’s authorities don’t extend to all the different markets and instruments in the system. 

Mr. MANZULLO. Correct. How do you balance, if that is the work 

that the oversight council would do, with a new consumer financial 

protection agency, especially if it comes to a dispute over instruments, products? You may think that a particular product may 

pose a systemic risk, such as the whole rotten subprime market, 

when people were allowed to get 3/27 and 2/28 mortgages and teaser rates and things like that and were allowed to get loans without 

written proof of their income. What happens if you have a conflict 

with the oversight council and a new consumer financial protection 

agency? 

Mr. BERNANKE. Well, first, there are several governance mechanisms which is, of course, on the one hand, the agency part of the 

council would have to talk to its colleagues; on the other hand, it 

would be on the board of the agency, as I understand it, some of 

the regulators would be part of the board. But I think what the 

most powerful weapon would be if the council believed that actions 

taken by any of the members of the council were not consistent 

with a safe financial system, I would think one of their best methods would be to provide a report or recommendation that would be 

public and that would be a very powerful tool because the agency 

that ignored that would certainly be going against their peers and 

taking the risk on themselves that they are making a mistake in 

being too lax, for example. So I do think that there would be a certain amount of peer pressure that would affect the ability of the 

council to get cooperation with the members. 

Mr. MANZULLO. By the time you came in office 31⁄2 years ago, the 

die had been cast. It was pretty late for you to do anything to turn 

around the train, and you tried to. 

Looking back with seasoned eyes over the last 10, 12, 14 years, 

what do you see now that you think should have been seen back 

then? 

Mr. BERNANKE. Well, you know, it is not a single smoking gun, 

but there are lots of different problems where, again, there were 

gaps that arose because we didn’t take enough of a systemic viewpoint. I talked about consumer protection and the problem of 

subprime, those things that you talked about. I think that is important. But if you look across the whole range of financial institutions, not just banks but investment banks and others, it seems 

clear that the strength and consistency of the oversight was not 

adequate; that there were many individual financial instruments, 

like the CDS and others, where again the oversight was fragmented and not sufficiently consistent and powerful. So it would 

50 

take me some time frankly—I am sure you appreciate how complex 

the whole crisis has been. It would take me some time to go 

through all the different elements. But I think what we learned is 

that the system which seemed to be working fine as long as the 

economy and financial stresses were not too great; when things got 

much worse, then the system wasn’t able to stand up to it. We 

learned a great deal from this crisis. I very much hope that this 

Congress and the agencies together will make use of those lessons. 

Mr. MANZULLO. I thank the gentleman. 

Mr. WATT. The gentleman’s time has expired. 

The gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. 

Thank you, Chairman Bernanke, for appearing again. I trust 

that all is well with you and your family. 

Mr. Chairman, I sense a hint of exasperation with you in terms 

of your having to continually express that you are opposed to ‘‘toobig-to-fail.’’ Trying to get that message out has been quite a challenge for me, too, in that I am opposed to ‘‘too-big-to-fail.’’ And the 

temptation is there to use what I call a pneumonic device, a memory-aiding device. However, pneumonic devices will only help a person have a better sense of memory. It won’t force the person to use 

memory. And I suspect that a lot of the people who continually 

misunderstand my position are doing so with a certain amount of 

design as opposed to a lack of memory. But for the record, I, too, 

am opposed to ‘‘too-big-to-fail’’ for the nth time. 

Now, having said this, some of my colleagues on the other side 

are also talking about jobs and the recovery as though jobs are a 

leading indicator. I think it is fairly well-documented that jobs are 

a lagging indicator. But, for the record, Mr. Chairman, have we 

ever had a recovery from a recession wherein jobs were a leading 

indicator? 

Mr. BERNANKE. I am not aware of any. As you point out, it is 

normally a lagging indicator, because it takes time for firms to 

bring people back to work after recovery begins. 

Mr. GREEN. Exactly. 

The market, stock prices are, generally speaking, procyclical, but 

unemployment is, generally speaking, countercyclical. So I want to 

talk for just a quick moment about countercyclicality. When a policy is countercyclical, it will cool down an economy that is in an upswing, and it will stimulate an economy this is in a downturn. 

If this is the case, when we require banks to increase that capital 

ratio in a recession, while it may be a good thing to do, it can also 

prove to be procyclical in that it can offset some of the lending that 

might take place. Would you just kindly give a quick comment on 

this, the capital requirement, because, if you recall, we started out 

with a TARP fund that became a capital purchase program that 

dealt with capital requirements, and that may have had some impact on the lending side of banking, if you would, please? 

Mr. BERNANKE. No, you are absolutely right. Banks do have various ways to raise capital. They can go to the public markets, for 

example. But one of the tensions we face now in this and other 

spheres is that there certainly is a desire, both in the United 

States and abroad, to raise bank capital levels so that they will be 

safer in the future, but recognizing though that, in the short run, 

51 

raising capital levels may cause banks to reduce their assets and 

to reduce lending. We need to find a way to phase that in, sufficiently gradually that it doesn’t impede the recovery. So we face 

that problem in a lot of cases. We want people to save more, but 

not immediately because the economy is in a recession. So it is the 

timing that is very important. 

Mr. GREEN. In fact, this is one of the reasons why Basel II has 

been criticized, because it advocates this, but moving on. 

‘‘Dark liquidity,’’ an interesting term, it has to deal with a term 

that I call ‘‘quiet money’’ that is placed in the market. Did dark liquidity have an impact on the circumstance that we are dealing 

with currently? 

Mr. BERNANKE. Do you mean ‘‘dark pools?’’ Is that what you are 

referring to? 

Mr. GREEN. Yes, sir. 

Mr. BERNANKE. Well, the SEC is looking at that. 

I think there are interesting questions about whether the market 

is served by having more transparency about those pools. I don’t 

really have a firm position on that. 

I am not aware that those dark pools were an important factor 

in the crisis as a whole. I mean, I may be mistaken, but transparency in general is very important, but again, on this particular 

area, I know the SEC is looking at it and trying to make some determination. 

Mr. GREEN. Final comment, with reference to small banks and 

community banks, I want to thank you for your efforts to avoid 

having them become—bear the burden, if you will, of a lot of what 

has happened when they in fact were, in the main, not the cause 

of this downturn that we are suffering from. I have had an opportunity to meet with many of the community bankers, and one of 

the things they continually say to me is, look, don’t have us punished for the sins of others. We have been here. We are doing a 

good job, and we are maintaining a lot of loans in our portfolios, 

so please don’t let it happen to us. And I thank you for your efforts 

in this area. 

I yield back, Mr. Chairman. 

Mr. WATT. The gentleman from New Jersey, Mr. Lance. 

Mr. LANCE. Thank you, Mr. Chairman. 

Good afternoon, Mr. Bernanke. 

We are all obviously concerned about the levels of unemployment. Traditionally, this is a lagging indicator. My concern is that, 

given the state of the workforce in this country, post-industrial in 

many ways, do you believe long term, over the course of the next 

year perhaps, that the unemployment rate will be lowered significantly? 

Mr. BERNANKE. I would be fooling myself and you if I said I 

knew with any certainty. But most forecasters, including the Fed, 

are currently looking at growth in 2010, but not growth so rapid 

as to substantially lower the unemployment rates. 

Mr. LANCE. So, at the moment, we are at 9.7 percent. If we may 

technically get out of the recession the fourth quarter or perhaps 

the first quarter of next year, could we expect a significant lowering any time next year, Mr. Chairman, of the unemployment 

rate? 

52 

Mr. BERNANKE. Well, if we—just to explain the arithmetic, we 

have to grow faster than the underlying potential in order to make 

a dent in the unemployment rate. So it depends entirely on how 

quickly the economy grows. There are some who think it could 

grow at a fast clip, but if it only grows at 3 percent, say, which is 

not much faster than the underlying potential growth rate, then, 

unfortunately, the unemployment rate would still probably be 

above 9 percent by the end of the year. 

Mr. LANCE. Above 9 percent by the end of 2010? 

Mr. BERNANKE. That is right, by the end of 2010, if growth is 

about 3 percent. 

Mr. LANCE. This is as I understand it different from more typical 

recoveries in the past, perhaps exacerbated by the workforce as it 

now exists, fewer manufacturing jobs, manufacturing jobs going to 

other parts of the world. 

I can’t imagine the American people will consider the country to 

be in recovery if the unemployment rate is at roughly 9 percent or 

in the high 8 percent area a year and 3 months from now. Based 

upon your great expertise and given your extremely expansive 

knowledge as to what has happened in the past, particularly in the 

Great Depression, is there anything else we should be doing to 

make sure that we bring the unemployment rate down more quickly than may now be anticipated is the case. 

Mr. BERNANKE. I don’t have any magic bullets to offer. If I did, 

I would have offered them by now. 

But I think, as I was saying, and again, these are areas that 

Congress needs to decide and not the Federal Reserve, but one way 

to mitigate the long-term damage is to try to make sure that those 

who are out of work for an extended period don’t lose attachment 

to the labor force and that they do get opportunities to improve 

their skills and remain employable. 

Mr. LANCE. Thank you. 

Let me say in conclusion that I think we are all concerned about 

the unemployment rate, Congress as well as, of course, the Federal 

Reserve Board. And this is the indicia by which the American people determine whether or not we are out of a recession, even 

though that might not be the technical definition. And certainly we 

want to work with you on this issue. 

I yield back the balance of my time. 

Mr. WATT. I thank the gentleman for yielding some of his balance and recognize Mr. Cleaver as the final questioner. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Mr. Chairman, I want to juxtapose two speeches, one by Governor Duke, and there have been some references to his speech; the 

other is World Bank President Bob Zoellick. 

Let me first deal with Governor Duke. When he testified before 

this committee, he surprised me a little when he suggested that 

consumer protection should become one of the Fed’s core missions. 

Are there other central banks in the industrialized world that hold 

the responsibility of consumer protection as a core mission? Do you 

know of any? 

Mr. BERNANKE. Well, the consumer protection function varies a 

lot across countries, where it is located and how it is managed, but 

I can’t give you a good example. 

53 

Mr. CLEAVER. I am sorry. 

Mr. BERNANKE. I don’t have a good example to give you, no. 

Mr. CLEAVER. So does that mean that you agree with me that 

consumer protection should be performed by a single agency that 

has only consumer protection as its core responsibility? 

Mr. BERNANKE. I think the main argument for a single agency 

is the focus core mission aspect that you are talking about. But 

again, I reiterate that, given the historical accident or whatever 

that gave this authority to the Federal Reserve, that in the recent 

years, we have been very aggressive at pursuing it. 

Mr. CLEAVER. Secretary Clinton wanted me to correct myself 

calling Governor Duke a ‘‘he.’’ 

Let’s go back to the World Bank president. In a speech earlier 

this week, he said that the Fed should not be given the responsibility for regulating systemic risk and he said that the Treasury 

Department should have that responsibility. And the reason behind 

his statement was that Treasury is responsible to the President 

and to Congress. And this doesn’t mean that I have joined in with 

the ‘‘eliminate the Fed’’ movement, but that the Fed does not answer to Congress. And so that the American public should have 

some participation in this and that the Treasury is the likely spot 

for this responsibility. Do you agree with Mr. Zoellick? 

Mr. BERNANKE. Well, without commenting on his speech in particular, I think I do agree that there should be a systemic risk 

council and that the head of that should be the Treasury, so in that 

respect, I agree with that. I think the Federal Reserve is the appropriate body to do the consolidated supervision of large financial 

companies that may be systemically critical. But that would be underneath the AG of the systemic risk council. And I would dispute 

the claim that the Fed is less responsive to Congress than the 

Treasury is, for example. I am here today, and we testify frequently, and of course, we are subject to congressional oversight. 

Mr. CLEAVER. Well, yes, but not to the degree that the Treasury—I mean, you would agree that Treasury, that the Secretary of 

the Treasury can be fired rather easily. I don’t think you are going 

to see a lot of mass firing in the Fed initiated by Congress. And 

you are probably not mad about it, but you would agree with me, 

right? 

Mr. BERNANKE. Well, it would be the President who would fire 

the Treasury Secretary, not the Congress. 

Mr. CLEAVER. Yes, I understand. That is the whole point, he can 

be fired easily, I mean, one person. 

Mr. BERNANKE. But again, I think—again, I don’t know exactly 

what Mr. Zoellick had in mind. But I do agree the Treasury, I said 

this just a few minutes ago, I thought the Treasury ought to be a 

Chair of the council and the council ought to have the overarching 

responsibility. But underneath the council, you still have agencies 

to perform specific tasks. You need the SEC to monitor credit-rating agencies and money market mutual funds. You need the CFTC 

to monitor exchanges. So the Federal Reserve, this is not a new 

power for the Federal Reserve, the Federal Reserve since the last 

decade has been the consolidated supervisor of large—all bank 

holding companies, in fact. And I am just saying that we should retain that, what we already have, and that we should cooperate 

54 

with the other agencies to create a more systemic orientation in 

our oversight. 

Mr. CLEAVER. Thank you. You do come and sit through this torturous session with us, so I want to express appreciation. 

Mr. WATT. The gentleman’s time has expired. 

I want to express my appreciation for the gentleman sitting and 

sitting through the torturous process also. And thank you very 

much for being here and being as eloquent as you always are. The 

hearing is adjourned. 

[Whereupon, at 12:40 p.m., the hearing was adjourned.] 

(55) 

A P P E N D I X 

October 1, 2009 

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