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75–045 2012

S. HRG. 112–485 

THE ECONOMIC OUTLOOK 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JUNE 7, 2012 

Printed for the use of the Joint Economic Committee 

( 
(II) 

JOINT ECONOMIC COMMITTEE 

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] 

SENATE 

ROBERT P. CASEY, JR., Pennsylvania, 

Chairman 

JEFF BINGAMAN, New Mexico 

AMY KLOBUCHAR, Minnesota 

JIM WEBB, Virginia 

MARK R. WARNER, Virginia 

BERNARD SANDERS, Vermont 

JIM DEMINT, South Carolina 

DANIEL COATS, Indiana 

MIKE LEE, Utah 

PAT TOOMEY, Pennsylvania 

HOUSE OF REPRESENTATIVES 

KEVIN BRADY, Texas, Vice Chairman 

MICHAEL C. BURGESS, M.D., Texas 

JOHN CAMPBELL, California 

SEAN P. DUFFY, Wisconsin 

JUSTIN AMASH, Michigan 

MICK MULVANEY, South Carolina 

MAURICE D. HINCHEY, New York 

CAROLYN B. MALONEY, New York 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

WILLIAM E. HANSEN, Executive Director 

ROBERT P. O’QUINN, Republican Staff Director 
(III) 

C O N T E N T S 

OPENING STATEMENTS OF MEMBERS

Hon. Robert P. Casey, Jr., Chairman, a U.S. Senator from Pennsylvania ......... 1 

Hon. Kevin Brady, Vice Chairman, a U.S. Representative from Texas .............. 3 

WITNESSES

Hon. Ben Bernanke, Chairman, Board of Governors of The Federal Reserve 

System, Washington, DC ..................................................................................... 5 

SUBMISSIONS FOR THE RECORD

Prepared statement of Chairman Robert P. Casey, Jr. ........................................ 38 

Prepared statement of Vice Chairman Kevin Brady ............................................ 38 

Prepared statement of Hon. Ben Bernanke ........................................................... 41 

Letter dated June 8, 2012, transmitting questions from Vice Chairman Brady 

to Chairman Bernanke ........................................................................................ 49 

Letter dated July 2, 2012, transmitting Chairman Bernanke’s responses to 

Vice Chairman Brady .......................................................................................... 52 

Letter dated June 14, 2012, transmitting questions from Representative Mick 

Mulvaney to Chairman Bernanke ...................................................................... 57 

Letter dated July 16, 2012, transmitting Chairman Bernanke’s responses 

to Representative Mick Mulvaney ...................................................................... 59 

Letter dated June 12, 2012, transmitting questions from Senator Jim DeMint 

to Chairman Bernanke ........................................................................................ 63 

Letter dated July 16, 2012, transmitting Chairman Bernanke’s responses 

to Senator Jim DeMint ........................................................................................ 66 

(1) 

THE ECONOMIC OUTLOOK 

THURSDAY, JUNE 7, 2012 

CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, DC. 

The committee met, pursuant to call, at 10:00 a.m.. in Room G– 

50 of the Dirksen Senate Office Building, the Honorable Robert P. 

Casey, Jr., Chairman, presiding. 

Senators present: Casey, Bingaman, Klobuchar, Sanders, 

DeMint, Coats, Lee, and Toomey. 

Representatives present: Brady, Burgess, Campbell, Duffy, 

Mulvaney, Hinchey, Maloney, Sanchez, and Cummings. 

Staff present: Brenda Arredondo, Conor Carroll, Gail Cohen, 

Cary Elliott, Will Hansen, Colleen Healy, Madi Joyce, Jessica 

Knowles, David Michaelson, Patrick Miller, Matt Salomon, Annabelle Tamerjan, Justin Ungson, Jim Whitney, Andrew Wilson, Ted 

Boll, Al Felzenberg, Robert O’Quinn, Sean Ryan, Jeff 

Schlagenhauf, Michael Connolly, Christina Forsberg, and Rachel 

Greszler. 

OPENING STATEMENT OF HON. ROBERT P. CASEY, JR., 

CHAIRMAN, A U.S. SENATOR FROM PENNSYLVANIA 

Chairman Casey. The hearing will come to order. Thank you 

for being here, Chairman Bernanke. We are grateful for your presence here and your testimony. 

After my opening statement, we will have Vice Chairman Brady 

go through his statement, and then we will get to the Chairman. 

We all look forward today to Chairman Bernanke’s report on the 

state of the economy and his perspective on additional actions that 

the Federal Reserve may take to strengthen the economic recovery. 

With the May jobs report this past Friday, it is clear that Washington needs to continue our focus on creating jobs. Today’s hearing 

is especially timely for that reason. 

There are a number of bipartisan actions Congress can take right 

now to create jobs and strengthen the recovery. We know that the 

Surface Transportation bill now is one opportunity to create jobs. 

We have got to get that legislation out of conference and signed 

into law. 

We know that infrastructure, transportation infrastructure, is 

central to our national competitiveness and the bipartisan bill that 

passed in the Senate with 70 votes—74 votes, I should say—would 

create almost 3 million jobs by accelerating those infrastructure 

projects. 
2 

Second, we should do more to support small businesses. By targeting tax incentives to firms that expand their payrolls, we can 

help to strengthen the recovery. 

A bill that I have introduced would provide a tax credit of 10 percent for any increases to the payroll tax base—that could be hiring 

workers, increasing hours, or raising wages of existing employees. 

Third, the Senate this week has taken up the Farm Bill, which is legislation which cuts the deficit by some $23 billion, and I think 

has tremendous bipartisan support. It helps farmers manage their 

risks relating to rapidly fluctuating prices for their crops, and it 

provides critical support to rural America—part of our country that 

was especially hard hit in the recession, and still has major challenges. 

We have fiscal challenges to tackle in a bipartisan manner, as 

well. Without Congressional action, the automatic spending cuts 

contained in the Budget Control Act of 2011, along with the expiration of several tax cuts, will present a significant economic 

headwind in 2013. 

The Congressional Budget Office recently estimated that real 

GDP growth will slow to just .5 percent in 2013 unless Washington 

in fact acts. 

Chairman Bernanke has expressed concerns regarding the risk 

that a so-called ‘‘fiscal cliff’’ presents to the recovery. I share that 

concern, and I know a lot of others share that same concern. 

But let us be clear: There are right ways and wrong ways to balance the budget. We have to be smart about the cuts we make so 

we can keep growing the economy and create jobs rather than 

make a bad situation even worse. That means we should not increase taxes on middle-income families. 

We cannot put America on the road to full recovery unless we all 

agree on tackling the huge budget deficit and debt that America 

faces. We need to continue to cut spending. There is no doubt about 

that. And certainly you cannot reduce the deficit by spending tens 

of billions of dollars on tax cuts for the very wealthiest. 

Additionally, just as when Chairman Bernanke was before this 

Committee when we spoke about this, I would like to address very 

briefly currency manipulation, especially on the part of China, because it has such a harmful impact on the American economy and 

American jobs. 

We recently learned that China allowed its currency to weaken 

more in May than in any other month since 2005. Chairman 

Bernanke has testified previously that allowing the yuan to appreciate would be good for both the U.S. and China’s economy as well. 

The Chinese Government manipulates their currency so that 

their goods sell for less than they should. Some people may think 

it is some far off theoretical issue—it is not. When China cheats, 

we lose jobs. 

So I urge my colleagues in the House to pass the currency exchange legislation that deals with this issue. It has passed in the 

Senate in a bipartisan way, and we want to get that out of the 

House. 

So to sum up, our economy, while in much better shape than it 

was three years ago, is still recovering from the Great Recession. 

With unemployment above 8 percent, the labor market still needs 
3 

to heal. Europe continues to wrestle with debt issues, as well, and 

we know that, which will continue to impact U.S. financial markets 

and the global economy. 

So against this backdrop, it is clear we need to stay focused on 

promoting a stronger economic recovery, and of course that means 

jobs. 

Chairman Bernanke, thank you for your testimony and now we 

will turn to Vice Chairman Brady. 

[The prepared statement of Chairman Casey appears in the Submissions for the Record on page 38.] 

OPENING STATEMENT OF HON. KEVIN BRADY, VICE 

CHAIRMAN, A U.S. REPRESENTATIVE FROM TEXAS 

Vice Chairman Brady. Well, Chairman Casey, thanks for holding this hearing. And thank you, Chairman Bernanke, for appearing before the Joint Economic Committee at this critical juncture 

to discuss America’s economic outlook. 

While we are all anxious for signs of a strong, sustainable recovery, the recent jobs report for May was grim—with U.S. employers 

creating a mere 69,000 non-farm payroll jobs, the fewest in a year. 

Job growth over the past two months has dropped by two-thirds 

over the first quarter of the year. Business and consumer confidence is down. First quarter GDP estimates were revised downward. 

Four-and-a-half years after the recession began, Americans are 

enduring the 40th straight month of an official unemployment rate 

at or above 8 percent. This is a post-World War II record. 

And much of the drop in the unemployment rate from its high 

of 10 percent in October of 2009 is attributable to Americans simply dropping out of the workforce. The labor force participation rate 

is scraping a 30-year low. Without this severe drop in the number 

of workers since the recession began, the unemployment rate would 

be nearly 11 percent. 

Since the Recession ended, our economy has struggled to grow at 

an annualized average quarterly increase of 2.4 percent. And to 

place it in perspective, of the 10 economic recoveries since World 

War II lasting more than a year, this recovery ranks, regrettably, 

tenth. And dead last is unacceptable by any standard. 

Today, because our economy is not flying strong and steady at 

50,000 feet as it should be at this point, but rather flying low and 

slow, we are increasingly vulnerable to external shocks. 

The economic crisis in Europe has intensified in recent weeks. A 

nascent bank run has begun in Greece. Greek banks are rapidly 

depleting their eligible collateral for lender-of-last-resort loans from 

the European Central Bank. 

Not just Greece, but the European Union as a whole appears to 

be in recession. Questions of whether Greece or other memberstates of the European Monetary Union will exit the euro and reissue national currencies are dominating the news. 

Mr. Chairman, at this hearing I hope we will get your perspective on Europe, including the likelihood of a Greek exit from the 

Eurozone, the contagion risk for the exit of other EMU MemberStates, and the consequences of these possible events for the European Union, the United States, and the rest of the world. 
4 

When you appeared before this Committee last October—in response to a question about the tools you are considering to mitigate 

and limit the adverse economic impact on the United States—you 

testified that you believe that the European Central Bank has 

enormous capacity to provide liquidity to European banks, that traditional currency swaps can provide dollar funding for global dollar 

money markets, and that the main line of defense is adequate supervision of well-capitalized American banks—with the Fed standing ready to provide as much liquidity against collateral as needed 

as lender-of-last-resort to the American banking system. 

Is that still your assessment? And are you considering any tools 

beyond those? 

In addition, American taxpayers and lawmakers—like their counterparts in Germany—are becoming increasingly concerned that 

they will be asked to bail out, however indirectly, struggling European governments and banks. 

There is a growing concern that the U.S. Treasury will try to bail 

out the Eurozone either directly through the Exchange Stabilization Fund or indirectly through the International Monetary Fund. 

The Fed has a challenge as well, explaining to a skeptical Congress 

why traditional currency swap lines with the European Central 

Bank will not turn into an indirect bailout of Eurozone countries. 

At the same time that European economies are weakening, 

growth is also slowing in both China and India. Given the prospects of a global slowdown, some economists are speculating that 

the Federal Reserve may initiate a third round of quantitative easing. 

Mr. Chairman, during the questions I would like to discuss with 

you whether and under what conditions the Federal Reserve would 

consider launching a third round of quantitative easing. 

It is my belief that the Fed has done all that it can do—and perhaps done too much. Further quantitative easing won’t stimulate 

growth and create jobs. There exists a real risk that the massive 

amount of liquidity the Fed has already injected into the economy 

could trigger higher inflation before the Fed can execute its exit 

strategy. 

I also believe another round of Fed intervention will increase uncertainty among job creators while ignoring the genuine reason for 

low business investment and job creation—which is sound, timely 

fiscal policy. 

The businesses I look to along Main Street aren’t holding back 

on hiring because they’re waiting to learn what the government 

will do ‘‘for’’ them; they are holding back on hiring for fear of what 

the government will do ‘‘to’’ them. 

The obsessive push for higher taxes on job creators, the unprecedented tax and fiscal cliff we face at the end of this year, the 

unsustainable structural federal debt and deficits, along with the 

flood of red tape and fear of the consequences of the President’s 

new health care law, these are the true drags on the economy. 

And no matter what actions the Fed takes, without strong leadership by the President today—and action by Congress now—on 

these fiscal issues, Americans will not see the jobs or the strong recovery we deserve. 
5 

And of course the combination of sluggish growth and the rapid 

accumulation of federal debt is a toxic brew that could eventually 

spark a debt-driven economic crisis here at home unless the United 

States soon reverses course. 

Finally, Mr. Chairman, last January the Federal Open Market 

Committee adopted an explicit inflation target of two percent, 

measured by the price index for personal consumption expenditures. By doing so, the Fed has taken an important step toward establishing a rules-based monetary policy going forward that should 

help to achieve price stability and protect the purchasing power of 

the dollar over time. 

Nevertheless, your adoption of the target raises as many questions as it answered. Is the two percent target a minimum, a midpoint, or a maximum? How wide is the range? How long will the 

Federal Reserve tolerate a deviance from the range before taking 

action? 

I also appreciated that you distinguished between that which 

monetary policy can control—namely prices—and that which monetary policy cannot—namely employment. 

By letter, I will request further clarification on this monetary 

policy statement in more depth. 

With that, Chairman, I again thank you for appearing before the 

Committee and I look forward to your testimony. 

[The prepared statement of Representative Brady appears in the 

Submissions for the Record on page 38.] 

Chairman Casey. Thank you, Vice Chairman Brady. 

Just two housekeeping matters before I introduce Chairman 

Bernanke. Number one is we will keep to our time limits more 

strictly than we sometimes do because of the number of members 

here. Number two, the Senate has a vote at 10:30—and I do not 

think that is going to change—so we will accommodate members 

for that reason. 

But let me briefly introduce Chairman Bernanke. Dr. Bernanke 

began a second term as Chairman of the Board of Governors of the 

Federal Reserve System on February 1st of 2010. 

Dr. Bernanke also serves as Chairman of the Federal Open Market Committee, the System’s principal monetary policymaking 

body. He originally took office as Chairman on February 1st, 2006 

when he began a 14-year term as a member of the Board. 

Dr. Bernanke was Chairman of the President’s Council of Economic Advisers from June of ’05 to January of ’06. Prior to beginning public service, Dr. Bernanke was a chaired professor at 

Princeton University. He has been a professor of economics and 

public affairs at Princeton since 1985. 

Mr. Chairman, welcome. 

STATEMENT OF HON. BEN BERNANKE, CHAIRMAN, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, DC 

Chairman Bernanke. Thank you. Chairman Casey, Vice Chairman Brady, and other members of the Committee: 

I appreciate this opportunity to discuss the economic outlook and 

economic policy. 
6 

Economic growth has continued at a moderate rate so far this 

year. Real GDP rose at an annual rate of about 2 percent in the 

first quarter after increasing at a 3 percent pace in the fourth 

quarter of 2011. Growth last quarter was supported by further 

gains in private domestic demand, which more than offset a drag 

from a decline in government spending. 

Labor market conditions improved in the latter part of 2011 and 

earlier this year. The unemployment rate has fallen about 1 percentage point since late August; and payroll employment increased 

2,325,000 per month on average during the first 3 months of this 

year, up from about 150,000 jobs added per month in 2011. 

In April and May, however, the reported pace of job gains slowed 

to an average of 75,000 per month, and the unemployment rate 

ticked up to 8.2 percent. This apparent slowing in the labor market 

may have been exaggerated by issues related to seasonable adjustment and the unusually warm weather this past winter. 

But it may also be the case that the larger gains seen late last 

year and early this year were associated with some catch-up in hiring on the part of employers who had pared their workforces aggressively during and just after the Recession. 

If so, the deceleration in employment in recent months may indicate that this catch-up has largely been completed and, consequently, that more rapid gains in economic activity will be required to achieve significant further improvement in labor market 

conditions. 

Economic growth appears poised to continue at a moderate pace 

over coming quarters, supported in part by accommodative monetary policy. In particular, increases in household spending have 

been relatively well sustained. 

Income growth has remained quite modest, but the recent declines in energy prices should provide some offsetting lift to real 

purchasing power. 

While the most recent readings have been mixed, consumer sentiment is nonetheless up noticeably from its levels late last year. 

And despite economic difficulties in Europe, the demand for U.S. 

exports has held up as well. The U.S. business sector is profitable 

and has become more competitive in international markets. 

However, some of the factors that have restrained the recovery 

persist. Notably, households and businesses still appear quite cautious about the economy. For example, according to surveys, households continue to rate their income prospects as relatively poor and 

do not expect economic conditions to improve significantly. Similarly, concerns about developments in Europe, U.S. fiscal policy, 

and the strength and sustainability of the recovery have left some 

firms hesitant to expand capacity. 

The depressed housing market has also been an important drag 

on the recovery. Despite historically low mortgage rates and high 

levels of affordability, many prospective homebuyers cannot obtain 

mortgages as lending standards have tightened and the creditworthiness of many potential borrowers has been impaired. 

At the same time, a large stock of vacant houses continues to 

limit incentives for the construction of new homes, and a substantial backlog of foreclosures will likely add further to the supply of 

vacant homes. 
7 

However, a few encouraging signs in housing have appeared recently, including some pickup in sales and construction, improvements in homebuilder sentiment, and the apparent stabilization of 

home prices in some areas. 

Banking and financial conditions in the United States have improved significantly since the depths of the crisis. Notably, recent 

stress tests conducted by the Federal Reserve of the balance sheets 

of the 19 largest U.S. bank holding companies showed that those 

firms have added about $300 billion to their capital since 2009. 

The tests also showed that, even in an extremely adverse hypothetical economic scenario, most of those firms would remain able 

to provide credit to U.S. households and businesses. 

Lending terms and standards have generally become less restrictive in recent quarters, although some borrowers such as small 

businesses and, as already noted, potential homebuyers with lessthan-perfect credit, are still reporting difficulties in obtaining 

loans. 

Concerns about sovereign debt and the health of banks in a number of euro-area countries continues to create strains in global financial markets. The crisis in Europe has affected the U.S. economy by acting as a drag on our exports, weighing on business and 

consumer confidence, and pressuring U.S. financial markets and 

institutions. 

European policymakers have taken a number of actions to address the crisis, but more will likely be needed to stabilize euroarea banks, calm market fears about sovereign finances, achieve a 

workable fiscal framework for the euro area, and lay the foundations for longer term economic growth. 

U.S. banks have greatly improved their financial strength in recent years, as I noted earlier. Nevertheless, the situation in Europe 

poses significant risks to the U.S. financial system and economy 

and must be monitored closely. As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate. 

Another factor likely to weigh on the U.S. recovery is the drag 

being exerted by fiscal policy. Reflecting ongoing budgetary pressures, real spending by state and local governments has continued 

to decline. Real Federal Government spending has also declined, on 

net, since the third quarter of last year, and the future course of 

federal fiscal policies remains quite uncertain, as I will discuss 

shortly. 

With regard to inflation, large increases in energy prices earlier 

this year caused the price index for personal consumption expenditures to rise at an annual rate of about 3 percent over the first 

three months of the year. 

However, oil prices and retail gasoline prices have since retraced 

those earlier increases. In any case, increases in the prices of oil 

or other commodities are unlikely to result in persistent increases 

in overall inflation so long as household and business expectations 

of future price changes remain stable. 

Longer term inflation expectations have indeed been quite well 

anchored according to surveys of households and economic forecasters and as derived from financial market information. 
8 

For example, the five-year-forward measure of inflation compensation derived from yields on nominal and inflation-protected 

Treasury securities suggests that inflation expectations among investors have changed little, on net, since last fall and are lower 

than a year ago. 

Meanwhile, the substantial resource slack in U.S. labor and 

product markets should continue to restrain inflationary pressures. 

Given these conditions, inflation is expected to remain at or slightly below the 2 percent rate that the Federal Open Market Committee judges consistent with our statutory mandate to foster maximum employment and stable prices. 

With unemployment still quite high and the outlook for inflation 

subdued, and in the presence of significant downside risks to the 

outlook posed by strains in global financial markets, the FOMC has 

continued to maintain a highly accommodative stance of monetary 

policy. 

The target range for the federal funds rate remains at 0 to 1/4 

percent and the Committee has indicated in its recent statements 

that it anticipates that economic conditions are likely to warrant 

exceptionally low levels of the federal funds rate at least through 

late 2014. 

In addition, the Federal Reserve has been conducting a program, 

announced last September, to lengthen the average maturity of its 

securities holdings by purchasing $400 billion of longer term Treasury securities and selling an equal amount of shorter-term Treasury securities. 

The Committee also continues to reinvest principal received from 

its holdings of agency debt and agency mortgage-backed securities 

in agency MBS and to roll over its maturing Treasury holdings at 

auction. 

These policies have supported the economic recovery by putting 

downward pressure on longer-term interest rates, including mortgage rates and by making broader financial conditions more accommodative. The Committee reviews the size and composition of its 

securities holdings regularly and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a 

context of price stability. 

The economy’s performance over the medium and longer term 

will also depend importantly on the course of fiscal policy. Fiscal 

policymakers confront daunting challenges. As they do so, they 

should keep three objectives in mind. 

First, to promote economic growth and stability the federal budget must be put on a sustainable long-run path. The federal budget 

deficit, which averaged about 9 percent of GDP during the past 

three fiscal years, is likely to narrow in coming years as the economic recovery leads to higher tax revenues and lower income support payments. 

Nevertheless, the CBO projects that if current policies continue 

the budget deficit would be close to 5 percent of GDP in 2017 when 

the economy is expected to be near full employment. 

Moreover, under current policies and reasonable economic assumptions, the CBO projects that the structural budget gap and 

the ratio of federal debt to GDP will trend upward thereafter, in 
9 

large part reflecting rapidly escalating health expenditures and the 

aging of the population. 

This dynamic is clearly unsustainable. At best, rapidly rising levels of debt will lead to reduced rates of capital formation, slower 

economic growth, and increasing foreign indebtedness. 

At worst, they will provoke a fiscal crisis that could have severe 

consequences for the economy. To avoid such outcomes, fiscal policy 

must be placed on a sustainable path that eventually results in a 

stable or declining ratio of federal debt to GDP. 

Even as fiscal policymakers address the urgent issue of fiscal 

sustainability, a second objective should be to avoid unnecessarily 

impeding the current economic recovery. Indeed, a severe tightening of fiscal policy at the beginning of next year that is built into 

current law—the so-called fiscal cliff—would, if allowed to occur, 

pose a significant threat to the recovery. 

Moreover, uncertainty about the resolution of these fiscal issues 

could itself undermine business and household confidence. Fortunately, avoiding the fiscal cliff and achieving long-term fiscal sustainability are fully compatible and mutually reinforcing objectives. 

Preventing a sudden and severe contraction in fiscal policy will 

support the transition back to full employment, which should aid 

long-term fiscal sustainability. At the same time, a credible fiscal 

plan to put the federal budget on a longer-run sustainable path 

could help keep longer-term interest rates low and improve household and business confidence, thereby supporting improved economic performance today. 

A third objective for fiscal policy is to promote a stronger economy in the medium and long term through the careful design of tax 

policies and spending programs. To the fullest extent possible, federal tax and spending policies should increase incentives to work 

and save, encourage investments in workforce skills, stimulate private capital formation, promote research and development, and 

provide necessary public infrastructure. 

Although we cannot expect our economy to grow its way out of 

federal budget imbalances without significant adjustment in fiscal 

policies, a more productive economy will ease the tradeoffs that are 

faced by fiscal policymakers. 

Thank you, Mr. Chairman, I would be glad to take your questions. 

[The prepared statement of Hon. Ben Bernanke appears in the 

Submissions for the Record on page 41.] 

Chairman Casey. Thank you, Chairman Bernanke. 

I will start with the first round of questions, and I will set forth 

a predicate for the question before I ask it, based upon three news 

items, I’ll call them. 

First of all, we know that China announced just today I guess 

that it has cut its benchmark lending rate for the first time in 

nearly four years in order to reverse an economic slowdown. 

Secondly, the European Central Bank hinted at least that it 

would take no further action to aid the faltering European economy. 

And then third, two Federal Reserve Board Governors, as well as 

Vice Chair Janet Yellen, have hinted at additional action by the 

Federal Reserve. 
10 

So based upon those three items, and based upon your testimony, 

the basic question I have for you is: Is the Federal Reserve planning to take any additional actions in the short term to spur economic growth and create jobs? 

Chairman Bernanke. Well, Mr. Chairman, first I think China 

and Europe face rather different economic situations than we do. 

We obviously have to make our judgments based on what is happening here in the United States. 

Looking forward to our meeting in about 10 or 11 days, I think 

the main question we have to address has to do with the likely 

strength of the economy going forward. 

As I discussed in my testimony, the weakness in labor markets 

in the last couple of months may reflect the end of a catch-up period in which employers were offsetting the very sharp declines in 

employment that occurred during and after the Recession. 

If that analysis is correct, then going forward in order to see continued improvement in employment and a lower unemployment 

rate, we will need to see growth at or above the trend rate of 

growth. And so that is the essential decision and the central question that we have to look at: Will there be enough growth going forward to make material progress on the unemployment rate? 

So my colleagues and I are still working on our own assessments. 

Staff are working on their updated forecasts. We will have a new 

round of economic projections by all the participants in the FOMC 

between now and the meeting. And that is I think a key question. 

If we decide that further action is required, then of course we 

also have to decide what action is appropriate, or what communication is appropriate. We have a range of options. Obviously the traditional reduction in the short-term interest rate is no longer feasible, but we do have options that we can consider. 

In looking at those options, we are going to have to make some 

difficult assessments both about how effective they would be, and 

whether there are costs and risks associated with those steps that 

would outweigh the benefits that they might achieve. 

Obviously I cannot directly answer your question; it is too soon 

for me to do that; and we have a committee meeting which will try 

to evaluate these questions. I think the key question we will be facing will be: Will economic growth be sufficient to achieve continued 

progress in the labor market? 

And our mandate for maximum employment says that we should 

be looking to try to achieve continued improvement. 

Chairman Casey. Well thank you. That helps to give us a sense 

of how you are approaching the question. 

I want to ask you about the so-called, ‘‘fiscal cliff,’’ which you 

have spoken to a number of times. A lot of Americans I think have 

a sense of it, but when you line up the matters that we have got 

to confront in literally just a number of months, the question of tax 

cuts, the automatic spending cuts that are put into place by last 

year’s Budget Control Act, the payroll tax cut expiration, Federal 

Unemployment Insurance expires, and a whole host of other challenges. 

Can you assess—and if you can assess it, we would want to hear 

your assessment—the impact on the economy just on one of those 

items? And specifically, if the tax cuts for middle-income folks were 
11 

to expire? Just that particular question, if you can make an assessment of that? 

Chairman Bernanke. Well the potential expiration—I am not 

sure I can break it down to the different components—but the potential expiration of the so-called Bush tax cuts, the 2001–2003 tax 

cuts, is the single biggest item in the fiscal cliff and would have, 

I think if everything else held constant, would have an adverse effect on spending and growth in the economy that would be significant. 

Now in saying that, I am again talking about the size, the fiscal 

impact of that. I am not necessarily saying that the right thing to 

do is to extend those cuts. It could be there are other steps you 

could take that would have a similar impact. But that is the single 

biggest component of the so-called ‘‘cliff.’’ 

Chairman Casey. And in keeping with my orders on time, I am 

going to turn to Vice Chairman Brady. 

Chairman Bernanke. Thank you. 

Vice Chairman Brady. Thank you, Chairman. You mentioned 

the options, a third round of quantitative easing. Would purchases 

in the third round be confined to Treasuries? Or would other debt 

securities be purchased? 

Chairman Bernanke. We have, again, obviously made no decisions. The law permits us to purchase Treasuries and government 

agency securities, and those are the securities that we have purchased in the past and I wouldn’t want to take anything off the 

table at this juncture. 

But I want to emphasize, again, that there’s really in some sense 

two steps here. The first is to determine whether we think that 

growth will be adequate to lead to further improvement in employment. And I think at the same time of course we will be assessing 

the price stability mandate and the outlook for inflation. 

If we determine that further action is at least potentially warranted, then obviously we have a number of different options and 

we would have to consider each of them and the costs and benefits 

associated with them. 

But at this point, I really can’t say that anything is completely 

off the table. 

Vice Chairman Brady. Well I guess my more direct question 

is: Long-term interest rates, other than in the financial crisis, we 

have not seen this level since the 1950s. Do you really think that 

is holding back our economy? 

Chairman Bernanke. Well the question is, again: Could, again, 

if additional stimulus is needed, could the actions the Federal Reserve might take achieve additional financial accommodation? 

Putting aside potential bad side effects, or costs that might be associated with that, I recognize that rates are quite low. So that 

clearly is a consideration. I do think that we do have methods— 

we do have tools that would allow us to get further accommodation 

in the economy and provide some support. 

It is one thing—it is not quite the same thing to say that the 

problem of the U.S. economy is not lack of financial accommodation. It is a different thing to say that, and to say that, even if the 

main problems are coming from elsewhere, that the Federal Reserve might provide some support from using the tools that it has. 
12 

But I do want to say—and I have said this before—that monetary policy is not a panacea. It would be much better to have a 

broad-based policy effort addressing a whole variety of issues. I 

leave the details to Congress who has considered many of these 

issues. 

So I would be much more comfortable if in fact Congress would 

take some of this burden from us and address those issues. 

Vice Chairman Brady. Well I think that is the point I would 

like to make. You—my belief is, I wish you would take a third 

round of quantitative easing off the table. I wish you would look 

the market in the eye and say: The Fed has done all it can, perhaps too much. I wish you would look this President and Congress 

in the eye and say: It is time to do your job. Get your tax policy 

right. Get your financial house in order. Rebalance your regulation 

so that you are encouraging job creation. And mitigate the uncertainty and concern over the President’s new health care law. 

I am not asking you to say that today, but I wish you would. Because back home on Main Street I believe those are the elements 

that are holding this economy back. And until we get that right, 

no actions from the Fed will get this recovery moving in a way I 

think we would all be satisfied with. 

May I ask, very quickly, on Europe. There are a lot of concerns 

about what will happen with Greece as far as exiting the euro. 

What type of contagion will occur in Europe. Earlier you said—or 

last October, you said the tools you believed important were providing liquidity through the currency swaps, ensuring American 

banks are in strong financial condition, and being there to provide 

liquidity to solvent banks. 

Are there any other tools than that that you are considering, 

should that contagion reach us from Europe? 

Chairman Bernanke. No. You have a pretty good list there. We 

did the swaps, as you know. They were very helpful in reducing 

stress in dollar funding markets. They have been coming down 

quite significantly from a peak of about $110 billion down to now 

about $20 billion. So their need seems to be declining. 

I would like to emphasize that on the banking side we have 

worked really hard to try to make sure the banks and the financial 

system would be resilient to shocks coming across the Atlantic, including our stress tests which have shown very strong capital positions and liquidity positions. Our ongoing reviews of exposures of 

banks to Europe. So we are taking steps to try to make sure that 

we are as well prepared as possible in the financial system. 

And then as I said in my remarks, the Federal Reserve retains 

broad-based authority to provide liquidity against collateral in the 

event of intense financial stress. That was retained in Dodd-Frank. 

And in its role as liquidity provider of last resort, the Federal Reserve stands ready to do whatever is necessary to protect our financial system. 

Vice Chairman Brady. Thank you, Chairman. 

Chairman Casey. Thank you, Vice Chairman Brady. Congresswoman Sanchez. 

Representative Sanchez. Thank you, Mr. Chairman. And 

thank you, Mr. Chairman, for being before us today. 
13 

I want to go back to something you just said to my colleague 

from the Senate. You were talking about one of the biggest portions 

of that fiscal cliff would be the expiration of the Bush tax cuts. But, 

you said, I am not advocating that necessarily. There are other 

steps that Congress could do. 

Could you, in your wisdom, tell us what those other steps might 

be? Just articulate them so I sort of have a to-do list, if that’s the 

case. I think I know them, but—— 

Chairman Bernanke. I think I am wise enough not to tell you 

the answer to that question. 

[Laughter.] 

What I am saying is that the concern here in the short term is 

that all of these measures together, if they all occur, will amount 

to a withdrawal of spending and an increase in taxation, depending 

on how you count between 3 and 5 percent of GDP, which would 

have a very significant impact on the near-term recovery—whatever benefit you might see in those programs in the very long term. 

And what I am saying is that in ways that are up to Congress, 

steps should be taken to mitigate that overall impact. And what 

combination of tax reductions and spending increases, that is really 

up to you, but if no action is taken—I mean, what is particularly 

striking here is that this is all preprogrammed. 

Representative Sanchez. Right. 

Chairman Bernanke. If you all go on vacation, it is still going 

to happen. So it is important to be thinking about that and working with your colleagues to see how you might address that concern 

at the appropriate time. 

Representative Sanchez. That leads me into my second question. Because I hear this out a lot in—I hear it on television, I hear 

it among some of my colleagues even, I hear it from people back 

home—that we are all headed towards the Greece situation. 

Now to some people, the Greece situation is: Hey, you spent too 

much, you didn’t—you retired early, there are not enough workers, 

there’s not enough economy going to sustain the people who are living on payments, if you will, mostly from the taxpayers. 

Then there are other people who are saying, you know, the 

Greece situation is: You cut too much spending. And you’re trying 

to collect taxes too fast. And the economy has contracted. And it’s 

almost like a vicious cycle going on. 

So my question to you is, for those people are saying we are 

headed toward the Greece situation, what do you think the Greece 

situation is? And is it really true that we are mirroring in any form 

that? 

Because I see us in a totally different manner. Are we really subject to what’s going on in Greece with the type of real economy that 

we have? 

Chairman Bernanke. No. I think the United States and Greece 

are extremely different economies. Greece is a very small economy. 

The causes of the crisis vary quite a bit from country to country. 

Greece was in fact a country that overspent and overborrowed. And 

that is a major reason why it is currently in such trouble. 

The United States is a large, diverse economy with deep financial 

markets, international reserve currency, independent monetary 

policy, great credibility after 200 years of paying our debts—which 
14 

by the way we should be, is a strength which we should not squander if at all possible. 

That being said, I do not think we are in a Greek situation. And 

the evidence for that is that we are currently paying about 1.5 percent for 10-year money, where Greece cannot borrow at any price 

essentially. 

That being said, I do not think we should be complacent. Obviously we have a situation which is not sustainable, and we do need 

to be thinking very seriously about how to put the fiscal budget on 

a path that will be sustainable in the longer term. 

Representative Sanchez [presiding]. Thank you. And in the interests, because we have so many members, I will yield back my 

time. 

And I will call on Mr. Campbell from California for his five minutes. 

Representative Campbell. Thank you, Ms. Sanchez. 

Chairman Bernanke, you have made it quite clear that so-called 

QE3 is the decision that has not been made and will not be made 

for at least 11 days. 

What I would like to ask is, from my perspective a QE3 would 

affect interest rates potentially, and potentially liquidity, neither of 

which it seems to me are obstacles to growth at the moment, interest rates being historically low and there appears to be plenty of 

liquidity. 

So my question is: Why, in considering a QE3, if the decision 

were made to do it—and I understand you have not made that— 

but in what ways do supporters of QE3 believe it would help the 

current economic situation? 

Chairman Bernanke. So again, putting aside the question of 

whether we need further steps, putting aside the question of the 

adverse side effects that are risks and costs that might be associated with given policies, our analysis is that the quantitative easing programs we did in the past did ease financial conditions. They 

lowered interest rates. They lowered the spreads between private 

rates and government rates. 

So in other words, even given a level of Treasury Security interest rates, it could lower the rate paid by corporations. We have lowered mortgage rates. It has raised stock prices and increased therefore wealth effects for consumers. 

So in general we continue to believe that, while some may think 

that the effects are less powerful than they were for example in 

2009, we continue to believe that potentially, that these sorts of 

measures could still add some additional accommodations, some additional support to the economy. 

But then again, you know, as you point out, there may be some 

diminishing returns, and that would be a consideration we would 

have to look at as we try to analyze what our options are. 

Representative Campbell. Okay. Let me move over to Europe, 

if I can. In your testimony you said that we should monitor the situation and that the Federal Reserve remains prepared to take action. And you outline what some of that action should be. 

What should we as policymakers be monitoring? 

And what action might we be prepared to consider or to take? 
15 

Obviously in Europe we cannot control their fiscal policy, their 

monetary policy, nor their political decisions. If there were to be a 

deterioration, a rapid deterioration of some situation in Europe, be 

it the currency or the banks or whatever, how can we put up a firewall? Or can we? Or what things might we be prepared to do? 

You mentioned you are doing what you can to minimize the impact on the U.S. economy. 

Chairman Bernanke. Well, the Congress and the Administration have not, you know, agreed to any kinds of direct support to 

Europe. The Administration has not, for example, asked for additional IMF funds. 

So I think the main things that Congress could do would be to 

help strengthen our own economy. The more momentum, the 

stronger our economy, the better able we would be to withstand the 

financial spillover from problems in Europe. And so that goes back 

to my earlier points about getting our fiscal situation clarified, taking appropriate steps to help troubled parts of our economy from 

the employment market, to the housing market, to whatever else 

you would be looking at. 

But again, I think my bottom line here is that there is not a 

whole lot that can be done that I can think of to attenuate the 

problems in Europe. We obviously have to monitor very carefully. 

I think the best thing we can do is try to make sure that we are 

strong and prepared here in the United States. 

Representative Campbell. Are the risks to our economy and 

Europe, are they greater today than they were six months ago? 

Chairman Bernanke. Well the risks have waxed and waned. 

You know, this problem has been going on now for more than 

two years. This crisis has been going on for more than two years. 

And there have been periods of greater intensity and less intensity. 

Earlier this year, particularly following the long-term refinancing 

operations conducted by the European Central Bank, as well as the 

debt restructuring of Greece, the situation calmed down fairly notably for awhile. But for a number of reasons, including the Greek 

election which raised questions about whether Greece would in fact 

meet the requirements of its program, and concerns about Spain 

and Italy, the Spanish banking system and so on, the stresses have 

risen pretty significantly in the recent month or two. 

So I am not quite sure whether it is the highest point it has 

been, but it certainly is at a point where it is important for European leaders to take additional effective steps to contain the problem. 

Representative Campbell. Thank you, Mr. Chairman. 

Representative Sanchez. I will recognize Representative 

Cummings from Maryland now for five minutes. 

Representative Cummings. Thank you very much. 

Chairman Bernanke, it is good to see you again. When you appeared before this Committee last October, you testified that in 

most recessions the housing sector is usually, and I quote, ‘‘a big 

part of the recovery process,’’ end quote. 

You testified that many people are underwater, and that their 

loss of equity means that they are poorer, they are less willing to 

spend, and that addressing the housing situation is very, very important. 
16 

In January the Federal Reserve issued a report on current conditions in the United States housing market. The report says this, 

and I quote: 

‘‘Continued weakness in the housing market poses a significant 

barrier to more vigorous economic recovery.’’ 

Chairman Bernanke, I assume you still believe that addressing 

the housing crisis is critical to resolving our economic situation? Is 

that correct? 

Chairman Bernanke. Yes. 

Representative Cummings. And economists and experts across 

the political spectrum believe that one key tool to addressing the 

housing crisis is to target principal reductions for underwater mortgages because they help homeowners and save taxpayers money by 

avoiding default. 

Mr. Chairman, in 2008 you said this to the Independent Community Bankers of America, and I quote: 

‘‘In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means 

of avoiding delinquency and foreclosure.’’ 

And a lot of people have characterized principal reductions as 

helping only homeowners, but can you please explain why in some 

cases they actually could help the taxpayers, too? 

Chairman Bernanke. Well I think we have made some 

progress on this. First of all, the housing market looks to be stabilizing, which if true would be good news. And going forward, it 

would be helpful I think to the recovery. 

There’s been a lot of effort since I gave that speech to try to modify mortgages, to try to reduce foreclosures, and so on. And some 

of that has taken the form of principal reduction. Notably, the 

Fannie and Freddie have decided that some principal reduction, or 

at least they are looking at principal reduction as a tool for reducing foreclosures. And principal reduction is part of the settlement, 

you know, with the large servicers. 

So we are going to get some more evidence on this I think very 

soon. The Board of Governors does not have an official position on 

principal reduction versus other means of modifying mortgages or 

otherwise avoiding foreclosure. 

I think as a practical matter you would want—if there’s a limited 

amount of resources available, you would want to consider whether, say for example reducing payments is more effective in some 

cases than reducing principal owed. 

So I think there are some important questions there. But generally speaking, I think the point that I was trying to make a few 

years ago is that, while we all focus on the help that avoiding unnecessary foreclosures gives to the homeowner, if it is successfully 

done, it also reduces the losses to the lender. It supports the housing market. And that in turn helps the broader economy. 

So to the extent that we can avoid unnecessary foreclosures and 

do so in a cost-efficient way, then there are benefits that are broader than just the help to the individual homeowner. 

Representative Cummings. Now last November William Dudley, the president of the Federal Reserve Bank of New York, testified before the House Oversight Committee and he said this, and 

I quote: 
17 

‘‘We think that you can devise a program for homebuyers that 

have mortgages that are underwater to incent them to continue to 

pay on those mortgages by giving them some program of principal 

reduction. Obviously the devil is in the detail, so you have to have 

good program design, but we are confident that one can design a 

program which would be beneficial net positive to the taxpayer.’’ 

Do you agree with Mr. Dudley, that a targeted principal reduction program could be designed in a way that would be net present 

value positive for taxpayers, investors, and homeowners? 

Chairman Bernanke. Well first, president Dudley was speaking for himself, as I said before—— 

Representative Cummings. I understand that. 

Chairman Bernanke [continuing]. The Board does not have an 

official position on that. 

Where I do agree with him is to say that the devil is in the details. I mean, a lot would depend on what the criteria are for being 

eligible for principal reduction, and how it would be structured. 

For example, a useful approach would be to give principal reduction but to have an equity-sharing arrangement whereby if there 

are future gains those would flow back to the lender. 

So I think it depends very much on the way the principal reduction is structured. No doubt there are some situations where that 

would be the most effective method of averting unnecessary foreclosures, but I do think we should look not only at that, we should 

look at the whole range of tools for averting unnecessary foreclosures. And we should look at other issues like the conversion of 

foreclosed homes to rentals, steps to improve the access to credit 

of mortgage borrowers, and so on, to really address the whole range 

of issues in the housing market. 

Representative Cummings. Thank you very much, Mr. Chairman. 

Chairman Casey [presiding]. Thank you very much. Representative Mulvaney. 

Representative Mulvaney. Thank you. 

Dr. Bernanke, I want to talk about a different topic here today, 

a somewhat esoteric topic that may not be of interest to a lot of 

folks but it is something that caught my attention. 

I want to talk a little bit about the interest rate derivative market. And specifically the market for interest rate swaps. Apparently, if I have got my numbers correctly, the notional value of the 

size of this market has grown from $682 billion in 1987 to over 

$400 trillion today—roughly a sixth size of the world economy. And 

I recognize that is notional value. But it certainly implies a large 

underlying gross market value to this particular market. 

And there was a Federal Reserve of New York report back in 

March called ‘‘An Analysis of OTC Interest Rate Derivative Transactions’’ that essentially said that this market was very difficult to 

measure, very difficult to see, very difficult to value. So that most 

of the transactions occurred over the counter and not in the broader exchanges, and they actually said that the lack of comprehensive 

transaction data has been a barrier to understanding how the OTC 

derivative markets operate. 

And as I was reading this, it struck me that a lot of those words 

could be used to describe what happened with the mortgage-backed 
18 

securities and the collateralized debt obligations’ issues that we 

had back in 2008. 

So I guess my first question is: Should we be concerned about 

this market and its lack of transparency? 

Chairman Bernanke. Well it is probably one of the most important derivatives markets, and we pay a lot of attention to it, as do 

the SEC and the CFTC, which has a lot of the jurisdiction over 

those swaps. 

I think it is important to say, first, on the one hand that those 

numbers that you cite greatly overstate the actual exposures that 

the people involved in the swap are facing. Those are just notional 

values. 

It is also true that interest rate swaps are typically among the 

most straightforward and simple to understand of derivatives. So 

that many of them are vanilla swaps that are pretty easy for regulators and for participants in the market to understand. So in some 

ways it does not pose the risks that the credit default swaps during 

the crisis posed, for example. 

All that being said, you know, I agree with the general thrust, 

which is that we have seen that over-the-counter derivatives can 

be dangerous. And following the spirit of financial reform from this 

Congress, we and our fellow regulators are working to put as big 

a share as possible of swaps on centrally cleared, central 

counterparty type exchanges. And, to increase the transparency so 

that the regulators and the public will have more information. 

So we are working in that direction. I agree with you, it is an 

important—important objective. 

Representative Mulvaney. Does the size of this overall market 

somehow give a false impression of the true demand for debt, and 

thus a false impression of the true interest rates? 

Chairman Bernanke. Well interest rate swaps are basically 

ways in which participants can convert, for example, a fixed interest payment into an interest payment which is floating and depends on some indicator. 

So it is really a way of just customizing the flow of interest received, or interest paid. You can have enormous amounts of interest rate swaps based on a relatively modest amount of underlying 

debt. 

So I don’t think it overstates the amount of actual debt in the 

market. It is really a hedging tool for market participants who 

want to customize the flow of their payments and receipts and interest rates. 

Representative Mulvaney. Does the size of the market, and 

the risks that some of the larger financial institutions—because I 

think that mostly just large financial institutions play in this market—and given the losses that they could incur, given rapid swings 

in interest rates, does that somehow impair your ability to perform 

your job? 

Does it impair your ability to exercise independence in monetary 

policy? 

Chairman Bernanke. No, I don’t think it does because the underlying instruments, credit instruments, are still the same, which 

is just a way of sharing the risk, or the pattern of interest receipts 

and payments. 
19 

I should have said that to the extent that interest rate swaps are 

not traded on central counterparties, we are also working when, if 

they’re traded over the counter, the regulators are also working to 

make sure that (a) there is sufficient margin posted on both sides 

of the swap so that if there are rapid changes in the value of the 

swaps that both parties will be protected; and also, in fact this 

afternoon we are going to have a meeting at the—open meeting at 

the Federal Reserve to discuss Basel III, and our discussion will include capital requirements for the market book, including derivatives. 

So in other words, even over-the-counter financial institutions 

are going to be protected both by the capital that they hold and by 

the margin that they place when they transact with counterparties. 

So it is important for us to take steps to make sure that individual banks are not exposed unduly to large swings in interest 

rates, for example. 

The counter example is AIG, which was basically taking a huge 

one-way bet. And when it lost the bet, it lost enormous amounts 

of money which nearly brought down the company. 

So we want to avoid a situation like that. And that means as 

much central counterparty trading as possible, and adequate capital and margin for over-the-counter transactions. 

Representative Mulvaney. Thank you, Mr. Chairman. 

Chairman Casey. Thank you very much. Senator Klobuchar. 

Senator Klobuchar. Thank you, very much. 

Thank you, Mr. Chairman, for being here. I continue to work 

with a bipartisan group of Senators—there’s something like 45 of 

us, Democrats, Republicans—trying to come up with a comprehensive solution for the debt. We have made some headway, and it 

would be a mix of spending cuts and revenue to get us to that $4 

trillion figure in 10 years in debt reduction. 

You made it clear that you believe we need to do something significant to address these fiscal challenges. Do think a balanced approach would be about the best way to do it with a mix of the 

spending cuts and the revenue? 

Chairman Bernanke. Well first of all, I congratulate you on 

these efforts. I am glad to see people are working hard on this. 

It is really not my place to advise Congress on the particular mix 

of spending and tax changes, so I hope you will understand that. 

But I am glad to see that there is a bipartisan effort involved in 

trying to address this important problem. 

Senator Klobuchar. But I remember the last time we talked, 

you did talk—at the hearing, you talked about how if we failed to 

act again and went to the brink, as happened last summer with the 

debt ceiling, that that clearly created some problems with our economy and the fiscal situation in this country. 

Chairman Bernanke. The debt ceiling is a somewhat separate 

issue. It is a strange thing that Congress can approve say to spend 

$5 and to tax $3, and not approve the $2 issuance of debt, which 

is implied by those two previous decisions. No other country that 

I know of has anything like the debt limit rule that we have. 

And the brinkmanship last summer over the debt limit had very 

significant adverse effects for financial markets and for our econ-
20 

omy. For example, it really knocked down consumer confidence 

quite noticeably. 

So that is a somewhat separate issue. But I urge Congress to 

come to agreement on that well in advance so as not to push us 

to the 12th hour. 

But again, I think that trying to put our fiscal situation on a sustainable basis is perhaps one of the most important things that 

Congress can be working on. 

Senator Klobuchar. You know, when you look at the Fed’s last 

action since late 2008, short-term interest rates have been held at 

zero. The Fed has pushed over $2 trillion in the U.S. Treasury, and 

mortgage securities, in an effort to support our economy. 

Do the past actions inform you as you go forward in the current 

economic situation as you make your decisions? 

Chairman Bernanke. Yes. Obviously when we began these 

nonstandard actions, we did not have the benefit of very much experience except looking say at Japan. But we now have more actual 

data, more experience. We’ve been able to observe the effects of 

these actions on financial market prices. 

We have some model-based analysis of the effects on the broader 

economy. So there’s still a lot of uncertainty about the effectiveness 

of these tools, and the channels through which they work. And it 

is probably also the case that monetary policy is less effective than 

it would normally be because of various constraints on lending and 

so on. 

But all that said, having had that experience has certainly made 

us better informed and better prepared to use these tools if necessary. 

Senator Klobuchar. Okay. My State is doing better than a lot 

of the states. Our unemployment rate is at 5.6 percent, but there 

are still people hurting. And one of the things that I have noticed 

when you look at the numbers in past recoveries, we have seen a 

more direct correlation nationally between economic growth and 

hiring. 

We do not seem to have that correlation today. What has 

changed? And do you think we could be doing more to address that 

issue? 

Chairman Bernanke. Well I talked about this a bit in my testimony. In fact, the pace of improvement in the labor market from 

last summer through say March, was actually surprisingly strong, 

given the relatively tepid rate of growth in overall economic activity. And it was a puzzle that we were trying to understand. 

I gave a speech about this in March. And one hypothesis is that 

there was a burst of extra hiring that reflected the reversal of what 

might have been excessive layoffs during the recession period, 

where firms felt they had actually laid off too many workers—— 

Senator Klobuchar. This is the catch-up you were referring to? 

Chairman Bernanke. The catching up to that. If that is true, 

which we do not know for sure because there are a lot of other 

things going on, but if that is true then the implication is that if 

growth stays near the potential rate of growth, say 2 to 21⁄2 percent, that the improvement in the unemployment rate going forward might be quite limited. 
21 

And so that is, again, as I said, a question that we really have 

to think about. 

Senator Klobuchar. Thank you. 

Chairman Casey. Senator DeMint. 

Senator DeMint. Thank you. 

Thank you, Mr. Chairman, for being here. My experience in business and politics tells me that most of the time when we’re trying 

to solve problems we are actually treating symptoms. And I am 

worried about that with our political policy, as well as monetary 

policy. 

It is pretty clear our current tax rates did not cause the deep recession. As you know, they were implemented during a downturn 

in the early 1990s. We had six years of growth. 

The problem clearly came from loose credit policies that resulted 

in subprime mortgages and toxic securities. And we have not really 

addressed that, except it appears that we overaddressed it from 

talking to a lot of businesses, home builders, realtors; that we have 

constricted credit to such a degree that local banks do not have the 

flexibility to deal with their local economies because the Federal 

Government and various agencies are telling them what has to be 

in their portfolio. 

So I feel like maybe the solution is much simpler. Maybe not 

simple, but in effect we are not addressing that problem that would 

allow the flexibility. You know we cannot deal with the overbuilding of houses. It is going to take years to do that. 

But I don’t think we have addressed the true cause, or at least 

a big part of the cause. Instead, we have tried unprecedented bank 

bailouts, unprecedented government spending, unprecedented federal monetary activism, and it is not working. 

And so I am concerned about that. And the thing I am really concerned about now is, since 2008 the national debt has increased 

about 50 percent, but the interest paid on that debt has increased 

about 2 percent. And I think some of the things you are doing in 

the Federal Reserve is giving us a false sense of security. 

Last year I think you bought over 75 percent of the debt that we 

created, which masks the real problem and I think probably give 

us a debt interest rate that is much lower than it would be. 

And part of my concern now is, as my colleague just said, that 

on one side you appear by these huge derivative markets and other 

things that are going on to have to keep our interest rates low, and 

on the other side if you don’t keep Treasury yields low banks are 

going to park the free money we’re giving them in Treasuries. 

It seems you are caught in a Catch 22 now where you have to 

work both sides of this to keep interest rates abnormally low and 

you have to continue to buy Treasuries, or we will be paying so 

much on our national debt that the fiscal problems we are looking 

at will complicate overnight. 

So we are on one side doing things that don’t appear to address 

the true root causes of our problem. We seem to now be in a quagmire that we can’t get out of. 

Now I am sure you have a totally different take on that, but I 

think you would have to agree that the activism has been unprecedented and reason to at least cause some concern? 
22 

Chairman Bernanke. Well of course there’s been a whole range 

of approaches and responses to this crisis, which of course was a 

terrible crisis and required a strong response. 

I guess I would comment on your point about interest rates and 

the federal debt. The reason we keep interest rates low is not to 

accommodate Congressional fiscal policy. The reason we keep interest rates low is because we think it is going to help the economy 

recover just a bit faster and keep inflation near our 2 percent target. Those are our objectives for low interest rates. 

But I would question whether or not low interest rates are in 

some way enabling fiscal deficits. The deficit over the last three 

years has been over a trillion dollars a year, as you know, about 

9 percent of GDP. 

If we were to raise interest rates by a full percentage point, and 

ignoring the fact that most debt is of longer duration and would not 

reprice—that would still only raise the annual deficit by something 

a little over a hundred billion dollars. 

Senator DeMint. Which is a trillion dollars over ten years. I 

mean, that is real money. 

Chairman Bernanke. No. A trillion dollars a year is what I am 

saying is what the current deficit is. 

Senator DeMint. Right. But is the interest cost on that, if it would be $100 billion a year, we’re talking $1 trillion over 10 years, 

we are talking real money. 

Chairman Bernanke. A trillion there, a trillion here. 

[Laughter.] 

Yes, sir. No, I agree with that. But what I am saying is that the 

situation is—the deficits are so large, particularly going out over 

the next few years, irrespective of the level of interest rates, that 

I would think that Congress would have plenty of motivation to try 

to address that; and that, whether or not the interest rates are currently 11⁄2 percent for 10 years, or 21⁄2 percent, just does not make 

that much difference. 

Senator DeMint. I want to respect the Chairman’s time, but 

just one other point. My concern now is we are equating pro-growth 

economic policies with more government spending. And our President is talking about that to the Europeans. Austerity is bad? And 

on the one hand you are telling us this debt is creating a potential 

huge crisis, yet you’re telling us we need to keep spending with 

more debt. 

What is the real signal here? 

Chairman Bernanke. Well first of all, it is not necessarily more 

spending. Appropriate tax relief would also help in the same way. 

But I have always said, and I said in my remarks, and I have said 

this a number of times, that you do not want to just do short-run 

stuff and ignore the long-run. You don’t want to just do long-run 

stuff and ignore the short-run. You need a balanced program, I 

would say a ‘‘do no harm’’ policy is what I am looking for here that 

at least avoids derailing the recovery in the short term, but combines that with a strong and credible plan for reducing the deficit 

over the medium term. 

I think that is the best policy. It may be very difficult to achieve, 

but that—in principle, that would be the best way to go. 

Senator DeMint. Thank you, Mr. Chairman. 
23 

Chairman Casey. So far we have got a bipartisan commitment 

to keeping time. Senator Sanders. 

Senator Sanders. Thanks very much, Mr. Chairman. 

And, Mr. Bernanke, thank you very much for being with us. I am 

going to try to be as brief as I can. I think I have three questions 

which I would appreciate your answering. 

Number one, the first one deals with conflicts of interest at the 

Fed. As you know, Jamie Diamon is the CEO and Chairman of J.P. 

Morgan Chase, which is the largest financial institution in this 

country. During the Fed bailout, if you like, when $16 trillion in low interest loans over a period of time were given out to every financial institution in this country, J.P. Morgan Chase received over $300 billion of those loans. 

The American people, I believe, perceive a conflict of interest 

when you have, among others, the head of the largest financial institution in America sitting on the New York Fed, which is presumably supposed to be regulating the Fed—regulating these financial 

institutions. 

I think many people, including myself, see this as a situation 

where the fox is guarding the henhouse, and that we need real reform in the Fed to make sure that it is representing the middle 

class and small businesses of this country, rather than just Wall 

Street and the big-money interests. 

Would you be supportive of legislation that I have introduced 

which says that representatives of financial institutions—not just 

Mr. Diamon but others—get off of the Fed and they be replaced by 

folks from the general public? 

Chairman Bernanke. Well you raised—Senator, you raised an 

important point, which is that this is not something the Federal 

Reserve created. 

Senator Sanders. Right. 

Chairman Bernanke. This is in the statute. 

Senator Sanders. Yes. 

Chairman Bernanke. Congress, in the Federal Reserve Act, 

said this is the governance of the Federal Reserve. And more specifically, that bankers would be on the board and—— 

Senator Sanders. Six out of nine. 

Chairman Bernanke. Sorry? 

Senator Sanders. Six out of nine in the regional banks are from 

the banking industry. 

Chairman Bernanke. That’s correct. And that is in the law. 

Senator Sanders. Right. 

Chairman Bernanke. And what we have done is try to make 

something useful out of that. What we have done is, first of all, we 

have taken a lot of actions to negate conflict of interest. And under 

Dodd-Frank, the GAO did a comprehensive study, as you know, of 

our governance and did point out some appearances of conflict—— 

Senator Sanders. I know. I wrote that provision. I am familiar 

with it. 

Chairman Bernanke. Yes. And I congratulate you. 

But it also found that there were not ‘‘actual’’ conflicts of interest. 

Senator Sanders. Right. 
24 

Chairman Bernanke. Because there is a firewall so that the 

bankers do not have any information, or ability to influence supervisory decisions. 

I will answer your question, though. The answer to your question 

is that Congress set this up. We have tried—I think we have made 

it into something useful and valuable. We do get information from 

it. But if Congress wants to change it, you know, of course we will 

work with you to find alternatives. 

Senator Sanders. Okay. Thank you. And I think that is something—you are quite right. This is something the Congress established a long time ago. I think it is time to change it. 

My second question is: In America today we have the most unequal distribution of wealth and income of any major country on 

earth, worse than at any time in our country since before the Great 

Depression. 

You’ve got 400 individuals owning more wealth than the bottom 

150 million Americans. You’ve got the top 1 percent owning 40 percent of the wealth of America. While, incredibly enough, the bottom 

60 percent own only 2 percent of the wealth in America. 

The last report that I have seen in terms of income, not wealth, 

suggests that in 2010 93 percent of all new income from the previous year went to the top 1 percent. 

Now my question is, we can talk about economic growth all you 

want, but to the average person it doesn’t mean a damn thing if 

all of that new income is going to the top 1 percent. 

Do you believe that we can see an expanding middle class if we 

continue to have that kind of grossly inequitable distribution of 

wealth and income? 

Chairman Bernanke. Well I think it is not so much a question 

of bringing down the top 1 percent as it is bringing up the lower 

99 percent. The question is: How can you strengthen the middle 

class? How can you make middle class incomes higher and more secure? 

This has been, as you know, a trend that has been going on for 

35 years and it is related to a lot of factors, including globalization, 

the technical change which has made a high school education simply less valuable. 

I would be very much in favor of measures to strengthen the 

middle class and to help the average American do better, focusing 

on approaches like education and so on would be very constructive. 

Senator Sanders. Last question. 

Chairman Bernanke. Yes. 

Senator Sanders. You have six of the largest financial institutions in this country, the large Wall Street banks, that have together assets equivalent to two-thirds of the GDP of the United 

States of America, over $9 trillion. 

You have some folks on the Regional Feds, and I, and some others, beginning to talk about the need to break up these huge financial institutions which have so much economic and political power. 

The top six banks write two-thirds of the credit cards in this country, and half of the mortgages. 

My suspicion is, if Teddy Roosevelt were here, a good Republican, 

he would be talking about breaking up these financial institutions. 
25 

How do you feel about the need to finally break up these large 

financial institutions that have so much economic and political 

power? 

Chairman Bernanke. Well I first commented, a lot of these 

people saying they want to break up the banks are not very specific. Does that mean making them a little smaller? Does it mean 

making everything community banks? 

I really would like to see a plan that clarifies what is really 

meant by that. The Dodd-Frank Act put forward a strategy for ending too-big-to-fail. I think it is incredibly important to end too-bigto-fail. 

That strategy involves taking away the advantages of size. It 

means that banks will be allowed to fail, but through a safe method that will avoid the effects on the broader financial markets 

through the orderly liquidation authority that Dodd-Frank created 

for the FDIC. 

It means that large banks will pay—will have higher capital requirements, tougher supervision, will be subject to a whole set of 

rules that smaller banks will not face. I will guess that if the size 

of banks is basically motivated by a too-big-to-fail motivation, as 

we take that away the market forces themselves will make it attractive for banks to downsize, rationalize, and so on. 

I would add an additional tool that we have from the DoddFrank is the so-called ‘‘living wills’’ which require banks to give us 

information about their very complex structures. 

One approach would be to ask banks, for the purposes of being 

able to be brought into receivership if necessary, is to simplify their 

structures to avoid these very complex interconnected types of situations that I think are as much a problem as sheer size. 

Senator Sanders. Okay. Thank you very much. 

Chairman Casey. Senator Coats. 

Senator Coats. Thank you, Mr. Chairman. 

And thank you, Mr. Chairman. On page 4 of your statement you 

talk about inflation. You say with regard to inflation: ‘‘Longer-term 

inflation expectations have, indeed, been quite well anchored’’, ‘‘expectations among investors have changed little, on net, since last 

fall and are lower than a year ago.’’ ‘‘ . . . substantial resource slack 

in U.S. labor and product markets should continue to restrain inflationary pressures.’’ 

That is good news. That is good news for all of us. Let me ask 

you a question about the reverse of that, and that is: deflation. 

We have gotten some bad employment numbers not only for May 

but the revision for April. We have bad news out of Asia. It appears that the Australian manufacturing is in recession. India has 

posted its slowest growth in nine years. China, many say, is on the 

verge of a manufacturing downturn. 

A lot of people are saying that we are at stall-speed here in the 

United States. The question is: What is the risk of spending too 

much time worrying about inflation and ending up in a potentially 

deflationary new recession, perhaps prompted by a shock from Europe if they can’t pull it together? 

What are your concerns about that? What is the Fed thinking 

about that? Is that something we should worry about? Is that 
26 

something you are worrying about? What kind of guidance can you 

give us on that? 

Chairman Bernanke. Well when we set our definition of price 

stability as 2 percent inflation, we meant that to operate in both 

directions. We do not want inflation above that, but we also do not 

want inflation well below that. We obviously want to avoid deflation. 

And it is one of the principal motivations for the so-called QE2 

we did in November of 2010 to avoid deflationary pressures. And 

we were in fact successful and brought inflation back to—back to 

target. 

Now part of your question was about general slow-down in the 

global economy. And there are some signs certainly in Europe. 

China cut interest rates today. Some of the emerging markets have 

seen some slowdown. So there’s certainly some signs of global slowdown and we are trying to assess how important those are, and 

what implications they have for the United States. 

I would say, though, at this juncture that with respect to deflation specifically that we think deflation is at this point probably a 

pretty low probability risk. And at the moment, inflation seems to 

be pretty stable, close to 2 percent. We haven’t seen much indication of declining inflation, particularly when you look at the—either the noncommodity prices, or look at expectations. 

So that particular concern right now is not I think very much in 

our forefront of our concerns. 

Senator Coats. What would a shock to the system, a war in the 

Middle East, euro coming apart, what would that do to that analysis of what you just gave? 

Chairman Bernanke. I think it depends on what the shock is 

and how it ramifies. A shock in the Middle East presumably would 

cause oil prices to go up a lot. That would tend to be inflationary. 

But it would also probably slow the economy further because it 

would be like a tax increase on consumers who would have to pay 

more for gas and therefore less for other things. 

The euro situation depends a lot on the situation, which we hope 

will not occur, in which there is a big escalation of financial stress. 

It would depend a lot on exactly how that happened. If Greece for 

example were to leave the Eurozone but the stresses were contained there, then the effects would likely be fairly moderate. 

If the financial distresses were to spread more broadly, then that 

would create a lot of volatility in our own financial markets and 

would put stress on our financial institutions, would probably reduce lending, and would at a minimum tend to slow the economy. 

But again, I don’t think deflation is the main concern here. I 

think the main concern is promoting adequate growth to continue 

to bring down unemployment over time. 

Senator Coats. Given the kind of fragile economic state that we 

are in and the situation unfolding in Europe, do you sleep well at 

night? 

Chairman Bernanke. Do I? 

Senator Coats. Do you sleep well at night? 

Chairman Bernanke. I generally sleep pretty well, yes. But I 

have a lot to do during the day and I need to be well rested. 

[Laughter.] 
27 

Senator Coats. Thank you, Mr. Chairman. 

Thank you. 

Chairman Casey. Thank you. Representative Maloney. 

Representative Maloney. Thank you, Mr. Chairman. 

And welcome, Mr. Bernanke. I would like to respectfully speak 

in opposition to the point of view that has been put forward by my 

colleagues on the other side of the aisle in strong opposition to any 

QE3. 

I believe that the Fed should use any tool in your arsenal, whatever it is, to provide support to our fragile economy. And we need 

to ensure against any downward turns that would hurt housing, 

employment, and all the other areas in our economy. 

I think it is particularly important, coming up on your June 19th 

meeting, that you act forcefully to help our economy, given the fact 

that China has cut its benchmark lending rate. And already, in response to that, the price of gold has gone up; the dollar fallen. 

I would like to hear your comments on China. Will China be buying our Treasury Notes now with this economic downturn in what 

appears to be in their economy, and combined with the news from 

the past month that the Eurozone debt and banking crisis seems 

to have deteriorated further in Europe? So could you comment further? You have, in many ways, but even further on China specifically and the impact China will have in the overall, really, our 

economy? They have been a partner in our financial recovery, and 

your comments on China? 

Chairman Bernanke. Well, China has slowed somewhat. So far 

the slowdown is pretty moderate. They still have rates of growth 

that we would love to have here. 

Part of the slowdown is policy-induced, intentional. In particular, 

China took a number of actions to try to avoid what looked to be 

a building bubble in real estate prices. So they took a number of 

actions to mitigate that. That tended to slow activity. 

And they have in general tried to slow growth both to achieve a 

more sustainable pace of growth, and also as a part of their process 

for trying to switch from an export-led economy to one that has a 

greater emphasis on domestic demand. 

So there has been some slowing there. We watch that very carefully. But so far I don’t think the change in Chinese prospects on 

net are enough to be concerning for the United States, particularly 

since there are some offsetting factors—notably, when China slows, 

that tends to bring down oil prices, and that is actually a positive 

for the U.S. economy. 

I think the greater concerns for us right now are still coming 

from Europe. Even as the situation is still being managed, we are 

seeing of course, as you can see every day, the volatility in large 

movements in stock prices and other asset prices, and the uncertainty that that generates. 

So that is a concern. 

Representative Maloney. I would also like to ask you a question about the so-called ‘‘fiscal cliff’’ that we confront next year if 

current laws governing taxes and spending are maintained and the 

Bush tax cuts expire. Also, the payroll tax cut expires. The Federal 

Unemployment Insurance expires. And the automatic spending 

cuts mandated by the Budget Control Act would take effect. 
28 

CBO tells us that this will cause the economy to fall into a recession. It also tells us that if we continue all current policies, we can 

avoid a recession but that our long-term budget situation will continue to deteriorate. Certainly neither of these outcomes are satisfactory. 

My question is: What would happen if we failed to achieve a 

budget agreement in the lame duck session and all the fiscal cliff 

priorities kicked in? 

Chairman Bernanke. Well I agree very much with the CBO’s 

general analysis there. If no action were taken and the fiscal cliff 

were to kick in in its full size, I think it would be very likely that 

the economy would begin to contract, or possibly go even into a recession, and that unemployment would begin to rise. 

So that is obviously something we want to avoid if at all possible. 

At the same time, I am not advocating undoing all of these measures and simply ignoring the distant future. I mean, I think as I 

have said before, what we need is a combination of sensible policies 

that allow the recovery to continue over the next year or two, with 

a long-term credible plan for putting our budget on a sustainable 

path. 

Representative Maloney. Thank you. My time has expired. 

Chairman Casey. Thank you. Representative Burgess. 

Dr. Burgess. Thank you, Mr. Chairman. 

Dr. Bernanke, welcome to our Committee again. I just want to 

pick up, Senator DeMint used the word ‘‘quagmire,’’ Senator Coats 

used the term ‘‘stall-speed.’’ And I’ve got to admit, I am concerned 

about some of these same things. 

The Vice Chair of the Fed yesterday at the Boston Economic 

Club described adverse shocks that could push the economy into 

territory where a self-reinforcing downward spiral of economic 

weakness would be difficult to arrest. 

I am not an economist, but that sounds bad. Is that right? 

Chairman Bernanke. The concern she is expressing is that if 

growth is not sufficiently strong, that it would not take too much 

to put us back into a—— 

Dr. Burgess. That’s correct. 

Chairman Bernanke [continuing]. Into either a recession or at 

least a significant slowdown. 

Dr. Burgess. So I won’t admit to having trouble sleeping every 

night, but what does bother me at night is Lehman Brothers. And 

that is, when I wake up at three o’clock in the morning, that is 

what I am worried about. 

Now I do not know what the next Lehman Brothers will look 

like. I do not even know whether it would be in this country, or 

perhaps be in Europe, but I think she summed it up pretty well. 

And this was reported on the CNBC Squawkbox this morning. And 

I must admit, when they played that clip it really got my attention 

because this was one of the things that has bothered me since September of 2008. 

I see a lot of parallels as we cruise into this summer season with 

the summer of 2008. Gas prices have moderated, so perhaps you 

can move that off the table a little bit, but similar situations. Presidential election year coming up, and the economy still in tough 

shape and has not recovered. 
29 

And we see all this stuff happening in Europe. So you said on 

page 3 of your testimony down right at the bottom of the page, you 

said you’re ‘‘prepared to take action as needed’’. Can you outline for 

us very briefly maybe what the top three steps are of that ‘‘action 

as needed’’ item that you have there? 

Chairman Bernanke. Sure. First of all, we are already taking 

some actions, important actions. Notably, that we are working to 

ensure that banks have adequate capital and liquidity. And as I 

noted, banks are now much better capitalized than they were prior 

to Lehman, which is helpful. 

Dr. Burgess. Can I ask you a question about that? 

Chairman Bernanke. Certainly. 

Dr. Burgess. You talk about ‘‘our banks’’—— 

Chairman Bernanke. Our banks. 

Dr. Burgess. Our domestic banks. 

Chairman Bernanke. Yes. 

Dr. Burgess. You really cannot control what is happening in 

banks in Europe. Is that correct? 

Chairman Bernanke. I cannot, no. 

Dr. Burgess. And we cannot do a stress test. Timothy Geithner 

can’t run over there and do a stress test. 

But if we are asked to help with the situation in Europe, what 

assurance do you have, or can you give us, or can you tell us that 

we can give the American people, that we are doing that due diligence? Or is that help just not available? Is that one of the things 

that’s just not on your—within your realm of being able to help? 

Chairman Bernanke. Well I think the U.S. Government’s position has been, reasonably, that Europe is a rich region, and that 

they have the resources necessary to achieve stability. 

I think the main problems over there are political, rather than 

economic. There’s a lot of different—17 countries are involved, and 

a lot of different interests. So, you know, I’m not sure that there’s 

much that the United States can do other than be supportive and 

try to provide whatever advice and, you know, verbal help that we 

can do, but—— 

Dr. Burgess. We can send them a get-well card. 

Chairman Bernanke. Send them a get-well card. What the 

Federal Reserve can do is try to protect our own country, and we 

are doing that by strengthening our financial system by making 

sure—or at least by monitoring on a regular basis the exposures 

that our financial institutions have to Europe, both direct and indirect, and how they are hedged. 

We have done the swaps, which was I think a useful thing that 

we did to help stabilize the money markets, the bank funding markets over there. 

I think the main thing that we have not done yet, but could do 

if financial conditions got sufficiently severe, would be to use our 

authority through the discount window, or through our 13.3 authority, to lend to financial institutions against collateral to make 

sure that lack of liquidity was not a reason that they would collapse or at least stop lending. 

So I think that’s the main tool that we obviously have in reserves 

that we could use, and we will use if financial conditions call for 

it. 
30 

Dr. Burgess. Let me ask you this. Are there any U.S. banks 

whose capital could be seriously jeopardized by what’s happening 

in Europe that then could push a Lehman-type scenario to the forefront? 

Chairman Bernanke. Well as I said, we’ve been monitoring the 

direct exposures. And for the most part, our banks are far less exposed to European sovereign debt and the European financial institution debt than are the European banks. Which is why there’s 

such a difficult interaction between the sovereign debt problems 

and the banking problems in Europe. 

That being said, if there’s widespread contagion, hard to predict, 

operating through financial markets, operating through the potential problems of a large European institution, whatever that might 

be, then we can’t really foresee or guarantee that there might not 

be serious stresses on some U.S. financial institutions. In which 

case, the Federal Reserve with the experience that we had in 2008, 

is certainly going to do what’s necessary to try to mitigate that 

problem. 

But I don’t mean to be represented as saying that there is no 

problem. There is a risk. And all we can do is prepare for it as best 

we can. 

Dr. Burgess. Thank you, Mr. Chairman. I will yield back. 

Chairman Casey. Representative Hinchey. 

Representative Hinchey. Well thank you very much, Mr. 

Chairman. 

Dr. Bernanke, thank you very much for everything that you have 

done, and for all the things that you are engaged in, and for also 

being with us here today to talk about these issues. 

I think that we have come a long way, considering the financial 

meltdown that occurred back in 2007, but we have still got a long 

way to go. 

I think there are still some things that Congress must do to ensure we do not go down the same paths of our European counterparts. And I think that that is an interesting set of circumstances 

there. 

Since the end of the Recession, our economy has steadily improved. We are still working hard on that. We have created 4 million private-sector jobs, and unemployment has steadily decreased 

to 8.2 percent now. 

President Obama I think deserves enormous credit for turning 

the economy around. If it had not been for his action and those of 

the Democratic majority, I have no doubt our country would have 

fallen into a deeper economic depression. 

So we obviously have a long way to go, but the President is on 

the right path. The Fed’s aggressive action and monetary policies 

that have stimulated the economy have also been instrumental to 

getting our economy back on track. 

Europe, on the other hand, has been a total disaster. Europe has 

clearly proven that austerity was the wrong policy to pursue during 

a recession. If you look at the situation that they’re dealing with 

there, Greece and Spain, 20 and 24 percent respectively unemployment in those two countries. Britain has shown zero economic 

growth over the course of the past year. 
31 

So naturally I am surprised that with such strikingly different 

recoveries occurring between the United States and Europe, that so 

many United States lawmakers will continue to support the same 

types of policies that are utilized by Europe. 

What do you think are the key lessons that we should learn from 

Europe’s failed monetary policies, particularly austerity? What do 

you think the United States is most at risk, in the context of that 

situation, of repeating? 

Chairman Bernanke. Well I think in fairness you have to 

agree that there are structural differences. You have 17 different 

countries on a single monetary policy, essentially a fixed exchange 

rate. 

There are in fact some very serious fiscal situations. Greece for 

example probably has no alternative but to try to cut its deficits. 

So there are some important differences. 

I think, though, that the main message I would take is the one 

I have been trying to sell here for the last couple of hours, which 

is that a sensible fiscal policy is one that takes into account both 

the short-run needs of the economy, not to lose fiscal support 

sharply and rapidly during a period of fragile recovery; while at the 

same time combining that with a medium-term plan, we do have 

to address these fiscal sustainability issues. 

So I don’t think it is inconsistent to do both of those things. And 

that is where I would differ with at least a few of the countries in 

Europe. But again, the situation is much more complicated. The 

countries that have capacity to expand their budgets, for example, 

like Germany, have much less need than the countries like Greece 

which have very little capacity to spend more or borrow more. 

Representative Hinchey. Well Germany is another example. 

But the other things are negative examples that we have to deal 

with, and we have to be acting I think in a very positive way. 

Also, after Congress and President Obama acted in 2009 and 

2010 to turn around our economy, since then the House has basically done nothing significant to revive our economy. As a result, 

the Fed has really led the efforts to help get our economy back on 

track. 

However, we have nearly exhausted all the Fed’s tools to nurture 

our economy back to health. Congress needs to step up to the plate. 

Clearly our actions back in 2009 and 2010 turned things around. 

But more needs to be done. 

We cannot allow the European austerity model and allow growth 

to just continue to fail, and have it fail on us. The American Jobs 

Act is a prime example, unfortunately, of stalled legislation in the 

House that would inject nearly $450 billion worth of tax cuts, jobs, 

business opportunities, all of those things, into our economy. 

I think it has been a major mistake to sit on this legislation 

when it could be helping so many people. So do you think Congress 

has carried its fair share of the burden with regards to stimulating 

economic activity? And do you think legislation such as the American Jobs Act is important to help the Fed stimulate job growth 

and economic activity? 

Chairman Bernanke. Well I certainly agree, as I have said before, that monetary policy cannot carry this burden by itself. We 

need good policies over a range of areas from Congress. 
32 

Now you know I am not going to endorse a specific program. But 

I hope that Congress can work together to address their problems 

across the economy in a number of different sectors, and I hope 

that, you know, Congress will work collaboratively to try to address 

some of those problems. 

Representative Hinchey. Thank you. 

Chairman Casey. Representative Duffy. 

Representative Duffy. Thank you, Mr. Chairman. 

And good morning, Mr. Chairman. I want to talk to you about 

too-big-to-fail. We had all heard two years ago when Dodd-Frank 

passed that this was going to be our silver bullet to address this 

issue of too-big-to-fail, and to make sure that the taxpayers 

wouldn’t hold the bag should one of these large institutions fail, to 

make sure that it doesn’t roil our whole economy. 

And I guess I would argue that Dodd-Frank has not fully and 

completely addressed the issue of too-big-to-fail. And it still exists. 

I think it has come up more recently as we look at what is happening in Europe. But here at home it has come up with regard 

to J.P. Morgan, and they experienced a $2 billion loss that might 

go up to $4 or $5 billion. 

And some have argued that the Volcker Rule would have addressed—had it been implemented, and it is going to come shortly—had it been implemented, it would have addressed this massive 

loss from J.P. Morgan. 

One of my concerns, though, is as you look at the Volcker Rule 

and you look at these trades, it becomes very difficult to determine 

what is prop trading and what is macro hedging. 

So as you sit in a classroom, it might be easy to work through 

the Volcker Rule, but in practice isn’t it very difficult to use the 

Volcker Rule to stop the issue of J.P. Morgan? 

Chairman Bernanke. Well let me just say, in the specific case 

we are still investigating it, and I don’t want to talk very much 

about the specific case. But in general, yes, differentiating proprietary trading from legitimate hedging activities and marketmaking 

activities is inherently very difficult, and regulators are looking at 

19,000 comment letters and trying to figure out how to do that as 

best as possible. 

The one comment I would make, which my colleague, Governor 

Tarullo, made yesterday is the one requirement of the Volcker Rule 

is that there be very extensive documentation and explanation to 

the supervisors in advance for complex hedges, as well as auditing 

and appropriate incentives for the executives involved in the activities of the traders. 

So at a minimum, if the Volcker Rule had been in place we 

would have known a lot more about this whole situation. And that 

might have been helpful. 

Representative Duffy. And the classroom theory, I agree with. 

I am not opposed to it. I am concerned about the implementation. 

But isn’t really the silver lining here that there was no taxpayer 

loss here? J.P. Morgan had the appropriate capital requirements to 

cover the loss, which is what you guys are talking about later on 

today when you’re going to talk about Basel III. Isn’t the real issue 

here is not thousands of new rules and a 2000-page bill, but really 

increasing the capital requirements of our American banks? Mak-
33 

ing sure that they have more skin in the game, and that the taxpayer is not going to bear that loss, the investors in those banks 

are going to be responsible for the losses of bad trades? 

Chairman Bernanke. I agree with you entirely. The reason for 

high capital requirements—and we are looking to greatly increase 

capital requirements—is because we are not going to be able to anticipate everything that could happen. And the good news here is 

that J.P. Morgan’s losses are a very small fraction of their very 

substantial capital base. 

There have been losses to the shareholders, as you say, but there 

is not any risk that the firm will fail or that taxpayers will be in 

danger in any way. 

So, yes, capital is extremely important and I agree with you a 

hundred percent on that. 

Representative Duffy. And so in essence we increase those ratios. And I imagine you would—and I do not have much time—but 

you would agree with the SIFI surcharge, making sure that our 

larger banks are required to hold more capital? Yes? 

Chairman Bernanke. Yes. 

Representative Duffy. Okay. Just quickly, sometimes—and I 

know you have to do this—but when you talk to us, what you say 

can be open to interpretation. You do a very nice job of that. But 

as you’re talking about the cliff, as we are talking about taxes specifically, are you telling us if we allow nothing to happen and we 

see all of these taxes increase—the Bush tax cuts, the Obama tax 

cuts go away—there is going to be a direct impact on economic 

growth and job creation? 

Chairman Bernanke. I am looking not just to the taxes, but 

also the sequester and the end of the payroll tax, and everything 

else. Yes, I think that it—I mean, of course economic forecasting 

is an imperfect science, but everything we understand about fiscal 

policy suggests it would be a significant short-term effect. Yes. 

Representative Duffy. Okay. So in essence our—you are not 

here to advise us, but if you were you are telling us to extend 

them? 

Chairman Bernanke. I would tell you to try to avoid a situation in which you have a massive cut in spending and increase in 

taxes all hitting at one moment, as opposed to trying to spread 

them out over time in some way that will create less short-term 

drag on the U.S. economy. 

Representative Duffy. I appreciate your testimony. I yield 

back. 

Chairman Casey. Thank you. 

Senator Lee. 

Senator Lee. Thank you very much, Mr. Chairman. 

And thank you for joining us today, Chairman Bernanke. 

What are some of the risks that accompany quantitative easing? 

Could you walk us through those and help us understand the risk 

factors you consider as you approach a decision like that one? 

Chairman Bernanke. Well I think a preliminary thing to say 

is that, since we have less experience with quantitative easing our 

estimates and our understanding of its efficacy and exactly how 

much is needed and so on are less than the traditional monetary 

policy. 
34 

But in terms of potential side effects, a number have been identified. But I think the two that we would pay most attention to: 

First, there are some who believe that greatly expanding our balance sheet would make the exit strategy more difficult, and that 

therefore inflation is more likely. And then that might lead inflation expectations to go up, which could be a problem. 

Now I want to be very clear that we are very confident that we 

can exit in a timely way from our balance sheet strategy, and that 

there is in fact no justification for such a concern. But nevertheless, 

some people might have that concern. So that is one issue. 

The second issue—— 

Senator Lee. No justification for which concern? 

Chairman Bernanke. The concern that inflation will rise excessively because we can’t get out of our balance sheet position. 

Senator Lee. Okay. Okay. So go ahead to your second point. 

Chairman Bernanke. The second one has to do with financial 

stability. The question is does the prospect of very low interest 

rates for a long time, does it create problems for certain types of 

firms like life insurance companies or pension funds? Does it induce excessive risk taking? Does it lead to effects that could be 

counter productive in the longer term? 

There, we do extensive monitoring, extensive analysis to try to 

identify any such problems. But it is always possible that we might 

miss something. 

Senator Lee. Okay. And it sounds like you are not discounting—you are not refuting the possibility that it can have inflation effects, you are just saying that you think you can time it 

in such a way that it is less likely to? 

Chairman Bernanke. There are two separate issues. One is our 

timing of when we take monetary policy back to a more normal 

stance. 

In any monetary policy easing episode, there is always the question of whether the Fed gets it exactly right—too soon? Too late? 

And it is always the case that if the Fed waits too long to remove 

monetary accommodation, you could get some inflation effect. 

What I am talking about here is the question of whether it is 

technically possible to undo the balance sheet expansion in a timely 

way. We are very confident that we have the technical tools to 

bring the balance sheet down to a more normal level, to bring the 

amount of reserves in the banking system down to a more normal 

level, at the appropriate—you know, when we decide it is time to 

tighten monetary policy. 

So the technical side, we think we are quite comfortable with. 

It is always the case, no matter, under the most normal traditional monetary policy that the timing of withdrawal of stimulation 

is difficult. And it is always possible that you could either undershoot or over-shoot, and that is unavoidable. 

Senator Lee. With Treasury yield rates being at all-time historic lows, I think it becomes difficult to dispute that at some point 

in the next few years we will start to see a normalization and we 

will start to see yield rates return to their historic averages, perhaps above. 

Do you have any sense, and can you offer us any insight into 

when we might expect to see that happen? 
35 

Chairman Bernanke. Well, we have indicated that we expect 

to keep short-term rates low until late 2014, at least. But even 

then, longer term rates might be rising. If in fact we are removing 

short-term rate reductions at that point, since long rates include 

expectations of short rates even beyond that window, you could be 

seeing some movement by then. 

We do expect of course rates to normalize over time, but the 

exact timing is very difficult to judge because it depends very much 

on the recovery of the economy. And while we see the economy 

moving in a moderate pace in the right direction, the point at 

which we are comfortable that it is time to withdraw monetary 

stimulus is obviously quite uncertain. 

Senator Lee. Is there a risk of a sharper rebound the longer you 

keep the rates low? 

Chairman Bernanke. Um, I don’t think so. It is true that, that 

the quantitative easing measures have pushed down the so-called 

term premia on longer term rates, and if those were to normalize 

quickly that would make the increase in rates a little faster than 

might otherwise be the case. 

But we have stress-tested both our economic models and our financial portfolio—I mean the financial portfolios of financial institutions, and we don’t see at this point any serious risk either to 

economic recovery or to the financial stability of that return of interest rates to more normal levels. 

But it’s obviously, again, something we need to pay close attention to. 

Senator Lee. Okay. Thank you, Chairman Bernanke. I see my 

time has expired. 

Chairman Casey. Thank you very much. 

Chairman Bernanke, thank you for your testimony. 

For the Members, the record will remain open for five business 

days to submit either additional questions or of course a statement. 

And we are adjourned. 

[Whereupon, at 11:50 a.m., Thursday, June 7, 2012, the hearing 

of the Joint Economic Committee was adjourned.] 

(37) 

SUBMISSIONS FOR THE RECORD 
38 

PREPARED STATEMENT OF SENATOR BOB CASEY, CHAIRMAN, 

JOINT ECONOMIC COMMITTEE

I look forward to Chairman Bernanke’s report on the state of the economy and 

his perspective on additional actions that the Federal Reserve may take to strengthen the economic recovery. 

With the May jobs report released on Friday—it is clear that Washington needs 

to continue our focus on creating jobs. Today’s hearing is especially timely. 

There are a number of bipartisan actions Congress can take right now to create 

jobs and strengthen the recovery. 

First, we need to get the Surface Transportation Reauthorization out of conference 

and signed into law. 

Our transportation infrastructure is central to national competitiveness and the 

bipartisan bill that passed the Senate, with 74 votes, would create almost three million new jobs by accelerating infrastructure projects. 

Second, we should do more to support small businesses. By targeting tax incentives to those firms that expand their payrolls, we can help to strengthen the recovery. 

The Small Business Jobs and Tax Relief Act would provide a tax credit of 10 percent for any increases to the payroll tax base—hiring new workers, increasing 

hours, or raising wages of existing employees up to the $110,100 cap for the payroll 

tax. The proposed credit is capped at $500,000 per firm in order to target the tax 

credit to small businesses. 

Third, the Senate this week has taken up the Farm Bill, responsible legislation 

that cuts the deficit by $23 billion, helps farmers to manage risks relating to rapidly 

fluctuating prices for their crops, and provides critical support to rural America. 

We have fiscal challenges to tackle in a bipartisan manner. Without congressional 

action, the automatic spending cuts contained in the Budget Control Act of 2011 

along with the expiration of several tax cuts will present a significant economic 

headwind in 2013. 

The non-partisan Congressional Budget Office recently estimated that real GDP 

growth will slow to 0.5 percent in 2013 unless Washington acts. 

Chairman Bernanke has expressed concerns regarding the risk the fiscal cliff presents to the recovery. I share that concern. But let’s be clear there are right ways 

and wrong ways to balance the budget. We have to be smart about the cuts we 

make so we can keep growing the economy and create jobs rather than make a bad 

situation even worse. 

We can’t put America on the road to full recovery unless we all agree on tackling 

the huge budget deficit and debt America faces. We need to continue to cut spending. And certainly, you cannot reduce the deficit by spending tens of billions on tax 

cuts for the very wealthiest. 

Additionally, just as when Chairman Bernanke was before this Committee in October, I would like to address currency manipulation, especially on the part of 

China, because it has such a harmful impact on the U.S. economy and American 

jobs. 

We recently learned that China allowed its currency to weaken more in May than 

in any other month since 2005. 

Chairman Bernanke has testified previously that allowing the yuan to appreciate 

would be good for both the U.S. and Chinese economies. The Chinese Government 

manipulates their currency so that their goods sell for less than they should. Some 

people may think it’s some far off theoretical issue but when China cheats, Pennsylvania and the rest of the country loses lots of jobs. 

I urge my colleagues in the House to pass legislation, such as the Currency Exchange Rate Oversight Reform Act already passed by the Senate, to crack down on 

countries that manipulate their currencies to promote their own exports. 

To sum up briefly: our economy, while in much better shape than it was three 

years ago, is still recovering from the Great Recession. With unemployment above 

8 percent, the labor market still needs to heal. Europe continues to wrestle with 

debt issues, which impact U.S. financial markets and the global economy. 

Against this backdrop, it is clear that we need to stay focused on promoting a 

stronger economic recovery.Chairman Bernanke, thank you for your testimony. 

PREPARED STATEMENT OF REPRESENTATIVE KEVIN BRADY, VICE CHAIRMAN, 

JOINT ECONOMIC COMMITTEE

Thank you, Chairman Bernanke, for appearing before the Joint Economic Committee at this critical juncture to discuss America’s economic outlook. 
39 

While we’re all anxious for signs of a strong, sustainable recovery, the recent jobs 

report for May was grim—with U.S. employers creating a mere 69,000 non-farm 

payroll jobs, the fewest in a year. Job growth over the past two months has dropped 

by two-thirds over the first quarter of the year. Business and consumer confidence 

is down. First quarter GDP estimates were revised downward. 

Four and a half years after the recession began Americans are enduring the 40th 

straight month of an official unemployment rate at or above 8%—a post-World War 

II record. And much of the drop in the unemployment rate from its high of 10% in 

October of 2009 is attributable to Americans simply dropping out of the workforce— 

the labor force participation rate is scraping a 30-year low. Without this severe drop 

in the number of workers since the recession began, the unemployment rate would 

be nearly 11%. 

Since the recession ended, our economy has struggled to grow at an annualized 

average quarterly increase of 2.4%. To place it in perspective, of the 10 economic 

recoveries since World War II lasting more than a year, this recovery ranks, regrettably, tenth. And dead last is unacceptable by any standard. 

Today, because our economy isn’t flying strong and steady at 50,000 feet as it 

should be at this point, but rather flying low and slow, we are increasingly vulnerable to external shocks. 

The economic crisis in Europe has intensified in recent weeks. A nascent bank run 

has begun in Greece. Greek banks are rapidly depleting their eligible collateral for 

lender-of-last-resort loans from the European Central Bank. Not just Greece, but the 

European Union as a whole appears to be in recession. Questions of whether Greece 

or other member-states of the European Monetary Union (EMU) will exit the euro 

and reissue national currencies are dominating the news. 

Mr. Chairman, at this hearing I hope we’ll get your perspective on Europe, including the likelihood of a Greek exit from the Eurozone, the contagion risk for the exit 

of other EMU Member-States, and the consequences of these possible events for the 

European Union, the United States, and the rest of the world. 

When you appeared before this Committee last October—in response to a question 

about the tools you are considering to mitigate and limit the adverse economic impact on the United States—you testified you believe that the European Central 

Bank has enormous capacity to provide liquidity to European banks, that traditional 

currency swaps can provide dollar funding for global dollar money markets, and 

that the main line of defense is adequate supervision of well-capitalized American 

banks—with the Fed standing ready to provide as much liquidity against collateral 

as needed as lender-of-last-resort to the American banking system. 

Is that still your assessment? Are you considering any tools beyond those? 

In addition, American taxpayers and lawmakers—like their counterparts in Germany—are becoming increasingly concerned that they will be asked to bailout, however indirectly, struggling European governments and banks. 

There is a growing concern that the U.S. Treasury will try to bail out the 

Eurozone either directly through the Exchange Stabilization Fund or indirectly 

through the International Monetary Fund. The Fed has a challenge as well, explaining to a skeptical Congress why traditional currency swap lines with the European 

Central Bank will not turn into an indirect bailout of Eurozone countries. 

At the same time that European economies are weakening, growth is also slowing 

in both China and India. Given the prospects of a global slowdown, some economists 

are speculating that the Federal Reserve may initiate a third round of quantitative 

easing. 

Mr. Chairman, during the questions, I would like to discuss with you whether and 

under what conditions the Federal Reserve would consider launching a third round 

of quantitative easing. 

It’s my belief that the Fed has done all that it can do—and perhaps done too 

much. Further quantitative easing won’t stimulate growth and create jobs. There exists a real risk that the massive amount of liquidity the Fed has already injected 

into the economy could trigger higher inflation before the Fed can execute its exit 

strategy. 

I also believe another round of Fed intervention will increase uncertainty among 

job creators while, ignoring the genuine reason for low business investment and job 

creation: sound, timely fiscal policy. 

The businesses I look to along Main Street aren’t holding back on hiring because 

they’re waiting to learn what the government will do for them—they’re holding back 

on hiring for fear of what the government will do to them. 

The obsessive push for higher taxes on job creators, the unprecedented tax and 

fiscal cliff we face at the end of this year, the unsustainable structural federal debt 

and deficits, along with a flood of red-tape, and fear of the consequences of the 

President’s new health care law—these are the true drags on the economy. 
40 

No matter what actions the Fed takes, without strong leadership by the President 

today—and action by Congress now—on these fiscal issues, Americans will not see 

the jobs or the strong recovery we deserve. 

And, of course, the combination of sluggish growth and the rapid accumulation 

of federal debt is a toxic brew that could eventually spark a debt-driven economic 

crisis here at home unless the United States soon reverses course. 

Finally, Mr. Chairman, last January the Federal Open Market Committee adopted an explicit inflation target of 2%, measured by the price index for personal consumption expenditures. 

By doing so the Federal Reserve has taken an important step toward establishing 

a rules-based monetary policy going forward that should help to achieve price stability and protect the purchasing power of the dollar over time. 

Nevertheless, your adoption of an explicit target raised as many questions as it 

answered. Is the 2% target a minimum, mid-point, or a maximum? How wide is the 

range? How long will the Federal Reserve tolerate a deviance from the range before 

taking action? 

I also appreciated that you distinguished between that which monetary policy can 

control—namely prices—and that which monetary policy cannot control—namely 

employment. 

By letter, I will request further clarification on this monetary policy statement in 

more depth. 

With that, I again thank you for appearing before the Committee, and I look forward to your testimony. 
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