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28–024 PDF 2006

MONETARY POLICY AND

THE STATE OF THE ECONOMY

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

FEBRUARY 15, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–72

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

JOHN CAMPBELL, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

ROBERT U. FOSTER, III, Staff Director 

(III)

C O N T E N T S 

Page 

Hearing held on: 

February 15, 2006 ............................................................................................ 1

Appendix: 

February 15, 2006 ............................................................................................ 61

WITNESSES 

WEDNESDAY, FEBRUARY 15, 2006

Bernanke, Hon. Ben S., Chairman, Federal Reserve Board of Governors .......... 6

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 62

Gillmor, Hon. Paul E. ....................................................................................... 64

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

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Excerpts from the Monetary Policy Report to Congress, February 15, 

2006 ................................................................................................................ 75

Lee, Hon. Barbara: 

The Price Of Credit: Prime and Subprime Lending in California 2004 ...... 76

Bernanke, Hon. Ben S.: 

Monetary Policy Report to Congress, February 15, 2006 .............................. 79

Written responses to questions from Hon. J. Gresham Barrett ................... 108

Written responses to questions from Hon. Harold E. Ford, Jr. .................... 111

Written responses to questions from Hon. Mark R. Kennedy ...................... 116

Written responses to questions from Hon. Ron Paul ..................................... 118

Written responses to questions from Hon. Brad Sherman ........................... 119

(1)

MONETARY POLICY AND 

THE STATE OF THE ECONOMY 

Wednesday, February 15, 2006

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

WASHINGTON, D.C. 

The committee met, pursuant to notice, at 10:05 a.m., at 2128 

Rayburn Building, Hon. Michael G. Oxley [chairman of the committee] presiding. 

Present: Representatives Oxley, Leach, Bachus, Castle, Royce, 

Lucas, Kelly, Paul, Gillmor, Jones, Biggert, Shays, Kennedy, Garrett, Brown-Waite, Pearce, Price, Fitzpatrick, Davis of Kentucky, 

McHenry, Frank, Kanjorski, Waters, Sanders, Maloney, Velazquez, 

Carson, Sherman, Meeks, Lee, Moore of Kansas, Capuano, Ford, 

Hinojosa, Crowley, Clay, McCarthy, Matheson, Miller of North 

Carolina, Scott, Davis of Alabama, Green, Cleaver and Bean. 

Chairman OXLEY. The committee will come to order. Pursuant to 

Rule 3(f)(2) of the rules of the Committee on Financial Services for 

the 109th Congress, the chairman announces he will limit recognition for opening statements to the Chair and ranking minority 

member of the full committee, and the Chair and ranking minority 

member of the subcommittee on Domestic and International Monetary Policy, or their respective designees, to a period not to exceed 

16 minutes, evenly divided between the majority and minority. 

The prepared statements of all members will be included in the 

record, and the Chair now recognizes himself for an opening statement. 

Chairman Bernanke, welcome to the House Financial Services 

Committee, and on behalf of the entire committee, congratulations 

on your confirmation as the 14th Chairman of the Federal Reserve 

Board. 

We look forward to getting to know you and gaining a better understanding of how you intend to run the Federal Reserve. Even 

though this is your first appearance before this committee, we’re 

well familiar with the Fed, your staff, and the work of the Fed in 

setting monetary policy and supervising banks and financial holding companies. 

Based on my brief conversation with you and your amazingly 

smooth confirmation hearings, I’m confident that you will be successful as your predecessor. I know the setting and this testimony 

can be intimidating. I hope it puts you at ease to know that you 

will have numerous opportunities to testify before this committee 

and the Congress. 

2

As a matter of fact, you’re mandated by law to come over here 

twice each year. I’m sure you’re comforted by that. 

This morning, the press and the markets will focus on your every 

word and gesture. This committee will take a long-term view and 

I hope focus more on public policy, not the fleeting gyrations of the 

markets. 

Your predecessor and over time the members of this committee 

have come to view this hearing as an ongoing dialogue between an 

independent Fed and the elected representatives of the American 

public. 

These hearings have become the highlight of our year. I hope 

they will become the highlight of yours and that like Chairman 

Greenspan, you will use them as an opportunity to hear a wide 

range of views and take the temperature of more parts of the country than you can visit in a year. 

You are addressing us at a time when there is universal agreement that monetary policy is where it should be and that the economy is thriving. We can report that the U.S. economic growth is 

steady and strong. 

In fact, we are beginning the fifth full year of the current expansion. While we face some uncertainty abroad, and we can be assured of the likelihood that there will always be uncertainty 

abroad, our national economic performance is the envy of the 

world. 

Americans are well aware of the economy’s steady growth, low 

inflation, and productivity gains. Consumer confidence numbers 

are optimistic, and economic predictions show annual growth in the 

three to four percent range for the short and intermediate term. 

Alan Greenspan has handed you the wheel of monetary policy at 

a time of unparalleled growth and prosperity in America. While 

Federal law requires that the Federal Reserve conduct monetary 

policy in a way that ensures maximum employment, stable prices, 

and moderate long-term interest rates, we know that monetary policy is only one tool to achieve that goal. 

Another equally important tool is fiscal policy, as set by Congress 

in the annual budget, and tax policy. As you contemplate the start 

of your tenure as Chairman of the Fed, I pledge to you to use my 

influence and the influence of this committee, not only to support 

you in your work, but also to see to it that Congress conducts fiscal 

policy with the same acumen as the Fed has shown in monetary 

policy. 

I’m confident that we can maintain the excellent track record of 

the U.S. economy if we work together and understand each other’s 

goals. We will face challenges together in the future. Some will be 

self-inflicted, and some will be inflicted upon us. 

Let us use this relatively quiet time to begin our dialogue, finetune the monetary and fiscal policy, and pledge to work together. 

Mr. Chairman, it’s a pleasure to have you before the committee, 

your first appearance before our committee on monetary policy, and 

again congratulations on your outstanding career before here and 

your confirmation by the Senate. 

I now yield to the gentleman from Massachusetts for an opening 

statement. 

3

[The prepared statement of Hon. Michael G. Oxley can be found 

on page 62 in the appendix.:] 

Mr. FRANK. Thank you, Mr. Chairman and Mr. Chairman, thank 

you and thank you for the courtesies you’ve extended to us. You 

have made yourself very available for the kind of conversations 

that will be helpful in our having to work together and including 

be able to articulate those legitimate policy disagreements that are 

part of a democracy. 

I just want to apologize in advance because the Fund Joint bill 

has been scheduled to come up, and I’m going to go over after I do 

my questioning, I’m sorry to say to you. But I will be on the floor 

and come back again. So I apologize for that. 

But I want to just talk to the Chairman because I think we are 

facing a kind of crisis in our economy. I am glad to see that economic growth is steady and solid. I agree with the projections that 

it will good going forward. 

But we face a problem we haven’t faced a long time in America. 

I’m not enough of an economic historian to know when, if ever, that 

was. There is a decoupling between growth in the gross domestic 

product and the economic situation of the average American. 

The report documents that—the monetary report to Congress. On 

page nine of the report, page eight, ‘‘With profits posting further 

solid gains in 2005,’’ et cetera, and on page nine, ‘‘Corporate profits 

continue to grow strongly in 2005. The ratio of before-tax profits of 

domestic non-financial corporations to that sector’s gross value 

added grows to more than 12 percent of its 1997 peak.’’ 

‘‘Operating earnings for S&P 500 firms appear to have been 

nearly 14 percent above their level four quarters earlier. That’s explained in part by the growth in productivity. It was not as high 

last year as it’s been, but it will still considerably above trend. If 

you look productivity over the last 5 years, as has been noted, it 

has been very high.’’ 

Then we get to page 17. ‘‘Increases in hourly labor compensation 

were moderate in 2005.’’ In fact, real wages, wages paid to people 

who work for other people, taking into account inflation, have not 

gone up for years. They have been flat. 

What we have is an economy in which thanks to increased productivity, gross domestic product goes up and a very, very large 

share, an excessive share of the increased wealth has gone to a 

very small number of people who own the capital. 

Now obviously for the system to work, there needs to be compensation for those who own capital. No one is, I hope, arguing 

that that shouldn’t happen at all. But in recent years, that has become disproportionate. Your predecessor had acknowledged that on 

several occasions. 

You have wages flat; you have insecurity caused by pensions 

being underfunded, being abandoned, defined benefits going over to 

401(k)s; you have medical care costs increasing, the extent to which 

workers have to pay them. 

The consequence is this, and it’s something that people compare. 

I will tell you when I was in Davos listening to a leader of one our 

financial institutions lament the fact that the American people 

seem so unimpressed with globalization, so resistant to the effort 

4

to adapt that very productivity which many believe is so important 

for the economy, and I share that. 

He said, ‘‘Recent studies show that globalization adds a trillion 

dollars a year to the American economy. That’s $9,000 per family. 

Why are Americans so resistant to something that adds $9,000 per 

family?’’ 

My answer was, ‘‘Because they don’t have the $9,000. Not only 

do they not get the $9,000,’’ I said to this individual, ‘‘but they 

think you have their $9,000. In fact, you have the $9,000 for about 

2,000 of them or more.’’ 

This disparity, this problem is why you now encounter increasing 

resistance to trade to deregulation, to the very flexibility that many 

think are important for the economy. 

So these numbers are right here. Productivity goes up. The economy is going to go well. But average Americans collectively assert 

that they are getting little if any of the benefit. And then those 

people tell you, ‘‘Well, you know, some of these things, globalization 

means that tee shirts are a lot cheaper now than they used to be 

at Wal-Mart and elsewhere.’’ 

But I’m talking about real wages. That factors in the cost of living. So when you talk about real wages being flat, you can’t doublecount the low prices. Real wages is obviously nominal wages discounted by inflation. 

So if we do not do a better job in this country of not getting rid 

of inequality, which is essential for our society’s markets to function, but diminish it, you will continue to have the resistance to 

many of the policies that people advocate, and that I think is the 

major test before us. 

We have to end this decoupling of growth of the GDP and the 

economic well-being of the average American. 

Chairman OXLEY. The gentleman’s time has expired. The 

gentlelady from Illinois, Ms. Biggert. 

Ms. BIGGERT. Thank you, Mr. Chairman and Chairman 

Bernanke. First, let me associate myself with the chairman’s remarks, both in welcoming you to the committee, and in recognizing 

both the skills you bring to this new job and the enormity of the 

job. 

We are looking forward to your testimony. We want to get to 

know you and understand the subtle differences, and there will be 

differences in the way that you will do your job, from the methods 

of your predecessor. 

To date, we have mostly been able to only read about your views. 

So today, I hope than you will elaborate a little. For example, anyone who had read much about you knows of your interest in real 

world problems, particularly the Great Depression. 

We also know of your reputation as a proponent of inflation targeting, expressly setting a band in which you think inflation should 

be kept. Naturally, I might like to hear a little bit more on that, 

both because we have read so much about it recently, but also because of the spin-up in energy prices and the quite welcome drop 

in unemployment. 

Both of these are well-recognized as potential inflation triggers. 

Most analysts believe that at the first meeting you chair late next 

5

month, the Open Market Committee will continue its measured 

tightening. 

But many are wondering at what point a new Fed Chair will be 

moved to, as the longest-tenured Chairman, William McChesney 

Martin famously said, ‘‘take away the punch bowl just as the party 

gets going.’’ 

As well I think many members would like to better understand 

your views on the global saving glut; economists and politicians of 

all stripes and colors have for years wrung their hands about the 

alleged low savings rate in the United States. 

Many are also puzzled about both the high balance of payments 

deficit and what your predecessor called the conundrum of low, 

long-term bond rates as the Fed gradually pushed up short-term 

rates. 

Of course, in classic economics, a trade deficit in theory can be 

managed and a rate inversion is a thing to be avoided. So I think 

we’d like to hear if there is a savings glut, what are the implications for capital investment here and in emerging markets; is there 

more that we should do unlock capital investment? And how much 

of the current account deficit should we imagine may erode if the 

economies of other developed and developing countries picks up? 

Anyway, I hope you will take some time, either at this hearing 

or at your next appearance here in July, to talk to us a little bit 

about the equality of economic data and its impact on the Fed’s 

ability to confront monetary policy. 

Doubtless the Fed is awash in data, but it is troublesome to 

think that in our high tech society in the 21st Century that Federally-collected economic data is sometimes a month out of date and 

often trails privately-collected data. 

I know, I remember a number of members on the committee are 

interested in this topic, and I hope you’ll let us know if and when 

and where you think there is need for improvement, along with 

suggestions. With that, Mr. Chairman, I wish you well in a new 

and very important job. Thank you for your testimony and I yield 

back the balance of my time. 

Chairman OXLEY. The gentlelady yields back. The gentlelady 

from New York, Ms. Maloney? 

Mrs. MALONEY. Thank you, thank you. Thank you, Mr. Chairman and welcome. We on this committee are particularly honored 

that your first appearance before Congress is before this particular 

committee, and I might add that the President’s choice to fill the 

shoes of Chairman Greenspan has been greeted with consistent bipartisan applause, and this is a true testament to your reputation 

as an economist, scholar, and independent thinker. 

First of all, I’d like to be associated with the comments of our 

ranking member, Frank. We are deeply concerned about the growing gap between the haves and have-nots. That is a very troubling 

trend for our country and I am particularly concerned that the 

American worker, after inflation in the past 2 years, has taken less 

home in their paychecks. Again, a very troubling trend. 

In your job on the President’s Council of Economic Advisors, you 

were thoroughly immersed in issues of employment, jobs, wages, 

debts, and deficits, and I hope and expect that those issues will 

6

continue to influence your decisions now that you are on the monetary policy side. 

In my opinion, this Administration has made your new job much 

more difficult through its reckless spending and lack of fiscal discipline. On Friday, we learned that once again, this Administration 

has set a new record; only it’s the wrong kind of record, a record 

for debts now over eight trillion dollars in deficits. 

The trade deficit for 2005 was the highest ever for the fourth year in a row, at over $700 billion. The trade deficit for this year 

is 18 percent higher than the year before, even though the Administration has been saying all year that it plans to do something to 

address this imbalance, which our allies have repeatedly said and 

warned us is unsustainable. 

Fully one-third of that debt is our trade deficit with China, which 

is exploding, and I don’t think it’s any secret that if China and 

Japan were to slow its purchases of U.S. debt, the Fed would be 

forced to tighten monetary policy beyond what the domestic market 

would be comfortable with. 

In fact, the widely discussed concern that Asian banks will slow 

their investment in U.S. debt because they seek diversification is 

now a reality. We are now actually seeing that happen. According 

to the Fed, in the last several, months Asian foreign central banks 

have shifted their purchases from Treasury debt to Governmentsponsored entities and mortgage-backed bonds to such an extent 

that this new type of debt is now about a third of the U.S. debt 

held by foreign central banks. 

Chairman Greenspan strongly believed that our current account 

deficit is caused by the fact that America is saving too little and 

that our huge Federal budget deficit is Exhibit No. 1. 

Recently, the Administration has switched to saying that the real 

problem is that China is saving too much. I don’t think that Americans particularly care about this sort of blame game, but are more 

concerned about the actual impact of our huge Federal budget deficit and our record trade deficit on monetary policy. 

American workers have not yet seen the benefits of this economic 

recovery. They haven’t seen it in their paychecks. An international 

financial crisis could lead to more inflation and higher interest 

rates that could choke off the recovery before American workers 

have a chance to share in it. 

I hope that you will address these concerns today. We wish you 

well in your new position and congratulate you on your appointment. 

Chairman OXLEY. The gentlelady yields back, and Mr. Chairman, 

again welcome to the Financial Services Committee, and you may 

begin your testimony. Thank you. 

Mr. BERNANKE. Thank you, Mr. Chairman. I’ve submitted written testimony. I’d like to excerpt from that testimony. 

Chairman OXLEY. Without objection. 

STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. BERNANKE. Mr. Chairman and members of the committee, I 

am pleased to be here today to present the Federal Reserve’s monetary policy report to the Congress. I look forward to working closely 

7

with the members of this committee on issues of monetary policy, 

as well as on matters regarding the other responsibilities with 

which the Congress has charged the Federal Reserve system. 

The U.S. economy performed impressively in 2005. Real gross domestic product increased a bit more than three percent, building on 

a sustained expansion that gained traction in the middle of 2003. 

Payroll employment rose two million in 2005, and the unemployment rate fell below five percent. Productivity continued to advance 

briskly. 

The economy achieved these gains despite some significant obstacles. Energy prices rose substantially yet again, in response to increasing global demand, hurricane-related disruptions to production, and concerns about the adequacy and reliability of supply. 

The gulf coast region suffered through severe hurricanes that inflicted a terrible loss of life, destroyed homes, personal property, 

businesses and infrastructure on a massive scale, and displaced 

more than a million people. 

The storms also damaged facilities and disrupted production in 

many industries, with substantial effects on the energy and petrochemical sectors and on the region’s ports. Full recovery in the affected areas is likely to be slow. 

The hurricanes left an imprint on aggregate economic activity as 

well, seen in part in the marked deceleration of real GDP in the 

fourth quarter. However, the most recent evidence, including indicators of production, the flow of new orders to businesses, weekly 

data on initial claims for unemployment insurance, and the payroll 

employment and retail sales figures for January suggests that the 

economic expansion remains on track. 

Inflation pressures increased in 2005. Steeply-rising energy 

prices pushed up overall inflation, raised business costs, and 

squeezed household budgets. Nevertheless, the increase in prices 

for personal consumption expenditures, excluding food and energy, 

at just below two percent, remained moderate, and longer-term inflation expectations appeared to have been contained. 

With the economy expanding at a solid pace, resource utilization 

rising, cost pressures increasing, and short-term interest rates still 

relatively low, the Federal Open Market Committee over the course 

of 2005 continued the process of removing monetary policy accommodation, raising the Federal funds rate two percentage points in 

eight increments of 25 basis points each. 

At its meeting on January 31st of this year, the FOMC raised 

the Federal funds rate another one quarter percentage point, bringing its level to four and a half percent. 

At that meeting, monetary policymakers also discussed the economic outlook for the next 2 years. The central tendency of the 

forecasts of members of the Board of Governors and the presidents 

of Federal Reserve Banks is for real GDP to increase about three 

and a half percent in 2006 and three percent to three and a half 

percent in 2007. 

The civilian unemployment rate is expected to finish both 2006 

and 2007 at a level of between four and three quarters percent and 

five percent. 

Inflation, as measured by the price index for personal consumption expenditures excluding food and energy, is predicted to be 

8

about two percent this year and one and three quarters percent to 

two percent next year. 

While considerable uncertainty surrounds any economic forecast 

extending nearly 2 years, I am comfortable with these projections. 

In the announcement following the January 31st meeting, the 

Federal Reserve pointed to risks that could add to inflation pressures. 

Among those risks is the possibility that to an extent greater 

than we now anticipate, higher energy prices may pass through 

into the prices of non-energy goods and services or have a persistent effect on inflation expectations. 

Another factor bearing on the inflation outlook is that the economy now appears to be operating at a relatively high level of resource utilization. Gauging the economy’s sustainable potential is 

difficult, and the Federal Reserve will keep a close eye on all of the 

relevant evidence and be flexible in making those judgments. 

Nevertheless, the risk exists that with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately, in the absence of countervailing monetary policy action, to further upward pressure on inflation. 

In these circumstances, the FOMC judged that some further 

firming of monetary policy may be necessary, an assessment with 

which I concur. 

Not only the risks to the economy concern inflation. For example, 

a number of indicators point to a slowing in the housing market. 

Some cooling of the housing market is to be expected and would 

not be inconsistent with continued solid growth of overall economic 

activity. 

However, given the substantial gains in house prices and the 

high levels of home construction activity over the past several 

years, prices and construction could decelerate more rapidly than 

currently seems likely. 

Slower growth in home equity in turn might lead households to 

boost their saving and trim their spending relative to current income by more than is now anticipated. 

The possibility of significant further increases in energy prices 

represents an additional risk to the economy. Besides affecting inflation, such increases might also hurt consumer confidence and 

thereby reduce spending on non-energy goods and services. 

Although the outlook contains significant uncertainties, it is clear 

that substantial progress has been made in removing monetary policy accommodation. As a consequence, in coming quarters, the 

FOMC will have to make ongoing provisional judgments about the 

risks to both inflation and growth, and monetary policy actions will 

be increasingly dependent on incoming data. 

As I noted, core inflation has been moderate, despite sharp increases in energy prices. A key factor in this regard has been confidence on the part of the public and investors in the prospects for 

price stability. 

Maintaining expectations of low and stable inflation is an essential element in the Federal Reserve’s effort to promote price stability. Thus far, the news has been good. 

Measures of longer-term inflation expectations have responded 

only a little to the larger fluctuations in energy prices that we have 

9

experienced, and for the most part they were low and stable last 

year. 

Inflation prospects are important, not just because price stability 

is in itself desirable and part of the Federal Reserve’s mandate 

from the Congress, but also because price stability is essential for 

strong and stable growth of output and employment. 

Stable prices promote long-term economic growth by allowing 

households and firms to make economic decisions and undertake 

productive activities with fewer concerns about large or unanticipated changes in the price level and their attendant financial consequences. 

Experience shows that low and stable inflation and inflation expectations are also associated with greater short-term stability of 

output and employment, perhaps in part because they give the central bank greater latitude to counter transitory disturbances to the 

economy. 

Similarly, the attainment of the statutory goal of moderate longterm interest rates requires price stability because only then are 

the inflation premiums that investors demand for holding longterm instruments kept to a minimum. 

In sum, achieving price stability is not only important in itself; 

it is also central to attaining the Federal Reserve’s other mandated 

objectives of maximum sustainable employment and moderate longterm interest rates. 

As always, however, translating the Federal Reserve’s general 

economic objectives into operational decisions about the stance of 

monetary policy poses many challenges. 

Over the past few decades, policymakers have learned that no 

single economic or financial indicator, or even a small set of such 

indicators, can provide reliable guidance for the setting of monetary 

policy. 

Rather, the Federal Reserve, together with all modern central 

banks, has found that the successful conduct of monetary policy requires painstaking examination of a broad range of economic and 

financial data, careful consideration of the implications of those 

data for the likely path of the economy and inflation, and prudent 

judgment regarding the effects of alternative courses of policy action on prospects for achieving our macroeconomic objectives. 

In that process, economic models can provide valuable guidance 

to policymakers, and over the years, substantial progress has been 

made in developing formal models and forecasting techniques. 

But any model is by necessity a simplification of the real world, 

and sufficient data are seldom available to measure even the basic 

relationships with precision. 

Monetary policymakers must therefore strike a difficult balance, 

conducting rigorous analysis informed by sound, economic theory 

and empirical methods, while keeping an open mind about the 

many factors, including myriad global influences at play in a dynamic, modern economy like that of the United States. 

Amid significant uncertainty, we must formulate a view of the 

most likely course of the economy under a given policy approach, 

while giving due weight to the potential risks and associated costs 

to the economy should those judgments turn out to be wrong. 

10

During the nearly 3 years that I previously spent as a member 

of the Board of Governors and of the Federal Open Market Committee, the approach to policy that I just outlined was standard operating procedure under the highly successful leadership of Chairman Greenspan. 

As I indicated to the Congress during my confirmation hearing, 

my intention is to maintain continuity with this and the other 

practices of the Federal Reserve in the Greenspan era. I believe 

that with this approach, the Federal Reserve will continue to contribute to the sound performance of the U.S. economy in the years 

to come. Thank you, and I’d be happy to take your questions. 

[The prepared statement of Hon. Ben. S. Bernanke can be found 

on page 65 in the appendix.:] 

Chairman OXLEY. Thank you, Mr. Chairman. Let me begin by 

saying there’s been a lot written and a lot discussed about, and as 

a matter of fact your predecessor described it as a conundrum, the 

whole issue of rate inversion, the conundrum being that when you 

raise the short-term rates, long-term rates don’t respond accordingly. 

I think it was interesting that Chairman Greenspan, at least on 

more than one occasion, I think, described that as a conundrum. 

Is it a conundrum or is it a major problem going forward with the 

economy, or is the economy strong enough to do that? 

I know you addressed that in your prepared testimony. I wonder 

if you could expand on that issue. 

Mr. BERNANKE. Mr. Chairman, the conundrum is a very interesting question. The issue is that, unusually, long-term interest 

rates are lower than short-term interest rates, so we have an inverted yield curve. 

There are at least two broad sets of reasons for why that’s occurring. 

The first is that term premiums, the premiums that investors 

charge for holding long-term debt, have fallen in recent years, reflecting a variety of influences including, I believe, greater confidence that inflation will be kept low, greater stability in the economy more generally, and additional influences such as demand for 

duration, the idea that pension funds, for example, are looking for 

longer-term assets to hold. 

So the term premium has come down. Therefore, the normal 

term structure is going to be flatter now than it was in the past. 

The second factor, and one that I’ve talked about myself in some 

speeches, is that currently there are a lot of savings in the global 

capital market looking for returns. 

That appears to have driven down, to some extent, the real return to capital around the world. That factor also has contributed 

to lowering long-term real interest rates. And, as we can see, it’s 

a global phenomenon, and we’re seeing inversion. We’re seeing low 

long-term real interest rates in other countries. 

The question arises is whether or not this inversion portends a 

slowdown in the real economy. Historically, there has been some 

association between inversion of the yield curve and subsequent 

slowing of the economy. 

11

However, I think at this point in time that the inverted yield 

curve is not signaling a slowdown. First, the historical relationship 

has certainly weakened in the last 15 years or so. 

But more importantly, in the past, when the inverted yield curve 

presaged a slowdown in the economy, it was usually in a situation 

where both long-term and short-term interest rates were actually 

quite high in real terms, suggesting a good bit of drag on the economy. 

Currently, the short term real interest rate is close to its average 

level, and the long-term real interest rate is actually relatively low 

compared to historical norms. 

So with real interest rates not creating a drag on economic activity, I don’t anticipate that the term structure is a signal of oncoming slowing of the economy. 

Chairman OXLEY. Well, what effect, if any, will the return of the 

30-year bond have on the whole process, in your opinion? 

Mr. BERNANKE. Well, the return of the 30-year bond just a few 

days ago was very welcomed by the investor community because, 

in part, as I mentioned, there is a demand for long-term assets, for 

pensions and other reasons. 

The arrival of the bond meant that the inversion extends even 

further out into the future, but I don’t think it changes the basic 

forces. It just suggests that investors are looking for long-term paying assets and that they’re willing to accept a relatively low real 

yield in order to get long-term safe assets. 

Chairman OXLEY. In retrospect, do you think it may have been 

a mistake to suspend the 30-year bond? 

Mr. BERNANKE. The suspension of the bond occurred at a time 

when there predictions that the U.S. Government debt was going 

to be declining rather than rising and, therefore, considerations of 

maintaining liquid markets at different horizons suggested the idea 

of reducing the number of issuances that the Treasury made. 

Now with the U.S. Government debt rising again, I think it actually makes good sense for the Treasury to afford itself of the low 

real interest rates that are available on these long-term bonds, and 

I think the Treasury is well-served, the American public is wellserved, and the investor community is well-served by the 

reissuance of these bonds. 

Chairman OXLEY. The initial issuance was relatively small in 

overall terms. Is it contemplated that those sales will go on periodically? 

Mr. BERNANKE. Those decisions are made by the Treasury, and 

I know they’re concerned about making sure that the market is liquid, and that means they would want to issue sufficient bonds that 

the secondary market will be deep enough so that they’ll be sufficient trading and liquidity in that market. 

So my expectation is that they’ll continue to issue those securities on a regular basis. 

Chairman OXLEY. Thank you. My time is expired. The gentleman 

from Massachusetts. 

Mr. FRANK. Thank you, Mr. Chairman. I’ll start my time and 

give credit where credit is due. As this colloquy about the 30-year 

bond has occurred, when President Bush came to office, there was 

some concern, and Mr. Greenspan had it, about how the Federal 

12

Government would deal with this problem with surpluses and a 

disappearing debt, and the Bush Administration certainly solved 

that problem. 

No one has to worry any more, thanks to our recent fiscal policy 

about the possibility of surplus and not enough debt. So I did want 

to acknowledge that accomplishment. 

On the question that I began with, Mr. Bernanke, I wonder, Mr. 

Greenspan did on several occasions lament the increasing inequality that was happening in America. Again, I want to stress inequality is a good thing in a capitalist economy. The economy doesn’t 

work without it. 

But it can become excessive in ways that I think don’t, are not 

necessarily for efficiency and can cause other kinds of problems. 

Do you feel his concern about inequality, both in the abstract and 

in terms of how we’ve been in the last few years? 

Mr. BERNANKE. I agree with you, Congressman, that rising inequality is a concern in the American economy. It’s important for 

a society that everyone feels that they have a chance to participate 

in the opportunities that the economy is creating. 

In a situation where incomes are becoming less equal, there will 

be less support, for example, for free trade, for keeping the markets 

flexible. So the strength of the economy itself again requires a certain amount of belief on the part of the broad public that they are 

participants and beneficiaries of the strength of the economy. 

Now there’s a deep question as to why there have been some indications of rising inequality. There are a number of factors. I don’t 

want to take all your time. I guess I would submit that the most 

important factor is a long-term trend, which has been going on for 

a quarter of a century or more, which is the rising school premium, 

the increase return to education. 

We’ve seen since about 1980 that people with a high school education or lower have seen essentially no increases in their real 

wages, whereas people with a college education or greater have 

seen a significant increase. 

Mr. BARNEY. Well, and I think that’s true. One thing, and then 

I’ll just give you a chance to respond. Committed to the institution 

which you now have, not even in indirect quotes, but in the financial pages, the saying is attributed to your institution that one of 

the things that troubles you is the possibility that wages might 

rise, and we see that the Fed is worried that wages will rise, and 

this will of course cause terrible things. 

We are, of course, delirious when profits rise, but the potential 

that wages might rise causes concern. Are you worried that wages 

might rise, Mr. Chairman? 

Mr. BERNANKE. Congressman, there’s a bit of a misunderstanding there. What would not be desirable would be for nominal 

wages to rise and for nominal prices to rise even more, leaving 

workers worse off than when they started. 

What is desirable is for real wages, wages measured in terms of 

purchasing power, to rise. I believe that will happen as the market 

strengthens, and I have certainly no objection to— 

Mr. FRANK. Well, I’m glad to hear you say that because it is the 

matter. I am quoting some of the financial pages, and that difference you mentioned isn’t there. 

13

In fact, as we’ve noted, productivity has been outstripping wage 

increases. Real wages have in fact been stagnant, and if you throw 

in what’s happening in health and elsewhere, there are other problems. 

Now one other thing I just would note, and I know there’s a debate about the cause of this, but it is true that unemployment has 

dropped, but a significant factor in the drop of unemployment has 

not been growth in jobs above trend—at least that’s a part of it—

but a drop in the participation rate. 

You’ve noted this; the Council of Economics has noted this; your 

report. The participation rate of people in the work force. In January 2006, it was 66 percent, well below the high of 67 and a quarter percent reached in early 2000. 

Now there’s a debate about what extent it’s demographic. The 

Council of Economic Advisors does say on page 171, it’s at least 

partly cyclical. But in any case, we ought to be clear that the drop 

in unemployment has been greatly helped not by job growth above 

trend, but by demographics. 

Here’s a question. I agree with you that the skill premium has 

been increasing. Natural trends in the economy, globalization, technological change, productivity; those I agree are exacerbating inequality. 

The problem is that I believe public policy has made it worse 

rather than better. It might be the global public policy in part 

ought to be to try to mitigate the inequality, not the point where 

you destroy incentives, but at least mitigate it. 

Frankly, I think that is the difference between the approach in 

the previous Administration and the current one, through tax policy. You know, we read today there’s a new assault being launched 

by very conservative elements on labor unions. 

We see a major funded effort to try and undercut labor unions. 

We see, in my judgment, a budget which cuts back on virtually all 

of the Federal programs that would go to diminishing the inequality. So the question is—I know I’m out of time, and I’d be glad to 

take this in writing later—given that we agree that inequality is 

a problem, and I agree that it is trends in the economy that cause 

it. 

But my problem is that public policy has gone from trying to 

mitigate that, it seems to me, to exacerbating it, maybe out of the 

motive that this will promote incentives that lead to growth. 

So the question is what do we do about it? What Federal policies 

would make sense, if we all agree that inequality is increasing beyond what is healthy? What should we do about it? 

Chairman OXLEY. The gentleman’s time has expired. The Chairman may respond. 

Mr. BERNANKE. Well, the discussion we were having a moment 

ago that turns to skills, suggests that one very positive thing would 

be to continue to strengthen education and to continue to strength 

job training and skills acquisition through lifelong learning. I think 

that’s a very important dimension of public policy. 

Chairman OXLEY. The gentlelady from Illinois. 

Ms. BIGGERT. Thank you, Mr. Chairman. Mr. Chairman, could 

you discuss the role that you see R&D playing in the future 

14

robustness of our economy, and what sort of incentives you believe 

are necessary in this area? 

I know that the President has talked about research and development and how important that is to our country. 

Mr. BERNANKE. Congresswoman, thank you. I believe that research and development are essential to our growth in a technological era. I think there are considerable grounds for optimism. 

The United States remains a technological leader. We retain a 

very substantial share of the world’s patents and publications and 

innovations. That’s a position we want to keep. 

How to promote that? First on the public side, I think most 

economists would agree that support by the Government of basic 

research in a variety of areas is productive. Private companies can’t 

necessarily capture the benefits of basic research and, therefore, 

Government support in that area is beneficial. 

We also have in this country substantial private sector research 

and research within universities. I don’t want to get into any details, really, on tax policy, but I simply note that this Congress will 

consider extension of the research and development tax credit, 

which will be one mechanism to support R&D at the private sector 

level. 

So I agree. This is a very high priority for the U.S. economy, and 

it’s needed to keep us technologically at the frontier. 

Ms. BIGGERT. Thank you. 

We have had a relatively warm winter, a little bit of snow lately 

in various parts of this country. But there hasn’t been any—I don’t 

think any noticeable slowing in the steady rise in the price of energy over the last year or more. But however, the economy is going 

strong. Why has the economy been able to shrug off such a significant rise in the cost of energy? 

Mr. BERNANKE. That’s an excellent question. And the Federal Reserve has given a great deal of thought to that question. Part of 

the answer is that the U.S. economy is less dependent on energy, 

on oil, than it was 30 years ago. The increase in prices we saw in 

the ’70s did lead to increased efficiency and, therefore, less sensitivity to changes in oil prices. 

Secondly, the increase in energy prices, although substantial, 

with the exception of the hurricane period, has been generally less 

rapid than occurred in some episodes during the 1970s. 

Third, the economy is very resilient. It showed remarkable 

strength after the hurricanes. It showed remarkable strength after 

9/11. So our economy does have a lot of staying power, a lot of ability to deal with shocks. 

But the final point that I’d like to make, and it relates to some 

comments I made in my testimony, is that a big difference between 

the 1970s and today is that inflation expectations are low and stable. The public has a great deal of confidence that the Federal Reserve will keep inflation low and stable. In the 1970s, that confidence did not exist, and when oil prices rose, wages and prices 

began to spiral upward. The Federal Reserve had to raise interest 

rates quite substantially, slowing the economy, in order to keep the 

inflation rate under control. 

Today we see oil prices going up, but we see very little response 

in wages and prices. We see overall inflation relatively stable. We 

15

don’t have to have the same aggressive monetary policy response 

we had in the ’70s, and that’s a direct benefit of the improvement 

in inflation expectations that we’ve gotten in the last 30, 35 years. 

Mrs. BIGGERT. Do you have a crystal ball or a view of what can 

be done to move energy prices lower? 

Mr. BERNANKE. No. I wish I had such a crystal ball. We’re in a 

difficult period because, for the foreseeable future, we are operating 

close to the margins of available global supply of oil and natural 

gas. And as a result, prices are likely to stay high, and the risk exists, if there are significant disruptions of supply, that we’ll get additional spikes or movements in energy prices. 

Now in the longer term, energy prices at the current level should 

be sufficient to bring forth a number of alternative sources of supply as well as induce significant conservation on the part of consumers and firms. So I’m actually fairly optimistic about 10, 15, 20 

years down the road because these high prices will allow the economy to adjust. 

But over the next 5 or 10 years, we are in the zone of vulnerability without available alternatives to the extent we would like 

and with a relatively small margin of error in terms of global supplies. 

Mrs. BIGGERT. Thank you very much. I yield back, Mr. Chairman. 

Chairman OXLEY. The gentlelady yields back. The gentlelady 

from New York, Ms. Maloney. 

Mrs. MALONEY. Thank you, Mr. Chairman. I’d like to follow up 

on Ranking Member Frank’s question. You mentioned that education was very important, but the last time we focused on educating large segments of our unemployed population, those jobs 

ended up being outsourced. 

And what I hear from many of my constituents, particularly 

women that are middle-aged and possibly older is, ′′What jobs are 

we going to educate them for?′′ We live in a changing economy, but 

what policies, including the Federal Reserve’s policies, have played 

a role in labor’s share of economic gains dropping to an unusually 

low level? 

Mr. BERNANKE. Congresswoman, with respect to the Federal Reserve’s policies, of course our mandate is maximum sustainable employment. We will strive for that mandate by maintaining a level 

of employment which is not only high but is also sustainable. In 

that way, we make it possible for better jobs to be created because 

we don’t have seasonal and fluctuating jobs as we would in a boom/

bust kind of cycle. So that’s the contribution that the Federal Reserve will make. 

With respect to the relationship between productivity and real 

wages, I have some confidence that there will be some catch-up. 

During the late 1990s in the previous episode when productivity 

surged ahead, there was a period where labor’s share declined 

below its long-term average and real wages fell somewhat behind 

productivity gains. 

After a couple of years, as the labor market strengthened, we 

saw that those gains translated into overall real wages. And I believe that as the market continues to strengthen now that we’ll see 

real wages rising as well. That’s a statement about overall real 

16

wages. It doesn’t necessarily address the entire distribution of 

wages, and we’ve already discussed some of those issues. 

With respect to your question about education, I think an important point to make is that education is much more than K-12 and 

university. It involves continuing education. Community colleges 

play an important role. So does job training, on-the-job training. I 

think we need to promote those kinds of activities, and the Government has some role in assisting on that. 

Mrs. MALONEY. Many of us are fortunate to represent highly 

educated people that have lost their jobs in a changing economy, 

and particularly in the economy in my state, many of our jobs have 

been outsourced overseas, and there is this troubling trend in distribution of income. 

And what policies or change in public policy, including the Fed 

or other policies, may be needed to move the distribution of income 

back to a more normal and healthier distribution of income in our 

country? 

Mr. BERNANKE. Well, Congresswoman, I lack a lot of good answers, as many of us do. I think there really is only one fundamental solution, and that is increasing skills. Now there are different ways to increase skills. There’s formal education. 

Mrs. MALONEY. Mr. Chairman, I’m with highly skilled workers, 

and they tell me they can’t find a job and they’ve lost their job. 

But I would like to go back to the point that Mr. Oxley raised 

over the great mystery in rates over the past year or so and that 

the Fed tightening has not yet caused long-term interest rates to 

budge. And I’d like to ask you to elaborate. And does this disconnect between Fed actions and long-term interest rates have implications for the Fed’s ability to control inflation? 

Mr. BERNANKE. Congresswoman, if you break up the term structure into short tranches, or term interest rates across the length 

of the term structure, you’ll see that what’s happening is that the 

far out short-term rates, the ones at far maturities, are the ones 

that have been declining. And this is the phenomena we discussed 

before, the decline in term premiums and the expectation of low returns to investment. 

So that’s the reason for the phenomenon. I don’t think that it 

necessarily affects our ability to affect inflation. Short-term interest 

rates, first of all, directly affect a good bit of economic activity. And 

secondly, there’s also going to be impact on longer-term rates that 

will feed through into the rest of the economy. 

Our strategy is not to pick a magic rate or to pick a magic longterm rate. Rather, we consider alternative paths of future policy 

rates, and under each alternative path, we try to make a forecast 

about where the economy is going to go. Based on those forecasts, 

we try to judge what path will give us the best outcomes in terms 

of our mandated objectives. 

Mrs. MALONEY. I can see you were a former teacher. You’re very 

clear in your responses. 

Mr. BERNANKE. Thank you. 

Mrs. MALONEY. And finally, this large debt, deficit, and trade 

deficit—what is the implication for growth for our economy, and 

isn’t this structure bad for economic growth in the long term? 

17

Mr. BERNANKE. Are you referring to the fiscal deficit or to the 

current account? 

Mrs. MALONEY. Current account. 

Mr. BERNANKE. Current account deficit. The current account deficit, I should first say, I was asked about it earlier, is a very complicated phenomenon. There are many factors underlying it. And 

perhaps I’ll have an opportunity to talk more about those factors. 

The immediate implication, though, is that the U.S. economy is 

consuming more than it’s producing, and the difference is being 

made up by imports from abroad, which in turn are being financed 

by borrowing from abroad. 

So the concern is that over a period of time, we will be building 

up a foreign debt to other countries which will lower national 

wealth and lower our ability to consume in the future. So it is a 

concern. 

I do believe that the current account deficit can and should come 

down gradually over a period of time. I think it’s neither possible 

nor desirable to have it shift radically in a short period of time. 

But over a longer period of time, a combination of higher national savings in the United States, increased demand by our trading partners, and greater exchange rate flexibility, taken together, 

will allow the current account deficit to come down in a way that 

I hope would not be disruptive to our economy. 

Chairman OXLEY. The gentlelady’s time has expired. The gentleman from Iowa, Mr. Leach. 

Mr. LEACH. Thank you, Mr. Chairman. Mr. Chairman, as you 

know, there are odd financial entities on the financial landscape 

called industrial loan companies, which have powers of banks in 

many different ways. Because they allow the merging of commerce 

and banking, a number of well known companies have established 

ILCs or are seeking to establish them. And then, because of their 

regulatory arbitrage advantages, a number of financial companies 

have also established ILCs. 

In his last communication to the Congress, the former Chairman 

of the Fed, Mr. Greenspan, endorsed a bill called H.R. 3882 that 

would subject industrial loan companies to the same laws and principles that apply to financial holding companies. 

In this hearing as your first appearance before the Congress, I’m 

wondering if you would care to present your views on the industrial 

loan company issue. 

Mr. BERNANKE. Yes, Congressman. If I understand your bill correctly, and you should correct me if I’m mistaken, the bill would 

require any firm acquiring an industrial loan company to take financial holding company status, which in turn could create restrictions on its activities, require consolidated supervision, and indeed 

would also require that the firm hold its subsidiaries to a somewhat higher standard that might otherwise be the case. 

Is my understanding correct? 

Mr. LEACH. That’s correct. It simply puts ILCs under the Bank 

Holding Company Act, which has that effect. 

Mr. BERNANKE. Congressman, as you know, the Federal Reserve 

has had concerns about industrial loan companies and the level 

playing field and the separation of banking and commence. In my 

view, the bill that you’re describing would solve the problem and 

18

would relieve our anxieties considerably about this particular type 

of organization. 

Mr. LEACH. Thank you, sir. 

Chairman OXLEY. The gentleman yields back? Mr. Kanjorski. 

Mr. KANJORSKI. Mr. Chairman, welcome to your new role. Probably this will be the most entertaining session you’ll ever have with 

this committee. So enjoy. 

Ms. Maloney brought up the question of the deficit, and your 

predecessor used to always indicate that deficits matter a great 

deal, but it never seemed that the leadership came from the Federal Reserve as to facing the reality of what causes the deficit and 

what limited policies both the Federal Reserve and the Congress 

has with fiscal policy to resolve the problem. 

But two or three things have come to my attention in the last 

several months that are to me very frightening. One, the deficit is 

rising faster than productivity, or what I should say is growth of 

the American economy. If you take a three percent growth of the 

American economy at roughly a $12 trillion size, that’s about $360 

billion a year, and our deficits are far outstripping that. 

And, too, as a result of that and the policies over the last 5 years, 

the debt owed by the United States to foreign entities, it was from 

1789 to 2000 it took us that period of time to have a combined borrowing of one trillion, .01 trillion. 

Now since 2000 till today under this Administration, we’ve borrowed 1.05 trillion, which means it exceeds that entire 200-plus 

year history, more under this Administration than all 42 Presidencies prior to it. And with no end in sight, it seems to me, although we keep hearing that there’s a plan of the Administration 

to reduce the deficit by half at a year beyond this Administration’s 

term in office, which is always interesting. I think the Congress 

has a tendency to promise action for future Congresses but not to 

take action in this Congress. 

It seems to me we’re at a point now that the American people 

really don’t understand deficits, the problems attendant thereto, 

and the potential long-term problems, particularly the potential 

since most of this debt is owed to Japan, China, and the United 

Kingdom, how that will affect our foreign policy in years to come. 

At what point is the chairman of China going to be able to call 

the President of the United States when he disagrees with a policy, 

foreign policy of the United States, and not threaten war, not 

threaten retaliation of a military way, but just say, Mr. President, 

you won’t be able to pay your Social Security checks next month 

if you don’t change your policy? I think that’s rather dire. That actually could occur today. If we weren’t able to fund this deficit with 

foreign money, we could not meet our Social Security obligations in 

the next month. 

Where do you see your role as a leader and an educator of the 

American people as to the significance of this and how that policy 

should change or shouldn’t it change? 

Mr. BERNANKE. Congressman, I think that in my role as chairman of the Federal Reserve, it is appropriate for me to talk about 

long-term Government spending, taxes, and deficits. I think that 

bears on economic stability and financial stability, and I will speak 

out on those issues. 

19

I am concerned about the prospective path of deficits. I believe 

that it does reduce national savings, and, therefore, imperils to 

some extent the future prosperity of our country, and increases the 

burden that will be faced by our children and grandchildren. 

Of particular concern to me is that in the very near term, the demographic changes in our economy are going to lead to increasing 

promises, increasing entitlement payments associated with the 

large programs of Social Security, Medicare, and the Federal contribution to Medicaid. Indeed, according to the best estimates we 

have, the share of GDP going to those three programs will go from 

about 8 percent today to about 16 percent when my children, who 

are now in college, are contemplating retirement. 

If that were in fact to happen, given that total revenues are now 

about 18 percent of GDP, that would suggest that either we would 

have to eliminate all other Government spending, raise taxes considerably, or else take some action to bring entitlement spending 

under control. I’m not saying which of these things. I’m just pointing out that the implications of these obligations are quite draconian in the long run. 

We need to be addressing those long-term issues soon. We need 

to give people the time to prepare for whatever changes might 

occur in entitlement programs. And, therefore, I think that we do 

need to think about fiscal deficits and their implications for our national saving and our long-run ability to meet our obligations to our 

citizens. 

Chairman OXLEY. The gentleman’s time has expired. The gentleman from Alabama, Mr. Bachus. 

Mr. BACHUS. Thank you. Chairman Bernanke, you’re known, 

widely known, as a proponent of greater transparency at the Fed. 

Now that you’re Chairman, would you give us some idea of what 

specifics you’re considering to bring greater transparency to the 

Fed? And in answering that question, at some point, could you 

reach a point where too much transparency and too much openness 

ties your hands in terms of policymaking? And if so, what principles will you use in determining what a proper balance would be? 

Mr. BERNANKE. I do believe that transparency is very important 

for the Federal Reserve for a variety of reasons, including democratic accountability. I also believe that a more transparent Fed is 

going to be more effective because the public and the markets will 

have a better understanding of what the Fed is trying to do. Expectations will be better anchored, and I think policy will just work 

better if the Fed is more transparent. 

I don’t want to give the impression that I’m coming in with a 

whole new program. Transparency has been increasing at the Fed 

over the last decade quite significantly. During the time that I was 

Governor there, we increased the informativeness of the statements. We moved up the release of the minutes, and generally in 

speeches and testimonies, I think there was a definite movement 

towards trying to be more open about the Federal Reserve’s strategy and approach. 

I would like to continue that direction of increased transparency. 

Obviously, I’ll have to do that in concert with my colleagues on the 

Federal Open Market Committee. But one of the possibilities that’s 

already been mentioned is providing guidance on the long-term 

20

range of inflation which is most consistent with our objectives of 

maximum sustainable employment and price stability. 

I will also, individually and personally as I come before committees or make speeches, try to be as open and forthcoming as I can 

in providing information about the Fed’s strategy and how we see 

the economy. 

Now you quite correctly ask, is it possible for transparency to go 

too far. And I think it is possible. We certainly wouldn’t want a situation where the transparency is such that it inhibits the discussion, that it inhibits the policymaking process. I would not, for example, favor TV cameras in the FOMC meeting because I think 

that would not allow a full and frank discussion to take place. 

So there are limits, and we have to pay attention to those limits. 

But I think broadly speaking that fresh air is good for the Federal 

Reserve, and I want to keep moving us in that direction. 

Mr. BACHUS. Thank you. You mentioned today maximum sustainable employment, and I want to commend you in your statement today; you’ve spent a considerable time talking about energy. 

One thing that you said because of Hurricane Katrina, but I think 

it’s also true today is we have tremendous restraints on our economy because of the high price of energy. And you go talk to plant 

owners, you talk to company owners, you talk to even union officials, and they used to complain about low wage subsidized foreign 

competition, taxes, and regulation, being able to get skilled, educated workforce, which is still—those are all still concerns. But 

today I hear time and time again the high cost of natural gas and 

petroleum. 

Recently the chemical industry has come out and said we’re uncompetitive with the world. In your testimony and in former testimony, the Fed has suggested that the recent energy price increases 

have not been a major negative impact on the economy. But today 

I think maybe you’ve indicated that they may be. 

You know, China has just announced plans to build 30 nuclear 

power plants. We don’t even have one in the licensing process 

today. Japan has built 23 LNG terminals while we’ve built four. 

France has built 58 nuclear power plants. We’ve built none—or one 

during that time, and that was 1996 or 1997, Watts Bar. So going 

forward, are you—what is the level of your concern that if we don’t 

do the things our competition is doing that it will affect our sustainable employment? We’ve lost 150,000 jobs in forestry and paper 

just recently because of energy. 

Mr. BERNANKE. Congressman, when I was responding to the 

question about the effect on the economy, I was talking about 

broad aggregates like GDP growth. You’re absolutely correct that 

there are many industries that depend on natural gas, for example, 

which have suffered quite severely in the recent episode. 

Natural gas is unusual because, unlike oil, which is traded freely 

on a global market, natural gas is a much more regional market 

because of the difficulties in transportation. And so building LNG 

terminals is one thing that we, I think that we can do and we 

should continue to do to create a more global market for natural 

gas. 

I can only just endorse your sentiment that while I was optimistic that in the long run these high prices will call forth alterVerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY
21

native sources of supply, the Government does have a role in supporting that activity. 

I mentioned just two possibilities. One is that the Government 

has been very helpful in basic research to help develop new designs 

to find new methods of conservation. 

And secondly, certainly there are many legitimate reasons to regulate, say, new refineries, for example, and there’s absolutely no 

reason, you know, to eliminate their regulation. But clearly, one 

should try to make the regulation as clear and straightforward as 

possible so that new refineries can meet the appropriate standards 

and operate. 

So by clarifying regulations, by providing additional support for 

basic research, those are just methods that the Government can 

undertake to help with the energy situation. Again, I agree it’s a 

very important issue for us in the next 10 years or so. 

Chairman OXLEY. The gentleman’s time has expired. 

Mr. BACHUS. Let me make a closing comment. If I can just say, 

yeah, we need alternative energy, conservation, but even with all 

that, we’re projected, with all those things, if we do those things, 

we’re still going to have about 40 percent more need for electricity 

and energy 20 years from now. 

And I know Mr. Sanders knows Vermont gets about 78 percent 

of their electricity from nuclear power plants, but that’s the only 

State in the Union where they are over 50-some. 

Chairman OXLEY. The gentleman’s time has expired. The gentleman from Vermont, the aforementioned Mr. Sanders. 

Mr. SANDERS. Thank you, Mr. Chairman. And Chairman 

Bernanke, welcome to the Financial Services Committee and very 

best of luck on your new job. 

Mr. Bernanke, there is a great concern in this country that our 

current economic policies are not working for ordinary Americans. 

The middle class continues to shrink. Poverty is increasing. The 

gap between the rich and the poor is now wider than it has been 

in over 7 years. We have a recordbreaking national debt as well as 

a recordbreaking trade deficit. And the Bush Administration has 

the worst record of private job creation since Herbert Hoover. 

Meanwhile, while millions of American workers are seeing their 

real wages decline, or they’re using their pensions and their health 

care, while they can’t afford child care or college education, the 

wealthiest people in this country frankly have never had it so good. 

My own view is that the time is long overdue for the Bush Administration and Congress to start making fundamental changes in 

our economic policies so the Government works for everybody and 

not just the very wealthy and their lobbyists who descend on Capitol Hill every day. And if we don’t, what we are going to see in 

my view is that for the first time in the modern history of America, 

our kids are going to have a lower standard of living than we do. 

Now I want to just very briefly, because time is limited, solicit 

your remarks, your thoughts on some very important economic 

questions. And my first one is the following. Since President Bush 

has been in office, more than five million Americans have slipped 

into poverty. Childhood poverty has increased by over 12 percent. 

We continue to have by far the highest rate of childhood poverty 

in the industrialized world. American house—average America 

22

household income has declined for the past 4 consecutive years. It’s 

down by more than $1,600. Twenty percent of American jobs now 

pay less than a poverty level wage for a family four. 

My question is a very simple one. All over America, States like 

the State of Vermont have raised the minimum wage, which now 

at the Federal level remains $5.15 an hour and in fact has the lowest purchasing power that it has had in over 50 years. Chairman 

Bernanke, should the Congress raise the minimum wage so that 

every worker in America who works 40 hours a week escapes from 

poverty? Very simple question, sir. 

Mr. BERNANKE. Well, I’m going to be an economist and give you 

the one hand and the other hand. On the minimum wage, it’s actually a very controversial issue among economists. Clearly, if you 

raise the minimum wage, then those workers who retain their jobs 

will get higher income and that, therefore, it helps them. 

The concerns that some economists have raised about the minimum wage are first, is it as well targeted as it could be? That is, 

how much of the increase is going to the teenage children of suburban families, for example? And secondly, does it have an employment effect? That is, do higher wages lower employment of low 

wage workers? 

Mr. SANDERS. And your response is? 

Mr. BERNANKE. My response is that I think it does lower employment, that, however, I note that the literature is fairly controversial on this subject, and my colleagues from Princeton, Alan Kruger 

and David Card, have presented results saying that— 

Mr. SANDERS. Should Congress raise—I’m sorry to be abrupt, but 

we have a limited amount of time. Should Congress raise the minimum wage? 

Mr. BERNANKE. I’m very reluctant to comment on specific measures of this sort. But I will say this, that one might consider alternative ways of helping working class Americans, for example, the 

earned income tax credit, which delivers money to working families— 

Mr. SANDERS. Okay. Thank you. 

Mr. BERNANKE.—without necessarily the employment effect. 

Mr. SANDERS. I’m sorry to be abrupt, but we have just a limited 

amount of time. This is my second question. Our country now has 

a recordbreaking $720 billion trade deficit, and our trade deficit 

with China, as you know, is over 200 billion. Over the past 5 years, 

the United States has lost almost 3 million good paying manufacturing jobs—industry after industry, good paying jobs, good benefits, hemorrhaging. Many of the new jobs that are being created are 

low wage, minimal benefits. 

To my mind, to more and more Members of Congress and to 

more and more Americans, it appears clear that our current trade 

policies—NAFTA, permanent normal trade relations with China—

are a disaster, leading us to a race to the bottom, encouraging 

American companies to throw workers out on the street, move to 

China, pay people 30 cents an hour. 

Question. Do you think that the time is now to rethink our disastrous trade policies which have lost millions of good jobs and run 

up a recordbreaking trade deficit? 

23

Mr. BERNANKE. Well, Congressman, Ambassador Portman has 

just released a report on trade with China, and he’s pointed out a 

number of areas where he’s concerned about China’s adherence to 

international agreements and to free and fair and open trade. I 

know he’s going to pursue some of these issues and try to make 

sure that trade with China is on a fair and open basis. 

Mr. SANDERS. Well, let me ask you this. 

Chairman OXLEY. The gentleman’s time has expired. The gentleman’s time has expired. 

Mr. SANDERS. Just, you know— 

Chairman OXLEY. The gentleman may respond. The Chairman 

may respond. 

Mr. SANDERS. Is it a fair—no, you asked—Mr. Bachus was able 

to continue just for a little bit, okay? 

Chairman OXLEY. Your time has expired, Bernie. 

Mr. SANDERS. So did other people who were continuing their 

questioning. 

Chairman OXLEY. Make it quick. 

Mr. SANDERS. Is it a level playing field when people in China 

make 30 cents an hour compared to American wages? How can 

that be a level playing field? 

Mr. BERNANKE. Well, again, I think we need to have free and 

open trade. I think there are many benefits from that. And I don’t 

want to move back from free trade, but I think it’s important to 

make sure that the trade that takes place is done on a fair and 

open basis and that, for example, that the Chinese respect our intellectual property so that we receive the appropriate compensation 

for that. I favor free trade, however. 

Chairman OXLEY. The gentleman from the first State, Mr. Castle. 

Mr. CASTLE. Thank you, Mr. Chairman. Chairman Bernanke, the 

House-passed GSE reform bill, which is H.R. 1461, you may be familiar with it, consolidates regulations of the three housing GSEs, 

and for the first time fully empowers a new independent regulator 

to—and I’ll go through it specifically—set minimum and risk-based 

capital requirements, review and adjust portfolio holdings, establish credential management and operation standards, approve new 

business programs through public rulemaking, take prompt corrective and enforcement actions, put a failing enterprise into receivership, and fund the agency outside the Congressional appropriations 

process. 

I recognize that our bill does not go as far as some would prefer, 

but do think that H.R. 1461 is an improvement over current law? 

Or any other comments you have on that. 

Mr. BERNANKE. I think, Congressman, that we have an opportunity now to address the important concerns about GSEs and 

their potential effects on financial stability. 

I understand the good intentions underlying the House bill, but 

I feel that it does not solve the problem. And, therefore, if we were 

to go with that bill, we would be missing perhaps the last opportunity we’re going to have in many years to really address these 

problems. 

In particular, the House bill does not go as far as the Senate bill 

or as bank regulatory bills do in giving the GSE regulator power 

24

over capital and setting capital. Secondly, it is not precise in terms 

of when receivership would be invoked, leaving uncertainty in the 

market about exactly when that would happen and creating an impression of Government backing for the GSEs. 

And thirdly, and I think most important, the point that Chairman Greenspan made extensively in his numerous testimonies on 

the subject, the portfolios of the GSEs are much larger than can 

be justified in terms of their fundamental housing mission. And 

these large portfolios represent a risk to financial stability. And if 

the taxpayer were to be called upon, also to the FISC. 

The House bill does address portfolios, but it doesn’t provide, in 

my opinion, sufficiently strong guidance to the regulator to mandate that the portfolios be limited to an amount needed to serve 

the true housing mission of those organizations. 

Mr. CASTLE. Thank you for a very specific answer. Let me change 

subjects for a moment, sort of building on some other questions 

that have been answered here. 

But I think we’re all becoming increasingly concerned, and 

maybe it’s the baby boomers’ fate that we should be concerned 

about what’s happening in the economy. That is, defined benefit 

pensions going out the window. The borrowing rate, particularly 

because the borrowing rate seems to be shifting from general borrowing to added mortgages based on the value of housing. The cost 

of medical care, the medical insurance if not the medical care. All 

the various aspects that seem to be eroding the assets that people 

are going to have as they come closer to the end of their lives with 

the exception of, say Social Security. 

Is there anything that we in Congress should be doing? I mean, 

should we be consolidating the various tax-created savings type 

plans that we have done, most of which, frankly, are hard to understand? There’s a whole lot of them. Are there other things that we 

should be doing to somehow spur the savings? I mean, every economist you talk to says with both of their hands that we need to have 

additional savings in the United States of America, but there 

seems to be a creeping problem where people are not going to have 

the old standbys, their pensions, their savings accounts, et cetera, 

that they had in the past. 

Do you have any thoughts about anything that we can be doing 

other than using the bully pulpit to encourage people to save more 

and to be more careful? 

Mr. BERNANKE. Congressman, it’s a very tough problem. As I already indicated, one way to address saving at a national level is 

through fiscal responsibility and in reducing over a period of time 

the deficit, which adds to national saving. 

Mr. CASTLE. Right. But I was trying to go to the individual’s 

level. 

Mr. BERNANKE. At the individual level, again, I want to be careful not to endorse specific programs, but there are various ways of 

providing tax benefits for saving. The evidence on their effects is 

somewhat mixed. We really haven’t found a magic bullet for increasing saving. 

There is some view among economists that more consumptionbased taxation would be helpful in that regard. That is a pretty 

25

broadly held view, but is one that has not been firmly demonstrated. 

I think financial literacy has got to play a role here. People need 

to understand, first of all, the importance of saving, the importance 

of planning, and also understand how to utilize the financial markets to accumulate wealth. 

You mentioned defined benefit pensions. There really is a problem in that we have seen companies that have promised their 

workers pensions and now essentially are reneging on those promises. Going forward, I know Congress is considering various pension reform bills. We need to make sure that when companies 

promise pensions that they fully fund those obligations and that 

they are sufficiently transparent so that workers can understand 

that their pensions will be there when they retire. 

So, again, I think there are some policies that may help with saving in terms of providing incentives for saving, allowing people to 

combine savings in a limited number of accounts and the like. But 

the truth is that there is still some controversy about how effective 

these incentives will be, and education has got to be part of the effort. 

Mr. CASTLE. Thank you, Mr. Chairman, and good luck to you, sir. 

I yield back. 

Chairman OXLEY. The gentleman yields back. The gentlelady 

from Indiana, Ms. Carson. 

Ms. CARSON. Thank you very much, Mr. Chairman, and thank 

you, Mr. Chairman, for being here today. I have a quick question 

concerning the housing market. At one point it was just skyrocketing and booming, and now it seems to be on the decline. 

Could you anticipate what kind of effect, impact that’s going to 

have on the domestic economic growth? 

Mr. BERNANKE. Yes, Congresswoman. We discuss it in our report. 

The housing market has been very strong for the past few years. 

Housing prices have been up quite a bit. Residential investment 

has been very strong. 

It seems to be the case, there are some straws in the wind, that 

housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that 

house prices will probably continue to rise, but not at the pace that 

they had been rising. 

So we expect the housing market to cool, but not to change very 

sharply. If the housing market does cool more or less as expected, 

that would still be consistent with a strong economy in 2006 and 

2007. In particular, capital investment and other forms of demand 

would take up the slack left by residential investment. 

Ms. CARSON. Thank you very much, Mr. Chairman. 

Mr. BERNANKE. Thank you. 

Chairman OXLEY. The gentlelady yields back. The gentleman 

from Texas, Mr. Paul. 

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

Chairman. Mr. Chairman, I was very pleased with what you said 

about your support for transparency, and I want to ask a question 

dealing with that. 

Also, at the bottom of page 8, you said something that I thought 

was very important, where you said that the Federal Reserve, toVerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY
26

gether with all other central bankers, has found that successful 

policy depends on painstaking examination of a broad range of economic and financial data, and I also think that’s very important. 

There is a famous quote by an economist, which I’m sure you’re 

familiar with, that inflation is always and everywhere a monetary 

phenomenon. And likewise, another famous economist from the 

20th Century, and I’ll paraphrase this, said that monetary authorities deliberately confuse the issue of inflation by talking only about 

price increases. Yet it’s the price increases which are merely the inevitable consequence of inflation. This is done on purpose to distract from the real cause, which is the increase in the quantity of 

money and credit. 

And I notice in your report to the Congress, you do report M2, 

and it went up last year at four percent. And M3 was not mentioned, other than the fact that it won’t be reported any more. M3, 

interestingly enough, went up twice as fast, and M3 is going up 

probably more than two times as fast as the GDP. 

And this is information that I consider important and I know a 

lot of other economists consider important. And I find it rather interesting and ironic that one of the reasons that the Federal Reserve has given—of course, this was before you were the chairman—for this change is the fact that it costs money; it costs too 

much money. 

Now that is really something in this day and age, especially since 

the Federal Reserve creates their own money and their own budget 

and they have essentially no oversight, and all of a sudden it costs 

too much money to give us a little bit of information. 

So that to me is a bit ironic that this information will not be 

available to us. And my question to you is, would you ever reconsider this policy of denying this information to the Congress just 

so that we have another tool to analyze what’s going on with monetary policy? It seems like with your support for transparency, this 

should be something that you would heartily support. 

Mr. BERNANKE. Congressman, first, you’re absolutely right. We 

do look at a wide variety of indicators, and money aggregates are 

among those indicators. In particular, M2 has proven to have some 

forecasting value in the past, and I think the slowdown this year 

is consistent with the removal of accommodation that’s been going 

on. 

In regard to your references to M3, a still broader measure of 

money, we have done, and I’m now speaking about the Federal Reserve before my arrival, but we have done periodic analyses of the 

various data series that we collect to see how useful they are. And 

our research department’s conclusion was that M3 was not being 

used by the academic community, nor were we finding it very useful ourselves in our internal deliberations. 

Now it’s not just a question of our own cost; although, of course, 

we do want to be fiscally responsible on our own budget, but it’s 

also I think important for us to recognize the burden that’s placed 

on banks that have to report this information. 

And so when we can reduce that burden, we would like to do so. 

And that was one of the considerations in the decision that was 

made about M3. 

27

Would we reconsider it? If there were evidence that this was an 

informative series and that it was useful to the public and to the 

Federal Reserve in forecasting the economy, naturally we would 

look at it again. There’s nothing dogmatic going on here. 

Dr. PAUL. If the Congress expressed an interest in receiving this 

information, would you take that into consideration? 

Mr. BERNANKE. If there was broad interest in the Congress in receiving this information, we would look at it. But, again, Congressman, remember, it’s a burden on the reporting banks to provide the 

information, and we are trying to reduce that burden as much as 

we can. 

Dr. PAUL. But, of course, this has been available to the financial 

community for a lot of years, and for some people it’s very important to measure what you’re doing. If the money supply is important, which a lot of people believe it is, and it causes the inflation, 

this to me seems like we’re taking information about the money 

supply and literally hiding it from the people. 

And I yield back. 

Chairman OXLEY. The gentleman’s time has expired. The gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Thank you. Chairman Bernanke, I’m the only 

member of this committee to actively work to thwart your appointment. Nothing personal. I simply authored legislation to extend 

your predecessor’s term limits. You owe your office to that bill’s 

sole and very powerful opponent, Andrea Mitchell. 

Speaking of how you get appointed, you are as insulated from 

politics as anyone in Government. The natural tendency of Congress year in and year out, the pressures on us are to spend more, 

tax less. It’s caused many to wonder whether the U.S. is ready for 

self-government. 

Now can we count on you, being so insulated, to make the tough 

decisions? I’m going to ask a whole bunch of questions and allow 

you to respond at the end. And I realize I may be asking too many 

for you to respond to all of them, and I hope that you’ll respond 

for the record. I also ask unanimous consent that we all be given 

5 days to submit additional questions for the record. 

Chairman OXLEY. Without objection, that’s the standard. 

Mr. SHERMAN. But I hope that you would, in your written response, comment on whether we can count on you to urge both 

spending restraint and restraint on tax cuts and push for adequate 

revenues. And I’ll also be asking you whether you agree with your 

predecessor and his comments before this committee in response to 

my question in 2003, that tax cuts do not pay for themselves, that 

they do reduce revenue; unless through some mysterious legislative 

process that I’ve been unable to observe, a tax cut bill leads to 

spending reductions. 

The next series of questions I hope you can respond to is the fact 

that we have this enormous trade deficit. Several have commented 

on it. 

An adjustment in currency values is inevitable, and I would like 

you to set forth how we can work with other countries to make sure 

that any realignment of the value of the dollar compared to other 

currencies is smooth and does not result in a sudden crash of the 

dollar where circuit breaker agreements are necessary, et cetera, 

28

but after running trade deficit after trade deficit that are the most 

enormous of history, we ought to be expecting an eventual decline 

in the value of the dollar, and we hope it is not sudden. How is 

the Fed preparing for such a possibility? 

Finally, there is the controversy about mixing commerce in banking. We have seen in Japan how that leads to the misdirection of 

capital and how it can impair the banking system. 

More important, just as importantly, we know that mixing banking and commerce is wrong because it’s illegal, as we established 

in the bill that came through this committee. 

Yet, I’m troubled that this prohibition, logical as it is, between 

mixing commerce and finance, is being evaded in part through the 

device of saying well, any commercial activity is financial if the 

buyer needs financing. 

We are told that sellling homes or cars is a financial activity. I 

would say I’ve been paying the bank for this suit ever since, well, 

it’s been let out and let in again. I’m still paying for it on that credit card. 

We can argue that my tailor is engaged in a financial as well as 

a frustrating activity. 

In December, the Office of the Controller of the Currency issued 

several legal opinions. Many think that existing law allows banks 

to own real estate to accommodate their banking business, and now 

that seems to be interpreted to allow them to build luxury hotels, 

to develop residential condominiums for sale. 

This sounds like speculative real estate investment of the very 

type that brought down the savings and loans. 

Do you think the OCC is giving the banks too much freedom so 

as to create a risk to the deposit insurance system? 

I’m particularly concerned about a recent opinion that allows a 

national bank to own a 70 percent ownership stake in a wind mill 

farm, and that means that the deposit insurance fund is dependent 

upon which way the wind blows. 

I know that others have already asked you about the ILC loop 

hole, so I hope that you will be able to address the mixing of banking and commerce and what steps the Fed should take to protect 

our financial system from both a violation of the spirit of Gramm/

Leach/Bliley and also from what has imperiled and really held back 

the growth of the Japanese economy as well as imperiling its financial system. 

Chairman OXLEY. The gentleman’s time has expired. The gentleman from California, Mr. Royce. 

Mr. ROYCE. Chairman Bernanke, congratulations to you on your 

new position. 

In April of 2005, Chairman Greenspan delivered testimony at 

that time to the Senate Banking Committee outlining the Federal 

Reserve’s view on reforming regulation of the Nation’s three housing GSEs, and as I recall at that time, you were a member of the 

Federal Reserve Board. 

I’d like to know if there are any notable differences between your 

views on GSE reform and the views presented by Chairman Greenspan in April of 2005 in that Senate speech that he gave. 

29

Mr. BERNANKE. Congressman, as you point out, I was a member 

of the Board, and the testimony that Chairman Greenspan gave I 

believe was an official Board position. 

I was there during the evolution of these issues, during the staff 

presentations, during discussions. I had discussions myself with 

Chairman Greenspan. 

I find his economic arguments persuasive, in particular, the concerns about the portfolio, the risks they present to financial stability and potentially to the taxpayer. 

I want to just also reiterate that I agree with Chairman Greenspan that the GSEs do perform a very important service in 

securitizing mortgages and providing/creating a secondary market, 

a liquid secondary market for those mortgages. 

I have no vendetta against the GSEs by any means. I think they 

are very positive institutions and they do some very important 

things for housing in the United States. 

I am concerned, as Chairman Greenspan was, about the size of 

the portfolios and the risks that are inherent in trying to hedge 

them in a dynamic market with rapidly moving financial conditions. 

Mr. ROYCE. I agree totally with your assessment. Do you generally agree with the Treasury Department’s GSE regulatory reform recommendation that we have seen that calls on Congress to 

limit the GSE’s portfolio assets to those necessary for the GSEs to 

fulfill their statutory housing mission? 

Mr. BERNANKE. I do agree. The question is why they are allowing 

the portfolios to exist when they have as much inherent risk as 

they do. 

The question is how much of the portfolio is necessary to fulfill 

the mission. That is something that may require some judgment 

and analysis, but it seems clear it’s a much smaller number than 

currently being held by the large GSEs. 

Mr. ROYCE. Thank you. May it be that the rise in home ownership and the rise in housing wealth that went along with it over 

the past several years has enabled many consumers to dip into savings from current income, and thus, maintain spending even in the 

face of these high energy prices, as there are some signs that housing demand is slow, which you mentioned in your testimony, and 

the rise in home prices clearly are leveling off or starting to dip, 

in your view, how big of a risk to consumer spending from what 

might occur, a rapid downward adjustment in home prices, and are 

there possible offsetting factors in terms of how this will play out 

in the economy? 

Mr. BERNANKE. Our expectation is that if and when the housing 

market slows, that savings rates will tend to rise. 

We have built into the forecast, so to speak, some increase in 

personal savings. 

As home values grow more slowly, then consumers can rely less 

on the increase in equity as a source of wealth building and, therefore, must save more out of their current income. Again, that’s to 

be expected. 

As I’ve indicated, our current expectation is that process will be 

gradual and is consistent with continued strong growth in the economy. 

30

However, as I also indicated, the housing market and the consumer response to any changes in the housing market is one of the 

risks to the forecasts and one we will be monitoring closely as we 

try to assess the state of the economy in the coming year. 

Mr. ROYCE. Mr. Chairman, I yield back. 

Chairman OXLEY. The gentleman yields back. The gentle lady 

from California, Ms. Waters. 

Ms. WATERS. Thank you very much, Mr. Chairman. I’m pleased 

to be here with you, Mr. Bernanke. I welcome you to this committee. We are going to miss Mr. Greenspan. No one talks like him, 

and we don’t want you to. 

I had a great relationship with him. He’s been to my district. I’m 

going to invite you. 

I want to continue this discussion this morning about rising inequality in two ways. I’m going to talk about housing a little bit 

more. 

It’s been alluded to any number of ways this morning. I want to 

talk about the fact that many Americans are priced out of the market. They are not able to buy homes because of the rising cost. I 

am going to talk about this in relationship to affordable housing 

and what the Government can or cannot do. 

Some of the policies of this Administration are such that we don’t 

have support for low- or moderate-income housing that we thought 

we had, and the cuts that are being made will eliminate the opportunities for first time home buyers and others to get into the housing market. 

We are concerned about this iddur. I’m also concerned about the 

bubble. The fact is that some people are stretched to buy a house. 

It cost too much. They got the special product loans, interest only 

loans, et cetera. And what is that going to mean to the economy 

if in fact this bubble does burst? 

I’d like you to give us a little discussion about housing and housing affordability in relationship to some of the things to which I’ve 

alluded and the rising interest rates. 

Secondly, I want to talk about investment in poor and minority 

communities. I used to have this conversation with Mr. Greenspan 

all the time. When I invited him to my district, it was to engage 

entrepreneurs and business persons and the financial services community in conversation about investment in poor communities. 

We know we have things like the new markets initiative that’s 

been very helpful and could be even more helpful if in fact we could 

do more of that. 

What do you envision? What advice could you give us about how 

we could spur investment in these poorer communities, where investment can be the only possibility for growing these communities 

and expanding opportunities for jobs, et cetera? 

Do you have any ideas about this issue? What can you advise us? 

What can you work on that would help to expand the idea of the 

new market tax credit initiative in order to grow these poor communities? 

Mr. BERNANKE. Congresswoman, I’m very much in favor of home 

ownership. I think it’s a positive thing that we now have close to 

70 percent home ownership rates in this country. 

31

I think when people have their own home, it makes them more 

involved in their communities. It makes them more interested in 

participating in the democratic process. I’m very much in favor of 

supporting that. 

Over the recent years, financial markets have opened up to the 

extent that there now is a much more extensive housing credit 

market. There is more access than there was before. There still remain problems. 

As you may know, the Federal Reserve’s analysis of Home Mortgage Disclosure Act data suggests there are still differences in access and pricing between minorities and others in the housing market. 

It is still important for us to continue to make sure that there 

is fair treatment in those markets. 

There is always a tradeoff between giving people access and 

making sure they don’t take on more debt than they can sustain. 

If the housing market does slow down, we want to see how 

strong the mortgage market is and whether or not we will see any 

problems in that market. That’s an issue. 

I’d like to say my very first trip as a Governor of the Federal Reserve was to Brownsville, Texas, to see how a set of non-profit organizations were using funds provided under the Community Reinvestment Act from banking institutions to re-develop or develop 

housing for immigrants to that area. 

It was a very interesting experience. It suggested to me that the 

financial institutions themselves also become more informed about 

low- and moderate-income communities, about immigrant communities. They can find new opportunities there. 

In fact, those investments that the banks were making under the 

CRA through the non-profits in Brownsville were quite profitable. 

They were good for the banks. They were good for the immigrants 

who were buying homes, and good, I think, for our economy. 

I don’t want to comment specifically on fiscal programs to support housing. Again, I think that’s something that really is up to 

Congress. 

From my perspective at the Federal Reserve, I’m certainly going 

to maintain an ongoing interest in the financial markets for lowand-moderate income people, making sure they are fair and open. 

Chairman OXLEY. The gentle lady’s time has expired. The gentleman from Connecticut, Mr. Shays. 

Mr. SHAYS. Thank you, Mr. Chairman, for being here and for responding so thoughtfully to our questions. 

I want to know if you believe that we have primarily a revenue 

problem or a spending problem as it relates to the Federal budget. 

Mr. BERNANKE. The key problem is that the Congress at some 

point needs to decide what the appropriate size of the Federal Government is. That is really the first essential question, and it’s a 

question based on values. Therefore, it is really the elected representatives that have to make that decision. 

Those Members of Congress who are in favor of low tax rates and 

continuing tax cuts have to accept also that in order for those low 

tax rates to be sustained, ultimately, they have to find savings on 

the spending side to avoid exploding deficits. 

32

Likewise, those who would like to see a more expansive role of 

the Government need to understand and accept that commensurate 

tax revenues are going to be necessary to support those activities. 

It’s not up to me to decide what the size of Government is— 

Mr. SHAYS. Do you think our tax rates are low? 

Mr. BERNANKE. They are relatively low compared to other industrial countries. They are not at a historical low. The current tax 

rate of 35 percent is higher than, for example, the 28 percent rate 

that was agreed upon— 

Mr. SHAYS. You are talking about rates. Are we not getting 

enough revenue? 

Mr. BERNANKE. The question is, compared to what? It’s a question of how big the Government is going to be. There is a deficit. 

I’d like to see it lowered, but it’s up to the Congress to decide 

whether that should be done by higher taxes, lower spending, or 

some combination. 

Mr. SHAYS. When the Congress lowered the dividends and capital 

gains tax, did we get more revenue from it or less? 

Mr. BERNANKE. I think most economists would agree that a well 

constructed tax cut does not lose as much revenue as a purely static analysis would suggest. In particular, the dividend and capital 

gains tax cut led to some increased realizations and, therefore, 

more revenue, or less revenue loss, at least, than a purely arithmetic analysis would suggest. 

Mr. SHAYS. When we talk about the size of the Government, I 

think of our Government in two ways. I think of the way Government spends money on entitlements. Do you call that the size of 

Government or do you call the size of Government how many employees we have and so on? 

Mr. BERNANKE. I’m thinking of Federal outlays, which includes 

entitlements, because it’s the entire amount of outlays that has to 

be financed by tax revenues. 

Mr. SHAYS. We could have large entitlements, but that doesn’t 

increase the size of Government. That increases the budget of the 

Government. Correct? 

Mr. BERNANKE. If you like, I could say it’s the budget of the Government that ultimately the Congress has to choose the size. 

Mr. SHAYS. In regard to inflation, what is the impact of dollars 

held overseas? Is there any impact? 

Mr. BERNANKE. I think the effect on inflation of dollars held 

overseas is modest to negligible. Clearly, in determining the domestic money supply, the Federal Reserve has to take into account the 

share of currency and other forms of money that are held abroad, 

but we do that, and we essentially offset those overseas holdings 

in order to achieve the domestic inflation objective that we are trying to reach. 

Mr. SHAYS. I’m not clear about that. How do you control the supply of money overseas? 

Mr. BERNANKE. We don’t. We can’t directly control how much 

money is held overseas, but we can estimate how much is held 

overseas, compare that to the amount of money which has been 

issued, and, therefore, determine how much money is being held 

domestically. 

33

Mr. SHAYS. Are you concerned about counterfeiting overseas? Do 

you think it is a serious problem, a relatively serious problem, not 

all that serious? 

Mr. BERNANKE. I believe there is a joint report coming out soon 

by the Federal Reserve and some other agencies, which has found 

at least in a few cases, some fairly serious issues of counterfeiting. 

I’m not sufficiently familiar with that report or its contents to be 

very helpful at this point. 

Mr. SHAYS. Let me conclude by just making this comment. I’m 

very concerned about data security. I’ve been notified by my own 

bank that tens of thousands of records have been misplaced. I’m 

hoping that your office will be paying a tremendous amount of attention to this issue. 

Finally, I just want to thank you for your short answers, which 

gives us more time to ask questions. It is very appreciated. 

Thank you, Mr. Chairman. 

Chairman OXLEY. The gentleman’s time has expired. The gentleman from New York, Mr. Meeks. 

Mr. MEEKS. Thank you, Mr. Chairman. Both Mr. Chairmans. 

Let me just ask you real quickly as a follow up to some of the 

questions that Mr. Royce was indicating, talking about the lack of 

individuals with savings now and a possible cool down of the housing market. 

My question to you is what effects will this have with the money 

that’s available for investment, and most importantly, in the short 

term, the short term interest rates? 

Mr. BERNANKE. Congressman, I would say in terms of capital investment, there is currently plenty of funding available. Corporations have retained a lot of these profits they have earned in recent 

years, and they have very liquid balance sheets. 

There have been actually relatively low rates of bank borrowing 

by corporations because they have sufficient internal funds to finance their investment spending. 

Moreover, the general credit conditions still appear to be quite 

positive. Spreads are low. That is, bankruptcy risk appears to be 

relatively low. 

My sense is that we will continue to see strong growth in capital 

investment in the U.S. economy, and that is going to be beneficial 

both in terms of generating demand in the short run, but also in 

terms of expanding our capacity to produce and our productivity in 

the longer term. 

Mr. MEEKS. Short term interest rates? 

Mr. BERNANKE. I can’t comment directly on short term interest 

rates. Obviously, we are still 6 weeks away from the next meeting, 

and I will have to discuss the state of monetary policy with my colleagues at that meeting. 

Mr. MEEKS. I want to ask you two quick questions both related 

somewhat to trade. One of the major concerns of the Federal Reserve Board is to keep inflation under control, and according to the 

Bureau of Labor Statistics, the average annual rate of growth of 

import prices has been only 0.6 percent versus 2.2 percent for overall consumer prices. 

My first question is what is the perspective on the role of free 

trade agreements in controlling inflation? My second question is 

34

there has been growing concern about our trade deficit and current 

account deficit and its long term effects on our economy. 

However, as we say in the Financial Services Committee, financial services has become increasingly a greater share of the U.S. 

GDP, with almost five percent experiencing a trade surplus of approximately 2.5 to 1. 

Some like myself are concerned that trade agreements being negotiated don’t focus enough on trade in services, particularly financial services. 

My second question to you is are we coming up short in the liberalization of trade in financial services? 

Mr. BERNANKE. With respect to your first question, I think free 

trade has moderated inflation to some extent because of the additional competition, because, as you point out, with a stronger dollar, import prices have been moderate. It has been a positive factor. 

With respect to trade, I think there is enormous opportunity to 

improve trade or increase trade in services. The DOHA round, 

which is still ongoing, has been working somewhat sequentially. 

It’s been focused initially on agriculture trade, access, terrorists 

and the like, then on manufacturing, and trade in services has 

brought up the rear to some extent. 

In the United States’ case, we are net exporters of services. We 

are the primary producer of internationally traded services in the 

world. It’s very much in our interest, both bilaterally and multilaterally, to try to increase trade in services and to work towards 

freer trade in financial services and other types of services as well. 

I endorse that sentiment. 

Chairman OXLEY. The gentleman’s time has expired. Ms. Kelly. 

Ms. KELLY. Thank you, Mr. Chairman. Chairman Bernanke, I 

welcome you here today, and you have been very patient with us. 

I’d like to bring up a topic. I unfortunately had to go to another 

meeting. I don’t know if it has been brought up yet. I’d like to ask 

you about something that your predecessor stated, and that is that 

markets can only work when participants in the market are not 

subject to attack and that in his view the market for terrorism insurance should not exist without Government assistance because of 

the risk of a terrorist attack. 

I noticed in your testimony here today you don’t discuss unexpected events that could affect the Treasury. 

The Treasury study last year confirmed that for high risk cities, 

they have lowered premiums and improved rates for terrorism insurance. 

Since you did not address the question of high risk cities directly 

in your 2005 testimony on the subject, do you agree with Chairman 

Greenspan that for these high risk areas, Government provisions 

for the terrorism insurance market will be necessary for the foreseeable future? 

Mr. BERNANKE. Congresswoman, I think it’s important to begin 

by noting that the Terrorism Risk Insurance Act does not contemplate any attacks with costs exceeding $100 billion. 

Clearly, there are enormous events that could occur and we hope 

will never occur, but they could occur, in which there would be no 

plausible possibility that private insurance could cover that cost, 

35

and, therefore, Congress and the Government would have to try to 

address the aftermath of that attack as best as possible. 

The more difficult question is what about attacks, still large, but 

nevertheless, more moderate in size, perhaps of similar size to the 

Katrina event, for example. Again, enormous, but still within the 

range of historical experience. 

My view is that the country is best served by as much as possible 

developing private sector insurance capability, to the extent that 

we can, develop capacity in terms of ability to risk rate, to write 

insurance and to provide reimbursement in the case of an attack. 

Should an attack occur, we would be better off in that we would 

have both the private sector insurance and Government resources 

to fall back on. 

Therefore, my view is that we should be working, as the last bill 

has done, to try over time to increase private sector participation 

in terrorism risk insurance. 

I leave open for now to what extent or how long Government participation will be necessary. I agree that beyond a certain point, 

there will be no alternative to having Government involvement. 

I do think we are moving in the right direction in trying to build 

private sector participation in this market by increasing the copays and deductibles and the like. 

Ms. KELLY. If I understand you correctly, by implication, you are 

saying that the presence of TRIA as sort of a carrot to the market 

would allow the market to further pick up some of the risk that 

otherwise would be borne by the Federal Government in the event 

of a terrorism attack. 

Do I understand that correctly? 

Mr. BERNANKE. My objective here is to continue to increase the 

capacity of the private sector to contribute to terrorist risk insurance and to create resources that will be available in case a major 

attack were to occur. 

I agree that the existing law is moving in the right direction in 

increasing private sector participation and, on the other hand, I’m 

comfortable with the fact that Government support still remains at 

this juncture. 

Ms. KELLY. If I understand you correctly, what you are saying 

is that having TRIA available so that the Federal Government is 

not the insurer of first resort is an important factor in allowing the 

private market to cover as much as possible prior to the Federal 

Government stepping in, in the event of a terrorism attack. 

Mr. BERNANKE. I think I agree with what you are saying, the 

point being that we want to have cooperation between the private 

and public sectors, with an increasing role for the private sector 

over time. 

Ms. KELLY. Chairman Bernanke, this committee has taken an 

active role in fighting terrorist use of our financial system. Working 

with Federal regulators, we have exposed Riggs Bank, the Arab 

Bank, violations of the law, and we have worked with other agencies to improve the effectiveness of examinations. 

Unfortunately, we have seen several cases of banks subject to 

Federal Reserve supervision who have been violating the law for 

years without being discovered, particularly, in the more recent 

case of ABM. 

36

I’d like you to explain to the committee, if you will, how you 

would strengthen the Federal Reserve’s ability to defend our financial system against terrorists who want to use it for their advantage. 

I want to know if you think the Federal Reserve has enough staff 

resources and puts them into the enforcement of the BSA versus 

its other activities. I’m concerned especially about ABM deliberately violating U.S. laws by trading with Iran for 7 years. 

I wonder if you would be willing to address that. 

Chairman OXLEY. The gentle lady’s time has expired. The Chairman may respond. 

Mr. BERNANKE. I just agree it’s a very important issue and we 

are going to work harder and we are going to be particularly focused on the banks’ internal mechanisms for making sure that 

their counterparties are legitimate. 

Chairman OXLEY. The gentle lady from California, Ms. Lee. 

Ms. LEE. Thank you, Mr. Chairman. Welcome, Mr. Chairman. 

Congratulations to you. 

Let me say a couple of things. First, I’m glad to hear you say 

that you recognize that a rise in inequality is a concern and a problem, but you also indicated that part of this had to do with the fact 

that lower wage workers haven’t received a higher level of income, 

those at least who have no more education than a high school education. 

I think I heard you correctly, you don’t support an increase in 

the minimum wage. You indicated your policies would be very consistent to Chairman Greenspan. I believe that’s probably about 

where he was. I’m quite frankly very disappointed. 

I know you do support the tax cuts and making those tax cuts 

permanent, and it seems to me if you are really concerned about 

this rise in inequality, somehow you as our new Federal Reserve 

Chair would say something about increasing the minimum wage 

for very low wage workers. 

Secondly, part of this rise in inequality has to do with discrimination in mortgage lending. If you look at the home ownership 

rates, you have approximately 70 percent nationwide with regard 

to the Caucasian population, yet you have 46 percent African 

American, 46/47 percent Latino. 

There is a huge disparity there. With Mr. Greenspan, we were 

trying to talk with him about how to make sure that financial institutions provided more mortgage lending to African Americans 

and Latino’s. 

Right now, conventional loans, I believe probably most banks 

provide maybe one to two percent of their conventional loans to African Americans. That is just down right shameful. 

Yet, on the other hand again, going back to Mr. Greenspan and 

if you are going to be consistent with much of his policies and his 

work, I have to raise these issues with you. 

CRA, for example. Many of these banks that receive an A or B 

on their CRA ratings probably lend one to three percent of their 

mortgages to African Americans and Latino’s. I don’t know for the 

life of me how they can get an outstanding and satisfactory CRA 

rating, when again, they are not in good faith lending to minority 

communities. 

37

Finally, just with regard to prime loans and sub-prime loans, the 

data that came out in October of last year, we have a report, and 

Mr. Chairman, I’d like to put this in the record. 

Chairman OXLEY. Without objection. 

Ms. LEE. Thank you, Mr. Chairman. It indicated first of all, 

taken together, sub-prime loans make up about six percent of all 

loans to African Americans and Latino’s as opposed to two percent 

to all white borrowers. 

We looked at this and decided that FICO scores should be revised and possibly take into account rent, utilities, telephone service as a sign of creditworthiness. 

I’m wondering if you would work with us to help improve the 

scoring process so we can improve this inequality in mortgage lending to minorities in our country. 

As you know, and you said earlier, home ownership is really the 

key to the accumulation of wealth. It’s the only way people can 

send their kids to college, start a small business, and yet you have 

huge, I mean massive discrimination in mortgage lending to people 

of color and to minorities in our country. Yet, these financial institutions get off the hook each and every time. 

Chairman Greenspan wasn’t able to help us figure out a way to 

rectify this and close this gap. Maybe you can. 

Could you respond and tell us what you think we can do? 

Mr. BERNANKE. I will comment. Part of the discrepancy relates 

to the underlying discrepancies in wealth and income, which I 

agree are a serious problem. 

That affects people’s ability to afford homes. In some sense, part 

of the issue goes back to our earlier discussion about helping people 

build wealth and build income through training and through other 

methods. 

Ms. LEE. An increase in the minimum wage. 

Mr. BERNANKE. The minimum wage affects a very small number 

of workers actually. I don’t think it would affect a great majority 

of people that you are concerned about. 

Be that as it may, I just want to say that I do support very 

strongly fair lending. I will be actively involved in making sure 

that our fair lending policies are actively prosecuted. 

I would also agree with you on the inappropriateness in some circumstances of using FICO scores for evaluating creditworthiness. 

I know some banks are experimenting with non-standard approaches that take into account people’s relatively short credit histories, for example, or alternative backgrounds. 

I think that is good banking. I think it is good for the society and 

the Federal Reserve will work with banks to look at those kinds 

of alternative approaches. 

Chairman OXLEY. The gentle lady’s time has expired. The gentleman from New Jersey, Mr. Garrett. 

Mr. GARRETT. Thank you, Mr. Chairman, and thank you, Mr. 

Chairman. I appreciate your being with us on your maiden voyage 

before this committee. I echo Mr. Shays’ comments about the conciseness of your answers in a manner that we can actually understand. 

38

I will be interested as others will be just to see after we are all 

done in here, as we check the markets, to see how they will respond to all your answers as well. 

On that note, I don’t know if you saw the article in USA Today, 

I think it was earlier this week, regarding your predecessor and 

the impact that your predecessor continues as he goes out and 

speaks publicly and privately, and then I guess when he speaks 

privately, rumors swirl around as to exactly what he said privately, 

and I guess in some cases, allegations are that the dollar actually 

rose or failed because of his comments. 

I just wondered if you had a comment on that as to how the markets are impacted by your comments and by your predecessor’s 

comments still to this day. 

Mr. BERNANKE. My only comment on Chairman Greenspan is 

that according to Government ethics rules and to FOMC rules, it’s 

permissible for a retired Governor to speak in public about the 

economy, so long as he or she does not divulge confidential information. 

I have no indication that he has violated that rule. I have no further comment on that. 

Mr. GARRETT. Getting to the questions on the GSEs, just a couple 

more points, I appreciate your comments as to the importance of 

them. 

I’m just curious, in your mind, whether you think that Fannie 

and Freddie are really the soundest and the best way that we have 

to assist homeowners in financing, or is there something else that 

Congress can do, as we always like to say, to level the proverbial 

playing field, to provide methods for S&Ls and banks and other financial institutions to get into the market on the same level field 

as Fannie and Freddie are right now to address the issues that 

have been already raised as far as increasing the housing market 

and to provide liquidity. 

Is there something else we could be doing aside from Fannie and 

Freddie? 

Mr. BERNANKE. I’d have to hear your specific suggestions. As I 

indicated before, Fannie and Freddie did a very important service 

to us, to the economy, to the country, by creating the secondary 

mortgage markets. They are no longer the only participants. Obviously, there are now large financial institutions which are also involved in creating and servicing these markets. 

I think what they do is very valuable. I have no desire to— 

Mr. GARRETT. I’ll follow up with some of the other models that 

are out there. I would appreciate your comments as to whether 

Congress can explore some of these other avenues as well to either 

supplement or eventually go down the road to a different direction. 

Another thing that the House did, it passed this committee, and 

the House passed the GSE reform legislation. As you know, one of 

the aspects was what I will call the five percent tax or five percent 

diversion, always with the laudable goal of trying to provide revenue to those most in need in the housing market. 

The question on the other side of that equation comes, and this 

involves your concerns and mine as well, with regard to portfolio 

size and limitations. I think we are on the same page. I was fightVerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY
39

ing for that when your predecessor was here, to try to put those 

stronger limitations in place. 

What is your comment on what the House has done in that area 

by diverting revenue from the normal revenue stream? Does this 

put an additional burden on the GSEs to basically go in the other 

direction that we would want them to into, and that is to increase 

the portfolio to make up for the lost income? 

Mr. BERNANKE. I’m afraid, Congressman, that is out of my purview. It’s really up to Congress to decide how they want to manage 

these kinds of funds. 

My main concerns are about financial stability and, therefore, 

about the fact that we have such a large portfolio which has to be 

hedged in a complicated dynamic fashion. 

Mr. GARRETT. Does it affect their financial stability if there is a 

pressure on them to increase their portfolio size? 

Mr. BERNANKE. I honestly don’t know the magnitude of the effect. 

Mr. GARRETT. Changing subjects a little bit but keeping the 

whole area as far as your earlier comments with your concern, also 

mine, as far as whether it’s the size of the Government question, 

as you were saying, it’s actually the size of the budget that we 

have. 

I will be going down to Louisiana in a couple of days again to 

see what the situation is there now, 7 months or longer after the 

fact. 

Congress has already passed some legislation, appropriations for 

that measure. As you know, the Administration is talking about 

additional legislation. There are some proposals out there to go 

even broader, providing a framework for substantial additional 

monies for that area. 

Can you address if we go in those areas whether that acts as a 

positive or a negative drag on the economy as the additional size 

increases for expenditures of the Government for those recovery efforts? 

Chairman OXLEY. The gentleman’s time has expired. The Chairman may respond. 

Mr. BERNANKE. Mechanically, and I’m not endorsing any particular program for Katrina recovery, but building and reconstruction do add to economic activity, and it’s one of the reasons why 

2006 may be a bit stronger than we otherwise thought. 

Chairman OXLEY. The gentleman from Kansas, Mr. Moore. 

Mr. MOORE. Thank you, Mr. Chairman. 

Mr. Chairman, welcome to the committee. In a speech you gave 

last March of 2005 before the Virginia Association of Economists, 

you stated that reducing the Federal budget deficit is still a good 

idea. You said that reducing the deficit would reduce ‘‘debt obligations that will have to be serviced by taxpayers in the future.’’ 

I have six grandchildren. A lot of us here have children and 

grandchildren whom I believe would be affected, as you have indicated, by what we do as a country in the future. 

I believe Congress should be doing what we can to relieve our 

children and grandchildren of the burdens we are imposing on 

them today. One way I think we can do that is to address the deficit/debt issue, to reinstate a rule called pay/go. 

40

In 2002, the pay/go rule in Congress was allowed to expire. It has 

not been renewed. In fact, former Chairman Greenspan and a 

group in Congress called the Blue Dog Coalition, which believes in 

fiscal responsibility, has advocated reinstatement of pay as you go, 

pay/go rules, that would require Congress to pay for spending increases and revenue reductions. 

Should pay/go in your estimation be reinstated? Should it apply 

to new spending as well as new revenue reductions or tax cuts? 

Mr. BERNANKE. First, Congressman, I stand by my statement 

from my speech from last year. I think reducing the fiscal deficit 

is very important. 

Mr. MOORE. Good. 

Mr. BERNANKE. Doing so increases national saving and reduces 

the burden on our grandchildren. 

I’m sorry that I don’t feel it is appropriate for me to make recommendations to Congress about their procedures. I do hope Congress will be thinking about the long-term implications of spending 

and tax programs so that we are looking not just at the very near 

term, but the very long term implications. 

I think that is very sensible. I think in my role as head of the 

central bank, I should not be involved in making specific recommendations about your internal decision making process. 

Mr. MOORE. Are you aware of a pending request for an increase 

in the debt limit? 

Mr. BERNANKE. Yes, I am. 

Mr. MOORE. How much is that, sir, if you know? 

Mr. BERNANKE. Eight trillion plus. 

Mr. MOORE. It would take us up to eight trillion plus. It was at 

about $900 billion, the request for the debt increase is supposed to 

come by February of next year. Is that correct? 

Mr. BERNANKE. I don’t recollect exactly. 

Mr. MOORE. I believe about 4 years ago, our Federal debt in this 

country stood at about $5.7 trillion. Is that your recollection? 

Mr. BERNANKE. I don’t recollect exactly. 

Mr. MOORE. It is now, as you understand, $8.2 trillion. Is that 

correct? 

Mr. BERNANKE. Yes. 

Mr. MOORE. We are just digging ourselves a deeper and deeper 

hole. Is that correct? 

Mr. BERNANKE. The deficit is certainly adding to the national 

debt. The total debt includes a lot of debt which is held by trust 

funds and the like, so that the so-called debt held by the public is 

more in the vicinity of $4.5 to $5 trillion. Some of this debt is accounting money held within Government trust funds. 

Mr. MOORE. At some point in the future, taxpayers in this country are going to have to make good on this. Isn’t that correct, sir? 

Mr. BERNANKE. That’s correct. I agree with you that we have a 

very serious long term fiscal problem and we need to begin to address that. 

Mr. MOORE. One way to address that would be to reduce substantially the amount of deficit that we incur each year. Isn’t that 

correct? 

Mr. BERNANKE. That’s correct. 

41

Mr. MOORE. Would it be helpful in your estimation, Mr. Chairman, if we were to go back to the way things were 20 plus years 

ago before Congress passed a law that allowed the unified budget 

to include not only tax revenues but Social Security revenues? 

Mr. BERNANKE. I think it’s important to make the distinction, 

which is not made so clearly now, between the current budget and 

the payroll contributions to social insurance. 

Mr. MOORE. I have a bill that in fact would do that and take Social Security revenues out of the unified budget. I approached one 

of my colleagues on the other side of the aisle, and I said I know 

you believe in fiscal responsibility, and I said you should be on my 

bill, and he said, Dennis, there’s one problem with your bill. 

I said what is that. He said it would make our deficits look even 

larger. I call that telling the truth to the American people, and I 

think we need to start doing that again. 

Thank you, Mr. Chairman. 

Chairman OXLEY. The gentleman’s time has expired. The gentleman from Ohio, Mr. Gillmor. 

Mr. GILLMOR. Thank you, Mr. Chairman. 

Let me ask you, in terms of what has been happening in housing, 

and some people think we have a housing bubble, some don’t. I 

think the Fed position is we don’t. 

One of the things that has been happening is a great proliferation in zero percent down loans, adjustment of rate mortgages, and 

that was happening in a time of very low short term rates. Now, 

those are going up. 

Do you see any dangers to the system and what impact is this 

going to have on those borrowers? 

Mr. BERNANKE. Congressman, you are correct that the incidence 

of these so-called non-traditional mortgage products has been increasing. There are some customers for whom these products are 

appropriate, but there are also some customers for whom they are 

probably not appropriate. 

The Federal Reserve and the other banking agencies have issued 

guidance for comment to the banks, asking them first to re-think 

their underwriting standards, to make sure that when they make 

a loan of this type, the recipient is able to finance not only their 

first payment but also the payments that may come later if interest 

rates adjust, for example. 

Secondly, the guidance asks banks to be sure their disclosure to 

consumers is adequate so the consumers fully understand these 

complex financial instruments and understand what they are getting into. 

Third, that the banks themselves are adequately managing the 

risks inherent in making these kinds of loans. 

We are addressing these issues. These loans are quite popular in 

terms of new credit extensions. They remain a fairly modest portion of the outstanding mortgages. 

This goes back to a question that was asked earlier. I think the 

one area where they may pose some risks if the housing market 

slows down might be in the sub-prime area where they have been 

popular and it’s more likely in those cases that they are inappropriate for the borrower. 

42

Mr. GILLMOR. Let me ask you. We have had a pretty good economy for a couple of years after we came out of a recession, a fairly 

mild one, at the beginning of the decade. 

Since the tax relief package of 2003, growth in the GDP has gone 

up from about 1.3 percent before that to over four percent since 

then. I think a logical person would conclude that tax relief probably had something to do with it. 

The tax relief was temporary. My question is if the tax relief expires, which would amount to basically a tax increase at that point, 

what if any impact do you think that would have on the economy, 

jobs, and growth? 

Mr. BERNANKE. Congressman, I do agree, and I think most 

economists would agree that the tax relief earlier this decade was 

helpful in helping the economy recover from the recession in 2001. 

I am going to try to stick to the principle of not directly or indirectly endorsing specific tax or spending programs. I hope you will 

forgive me for that. 

Mr. GILLMOR. You’re forgiven. 

Mr. BERNANKE. Thank you. 

Mr. GILLMOR. I heard what I wanted to hear. 

One other question. We have talked a lot about the global savings glut. I guess the question is, is this really a glut or is there 

a lack of investment demand? Certainly, that glut, the United 

States is not contributing to the savings glut. If you could comment 

on that, I would appreciate it. 

Mr. BERNANKE. Yes, Congressman. Perhaps the terminology 

′′savings glut′′ was unfortunate. The issue is the amount of global 

savings relative to the amount of global investment opportunities. 

The most striking change in the past 10 or 12 years has been in 

emerging markets, particularly East Asia, which 10 to 12 years ago 

were large net borrowers on international capital markets, and now 

are even much larger net lenders. 

If you try to take apart the reasons for that change, it’s partly 

their very high rate of savings, but the change itself is due more 

to declines in investment outside of China. 

Part of the cause of this so-called global savings glut, I believe, 

is the financial crisis of the late 1990s which reduced in-flows of 

investment capital expenditure in some of these emerging market 

economies. 

The oil producers also are playing a role here because they are 

receiving all this oil money. They don’t have sufficient opportunities at home for investment. Therefore, they, too, are recycling 

these funds into the global capital markets. 

Mr. GILLMOR. Has my time expired? 

Chairman OXLEY. Mr. Ford. 

Mr. FORD. Chairman Oxley, thank you. 

I know you indicated, Chairman Bernanke, and congratulations. 

I know they trained you well and you come highly regarded from 

just about everybody. 

I’m from Memphis, and we have a small banking center there. 

We like to think of it as a big banking center. And all of my supporters and friends and even opponents think very highly of you, 

so I congratulate you today. 

43

I guess you have indicated you’re not going to endorse particular 

tax packages or not, but if they did do one, would it be in the interest to look at some kind of AMT reform outside of—let me step 

back. 

Is AMT reform something that you think will allow you and the 

board, as you all make determinations about tightening or loosening a policy, would the AMT relief help as you move forward, or 

would it hinder, or is it hard to say? 

Mr. BERNANKE. Well, AMT reform is reducing revenues. 

Looking forward, we would factor that into our projections of 

Government spending and revenues. 

Relevant to some of the issues we were talking about before, with 

no other change being made, and I’m speaking here arithmetically, 

AMT reform is going to increase the deficit because it’s going to 

lower tax revenues. So that’s an issue. 

I’m not commenting on the AMT as a tax. I understand that 

many Congresspeople have considerable concerns about the AMT 

as a tax, and so it’s really your choice as to how you proceed with 

that tax. 

Mr. FORD. Let me ask you this. 

You’ve mentioned the deficit, then, and so forth, so in light of 

what Mr. Moore said, would that mean—I don’t want to put words 

in your mouth, but we’re going to probably have a vote here soon 

on raising the debt ceiling. Is that something Congress should do? 

Mr. BERNANKE. When Congress passes a spending act or a tax 

act, that has implications for the amount of debt. 

Arithmetically, that has implications for the amount of debt the 

Government is going to take on. And therefore, I think that the 

debt ceiling doesn’t really provide much additional value. 

The Congress ought to be contemplating the effects of its spending and tax actions on the debt and the deficit as it goes along, 

with each determination, both in the short run and in the long run. 

Mr. FORD. In our most recent budget, or the budget that Congress is considering now, and Mr. Moore and I serve on the Budget 

Committee, in the President’s numbers, there was no inclusion of 

any monies for the war in Iraq and Afghanistan. 

If we do a budget, when Congress puts its budget together, would 

you recommend that at a minimum we put everything in there, so 

at least you’re working with either X deficit or X-plus deficit, at 

least you know what you’re working with, before your colleagues 

and you convene here in the near future? Would you recommend 

we include those numbers in the budget? 

Mr. BERNANKE. At the Federal Reserve, when we make forecasts 

of budgets, we try to make the most realistic forecasts we can, and 

we try to take into account all features of what Congress is likely 

to do, both on the tax side, say AMT, and on the spending side. 

So yes, clearly, good planning requires you to think hard about 

what you believe actual spending needs are going to be. 

Mr. FORD. Thank you. 

Let me ask you one or two other quick questions, Mr. Chairman, 

just as relates to some of the concerns that those in my district 

have about a variety of things. 

Despite an unemployment rate of 4.7 percent, both the employment cost index and average hourly earnings suggest that labor 

44

costs remain quite well behaved due to the strong productivity 

growth. 

Corporate profit margins remain robust, giving firms a cushion 

against price shocks and competition, sustaining a strong bias toward cost control that has short-circuited the field inflationary spiral. 

Is it simply fear of rising inflationary expectations rather than 

actual inflation that will drive further Fed tightening or other factors? 

Mr. BERNANKE. Congressman, when we make policy, we have to 

take into account the fact that monetary policy works with a lag. 

It doesn’t affect the economy in a day or a week or a month. It has 

its effects over 6 months, a year, or 18 months. 

And so we have to think about the forecast. We have to think 

about how the economy is likely to evolve over the next year or 

two. 

In addition, inflation expectations are important as an independent factor because, as I was indicating earlier, when inflation 

expectations themselves, as measured by surveys, for example, are 

low and stable, the economy itself will be more stable when it’s hit 

by other kinds of shocks. 

So we do care about both inflation and inflation expectations. 

Mr. FORD. And finally, as Congress considers a variety of not 

only tax reform packages but even reform packages as relates to 

how we spend on pork spending here in the Congress or earmarks, 

as we like to call them, but the public calls them pork spending, 

you would recommend that as we look at spending and tax policies 

that we try our hardest—now let me say, I hate to put you on the 

record, Mr. Chairman, but I think it’s important for all of us here 

who like to spend and who like to cut taxes to understand that 

they have real implications as the debt continues to rise. 

Is that fair to say? If our policies cause the debt to rise, that has 

real implications on what you do and what you don’t do? 

Mr. BERNANKE. Increased deficits are a negative for the economy, 

certainly. 

Mr. FORD. Huge deficits are a negative for the economy? 

Mr. BERNANKE. Yes. 

Mr. FORD. So those who continue to cite the debt as a small percentage of, or they cite it as 2.5 or 3.5, only 4.5 percent of all that 

we spend, you think the number itself, so 8 trillion versus this 

number compared to the economy, is as important as the percentage of our overall spending? 

Mr. BERNANKE. Well, I think it is important to look at the percentage of the deficit as a share of GDP because that gives some 

indication of how big it is relative to the size of the economy. 

The point I tried to make earlier is that my particular concern 

is about the long run obligations of the Federal Government on the 

entitlements side, in particular, which are going to be putting a lot 

of pressure on the Federal deficit and the Federal budget in the 

long run. 

In the short run, we need to begin to plan ahead for those contingencies, and that means trying to be as efficient as possible in our 

spending and tax policies in the near term, as well. 

Mr. FORD. Thank you, Mr. Chairman, for the indulgence. 

45

Chairman OXLEY. The gentleman from Georgia, Dr. Price. 

Mr. PRICE. Thank you, Mr. Chairman. 

And I welcome you, Mr. Chairman and wish you the very best 

in your new role, and I want to echo some others and thank you 

for the responsiveness that you have given this morning to your 

questions. 

There are some benefits to coming late in the questioning, and 

one of them is that oftentimes we have an opportunity to clarify 

the record. 

There have been some things said that I’d like to just get your 

comment on. 

It’s been said that the economic policies that we currently have 

are, quote, ‘‘not working for the average American,’’ unquote. 

Would you say that our economic policies are not working for the 

average American? 

Mr. BERNANKE. The economy as a whole has recovered very 

strongly from the slow period earlier this decade, and I think that’s 

very positive. 

We have strong GDP growth. We have low inflation. We have 

strong productivity growth. 

Compare our economy to many other industrial economies. We 

see that we’ve had a very good run. 

Mr. PRICE. All those things are positive for the average American? 

Mr. BERNANKE. All those things are quite positive. 

The issue, the specific issue which we’ve been discussing is the 

fact that there has been some indication of increased inequality in 

wages and incomes, and a point I tried to make is that this is a 

relatively long-term— 

Mr. PRICE. Correct. 

Mr. BERNANKE.—feature of the economy that goes back probably 

at least to about 1980, when we began to see the increased return 

to skills and education leading to a greater— 

Mr. PRICE. I would agree. I would agree. 

It’s also been stated that we have as a Nation, quote, ‘‘disastrous 

trade policies,’’ unquote. 

Would you say that we had disastrous trade policies in place? 

Mr. BERNANKE. No, I wouldn’t say that. 

Mr. PRICE. Thank you. 

Mr. BERNANKE. I think we— 

Mr. PRICE. I want to go on because I’ve got some other questions. 

I appreciate that response. 

Regarding home ownership, it’s been stated by some folks on the 

other side that, quote, ‘‘There is massive discrimination,’’ unquote, 

in the provision of mortgages. 

It’s my understanding that home ownership for our Nation is at 

an all-time high, and that for comparable levels of wealth and income, do you believe that there’s, quote, ‘‘massive discrimination,’’ 

unquote, in the provision of home mortgages for those comparable 

levels of wealth and income? 

Mr. BERNANKE. I tried to make the point in my answer to that 

question that I thought a large part of the difference had to do with 

the differences in income and wealth between different groups in 

46

the population, which in itself is an issue that, you know, we hope 

to address over time. 

Mr. PRICE. Indeed. 

Mr. BERNANKE. I don’t think that there is massive discrimination, but I think that it does exist, and I think it’s important for 

the Federal Reserve and other agencies to look carefully and make 

sure that banks and other lenders obey the law in their mortgage 

extension. 

Mr. PRICE. Okay. Thank you. 

I want to switch gears, if I may, because I think it’s appropriate 

and important that you brought up the demographic changes that 

we have occurring in our Nation. 

And I think you said that those things needed to be addressed 

soon, and I would agree with that. 

Some have suggested in the area of Social Security that everything is fine, that we don’t need to do anything right now, that, in 

fact, we may not need to do anything until 2042 or 2052. 

What’s your view on the speed at which Congress should address 

the issue of Social Security reform? 

Mr. BERNANKE. I would just raise the point that people who are 

35 years old today will not be retiring until 30 years from now, and 

the sooner we can address these issues and make whatever 

changes we are going to make, if we do make changes, the fairer 

it is to those people, because then they can better make their own 

plans, change their savings behavior, for example, so the sooner we 

can address these issues, the better. 

Moreover, from the point of view of financial markets and the 

like, the more confidence they have that Government is going to 

address these long-term deficits, probably the better the terms that 

we’ll be able to borrow on and the more confidence there will be 

in those markets. 

Mr. PRICE. Thank you. 

There are some proposals that we ought to price index Social Security payments. 

Do you have any view as to that? 

Mr. BERNANKE. I don’t think I’ll go into that issue. 

Mr. PRICE. I want to switch to the savings rate. I have, as I know 

that you do, real concerns about our level of individual personal 

savings. 

Do you have a sense as to what the appropriate level is for personal savings in terms of retirement security for an individual? 

Mr. BERNANKE. It depends very much on the person’s expectations in retirement, when they expect to retire, will they continue 

to work, and the like. 

I mean, one of the things which makes all this so difficult to forecast is that lifestyles are changing. 

We no longer have people retiring to Florida 100 percent of the 

time necessarily. Many people continue to work part-time, or work 

longer. My predecessor worked a bit beyond age 65, for example. 

So the amount of savings that people, individuals, have to do depends a lot on their plans and expectations. 

I think that it’s arguable that a large share of the population is 

not saving enough to significantly augment Social Security and, 

therefore, to guarantee a comfortable retirement. 

47

Chairman OXLEY. The gentleman’s time has expired. 

Mr. PRICE. Thank you, Mr. Chairman. 

Chairman OXLEY. The gentleman from Texas, Mr. Hinojosa. 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

Chairman Bernanke, thank you for coming before our committee 

to testify. 

I realize that many have discussed the issue of China’s yaun, the 

currency exchange rate, with you and that you’re likely more familiar with all the models and mechanics that go into it than I am. 

Some have likely expressed concern about the decision of the 

Chinese to create a controlled float of their currency based on a 

basket of certain foreign currency exchange rates, including the 

dollar, the Euro, and other currencies. 

Other Members may have expressed support for China’s decision, 

especially in light of what some have said to be its arguably unstable banking system. 

I understand further that many U.S. institutions are taking certain actions, such as making investments in China’s financial services sector, to bolster the Chinese banking system and its economy. 

However, in economics, there truly is no black and white, but 

only shades of gray. 

In light of that perspective, how do you think the economies of 

the U.S. and China will fare in the future? 

Are they as interdependent as many claim? If so, do you foresee 

any potential conflicts arising between these two countries in the 

near or distant future in light of China’s amazingly fast growth 

and its ever-increasing economic demand for raw materials, including iron, steel, and petrol? 

Chairman OXLEY. Congressman, as we’ve seen in earlier episodes, such as the emergence of the Asian tigers or the emergence 

of Japan, when a new economic power comes into the global scene, 

it can produce lots of stresses and strains, and we have observed 

some of those stresses and strains. 

I think, though, that one of the stresses and strains that you already alluded to is the competition for global resources. 

Certainly one of the reasons that oil prices have gone up as much 

as they have is the increased demand for petroleum products by 

China. 

I do believe that there’s an enormous amount of opportunity for 

cooperation between the United States and China in terms of 

trade, in terms of foreign investment, and I hope that will proceed 

positively, although I think I can safely predict there are going to 

be bumps in the road as these stresses and strains manifest themselves. 

I hope we’ll continue to work positively with China and that 

when we have disagreements, that we’ll work through international agencies like the World Trade Organization or others to 

try to resolve them as effectively as possible. 

Mr. HINOJOSA. Since 9/11, we have reduced the number of student visas from China and many other foreign countries, and yet 

when you combine China, India, and Taiwan, they’re producing 

about 700,000 engineers and technicians, and we’re only producing 

about 70,000. 

48

So this worries me because we don’t seem to have the mindset 

here in Congress to really invest heavily to be able to get more students into that pipeline in early years—third, fourth, fifth, sixth 

grade—so that they can get into those stem careers—science, technology, engineering, math. 

And it worries me that we just continue to increase the amount 

that we’re importing from China and we’re falling behind in producing those engineers. 

What do you recommend to those of us who have a responsibility 

to correct the acute shortage of scientists and engineers that I’ve 

mentioned to you? 

Mr. BERNANKE. Congressman, a theme that’s come up a few 

times in this hearing is education, and I agree a lot could be done 

for American K-12 education and for universities, as well, and Congress has a role to play there, and I hope that you’ll continue to 

play a positive role in that area. 

On the number of engineers being produced, sometimes it’s a 

question of apples and oranges. I’m not sure that an engineer is an 

engineer is an engineer. There are obviously different levels of 

qualifications and skills. 

And I think the United States, while we have to always be careful and look to our position in the world, remains a technological 

leader in terms of our skills, in terms of our technology and our research and development, so that’s positive. 

I’d make one suggestion, or give one thought on the issue of engineers and scientists, which is that simply producing more engineers and scientists may not be the answer because the labor market for those workers will simply reflect lower wages or perhaps 

greater unemployment for those workers. 

Currently, there’s not an obvious shortage of scientists and engineers in terms of the labor market indicators. That is, wages for 

engineers are not rising more rapidly than other professionals. 

So I think one way to address this issue is to ask, are there ways 

in which the Government can support basic research and in some 

sense produce a demand side that strengthens the market, that 

therefore brings people into science and engineering because there 

are opportunities there, not simply creating a bigger supply, which 

will then compete and drive down the wages in that category. 

Chairman OXLEY. The gentleman’s time has expired. 

Mr. PRICE. Thank you, Mr. Chairman. 

Chairman OXLEY. The gentleman from New Mexico, Mr. Pearce. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Chairman Bernanke, thank you very much. 

In the responses to inflationary pressures of energy, the idea of 

a supply increase, current supply increase of oil and gas, did not 

come up. Isn’t that the easiest way to stem the price? 

Mr. BERNANKE. Certainly. It is a way, certainly, to respond. And 

high prices in themselves of course provide an incentive to produce 

more supply. 

Unfortunately, a very large part of the world’s oil reserves are 

located in areas— 

Mr. PEARCE. In the U.S., we’re artificially restricting through 

regulation and through restriction of access to the outer continental 

shelf and the— 

49

Mr. BERNANKE. I argued earlier for regulation that accomplishes 

its purposes, that’s sensible and predictable so that people will 

meet the standards being set but will not be arbitrarily delayed by 

ongoing port challenges, for example. 

Mr. PEARCE. You had mentioned the appropriate size of the Federal Government was the function of Congress. 

Looking at Germany and the stagnation that they’ve had because 

it appears that there’s a relationship between the high percent of 

Government spending to GDP. What is the target range where an 

economy will stay vital and growing versus stagnant? 

Mr. BERNANKE. I don’t have a target range to give you. If you 

have a higher share of Government spending in the economy, I 

think a lot depends on how well the money is spent. Is it being 

spent in ways that promote growth, for example, by creating skills 

or supporting research? 

If it’s being spent in wasteful ways, obviously, that’s a heavy burden on the economy, not only because of the resources being directly used, but because higher taxes in themselves will distort economic decisions and make the economy less efficient. 

Mr. PEARCE. Looking 10 years into the future, when we’re in the 

depth of the baby boom retirement and the number of skilled workers available, and again setting aside skilled versus unskilled on 

immigration, do you see enough reason that we’d need workers to 

come into the country, or do you think we can solve our internal 

problems with the people who are available in the next generations? 

Mr. BERNANKE. Well, I think first of all that immigrants are an 

important source of energy, vitality, and work ethic, so I think immigrants are very positive for the economy, and I wouldn’t make 

it an either/or proposition. 

I think we should allow legal immigrants, but I think we should 

also make sure that our own citizens are well educated, well prepared, and able to— 

Mr. PEARCE. But as far as the quantity of workers, you don’t 

have an opinion? 

Mr. BERNANKE. No. The economy grows along with the quantity 

of workers available, so if there are more workers, the economy will 

just be correspondingly bigger. 

Mr. PEARCE. There is speculation, Mr. Chairman, that you would 

encourage a transition from the dual mission of price stability and 

full employment mission of the Fed to a single mission of inflation 

targeting. 

Do you intend to lobby for that change or to encourage that 

change to occur? 

Mr. BERNANKE. Absolutely not, Congressman. I completely subscribe to the dual mandate of price stability and maximum sustainable employment. 

The modest and incremental changes which I have discussed and 

which I will continue to discuss with my colleagues are intended 

solely to allow the Federal Reserve to meet both parts of its mandate more effectively and more efficiently. 

Mr. PEARCE. The idea of surpluses as far as the eye could see 

back at the end of the Clinton time, was that a real phenomenon 

or was that a fictitious phenomenon? 

50

In other words, what we’ve heard testimony as the dotcom rampup and the associated capital gains off those stocks that were valued at zero and went very high, that the entire increase of revenues and projection of revenues was simply those imaginary increases which then deflated back down, and actually the revenues, 

when they sank, sank back to where they were consistent with the 

increase before—was that a fictitious thing or were those—should 

we have increased the size of our budget based on those surpluses? 

Mr. BERNANKE. The share of GDP that took the form of revenues 

in 2000 was about 21 percent, which was the post-war high, and 

certainly in retrospect, we can say that a good bit of that was due 

to the unsustainably high level of the stock market, in particular, 

capital gains, bonuses, and stock options, and the fact that firms 

did not have to contribute so much to their pension plans because 

their valuations were rising with the stock market and, therefore, 

they reported higher profits. 

So a significant portion of the tax collection clearly was related 

to the stock market boom of that period. 

Chairman OXLEY. The gentleman’s time has expired. 

The gentleman from New York, Mr. Crowley. 

Mr. CROWLEY. Thank you, Mr. Chairman. 

Thank you, Mr. Chairman, and welcome to the committee on the 

first of many, many visits to this room and before this committee. 

I have a question dealing with some of the legislative proposals 

being recommended by the President and Republican Congress 

with respect to the health insurance that’s provided to American 

workers and to their families. 

And I’d like to begin by pointing out some what I believe are very 

scary facts about the Bush administration and this Congress with 

respect to the care of American workers. 

The fact is that between 2000 and 2004, the number of Americans lacking health insurance grew by 6 million to almost 46 million Americans, and that number is growing; it is not shrinking. 

Another fact is that in 2004, the percentage of people with employer-provided health insurance declined for the fourth year in a 

row; 3.7 fewer people had it in 2004 than had it in 2000. 

Now as a so-called remedy, the President, in the 2000 budget, is 

calling for the expansion of health savings accounts. 

The Administration’s budget would give greater tax breaks to 

people who shift health insurance plans with a high annual deductible from $1,050 or more, compared to the $300 to $400 of deductible found commonly among employer-sponsored insurance plans. 

At least 3 million people have high deductible health insurance, 

but this still represents a small segment of the about 195 million 

Americans with private health coverage. 

I believe the HSA plan would encourage employers to opt out of 

traditional health insurance plans they offer to workers and their 

families and place them with these HSAs, allowing workers to save 

under these plans for their own health care choices, albeit paying 

far, far more than they would in the annual deductibles that they 

have in their present plans, three or four times more. 

The Administration touts studies showing that HSAs would appeal to higher-income workers, as it allows individuals to accumulate money tax free in accounts that they can take with them from 

51

job to job, but studies also show that low-income and middle-income people have little if any leeway in their own budgets to accumulate or save money in HSAs. We can’t get them to save in bank 

accounts. 

And this is something that was reinforced in this year’s Economic Report of the President drafted by the Council of Economic 

Advisors, which you chaired until you assumed this new position. 

This report shows the U.S.A. has a negative savings rate, something we haven’t seen since the Great Depression. 

So seeing the President’s plan for HSAs, which are based on 

workers saving money for their own health care, and your own 

council’s report that workers have a negative savings rate in our 

country, and that other tax incentives for savings have could you 

tell me how can workers, especially middle-income and lower-income workers, actually save the funds to create so-called health 

savings accounts when they haven’t taken advantage of IRAs and 

other savings mechanisms? Can you give us an example? 

Mr. BERNANKE. Congressman, first of all, let me just acknowledge the very important problem of the rising cost of health care. 

I mean, that is the underlying reason that the price of insurance 

remains high, why employers are either dropping plans or increasing the share that they require their employees to pay. 

So that is the underlying problem, and I urge Congress to make 

this a very high priority because it’s something that bears not only 

on the efficiency and competitiveness of our economy today, but obviously, through Medicare and Medicaid, it has an important implication for our long-term fiscal stability. 

Unfortunately, as you’ve mentioned before, I had a different hat. 

I’ve changed hats. I’m now at the central bank. 

And I think again, as I’ve mentioned, in my current role, I’d like 

to stay away from endorsing, either directly or indirectly, specific 

plans. 

I guess a question I’m not really even sure of the answer to is 

exactly what the 3 million HSAs have been taking up. 

I don’t know precisely, but I don’t think that it’s been entirely 

upper-income people who have taken those up. I don’t know that— 

Mr. CROWLEY. I’m not asking you for an endorsement, Mr. Chairman, for this plan or for any plan at this point in time. 

But what I’m asking for I guess is do you think it’s realistic if 

lower-income Americans and middle-income Americans are not taking advantage of tax incentives to save right now, or fully taking 

advantage of them, how can we expect them to then now save for 

health care when they don’t have the resources to save for themselves, for health care and a higher deductible than they are right 

now? 

I mean, where’s the incentive for them to do that? 

Mr. BERNANKE. My understanding of the President’s budget is 

that it includes tax credits and other assistance to lower-income 

people who— 

Mr. CROWLEY. If they’re not using those right now for other 

forms of savings, how are we to believe they’re going to use them 

for their own health? 

52

I mean, it just goes to show they live paycheck to paycheck. How 

can they then therefore afford to pay for their health if they’re not 

even paying for their future? 

Chairman OXLEY. The gentleman’s time has expired. 

Mr. CROWLEY. I thank the chairman. 

Chairman OXLEY. The gentleman from Pennsylvania, Mr. 

Fitzpatrick. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Good afternoon, Chairman Bernanke, and welcome. 

I represent Southeastern Pennsylvania, including Bucks County, 

which is near to your old neighborhood, and we appreciate your 

service in this way. 

We also value education very highly. A number of questions 

today about education. 

I’m proud to see that, especially in the area of science, the nations of China and India are investing very heavily now, we’ve had 

that discussion, in science and technology and engineering. 

The New York Times journalist, Thomas Friedman, wrote a book 

called, ‘‘The World is Flat’’ which stands for the proposition that as 

we lose this race in education—science, technology, engineering, 

and math—this is not only bad for the economy, but it also may 

rise to the level of a national security threat. 

I was wondering if you shared that opinion. 

Mr. BERNANKE. I think it’s somewhat overstated at this point in 

time. 

The United States is still a far richer country than China, for example, and we still have a very substantial world leadership in 

technology and in high-tech skills and high-tech industries. 

Having said that, I agree absolutely that it’s important that we 

work hard to maintain that leadership, and that should take place 

through continued support of research and development, education, 

and all the things that you mentioned. 

Mr. FITZPATRICK. I appreciated your comments earlier that it’s 

important not just to train in these areas of science and technology 

but also to make sure that there are jobs available and there’s opportunity and opportunity for wage increases in those areas. 

The President recently has made quite a number of comments 

about the need to invest in alternative fuels. 

Do you feel as though this new area, this new area of investment, this area that we need to go to as a Nation, will provide opportunity for scientists and engineers in the future here in America? 

Mr. BERNANKE. There is a case, I think, for the Government to 

be involved in basic research, that is, research that private companies would not find it in their interest to undertake because they 

would not feel able to capture the financial benefits of that research. 

Energy has been an area where the Government has played a 

very important role in developing new technologies, so my general 

answer is yes, but I would say that the Government’s role should 

be more at the upstream end, ant more basic levels, because more 

downstream, the corporations will have sufficient incentive from 

the market to implement these new technologies and to develop 

them. 

53

Mr. FITZPATRICK. Yes, sir, and I want to associate—I appreciate 

your comments earlier regarding technical education and community colleges. 

This is a town with a lot of programs, a lot of programs about 

education create at different times, and disparate kind of treatment 

of these programs. 

Do you have any—would you have any public policy suggestions 

on ways to better coordinate the way we here in the Nation’s capital deal with funding education? 

Mr. BERNANKE. I can make one suggestion, which is that what 

we think about funding the student rather than the school, that is, 

that we provide individuals with the choice where they want to go 

and how they want to use money, rather than necessarily funding 

the institution. 

So in that respect, we utilize the market and choice as a way of 

creating competition among different schools and institutions. 

So that’s one strategy, a general strategy that one might consider. 

Mr. FITZPATRICK. Thank you, I appreciate that. I yield back. 

Chairman OXLEY. The gentleman yields back. 

The gentleman from Utah, Mr. Matheson. Congratulations to 

your constituent on a gold medal. 

Mr. MATHESON. We appreciate your acknowledging that, Mr. 

Chairman. Winter sports capital, you know. 

Chairman OXLEY. Yeah, we don’t have too many skiers in Ohio. 

Mr. MATHESON. You’re welcome to come and spend all the money 

in skiing in Utah that you want. 

Mr. Chairman, thank you and welcome to your first hearing before the committee. 

I do want to reiterate what a couple of my colleagues said about 

the importance of getting our fiscal house in order, and I appreciate 

your comments on stating the case for why, over a prolonged period, continued deficit spending creates some concerns, and I encourage you to be forceful on that. 

And while I don’t expect you to come up with a specific spending 

cut or tax issue or whatnot on that, I would suggest that Congress 

had budget enforcement rules in place they enacted in 1990; they 

expired at the end of 2001; they were an important structural component of what allowed us to get our arms—Congress to get its 

arms around what I thought was an out-of-control deficit and actually move to a surplus, and I think that that would be something 

that I would suggest you might want to advocate for going forward, 

as putting in some of those structural components that help move 

us to more of a reasonable fiscal policy at the Congressional level. 

I think that would be real helpful if you would do that, and I 

want to associate myself with the comments of Mr. Moore, who 

raised those issues. 

A question I wanted to ask you is, I know the Federal Reserve 

has expressed, and some folks on this committee for that matter, 

have expressed concerns about the mixing of banking and commerce, when the commercial entity is owned by a corporation. 

And I wanted to ask you about that issue in the context of many 

independent banks that are owned by businesspeople who also own 

other local businesses, commercial businesses, for example. 

54

Does the Federal Reserve’s concern about mixing banking and 

commerce extend to the common individual or family ownership of 

banks and non-financial commercial businesses? 

Mr. BERNANKE. I don’t believe so, as long as the businesses are 

legally separate. I may be mistaken, but that’s my understanding. 

Mr. MATHESON. But I am talking about common ownership in 

terms of a local bank and—so you’re not concerned about the mixing of banking and commerce with the same ownership? 

Mr. BERNANKE. I don’t think so, but I would like to think about 

it a bit more. 

Mr. MATHESON. Okay. I would encourage that, as we hear these 

discussions about banking and commerce, and obviously you’ve 

heard from other colleagues on the committee related to the industrial loan companies there may be a broader issue out there in 

other constituencies that, you know, those same discussions maybe 

should be looking at. 

And in terms of the industrial loan company discussions, you 

know, the state I’m from is the State of Utah. 

What I would suggest is that we have an even-handed approach 

in looking at this issue, in trying to make sure that when it comes 

to the information that is put out about the issue that it is accurate, and we can tone down some of the rhetoric. 

I think an even-handed approach of looking at this serves everybody, both this committee and the Federal Reserve and everybody 

in the best way possible, and I encourage the tone of that discussion to take on that. 

That would be my other suggestion for you, as you take your role 

as chairman. 

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

Chairman OXLEY. The gentleman yields back. 

The gentleman from Georgia, Mr. Scott. 

Mr. SCOTT. Thank you. 

Thank you, Mr. Chairman. 

Mr. Chairman, I certainly want to welcome you to your new position, and you come with such great credentials from Harvard, MIT, 

Princeton. 

It seems like the only one you’re missing is the Wharton School 

of Finance at the University of Pennsylvania. 

Of course, that’s where I graduated from, but I won’t hold that 

against you, because you have the one sterling criterion, which is 

you’re a native of my home state of Georgia, so as a fellow Georgian, I welcome you. 

Let me start out by first of all reading something you said, which 

I think is very interesting, concerning your independence. You 

made a very, very good statement. 

You said in your hearings, you stated, ‘‘I will be strictly independent of all political influences and will be guided solely by my 

mandate from Congress and the public interest’’—which is very 

good. 

I want to give you this opportunity to begin that process. 

This deals with our tax relief package, the tax cuts, the permanency of tax cuts at a time of great uncertainty and great demands. 

55

You’re looking at one here who supported the tax cuts, the earlier tax cut relief because I thought they did well in stimulating the 

economy, and they did so. 

But permanency at a time when our fiscal health is in dire 

straits, at a time of great uncertainty—we don’t know what energy 

costs are going to be; we don’t understand and fully grasp the 

meaning of what the war on terror is going to be; we’ve not been 

able to adequately even respond to natural disasters like Katrina 

at a time when global warming says there are going to be more of 

these. In order to offset these tax cuts, we’re going to have to cut 

dire programs of the American people—Medicare, Medicaid, 45 million Americans have no health insurance at all; on top of that, we 

are borrowing 45 percent of our debt from foreign countries, over 

half of it from China, India, and Japan, at extraordinary interest 

rates in and of themselves, and that debt has gone, just to our foreigners, from 1 to 20 trillion dollars in just the last 2 years. 

My point is, if you’re going to really respond to the mandate of 

Congress and the public interest, I urge you to speak independently. 

When the President asks you, ‘‘Is this the time,’’ not whether tax 

cuts are good, not whether making them permanent is good, but 

given the crisis, the situation that our financial health is in, ‘‘This 

is not the time to make them permanent, Mr. President.’’ 

Would you do that? 

Mr. BERNANKE. I stand by my earlier statement that I’m going 

to be independent and nonpartisan, and I think making a specific 

recommendation as to a specific tax— 

Mr. SCOTT. Well, would you make the recommendations? Would 

you make the case? 

You are our number one economist. You are the person that we 

all look to for that advice. 

You can’t just sit there and say, ‘‘I’m not going to.’’ I mean, you’re 

not there to just sit on the middle of the fence and not do anything. 

Mr. BERNANKE. No, but— 

Mr. SCOTT. These are serious issues, and I believe that given 

your background and your interest—and I’ve read your background 

very thoroughly—I’m just urging you—and I’ll take back; I’m not 

going to put you on the spot, and I understand where you’re coming 

from on that. 

But I just urge you to use your position to speak to the critical 

nature of the financial health we’re in, that it would be foolhardy 

to make a permanent tax cut on issues at times when this Nation 

is in such a perilous state with our financial health and our debt 

and all the other things that I had mentioned. 

Now, before my time is up, I do want to go to another point that 

you talked earlier about, the dual mission of fighting inflation and 

growing employment. Those are the two dual missions of your mission. 

And you spoke earlier about your affection for targeting inflation, 

or targeted inflation, and you said that that would not take away 

from the other side of the mission of employment. 

What I’d like to urge you to do is to target employment. If you’re 

going to have a targeting of inflation as a part of your portfolio as 

you come in, which is good, I urge you to have a targeting of emVerDate 0ct 09 2002 14:42 Jun 23, 2006 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 G:\DOCS\28024.TXT RODNEY
56

ployment, because again, let me just tell you or show you just a few 

of the statistics here, and I’ll be very brief— 

Chairman OXLEY. The gentleman’s time has expired. Will you 

wrap up? 

Mr. SCOTT. Yes, I will—that there are 37 million people who are 

classified as poor now that were not in 2000, and over that same 

period, there was a 24 percent increase in the number of families 

considered desperately poor, and that there is another burgeoning 

class of folks who have just given up, who are discouraged, and are 

not even seeking employment. 

We have a terrible problem in unemployment in this country. It 

is not a rosy picture. 

And what I urge to you would be, just as you target inflation, 

let’s have some targeting of employment. 

Chairman OXLEY. The gentleman from Alabama, Mr. Davis. 

Mr. DAVIS. Thank you, Mr. Chairman. 

Chairman Bernanke, welcome to the committee and thank you 

for being indulgent enough to stay past your allotted and appointed 

time. 

Let me come at Mr. Scott’s first question from a slightly different 

angle. 

As you’ve, I think, already figured out about Washington, D.C., 

most of our policy arguments tend to get reduced to very stark either/or propositions. 

People on my side of the aisle tend to be very skeptical of the 

tax cuts and tend to say that, all things being equal, we’d just as 

soon repeal them. 

People on the other side of the aisle say that the tax cuts in their 

entirety are indispensable to the health of the economy. 

There obviously is a middle ground in which a significant portion 

of the tax cuts would be retained, but there would be some adjustment in the marginal rates. 

For example, if my numbers are right, the average person earning over $1 million gets roughly $103-105,000 in tax relief a year. 

You could shave that number down slightly by making a few adjustments to the marginal rate go down to say 85 to 90. That person will still get a substantial tax cut. 

The budget would recoup enough money to altogether pay for the 

cost of some of the budget cuts that have been debated the last few 

years. 

I fully understand that your function is not to weigh into given 

disputes about policy choices, but let me ask you a broader question. 

Can we make marginal readjustments to the tax rate without 

doing violence to the economic recovery? 

Mr. BERNANKE. Again, if I may address the former question as 

well, I do think it’s very important for me to talk about the broad 

issues here, and I think again the fundamental issue is the size of 

the Government budget. 

Now, you asked me if you could make marginal changes to the 

tax. 

You can make marginal changes probably to anything. You could 

also make marginal changes to spending, of course, you know. 

57

And my point only is that while it’s up to me, I think, to point 

out the necessity of maintaining fiscal discipline over the long period, I just don’t want to be injecting myself into the specifics of 

how to do that. I think that’s Congress’s prerogative. 

Mr. DAVIS. And I fully agree with you and understand that, but 

I just want to isolate that point and don’t want to stretch out 

things by asking you to repeat it. 

But it seems you agree that of course, as with anything, you can 

make marginal changes without doing violence. 

That is not a minor observation in the context of these debates 

because, as you know, people on one side of the debate tend to say, 

‘‘No, we need every single dime from these Medicaid cuts; we need 

every dime from these Medicare cuts; and we can’t forego one inch 

of the tax cuts because it would slow down the economy.’’ That’s 

the way the argument plays out. 

Let me ask you a secondary question. 

Mr. Frank asked you a number of questions earlier about the 

phenomenon of income and equality, and I understood you to endorse Chairman Greenspan’s observations that we have a problem 

in that area. 

Once again, we put it in context. There’s an interesting phenomenon that we see in our budget debates. 

It’s the phenomenon of cuts that are inconsequential as far as 

the deficit goes, but are enormously significant to the affected individuals. 

Classic example: the Congress, by a very narrow margin a few 

weeks ago, approved a budget reconciliation package that saves 

about $3.5 billion worth of Medicaid, as you know, a fractional 

amount in a $2.9 trillion discretionary budget. 

At the same time, even that small amount it’s estimated will 

raise costs and premiums for 13 million Medicaid recipients. CBO 

estimates that the effect of that will be 60,000 people losing their 

Medicaid coverage. 

So the question that I would pose to you is, should we be concerned, or what’s your reaction to this phenomenon of budget cuts 

that are frankly inconsequential as far as the deficit goes but that 

could widen the economic inequality which you decry? 

Mr. BERNANKE. Well, every cut is going to be painful to somebody. 

I mean, it’s really, you know— 

Mr. DAVIS. But some could widen the inequality, couldn’t they? 

Mr. BERNANKE. I think that, again, without being too specific, I 

think the question is what is the best way to use the money, and 

there may be different programs that are more effective than others. 

Mr. DAVIS. But the last point, as my time runs out, you would 

acknowledge that some policy choices by the Congress could have 

the effect of actually exacerbating the income inequality which you 

were concerned about? 

Obviously, making poor people pay more for health care takes 

more of their discretionary income away and that could tend to 

widen the gulf between rich and poor. You would agree with that, 

I assume? 

58

Mr. BERNANKE. There may be different ways of paying for a cut, 

though. 

There could be ways you could transfer from some other program, so— 

Mr. DAVIS. Right, but there are ways of paying for it that widen 

inequality. 

Mr. BERNANKE. This is why these are value judgments, and 

there’s no scientific way to answer your question. 

It’s up to the Congress to decide what are the priorities that we 

want to address, be it on the tax side or on the spending side. 

This is what the people have elected you to do, and clearly it’s 

your responsibility. 

Mr. DAVIS. Thank you— 

Chairman OXLEY. The gentleman’s time has expired. 

And batting cleanup, the gentleman from Missouri, Mr. Cleaver. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Mr. Bernanke, Mr. Chairman, do you support the seniority system in Congress that made me the last person to have the chance 

to discuss with you, and do you believe that it contributes to, let’s 

say, inflation of the bladder if— 

Go ahead, Mr. Chairman. 

Mr. BERNANKE. I’m very interested in hearing your question, sir. 

Mr. CLEAVER. I am extremely concerned about the debt, as I 

think many of my colleagues have expressed, with China, Japan, 

and the U.K. holding $1.3 trillion of that debt. 

What impact on the U.S. economy would take place if China 

made the decision that they would invest internally or in Europe 

rather than the U.S.? If they called in their debt, what happens to 

the U.S. economy? The Chinese hold like $255 billion of our debt. What happens if 

they call it in? 

Mr. BERNANKE. Congressman, China is not holding our debt because they want to be nice to us. 

They’re holding it because they value the fact that this debt is 

being traded in deep, liquid, and safe financial markets, and so 

their own interest is in holding this debt. 

And despite occasional rumors of diversification and the like, 

generally speaking, there’s not been, as far as I know, any significant changes in the amount of debt, U.S. debt or U.S. dollar-denominated assets being held by China, and any sharp change really 

would not be in their interest to undertake. 

I think that the financial markets are really very deep and liquid 

for U.S. dollar assets. 

If you include not only U.S. Government debt, GSE debt, but also 

highly rated corporate debt, for example, the size of the market for 

high-rated U.S. dollar credit instruments is perhaps $40 trillion, 

something along those lines, which means that China is only holding a few percentage points of that debt. 

So I’m not deeply concerned about this issue. I think that realistic changes in China’s portfolio are not going to have major impacts on U.S. asset prices or interest rates. 

The issue is not so much the change in China’s portfolio. The 

issue really is the fact that we are consuming more than we are 

producing domestically. 

59

That means that foreign debt is increasing, and there may come 

a period or a time when foreigners are not willing to continue to 

add to their holdings of U.S. dollar assets, and that will in turn 

lead to perhaps an uncomfortable adjustment in the current account. 

Mr. CLEAVER. That’s where I’m going. 

Mr. BERNANKE. Right. It has not so much to do with the portfolio 

choices in the short run. 

It’s really whether over the long period, are foreigners willing to 

keep financing our consumption, our imports. So I think it’s important, and we’re probably in agreement, I think, it’s important over 

a period of time for us to begin to bring down that current account 

deficit, and I think that a combination of increased U.S. national 

savings, greater demand in other countries, and more flexibility in 

exchange rates, put all together, will allow us over a period of time 

to bring the current account deficit down to a somewhat lower 

level. 

Mr. CLEAVER. This is my final point here. 

So if OPEC and China and whomever else made a decision that 

they would in fact discontinue buying U.S. paper, you’re saying 

that it would have little consequence on the U.S. economy right 

now, today? 

Mr. BERNANKE. You envision them selling everything they currently own? 

You’ve got to sell to somebody. 

Mr. CLEAVER. Yes. 

Mr. BERNANKE. Somebody else has to hold those assets. 

No, I think it’s less to do with the dollar portfolio than it has to 

do with the fact that over a period of time, we have to rely on foreign financing for the current account deficit. I don’t think that foreigners will in some sense refuse to finance it, but they may charge 

a higher price, and that higher price in turn would feed back on 

the U.S. economy in ways that might be uncomfortable. 

Chairman OXLEY. The gentleman’s time has expired. 

Mr. CLEAVER. Thank you. 

Chairman OXLEY. Before dismissing our distinguished witness, 

the Chair notes that some members may have additional questions 

for the Chairman which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 

days for members to submit written questions to the witness and 

to place his response in the record. 

Mr. Chairman, we have been most appreciative of your time and 

the quality of the responses that you gave to our committee. 

You can tell by the variety of questions from the members from 

all over the country that this is a worthwhile exercise and your 

participation is most appreciated. 

The committee stands adjourned. 

[Whereupon, at 1:18 p.m., the committee was adjourned.] 

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A P P E N D I X

February 15, 2006

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