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27–824 PDF 2006

S. HRG. 109–404

NOMINATIONS OF:

BEN S. BERNANKE AND BRIAN D. MONTGOMERY

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

ON

NOMINATIONS OF:

BEN S. BERNANKE, OF NEW JERSEY, TO BE CHAIRMAN OF

THE COUNCIL OF ECONOMIC ADVISERS

BRIAN D. MONTGOMERY, OF TEXAS, TO BE ASSISTANT SECRETARY FOR

HOUSING/FEDERAL HOUSING COMMISSIONER, U.S. DEPARTMENT OF HOUSING

AND URBAN DEVELOPMENT

MAY 25, 2005

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN E. SUNUNU, New Hampshire

ELIZABETH DOLE, North Carolina

MEL MARTINEZ, Florida

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

ROBERT MENENDEZ, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

PEGGY R. KUHN, Senior Financial Economist

MARK F. OESTERLE, Counsel

MARK A. CALABRIA, Senior Professional Staff Member

MARTIN J. GRUENBERG, Democratic Senior Counsel

JONATHAN MILLER, Democratic Professional Staff

JENNIFER FOGEL-BUBLICK, Democratic Counsel

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

WEDNESDAY, MAY 25, 2005

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of:

Senator Allard ................................................................................................... 3

Senator Reed ..................................................................................................... 9

Senator Sarbanes .............................................................................................. 14

Senator Carper ................................................................................................. 24

WITNESS

John Cornyn, a U.S. Senator from the State of Texas ......................................... 2

NOMINEES

Ben S. Bernanke, of New Jersey, to be Chairman of the Council of Economic

Advisers ................................................................................................................ 4

Prepared statement .......................................................................................... 31

Biograpical sketch of nominee ......................................................................... 32

Response to written questions of Senator Bunning ....................................... 54

Brian D. Montgomery, of Texas, to be Assistant Secretary for Housing/Federal

Housing Commissioner, U.S. Department of Housing and Urban Development ...................................................................................................................... 5

Biograpical sketch of nominee ......................................................................... 44

Response to written questions of:

Senator Reed .............................................................................................. 55

Senator Sarbanes ...................................................................................... 55

(III)

(1)

NOMINATIONS OF:

BEN S. BERNANKE, OF NEW JERSEY,

TO BE CHAIRMAN OF

THE COUNCIL OF ECONOMIC ADVISERS AND

BRIAN D. MONTGOMERY, OF TEXAS,

TO BE ASSISTANT SECRETARY FOR

HOUSING/FEDERAL HOUSING COMMISSIONER,

U.S. DEPARTMENT OF HOUSING

AND URBAN DEVELOPMENT

WEDNESDAY, MAY 25, 2005

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 10:03 a.m., in room SD–538, Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

Chairman SHELBY. The hearing will come to order.

This morning, we will consider the nominations of two very distinguished individuals.

Our first nominee this morning will be Dr. Ben Bernanke, nominated to be a Member of the Council of Economic Advisers. Upon

Senate confirmation, President Bush would designate him to serve

as Chairman of the Council of Economic Advisers.

He currently serves on the Board of Governors of the Federal Reserve System. He is no stranger to this Committee. Before becoming a Member of the Board, Dr. Bernanke served as Chair of the

Economics Department at Princeton University. Before arriving at

Princeton, Mr. Bernanke had been an Associate Professor of Economics and an Assistant Professor of Economics at the Graduate

School of Business at Stanford University. His teaching career also

included serving as Visiting Professor of Economics at New York

University and the Massachusetts Institute of Technology.

Dr. Bernanke has published many articles on a wide variety of

economic issues, including monetary policy and macroeconomics.

He also served as the Director of the Monetary Economics Program

of the National Bureau of Economic Research. He received a B.A.

in economics in 1975 from Harvard University, summa cum laude,

and a Ph.D. in economics in 1979 from the Massachusetts Institute

of Technology.

2

Our second nominee this morning is Mr. Brian Montgomery,

nominated to be Assistant Secretary for Housing and Federal

Housing Commissioner at the U.S. Department of Housing and

Urban Development. This is an extremely important position as the

Federal Housing Commissioner oversees the Federal Housing Administration, FHA. Historically, FHA has acted as a vital tool for

expanding homeownership, a goal that I strongly share.

Most recently, Mr. Montgomery served as Deputy Assistant to

the President and Cabinet Secretary. I believe his experience working with the President’s Cabinet will help further coordinate housing activities across various Cabinet agencies.

Mr. Montgomery previously served at the Texas Department of

Housing and Community Affairs and at the Texas Department of

Commerce. His service at these departments give him a direct

knowledge of the working of various housing and challenge development programs.

We look forward to hearing your statements this morning and to

an interesting discussion to follow, and at the proper time, I would

ask you to stand—not yet—and take the oath of office. I want to

note Senator Cornyn, our distinguished and friend from Texas, is

here, I believe, to introduce his fellow Texan. Senator Cornyn, you

are recognized.

STATEMENT OF JOHN CORNYN

A U.S. SENATOR FROM THE STATE OF TEXAS

Senator CORNYN. Thank you very much, Mr. Chairman, and I appreciate your allowing me to appear today to commend to the Committee the nomination of Brian Montgomery to be Assistant Secretary of Housing and FHA Commissioner.

Mr. Chairman, you have already done a great job of talking

about Mr. Montgomery’s record. Let me just add a couple of things

that you did not cover.

Brian has a great record of dealing with difficult and high-profile

issues, whether it is serving as the lead White House official dealing with the Shuttle Columbia accident in February 2003 as President Bush’s Cabinet Secretary, where coordination among a number of Federal agencies was critical, or working with other key

agency officials to establish a more coordinated Federal approach

to dealing with the aftermath of wildfires in California, or three

hurricanes hitting several States in rapid succession.

Brian has demonstrated a proven ability to lead and to listen

when challenges are thrust upon him. In particular, he has maintained a longstanding involvement in housing issues, from homeownership for the disabled to counseling for prospective low-income

homebuyers. Serving then-Governor Bush at the Texas Department

of Housing and Community Affairs, as you noted, he was one of

only a handful of representatives of the Governor working with

close to 400 career employees in one of the largest and most programmatically diverse State housing agencies in the country. And

during that service, TDHCA expanded homeownership for people

with disabilities and implemented a nationally recognized homebuyer education program.

Given the chance, I know that Brian will leave no stone

unturned in his effort to assist low-income families and persons, inVerDate 11-MAY-2000 17:41 Jun 02, 2006 Jkt 025856 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 27824.TXT SBANK4 PsN: SBANK4
3

cluding the elderly and other persons with special needs. He will

work hard to continue the Department’s homeownership successes,

focusing on preserving affordable housing and, as importantly, he

will be an open-door leader in regular dialogue with you and this

Committee.

I know he has the confidence of the Secretary, Alphonso Jackson,

another good Texan, and we appreciate your willingness to take up

this nomination. And I know Senator Hutchison joins me in commending this nominee to you and the rest of the Committee.

Thank you very much.

Chairman SHELBY. Thank you, Senator Cornyn.

Senator Allard, do you have an opening statement?

STATEMENT OF SENATOR WAYNE ALLARD

Senator ALLARD. Mr. Chairman, I do have a brief one.

Chairman SHELBY. You are recognized.

Senator ALLARD. I would like to thank you, Chairman Shelby, for

convening today’s hearing, and I am keenly interested in both of

today’s nominees both as Chairman of the Subcommittee on Housing and Transportation. And I am particularly focused on the position of the Federal Housing Commissioner, which is one of the key

positions at the Department of Housing and Urban Development.

I would also like to take this opportunity to raise a serious concern that will impact HUD’s ability to operate effectively and efficiently. The Department currently faces critical staffing vacancies.

Eight of the 11 Assistant Secretary level positions are currently vacant. This includes a number of critical positions such as the General Counsel and Chief Financial Officer. Additionally, nearly half

of the regional director positions are vacant, and this leadership

vacuum will seriously inhibit HUD’s effectiveness, particularly in

light of the lean budget.

Right now, more than ever, we need to fill HUD’s vacancies. This

Committee, whether under Republican or Democrat leadership, has

always made it a point to consider nominees in a timely fashion,

and Senator Shelby has shown a consistent willingness to move

promptly. However, we cannot consider nominees to fill the many

vacancies until we receive nominations.

I am hopeful that the White House will be forthcoming with

nominees. HUD has a difficult challenge, and its mission is not

made easier nor is its work more effective when key positions remain vacant.

Finally, I would encourage our nominees to become familiar with

the Government Performance and Results Act, which has been

named PART assessment by the Administration. The Results Act

is a key tool in giving them the focus and vision to carry out effective, efficient programs. I would exhort the nominees to become familiar with the appropriate strategic plans, annual performance

plans, annual accountability reports, and financial statements that,

properly utilized, can help you achieve success in meeting your

mission.

Again, Mr. Chairman, thank you for giving the Committee an opportunity to review these nominations.

Chairman SHELBY. Will both of you stand and hold up your right

hand to be sworn? Do you swear or affirm that the testimony you

4

are about to give is the truth, the whole truth, and nothing but the

truth, so help you God?

Mr. BERNANKE. I do.

Mr. MONTGOMERY. I do.

Chairman SHELBY. Do you agree to appear and testify before any

duly-constituted committee of the Senate?

Mr. BERNANKE. I do.

Mr. MONTGOMERY. I do.

Chairman SHELBY. Thank you. We will start with you, Dr.

Bernanke. If either one of you want to introduce any members of

your family that are here today, feel free to do it.

Mr. BERNANKE. Thank you, Mr. Chairman. My wife is a teacher

at the National Cathedral School here in Washington, and she is

giving an exam to her seventh graders this morning, so she was

not able to come.

Chairman SHELBY. That is a good place to be.

Mr. BERNANKE. Yes, sir.

Chairman SHELBY. Mr. Montgomery, do you have any family?

Mr. MONTGOMERY. Yes, Mr. Chairman. I would like to introduce

my wife, Katy, from California. She is an employee at the Department of Homeland Security.

Chairman SHELBY. Good. She needs to be there, too.

[Laughter.]

Gentlemen, Dr. Bernanke and Mr. Montgomery, your written

statements will be made part of the record in their entirety. You

proceed as you wish. It is your hearing.

STATEMENT OF BEN S. BERNANKE, OF NEW JERSEY

TO BE CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS

Mr. BERNANKE. Thank you, Mr. Chairman. I am very honored to

be here today as the President’s nominee to Chair the Council of

Economic Advisers.

Created by Congress in 1946, the Council of Economic Advisers

is a unique institution with a proud history. Its role is to provide

the President with professional and objective advice on the entire

range of issues bearing on the economic well-being of American citizens. I believe that, over the years, the Council has exerted an important positive influence on economic policymaking in the United

States. The economic challenges that are facing the United States

today—including the needs to address the implications of an aging

population, to achieve long-term energy security while protecting

the environment, and to reform our tax system so that it is simpler, fairer, and more supportive of economic growth—are as great

as at any time since the Council was created. If I am confirmed,

I will do everything in my power to ensure that the Council continues its tradition of providing the best possible advice and analysis and promoting sound economic policies.

Mr. Chairman, you were kind enough to give information on my

background, which includes both academic and policy experience,

and so I will not repeat that here, sir. But I would like to take this

opportunity to thank you, Mr. Chairman, and the Committee for

the prompt consideration of my nomination, and I would be very

pleased to take any questions you might have.

Thank you.

5

Chairman SHELBY. Mr. Montgomery.

STATEMENT OF BRIAN D. MONTGOMERY, OF TEXAS

TO BE ASSISTANT SECRETARY FOR

HOUSING/FEDERAL HOUSING COMMISSIONER,

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Mr. MONTGOMERY. Thank you, Mr. Chairman. Distinguished

Members of the Senate Banking, Housing, and Urban Affairs Committee, I am honored to appear before you today as the President’s

nominee for Assistant Secretary of Housing and Federal Housing

Commissioner at the Department of Housing and Urban Development. I, too, want to thank the Committee for arranging so quickly

today’s hearing to hear our nominations.

I also want to thank my fellow Texan, Senator Cornyn, for his

very kind introductory remarks, and I want to say I am very much

humbled by the opportunity to appear before you today.

I would like to say I am very happy my wife, Katy, is here. I

wish my parents were also here today. They are mostly retired, living in Houston, Texas, these days. But even though they are retired, they still manage to work 2 to 3 days a week. My father

serves as an ad litem attorney in a family law court in Harris

County, and the other judges frequently mention to me how much

they admire and respect my father. He has practiced law since the

late 1950’s. He is very proud of the work he does. All his clients

are certainly impoverished. My mom still works as a secretary in

the same hotel that she has for the last 20 years.

I am certainly, like all of us, very thankful to my parents for a

number of things, but I am mostly proud of the value system that

they instilled in myself and my three sisters. I would say it is a

value system that reflects their very modest and very diverse childhoods. My dad was raised in east Texas during the Great Depression. His father worked there as a roughneck in the oil fields

around Kilgore.

My mom, while she was born in McAllen, Texas, was raised in

a small village in northern Mexico, living there until she was a

teenager.

It was a chance encounter in San Antonio many years ago while

my Dad was in the Air Force that brought them together. After

serving his country, my Dad did something that no one else in his

family had done, and that is, go to college via the GI bill, and ultimately to law school.

I am fortunate to have parents of very modest beginnings who

taught me the values they learned growing up in their respective

communities: honesty, hard work, and to always help one another.

Mr. Chairman, I believe these values have helped me make a difference in the lives of many citizens in the 12 years I have worked

in the government sector. While I have been very fortunate to work

for two Presidents, one Vice President, and one Governor, I am

most proud of the time I spent at the Texas Department of Housing

and Community Affairs. Let me say also, sir, that I was very honored to work side by side with some of the most dedicated and

hard-working career staff around. And should I be honored by your

vote of confidence, I look forward to doing so at HUD as well.

6

We have enjoyed many successes during my 31⁄2 years at the

State housing agency, some of which, Mr. Chairman, you touched

on earlier.

To be sure, the need for affordable housing was profound in the

metropolitan areas of Texas and remains so at present. However,

the living conditions that existed along certain areas of the TexasMexico border were, and still are today, deplorable. The communities I am referring to are called ‘‘colonias.’’

There are more than 1,200 colonias along the Texas-Mexico border with an estimated 400,000 residents. Most of the residents live

in Third World conditions, without basic health and human services. They must also cope with some of the highest unemployment

rates in America and incomes far below the poverty level.

I know this description firsthand because our agency spent a

good bit of our time and resources within the border region. In a

cruel twist, many of the colonias have names like Sunset Acres,

Los Fresnos, or River Place—names that do not accurately represent the quality-of-life conditions these families endure every

day.

While homeownership for all Americans will always be a very

important goal, so are the most basic needs we take for granted,

like safe drinking water. Many of our limited State funds at the

time were spent trying to bring water to these communities, improve the roads, or remove the sewage. Some of our most memorable moments during my tenure at the State housing agency were

seeing the faces of the residents the first time they had safe drinking water flowing to their neighborhood.

Of course, the profound need for safe and sanitary housing and

living conditions did not end along the Texas border region. A good

bit of our efforts were directed toward Texas’ rural communities as

well as inner-city neighborhoods. There we directed much-needed

low-income housing tax credits, rehabilitated homes that were in

desperate need of repair, or leveraged our funds with a local unit

of government or nonprofit agency via the low-income housing tax

credit program as well. Again, it was the faces of the needy citizens

that so vividly touched all of us.

Mr. Chairman, I offer this brief narrative since I know each of

you have similar conditions within your own States. Cultures and

regional differences aside, these people share one immutable fact:

They need our help.

And speaking of people in need, I want to briefly say something

about our elderly population, which happens to include my mom

and dad. While the debate over Social Security reform continues

around us, I hope the debate also gets Americans thinking about

where these senior citizens are going to live, especially those of low

incomes. It is difficult to imagine that by the year 2030, one-fifth

of our population will be over 65 years of age.

Mr. Chairman and Members of the Committee, my pledge to you

is a simple one: If confirmed, I will never forget that there is a

human face at the heart of these issues. And in the case of elderly

housing, the faces I see include my parents. All of these groups represent far more than numbers on a spreadsheet. They represent

the lives of everyday Americans in need.

7

Finally, Mr. Chairman, whether it was leading the White House

effort following the Space Shuttle Columbia disaster that ultimately led to the first major shift in America’s space program in

a generation, or working with the President’s Cabinet on a variety

of complex and challenging issues on a daily basis, I believe I have

proven myself as a very capable manager and a steady leader. And

if confirmed, I hope to bring those skills to the Office of Housing.

I am very grateful to President Bush and Secretary Jackson for

their trust and confidence. And should you confirm my nomination,

I pledge to work closely with you and with your staffs as we look

for new ways to better assist our fellow Americans.

At this time, Mr. Chairman, I will try to answer any questions

you or the other Senators may have, and I thank you very much

for your time.

Chairman SHELBY. Senator Martinez has notified us that as a

former HUD Secretary, he is very interested in what you are doing,

both of you, and especially housing. He is tied up in the Energy

Committee. He hopes to get here.

Mr. Bernanke, tomorrow morning here, the Secretary of the

Treasury, John Snow, will testify regarding international exchange

rates and policies. As you are well aware, many Members of Congress, including myself, find the continued imbalance of trade with

China to be a significant concern. What is your assessment as to

the desirability of the Chinese Government broadening the range

in which its currency fluctuates or linking it to a basket of currency? If so, how would you recommend that the United States

bring about such an action, if we can? And do you believe sufficient

reforms have taken place within the Chinese banking and financial

system to make such a change?

Mr. BERNANKE. Senator, first of all, as a general matter, for large

economies like China and the United States, it is preferable to

have a market-determined flexible exchange rate, and I do believe

that China should move as expeditiously as possible toward loosening up its exchange rate regime.

The Treasury, to my understanding, has been in consultation

with China helping them in various ways to prepare the ground

from loosening their exchange rate, discussing the banking system,

working with them on developing markets of foreign exchange. I

think that they are perhaps some way from a full capital mobility

regime. But I do believe that they are now ready to go to a more

flexible exchange rate regime, and I would urge them to do that.

That would be part of the solution to moving the United States

back toward a more balanced trade position and a reduced reliance

on foreign borrowing.

Chairman SHELBY. Are you concerned with such an imbalance of

trade with China that we have?

Mr. BERNANKE. Senator, we have an imbalance of trade with

China, and we have, of course, a large imbalance with the rest of

the world. I think there are a lot of reasons for that imbalance, including the strength of the U.S. economy, and the fact that people

want to invest here. So it is a very complicated phenomenon, but

I do think that our trading partners, including China, are more oriented toward exporting and not sufficiently oriented toward domestic consumption and domestic investment. And I think that flexible

8

exchange rates in China and the rest of the world would be a step

toward restoring a better balance in trade as well as in capital

flows.

Chairman SHELBY. Moving on to GSE regulatory reform, as you

well know, this Committee has made regulatory reform a high priority for the GSE’s, that is, Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System. I have repeatedly, and others on

this Committee have, expressed views that a credible regulator, a

strong regulator must have sufficient and flexible authority over

capital standards, product approval, and the ability to place a troubled GSE into receivership if it came to that need.

In your opinion, what are the most important components in any

reform measure? And do you share Chairman Greenspan’s concerns

regarding systemic risk in the GSEs’ portfolios?

Mr. BERNANKE. Yes, Senator, I agree with the elements that you

suggested. The GSE’s perform a vital service in securitizing loans

and helping to make the housing market more efficient. But the

great size and complexity of their portfolios poses a risk to both the

U.S. financial system and to the taxpayer ultimately if the taxpayer is called upon to intervene.

It is in everyone’s interest to make sure that the GSE’s are safe,

sound, and able to perform their function. The elements you have

described, including a strong regulator, the ability to invoke receivership if necessary, to set capital standards, and to set limits on

activities, are all important components toward making the GSE’s

safe and ensuring the success of their mission.

I do agree with Chairman Greenspan that it is very important

to take action in this area and that it is something that this Committee has made excellent progress in, and I commend you for your

work on it.

Chairman SHELBY. Thank you.

Mr. Montgomery, FHA’s share of the single-family mortgage

market has fallen over the last 10 years from 11 percent to just

over 3 percent today. I understand HUD has announced a new advertising campaign for FHA to make potential borrowers aware of

FHA’s lower costs compared to many subprime products. How

much of FHA’s declining market share do you believe results from

borrowers being unaware of FHA as an option? And do you believe

that FHA’s role is to compete with the private market or rather to

address needs not being met in the marketplace?

Mr. MONTGOMERY. Thank you, Mr. Chairman. I think a lot of us

can recall a time not too long ago when we would open the Sunday

newspaper, look in the home section, and you would see homes listed, FHA/VA, FHA/VA. And certainly you do not see that much

more these days, sir, and you certainly do not see it in the housing

market up here.

I think FHA is a very viable option for many low-income homebuyers. As you know, sir, we have to depend on a lot of lenders and

others in the community to help market our product. But I think

we could do a better job of educating consumers, Mr. Chairman. I

think in a lot of cases consumers are not even thinking about FHA.

So, I think we certainly need to raise awareness of it.

9

As far as competing with the private sector, sir, I think it is more

of a product that will help more consumers become

homeowners——

Chairman SHELBY. More complementary perhaps?

Mr. MONTGOMERY. Yes, sir, I would say so. The subprime market, sir, that you brought up, there is certainly nothing wrong with

that. In fact, the subprime market has grown I believe tenfold since

1994 and 2003. But I have to believe in some of my discussions

with HUD staff that some of those homebuyers who are in the

subprime market could have fared much better under FHA. And if

confirmed as FHA Commissioner, sir, I would like to work hard

with your Committee and other Members to see if we could raise

the profile of FHA, make it more of an option for prospective homebuyers out there.

Chairman SHELBY. Okay. Senator Reed.

STATEMENT OF SENATOR JACK REED

Senator REED. Thank you, Mr. Chairman, and thank you, gentleman.

First, Mr. Bernanke, you are a distinguished economist with a

great record, and you are facing some serious challenges in the

White House. One question I would like to follow up on the Chairman’s point is that you mentioned in terms of our current international situation the attractiveness of individuals around the

world to invest in the United States. But hasn’t there been a shift

from individual investment to more government central banking investment and buying our securities and funding our debt? Is that

something we should be concerned about?

Mr. BERNANKE. Senator, it is true that a number of countries

have begun to hold large quantities of U.S. treasuries as reserves.

That includes, of course, China and Japan. But I do not think it

is the case that it is the principal source of demand for U.S. securities. There still is very substantial private sector interest in U.S.

securities. One needs to look not just at the net flows, but at the

gross flows. What are the total purchases of U.S. securities from

abroad. And if you look at the gross flows, you find that it is often

the case that more than three-quarters of those securities being

sold abroad are going to private sector holders.

I believe considerable interest remains in both the private sector

and also from governments in holding U.S. securities.

Senator REED. But I think, again, correct me, the positions which

foreign central banks have taken over the last several years have

grown significantly. Is that accurate?

Mr. BERNANKE. That is correct, principally in China.

Senator REED. And that is a new dimension that was not as

problematic 10 years ago or 20 years ago. Is that fair to say?

Mr. BERNANKE. I think that is fair to say. The U.S. dollar remains about 65 percent of world reserves, so it remains the principal world reserve currency.

I think the primary issue, though, Senator Shelby already alluded to, is the exchange rate regime. If the exchange rate regime

were loosened up, it would not be necessary or desirable for China

to accumulate more reserves. Therefore, I think that is the basic

issue.

10

Concern has been raised as to whether if China were to stop purchasing U.S. treasuries, would that have a significant impact on interest rates? I think that it might have a measurable effect, but I

do believe that U.S. financial markets and world financial markets

are sufficiently deep and liquid and there is sufficient private interest in U.S. securities that moderate adjustments in these reserve

positions are not a risk to U.S. interest rates or the economy.

Senator REED. But on the other side of the coin, providing for a

different exchange rate is the possibility that they will stop buying

U.S. securities to hold. That will affect interest rates; most people

are concerned now about the housing market. How do you see that

playing out?

Mr. BERNANKE. Senator, as I said, you are quite correct that if

China were to sharply change its holdings of U.S. treasuries, that

might have a measurable impact on our interest rates. However, I

do not think that it would be a large or dangerous change in interest rates. I think it is worth noting that our current low rates of

interest in the United States are not unique, that other countries—

France, the United Kingdom, and others, and, of course, Japan—

have interest rates that are lower than ours. So, I do not think it

is really the case that foreign central bank holdings of U.S. securities are the primary reason why our interest rates are as low as

they are.

Senator REED. Let me just change topics briefly, related to the

issue of trade, and that is the fact that—and you have spoken or

written about this—the plight of workers who are displaced by the

movement of jobs overseas.

First, could you tell us how serious you think that is? And, also,

is it a situation that is getting worse or it continues to be at a

steady level?

Mr. BERNANKE. Senator, first of all, it is certainly a problem

when any American loses a job, whether it be to international

trade, whether it be to new technologies, whether it be to changes

in business or demands. So, I think it is very important that we

pay attention to that issue, make sure that people who lose jobs are

assisted in any way we can, whether it be through education,

through trade adjustment assistance, whatever mechanism we

have. So that is an ongoing problem, and I, in no way, want to diminish that.

I think, however, that the U.S. labor market, after a period of

weakness earlier in this decade, has been showing improvement.

The unemployment rate, of course, is down. Unemployment insurance claims are down. The job growth, of course, has been rising

quickly. Part-time work has been reduced and people are more able

to find full-time jobs.

So overall the labor market does seem to me to be improving significantly. There is still a ways to go, and in particular, I think we

need to see some increase in real wages before we are really satisfied with what is happening in the labor market. But relative to

a couple of years ago, I think the labor market has improved, and

I hope it will continue to do so.

Senator REED. Mr. Chairman, I have some questions of Mr.

Montgomery, but I would be happy to wait for a second round.

Chairman SHELBY. Certainly. Senator Allard.

11

Senator ALLARD. Thank you, Mr. Chairman.

As you may or may not be aware, Mr. Bernanke, I am strong advocate of the Government Results and Performance Act, and as you

are probably aware, it promotes outcome-based management and

accountability through measurable results. My question is: During

your tenure in this appointed position, what key performance goals

do you want to accomplish and how will the Congress know whether you have accomplished it?

Mr. BERNANKE. Senator, I endorse your position. I am aware of

the Office of Management and Budget’s PART program. In general,

I think Government programs should be set to various criteria. Are

they appropriate Federal responsibility? Are they a high priority?

And once they are undertaken, do they have measurable effects, do

they have measurable outcomes?

One of the strengths of economics, I think, is we understand how

to do cost/benefit analysis; we know how to try to measure outcomes. And I will certainly do the best I can to bring this Council

of Economic Advisers into the budget process wherever I am able

to do so and to insist on accountability and measurability in the

Government budget.

The real cost of Government is really not the taxes we collect,

but really the whole spending, all the resources that the Government takes out of the economy. And it is extraordinarily important

that we make sure that those resources are used as effectively as

possible. I entirely endorse that view.

Senator ALLARD. Let me just bring up a little bit on balance of

trade. I know that the Chairman asked about it. I do not view balance of trade as a real problem. In fact, whenever our balance of

trade numbers have been the highest in the negative for us, it has

been during good economic times, and when they have been lowest

is during the Depression and during the latter part of the 1970’s

when we had double-digit—the misery index and all that. And so

I have always viewed that the balance of trade figures, whenever

they got high, just reflected a great economy in the United States.

I wonder if you might comment on that view.

Mr. BERNANKE. Senator, you are correct that a balance of trade

deficit is not an indicator necessarily of a weak economy. We have

a strong and fast-growing economy; very attractive to investment.

We have a balance of trade deficit. Japan and Germany have large

current account surpluses, and they are envious, I think, of the

rate of growth that we are able to achieve in this economy. So

there is certainly no simple relationship between the two.

I do think that over a period of time it would be desirable for us

to achieve a more balanced trade, not necessarily a balance but

something more in the direction of balance. And in part that would

be facilitated by exchange rate policies, as Chairman Shelby alluded to, and in part it would be associated with greater demand

on the part of our trading partners.

One of our concerns here is that China, other East Asian countries, Europe, are not buying enough and not providing strong

enough demand for our exports and our export industries. So we

continue to be a very strong economy, which is why we import so

much and why we attract so much capital. But I think it would be

12

desirable to have strengthened markets for ourselves and other

countries as well.

Senator ALLARD. Mr. Montgomery, as you are probably well

aware, I have worked with the Department of HUD on RESPA,

and I have been rather vocal about HUD working with industry

and trying to set up some guidelines as far as RESPA is concerned.

And I continually get rumors that the Department is still on the

verge of issuing a proposal on RESPA without any consultation

with industry. Can you please provide assurances that HUD intends to stick by its pledge to consult with Congress, particularly

Secretary Jackson, and produce any further reform proposals in a

more consensus-based approach?

Mr. MONTGOMERY. Thank you very much, Senator. To answer

your question, yes, sir, we absolutely will. The Department is doing

more of a consultative approach, I would say, this go-round, I think

reaching out to the various stakeholders to build a good consensus,

to make sure we are not harming small businesses who are involved in that industry.

By the same token, this is the largest investment most Americans will make, and I think we would all be in agreement that the

more transparent we can make the transaction for the homebuyer

who goes in there, what they were told up front is certainly what

is presented to them when they sit down to sign those many, many

documents. But I just want to certainly reassure you, Senator, that

we will make sure that it is a consultative process, certainly with

the Members up here, those in the industry, small business, and

certainly consumer groups as well, sir.

Senator ALLARD. I support the President’s proposal on homeownership, and I do think that manufactured housing, particularly

after the manufactured housing bill we passed here a year or two

back, maybe three or four, I think has helped to establish some national standards. But I do think there is an opportunity for affordable homeownership here.

I would just like to have you say a few words on the role of manufactured housing in promoting homeownership.

Mr. MONTGOMERY. Thank you, Senator. There was a time when

I was in Texas that there were more new manufactured homes sold

in that State than there were bricks and mortar homes. That happened a good bit in the late 1990’s. A manufactured home is a very

good option for many homebuyers, and certainly FHA can provide

assistance if it is a manufactured home that is installed on a foundation. For many homeowners, that is their option, and I think it

is something that in working with the industry, I think we can certainly continue to promote that as an option.

You had referenced some of the other facets of manufactured

housing relative to installation. Just as the Federal Government

helped set some manufacturing standards many years ago to bring

conformity to the industry, I think at the very least a minimum

threshold in terms of installation procedures is something definitely we should certainly continue to look at.

Recognizing, sir, my own State, when we were in Texas, relative

to the installation, the process is far different in East Texas than

it is in South Texas than it is in West Texas. So, we realize it is

not a one-size-fits-all solution, sir, but certainly I think looking at

13

a minimum threshold for installation requirements is something

worth looking into.

Senator ALLARD. Thank you, Mr. Chairman. I see my time has

expired.

Chairman SHELBY. Thank you.

Dr. Bernanke, you have served as a Member of the Board of Governors of the Federal Reserve since August 2002. You have also

spoken frequently on various monetary policy issues, such as inflation targeting and making the Federal Reserve’s decisionmaking

less mysterious to the public, I believe were your words. As the

Chairman—and you will be—of the Council of Economic Advisers,

will you continue to discuss such matters? And as the President

looks toward naming a replacement for Chairman Greenspan, what

role would the CEA Chair play if the CEA Chair is one who is

highly regarded like yourself in monetary affairs?

Mr. BERNANKE. Senator, first of all, it is very important that the

Federal Reserve remain independent of the Administration in making monetary policy, and for that reason, even though at the moment, I am a Member of the Board of Governors, I recused myself

from even participating in the monetary policy process. So, I would

not—in my new position, I will not be commenting on——

Chairman SHELBY. The independence of the Federal Reserve is

paramount, is it not?

Mr. BERNANKE. The independence is paramount, yes, sir, and I

do not expect to be involved in any of these issues that you are referring to, sir.

Chairman SHELBY. Okay. The Social Security system clearly

faces many challenges, as we all know, in its future financing that

will prove difficult to resolve the longer we wait. The Medicare program also faces a significant financial problem, perhaps even more

dramatic than that of Social Security.

As a key adviser to the President, how would you recommend,

Doctor, that the Administration approach these problems; that is,

is there a set of basic guiding principles that should be kept in

mind as the Administration proposes various reform options? And

I should include Medicaid, too, in that area.

Mr. BERNANKE. Senator, that is quite a large question you asked

me there. I think there are two primary objectives that we need to

serve. The first is that these programs which are crucial parts of

our social safety net continue to serve that function, that Social Security continue to provide decent retirement income for people

when they reach that age, and that Medicare provide important

support for health costs for our public.

At the same time, we have an aging population. We have a

longer-living population. We have greatly increased costs particularly on the health side. And so a responsible approach must be to

make sure that resources are there, that the Government is able

to afford the promises that it makes.

Senator, I know you are familiar with the broad outlines of the

President’s proposals, and I will not repeat those unless you would

like me to discuss them. But I think we do have to make sure that

we are meeting both those goals and, in particular, that we have

made provision for the resources we are going to need to pay for

those promises. So, I would look in the case of Social Security to

14

think about how we can restructure, if necessary, to make sure

those promises can be kept.

The Medicare problem, of course, is in some sense more complicated because it involves not only a Government transfer program, but also the entire health care system of the United States.

I think there are a number of reforms that would be quite useful.

I think it is possible, for example, through health savings accounts

and high-deductible insurance policies to provide a bit more market

discipline in the health care industry. I think there are a number

of mechanisms that could reduce costs and help control costs without sacrificing the essential function of that program.

So it is a tremendous challenge, Senator, and I look forward to

trying to meet both of those responsibilities.

Chairman SHELBY. Mr. Montgomery, housing market risk, there

is always risk. HUD has proposed allowing FHA to insure zero

downpayment mortgages. In recent years home values, as we all

know, have increased dramatically. If home values were to decline—and if history is a guide, they will—what impact do you expect this to have on borrowers with zero or even negative equity?

And could the growth of low- and zero downpayment mortgages put

the FHA insurance fund in the risk of insolvency? Is that a concern? And how would you manage that?

Mr. MONTGOMERY. Thank you very much, Mr. Chairman. Certainly, the function of FHA is an insurance policy, and without

risk, we basically certainly would not be using it to the degree that

we should be using it. I would say that the zero downpayment program goes a long way toward solving the largest hurdle for many

homebuyers, and that is the downpayment.

In my consultations with HUD staff, in my opinion, I believe the

way they have structured it would be as such that the premiums

would cover any inherent risk. And certainly the underwriting

standards I think we should put in place would perhaps need to

meet another threshold to ensure that we have homebuyers who

are using the product that are less likely to default on the loans.

Chairman SHELBY. Senator Sarbanes, do you want to take a

round? We are in our second round.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Yes. Thank you very much, Mr. Chairman.

Mr. Montgomery, I would like to ask you a few questions, because the positions you are going to are extremely important in addressing the housing needs of our citizens. Secretary Jackson has

apparently made it a priority for the Department to seek to gain

back market share for the FHA program. As you know, FHA’s

share of the mortgage market has declined from nearly 12 percent

in 1994 to just over 3 percent last year.

To what do you attribute this decline? And what plans do you

have for addressing this problem?

Mr. MONTGOMERY. Thank you very much, sir. The FHA has not

been a very good option for a lot of people as of late, for a number

of reasons, sir. I would say a lot of consumers are not even aware

that the program exists anymore. I can remember a time not too

long ago when you would see FHA/VA homes for sale in the Sunday newspaper. You certainly do not see that up here. You cerVerDate 11-MAY-2000 17:41 Jun 02, 2006 Jkt 025856 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 27824.TXT SBANK4 PsN: SBANK4
15

tainly do not see it in California, where the median price of a home

has hit almost half a million dollars now.

But getting back to how we can make consumers aware of it, I

think we could do a better job of marketing the program. Somebody

had mentioned to me, well, perhaps a consumer education program,

and I said I am not even so sure a lot of potential homebuyers are

even thinking about FHA. There is certainly nothing wrong with

the subprime market. It is viable and has been a very good option

for many homebuyers, but I have to believe, Senator, that there are

some homebuyers who have gone to the subprime market that

could have probably done a better job if they had gone with FHA

instead of subprime. So, I look forward, if confirmed, to working

with this Committee to see ways we could better position FHA as

an alternative for many low-income homebuyers.

Senator SARBANES. Well, let me just follow along. In a recent nationally syndicated column by Ken Harney, Secretary Jackson was

said to be urging homebuyers to consider FHA as an alternative to

subprime loans. And one of the reasons Secretary Jackson gave for

using FHA, which Harney applauded in his column, was the fact

that FHA loans carry no prepayment penalties. Subprime loans

often impose heavy early payoff fees.

I strongly agree with that analysis, actually. In fact, it is through

prepayment fees and frequent refinances that many subprime lenders strip unsuspecting homeowners of their home equity. We have

had hearings in this very Committee on that subject and have

heard really heart-rending stories of people who have just lost their

homes, in effect, because they were subjected to this constant refinancing, talked into by some pretty slick people.

It seems to me particularly unfair that homeowners who take out

higher-priced loans in order to become homeowners and who have

a credit problem are penalized by prepayment penalties when they

try to take advantage of lower rates, which, of course, would make

them more secure in their home as payments would become more

affordable.

What is your view about prepayment penalties in the subprime

market? Do you have a view about that?

Mr. MONTGOMERY. Senator, as you know, many homebuyers like

to use prepayment options, and I think anything we can do to be

more consumer friendly in that area certainly we should do. But,

again, Senator, I think it gets back to making potential low- to

moderate-income homebuyers aware that FHA is out there and can

help them and has helped tens of millions of people since 1934.

The subprime market has literally exploded in size, Senator.

From 1994 to 2003, it has increased tenfold. And, again, there is

certainly nothing inherently wrong with the subprime market. I

just have to believe in my heart of hearts, Senator, that there are

more homebuyers out there who are unaware of the benefits of

FHA, for whatever reason, that could have gone that route versus

the subprime market. Again, sir, I think we could do a much better

job of offering that as an option to some homebuyers out there.

Senator SARBANES. Of course, you are going to be the FHA Commissioner. I mean, you can establish a more effective competition

with the subprime market and use as one of your marketing deVerDate 11-MAY-2000 17:41 Jun 02, 2006 Jkt 025856 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 27824.TXT SBANK4 PsN: SBANK4
16

vices actually the fact there are no prepayment penalties on FHA

loans, presumably. I mean, that seems to me a strong argument.

On occasion, I would almost say traditionally in this country, the

FHA Commissioners, the strong and effective ones, have affected

prevailing views or standards in the industry as a general proposition, and on that score, it seems to me that there is a role for you

to play to urge subprime lenders either to reduce or eliminate their

prepayment penalties.

What is your view of trying to play that role if you are confirmed

as the FHA Commissioner?

Mr. MONTGOMERY. Certainly, Senator, if confirmed, I can assure

you it will be one of my top priorities to look at ways we can do

what is good for the consumer and present FHA as a better option

to them.

Senator SARBANES. Mr. Chairman, I see my time is up. Could I

ask one more question?

Chairman SHELBY. Go ahead, Senator Sarbanes.

Senator SARBANES. The default and foreclosure rates for FHA are

much higher than for the prime market. In fact, even as the loans

past due in the prime market have declined each year since 2001,

FHA loans past due increased from 2001 to 2003 and have stayed

stubbornly high since then. FHA foreclosure rates have gone up

steadily even while the prime markets have stayed steady and, in

fact, subprime foreclosures have declined. The claim rates for FHA

single-family loans increased sharply starting in 2000 and have remained high.

Why is all of this happening?

Mr. MONTGOMERY. Thank you, Senator. I would agree with you

that the default rate and the foreclosure rate are much higher than

you would find in the conventional market. As I recall, the default

rate for FHA is somewhere around 6, 6.5 percent right now. I

would also say in defense of HUD, I believe they have put in some

fairly good loss mitigation programs in effect, whereas the foreclosure rate is only around 1.2 to 1.5 percent.

I believe there were some products that were perhaps used in the

late 1990’s in an effort to increase homeownership, that we perhaps

may be paying a price for now. But it gets back to, I think, just

being very careful on the front end in our zeal to make people

homebuyers that we are not ultimately paying a larger price on the

back end. And I can assure you, Senator, there is nothing worse

than foreclosing on a home. And if confirmed, I can assure you we

will do everything we can to get down the default rate as well as

the foreclosure rate.

Senator SARBANES. Mr. Chairman, I will defer to the next round.

Thank you.

Chairman SHELBY. Senator Allard.

Senator ALLARD. Mr. Chairman, I would like to follow up on the

line of questioning of Senator Sarbanes in that I have also recognized, you know, the default rate and foreclosure rates are higher

in FHA. Are you considering any reforms to improve FHA’s performance in that regard? You have done some now. Are you considering any additional ones?

Mr. MONTGOMERY. If confirmed, Senator, absolutely. That would

be one of my biggest priorities. As I mentioned, I was very imVerDate 11-MAY-2000 17:41 Jun 02, 2006 Jkt 025856 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 27824.TXT SBANK4 PsN: SBANK4
17

pressed with what HUD has put into place to work with homebuyers who have defaulted, who are 60 to 90 days past due, to

work with them, to perhaps restructure the loan or other options

so it does not go to foreclosure. It then begs the question could

there be more we could be doing on the front end so these people

do not find themselves getting into dangerous territory and the

possibility of losing their home? So, certainly, Senator, it would be

one of my top priorities to look at that program as well.

Senator ALLARD. I think you have implied in your answer that

we need to somehow or other balance the needs of the homeowner

with safety and soundness concerns. Do you have any idea how we

reach that balance?

Mr. MONTGOMERY. Senator, I do not have the exact answer

today, I can assure you, but I would definitely look forward to

working with your staff as we find solutions.

I would say that you do not necessarily, in our zeal to get more

homebuyers, to have a product that would ultimately—those consumers might pay a larger price for 5, 6, or 7 years down the road,

we need to protect the safety and soundness of the Mutual Mortgage Insurance Fund and make sure that we are above the Congressionally mandated thresholds in terms of reserves.

I am trying to look at it more strategically, Senator. If confirmed,

I would certainly do so, to see that we can put in ways to where

those homebuyers remain homeowners for 20 or 30 years.

Senator ALLARD. I applaud the President in his promotion of affordable housing or homeownership society. I think that is the

dream of most Americans, to at least be able to own their own

home. But in the process of doing that sometimes I wonder if we

get in, we so marginally qualify them that they do not have the resources to take care of the roof when it leaks or if they have sewer

problems or maybe do not maintain the home as it should be and

can affect the neighborhood if they do not. I would like to hear your

thoughts on how a family that is in some of these marginal loans

can face these expensive repairs or if you want a family to be prepared to face these possibilities, can you comment regarding the

importance of long-term ownership? These are challenging problems and it is something that I think we all struggle with.

Mr. MONTGOMERY. Certainly the spill-over benefit of homeownership, the social benefits if you will, are excellent, and we certainly

applaud any effort to make people homebuyers. But again, sir, I

just want to get back to structuring it in a way to where we are

not paying a price further down the road. I just want to ensure,

perhaps, through homebuying counseling. I know HUD’s budget for

that has gone up of late. That is something we had great success

with within Texas. And as I mentioned before, this is the single

largest investment many of us will make. I think the more that we

can sit down on the very front end, working with nonprofits on

homebuying counseling, I think would serve us all better in the

long-term, and especially serve the family in the long-term.

Senator ALLARD. I mean if we look at the poverty levels it is

many times lower in the rural areas of the country than anyplace

else, and I think I have maybe the poorest or second poorest county

in the Nation in the State of Colorado, and people do not think of

that in those terms, but it is a rural area, and their populations

18

are very similar I think to what you have seen in Southern Texas

in which you have mentioned some of your experience in working

with those.

I just hope, Mr. Chairman, that you are able to bring some of

your experience forward in a way that will help us resolve some of

these dilemmas that we face, and so I wish you well.

Mr. MONTGOMERY. Thank you, Senator.

Chairman SHELBY. Senator Reed.

Senator REED. Thank you, Mr. Chairman.

Before I address questions to Mr. Montgomery, one final question

to Mr. Bernanke.

You mentioned in your comments, and I agree with you, is that

we have to do more to increase the wages of working Americans.

What specific policies would you be proposing to do then?

Mr. BERNANKE. Yes, Senator. Increasing real wages would certainly better the lives of our workers.

I am somewhat optimistic about the near-term. Productivity has

grown very substantially in the last few years in the U.S. economy.

Historically, real wages tend to catch up with productivity, but

often with a lag. During the late 1990’s, for example, during the

first part of the productivity boom, real wages did not move very

far for a couple of years, and then as the labor market strengthened, real wages began to rise. I suspect that we are currently in

the same situation. Productivity has risen at a remarkable pace for

the last 2 or 3 years, but real wages have not yet caught up with

that productivity.

As I said in my response to your earlier question, as the labor

market strengthens, I believe we will see real wages rising to

match the gains in productivity.

The one other suggestion or thought I have on this subject is that

an important reason that real wages are rising slowly is the increased cost of benefits to employers, which takes away from the

money available to pay wages, and of course a principal culprit

there is health insurance costs. So, as Senator Shelby alluded to

earlier, I think addressing the cost of health insurance, trying to

make that more affordable, would go a long way in strengthening

the labor market and making real wages grow more quickly.

Senator REED. Thank you, Mr. Bernanke.

Mr. Montgomery, several of my colleagues have spoken about the

declining share of the FHA program in the market. One reason—

and you mentioned it—is the fact that now the price of housing is

so significantly higher that many times they exceed the limits. In

my home State of Rhode Island, the FHA loan limit is $280,000.

The median home price is $283,000, so for many people who would

qualify based upon their income, they cannot find a house that is

suitable for purchase with an FHA instrument.

What are your thoughts on increasing loan limits for high-cost

areas like Rhode Island?

Mr. MONTGOMERY. Thank you very much, Senator. I think anything that we can do to work with lenders who are the entity that

promotes FHA, to be a little more nimble is probably the best way

to say it, Senator. It is not a one-size-fits-all issue. In many ways

the ceiling is a concern, and certainly a higher-price market such

as Rhode Island and parts of the Northeast. On the other end, the

19

floor to the conforming loan limits is also a problem as well, but

given the opportunity, Senator, I think we need to look at ways

that we can better position FHA so we are not marketing it in only

areas that happen to have affordable homes, which you certainly

do not find in this part of the country, nor do you find out on the

West Coast as well.

Senator REED. Does that mean you are going to look at the possibility of raising, in selected regions, the top line?

Mr. MONTGOMERY. Senator, I think we need to look at just about

every option to expand FHA as a viable product for low- to moderate-income homebuyers, and I look forward to working with the

Committee, if confirmed, to ways that we can better position FHA.

Senator REED. Mr. Montgomery, another topic. The FHA, one of

its principal functions is to provide insurance for private lenders.

This is accomplished through the Mutual Mortgage Insurance

Fund. In 2003, they recorded a $7 billion upward reestimate of the

credit subsidy in this fund, and it is a succession of these increases

over a decade or more, which suggests that the MMI program, the

Mutual Mortgage Insurance Fund is becoming less profitable and

causing problems for FHA. What plans do you have to ensure the

long-term viability of this fund?

Mr. MONTGOMERY. Thank you very much, Senator. It is critically

important that FHA meet the Congressionally mandated threshold.

I believe it is about 2.3 percent of the reserves. The MMI is I believe somewhere around $400 billion right now, and the reserves

are on the order of about $25 billion. I think anything we can—that

fund is obviously constantly readjusted. This is certainly something

we need to work better on, I think. Last year I think we were looking at readjustment around $7 billion, and next year, Senator, it

could be a readjustment or a plus-up of $3 to $4 billion. In my consultations with the HUD staff I think it is something we definitely

need to look at, how we can better reestimate the sanctity of that

fund.

Senator REED. Do you have any other proposals with respect to

the fund and its long-term viability? It is difficult if it gets reestimated every year, to maintain that fund as it should be.

Mr. MONTGOMERY. Absolutely, Senator. I do not have those for

you today, but if confirmed, I certainly would work with your office

on that.

Senator REED. We have had in the past a concerted effort on

both sides of the aisle to maintain Section 8 contracts that were expiring, to prevent what the term was, subsidized units to be flipped

back in the private market. We gave some tools to HUD. One tool,

for example, was the ability to set certain budget-based rents subject to a cap that could include new debt service, would allow a

landlord to go out, borrow, include that in improvements in the

property so that it would be competitive and it would be a good

place to live. But we are told by some people that HUD is not allowing these devices or using these tools effectively. Do you have

any information about that?

Mr. MONTGOMERY. Senator, I cannot comment specifically on

that issue, but I will say as a general matter the preservation of

affordable housing in this country is a critical issue for the Department, and in my meetings with staff it is something that we have

20

spent a good bit of time discussing. As properties expire, I think

the Department has done a fairly good job the last 2 years of convincing more owners to not opt out. And I think HUD has done a

pretty good job of trying to be a better steward of the public money

to ensure that the properties are maintained, to ensure that the

credit subsidies are accurate, but I can assure you it would be a

top priority, Senator, as the need continues to grow, that if we preserve and maintain our affordable housing stock.

Senator REED. Thank you, Mr. Montgomery.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Thank you very much, Mr. Chairman.

Mr. Montgomery, I just have a couple more questions and then

I want to turn to Mr. Bernanke.

I was pleased to see that one area you mentioned in your testimony is the pressing needs of the growing senior population in this

country. Current projections show the senior population doubling

from 35 million to 70 million by the year 2030. Regrettably, I think

we have done little to prepare for the needs of seniors, and in particular there is concern that seniors are being moved into institutional settings prematurely because of the lack of services to help

seniors to age in place.

Now, most experts view such premature institutionalization as

costly in dollars terms, but also harmful to the well-being of the

seniors, most of whom would prefer to stay in their homes and in

their communities. Actually, I proposed a legislation to establish an

interagency council on meeting the housing and service needs of

seniors, which would give us a critical first step in coordinating the

Federal effort in addressing the needs of the aging population by

bringing together the Federal agencies and offices which deal with

seniors, as well as establishing cooperative patterns with State,

local, and private partners.

I mention it only in the hope that you will take a careful look

at that legislation. It would seem to me something the Administration might be willing to support, and I think it would be first step

toward moving us toward developing a comprehensive policy for

seniors, and particularly one that coordinates housing and other

needs of the senior community. Have you had any chance to think

about that issue heretofore?

Mr. MONTGOMERY. Yes, sir, Senator, I have. And I could add my

parents to that category.

Senator SARBANES. It always helps to have a personal example.

Mr. MONTGOMERY. I could not agree with you more, Senator,

that the need is growing. And if you look at the statistic of that

age group over 65 doubling in just 25 years from now, and as a

subgroup of that, people over age 80 are one of the fastest-growing

age groups in the country. Certainly, Senate Bill 705 that will establish the council, in reading it, it seems very similar to a similar

effort done to establish the Interagency Council on Homelessness,

which I played a part in in my previous job at the White House.

So certainly, Senator from what I have read from the bill, I would

certainly support the establishment of that group.

Senator SARBANES. We look forward to interacting with you on

that issue. I think we might be able to do some good here.

21

The final question I want to ask to you, and I have saved it to

the last because I think it has a carryover to Mr. Bernanke. I know

he has been paying attention to all the questions put to you, but

I urge him to pay attention to this one since I want to swing over

to him about it.

According to a recent article in The Wall Street Journal, the

Mortgage Bankers Association data shows that adjustable rate and

interest rate loans, where the borrowers pay only interest for a period of time, typically 5 years before they start paying down the

principal, accounted for nearly two-thirds of mortgage originations

in the second half of last year. The article goes on to say that the

surge in ARM’s and interest-only loans is particularly notable because rates on 30-year fixed rate mortgages remain below 6 percent, still low by historical standards. You are getting apparently

a trend in this direction, at least off those figures.

The conclusion that many analysts are drawing from this data is

that buyers are using these riskier products in order to buy homes

they could otherwise not afford because these products carry lower

initial payments.

However, if interest rates rise or home values stop rising at the

extraordinary rates that they have been, then these homeowners

could find themselves in very serious trouble. In fact, regulators

are also getting nervous about a drop in credit quality for both

home equity lines of credit and first mortgages and have warned

banks to tighten up standards.

In your view first, Mr. Montgomery, and then I would like to

hear from Mr. Bernanke as well, how much of a concern are these

trends? What if anything should be done about them? What are the

potential implications of this looking ahead in terms of the potential for significant negative impact on the economy, let along on the

particular individuals?

Mr. MONTGOMERY. Senator, I am equally concerned for many

homebuyers who, through zero interest rate, or interest rate only

loan, sir, may be paying a price ultimately down the road. In fact,

this month’s Money Magazine has a very detailed article about

such a problem. Inherently it is certainly not bad, but I agree, Senator, that the homebuyer’s right on the cusp. If a roof leaks, a

transmission breaks, and before you know it they are right on the

cusp of perhaps going to foreclosure. At the same time they are not

building in any equity in their home. The reverse of that certainly

are some homebuyers who have tapped into their home equity line

of credit, which is certainly a good product, but again, it gets back

to something, sir, I think we definitely need to take a look at to

make sure again that we are not paying a price further down the

road.

Senator SARBANES. Mr. Bernanke.

Mr. BERNANKE. Thank you, Senator. There is nothing intrinsically wrong with ARM mortgages or interest-only mortgages if they

are used properly. For example, ARM mortgages typically have a

period of fixed rates, before they are affected by the current market

rate. So people who are, for example, planning to live in one location for only a modest period of time, for example, may find that

a more attractive option.

22

Similarly, interest-only mortgages can be sensible for people who

have sufficient equity and otherwise are fairly strong financially

and do not want to put a lot of their wealth into their home. So

these instruments are not in themselves necessarily a bad thing.

What is important of course is that they are used properly. And

I would just make two comments. The first is that the underwriting standards need to be strong, and I hope that banks and

others who make loans will pay due care to the ability of borrowers

to repay, even should interest rates begin to rise. And second, I

would also urge those who are looking to buy a home to buy a

home that you can afford to live in and not buy a home just because you think the price is going to go up.

So, I think with sensible behavior that these instruments are not

necessarily a threat, but I do agree that care is needed on parts

of both lenders and borrowers.

Senator SARBANES. I guess a thing of concern is when you get a

surge in the figures it gives you pause and worry because I think

it is difficult to make the assumption that it is all being done very

carefully. It is not as though you get incremental steps that people

are thinking this through very carefully. I think we need to be very

careful about that.

Let me ask you, in your macroeconomic textbook, the 1991 edition, you had a section on the minimum wage, and you gave the

pros and cons. At the end of the debate the textbook concludes,

‘‘Therefore, the total labor income of unskilled workers does increase when the minimum wage rises. overall, taking these various

effects into account, a recent study finds that raising the minimum

wage from $3.35 per hour to $4.25 per hour’’—those are the figures

that were under discussion at that time—‘‘could reduce the number

of families by poverty by about 6 percent, on balance a reasonably

substantial effect.’’ And the textbook goes on to say, ‘‘Thus, the inflationary effects of an increase in the minimum wage are relatively small. As a result an increase in the minimum wage has

negligible effects on aggregate employment and output.’’ Now, today’s minimum wage in real terms, if you took the $4.25 we were talking about in 1991, it should be $5.89. It is $5.15. I am

interested whether you continue to see increasing the minimum

wage as an effective to reduce poverty and increase the income of

lower-wage workers while negligible effects on employment and inflation?

Mr. BERNANKE. Senator, the study you refer to by my colleagues,

Allan Krueger and David Card, has been a very controversial one,

and debate still continues about their estimates.

I think the minimum wage has a place and I think the Congress

should consider its policies in minimum wage. It has some drawbacks. While it does raise the wages of most skilled workers, it also

perhaps reduces employment among the low-skilled group. The

other issue with the minimum wage is that it is not a very welltargeted instrument. Many of the people who benefit from the minimum wage might be teenagers from affluent families, for example,

working during the summer. There are also concerns that a minimum wage may prevent young people from getting access to labor

markets and therefore gaining the experience they need to be more

productive and earning a higher wage later.

23

I think there are pros and cons to minimum wage policy, and I

think you need to look at that very carefully.

Another suggestion I would make is perhaps to consider alternative means of helping low-income workers. For example, the

earned income tax credit has proven to be an effective way to provide income to working families, and may be a better targeted approach relative to the minimum wage. But to summarize, I think

it is an issue that Congress needs to look at, and there are points

on both sides to be made.

Senator SARBANES. I take it that means you have departed from

your 1991 view in your textbook?

Mr. BERNANKE. No, Senator. I have just become more uncertain.

Senator SARBANES. Let me ask you about China real quick. I see

Senator Carper is here now.

Chairman SHELBY. Go ahead.

Senator SARBANES. In confirmation hearings before this very

Committee in 2003, you were asked about the issue of China manipulating its currency and about how that might be corrected. And

you said, ‘‘I do think that a purely floating exchange rate would

provide some dangers in the current financial system in China.’’

You then went on to suggest that rather than forcing the Chinese

to move directly to a float, part of an alternative approach would

be to discuss and consider the possibility of a revaluation, which

means to keep the exchange rate fixed but at a different parity,

that is, at a different value.

Is it still your view that a revaluation would be the preferable

course in terms of addressing this currency valuation issue with

China?

Mr. BERNANKE. Senator, since my last testimony, China has

made significant progress on the institutional side to prepare for a

more flexible exchange rate. For example, they just recently introduced a market for trading eight currency pairs, giving them the

capacity to trade foreign exchange in a free market. So they have

made progress I think institutionally toward preparing themselves

for a more flexible exchange rate regime.

I think the key here is not whether it is floating or not. I think

the key is that they move to a more flexible exchange rate which

can better reflect the actual value of the currency and contribute

to a more balanced trade between the United States and China and

between the rest of the world and China.

I do not have a strong view on whether they should choose a basket, whether they should revalue, whether they should try some

other mechanism, and I think that is something that needs to be

discussed, but I do think they need to move from their current

fixed exchange rate to a more flexible system.

Senator SARBANES. You know, they said President Truman, at

one point in his Administration asked his adviser to get him a onearmed economist. And they said, ‘‘Well, why do you want a onearmed economist, Mr. President?’’ And he says, ‘‘Well, I am tired

of this advice on the one hand and on the other hand.’’

[Laughter.]

I am reminded of that story by the answer to the two questions

I put to you. I yield to Senator Carper.

Chairman SHELBY. Senator Carper.

24

STATEMENT OF SENATOR THOMAS R. CARPER

Senator CARPER. Thanks, Mr. Chairman. To our witnesses, welcome this morning.

Mr. Montgomery, if I could, I would just like to address a couple

of questions to you today. I was provided a short briefing paper

about you and your background, and the purpose of my question

is just to give you a chance to defend yourself, all right?

Mr. MONTGOMERY. Thank you.

Senator CARPER. The briefing paper—and I will paraphrase

this—it says Mr. Montgomery has worked in public relations and

as advance person in his professional career since 1990. His only

professional connection to housing was as the Communications Director of the Texas Department of Housing and Community Affairs.

His time at the Texas Department of Housing was marked by scandal, and although Mr. Montgomery was not implicated, there were

accusations of favoritism and corrupt practices including bribery.

The executive director and a board member apparently were convicted.

My briefing sheet goes on to say Mr. Montgomery came to meet

me as a courtesy. He seemed very nice and genuinely interested in

housing issues. However, his lack of housing experience is troubling. This position requires expertise.

Now, the three previous men who have held this position in the

Clinton Administration and in President Bush’s first 4 years had

extensive experience in housing, development, finance, or policy,

and that is all I know about you walking into here, and I just want

to give you a chance to like defend yourself as to why you should

be the person who we should confirm as the Assistant Secretary for

Housing and for the FHA Commission.

Mr. MONTGOMERY. Thank you for that question, Senator.

Senator CARPER. I am sure you appreciate it.

[Laughter.]

Mr. MONTGOMERY. Starting with my experience in housing, the

title of Communications Director——

Senator CARPER. I will say this, if I can interrupt, my colleagues,

we have all known people who serve as drivers in our campaigns

who just went on to do extraordinary things in their lives, and you

probably can think of some people. I have seen people who were

like political drivers and they went on to amazing things in their

lives. So, I would not question you, probably you were the guy who

worked in advance for a long time for a couple of fellows—I do not

consider that a demerit or anything. I say that as a precursor.

Mr. MONTGOMERY. I appreciate that comment, Senator, because

I too started as a driver.

Senator CARPER. See, what did I tell you? History repeats itself.

Chairman SHELBY. History has done pretty well with Senator

Carper, Congressman, Governor, U.S. Senator.

Senator CARPER. I was never a driver. I did not have that on my

re ́sume ́.

Mr. MONTGOMERY. Senator, starting with my experience in Texas

as Communications Director, which was my title, and certainly you

cannot read a lot into titles these days. I, should say, had a very

large role in all facets of the agency. I had a legislative role, the

marketing role, the programmatic, the policy side. The Texas DeVerDate 11-MAY-2000 17:41 Jun 02, 2006 Jkt 025856 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 27824.TXT SBANK4 PsN: SBANK4
25

partment of Housing and Community Affairs at the time, and still

is one of the largest if not the largest State housing agencies in the

country. It was certainly one of the most programmatically diverse.

We administered an amalgam of housing-related programs, firsttime homebuyer program through mortgage revenue bonds, housing tax credits, CDBG, Community Service Block Grants, LIHEAP,

emergency shelter grants program. The need was very profound in

Texas, certainly, Senator. I would also agree Texas’s housing agency is not on the scale of HUD, but I think many of the same concerns and our ability to adapt to the needs of the State. Hopefully,

if confirmed, I would like to do so as well in this capacity.

Relative to my experience, Senator, I think if you ask a lot of my

colleagues in my life, that I am a very capable leader, a very good

consensus builder. Whether it was heading up the White House effort following the Shuttle Columbia accident, which was put on my

shoulders barely two hours after it happened. It was about my first

week on the job as Cabinet Secretary as well.

Looking at the same issues, the ability to look at not just the

causes of the accident and dealing with the Columbia accident investigation board, the ability to bring the groups together, the industry, the stakeholders, and to play a big role in doing what had

not been done, Senator, in a generation, and that is essentially play

a big role in helping revamp America’s space program.

Certainly, being White House Cabinet Secretary, I dealt with an

amalgam of issues on a daily basis, Senator, dealing with Cabinet

Secretaries, deputy secretaries, chiefs of staff, whether it was Department of the Interior or Department of Labor, interacting with

the White House staff, senior staff, which I was a member of as

well, on a daily basis, I think definitely allowed me to have very

good experience, what I would hope to be able to use if confirmed

to my capacity as Assistant Secretary for Housing.

Senator CARPER. One last question if I could, Mr. Chairman.

Chairman SHELBY. Go ahead.

Senator CARPER. That is, just take a minute or two and just

share with us your vision of the future for FHA.

Mr. MONTGOMERY. I would say, sir, in one word, that FHA needs

to be more nimble, needs to be better adapting to the needs of lowto moderate-income homebuyers. We have talked earlier about

FHA’s market share shrinking. Mostly families who could have

used FHA have gone to the subprime market, which has exploded

exponentially almost in the last 10 years. There is nothing inherently wrong with that market.

Somebody previously mentioned to me in my meetings at HUD

that we need to do a consumer education program, and I said, I

think you need to do a consumer awareness program. I am not so

sure people are even thinking about FHA. There was a time in all

of our lives, probably 10 or 15 years ago, where you would look in

the Sunday paper and you would actually FHA/VA homes, FHA/VA

homes. You just do not see that any more, especially in California

where the median sales price is now half a million dollars, certainly in this part of the country as well. And I think anything we

can do to show consumers that FHA is a very good alternative for

them for any number of reasons, I think we would be well-serving

those homebuyers, Senator.

26

Senator CARPER. Thanks very much.

Mr. MONTGOMERY. Thank you, sir.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Thank you, Mr. Chairman.

Mr. Bernanke, I was at the first Congressional hearing on remittances 3 years ago. Since that time the size of the remittance flows

continues to grow, how they are marketing. The Inter-American

Development Bank estimates that remittance flows from the

United States last year to Latin America alone totaled more than

$30 billion, and they estimate that by 2010 total remittances to

Latin America from the United States for the decade 2001 to 2010

will be more than half a trillion dollars. So there is a very significant movement of funds. Despite this, the exploitation of those

doing the remittances still remains a problem, at least of concern

to many of us.

You recently gave a speech on the U.S. remittance market in

which you identified the exchange rate fee as one mechanism for

this abuse. You said:

Typical nonbank fees for remittances remain high on an absolute basis, and consumers who deal with the less scrupulous providers of remittance services may bear

a significant financial cost. One problem in practice is that users of remittance services often do not appear to be aware that some services exchange dollars for foreign

currencies at rates less than favorable to the consumer than the market-determined

exchange rate.

And you go on and conclude your speech by saying:

The challenge is to ensure the remitters can send funds to their home countries

conveniently, safely, and at reasonable cost. The opportunity is to find ways to leverage immigrants’ needs for remittance services into a broader relationship, one that

will be both profitable for the bank and will also provide immigrants and their families with greater financial access.

Actually, legislation has been introduced to address some of

these concerns, and Chairman Shelby and I have actually asked

the GAO to study the U.S. remittance market, and we expect their

report later this year.

Is this an issue that you plan to pursue at the Council and is

it an issue that the Council and the Committee could work on together to try to address? It seems to me an issue that needs to be

addressed. I think that there is a range of reasonableness in which

a solution can be found that would help those sending the remittances, that would have the support at least of some of the industry, the ones who hold to higher standards. It would obviously impact those who are prepared to exploit people, not fully disclose,

not deal with them in a straightforward and fair way, but it seems

to me we might be able to do something here that would benefit

everyone who should be benefited, including the responsible elements in the industry and those sending the remittances.

Mr. BERNANKE. Senator, I developed an interest in remittances

at the Federal Reserve, and I would like to continue thinking about

that and working with you on those issues.

The bottom line of my speech was that it is a positive development, that more competition is developing in this market, in particular that credit unions and banks are becoming more involved

in remittances. The Federal Reserve has provided some additional

support for sending money across the border. There is a general

concern that—among immigrant populations—the share of people

27

who are so-called ‘‘banked,’’ that is who are involved in banking

and involved in the financial system, is much lower than the general population, and this provides a very interesting possibility for

banks to reach into these communities and say, ‘‘We can provide

remittance services at a lower price and in a more reliable way,’’

and at the same time, you know, help immigrants avail themselves

of the range of financial services, including credit, savings accounts, and the like. So, I think that is a very positive development, and it interacts with all these other aspects of financial literacy that I think we are all interested in promoting.

Senator SARBANES. Yes, very good. The credit unions have actually taken a major initiative in this area. It is a priority item for

them, and they have taken some very positive steps and we have

tried to be very encouraging of them. We look forward to working

with you on this.

Mr. BERNANKE. Thank you, Senator.

Senator SARBANES. I wanted to ask about the long-term unemployed in particular. The BLS tells us that there are 7.7 million unemployed workers today who are actively seeking work. There are

another just over 5 million who are not in the labor force but say

they want a job. If you factor them in, the unemployment rate is

substantially higher than the one we use when we report the figures.

But a problem seems especially severe among the long-term unemployed, those who have been unemployed for over 26 weeks,

which is the period for which the traditional unemployment benefits run unless we extend it. We have extended it, but now no

longer. That is not applicable at the moment. But the problem is

that the long-term unemployment has not subsided as growth has

resumed, which was generally the pattern in previous downturns.

Its share of the total joblessness actually continues to rise. The

long-term unemployed now constitute 21.2 percent of all unemployed workers and the figure has been above 20 percent for 31

consecutive months. In other words, of the unemployed more than

20 percent of them are long-term unemployed. That is the longest

duration of elevated long-term unemployment since the Bureau of

Labor Statistics began tracking such figures about 50 years ago. So

if you look at the patterns and everything, it moves out on you or

leaps out on you in terms of a disturbing departure from past

trends.

First of all, how serious do you regard this as being? And second,

what can we do about it, and particularly what can we do about

it in the short-run since by definition these are people and families

who have exhausted their unemployment benefits? So they are not

getting any support to meet their family needs. And the traditional

view, that the economy will pick back up again, jobs will be more

available, you will able to move out of this situation, does not seem

to be working.

Mr. BERNANKE. Senator, your characterization is correct. As I replied earlier to another question, the labor market in general was

slow to recover after the 2001 recession, but has, generally speaking, made a very good recovery in the last year and a half.

28

One area though that has not been as strong—and you are quite

correct in pointing it out—is long-term unemployment. Evidently

there are people who have not yet been able to find new work.

I agree this is a serious issue. I think as a Member of the CEA

I will certainly want to look at the range of policies and the range

of options we have to address it.

Just a couple of directions one might want to think about. One

way to help is to provide assistance in retraining, education, opportunities to get on the job training, to help people adjust to the

changes in the economy and to find new work.

Another thought has to do with unemployment insurance. One

suggestion, which I at least find worth entertaining is the idea that

beyond a certain point that individuals receive a grant which they

could use to get more education, for example, and that whatever—

when they found work, they would not be forced necessarily to give

back what remained, that is, they would have an incentive to find

work so that they could not use up the grant in living expenses.

I think there are some mechanisms, but I do not pretend to have

the answer. I think it is a very difficult problem and one we need

to look at.

Senator SARBANES. Maybe some thought should be given maybe

of some task force within the Executive Branch to focus specifically

on the long-term unemployed which would include the Council or

the Labor Department, maybe the Department of Education. I do

not know. You could go through the various agencies and put together a program.

One final question. The CEA has been moved out of the Executive Office Building next door to the White House. Now, there are

some who think that if you do not have proximity to the White

House that that means you are losing influence, and there is reason to think that. Mr. Montgomery has had a lot of proximity, so

presumably has a lot of influence.

[Laughter.]

Is the CEA going to get back into the Executive Office Building,

and if so, when, and you as its Chairman, are you going to make—

what kind of effort are you going to make to bring that about, or

are you going to allow them to relegate you out of the immediate

Executive compound there?

Mr. BERNANKE. Senator, the CEA staff was moved a block away

because of the need to renovate the Old Executive Office Building,

and my understanding is that renovation is still proceeding so

there is no immediate prospect of change in that situation.

Senator SARBANES. Is the plan that when the renovation is completed, the CEA will come back in or is something else going to

happen to——

Mr. BERNANKE. Senator, I believe that is the case. I would like

to add that the CEA has retained the Chairman’s office, which is

a large office immediately across from the West Wing, which provides access and a place to work and prepare for meetings. My

sense has been, in my very small exposure I have had so far, that

the CEA has ready access to the decisionmakers in the West Wing.

Senator SARBANES. I think you need to focus on that question.

29

Finally, let me just say we look forward to continuing to interact

with you. I might say to you, we do some of our nightly reading,

we go back and read Macroeconomics by Abel and Bernanke.

Mr. BERNANKE. I will send you the latest edition, Senator.

Senator SARBANES. As these issues come along, we may refer

back to your previous positions to see how consistent they remain.

Mr. BERNANKE. Thank you, Senator.

Senator SARBANES. Thank you, Mr. Chairman.

Chairman SHELBY. Dr. Bernanke, how many people are employed in the United States, roughly? Say, using Senator Sarbanes

numbers, which I do not doubt, there are 7.7 million people in

seeking jobs, unemployed, and there are about 5 million unemployed that are not seeking jobs. But how many people out of nearly 300 million people are currently working just in your judgment?

Mr. BERNANKE. Senator, according to the Bureau of Labor Statistics there are 150 million or so in the labor force, of which 141 million currently have jobs.

Chairman SHELBY. And what is the national average of unemployment roughly now?

Mr. BERNANKE. Today, 5.2 percent, sir.

Chairman SHELBY. And what was it 3 years ago?

Mr. BERNANKE. It peaked 2 years ago at 6.3 percent.

Chairman SHELBY. It is 5 point what now?

Mr. BERNANKE. Currently, 5.2 percent, sir.

Chairman SHELBY. Is some of the unemployment nationally—I

can use my own State, Alabama. We have pockets of high unemployment, and in other areas of the State we have 3 percent unemployment, full employment so to speak. Is that true around the

country, is it pockets of unemployment?

Mr. BERNANKE. Senator, there is certainly a great bit of variety

across States across occupations and the like. As I have indicated,

the general labor market is much stronger than it is been in the

last couple of years, but there are always occupations, areas where

the labor market is not as strong, and those represent a challenge

for policy.

Chairman SHELBY. As we seek ways to address the chronic unemployed people who remain unemployed, I guess there are many

reasons, and probably a lot of them unknown to me, but I hope you

would consider, rather than just unemployment compensation—or

somebody would—some type of cash grant or something to give

people once, then maybe they will start a small business or have

a little risk capital or something, because I am concerned and have

been for a number of years, that—which we want to do, we want

to help people that are down and out. But to continue to help

them—and they are treading water, so to speak, they are not getting anywhere—I do not think helps them and does not help the

economy either, whereas some kind of incentive to give them a little capital to start a little risk in the marketplace, some of them

will. Now I understand some of them will not.

I wonder if there have been any studies in that regard that you

know about?

Mr. BERNANKE. Senator, we do not have many examples of that

particular approach, but I do think it is a very interesting apVerDate 11-MAY-2000 17:41 Jun 02, 2006 Jkt 025856 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 27824.TXT SBANK4 PsN: SBANK4
30

proach. It has much better incentives and gives people a chance to

get a fresh start, go back to school, or start a business.

Chairman SHELBY. Given them confidence.

Mr. BERNANKE. I think it is a very interesting approach.

Chairman SHELBY. Senator, do you have another comment?

Senator SARBANES. Yes. I want to pursue these unemployment

figures because I want to be sure we are clear on them. My understanding is that the labor force participation now is near historically low levels. In other words, there are a number of people—and

the 5.1 million figure I cited would bear that out—that actually are

not in the labor force and are not currently seeking because they

have, in many instances, been discouraged. Is that correct?

Mr. BERNANKE. Senator, the labor force participation rate

reached an all-time high of about 66.8 a few years ago and it has

declined a bit since then.

Senator SARBANES. Right.

Mr. BERNANKE. But it remains high relative to historical levels.

Senator SARBANES. In addition to the 7.7 million who are unemployed, who are looking for jobs, unemployed, and that is the figure

we use when we calculate the 5.2 percent unemployment rate.

There are then the over 5 million the White House says are not in

the labor force but indicate that they want a job. I mean they have

not, in a sense, retired, correct?

Mr. BERNANKE. Yes.

Senator SARBANES. And in addition I understand there are about

over 4 million people who are working part time for economic reasons. They would like a full-time job, but they cannot find or have

a full-time job. So in effect they are working part time for economic

reasons. So if you factor all of that in, you end up moving the unemployment rate up toward 10 percent. Is that correct?

Mr. BERNANKE. Senator, these are alternative measures of labor

market slack.

Senator SARBANES. Right.

Mr. BERNANKE. If you look at some of those measures they actually have improved recently. For example, the part-time work

measure you mentioned has actually come down quite a bit in the

last year. I do believe though—I am not really disagreeing with

you—in the following sense that the decline in the participation

rate that we saw since 2000 may be partially reversible as the

economy gets stronger.

So as I have indicated, the labor market has improved quite a

bit but I think we have some ways to go before we are at full employment, so I do not dispute that we are not there yet.

Senator SARBANES. Thank you.

Chairman SHELBY. I thank both of you for your appearance

today. We will try to move your nominations as quickly as possible.

The hearing is adjourned.

[Whereupon, at 11:44 a.m., the hearing was adjourned.]

[Prepared statements, biographical sketches of nominees, response to written questions, and additional material supplied for

the record follow:]

31

PREPARED STATEMENT OF BEN S. BERNANKE

CHAIRMAN-DESIGNATE, THE COUNCIL OF ECONOMIC ADVISERS

MAY 25, 2005

Mr. Chairman, Senator Sarbanes, and members of the Committee, I am honored

to appear before you today as the President’s nominee to Chair the Council of Economic Advisers.

Created by Congress in 1946, the Council of Economic Advisers is a unique institution with a proud history. Its role is to provide the President with professional

and objective advice on the entire range of issues bearing on the economic well-being

of American citizens. I believe that, over the years, the Council has exerted an important, positive influence on economic policymaking in the United States. The economic challenges facing the United States today—including the needs to address the

implications of an aging population, to achieve long-term energy security while protecting the environment, and to reform our tax system so that it is simpler, fairer,

and more supportive of economic growth—are as great as at any time since the

Council was created. If I am confirmed, I will do everything in my power to ensure

that the Council continues its tradition of providing the best possible advice and

analysis and promoting sound economic policies.

My background includes both academic and policy experience. I have held a professorship at Princeton University since 1985, where I also served as the chair of

the economics department from 1996 until 2002. Before coming to Princeton I

taught for 6 years at the Stanford Graduate School of Business. I have served as

the Director of the Monetary Economics program of the National Bureau of Economic Research, as a member of that organization’s business cycle dating committee, and as the editor of the American Economic Review, a leading research journal. I have been selected a Fellow of the Econometric Society and a member of the

American Academy of Arts and Sciences. During my time as an academic, I visited

or advised a number of policymaking institutions, including the Bureau of the Census, the State Department, and several Federal Reserve Banks. Since August 2002

I have served as a member of the Board of Governors of the Federal Reserve System, a position that has exposed me to a diverse set of policy issues and given me

first-hand experience of the policymaking process.

In closing, I would like to take this opportunity to thank you, Mr. Chairman, and

the Committee for the prompt consideration of my nomination. I would be pleased

to take any questions you may have.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING

FROM BEN S. BERNANKE

Q.1. Will you stand up to the President when you believe he is

wrong?

A.1. Consistent with the traditions of the Council of Economic Advisers, I will provide the Administration with objective, professional

advice on matters of economic policy, even if that advice is politically unpopular or conflicts with the views of the President or other

members of the Administration. If I become aware of policy proposals that I believe to be inconsistent with sound economics, I will

make my views known to the President and other appropriate officials, and I will encourage other Council Members to do the same.

Q.2. Did you stand up to Chairman Greenspan when you believed

he was wrong?

A.2. In my view, Members of the Board of Governors best serve the

country and the Federal Reserve itself by making independent

judgments on all matters coming before the Board. During my time

on the Board, I always endeavored to base my analyses and policy

recommendations on the facts and on my own understanding of the

issues at hand, without concern about whether others would necessarily agree with me. When I disagreed with Chairman Greenspan, other Board Members, or with other Members of the Federal

Open Market Committee, I made my views known and tried to

make the case for my position in terms of sound economic analysis.

Q.3. Can you cite any public disagreements between yourself and

Chairman Greenspan?

A.3. During my time at the Federal Reserve, I often publicly advanced my own independent views on policy issues, through public

speeches for example. One substantive policy issue on which I have

publicly disagreed with the Chairman, and on which I have spoken

on a number of occasions, is the question of whether the Federal

Reserve should adopt a medium-term, quantitative objective for inflation, as has been done by many other central banks. Chairman

Greenspan has indicated that he does not think that adopting an

inflation objective is appropriate for the Federal Reserve. In my

view, providing quantitative information to the markets about the

Fed’s medium-term objective for inflation would serve to reduce uncertainty, improve the clarity of Fed communication, and help to

further anchor the public’s long-run inflation expectations. Greater

clarity and better-anchored inflation expectations would in turn

promote the Federal Reserve’s ultimate objectives of maximum sustainable employment, price stability, and low, long-term interest

rates.

Q.4. How many times did you vote against Chairman Greenspan?

A.4. By custom and tradition, the Federal Open Market Committee

operates by consensus, and formal dissents are rare. In that tradition, during my time on the Committee I focused on trying to influence the Committee’s decisions by presenting persuasive economic

arguments in the meetings. I believe that this approach allowed me

to be an effective Member of the Committee. At the conclusion of

each meeting in which I participated, I found that I was comfortable with the consensus that emerged. For that reason, during

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my tenure, I did not dissent from any monetary policy decision of

the FOMC. On every occasion, I voted for what I believed to be the

best policy alternative at that particular time.

RESPONSE TO A WRITTEN QUESTION OF SENATOR REED

FROM BRIAN D. MONTGOMERY

Q.1. On numerous occasions (most recently in the House Appropriations Committee’s fiscal year 2005 VA–HUD Report (H.Rpt.

108–674, page 67)), HUD was directed to come forward with programmatic guidance for the Section 811 ‘‘mainstream’’ tenant-based

assistance program. This guidance was to include: (a) Targeting of

rental assistance consistent with longstanding 811 targeting criteria, that is targeting to individuals with the most severe disabilities; (b) Maintenance of these vouchers upon turnover; and (c) Retention of a meaningful role for nonprofit disability groups in the

program; (d) In addition, Congress has acknowledged concerns regarding the diversion of Section 811 Tenant-Based Assistance to

the Section 8 Voucher program. If confirmed, will you commit to

moving forward in developing this long-overdue, programmatic

guidance for the 811 Tenant-Based program?

A.1. The Department has addressed points (a), (b), and (c) through

its publication on February 1, 2005 of Notice PIH 2005–5 (HA).

Paragraph 6 of this Notice specifies that vouchers funded with 5-

year budget authority under the Section 811 program must be

issued to elderly and non-elderly disabled families initially and

upon turnover. The Notice indicates this requirement is applicable

during the initial 5-year funding increment, as well as upon renewal of that funding. Paragraph 6 of Notice PIH 2005–5 (HA), encourages PHA’s to utilize ‘‘local supportive service or disability organizations’’ to assist families in locating accessible housing units,

and for counseling and assistance with security deposits, moving

expenses, etc. The Notice indicates that ‘‘these organization should

include State protection and advocacy agencies, Centers for Independent Living, State Medicaid agencies, and disability advocacy

groups that represent individuals with a variety of disabilities. You

should also note that on August 8, 2004, the Department issued

Notice PIH 2004–13 (HA) that requires public housing agencies,

(PHA) to report to HUD on their issuance of Section 811 funded

vouchers to disabled families, thereby allowing HUD to track the

usage of these vouchers.

Finally, I am committed to work within the Department to provide additional guidance for the Section 811 Tenant-Based program, if necessary.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM BRIAN D. MONTGOMERY

Q.1. I want to ask you some questions about FHA and its commitment to support cooperative homeownership. As background, let me

lay some groundwork:

As you may know, cooperatives are a form of multifamily homeownership. In that way, they are similar to condominiums, although they are less widely known. Cooperatives are eligible users

of all of the FHA multifamily insurance programs open to rental

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properties, as well as the Section 213 Multifamily Insurance program, which is limited to cooperative use.

Limited equity cooperatives (which limit the resale prices of individual units to keep them affordable to successive generations of

owners) provide many of the same advantages provided by homeownership generally:

• They offer co-op owners control of a critical element of their

lives—their housing;

• They demonstrate a lower default rate compared to rental housing;

• They develop greater affordability over time than rental properties, with monthly charges on the order of 15 percent lower;

• They attract residents with a greater mix of income levels;

• Residents tend to have longer tenure in limited equity cooperatives than comparable rental properties, increasing community

stability; and,

• Cooperatives develop higher levels of community participation.

Affordable market rate cooperatives, whose prices are determined

by the marketplace and where resale prices are not limited, also

provide substantial advantages:

• Economies of scale lower per unit costs;

• Risk spreading across the entire membership cushions the financial shock of major repairs;

• Cooperatives can use blanket loans (loans secured by the entire

cooperative development) to finance major rehabilitation projects;

• Cooperatives have effective tools to ensure owner occupancy (unlike affordable condominiums, which often end up with high levels of absentee ownership).

The Section 213 program, which exists to provide insurance for

cooperative blanket loans, is a very successful program within

FHA. Importantly, the program requires no credit subsidy.

Unfortunately, HUD has failed to support adequately the FHA

program for cooperative homeownership.

What is your view of this program? Do you agree that cooperative housing is a good vehicle to achieve homeownership for many

people?

A.1. I agree that cooperative housing is a good vehicle for prospective homebuyers in that they provide some of the tax and equity

benefits of single-family homes. If confirmed, I would fully support

using all of the programmatic tools the Department has to promote

affordable housing. However, I think any commitment to devote additional resources to mortgage insurance for cooperatives must be

viewed in the overall context of needs and available resources.

Q.2. Specifically, would you make the FHA Section 213 (co-op blanket lending) program a part of the Multifamily Accelerated Processing (MAP) Program on a timely basis? This has not been done,

despite what I understand is a commitment to do so by former

Commissioner Weicher.

A.2. In my current capacity, I have been unable to confirm any

such commitment. However, if confirmed, I will look into the matter and get a status report.

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Q.3. Further, FHA recently commissioned a study of housing co-ops

by the Hollister Group that has not yet been released. Would you

release this study?

A.3. If confirmed, and given the opportunity to review the study in

an official capacity, I would commit to discussing with staff the potential release of the report to the public.

Q.4. In addition, I understand that some HUD area offices have refused Multifamily Accelerated Processing under any FHA programs

when the borrower seeks to form a co-op, even though co-ops are

clearly eligible users. Would you also make MAP available to coop borrowers in all FHA programs?

A.4. I have not been made aware of any across-the-board policy to

exclude cooperatives but, if confirmed, I would further look into the

matter and ensure that our field offices are processing co-op applications in accordance with the Department’s program guidelines.

In regard to making MAP available to co-op borrowers in all

FHA programs, it is my understanding that the description of eligible borrowers is per statute and currently, the only program available to cooperatives is Section 213.

Q.5. The FHA Section 203(n) program is intended to provide FHAinsured share loans to individuals seeking to purchase an interest

in a co-op. Despite clear statutory authority, the regulations for

this program are very old and make it nearly impossible to use this

program. Would you be willing to update the 203(n) regulations to

make co-op share loans readily available through FHA?

A.5. HUD acknowledges co-op homeownership has not received full

support by the Department. The Department is analyzing the regulations to create a more effective utilization of its cooperative homeownership program. FHA will update the regulations to permit

insurance on co-ops to comply with the statute regarding the blanket mortgage.

Q.6. As we discussed at your hearing, I have a particular interest

in senior housing. Your statement made it clear that you share this

interest. I think it is particularly important to enable seniors to age

in place as long as possible. So-called ‘‘reverse mortgages’’ are a

very good way for seniors to do this, as it allows them to tap their

home equity for living expenses, within carefully crafted limits. Unfortunately, FHA has not yet issued regulations to enable the use

of insured Home Equity Conversion Mortgages (HECM’s) to allow

seniors to tap their home equity while remaining in cooperative

apartments. Would you be willing to issue regulations that will

make HECM’s available for seniors residing in co-ops?

A.6. I am aware there are legal obstacles with the first lien requirement as it relates to the cooperative blanket mortgage and the

National Housing Act requirement of FHA to be in first lien position. If confirmed, I am committed to working with the Department’s Office of General Counsel to overcome this barrier and

pursue implementing regulatory authority for insuring cooperatives

for HECM’s.

Q.7. A number of for- and not-for-profit developers have come forward with some creative ideas about how to redevelop and preserve

multifamily FHA-insured Section 8 project-based developments. In

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some cases, these ideas involve reducing the density of the assisted

housing and bringing market rate housing into the development.

This may require building on adjacent or nearby parcels of land

where such property is included in the larger development. Unfortunately, HUD currently argues that no subsidy, either FHA Upfront Grants or Section 8, may be used in a development in which

the new project goes beyond the ‘‘footprint’’ of the original FHA-insured property. This makes it very difficult to preserve all the

assisted units and achieve the mixed-income communities that developers now seek to create. Will you commit to looking into this

issue and trying to have FHA show additional flexibility in these

cases, where possible?

A.7. I am firmly committed to preserving the FHA affordable rental

housing stock and, if confirmed, would make this one of my top priorities. I understand the challenges in attempting to preserve all

the assisted units while trying to achieve mixed-income communities and would certainly look into the issues you raise and give

them every consideration. I believe that we should do all that is

practical and fair to all within the statutory authorities of HUD

and provide the utmost flexibility within those authorities. If confirmed, I would also look forward to working with Congress and

our industry partners to develop creative solutions to achieve the

successful preservation and/or redevelopment of these housing

units.