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MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

FEBRUARY 24, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–102 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

February 24, 2010 ............................................................................................ 1 

Appendix: 

February 24, 2010 ............................................................................................ 63 

WITNESSES 

WEDNESDAY, FEBRUARY 24, 2010 

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

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

APPENDIX 

Prepared statements: 

Carson, Hon. Andre .......................................................................................... 64 

Foster, Hon. Bill ............................................................................................... 65 

Paul, Hon. Ron .................................................................................................. 67 

Watt, Hon. Melvin ............................................................................................ 68 

Bernanke, Hon. Ben S. ..................................................................................... 71 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Green, Hon. Al: 

Final Vote Results for Roll Call 681 on H.R. 1424 ........................................ 83 

Bernanke, Hon. Ben S.: 

Monetary Policy Report to the Congress, dated February 24, 2010 ............. 87 

(1) 

MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

Wednesday, February 24, 2010 

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

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

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

the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Waters, 

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

Kansas, Hinojosa, Clay, Baca, Lynch, Miller of North Carolina, 

Scott, Green, Cleaver, Bean, Klein, Wilson, Perlmutter, Donnelly, 

Foster, Carson, Minnick, Adler, Kosmas, Grayson, Himes, Peters; 

Bachus, Castle, Royce, Paul, Manzullo, Biggert, Miller of California, Capito, Hensarling, Garrett, Neugebauer, McHenry, Campbell, Putnam, Bachmann, Marchant, McCotter, McCarthy of California, Posey, Jenkins, Lee, Paulsen, and Lance. 

The CHAIRMAN. This is the semi-annual hearing held pursuant to 

the Humphrey-Hawkins Act. I should note that Mr. Hawkins is 

represented here in the fact that his successor in Congress is our 

colleague from Los Angeles, Ms. Waters. We are in the direct Humphrey-Hawkins’ succession here. 

This is the semi-annual hearing. As people know, the Chairman 

of the Federal Reserve testifies before both the House and the Senate. He goes first here. Tomorrow, he goes to the Senate. 

This is one of those occasions when we can act first and have 

confidence that the Senate will in fact act second. We cannot always make that assumption, unfortunately, but we can in this 

case, because all they have to do is sit there and listen. 

We will begin. Under the rules of the committee, each side will 

have 8 minutes. We want to move quickly. We have divided up the 

time according to each side’s decision. We will begin, and I will 

yield 21⁄2 minutes to my colleague from Illinois, Mr. Foster, to 

begin the statements. 

Mr. FOSTER. Thank you, Mr. Chairman. As a scientist, I have always found that numbers are more illuminating than ideology and 

talking points, so on the chart that I believe will be displayed on 

the monitors in a moment, I have plotted some interesting numbers 

that I downloaded from the Flow of Funds Report that the Federal 

Reserve Web site updates each quarter. 

It shows that from July 2007 to March 2009, roughly the last 

year-and-a-half of the previous Administration, the net worth of 

households in the United States dropped by $17.5 trillion. 

2 

Our economy is suffering from the aftermath of the largest destruction of wealth in human history. 

Under Democratic leadership, since the passage of the stimulus 

and other important initiatives, this trend has been reversed. Our 

economy is now stabilized and household net worth has increased 

by more than $5 trillion. The $17.5 trillion of wealth destroyed in the last months of the 

previous Administration is so large that it is hard to get your arms 

around. Just how large is $17.5 trillion: $17.5 trillion is more than 

1.5 times the entire U.S. national debt; $17.5 trillion is more than 

1 year of the U.S. GDP, which is roughly $14 trillion; $17.5 trillion 

is more than $57,000 for every man, woman, and child in the 

United States; and finally, $17.5 trillion is about 200 times larger 

than the anticipated losses in Fannie Mae and Freddie Mac. 

Let’s talk for a moment about the return on investment of the 

stimulus. When the dust settles, the total cost to taxpayers of the 

stimulus, TARP, and the other emergency interventions in our 

economy will be roughly $1 trillion. In response, household wealth has rebounded by $5 trillion. I’m 

a businessman as well as a scientist and it seems to me that an 

investment of roughly $1 trillion that generates an increase in 

wealth of $5 trillion represents a pretty good return on investment. 

If I could have the next slide, let’s talk about job loss and unemployment. A year ago, over 700,000 jobs were being lost every 

month and the job losses were increasing by 100,000 more jobs lost 

each additional month. The economy was spiraling toward another 

great Depression. 

After the passage of the stimulus and the other emergency measures to rescue our economy, job losses started decreasing promptly 

and job growth is said to turn positive by 2010. 

Unfortunately, job recovery always takes longer than people 

would like. Most downturns take 1 to 2 years, if you look at them 

in the stock market, and 2 to 3 years if you look at unemployment. 

That is just the way it is. 

It is very difficult for a reasonable person to look at this data and 

conclude that Democratic policies have not been effective at dealing 

with job loss. 

Finally, how did we get here? 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. WATT. Mr. Chairman, might I yield him some of my time? 

The CHAIRMAN. Yes, does the gentleman want to yield 30 seconds? 

Mr. WATT. Yes, so he can finish. It is such a powerful statement 

he is making. 

The CHAIRMAN. I thank the gentleman from North Carolina. 

Mr. FOSTER. Finally, I would just like to make one last comment 

on how did we get here. It is important to understand that the 

$17.5 trillion of destruction of household wealth that our country 

just experienced was not the result of a normal business cycle. It 

was the result of an ideologically driven deregulation of the financial markets. 

Most importantly, it will happen again if we do not understand 

and acknowledge what happened and take steps to prevent it from 

recurring. 

3 

Thank you. I yield back. 

The CHAIRMAN. I thank the gentleman from North Carolina. The 

gentleman from North Carolina will have 2 minutes and 10 seconds. 

The gentleman from Texas is now recognized, the ranking member of the Subcommittee on Domestic and International Monetary 

Policy, for 3 minutes. 

Dr. PAUL. Thank you, Mr. Chairman. Welcome, Chairman 

Bernanke. 

I am interested in the suggestion that Mr. Volcker has made recently about curtailing some of the investment banking risk they 

are taking. In many ways, I think he brings up a very important 

subject and touches on it, but I think it is much bigger than what 

he has addressed. 

Back when we repealed Glass-Steagall, I voted against this, even 

though as a free market person, I endorse the concept that banks 

ought to be allowed to do commercial and investment banking. 

The real culprit, of course, is the insurance, the guarantee behind this, and the system of money that we have. 

In a free market, of course, the insurance would not be guaranteed by the taxpayers or by the Federal Reserve creating more 

money. The FDIC is an encouragement of moral hazard as well. 

I think the Congress contributes to this by pushing loans on individuals who do not qualify, and I think the Congress has some responsibility there, too. 

I also think there has been a moral hazard caused by the tradition of a line of credit to Fannie Mae and Freddie Mac and this expectation of artificially low interest rates helped form the housing 

bubble, but also the concept still persists, even though it has been 

talked about, that it is too-big-to-fail. It exists and nobody is going 

to walk away. 

There is always this guarantee that the government will be there 

along with the Federal Reserve, the Treasury, and the taxpayers 

to bail out anybody that looks like it is going to shake it up. 

It does not matter that the bad debt and the burden is dumped 

on the American taxpayer and on the value of the dollar, but it is 

still there. ‘‘Too-big-to-fail’’ creates a tremendous moral hazard. 

Of course, the real moral hazard over the many decades has been 

the deception put into the markets by the Federal Reserve creating 

artificially low interest rates, pretending there has been savings, 

pretending there is actually capital out there, and this is what 

causes the financial bubbles, and this is the moral hazard because 

people believe something that is not true, and it leads to the problems we have today because it is unsustainable. 

It works for a while, but eventually, we have to pay the price. 

The moral hazard catches up with us and then we see the disintegration of the system that we have artificially created. 

We are in a situation coming up soon, even though we have been 

already in a financial crisis, we are going to see this get much 

worse and we are going to have to address this subject of the monetary system and whether we want to have a system that does not 

guarantee that we will always bail out all the banks and dump 

these bad debts on the people, and that it is filled with moral hazard, the whole system is. 

4 

When that time comes, I hope we come to our senses and decide 

that the free market works pretty well. It gets rid of these problems much sooner and much smoother than when it becomes politicized that some firms get bailed out and others get punished. It is 

an endless battle. 

Hopefully, we will see the light and do a better job in the future. 

The CHAIRMAN. The gentleman from North Carolina is now recognized for 2 minutes and 10 seconds. 

Mr. WATT. Thank you, Mr. Chairman. 

Over the last two breaks in August of last year and the President’s break this year, Mr. Meeks, as chairman of the International 

Monetary Policy Subcommittee, and myself as chairman of the Domestic Monetary Policy Subcommittee have traveled and met with 

Central Bank governors, finance ministers and leaders in Tunisia, 

Rwanda, Zimbabwe, Senegal, Nigeria, Ethiopia, Botswana, and The 

Gambia, to try to figure out what impact this economic downturn 

is having on African countries. 

Today, we get a chance to hear the impact it is having on our 

own domestic economy and what we can do to try to address that 

impact. 

Against that backdrop, the question I would really like to have 

addressed today is what tools the Fed has in its tool kit to reverse 

the trends and spur job growth in the 12th District of North Carolina and elsewhere in America. 

I asked a similar question last year at the Humphrey-Hawkins’ 

hearing, and at that time, Chairman Bernanke vowed to take 

strong and aggressive action to halt the economic slide and improve 

job growth. 

One year later, unemployment has gotten worse, although there 

are small signs of recovery. 

Today, I hope to hear specifics on the Fed’s plan to spur job 

growth and meet the other half of this dual mandate, fostering 

maximum sustainable employment. 

If there are things Congress can and should do to help, we 

should be ready to assist with that agenda. 

With that, Mr. Chairman, I yield back and I will submit the rest 

of my statement for the record. 

The CHAIRMAN. There are a couple of 1-minute statements. The 

gentleman from Florida, Mr. Posey, and if she is ready next, the 

gentlewoman from Kansas, Ms. Jenkins. 

The gentleman from Florida is recognized for 1 minute for the 

Minority. 

Mr. POSEY. Thank you, Mr. Chairman. 

Chairman Bernanke, the Fed’s decision to raise the discount rate 

can be interpreted that the Federal Reserve will raise the Federal 

fund’s rate in the months ahead, which would suggest economic recovery is under way, yet the road ahead seems difficult. 

The 2010 Economic Report of the President states ‘‘It will take 

a prolonged and robust GDP—I think they meant GOP—expansion 

to eliminate the jobs’ deficit that has opened up over the course of 

the recession.’’ 

A question specifically is what are you looking for, and once 

again, what is the plan? I do not see how recovery can be defined 

without reducing unemployment and expanding GDP. It would also 

5 

be helpful to know how optimistic the Fed is for GDP expansion in 

light of some of the job-killing policies coming out of Washington. 

For example, I recently learned the President’s budget would kill 

our human space exploration program and send our high-skilled 

jobs to Russia. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from Kansas for 1 minute. 

Ms. JENKINS. Thank you, Mr. Chairman. 

Over the past 18 months, the Fed has taken extraordinary steps 

to address the financial downturn. Last year, Chairman Bernanke 

spoke about the importance of reducing our deficit spending and 

making a real commitment to fiscal discipline. 

Today, the deficit exceeds 10 percent of GDP and as evidenced 

by the Administration’s budget proposal, they are not making such 

a commitment. 

Since joining this committee, my priority has been to protect the 

taxpayers by ending bailouts and preventing future taxpayer-funded bailouts. 

I have concerns about TARP, and I am interested to hear how 

the Chairman intends to pull back on the increased liquidity without further disrupting our markets. 

I am also interested to learn if he believes a true economic recovery can occur with continued excessive deficits. 

I yield back the remainder of my time. 

The CHAIRMAN. The gentleman from New York will now be recognized for 1 minute, and then we will get to the gentlemen from 

Minnesota and New Jersey. 

Mr. LEE. Thank you, Mr. Chairman. 

Chairman Bernanke, thank you for coming before the committee 

today. I know there will be a number of important issues that you 

will be raising over the course of your testimony, but I wanted to 

highlight just a few specific ones that I hope you can address during your discussion. 

It is important for us to hear your thoughts on the significant 

level of spending that is currently going on in this Congress. 

As you know, we just raised the debt ceiling by another $1.9 trillion, and whether you believe Fannie Mae/Freddie Mac, that exposure, should be factored into the debt ceiling that we currently live 

by. 

I am also increasingly concerned with discussions by rating firms 

in which the AAA rating that this country currently enjoys is in 

jeopardy and when and if do you think that will be downgraded. 

We simply cannot ignore what we are doing in terms of spending 

in this country and the impact it may have on us. 

I look forward to you replying to those through your testimony. 

The CHAIRMAN. I now recognize myself. I am told I have 2 minutes and 50 seconds. 

I want to begin by responding to that last point. The notion that 

America will never not pay its debts is without any foundation. I 

frankly regard it as very irresponsible for anyone here to suggest 

there could ever be any such failure. 

Inviting the rating agencies without any fact or basis whatever 

to raise our interest rates would be a mistake. The rating agencies 

6 

have done enough damage. I do not doubt for one second that this 

Congress will fully fund any obligations we have internationally. 

Secondly, I did want to respond on bailouts. I understand the 

nostalgia some of my Republican friends have for the past Administration, which is when the bailouts happened. 

Every single activity of the Federal Government that is now 

going forward that is called a ‘‘bailout’’ was begun by the Bush Administration, in most cases, for very good reasons, but by the Bush 

Administration and its high economic officials, in some cases in 

conjunction with Congress, in other cases, on their own, without 

any congressional input, like Bear Stearns and the first part of 

AIG. 

I am not aware of any bailouts that were initiated since President Obama took over in this Administration. 

Next, I want to talk about jobs. One of my Republican colleagues 

likes to ask, where are the jobs? I guess they all do. They tend to 

talk from the same notes. 

I do not know where they are. Maybe they are in Crawford. Here 

is the figure that we have on pages 18 and 19 of the Monetary Report. Non-farm private payroll employment fell 725,000 jobs per 

month on average from January to April 2009. I know it is the Republican view that everything bad in America started on January 

21, 2009 and before that, everything was wonderful. 

No rational individual claims that the Obama Administration is 

responsible for things that happened in January, February, and 

April of this year. 

By November to January, 2009 and 2010, for which the Obama 

Administration can get some responsibility, and after the Economic 

Recovery bill was passed, we averaged a loss of 20,000 jobs per 

month. That means we got a positive swing of 700,000 jobs. Unfortunately, it is not the most important swing, which is to a plus. 

What that means is by these figures in the Federal Reserve, for 

the first 3 months of 2009, we lost 2.1-something million jobs, and 

in the last 3 months—November, December, January—we lost 

60,000 jobs. 

The answer is 2.1 million jobs disappeared and have not yet 

come back because of the economy that the Obama Administration 

inherited. 

I do note that the Chairman twice notes the positive impact of 

the stimulus on the economy. There are a number of things, but 

both in his statements and in the Monetary Report, as he lists the 

reasons why the economy has gotten better, the stimulus is twice 

mentioned. 

It is possible to debate what was the best way to do the stimulus. 

Some people like to exaggerate the extent to which it was spending, including some tax deduction—I think not too effective tax deduction, but no sensible human being can deny the stimulus had 

a positive effect. The question is, going forward, can we improve on 

that positive effect. 

Now I recognize the gentleman from Minnesota for 1 minute. 

Mr. PAULSEN. Thank you, Mr. Chairman, for being here this 

morning as well. I have two issues of particular concern and hopefully, you will be able to address them. 

7 

The first is the lack of available credit for the small business 

community and the fear that if the Fed raises interest rates in the 

near term, it will further erode credit opportunities for small business and exacerbate that problem. 

I would like to hear about the potential of the Fed Reserve increasing rates in the near future and ensuring that credit for small 

businesses is going to be available for job growth. 

Second, the issue of the explosion of the deficit and the debt, and 

the warning signals are getting louder that our fiscal situation is 

putting increasing pressure on our bond rating. 

I would like your opinion on the long-term impact of not addressing our debt as it relates to our bond rating, but more importantly, 

the impact it would have on our global competitiveness. 

Thank you and I do look forward to your testimony. 

The CHAIRMAN. The gentleman from New Jersey for the final 

minute. 

Mr. LANCE. Thank you for coming back to our committee, Chairman Bernanke. 

Last week, like most of our colleagues, I was back home as part 

of the President’s Day District work period. As I traveled throughout New Jersey’s 7th Congressional District in northern and central New Jersey, I was speaking with constituents and meeting 

with small businesses, and I heard a common refrain, people are 

deeply concerned about the state of the United States’ economy. 

Most New Jerseyans believe we are still mired in a deep recession and they are extremely concerned about job prospects and income worries. 

These concerns, which I believe exist across the Nation, will likely lead to curbed consumer spending for some time to come. 

I hope, sir, in your testimony to the committee this morning, you 

will address this issue and what the Fed intends to do moving forward to boost consumer confidence, which after all, constitutes 70 

percent of our economic activity. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. That concludes the opening statements. I thank all the members for adhering to the time limits. 

Mr. Chairman, we will not hold you to the 5 minutes. I think the 

economy probably deserves a 3 or 4 extra minutes this morning, so 

you take whatever time you think is necessary to tell us how you 

are going to fix everything. 

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

SYSTEM 

Mr. BERNANKE. Thank you, Mr. Chairman. I will try not to abuse 

that. 

Chairman Frank, Ranking Member Bachus, and other members 

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

semi-annual Monetary Policy Report to the Congress. 

I will begin today with some comments on the outlook for the 

economy and for monetary policy, then touch briefly on several 

other important issues. 

Although the recession officially began more than 2 years ago, 

U.S. economic activity contracted particularly sharply following the 

8 

intensification of the global financial crisis in the fall of 2008. Concerted efforts by the Federal Reserve, the Treasury Department, 

and other U.S. authorities to stabilize the financial system, together with highly stimulative monetary and fiscal policies, helped 

arrest the decline and are supporting a nascent economic recovery. 

Indeed, the U.S. economy expanded at about a 4 percent annual 

rate during the second half of last year. A significant portion of 

that growth, however, can be attributed to the progress that firms 

have made in working down unwanted inventories of unsold goods, 

which have left them more willing to increase production. As the 

impetus provided by the inventory cycle is temporary, and as the 

fiscal support for economic growth will likely diminish later this 

year, a sustained recovery will depend on continued growth in private-sector final demand for goods and services. 

Private-sector final demand does seem to be growing at a moderate pace, buoyed in part by a general improvement in financial 

conditions. In particular, consumer spending has recently picked 

up, reflecting gains in real disposable income and household wealth 

and tentative signs of stabilization in the labor market. Business 

investment in equipment and software has risen significantly. And 

international trade—supported by a recovery in the economies of 

many of our trading partners—is rebounding from its deep contraction of a year ago. However, starts of single-family homes, which 

rose notably this past spring, have recently been roughly flat, and 

commercial construction is declining sharply, reflecting poor fundamentals and continued difficulty in obtaining financing. 

The job market has been hit especially hard by the recession, as 

employers reacted to sharp sales declines and concerns about credit 

availability by deeply cutting their workforces in late 2008 and in 

2009. Some recent indicators suggest that the deterioration in the 

labor market is abating: Job losses have slowed considerably, and 

the number of full-time jobs in manufacturing rose modestly in 

January. Initial claims for unemployment insurance have continued to trend lower, and the temporary services industry, often considered a bellwether for the employment outlook, has been expanding steadily since October. Notwithstanding these positive signs, 

the job market remains quite weak, with the unemployment rate 

near 10 percent and job openings scarce. Of particular concern because of its long-term implications for worker’s skills and wages, is 

the increasing incidence of long-term unemployment; indeed, more 

than 40 percent of the unemployed have been out of work for 6 

months or more, nearly double the share of a year ago. 

Increases in energy prices resulted in a pick-up in consumer 

price inflation in the second half of last year, but oil prices have 

flattened out over recent months, and most indicators suggest that 

inflation likely will be subdued for some time. Slack in labor and 

product markets has reduced wage and price pressures in most 

markets, and sharp increases in productivity have further reduced 

producers’ unit labor costs. The cost of shelter, which receives a 

heavy weight in consumer price indexes, is rising very slowly, reflecting high vacancy rates. In addition, according to most measures, longer-term inflation expectations have remained relatively 

stable. 

9 

The improvement in financial markets that began last spring 

continues. Conditions in short-term funding markets have returned 

to near pre-crisis levels. Many (mostly larger) firms have been able 

to issue corporate bonds or new equity and do not seem to be hampered by a lack of credit. In contrast, bank lending continues to 

contract, reflecting both tightened lending standards and weak demand for credit amid uncertain economic prospects. 

In conjunction with the January meeting of the Federal Open 

Market Committee, Board members and Reserve Bank presidents 

prepared projections for economic growth, unemployment, and inflation for the years 2010 through 2012 and over the longer run. 

The contours of these forecasts are broadly similar to those I reported to the Congress last July. FOMC participants continue to 

anticipate a moderate pace of economic recovery, with economic 

growth of roughly 3 to 31⁄2 percent in 2010 and 31⁄2 to 41⁄2 percent 

in 2011. Consistent with moderate economic growth, participants 

expect the unemployment rate to decline only slowly, to a range of 

roughly 61⁄2 to 71⁄2 percent by the end of 2012, still well above their 

estimate of the long-run sustainable rate of about 5 percent. Inflation is expected to remain subdued, with consumer prices rising at 

rates between 1 and 2 percent in 2010 through 2012. In the longer 

term, inflation is expected to be between 13⁄4 and 2 percent, the 

range that most FOMC participants judge to be consistent with the 

Federal Reserve’s dual mandate of price stability and maximum 

employment. 

Over the past year, the Federal Reserve has employed a wide 

array of tools to promote economic recovery and preserve price stability. The target for the Federal funds rate has been maintained 

at a historically low range of 0 to 1⁄4 percent since December 2008. 

The FOMC continues to anticipate that economic conditions—including low rates of resource utilization, subdued inflation trends, 

and stable inflation expectations—are likely to warrant exceptionally low levels of the Federal funds rate for an extended period. 

To provide support to mortgage lending and housing markets and 

to improve overall conditions in private credit markets, the Federal 

Reserve is in the process of purchasing $1.25 trillion of agency 

mortgage-backed securities and about $175 billion of agency debt. 

We have been gradually slowing the pace of these purchases in 

order to promote a smooth transition in markets and anticipate 

that these transactions will be completed by the end of March. The 

FOMC will continue to evaluate its purchases of securities in light 

of the evolving economic outlook and conditions in financial markets. 

In response to the substantial improvements in the functioning 

of most financial markets, the Federal Reserve is winding down the 

special liquidity facilities created during the crisis. On February 

1st, a number of these facilities, including credit facilities for primary dealers, lending programs intended to help stabilize money 

market mutual funds and the commercial paper market, and temporary liquidity swap lines with foreign central banks, were all allowed to expire. The only remaining lending program for multiple 

borrowers created under the Federal Reserve’s emergency authorities, the Term Asset-Backed Securities Loan Facility or TALF, is 

scheduled to close on March 31st for loans backed by all types of 

10 

collateral except newly issued commercial mortgage-backed securities (CMBS) and on June 30th, for loans backed by newly issued 

CMBS. 

In addition to closing its special facilities, the Federal Reserve is 

normalizing its lending to commercial banks through the discount 

window. The final auction of discount-window funds to depositories 

for the Term Auction Facility, which was created in the early 

stages of the crisis to improve the liquidity of the banking system, 

will occur on March 8th. Last week, we announced that the maximum term of discount window loans, which was increased to as 

much as 90 days during the crisis, would be returned to overnight 

for most banks, as it was before the crisis erupted in August 2007. 

To discourage banks from relying on the discount window rather 

than private funding markets for short-term credit, last week we 

also increased the discount rate by 25 basis points, raising the 

spread between the discount rate and the top of the target range 

for the Federal funds rate to 50 basis points. These changes, like 

the closure of most of the special lending facilities earlier this 

month, are in response to the improved functioning of financial 

markets, which has reduced the need for extraordinary assistance 

from the Federal Reserve. These adjustments are not expected to 

lead to tighter financial conditions for households and businesses 

and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about the same as it was 

at the time of the January meeting of the FOMC. 

Although the Federal funds rate is likely to remain exceptionally 

low for an extended period, as the expansion matures, the Federal 

Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures. Notwithstanding the substantial increase in the size of its balance 

sheet associated with its purchases of Treasury and agency securities, we are confident that we have the tools we need to firm the 

stance of monetary policy at the appropriate time. 

Most importantly, in October 2008, the Congress gave statutory 

authority to the Federal Reserve to pay interest on banks’ holdings 

of reserve balances at Federal Reserve banks. By increasing the interest rate on reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates. Actual 

and prospective increases in short-term interest rates will be reflected in longer-term interest rates and in financial conditions 

more generally. 

The Federal Reserve has also been developing a number of additional tools to reduce the large quantity of reserves held by the 

banking system, which will improve the Federal Reserve’s control 

of financial conditions by leading to a tighter relationship between 

the interest rate paid on reserves and other short-term interest 

rates. Notably, our operational capacity for conducting reverse repurchase agreements, a tool that the Federal Reserve has historically used to absorb reserves from the banking system, is being expanded so that such transactions can be used to absorb large quantities of reserves. The Federal Reserve is also currently refining 

plans for a term deposit facility that could convert a portion of depository institutions’ holdings reserve balances into deposits that 

are less liquid and cannot be used to meet reserve requirements. 

11 

In addition, the FOMC has the option of redeeming or selling securities as a means of reducing outstanding bank reserves and applying monetary restraint. Of course, the sequencing of steps and the 

combination of tools that the Federal Reserve uses as it exits from 

its currently very accommodative policy stance will depend on economic and financial developments. I have provided more discussion 

of these options and possible sequencing in a recent testimony. 

The Federal Reserve is committed to ensuring that the Congress 

and the public have all the information needed to understand our 

decisions and to be assured of the integrity of our operations. Indeed, on matters related to the conduct of monetary policy, the 

Federal Reserve is already one of the most transparent central 

banks in the world, providing detailed records and explanations of 

its decisions. Over the past year, the Federal Reserve also took a 

number of steps to enhance the transparency of its special credit 

and liquidity facilities, including the provision of regular extensive 

reports to the Congress and the public; we have worked closely 

with the Government Accountability Office (GAO), the Office of the 

Special Inspector General for the Troubled Asset Relief Program 

(SIG TARP), the Congress, and private-sector auditors on a range 

of matters relating to these facilities. 

While the emergency credit and liquidity facilities were important tools for implementing monetary policy during the crisis, we 

understand that the unusual nature of those facilities creates a 

special obligation to assure the Congress and the public of the integrity of their operation. Accordingly, we would welcome a review 

by the GAO of the Federal Reserve’s management of all facilities 

created under emergency authorities. In particular, we would support legislation authorizing the GAO to audit the operational integrity, collateral policies, use of third-party contractors, accounting, 

financial reporting, and internal controls of these special credit and 

liquidity facilities. The Federal Reserve will, of course, cooperate 

fully and actively in all reviews. We are also prepared to support 

legislation that would require the release of the identities of the 

firms that participated in each special facility after an appropriate 

delay. It is important that the release occur after a lag that is sufficiently long that investors will not view an institution’s use of one 

of the facilities as a possible indication of ongoing financial problems, thereby undermining market confidence in the institution or 

discourage use of any future facility that might become necessary 

to protect the U.S. economy. 

Looking ahead, we will continue to work with the Congress in 

identifying approaches for enhancing the Federal Reserve’s transparency that are consistent with our statutory objectives of fostering maximum employment and price stability. In particular, it 

is vital that the conduct of monetary policy continue to be insulated 

from short-term political pressures so that the FOMC can make 

policy decisions in the longer-term economic interests of the American people. Moreover, the confidentiality of discount window lending to individual depository institutions must be maintained so 

that the Federal Reserve continues to have effective ways to provide liquidity to depository institutions under circumstances where 

other sources of funding are not available. The Federal Reserve’s 

ability to inject liquidity into the financial system is critical for preVerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE
12 

serving financial stability and for supporting depositories’ key role 

in meeting the ongoing credit needs of firms and households. 

Strengthening our financial regulatory system is essential for the 

long-term economic stability of the Nation. Among the lessons of 

the crisis are the crucial importance of macroprudential regulation—that is, regulation and supervision aimed at addressing risks 

to the financial system as a whole—and the need for effective consolidated supervision of every financial institution that is so large 

or interconnected that its failure could threaten the functioning of 

the entire financial system. 

The Federal Reserve strongly supports the Congress’ ongoing efforts to achieve comprehensive financial reform. In the meantime, 

to strengthen the Federal Reserve’s oversight of banking organizations, we have been conducting an intensive self-examination of our 

regulatory and supervisory responsibilities and have been actively 

implementing improvements. For example, the Federal Reserve has 

been playing a key role in international efforts to toughen capital 

and liquidity requirements for financial institutions, particularly 

systemically critical firms, and we have been taking the lead in ensuring that compensation structures at banking organizations provide appropriate incentives without encouraging excessive risk-taking. 

The Federal Reserve is also making fundamental changes in its 

supervision of large, complex bank holding companies, both to improve the effectiveness of consolidated supervision and to incorporate a macroprudential prospective that goes beyond the traditional focus on safety and soundness of individual institutions. We 

are overhauling our supervisory framework and procedures to improve coordination within our own supervisory staff and with other 

supervisory agencies and to facilitate more-integrative assessments 

of risks within each holding company and across groups of companies. 

Last spring, the Federal Reserve led the successful Supervisory 

Capital Assessment Program, popularly known as the ‘‘bank stress 

test.’’ An important lesson of that program was that combining onsite bank examinations with a suite of quantitative and analytical 

tools can greatly improve comparability of the results and better 

identify potential risks. In that spirit, the Federal Reserve is also 

in the process of developing an enhanced quantitative surveillance 

program for large bank holding companies. Supervisory information will be combined with firm-level, market-based indicators and 

aggregate economic data to provide a more complete picture of the 

risks facing these institutions and the broader financial system. 

Making use of the Federal Reserve’s unparalleled breath of expertise, this program will apply a multidisciplinary approach that involves economists, specialists in particular financial markets, payment systems experts, and other professionals, as well as bank supervisors. 

The recent crisis has also underscored the extent to which direct 

involvement in the oversight of banks and bank holding companies 

contributes to the Federal Reserve’s effectiveness in carrying out 

its responsibilities as a central bank, including the making of monetary policy and the management of the discount window. Most important, as the crisis has once again demonstrated, the Federal ReVerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE
13 

serve’s ability to identify and address diverse and hard-to-predict 

threats to financial stability depends critically on the information, 

expertise, and powers that it has by virtue of being both a bank 

supervisor and a central bank. 

The Federal Reserve continues to demonstrate its commitment to 

strengthening consumer protections in the financial services arena. 

Since the time of the previous Monetary Policy Report in July, the 

Federal Reserve has proposed a comprehensive overhaul of the regulations governing consumer mortgage transactions, and we are 

collaborating with the Department of Housing and Urban Development to assess how we might further increase transparency in the 

mortgage process. We have issued rules implementing enhanced 

consumer protections for credit card accounts and private student 

loans as well as new rules to ensure that consumers have meaningful opportunities to avoid overdraft fees. In addition, the Federal 

Reserve has implemented an expanded consumer compliance supervision program for nonbank subsidiaries of bank holding companies 

and foreign banking organizations. 

More generally, the Federal Reserve is committed to doing all 

that can be done to ensure that our economy is never again devastated by a financial collapse. We look forward to working with 

the Congress to develop effective and comprehensive reform of the 

financial regulatory framework. 

Thank you, Mr. Chairman. 

[The prepared statement of Chairman Bernanke can be found on 

page 71 of the appendix.] 

The CHAIRMAN. Mr. Chairman, one of my colleagues, it may have 

been Mr. Paulsen or Mr. Lee, raised a question of lending to small 

business. I was pleased to note on page 13 of the Monetary Report, 

you cite the Federal financial regulatory agency, Conference of 

State Bank Supervisors’ statement telling the regulators in the 

field not to overdo it. That does not mean you think they are, but 

it does mean you recognize there is a problem. We call it the 

‘‘mixed message problem’’ that we have. 

I am not going to take too much time now, but I would note we 

have a hearing on Friday on that subject, which had been previously scheduled and snowed out. It is an all-day hearing on regulation. Governor Duke will be testifying. We appreciate your doing 

it. It is very important. 

We are getting everybody in the same room, the banks who say 

the regulators are being too tough on us, the regulators who say 

the problem is there is not any demand, and the borrowers who say 

the banks will not lend to us. 

We thought it was important to get everybody in the same room. 

It is an all-day hearing in corroboration with our colleagues on the 

Small Business Committee chaired by my colleague, Ms. Velazquez. 

I appreciate your mentioning that. We will be getting into that. 

I want to talk now about the central question of employment. 

Getting people back to work is important, socially most of all, but 

also for the overall economy. 

I was pleased to see you note on a couple of occasions, if you 

have a debate, you debate history, but it is part of a debate over 

policy as to whether or not an economic stimulus should take place. 

14 

We do have a deficit. When we do stimulative things, it does in 

the short term add to the deficit, I would note, both by expenditures and by tax cuts. 

People have taken to talking about the total stimulus numbers 

as if it was all expenditures. About 30 percent of it was tax-cutting. 

People may or may not think that worked well. 

I was struck to note that in your statement, you say ‘‘Concerted 

efforts to stabilize the financial system together with highly stimulative monetary and fiscal policy,’’ and in the report in the very 

first paragraph, ‘‘The U.S. economy turned up in the second half 

supported by an improvement in financial conditions, stimulus 

from monetary and fiscal policies,’’ and then again on page 8, ‘‘A 

development that helped rebuild household wealth and household 

income was lifted by provisions in the fiscal stimulus package.’’ 

These are three references to the extent to which the stimulus 

package which this Congress adopted aided in reducing unemployment and in stimulating the economy. 

That has become controversial because you have to do it again. 

Am I accurate in interpreting your comments as saying the stimulus, without saying it was the best possible way to do it, but the 

fact that the stimulus was adopted did contribute to the improvement we are seeing in economic activity? 

Mr. BERNANKE. Yes, Mr. Chairman. I think most economists 

would agree that the stimulus has created jobs relative to where 

the baseline would have been in the absence of the stimulus. Of 

course, we do not know what that alternative would have been, and 

therefore, it is very difficult to— 

The CHAIRMAN. We do know one alternative, which was to do 

nothing, because if people say the major thing was the deficit, 

there was nothing you could have done that would have been a 

short-term stimulative that would not have added to the deficit, 

whether it was tax reduction or something else. 

I know there are people who argue that if you do tax reduction, 

it means more revenue. I do remember your predecessor, Mr. 

Greenspan, asked by one of my Republican colleagues if it was not 

true that if you cut taxes, you could raise revenue overall, and he 

said that was theoretically possible but it had not happened in his 

lifetime. I do not think it has happened since then either. 

This is important. I say that for this reason: We should have a 

thoughtful debate about what to do next. When we are bogged 

down in a debate about whether we should have done anything, it 

is not very helpful. I appreciate your comments on that. 

Let me ask, at this point going forward, and I understand your 

primary responsibility is monetary policy, should we say that concerns for not increasing the deficit is so important that nothing further should be done that would have a fiscally stimulative effect? 

Mr. BERNANKE. Mr. Chairman, you know, that is really the congressional tradeoff that has to be made. Obviously, unemployment 

is the biggest problem we have, and if the Federal Reserve and the 

Congress can address that issue, we need to find ways to address 

that issue, but there are difficult tradeoffs. 

The CHAIRMAN. I appreciate that. I think we are aided by the 

fact that inflation is not now or in the near term seeming to be a 

problem. 

15 

The last point I would make if you could comment, we hear this 

threat that the rating agencies might reduce our debt rating because of the deficit. Do you think there is any realistic prospect of 

America defaulting on its debt in the foreseeable future? 

Mr. BERNANKE. Not unless Congress decides not to pay, which I 

do not anticipate. No, I do not anticipate any such problem. I do 

not anticipate any downgrade. Of course, there are real long-term 

budget problems that need to be addressed. 

The CHAIRMAN. I agree with that. If you can get enough risk premium on treasuries, buy them. 

Now, the gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. Chairman Bernanke, I 

think Chairman Frank mentioned the deficit in passing and the 

debt, and that is what I want to ask you about. Really, to me, that 

is the elephant in the room. 

Our debt is going to double in the next 5 years, triple in the next 

10 years, and is fueled by historic deficits. 

I heard this morning on TV that we have in many cases across 

the United States this year, children and even adults who are kind 

of walking out on the thin ice, and they walk out maybe day after 

day, and they get some comfort that nothing happens. Thin ice is 

dangerous. I submit that this type of budget path is dangerous and 

the deficits we are running are dangerous. 

I would ask you, number one, I do not believe our present budget 

path is sustainable, so my first question to you is, is our budget 

path sustainable, and second, is there a need for what I would consider an urgent need for the Congress—you said it was up to the 

Congress to come up with a concrete plan to change that budget 

path, and do you believe there is an urgency in that? 

Mr. BERNANKE. Congressman, as to sustainability, you are talking about the medium-term structural deficit that remains even 

after the economy is returned close to more normal levels of activity, estimates of the structural deficit range from 4 percent by the 

OMB to up to 7 percent of GDP in some scenarios run by the CBO. 

Those numbers are above a sustainable level. I think in order to 

maintain a stable ratio of debt to GDP, you need to have a deficit 

that is 21⁄2 to 3 percent, at the most. 

I think yes, under current projections, we have a deficit and a 

debt that will continue to grow, interest rate costs will continue to 

grow. 

I do think it is very important that we begin to look at the path, 

the projectory of the deficit as it goes forward, and there could be 

a bonus there to the extent that we can achieve creditable plans 

to reduce medium- to long-term deficits, we will actually have more 

flexibility in the short term if we want to take other kinds of actions. 

Mr. BACHUS. The current budget path is not sustainable, is it? 

Mr. BERNANKE. Given the numbers that the CBO and the OMB 

have projected, that is right. 

Mr. BACHUS. It may be upon us sooner than we think, is that a 

good analogy that I have used, of walking on thin ice? 

Mr. BERNANKE. Yes, sir. That is true. It is not necessarily just 

a long-term issue because it is possible that bond markets will beVerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE
16 

come worried about sustainability and we may find ourselves facing higher interest rates even today, given that concern. 

Mr. BACHUS. Is it critical that we have a long-term plan and we 

have it now? 

Mr. BERNANKE. Yes, I think it is very important. I realize it is 

extremely difficult. I do not underestimate in any way how difficult 

it is. It is also difficult to address issues which are still a few years 

away. I understand that as well. 

It would be very helpful even to the current recovery to markets’ 

confidence if there were a sustainable creditable plan for a fiscal 

exit, if you will. 

Mr. BACHUS. If we do not address them now, I am not sure we 

can address them in an effective way 2 or 3 years from now or 4 

or 5 years from now. 

Mr. BERNANKE. It will become increasingly difficult because the 

cuts you will need to make will be even sharper or the tax increases even sharper. 

Mr. BACHUS. I very much appreciate your testimony. I do believe 

you have addressed many of the concerns. I am happy that you 

mentioned the legislation that we passed in a bipartisan way has 

been an important tool. Thank you. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. WATT. Thank you. I wanted to welcome you back to the committee. In response to a question that Chairman Frank asked, you 

made it clear that you do not want to meddle too much in what 

the Congress does on these things, and I am not going to ask you 

to stray over there. 

I am more interested in what I perceive to be as reading between 

the lines of what you said, that you think the Fed itself has used 

all the tools that are available to the Federal Reserve to help facilitate job creation, actually probably more than would normally be 

done to facilitate job creation and create maximum sustainable employment since you do not really have a lot of concerns about the 

other part of the dual mandate, which is price stability. 

Am I reading that correctly or are there other specific things that 

the Fed tool kit might allow the Fed to do to create the environment for more job creation? 

Mr. BERNANKE. I think one set of tools that we have that we continue to work on as regulators is to try to get credit flowing again. 

We know that small business lending is closely tied to job creation. 

We know there are problems with bank lending to small businesses. 

I do not know if you want me to take your time to go through 

some of these things, but we are collecting more information. We 

are doing more consulting. We are trying to train our examiners. 

We are trying to do everything we can to make sure that creditworthy small businesses can get credit and banks would be willing 

to take a second look at small businesses to make sure they have 

access to credit. 

Mr. WATT. I presume that will be the subject of testimony by 

folks at the Friday hearing primarily, so I will not ask you to elaborate more on that in this context. 

What other kinds of things in your tool kit might be considered 

or actually I guess maybe the question I should be asking is, are 

17 

the short-term consequences of anything you might use in your tool 

kit, the short-term benefits, worth the long-term consequences, or 

do you think the Fed really has done everything it should be doing 

other than trying to facilitate credit, as you just mentioned, in 

terms of monetary policy, the emergency steps you have taken? 

Are there other things you could prudently do, I guess is the 

question, to facilitate job creation? 

Mr. BERNANKE. As you point out, we have extremely accommodative monetary policy with very low interest rates and also large 

purchases of securities to expand our balance sheet. That is a very 

accommodative supporting recovery, supporting job creation. 

The FOMC is going to have to continue to evaluate whether additional stimulus would be necessary, depending on how the economy 

evolves. We will continue to look at that. 

Mr. WATT. You are kind of in the same posture that we are in 

on the other side, your policies are creating some stresses on your 

own balance sheet that over time might have some consequences 

and you have to get out of it, and what you are saying is we need 

to be looking at those long-term consequences of more debt and 

more deficits so that we have an exit strategy to get back to a more 

normal kind of fiscal policy at the same time you are getting back 

to a more normal monetary policy. 

Am I misstating that? 

Mr. BERNANKE. Not at all. One of the greatest challenges of the 

extraordinary policies that we have both taken is at some point, we 

want to return to a more normal stance, and finding a way out that 

is creditable and understandable and clear is very important for 

confidence. 

Mr. WATT. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas, Mr. Paul. 

Dr. PAUL. I thank you, Mr. Chairman. The Federal Reserve 

Transparency Act, which has passed the House already, is something that the Federal Reserve obviously has been opposed to, and 

one of the reasons they are opposed to it, as I understand it, is it 

would politicize monetary policy, which is not what the bill actually 

does. 

The other reason they give is that if Congress had any subtle influence, they would inflate more than the Federal Reserve might 

want to. It is sort of ironic, the Federal Reserve kept interest rates 

too low for too long and the consensus now in the financial community is that is true, interest rates are still down at 1 percent, hardly could the Congress influence the Federal Reserve in a negative 

way by causing them to inflate even more. 

There has been a cozy political relationship between Congress 

and the Federal Reserve, although the Congress has been derelict 

in their responsibilities to perform oversight. 

When it comes to debt, the Fed is there. They can monetize the 

debt and keep interest rates low. The Congress can keep spending 

and get re-elected. They do not have to raise taxes so the Fed can 

act as a taxing authority. You print the money, dilute the value of 

the money. Prices go up and price inflation is a tax. 

When people pay a lot more for their medical care than they 

used to, they ought to think about the inflationary tax. 

18 

Also, the Fed accommodates the Congress by liquidating debt, by 

debasement of the currency, the real value of the money goes down, 

the real debt actually goes down. 

In many ways, the Congress and the Fed do have a pretty cozy 

political relationship. 

I would like to get to more specifics on the transparency bill because it has been reported in the past that during the 1980’s, the 

Fed actually facilitated a $5.5 billion loan to Saddam Hussein, who 

then bought weapons from our military industrial complex, and 

also that is when he invested in a nuclear reactor. 

A lot of cash was passed through and a lot of people supposed 

it was passed through the Federal Reserve when there was a provisional government after the 2003 invasion. That money was not appropriated by the Congress, as the Constitution said. 

Also, there have been reports that the cash used in the Watergate scandal came through the Federal Reserve. When investigators back in those years tried to find out, they were always 

stonewalled, and we could not get the information. 

My question is, you object to this idea that I would say give us 

6 months, after 6 months, we could find out what we are doing, but 

what about giving you 10 years? 

Would you grant that the American people deserve to know 

whether the Federal Reserve has been involved in this, and what 

kind of shenanigans they are involved in with foreign countries and 

foreign central banks, and find out possibly you are working now 

to bail out Greece, for all we know. 

Would you grant that after 10 or 15 years, the American people 

deserve to know? It seems if the Fed was not involved with this 

at all, it would be to your advantage to say no, we do not do stuff 

like that. Why could we not open the books up 10 years back and 

find out the truth of these matters? 

Mr. BERNANKE. Congressman, the specific allegations you have 

made, I think, are absolutely bizarre, and I have absolutely no 

knowledge of anything remotely like what you just described. 

As far as the 10 years, after 5 years, we produce complete transcripts of every word said in the FOMC meetings. You have every 

word in front of you. 

Dr. PAUL. Can we get the results of every agreement, every loan 

made, every single thing to foreign governments? 

Mr. BERNANKE. Yes, sir. 

Dr. PAUL. There has been a lot of information, when this came 

out in the early years, they did have an effort and the Federal Reserve never participated in this. It is easily covered up. 

I think eventually, because the system is not viable and that it 

is this cozy relationship, that we will get to the point where something will have to be done about this financial system, so as long 

as we continue to do this, this cover up, and quite frankly, I do not 

believe that the real effort to facilitate some of these things that 

have been done in the past would become available to us because 

it is in the interest of the Federal Reserve to make sure that the 

people do not know. 

Right now, today, is it quite possible, have you talked with any 

international groups about possibly participating in a bailout of 

Greece? 

19 

Mr. BERNANKE. I have not. 

Dr. PAUL. The Federal Reserve under the law is capable of doing 

this. Is it not correct that the Fed can buy debt of other nations, 

and under the Monetary Control Act of 1980, is that not permissible? 

Mr. BERNANKE. Yes, that is true, but we have no plans whatsoever to be involved in any foreign bailouts or anything of that sort. 

Dr. PAUL. If they did, it certainly would be to our advantage to 

know about it. I yield back. 

The CHAIRMAN. The gentleman’s time has expired. I recognize 

the gentleman from Pennsylvania. 

This committee will look into the allegations that under Presidents Reagan and Nixon, the Federal Reserve was engaging in 

those activities, and the gentleman said during the 1980’s, the Federal Reserve lent money to Saddam Hussein and during Watergate, 

they did this, and I agree we should look into what might have 

happened under those two Presidencies. 

The gentleman from Pennsylvania. 

Mr. KANJORSKI. Thank you, Mr. Chairman. Mr. Chairman, I am 

not going to take all of my time, because I know we have the interest of the other committee members. 

I am particularly interested in some of the communications we 

have had recently on the commercial real estate problem. Could 

you give us your assessment of what that potential problem is 

today and where it can grow and if there is any actions we in the 

Congress should take in anticipation of getting a second hit in the 

economy? 

Mr. BERNANKE. Congressman, it remains probably the biggest 

credit issue that we still have. Yesterday, Chairman Bair talked 

about a big increase in the number of problem banks, a great number of those banks are in trouble because of their commercial real 

estate positions, both because the fundamentals, shopping center 

vacancies, things of that sort, have been worsening, and because of 

problems in financing, there are a lot of troubled commercial real 

estate properties, and they are causing problems for a lot of banks, 

particularly small- to medium-sized banks. 

We are watching that very carefully. The Fed has done a couple 

of things here. We have issued with the other agencies guidance on 

commercial real estate, which gives a number of ways of helping. 

For example, instructing banks to try to restructure troubled 

commercial real estate loans and making the point that commercial 

real estate loans should not be marked down just because the collateral value has declined. That depends on the income from the 

property, not the collateral value. 

We have also had this TALF program, which has been trying to 

restart the CMBS, commercial mortgage-backed securities market, 

with limited success in quantities, but we have brought down the 

spreads and the financing situation is a bit better. 

We are seeing a few rays of light in this area, but it does remain 

a very difficult category of credit, particularly for the small- and 

medium-sized banks in our country. 

Mr. KANJORSKI. Is there anything that you would suggest that 

the Congress get involved with or this committee now in anticipation of any problems that may occur? 

20 

Mr. BERNANKE. I do not have a specific suggestion. I would be 

happy to think about that. 

Mr. KANJORSKI. Thank you, Mr. Chairman. I yield back my time. 

The CHAIRMAN. The gentleman from Texas, Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. Mr. Chairman, 

congratulations on your reappointment. 

I want to go back to page nine of your testimony where you said 

that the Federal Reserve has been playing a key role in international efforts to tighten capital and liquidity requirements for financial institutions, particularly systemically critical firms. 

Can you give me an idea of who you think the international systemically risky firms are? 

Mr. BERNANKE. One of the issues that we will have to address, 

for example, if the regulators agree there should be additional capital on systemically risky firms, then the question will be how to 

identify those firms. 

Presumably, we will look at things like their size, their complexity, their interconnectedness, and the kinds of services they 

provide to the financial system. 

We have not addressed that question. We do not have a list or 

anything like that. It is also possible we might want to do it in 

kind of a gradated way so that the bigger and more complex the 

firm, the more capital it needs to hold, as protection for the system, 

so we do not have the ‘‘too-big-to-fail’’ problem that Congressman 

Paul was talking about. 

Mr. NEUGEBAUER. I also heard you say you are now going back 

internally and looking within your organization as to what are the 

things we missed, what should we have been looking at, and moving forward. 

I think one of the questions—I hear almost all of your former colleagues keep using the word ‘‘capital,’’ and I truly believe if you 

want to regulate the financial entities, capital is the primary way 

to do that. 

Looking forward, what is going to be the appropriate leverage 

level that we should allow our large financial institutions to have 

so they will have a shock absorber moving forward? Some of these 

entities were leveraged, 30, 40, big numbers. 

As the Federal Reserve Chairman, primary regulator for many of 

these entities, what is the appropriate leverage? 

Mr. BERNANKE. Congressman, everybody agrees with what you 

just said, which is more capital is needed. The Federal Reserve representing the United States has been working with other countries, 

the Basel Committee and in other contexts, to try to develop new 

standards. 

We have implemented a few of them. For example, for market 

trading. At this point, we have not completed the whole process of 

developing higher, more stringent capital standards for large firms. 

A proposal has been put forward which is now being tested. 

Banks are being asked to evaluate how much capital they would 

have to hold under these more stringent standards, so we can get 

a sense of what the implications would be for the leverage ratio. 

I do not know that number yet. We are trying to figure out what 

will be safe. It would depend on the composition of the assets the 

bank has. The riskier the assets, the more capital you should have. 

21 

We are working to try by the end of 2010 to have a very concrete 

proposal that each country would then have to decide whether to 

adopt or not. 

Mr. NEUGEBAUER. You would agree the standards we had before 

evidently did not work? 

Mr. BERNANKE. Clearly, they did not. I would add the liquidity 

issue also, that during the crisis, many banks were technically 

well-capitalized, but they did not have enough cash on hand to 

meet the run that was coming on them. Higher liquidity is also a 

part of this. 

Mr. NEUGEBAUER. One of the concerns I have is in some of these 

entities, I have seen some deleveraging, but I have not seen a lot 

of deleveraging. 

I am wondering if it is not better sooner rather than later for the 

Fed to develop these guidelines and standards and start asking the 

entities that you are regulating to start ponying up either more 

capital or deleveraging their balance sheets because certainly the 

American taxpayers do not want another round of this. 

Do you have a time line in mind where we could anticipate hearing that the Fed is taking action to increase the capital standards 

or setting some new capital standards? 

Mr. BERNANKE. As I said, I think around the end of the year we 

will have some formal standards, but we have been very much involved in pushing banks to raise more capital. 

That was one of the outcomes of the stress test we did last 

spring, that U.S. banks raised a very substantial amount of capital, 

and that has been very helpful in restoring confidence for the banking system. 

Mr. NEUGEBAUER. Are you concerned about what is going on in 

the European Union right now with Greece and some of the other 

countries within the Euro, their levels of debt, are those countries 

going to have to step in and back them up, and the implications 

of what the disruption within the European Union might impact 

the United States? 

Mr. BERNANKE. There are very serious challenges there involving 

not only fiscal issues but competitiveness issues because of the single exchange rate. 

We have talked to the European Union leaders. They are obviously very focused on getting this problem solved. They are working closely with Greece, which has proposed a substantial fiscal 

consolidation. 

We are keeping an eye on it. The Europeans, of course, it is most 

relevant to them and they are most exposed to those problems. 

They are very focused on trying to get them under control. 

The CHAIRMAN. The gentlewoman from California. 

Ms. WATERS. Thank you very much. I would like to thank Chairman Bernanke for being here today. 

Starting with your discussion on page four, ‘‘In addition to closing its special facilities, the Federal Reserve is normalizing its 

lending to commercial banks through the discount window,’’ and 

you go on to talk about your new Federal funds rate and discussion 

about why you have done this, and encouraging banks to go to the 

private market for investments. 

22 

You say further in this discussion that these adjustments are not 

expected to lead to higher financial conditions for households and 

businesses. The last thing I heard before I came here this morning 

was a prediction by some of the analysts on television that in about 

one month, we can expect there will be an increase in interest rates 

on mortgages and home loans. 

Everybody that I talked to really believes that this change that 

you have made in the Federal funds rate is what is going to trigger 

that. Is that true? Did you give any thought to this? How can you 

guarantee that it will not? 

Mr. BERNANKE. Congresswoman, it is not the Federal funds rate, 

it was the discount rate, the rate at which we lend on a special 

overnight basis to banks, we cut that very low because of the financial crisis. 

We wanted to make sure that banks had access to lots of liquidity in case there was a run on the banks. Now that there is easy 

access to private markets, they do not need that kind of help any 

more, so we have just slightly reduced the subsidy we are giving 

to banks. 

It has nothing to do with the Federal funds rate or the overall 

stance of monetary policy. It has to do with normalizing our extraordinary support for the banks and the financial markets. 

We do not anticipate that action having any implications— 

Ms. WATERS. Let’s be clear. The change that you have made, no 

matter how slight it is, at the discount rate, will increase the 

amount they have to pay for their loans, the banks; is that right? 

Mr. BERNANKE. It is a very small amount in terms of the amount 

they borrow. 

Ms. WATERS. I understand that. What I am trying to understand 

is, is there a connection between the increase in the amount of 

money they have to pay and household interest rates? 

Mr. BERNANKE. I do not think there is any material— 

Ms. WATERS. Can you assure us that will not happen? 

Mr. BERNANKE. I think it is extremely unlikely, and if it were to 

happen, we would look at it. I do not think there is any connection. 

Ms. WATERS. What I am worried about is you still have a lot of 

mortgages out there, adjustable rate mortgages, with 3 percent 

margins on them. If in fact this is going to trigger an increase, we 

are going to have more foreclosures because the interest rates are 

going to be higher. That is what I am worried about. 

The predictions are that we have not seen the end to these foreclosures, that with the loans that were extended, people are going 

to be more at risk. I do not want to see the interest rate increase 

on these adjustable rate mortgages. 

Mr. BERNANKE. There is no linkage between adjustable rate 

mortgages and the discount rate. It is linked to the Federal funds 

rate, which we have said we anticipate will be at an unusually low 

level for an extended period. 

Ms. WATERS. I want to be clear for this committee that the actions you have taken have no connection to the possibility of an increase in the household interest rates, we do not have to worry 

about that; is that right? 

Mr. BERNANKE. The reason we took the action was again to reduce the subsidy that we are giving to a small number of banks— 

23 

Ms. WATERS. When you reduce the subsidy, that means they 

have to pay more money; is that right? 

Mr. BERNANKE. I do not think there will be any effect on consumers. 

Ms. WATERS. I beg your pardon? 

Mr. BERNANKE. I do not expect any effect whatsoever on consumers. 

Ms. WATERS. You do not expect them to pass on that cost to the 

consumers? 

Mr. BERNANKE. No, because it is very small, and I do not think 

it will affect it. 

Ms. WATERS. Let me just ask, you talked about the 10 percent 

unemployment rate. That does not really reflect what is happening 

in poor rural communities and African-American communities and 

in Latino communities where the unemployment rates are up as 

high as 16.9 percent in African-American communities and even 

higher in some of these poor rural communities. 

When you describe this jobless recovery, I think it would be important to talk about these communities that are not represented 

by the 10 percent description that you give. 

What do you have to say about that and is there anything you 

can recommend that we could do to deal with this problem? 

Mr. BERNANKE. You are absolutely right that minority communities in particular have much higher unemployment rates than 

the overall average, and that is a terrible problem. 

Monetary policy cannot really do much about those distinctions. 

I think those are issues that Congress needs to address if you are 

inclined to do so. 

I can only agree with you that it has not only short-term implications in terms of family income and so on, as I talked about in my 

testimony, it has long-term implications for skills, for workforce attachment, for wages and employability. 

It is a very long-term problem. I can only agree with you 100 percent that it needs to be addressed. 

The CHAIRMAN. The gentlewoman from West Virginia. 

Mrs. CAPITO. Thank you, Mr. Chairman. Welcome, Mr. Chairman, back to our committee, and congratulations on your reappointment. 

The CHAIRMAN. Will the gentlewoman suspend for a minute? 

Mrs. CAPITO. Yes, I will. 

The CHAIRMAN. Someone has his or her microphone on and we 

are getting these rumbling noises. Would members please make 

sure to shut their mikes off unless they are speaking? Sometimes, 

they pick up these noises. Thank you. 

The gentlewoman has 5 minutes, she can start from scratch. 

Mrs. CAPITO. Thank you. On page three of your testimony, you 

talk about contrasting larger lending institutions with smaller 

lending institutions, and you say bank lending continues to contract, reflecting both tightened lending standards and weak demand for credit and uncertain economic prospects. 

My question is that I have heard from our community bankers 

that they have the capital to lend but they are getting conflicting 

messages from regulators. 

24 

How can we ensure prudent lending and capital levels while 

working with these institutions but to expand on the question, too, 

they have the capital to lend, but creditworthy customers are not 

the ones coming in the door looking for expansion of their business 

because they lack confidence in where the economy is now, where 

we will be a year from now. 

That is my first question. Thank you. 

Mr. BERNANKE. Well, there are two separate issues there. It’s 

true that because the economy is weak that some borrowers are not 

in the market for credit and that’s one of the reasons why bank 

lending is down. 

The other issue, though, which I think you began with is that in 

situations where there is a creditworthy borrower who would like 

credit, we want to make sure that they get credit and we have been 

very focused on that issue. 

Mrs. CAPITO. But haven’t had the results that— 

Mr. BERNANKE. Well, we have been working on it very hard. We 

have, for example, increased substantially our information-gathering so that we can make an assessment of how many loans are 

turned down, what is the rate of loss on small loans versus large 

loans. 

We added questions to the National Federation of Independent 

Businesses Survey asking small firms about their experience with 

borrowing and so on. So we are trying very hard. 

We have also our reserve banks around the country currently 

having a series of summit meetings with community leaders, development organizations, small business lenders, and small companies 

to try to figure out what the problems are. So we are actively going 

out and learning about the situation the best we can. 

It’s very difficult because there will be some cases where tighter 

standards are justified because of the weakness of the economy and 

the weakness of the borrower’s condition. We just want to make 

sure that when there is a creditworthy borrower that they can obtain credit. 

Mrs. CAPITO. Well, thank you for addressing that. I think it’s extremely important in the smaller communities, more rural communities and States of that nature. 

My second question is a completely different question. We have 

lost four million jobs and—but over the longer span of time we 

have picked up four million jobs, government jobs, and when I went 

on the recovery.gov Web site to see where jobs were created or retained according to that site, in my 2nd Congressional District the 

largest zip code was the State capitol, implying and reasonably so, 

that these were State jobs that are being retained or created. 

My question is in a larger sense what do you—how do you feel 

this will impact our economy if this trend continues, and for me it’s 

a source of concern because it seems like our private sector manufacturing jobs, as they move down, our government jobs obviously 

to me that says it’s more government, more government spending, 

more government obligations. 

Mr. BERNANKE. Well, actually, we have lost somewhere in the vicinity of seven to eight million jobs on net, including government 

jobs, since the beginning of the recession. So obviously the total 

employment is very significantly down. 

25 

Some of those government jobs are bureaucrats. You’re thinking 

of those kinds of jobs, but two of the industries that have actually 

added jobs during the recession are health and education and many 

teachers are technically government employees. So some of that 

may be showing up from those particular areas which are growing 

very quickly. 

But certainly, as a general proposition, we want the private sector to be healthy and to be supporting the overall economy and we 

don’t want to create too much overhead of government jobs that are 

not productive in some direct sense. 

Mrs. CAPITO. Thank you. 

The CHAIRMAN. The gentlewoman from New York, the Chair of 

the Joint Economic Committee. 

Mrs. MALONEY. Thank you. Thank you so much, Mr. Chairman. 

Thank you very much, Mr. Chairman, and congratulations on your 

renomination, and I believe we have been very fortunate to have 

at the helm during this financial crisis a scholar, a professor who 

has dedicated his life work primarily to studying the Great Depression, writing about it, and I believe the Fed came forward with 

many creative unconventional responses to help us move out of this 

crisis. 

I also want to thank you for your leadership on many consumer 

issues that are important to this committee and to this Congress. 

The CARD Act, the Credit Cardholders’ Rule that helps consumers, 

will put billions back into consumers’ hands and the rule that came 

from the Fed was incredibly helpful in putting a clear logic forward 

and helping us win passage in this House, also the rule on overdraft is very welcomed and very important to consumers. 

In the Credit Card Bill of Rights, one of the items that will be 

enacted in August 22nd is the Federal Reserve’s reaction and analysis about charges that may be too onerous and how you would 

make them fair, and could you comment on what your work is in 

that area, when you intend to have that ready for us to see, and 

how you intend to approach this challenge? 

Mr. BERNANKE. We anticipate having those rules out very shortly, in a few weeks, and you will be able to give us your views on 

them at that time. 

We wanted to be sure to get them out in time so that the law 

would go into effect as Congress dictated and so there will be no 

delay in the implementation of these rules, even though they have 

been a couple of weeks later than we expected in getting them out. 

So we are working to have a comprehensive set of rules that will 

give a set of criteria, in particular if someone’s interest rate has 

been raised for some reason because they’re perceived as being a 

greater risk and 6 months later the condition has been corrected, 

we are looking at the rules under which the interest rate ought to 

be returned to the normal or the previous level. That’s one of the 

issues that we’re considering. 

But we anticipate having those out very shortly and we don’t expect any delay in the implementation. 

Mrs. MALONEY. As we dig our way out of this recession and we 

are definitely trending in the right direction, the month that President Obama took office, the last month that the former President 

was in the office, we lost well over 770,000 jobs. This past month, 

26 

under President Obama, we lost 18,000 jobs. We’re definitely 

trending in the right direction. 

The Fed is now looking at ways to really move back to a normal 

economy and some people—one article I was reading last night felt 

that you should invest more in Treasury notes as opposed to other 

actions that you’re taking. 

Could you comment on the steps you’re taking to really move our 

financial institutions and our total economy into the proper functioning expanding economically and other ways to help the people 

of America? 

Mr. BERNANKE. Yes. We have two broad sets of policies, roughly 

speaking. One was a set of special facilities, lending facilities that 

were intended to stabilize our financial system which obviously was 

extremely disrupted by the crisis. Those facilities have been quite 

successful. They have helped stabilize the money market mutual 

funds, commercial paper market, the repo market, many other important financial markets. 

With the improvement and stabilization of those markets, we 

have been shutting those down. So many of them were shut down 

on February 1st and this was a question Congresswoman Waters 

asked about the discount rate and so on. So we believe that, as 

those financial markets are normalizing, we can begin to reduce 

that source of support. 

The other approach, the other policy, set of policies we have is 

monetary policies intended to support the recovery which includes 

the low interest rates and the purchases of mortgage-backed securities and treasuries. Those remain at a very accommodative level. 

It is true that we will stop buying new mortgage-backed securities at the end of this quarter, but we will continue to hold one and 

a quarter trillion dollars of agency mortgage-backed securities and 

that taking that off the market itself will keep mortgage rates 

below what they otherwise would be. 

So we believe that there will still be stimulus coming from our 

holdings of those securities as well as our low interest rates. So we 

think the economy as opposed to the money markets, for example, 

still requires support for recovery. 

Mrs. MALONEY. Well, we are trending in the right direction. My 

time is up. 

Thank you for your public service. 

Mr. BERNANKE. Thank you. 

The CHAIRMAN. The gentleman from California, Mr. McCarthy. 

Mr. MCCARTHY OF CALIFORNIA. Thank you, Mr. Chairman. Mr. 

Chairman, I believe across this country, everywhere you go, jobs is 

Number 1. You have referred to that and also to the deficit. 

I want to follow up on both those topics, but I want to go back 

to what my colleague from West Virginia was talking about, four 

million more jobs in government than in manufacturing. You 

talked about that, but you cannot sustain that if the taxpayers are 

paying for that and the lack of manufacturing, how you would be 

able to grow. 

You talked in your testimony here of unemployment being at 10 

percent. In my State, it is higher. In my congressional district, it’s 

higher. Throughout the Central Valley in California, there are 

some places at 40 percent unemployment. 

27 

But even a stronger telling in there, you said 40 percent of the 

unemployed have been out of work 6 months or more, nearly double from a year ago. Now you did say these government jobs, there 

are some bureaucrats, but there’s—the growth was in education 

and in healthcare, but there has to be some commonsense because 

if you go down the road here, the Federal Government, there are 

more than 100,000 people who work there who make more than 

$100,000. The money is probably better used inside the classroom. 

But I’m trying to find where there are some ways that we can 

create jobs quickly with low cost, rolling back regulation, but you 

said in your testimony here, you talked about the international, 

that the international was recovering—if I state it right within 

there, you say, ‘‘International trade supported by the recovery in 

the economies of many of our trading partners is rebounding from 

its deep contraction of a year ago.’’ 

Now there are three trade agreements that are sitting here, Panama, Colombia, and South Korea. The President has said that if 

you increase U.S. exports by 1 percent, it would create over 

250,000 jobs and hence change the jobs we are creating from government to others. 

Do you agree that 1 percent, and they say with these three trade 

agreements it would give you that 1 percent, would it create 

250,000 new jobs? 

Mr. BERNANKE. I don’t know that number. I would have to look 

at that number, but certainly opening up trade creates opportunities for us to export and that ought to create jobs. I’m quite sure 

it would. 

Mr. MCCARTHY OF CALIFORNIA. And it would not cost anything 

more but it would create jobs that weren’t government-related? 

Mr. BERNANKE. It ought to improve the division of labor between 

our different countries. Each country can be more productive, 

should raise our standard of living, and I expect would create jobs, 

as well. 

Mr. MCCARTHY OF CALIFORNIA. If I could just touch base on what 

our ranking member talked about earlier because we have had 

many discussions with you and your past profession, the study of 

former countries and some of their downfalls. 

The national debt and the budget deficit, you have told us time 

and time again that you cannot sustain a budget deficit over 21⁄2

to 3 percent of GDP, and you stated that earlier and I wrote down 

a few words that you refreshed. You said if we were able to get a 

fiscal exit from this, it would actually help the current recovery, is 

that correct? 

Mr. BERNANKE. Yes. 

Mr. MCCARTHY OF CALIFORNIA. Looking at the current budget 

that is proposed, does that reflect the commitment of changing the 

growth curve of our budget deficit or our national debt? 

Mr. BERNANKE. Well, as I said earlier, the projections of 4 to 7 

percent deficits from 2013 to 2020 and increasing after that, I 

think everyone would agree, including the President, that is not 

sustainable and that we need to address those numbers and get 

them down in the out-years. 

Mr. MCCARTHY OF CALIFORNIA. I heard you say that, and I’m trying to say here as a Member of Congress looking at a budget today, 

28 

hearing your words that you have told us time and time again and 

every economist says it, that you cannot sustain this, watching our 

national debt of GDP go up almost to the highest level outside of 

World War II, especially at the end of this decade to be 77 percent. 

What do we do today? Your quote earlier said, ‘‘would help the 

current recovery if we were able to sustain that.’’ So looking at the 

current budget, does it give us the change needed in any shape or 

form? 

Mr. BERNANKE. Well, it’s not sufficient to look at this year’s 

budget, if that’s what you mean. I mean, you have to look at the 

next 10 years and— 

Mr. MCCARTHY OF CALIFORNIA. Yes. But we’re sitting in a place 

where we vote where we look today. We all see 10 years and where 

it’s going. We all realize that this is putting us in a place that gives 

us great hardship. So our actions have to be now and your comment says it helps the current recovery if we take action, as well. 

So the current budget that I see does not give us that, and I’m 

asking you, do you see it as helping us in this fiscal crisis or does 

it expand the deficit further? 

Mr. BERNANKE. I think it would be helpful for the current situation if the Congress and the Administration could provide a plan 

which shows how the deficit will fall to this 21⁄2 and 3 percent 

level, at least, over the next 10 years. I don’t know exactly which 

programs, what taxes, what changes you would make, that’s certainly up to Congress, but even a strong effort would be probably 

good for confidence. 

Mr. MCCARTHY OF CALIFORNIA. It would be good for the future 

but even be good for the recovery. I’m not asking you to pick departments. 

Mr. BERNANKE. It would increase confidence, lower expected tax 

rates, and lower real interest rates. 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. MCCARTHY OF CALIFORNIA. I thank you, Mr. Chairman. 

The CHAIRMAN. And we’re trying to be fairly strict on the time 

because we have a vote coming up and I understand that Chairman Bernanke needs to be—we have assured him that he’ll be out 

by 2 o’clock. 

So the gentleman from Illinois is recognized. 

Mr. MANZULLO. Thank you. Congratulations on your re-election, 

Mr. Chairman. You got reappointed, but you had to get elected, 

just like we do. It was a vote count. 

Chairman Bernanke, the FDIC reported yesterday that bank lending in 2009 fell by 7.5 percent or $587 billion, $587 billion, and 

the Wall Street Journal, its headline today said it was epic, the decline. There’s a chart behind. 

Why is bank lending falling so dramatically? It has fallen, I believe, because we’re forced to hold greater capital reserves, given 

the rising default rates on commercial real estate. 

Up on the committee room TV now is a chart from the most recent Congressional Oversight Panel report which shows the value 

of delinquencies on CRE loans has increased 700 percent since the 

first quarter of 2007. You’ll notice from the chart behind you, Mr. 

Chairman, that if the trend continues, the rate of CRE loans will 

soon be literally off that chart. 

29 

The dramatic increase in delinquencies to me is really approaching a tsunami, threatening our local communities and banking system. It’s estimated to peak between 2011–2012 with over $300 billion in CRE debt expected to mature each year. As you know, the 

CRE market is huge. It’s $3.5 trillion of the total debt. It’s about 

$1.7 trillion held by banks and thrifts. Much of this debt is held 

by community banks across the country that have survived the 

first part of the tsunami, the mortgage default crisis, but now are 

being threatened by this one. 

The FDIC yesterday informed us that they’re adding 450 banks 

to the Troubled Bank List, more than doubling the number from 

the start of 2009. Many are small lending institutions that have invested in their communities for decades. 

Chairman Bernanke, I just held a hearing January 21st on the 

epidemic of bank failures focusing on the failure and seizure of a 

great Chicago community institution, Park National Bank. I would 

rather not have more hearings in the coming year on the autopsies 

of what have been rather good banks. 

I want to focus on how we can help these good banks and how 

we’re getting back to lending. So how much do you think of the 

coming tsunami of these loans, $1.7 trillion held by our local banks, 

loan defaults are going to harm our communities and local banks, 

and what have you done about it and what future plans do you intend to make about it? 

Mr. BERNANKE. Well, it is a serious problem and as I mentioned 

earlier, the commercial real estate losses, loan problems are probably the biggest threat at this point to our smaller and regional 

banks and, as you point out, if those banks have their capital depleted or if they go out of business, that’s going to affect the supply 

of credit and so that affects our economy, as well. So that’s a very 

important problem. 

I think, from the Federal Reserve’s point of view, there are basically two kinds of things we can do. First of all, we can support 

the economy and as the economy strengthens, that makes people 

go shopping in shopping malls or willing to—new employment fills 

up office buildings and so on and that helps solve that problem and 

so obviously we’re trying to support the recovery. 

The other thing we can do is to try to work directly in the market for CRE and we have done some things along those lines. We 

have had this program called the TALF which has been successful 

in getting the interest rates on commercial mortgage-backed securities down somewhat, reduced those spreads. 

We have issued guidance on commercial real estate loans where 

we are trying to work with banks so that they can restructure troubled loans so they can continue to be performing, perhaps at a reduced level, but continue to be providing income. So we’re looking 

for those kinds of solutions. 

Those supervisory approaches and monetary policy approaches, 

those are our two main tools. 

Mr. MANZULLO. Your program that you mentioned is going to end 

in June. Are you going to renew the program? 

Mr. BERNANKE. In June. Well, we will be evaluating the situation. There is progress being made in those markets. As I said, the 

30 

spreads have come down quite a bit and some deals are being done 

outside of the Federal Reserve’s program. 

Mr. MANZULLO. I appreciate all that you’re doing with the regulators, but, you know, the Park National Bank that we referred to 

really lost its shirt with Fannie and Freddie. The Federal Reserve 

and everybody said buy it, we’re going to give you extra credit if 

you do it, and they did and now they’re out of business because 

they followed the recommendations of many of our government financial regulatory institutions. 

So I really think that we shouldn’t underestimate the coming 

tsunami of this debt in commercial real estate. I hope that the actions that we take are going to fill those office buildings, but I 

would like to have more discussion with you about other steps that 

I think we take, other than hoping that what we’re doing is going 

to fill those office buildings. 

Mr. BERNANKE. We’re following it very closely. 

Mr. MANZULLO. Thank you. 

The CHAIRMAN. The gentleman’s time has expired. The gentleman from Delaware, Mr. Castle, is recognized. 

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

like many others here, probably all of us, I’m very concerned about 

the job situation in the United States and we can argue politically 

whether the Stimulus Program has worked well or not. 

Mr. Zandi, an economist, yesterday indicated that the jobs that 

were created were probably to some degree temporary in that we 

funded governments so they could keep on employees for a period 

of time and various capital projects that will expire at some point 

or another. So we still have a continuing problem, and I have had 

a couple of job fairs in my State and I have been surprised both 

at the number of people who have come out for that and the backgrounds of some of these people. It’s not the usual unemployed, it’s 

people with college degrees, even graduate degrees, who are unemployed at this point. 

I see that the lending by banking institutions has fallen by some 

7.5 percent in 2009, and my question to you is, is there anything 

that you as the head of the Fed or the Fed itself or us as Members 

of Congress could be doing to help with the employment circumstance? 

My further question is what is happening in this whole bank 

lending? I mean, we have put a lot of—we, being both the TARP 

Program and the Federal Reserve, have put a lot of money into 

banking institutions, primarily larger banking institutions, and the 

theory was that they’re the ones who are going to lend to the other 

commercial banks who would then lend to the business people on 

main streets throughout America and that somehow seems to have 

not connected. 

The lending is down for a lot of the reasons you’re talking about, 

the commercial real estate issues and various aspects like that 

which I understand, but what is it that we could do to make sure 

that the lending does pick up so that jobs can be created and, perhaps as an economist beyond even the Federal Reserve, what else 

should we be doing differently or considering doing in terms of 

helping with employment, by we meaning Congress and the Federal Reserve? 

31 

Mr. BERNANKE. Just to comment quickly on the TARP money, 

there were two objectives of the TARP money. One was to stabilize 

the banks and the second was to give them capital on which to 

base their lending. Unfortunately, the politics was very bad, as you 

know, and the public and the Congress have stigmatized that 

money and the banks therefore have done the best they can to pay 

it back as quickly as possible and so basically all the big banks 

have paid back their TARP money now and so it’s no longer available to provide support for credit. So that’s unfortunate. 

Another thing I would just like to mention is that ironically, one 

of the reasons that we lost so many jobs is that American firms 

were incredibly efficient in reducing their costs in the depths of the 

crisis. Many other countries were not as effective at cutting costs 

and what we found here is that we have had enormous increases 

of productivity, which bodes well for the long-run, but obviously in 

the short-run, means that there have been more job losses than 

otherwise would have been the case. 

It’s partly for that reason that it’s hard to judge how quickly jobs 

are going to come back. It may be that firms have already cut to 

the bone and they cannot get any further reductions in their costs 

and as growth comes back, as we’re seeing, they’ll be forced to 

bring back workers more quickly than we now anticipate. So that’s 

something to be looking for. 

From the Fed’s point of view, I have already mentioned that our 

jobs program consists of support of monetary policy and our supervisory policies to try to get credit flowing. From Congress’ point of 

view, there are a range of possible fiscal actions. Again, I hesitate 

to try to recommend specific ones, but I’m sure you know the menu 

of things that you could do which could create jobs. 

But, you know, unfortunately, there’s no silver bullet here. 

Mr. CASTLE. Well, I realize there’s no silver bullet. I just would 

hope that the Fed would continue to monitor very carefully the 

banking institutions— 

Mr. BERNANKE. Of course. 

Mr. CASTLE. —and what they’re doing with the money they get 

and either return of capital on the repayment of loans or the 

issuance of lending out to other banks. 

Let me ask a different question. Have Fannie Mae and Freddie 

Mac served their purpose? They are very expensive to this government at this point and the business of packaging mortgages and 

being able to sell them off could be done perhaps differently than 

that and, you know, this goes back—maybe this is a question I 

should have asked 10 years ago, I suppose. 

But the bottom line is that should we be looking at some different way of dealing with the financing of mortgage structures in 

this country or do you still believe that they serve that basic purpose and we should leave them intact, even if they have the problems they seem to have? 

Mr. BERNANKE. The Federal Reserve, I think, was one of the 

more vocal commenters on Fannie and Freddie for many years and 

we were very concerned about their stability and whether they had 

enough capital to support those large portfolios they had and it 

turned out they didn’t and we’re paying the cost of that right now. 

32 

I think we would be very cautious about supporting a return to 

the existing structure where you have this potential conflict between private shareholders and the public objectives. 

I think there are alternatives and I provided some of them in a 

speech I gave a year-and-a-half ago and would be happy to provide 

you, which would be a more stable long-term solution, including either a privatization approach with government guarantees or a 

public utility approach. Those are two options that you could consider. 

The CHAIRMAN. Time has expired. We were going to have a hearing on March 2nd on that very subject. I had to postpone it because 

there was a major hearing on the fishing industry in my district 

and I had to fish or cut bait, so I’m going fishing, but also it turned 

out we had originally thought that would be a day in which there 

had been votes the day before. It is a day in which there are not 

votes until that evening and members expressed a lot of interest 

in it. 

We will, on the next available hearing day, have a full hearing 

on exactly that topic and so, Mr. Chairman, we will be looking for 

an elaboration of those views, but we had the hearing set for 

March 2nd on precisely the topic the gentleman asked, not just 

Fannie and Freddie Mac but its interaction with the FHA and 

Ginnie Mae and the Federal Home Loan Bank and all of the various strains of housing financing. So we’ll get the rest of that answer within 10 days at the latest. 

The gentlewoman from New York, the Chair of the Small Business Committee, who will be co-presiding on Friday on a hearing 

on this recurring important topic of how do we get loans flowing 

to small businesses which she’s been focused on, the gentlewoman 

from New York. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Chairman Bernanke, 

you know, you quite well said that economic recovery is tied to jobs 

creation and we all know that job creators in our country are small 

businesses, and if you talk to any member in this panel sitting 

here, they will tell you that each one of us know some creditworthy 

borrowers who can’t access lending and and we know that we have 

put together all these tools to incentivize lending and we see today’s Wall Street Journal with that title about lending, the sharpest decline since 1942. 

And I know that your answer to me is going to be, well, that is 

not under my purview, but if we have tried all these tools and are 

not producing the success in terms of easing or getting credit flowing again for small businesses, even the loan guaranty by SBA, we 

have seen 50,000 less loans this year compared to last year and we 

increased the loan guaranty from 75 to 90, we reduced the fees 

paid by borrowers and lenders. 

So my question to you is, do you think that there is a time, given 

this economic crisis, for the Federal Government to play a more aggressive role in direct lending in a temporary basis? 

Mr. BERNANKE. First, let me just say that this is a Federal Reserve concern because we are bank regulators and I won’t go 

through the list again, but we are trying to get more information 

to try to make sure that the creditworthy borrowers are able to get 

credit and we consider it very important. 

33 

Indeed, one of the reasons that we value our bank supervisory 

role is because it provides us with that information and gives us 

that ability to understand what’s happening in that very important 

market. 

In terms of policy, I think there are a number of things that can 

be done. You mentioned the SBA. There’s a proposal to provide 

capital to small banks that make small business loans. 

Ms. VELAZQUEZ. That would be TARP money that has been stigmatized by Congress and by the people in this country. So if it 

didn’t work before, for example, when the secondary market was— 

we tried to unlock the secondary market by creating under Treasury small business lending facility and it didn’t work, they didn’t 

make one loan, if it didn’t work then, why do you think it’s going 

to work now? 

Mr. BERNANKE. You may be right. But I do know that the proposal is to try to put some distance between the TARP Program 

and this alternative program, but whether that works or not, I 

don’t know. 

But there certainly are some things that you could look at and 

we will continue to look at it from the perspective of supervision. 

Ms. VELAZQUEZ. Okay. Mr. Chairman, you mentioned your concern about real estate losses, and my question to you is if your— 

the Central Bank is currently in the process of winding down the 

TALF Facility and without the TALF, what will the Fed do in the 

event that instability returns in the CRE or small business markets? 

Mr. BERNANKE. Well, the purpose of the TALF was not really to 

solve the whole CRE problem. Its purpose was to try to get the 

commercial mortgage-backed securities market going again. 

I guess it’s a little bit of an overstatement to say that it’s going 

again, but we are getting some deals there and the spreads have 

come in and so that issue has been somewhat reduced in terms of 

the concern. 

I think the real concern at this point is that the fundamentals 

for hotels and office buildings and malls and so on are quite weak 

and that’s why the loans are going bad and really the only solution 

there is, first, to strengthen the economy overall and, second, to 

help banks deal with those problems, work them out. 

Ms. VELAZQUEZ. Mr. Chairman, today it has been reported that 

25 percent of all mortgage borrowers were underwater, 11 million 

families in this country. 

What is the Fed doing to encourage stability in the housing sector that is so tied to economic recovery in the long term? 

Mr. BERNANKE. Well, this is a little bit out of our ballpark, but 

we did work with Congress and the Treasury in developing the 

HOPE for Homeowners Program, for example, which has really not 

met expectations at this point. The structure of that program was 

to give principal reductions, principal forgiveness. So the main program right now, the HHM Program, is about affordability as opposed to principal reductions. 

So right now, there’s not a major program. I think the Treasury’s 

Mortgage Program is considering some pilot programs that would 

include principal reductions. 

34 

The CHAIRMAN. Mr. Chairman, I’m going to have to—because you 

didn’t have a lot of time, we would like the rest of that answer in 

writing. That’s a topic to which we will be returning— 

Mr. BERNANKE. Okay. 

The CHAIRMAN. —and if you want to elaborate in writing on that, 

we will ask you to do that. 

Mr. BERNANKE. All right. 

The CHAIRMAN. The gentleman from California, Mr. Royce, is 

now recognized. 

Mr. ROYCE. Thank you, Mr. Chairman, and, Mr. Bernanke, I 

watched and listened with interest to the opening statements here 

and let me explain one thing. 

Since January of 2007, since every spending bill originates in the 

House, since January of 2007, we have had Democratic majorities 

in the House and in the Senate and I was a critic, as you might 

recall, of Republican spending in 2005 and in 2006, but since 2007, 

it has been explosive and because every spending bill originates in 

the House, I think there is some confusion on the part of the public 

in terms of where the spending comes from, how it originates. 

To me, when I first reviewed the Administration proposal, something that struck me was the fact that at no point anywhere in the 

future does the Administration expect our Nation to have a balanced budget. As we look forward on this graph, at no point, according to its own numbers and presuming an economic recovery, 

do they expect this to change. 

As a matter of fact, the deficits are expected to spike dramatically in 2020. It goes up dramatically in this budget, and I think 

the failure to operate within our means is plunging our Nation 

deeper and deeper into debt, something which you see when we 

talk about the interest expense quadrupling to $840 billion by 

2020. It’s going to be the fourth largest budget item. 

So as you said, Chairman Bernanke, budget deficits, when you’re 

speaking about of this magnitude, as far as the eye can see are 

simply unsustainable. I think that eventually it occurs to those of 

us who have been a part of this process that the window to address 

this problem before it spirals out of control is closing very quickly. 

I’m afraid there is a lack of urgency here and here’s what I wanted to ask you. First, would you agree that this plan put forward 

by the Administration is not sustainable and, second, would you 

concur that in the past, the Federal Reserve has stepped forward, 

has tried to give direction to Congress very forcefully? 

And I remember with respect to Fannie Mae and Freddie Mac, 

the warnings that came from the Fed where Congress was told you 

are risking a systemic collapse of the financial system if you don’t 

do something about the overleveraging, the arbitrage that’s going 

on there, the 100:1 leverage, the fact that you have put mandates, 

Congress has put mandates on these institutions to buy subprime 

and Alt-A loans. This is a systemic risk. 

Now Congress ignored that, but the fact that you forcefully did 

that did at least alert a lot of people who otherwise wouldn’t have 

been aware of it. 

What can you do now in your capacity in order to call it—and 

this is my second question—in order to call attention to the severity of this? I say this because Mr. Hoenig with the Kansas City Fed 

35 

recently said that, ‘‘the most dire of the three options is for the Fed 

simply to print more money,’’ in this speech he gave knocking on 

the Fed’s door. That threatens hyperinflation. So what can be done 

to really get this point across? 

Thank you, Chairman Bernanke. 

Mr. BERNANKE. Well, first, let me say that we’re not going to be 

monetizing the debt, but I think everyone understands the basic 

arithmetic here, that if deficits go on at 3, 4, and 5 percent of GDP 

and that picture, if you extend it beyond 2020, would probably get 

worse because entitlement spending, aging society and so on, that 

you’ll get increasing interest payments and it will spiral out of control and the CBO will give you the same results. 

Again, it’s very easy for me to say this because I don’t have to 

grapple with these difficult problems, but it is very, very important 

for Congress and the Administration to come to some kind of program, some kind of plan that will credibly show how the United 

States Government is going to bring itself back to a sustainable position. 

Mr. ROYCE. And this plan is not it, I take it? 

Mr. BERNANKE. Assuming that those numbers are appropriate, I 

mean the forecasts are very difficult to make, but assuming they’re 

appropriate, no, it’s not. 

Mr. ROYCE. The CBO numbers, as you’ve said earlier, it just is 

not going to pencil out. 

Mr. BERNANKE. That’s right, and so it’s a very difficult challenge, 

but it’s not something that’s 10 years away because it affects the 

markets today and the longer you wait, the harder it’s going to be 

to change— 

Mr. ROYCE. Can you take the message on the road? 

The CHAIRMAN. We don’t have time for another question. We 

have votes. I think we can get two more in, and I now recognize 

the gentleman from California for 5 minutes, and then there will 

be one other, and then we can go vote. The members who want to 

vote obviously can go vote now. 

The gentleman from California. 

Mr. SHERMAN. The gentleman from California, Mr. McCarthy, 

talks about trade agreements and I would agree with him that if 

we had genuine free trade that might produce jobs, but so far our 

trade agreements have given us malignantly-unbalanced trade and 

I don’t think that helps our job situation. 

Chairman Bernanke, I’m going to lay out a few reasons that have 

been put forward why you might want an easier monetary policy, 

both short-term and long-term, and get your response. 

The first of these is that monetary easing short term can help 

stimulate the economy at zero increase to our national debt and in 

fact reduces our debt because it reduces our borrowing costs whereas we in Congress are considering fiscal stimulus which, of course, 

does increase the national debt. 

The second is that there is a stickiness in cutting certain nominal payments, particularly wages, and so if we had a modest 3, 4, 

even 5 percent inflation rate, that in effect solves that problem or 

allows for the solution of that problem without cutting a nominal 

amount. 

36 

The third is that your predecessor used to come to Congress and 

say that the CPI was overstating the inflation rate. So if you’re targeting for 2 percent inflation rate as measured by the CPI, you 

were really targeting for a 1 percent inflation rate, as he thought 

it ought to be calculated. 

And then, finally, you have the recent IMF economist report saying that central bankers ought to aim for a higher inflation rate so 

that in bad times they had more monetary tools. When you start 

with low interest rate and low inflation and then you try to stimulate the economy, you can’t go below zero. 

So the first question is, are you currently pedal to the metal? I 

see the statements coming out that talk about increasing the discount rate and those very statements can have a slight effect, more 

than a slight effect of reducing monetary easing, taking your—the 

accelerators—I realize a lot of talk about accelerators in the other 

room here, but easing up on the accelerator a bit and then your 

discussion here of the clear statement you’re not going to monetize 

the debt also is a little less than absolute pedal to the metal. 

So short term, are you or should you be pedal to the metal? 

Longer term, should we be aiming for a somewhat higher inflation 

rate, given the report of the IMF? 

Mr. BERNANKE. Well, we were clear that the higher discount rate 

was not intended to tighten monetary policy and, in fact, if you 

look at the market, there is no expectation. It did not engender any 

expected increase in monetary tightness. So that was successful in 

that regard. 

We do have a very stimulative monetary policy, as you know. We 

will continue to evaluate that. It’s a committee decision. Certainly, 

if the recovery begins to falter, we’ll have to look at that very seriously. 

With respect to the inflation rate, I understand the argument 

and it’s not without its appeal, but it carries certain risks obviously. If the Federal Reserve says we’re going to raise inflation to 

4 percent, how do we know that later it won’t go to 5 or 6 or 7 percent? 

Mr. SHERMAN. Well— 

Mr. BERNANKE. It took a long time to get inflation down to 2 percent. 

Mr. SHERMAN. Mr. Chairman, I’m going to try to squeeze in one 

more question. Obviously, if you say two, that’s a slippery step toward four. If you say four, that’s a slippery slope toward six. 

The second is the role of the credit unions. We’re in a circumstance where we have taken taxpayer money and injected it 

into the capital of the banks, but as a matter of the Federal Government, we have prohibited—the Federal Government has prohibited credit unions from raising alternative capital in the private 

market, not taxpayer money. 

We are begging the banks to make loans, particularly under 

$250,000. The credit unions are beginning for the right to make 

loans of under $250,000 and not count it against their limit on 

business lending. They’re telling me that they could make another 

$10 billion in small business loans, create 100,000 jobs, at no cost 

to the Federal Treasury at all, and with high capital standards and 

37 

even higher capital standards if we let them raise alternative capital. 

Should we be relying more on credit unions, giving them these 

tools to get us out of this recession, not that this one thing would 

get us out? 

Mr. BERNANKE. Well, as you know, credit unions are tax-favored 

because they have certain restrictions on their activities and the 

banks would complain obviously that if they’re allowed to do everything banks can do, why are they tax-favored? So I think that’s the 

trade-off that Congress has to — 

The CHAIRMAN. The gentleman’s time has expired. There’s only 

time for the witness. If members are going to ask complicated questions with 10 or 15 seconds, don’t expect a lot of back and forth. 

Does the witness wish to complete his answer? 

Mr. BERNANKE. No. 

The CHAIRMAN. It’s not a mandate. 

Mr. BERNANKE. This is the issue about the tax treatment of credit unions. 

The CHAIRMAN. The gentleman from Illinois, Mr. Manzullo, will 

be our last witness. We will break. We will come back very promptly. The Chairman has agreed to stay till 2 o’clock. We can get some 

more questions in. 

The gentleman from Illinois. 

Mr. MANZULLO. Thank you, Mr. Chairman. Chairman Bernanke, 

the district I represent has somewhere between 1,500 and 2,000 

factories, it’s highly industrialized, and the Institute for Supply 

Management is up now, above 50, for the 6th month, 7th month 

in a row. 

As I talk to my manufacturers, it’s the same choke point. I talk 

to the regulators. They say that the regulatory standards have not 

been tightened. I talk to the banks. The banks say they can’t lend 

because of the regulators. 

If we want to create jobs, as stated in NAM’s new study with the 

Milken Institute, John Ingram, the president of NAM, said, ‘‘The 

new report makes a powerful case that manufacturing can lead the 

U.S. into a renewed era of growth. It’s critical that we accelerate 

our economic recovery and create jobs for the benefit of manufacturers.’’ 

I have manufacturers that are ready, willing, and able to hire 

employees. They have orders, substantial orders. They can’t get 

capital in order to make their new product, and in some cases, the 

buyers are going overseas to buy the product. 

We have a choke point in credit. It’s a super, super, super crisis. 

These are existing borrowers. They are people with very, very low 

debt to equity ratio. They are prime borrowers, many in the food 

processing industry, which has seen an uptick in this economy, 

begging for credit, and they come to me and ask, why has the government created more and more programs out there when all we 

need is a simple operating loan or equipment loan as we had before? 

What is the answer? What can I tell them, besides we have been 

invited to come out to our district and talk to them personally and 

individually and perhaps help the banks out? 

38 

Mr. BERNANKE. Well, part of the issue here is, of course, there 

is more than one regulator and next time, please ask who the regulator is. If it’s the Federal Reserve, I would like to hear from you 

and I’ll be happy to talk to you about it. 

We at the Federal Reserve understand that, and we should all 

understand, we don’t want banks to make bad loans. If a borrower 

is not financially able to manage the loan, we don’t want to make 

that loan, but you’re talking about situations where you say the 

borrower is creditworthy. In that situation, we want the bank to 

make the loan. 

I have answered a number of questions about steps we have 

taken to gather more information, to have meetings and to train 

our examiners to focus on this exact point. So we are very, very focused on trying to keep that in balance. 

Mr. MANZULLO. I know you are, Mr. Chairman. The problem is 

that it’s simply not getting through and it’s not your fault, and I 

don’t think it’s the fault of the regulators there either because everybody is skittish because of the economy, but the problem is 

we’re at the beginning of a real recovery, not make-up jobs for the 

dumb Stimulus Bill, not creating government jobs, but the creation 

of real jobs of people in manufacturing going back to work and exporting and many of these are highly-paid union jobs. They just 

can’t get the money and they’re creditworthy. 

It doesn’t make sense for us to have all this debt, all these programs, people ready to go, they’re creditworthy, but they can’t get 

the money in order to make the product to create the jobs. 

Mr. BERNANKE. I would be happy to hear more details and try 

to figure out what’s going on because we are working very hard to 

make sure that’s not the case in banks that we supervise. 

Mr. MANZULLO. Is it possible, Mr. Chairman, that you could meet 

personally with some of these people? 

Mr. BERNANKE. Certainly. 

Mr. MANZULLO. I’ll take you up on that. Thank you, sir. 

The CHAIRMAN. The committee will be in recess. I intend to come 

back as soon as I can. It’s the third vote. It shouldn’t be too long. 

Any member who wants to ask questions, if they’re here, we’ll call 

on them. 

[recess] 

The CHAIRMAN. The committee will reconvene, and the gentleman from New York, Mr. Meeks, will be the next questioner. 

And the committee will be in order. Someone please shut the door. 

The gentleman from New York. 

Mr. MEEKS. Thank you, Mr. Chairman. It is good to see you, 

Chairman Bernanke, and congratulations on your reappointment, 

and thank you for your service. 

My question—and I’m trying to focus more around real estate 

and the housing industry, I know some of which you deal with and 

some of which you do not based upon some of the questions, but 

it is to me—most Americans, it is their largest investment that 

they will ever make—is in their home. 

And in listening to some of your testimony earlier, and I know 

that by, I guess, March 31st, you are scheduled to end the Fed’s 

program to buy more mortgage-backed securities from Fannie Mae 

and Freddie Mac-backed debt, and I guess there is pressure to 

39 

tighten up. And the last time the tightening took place, I think it 

was about 33 months ago, after the recession began and foreclosure 

rates were 4 times lower than they currently are. And there are 

signs, from what you are saying now, of growth. 

But my first question is, is it a little premature to consider tightening today because—will that kill the incipient housing recovery 

by tightening today and then hurting the housing market? 

Mr. BERNANKE. We will still continue to hold $1.25 trillion of 

mortgage-backed securities, plus additional agency debt, and we 

think that is going to continue to keep mortgage rates down. There 

are a lot of differences of view about how much mortgage rates 

might go up after the end of this program. So far, we haven’t seen 

much, so I think we need to look and see if there is a big reaction, 

if it does affect the housing market. It may not be a significant reaction, so we are going to continue to watch that. 

Mr. MEEKS. We have seen that, for example, also—and I think 

especially in California, to a degree in New York also, and other 

places—I have talked quite frankly to some friends of mine. 

But in California where they have no recourse laws, we find that 

where banks are unwilling to write down the principal—and I 

know you talked about the HOPE program and writing down, but 

it seems now banks are not willing to write down principal. A lot 

of it was simply walking away. And then that is causing a difficulty 

on the banks and especially the small and community banks, and 

thus we heard about banks that may be closing as a result, especially the smaller community banks. 

So I was wondering if there are any steps that the government, 

the Federal Government, can take or the Fed can take to help 

banks—or to encourage banks, I should say, to write down principal on homes that are now underwater, which is to me one of the 

biggest drags on the economy overall also. 

Mr. BERNANKE. We found in our research that the combination 

of being underwater and then having loss of income due to loss of 

a job and so on—those two things are very high predictors of default. So right now, the main programs for mortgage restructuring 

are the Treasury’s programs under the TARP, the so-called HAMP 

program, which is an affordability program. My understanding is 

that they are going to be looking at alternative pilot programs that 

will take different approaches. And of course we also have the 

HOPE for Homeowners, which has the principal write-down element. 

So I think this is really an area for Congress, but clearly there 

is a lot of interest in the Administration and Congress to reduce 

the number of foreclosures, which remains very, very high. 

Mr. MEEKS. Yes, because what is happening is a lot of individuals that I know, homeowners in my district who are struggling to 

pay their mortgage, they are actually paying it, but they are underwater. And then they go back to the banks to have it refinanced 

and try—but then they are so far underwater, nobody will give 

them a loan, so now they are nervous and some of them have interest rates that can reset high and they won’t be able to afford them. 

And then we get back in—just as you talk about moving in the 

right direction, then we get back into a foreclosure problem where 

more and more people are going into foreclosure. And I think that 

40 

if we could do something earlier on to prevent that, that would be, 

I think, a smarter way to go. 

Mr. BERNANKE. Well last year, in part because of our program 

of buying MBS and bringing mortgage rates down, there were millions and millions of refinances, which got people into better shape. 

And I believe that Fannie and Freddie will refinance some people 

who are underwater if they meet other criteria. 

The CHAIRMAN. The gentlewoman from Illinois. 

Mrs. BIGGERT. Thank you, Mr. Chairman, and thank you for 

being here, Chairman Bernanke. 

You have heard it several times today, but small businesses can’t 

get credit, and obviously they need it. And I understand you are 

not the only regulator, but one of the issues which I would appreciate your view on is that the community banks are being asked 

to reassess commercial real estate loans, devalue then because of 

FASB’s mark-to-market accounting rules, and subsequently can’t 

get the credit. Even though these are performing loans; they are 

not in any problem. 

But the result is that commercial loans are being called in, lines 

of credit are being cut off, and creditworthy small businesses can’t 

get credit. Do we need to reassess, expand, and—or do something 

with FASB’s accounting rules again? Regulators’ implemented implementation doesn’t seem to make much sense. 

Mr. BERNANKE. Congresswoman, we and the other regulators 

just recently issued a guidance for banks on commercial real estate 

which explains how to restructure a loan which is in trouble, 

makes the point that a loan which is paying, but has a reduced collateral value should not be considered impaired under most circumstances. And it has been well regarded because the guidance 

provided a number of concrete examples about how to deal with 

troubled loans. So we have made a very concerted effort, I think 

a well-regarded effort, to help banks deal with the CRE problems. 

Now if the loans are bad, then clearly there is going to have to 

be some write-down. 

Mrs. BIGGERT. This is where the loans are performing. The customer is paying the loan off, but they say ‘‘Well, in the next year, 

it probably won’t be good, so you should revalue it now.’’ This has 

happened in my community. And then on top of having the FDIC 

coming in with this assessment in December, they can’t work with 

it with the capital that— 

Mr. BERNANKE. Again, we are not requiring banks to write down 

loans just because the collateral value has declined. 

Mrs. BIGGERT. Okay. Then you said in response to Mr. Castle’s 

question, there is a memo of things Congress can do for job creation, and my constituents need jobs. Can you give me three examples of the menu that you talked about? 

Mr. BERNANKE. Well, I think Members would disagree, but just 

to give you three examples, you could provide funding for State and 

local or infrastructure type spending, which would have some job 

impact. Other Members might prefer tax cuts for corporations to 

make them more competitive. A third possibility would be to adopt 

one of these programs to try to encourage small banks to make 

small business loans, like the one that the Treasury has proposed. 

So those are three very different types of programs, and I know difVerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE
41 

ferent Members have different preferences, but there are many different things that you could consider. 

Mrs. BIGGERT. Okay. And one of them might be trade agreements? 

Mr. BERNANKE. Of course, details matter, but I think in general, 

open trade creates a lot of opportunities and there certainly are a 

lot of firms in the United States that rely heavily on exports. And 

indeed, manufacturing has been leading the recovery so far, and 

part of that is because they have been able to take advantage of 

export markets. 

Mrs. BIGGERT. Then lastly, when implementing the so-called 

Volcker Rule that has been recently proposed by the Administration which would seek to limit, or in some cases eliminate, proprietary trading at financial institutions, would this reduce liquidity, 

would it add to the volatility in the capital markets, or is it a good 

thing? 

Mr. BERNANKE. First of all, we all agree that we don’t want 

banks to take excessive risks when they have a safety net from the 

government. So the question is, then, how do you control those 

risks? 

The Volcker Rule might be appropriate. You have to be careful 

that you don’t inadvertently prevent good hedging, which actually 

reduces risks, or that you don’t prevent market making, which is 

good for liquidity. One possibility is that—if you were to go in this 

direction would be to give some discretion to the supervisors to decide whether a set of activities is so risky or complex that the firm 

doesn’t have the risk management capacity or the managerial capacity to deal with it and then give the supervisors the authority 

to ban that activity. So there might be ways to do it using supervisors. 

The CHAIRMAN. The gentlewoman’s time has expired. 

Mrs. BIGGERT. Thank you. 

The CHAIRMAN. I recognize the gentleman from Kansas and ask 

for 10 seconds to say that the amendment to the House bill embodies precisely the approach that the Chairman just recommended 

with regard to proprietary trading, and it is in our bill. 

The gentleman from Kansas. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. 

And Mr. Chairman, the economist Mark Zandi testified yesterday 

that policy uncertainty is playing a role in the business community’s lack of confidence. 

It will be 2 years next month since the financial crisis started in 

full with the failure of Bear Stearns, and Republicans and Democrats have been in agreement of the key principles of financial reg 

reform, including increased consumer and investor protections, 

strong oversight of derivatives and executive compensation, new 

dissolution of authority to safely unwind the next AIG while protecting tax payers, stricter capital and leverage standards, and a 

financial reg structure that monitors systemic risk. The House recently passed a strong bill that accomplished all of these principles, 

in my judgment, that the Senate is now considering. And we need 

to eventually reform housing finance after considering the best 

ideas and the ways to do that. 

42 

Mr. Chairman, will uncertainty increase or decrease in the business community if Congress delays these important reforms, or 

should Congress enact these reforms into law this year, now, so 

businesses know what the rules of the road will be? Won’t that encourage investment and hiring in your judgment? 

Mr. BERNANKE. Clearly, Congress has to take the time it needs 

to deliberate, but I agree with your basic premise that if there is 

excessive delay, it will create uncertainty about what the regulations are going to be, how much capital will be required, and so on, 

and that makes banks more reluctant to lend, for example. 

Mr. MOORE OF KANSAS. Thank you, and one last thing. My colleague from Illinois, Mrs. Biggert, just asked you a question about 

commercial real estate, and I want just a little different, I think, 

than her question. I am concerned about the commercial real estate 

market—I think all of us are—and what impact that is going to 

have on the economic recovery. 

The Congressional Oversight Panel for TARP issued a report this 

month expressing concern that a wave of commercial real estate 

loan losses over the next 4 years could jeopardize the stability of 

many banks, especially community banks, which I think really are 

not responsible for what we have seen in this whole situation. In 

the report, they say, ‘‘A significant wave of commercial mortgage 

defaults would trigger economic damage that could touch the lives 

of nearly every American.’’ 

Mr. Chairman, I heard your response to Mrs. Biggert. Is there 

anything else that you can suggest or that Congress should look at 

to minimize the negative impacts of the commercial real estate crisis? 

Mr. BERNANKE. I think one thing that would help would be just 

the general improvement in the economy, and that is one reason 

why the Federal Reserve has been using accommodative policies. 

And some of the ideas you have just raised about reducing uncertainty and trying to stimulate growth, those are the kinds of things 

that would lead back to having people go to the mall or having people be employed and housed in an office building. So that is one, 

obviously, direct way. I don’t have another good suggestion for you, 

but I would be happy to talk to you about it. 

Mr. MOORE OF KANSAS. Thank you so much, Mr. Chairman. I 

yield back my time. 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you. 

Chairman Bernanke, I want to follow up on a question that one 

of my colleagues had that I am not sure I heard a precise answer 

to. I think the question was a variant of, what is the level of desirable or necessary leverage within the banking system on a macroeconomic level to hopefully ensure we don’t repeat what we have 

just been through? 

Clearly, there are those within Congress who believe in artificial 

limits to the size of financial institutions, who believe that Federal 

regulators should have power to prohibit certain credit offerings. 

But some of us believe that hopefully out there is a proper application of risk-based application of capital and liquidity standards that 

would hopefully, perhaps, lead to a more prudent leveraging within 

our economy. 

43 

But the question is, from your perspective, on a macroeconomic 

level, what is the amount of leverage the system can handle a cyclical downturn? 

Mr. BERNANKE. That is not an easy question to answer. 

Mr. HENSARLING. That is why I asked you. 

Mr. BERNANKE. It is not a single number, because as you mentioned in your question, first of all, it is risk-weighted. It depends 

on the mix of assets. As you know, we currently have the 8 percent 

requirement under Basel II. I think we want to, first of all, increase the risk weights so that there is more protection against 

risky assets, number one. Second, we want to make sure the capital is of higher quality that is more common equity and less subordinated debt instruments, for example. And third— 

Mr. HENSARLING. Mr. Chairman, if I could. I understand that, 

but does the question defy an answer? Is it possible to quantify on 

a macroeconomic basis? 

Mr. BERNANKE. I’m sorry. It is certainly possible, but we are currently engaged in a very elaborate process with the Basel committee and other colleagues around the world to try and determine 

that number. We don’t have a single number yet that we can give 

you. 

Mr. HENSARLING. And Mr. Chairman, when might we expect that 

number from on high? 

Mr. BERNANKE. The objective is to have it by the end of this year. 

Mr. HENSARLING. Thank you. Mr. Chairman, you answered several questions. Clearly, you believe, as do many others, that the 

Nation is on an unsustainable fiscal path, and I think you have described quite eloquently, as have other prominent economists, the 

dire consequences associated with that. 

I don’t think I quite have the lyrics right, but I’m reminded of 

a country and western song that says something along the lines of, 

everybody wants to go to heaven, they just don’t want to go now. 

So we have so many people who claim they want to do something 

about this problem, but with one exception offered by Congressman 

Ryan of Wisconsin, I haven’t seen any plans put on the table. 

Taking default off the table, because it is totally unacceptable, 

assuming for the moment we do not achieve any level of spending 

discipline we haven’t been able to achieve in previous decades, I’m 

under the impression we cannot grow our way out. I don’t have the 

number at my fingertips. I think I have seen at least some studies 

suggesting we would have to have double digit economic growth for 

the next 3 decades to grow our way out. Can we grow our way out 

of this problem? 

Mr. BERNANKE. I don’t think so, not in the medium term. 

Mr. HENSARLING. Okay. If we can’t grow our way out, you have 

said repeatedly you do not intend to monetize the debt, although 

there are a number of people within our economy who think you 

are already doing that. We will leave that subject to a different 

time and place. 

That unfortunately leaves, under my hypothetical, tax increases. 

I have seen studies that show that if we only try to solve this problem on the tax side, that number one, just over the next 10 years 

of the President’s budget window, we would have to increase inVerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE
44 

come taxes roughly 60 percent. Have you seen similar studies? Has 

the Fed researched this? 

Mr. BERNANKE. That sounds like the right order of magnitude. 

Mr. HENSARLING. Okay, and my children, who are young, according to a CBO analysis, we would see tax brackets go—10 would 

have to go to the 25 percent bracket, 25 to 63, 35 percent bracket 

to 88. It is fairly dire. So have you modeled what would happen to 

the economy if we indeed had tax increases of this magnitude? 

Mr. BERNANKE. I don’t know the exact numbers, as I said, and 

obviously forecasting is difficult, so I don’t want to put too much 

weight on any single number. But I think you and I would agree, 

I think most people would agree, that a big increase in marginal 

tax rates is going to be counterproductive from a growth perspective. 

Mr. HENSARLING. I hope I can slip this in, in the seconds I have 

left. Recently Alan Meltzer wrote an op-ed in the Wall Street Journal, and my guess is that you are familiar with it, that asked the 

question how much one might have to pay on the interest on the 

bank reserves. I’m not sure you have—I haven’t seen you answer 

that question publicly and I want to give you that opportunity. 

Mr. BERNANKE. We think— 

The CHAIRMAN. We are into the deficit now, so if you can give 

a brief answer, otherwise it will have to be in writing. 

Mr. BERNANKE. We think that the interest rate we pay on reserves will bring along with it the Federal funds rate within tens 

of basis points. Not a tremendous difference. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

The CHAIRMAN. You can elaborate in writing. 

The gentleman from Texas, Mr. Hinojosa. 

Mr. HINOJOSA. Thank you, Mr. Chairman. Chairman Bernanke, 

welcome, and thank you for coming to visit with us and give us an 

update. 

I represent the 15th Congressional District of Texas, and I refer 

to it as deep south Texas. We are along the Texas-Mexico border, 

and our county is about 750,000 people and it has the highest concentration of—about 89 percent Hispanics. Hidalgo County is one 

of the poorest. 

I’m going to preface my question by saying our area was plagued 

by a double digit unemployment for about 35 years before I came 

to Congress. And to give you an idea, in December of 1990, the unemployment rate was much higher than Detroit, Michigan, is 

today. It was 29 percent. In January of 1996, when I came to Congress, it was 24 percent. The unemployment rate dropped over the 

14 years that I have been in Congress. In April 2008, it was 6 percent. So even though we have seen an improvement, and today 

even though it is 11 percent, it is very close to the national average. 

So what do we do to try to bring it back down to 6 percent when 

the banks tell me—the community banks and the large banks say 

that they are lending money, but there is no proof that there is because so many businesses have closed, so many signs for rent, 

buildings that are now empty and spaces that are empty? Then we 

get the credit banks representatives coming to visit me and say 

that they want us to support their mission statement to expand it 

45 

so that they can lend money to small and medium-sized businesses. 

And I’m torn between supporting that idea. 

I heard the President say just recently that there was going to 

be $20 billion from the TARP money being repaid to us in Federal 

Government available to make money available to the small and 

medium businesses. Tell me, what is the answer for regions like 

mine, very poor, very large, and that we can’t seem to have access 

to capital? 

Mr. BERNANKE. I know you are asking the questions, but I would 

like to hear some time how you got the unemployment rate down 

the way you described it. 

Again, I think if I’m not mistaken, the Treasury is proposing to 

provide capital to CDFIs, Community Development Financial Institutions, which are banks or other institutions, which make more 

than 60 percent of their loans to low- and moderate-income communities. I think that is a very constructive thing to do. So that is the 

kind of vehicle that could bring capital into a lower-income community using TARP money, essentially. 

Mr. HINOJOSA. Would you support the idea that our chairman of 

the Small Business Committee, Nydia Velazquez, has proposed, 

and that is that there be more direct loans instead of being bank 

loans through the Small Business Administration? 

Mr. BERNANKE. I think that is really up for Congress to decide. 

I think you need to investigate. Her view, she said earlier today, 

was that going through the banks would not work because they 

wouldn’t take the TARP money. Whether that is true or not, I don’t 

know. So I’m sorry, I don’t have a recommendation, and I think 

Congress is going to have to look at those two options. 

Mr. HINOJOSA. One of the sectors that helped us bring the unemployment down was the housing, the construction of both retail 

businesses and residential. What is your projection for things to 

turn around for that sector so that they can help us bring that unemployment back down to the 6 percent that I have a goal to do? 

Mr. BERNANKE. Unfortunately, the construction was probably 

overinflated for a period, and now it is quite weak. I wouldn’t conjecture to see a big return of construction, either of residential or 

commercial, for some time. We still have a lot of unsold homes, for 

example, a lot of high vacancy rates, and also high vacancy rates 

in commercial real estate, so there is not, at this point, a lot of demand for new construction. 

Mr. HINOJOSA. My last question— 

The CHAIRMAN. No, your time has expired, I’m sorry. 

Mr. HINOJOSA. Thank you Mr. Chairman. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. MCHENRY. That is on how that affects— 

Mr. BERNANKE. The different mechanisms to the extent that the 

fiscal thrust is expansionary, it creates some additional growth 

that would potentially affect Federal Reserve policy, except we are 

at the zero bounds, so we are not responding too much there. 

One risk that I have described is that if there is a long-term loss 

of confidence in the long-term capacity of the government to balance its affairs, that could raise interest rates today, which would 

have a drag effect on the economy. 

46 

Another possibility, which I think is relatively unlikely, but is 

certainly possible, is that if there is a loss of confidence again in 

the government’s ability to achieve fiscal stability, that the dollar 

could decline, which would have potentially inflationary impact on 

the economy. 

There are a number of different channels through which large 

deficits or unsustainable deficits could affect the current economy. 

Mr. MCHENRY. I have heard various economists say that a deficit 

of 3 percent of GDP over the long time is sustainable and anything 

beyond that is unsustainable. Is that fairly accurate? 

Mr. BERNANKE. That is roughly right. The idea here is if you 

have a growing economy, you can run deficits and still maintain a 

flat ratio of debt to GDP, which is a sustainable situation. 

Normally, that would involve having what is called a primary 

deficit, that is deficit excluding interest payments from about zero. 

Normally, that would involve about 2.5 percent to 3 percent of a 

total deficit, including interest payments. 

Mr. MCHENRY. Beyond that, it could have a destabilizing effect 

on the dollar and obviously interest rates on top of that? 

Mr. BERNANKE. If protracted. I mean for one year, it does not 

necessarily have a big impact. If it looks to be going on indefinitely, 

certainly. 

Mr. MCHENRY. In terms of liquidity in the system right now, are 

we still facing deflationary pressures? Is that a part of your consideration in the months ahead? 

Mr. BERNANKE. Right now, we do not see deflation as an imminent risk, and neither do the financial markets, which seem to 

have inflation expectations of around 2 percent or a little higher. 

There are scenarios in which they would become more of a concern. 

Right now, we do not see that as an imminent risk. 

Mr. MCHENRY. In terms of tax rates and financial regulatory 

policies and those larger issues, could we see a scenario where between high corporate and personal income taxes that we have an 

outflow of capital to lower tax regimes around the world, is this a 

concern for our long-term growth, price stability, and full employment? 

Mr. BERNANKE. Certainly. In some sense, the cost of large deficits is that tax rates in the future are likely to be somewhat higher. 

As I was talking to Mr. Hensarling, that can be bad for growth in 

lots of different ways. 

One possibility is that it makes the country uncompetitive, relative to other countries in terms of their tax costs of production, 

although there are exchange rates and other factors that would affect that. 

Clearly, very high tax rates tend to make a country less productive. 

Mr. MCHENRY. Over a 25- to 50-year horizon, you said over the 

medium term, we cannot grow our way out of this structural budget deficit, to Mr. Hensarling’s point, over the long term, is that 

going to be possible or is it going to require a period of spending? 

Mr. BERNANKE. Nobody really knows for sure, I want to emphasize. We are an aging society. The fraction of the population that 

is working is going to be going down for a long time, and at the 

47 

same time, the number of people who are going to be requiring 

Medicare and other types of assistance is going to be rising. 

Barring very sharp changes in our growth rate in productivity, 

I do not think that would be very likely; no. 

Mr. MCHENRY. Thank you. 

The CHAIRMAN. The gentleman from Texas. Let me say we will 

be able to accommodate all the members here now. The gentleman 

from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. I thank Chairman 

Bernanke for appearing and congratulations again on your being 

reappointed. 

Chairman Bernanke, I would like to make a comment, and I may 

want you to say a word, but I am not sure that I do until I finish. 

Sometimes, I have to wait until I finish to know what I am going 

to say. 

When we talk about the TARP, we sometimes confuse it with 

let’s just use the terms that the public can relate to, the bank bailout, we sometimes confuse it with a stimulus. The bank bailout 

was an initiative proposed under the Bush Administration. My belief is that the President himself supported this initiative and in 

fact made public comments in support of it. 

When it was finally passed, because it did not pass on the first 

vote, but when it passed on its second vote, it was a bipartisan passage. It was supported by 91 Republicans. 

I think sometimes this is lost in the translation, that 91 Republicans supported it. As a matter of fact, we had about 10 Republicans, friends of mine, and this is not to demean them, I just want 

to get the facts straight, 10 friends of mine who sit on this very 

committee supported it. This is not in any way demeaning, just to 

have it as a statement of fact. 

What I would like to do, Mr. Chairman, with your consent and 

permission and without any objection, is submit the final vote results, the roll call vote, if you will, on this piece of legislation. May 

I submit this for the record? 

The CHAIRMAN. So ordered, without objection. 

Mr. GREEN. Thank you very much. A simple ‘‘yes’’ or ‘‘no’’ will 

suffice. Is what I stated correct saving the vote count, I do not expect you to know this, but the fact that it was a bipartisan effort 

and the TARP is separate and apart from what we call the ‘‘stimulus?’’ 

Mr. BERNANKE. Yes. 

Mr. GREEN. Thank you. With reference to trade, I think we do 

ourselves a disservice when we discredit legitimate positions that 

are made by what we call ‘‘the other side.’’ I think there is some 

good in trade. 

In fact, I believe we ought to have trade. ‘‘Free trade’’ is a term 

of art. ‘‘Fair trade’’ is a term of art. The question becomes for some 

how will the trade impact not only the exports from our country 

but also imports in that sometimes jobs will occur in countries 

wherein you can get workers for pennies a day, whereas in this 

country, it is going to cost you dollars per day to get a worker, and 

there seems to be the notion that this can influence where the businesses will locate jobs and hence, by locating them in places where 

48 

they have pennies per day, they are in fact in a sense taking the 

jobs from this country, from the United States. 

That is the concern. I think we have to try to find a balance that 

accommodates everyone when it comes to this concern. I respect 

the fact that we can import and export and these exports will create jobs here in this country. 

Is this a fair statement to say there is a balance we have to try 

to strike? 

Mr. BERNANKE. The point that you are making, which is correct, 

is that trade does not necessarily benefit everybody. It might make 

some people better off, and in particular, people with low skills who 

are competing implicitly with low-skilled workers around the world 

might be made worse off. 

Some people have attributed some part, perhaps not a large part, 

but some part of increased inequality to increasing trade. That is 

a concern. 

I think most economists would say the right solution is not to 

block trade because trade creates a lot of wealth, but rather to find 

other ways to help low-income people, low-skilled people acquire 

skills or otherwise make themselves better off. 

Mr. GREEN. Would you agree that one of the things that we 

might do is try to help those countries where they have people 

working for pennies per day that may not have labor standards 

that people of goodwill would agree with? We might also try to influence what they do if we trade with them. 

It would not cause me as a person, a human being, to feel good 

about an effort that would cause persons to work for pennies a day 

and allow me to benefit when they are working under conditions 

that are less than tolerable by my standards. 

Mr. BERNANKE. It is a very hard question. Certainly, you want 

to have humane conditions. Low income is a fact of life in poor 

countries and sometimes trade is an opportunity to better yourself. 

Mr. GREEN. I agree. We have a balancing test with this as well. 

I see that my time is up. I did not get to the real question I had 

for you, but I will get to you next time. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Minnesota, and as he begins, I would ask the gentleman from Idaho to come and assume 

the Chair so I can go talk about fishing and we will be able to take 

the last three members. 

I thank the Chairman for his indulgence and I also want to 

thank the members. I think it has been a thoughtful and civil hearing, which I appreciate being able to do. 

Mr. PAULSEN. Thank you, Mr. Chairman. Chairman Bernanke, 

we have had a lot of discussion earlier and I was gone for part of 

it, I know we discussed mostly about the deficit, the national debt 

and the effect of long-term borrowing in terms of the Federal Reserve’s policies. 

Let me ask this, some have made claims that taking steps to put 

our fiscal house in order, to right ourselves right now, could itself 

be stimulative in some effect. 

What impact would implementing policies that are more focused 

on the long term have on the short-term dynamic, if we just 

thought more about the long term going forward thinking as opVerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE
49 

posed to dealing with the short-term challenges that we do face 

right now with our economy? 

Mr. BERNANKE. It is possible that a persuasive, creditable longterm plan for fiscal balance would be stimulative today by lowering 

interest rates and perhaps increasing investment because people 

would not be worried about high taxes, for example. 

It is certainly possible a good plan would actually pay off in the 

present, not just in the future. 

Mr. PAULSEN. Let me ask you this, does the large budget deficit 

right now, does it really impair the Fed’s ability to either stabilize 

prices or ensure long-term growth? 

Mr. BERNANKE. No, I do not think so. I think we do have to recognize, I want to be clear, given the depth of the recession, the fact 

that revenues have fallen from the normal 19 percent of GDP to 

15 percent, given the payments to the unemployed and so on that 

are obviously important during a deep recession, it is not surprising that we have a deficit this year. I do not think any reasonable policy could eliminate that deficit this year. 

The answer to your question is no, I do not think so, but clearly, 

a long-term unsustainable policy would have bad consequences. 

Mr. PAULSEN. How does the large Federal balance sheet that you 

opened up a little bit with your testimony and talked about a little 

earlier impede your ability to set interest rates? 

Mr. BERNANKE. Are you talking about the Federal Reserve’s balance sheet? 

Mr. PAULSEN. Correct. 

Mr. BERNANKE. If we had no other tools, it would create a problem because with so many reserves in the system, such a large supply of reserves, you would not be able to raise the Federal funds 

rate, which is the price of reserves. 

However, as I described in my testimony, we have a number of 

tools, including interest on reserves and various ways of draining 

reserves that will allow us to raise interest rates at the appropriate 

time, notwithstanding the fact that we have the large balance 

sheet. 

Mr. PAULSEN. How long do you think it will be before the Federal 

funds rate becomes the benchmark again for overnight lending, and 

how tested are these tools that you have to employ or you plan on 

employing in the near future, I guess? 

Mr. BERNANKE. None of them have been completely tested. We 

have not been in this situation before. On the other hand, we have 

a belts-and-suspenders kind of situation here. We think the interest rate on reserves by itself could be used to tighten policy and 

there are good economic reasons to think so. Beyond that, we have 

these additional tools that would allow us to drain reserves, just 

to make doubly sure. 

In fact, beyond that, although we do not anticipate selling any 

of the assets on our balance sheet in the near term, if we absolutely had to, that would be another way to reduce the size of the 

balance sheet. 

Mr. PAULSEN. Okay. Thank you, Mr. Chairman. 

Mr. MINNICK. [presiding] The Chair recognizes the gentleman 

from North Carolina for 5 minutes. 

50 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. My 

questions are also about how to encourage lending. I am sure as 

a scholar of the Great Depression, you know the Reconstruction Finance Corporation did not start out with a direct lending program. 

They only resorted to that when they could not persuade banks 

to lend, when they tried to lend to banks for the banks to lend in 

turn, that did not work. They tried to buy preferred stock in banks 

so banks could have additional capital. That did not work. 

It was only then that the Reconstruction Finance Corporation 

began direct lending, and 20 years later, when the program was 

ratcheted down, it had turned a slight profit. It does appear it is 

possible to lend even in a bad economy with proper underwriting. 

I am sure I am in a distinct minority in this committee in thinking that it was probably a mistake to—we were probably better off 

having mark-to-market rules for accounting, that it is better to 

know what is on a bank’s books, to have an accurate idea of the 

assets and of the liabilities. 

I was also skeptical a year ago about the stress test, that would 

be seen as a rigorous test, a real measure of the sovereignty of 

banks. I have been surprised at the amount of capital that has 

gone into those 19 banks. 

A couple of questions. To what extent was that the result of investors getting confidence to cause the stress test, because they did 

feel reassured their books were accurate, and to what extent was 

that because investors became convinced that the government was 

not going to allow any of those 19 institutions to fail, that they 

were too-big-to-fail? 

Second, with respect to community and regional banks, it does 

not appear that capital is flowing into community and regional 

banks in the same way they flowed into those 19 bigger banks. 

Do you agree it is important they have additional capital? Are 

they trying to acquire it? Is that because of the skepticism about 

what is really on their books? Do they have accurate books or are 

their books being cooked somewhat? 

To what extent because they are too small to fail and investors 

know they may in fact lose their entire investment in a way they 

cannot possibly lose their entire investment at the bigger banks? 

Mr. BERNANKE. It is my belief, first of all, on the stress test, I 

think that the revelation of information, the fact that the government showed what the underlying evaluations were and what the 

potential credit risks were, that cleared up a lot of the uncertainty 

in the market and that is why so much capital flowed in. 

I think the alternative that it was a ‘‘too-big-to-fail’’ issue would 

not work because there was not really a change in that respect, 

and in any case, when a ‘‘too-big-to-fail’’ institution comes under 

stress, the shareholders can definitely lose money, as they did in 

many of these big banks. 

I do think the stress test was quite successful in that respect in 

providing this information to the markets. 

I think it is hard to distinguish two explanations for why the regional banks have raised less, some of them have raised some capital. Part of the problem is they are in fact—regional banks and 

smaller banks—more exposed to commercial real estate, which 

right now is the more stressful area, so therefore, it is not a quesVerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE
51 

tion of information, but a question of the fact that some of those 

banks are facing that highly stressed situation. 

Surely, we are advising and supporting capital raises, particularly of common equity, by banks of all sizes, and some of the 19 

banks were in fact big regionals, and some of them have been able 

to raise capital and pay back. 

Mr. MILLER OF NORTH CAROLINA. Is there a confidence among investors that the books of the regional and community banks are accurate, that their assets are properly valued? 

Mr. BERNANKE. I have not heard anything to the contrary. I 

guess you would have to ask the investors. 

To respond to your earlier point, I think mark-to-market can be 

very useful in terms of information, but I think for banks, which 

have long-term loans on their books, often it is very difficult, because there is no liquid market, it is very difficult to get an accurate price of what a long-term loan might be worth, and even a 

large commercial real estate loan might be very hard to price accurately. 

For capital and regulatory purposes, I think you do need to look 

at the hold to maturity prices as well as the mark-to-market prices. 

Mr. MILLER OF NORTH CAROLINA. I will yield back the little bit 

of time I have left. 

Mr. MINNICK. The gentleman from New Jersey, Mr. Lance, for 5 

minutes. 

Mr. LANCE. Thank you very much, Mr. Chairman. Good afternoon to you, Chairman Bernanke. 

Was the Federal Reserve consulted before the Administration announced its proposal about $100 billion in taxes on banks across 

the country? 

Mr. BERNANKE. I think there were some technical discussions. 

You are talking about the financial responsibility fee? 

Mr. LANCE. Yes. What are your views, Mr. Chairman, on the imposition of that amount of money on banks across America? 

Mr. BERNANKE. I think in terms of whether or not to impose a 

tax on the banks, that is obviously a fiscal matter, and Congress 

has to decide about that. I do think it is important that it be imposed in a way that it does not have unintended consequences. 

One issue which has arisen is that imposing the tax on non-deposit liabilities could have some negative consequences for the repo 

market, as an example. 

If you want to impose the tax and many do, you just want to be 

sure to do it in a way that does not create unintended consequences. 

Mr. LANCE. My point of view is that the tax should not be imposed because the banks by and large have paid back their TARP 

funds with interest, and those that are still outstanding, General 

Motors and AIG, would not be liable, as I understand it. 

I have a concern that it would lead to even less lending than is 

now the case. Does the Federal Reserve Board have a position on 

that aspect of what might occur as a result of imposition of these 

taxes? 

Mr. BERNANKE. You are correct that the large banks have paid 

back the TARP, and in fact, I think it is important to say that the 

financial part of the TARP, even including AIG, is not that far in 

52 

the red at this point. I think there is a very good chance the taxpayers are going to come out whole in this entire process, which 

is an important thing to recognize. 

Mr. LANCE. Yes. The rhetoric of the President when announcing 

this was in direct relationship to the fact that funds were used for 

TARP and they are being paid back. I just have the greatest concerns that this would mean less lending than would otherwise be 

the case. 

Mr. BERNANKE. I believe one reason for the proposal is the law 

requires that the President make a proposal on how to recoup the 

TARP money, and the TARP technically does include not only the 

auto losses, but the mortgage modification program as well. 

Mr. LANCE. Thank you, Mr. Chairman. Another area you note in 

your testimony, that more than half of the fourth quarter GDP 

growth was due to restocking of inventories. I do not think that can 

continue without demand for goods of those inventories. 

In my opening remarks, I talked about consumer confidence and 

the report others have cited. Today’s figures with a lack of consumer confidence, what do you believe might be the most effective 

way the Federal Reserve moving forward could instill even greater 

consumer confidence in such a large percentage of our economy? 

Mr. BERNANKE. I think the confidence issues, particularly the 

number we saw yesterday, are tied pretty strongly to the labor 

market situation. 

Mr. LANCE. Yes. 

Mr. BERNANKE. All the things we have talked about from the 

monetary policy side, lending, from whatever actions Congress 

wants to take on the employment side, I think those are the issues 

that will create stabilization in the labor market, and that in turn 

is one of the keys to consumer confidence. 

Mr. LANCE. I thank you. A statement, not a question, Mr. Chairman. I think consumer confidence is at the heart of restoring the 

economy, getting more people working in America since it is such 

a large percentage of the overall economy, and I am deeply concerned about any bank tax as suggested by the President’s proposal 

because I think it would lead to less lending by banks and what 

we need in this country is more lending, not less. 

Thank you. I yield back the balance of my time. 

Mr. MINNICK. The Chair recognizes the gentleman from Illinois, 

Mr. Foster, for 5 minutes. 

Mr. FOSTER. Thank you. In this week’s Economists magazine, 

there was an interesting article on Canada and the situation they 

are in, where they are seeing an incipient housing bubble reemerge. 

They have kept interest rates very low for the same reasons we 

are doing, to try to restart industrial and business spending, and 

because if this persists for a long time, some of that money is going 

to leak out and could make a housing bubble. 

China is also facing similar problems where they have responded, as has Canada, by actually increasing the amount of 

money you have to put down on a real estate investment, an investment, as opposed to one you live in. 

I was wondering do you have contingency planning? Are there 

tools available that you are thinking of in case you keep interest 

53 

rates low for an extended period of time, and all of a sudden, in 

regions of the United States, this starts to show up as a local or 

national real estate bubble? 

Mr. BERNANKE. We are monitoring that very carefully. It is obviously very difficult to know if there is a bubble, particularly in the 

early stages. Our best assessment right now is there is not any obvious level in U.S. economy. If there was a bubble, then the response probably would depend on which asset it was, what part of 

the economy it was. 

My view is that in the longer term, when possible, you want to 

address those kinds of systemic risks through regulation and supervision rather than through monetary policy, but if there were 

not appropriate tools, and you are right, there are some countries 

where they can vary the loan to value ratio as a policy tool, which 

I think— 

Mr. FOSTER. It is a very valuable handle that we have not used 

in this country yet and maybe we should look abroad and think 

about using that. 

Mr. BERNANKE. Given that we do not have that tool, we would 

have to see what tools we did have. 

Mr. FOSTER. Do you feel that you do not have that tool? You have 

had the ability to set nationwide mortgage origination standards 

since the early 1990’s, is my understanding. The question is if you 

just said okay, everyone, 5 percent down, 8 percent down. 

Mr. BERNANKE. Our standards are based on a finding of unfair 

and deceptive practices. 

Mr. FOSTER. You feel you need additional authority, legislative 

authority? 

Mr. BERNANKE. I think so, particularly if you wanted to make a 

rapid change, because these processes take a long time, 

rulemakings and so on. 

Mr. FOSTER. As you know, I am an enthusiast for actually looking into this as a way of stabilizing our economy against future, especially real estate, bubbles. 

We had some testimony from our snow-canceled hearing by a 

gentleman called Richard Koo from Nomura Securities Institute, 

and he talked about what he called a ‘‘balance sheet recession.’’ 

He said there was a qualitative difference between normal business circumstances where businesses respond to a lower interest 

rate by actually expanding operations, and a situation where after 

the bursting of a bubble that was fueled by deficits and so on, that 

you behave differently. 

If you are terrified you are insolvent, then a lower interest rate 

does not interest you, except in helping you pay off your debt faster. 

I was wondering if you think that is a valid point of view and 

really if there is an element to that. 

He made the comparison also of Japan 15 years ago and the 

United States today. I was wondering if you would comment on 

that. 

Mr. BERNANKE. I think there is some validity. I think that is an 

interesting perspective. In fact, my own research when I was an 

academic addressed some of those issues as well. 

54 

It does not mean that monetary policy, for example, is impotent 

because, for example, lower interest rates can improve balance 

sheets by lowering interest costs or raising asset values. It is a different mechanism through which monetary policy has its effects 

and through which the business cycle operates. 

Mr. FOSTER. Finally, if you are paying interest rates on reserves, 

does that have a big effect on the profitability of the Fed? In case 

no one else has thanked you, I want to thank you for the $50 billion and some you returned to the Treasury. Maybe what we need 

actually are more Federal reserves, and not fewer, if we could replicate you. 

Mr. BERNANKE. It would reduce the profitability a little bit because we would have a higher cost of funds, but since we are making 4 percent-plus on the MBS, we still have quite a bit of margin 

there. It would still be a positive cash flow. 

Mr. FOSTER. Thank you very much. I yield back. 

Mr. MINNICK. The Chair recognizes the gentlewoman from Minnesota for 5 minutes. 

Mrs. BACHMANN. Thank you. I appreciate that, Mr. Chairman, 

and thank you so much also for coming, Mr. Chairman. 

One thing that constituents have continued to ask me about is 

if we are any closer to an audit of the Federal Reserve and knowing what the overnight loans are, the collateral requirements, who 

is getting the loans, and are we any closer. I get that question 

asked almost everywhere I go, where are we at in terms of auditing 

the Fed. 

Mr. Paul had a bill— where are we at with that, and what is the 

response of the Federal Reserve? 

Mr. BERNANKE. In my testimony today, in my written testimony, 

I made a proposal that we would be glad to support complete audits of all the emergency facilities and all aspects of those facilities 

with disclosures of the names of the borrowers with an appropriate 

delay. All of that, we are very supportive of. 

Our concern with Mr. Paul’s bill and similar bills is that the 

word ‘‘audit’’ is not just a financial term, it is also a policy evaluation term. As written, his bill will allow the Congress to ask the 

GAO to come in and essentially determine whether they thought 

the Federal Reserve had made a mistake in its interest rate policy 

or not. 

We think that would be inconsistent with the very important 

principle that Congress should not be managing monetary policy, 

that the Federal Reserve should be independent in making its monetary policy decisions. 

We think that would actually have very bad effects on markets. 

Mrs. BACHMANN. Would the American people be able to know 

what overnight loans are made, who they are made to, what the 

collateralization is, would we have that information? 

Mr. BERNANKE. We are happy to provide some information on 

that. 

Mrs. BACHMANN. Define ‘‘some.’’ 

Mr. BERNANKE. There are two classes of loans. There are a whole 

bunch of programs that were established under emergency authorities. These are now being shut down. We essentially are offering 

55 

full transparency on all those programs, including the names of the 

borrowers. 

There is another program which is pretty small in size, but is 

very important, called a ‘‘discount window.’’ The discount window, 

we think it is very important to keep the names of the borrowers 

confidential, and the reason is the banks will only come to the discount window in a period of crisis or panic, and if they believe their 

names will be revealed, that would indeed intensify the crisis or 

panic, and therefore, the whole purpose of the discount window, to 

try to eliminate financial panics, would be severely damaged. We 

are concerned about that. 

Mrs. BACHMANN. Mr. Chairman, was the discount window open 

to private investment banks prior to March 2008? 

Mr. BERNANKE. The loans to investment banks were made 

through an emergency facility and we are opening that. 

Mrs. BACHMANN. Was the first time that was opened by the Federal Reserve, the Federal Reserve’s discount window, was that in 

March of 2008 or had the Federal Reserve opened that up prior to 

that time? 

Mr. BERNANKE. The discount window is for banks only. The lending we did to investment banks, we did through an emergency facility, which was opened in March 2008, and which we are offering 

now complete transparency on. 

Mrs. BACHMANN. You are saying there are two discount windows? 

Mr. BERNANKE. One of them was an emergency one, which has 

already been shut down. 

Mrs. BACHMANN. The other discount window that is available to 

banks, that is obviously open, that information, you are saying, we 

could not have access to? 

Mr. BERNANKE. I am concerned that public release of the names 

of the borrowers would in fact severely damage the function of the 

discount window, which is to allow liquidity to be put into the system during a period of financial panic. 

Mrs. BACHMANN. Another question that I wondered if you could 

address would be on the GSEs, with Freddie and Fannie, and it appears we may have an attending risk up to $5 trillion. Those are 

some figures we are hearing, that we are looking at potentially 

$400 billion directly, but we may have exposure up to $5 trillion. 

What are we doing really to limit that risk? It does not seem 

there has been any appreciable reform of the GSEs, Freddie and 

Fannie, and it seems like if anything, we are making that situation 

worse by raising the levels of loans that people can have access to. 

What are we doing to protect taxpayer risks? 

Mr. BERNANKE. The Federal Reserve for a very long time warned 

the Congress about the risks of Fannie and Freddie, that we believed they did not have enough capital for their portfolios, and in 

fact, that has turned out to be the case. 

The government’s exposure is a couple of billion dollars, which 

obviously is a large amount of money. 

Mrs. BACHMANN. You hold toxic assets on your books now, right? 

Mr. BERNANKE. Very little. 

Mrs. BACHMANN. What amount is that? 

56 

Mr. BERNANKE. About 4 or 5 percent of our balance sheet, about $100 billion. 

Mrs. BACHMANN. About $100 billion? 

Mr. MINNICK. The gentlewoman’s time has expired. 

Mrs. BACHMANN. Mr. Chairman, thank you. 

Mr. MINNICK. The Chair recognizes the gentleman from Colorado, Mr. Perlmutter. 

Mr. PERLMUTTER. Thank you. Mr. Chairman, thank you again for 

appearing. Thank you for the stamina, because you and I are generally the last guys in the room. 

I do want to thank you for being a pretty steady hand during a 

very difficult time, and the way I would describe it is we had a 

heart attack, this economy, this financial system had a heart attack in September 2008. 

There were a lot of consequences, but we are convalescing now, 

or we went through a heck of a storm, it is still kind of raining, 

but not nearly as hard as it was. 

I would like to first turn your attention to your slide number 27, 

and if we could pull up the other slide on unemployment, job loss. 

You are looking at your 27 as well as Mr. Foster’s slide on job 

loss. Do you see that? 

In your 27, it is more pronounced because the scale is a little different than what he has. Just a sharp drop and then a sharp rise. 

The loss of unemployment changes dramatically beginning in early 

2009. To what do you attribute that? 

Mr. BERNANKE. As you pointed out, in the fall of 2008, the world 

economy essentially had a heart attack and the firms started dropping employees very quickly. There was a sharp contraction of global trade, a sharp contraction of global economic activity. We had 

minus 6 percent growth in the fourth quarter of 2008 and the first 

quarter of 2009. 

Through a variety of policies, including I would give a lot of credit to Federal Reserve policy, but of course, you can consider me biased, the economy stabilized in the second quarter, and has been 

growing since then. It was the stabilization—this is the change. 

This is the number of losses. 

When the economy stabilizes, then losses begin to shrink very 

dramatically. That is what we have seen. We have not yet, of 

course, seen any actual increases in employment. 

Mr. PERLMUTTER. Just looking at the glass-half-full for a second, 

we were in free fall in terms of jobs. We were just losing jobs at 

a rate we had not seen. I am not sure we have ever seen job loss 

at that rate, including in the 1930’s. We have reversed that. I 

would credit monetary policy, the Federal Reserve, also fiscal policy 

as coming out of this Congress. 

My friends on the other side of the aisle, for a while, they were 

picking on where are the jobs. Well, we have a graph to show they 

are coming back, which is up there on the wall as well as your slide 

27. 

Now they have moved onto the next thing, which is the debt. We 

are not out of the woods yet on jobs, are we, sir? 

Mr. BERNANKE. No. 

Mr. PERLMUTTER. Part of our debt problem is there was a contraction in the revenues stream to the United States of America. 

57 

Mr. BERNANKE. That is right. 

Mr. PERLMUTTER. I was kind of listening to a couple of their 

points. Mr. Hensarling gave us the words from his song, everybody 

wants to go to heaven, they just do not want to go now. It reminded me of sort of the corollary of that is, John Kaines, who said 

we are all dead in the long run. 

We have to take care of today and today is jobs. We have to put 

people back to work. I think there has been a complimentary set 

of policies that are trying to reverse that job loss and to move people into jobs. 

My question to you is, how are we getting credit, the smaller 

banks, community banks, so we can get it to small businesses? 

That is the big complaint I hear. I think that is where we will get 

the next surge or we will get a surge of employment, if we can get 

small businesses really running strong again. How do we do that? 

Mr. BERNANKE. On the first point, I am not advocating and I do 

not think anyone is advocating trying to balance the budget this 

year or next year. Obviously, there has been a big drop in revenues, a lot of extra expenses. 

The issue is trying to have an exit strategy, try to find some 

years down the road a sustainable fiscal path that will give confidence that we can in fact exit from this extraordinary situation. 

I have talked, as you know, a good bit about getting lending 

going again and talking about supervisory efforts that we are 

doing. 

I think it is worth noting that there was a poll this morning the 

NFIB put out and asked small firms what their most important 

problem is. We got an answer which we have seen before which is 

only 8 percent said credit was their most important problem. The 

majority of them think weak demand, the weak economy, is the 

most important problem. 

This is not a complete answer to your question, but I do think 

as we get the economy moving again and strengthening, that is 

going to make banks more willing to lend and it is going to bring 

good borrowers to the banks to get credit. 

I think just strengthening the economy is going to be a big help. 

It is important for us as supervisors, and I have mentioned, for example, the various new efforts we are making to get feedback, to 

get data, to do analyses, to try to make sure our examiners are taking a balanced perspective and are not blocking loans to good creditworthy borrowers. We do not want to make loans to borrowers 

who cannot pay back, but we do want to make loans to those who 

are creditworthy. That is an important objective we can continue 

to work on. 

Mr. PERLMUTTER. Thank you. 

Mr. MINNICK. The gentleman’s time has expired. The Chair recognizes the gentleman from New Jersey, Mr. Garrett, for 5 minutes. 

Mr. GARRETT. Perhaps your last questioner for the day. Thank 

you for being here. Thank you for staying so long. I appreciate the 

chance to ask you a couple of questions. 

The Fed is talking about pulling back on the purchase of mortgage-backed securities. Some experts when they hear that suggest 

if that does happen, that one of the consequences of that might be 

58 

that interest rates will go up some degree. How much, is the question. 

If that were to occur, the question then is, what happens to 

Fannie, Freddie, and the GSEs? Some speculate that if they go up 

a significant amount or a certain amount, that could have a devastating impact upon their losses at the end of the day. 

My first question to you is, considering all that, would it be prudent then for the GSEs today to try to as quickly as possible start 

to shrink down the size of their portfolio, and if so, then what sort 

of time frame would be necessary in light of what you project on 

potentials for interest rates going up? 

Mr. BERNANKE. First, we are interested to see what the effect is 

going to be on mortgage rates. So far, the evidence suggests it will 

be a modest effect, which would not have a big impact. If you are 

talking about interest rate risks for the GSEs, I do believe they are 

mostly hedged by holding treasuries and other securities. 

I do not know how much a modest increase in mortgage rates 

would affect their balance sheet. I do not think it would be catastrophic in any case. 

As you know, the arrangements under which Fannie and Freddie 

were put under conservatorship involved a gradual reduction over 

time. 

Mr. GARRETT. Pretty slow. 

Mr. BERNANKE. Pretty slow, in their portfolios. I was asked earlier about what is the right long-term solution for Fannie and 

Freddie. That obviously needs to be worked out. Many possible outcomes would involve not having a substantial portfolio, so there 

would have to be a transition into that. 

Mr. GARRETT. Working that out, Secretary Geithner is over at 

the Budget Committee, and that is where we were earlier today, 

we have a chart over there that shows how much taxpayer money 

has gone out the window, so to speak, on all the programs, and programs you folks have been working on actually pale in comparison 

if you saw the red lines we see over at Fannie and Freddie, with 

the $200 billion and the $400 billion, whether or not you put them 

on budget or not. 

We have a blueprint, if you will, from the Administration, as to 

where we should go on the regulatory reform. We do not have any 

blueprint for this. 

What sort of time frame should we try to come up with for some 

solution on this? By the next 6 months, 9 months? A year? 

Mr. BERNANKE. I hope so. Chairman Frank said earlier that he 

had scheduled a March 2nd hearing on the issue. Whether it has 

been changed, I am not sure. Clearly, you need to be talking about 

it. 

Mr. GARRETT. I know we have an election year. Before the election, I would hope to have this resolved. Is that where you would 

like to come from on this, if you could? 

Mr. BERNANKE. The sooner you get some clarity about what the 

ultimate objective is, the better. Of course, you do not necessarily 

have to get there by the end of the year. It is going to take some 

time to make a transition. 

Mr. GARRETT. At least get the plan in place so there is certainty. 

Mr. BERNANKE. Right. 

59 

Mr. GARRETT. Let me change the subject, with regard to bonds 

and the Fed issuing bonds. I know there was new authority to the 

Fed at the end of last year for you to pay interest in reserves, and 

there was talk about the Fed actually issuing bonds. Then there 

was a proposal as far as you were creating something called a 

‘‘term deposit facility.’’ 

If I understand it correctly, that would allow a 6-month period 

of time for the short-term bonds, which is very similar to just regular short-term bond issuance, with the main difference that unlike 

a bond, the term deposit cannot be traded on the marketplace; 

right? 

First of all, do you have authority to do that? 

Mr. BERNANKE. Yes, because it comes under our authority to pay 

interest on reserves. We cannot sell those deposits to anybody, only 

to banks who have reserves with us. It is not an open thing; you 

and I could not purchase them. 

Mr. GARRETT. Do you see that in any way coming up to the edge 

as far as the authority, as far as the Fed being able to issue bonds 

as skirting the spirit of the law as to what the Fed should be doing 

when it comes to issuing bonds? 

Mr. BERNANKE. No. Congress very appropriately gave us the authority to pay interest on reserves and this is what this would be, 

only the reserves would be in these accounts. I do not see any issue 

with it. 

I would add, this does not answer your question, but I would add 

that every central bank in the world, major central bank, has these 

kinds of authorities, and they are very important for managing 

short-term interest rates in a period like the present. 

Mr. GARRETT. Going back to the beginning part of the question, 

the initial discussion, at least by some, as far as having the authority to issue bonds that would be just widely circulated or sold in 

the marketplace— 

Mr. BERNANKE. So-called Fed bills. 

Mr. GARRETT. Where are you with regard to that? 

Mr. BERNANKE. We are not proposing that now. 

Mr. GARRETT. Okay. Thank you. 

Mr. MINNICK. If the Chairman has just a few more moments, I 

would like to ask a couple of questions. 

During the Reagan Administration and dealing with the problem 

of commercial bank lending, which we are going to have a hearing 

on as the chairman said on Friday, in dealing with a similar situation, the Reagan Administration adopted a policy they called ‘‘forbearance,’’ which was a temporary reduction in the capital requirements at the discretion of regulators in order to permit banks that 

were scraping against the very minimum capital levels in the appropriate circumstance to continue to lend. 

Do you have an opinion as to the efficacy and appropriateness of 

that kind of a policy, and if you think it has merit, is it something 

we should consider in the present circumstance? 

Mr. BERNANKE. There are general ideas about setting up a system that would allow capital requirements to vary over the business cycle, during weak periods, that you could run down some capital, for example. 

60 

Those so-called countercyclical capital requirements, and those 

are being discussed. They might be actually a useful innovation. 

There is quite a bit of danger, I think, with the forbearance idea 

because if you begin to allow capital to fall arbitrarily, according 

to short-run objectives, you might find yourself with the government having to pay a lot of money to bail out banks that have 

failed because they did not have enough capital. 

It is a very delicate issue. I think you are better off if you are 

going to go that way having a system in place that allows for circumscribed variation over the business cycle and the amount of 

capital the banks have to hold. A buffer during the good times, 

they can run it down during the bad times. 

Mr. MINNICK. Some variability, depending on the cycle. Would 

you leave the discretion to institute that variability with the bank 

regulators or would you provide some legislative side bars? 

Mr. BERNANKE. I think the legislation is probably already adequate. It gives the authority to the regulators to set capital standards. I think the regulators could do it through a rulemaking process. 

You used the word ‘‘discretion.’’ Again, I would not create a system where the regulators could arbitrarily say at any given time 

you can reduce your capital. I think there ought to be a set of rules 

that explain exactly how that would happen over time. 

Mr. MINNICK. Is implementing such a process that wearing your 

hat as a bank regulator you have seriously contemplated or would 

contemplate in this circumstance? 

Mr. BERNANKE. Yes. That is being considered in international forums and there are examples around the world, like in Spain, 

where systems like that seem to have been helpful during the crisis. 

Mr. MINNICK. Looking at the other side of financial institutions, 

balance sheets, one of the complaints I am certain we are going to 

hear on Friday from commercial banks is that the bank examiners 

are valuating assets based on the last distressed sale and those 

values are substantially below current market replacement costs, 

even discounted for the time anticipated to sell. 

Do you think there would be merit in providing guidance by regulators that you could use replacement value discounted to sale as 

an appropriate valuation for purposes of bank examiner examinations? 

Mr. BERNANKE. There is guidance to appraisers in general. I suspect that the principle would be to use true comparables, which 

would involve not just distressed sales, but other properties as 

well. I think the main principle would be not to focus on distressed 

sales as representative of the value of a property. 

Mr. MINNICK. Thank you, Mr. Chairman. The gentleman from 

California has just arrived. We are going to declare him the last 

speaker and get you out by 2:00 as promised. 

The Chair recognizes the gentleman from California, Mr. Campbell, for 5 minutes. 

Mr. CAMPBELL. Thank you. Thank you, Chairman Bernanke. I 

am last and perhaps least as well. 

Two questions. One is the public sector, governments at all levels, currently represent, I believe, about 36 percent of GDP, which 

61 

is a high since World War II. Governments at all levels are in some 

trouble. One could say they are overleveraged. 

You spoke earlier about the unsustainability of the current debt 

at the Federal level. My home State of California is obviously in 

deep fiscal trouble and has been for a long time, and so are many 

States and local communities. 

I have a concern about the public sector kind of being in a position that the private sector was in a few years ago, as being overleveraged, overextended, too much debt, too much spending, and 

actually the public sector being one of the drags and problems on 

the economy in the near future. 

Your thoughts on that? 

Mr. BERNANKE. We have talked in this hearing quite a bit about 

debt and deficits. I do believe it is very important. It is probably 

inevitable to have large deficits in the middle of a deep recession, 

given the loss of revenues and so on. 

It is very important to develop a creditable plan for restoring 

deficits to a sustainable level in the medium term, which I would 

define to be 3 or 4 years out, and that would mean getting deficits 

down to something on the order of 3 percent or below, to maintain 

a stable ratio of debt to GDP. 

That is very important to maintain confidence in the debt of the 

sovereign. Some countries around the world are having some difficulty with that right now. We certainly want to make sure that 

in the future some time, we will not be put into a situation where 

our interest payments are so large that it is very difficult for us 

to make those payments. 

Mr. CAMPBELL. Right, and State and local governments have 

similar problems. They either have to raise taxes, reduce what they 

are doing, or both as well. 

Mr. BERNANKE. That is right. 

Mr. CAMPBELL. One more and final question for you is about 

Fannie Mae and Freddie Mac. If interest rates were to go up broadly, let’s say by not 25 basis points, but 200 basis points or something like that, what is the impact? 

Are they not carrying a lot of interest rate risk and what is the 

impact on their bottom line and since they are now taxpayer-owned 

entities, government-owned entities, what problems do we face 

there? 

Mr. BERNANKE. Mr. Garrett had a similar question. I think I 

would recommend that you talk directly to the regulator of Fannie 

and Freddie, but my understanding is they have hedged a good bit 

of that risk so that they would not be deeply hurt if there was a 

change in interest rates. 

To get an exact answer, you really ought to talk to Mr. DeMarco, 

who is the acting regulator. 

Mr. CAMPBELL. Okay. Thank you, and thank you for everything. 

I yield back my time. 

Mr. MINNICK. The Chair would like to thank Chairman 

Bernanke for his professionalism, for his time, and for the expertise 

with which you are carrying out your duties in this very important 

time for the country. We appreciate you being here. 

The Chair also notes that some members may have additional 

questions which they may wish to submit in writing. Without objecVerDate Nov 24 2008 12:05 Jul 01, 2010 Jkt 056766 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 K:\DOCS\56766.TXT TERRIE
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tion, the hearing record will remain open for 30 days for members 

to submit questions to this witness and to place his responses in 

the record. 

The hearing is adjourned. 

[Whereupon, at 1:53 p.m., the hearing was adjourned.] 

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A P P E N D I X 

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