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UNWINDING EMERGENCY FEDERAL RESERVE 

LIQUIDITY PROGRAMS AND IMPLICATIONS 

FOR ECONOMIC RECOVERY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

MARCH 25, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–118 

( 

(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: 

March 25, 2010 ................................................................................................. 1 

Appendix: 

March 25, 2010 ................................................................................................. 57 

WITNESSES 

THURSDAY, MARCH 25, 2010 

Ball, Laurence, Professor of Economics, Johns Hopkins University ................... 47 

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

System ................................................................................................................... 6 

Goodfriend, Marvin, Professor of Economics, and Chairman of the Gailliot 

Center for Public Policy, Tepper School of Business, Carnegie Mellon University ................................................................................................................... 45 

Meyer, Laurence H., Vice Chair, Macroeconomic Advisors .................................. 42 

Taylor, John B., Mary and Robert Raymond Professor of Economics, Stanford 

University ............................................................................................................. 44 

APPENDIX 

Prepared statements: 

Paul, Hon. Ron .................................................................................................. 58 

Watt, Hon. Melvin ............................................................................................ 59 

Ball, Laurence ................................................................................................... 63 

Bernanke, Hon. Ben S. ..................................................................................... 69 

Goodfriend, Marvin .......................................................................................... 76 

Meyer, Laurence H. .......................................................................................... 82 

Taylor, John B. ................................................................................................. 90 

(1) 

UNWINDING EMERGENCY FEDERAL RESERVE 

LIQUIDITY PROGRAMS AND IMPLICATIONS 

FOR ECONOMIC RECOVERY 

Thursday, March 25, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Waters, Velazquez, 

Watt, Sherman, Meeks, Moore of Kansas, Capuano, Baca, Lynch, 

Miller of North Carolina, Green, Cleaver, Bean, Perlmutter, Donnelly, Foster, Minnick, Adler, Grayson, Himes, Peters; Bachus, 

Royce, Paul, Hensarling, Garrett, McHenry, Marchant, McCotter, 

Posey, Jenkins, Lee, Paulsen, and Lance. 

The CHAIRMAN. The hearing will come to order, which means the 

photographers will get out of the way. This is an important hearing. We have had for some time now the Federal Reserve System 

under the leadership of Chairman Bernanke playing a very active 

role in dealing with the problems generated by the financial crisis 

of 2008 or that culminated in 2008. I believe the Federal Reserve 

has played a very constructive role in providing liquidity in ways 

that helped diminish the negative effects, and I believe the chairman and the system have also been responsible in making clear 

that they are aware of the need to undo this in a way that is protective of the taxpayers but also is not going to damage the economy and is not done prematurely. 

The chairman of the Subcommittee on Domestic Monetary Policy, 

the gentleman from North Carolina, Mr. Watt, has been closely 

monitoring this. I think he has been playing a very constructive 

role, and I will be turning over the job of presiding over this hearing to him, because he has taken the lead in this. And as we said, 

the Federal Reserve has a dual role, which is to make sure that 

it continues to be supportive of the economy, but that it also gets 

back to a more normal status in a way that does not cause damage. 

I will repeat publicly now what I have mentioned privately to 

Chairman Bernanke. Part of my job here as chairman is to hear 

from other members about what their current concerns are. Not 

surprisingly, in a bipartisan way, I have heard concerns from a 

number of members about commercial real estate and the impending problems with commercial real estate, with loans that have to 

be rolled over with problems of valuation, people concerned that 

2 

loans that are fully performing in terms of the income may be jeopardized. One of the facilities that we are talking about here that’s 

due to expire has a role in commercial real estate, so while I will 

not be able to stay for the whole hearing, Mr. Chairman, I hope 

you will be addressing what we can do about commercial real estate. I appreciate the fact that you, as well as other regulators, had 

sent some members of your staff here to talk to us about what 

could be done. Some of the members on this committee—Ms. Kosmas of Florida, Mr. Minnick of Idaho, Mr. Klein of Florida, and Mr. 

Gutierrez of Illinois—have various proposals both to the regulators 

and that could be legislated to deal with this. I think there’s general agreement that dealing responsibly with the commercial real 

estate is very important. 

One of the things that occurs to me again to stress is some of 

this has to do with concerns over the accounting, and I would reiterate the position we have been taking. I don’t think we should be 

telling the accounting board what to do or trying to, but we can, 

I think, urge the regulators to show some discretion and flexibility 

as they act on what the accounting rules require. 

So with that, I am now going to recognize the gentleman from 

Alabama for 2 minutes, according to the Minority’s list, and the remainder of the hearing will be under the chairmanship of the gentleman from North Carolina. 

Mr. BACHUS. Thank you, Mr. Chairman. Thank you for holding 

this hearing, and I thank you, Chairman Bernanke, for your testimony. The Federal Reserve, with a trillion-and-a-half dollars of additional liquidity in the system, is faced with a very difficult problem—how to vacuum that money out fast enough to avoid hyperinflation, but to do so without stalling a recovery. 

Chairman Frank, an exit strategy is made necessary in the first 

place due partially to a series of interventions by the Fed and the 

Treasury that were both unprecedented and highly controversial, 

the most questionable of which was the use of 13(3) authorities to 

rescue individual firms and their creditors under the doctrine of 

‘‘too-big-to-fail.’’ Of course, House Republicans have rejected the 

concept of ‘‘too-big-to-fail’’ in the long term. 

Now is the time for the Federal Government and the Fed to get 

out of the bailout business. As I have said previously, the term 

‘‘intervention’’ implies that the government is interfering with the 

economy and market forces. An intervention creates an artificial 

condition in which the system becomes increasingly dependent on 

government action. You see that with the GSEs. As with any addiction, an altered state is created where the only choices are permanent addiction or somewhat painful withdrawal. 

That is why a centerpiece of the Republican regulatory reform solution is not only to end ‘‘too-big-to-fail’’ but to rein in the Fed’s 

13(3) authorities consistent with that goal. To his credit, Chairman 

Frank has incorporated several of these ideas in the regulatory reform bill that passed the House in December. While there was 

much that we disagree with, the need for limitations on the Fed’s 

authority to conduct large-scale bailouts of individual firms was 

one area in which there was bipartisan consent. 

In conclusion, withdrawing excess liquidity and returning the 

Fed to its more traditional monetary policy role will be difficult. If 

3 

done incorrectly, it may negatively impact the economic recovery 

and result in higher borrowing costs for individuals, corporations 

and the U.S. Government. But this transition must take place. 

Thank you, Mr. Chairman. 

Mr. WATT. [presiding] The gentleman’s time has expired, and I 

will yield myself—I think the balance of the time is 5 minutes. 

In response to the global economic crisis, the Federal Reserve in- jected over $2 trillion into the economy through various liquidity 

initiatives, including the Term Asset-Backed Securities Loan Facility, the Commercial Paper Funding Facility, and the Fed’s commitment to purchase about $1.25 trillion of mortgage-backed securities. 

The immediate result of the Fed’s action was to expand this balance sheet dramatically and to put an unprecedented volume of 

money into the banking system. These steps were designed to 

unfreeze the domestic credit markets, and many economists credit 

the decisive steps taken by the Fed with saving the U.S. economy 

from collapse and staving off an economic downturn that might 

have equalled or exceeded the Great Depression. 

The central issue of today’s hearing is how the Fed will decide 

the proper timing and sequencing of unwinding these emergency liquidity programs. The Fed must withdraw this liquidity while 

keeping inflation in check and encouraging job growth, all without 

hurting the fragile economic recovery that is under way. Every 

analysis I have seen has suggested that this is a delicate balancing 

act that will have to be done just right to avoid significant damage 

to the economy. If recent history is any guide, any decisions the 

Fed makes to carry out this delicate balancing act, regardless of 

what these decisions are, will be second-guessed by the Congress 

and the public, and this could also lead to questions about the independence of the Fed. 

I’m hopeful that we can use this hearing to understand better 

the policy options available to the Fed to unwind these programs 

and the potential policy implications of these various options. At 

the same time, I think we should be careful not to infringe on the 

Fed’s ability and willingness to exercise its independent judgment 

about which options will be the most desirable and effective. 

So I view this hearing as an effort to educate members of our 

committee, not as a forum for us to try to intimidate or browbeat 

the Fed into pursuing specific options. We have asked the witnesses to provide information about specific monetary policy tools 

and options that are available to the Fed, including paying interest 

on reserves, entering reverse repurchase agreements, utilizing the 

recently introduced Term Deposit Facility, conducting direct asset 

sales of the market-backed securities it has purchased, and any 

other options that might be appropriate. 

We need to understand the projected advantages and disadvantages of each option so we’ll understand better what the Fed is 

doing when it uses particular options, and perhaps even be in a position to explain to our constituents why particular steps are being 

taken. 

I look forward to Chairman Bernanke telling us how the Fed can 

effectively unwind its emergency liquidity programs while reducing 

inflationary fears, encouraging job growth, and managing the fragVerDate Nov 24 2008 17:56 Jul 23, 2010 Jkt 056764 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\56764.TXT TERRIE
4 

ile economic recovery, knowing full well that we all expect him to 

be the master conductor who will wave the magic wand and lead 

our economy to play sweet music again. 

With that, I will submit the balance of my statement for the 

record, and I will recognize Mr. Paul of Texas, the ranking member 

of the Domestic Monetary Policy Subcommittee, for 3 minutes. 

Dr. PAUL. I thank you, Mr. Chairman, and welcome, Chairman 

Bernanke. On February 24th, we had our Humphrey-Hawkins 

meeting here, and I asked some questions about some of the things 

the Fed had done in the past, and the comments you made included the fact that you considered this rather bizarre, what I was 

saying. Chairman Frank followed up with sending a letter and asking to get some clarification for you to look into it, and even suggested that you and I get together so I can present exactly what 

my concerns are and see if we can resolve it. And I’m certainly 

open to that, so I hope that we can follow up on that and the suggestions of Chairman Frank. 

But I also wanted to make a comment about the March 19th ruling at the U.S. Court of Appeals in Manhattan, because once again, 

the Federal Reserve lost their case against the—I guess it was 

Bloomberg filing for a Freedom of Information Act for information 

dealing with the $2 trillion of loans during the crisis. 

Of course, that was ruled in a lower court, and the Court of Appeals has upheld this, and the main argument the Fed uses in the 

court as well as here in the hearings is that if we knew so much 

about these banks and where these loans are going, it would stigmatize these companies and banks and do harm to their reputation 

and make our problems worse. I sort of understand that argument, 

even though I don’t agree with it, because in a way, that challenges 

the whole notion of what the SEC exists for. They want accounting 

procedures. They don’t want to hide information. And if they do, if 

it’s not out in front, it deceives the investors. So in a way, the SEC 

is fighting to get information to notify investors, and if they don’t 

do it right, they get charged with fraud. But it seems to be perverse that the Federal Reserve takes a different position that if a 

company is in trouble or a bank is in trouble, what we don’t want 

to do is let the customers know. So I find that rather challenging, 

because I think revelation of what’s going on, and what’s going on 

especially now with the financial crisis, is what the American people want. 

I’m also interested in finding out someday whether or not you 

will appeal this case that was ruled on March 19th, and I think 

the taxpayers would like to know how much does the Federal Reserve really spend on their legal counsels? I’m sure there are a lot 

of lawyers, and I know you don’t have to come to the Congress to 

get an appropriation for this. So I would like to know how you pay 

these bills and how much you pay. 

So these are the things that we need to talk about, but also in 

the question-and-answer session, I do want to bring up some specifics about the challenges that you have for someday maybe 

shrinking the balance sheet, but I will pursue that in the questionand-answer period. Thank you. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from Texas, Mr. Hensarling, is recognized for 11⁄2 minutes. 

5 

Mr. HENSARLING. Thank you, Mr. Chairman. On Sunday night, 

the Nation’s fiscal future went from grim to grimmer. If one takes 

out the Bernie Madoff accounting gimmicks like the timing shift, 

the unpaid-for doc fix, the raid on Social Security, and the double 

accounting for the half a trillion dollars of Medicare cuts, the true 

cost of the government health care takeover bill is $2.3 trillion, or 

another $20,000 per American family. 

This is on top of the fact that our deficit has increased tenfold 

in the last 2 years. The President has submitted a budget that will 

triple the national debt over the next 10 years, a budget that even 

his own OMB Director says is unsustainable. Spending as a percentage of the economy is 24.7 percent of GDP, the highest since 

World War II. This has caused CBO Director Doug Elmendorf to 

say, ‘‘The outlook for the Federal budget is bleak. U.S. fiscal policy 

is on an unsustainable path.’’ 

Economist Robert Samuelson has said about our spending patterns, ‘‘It could trigger an economic and political death spiral.’’ Unless the Congress and the President have a sudden epiphany of fiscal sanity, this story does not have a happy ending. It ends in either job-crushing, family-budget-crushing tax increases, or skyrocketing interest rates as we beg the Chinese to buy more of our 

debt. Our level of inflation will make us look longingly and nostalgically upon the Carter era. Clearly, the actions of the President, 

the Congress, and the blurring of the lines with the Federal Reserve between fiscal and monetary policy will have much to do with 

the future, and I look forward to the chairman’s testimony. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from New Jersey, Mr. Garrett, is recognized for 11⁄2 minutes. 

Mr. GARRETT. Thanks, Mr. Chairman. Today, obviously we’re 

going to be discussing the Fed’s exit strategy from the unprecedented propping up of the economy due to the financial crisis. 

Back on February 10th, you were here, and you talked about one 

of the tools that you now have, and that’s paying interest on reserves held at the Fed. I would think, and experts seem to tell me 

that trying to use this and other tools is going to be a real challenge for the Fed in order just to get it all right. And that’s not 

just me saying that. Renowned Fed historian Alan Meltzer said, for 

instance, that he believes that the Fed’s anti-inflationary exit strategy will fail. He asserts that the efforts to reduce inflation back 

during the 1970’s failed because, as the chairman points out, if you 

do it prematurely, if it ends prematurely. And if it ends prematurely, it’s because of public pressure, pressure from the public, 

pressure from Congress, from the Administration, and they complain loudly because, well, these things affect the employment rate 

or the unemployment rate. 

We’re sort of in the same situation today with high current and 

prospective unemployment, and so you may be facing, as you realize, a similar dilemma. So, here you have these political obstacles, 

and I’m wondering if the Chairman and others at the Fed have 

concerns about the political ramifications if the Fed were to, say, 

hold reserves on the balance sheet of around a trillion dollars, interest rates go up to say around 5 percent that you’re paying out 

on those, and in effect, the Fed will be paying out, at that rate, $50 

billion every year with that balance sheet and the interest rates 

6 

stayed at that level. Some might say, then, well, the Fed would be 

paying $50 billion to banks not to lend. So I’ll be curious to see how 

the Fed will be able to deal with that political ramifications. 

Mr. WATT. The gentleman’s time has expired. We are pleased 

today to have again the Chairman of the Federal Reserve, Chairman Bernanke, and we will now recognize the Chairman for his 

statement. 

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

SYSTEM 

Mr. BERNANKE. Thank you, Chairmen Frank and Watt, Ranking 

Members Bachus and Paul, and other members of the committee 

and subcommittee. I appreciate the opportunity to discuss the Federal Reserve’s exit strategy from the extraordinary lending and 

monetary policies that it implemented to combat the financial crisis 

and support economic activity. 

As you know, I previously submitted prepared testimony for a 

hearing on this topic that was canceled because of weather conditions. I requested that testimony be included in the record of this 

hearing. This morning, in lieu of repeating my previous prepared 

statement, I would like to summarize some key points from the 

earlier testimony and update the committee on recent developments. 

Broadly speaking, the Federal Reserve’s response to the crisis 

and the recession can be divided into two parts. First, our financial 

system during the past 21⁄2 years experienced periods of intense 

panic and dysfunction during which private short-term funding became difficult or impossible to obtain from any borrowers. The pulling back of private liquidity at times threatened the stability of financial institutions and markets and severely disrupted normal 

channels of credit. 

In its role as the liquidity provider of last resort, the Federal Reserve developed a number of programs to provide well-secured, 

mostly short-term credit to the financial system. These programs, 

which imposed no cost on taxpayers, were a critical part of the government’s efforts to stabilize the financial system and restart the 

flow of credit to American families and businesses. Besides ensuring that a range of financial institutions, including depository institutions, primary dealers, and money market mutual funds had access to adequate liquidity in an extremely stressed environment, 

the Federal Reserve’s lending helped to restore normal functioning 

and support credit extension in a number of key financial markets, 

including the interbank lending market, the commercial paper 

market, and the market for asset-backed securities. 

As financial conditions have improved, the Federal Reserve has 

substantially phased out these lending programs. Some facilities 

were closed over the course of 2009, and most others expired on 

February 1st. The Term Auction Facility under which fixed 

amounts of discount window credit were auctioned to depository institutions, was discontinued in the past few weeks. As of today, the 

only facility still in operation that offers credit to multiple institutions, other than the regular discount window, is the Term AssetBacked Securities Loan Facility or TALF, which has supported the 

7 

market for asset-backed securities, such as those backed by auto 

loans, credit card loans, small business loans, and student loans. 

Reflecting notably better conditions in many markets for assetbacked securities, the TALF is scheduled to close on March 31st for 

loans backed by all types of collateral except newly issued commercial mortgage-backed securities or CMBS, and on June 30th for 

loans backed by newly issued CMBS. 

In addition, the Federal Reserve has been normalizing the terms 

of regular discount window loans. We have reduced the maximum 

maturity of discount window loans from 90 days to overnight for 

nearly all loans, restoring the pre-crisis practice. In mid-February, 

the Federal Reserve also increased the spread between the discount 

rate and the upper limit of our target range for the Federal funds 

rate from 25 basis points to 50 basis points. 

We have emphasized that both the closure of our emergency 

lending facilities and the adjustments to the terms of discount window loans are responses to the improving conditions in financial 

markets. They are not expected to lead to tighter financial conditions for households and businesses, and hence do not constitute a 

tightening of monetary policy, nor should they be interpreted as 

signaling any change in the outlook for monetary policy. 

The second part of the Federal Reserve’s response to the crisis 

and recession, besides the provision of liquidity to the financial system, involves both standard and less conventional forms of monetary policy. After reducing short-term interest rates nearly to zero, 

the Federal Open Market Committee provided additional monetary 

policy stimulus through large-scale purchases of Treasury securities, agency mortgage-backed securities, and agency debt. All told, 

the Federal Reserve purchased $300 billion of Treasury securities 

and will conclude purchases of $1.25 trillion of agency MBS and 

about $175 billion of agency debt at the end of this month. 

The Federal Reserve’s purchases have had the effect of leaving 

the banking system highly liquid, with U.S. banks now holding 

more than $1.1 trillion of reserves with Federal Reserve banks. A 

range of evidence suggests that these purchases and the associated 

creation of bank reserves have helped improve conditions in mortgage markets and other private credit markets and put downward 

pressure on longer-term, private borrowing rates and spreads. 

At its meeting last week, the FOMC maintained its target range 

for the Federal Funds Rate at zero to one-fourth percent, and indicated that it 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. 

In due course, however, as the expansion matures, the Federal 

Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures. The Federal Reserve has a number of tools that will enable it to firm the stance 

of policy at the appropriate time. 

Most importantly, in October 2008, the Congress gave the Federal Reserve statutory authority to pay interest on balances that 

banks hold at the Federal Reserve banks. By increasing the interest rate on banks’ reserves, the Federal Reserve will be able to put 

significant upward pressure on all short-term interest rates, as 

8 

banks will not supply short-term funds to the money markets at 

rates significantly below what they can earn by holding reserves at 

the Federal Reserve banks. Actual and prospective increases in 

short-term interest rates will be reflected in turn in higher longterm interest rates and in tighter financial conditions more generally. 

The Federal Reserve has also been developing a number of additional tools it will be able to use to reduce the large quantity of reserves currently held by the banking system. Reducing the quantity of reserves will lower the net supply of funds to the money 

markets, 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, to build the capability to drain large quantities of reserves, the Federal Reserve has been working to expand its range 

of counterparties for reverse repurchase operations beyond the primary dealers and to develop the infrastructure necessary to use 

agency MBS as collateral in such transactions. In this regard, the 

Federal Reserve recently announced the criteria that it will be applying in determining the eligibility of money market mutual funds 

to serve as counterparties in reverse repurchase agreements. 

As an additional means of draining reserves, the Federal Reserve 

is also developing plans to offer to depository institutions term deposits which are roughly analogous to certificates of deposit that 

the institutions offer to their own customers. A proposal describing 

a Term Deposit Facility was recently published in the Federal Register, and the Federal Reserve is finalizing a revised proposal in 

light of the public comments that have been received. After a revised proposal is reviewed by the Board, we expect to be able to 

conduct test transactions this spring and to have the facility available if necessary thereafter. 

The use of reverse repos and the deposit facility would together 

allow the Federal Reserve to drain hundreds of billions of dollars 

of reserves from the banking system quite quickly should it choose 

to do so. 

When these tools are used to drain reserves from the banking 

system, they do so by replacing bank reserves with other liabilities. 

The asset side and the overall size of the Federal Reserve’s balance 

sheet remain unchanged. If necessary, as a means of applying monetary restraint, the Federal Reserve also has the option of redeeming or selling securities. The redemption or sale of securities would 

have the effect of reducing the size of the Federal Reserve’s balance 

sheet as well as further reducing the quantity of reserves in the 

banking system. Restoring the size and composition of the balance 

sheet to a more normal configuration is a longer-term objective of 

our policies. 

In any case, 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 and our best judgments about how to meet the Federal Reserve’s dual mandate of maximum employment and price 

stability. 

In sum, in response to severe threats to our economy, the Federal Reserve created a series of special lending facilities to stabilize 

9 

the financial system and encourage the resumption of private credit flows to American families and businesses. As market conditions 

and the economic outlook have improved, these programs have 

been terminated or are being phased out. 

The Federal Reserve also promoted economic recovery through 

sharp reductions in its target for the Federal Funds Rate and 

through large-scale purchases of securities. The economy continues 

to require the support of accommodative monetary policies. However, we have been working to ensure that we have the tools to reverse at the appropriate time the currently very high degree of 

monetary stimulus. We have full confidence that when the time 

comes, we will be ready to do so. 

Thank you, Mr. Chairman. 

[The prepared statement of Chairman Bernanke can be found on 

page 69 of the appendix.] 

Mr. WATT. I thank the Chairman for his statement, and we will 

now recognize members for 5 minutes each. I will recognize myself 

initially for 5 minutes. 

Chairman Bernanke, I guess one thing I usually am pretty aggressive about is the balance between unemployment and inflation 

or an emphasis on unemployment, and again there seems to be 

more emphasis in your statement about making sure we counter 

inflation than on the employment side. So I guess my first question 

would be, how should the high unemployment rate factor into the 

Fed’s timing and sequencing decisions? And if you could elaborate 

on that a little bit more. 

Mr. BERNANKE. Certainly. Of course, as you know, we have a 

dual mandate from the Congress to pursue both maximum employment and price stability, and we intend to do that. The two are mutually reinforcing, in particular maintaining stable inflation over 

the longer term increases economic growth and improves employment potential in that respect. So it’s very important that we pay 

attention to both sides of the dual mandate, and we will do so. 

Currently, the employment situation is very weak, as you know. 

The unemployment rate is close to 10 percent, and about 40 percent of the unemployed have been unemployed for a long term. In 

response to that, the Federal Reserve has been maintaining extremely accommodative policies. We have lowered the interest rate 

almost to zero. We have increased the size of our balance sheet, as 

I described, to $2.3 trillion, 21⁄2 times what it was before the crisis. 

So, we are producing some very substantial support for the economy. And as we have indicated in our statements, we believe that 

the overall configuration of resource utilization and inflation will be 

such that accommodative policy will be justified for an extended period. And so we are certainly not ignoring that side of our mandate. 

Mr. WATT. I’m sure my ranking member may think that I’m 

throwing you a softball when I ask this question, but I seem to detect in your statement a greater emphasis on transparency at the 

Fed, particularly on page 4 where you say that the Federal Reserve 

recently announced the criteria that it will apply to determine the 

eligibility of money market mutual funds to serve as counterparties. That’s something that you are announcing pretty far in advance. And then a proposal describing a Term Deposit Facility was 

recently published in the Federal Register, and the Federal ReVerDate Nov 24 2008 17:56 Jul 23, 2010 Jkt 056764 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\56764.TXT TERRIE
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serve is finalizing a revised proposal. Am I misreading that you all 

seem to be putting a greater emphasis on providing more transparency to the public and to the people that you deal with about 

how the Fed is going to play this out? 

Mr. BERNANKE. We have been very much committed to maintaining high transparency. We will continue to explain and communicate as clearly as possible our criteria and how we’re going to forward with withdrawing stimulus. And we’ll be providing information, as we already are, for example, on the specifics of our asset 

purchases and what we hold. 

As I mentioned in my testimony, we have just recently phased 

out, and with the TALF in June we will have phased out all of our 

13(3) facilities that we created to support troubled financial markets. And as I mentioned in my Humphrey-Hawkins testimony before this committee, we are quite open to a very full auditing of 

those facilities by the GAO, including with an appropriate delay 

the names of all the firms to which we made loans. So we understand the importance of transparency, and I promise you that we 

will continue to do that. 

Mr. WATT. And you have announced closing dates for a couple— 

at least one of the facilities—March 31st and June 30th. Are there 

potential specific impacts that we could see from closing those facilities? Could you elaborate on whether there may be specific impacts in doing that? 

Mr. BERNANKE. Mr. Chairman, these facilities were created 

under the 13(3) emergency authority because conditions were unusual and exigent. The markets were highly disrupted, and highly 

dysfunctional. In substantial part because of our interventions, 

those markets are now working quite normally. So there’s no 

longer a justification for holding those facilities open. And as I 

mentioned, we had closed most of them as of February 1st, and so 

far we have seen no adverse circumstances. 

In the case of the asset-backed securities market, which is the 

one remaining area where we are providing support, while that 

market has not completely returned to normal, we have seen considerable improvement. For example, the spreads between the ABS 

yields and the Treasury yields have come in considerably. Those 

markets are now exhibiting issuances without any kind of Fed support. And so, you know, we believe that it’s appropriate as those 

markets are returning to a more normal condition that we withdraw that support. 

Mr. WATT. Thank you. My time has expired and I’ll recognize the 

gentleman from Alabama, Mr. Bachus. 

Mr. BACHUS. Thank you. Chairman Bernanke, I want to acknowledge that you have been talking about transparency for several years, and you have been an advocate on the Board, and I appreciate that. I think there are distinctions we draw between transparency when it comes to the 13(3) actions and monetary policy, 

and I think there’s a consensus on the 13(3) programs, and some 

of the extraordinary things, and I think that we can get there on 

the monetary policy. 

As part of your quantitative easing strategy, you’re going to stop 

purchasing mortgage-backed securities at the end of this month. 

11 

Does that indicate that you believe that maybe housing has 

reached a sustainable level? 

Mr. BERNANKE. Well, the housing market, Congressman, as we 

all know, is still quite weak, and we have just seen some very weak 

sales numbers in the last few days. But we do believe that the 

mortgage markets are performing better and mortgage rates are 

quite low from a historical perspective, and moreover, our purchases of mortgage-backed securities were also intended to create 

better conditions in private credit markets more broadly. And we’re 

seeing, for example, record issuance in the corporate bond market. 

So we think that our program has been effective. 

We announced quite a while ago that we were going to stop those 

purchases, taper off those purchases at the end of this quarter. 

When we did that, we of course were concerned that when we 

stopped that, mortgage rates might pop back up or we might see 

some fallback in financial conditions. We’ll of course continue to 

watch that situation, but so far, there seems to be very little negative reaction, which is encouraging, and that would allow us to stop 

our purchases without concerns about the implications for the economy. 

Mr. BACHUS. I guess that is some indication that you believe we 

may have reached sustainable prices in housing or at least the 

short-term prospects for housing are more stable? 

Mr. BERNANKE. As I have said in the past, knowing the correct 

value for any asset is a difficult challenge, but many economists 

have pointed out that the ratio of house prices to rents, for example, is very much in a normal range, and between low mortgage 

rates and the decline in house prices, affordability of housing for 

people who want to buy homes is now at a very good level. 

Mr. BACHUS. All right. Thank you. I appreciate that some of the 

actions that were taken in the financial markets by the Fed were 

a result of an economy that was under extreme stress. I’m not sure 

the American people realize the challenges, and they were somewhat unprecedented. And so I think some of the actions that were 

taken were, because of financial markets, in what I have said was 

a heart attack or a stroke condition almost. 

Having said that, we want to avoid that in the future. And my 

concern as we’re talking about regulation, we’re talking about tools 

to deal with this, but—and I would like your thoughts on this. I 

don’t believe that even with all the tools and all the regulations, 

if we don’t get our fiscal house in order, the Congress, you’re not 

going to be successful. I think reining in the growth of debt is simply going to be impossible for you to do your job if we don’t do ours. 

And I have listed budget reform, entitlement reform, tax reform. 

I think—do you agree that those—it’s critical for Congress to 

take action and do that now to avoid another catastrophic event, 

whether it’s 2 years, 5 years or 10 years from now? 

Mr. BERNANKE. Congressman, we have very high deficits this 

year and next year, and given the severity of the recession, it’s unlikely we could get a balanced budget in the next year or two. And 

I think we all understand that. 

But my concern is that our projections, whether they come from 

the Administration or from Congress or from outside analysts, still 

show deficits between say 2013 and 2020 of between 4, 5, 6, and 

12 

7 percent of GDP, which, if that happens, would cause the ratio of 

debt outstanding to our GDP to rise to very high levels. I think 

while that’s still sometime in the future, the risk exists that even 

today investors, creditors might become concerned about our ability 

to maintain a sustainable fiscal position. 

So I think it is very important that the Congress try to develop 

a plan, a program, an exit that will be a credible plan for returning 

to a sustainable fiscal situation over the next few years. 

Mr. BACHUS. Thank you. 

Mr. WATT. The gentleman’s time has expired. The gentlelady 

from California, Ms. Waters, is recognized for 5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. I would like 

to thank Mr. Bernanke for being here today. The last time he was 

here, we had a limited discussion about the Federal funds rate. 

There’s going to be some testimony here today by Dr. Ball of Johns 

Hopkins, where he says the Fed should not raise the Federal funds 

rate in the near term. His exact quote is, ‘‘Someday the economy 

will recover and the Fed should raise the Federal funds rate, not 

soon but someday.’’ Would you agree with this assessment? How 

long would unemployment have to go in order for you to think it 

was appropriate to raise the Federal funds rate? Do you agree with 

Dr. Ball’s assessment that the Fed should give greater weight than 

usual to unemployment when deciding how to set rates? 

I raise this question because, as you know, the National Urban 

League released its State of Black America report for 2009 yesterday. We know that last month, Blacks were unemployed at nearly 

twice the rate of Whites, 15.9 percent to 8.8 percent. The gap since 

1974 is just barely closing. In considering the question on the Federal funds rate, do you consider this wealth and employment gap 

to be a serious problem? Do you think that a rising tide for the 

overall economy will actually reduce the gap? Based on your experience as an economist, should we be targeting stimulus to the communities with the greatest needs? On and on and on. I guess I have 

been talking to you and others about the unemployment rate 

among African Americans, Latinos, and the rural poor for a long 

time. I hear nothing about what we can do in terms of targeting. 

I hear no plan coming forth about how we can involve these communities in opportunities that would reduce the unemployment. 

Can you help me out with this in some way today, in talking about 

the Federal funds rate or any other aspect of your responsibility to 

help us understand what we can do? 

Mr. BERNANKE. Certainly. First, we are in complete agreement 

that the high unemployment rate is a tremendous social and economic problem in the United States today, and just a quick look 

at the figures verifies that minority immigrant populations suffer 

from much higher unemployment rates than the average. 

And that’s bad for social integration, it’s bad for progress in the 

communities, so I absolutely agree with you that’s a very severe 

problem, particularly when you have as you have today a lot of 

long-term unemployment. Because it’s one thing to be out of work 

for a month or two, but if you’re out of work for 6 months or a year, 

then you begin to lose your skills, you begin to become very unattractive to employers, and it’s clearly a long-term negative and not 

just a short-term negative. 

13 

As I have said to Chairman Watt, the Federal Reserve takes very 

seriously its responsibility to try to induce maximum employment, 

and that’s precisely why we have done these extraordinary things 

to go beyond zero interest policy to expanding our balance sheet 

and providing as much stimulus as we can to get the economy moving again, and we consider that to be very important. 

As we exit at some point, of course, we’ll try to pay attention— 

we will pay attention to employment and how that’s evolving. We 

will not be able to wait until things are completely back to normal, 

because monetary policy takes some time to operate, and given 

those lags, we’re going to have to anticipate to some extent the return of the economy back to normal conditions. But we certainly 

want to be sure that the economy is on a sustainable growth path 

and that jobs are being created as we begin to withdraw some of 

the— 

Ms. WATERS. Excuse me, Mr. Chairman, I don’t want to interrupt 

you. Do you have any ideas about what we could do about the extreme unemployment in these communities, rural poor, African 

Americans, Latinos? 

Mr. BERNANKE. Sure. 

Ms. WATERS. I understand what you’re saying, and you correctly 

described the problem, reiterating what we all know, but what 

plans, what ideas do you have about how we can target these communities to get rid of this unemployment? 

Mr. BERNANKE. Well, I was talking about the Federal Reserve’s 

role, but there are certainly a number of things that Congress can 

consider. 

Ms. WATERS. Well, now I really do want to know the Federal Reserve’s role. Is there anything that you can recommend? 

Mr. BERNANKE. I can recommend things. For example, I met yesterday with Community Development Financial Institutions, 

CDFIs—I’m sure you’re familiar with those—who are taking funding and bringing it to underserved communities to try to create economic opportunities. I think that’s a very valuable direction. 

I know Congress is looking at education and training issues, and 

I think given the long-term unemployment issues, trying to make 

sure people can either retain their skills or get new skills is going 

to be very, very important. There are a number of proposals out 

there for job creation through fiscal measures. I think it’s really up 

to Congress to decide what combination of actions to take, but certainly there are things that you can do through the States, for example, to try to increase employment. But many of those programs 

are fiscal, and therefore are the appropriate province of the Congress. 

We at the Federal Reserve have a lot of economic analytical capability, and as you know, we are always willing and interested to 

provide technical assistance to any Congressperson working on a 

program. We have worked with Treasury on their employment programs, and we stand ready to provide any kind of help we can, and 

if you have some specific things you would like us to work with you 

on. 

Mr. WATT. That might be one of those issues that we want to 

pursue outside the context of this hearing. The gentlelady’s time 

14 

has expired, and the gentleman from Texas, Mr. Paul, is recognized. 

Dr. PAUL. I thank the gentleman for yielding. I imagine everybody agrees that the increase in the monetary base in this last 

year-and-a-half is probably historic. I don’t think we have much in 

our history to look back at as a precedent. So I would assume that 

we can’t look back too easily and look at trying to solve a problem 

like this and what we have to do and how much the monetary base 

has to shrink. 

As we talk about this, I think most people assume that they’re 

waiting for a signal from you when the balance sheet might shrink. 

But even in the Depression, when it shrunk 16 percent, it wasn’t 

done purposely; it was the way the system was working back then. 

Can you give me a rather quick answer on this? Do you have any 

idea what percentage the base should shrink or might shrink, or 

is that something that you don’t even want to address? 

Mr. BERNANKE. No. I think we would like to bring the balance 

sheet back to something consistent with where it was before the 

crisis, which means enough to accommodate Americans’ demand for 

currency plus a modest amount of reserves in the banking system, 

and that would suggest something under a trillion dollars I think 

would be— 

Dr. PAUL. A trillion dollars? 

Mr. BERNANKE. Or less, yes. 

Dr. PAUL. Okay. Of course, that would be very unprecedented. 

During the crisis that Paul Volcker had to deal with from 1979 to 

1982, it was considered a major problem. The inflation got out of 

hand at 15 percent and he had to come in and do something. And 

I guess the question is, how much did he have to shrink the balance sheet during those 3 years? 

Mr. BERNANKE. Well, not very much. He was focused on money 

growth in particular. So he wasn’t clearly in a situation where we 

are now where there are these large, unused balances. I would 

point out that he was focused on M1 and M2 growth. M1 and M2 

are not doing anything now. They’re very flat. It’s just the base, as 

you point out. 

Dr. PAUL. Excuse me, but the truth is, is during that time, which 

was considered very tight money, the monetary base was still growing, during those 3 years, the monetary base grew 31 percent. So 

my suggestion is, it might not be so easy to cut back, because even 

in the midst of an inflationary crisis like that, because maybe in 

6 months or a year from now when you decide to do something, 

maybe there will be an increase in M1 and M2, and then it will 

be a different ball game when you’re dealing with this. 

But I have another question dealing with something you said on 

page 4 when you talked about one tool that you will have. Because 

quite frankly, I think if we get into a situation where this housing 

crisis reemerges, which I believe it is, it is going to be difficult for 

you to do what you say, because that’s why you have been obviously hesitant to do anything. 

But you said one of your tools will be to pay interest on the balances, and that will cause banks to do different things and borrowers to do different things. And of course, I see that as a method 

of price fixing. In the early part of the last century, the free market 

15 

economists said that socialism couldn’t work. It wouldn’t work. It 

would fail. And socialism and communism would fail because of 

pricing. And I assume that you would endorse this principle that 

wage and price controls aren’t necessarily the best way to handle 

rising prices. Is that a safe assumption? 

Mr. BERNANKE. Absolutely. 

Dr. PAUL. Okay. My question and concern in economic policy is, 

isn’t fixing interest rates in order to get the economy to do something a form of price fixing? The importance of prices in a free market is to tell the businessman and the consumer what to do. If the 

price is too high, they don’t buy, and the businessman responds to 

supply and demand. Why is that not true in money? Money is onehalf of every transaction. So if we’re working on this false assumption that you’re exempt from the market forces and you have some 

type of unique ability to say, ah, interest rates are different. I know 

what is best. I know what they should be. They should be zero percent for 15 months instead of 16 months. Why does that logic not 

apply to fixing interest rates? 

Mr. BERNANKE. Because if you believe that wages and prices are 

not perfectly flexible, and there are many that are not, then the 

economy can get pushed away from full employment, as it obviously is today. And economists of all stripes, including Milton 

Friedman and others, agree that using monetary policy, monetary 

policy can be a useful tool to try to create growth and stability. In 

this particular case, low interest rates create more demand and can 

help bring the economy back to full employment. 

Now obviously there are limits to that, and we recognize those 

limits, but changing the interest rate is really just the other side 

of changing the quantity. Quantity and price are two sides of the 

same equation, as you know. So we can either change the quantity 

or we can change the price. By changing the price, we affect economic activity and try and achieve the objectives that the Congress 

has given us. 

Dr. PAUL. Well, my fear is— 

Mr. WATT. The gentleman’s time has— 

Dr. PAUL. —that your results will be the same as wage and price 

controls. 

Mr. WATT. The gentleman’s time has expired. The gentlelady 

from New York, Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Good morning, 

Chairman Bernanke. 

Mr. BERNANKE. Good morning. 

Ms. VELAZQUEZ. The Central Bank is currently in the process of 

winding down the TALF facility which provided vital liquidity for 

commercial real estate and small business lending. Many experts 

have expressed concern that these lending sectors remain vulnerable to further losses. Without the TALF, what will the Fed do in 

the event that instability returns in the CRE or small business 

lending markets? 

Mr. BERNANKE. Let me put aside just for a moment the CRE. In 

the other categories, credit cards and auto loans and student loans 

and small business loans, we have seen the secondary market, 

asset-backed securities market, coming back pretty well, and we 

have been seeing spreads that are normal. We have been seeing 

16 

issuance outside the Fed’s facility. So it’s not 100 percent normal, 

but we have seen considerable improvement in those asset-backed 

securities markets. 

Now CRE is a difficult problem, as you know, and the basic reason at this point is that the prices of commercial real estate across 

the country have dropped, in many areas 40 percent or more, 

which obviously makes the creditworthiness or their credit risks 

much greater, and has made it much more difficult to obtain credit. 

We have been attacking that issue from a number of fronts at 

the Federal Reserve. The TALF is just one dimension. The commercial mortgage-backed securities market is not completely normalized, but it has improved, and those spreads have come in. And we 

believe that it’s getting more and more difficult for us to justify our 

unusual and exigent emergency powers in the context of a market 

that is improving. 

But we recognize there are a lot of issues still, and that’s why 

we have, for example, issued guidance to the banks about how to 

manage their CRE portfolios, and in particular how to make sure 

that they provide credit where the borrowers are creditworthy, and 

try to help them work out loans that are troubled and find ways 

to solve that problem. 

So we’re working more through the banks now at this point than 

through the MBS market or CMBS market. But that is a troubled, 

certainly one of the most difficult areas right now. 

Ms. VELAZQUEZ. Mr. Chairman, we continue to hear that small 

businesses are facing a problem of accessing credit. In your view, 

is the lack of liquidity the root cause of credit for small businesses? 

What is it? 

Mr. BERNANKE. Well, there are a lot of reasons. There has certainly been a big drop in the demand for credit from small businesses because of weakness of the economy. And in some cases, 

small businesses have had financial reverses, which make it much 

more difficult to lend to them. But all that being said, there certainly are creditworthy small businesses that cannot obtain credit, 

and again, that has been an important priority of the Federal Reserve, and we have worked with the Congress and the Treasury as 

well to try to support small business lending. 

Once again, we have issued guidance to the banks about encouraging lending to small businesses and have trained our own examiners to take a balanced perspective, that they not over-penalize 

loans to small businesses. We are trying to get as much feedback 

as we can. For example, we have inserted questions in the NFIB 

survey to get back more information from small businesses about 

their credit experience. And currently, our reserve banks around 

the country are holding meetings with small businesses, banks, 

and community development groups to try to understand better 

what the issues are and how we can improve small business lending. 

So it’s a tough problem. I think there are some proposals from 

Treasury that I think are worth looking at, but we are certainly 

working with the banks on this issue. 

Ms. VELAZQUEZ. Can we talk about the $30 billion proposal from 

Treasury for a moment? Should regulators be concerned that the 

banks who participate in this program may stretch to make impruVerDate Nov 24 2008 17:56 Jul 23, 2010 Jkt 056764 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\56764.TXT TERRIE
17 

dent loans in an effort to reach lending levels that deliver higher 

interest rate incentives? 

Mr. BERNANKE. There are various ways to structure the program, 

but all the ones that I understand basically make the bank have 

some skin in the game. That is, they share in the loan, and if the 

loan goes bad, then they’ll lose at least part of the loss. And I think 

that’s the reason to try to use the small banks in particular to 

make these loans, because they have the information and the expertise to make them. So as long as the banks have sufficient incentive to make good loans because they’ll lose money if they don’t, 

then I think that will reduce that risk considerably. 

Ms. VELAZQUEZ. And do you think that without any strings attached to the $30 billion that the banks will make small business 

loans? 

Mr. BERNANKE. There should be strings attached in terms of 

being able to report that they increased their lending by a certain 

percentage. 

Mr. WATT. The gentlelady’s time has expired. 

Ms. VELAZQUEZ. Thank you. 

Mr. WATT. The gentleman from California, Mr. Royce. 

Mr. ROYCE. Chairman Bernanke, I think most economists believe 

that creating a massive new entitlement, the health care entitlement bill that we passed, is going to add to our deficit. I do not 

think anyone in here believes that we are going to cut half a trillion dollars out of Medicare, as we say we are in the bill, in order 

to help pay for it. So, Congress is adding to the deficit. And on that 

note, in recent weeks, Brookshire-Hathaway and Proctor and Gamble, and Lowes, and Johnson and Johnson’s debt traded at lower 

levels, lower yields, than Treasuries of similar maturity. 

And essentially, the market is saying it is now safer to loan to 

Warren Buffet than it is to the United States Government. Now, 

Mr. Geithner disagreed with that conclusion or that assessment. I 

would just ask you your view, because I do not know what else it 

could mean, and I would also ask if you have ever seen this in the 

bond market? What does this say about our fiscal outlook? 

Mr. BERNANKE. It is very unusual, certainly. There are a number 

of possibilities. The one you raised, I guess, is one possibility, although if the U.S. Government is not paying off, then there’s going 

to be a huge amount of economic dislocation that would affect everybody. 

I think one of the issues recently has been, and this would be 

consistent with what you are saying, that the U.S. Government’s 

very large debt issuances have been very big auctions with lots of 

borrowing going on, has put some pressure on the normal purchasers of that debt and they have had a preference for diversifying 

into corporate debt, as you described. So— 

Mr. ROYCE. But, let me ask you about that because the Federal 

Reserve in one analysis I saw purchased a staggering 80 percent 

of the $1.5 trillion of debt issued by the Federal Government last 

year. If we run a trillion and a half deficit here, somebody has to 

buy it. And I think it was the PIMCO analysis that said that 80 

percent of that was bought by the Federal Government. 

I know there was some opposition from some people within the 

Fed in terms of doing that, but you have pundits quipping that, in 

18 

essence, this is like a Ponzi scheme. So, with yesterday being the 

worst day since last July for 10-year U.S. Treasuries, is the Federal 

Reserve considering getting back into the business of buying U.S. 

Treasuries or are we laying off of that approach for awhile? 

Mr. BERNANKE. Well, Congressman, that number is not correct. We purchased last year $300 billion in Treasuries, which was much 

less than 80 percent and that total number brought us back to 

$790 billion which is about where we were before the crisis. So, at 

this point, the Fed owns the smallest share of U.S. Government 

debt as it had for many, many years. We are not monetizing the 

debt and we have no immediate plans to do so in the future. 

Mr. ROYCE. Let me ask you another question. I appreciate your 

analysis on that, and I was struck when I read the analysis from 

PIMCO and I do not know how they perceived the amount of government intervention into the market here, but let me ask you one 

last question. The Dallas Fed president, Richard Fisher, said of the 

easy money policy during the most recent housing boom, rates held 

too low for too long during the previous Fed regime were an accomplice to the reckless behavior. 

Now, I remember The Economist, the British magazine, arguing 

at the time when we lowered the Fed funds rate to what effectively 

was below inflation, that we were going to face a boom, a bubble 

in the housing market. And they also argued that because Europe 

would have to follow suit to be competitive, it was going to cause 

a bubble there, as well. 

And year after year after year that rate was held that low. I 

would just ask you, given the Fed’s track record, what assurances 

do we have that the Fed will be any more vigilant when the next 

bubble begins to form? Is it even possible to take away the punch 

bowl, as they say, just as the party is getting started? 

Mr. BERNANKE. I do not want to rehash history, but I think there 

is a lot of conventional wisdom out there about the earlier episode, 

and we have published a paper looking at the evidence, and I think 

it is much less clear than some people would make it. 

But, putting that aside, we recognize that the very low interest 

rates we have today, that a number of people have been concerned 

about the possibility of creating a bubble in some asset class, I am 

not clear which one, and all I can say is that we agree that it is 

important to monitor what is happening in financial markets. We 

are doing that and although it is very difficult to know whether an 

asset is appropriately priced or not, we do not see at this point any 

major mispricing in important asset classes right now. 

Mr. ROYCE. Thank you, Chairman Bernanke. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from California has deferred until later in the process, so the gentleman from New York, Mr. Meeks, is recognized for 5 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. Chairman Bernanke, it 

is good to see you again. I just want to make sure that first, let 

me get an understanding with the talks in reference to interest 

rates. I know that at the last FMOC meeting, the President of the 

Federal Reserve Bank of Kansas City, Tom Hoenig, dissented in regards to the use of language about low rates for an extended period 

of time. He basically made the argument that does not give the Fed 

the flexibility that it would need in case the recovery happens at 

19 

a quicker pace and that people are starting to build on expectations 

into the market place because of the low interest rates. 

So, do you, I am just asking you, first of all, can you have the 

flexibility that you need and then if the economy improves at a 

quicker rate, can you be flexible without shocking markets that are 

building in the expectations about the low interest rates? 

Mr. BERNANKE. Yes, we can. Mr. Hoenig’s specific concern was 

the same one I talked to Mr. Royce about, which was about bubbles 

and asset imbalances, and as I say, we are looking at that issue. 

But, I think it is very important to keep in mind that when we talk 

about an extended period, we are not saying a fixed period of time, 

we are saying a period of time which depends on how the economy 

evolves. And our statement very specifically says it depends on the 

level of resource utilization or unemployment, it depends on what 

inflation is doing, and it depends on inflation expectations. 

So, if those things begin to move, then obviously that is going to 

lead us to respond appropriately. 

Mr. MEEKS. I’ll tell you what my concerns are just in the housing 

market, for example, in that regard. What takes place, or what is 

taking place in America in a lot of communities, is a lot of people 

are underwater right now with their mortgages. And some are 

okay, they are making their payments if they have these adjustable 

rates because the interest rates are low. And so, they are not concerned because they are making it now, but if those interest rates 

suddenly jump up, then they are going to have a problem paying 

their mortgage, you know, that shock and where we go. 

Now, Bank of America has recently, I just want to ask this question, has said that they are going to, as opposed to just reducing 

interest rates, they are going to reduce principal by as much as 30 

percent. So, I would like to know: (a) do you think that would have 

a significant impact on reducing foreclosures in the future, because 

I’m concerned about foreclosures going up in the future; and (b) 

what is the Fed doing, if anything, to encourage other banks to 

lower the principal as opposed to just reducing interest rates? 

Mr. BERNANKE. Well, I think one thing we are learning is that 

when it comes to addressing foreclosures, one size does not fit all. 

There are people with different types of problems. There are people 

who have a payment which they cannot afford and a lot of the programs we have seen so far, like the HAMP program, are about getting the payment down. 

Then, you have people who are unemployed for a period of time. 

Maybe they can afford their house in a longer term, but for a period of time, they do not have the income and they need temporary 

help. 

Then, you have a lot of people around the country who are underwater, as you say, and the Federal Reserve has argued for several years that one strategy is to help people who are underwater 

to build up equity again so that they will have an incentive to stay 

in the home and continue to make the payments. 

Going forward, I think it is useful to have all these different 

strategies, because each different type applies to a different group 

of people. I don’t know that much about Bank of America’s specific 

approach. A lot depends on the details. But, I am glad to see that 

they are including this strategy. The industry was very reluctant 

20 

to use principal reduction for a long time. And I am glad to see 

that they are opening up now the idea of using that as one tool to 

address foreclosures. 

The Federal Reserve, as a bank regulator, we put out guidance 

in November of 2008, and we are certainly strongly urging banks 

to be responsible in restructuring of their mortgages where necessary, and in particular, in participating in the Administration’s 

and Congress’ plans to help underwater borrowers. 

Mr. MEEKS. Do you see or do you have the concerns that I have, 

that we could have another foreclosure crisis, though, given the 

way that the markets are and the interest rates right now, especially those that are still in adjustable rates, especially those who 

are underwater, because they cannot refinance their mortgage to 

get a fixed rate and thereby— 

Mr. WATT. The gentleman’s time has expired, so the Chairman 

will perhaps answer that question. 

Mr. BERNANKE. Later? 

Mr. WATT. Later or briefly. 

Mr. BERNANKE. Okay. We control the very short-term rates. 

There are very many fewer adjustable rate mortgages out there 

now than there were a few years ago. Most people have fixed-rate 

mortgages, and so they would not be affected very much by our policy. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. Good morning, 

Chairman Bernanke. Yesterday, we had a hearing, yesterday or 

the day before, with Secretary Geithner regarding the GSEs. In a 

line of questioning from my colleague from New Jersey, Mr. Garrett here, the Secretary first said that the debt of the GSEs was, 

‘‘as I said, it is not sovereign debt.’’ And he also said, ‘‘we are going 

to make sure that these institutions have the resources they need 

to meet their commitments past and future,’’ which may be a distinction without a difference on whether or not the GSE debt is 

sovereign debt. 

Clearly, as your balance sheet has inflated, a lot of this is agency 

MBS, a lot of it is clearly GSE paper. As I understand your current 

strategy, the program to purchase the agency MBS is about to wind 

down, or has wound down. Is that correct? 

Mr. BERNANKE. At the end of March, yes. 

Mr. HENSARLING. At the end of March? So, literally in a matter 

of days. But, you still have a lot of this on your balance sheet. As 

I understand it, your strategy is to retain most of it, although you, 

to hold to maturity, although you hold open the option of perhaps 

selling it when market conditions improve. Do I understand the 

strategy of the Fed correctly? 

Mr. BERNANKE. We would like to get back to an all-Treasury 

portfolio within a reasonable amount of time. So, we are currently 

letting GSE paper that redeems, that matures, we’re letting it roll 

off. And I anticipate that at some point we will, in fact, have a 

gradual sales process so that we can begin to move our balance 

sheet back to its pre-crisis condition. 

Mr. HENSARLING. There was an article in The American Banker 

yesterday concerning your strategy. I will read from a portion of it. 

21 

It talks about when you announced that you would slow your MBS 

purchases, cease them by the end of the first quarter, that mortgage bankers winced. 

‘‘They fear that without the Fed to prop up such, securities would 

sink causing their yields relative to benchmarks like Treasury 

bonds to soar. Such an increase would, in turn, cause mortgage 

rates to jump, sapping demand for home loans in an already weak 

market, but it appears that the industry’s worst fears were unfounded. Market participants point to several reasons for the relative stability. For one, their traditional MBS buyers that were 

pushed to the sidelines when the Fed came in are ready and waiting for their chance to get back into the market.’’ 

Would you agree with the assessment of that American Banker 

article? 

Mr. BERNANKE. Broadly speaking, yes. 

Mr. HENSARLING. Let me ask you this, Mr. Chairman, then. As 

you are aware, the Administration has not put forth a plan in dealing with the long-term future of the GSEs. Neither has Congress 

heretofore. I personally have introduced my own bill to deal with 

the GSEs that, over a 5-year period, would essentially send them 

back to a competitive marketplace by slowly ratcheting down their 

portfolio holdings, their conforming loan limits, raising their capital 

standards to that of insured depository institutions. You know, it’s 

at last a plan. 

I guess my question for you, Mr. Chairman, is, I do not believe 

anybody believes that we can do without the GSEs in the short 

term, but as you have said in earlier testimony, it is important for 

us to show a sustainable fiscal path for the future. How important 

is it that the future of the GSEs be included in that sustainable 

fiscal path, and if we do not do it, what are the implications for 

you unwinding your balance sheet? 

Mr. BERNANKE. Well, I think, as I said last time, if we can begin 

to map out a future for the GSEs sooner rather than later, even 

if we do not execute that immediately, it will remove some uncertainty from the mortgage market and it will also help give confidence about the future of the Federal budget because it will give 

clarity about what obligations, implicit or explicit, the Federal Government is taking on. 

Mr. HENSARLING. Mr. Chairman, if I could, I hate to be rude, but 

I see my time is winding down. I am going to attempt to slip in 

one more question. In the next panel, we are going to be hearing 

from economist Dr. Taylor. I read part of his testimony and if I 

could quote from it: 

‘‘Whether one believes that these programs worked or not, alluding to the Federal Reserve programs, there are reasons to believe 

their consequence going forward are negative. First, they raise 

questions about Fed independence. The programs are not monetary 

policy as conventionally defined, but rather fiscal policy or credit 

allocation policy or mundustrial policy, a word that has not been 

previously in my vocabulary, because they try to help some firms 

or sectors and not others and are funded through money creation 

rather than taxes or borrowing.’’ 

Perhaps you could comment upon that in writing, on whether or 

not you agree with that assessment. Thank you. 

22 

Mr. WATT. The gentleman’s time has expired and we will allow 

subsequent written responses. The gentleman from Kansas, Mr. 

Moore, is recognized for 5 minutes. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. Chairman 

Bernanke, looking at how debt and leverage have been used in the 

past decade by financial firms, non-financial businesses, consumers, and the government, we seem to have developed an 

unhealthy dependence on the use of credit cards, overleveraged balance sheets, and massive deficits to seek economic growth and 

prosperity. 

Analysis by Morgan Stanley shows total credit outstanding, including households, financial firms, businesses, and government, 

amounted to roughly 350 percent of GDP at the end of 2008. Clearly, this is unsustainable. And the McKinsey Global Institute noted 

that the leveraging can last a painful 6 to 7 years after a financial 

crisis. 

Do you believe that we are too dependent on debt and leverage, 

Mr. Chairman? And if so, how should we encourage and restore fiscal responsibility and restraint in the use of credit and debt acrossthe-board? And most importantly, for the financial sector but also 

for government, for businesses, and for individuals and families? 

Mr. BERNANKE. I think there are debt concerns and they affect 

different sectors differently. For the banking sector, for example, 

there was too much leverage and that is part of the reason why we 

had the financial crisis. The Federal Reserve and other agencies 

are working internationally to try to develop higher, more rigorous 

capital standards, which we will try to phase in slowly so as not 

to disrupt the recovery too much. But, going forward, there needs 

to be higher capital, and lower leverage in the financial system. 

More generally, we need to have a better balanced economy. We 

need more saving by consumers and we need a better fiscal situation, as we have discussed already several times. And that, in both 

cases, that would involve less debt by the public and private sectors. On the other hand, we need to make sure that there are 

sources of growth going forward. And if it is not going to be consumer spending, then what is it going to be? 

One area certainly is capital investment, which increases productivity and leads to long-term growth. And another is net exports. 

We have a current account deficit, a trade deficit, and we are borrowing to finance that. That is another form of debt. We would like 

to have an economy that has a better balance in our trade so that 

exports would be a source of demand, a source of growth for our 

economy. 

So, yes, debt and lack of saving is an important issue. It is a 

somewhat different issue for the financial sector, private sector, 

government, and the trade sector, but in each of those areas, I 

think we need to work to a more balanced situation. 

Mr. MOORE OF KANSAS. Thank you. Mr. Chairman, I am interested in learning more about the repurchase agreements, or repos 

and reverse repos that the Fed is utilizing to safely unwind the 

emergency programs set up to deal with the crisis. In particular, 

I feel like we have not given enough attention to the short-term financing market that Wall Street firms and others have depended 

23 

on for their financing. In addition to the repo market, I am thinking about the commercial paper and money markets, as well. 

When we learned about Lehman using repo 105 to conceal its leverage, I wonder if this short-term financing market is another 

shadow market where there is not a lot of transparency by its very 

nature. It provides an opportunity for more shady financial activity 

in the future. 

Would you explain, Mr. Chairman, how the Fed itself uses these 

repos and then share any thoughts you have on improving financial 

stability in terms of how the short-term debt and liquidity markets 

function, especially in a crisis? 

Mr. BERNANKE. Well, I would like particularly to address the 

functioning of that tripartite repo market, which is a short-term 

market that allows money market mutual funds, pension funds, 

and others to park their money for short periods. It is a huge market, it is two and a half trillion dollars, or so. And the Federal Reserve has been very much engaged in trying to make that market 

stronger, more resilient. 

We were very concerned back in the crisis, one of the reasons we 

were so worried about the failures of Bear Sterns and Lehman 

Brothers was that we thought it might lead to a collapse of this 

critical market and so, in recent quarters, the Fed, the private sector, and others have been working together to try to improve how 

those markets function, and in particular, that we would have a set 

of protocols that we could have used in case a major player failed, 

a major firm were to fail. 

So, we want to make those markets stronger. That, indirectly, 

helps with the ‘‘too-big-to-fail’’ problem because if we feel that the 

system is strong enough, there is less need or danger in allowing 

a firm to fail. 

So, we are very much interested in strengthening those markets. 

The Fed is very active in the repo market now, but in order to help 

reduce reserves in the system, we are looking to broaden the people 

we trade with to include not just the primary dealers whom we 

deal with on a daily basis, but also a wide range of other shortterm money providers like money market mutual funds, that we 

have already worked with. 

We are expanding that so that we will be able to drain reserves 

effectively as we come to the point where we need to tighten monetary policy. 

Mr. Moore of Kansas. Thank you, Chairman Bernanke. And Mr. 

Chairman, I yield back my time. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from New Jersey, Mr. Garrett, is recognized for 5 minutes. 

Mr. GARRETT. Thanks, Mr. Chairman. Chairman Bernanke, you 

made the comment, and you said it here as well, and everybody 

agrees, that you want to try to shrink back the balance sheet to 

just the prior date, which is, everybody here agrees, a good thing. 

But, the economy was really big then, too, and since that time, 

things have changed. You have lost, sort of, the shadow banking 

system that is really not there anymore. The huge multiplier effect 

that is out there, the money supply, that is not there anymore, the 

leverage ratios that we have had in the past, they are not there 

anymore. 

24 

So, with all that gone, which was really making the economy 

grow at a good pace, with those things gone now, and if you do the 

good thing and go back to the smaller balance sheet, would that 

not have a negative impact or see the economy shrink because of 

that, or not shrink, but not grow to the levels that we saw before, 

and would not that play into your decision-making as far as how 

soon you want to shrink your balance sheet? And is there some sort 

of, I guess, metrics, that you are going to have to use in that sense 

of setting the timeline or establishing your balance sheet shrinkage? 

Mr. BERNANKE. I think that you are right, that shrinking the 

balance sheet is akin to a monetary tightening. You sell mortgages 

on the market, you are going to tend to raise mortgage rates, for 

example, and that will tend to tighten the housing market and 

slow the economy— 

Mr. GARRETT. Plus, you have all this other tightening going on, 

too. 

Mr. BERNANKE. And others, as well. You are absolutely right. We 

should not even want to hold this stuff 30 years, so the key here 

I think is to, when we do come to the point we want to sell assets, 

is to do it in a gradual and predictable way so it has minimal impact. 

Even when we get back to the pre-crisis balance sheet, we will 

still be able to manage the short-term interest rate, the Federal 

funds rate, much as we have in the past, so if the economy needs 

stimulus, we will still be able to do that. But, we just would not 

be doing it through the— 

Mr. GARRETT. So do you target the size of the balance sheets sort 

of the same way you target the funds rates now? 

Mr. BERNANKE. You could think about it as a two-step procedure. 

First, we bring the funds rate down as far as it can go, then we 

cannot do that anymore, that is as far as it can go, and then the 

balance sheet is a secondary tool. When we get back to normal, we 

hope the balance sheet will be back to normal, and we will be going 

back to where we were before, which is just using the short-term 

interest rate as our basic tool. 

Mr. GARRETT. And you will be back to where you were before the 

economy just cannot be back there because of those multiplier effects. 

Mr. BERNANKE. I think that the economy will be able to recover 

as long as we make these adjustments in a gradual way. 

Mr. GARRETT. Okay. Second question. Walk me through. I threw 

out some numbers before. If you try to pay the interest on reserves 

here, and I threw out the number, if you had a trillion dollars set 

on reserves and if the interest rates go up, because a lot of people 

expect them to, to say, 5 percent, to use round numbers in my 

head, that is $50 billion that you will be paying out. That is, in essence, a capital version of how it works, right? 

Mr. BERNANKE. Yes. 

Mr. GARRETT. Okay. So then, if you did that, starting tomorrow, 

let us say, how long can the Fed do that? How long can the Fed 

hold a trillion dollars here on your books, pay out $50 billion in interest payments, can you do that this year, and the next year, and 

the next year? How does that work? 

25 

Mr. BERNANKE. We can, for the following reason, that there are 

two sides to our balance sheet. The reverse repos, reserves, whatever, are financing. On the other side, agency MBS, which pay 

about 41⁄2 percent. So, from the point of view of the seignorage, or 

the revenue we give to the Treasury, the money we’re paying to 

banks from say, interest on reserves, is more than compensated by 

the income received from the mortgage-backed securities. 

And so, in fact, for the next few years, we anticipate and we already have seen this, that the Fed will be sending to the Treasury 

an unusually large amount of money because the returns on the 

mortgages so much exceed the cost of funds to the Fed. So, because 

of the two sides of the balance sheet, it will not be costing the taxpayer any money. 

Mr. GARRETT. Okay, and it is not just the cost to the taxpayer, 

but it could go on into, I do not want to use the word in perpetuity, 

but you can do it indefinitely, is what you are saying? 

Mr. BERNANKE. Well, because half of our balance sheet is, we are 

paying right now 12 basis points and the other half we are paying 

zero because it is just cash, so we have very little cost of funds and 

so obviously we can go a long time. 

Mr. GARRETT. And with just a short time left, what is the technical term, what are technical indicators you look to with regard 

to inflationary rates or otherwise, as far as your tightening policy? 

Mr. BERNANKE. Well, we look obviously, at current inflation 

numbers including a variety of indicators like trim means, and core 

measures, and overall measures and so on, but we also look at 

things like the break-even rate in the inflation protected securities 

market, survey numbers, because expectations are as important as 

the level of inflation, itself. Because if people think inflation is 

going to be high, then they are going to demand higher wages, and 

prices, and that will create an inflation spiral. So, we look both at 

expectations and at current prices. 

Mr. GARRETT. Okay. And there is the red light, so thank you, Mr. 

Chairman. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from California, Mr. Sherman, is recognized for 5 minutes. 

Mr. SHERMAN. Yes. To the ranking member’s opening statement, 

indeed there has been an enormous and controversial multi-trillion 

dollar expansion of the Fed balance sheet and this has been part 

of an overall process called bailouts. As lawmakers, we would ask, 

well, under what law was this done? And the answer is, 13(3) of 

the Federal Reserve Act which gives the Federal Reserve Board unlimited authority which they have used to the tune of trillions of 

dollars, and I remember last year asking Chairman Bernanke 

whether he would accept a $12 trillion limit. Being a man of modesty, he agreed to that, and then this committee adopted on voice 

vote a $4 trillion limit and no other limit was proposed, though I 

proposed a $4 trillion limit, nobody else said, well, why not three 

or two or six? 

And I would like the acting ranking member to indicate whether 

he thinks it is better that we have a $4 trillion limit on section 

13(3) or no limit at all? I yield to the gentleman. But I realize there 

are other— 

26 

Mr. WATT. If the gentleman is yielding, and my choices are $4 trillion or indefinite, I prefer $4 trillion. 

Mr. SHERMAN. Thank you. I would hope that the senior leadership on the Republican side would correct some of the misleading 

press releases that have gone out from some Republican members 

attacking those who voted for a $4 trillion limit and implying that 

a $4 trillion limit was a grant of $4 trillion of power to the evermodest Chairman Bernanke, when in fact, that was indeed our 

choice—$4 trillion is what was in my amendment. The alternative 

is to stick with the present statute, which is absolutely unlimited. 

Those who propose limits should not be attacked as those who 

are calling for the removal of limits. 

With that in mind, we have a little problem in the 10 biggest 

real estate markets in the country, including especially Los Angeles. Right now, the conforming loan limit and the FHA limit is 

$729,750. End of this year, it drops, the GSE limit drops in L.A., 

and most of these other markets to $417,000, a precipitous drop. 

This country is still dependent for its wealth, its consumer confidence, on home prices and is still dependent on the GSEs for supporting the mortgage market. 

Chairman Bernanke, do you think it would have a bad effect on 

home prices in those 10 markets and the national economy if we 

were to see a sudden, precipitous, and massive drop in the GSE 

limit? 

Mr. BERNANKE. At this point, there is really no private label 

mortgage market around and the availability of credit for so-called 

jumbo loans and so on is very restricted, so it would certainly reduce availability of mortgages and increase the rate paid for mortgages above that new limit. Now, I think people should be concerned and make sure they are comfortable with any costs that 

might imply for the GSEs, given the money that the government 

is using to support the GSEs right now. But, I think it is certainly 

clear that if that happens, it will raise interest costs and reduce 

prices in those areas. 

Mr. SHERMAN. And I would point out for the record that the GSEs actually make a profit on those loans between $417,000 and 

$729,000, and I’ll move on to my next question. 

It is often said that you are supposed to take away the punch 

bowl when the party gets going. This is the dullest party I have 

ever been to and I am an accountant. Thus, you do not need to be 

talking about how to make this party more dull or to keep it from 

getting going, at least in the foreseeable future. 

We do, however, need to focus on what flavor of punch. You have 

mentioned that you have lowered the interest rates. You have expanded your balance sheet, not so much by buying Treasuries, as 

buying private sector debt. The question is, why should taxpayers, 

assuming you should have the expanded balance sheet and I think 

that is a good assumption for the present, why should we expose 

taxpayers to the relatively small risks of the high quality private 

sector debt you have purchased? Why is your balance sheet not all 

Treasuries, rather than the various other investments you have 

made? 

Mr. BERNANKE. At this point, about $100 billion out of $2.3 trillion is related to bailouts. And given AIG’s recent sales, we hope 

27 

that would soon be down to $50 billion. We are moving down on 

that. So, this is not really about bailouts. It is about buying primarily mortgage-backed securities. And from our perspective, the 

Fed’s perspective, these are Fannie Mae, Freddie Mac, and Ginnie 

Mae MBS, which are explicitly or implicitly guaranteed by the U.S. 

Government and so we are not adding any credit risk, whether we 

are holding it or somebody else, it is still a liability of the U.S. 

Treasury and we are not adding to the taxpayers’ risk by buying 

them. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from Texas, Mr. Marchant. 

Mr. MARCHANT. Thank you, Mr. Chairman. Mr. Bernanke, banks 

are also experiencing an historically low cost of funds, are they not? 

Mr. BERNANKE. Yes. 

Mr. MARCHANT. And in this recent raise from a 1/4 of a point to 

a 1/2 point, actually, many banks are, their cost of deposits is much 

less than that. At what point will the banks decide that they are 

better off turning back to loans rather than placing their money, 

keeping their money liquid and placing it, perhaps, in short-term 

Treasuries, where they are making a very, not risk free, but relatively risk free yield? 

At what point does the Fed have a plan or an idea, at what 

point? Or is it an objective to wean the banks off the lower costs, 

at least from the Fed, and begin to put that liquidity, which is massive, back into traditional loans and then the economy will come up 

with it? 

Mr. BERNANKE. We are supplying liquidity, we are not blocking 

its use in any way. Our increase in the discount window rate applies to a very small amount of money, basically the cost of funds 

in the markets for banks remains very, very low. So, we are not 

doing anything to prevent them from lending. The reason they are 

not lending is either they are concerned about their capital, or they 

do not believe they have good lending opportunities. And our view 

is that if we provide continued support to the economy with low interest rates, that the economy will begin to grow, will see more 

strength, and yields remain low, and that, in turn, should make increased opportunities for banks to make profitable loans. And when 

they see profitable loans to make, they will go ahead and make 

them. 

So again, we are just simply supporting a low cost of funds for 

banks, which makes, everything else being equal, it easier for them 

to raise cash to make loans. But there is a little bit of pushing on 

a string here in that unless banks feel that there are good opportunities out there, and right now we are still recovering from this 

very deep recession, they are going to be very cautious. And they 

are very cautious. 

But, going forward, I think I am safe to say we are already beginning to see some improvement in banks’ outlook and their willingness to make loans and I suspect we will see improvement going 

forward this year. 

Mr. MARCHANT. The other thing that I hear from constituents at 

town hall meetings, other than health care, there are a few other 

concerns, is that a large portion of our population depends on their 

CD rates, or the amount of money that they have been saving all 

28 

these years, for part of their income. And now that the income is 

not there, they are not spending. And so, another part of the economic puzzle is that if the rates that they can get for their money 

come back, they will begin to spend again. 

And so, at what point do you feel like the banks will not rely on 

this increased liquidity that you are providing and they will begin 

to put the loans out, raise their rates, and put the money back into 

the economy? 

Mr. BERNANKE. You are right that savers are hurt by a situation 

like this in that the yields they can get are lower and there is no 

question about it. The reason we have kept yields low is because 

we are actually trying to encourage investment and spending that 

will get the economy moving again. And there is a trade-off there, 

I agree. As I said before, we want the banks to have access to liquidity. We have worked with the banks through our stress test to 

try to increase the capital they have. 

That gives them the raw materials to make loans, so to speak, 

and when they see opportunities and the economy is strengthening, 

then they should be willing to make loans. At that point, it will be 

safe for the Fed to consider raising rates, as the economy strengthens, and we will try to get back to more normal situation. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from Massachusetts, Mr. Capuano, is recognized for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. Chairman Bernanke, 

you have only said one thing this morning that really gets me concerned and I want to make sure I understand it. You said something about the asset-backed securities market returning to normal. My definition of the word normal is not a good thing in the 

ABS and I just want to make sure that your definition of normal 

is the new normal, not the old normal. 

Mr. BERNANKE. Yes, it is the new normal, and I am talking about 

traditional ABS, like credit card securitizations and so on, I am not 

talking about structured credit products and all the things that got 

us in trouble. 

Mr. CAPUANO. That’s what I hoped you meant, but I just needed 

to hear it. I did not want to get all worked up over nothing. I do 

want to talk a little bit about the gradual sales process that you 

have talked about, about the securities that you do hold. And I am 

just curious, have you started making any decisions as to where 

you are going to start—are you going to start with Federal agency 

paper, or are you going to use a light method, are you going to go 

with whatever ones have the biggest losses, any decisions at all? 

Mr. BERNANKE. No, we are continuing to discuss it in the Forum 

C. We have not come up with a specific plan. The only thing we 

have done so far is to agree to allow both agency debt and agency 

MBS that mature to just expire and we are not replacing it. We 

are not rolling it over. So that, in itself, will actually reduce the 

portfolio over time. 

Mr. CAPUANO. Because, maybe I am wrong, but as I see it, these 

sales, if and when they start taking place, are really the first time 

between the whole financial crisis that this country might see, well, 

realize or recognize, a loss. Up until now, we may have losses on 

paper that we have not recognized or realized, but this might be 

29 

the first opportunity, the first situation where we actually experience one. Is that a fair reading of the current situation? 

Mr. BERNANKE. That is possible, but on the other hand, as I have 

discussed earlier, we are making an awful lot of income right now 

and that should be set against any losses that we might take in 

the future. 

Mr. CAPUANO. Okay, I appreciate that. I mean, obviously, as you 

go forward, we are all interested in decisions you make. 

The last item I want to talk about is actually something that 

came up when Secretary Geithner was here the other day, and that 

is Fannie and Freddie. As I read the December report that you 

have, roughly about $1.8 trillion, give or take, in secured assets, 

roughly how much of that, and I have the numbers here, I am not 

playing games. I just want to make sure I am reading it right. 

How much of that is Fannie and Freddie assets, roughly? Am I 

reading it right that it is around $200 billion? 

Mr. BERNANKE. I even have the numbers, if you would like. 

Mr. CAPUANO. No, I am not trying to get you. I am trying to 

make sure I am reading it right. 

Mr. BERNANKE. We have about $1.3 trillion or so in agency debt 

and securities, roughly, of which about $175 is debt and the rest 

is MBS. And I think the biggest chunk is from Fannie and then 

Freddie and then finally, Ginnie. 

Mr. CAPUANO. The reason I ask is obviously because, just to tell 

you where I come from. I come from the position that Fannie and 

Freddie might have been engaged in some inappropriate activity 

over the last several years, but no more so for the most part than 

private entities. And as I read these sheets and a lot of the stuff 

that you are dealing with is also, you know, private MBS between 

this and the PPIP and other things you are doing. 

And it just strikes me, is that a fair assessment that Fannie and 

Freddie, though may be engaged in certain unwise decisions for the 

last couple of years, was not doing in any more excessive manner 

than private agencies? The Goldmans and the others? 

Mr. BERNANKE. They surely made mistakes and that is why they 

are losing money, but I do not think their delinquency rate is any 

higher than the private sector, and I think, I would just add for 

the record that since most of our purchases are of relatively new 

MBS, I think the standards have been actually much tighter in the 

last couple of years. 

Mr. CAPUANO. Good. Yes, and the reason I asked that is because 

there has been a lot of wailing and gnashing of teeth about how 

terrible Fannie and Freddie are. And I will tell you that historically, not within the last couple of years, historically, I have seen 

them as a positive thing for this country, creating the middle class 

by allowing people to buy homes, for the most part. 

And I guess, in general, because my time is running out, would 

you submit, would you suggest that we end Fannie and Freddie 

and simply go back to private mortgage or do you think that, again, 

with some of the tweaks that we might have to do and some of the 

fixes, some of them may be extreme, who knows, but the concept 

of government involvement in the mortgage industry is a good concept or a bad one? 

30 

Mr. BERNANKE. I wouldn’t go back to the status quo ante, but I 

think that, and I gave a speech on this a couple of years ago, where 

I laid out some alternatives. I do think there are some scenarios 

where a backstop government guarantee, which is fully paid for, for 

housing, for mortgages, would be a reasonable strategy. 

Mr. CAPUANO. Great. Thank you, Mr. Chairman. Thank you, 

Chairman Bernanke. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from North Carolina, Mr. McHenry. 

Mr. MCHENRY. Thank you, Chairman Watt, and thank you, 

Chairman Bernanke, for being here today. I certainly appreciate 

your leadership of the Fed and trying to get our economy back on 

track. But, as we know, and as you have discussed before, there are 

two houses: monetary policy, which you and the Fed control; and 

fiscal policy, which Congress has authority over. And so it is certainly a challenge for you to control your dual mandates, being only 

able to control half of the quotient of this. 

And so with that, you know, the budget deficit. Being over 10 

percent last year, 10 percent of GDP, last year, this year, next 

year, and only subsiding just barely, the following year. Is this 

price, this high deficit, and the long-term view of where the deficits 

are going under this President’s budget, is that priced into Fed policy and outlook? 

Mr. BERNANKE. It affects Fed policy in several ways. In the short 

term, it affects overall economic activity and that affects our monetary policy strategy to some extent. If there is a loss of confidence 

about the ability of the government in the medium and longer term 

to achieve a sustainable fiscal balance, then the risk which we have 

seen a little bit of, I think, even yesterday, there was just a bit of 

concern, is that interest rates might rise because of a lack of confidence by creditors in the long-term fiscal stability of the government. And that, in turn, would tend to endanger the recovery because high interest rates tend to slow the economy. 

So, it would certainly be good for the Fed and for the country, 

for the economy. As I said before, it is not a practical goal to 

achieve a balanced budget this year or next year, but certainly 

there needs to be some plan for exiting from the current very high 

deficit prospects to give something that is more sustainable over 

the medium term. And that would be very helpful, even today, as 

the Fed tries to plan how we are going to exit our accommodative 

policies. 

Mr. MCHENRY. So, in terms of major legislation that was just 

signed into law 2 days ago, the health care policy, and the cost of 

that, was that priced into the Fed’s outlook over the medium/long 

term? 

Mr. BERNANKE. I know it is very controversial exactly what the 

fiscal implications of that are and I am not going to try to second 

guess the CBO or others who have priced it, but clearly everybody 

agrees that the overall fiscal outlook for the U.S. Government is 

somewhat dark over the medium term. And it would be very useful 

if there could be a bipartisan, concerted effort to explain, demonstrate, and decide, how the government is going to achieve a 

more sustainable fiscal trajectory. 

31 

Mr. MCHENRY. Would you say that enacting that bill has negatively or positively changed the Fed’s outlook on the economy over 

the medium and long term? 

Mr. BERNANKE. No, I could not say. It depends on your assessment of the fiscal implications and, as I said, the CBO and others 

have come up with a wide variety of estimates of the possible fiscal 

implications. 

Mr. MCHENRY. What about the expiration at the end of this year 

of a whole variety of tax cutes put in place in 2001 and 2003? Are 

the expiration of those tax cuts, priced into Fed policy over the 

short, medium, and long term for the Fed’s outlook on the economy? 

Mr. BERNANKE. To some extent. I mean, we try to make forecasts 

and our forecasts are typically 18 months ahead and we try to factor in our expectations of fiscal policy the best we can. But, of 

course, we recognize that there is a lot of uncertainty about what 

the implications will be for the economy, where the economy will 

be a year from now, or 18 months from now. But, we do try to factor in all the aspects of fiscal policy to the extent that we can, you 

know, ascertain where we think it is going to be. 

Mr. MCHENRY. So, certainly this adds to the high wire act that 

you are performing right now, trying to unwind with the fiscal policy, as well? 

Mr. BERNANKE. Certainly, a part of the difficulties of forecasting 

the economy, certainly. 

Mr. MCHENRY. Thank you. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from Massachusetts, Mr. Lynch, is recognized for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. I certainly appreciate the 

difficulty we are in. I know a lot of the members have recalled that 

the Federal balance sheet before the crisis was about $800 billion, 

and now it is somewhere around $2.1 trillion. I generally agree and 

understand the idea of the Term Deposit Facility, and also the reverse repurchase agreements to soak up all this liquidity that is 

sloshing around in the economy in which makes the economy less 

responsive to your interest rate decisions. As you say, pushing on 

a string. 

Do you think that those two mechanisms will be sufficient to reattach or make the economy more responsive to interest rate controls that are traditionally used? 

Mr. BERNANKE. Yes, I think so. We have really a belt and two 

pairs of suspenders at this point. We have a basic tool which is the 

interest we pay on reserves to banks, which by itself ought to move 

the whole complex of interest rates up as we raise that rate. There 

could be some slippage between that rate and general market 

rates, and those tools you mentioned will be able to drain reserves 

and tighten up that relationship and so that will be a second tool 

that assists us in managing interest rates. But then, if it were absolutely necessary, we could also sell some of our securities and 

that would certainly tighten up— 

Mr. LYNCH. That is what I want to talk about. That part I guess 

I am less confident in. Do we get into trouble here in selling assets? 

And I know these are all government issues, so the risk part of this 

is already there. But for some time now, the whole market has 

32 

been fed by—the mortgage-backed security market has been fed by 

the GSEs and I believe the Federal Home Loan Banks, I do not 

know if you have included that as well, but I am just concerned 

about selling assets into a very poor economy and a very poor market. And whether we might sustain considerable losses in those 

sales, and then have the compounding insult of having others who 

might buy those at distressed rates do very well. 

And then we end up with a similar argument we had during the 

resolution trust corporation sale of assets after the savings and 

loans bailout where some folks came in afterwards and capitalized 

greatly on the timing. When I first read your remarks surrounding 

the purchase of these assets, I thought it was clear that this was 

going to be passive ownership and investment and long—we are 

going to hold these long term. And that was only last March, so 

has there been something that has changed our position on this? 

Or can you explain that? 

Mr. BERNANKE. We have had a good bit of time to discuss all the 

aspects of this exit strategy, and I think the FOMC is not comfortable withholding all of these securities until they mature, some 

would be 30 years and we want to move more quickly than that 

back to the pre-crisis balance sheet. But again, my expectation is 

that sales would be a slow gradual announcement in advance and 

would not create undue market impacts. You mentioned adding insult by selling into a weak market, of course in a situation where 

we would be selling this would be one where we were actually trying to tighten policy because the economy was back on a growth 

track and we were trying to avoid future inflation risks. So, we 

wouldn’t be doing that in a really weak economy. 

Mr. LYNCH. Well, you know, I appreciate that is the only mechanism of the three that actually shrinks the size of the Fed balance 

sheets, so I know we have to do something. I am just very concerned about the timing of this and what the end result might be, 

but I appreciate your comments and thank you. Thank you, Mr. 

Chairman. 

Mr. WATT. The gentleman yields back. The gentleman from New 

Jersey, Mr. Lance, is recognized for 5 minutes. 

Mr. LANCE. Thank you very much, Mr. Chairman. Good morning 

to you, Chairman Bernanke. Thank you as always for being here. 

My principal concern, as I have indicated on many occasions in this 

committee, with many different witnesses, continues to be levels of 

Federal spending and the overall Federal debt now at $12 trillion 

and rising rapidly. 

As I understand it, Mr. Chairman, the ratio of national debt to 

GDP has shot up from 37 percent before the crisis to approximately 

60 percent in Fiscal Year 2010. And the President’s budget indicates that it may be headed towards 77 percent of GDP by the end 

of the decade. As you well know better than almost anyone in 

America, except for World War II, the debt has never been higher 

as a percentage of GDP. 

Your thoughts, Mr. Chairman, on what the growth rate would 

have to be here in the United States in order to pay the Federal 

debt over the course of the next generation, perhaps the next 25 

or 30 years? 

33 

Mr. BERNANKE. Well, the 77 percent doesn’t capture the entire 

problem in that there is an awful lot of which might call off balance 

sheet, obligations, future Medicare, and Social Security and so on, 

and other obligations that are not fully accounted for in our debt. 

So, in some sense, the burden is greater than what you describe, 

and I would have to say looking at it from that perspective and recognizing that we are an aging society and those costs are going to 

be coming down the pike, I don’t think there is a realistic growth 

rate. I don’t know what number to tell you, but it would certainly 

be a very high number, probably not realistic, so I don’t think that 

just growing out of this will be a solution. 

Mr. LANCE. Nor do I. And since that is clearly not the solution, 

your thoughts on what the solution would be. Presumably, it is 

somehow to rein in levels of Federal spending over time and certainly to get our national expenditures as a percent of GDP back 

to a historic average as I understand it. Since the end of World 

War II, the historic average has been roughly 20 percent of GDP, 

it is now 25 percent. 

I personally am one of the co-sponsors of a constitutional amendment sponsored by Mr. Pence and Mr. Hensarling that would address this constitutionally. Your thoughts as to what level you 

would suggest long term, given the historic average being 20 percent for the last 60 years? 

Mr. BERNANKE. There are tradeoffs there that really are up to 

the elected representatives to make. The only thing I would say is 

that we need to enforce in some sense a consistent perspective, so 

those folks who believe that low tax burdens are very important 

need to also specify how they are going to cut spending, and those 

who see much benefit in spending need to sort of specify what their 

revenue source is going to be. So if we can force people to recognize 

that there are two sides to this, that is the way to ultimately bring 

down the deficits. 

Mr. LANCE. What would you suggest, based upon your obvious 

extensive knowledge of the area, would be a good range as a percentage of GDP? And based upon your experience as a historian of 

these subjects, particularly related to the Depression? 

Mr. BERNANKE. There is quite a range of debt to GDP and government spending to GDP across the developed world, and a lot of 

that depends on decisions that are being made about what parts 

of the economy will function through the government and which 

parts will be entirely private, decisions about health care for example. So those are very broad decisions about how you want to structure your economy and your society which again, go beyond simple 

fiscal issues, and I do not feel well-placed to make those decisions 

for the American people or for the Congress. 

With that being said, obviously we are going to have to make 

some tough decisions. There is this tendency that nobody wants to 

cut and nobody wants to raise taxes. At some point, we are going 

to have to make some unattractive and tough decisions, and I don’t 

envy Members of Congress who have to grapple with this problem, 

but one way or another, there needs to be some greater balance between revenues and expenditures. 

Mr. LANCE. Thank you, Mr. Chairman. My own view is that it 

is the fundamental issue of our time, and whether or not America 

34 

will continue to be the preeminent society in the world in this century is based upon whether or not we can get our fiscal house in 

order. Thank you, Mr. Chairman. 

Mr. WATT. Gentlemen, as time has expired, the gentleman from 

North Carolina, Mr. Miller, is recognized for 5 minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. I 

am also concerned about the deficit and long-term debt. At the beginning of the decade, your predecessor worried that we might 

spend the debt down too quickly and it might be disrupting the 

economy. That proved not to be so much of a problem in the last 

decade. And it appears that a couple of my best folks here were 

against Bush tax cuts and against the prescription drug plan that 

was more of a giveaway to the insurance industry and the pharmaceutical industry than it was for seniors on Medicare, and was not 

paid for. 

What is the kind of distribution of the current deficit? How much 

of it is structural, the extent to which our revenue and our expenditure simply do not match up and would not match up even if we 

were growing at 3 or 4 percent a year and had unemployment at 

3 or 4 percent, so that the existing program is not anything new? 

How much is the result of the recession itself, the decline in revenues and the additional expenditures required for unemployment, 

for Medicaid, for childhood insurance, or any other kind of entitlement program that depends upon income? And to what extent is 

it because of what we are doing in response to the recession to try 

to get the economy going? I have heard that it is roughly 50-40- 

10. But about what is the allocation? 

Mr. BERNANKE. Well, the way I would think about it is that 

again, if you look out from say 3 years from now out to 2020, that 

longer period where the forecasters are assuming something more 

normal—a more normal economy—the estimates of deficit to GDP 

are sort of 4, 5, 6 percent, that kind of range. So, since that would 

be something where the economy is close to its potential, then that 

say 5 percent would be the structural component. 

Mr. MILLER OF NORTH CAROLINA. I am sorry, say that again? 

Mr. BERNANKE. About 5 percent of GDP would be the structural 

component. 

Mr. MILLER OF NORTH CAROLINA. But how much of that, of the 

deficit is that? 

Mr. BERNANKE. Sorry, 5 percent of the deficit. The deficit is 5 

percent of GDP. So today, the deficit is 10 percent of GDP, and 

what I am saying is that looking at the perspective deficit 5 years 

from now, that suggests that of that 10 percent today 5 percent is 

related to the recession and the other 5 percent or so is related to 

structural issues, and that is looking at the next decade or so. It 

is probably going to get worse after that because of the aging of the 

population, increased medical costs, and so on. So, we are looking 

at even in the medium term, I think we need to have a goal of 

something in the order of 2 or 3 percentage points of GDP improvement in the structural deficit to get to something which is more 

sustainable, at least over the next decade. 

Mr. MILLER OF NORTH CAROLINA. My view is that the most important thing we can do to address the deficit is to get the economy 

going to put America back to work. Do you agree with that? 

35 

Mr. BERNANKE. In the short term, that is absolutely correct. The 

share of revenue as the share of GDP has fallen from its historical 

19 percent down to 15 percent, so just getting tax revenues back 

up to historical norms would take a good chunk out of the deficit. 

So that is absolutely correct, but that doesn’t solve the very longterm issues, as you know. 

Mr. MILLER OF NORTH CAROLINA. Sure. As to mortgages, there 

has been a good deal of discussion about the conflicts of interests, 

the various ways in which mortgages were divided into tranches 

and the tranches’ interests were different, and especially the different interest between first and seconds. I understand about two 

thirds of all servicing mortgages is controlled by the four biggest 

banks. And those same four banks also hold $477 billion in second 

mortgages. Do you see a conflict of interest there, and is that something we should allow going forward? 

Mr. BERNANKE. There is a problem there which is that under 

current rules and under current practices, the same bank might 

hold the second and the first and not be aware that those two go 

together. So, it is not uncommon for a homeowner to pay their second and be delinquent on their first, and so the bank would therefore count the second as fully current even though the first is delinquent. So, I think we would get, first of all, a better understanding 

of banks’ financial position in their losses in the mortgage space if 

there were better connections between the first and the second. 

But very importantly, efforts to restructure mortgages and keep 

people out of foreclosure would be facilitated if the first and seconds were linked together and perhaps negotiated jointly rather 

than separately, so that there could be one solution to the whole 

problem. And the Treasury is working on that. There is a program 

called the 2MP Program where a lot of those large banks you referred to have signed up and the basic premise of this program is 

to try to link up the first and seconds, and when doing mortgage 

restructuring to do them jointly rather than separately. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from Texas, Mr. Green, is recognized for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. Thank you, Mr. 

Bernanke, for appearing today. I would also like to take a moment 

if I may and thank Bank of America. If what I am reading in the 

newspaper is correct, I would like to thank them for producing a 

principal reduction program. And I am referencing this because we 

have not yet resolved the question of foreclosures. It is a serious 

question and it is one that I think we have to get a handle on before we can conclude that we are out of the woods, to borrow a 

phrase. My question, Mr. Bernanke, is this: how important is it for 

us to resolve the question of foreclosures that the, just the unusual 

number that actually have now gone into persons who are not 

blessed with or cursed with, depending on how you look at it, with 

adjustable rate mortgages. We have persons now who clearly qualify for the mortgages that they have, but their mortgages are now 

underwater. So how important is it for us to get a handle on this 

to avoid a double dip recession? 

Mr. BERNANKE. It is certainly a risk to the economy for a number 

of reasons. One obvious reason is that in recent periods, as much 

as 30 or 40 percent of the new housing coming on the market is 

36 

foreclosed housing, so foreclosures generate a supply of housing 

which dries down prices in the housing market, lowers the wealth 

of consumers or homeowners, increases the rates of delinquencies 

in losses in banks, and weakens the incentives to build new homes. 

So for all of those reasons, foreclosures besides being obviously a 

tragedy for homeowners who would like to stay in their homes, has 

negative effects for the economy and the financial system more 

broadly. 

And so, I certainly encourage efforts to avoid preventable foreclosures. Having said that, of course it is a very, very difficult problem, and a lot of people have been working on it, and unfortunately 

we are still looking for, I think, a significant number of foreclosures 

in 2010 and probably into 2011 as well. 

Mr. GREEN. Mr. Chairman, you said you encourage, and I am 

going to ask, are you permitted to encourage other institutions 

comparable to Bank of America to do a similar thing? And I ask 

because I am not sure what the protocols are with reference to your 

office. I know that you try as best as you can to make sure that 

you don’t encroach upon the province of Congress and others, but 

are you permitted to and can you encourage other institutions to 

take similar action? 

Mr. BERNANKE. I think the way to proceed is to try to encourage 

banks to be in touch with troubled borrowers and to try to work 

out some solution, whether it is a principal reduction or some other 

solution; that is something that we do very much encourage. 

More specifically, we encourage banks to participate in the government programs like the HAMP and so on. As you know, the 

HAMP program has been focused on payment, on a monthly payment, as opposed to on principal reduction. I know they are looking 

at alternative ways of addressing foreclosures through principal reduction, through assisting unemployed homeowners and so on. And 

as they develop these programs, then we would certainly encourage 

banks, particularly the large servicing banks, to fully participate in 

those programs. We can’t tell them to participate in something that 

doesn’t quite exist yet, so we are hoping that Congress will develop 

some viable programs that will be attractive to the servicers to participate in, and we will encourage that. 

Mr. GREEN. Well, thank you. And I will say this, that I think we 

will do what we can and we should, but I would also hope that 

other institutions will of their own volition decide that they too 

have a role to play in this. This is why I compliment Bank of America, because they of their own volition it appears, unless there is 

something going on that I am not privy to, they have decided to 

engage in principal reduction. 

Reducing interest rates, I think that is a great thing to do, and 

I think that can be helpful, but principal reduction based upon payments made is an inducement to a person to keep your home and 

also know that you will not be underwater perhaps at some point 

in the future. Thank you for your comments, and I yield back, Mr. 

Chairman. 

Mr. WATT. Thank you. As time has expired, I would remind them 

that is the bank that is based in my congressional district. 

[laughter] 

Mr. WATT. Maybe there is some causal connection. 

37 

Mr. GREEN. But Mr. Chairman, I know that good things happen 

whenever you show up. 

Mr. WATT. The gentleman from Missouri, Mr. Cleaver, is recognized for something good to happen. 

Mr. CLEAVER. Thank you, Mr. Chairman. I have no questions. 

Mr. WATT. Oh, you yielded back already, or are you deferring? 

The gentleman from Illinois, Mr. Foster, is recognized for 5 minutes. 

Mr. FOSTER. I won’t deal with that, Ed. 

[laughter] 

Mr. FOSTER. Let’s see, I would like to follow up on Representative Waters’ line of questioning having to do with unemployment 

and your offer of analytic and technical help. 

Mr. WATT. Let me apologize to Mr. Perlmutter. I thought we 

went to the other end. 

Mr. FOSTER. I will proceed. There is some discussion in the world 

of economists about the breaking of Okun’s Law that may have 

happened in 2009. And this is very troubling to us because we had 

all of these predictions that if we went ahead past the stimulus and 

so on, all the people who run macro models said that the GDP 

would recover and that unemployment would recover. 

And if you look, roughly speaking, GDP and business profitability and so on, did recover as predicted by all these models; unemployment did not. And it is my impression, though I am not an 

expert on these models, that basically uses changes in GDP and 

then back-calculates what the change in unemployment should 

have been. And if that link broke Okun’s Law, broke in the last 

year, that means that we no longer have a predictive policy tool in 

these models, and it is a very painful way for it to break since of 

course having unemployment. So, I was wondering your take on 

this. It appears in your textbook and I presume I can get some expert advice on how we should go forward from a policy point of 

view if our model’s unemployment are no longer predictive. 

Mr. BERNANKE. I think it is too strong to say they are no longer 

predictable. It is just that given the depth of the recession, the unemployment increase was even worse than you would have anticipated which may be a one time thing we hope, obviously. 

There are a number of possible explanations for it. One might be 

that in fact the GDP numbers were too optimistic. It could be that 

if you look at alternative measures of output like gross domestic income as opposed to product, that was a deeper recession, maybe 

that explains it. But the more conventional story is that as the 

economy dropped very sharply at the end of 2008, beginning of 

2009, firms became very—employers became very concerned and 

they cut very deeply, perhaps more deeply than normal. And that 

may be why the unemployment rate went up faster. And so going 

forward the question is, is there enough confidence that employers 

will now begin to rehire those people that they let go during the 

depth of the crisis? 

One issue, interestingly enough, is productivity. The firms cut 

very deeply and still managed to maintain production, and as a result, the productivity numbers have been extraordinary. 

Mr. FOSTER. And this is the IT theory, that people bought computer systems that allowed them, in principle, to lay off a bunch 

38 

of workers. They weren’t comfortable doing that in the good times 

and then, but did grow comfortable with the computer systems, and 

when it was time to cut they were able to keep shipping products— 

which is a plausible theory. My general question was, do you think 

that you have to put more effort into modeling the effect on the 

labor market? That is the approach that you have been, that is taking on the macro models, I am saying is it all about GDP if we get 

GDP right, the labor market is automatically dealt with correctly? 

That you need a more sophisticated modeling so that we understand— 

Mr. BERNANKE. Certainly, absolutely. And we do look at the 

labor market separately and in great detail. 

Mr. FOSTER. Did you see this coming? The break in the Okun’s 

Law? 

Mr. BERNANKE. No, no we did not. 

Mr. FOSTER. Does the modeling reproduce the breaking in Okun’s 

Law? 

Mr. BERNANKE. Well, again, as I said there, we sort of have two 

explanations. One is that maybe the recession was deeper than we 

thought. The other is that the productivity gains were greater than 

we thought they would be when firms were able to cut their work 

forces and still maintain output. All that being said, I think that 

as the economy comes back and as we see job creation, I see no reason to think that we won’t see declines in unemployment on the 

way up just as we saw increases on the way down. 

Mr. FOSTER. So you would view this as a one-time occurrence 

and we should stay back—we should return to the— 

Mr. BERNANKE. It is too strong to say that we just have to throw 

out everything we know, that is certainly not the case. But it is an 

episode that we economists in general are going to want to understand better and look at for a long time. A related issue is participation rates, which have moved around a lot. A number of people 

who are looking for work and are in the labor force—that has been 

going down for a while because of an aging society, but we saw it 

rise for a period perhaps because people when they saw their 

401(k)s, you know, being hit by the stock market decline, said look, 

we have to work harder, and work longer. So, there were a number 

of factors, a number of issues that were unexpected and we need 

to understand better, certainly. Thank you and I yield back. 

Mr. WATT. The gentleman from Colorado, Mr. Perlmutter. 

Mr. PERLMUTTER. Thank you, and just following up really on Mr. 

Foster’s questions, and I’m looking at pages 20 and 21 of your monetary report. There are three very interesting charts there, and the 

first one is your chart 27, which shows net change in private payroll, and from the beginning of 2008 to the beginning of 2009, that’s 

about as close to falling off a cliff in terms of employment as you 

can have. 

Now you used, when Mr. McHenry was asking you questions, you 

used going forward the situation is somewhat dark. Those were 

your words, somewhat dark. How would describe what happened 

from the beginning of 2008 to the end of 2008? Would you say absolutely black? 

Mr. BERNANKE. I was talking about a different set of issues. But 

certainly, the recession in the latter part of 2008/beginning of 2009, 

39 

not only in the United States but around the world, was extraordinarily sharp. Absolutely. 

Mr. PERLMUTTER. And this drop in employment reflects that. 

Mr. BERNANKE. Certainly. 

Mr. PERLMUTTER. And then, since the beginning of 2009, we are 

almost back to zero in terms of job losses. 

Mr. BERNANKE. In terms of job losses. 

Mr. PERLMUTTER. Okay. And we have another chart. This one is 

not from your monetary report, but it is the Bureau of Labor Statistics, sort of the job losses that occurred in 2008 and the job 

losses as they sort of shrunk in 2009. 

But it relates to about 8 million jobs, if I am correct. So we still— 

even though things—the rate of job losses is pretty much stopped, 

we still have 8 million people who lost their jobs between 2008 and 

through 2009. 

So, you know, then you have another very interesting—and you 

were talking about productivity, your chart No. 30 in your report. 

I mean, this one basically shows America to be the most productive 

it has been per person in 60 years. 

So, I mean, there are—looking at it in that light, that is great 

news, except that we have 8 million people who are unemployed. 

So in this process of—you know, Mr. Lance, I agree with him. We 

have to deal with the debt. But we also have to get 8 million people, in my opinion, back to work. 

So it is, step one, get people back to work. Step two, grapple with 

this debt that exists. By getting people back to work, you help the 

revenue side of the balance sheet; dealing with the debt, you take 

care of the expense. 

Where are you in terms of the Federal Reserve in terms of sort 

of your ideas as to getting people back to work? If you start tightening the money supply, what do you expect to happen to our effort 

to get people back to work? 

Mr. BERNANKE. Well, first, on the fiscal side, just to make sure 

you understand my position, you have to look at two different periods of time. In the very near term, there is a reason for the big 

deficit, and I don’t think it is either desirable or possible to get rid 

of it in the next year or two. 

Down the road, when the economy is operating more normally, 

then if we can convince creditors that, in fact, we will have a more 

stable, sustainable situation, that will actually improve interest 

rates today and support the growth process today. 

From the Federal Reserve’s perspective, we are recovering from 

a very deep recession, and monetary policy is just about as supportive and accommodative as it has ever been. Interest rates are 

close to zero, and we have more than doubled our balance sheet 

and used all these other policies to try to get markets working 

again and try to increase capital in the banking system. 

So we are taking very seriously the unemployment situation, and 

we take seriously that part of our mandate, for maximum employment. 

Mr. PERLMUTTER. And I would just say, in looking back at this 

unemployment chart, that the coupling of the monetary policy with 

the fiscal policy that began in early 2009 reversed what was 

freefall in this economy. 

40 

So, personally, we have to deal with the first thing, employment. 

Then we deal with the second thing, debt. To the degree we can 

deal with them together, wonderful. 

I think the other chart that is really interesting on page 20 is 

the savings chart, that people in this country who had not been 

saving now are saving at a pretty good clip. The Federal Government is not saving, but they are having to deal with a lot of folks 

who have needs because they have been laid off, they needed insurance, whatever it might be. 

But, you know, Mr. Chairman, again, we have been visiting a lot 

over the last 2 years, and I just thank you for your service. 

Mr. BERNANKE. Thank you. 

Mr. WATT. The gentleman’s time has expired and—oh, Mr. 

Adler—he is hiding down there—is recognized for 5 minutes. 

Mr. ADLER. Mr. Chairman, thank you. 

Chairman Bernanke, I want to follow up on Mr. Perlmutter’s 

comments. I also want to thank you in a broad sense, but actually 

in a narrow sense as well. The first time I spoke to you a year ago, 

I asked you to consider including in TALF auto fleet leasing. 

You weren’t sure whether it was in it or was going to be in it. 

You said you would get back to me in a couple of days. And 2 days 

later, you publicly announced that auto fleet leasing would be included in TALF. 

For my district, which has two of the four or five biggest auto 

fleet leasing services in the country, it saved hundreds and hundreds of jobs, great private sector companies that couldn’t get liquidity. You did a good thing for them. So you used your head with 

a great heart, and it really did help people; the sort of things Mr. 

Perlmutter is talking about, employment, you saved lots of jobs. 

That was a great thing. 

Following up on Mr. Perlmutter’s comments, I heard Mr. Lance 

and you in a dialogue regarding deficits some minutes ago. And I 

sort of share the view that we have to deal with deficits some time 

soon, not some time in the distant future. 

And I am wondering what sort of hope you can think in terms 

of, within a certain period of time, we could realistically start grappling with deficits because while I recognize that we don’t have inflation now, I worry that big deficits with rising inflation could be 

very, very expensive for the American taxpaying public. 

Mr. BERNANKE. Well, it is never too soon to start planning. We 

have—we know pretty much what is going to happen to our population, and we know what has been happening to costs, both health 

care costs, defense costs, and a whole variety of things. 

I know that the President created this commission, and both parties have nominated people to be part of that. I hope that is an effective way of putting out some options that Congress will consider 

seriously. 

But anything we can do to, at the same time that we are all very 

concerned about the current situation and looking at how to get the 

economy moving again, you know, with one eye, we should be also 

looking at the next 5 years, the next 10 years, and using whatever 

methods we can to try to develop a plan that we can all agree on 

to restore greater balance in our fiscal situation. 

41 

So it is a difficult problem, but I don’t think there is any reason 

why we can’t start working on that more or less immediately. 

Mr. ADLER. Thank you. I know on the Senate side, while they are 

voting on health care right now, I suspect very, very soon they will 

take up a bill or a series of bills on regulatory reform to try to get 

our financial house in order. 

I wonder if you could comment a little bit on the sense that I 

have, and that maybe other people have, that the business community, the lending community, is sort of frozen right now, waiting to 

invest but not certain what the ground rules are going to be going 

forward. 

So at least I am hearing from business people in my district, 

from around the country, that they really want a new structure in 

place so that they know what the rules are going to be, so they can 

have some predictability, some certainty, almost, where possible 

before they can really move forward and help us recover as a private sector economy. 

Mr. BERNANKE. And we hear exactly the same thing, that policy 

uncertainty, economic uncertainty, is a real drag because, you 

know, you are trying to make a decision about where to locate your 

plant or hire a bunch of parallel or undertake a new line of business, and you don’t know what the economic environment, the policy environment, is going to be. It makes it much more difficult. 

So from the perspective of financial firms in particular, even 

though they may be concerned or oppose certain elements of the reform bill, I think, all else being equal, they would like to see— 

whatever happens, they would like to see it get done because then 

they would at least have—you know, have some certainty about 

what the environment is going to be, and they could plan better 

and be more willing to make investments and loans, I hope. 

Mr. ADLER. I thank you. I yield back the balance of my time. 

Mr. WATT. It appears that all of the members who might secondguess you in the future about how you withdraw from this liquidity 

situation have not shown up. So we thank you so much for your 

testimony and, as I say, we consider you the master conductor, so 

we know that you will deal very well with the decisions going forward, with the brain trust you have behind you, of course. 

So we thank you, and we will consider this part of the hearing 

completed, and call up the second panel of witnesses so that we can 

start the second panel. 

Mr. BERNANKE. Thank you. 

Mr. WATT. There may be follow-up questions in writing from 

some of the members. And of course, we will accommodate that at 

the end of the hearing. 

Has anybody seen Mr. Goodfriend? He was here earlier. So we 

will search for him just for a second, and then we will try to figure 

out— 

[pause] 

Mr. WATT. We presume he will show up shortly, so let’s convene 

the second panel so as not to back ourselves into a time conflict 

with votes. 

We are pleased today to have four distinguished members—three 

of whom are present—on this panel: Mr. Larry Meyer, vice chair 

of Macroeconomic Advisors; Mr. John B. Taylor, Mary and Robert 

42 

Raymond professor of economics at Stanford University; Mr. 

Marvin Goodfriend, professor of economics, and chairman of the 

Gailliot Center for Public Policy, Tepper School of Business, Carnegie Mellon University—your timing is exquisite; and Mr. Laurence Ball, professor of economics at Johns Hopkins University. 

Each of you will be recognized for 5 minutes and, of course, the 

full content of your written statements will be made a part of the 

record. We would ask you to summarize your statements in the 5- 

minute window. 

The lighting system there will alert you. The green light will be 

on for 4 minutes, a yellow light will be on for 1 minute, and then 

we would ask you to wrap up. We obviously won’t cut you off in 

mid-sentence, but we do try to stick to that timeframe as closely 

as we can. 

So with that, Mr. Larry Meyer, vice chair of Macroeconomic Advisors? 

STATEMENT OF LAURENCE H. MEYER, VICE CHAIR, 

MACROECONOMIC ADVISORS 

Mr. MEYER. Chairman Watt, Acting Ranking Member Paul, and 

the other members of this committee who have decided to stay for 

this panel, I am particularly grateful to you— 

Mr. WATT. I suspect other members will wander in and out during the course of it. Make sure your microphone is on. 

Mr. MEYER. Yes, it is. Thank you for giving me this opportunity 

to discuss questions about the Fed’s exits from its emergency liquidity facilities and from its extraordinary accommodative monetary policy. 

As the chairman explained to you today, but really more in his 

earlier testimony, the Fed has already closed its emergency liquidity facilities. They were no longer needed. These facilities basically 

closed on their own. Borrowing declined and virtually stopped as 

markets healed. Then the Fed just closed the door. 

The increase in the discount rate was just the last step in liquidity normalization. In executing aggressive easing, the Fed raised 

the level of reserves by $1 trillion, lowered the fund’s rate to near 

zero, and doubled the size of its balance sheet to about $2 trillion. 

Exit from the Fed’s extraordinarily accommodative monetary policy involves actively withdrawing reserves, raising the policy rate, 

and shrinking the balance sheet. Each step has one or more tools 

designed explicitly for it. 

The Fed will withdraw reserves by executing reverse repos and 

offering term deposits to depository institutions. It will raise the 

policy rate by increasing the interest rate on reserves. And the balance sheet will passively shrink by runoff, and the Fed appears to 

intend eventually to sell MBS. 

Sequence is about the order in which these steps will be taken. 

In his earlier testimony, the Chairman provided you with an outline of the likely order. The Fed in this case would likely withdraw 

reserves first, later—but not much later—raise rates, and still later 

sell MBS. 

Reducing reserves first will help the next step, raising interest 

rates, reinforcing the role of interest on reserves. While the Fed is 

operating in uncharted waters so there is a lot of uncertainty about 

43 

this exit, I believe that the tools are sufficient to accomplish each 

step, and the sequence is very well designed. 

The Fed can avoid unwanted inflation by exiting at the right 

time. The right time depends in part on the evolving outlook and 

forecasts, and in part on the strategy that links the forecast to appropriate monetary policy. I think that strategy is also well 

thought out. 

And given both our and the FOMC’s expectation that the unemployment rate will remain quite elevated for some time, and that 

inflation will remain subdued, there is no reason to begin to raise 

the policy rate any time soon. I expect the first increase will not 

come until mid-2011. 

There is very little chance that the Fed’s policies could lead to 

unwanted inflation over the next few years. Now, it is interesting 

nevertheless that some worry that inflation will be very high over 

the medium term, and some even believe we are headed to hyperinflation. 

There are only two ways that this can happen: a colossal and almost inconceivable policy error by the Fed; and your taking away 

the Fed’s independence. In my judgment, the risk of very high inflation comes from you, not the Fed. 

Inflation and long-term inflation expectations would soar if you 

forced the Fed to monetize deficits to avoid the very sharp rise in 

interest rates that would otherwise occur at some point from continued unsustainable deficits. This won’t happen if you take steps 

to put the deficit on a sustainable course, and it cannot happen if 

you respect the independence of the Fed. 

Now, the FOMC is at a zero rate only because it cannot lower 

the rate further into negative territory. If they could, they would. 

In this case, the Fed has done as much as it can with conventional 

policy. The only option at this point was to implement unconventional policies, and in this case credit-easing policies. 

The Fed was by far the most aggressive central bank in pursuing 

these policies, and as a result, we will have the most challenging 

exit. Credit-easing policies involve buying longer-term illiquid assets in markets where the flow of credit is impaired as a result of 

the financial crisis, or buying long-term Treasuries to lower longterm rates relative to this near-zero funds rate. 

The effectiveness of these credit-easing policies is controversial. 

I agree qualitatively with a recent New York Fed staff study that 

estimates that purchases of long-term Treasuries in MBS had important effects, lowering long-term rates, and especially mortgage 

rates, although I don’t think the effects were as large as they estimate. Nevertheless, I am skeptical that the Fed can do much more, 

for example, if the economy slips into a double dip recession. 

Once the Fed is driven to near zero rate, the burden of further 

stabilization shifts to you. Sizable and timely fiscal stimulus was 

both needed and now viewed quite effective. The desirability of further stimulus, however, is understandably limited by concern about 

current and prospective deficits. 

The severe limits on monetary policy and fiscal policies in the 

case of an even weaker-than-expected economy is a further reason 

for keeping the policy rate extraordinarily low for an extended period. Thank you. 

44 

[The prepared statement of Mr. Meyer can be found on page 82 

of the appendix.] 

Mr. WATT. Thank you so much. 

Next, Mr. Taylor, Mary and Robert Raymond Professor of Economics, Stanford University. 

STATEMENT OF JOHN B. TAYLOR, MARY AND ROBERT RAYMOND PROFESSOR OF ECONOMICS, STANFORD UNIVERSITY 

Mr. TAYLOR. Thank you very much, Mr. Chairman, and Ranking 

Member Paul. I am going to address my comments to the things 

that were requested in the letter of invitation which is, first, an assessment briefly of the extraordinary measures the Fed has taken, 

and second, an exit strategy from those. 

I have been studying these extraordinary measures for several 

years now using empirical methods and looking at the data, trying 

to think of counterfactual hypotheses. I think it is most useful to 

divide this period of the financial crisis into three parts to answer 

the questions: the first is, if you like, the pre-panic period from August 2007 until the panic in the fall of 2008; the second is the panic 

period itself, which is the fall of 2008; and the third, I call the postpanic period, since then. 

It seems to me, if you look at the extraordinary actions taken in 

the pre-panic period, they did not work very well and were harmful 

in certain cases. The term ‘‘auction facility’’ did little to reduce tension in the interbank markets during this period. And as I testified 

in this committee 2 years ago, based on my research, it had very 

little effect—in fact, I think drew attention away from—the 

counterparty risks in the banking sector, which were apparent way 

back then. 

Most important, I think, was the extraordinary bailout measures, 

which began with Bear Stearns. They were most harmful, in my 

view. The Fed’s justification for the use of Section 13(3) of the Federal Reserve Act in the case of Bear Stearns led many to believe 

that the Fed’s balance sheet would again be available in case of another similar institution, such as Lehman Brothers, failing. 

But when the Fed was unsuccessful in getting private firms to 

help rescue Lehman over the weekend of September 13–14, 2008, 

it surprisingly cut off access to its balance sheet. Then, the next 

day, it reopened its balance sheet to make loans to rescue the 

creditors of AIG. Then, it was turned off again, and the balance 

sheet was not able to make loans in the next event. 

It seems to me that this on again/off again bailout measures 

were an integral part of the generally unpredictable and confusing 

government response to the crisis which, in my view, led to the 

panic. 

What about action taken during the panic itself? It seems to me 

this is the most difficult period to analyze because so many other 

things were taking place, so many other government actions. But 

I believe, based on conversations with traders and market participants, that the actions taken in the commercial paper market and 

the actions taken with respect to the money market mutual funds 

were helpful in rebuilding confidence during this difficult period. 

Finally, the post-panic actions. It seems to me that, of course, the 

biggest measure taken in this period was the MBS program. We 

45 

also had the TALF as well, which has not really amounted to very 

much. 

But my assessment of the MBS program, again based on empirical work looking carefully at these data, is that once one controls 

for prepayment risk and default risk, they had very little impacts 

on mortgage interest rates. I emphasize these estimates are uncertain. 

Now, what about exiting from these strategies? The chairman 

has listed the tools that are available. I think it is important to exit 

as soon as is practically possible. What I would emphasize is, in addition to the tools that he has listed, that there be some emphasis 

on a strategy for using the tools. 

In other words, an exit strategy is more than just simply a list 

of instruments. It is a policy describing how the instruments will 

be adjusted over time until the monetary framework which we are 

looking for is reached. 

In my testimony, the written version, I have outlined a possible 

strategy. I call it an exit rule. It is one in which the Federal Open 

Market Committee’s decisions about the interest rate increases, 

which will come at some point, are linked to decisions to reduce the 

level of reserves. 

In other words, when the FOMC decides to start increasing the 

Federal funds rate target, it would also reduce reserve balances. It 

seems to me such an exit rule or exit strategy could be announced 

to the markets with whatever degree of precision the FOMC thinks 

is appropriate. 

The biggest advantage of such an exit strategy like that is it is 

predictable. It would reduce considerable uncertainty about the 

Fed’s unwinding of these huge programs while providing, in my 

view, enough flexibility to adjust if the exit appears to be too rapid 

or too small. 

Thank you very much. 

[The prepared statement of Professor Taylor can be found on 

page 90 of the appendix.] 

Mr. WATT. Thank you very much, Professor Taylor. 

Next, Professor Marvin Goodfriend of the Tepper School of Business, Carnegie Mellon University. 

STATEMENT OF MARVIN GOODFRIEND, PROFESSOR OF ECONOMICS, AND CHAIRMAN OF THE GAILLIOT CENTER FOR 

PUBLIC POLICY, TEPPER SCHOOL OF BUSINESS, CARNEGIE 

MELLON UNIVERSITY 

Mr. GOODFRIEND. Thank you, Mr. Chairman. I am especially 

gratified to be invited to testify before the House Financial Services 

Committee today because I have spent 25 years at the Federal Reserve Bank of Richmond working on monetary policy, thinking 

about other aspects of the Federal Reserve’s operations. 

The recessions and credit turmoil led the Fed into uncharted 

waters. While pushing short-term interest rates nearly to zero, the 

Fed more than doubled the size of its balance sheet and created 

roughly a trillion dollars of bank reserves, which it used to finance 

the purchase of a variety of non-Treasury securities to fund loans 

to financial institutions through a variety of liquidity facilities. 

46 

In my view, the economy is likely to recover slowly, and it may 

be some time before it is appropriate for the Fed to raise shortterm rates or shrink its balance sheet. But the point is, in the 

meantime, I think the Fed ought to position itself to deal flexibly 

and credibly with whatever comes by doing two things: one, taking 

the opportunity to improve its actual and perceived independence 

on monetary policy; and two, taking actions to strengthen the mechanical capability to raise interest rates in case it cannot first 

shrink its balance sheet. 

In my testimony, I suggest how the Fed can do these things by 

talking in terms of three distinct aspects of central banking: monetary policy; credit policy; and interest on reserves policy. 

In my classification, monetary policy involves open-market operations that expand or contract high-powered money, that is, bank 

reserves or currency, by buying and selling only Treasury securities, U.S. Treasury securities. Until the recent credit turmoil, the 

Fed satisfied virtually all of its asset acquisition needs in support 

of monetary policy by purchasing Treasury securities, a policy 

known as ‘‘Treasuries only.’’ 

By adhering to Treasuries only, the Fed passes all the revenue 

from money creation back to the Treasury and leaves all the decisions regarding the use of that revenue to the fiscal authorities. 

Hence, and this is the first point of my testimony, returning to 

Treasuries only would strengthen the Fed’s independence on monetary policy by narrowing the potential for conflict with the Treasury and Congress on fiscal policy. 

In my terminology, credit policy undoes Treasuries only. Credit 

policy uses the proceeds from selling Treasury securities to finance 

discount window loans and the purchase of non-Treasury assets by 

the central bank. Credit policy has no effect on the Federal funds 

rate because it doesn’t change bank reserves. 

Credit policy works by interposing the government’s creditworthiness between private borrowers and lenders, and exploiting the 

government’s creditworthiness to lower private borrowing costs. All 

central bank credit policy initiatives carry some risk and involve 

the central bank, and ultimately taxpayers, in potentially costly 

and controversial disputes regarding credit allocation. 

Hence, when a central bank extends its credit policy reach in 

scale, maturity, collateral to unsupervised nondepository institutions, and the purchase of non-Treasury securities, that central 

bank policy infringes increasingly on the fiscal policy prerogatives 

of the fiscal authorities and properly draws Congress to scrutinize 

the Fed. 

In so doing, expansive credit initiatives undermine the central 

bank’s independence. And here is the second point of my testimony. 

In order to preserve its independence on monetary policy and credit 

policy, too, the Fed should confine its credit initiatives to conventional last resort lending, that is, lending to illiquid but solvent depositories. Temporary lending to supervised solvent depositories on 

a short-term basis against good collateral has multiple layers of 

protection against loss, with minimal allocative effects. 

Last resort lending narrows the scope for conflict between the 

central bank and the fiscal authorities sufficiently, in my opinion, 

to be compatible with independence. 

47 

Moving on, Chairman Bernanke, in his written testimony for the 

July 2009 report to Congress, expressed the view that the power 

of interest on reserves to put a floor under the Federal funds rate 

is perhaps the most important tool, enabling the Fed to raise the 

Federal funds rate without shrinking its balance sheet. I agree. 

However, the Federal funds rate slipped below interest on reserves in the fall of 2008 because large lenders—Fannie Mae, 

Freddie Mac, and the Federal Home Loan Banks—are legally ineligible to receive interest on balances that they hold at the Fed. 

And here is my third point. I believe that the Treasury and Congress should help the Fed to secure the interest on reserves floor 

by modifying regulations for the Federal funds market so as to exclude all but depository institutions from lending in that market, 

or by allowing all institutions eligible to lend to earn interest on 

deposits at the Fed. 

I say this because I believe the alternative options to raise the 

Federal funds rate by draining or immobilizing excess reserves 

have serious drawbacks. 

First, the Fed would likely have to drain hundreds of billions of 

dollars of reserves over a span of time to have much effect on the 

Federal funds rate at all. 

Second, the use of large-scale reverse repurchases to drain reserves would expose the Fed to substantial counterparty risk. My 

opinion is that the Fed should not be exposed to counterparty risk 

on private arrangements, should not be dependent on that sort of 

counterparty risk to do its job. 

And third, term deposits issued by the Fed to drain reserves 

would compete with Treasury bills, and again create friction with 

the fiscal authorities. 

And my very last point is this: More generally, the use of what 

I would call managed liabilities by our central bank would turn the 

Federal Reserve into a financial intermediary and potentially jeopardize its independence by facilitating the perpetual funding of 

credit policy independently of monetary policy. Thank you. 

[The prepared statement of Professor Goodfriend can be found on 

page 76 of the appendix.] 

Mr. WATT. Thank you so much for your testimony. 

Next, Professor Laurence Ball of the Johns Hopkins University. 

STATEMENT OF LAURENCE BALL, PROFESSOR OF 

ECONOMICS, JOHNS HOPKINS UNIVERSITY 

Mr. BALL. Chairman Watt, Ranking Member— 

Mr. WATT. Your microphone may not be on. 

Mr. BALL. Is it on now? All right. So I will get it right. 

Chairman Watt, Ranking Member Paul, I am very grateful for 

the chance to participate in this hearing. 

The eventual unwinding of the Fed’s emergency policies raises 

many issues. I am going to focus on the set of issues that I believe 

are most important, which is the prospect of an eventual increase 

in the Fed’s target for the Federal funds rate. 

This issue has two parts. One is a technical question of how the 

Fed will be able to raise the Federal funds rate when it decides it 

is the right time to do so. And the other is the policy question of 

when will be the right time for the Fed to raise interest rates. 

48 

The technical question, I think, is actually quite easy, and Chairman Bernanke has explained it very well. The Fed has several 

tools, including interest on reserves. And to make a long story 

short, I am very confident that the Fed has the capability to raise 

interest rates whenever it decides the time is right. 

So let me concentrate on the harder question of when the time 

will be right. When will we know that the Fed should be raising 

interest rates again? 

The first thing I want to say about that is that a lot of the debate 

about when the Fed should raise interest rates is about how long 

it should be in time. Some people say it should be 6 months. Some 

people say it should be 2 years. I think that is a little bit misplaced 

because the right time to raise interest rates is defined by economic 

circumstances. We should raise rates when there is a sufficient economic recovery. 

And there is enough uncertainty about the course of the economy 

over the next few years that it is very hard to know in what month 

or year it is going to be time. We have to just wait and see when 

the circumstances are right for the interest rate to rise. 

So what are the right circumstances? This, I believe, has a fairly 

simple answer. Interest rates should start rising at some point 

when there is substantial progress in reducing unemployment. 

I think everybody in the room would agree that the current 10 

percent unemployment rate is a terrible problem for the United 

States. And I believe policy should remain very accommodative and 

do everything it can to help with reducing unemployment until it 

is clear that unemployment is falling and is on a path towards 

something much closer to what we used to consider normal unemployment of 5 percent or so. 

Now, probably the most important point I want to make is that 

in my view, as long as unemployment remains high, the Fed should 

not start increasing interest rates because it is concerned about inflation. 

A number of people, including a number of presidents at Federal 

Reserve banks, have suggested that there may be a risk of inflation, that maybe the Fed needs to raise interest rates sooner rather 

than later to head off the risk of inflation. And in my personal 

view, I strongly disagree with this, for two reasons. 

First, I think there is very little risk of inflation in the near future. Second, even if eventually there is a moderate increase of inflation, let’s say to 3 percent or 4 percent, that is probably, on balance, a good thing, not something to be feared. So let me address 

those two points. 

Why is there little risk of inflation? If one notices that the Federal funds rate is zero, and the monetary base has risen at tremendous rates, that gives one a reason to fear inflation. But the reason 

that such accommodative monetary policy causes inflation is that 

usually it sparks an economic boom. 

Super-easy monetary policy causes the economy to overheat and 

grow too quickly, and that is what causes inflation. And having the 

economy overheat and grow too quickly is the last thing we have 

to worry about right now. So inflation is not a serious danger, in 

my opinion. 

49 

Now, eventually the economy will recover, and eventually there 

may be some increase in inflation along the way. But again, if we 

have a moderate increase in inflation, let’s say to 3 percent or 4 

percent rather than the implicit target of 1 to 2 percent over the 

last decade or so, that would probably be a good thing. 

The reasons are somewhat complex and discussed in my testimony. But briefly, somewhat higher inflation will imply somewhat 

higher nominal interest rates, which is a good thing because it 

gives the Fed more room to cut interest rates the next time there 

is a recession and we are less likely to hit the zero bound problem 

we hit in this recession. 

And then also, briefly, in my view there is no evidence whatsoever that 3 or 4 percent inflation causes serious damage to the 

economy. When Paul Volcker conquered inflation, that meant reducing inflation to 3 or 4 percent. That was considered perfectly acceptable at the time, and no evidence since then has contradicted 

that. Thank you. 

[The prepared statement of Professor Ball can be found on page 

63 of the appendix.] 

Mr. WATT. I thank all of you gentlemen for your outstanding testimony. We will now go to member questions, and reward Mr. Perlmutter for skipping over him earlier by recognizing him first. 

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

gentlemen, for your testimony. 

I just want to follow up with Professor Ball. Based on your experience and your research and your analysis of all this, when do we 

want to start tightening up? 

And Mr. Meyer, I thought you were saying, well, we are not in 

a position of inflation or hyperinflation right now. But just from 

your background, talking to me as a policymaker, as a layman, 

what should I be looking for just in terms of when are we going 

to start tightening things up? 

You heard me on the unemployment piece. That is where I am. 

I have a lot of people I have to put back to work. So if each of you 

would respond? 

Mr. MEYER. Okay. Well, I am going to answer that in terms of 

the spirit of the ‘‘Taylor Rule’’ that John has done. I don’t use exactly that one. But we know the Fed has two objectives, full employment and price stability. Okay? So the question is: How much 

does the unemployment rate have to fall, and where should inflation be? 

I believe the unemployment rate is going to be above 9 percent 

at the end of this year, 1 percent, and likely to be 1 percent for 

the next couple of years. You can’t convince me that it is time for 

the Fed to begin to tighten. 

So we can talk about how low the unemployment rate should be. 

Certainly, inflation has to stabilize, from 1 percent probably has to 

begin to turn up. And the unemployment rate has to get down to— 

you know, it is hard to judge this, but in our case, close to 81⁄2 percent. 

Even then, it is hard to make a really strong case for tightening 

under those circumstances because the unemployment rate will be 

higher than the Fed has ever tightened that, and the inflation rate 

50 

will be lower than the Fed has ever tightened that. So I will say 

the middle of 2011 or later. 

Mr. PERLMUTTER. And Mr. Taylor? Professor? 

Mr. TAYLOR. I agree that it depends on what happens with inflation and GDP growth and employment. I do think that the Fed has 

to be ready in case we get a surprise, an unfortunate increase in 

inflation. It has to also be ready if we are more pleasantly surprised with a stronger recovery. And in both cases, some interest 

rate increases will be required. I think it depends on when they 

occur. 

But I would just say briefly, remember, one of the theories— 

which has been discussed a lot, one I advocate—is that the reasons 

we got into this crisis and the reasons we have, therefore, this high 

unemployment rate was the Fed held interest rates too low for too 

long for several years. 

So don’t think that it is an automatic help for unemployment to 

delay the interest rate increases. It could very well help prevent 

another downturn later. 

Mr. PERLMUTTER. You heard it, and I would like Mr. Goodfriend, 

or Professor, to answer on this—but you heard Mr. Foster’s question about this Okun’s Law. And, I mean, productivity is really 

something that is at historic highs, which is wonderful. 

But people don’t get back to work because you are getting it all 

done and you are making a lot of money and you are doing it with 

a lot fewer people. Does that factor into anything? Do you believe 

this Okun’s Law, whatever the heck he was talking about, is broken? 

Mr. GOODFRIEND. Well, part of the productivity is cyclical. This 

happens when people’s employment—you know, it goes down and 

the economy starts to recover. It is very typical. So I don’t think 

that is a permanent thing. 

Mr. PERLMUTTER. This seems to be double pretty much anything 

in the last 60 years. And I was only going to ask one question, and 

I am sorry, Mr. Chairman. But Mr. Goodfriend? 

Mr. WATT. You have a minute and 20 seconds to go. 

Mr. GOODFRIEND. Yes. Where I come out on this comes from the 

lessons that I have learned studying the Volcker disinflation and 

the period of the Great Inflation before that. And the first thing 

that occurs to me to say is that the Fed, the government, is not 

in control of the public’s beliefs. The public’s beliefs are out there, 

and you have to stay ahead of those. 

I don’t like to start talking about these issues in terms of what 

we think about the unemployment rate or the natural rate of unemployment. I was at the Fed for 25 years, and I learned this, if 

nothing else, that in environments like we have, the public could 

get very nervous and raise inflation expectations in long-term bond 

rates, if we wait too long on this. And if that happens, interest 

rates go in the wrong direction, we go into a double dip. 

So in the limited time that I have to talk about this, I would 

urge everyone here to do what I have been saying in my testimony. 

Do whatever you can to create confidence in the public’s mind 

about the fiscal authorities and the central bank being on the same 

page so we can anchor those beliefs. And that gives us a little more 

51 

time to think about how to do these things with respect to the unemployment rate. 

Mr. PERLMUTTER. Thank you. Professor, anything else? 

Mr. BALL. Yes. My basic answer is that it is time to ease when 

unemployment is substantially lower. Chairman Bernanke talked 

about the Fed’s dual mandate. Professor Taylor, if I understood, 

talked about there are inflation risks. There are unemployment 

risks. That sounds very reasonable and balanced. 

I think in current circumstances, we have to be somewhat unbalanced. The economy has a crisis in unemployment, and it is essential to do something about that. Relative to that, whether inflation 

is 1 percent or 2 percent or 3 percent or 4 percent is really a minor 

issue, in my opinion. 

Mr. PERLMUTTER. Thank you very much. 

Mr. WATT. The gentleman’s time has expired. 

The gentleman from Texas, Mr. Paul, is recognized for 5 minutes. 

Dr. PAUL. I thank the chairman for yielding. 

I have a comment for Professor Ball first because you made the 

statement that it would be a good thing to get at a 4 percent inflation rate. That type of language happens to scare me a whole lot 

because I think it is so detrimental, and in many ways immoral. 

Because what you are saying is the purpose of the government 

is to depreciate the currency, depreciate the value of the money. 

And who suffers the most from that? Well, the poor people do because their prices go up. And the older people who are on retirement, they suffer a lot as well. The wealthy people seem to be able 

to handle inflationary problems a lot better than the average person. 

And a characteristic of inflation is that you eventually wipe out 

the middle class. And, quite frankly, we do have a lot of inflation 

right now because there is an inflationary factor in medical care. 

That is the main complaint. 

Could you give me a brief answer on that, if you would like? Because I want to ask Mr. Taylor a question as well. 

Mr. BALL. Well, those are complicated issues. Briefly and very respectfully, I disagree with what you are saying. Research suggests 

that the effects of inflation are distributed fairly evenly across different income groups, whereas the effects of unemployment are 

very heavily concentrated on lower-income people. 

And more generally, I think, just the costs to anybody of 3 or 4 

percent inflation, there has just been no documentation that they 

are important; whereas it is pretty obvious how costly unemployment it. 

Dr. PAUL. Okay. Thank you. 

For Professor Taylor, you have this exit rule. If the economy 

doesn’t get back to growth, as a matter of fact stays where it is or 

starts down again sharply like it might—some people suspect that 

the housing market is still in a major crisis—does your rule just 

not happen? Does it not kick in? You don’t worry about reducing 

the balance sheet if the economy suddenly takes a downturn? 

Mr. TAYLOR. What I like about this proposal that I made is that 

it is very similar to the decision about increasing or not increasing 

the interest rate. So if the economy languishes, the interest rate 

52 

will not increase, just as we discussed. If the economy picks up, 

then it will increase the interest rate. 

My proposal on reserves, it is very much like that. It is tied into 

it, so that as the Federal funds rate is increased, if it is, reserves 

will come down at a similar pace. And the idea is by the time the 

Federal funds rate reaches 2 percent, then reserves will be roughly 

at the level where the interest rate can be— 

Dr. PAUL. So it is on automatic. I get you. 

Professor Meyer suggested that there is not much left for the Fed 

to do. You can’t lower interest rates much lower. So we get into 

trouble. And the suggestion is that we just need more fiscal stimulation. And I think that is correct. 

Well, anyway, there is a lot of desire for more fiscal stimulation. 

We have had a lot. And even today Chairman Bernanke said, ‘‘We 

are not in the business of monetizing debt.’’ Of course, they just 

bought $300 billion worth of debt, and if push comes to shove, they 

do monetize debt. 

But wouldn’t it be safe to say that if a bank can get cheap 

money—you know, 1 percent, 0 percent—and take it, because it is 

available through the Federal Reserve system, and they buy Treasury bills, even though that might not go on the balance sheet, isn’t 

that indirectly monetizing debt? 

Mr. TAYLOR. I think the thing to look for in terms of monetizing 

the debt is how much the Fed— 

Dr. PAUL. Actually buys? 

Mr. TAYLOR. —purchases. Yes. I think—and also, it is not an 

easy thing. Remember, we think about the monetization that occurred in the great inflation; it occurred gradually in the late 

1960’s and 1970’s. There was a lot of support for that inflation. 

Dr. PAUL. Did Professor Meyer have a comment on that? 

Mr. MEYER. Well, I have a comment on a lot of things you said. 

Just with respect to fiscal policy, I don’t think that—I doubt anybody in Congress, or there certainly would be a majority, who 

would want to have a significant fiscal stimulus today when there 

is uncertainty about, one, whether the economy needs it, and when 

the budget is in such terrible shape going forward. 

With respect to a rule, yes. I mean, I use a rule to sort of follow 

what policy does. And, you know, the Fed is going to reduce reserves as it raises the funds rate. And that is what Chairman 

Bernanke sort of emphasized, when as you raise the interest on reserves, you could have managed reserves very carefully, withdraw 

them to keep the funds rate close to the interest on reserves. So 

that is inevitable, and that is really in the game plan. 

Mr. WATT. The gentleman’s time has expired. I will recognize 

myself, unless somebody else comes in, as the last questioner. 

It seems to me that the bulk of the conversation in this panel 

and in the questions that have come up to this point have kind of 

gone beyond the 13(3) authority, and assumed that we are back 

into a situation where we can deal with monetary policy. We are 

speculating about when monetary policy ought to be changed, the 

interest rates adjusted. 

And I am more interested in the 13(3) steps that the Fed has 

taken, and the withdrawal from them. Do you get to—well, let me 

frame this a little bit further. 

53 

One of the witnesses on the panel that was originally scheduled, 

who got snowed out, took the position that the United States was 

currently in a balance sheet recession, and that we ought to be 

very careful in withdrawing these emergency steps lest we get to 

the point that Japan ended up in. 

Now, what I am interested in is the intersection between—not so 

much when you raise the interest rates; I think that is way out 

there, I believe. Is that beyond getting out of all of this 13(3) steps, 

or can we even get to the discussion about raising interest rates 

without going through the discussion about how you withdraw the 

13(3) authority? I guess that is the question I want comments on. 

Mr. MEYER. Okay. So first of all, you have three things going 

there. One is the 13(3). One is rates. And the first one was what 

do you do with sort of liquidity programs. These are completely 

separate. 

The liquidity programs were put into place when there was a 

panic. Okay? The panic is over. Nobody was using those facilities. 

They closed on their own. Gone. History. Okay? 

With respect to 13(3), it is a very different animal. And the Federal Reserve Act says that they could only be used when there are 

unusual and exigent circumstances. Now, that is a very high hurdle. I believe it existed when the Fed put these into place. I think 

it clearly doesn’t exist today. And the Fed—this is not its choice. 

The Fed has no choice here. It must close those facilities. 

Mr. WATT. So you are just assuming that all of this discussion 

is taking place post-13(3). Now, Mr. Taylor said we are beyond the 

panic. One of the questions I wrote down is, ‘‘Are we there yet?’’ 

I am not sure. I am not sure we are there yet, but I would like 

your opinion on that. 

Mr. TAYLOR. Yes. Well, first of all, I think the use of 13(3) actually caused some damage the way it was used. Remember, it was 

used even before the panic with respect to Bear Stearns. And I 

think that caused a lot of confusion, and I have written about it 

extensively. 

So I would like to see a return to a monetary policy, which 13(3) 

is almost never used. And I think that would be a much better sort 

of standard monetary policy. I also think that it is very important 

to be more transparent about 13(3). 

Mr. WATT. But let’s—maybe I need a better understanding of 

what 13(3) is. You put it into three different categories. 

Mr. MEYER. Well, the 13(3) was used for the funds to bail out 

Bear Stearns. 

Mr. WATT. So none of the other two options, the liquidity options 

or the interest rate options, should be employed at all until the 

13(3) steps have been completely terminated? Is that what you are 

saying? 

Mr. MEYER. Well, I just would—I would just add one thing. Some 

of those emergency liquidity authorities were put in place using 

13(3). 

Mr. WATT. All right. But then I don’t have the capacity to distinguish those. If they were put in place under 13(3) authority, then 

I have to treat them as part of the 13(3). 

Mr. MEYER. No. They are very different. 

54 

Mr. WATT. You know, maybe we are being semantic here. But 

the question—and that was what was confusing me because you all 

had gone on to talking about only interest rates. That is monetary 

policy. That is not 13(3) authority. Can you even get there, is my 

question, before you deal with the 13(3) withdrawal? 

Mr. GOODFRIEND. Could I just—I want to say something. 

Mr. WATT. Mr. Goodfriend? 

Mr. GOODFRIEND. I talked extensively about something I called 

credit policy, which is very distinct from monetary policy. Monetary 

policy was reserves, buying Treasuries only. Credit policy undoes 

Treasuries only. Credit policy is 13(3). 

Mr. WATT. But if credit policy was implemented under 13(3)— 

Mr. GOODFRIEND. That’s right. But the two are distinct. 

Mr. MEYER. Could I just make a point? Regular reform bills all 

make a distinction between two parts of 13(3). One is bailouts of 

individual institutions, and the other are broad-based policies like 

the primary deal at credit facility that was just about injecting liquidity into the system, but injecting it through a wider base. 

These are very separate, and I understand that legislation will 

take 13(3) authority away from the Fed with respect to individual 

institutions, but leave it with respect to these broad-based. 

Mr. WATT. Go ahead, Professor. 

Mr. GOODFRIEND. I was going to say, for me, I have a particular 

take on these questions. There is the mechanical question of what 

you want to do in terms of sequencing the withdrawal of different 

13(3) programs, and how that will affect the unemployment rate, 

and what is your view about how soon to do that sort of thing. 

But to me, I always think that there is a signaling effect of these 

kinds of withdrawals that has to do largely with the potential beliefs of the public as to what the long-term prospects are for inflation expectations. 

And I think it is very important to kind of get 13(3) behind us; 

if not in fact, at least create a roadmap or rule, like John is saying, 

so the public sees that the Federal Reserve is regaining its independence from the fiscal authority, and also that the fiscal authority is working well with the Federal Reserve, that the government 

works. 

I mean, we had a huge panic in the fall of 2008, I believe, because the public thought that the government wasn’t working. 

Mr. WATT. But necessarily get 13(3) credit authority behind us 

before we go to the interest rate thing, or— 

Mr. GOODFRIEND. No. No, I think the discussion should be had 

so that there is a sense in the public mind of what the intentions 

are as to how to move forward to get out of 13(3). 

The point being is the public, I think, is going to be naturally 

nervous about the Federal Reserve’s independence and commitment to stabilize the inflation rate. And that has to be job one. If 

we don’t stabilize the inflation rate, the long-term interest rate will 

spike up and we’ll get—that, to my mind, is the greatest risk of a 

double-dip recession, a loss of credibility, so to speak, on inflation 

expectations. 

And so I believe this discussion you are having is central, but I 

think it is central for a slightly different reason, that to have this 

discussion about 13(3) openly that clarifies the Fed’s independence 

55 

vis-a-vis the fiscal authorities in Congress is a way of signaling to 

the public: The government is serious about doing the right thing 

about inflation, and that will keep long-term rates low. 

Mr. WATT. Okay. The only person I haven’t heard from on this 

issue is Mr. Ball, and then we will close. 

Mr. BALL. Okay. Well, if I understand the question, I think one 

can view interest rate policy and the unwinding of the other programs as separate issues. And the reason they can be separated is 

that the Fed has the tool of interest on reserves to manipulate 

market interest rates regardless of what is happening to the balance sheet. 

So I think we can separate those issues. I think probably the Fed 

will and should be unwinding the various programs slowly because 

we will want to unwind them eventually, but we don’t want to take 

the risk of jarring markets by dumping a lot of securities at one 

time or anything like that. 

So I think the Fed is on a proper course of gradually unwinding 

the unorthodox policies. And then there is the separate issue of 

when interest rates should be increased. 

Mr. WATT. I am not sure I am clear on it, but I probably won’t 

ever be clear because this is complex territory. I am sure you all 

understand it better, and that is why we have these hearings, for 

us to try to understand it better so we can make better decisions. 

We are extremely appreciative of your patience and your presence and your testimony. Let me do a couple of housekeeping 

things here. 

I ask unanimous consent to insert in the record a statement from 

Janis Eberly entitled, ‘‘Unwinding Emergency Federal Reserve Liquidity Programs, and Implications for Economic Recovery.’’ 

Your entire statements will be made a part of the record. The 

Chair notes that some members may have additional questions for 

this panel, or for Chairman Bernanke, which they may wish to submit in writing. Without objection, the hearing record will remain 

open for 30 days for members to submit written questions to these 

witnesses and to place their responses in the record. 

I think that completes all of our business, with our thanks, and 

the hearing is adjourned. 

[Whereupon, at 1:10 p.m., the hearing was adjourned.] 

(57) 

A P P E N D I X 

March 25, 2010 

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