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57–057 2010

S. HRG. 111–583 

THE ECONOMIC OUTLOOK 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

APRIL 14, 2010 

Printed for the use of the Joint Economic Committee 

( 

(II) 

JOINT ECONOMIC COMMITTEE 

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

HOUSE OF REPRESENTATIVES 

CAROLYN B. MALONEY, New York, Chair 

MAURICE D. HINCHEY, New York 

BARON P. HILL, Indiana 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

VIC SNYDER, Arkansas 

KEVIN BRADY, Texas 

RON PAUL, Texas 

MICHAEL C. BURGESS, M.D., Texas 

JOHN CAMPBELL, California 

SENATE 

CHARLES E. SCHUMER, New York, Vice 

Chairman 

JEFF BINGAMAN, New Mexico 

AMY KLOBUCHAR, Minnesota 

ROBERT P. CASEY, JR., Pennsylvania 

JIM WEBB, Virginia 

MARK R. WARNER, Virginia 

SAM BROWNBACK, Kansas, Ranking Minority 

JIM DEMINT, South Carolina 

JAMES E. RISCH, Idaho 

ROBERT F. BENNETT, Utah 

ANDREA CAMP, Executive Director 

JEFF SCHLAGENHAUF, Minority Staff Director 

(III) 

C O N T E N T S 

MEMBERS

Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New York .......... 1 

Hon. Kevin Brady, U.S. Representative from Texas ............................................ 3 

Hon. Sam Brownback, Ranking Minority, a U.S. Senator from Kansas ............. 4 

WITNESSES

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

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

SUBMISSIONS FOR THE RECORD

Prepared statement of Representative Carolyn B. Maloney, Chair .................... 48 

Prepared statement of Representative Kevin Brady ............................................ 49 

Prepared statement of Senator Sam Brownback .................................................. 50 

Prepared statement of Chairman Ben S. Bernanke ............................................. 51 

Prepared statement of Representative Elijah E. Cummings ............................... 54 

Letter from Representative Elijah E. Cummings Dated April 21, 2010, Transmitting Questions to Chairman Ben S. Bernanke ............................................ 56 

Letter from Chairman Ben S. Bernanke Dated May 27, 2010, Transmitting 

Responses to Representative Elijah E. Cummings ............................................ 62 

Letter from Senator Robert P. Casey, Jr., Dated April 21, 2010, Transmitting 

Questions to Chairman Ben S. Bernanke .......................................................... 68 

Letter from Chairman Ben S. Bernanke Dated May 27, 2010, Transmitting 

Responses to Senator Robert P. Casey, Jr. ........................................................ 69 

(1) 

THE ECONOMIC OUTLOOK 

WEDNESDAY, APRIL 14, 2010 

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

The committee met, pursuant to call, at 10:00 a.m. in Room 106 

of the Dirksen Senate Office Building, The Honorable Carolyn B. 

Maloney (Chair) presiding. 

Representatives present: Maloney, Hinchey, Sanchez, Cummings, Snyder, Brady, Paul, and Burgess. 

Senators present: Schumer, Klobuchar, Casey, Brownback, and 

Risch. 

Staff present: Andrea Camp, Gail Cohen, Colleen Healy, Jessica 

Knowles, Andrew Wilson, Rachel Greszler, Lydia Mashburn, Jane 

McCullough, Jeff Schlagenhauf, Ted Boll, and Robert O’Quinn. 

OPENING STATEMENT OF THE HONORABLE CAROLYN B. 

MALONEY, CHAIR, A U.S. REPRESENTATIVE FROM NEW YORK 

Chair Maloney. The Committee will come to order. In order to 

have time for questions, I am limiting opening statements to the 

Ranking Member, Senator Brownback, for five minutes, and the 

Vice Chair and Mr. Brady for three minutes. And I would also like 

to ask for unanimous consent to accept written statements of Members into the record. 

America is on a path toward economic recovery. A large part of 

the credit for this turnaround is due not only to President Barack 

Obama but also to Ben Bernanke, the Chairman of the Federal Reserve, a respected scholar on the Great Depression. 

Under this guidance the Fed took creative and effective actions 

to inject liquidity into our financial system, which saved our nation 

from economic catastrophe. 

I am confident that you will continue to steer monetary policy at 

the Fed carefully through the next set of obstacles, balancing the 

creation of robust economic growth with the prevention of inflation. 

Our hearing today on the economic outlook is timely for many 

reasons. Just this week, the committee of economists responsible 

for dating the end of the recession announced that the recovery is 

still too fragile to announce that the recession is over. But there 

are indications that we are indeed well on our way to economic recovery. 

After four straight quarters of negative growth, the economy 

grew during the last two quarters of 2009. There is a consensus 

that when the latest GDP numbers are announced on April 30th, 

2 

we will see that our economy continued to expand during the first 

quarter of 2010. 

The most recent employment report showed that 162,000 jobs 

were created in March, with three-fourths of those jobs in the private sector. 

Manufacturing employment was up for three straight months. 

The stock market is at its highest in almost 15 months. 

Temporary help, a leading indicator of the health of the labor 

market, has added 313,000 jobs since October of 2009. 

Sales of cars and light trucks were up in March. 

And many surveys of the economy are optimistic about growth in 

both the service and manufacturing sectors. 

These improvements in our economy are proof that actions taken 

by Congress, the Fed, and the Administration have started to have 

a positive impact. 

In the last year, Congress enacted policies that supported struggling families and encouraged job creation. The Recovery Act provided tax relief for 95 percent of American families and created 

jobs while investing in clean energy, infrastructure, and education. 

Last year we extended the $8,000 first-time homebuyers’ credit 

that will spur construction jobs. We extended a host of safety net 

programs that will help struggling families weather the economic 

storm. 

We extended the net operating loss carry-back provision that will 

help small businesses hire new employees. And we are boosting 

funding for small business loans via the Small Business Administration. 

We passed the HIRE Act to give tax breaks to businesses that 

hire unemployed workers. Without these measures, the depth of 

the contraction would have been much deeper and far longer. 

Although the recent estimates of the cost of the bailout of the financial system are much lower than initially expected, the true 

cost of the financial system failure in terms of lost employment and 

pain to working families is immeasurable. 

Much of the budget deficit over the next 10 years should be attributed to the financial crisis. Economists have estimated that the 

budget deficit has increased by $3.1 trillion due to the decline in 

tax revenues from the long line of workers who have lost their jobs. 

While we have come far in stabilizing the financial system, we 

would like to hear your thoughts on various reform proposals that 

have been introduced and are being considered before Congress to 

make sure that financial institutions do not take on excessive risk 

and have appropriate capital requirements. 

We also look forward to hearing your take on upcoming challenges, including the recovery of the housing market. One important factor in the housing market’s current recovery is the low 

mortgage interest rates that were sustained by the Fed’s purchases 

of mortgage-backed securities and Fannie and Freddie debt. Now 

that the Fed has completed those purchases, we would like to hear 

your assessment of the housing market and the impact of the Fed’s 

exit on mortgage rates. 

On another note, I am grateful for your leadership in ushering 

in new rules to prevent unfair or deceptive practices with respect 

3 

to credit card accounts and the rules the Fed put in place to curb 

excessive overdraft fees. 

We thank you for your testimony today, Chairman Bernanke, 

and look forward to working with you as the Committee continues 

to focus on helping our economy recover and expand. 

[The prepared statement of Representative Maloney appears in 

the Submissions for the Record on page 48.] 

Chair Maloney. Thank you, and the Chair recognizes Mr. 

Brady. 

OPENING STATEMENT OF THE HONORABLE KEVIN BRADY, A 

U.S. REPRESENTATIVE FROM TEXAS 

Representative Brady. Thank you, Madam Chairman. I am 

pleased to join in welcoming Chairman Bernanke before the Committee. 

The Federal Reserve’s injection of $1.3 trillion of liquidity in the 

fall of 2008 quelled the panic in financial markets. Although I disagree with the Fed’s participation in the ‘‘bailouts’’ of AIG and Bear 

Stearns because these institutions were insolvent, the Fed’s timely 

actions as lender of last resort to solvent but illiquid financial institutions and markets prevented the financial panic from becoming 

a depression. 

During the spring of 2009 the ‘‘stress test’’ and subsequent capital increases by large banks restored confidence in financial institutions and markets. Largely because of these decisive actions, the 

U.S. economy is now beginning to recover. 

However, the recovery will continue to be subpar as businesses 

delay critical hiring and investment decisions due to the uncertainty generated by President Obama and Congressional Democrats to increase taxes, raise energy prices, enact job-killing regulations, and generate a dangerous level of federal debt. 

Despite recent guidance from Washington to bank examiners 

about commercial mortgage loans, I am concerned that bank examiners are exacerbating real estate problems through their inflexibility. 

Pressed by regulators, community and regional banks are not renewing performing commercial mortgage loans even though their 

underlying cash flow can easily service the debt. 

That said, I would like to share with you my concerns about 

monetary policy going forward. We are in danger of repeating the 

mistakes that produced stagflation in the 1970s. Because of the lag 

time between monetary policy decisions and their effects, the Federal Reserve must act to prevent inflation well before the public 

perceives that prices are rising. 

Yet there are voices demanding that the Federal Reserve delay 

action. Recently economist Lawrence Ball advocated keeping the 

federal funds rate extraordinarily low even as prices rise to reduce 

the unemployment rate, notwithstanding the fact that the so-called 

Phillips Curve trade-off between inflation and unemployment had 

been thoroughly discredited three decades ago. 

Price stability contributes to economic growth, and only the Federal Reserve can maintain price stability. My concern is that Administration officials may press the Federal Reserve to delay raisVerDate Nov 24 2008 11:26 Aug 25, 2010 Jkt 055045 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\57057.TXT SHAUN PsN: DPROCT
4 

ing interest rates and unwinding the expansion of its balance sheet 

to cover for the Obama Administration’s anti-growth policies. 

Taxes, especially on small businesses and investment, are about 

to soar as the 2001 and 2003 rate reductions expire and $569 billion of new taxes to fund the President’s new health care plan are 

implemented. Additional costs are lurking in the form of regulations to control greenhouse gas emissions and complex cap and 

trade legislation. 

Despite these tax increases, the CBO projects that higher spending under the President’s budget would create deficits of $9.8 trillion over the next 10 fiscal years, spiking publicly held federal debt 

to 90 percent of GDP by 2020. Unless Congress controls federal 

spending, these deficits will crowd out private investment and slow 

our economic growth. 

Chairman Bernanke, I urge you to resist any attempts to delay 

raising interest rates in order to offset these anti-growth policies. 

Regarding financial services legislation, I am concerned about 

weakening the Fed’s independence, institutionalizing too-big-to-fail, 

and perpetuating the status of Fannie and Freddie as zombie 

banks. 

Making the President of the Federal Reserve Bank of New York 

a political appointee and stripping the supervision of smaller banks 

and their holding companies from the Fed would weaken the regional Reserve Banks and undermine the Fed’s independence. 

Moreover, diverting the Fed’s profits from the Treasury to pay 

for the Consumer Financial Protection Bureau would set a dangerous precedent that would open the floodgates for other off-budget federal spending. 

The perverse incentives arising from the presumption of government backing caused large financial institutions, especially Fannie 

and Freddie, to take excessive risks and inflate a huge bubble in 

the housing market. 

Instead of ending too-big-to-fail, the Senate bill would establish 

a permanent bailout fund for large financial institutions that may 

exacerbate this problem by identifying who the government regards 

as too big to fail. 

Incredibly, the Senate bill does not provide for final resolution of 

Fannie and Freddie, despite costing taxpayers $128 billion so far 

with no prospect for any recovery. Like walking zombies, Fannie 

and Freddie with their explicit government backing are frightening 

most private capital away from re-entering housing finance. 

We have a lot of challenges before us, Chairman Bernanke, and 

I look forward to your testimony. 

[The prepared statement of Representative Brady appears in the 

Submissions for the Record on page 49.] 

Chair Maloney. Thank you. 

Senator Brownback. 

OPENING STATEMENT OF THE HONORABLE SAM BROWNBACK, RANKING MINORITY, A U.S. SENATOR FROM KANSAS 

Senator Brownback. Thank you very much, Madam Chairman. 

I appreciate it. 

5 

Chairman Bernanke, welcome. It’s good to have you here. I 

would ask that my full statement be put into the record as if presented. 

Mr. Chairman, I really do look forward to your testimony today. 

It seems like to me that we have some giant issues. You are used 

to dealing with large problems and we continue to have them. 

It strikes me that the fiscal policy in the country is one that just 

must be commented on with its impact and its possibilities and 

problems down the road. 

I get very concerned about the very real prospect of a government bubble being created. We have come through the dot-com 

bubble, the housing bubble, and I am very concerned about us having a government bubble. And how is it that we can ease through 

this period of time, which is something I am certain you and the 

staff at the Federal Reserve must be talking a great deal about. 

One of the issues I would hope you would consider moving forward is the makeup of the FOMC Committee on Monetary Policy. 

A lot of us from all over the country are impacted by monetary policy. The Federal Reserve in New York has a permanent seat on 

that. Is that truly reflective of the diversity of views across the 

country? That is one of the issues I have been looking at and researching: should that committee be broadened out on its representation of Federal Bank chairmen on the FOMC Committee. And it 

is something that we will be presenting. 

Several of us in the Congress have joined on to a bill to press 

on China to allow its exchange rate to float. A number of us feel 

that artificially holding down the exchange rate has had a major 

impact on the U.S. economy. It does not reflect current economic 

realities and adds to the permanent feel of the imbalance between 

us and China on trade. 

And one of the things that should happen when you have a trade 

imbalance is the currencies should be adjusting to reflect that, 

under basic economic theory, and yet the Chinese Government 

doesn’t allow that to happen. 

That has a big impact on the prices of goods coming into this 

country. It has a big impact on us exporting to China. It has a big 

impact on other countries around China that are exporters, as well. 

And it seems to a number of us that if the Chinese are not going 

to allow this float to take place, that we should be forcing this 

through trade policy, through the possibility of sanctions. This 

would be something I am sure you probably do not want to be 

dragged into, but it is going to be something that will probably 

land on your doorsteps as well. 

Those are the big issues. Plus, I would hope in looking at interest 

rates down the road that it seems to me it shows strength in our 

economy if we are able to start saying we should allow these interest rates to move up a little bit; that we think the recovery is moving forward; that we are getting to a stabilized point; that it would 

show some strength and resiliency if you allow those interest rates 

to start edging upward. 

That is something that obviously is on your plate, and you guys 

have to decide, but looking at it as an outside observer it seems 

like we might be at a point at which that would be a wise move, 

6 

and one that would show strength, and get maybe some of the fear 

out of what may happen in the future. 

It seems like we think things are moving forward—and they’re 

starting to—and we want to get away from this government bubble, fiscal and monetary policy, and start to ease off the pressure 

on that in a slow and prudent fashion. 

Madam Chairman, I thank you for the hearing and I look forward very much to your testimony, Chairman Bernanke. 

[The prepared statement of Senator Brownback appears in the 

Submissions for the Record on page 50.] 

Chair Maloney. Thank you very much. We expect Senator 

Schumer to join us. He has a conflict with his committee work. 

When he comes, we will recognize him. 

I would now like to introduce Chairman Bernanke. Dr. Ben 

Bernanke began a second term as Chairman of the Board of Governors of the Federal Reserve System on February 1, 2010. Dr. 

Bernanke also serves as Chairman of the Federal Open Market 

Committee, the System’s principal monetary policy-making body. 

He originally took office as Chairman on February 1, 2006, when 

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

Bernanke was Chairman of the President’s Council of Economic 

Advisers from June 2005 to January of 2006. 

Prior to beginning public service, Dr. Bernanke was the Class of 

1926 Professor of Economics and Public Affairs at Princeton University. Dr. Bernanke had been a Professor of Economics and Public Affairs at Princeton since 1985. 

Welcome. We look forward to your testimony. 

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

SYSTEM 

Chairman Bernanke. Thank you, Madam Chair. 

Chair Maloney, Vice Chairman Schumer, Ranking Members 

Brownback and Brady, and other Members of the Committee, I am 

pleased to be here today to discuss economic and financial developments. I would also like to make a few remarks on the fiscal situation. 

Supported by stimulative monetary and fiscal policies and the 

concerted efforts of policymakers to stabilize the financial system, 

a recovery in economic activity appears to have begun in the second 

half of last year. 

An important impetus to the expansion was firms’ success in 

working down the excess inventories that had built up during the 

contraction, which left companies more willing to expand production. 

Indeed, the boost from the slower drawdown in inventories accounted for the majority of the sharp rise in real gross domestic 

product in the fourth quarter of last year, during which read GDP 

increased at an annual rate of 5.6 percent. 

With inventories now much better aligned with final sales, however, and with support from fiscal policy set to diminish in the 

coming year, further economic expansion will depend on continued 

growth in private final demand. 

7 

On balance, the incoming data suggest that growth in private 

final demand will be sufficient to promote a moderate economic recovery in coming quarters. Consumer spending continued to increase in the first two months of this year, and has now risen at 

an annual rate of about 21⁄2 percent in real terms since the middle 

of 2009. 

In particular, after slowing in January and February, sales of 

new light motor vehicles bounced back in March as manufacturers 

offered a new round of incentives. Going forward, consumer spending should be aided by a gradual pickup in jobs and earnings, the 

recovery in household wealth from recent lows, and some improvement in credit availability. 

In the business sector, capital spending on equipment and software appears to have increased at a solid pace again in the first 

quarter. U.S. manufacturing output, which is benefitting from 

stronger export demand as well as the inventory adjustment I 

noted earlier, rose at an annual rate of 8 percent during the 8 

months ending in February. Also, as I will discuss further in a moment, financial conditions continue to strengthen, thus reducing an 

important headwind for the economy. 

To be sure, significant restraints on the pace of the recovery remain, including weakness in both residential and nonresidential 

construction and the poor fiscal condition of many state and local 

governments. 

Sales of new and existing homes dropped back in January and 

February, and the pace of new single-family housing starts has 

changed little since the middle of last year. 

Outlays for nonresidential construction continue to contract amid 

rising vacancy rates, falling property prices, and difficulties in obtaining financing. Pressures on state and local budgets, though 

tempered by ongoing federal support, have led to continuing declines in employment and construction spending by state and local 

governments. 

As you know, the labor market was particularly hard hit by the 

Recession. Recently we have seen some encouraging signs that layoffs are slowing and that employment has turned up. 

Manufacturing employment increased for a third month in 

March, and the number of temporary jobs—often a precursor of 

more permanent employment—has been rising since last October. 

New claims for unemployment insurance continue on a generally 

downward trend. However, if the pace of recovery is moderate, as 

I expect, a significant amount of time will be required to restore 

the 81⁄2 million jobs that were lost during the past two years. 

I am particularly concerned about the fact that in March 44 percent of the unemployed had been without a job for 6 months or 

more. Long periods without work erode individuals’ skills and hurt 

future employment prospects. 

Younger workers may be particularly adversely affected if a 

weak labor market prevents them from finding a first job or from 

gaining important work experience. 

On the inflation front, recent data continue to show a subdued 

rate of increase in consumer prices. For the three months ended in 

February, prices for personal consumption expenditures rose at an 

8 

annual rate of 11⁄4 percent despite a further steep run-up in energy 

prices. 

Core inflation, which excludes prices of food and energy, slowed 

to an annual rate of 1⁄2 percent. The moderation in inflation has 

been broadly based, affecting most categories of goods and services 

with the principal exception of some globally traded commodities 

and materials, including crude oil. 

Long-run inflation expectations appear stable. For example, expected inflation over the next 5 to 10 years as measured by the 

Thompson Reuters/University of Michigan Surveys of Consumers 

was 23⁄4 percent in March, which is at the lower end of the narrow 

range that has prevailed for the past few years. 

Financial markets have improved considerably since I last testified before this Committee in May of last year. Conditions in shortterm credit markets have continued to normalize. Spreads in bank 

funding markets and the commercial paper market have returned 

to near pre-crisis levels. 

In light of these improvements, the Federal Reserve has largely 

wound down the extraordinary liquidity programs that it created to 

support financial markets during the crisis. 

The only remaining program, apart from the discount window, is 

the Term Asset-Backed Securities Loan Facility, or TABSLF, for 

loans backed by new-issue commercial mortgage-backed securities, 

and that facility is scheduled to close at the end of June. 

Overall, the Federal Reserve’s liquidity programs appear to have 

made a significant contribution to the stabilization of the financial 

system, and they did so at no cost to taxpayers and with no credit 

losses. 

The Federal Reserve also recently completed its purchases of 

$1.25 trillion of federal agency mortgage-backed securities and 

about $175 billion of agency debt. Purchases under these programs 

were phased down gradually, and to date the transition in markets 

has been relatively smooth. 

The Federal Reserve’s asset-purchase program appears to have 

improved market functioning and reduced interest-rate spreads not 

only in the mortgage market but in other longer term debt markets 

as well. 

On net, the financial condition of banking firms has strengthened 

markedly during recent quarters. Last spring, the Federal Reserve 

and other banking regulators evaluated the Nation’s largest bank 

holding companies under the Supervisory Capital Assessment Program, popularly known as the stress test, to ensure that they 

would have sufficient capital to remain viable and to lend to creditworthy borrowers even in a worse-than-expected economic scenario. 

The release of the stress test results significantly increased market confidence in the banking system. Greater investor confidence 

in turn allowed the banks to raise substantial amounts of new equity capital and, in many cases, to repay government capital. 

The Federal Reserve and other bank regulators continue to encourage the banks to build up their capital, ensure that they have 

adequate liquidity, improve their risk management, and restructure their employee compensation programs to better align risk and 

reward. 

9 

Despite their stronger financial positions, banks’ lending to both 

households and businesses has continued to fall. The decline in 

large part reflects sluggish loan demand and the fact that many potential borrowers no longer qualify for credit, both results of a 

weak economy. 

The high rate of write-downs has also reduced the quantity of 

loans on banks’ books. But banks have also been conservative in 

their lending policies, imposing tough lending standards and terms. 

This caution reflects bankers’ concerns about the economic outlook 

and uncertainty about their own future losses and capital positions. 

The Federal Reserve has been working to ensure that our bank 

supervision does not inadvertently impede sound lending and thus 

slow the recovery. 

Achieving the appropriate balance between necessary prudence 

and the need to continue making sound loans to creditworthy borrowers is in the interest of banks, borrowers, and the economy as 

a whole. 

Toward this end, in cooperation with the other banking regulators, we have issued policy statements to bankers and examiners 

emphasizing the importance of lending to creditworthy customers, 

working with troubled borrowers to restructure loans, managing 

commercial real estate exposures appropriately, and taking a careful but balanced approach to small business lending. 

We have accompanied our guidance with training programs for 

both Federal Reserve and state examiners, and with outreach to 

bankers throughout the industry. 

For example, we just completed a training initiative that reached 

about 1,000 examiners. We are also conducting a series of meetings 

across the country with private- and public-sector partners to gather information about the credit needs of small businesses and how 

those needs can best be met. 

We have also stepped up our information gathering so that we 

can better understand factors that may be inhibiting bank lending. 

These efforts include a survey by examiners of banks’ practices in 

working out loans, the results of which will serve as a baseline 

against which we will assess the effectiveness of our supervisory 

guidance. 

We are also obtaining additional information on small business 

credit conditions. For example, we assisted the National Federation 

of Independent Business in developing a survey to assess barriers 

to credit access by small businesses. And we are using our own 

Senior Loan Officer Opinion Survey on Bank Lending Practices to 

monitor changes in bank lending to small businesses. 

In addition to the near-term challenge of fostering improved economic performance and stronger labor markets, we as a Nation 

face the difficult but essential task of achieving longer-term sustainability of the Nation’s fiscal position. 

The federal budget deficit is on track this year to be nearly as 

wide as the $1.4 trillion gap recorded in fiscal 2009. To an important extent, these extremely large deficits are the result of the effects of the weak economy on revenues and outlays, along with the 

necessary actions that were taken to counter the Recession and restore financial stability. 

10 

But an important part of the deficit appears to be structural. 

That is, it is expected to remain even after economic and financial 

conditions have returned to normal. 

In particular, the Administration and the Congressional Budget 

Office project that the deficit will recede somewhat over the next 

two years as the temporary stimulus measures wind down and as 

economic recovery leads to higher revenues. 

Thereafter, however, the annual deficit is expected to remain 

high through 2020, in the neighborhood of 4 to 5 percent of GDP. 

Deficits at that level would lead the ratio of federal debt held by 

the public to the GDP—already expected to be greater than 70 percent at the end of fiscal 2012—to rise considerably further. 

This baseline projection assumes that most discretionary spending grows more slowly than nominal GDP, that no expiring tax cuts 

are extended, and that current provisions that provide taxpayers’ 

relief from the alternative minimum tax are also not further extended. 

Under an alternative scenario that drops those assumptions, the 

deficit at the end of 2020 would be 9 percent of GDP, and the federal debt would balloon to more than 100 percent of GDP. 

Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires 

that policymakers move decisively to set the federal budget on a 

trajectory toward sustainable fiscal balance. 

A credible plan for fiscal sustainability could yield substantial 

near-term benefits in terms of lower long-term interest rates and 

increased consumer and business confidence. 

Timely attention to these issues is important, not only for maintaining credibility but because budgetary changes are less likely to 

create hardship or dislocations when the individuals affected are 

given adequate time to plan and to adjust. 

In other words, addressing the country’s fiscal problems will require difficult choices, but postponing them will only make them 

more difficult. 

Thank you. I would be pleased to take your questions. 

[The prepared statement of Chairman Ben Bernanke appears in 

the Submissions for the Record on page 51.] 

Chair Maloney. Thank you very much. 

The Fed’s stance has been that it plans on, and I quote, ‘‘maintaining exceptionally low levels of the federal funds rate for an extended period of time,’’ end quote. 

Since there has been a great deal of speculation about the possibility that you might change your mind, let me simply ask you: Do 

you still hold that opinion? 

Chairman Bernanke. Well the Federal Open Market Committee has stated clearly that they currently anticipate that very 

low, extremely low rates will be needed for an extended period. 

They have emphasized, however, that that projection, that forecast, is conditional on three sets of conditions: 

One, very low resource utilization, high unemployment, low capacity utilization. 

Second, subdued inflation trends—low inflation. 

And third, stable inflation expectations. 

11 

So if those conditions cease to hold and we anticipate changes in 

the outlook, then of course we will respond to that. But the committee at its last meeting issued a statement reiterating that expectation about interest rates. 

Chair Maloney. And you mentioned certain criteria. Are there 

any other particular measures that the Fed will be using to determine when to raise the federal funds rate? 

Chairman Bernanke. Well we will certainly be looking at a 

broad range of economic indicators to try to assess where the economy is going. As was mentioned earlier, our policies take a while 

to work and therefore we have to look at the outlook as well as the 

current situation. And so I tried today to give you some sense of 

our outlook, which is for moderate economic recovery going forward. 

In addition of course we will continue to look at inflation, and 

look at inflation expectations. We will also look at what is happening in financial markets. And that was also mentioned earlier. 

We want to be sure that financial imbalances are not building. And 

to the best that we can tell, we have been trying to evaluate that 

criterion. And to the best we can tell, of course it’s very difficult, 

we’re not seeing obvious imbalances at this point. 

But certainly it is an issue, and recent experience suggests that 

we need to be very cautious about that, and we are paying attention to those issues. 

Chair Maloney. Thank you. 

Mr. Brownback. 

Senator Brownback. Thank you, Madam Chairman. 

Mr. Chairman, in your last statement on fiscal policy, we were 

running a deficit of 4 to 5 percent of GDP, but the more likely scenario is 9 percent of GDP if I interpreted you correctly, that if you 

don’t make any of these adjustments and yet the Congress generally goes on alternative minimum tax and things like that, and 

if we keep delaying action, you’re saying we are on track to be at 

9 percent of GDP debt by 2020. Are we on a sustainable path right 

now on our fiscal policy? 

Chairman Bernanke. Well, Senator, first let me just say that 

those numbers are based on CBO analysis, and assume, as you say, 

that AMT fixes continue to be extended, as they have been, and 

that expiring tax cuts are extended, and that nonmilitary spending 

grows as fast as GDP. So there are some assumptions about policy. 

I think it is fair to say that deficit, structural deficit, longer term 

deficits of anywhere between 4 and 9 percent, anywhere in that 

range, is not sustainable because it leads to a debt-to-GDP ratio, 

which grows essentially indefinitely; it does not stabilize. It leads 

to higher interest payments, which then feed back into the deficit. 

So I think it is very important that we consider how looking forward, not this year—because many economic conditions that are 

moving towards higher spending and lower revenues—but over the 

medium term as we try to plan our fiscal policy going forward, we 

need to find a sustainable path, and that would require lower deficits than we currently are projecting, or at least the CBO is projecting. 

12 

Senator Brownback. Are we on track to have the same sorts 

of problems that Ireland and some other European countries have 

presently? 

Chairman Bernanke. Well, we are a much larger, diversified, 

advanced economy than Greece and some of the other countries, 

but clearly at some point we need to address those balances. We 

need to make sure that we have a sustainable fiscal program that 

will not lead to indefinite growth in the debt, relative to the GDP. 

Senator Brownback. At what point does the global financial 

community determine that the United States is not being serious 

enough about its fiscal policy, so that it starts raising the cost of 

capital for the United States? 

Chairman Bernanke. Senator, that’s inherently very hard to 

know. At some point the markets will make a judgment about, 

really not our economic capacity, but our political ability, our political will to achieve longer term sustainability. And at that point, 

interest rates could go up, and that would be of course a negative 

for economic growth and recovery. 

So we don’t know when that point would be reached. And for 

that reason, I think it is important, even if we cannot balance the 

budget immediately, that we begin to think about how in the 

medium- to long-term we can put the federal budget on a sustainable trajectory. 

Senator Brownback. But it is clear that the markets could anticipate that happening even now. 

Chairman Bernanke. It is absolutely possible, certainly. 

Senator Brownback. Chairman Bernanke, we have a financial 

regulatory reform bill out of the Senate Banking Committee. I 

want to ask you about a specific issue concerning the Fed in this 

legislation. 

My concern is the placement of an independent Consumer Financial Protection Bureau within the Federal Reserve, funded by the 

Fed’s ability primarily to print money. Do you have views on this 

stand-alone agency being placed within the Fed? 

Chairman Bernanke. Well I would like to understand better 

how it would work. My current understanding is that the agency 

would not be within the Fed in any kind of accountability sense; 

that the agency would not be reporting to the Board, or to the 

Chairman; it would essentially be free-standing. 

So that means that ‘‘being within the Fed’’ is kind of a vague 

idea at this point. It is true that the current proposal would involve 

the Federal Reserve financing this agency. That of course does not 

make it any less costly to the taxpayer; it just means that there 

would be less revenue remitted from the Federal Reserve to the 

Treasury. 

So it is really up to Congress how you want to account for and 

finance the agency. But that particular way of doing it would lead 

to less seniorage, or revenue, being remitted from the Fed to the 

treasury because some would be used to support the agency. 

Senator Brownback. Mr. Chairman, I want to urge you to continue to speak out about the fiscal condition of the country. I think 

we are in a path that is not a good one, and that at any point in 

time the markets could start to react negatively to our fiscal probVerDate Nov 24 2008 11:26 Aug 25, 2010 Jkt 055045 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 C:\DOCS\57057.TXT SHAUN PsN: DPROCT
13 

lems. And I think the sooner we start to react to that and to show 

the ability to address it, the better for the country. 

Thank you very much, Madam Chairman. 

Chair Maloney. Senator Schumer for as much time as he may 

consume. 

Vice Chairman Schumer. Thank you. Mr. Chairman, I very 

much appreciate your being here. 

You have often spoken about imbalances in the global economy 

and the role that they played leading up to the financial crisis. Vice 

Chairman Kohn noted in a speech last week that deficit countries 

like the U.S. need to rely less on consumption, but surplus countries like China must increase their domestic demand, if the global 

economy is going to thrive. 

Which brings me to my first question: It is clear to me, and many 

experts agree, that China’s policy of keeping its currency pegged to 

the U.S. dollar helps to perpetuate the imbalances in the global 

economy by subsidizing even more Chinese exports at the cost of 

increasing American exports. 

It makes us too much of a consumption country, and China too 

much of an exporting country and not enough of a consumption 

country. This has a direct impact on American jobs. Now just about 

everyone I speak to admits that that is the case. 

When Lindsey Graham and I started out on this five years ago, 

everyone was saying, oh, please, just go away; we’re not. 

So if China appreciated its currency and moved to a free floating 

exchange rate, it would do more for jobs here in the U.S. than any 

single stimulus program we could pass into law. And now Senator 

Stabenow and I have combined our currency reform bills into one 

and we intend to push for action on it in Congress. 

First question: Do you agree that China’s currency policies contribute to harmful global imbalances, and was one of the causes of 

the worldwide Recession? 

Chairman Bernanke. Yes, I broadly agree with that. I think 

most economists agree that their currency is undervalued and has 

been used to promote a more export-oriented economy. 

I think it would be good for the Chinese to allow more flexibility 

in their exchange rate. It would give them more autonomy in their 

monetary policy so they could address inflation and bubbles within 

their own economy. It would be in their interests also to combine 

a more flexible exchange rate with other efforts to increase domestic demand, domestic consumption, and achieve a more balanced 

economy. 

So I don’t think the exchange rate is the only factor, but it is a 

contributing factor to these—— 

Vice Chairman Schumer. Isn’t it a large contributing factor? 

Chairman Bernanke [continuing]. It’s—— 

Vice Chairman Schumer [continuing]. 30 percent? 

Chairman Bernanke [continuing]. I don’t know what—— 

Vice Chairman Schumer. It’s 30 percent. Let’s just assume 

that for the sake of argument right now. That is huge. 

Chairman Bernanke [continuing]. I don’t know what share of 

the imbalances can be attributed to the exchange rate and how 

much to just the other policies that lead to an imbalance of domestic versus foreign demand, but it clearly is a contributing factor. 

14 

Vice Chairman Schumer. Okay. Now if it is in China’s interest 

to do it, why don’t they do it? 

Chairman Bernanke. Well because, like us, they have a variety 

of political considerations and concerns. They are being conservative, first of all, because I think they are concerned about the effects of any large changes, given what they still perceive as the 

fragile state of the global economy. 

Like we do, they have political factors such as the influence of 

exporters who are interested in maintaining that strong export orientation. And so they have a variety of both intellectual, if you will, 

and political rationales. 

Vice Chairman Schumer. Okay. And don’t we lose thousands 

and thousands of jobs because of this? And don’t billions and billions of dollars flow out of the American economy that wouldn’t if 

just, arguendo, their exchange rate floated? 

Chairman Bernanke. I would like to qualify that and say that, 

besides floating the exchange rate, they would also need to take action such as creating a stronger safety net that would increase consumption and create a more domestic orientation towards spending. 

I don’t think the exchange rate by itself in the short term would 

have a major impact. But over time it would have an impact. 

Vice Chairman Schumer. Of course it would. Okay, why don’t 

they move—you mentioned political forces. So, you’re me. Or one 

of us here. And we hear our manufacturers, for instance, saying 

they cannot compete. 

I have been to manufacturers in Upstate New York that make 

great products. They are selling them in China. The Chinese are 

now copying their products, not letting them sell them in China 

anymore for all kinds of reasons—but then going to sell them here. 

And this firm is worried it is going to go out of business. 

I hear this story over and over again. This is a high-end product. 

It’s a ceramic that deals with pollution in coal-producing electricity 

plants. What do you do, if you are us? I have been talking about 

this for five years. Talking gets you nowhere. And we are ready to 

act. 

What do you suggest we do? What do I tell all those workers who 

have lost their jobs? What do I tell good New York manufacturers 

who are being put out of business, they believe, by unfair competition? 

Chairman Bernanke. Senator, it is an important issue and I 

think we should continue to press for a more flexible exchange 

rate—— 

Vice Chairman Schumer. Don’t you think stronger—we should 

take stronger action than we have so far? It has produced virtually 

nothing. 

Chairman Bernanke [continuing]. Well there has been some 

appreciation, as you know. 

Vice Chairman Schumer. I know, but that was made up for. 

We are now still about 30 percent out of balance, which is where 

we were five years ago. 

Chairman Bernanke. Senator, I am not disagreeing with your 

economic premise at all. But of course the relationship between the 

15 

United States and China is a very complex one and covers many, 

many, many different issues. 

Vice Chairman Schumer. Well, you know it is about time we 

put jobs and American wealth first, and we’re not, and I worry 

about the future of the country for that reason. 

Let me go to one final question, Madam Chair. This relates to 

consumer protection, one substantive and one theoretical. 

It is clear that nonbank mortgage companies and others outside 

the mainstream banking system played a major role in the financial crisis, committed some of the worst consumer abuses. The new 

consumer bureau proposed in the Senate Financial Reform Bill will 

also have enforcement power over large nonbanks. And that power 

will have to be exercised through a rulemaking process. 

Now I filed an amendment in committee to pursue—and I will 

pursue it on the Floor—that would make the new consumer bureau 

able to enforce its rules against nonbank financial companies, large 

or small, payday lenders, rent-to-own debt collectors. These are 

some of the most rapacious people. They prey on the poor. And 

under our bill they are not regulated because they are small, nonfinancial. 

Do you agree they should be regulated? 

Chairman Bernanke. I think they should be regulated. I think 

it should be an even playing field, if you wish, between say banks 

and nonbanks in terms of the rules that they face. 

Vice Chairman Schumer. Yes. 

Chairman Bernanke. The only complexity is that of course 

there are many states involved in regulating. Some do a better job 

than others, and I think working with the states would be an important part of trying to do this effectively. 

Vice Chairman Schumer. Yes, but to just exempt small, nonfinancial companies does not make any sense, right? 

Chairman Bernanke. I think there should be an even playing 

field. 

Vice Chairman Schumer. Okay. And a final question that is 

following up on Senator Brownback. The CFPA. Why would you 

want it in the Fed? I mean, it would seem to me that the whole 

mission of the Fed is not consumer protection; it is safety and 

soundness. 

In my experience—and as you know, I think the Fed has done 

a good job in many areas; it’s done a poor job in consumer protection—why would you want it in any form in the Fed? Wouldn’t it 

be better to have it be an independent agency? 

Now if there are safety and soundness considerations, the Fed 

can always—they have lots of external events that affect safety and 

soundness. Why wouldn’t it be better to be independent? 

Chairman Bernanke. We haven’t asserted anything on this 

issue—— 

Vice Chairman Schumer. I understand. I’m asking you, as the 

head of the Fed, why would you want this? 

Chairman Bernanke [continuing]. Well the one thing I would 

like—— 

Vice Chairman Schumer. Or are you saying you don’t? You 

don’t want it, or not want it? 

16 

Chairman Bernanke [continuing]. I understand why people 

would be concerned, given that we were late in taking some important steps. I can understand why some advocates would want to 

have a purely independent agency that would have this as the top 

priority. I understand that. It’s perfectly sensible. 

Vice Chairman Schumer. I think I want to cut you off right 

there. 

Chairman Bernanke. All right, but may I just say—— 

Vice Chairman Schumer. I’m joking. 

Chairman Bernanke [continuing]. Just say, though, that while 

we have acknowledged, again, being late on these issues, I do believe that we should receive credit for a much better performance 

in recent years. And note that there are advantages, and I know 

that Congress has been grappling with the issue of whether or not 

the agency should be separated completely from the safety and 

soundness regulatory function, for example. There are issues there 

I think which are worth—— 

Vice Chairman Schumer. But if your number one goal were 

consumer protection, you would want it independent? Isn’t that correct? 

Chairman Bernanke [continuing]. I would want it to have—— 

Vice Chairman Schumer. I’m not saying it should be or it 

shouldn’t be. I’m just saying, if. 

Chairman Bernanke [continuing]. Well I think we all should be 

concerned about issues like credit availability, for example, and 

there may be benefits to having some strong interaction between 

this agency, or this set of rulemakings and the bank regulators. 

Vice Chairman Schumer. Thank you. 

Thank you, Madam Chair. Thank you, Mr. Chairman. 

Chair Maloney. Thank you, very much. 

Representative Brady. 

Representative Brady. Thank you, Madam Chairman. 

I think we all agree that China’s currency is undervalued. There 

is some real question about its impact on the U.S. trade deficit, and 

real concerns about the impact of raising prices on U.S. consumers. 

It is also important to note that it is equally important that we 

not allow that one single issue to overshadow concerns we have 

with intellectual property rights’ protection in China, subsidies, 

and other issues such as protecting investment and Chinese barriers to U.S. exports, especially in light of the view that this Congress and White House has not pursued pending trade agreements 

that could create over 250,000 new jobs in America by ratifying 

agreements with Panama, Colombia, and South Korea. 

A couple of thoughts. One, I appreciate in your testimony your 

reference to the commercial real estate market. I still am convinced 

that there is not a real differentiation in the Fed and the other 

banking regulators between growth markets and contracting regions. 

I am concerned that there is not an understanding that community and regional banks have picked up the demand left unmet by 

the fall of the CMBS, and of the inflexibility of bank examiners. I 

am convinced today in the real world among banks there is a clear 

view that commercial real estate loans are problem loans. The 

17 

sooner you get them off your books, the sooner you contract that 

portfolio, the better for us. 

The result of that I believe is that we are going to exacerbate a 

problem with more than a trillion dollars of those loans coming up 

for renewal. I do appreciate the effort that you are making. In fact, 

you had representatives at a recent roundtable this week with 

some of our most sound banks and real estate leaders in the Houston region. I appreciated the fact that you are listening to those 

concerns. 

Two thoughts. Independence and monetizing debt. You referenced the deficit today in your remarks. It’s so critical. Will 

you—you know, it’s reasonable to expect the Administration to 

press for easy money in the hope of artificially lifting output and 

unemployment in the short run. 

Will you resist the pressure to monetize the debt as rising borrowing costs intensify our federal budget problems? 

Chairman Bernanke. Well, Congressman, first absolutely we 

will. Our holdings of Treasury Securities today are about the same 

as they were before the crisis. We have not monetized the debt. 

And we will not. And we will of course continue to make sure that 

price stability is central to our objectives. So let me just assure you 

on that point. 

Let me just add parenthetically that, given the structure of our 

debt it wouldn’t even help. It wouldn’t even help reduce the debt. 

Given that so many of our obligations are either short-term, or indexed, or real obligations such as medical obligations or Social Security obligations, which are indexed, it wouldn’t have a substantial effect even if there were willingness to do that, which of course 

there is not. 

So there really is no alternative but to try to find real solutions. 

Inflation is just not an answer either, for economic reasons, and 

just because it wouldn’t even affect the balance very much. 

Representative Brady. Well the reason, I noticed OMB’s projections on Treasury Note yields for the next few years is much 

lower than what is already occurring today, so I think that pressure will increase, not just from the White House but from Members of Congress. 

I worry about the independence of the Fed, and I wanted to ask 

you. Obviously we’re all aware of the Senate bill dealing with making major changes to the Federal Reserve such as making the 

president of the Reserve Bank of New York a Presidential appointee, removing certain voting rights, and transferring your jurisdiction of certain banks. 

Do you have any concerns about making the president of the 

Federal Reserve Bank of New York a Presidential appointee? 

Chairman Bernanke. Yes. I don’t think that is the right way 

to go. I think we want to maintain accountability through the 

Board of Governors, which then oversees the system. And that is 

really the appropriate way for us to be accountable to the Congress, 

which we will be. 

We want to be completely open and transparent to the Congress 

on all financial matters, but we do need to maintain our independence in our policy decisions. 

18 

Representative Brady. Do you feel like some of the changes 

such as voting rights at the Regional Reserve Banks, do you think 

those changes—do you have concerns that they could weaken the 

Regional Reserve Banks and could undermine the independence of 

the Fed in dealing with monetary policy? 

Chairman Bernanke. Well I think that our FOMC structure, 

which was created in the late 1930s, has worked pretty well. It’s 

got a good combination of Presidentially appointed, Senate-confirmed governors here in Washington, and Reserve Bank presidents 

around the country. 

There are 19 people on the FOMC, 7 governors and 12 Reserve 

Bank presidents. We all come of course to every meeting, and everyone’s views are heard. So, not withstanding the voting arrangements, it really is a collective decision, a consensus decision. 

So I think we get both the Washington perspective and the 

Washington accountability, but we also get very important information and input from around the country. And you mentioned this 

earlier, Congressman, that one of the sources of that information 

is our oversight of state member banks, which are very well informed about their local economies, and therefore are a very important source of information for us. 

And so that is also a concern that we have, that we would lose 

that oversight. So the independence is very important, and I think 

the main issue here is just to make sure that we are allowed to 

take actions in pursuit of our mandate without intervention by either the Congress or the Administration. 

Representative Brady. Thank you, Mr. Chairman. 

Chair Maloney. Congresswoman Sanchez. 

Representative Sanchez. Thank you, Madam Chair. 

Thank you again, Mr. Chairman, for being before us today. Mr. 

Chairman, I think that I am having the same problem that a lot 

of other people are having with respect to what’s going on in our 

country. And that is, that we continue to say that small businesses 

in particular create the jobs, but we know that employment lags 

behind when the economy is turning around. 

So let’s just say for a minute that maybe we’re turning around. 

Maybe we have gotten to the break-even point, or we might be 

growing a little bit; or we may not; and we’re not going to see employment pick up for awhile. I think everybody is sort of coming to 

that realization. 

But here is the problem I have. Most of the small businesses, 

that went into business because it was good times, and the money 

was flowing, and there was lots of excess fat, the people who got 

into business for those reasons are gone. 

Now you have your businesses that have been around for awhile. 

A lot of them took good precautions in a normal period and are financially pretty sound, they can’t get working capital. They just 

can’t get loans to buy inventory, or to upgrade the technology that 

they need, and banks are not lending still. 

We are at almost a zero percent interest rate. I mean, money is 

pretty cheap. But even those credits that before were good credits, 

and today are still pretty good credits, can’t get to the money. 

So what do you suggest? I mean, what is happening out there? 

What are we missing? What do we need to do? Getting a loan 

19 

through the SBA Administration involves a lot of paperwork and 

it is a long and difficult process. 

So these businesses today are saying, we’ve made it through. 

We’re still around, but we still can’t get the working capital to really move forward. And I have seen a lot of businesses like that who 

are actually good credits but they do not have equity in their 

homes, which is where they used to go before to borrow against 

their own personal wealth. What are we going to do about that? 

I mean, what do you suggest? Or what can the Congress do? Or 

what can we do in conjunction to get that moving? 

Chairman Bernanke. Well let me first agree with your premise 

that small businesses do create a lot of jobs, particularly in economic recoveries. To the extent that they can’t get credit, that is 

going to slow or prevent their expansion. That is very important. 

And so that is a top priority for the Federal Reserve. 

I don’t want to take too much time, but the issues really are complicated. There are some firms that got easy credit earlier and now 

they can’t qualify for tougher credit terms. 

There are some firms that are not demanding credit. If you look 

at the surveys, their number one problem is lack of demand, lack 

of customers. And the surveys also suggest that some firms are 

able to get credit, though not all. So it is a complicated picture. 

That being said, one creditworthy small business that can’t get 

credit, that’s too many. We want to fix that. And we have approached this from a long list of policy actions, including strengthening the banking system, including our interest rate policy, as you 

mentioned. But I mentioned specifically that in our supervisory 

role, as I discussed briefly in my remarks, we have issued very 

strong guidance to banks and to examiners, and very explicitly to 

examiners, that small businesses are to be evaluated based on 

their ability to pay, not based on their industry, not based on their 

geography. 

And we encourage, for example, second-round reviews, if the first 

one doesn’t pass. We are very explicit that decline in the value of 

the collateral, of the home or the store, is not in itself a reason to 

mark down or deny the loan. 

We have been working very hard to get feedback. And one of the 

problems we get, frankly, is that bankers tell their Congressmen 

that they’re having a problem, but they won’t tell us, for one reason 

or another, and we are trying to make sure we get as much feedback as possible. 

So we have been having meetings around the country at all the 

Reserve Banks in the different districts with bankers, with small 

businesses, with community activists, to try to understand what 

are the barriers. What can we specifically do? 

So we are working very hard to improve that situation. Unfortunately, credit is somewhat tighter and will be somewhat tighter, 

and that is probably unavoidable. But we do want to make sure 

that creditworthy borrowers are able to access credit, and we are 

working very hard on that. 

In terms of what Congress can do, there are some proposals. The 

Administration has a proposal to use some leftover TARP funds to 

essentially incentivize small banks, because small banks are more 

likely to be lenders to small businesses. 

20 

Representative Sanchez. Sure. They know they’re closer 

to—— 

Chairman Bernanke. And they know them better, and they 

have longer term relationships. We have been doing a lot to try and 

increase our data information about those loans. 

Now it would take another lengthy discussion to talk about the 

pros and cons of a specific proposal, but there may be different 

ways to incentivize or support, either through the SBA or directly, 

small banks which know those customers to increase their lending, 

and I would encourage you to look at that. 

Representative Sanchez [continuing]. Well, Mr. Chairman, I 

would like to discuss with you or your people how we might get to 

that point. We have information from our bankers. Maybe they’re 

not telling you. Maybe we need to bring them in and talk to you. 

It just seems like there is a disconnect, and we need to get beyond 

this barrier to really get at what seems to me to be—I mean, I used 

to be in the financial industry—pretty creditworthy businesses 

when they come and they talk to me, and I look at their balance 

sheets. And yet, it is almost like the money is right here, but they 

can’t get to it. 

Chairman Bernanke. I encourage anyone around the table 

there who would like to bring in folks, we can work out ways to 

have those conversations. It would be very helpful to us. 

Representative Sanchez. Thank you, Chairman. I appreciate 

it. 

Thank you, Madam Chair. 

Chair Maloney. Thank you. 

Representative Paul. 

Representative Paul. Thank you, Madam Chairman, and welcome, Chairman Bernanke. 

I want to make a brief comment, and then I want to ask a question about the IMF. 

My brief comment is a comment about the answer you gave to 

Mr. Brady about monetizing debt. Because your balance sheet remains relatively stable with Treasury Bills, it doesn’t mean that 

the Fed can’t monetize debt. 

You mentioned in your statement that you bought securities, 

mortgage-backed securities, and agency debt, and that’s over $1.2 

trillion. Well where did you get the money? You created this 

money. So you did monetize debt. That went into the banking system. The banking system can buy Treasury Bills. And they can 

borrow money at zero percent, and that’s why they’re making a lot 

of money right now, because they can buy other debt and make a 

little bit more, and it looks magic except for the mortgage—the people who are losing their mortgages and losing their houses right 

now. 

But one other quick question. Are the thousand examiners that 

you’re training, are any of those new? Or are these people already 

on the payroll? 

Chairman Bernanke. On the payroll, and they include both 

Federal Reserve and State examiners. 

Representative Paul. Okay. Because my comment there is: 

Probably 10,000 won’t do much good. Because it isn’t a lack of exVerDate Nov 24 2008 11:26 Aug 25, 2010 Jkt 055045 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 C:\DOCS\57057.TXT SHAUN PsN: DPROCT
21 

amination, if you don’t deal with the problem, and the problem 

really comes from a monetary policy of low interest rates. 

As long as low interest rates rig the market and gives bad information to the investor, all the examiners in the world can’t compensate for this. And this whole idea that capital can come from 

a printing press rather than savings, I still have a terrible time 

trying to understand how an economy can thrive on that. Because 

it rejects every notion of free-market capitalism. 

But the question I have on the IMF is, this week the IMF has 

announced that they are going to open up that new arrangement 

to borrow, or expand. There’s a commitment of $50 billion there 

now, and it’s going to go up to about $560 billion, and it coincides, 

you know, with the crisis going on in Greece and Europe and how 

they’re going to be bailed out. 

The irony of this promise is that in the new arrangement, this 

increase, Greece is going to put $2.5 billion in there. I think this 

is—only a fiat monetary system worldwide could come up and have 

Greece help bail out Greece, and be prepared to bail out even other 

countries. 

We are going to go from fifty up—no, we are going from ten up 

to a hundred and five. So that is $105 billion we’re going to commit 

to bailing out the various countries of the world, and who knows 

what, but I think this does two things I want to get your comments 

on. 

One, why does it coincide with Greece? What are they anticipating? Why do they need $560 billion? Do we have a lot more 

trouble? 

And, when it comes to that time where we have to make this 

commitment, who pays for this? Where does it come from? Will this 

all come out of the printing press once again, and we expect to bail 

out the world? 

Are you in favor of this increase in the IMF funding and our additional commitment to $105 billion? 

Chairman Bernanke. Well the source of this was going back in 

the G–20 meetings in the crisis. And I think one of the agreements 

that the G–20 leaders came up with was sort of a mutual commitment to put more money into the IMF as a way of addressing the 

financial crisis around the world. And that’s why it happened. 

The Federal Reserve wasn’t involved in those meetings. So that 

was before Greece. If money is put out to any country, it will be 

done first of all with specific approval from the executive board, 

which includes of course the U.S. in a veto position, and with conditionality. That is, the country has to meet certain conditions. 

So the G–20 leadership apparently has agreed that this is a way 

to provide credit to avoid fiscal or exchange rate crises in countries 

around the world. 

Representative Paul. Yes, but do you think this is a good idea? 

Do you agree that we should make this commitment? 

Chairman Bernanke. I think in general that having the IMF 

available to try to avoid crises is a good idea, yes. 

Representative Paul. And again, where will the money come 

from? This is our problem in this country. We’re bankrupt, too. And 

also, along this line, do you feel like, you know, you go along with 

22 

this commitment, what are we going to do when a state gets under 

the gun, like California and others? 

I mean, they are approaching the state that Greece is in. We 

can’t turn down California. I mean, if we can pay out all these 

banks, and they get off the hook, and now they’re making billions, 

and their executive officers are cleaning up, do you think we would 

ever turn down California, or any other State that gets in the same 

situation? 

Chairman Bernanke. Well that is Congress’ decision. 

Representative Paul. Well you bailed out a lot of people from 

the IMF. You know, you have the capability of buying up some debt 

and doing all these kinds of things. We can’t even audit you to find 

out what you do. So you can do anything you want, and you can 

create as much money as you want. So—— 

Chairman Bernanke. You can see any transaction or loan we 

make. We’re happy to provide that information to you. And we are 

not involved with lending to the IMF. The IMF is a separate institution, which has American executives, part of the executive 

board—— 

Representative Paul [continuing]. But where would the money 

come from? 

Chairman Bernanke. It’s a loan, but it would come from the 

U.S. Government. 

Representative Paul. Eventually we would create out of thin 

air, because we don’t have—— 

Chairman Bernanke. Well, it’s a loan. If it’s not paid back, 

then we would take our share of the loss. 

Representative Paul [continuing]. I yield back. 

Chair Maloney. Thank you. 

Congressman Snyder. 

Representative Snyder. Thank you, Madam Chair. 

Thank you, Mr. Bernanke—Dr. Bernanke, for being here. I don’t 

often agree with things that my friend from Texas, Mr. Brady, 

says, but at the beginning of the hearing he said that you had 

quelled the panic at the end of 2008 and 2009, and I think that 

may be a phrase you want to remember. ‘‘He quelled the panic.’’ 

That could be tombstone material. So you might want to save that 

and tell your heirs to remember that phrase—— 

Chairman Bernanke. A long time from now, I hope. 

Representative Snyder [continuing]. Decades from now when 

you’re looking for something. 

On page 4 of your statement, you said ‘‘. . . , the financial condition of banking firms has strengthened markedly . . . .’’ 

What I want to ask about is the more amorphous of ethics in 

banking. What concerns me is this: If I want to buy a car, I will 

study who puts out the best car. And the manufacturers, and the 

dealers, they stand by their service, they stand by their product. 

If I’m looking for someone to paint my house, I ask around about 

who does the best job of painting houses. And I’ll get references, 

and I’ll go talk to people about, yes, this person did the best job 

of painting my house. And the providers of a product, the providers 

of services, they work to put out a product that satisfies me. 

23 

It seems to me that we’ve got a situation with major players in 

the financial services industry that they work for ways that their 

customers will be unsuccessful. Now what do I mean by that? 

Well, the one that we’re probably most familiar with now is that 

I’m a Bank of America customer—and they’re probably tired of me 

talking about them at these hearings—but the computer program. 

This happened to me. I didn’t go into late fees or anything, but I 

just look at it on line. Banks closed on Good Friday, Saturday, Sunday, Monday, and I look and all the debit card purchases I did 

through the weekend, regardless of when I did them, are processed 

in the order with the largest first, from the $300 down to the $3.65 

coffee at Starbucks, or something, and we all know what that’s 

about. 

The goal is to drive people unknowingly into overdraft fees. They 

want me to fail as a customer. Now if that’s how they’re treating— 

I think the study showed they make most of their money on overdraft fees from 14 percent of their customers—but they’re preying 

on people, hoping that we don’t succeed at managing our money. 

And then we’ve had this history over the last several years that 

led into this problem of loans that should never have been made, 

but they made them, and then sell them, so that then they can 

walk away from their mistakes and they then don’t care about 

whether they succeed or not. 

So my question is, you have done a great job of quelling the 

panic, and I think that history is going to treat you well, but my 

question is on the more vague one. What about the ethics, the morality of the financial services industry? 

I have asked this question of many people, and they say: Well, 

they’re responsible to their shareholders. But so are my painters. 

So are my car dealers. What about the issue of responsibility to 

customers, where you actually want your customers to succeed, 

where you actually want to put out a product which will help them 

meet the financial needs of their family? 

Where does that come into all these discussions? 

Chairman Bernanke. I think it is incredibly important. I think 

the heart of any good business is ethical treatment of your employees, and your customers, and so on. 

And my experience is that among bankers, like in any other 

group of people, there are some who are very ethical, and some who 

are not. And in the cases of those who are not, we need to make 

sure there’s adequate protection. It’s like a Better Business Bureau, if you will. 

In the case of the overdraft protections, the Fed recently put out 

rules requiring opt-in on debit card ATM transactions. You have to 

opt-in in order to be allowed to overdraw and receive an overdraft 

fee. 

Representative Snyder. But you did not do anything about 

this computer program that processes them from larger to smaller, 

did you? 

Chairman Bernanke. We did not in that particular rulemaking 

because it was part of the Electronic Funds Transfer Act and did 

not have a place to put that in, so to speak, but we are in fact looking at those practices and we will try to address them. 

24 

They are not completely straightforward because there are arguments for the big one first because people want to make sure that 

their mortgage gets paid before their coffee gets paid, but—— 

Representative Snyder. Well I’ve heard that from local bankers many a time—— 

Chairman Bernanke [continuing]. Well in any case, we’re looking at that very seriously and we will try to come up with a solution that will address the problem you are talking about. 

Representative Snyder [continuing]. Because, you know, it 

is—I mean, I have had the personal experience of going in and 

checking a balance before I get some cash out on a Saturday, and 

it says I’ve got $130, and I take out $100, and then because of the 

reprocessing, in fact—this was actually an experience several years 

ago where it did push me into an overdraft, but it was one that 

they had formally said to me, yes, you have enough money. 

I mean, that is how nefarious it is, and most people do not do 

online. Most people don’t follow it like I do, because I am so intrigued by what they’re doing. They are just preying on people. I 

just think it is very, very difficult to deal with all of the issues that 

the Chairwoman wants to deal with, what Ms. Sanchez was talking 

about, if there is a morality in the industry that says ultimately 

our goal is to get money from people, not necessarily to see them 

have a successful commercial real estate venture, or a successful 

home loan, but to package, and sell, and move on. And I don’t know 

how we get at that in this industry very well. 

Thank you. 

Chair Maloney. Thank you. Congressman Burgess. 

Representative Burgess. Thank you. 

Chairman Bernanke, welcome to our Committee. Let me—Dr. 

Paul made an observation that is so important it just bears repeating. The concept that the banks that got into trouble were able to 

get money at a very, very low interest rate, and now are turning 

around and loaning it back to you at a much higher interest rate. 

And there is no reason for them to make loans to the entrepreneur 

or the small business person. They are actually making money just 

working off this system that it appears to me that the Fed has provided for them. 

So I do urge you to look at that. You talked about the creditworthy business who is being given an appraisal that then makes 

them appear non-creditworthy, and this is a real problem. I heard 

from people all over my District during the break that this is going 

on today in almost any Congressional District in which you look in 

the country. 

To the extent that you offer help in that, I intend to take you 

up on that offer. I will have several of these individuals visiting me 

here in Washington next week, and I would like for them to be able 

to tell someone at the Fed just what they told me last week. And 

part of it is mark-to-market but part of it is the very slow rate of 

getting appraisals back, and the appraisals are so slow in coming 

back that they in fact do not reflect rapidly changing market conditions, and people in the real world cannot function in the system 

that we have created for them. 

So I think Representative Sanchez had some very good points, 

and I will also take you up on that offer because I think it needs 

25 

to—I think there needs to be more, there needs to be more handson from the Fed about what are the actual effects of the monetary 

policy that you are pursuing. 

You also made a comment that the Fed is open. I know Dr. Paul 

talks a lot about auditing the Fed and knowing what’s in there. Is 

there a way for me to know what the Fed holds as far as real holdings in my Congressional District? 

You hear stories on the radio about the Fed owning a shopping 

center in Oklahoma City, for example. I didn’t know you guys were 

into that. But what do you own in my Congressional District? So 

if I have a constituent ask me that question, am I going to be able 

to get that information? 

Chairman Bernanke. So the answer is: Yes. The only kind of 

strange assets like that that you’re referring to, basically what we 

own is Treasuries and the liabilities of Fannie and Freddie. That’s 

basically what we own. 

We do have some assets that were involved in the bailouts of 

Bear Stearns and AIG which are still on our balance sheet. That’s 

about 5 percent of our balance sheet. Again, this is not something 

we wanted to do, but we didn’t have an option at the time. 

That not withstanding, we have released all the information 

about what’s in that group of assets, and includes information 

about, you know, who the loan is to, et cetera. So, yes, you can find 

that out. 

Representative Burgess. All right, I appreciate that. And I will 

have someone from my office follow up with you on that. 

Now you mentioned, again in response to Senator Brownback’s 

question of the concern about the structural deficit and about the 

tax provisions that are due to expire and assumptions made that 

all of those expire. Here’s a report from the Joint Committee on 

Taxation. I won’t question you about it because it’s not fair to do 

that, but it has 50 pages of tax cuts that are expiring in the next 

10 years. Some of them are quite obscure. It appears to me some 

of them should expire. But have people at the Fed gone through 

this and really put pencil to paper about which of these—I doubt 

very much that Congress is going to let the Alternative Minimum 

Tax kick in. I don’t know quite what we’re going to do about that, 

or how we’re going to pay for that before the end of the year, but 

we always do something. So I expect you are correct in that assumption. 

But has someone at the Fed gone through this entire report from 

the Joint Committee on Taxation looking at the expiring tax provisions over the next ten years so that we have some idea of what 

we’re dealing with as far as what you term the structural deficit 

going forward? 

Chairman Bernanke. Well again we were using the publicly 

available CBO projections there. And on the tax side, I am not advocating any policy or anything like that; I am just telling you how 

the CBO has done these projections. 

That particular projection is one where all the expiring tax cuts 

are extended and quantitatively, by far, the two biggest are the 

2001–2003 tax cuts, and the AMT. And those dominate in terms of 

the dollar amount. Then there are a whole bunch of other ones like 

26 

the research and development credit, and other things like that 

which are often extended, but of course may not be. 

Representative Burgess. But all of that of course directly affects the policy that we all talk about that we should be concentrating on in job creation and job growth. 

Just one final thought to leave you with. And I heard from so 

many people over the break. And you referenced this in your testimony. The young person getting out of college today who is having 

terrible difficulty finding a job, and may set a tone for their productive years that is forever tainted by their experience because of this 

Recession. And then you have the person my age, what I like to 

refer to as the late boomer, who also is having difficulty, the person 

45 to 60. Those jobs do not exist. And that is really where we’ve 

got to look at both the beginning and the latter end of the employment years because they are both in serious trouble——— 

Chair Maloney. The gentleman’s time has expired, but Chairman Bernanke may answer. 

Chairman Bernanke. No, I would certainly agree with that. 

Both ends, including people near retirement, are having difficulty, 

and there are different ways to address those different parts, but 

it is clear that very long-term unemployment is not just a shortterm effect, it has a long-term implication for the person’s ability 

to earn a living in the labor market. 

Chair Maloney. Thank you. 

Congressman Hinchey. 

Representative Hinchey. Thank you, Madam Chair. 

Chairman Bernanke, thank you very much. You have a very interesting job, and it is fascinating because of the set of circumstances that you have to deal with. Among all the things you 

have to deal with, the organization of the monetary policy of this 

country is the critical issue. 

One of the things we are all confronting, of course, is this huge 

national debt. It is important to recognize what occasions caused 

that huge national debt—primarily, the illicit, unjustified invasion 

into Iraq and the hundreds of billions of dollars that have been 

spent there, and now continue to be spent there, and hopefully will 

end shortly. 

The tax reduction for the wealthiest people in this country, which 

has now brought about the greatest concentration of wealth in the 

hands of 1 percent of the population we’ve seen since 1929. 

And of course the dramatic drop in the income of virtually everyone else across this country—mostly among the working people. 

And other things like the inability to negotiate the price of prescription drugs in the context of Medicare, which is jeopardizing 

the future of Medicare. 

All of these things are critically important. The tax cut expires 

the end of this year, but all these other things that we have to deal 

with are critically important. And one of the most important aspects of them is just to understand what they are all about, and 

how they came about. 

The engagement of investment in commercial banks now continues, in spite of the fact that the economy now is beginning to 

get a little bit better. There are ways in which this is being attempted to be addressed. 

27 

One of the ways in which it’s being attempted to be addressed 

is in the context of the financial reform bill of Chairman Dodd. One 

of the things that he is trying to do is to introduce the elements 

of the Volcker Rule to deal essentially with what happened with 

the elimination of the Glass-Steagall Act, the interaction of commercial and investment banks. 

Now that aspect of his legislation is not solid by any means. 

There is a study that is going on apparently that is going to make 

a determination as to whether or not the provisions of the Volcker 

Rule, which are only partly effective in the context of dealing with 

the commercial and investment bank interaction/interrelationship/ 

inter-investments, manipulation of investments, all of those things. 

So what do you expect will come out of that study with regard 

to the inclusion of the Volcker Rule? And if it comes out positively 

with the inclusion of that in the Dodd bill, how effective is it going 

to be? 

Chairman Bernanke. Well first, I think we all agree that we 

don’t want to have banks or investment banks taking speculative 

positions with the U.S. safety net behind it. So clearly we have to 

draw that line. 

I think inevitably what the study will find is that drawing a 

sharp line is not easy because there are various activities such as 

hedging other positions, or making markets, that involve perhaps 

temporary proprietary holdings, and so on. 

So it may not be quite as easy to say this is proprietary, this is 

not. And so we will need to have a set of rules, or a criteria that 

helps us distinguish which is applicable under the Volcker Rule 

and which is not. And I think that is going to be the big challenge. 

So we will have to see what the results are. 

Representative Hinchey. And there’s going to be opposition to 

making that clear decision. There’s no question about that. And 

that opposition is going to come as a result of the huge amount of 

income that is generated in the process of the interaction of this 

situation. 

So this is something that’s got to be brought about effectively. 

Now, you know, we could do something simple like bringing back 

something like the Glass-Steagall Act and separating those banks, 

and eliminating the conflict of this kind of investment. And it 

would seem to me that that would be something that would be very 

effective. 

Back in 1933 when that was put into place, it had a very effective means to deal with the Great Depression. But there is a great 

resistance now to doing that, and that resistance is coming from a 

handful of people who are effectively engaged in this kind of manipulation of investment. 

So I wonder if you can tell us a little bit more about what you 

think should happen here? And if there’s any way in which your 

operation and this Congress can be engaged more effectively in 

bringing about a more open and honest way in which this banking 

situation is engaged, and the elimination of this manipulation that 

has been one of the major causes of this deep recession that we’re 

experiencing. 

Chairman Bernanke. Certainly. I don’t think Glass-Steagall by 

itself would solve our problems, because we had commercial banks 

28 

losing money on regular loans, and we had investment banks losing 

money on speculative securities trades. 

So separating that, you know, wouldn’t have saved Lehman 

Brothers, and it wouldn’t have protected a number of the banks 

that had problems—— 

Representative Hinchey. But if I could interrupt you just a 

second, I mean some of that elimination had occurred prior to the 

elimination of that complete legislation in 1999. There were interactions in the Glass-Steagall Act. There were interventions in it. 

There was some manipulation of it, all of which brought about 

some of the declines. 

Chairman Bernanke [continuing]. I don’t think it’s just the 

separation. I’m trying to say, I think we do need to take important 

steps. They would include, for example, stronger capital requirements to make sure that the institutions who are taking risks are 

bearing those risks themselves. 

It would include making sure that every large financial firm has 

a strong consolidated supervisor. We don’t have the GAAPs that we 

had, where some kinds of firms were able to sort of sneak by without being overseen. 

And I think it is also very important to have this resolution regime that allows us to wind up a failing firm, which means basically that the creditors and the shareholders would bear the costs, 

and that creates another set of incentives to keep banks and other 

financial firms away from excessively risky investments. 

So I think there are a bunch of things we can do. I don’t think 

Glass-Steagall by itself would solve this complex problem. 

Chair Maloney. The gentleman’s time has expired. 

Senator Klobuchar. 

Senator Klobuchar. Thank you very much, Madam Chairman. 

Thank you, Mr. Bernanke, for being here. Chairman Bernanke, 

I will tell you, I just was in my State last week and we have about 

a 7.3 percent unemployment rate, so it’s a little better than the national average. And despite all the struggles, there are some glimmers of hope there, which I know you see with all of your number 

crunching. Digi-Key in Thief River Falls, Minnesota, population 

7,500, has 2,500 employees, and they’re hiring 400. So anyone that 

wants to come there, should see me. 

So we have some glimmers of hope. And what I wanted to talk 

to you about where I see as a potential limitation on our recovery, 

and that is the debt. And I appreciate you speaking out on that. 

A number of us actually held out our votes on the budget and 

lifting the debt cap. We wouldn’t do it without a promise that we 

were going to get an up and down vote on the Debt Commission. 

I was very distraught that some of our colleagues changed their 

votes, didn’t do it, and then the President appointed one. 

Could you talk about the importance of getting something done 

on the debt in the long term for our markets and for our economy? 

And why something like this Debt Commission, if we can get some 

practical recommendations that we can have an up and down vote 

on, is so important? 

Chairman Bernanke. Well it has direct implications for the 

health of our economy, and maybe not even just in the long run. 

I mean, in the long run of course if we have higher interest rates 

29 

that’s going to reduce investment, and that’s going to reduce capital formation growth, and job creation. 

It’s going to mean we’re going to have to borrow more from 

abroad, which also means a heavier burden on our children to pay 

back. So those are the classic problems. But I think worse than 

that is that right now the markets are essentially signaling a lot 

of confidence that our political system will deliver a sustainable 

trajectory of fiscal policy going into the next few decades, and I 

think it’s very encouraging in a sense that we can borrow at 30 

years at 4 percent, or 4 percent plus. 

Senator Klobuchar. And part of that you believe is because 

they believe we’re actually going to do something about it? 

Chairman Bernanke. And they believe we’re going to do it, and 

I think—— 

Senator Klobuchar. And if we don’t do something about it? 

Chairman Bernanke [continuing]. If we don’t do it, or we give 

a strong indication that we’re not going to be able to do it—— 

Senator Klobuchar. Okay. 

Chairman Bernanke [continuing]. Then it would not be something that we’d have to worry about in 2040, it could be something 

we have to worry about on Wednesday—— 

Senator Klobuchar. Exactly. 

Chairman Bernanke [continuing]. Because it could happen 

that markets would lose confidence. And again, I want to draw a 

strong distinction between the United States economy and our fiscal position and that of some other countries. But we’ve seen 

around the world just recently, a number of countries who have 

come under pressure because of loss of confidence in their resolve 

or ability to address these problems. 

Now that does not mean we have to balance the budget tomorrow, but it does mean we have to have a plan and a credible process of some kind to, in the medium term to show that we can manage these difficult problems. And they are very, very difficult. You 

have all my sympathy, because they are extremely hard politically 

and intellectually to solve. 

How to do it? I think the commission will be interesting to see 

what they come up with. It’s actually a very good commission—— 

Senator Klobuchar. It is. It is. 

Chairman Bernanke [continuing]. A lot of very good people on 

that. 

Senator Klobuchar. Right. And that’s why—I want to move on 

to one other question, but I think this idea that we just put our 

heads in the sand is just not going to work in the long term is your 

point. And that is why I hope my colleagues take seriously, on both 

sides of the aisle, the recommendations of this commission and it 

does not just become a study on a shelf. 

My second focus here—and you and I have discussed small business lending, and I know some of my colleagues have discussed 

that with you and how important I believe—I have been working 

with Mark Warner on that proposal. 

The second thing is just these latest proposals by Chairman 

Dodd to look at taking back some of the power from the Regional 

Federal Reserves. We have one in Minneapolis, very close to my 

30 

State Office, and we have found it actually to be helpful. What you 

think of that proposal? 

And then second, the other concern I’ve heard a lot is from our 

small community banks, the proposal to limit your supervision to 

banks that have more than $50 billion in assets. Again, our community banks are not big fans of that proposal either; and I would 

like to hear your perceptions of this proposal to limit—to consolidate the Fed power away from Regionals and then also to take the 

community banks out from under the Federal Reserve. 

Chairman Bernanke. We are very concerned. We understand 

we need to play a role with the large institutions as part of a process of trying to keep our financial system stable, but it would be 

I think a very bad outcome if we were to lose all connection with 

the small- and medium-sized banks where we currently supervise 

state member banks and bank holding companies around the country. 

First of all, that provides us a great deal of useful information 

about what’s happening out there in the country about small business loans, about credit, about the local economy. 

It gives us a perspective on the whole financial system and the 

whole economy. We don’t want to just be looking at Wall Street. 

We need to look at the whole economy. And not only for monetary 

policy purposes, but also for financial stability purposes. 

Small banks, medium-sized banks can be part of a financial crisis, too, as they were for example during the thrift crisis, or during 

the Great Depression, or Penn Square in 1982, and there are many 

other examples. 

So both, because we want to have that connection with the rest 

of the economy, and because both monetary policy and financial 

stability require we have a broad view of the entire banking system. We think it is very important that we maintain that connection. 

We are not asking for new powers. We are asking just that the 

status quo be maintained so that the Fed has the ability to supervise and have a strong connection with small- and medium-sized 

banks, as well as the very largest banks. 

Senator Klobuchar. And the idea of the Regional Federal Reserves, the same thing? 

Chairman Bernanke. The Regional Federal Reserves are in 

fact our ears to the ground. They are where the actual supervisors 

reside, and they do the operational work, and they have those local 

connections, as you well know. And Washington is where the policy 

is set and where the overall accountability flows from, but we rely 

very heavily on those eyes and ears around the country to get that 

feedback. 

Senator Klobuchar. Excellent. Thank you very much. 

Chairman Bernanke. Thank you. 

Chair Maloney. Senator Casey. 

Senator Casey. Madam Chair, thank you very much. 

Chairman Bernanke, thank you for being here. We appreciate 

your testimony and your insights, but also your public service at 

this time. I know it is not easy to be in the position you are in. 

I wanted to explore two general areas, if we can get to both. One 

is jobs, and the other is currency. 

31 

First of all with regard to both the data that is out there, as well 

as your testimony, there is a good bit to be positive about. I have 

said a number of times that the actions that were taken in the Fall 

of 2008 when you came to us and presented the gravity of the financial situation, plus the Recovery bill in 2009, and more recent 

job creation bills, have had a positive impact, and even more so the 

next couple of months. 

But we still face a situation, for example, in our State, where 

even though if you look at the rate, we are at about 8.9 percent 

unemployment which in a relative sense is lower than a lot of big 

states, but it still means 577,000 people out of work. If it’s not a 

record, it is very close to a record. 

Then I look at it in terms of individual regions. We have had this 

unfortunate confluence of misery in places as large as Philadelphia 

where the unemployment rate has been at 10 for a long time, and 

it just bumped up more recently to over 11. But next to Philadelphia you have numbers higher than that in very small, and often 

rural counties where the loss of one employer means an unemployment rate of 12 or 13 or 14 percent. 

Having said all of that, in the midst of all that misery for a lot 

of people we keep hearing that small businesses have trouble accessing credit. We hear that over and over again. The dichotomy 

between that difficulty that folks are having, especially small business owners, and then you see the headline in the New York Times 

saying, and I’ll read it, ‘‘J.P. Morgan is upbeat on economy as it 

posts profit.’’ For a lot of people out there there are two words in 

that headline that are at variance with where they are. 

One is ‘‘upbeat.’’ A lot of people are not upbeat for the reasons 

I cited, those numbers. And the other words is ‘‘profit.’’ A lot of people are not seeing profit in the bottom lines of their small businesses. 

So as a long predicate, I know that you have highlighted in addition your concerns about fiscal matters like the deficit. You said, 

and I quote, ‘‘The decline in large part’’ meaning the decline in 

credit to small business, ‘‘reflects sluggish loan demand and the 

fact that many potential borrowers no longer qualify for credit, 

both results of the weak economy.’’ 

And that is kind of the diagnosis of the problem. What do you 

think are steps we could take in the short run, meaning the next 

six months to the next year, that would have a positive impact on 

the jobs climate as it relates in very particular way on small business? 

Chairman Bernanke. Well again, the small business problem 

is a very difficult one because we want small business to have credit, but we want to make good loans. We don’t want to go back to 

the weak lending standards of before the crisis. 

And so, as I’ve discussed earlier today as well, it’s a very high 

priority of the Federal Reserve to work with our banks and our examiners to make sure that there’s an appropriate balance. That is, 

loans have to be appropriately underwritten. They have to be sufficiently likely to be repaid, prudent. We don’t want banks to be losing money on bad loans. 

But on the other hand, we certainly don’t want a modern equivalent of red-lining. We don’t want to say that the whole category of 

32 

small business is not to receive credit, or all retailers are not to receive credit, or nobody in the State of Florida is to receive credit, 

because of just the general category. 

And I think part of this is a cooperation between the banks and 

the examiners working together, understanding each other to make 

sure that every loan is evaluated on its own two feet, so to speak, 

so that you could very well have a situation where the value of 

property has gone down, but the company has a stable business 

and it has been able to repay for many years. In which case, we 

have provided guidance to our examiners in training and asking for 

feedback, in which case that loan should be made, or at least it 

should be given a very careful assessment. 

This is something that goes back to a point that Senator Klobuchar raised, which is the Fed’s involvement with the banking 

system. We are of course bank examiners, and safety and soundness examiners, so we are obviously very concerned about making 

sure the banks are safe and sound and making good loans, not taking undue risks, et cetera; but on the other hand, as the central 

bank of the United States we are also very concerned about the 

overall health of our financial system in our economy. 

Therefore, perhaps more than others, we are really focused on 

getting that balance right. We really want to make sure that good 

loans do get made; that they are very much in everyone’s interest. 

So I have talked about some of our programs and our information gathering, and we have had meetings around the country, and 

conferences, and we are collecting extra data that we didn’t used 

to collect before about small business lending. We have put extra 

questions into the NFIB Survey to try and get more insight. 

And as I’ve said earlier, I invite direct feedback from Members 

of Congress and their constituents who have suggestions and ideas 

about how we can better meet this need. 

From Congress’s point of view, it is again a difficult problem, but 

we discussed earlier just some proposals to use TARP money, $30 

billion in TARP money, to provide additional capital, or reserves, 

to incent small banks to make more small business loans. And 

there are a lot of issues in how to do that, but that is one direction 

that could be constructive. 

Senator Casey. Thanks very much. 

Chair Maloney. Thank you. 

Thank you. Chairman Bernanke, you testified earlier that in financial regulatory reform we should have stronger capital requirements. Many believe that we should also limit leverage. Some of 

these financial institutions were highly leveraged, 60 percent, 35 

percent. 

Do you believe that the leverage should also be limited? And, if 

so, what would you recommend? And do you think we should have 

a specific number put in the legislation, a cap on leverage? 

Chairman Bernanke. So in the United States we have, as a 

first line of defense, a risk-weighted capital ratio, which is not a 

straight leverage ratio; it’s amount of capital we have to hold 

against assets, where we have to hold more capital against riskier 

assets, which makes sense. The riskier the asset, the more capital 

you want to hold. 

33 

And we, the Federal Reserve and the other bank regulators, are 

working very actively with other regulators around the world to 

strengthen the capital requirements. We have already made proposals to do that. We are going to get assessments from the banks 

about how big an impact that would have. And it is our intention 

to move forward with more conservative higher capital requirements. So that’s the first thing. 

The leverage ratio is kind of a backstop, a failsafe, if you will, 

because that’s a very simple ratio. It’s just a ratio of capital against 

total assets without making much or any distinction between 

Treasuries versus loans to small businesses, for example. 

And the United States has long had a leverage ratio as a backstop to our capital rules. One of the interesting things that appears 

to be coming out of the international negotiations is that the U.S. 

leverage ratio, which never was used abroad, now looks like it will 

be adopted by other countries as well, which is good for us because 

it will create a more even playing field and create greater safety 

in the global banking system as well as here. 

So the leverage ratio is part of these negotiations and discussions 

we’re having internationally, and there are proposals on the table. 

We haven’t yet gone through the whole process of doing the quantitative analysis to figure out exactly what the right number is, so 

I can’t tell you offhand what the final number will be. But we are 

certainly looking to make the leverage ratio part of the more conservative approach to making sure that banks have enough capital 

that they can absorb, even in a severe crisis like the one we’ve had, 

they can absorb their losses. 

So, yes, that will be part of our proposal. 

Chair Maloney. Well, I think you should reach your conclusion 

by the time we pass this bill. We should have something definite 

in the legislation on leverage. 

I would like to ask your assessment on international banking, 

your comments on what’s been happening in Greece. At the Senate 

Banking Committee hearing in February, you testified that the Fed 

was going to look into credit default swaps on sovereign debt. 

Can you tell us what you found? 

Chairman Bernanke. The Goldman Sachs arrangement with 

Greece is where we put most of our focus. On that, we found that 

there was in 2000 and 2001 a contract between the Greek Government and Goldman Sachs which, by using exchange rates that 

were different from the market rates, had the effect of modestly 

changing the reported debt and deficit ratios that Greece reported 

to the European Eurostate, their statistical agency. 

Goldman Sachs sold this position in 2005 to a Greek bank. A couple of comments. One, as I mentioned the effects—they did have 

the effect of distorting the numbers—were relatively modest, about 

1 percentage point. The debt to GDP ratio changed from about 101 

percent to 100 percent. So it wasn’t a large effect, but it was an 

effect. 

At that time, this of course was well before the Federal Reserve 

was supervising Goldman Sachs, and it was also before the Enron 

episode where following which, the Fed and other bank supervisors 

greatly strengthened our rules against arrangements which are baVerDate Nov 24 2008 11:26 Aug 25, 2010 Jkt 055045 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 C:\DOCS\57057.TXT SHAUN PsN: DPROCT
34 

sically intended to have accounting impacts, essentially to affect 

the accounting valuations. 

So we have discussed the issue with Goldman, and they have, as 

they are required to do, a much more elaborate procedure now to 

evaluate such possible deals to make sure that they are not being 

motivated by accounting and other kinds of appearance issues. 

So we believe that that situation is now well under control. And 

as I said, they divested that position in 2005. 

On the credit default swaps, we haven’t found large positions in 

U.S. banks vis-a`-vis European governments, but we have not addressed the question specifically of using CDS to manipulate prices, 

which of course would be illegal and inappropriate. That would be 

more an SEC responsibility. I know they are looking at that issue. 

But again, exposures of U.S. banks via credit default swaps or 

direct holdings to European governments are relatively limited. 

Chair Maloney. Are you satisfied with the solution Europe has 

reached? Do you see the problems plaguing Greece spilling over 

into other adjacent countries, or possibly having an impact on the 

United States? 

Chairman Bernanke. Well it’s a work in progress. They’ve 

made, I think, a good bit of progress, but it’s politically difficult because on the one hand the Europeans don’t want to assist Greece 

unless they are persuaded that the Greeks have made a very goodfaith effort on their own to reduce their deficit and improve their 

own fiscal position; and at the same time the Europeans themselves have to agree how they’re going to share the burdens and 

how they’re going to set up the arrangements. 

I think there’s a broad understanding that it’s very important for 

them to come to a solution, and they’ve made a good bit of progress 

there. But I think there will still be further discussions going forward. 

The United States is not directly involved in these negotiations, 

but I’ve been informed that they’ve made good progress and that 

they are quite confident that a solution will be forthcoming. 

Chair Maloney. Thank you very much. 

Mr. Brady. 

Representative Brady. Thank you, Madam Chairman. 

I do believe in the importance of small business credit. It’s not 

an issue of more capital; it’s an over-correction on behalf of the regulators at the banks. I really believe—and again I’m not a banker, 

I’m not an expert in the area—but especially in commercial real estate, even though they’re told these are guidelines, repeatedly these 

are guidelines, banks know, community and regional banks know 

if they go over, a dime over the concentration thresholds, they’re 

going to enjoy a visit, a special visitation from their friendly banking regulator. 

Plus, you know, the requirement of setting aside capital reserves 

for commercial real estate that are far in excess of the real risk of 

that loan is really creating—I can’t overstate the problems it is creating among creditworthy projects, not just inhibiting growth, but 

I think creating again a much more severe commercial real estate 

crisis where we already know there are real challenges anyway. 

35 

I really do appreciate your focus on that area, among all the 

other things you’re doing. It’s critical that the Fed be listening and 

injecting common sense wherever possible in that process. 

Can I ask you about two things. One about sort of the tradeoff 

between inflation and unemployment, and also a question about 

the balance sheet and exit strategy. 

We have had a couple of people testify before Congress here recently. Professor Lawrence Ball advocated raising the Fed’s inflation target to 4 percent. His argument was that higher inflation 

would alleviate unemployment and give the Federal Reserve more 

room to reduce nominal interest rates in the future, sort of that 

tradeoff again, inflation/unemployment. 

How do you respond to Professor Ball’s argument that unemployment is so dire that we should inflate our way to a more rapid recovery? 

Chairman Bernanke. Well his argument is that at a higher inflation rate, nominal interest rates would also be higher on average, and that would give more space to cut during a recession and 

perhaps more ability to create impetus. So that’s not an illogical argument, but it has substantial risks. 

Which are: The Federal Reserve over a long period of time has 

established a great deal of credibility in terms of keeping inflation 

low, around 2 percent roughly speaking, and you can see that for 

example in Inflation Index Treasury Debt, which shows that people 

expect over the next 10 years about 2.2 percent inflation on average over that 10-year period. 

If we were to go to 4 percent, and say we’re going to 4 percent, 

we would risk I think losing a lot of that hard-won credibility because folks would say, well, if we go to 4, why not go to 6, and if 

you go to 6, why not go to 8. It would be very difficult to tie down 

credible expectations at 4, beyond which of course in the longer 

term low inflation is good for the economy, and 4 percent is already 

getting up there a bit and would probably have detrimental effects 

on the functioning of our markets, and so on. 

So I understand the argument, but that is not a direction that 

we are interested in pursuing. We are going to keep our inflation 

objectives about where they are. We think about 2 percent is about 

appropriate, given biases and measurement of inflation, and given 

the need to have a little bit of space between the average inflation 

rate and the risk of having deflation, or falling prices. 

So that is where we are going to be. That is the path we are 

going to be following. 

Representative Brady. You have raised the issue of expectations, and there are, I believe, in this economic recovery rational 

expectations that businesses will see higher tax rates, higher energy prices, more regulation, I do think that has an impact, and individuals as well, the high debt, someone has to pay that back, is 

it going to land on them, and does it affect our economy. That’s all 

part of the psyche and confidence of business and consumers. 

One of those areas of uncertainty is the extraordinary balance 

sheet expansion of the Fed. Recently testifying before the House Financial Services Committee, Professor John Taylor stressed how 

important it would be for the Fed to provide an exit strategy with 

explicit decision rules, so as to allay fears of surging inflation, and 

36 

here in Congress, that the Fed will not continue to exceed its traditional purview of monetary policy. 

Are you prepared to lay out a definitive roadmap to normalization? 

Chairman Bernanke. Yes, we haven’t determined all of the details. We’re obviously going to see how things evolve. But I have 

recently testified before the House Financial Services Committee, 

and also released separately a document, another testimony which 

has laid out our proposed exit strategy. 

We are developing the tools to do that. This has been an ongoing 

campaign on my part and on the Fed’s part going back to last summer when I published a Wall Street Journal Op Ed—— 

Representative Brady. I saw that. 

Chairman Bernanke [continuing]. That laid out the strategy. 

My impression is that early on there was a lot of concern in the 

markets about this large balance sheet, and the large amount of reserves in the banking system. Now I’m not saying that the concerns have completely evaporated, but I think that over time that 

we have provided a lot of information about our exit strategy, and 

my sense is that it has had a good effect; that for the most part 

there’s a lot of confidence in the financial markets that we do know 

how to exit effectively, and we will exit effectively, and that we will 

do so in a way that doesn’t lead to any increase in inflation. And 

again, one piece of evidence is the long-term break-evens in the inflation indexed bond market. So we are doing that. 

I don’t think we can give quantitative rules at this moment on 

exactly how to do that because I don’t think we have enough 

knowledge. But we do know that we have all the tools we need to 

drain those reserves and to reduce the balance sheet over time, and 

to raise interest rates when it becomes necessary to do so to avoid 

inflation. 

Representative Brady. Right. Thank you, Mr. Chairman. 

Representative Hinchey [presiding]. Mr. Chairman, thank you 

very much. I deeply appreciate the position that you have, and how 

critically important it is, particularly right now. And frankly, the 

relatively candid responses that you give, which is in many ways 

revolutionary from this particular responsibility. 

I wanted to ask you a question about the housing market and the 

circumstances that we’re dealing with there. This economy is still 

very, very rough. It’s not secure by any means. And there are a 

whole host of things that really need to be done, and an awful lot 

of attention needs to continue to be paid to it. 

One aspect of that of course is the housing market. As you mentioned, the Federal Reserve under your leadership has worked with 

the Administration and Congress to create an environment to encourage responsible home ownership. And that was something that 

was very positive, and it stepped in in a very positive way to deal 

with this economic situation. 

The conditions are about to change. And one of the ways in 

which they change is the fact that in March the Federal Reserve 

stopped purchasing mortgage-backed securities, which had kept interest rates low and helped to stabilize the housing market. 

Can you give us the justification for that, and what you think the 

aspects of that are going to be? 

37 

Chairman Bernanke. Well, to go back to the comments of Mr. 

Brady, we have already expanded our balance sheet quite considerably and we didn’t want to create such a large balance sheet that 

it would create uncertainty, or concern about our ability to normalize policy at an appropriate time. 

We were concerned about the potential impact of the cessation of 

MBS purchases on mortgage interest rates, and for that reason we 

announced well in advance our proposal, and we reduced our purchases very gradually. We tapered off our purchases. And I am 

pleased to say that so far we see very little effect on mortgage 

rates. There’s been essentially no effect on mortgage-backed security yields, and so at this point I don’t anticipate any significant 

impact on mortgage rates. 

Of course if—— 

Representative Hinchey. For how long? I mean, there’s been 

some—there have been a number of announcements just over the 

course of the last week or so about the interest rates for mortgages 

going up, and specific elements talking about how they’re about to 

do it. 

Chairman Bernanke [continuing]. In the last couple of days it 

has gone the other direction. I think the net change since we 

stopped purchasing is pretty close to zero. 

So we will continue to watch that. There’s nothing that says if 

the economy weakens and the issue is housing and mortgage rates, 

there’s nothing that says we couldn’t resume those purchases if 

necessary, and we will certainly keep that option open. But again 

at this point the main effect seems to be that we are still holding 

$1.4 trillion in agency MBS and debt, and that amount being taken 

off the market seems to be having the ongoing effect of keeping 

mortgage rates pretty low. 

Representative Hinchey. Well no question about it, it has had 

a very positive effect. But my concern is, frankly, that now that 

positive effect is being eliminated. And we already see issues that 

indicate that these interest rates are going to go up. These interest 

rates go up, as they go up, that is going to reduce the housing market, particularly in the context of the ongoing economic circumstances that most working people are having to confront. 

So I am deeply worried about this, and I thank you for saying 

that you will be looking at it and considering it and maybe making 

some changes, hopefully, if it seems to be necessary. 

There are other aspects of the housing market, however, also 

that are also about to cause some serious problems, it seems to me 

at least. Among those, the first-time homebuyer tax credit is due 

to expire April 30th, and the FHA has recently tightened its restrictions on loan eligibility. 

So the housing market is not yet stabilized. So I wonder what 

you think about all three of these issues that are essentially being 

eliminated now, which were put into play to deal with the economic 

circumstances, and which caused a positive effect on the housing 

market. But now, those effects are being eliminated. 

And it seems to me that this situation is likely to get progressively worse, and maybe rapidly worse. 

Chairman Bernanke. Well the number of starts of housing has 

been very low, and unfortunately all the efforts, including the low 

38 

mortgage rates, have not really rejuvenated new construction very 

much. So that remains a concern. 

I think one other important aspect here is the foreclosure mitigation issues. One of the most important aspects of the housing market is not even just the amount of construction, but what happens 

to house prices. Because if house prices stabilize, that will help 

consumer confidence—because people will feel that the value of 

their home is not falling anymore—and it will help probably improve, reduce mortgage delinquencies as well. 

So one concern we have is that foreclosures will continue to put 

houses on the market and cause house prices to fall further. So we 

are watching that very carefully and we are hopeful that some of 

the programs that the government has put in place will help mitigate that foreclosure rate. 

Representative Hinchey. Well I am deeply concerned about 

the effect of elimination of these three issues, which had had a 

positive effect, and the elimination of these three issues prior to the 

moment when the housing market is improving significantly. 

So I think that this is something that needs a lot of attention. 

Chair Maloney [presiding]. That is an excellent point, and the 

gentleman’s time has expired, and we look forward to the Chairman’s response. 

Chairman Bernanke. I agree, the housing market has been a 

big part of this whole cycle, absolutely, and we are going to have 

to watch that sector very carefully, not just in terms of construction 

but in terms of prices and in terms of foreclosures. Those are all 

big issues for people in this economy. 

Chair Maloney. Congressman Burgess. 

Representative Burgess. Thank you, Mr. Chairman. 

Let’s just close the loop on what we were talking about on jobs 

when my time ran out before and talking about the problems people have in the beginning of their earning years, midlife crisis, and 

then pre-retirement. It seems like some of the things we have done 

recently in the past 14 or 15 months, the health care bill being a 

big one, and I heard from several people back home, a couple who 

had an assortment of small businesses and provided roughly 320– 

350 entry-level jobs, minimum wage jobs, if you will, for which they 

do not provide health benefits. Generally they are looking at the 

second wage earner in a home being the holder of this job, or someone just entering the job market who might in fact now be carried 

on their parents’ insurance, but they’re looking at the $2,000 fine 

that they will now have for each full-time equivalent, and at their 

level of employment they just simply can’t continue. 

They are either going to have to stop what they’re doing, sell 

their businesses and retire and go to Reno, or something different, 

but they cannot continue to do—as they outlined to me, they will 

not be able to continue to do what they’re doing. 

And here’s again a couple through various entrepreneurial activities providing 300 to 350 entry-level jobs for these people at the beginning of the job market. And you know that that scenario is replicated across the broader economy over, and over, and over again. 

We have also frightened people with what we’re doing with capand-trade and possible energy tax. We’ve also frightened people 

39 

with financial regulatory reform where people just don’t know what 

to expect around the next corner. 

And then the 50 pages of tax cuts that are going to expire that 

also add to the uncertainty. 

So where do we begin to ratchet back the uncertainty that we are 

providing to the small business person that prevents them from 

adding a job right now, or worse yet, may make them look at, hey, 

I may have to have my workforce by 2014 because I can’t do what 

you’ve asked me to do? 

Chairman Bernanke. No, we have heard around the country 

that uncertainty, both economic uncertainty, where’s the recovery 

going, and policy uncertainty; uncertainty about what the regulatory environment is going to look like, has had some adverse effects on businesses because they don’t know how to plan. They 

don’t know exactly what the environment is going to look like. 

And so, while it is very important of course that on these very 

important issues of health care, and environment, and regulatory 

reform and so on that Congress do a deliberative process and come 

up with the best possible outcomes. Obviously earlier resolution 

and clarity is better than delay. So that is certainly an issue to try 

to reduce that overhang of uncertainty. 

Representative Burgess. Although many more people were 

asking us to look at the problems with jobs and joblessness than 

there were asking us to deal with a problem with global warming, 

and health care inequities. I mean, the numbers are stark. 

My time is going to run out again. You were talking with Senator 

Klobuchar about the commission, the deficit commission, or as I 

like to call them, the debt panels, that have been created. And of 

course Congress, the House in particular, we do control the purse 

strings. 

You talked when you were in Dallas, and in fact your comments 

were, nothing prevents us from beginning now to develop a credible 

plan for meeting our long-run fiscal challenges. I agree with you. 

I just think that ought to come from the legislative body and not 

from an Executive Order on a death—I mean a debt commission. 

So are you familiar with Ranking Member Paul Ryan on the 

Budget Committee has what he describes as a Roadmap for America’s future? It’s a big lift, but he tackles Tax Code, Medicare, Social Security, as sort of one single entity and tries to deal with our 

long-term fiscal future from that standpoint. 

Wouldn’t that be a better way of going about looking at this, 

rather than the targeted reductions that a commission is going to 

come back with? 

Chairman Bernanke. Well just in general I think the entitlements—Social Security, and especially Medicare—are quantitatively a very big part of the fiscal issue going forward, and I 

think creative thinking in general about how to control those costs 

is extremely important. 

To go back to your question about health care costs for the small 

business, it’s not just the fiscal issue but anything we can do to reduce the costs of health care to make it more effective and efficient 

is going to help not only the federal budget, but it’s going to help 

the functioning of the economy. 

40 

So I can only agree and encourage any kind of creative thinking 

about bringing forth proposals. And as they come from Congress, 

as you say, all the better. The trouble is that, you know, obviously 

by its nature, you know, Congress is often very focused on the near 

term and it is hard to get the attention on the very long-term 

issues. 

Representative Burgess. Yes. Unfortunately this bill that we 

passed in health care, 4,000 pages that did nothing, nothing to reduce the long-term cost of health care other than provide for rationing in the very near future. 

Thank you, Madam Chairwoman, I will yield back my time. 

Chair Maloney. I thank the gentleman. And CBO estimates 

that over the 20 years it will save the economy a trillion dollars 

with that health care bill. 

Mr. Chairman, may I ask you, in your opinion what is the primary source of risk to the recovery at this time? And what is your 

assessment of the risk of a double-dip recession? 

Chairman Bernanke. I was always fairly humble about forecasting. In the last few years, I have become extremely humble 

about forecasting, so I have to be very cautious. 

But having said that, I think there’s a pretty broad view that we 

are seeing some building momentum in final demand. Consumer 

spending looks to be picking up. At least equipment and software 

investment looks healthy. The broader global economy is stronger, 

which implies more exports. 

So it looks like we are on a path to moderate recovery, and that 

the risk of a double-dip, while certainly not negligible, is certainly 

less than it was a few months ago. 

That being said, there are any number of possible things that 

could derail it. If for whatever reason consumers under the pressure of a weak labor market and tough balance sheets decided to 

become more conservative and slow their spending, a financial 

problem emanating from, I don’t know, Greece or whatever so-far 

unknown source that could cause more problems in the financial 

markets. There are all kinds of scenarios you could imagine. Oil 

prices being driven up by a geopolitical problem. 

So one could certainly imagine, and one thing we do in our Federal Open Market Committee meetings is look at alternative simulations and alternative scenarios that look at alternative possibilities that could occur. But right now, again as I said at the beginning, it looks like the financial markets are more stable. 

Banks are still working their way out of a period of high losses 

and financial stress, but they are making progress. The consumer 

looks to be doing better. So for all those reasons I think the best 

bet is that we’ll see a moderate recovery. 

But of course again forecasting is not a precise business. 

Chair Maloney. So we are making progress, but have not 

achieved total success. 

What happens, Chairman Bernanke, if the unemployment rate 

does not decline as the economy improves? 

Chairman Bernanke. Well that is a possible risk. So we anticipate the unemployment rate is likely to decline relatively slowly, 

and there are a couple of factors that will affect that. 

41 

One is the pace of overall growth. Obviously if growth is only 

moderate, that will not quickly lower the unemployment rate. That 

is the first observation. 

The second observation has to do with the rate of productivity. 

Following the 2001 recession, productivity gains were quite significant, which is a good thing generally, but meant that firms were 

relatively slow in bringing workers back because they didn’t need 

to. They had productivity gains in order to meet demand. 

We’ve seen remarkable productivity gains in the last year or so 

in the U.S. economy. We don’t anticipate productivity growth will 

continue at that rate going forward, but if it does then that may 

reduce the number of workers that firms need to bring back in 

order to meet demand. 

So there is a possibility. I wouldn’t consider it the leading possibility, but there is a possibility that unemployment will stay stubbornly high, around 10 percent. If that were to happen, that would 

be one of the risks that we were just discussing because that would 

reduce consumer confidence and make them concerned about their 

ability to sustain their spending. 

Chair Maloney. You took some creative steps in creating new 

lending facilities. I believe the only funding facility still operating 

is TALF, and when does the Federal Reserve plan to close TALF, 

or do you plan to make this facility permanent? 

And also, a prime concern from the District that I represent in 

New York is the commercial real estate crisis. I would like to know, 

are there any additional actions that can be taken by Congress or 

others to protect against the crisis in commercial real estate? And 

where do you see this going forward? 

Chairman Bernanke. So the only remaining facility is in fact 

the TALF for commercial real estate, and we left it in longer because of the extra needs there and because it takes longer to bring 

the commercial mortgage-backed security deals to market. 

However, we’re planning to close that on June 30th because we 

we’re only making those loans on an emergency basis, and we do 

have to justify having this emergency program. And we have in 

fact seen improvements in the commercial mortgage-back security 

market. So our current plan is to close that at the end of June. 

On commercial real estate, that is for many banks, particularly 

small- and medium-sized banks, that is a very big challenge. And 

we’re seeing a few glimmers of improvement, but it’s still going to 

be perhaps a few more quarters before banks have worked through 

their commercial real estate book and have gotten to the point 

where they have complete control and understanding of their losses 

and risks in that area. 

So once again, as in our capacity as bank supervisor the Fed has, 

along with the other supervisors, has issued new guidance on commercial real estate. Among other things, we want to encourage 

workouts in the same way that government policy has been to help 

residential mortgages, to help residential borrowers work out troubled mortgages, we’d like to see the same thing happen for commercial real estate mortgages. 

In fact, we believe that is happening in many cases, and we want 

to promote that. And again we have instructed our examiners to 

42 

work with banks to try to work out problem loans, and in general 

to maintain the flow of credit wherever possible. 

So it is a difficult problem. And in part now it’s not just a financing issue, it’s just fundamentals, prices of commercial real estate 

have fallen by 40 percent in many places. Vacancy rates are up. 

Rents are down. And so it is understandable that there are going 

to be some stresses in this market. So we are going to continue to 

work with banks to try to help work through that. 

There have been periods in the past where commercial real estate has created a lot of banking problems, as you know, and eventually we do work through it. But it is going to cause a problem 

for a number of banks in the near-term. 

Frankly, I don’t know what to suggest to Congress. I think ultimately that the banking system and the borrowers are going to 

have to find solutions and work through this as quickly as possible. 

Chair Maloney. Mr. Brady. 

Representative Brady. Madam, I have about a thousand questions, but in the interest of time, two proposals have been floated 

to increase banking taxes and enact a transaction fee on trades. 

One purportedly to pay back the TARP, although the banking sector is going to be repaying plus some. The transaction fee I think 

is simply a way to raise revenue. 

Your views on those taxes? And the banking one seems to be almost a global effort to increase taxes on banks that have international relationships and connections. Your view? 

Chairman Bernanke. Well first on the tax on transactions, the 

Treasury has rejected that idea, which came up in other jurisdictions, and I think I agree with the Treasury’s judgment on that. 

The problem is that, by taxing transactions, you would greatly 

reduce liquidity in markets. And people who are just ordinary investors transacting in those markets would find that bid-ask 

spreads had gotten much wider and much more costly for them to 

buy and sell assets and to hedge their portfolios and so on. 

And indeed what would probably happen is that, so long as there 

was any jurisdiction in the world that didn’t have those transaction 

taxes, everything would go offshore and you probably wouldn’t collect very much in terms of taxes. In the current world, I don’t think 

that’s a very good way to raise revenue. 

The fee on financial institutions, it is basically a tax and as such 

it is up to the Congress to decide whether it wants to raise revenue 

through taxing large financial institutions. 

I think the only observation I would make there is that it should 

be structured, if you do do it, it should be structured in a way that 

doesn’t create unnecessary problems. 

So, for example, one of the original ideas was to tax based on leverage, but some further investigation and discussion sort of revealed that that would cause very severe problems in the repo market that would essentially disrupt some very important markets because it would create essentially a tax on certain kinds of transactions. 

So there are other ways to create the tax base, if that’s the way 

you want to go, and so my only advice there is, if Congress decides 

that you want to raise revenue through that particular method, 

and you can justify it just as a general revenue measure as well 

43 

as a repayment, if you wish, that you do it in a way that minimizes 

the disruptive implications for the markets. 

Representative Brady. A final point, a real quick question. 

You know, SEC aside, I do think there is merit in allowing banks 

to set aside greater capital reserves during good economic times to 

be able to make it through the tougher times. 

Spain uses a model that provides that—it seems to have done, 

in the banking sector, fairly well in the financial recovery—unlike 

in pensions where the IRS takes a dim view of companies setting 

aside too much reserves during good times, seeing it as tax evasion. 

Is there merit in Congress specifically addressing the issue of 

banks being able to put aside more reserves during good times, you 

know, regardless necessarily of the—maybe setting aside per category versus per specific loans in order to build up those reserves 

for times like this? 

Chairman Bernanke. I don’t know whether it is best handled 

by Congress or by the regulators, but the basic idea I certainly 

agree with, which is that a lot of the reserve policy was governed 

by a desire to avoid income smoothing and those kinds of things. 

Representative Brady. Sure. 

Chairman Bernanke. And as a result, the main purpose of reserves—which is to protect against losses—was lost. And there was 

not enough reserving done in advance of the crisis. So I am very 

much in favor, and I think the world is coming around to the view 

that banks should be allowed to reserve not only for known losses 

but for, you know, yet unknown but nevertheless predictable losses 

that they will face in the future. 

So, yes, I very much encourage the regulators and Congress to 

look at ways to make sure that banks are able to reserve substantially during good periods so that they can run it down during a 

crisis. 

Representative Brady. Makes sense. Thanks, Chairman. 

Chair Maloney. Mr. Chairman, we understand that you have to 

leave, but I would like to give Representative Cummings an opportunity to ask his questions. Because of other committee commitments, he was not able to be here for the first round of questions. 

Do you have time? 

Chairman Bernanke. Certainly. 

Representative Cummings. Thank you, Madam Chair. I apologize. I had to be on the Floor to argue three bills, and so I apologize, because I really wanted to hear all of your testimony. And I 

know, my staff tells me that we’ve gone over small business quite 

a bit. 

But you did say one thing before I left that I was just curious 

about, when you were talking about the consumer protection agency, and you implied that when borrowers were having difficulty 

getting access to credit it might not be a bad idea—or it might be 

helpful, and you correct me if I’m wrong, if the consumer protection 

agency was inside the Fed. Is that a fair statement? Is that what 

you said? 

And then I want you to explain it to me. 

Chairman Bernanke. No. What I said was that there would be 

some benefit of the consumer protection agency working in a way 

that is cooperative with the bank safety and soundness regulators 

44 

and examiners. Because the safety and soundness examiners would 

have an understanding of the implications of the consumer protection rules for the costs and the business models of the banks, which 

in turn would affect whether or not credit would be constrained. 

Because you don’t want to create rules that just mean that people can’t get credit. 

Representative Cummings. Yes, yes. The thing, you know, 

there’s something going on here in our country, and the President, 

before he became President, said something that I found—I quote 

him all the time—he said: We have an empathy deficit. He’s been 

saying this long before he became President. 

And, you know, I look at what has happened in the health care 

area. I look at what is happening in the financial area. It seems 

almost that it is okay, it seems okay, with some folks that if people 

fail, or if they are too weak in a moment, just let them die, let 

them fall off the cliff. 

And when we talk about these small businesses, I sat in a meeting yesterday in Baltimore in my District and literally people were 

in tears. These were people, good business people, who have had 

impeccable records. Now they can’t get a line of credit. They’ve got 

business that they could do, but they can’t get a line of credit. They 

had one. And so it seems to me, I just refuse to believe that we 

cannot help these Americans who go out there every day, do the 

right thing, not trying to get a big bonus, just trying to do the right 

thing, employ their employees, produce what they’re supposed to 

produce, but yet and still it seems like when it comes to them, it’s 

okay to say, you know, Johnny, sorry, you know, yeah, we’re going 

through this economic storm, you’re going to be collateral damage. 

Collateral damage means you die in the process—that is, your business dies. You may never come back to do this business again. And 

it’s okay. 

And like I said, I felt the same thing when we were dealing with 

the health bill. You know, it’s like, okay, 45,000 Americans die? All 

right. Too weak. Let them go. That’s not the spirit of this country. 

That’s not the country that I grew up in. And that’s not the country 

that I believe in. 

So I am just wondering—and I know the Fed has certain powers 

and certain things, and maybe you can’t force people, the banks to 

lend, whatever, but there’s something awfully wrong. And you basically—and I know that there are some folk who the credit may not 

be what it is, but there are a lot of people who have decent credit, 

and who were doing fine, and could get the business. The business 

is like right there, and they cannot reach it because they cannot 

get the money. 

As I told my constituents yesterday, sometimes $25,000 is worth 

$10 million because it acts as a bridge. So, you know, I had a lot 

of questions I wanted to ask, but I beg you to even go further. And 

I know you’ve been—and I support you 100 percent, Mr. Bernanke, 

but I just believe with all my heart that we can do better. I just 

do. 

And I don’t know what that better is. I read in the papers where 

the banks say they’re doing okay, they’re paying the money back 

and whatever, while my folks are drowning. There’s something 

wrong with that picture. It doesn’t make sense. 

45 

I know it’s complicated, but we have brilliant people like you and 

your staff to figure it out. Comment? 

Chairman Bernanke. Yes. It is very important from an empathy perspective and from an economic perspective to get small business growing again. Absolutely. I talked a lot today about what 

we’re doing with banks in our supervisory and I just want to reiterate that we are looking for feedback and ideas from the banks 

and others who will give us more explicit suggestions, because we 

are really working hard on this. 

But let me also say that there are things that Congress is doing 

and can do. There’s money that’s flowed through the CDFIs, which 

has helped community development. There are proposals to use 

TARP money to incentivize small banks to make loans to small 

businesses. 

There’s the SBA. So there are things that can be done, and if 

Congress wants to go in that direction there are instruments that 

can be used. 

Representative Cummings. We have to do our part, and we 

know you’re going to continue to do your part. 

[The prepared statement of Representative Cummings appears in 

the Submissions for the Record on page 54.] 

Chair Maloney. The gentleman’s time has expired. And I know 

we’re up against—— 

Representative Cummings. Thank you, Mr. Chairman. 

Chair Maloney [continuing]. Time constraints, but in the spirit 

of Bipartisanship, Congressman Burgess has requested the consideration of a one-minute last question, if your time is—— 

Chairman Bernanke. Certainly. 

Representative Burgess. Thank you. And thank you, Chairman, for your visit today. I hope you see the exchange has been 

cordial and collegial, and I hope we will be able to see you back 

sooner rather than later because there are a lot of important 

things. 

Just on that issue of TARP, though, TARP was supposed to die 

last December 31st, and people know that, and they’re angered 

that TARP is still there. TARP is not to be a slush fund for any 

activity, no matter how benign it might seem. That’s the wrong 

way to go. Find another way to fund that, but not TARP. Let’s let 

TARP die. 

I just do have to ask you, because two years ago when we were 

cruising into this really rocky part of the economy, one of the 

early—perhaps not the early, but a mid-level harbinger was $5 a 

gallon diesel and $4 a gallon gasoline in the summer of 2008. 

I’ve got to tell you, I filled up right before I left and $2.78 for 

regular gasoline in the DFW market in Texas. In a month we get 

the clean air stuff where we’ve got to be buying these special 

blends. It goes up a dollar. So by the end of May we will be paying 

nearly $4 a gallon for gasoline again. 

Is the price of oil, the price of fuel, unimportant now in the consideration for the global economy? And if it is unimportant, at what 

price point does it become important again? 

Chairman Bernanke. Well every dollar that the price of oil 

goes up is another dollar out of the pockets of consumers, and that 

46 

makes it harder for them to spend on other things. And it also adds 

to inflation. So it is definitely a negative. We are at $85 a barrel right now. The forward curve is pretty 

flat. Markets don’t expect large increases in the future, but we 

don’t know. We’ll have to watch it very carefully. It depends a lot 

on global economic activity, which has been stronger generally 

speaking than in the U.S. and Europe. So of course we are still a long way from $145, which is where 

we were a couple of summers ago. So I do not think at this point 

that the price of oil is a serious threat to the recovery, but clearly 

if it moved a lot it would be a negative, and we have to watch that 

and be careful. 

Representative Burgess. It looks like for what the consumer 

sees, at least in my market, it may be very close to what it was 

two summers ago. 

Chairman Bernanke. Yes, I do not understand that dollar 

extra from oil? 

Representative Burgess. Well because the summer driving 

season they always jack the price up—— 

Chairman Bernanke. Okay. 

Dr. Burgess [continuing]. Supply and demand. And then of 

course the Clean Air Act does require we use special ethanol blends 

that always cost more. You’ve got to transport the ethanol. It’s 

more expensive. And that is a whole separate discussion. But I’ve 

got to believe it is going to play a role in the recovery, and it is 

likely not going to be a positive role. 

Chairman Bernanke. Natural gas prices are down. 

Representative Burgess. Yeah. That is actually not a good 

thing for my District. We would like to see those back up. 

Chair Maloney. Thank you once again, Chairman Bernanke, for 

testifying today. Since you testified last May, the economy has 

shown great progress. And the unprecedented actions taken by the 

Federal Reserve to inject liquidity into our financial system played 

a key role in the turnaround of the economy. 

I look forward to working with you in the future, and the Committee looks forward to working with you as we continue to build 

on the economic progress so far, and certainly on our goal of employing more Americans. 

Thank you so much for your testimony and for staying even past 

your time. So we really, really do appreciate it. Thank you. 

Chairman Bernanke. Thank you, Madam Chair. 

Chair Maloney. We are adjourned. 

[Whereupon, at 12:21 p.m., Wednesday, April 14, 2010, the hearing was adjourned.] 

(47) 

SUBMISSIONS FOR THE RECORD 

48 

PREPARED STATEMENT OF CAROLYN MALONEY, CHAIR, JOINT ECONOMIC COMMITTEE

America is on a path toward economic recovery. A large part of the credit for this 

turnaround is due not only to President Barack Obama but also to Ben Bernanke, 

the Chairman of the Federal Reserve, a respected scholar on the Great Depression. 

Under his guidance, the Fed took creative and effective actions to inject liquidity 

into our financial system which saved our nation from economic catastrophe. 

I am confident that you will continue to steer monetary policy at the Fed carefully 

through the next set of obstacles balancing the creation of robust economic growth 

with the prevention of inflation. 

Our hearing today on the economic outlook is timely for many reasons. 

Just this week, the committee of economists responsible for dating the end of recessions announced that the recovery is still too fragile to announce that the recession is over. 

But there are indications that we are indeed well on our way to economic recovery: 

• After 4 straight quarters of negative growth, the economy grew during the last 

two quarters of 2009. There is a consensus that when the latest GDP numbers 

are announced on April 30th, we will see that our economy continued to expand 

during the first quarter of 2010. 

• The most recent employment report showed that 162,000 jobs were created in 

March, with three-fourths of those new jobs coming from the private sector. 

• Manufacturing employment was up for 3 straight months. 

• The stock market is at its highest in almost 15 months. 

• Temporary help, a leading indicator of the health of the labor market, has 

added 313,000 jobs since October 2009. 

• Sales of cars and light trucks were up in March. 

• And many surveys of the economy are optimistic about growth in both the service and manufacturing sectors. 

These improvements in our economy are proof that actions taken by Congress, the 

Fed, and the Administration have started to have an impact. 

In the last year, Congress enacted policies that supported struggling families and 

encouraged job creation. The Recovery Act provided tax relief for 95 percent of 

American families and created jobs while investing in clean energy technologies, infrastructure, and education. 

Last year, we extended the $8,000 first-time homebuyers credit that will spur construction jobs. We extended a host of safety net programs that will help struggling 

families weather the economic storm. We extended the net operating loss carry-back 

provision that will help small businesses hire new employees. And we are boosting 

funding for small business loans via the Small Business Administration. 

We passed the HIRE Act to give tax breaks to businesses that hire unemployed 

workers. 

Without these measures the depth of the contraction would have been much deeper and far longer. 

Although the recent estimates of the cost of the bailout of the financial system 

are much lower than initially expected, the true cost of the financial system failure 

in terms of lost employment is immeasurable. 

Much of the budget deficit over the next 10 years should be attributed to the financial crisis—economists have estimated that the budget deficit has increased by 

$3.1 trillion due to the decline in tax revenues from the long line of workers who 

have lost their jobs. 

While we have come far in stabilizing the financial system, we would like to hear 

your thoughts on various reform proposals that have been introduced in this Congress to make sure that financial institutions don’t take on excessive risk and have 

appropriate capital requirements. 

We also look forward to hearing your take on upcoming challenges, including the 

housing market. One important factor in the housing market’s current recovery is 

the low mortgage interest rates that were sustained by the Fed’s purchases of mortgage-backed securities and Fannie and Freddie debt. 

Now that the Fed has completed those purchases, we would like to hear your assessment of the housing market and the impact of the Fed’s exit on mortgage rates. 

On another note, I am grateful for your leadership in ushering in new rules to 

prevent unfair or deceptive practices with respect to credit card accounts and the 

rules the Fed put into place to curb excessive overdraft fees. 

49 

Chairman Bernanke, we thank you for your testimony and I look forward to working with you as the committee continues our focus on fixing the economy, putting 

people back to work, and helping struggling families. 

PREPARED STATEMENT OF REPRESENTATIVE KEVIN BRADY

I am pleased to join in welcoming Chairman Bernanke before the Committee. 

The Federal Reserve’s injection of $1.3 trillion of liquidity in the fall of 2008 

quelled the panic in financial markets. Although I disagree with the Fed’s participation in the ‘‘bailouts’’ of AIG and Bear Stearns because these institutions were insolvent, the Fed’s timely actions as lender of last resort to solvent, but illiquid financial 

institutions and markets prevented the financial panic from becoming a depression. 

During the spring of 2009, the Supervisory Capital Assessment Program, commonly known as the ‘‘stress test,’’ and the subsequent capital increases by large 

banks restored confidence in financial institutions and markets. Largely because of 

these decisive actions, the U.S. economy is now beginning to recover. However, the 

recovery will continue to be subpar as businesses delay critical hiring and investment decisions due to the uncertainty generated by the dangerous level of federal 

debt and proposals by President Obama and Congressional Democrats to increase 

taxes, raise energy prices, and enact job-killing regulations. 

Despite recent guidance from Washington to bank examiners about commercial 

mortgage loans, I am concerned that bank examiners are exacerbating real estate 

problems through their inflexibility. Pressed by their regulators, community and regional banks may not be renewing some performing commercial mortgage loans 

even though their underlying cash flow can easily service the debt. 

That said, I would like to share with you my concerns about monetary policy 

going forward. We are in danger of repeating the mistakes that produced stagflation 

in the 1970s. Because of the lag time between monetary policy decisions and their 

effects, the Federal Reserve must act to prevent inflation well before the public perceives that prices are rising. 

Yet there are voices demanding that the Federal Reserve delay action. Recently, 

economist Laurence Ball advocated keeping the federal funds rate extraordinarily 

low even as prices rise to reduce the unemployment rate, notwithstanding the fact 

that the so-called Phillips Curve trade-off between inflation and unemployment had 

been thoroughly discredited three decades ago. 

Price stability contributes to economic growth, and only the Federal Reserve can 

maintain price stability. My concern is that Administration officials may press the 

Federal Reserve to delay raising interest rates and unwinding the expansion of its 

balance sheet to cover for the Obama’s anti-growth policies. 

Taxes, especially on small businesses and investment, are about to soar as the 

2001 and 2003 rate reductions expire and $569 billion of new taxes to fund Obama’s 

health care scheme are implemented. Additional costs are lurking in the form of regulations to control ‘‘greenhouse gas’’ emissions and complex ‘‘cap and trade’’ legislation. 

Despite these tax increases, the CBO projects that higher spending under the 

President’s budget would create deficits of $9.8 trillion over the next ten fiscal years, 

spiking publicly held federal debt to 90 percent of GDP by 2020. Unless Congress 

controls federal spending, these deficits will crowd-out private investment and slow 

economic growth. 

Chairman Bernanke, I urge you to resist any attempt to delay raising interest 

rates in order to offset these anti-growth policies. 

Regarding financial services legislation, I am concerned about weakening the 

Fed’s independence, institutionalizing ‘‘too big to fail,’’ and perpetuating the status 

of Fannie and Freddie as zombie banks. Making the President of the Federal Reserve Bank of New York a political appointee and stripping the supervision of smaller banks and their holding companies from the Fed would weaken the regional Reserve Banks and undermine the Fed’s independence. Moreover, diverting the Fed’s 

profits from the Treasury to pay for the Consumer Financial Protection Bureau 

would set a dangerous precedent that could open the floodgates for other off-budget 

federal spending. 

The perverse incentives arising from the presumption of government backing 

caused large financial institutions, especially Fannie and Freddie, to take excessive 

risks and inflate a huge bubble in the housing market. Instead of ending ‘‘too big 

to fail,’’ the Senate bill would establish a permanent bailout fund for large financial 

institutions that may exacerbate this problem by identifying who the government 

regards as too big to fail. 

50 

Incredibly, the Senate bill does not provide for final resolution of Fannie Mae and Freddie Mac despite costing taxpayers $128 billion so far with no prospect for any 

recovery. Like walking zombies, Fannie and Freddie with their explicit government 

backing are frightening most private capital away from re-entering housing finance. 

Chairman Bernanke, I look forward to your testimony. 

PREPARED STATEMENT OF SENATOR SAM BROWNBACK, RANKING MINORITY MEMBER

Thank you Chairwoman Maloney for arranging today’s hearing and thank you 

Chairman Bernanke for testifying today about the economic outlook. 

I am anxious to hear your update on the status of and outlook for the nation’s 

economy. I am equally interested in probing your views on a number of other issues 

regarding the structure and role of the Federal Reserve in monetary policy and financial regulation. Lastly, I hope we can discuss the frightening fiscal picture facing 

the United States and the implications that the massive run up in federal spending 

and debt will have on future economic growth. 

Although the U.S. has experienced positive economic growth since the second half 

of 2009, the labor market remains incredibly weak and unemployment is not expected to fall below 8.0% until 2012. The official unemployment rate of 9.7%, while 

unacceptably high, masks the weakness in the labor market. For the first time since 

1962, we have witnessed year over year declines in the civilian labor force—a disturbing trend. 

The Federal Reserve’s aggressive actions continue to prop up the economy through 

exceptionally low interest rates, as well as close to $2.0 trillion in purchases of longterm securities. There has been some concern, both among economists and policymakers as well as within the FOMC, that maintaining interest rates at record-low 

levels could contribute to an increase in financial imbalances and heightened risks 

for long term macroeconomic and financial stability. I am interested in hearing what 

indicators you will be watching for an indication that the economy has reached a 

level of strength that the Federal Reserve can shift its accommodative posture by 

increasing interest rates, begin selling its long-term securities, or engage in a combination of both. 

The Federal Reserve has played a monumental role in management of the financial crisis that began in 2008. Although there is little doubt that the Federal Reserve’s actions have, on net, helped alleviate the financial crisis and economic downturn, many of the decisions made by the Federal Reserve have been quite controversial. The actions of the Federal Reserve and of the Federal Open Market Committee 

(FOMC) are highly dependent upon the members and makeup of the Federal Reserve. I have long been concerned that too much power is concentrated in the hands 

of Washington and New York to the detriment of the rest of the nation. 

Presently, the Federal Reserve Bank of New York enjoys a special status and 

privilege. Unlike other regional Federal Reserve Banks, it has a permanent seat on 

the FOMC. Unfortunately, the financial reform legislation passed out of the Senate 

Banking Committee on a strictly partisan vote goes in the wrong direction. The legislation would expand upon the special status enjoyed by the NY Fed by making 

its president a presidential appointment. This will only serve to politicize the FOMC 

and ensure that the interests of Washington and New York are even more dominant. 

When financial reform legislation reaches the Senate floor, it is my intention to 

offer an amendment that will eliminate the special status afforded to the Federal 

Reserve Bank of New York by restructuring the FOMC to ensure that the rest of 

the country has a voice equal to, if not greater than, Washington and New York. 

Another concerning aspect of the financial reform legislation recently passed out 

of the Senate Banking Committee is the elimination of the Federal Reserve’s supervision of nearly 6,000 small and midsized banks. The Kansas banking community 

is particularly troubled by the potential transfer of supervision from regional Federal Reserve Banks to the FDIC. The current relationship between the regional Federal Reserve banks and the institutions they monitor provides important insight 

into economic conditions facing small businesses around the country. A loss of this 

relationship and information could potentially strip the Fed of important information used in its policymaking decisions. 

My final concern with the legislation passed by the Senate Banking Committee 

is that it seems not to have ended the notion of ‘‘too big to fail,’’ but rather to have 

simply institutionalized it. 

I am interested to hear Mr. Bernanke’s opinion on the makeup of the FOMC, on 

the proposed change in supervision of small and midsized banks, as well as the proposed institutionalization of ‘‘too big to fail.’’ 

51 

Finally, although fiscal policy is outside the domain of the Federal Reserve, it 

nonetheless is an issue that significantly affects both current and future economic 

and financial conditions, not to mention the prospective climate and lifestyle we will 

leave to our children and grandchildren. 

After a record deficit in 2009, the budget deficit in 2010 will exceed 10% of GDP. 

That is, the U.S. will spend 71% more than it collects in tax revenues this year. 

And yet, despite the bleak fiscal outlook, the Administration and Congress continue 

to propose and pass massive new spending initiatives, such as the $2.6 trillion 

healthcare entitlement. These costly and most likely inefficient programs will stay 

with us forever and be paid for by hard working Americans. 

The situation is even more disturbing when you consider that 18%, nearly one out 

of every five dollars of personal income in the country is the result of a transfer 

payment from some level of government. In contrast, at the end of 2000, less than 

13% of personal income was derived from government transfer payments. This is an 

unsustainable trend. 

With publicly held debt set to reach 90% of GDP by 2020 under the President’s 

proposed budget, I am concerned that the U.S. is on the brink of a tipping point 

where our international creditors lose confidence in the United States. It seems that 

we are moving from a housing bubble to a government-debt bubble. But unlike Wall 

Street or smaller countries such as Greece, no one will be there to bail out the U.S. 

Rather, our failure to confront out-of-control spending and entitlement programs 

puts us at risk of suffering decades of substandard economic growth and of losing 

our prominent role in the global economy. 

PREPARED STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF

THE FEDERAL RESERVE SYSTEM

Chair Maloney, Vice Chairman Schumer, Ranking Members Brownback and 

Brady, and other members of the Committee, I am pleased to be here today to discuss economic and financial developments. I will also make a few remarks on the 

fiscal situation. 

THE ECONOMIC OUTLOOK

Supported by stimulative monetary and fiscal policies and the concerted efforts of 

policymakers to stabilize the financial system, a recovery in economic activity appears to have begun in the second half of last year. An important impetus to the 

expansion was firms’ success in working down the excess inventories that had built 

up during the contraction, which left companies more willing to expand production. 

Indeed, the boost from the slower drawdown in inventories accounted for the majority of the sharp rise in real gross domestic product (GDP) in the fourth quarter of 

last year, during which real GDP increased at an annual rate of 5.6 percent. With 

inventories now much better aligned with final sales, however, and with the support 

from fiscal policy set to diminish in the coming year, further economic expansion 

will depend on continued growth in private final demand. 

On balance, the incoming data suggest that growth in private final demand will 

be sufficient to promote a moderate economic recovery in coming quarters. Consumer spending continued to increase in the first two months of this year and has 

now risen at an annual rate of about 21⁄2 percent in real terms since the middle 

of 2009. In particular, after slowing in January and February, sales of new light 

motor vehicles bounced back in March as manufacturers offered a new round of incentives. Going forward, consumer spending should be aided by a gradual pickup 

in jobs and earnings, the recovery in household wealth from recent lows, and some 

improvement in credit availability. 

In the business sector, capital spending on equipment and software appears to 

have increased at a solid pace again in the first quarter. U.S. manufacturing output, 

which is benefiting from stronger export demand as well as the inventory adjustment I noted earlier, rose at an annual rate of 8 percent during the eight months 

ending in February. Also, as I will discuss further in a moment, financial conditions 

continue to strengthen, thus reducing an important headwind for the economy. 

To be sure, significant restraints on the pace of the recovery remain, including 

weakness in both residential and nonresidential construction and the poor fiscal 

condition of many state and local governments. Sales of new and existing homes 

dropped back in January and February, and the pace of new single-family housing 

starts has changed little since the middle of last year. Outlays for nonresidential 

construction continue to contract amid rising vacancy rates, falling property prices, 

and difficulties in obtaining financing. Pressures on state and local budgets, though 

52 

1For more on the SCAP, see Ben S. Bernanke (2009), ‘‘The Supervisory Capital Assessment 

Program,’’ speech delivered at the Federal Reserve Bank of Atlanta 2009 Financial Markets 

Conference, Jekyll Island, Ga., May 11, www.federalreserve.gov/newsevents/speech/ 

bernanke20090511a.htm; Board of Governors of the Federal Reserve System (2009), ‘‘Federal Reserve, OCC, and FDIC release results of the Supervisory Capital Assessment Program,’’ press 

release, May 7, www.federalreserve.gov/newsevents/press/bcreg/20090507a.htm; and Daniel K. 

Tarullo (2010), ‘‘Lessons from the Crisis Stress Tests,’’ speech delivered at the Federal Reserve 

Board International Research Forum on Monetary Policy, Washington, March 26, 

www.federalreserve.gov/newsevents/speech/tarullo20100326a.htm. 

tempered by ongoing federal support, have led to continuing declines in employment 

and construction spending by state and local governments. 

As you know, the labor market was particularly hard hit by the recession. Recently, we have seen some encouraging signs that layoffs are slowing and that employment has turned up. Manufacturing employment increased for a third month in 

March, and the number of temporary jobs—often a precursor of more permanent 

employment—has been rising since last October. New claims for unemployment insurance continue on a generally downward trend. However, if the pace of recovery 

is moderate, as I expect, a significant amount of time will be required to restore 

the 81⁄2 million jobs that were lost during the past two years. I am particularly concerned about the fact that, in March, 44 percent of the unemployed had been without a job for six months or more. Long periods without work erode individuals’ skills 

and hurt future employment prospects. Younger workers may be particularly adversely affected if a weak labor market prevents them from finding a first job or 

from gaining important work experience. 

On the inflation front, recent data continue to show a subdued rate of increase 

in consumer prices. For the three months ended in February, prices for personal 

consumption expenditures rose at an annual rate of 11⁄4 percent despite a further 

steep run-up in energy prices; core inflation, which excludes prices of food and energy, slowed to an annual rate of 1⁄2 percent. The moderation in inflation has been 

broadly based, affecting most categories of goods and services with the principal exception of some globally traded commodities and materials, including crude oil. 

Long-run inflation expectations appear stable; for example, expected inflation over 

the next 5 to 10 years, as measured by the Thomson Reuters/University of Michigan 

Surveys of Consumers was 23⁄4 percent in March, which is at the lower end of the 

narrow range that has prevailed for the past few years. 

FINANCIAL MARKET DEVELOPMENTS

Financial markets have improved considerably since I last testified before this 

Committee in May of last year. Conditions in short-term credit markets have continued to normalize; spreads in bank funding markets and the commercial paper market have returned to near pre-crisis levels. In light of these improvements, the Federal Reserve has largely wound down the extraordinary liquidity programs that it 

created to support financial markets during the crisis. The only remaining program, 

apart from the discount window, is the Term Asset-Backed Securities Loan Facility 

for loans backed by new-issue commercial mortgage-backed securities, and that facility is scheduled to close at the end of June. Overall, the Federal Reserve’s liquidity programs appear to have made a significant contribution to the stabilization of 

the financial system, and they did so at no cost to taxpayers and with no credit 

losses. 

The Federal Reserve also recently completed its purchases of $1.25 trillion of federal agency mortgage-backed securities and about $175 billion of agency debt. Purchases under these programs were phased down gradually, and to date, the transition in markets has been relatively smooth. The Federal Reserve’s asset-purchase 

program appears to have improved market functioning and reduced interest-rate 

spreads not only in the mortgage market but in other longer-term debt markets as 

well. 

On net, the financial condition of banking firms has strengthened markedly during recent quarters. Last spring, the Federal Reserve and other banking regulators 

evaluated the nation’s largest bank holding companies under the Supervisory Capital Assessment Program, popularly known as the stress test, to ensure that they 

would have sufficient capital to remain viable and to lend to creditworthy borrowers 

even in a worse-than-expected economic scenario.1 The release of the stress test results significantly increased market confidence in the banking system. Greater investor confidence in turn allowed the banks to raise substantial amounts of new equity capital and, in many cases, to repay government capital. The Federal Reserve 

and other bank regulators continue to encourage the banks to build up their capital, 

53 

2See Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision (2008), ‘‘Interagency Statement on Meeting the Needs of Creditworthy Borrowers,’’ joint press release, November 12, www.federalreserve.gov/newsevents/press/bcreg/20081112a.htm; Board of Governors of 

the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, and Conference of State Bank Supervisors (2010), ‘‘Regulators Issue Statement on Lending to Creditworthy Small Businesses,’’ joint press release, February 5, www.federalreserve.gov/newsevents/ 

press/bcreg/20100205a.htm; Board of Governors of the Federal Reserve System, Division of 

Banking Supervision and Regulation (2009), ‘‘Prudent Commercial Real Estate Loan Workouts,’’ 

Supervision and Regulation Letter SR 09-7 (October 30), www.federalreserve.gov/boarddocs/ 

srletters/2009/SR0907.htm; and Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Federal Reserve Board, Federal Financial Institutions Examination Council and Office of Thrift Supervision (2009), ‘‘Policy Statement on Prudent Commercial Real Estate Loan Workouts,’’ joint policy statement, October 30, www.federalreserve.gov/boarddocs/ 

srletters/2009/sr0907a1.pdf. 3See William J. Dennis (2010), ‘‘Small Business Credit in a Deep Recession,’’ National Federation of Small Business Research Foundation (Washington: NFIB, February), available at 

www.nfib.com/ResearchFoundation. 4See Board of Governors of the Federal Reserve System, ‘‘Senior Loan Officer Opinion Survey 

on Bank Lending Practices,’’ webpage, www.federalreserve.gov/boarddocs/SnLoanSurvey. 

ensure that they have adequate liquidity, improve their risk management, and restructure their employee compensation programs to better align risk and reward. 

Despite their stronger financial positions, banks’ lending to both households and 

businesses has continued to fall. The decline in large part reflects sluggish loan demand and the fact that many potential borrowers no longer qualify for credit, both 

results of a weak economy. The high rate of write-downs has also reduced the quantity of loans on banks’ books. Banks have also been conservative in their lending 

policies, imposing tough lending standards and terms; this caution reflects bankers’ 

concerns about the economic outlook and uncertainty about their own future losses 

and capital positions. 

The Federal Reserve has been working to ensure that our bank supervision does 

not inadvertently impede sound lending and thus slow the recovery. Achieving the 

appropriate balance between necessary prudence and the need to continue making 

sound loans to creditworthy borrowers is in the interest of banks, borrowers, and 

the economy as a whole. Toward this end, in cooperation with the other banking 

regulators, we have issued policy statements to bankers and examiners emphasizing 

the importance of lending to creditworthy customers, working with troubled borrowers to restructure loans, managing commercial real estate exposures appropriately, and taking a careful but balanced approach to small business lending.2 We 

have accompanied our guidance with training programs for both Federal Reserve 

and state examiners, and with outreach to bankers throughout the industry. For example, we just completed a training initiative that reached about 1,000 examiners. 

We are also conducting a series of meetings across the country with private- and 

public-sector partners to gather information about the credit needs of small businesses and how those needs can best be met. 

We have also stepped up our information gathering, so that we can better understand factors that may be inhibiting bank lending. These efforts include a survey 

by examiners of banks’ practices in working out loans, the results of which will 

serve as a baseline against which we will assess the effectiveness of our supervisory 

guidance. We are also obtaining additional information on small business credit conditions. For example, we assisted the National Federation of Independent Business 

in developing a survey to assess barriers to credit access by small businesses.3 And 

we are using our own Senior Loan Officer Opinion Survey on Bank Lending Practices to monitor changes in bank lending to small businesses.4

FISCAL POLICY

In addition to the near-term challenge of fostering improved economic performance and stronger labor markets, we as a nation face the difficult but essential task 

of achieving longer-term sustainability of the nation’s fiscal position. The federal 

budget deficit is on track this year to be nearly as wide as the $1.4 trillion gap recorded in fiscal year 2009. To an important extent, these extremely large deficits 

are the result of the effects of the weak economy on revenues and outlays, along 

with the necessary actions that were taken to counter the recession and restore financial stability. But an important part of the deficit appears to be structural; that 

is, it is expected to remain even after economic and financial conditions have returned to normal. 

In particular, the Administration and the Congressional Budget Office (CBO) 

project that the deficit will recede somewhat over the next two years as the temVerDate Nov 24 2008 11:26 Aug 25, 2010 Jkt 055045 PO 00000 Frm 00057 Fmt 6601 Sfmt 6621 C:\DOCS\57057.TXT SHAUN PsN: DPROCT
54 

5These figures have been calculated by the Federal Reserve using the CBO’s estimates of the 

budgetary effects of selected policy alternatives to adjust the CBO’s baseline budget projection 

released in a recent report (see Congressional Budget Office (2010), The Budget and Economic 

Outlook: Fiscal Years 2010 to 2020 (Washington: CBO, January), also available at www.cbo.gov/ 

ftpdocs/108xx/doc10871/frontmatter.shtml). The specific alternative policies used in these calculations included the CBO’s estimates of the effects of reducing troop levels in overseas military operations to 60,000 by 2015, increasing regular discretionary appropriations at the rate 

of growth of nominal GDP, extending all expiring tax provisions, and indexing the alternative 

minimum tax for inflation. 

porary stimulus measures wind down and as economic recovery leads to higher revenues. Thereafter, however, the annual deficit is expected to remain high through 

2020, in the neighborhood of 4 to 5 percent of GDP. Deficits at that level would lead 

the ratio of federal debt held by the public to the GDP, already expected to be greater than 70 percent at the end of fiscal 2012, to rise considerably further. This baseline projection assumes that most discretionary spending grows more slowly than 

nominal GDP, that no expiring tax cuts are extended, and that current provisions 

that provide most taxpayers relief from the alternative minimum tax are not further 

extended. Under an alternative scenario that drops those assumptions, the deficit 

at the end of 2020 would be 9 percent of GDP and the federal debt would balloon 

to more than 100 percent of GDP.5

Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance. A 

credible plan for fiscal sustainability could yield substantial near-term benefits in 

terms of lower long-term interest rates and increased consumer and business confidence. Timely attention to these issues is important, not only for maintaining 

credibility, but because budgetary changes are less likely to create hardship or dislocations when the individuals affected are given adequate time to plan and adjust. 

In other words, addressing the country’s fiscal problems will require difficult 

choices, but postponing them will only make them more difficult. 

Thank you. I would be pleased to take your questions. 

PREPARED STATEMENT OF REPRESENTATIVE ELIJAH E. CUMMINGS

Thank you, Madam Chair. 

It is always a privilege to have Dr. Bernanke before us, and this latest installation is no different. 

After nearly falling off a cliff, the U.S. economy remains teetering on the edge, 

and the policies adopted by Dr. Bernanke, President Obama, and Secretary 

Geithner will determine how sure our footing is for the recovery. 

Through a series of extraordinary measures to create liquidity in the economy and 

support bank capitalization, the Federal Reserve has helped create stability in the 

financial sector. 

The stock market topped 11,000 recently, and banks are both recording profits 

and paying bonuses. 

However, I have a hard time trumpeting our success to my community in Balti- more. The minority business leaders with whom I met yesterday are struggling to keep 

their doors open, for one simple reason: They cannot access lines of credit. 

These are successful, capable firms, and they are shut out of the market because 

they cannot get a simple business loan. 

I am incapable of exaggerating how upset I was when I heard them describe how 

they may have to shut down because they could not maintain financing. 

During the recession, the Federal Reserve and Treasury placed the utmost importance on maintaining the market for short-term commercial paper and other forms 

of overnight financing. 

Investment banks that recklessly leveraged themselves to the hilt, holding our 

economy hostage, would have failed if we shut off the overnight financing faucet. 

So we left the faucet on, and made it extremely inexpensive to access. The Federal 

Reserve and the taxpayers successfully funded the ‘‘no trader left behind’’ policy. 

Now, when our neighborhood contractors, grocery stores, accounting firms, and 

cleaning businesses need a loan to bid on a government contract, or a line of credit 

to continue to make payroll each month, the faucet turns up dry for them. 

I am pleased with Dr. Bernanke’s efforts, and I do not doubt his motivations in 

the least. 

But I just cannot see our efforts as truly successful when not just one, but many, 

small and minority firms are forced to shut their doors for a simple lack of credit. 

55 

The Federal Reserve, and this Congress, owes them more. 

Hearings like this one today, that embrace honest and frank discussions of policy, 

will help move us toward meeting our obligations to these constituent firms, and 

the families who depend on them. 

With that, Madam Chair, I look forward to our discussion with Dr. Bernanke, and 

I yield back the balance of my time. 

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Æ 


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