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62–643 PDF 2010

S. HRG. 111–742 

FEDERAL RESERVE’S SECOND MONETARY POLICY 

REPORT FOR 2010 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

ON 

OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSUANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978 

JULY 21, 2010 

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

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

JUDD GREGG, New Hampshire 

EDWARD SILVERMAN, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

AMY FRIEND, Chief Counsel 

MARC JARSULIC, Chief Economist 

JULIE CHON, Senior Policy Adviser 

LISA FRUMIN, Legislative Assistant 

MARK OESTERLE, Republican Chief Counsel 

JEFF WRASE, Republican Chief Economist 

ANDREW OLMEM, Republican Senior Counsel 

DAWN RATLIFF, Chief Clerk 

LEVON BAGRAMIAN, Hearing Clerk 

WILLIAM FIELDS, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

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C O N T E N T S 

WEDNESDAY, JULY 21, 2010 

Page 

Opening statement of Chairman Dodd .................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 3 

Senator Bunning ............................................................................................... 4 

WITNESS 

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

System ................................................................................................................... 5 

Prepared statement .......................................................................................... 48 

Responses to written questions of: 

Senator Schumer ....................................................................................... 72 

Senator Brown ........................................................................................... 73 

Senator DeMint ......................................................................................... 74 

Senator Vitter ............................................................................................ 75 

Senator Hutchison ..................................................................................... 79 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Monetary Policy Report to the Congress dated July 21, 2010 ............................. 82 

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(1) 

FEDERAL RESERVE’S SECOND MONETARY 

POLICY REPORT FOR 2010 

WEDNESDAY, JULY 21, 2010 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 2:03 p.m., in room SD–G50, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. 

We are here today to hear from the Chairman of the Federal Reserve on the semiannual monetary policy report to the Congress, 

and, Mr. Chairman, we welcome you to our Committee once again. 

We thank you for your service to our country, and at least on my 

part, let me thank you and congratulate you for the tremendous 

work you and the staff of the Federal Reserve have been doing 

through these very difficult days in our country, and we are very 

fortunate to have you, in my view, as the Chair. 

I want to make some brief opening comments, and then I will 

turn to Senator Shelby for any opening comments he may have, 

and I will leave it up to the members themselves—we do not have 

a full complement here, but there are several who would like to be 

heard briefly before we turn to you for your thoughts, and then the 

questions we will have for you this afternoon. 

Let me express my gratitude to the Chairman and the other 

Members of the Committee. Normally, we would have had this 

Committee hearing in the morning, and because of the bill-signing 

ceremony this morning, we delayed it until this afternoon. So I appreciate you being able to accommodate us. 

We are pleased to welcome you again, Mr. Chairman, to the 

Committee. Today he will deliver his semiannual monetary policy 

report, as I have said, to the Congress. The timing of this testimony could not be better, in our view. Key questions about both 

financial regulation and our current economic policy will be answered in the coming months. The Federal Reserve will play a key 

role in answering both of those series of questions. 

Today the President, as many know, signed into law the Wall 

Street reform bill. This bill, in my view, is a comprehensive response to our financial crisis that devastated our economy. The bill 

demands that regulators change the oversight of the financial markets and financial institutions in very fundamental ways. It sets up 

a Financial Stability Oversight Council which will function as an 
2 

early warning system, we hope, be responsible for spotting and addressing threats to the overall financial stability of our country and 

institutions and even in other nations around the world. It creates 

a new orderly liquidation authority to provide for the wind-down of 

large financial institutions whose failure threatens overall financial 

stability. 

Further, it makes the markets for financial derivatives much 

more transparent. It requires regulators to establish capital standards and margin requirements for large derivative dealers. That 

will reduce the risk, we believe, posed by these financial instruments. 

Further, it limits the ability of banks and their owners to engage 

in risky trading strategies or to invest in hedge funds or private 

equity funds. Further, it requires higher prudential standards, including capital and liquidity for large bank holding companies and 

nonbank financial firms that have the potential to put the financial 

system at risk. 

The bill establishes for the first time a Consumer Financial Protection Bureau with a mandate to focus exclusively on protecting 

consumers from financial abuses and ensuring that consumers get 

the financial information that they need in a form that they can 

understand. 

But while the bill gives regulators substantial new authority, it 

does not contain the specific regulations that will translate authority into action. Congress is not in the position to write them. It is 

above the capacity of this institution to do that. Those rules and 

regulations require expert knowledge, and they must adapt over 

time to changing circumstances. Congress must rely on regulatory 

agencies to implement the goals of this reform bill. However, it is 

the role of Congress to oversee the actions of our regulators, and 

given the importance of getting financial reform right, it is a role 

that should be pursued with great vigor, attention, and diligence 

in the coming months and years. 

The Federal Reserve is one of the institutions on which Congress 

will rely most heavily. The additional authority it has been given 

is remarkable in this bill. The Federal Reserve will be a member 

of the Oversight Council, and the insights of its supervisors and researchers will play an important part in identifying developing 

risks to the financial system. It will be the Fed’s job to set the 

heightened prudential standards for the Nation’s large banks and 

nonbank financial companies designated by the Oversight Council. 

The Fed will help to decide when a failing financial firm needs to 

be put into the new resolution process, and the Fed will have the 

responsibility to oversee important financial utilities, including, for 

example, the clearinghouses that will become increasingly central 

in derivatives markets. 

As you are aware, Mr. Chairman, I have been critical of the Fed’s 

past performance and, in fact, advocated striking the Fed’s supervisory role. While the Fed managed the financial crisis superbly, in 

my view, it did less well in the run-up to the crisis. It failed to use 

the authority in HOEPA to prevent the serious deterioration in 

mortgage underwriting standards and abusive and fraudulent 

mortgage lending practices that, in my view, fueled the financial 

crisis we have been going through. It also failed, in my view, to 
3 

adequately supervise some of our largest bank holding companies. 

These holding companies were allowed to accumulate significant 

exposures to mortgage-related assets. The losses they suffered 

when the house price bubble burst helped to produce the financial 

crisis from which we have not yet fully recovered. 

However, as the financial reform bill worked its way through the 

legislative process, the Congress in its wisdom decided not only to 

preserve the Fed’s existing supervisory power but to bolster it. Indeed, Mr. Chairman, you sought those additional powers, and as a 

result, the Fed is central to maintaining our financial stability. 

I think it is fair to say that the success of the financial reform 

law depends in large measure on how the Federal Reserve meets 

its new responsibilities. It is my fervent hope that under your stewardship the Fed will exercise these authorities wisely. 

Of course, the financial reform law left the Fed’s responsibilities 

for monetary policy unchanged, and this gives the Fed even more 

crucial work to do. The devastation brought by the financial crisis 

is still with us, and while output has begun to grow, it is not growing rapidly enough to replace the millions of jobs lost during this 

crisis. In the first quarter of this year, GDP grew at an 

unimpressive 2.7 percent. The unemployment rate in June was still 

at 9.5 percent, and nearly 7 million workers have been unemployed 

for 27 weeks or more. 

As you have acknowledged in previous testimony, Mr. Chairman, 

the effects of long-term unemployment, which destroys job skills 

and demoralizes those who suffer from it, has the potential to create serious long-term problems in our Nation. And although firms 

with access to credit markets are able to borrow at relatively low 

interest rates, the businesses and households that depend upon 

banks for credit continue to find difficulty in accessing credit. Apart 

from inventories, investment demand remains anemic, and real 

fixed investment declined in the first quarter of this year. 

In this less than robust environment, it is not surprising that 

price inflation is hardly an issue. Over the past year, the CPI has 

increased by only 1.1 percent, and core CPI has increased by only 

0.9 percent. In short, it looks like our economy is in need of additional help. It is evident that the Fed takes this issue seriously, 

and I applaud you for that. The Federal funds rate is now near 

zero, and the banks are now sitting on extraordinary quantities of 

excessive reserves. But one of the issues I would like to explore 

with you today is whether the Fed can do more to help expand output and employment in our Nation. 

Now I would like to turn to my good friend and colleague, the 

former Chairman of the Committee, Senator Shelby, for any opening comments he may have. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Chairman Dodd. Welcome to the 

Committee again, Chairman Bernanke. You have been with us for 

many years now on many occasions. 

Mr. Chairman, judging by the minutes of the Fed’s June Open 

Market Committee meeting and statements by Fed officials, uncertainty about the economic outlook has risen recently, and there is 
4 

a growing divergence of views. Recent data suggests that the already modest recovery may have hit a soft patch. 

We have also recently experienced another flight to quality and 

elevated uncertainty given the events surrounding Greece and others. Although some concerns have waned, we should continue, I believe, to monitor the situation in Europe and learn from their fiscal 

difficulties. 

Given market uncertainties and the possibility of a double-dip recession, there has been a modest change in the Fed’s outlook as reflected in its recent policy discussions about whether inflation or 

deflation is the predominant current threat. 

There are questions about what the Fed’s contingency plans are 

in the event of a double-dip recession or persistent deflationary 

pressures. There are questions about whether the Fed could combat deflationary pressures or whether the U.S. would have any experience like Japan. There are questions about whether the Fed 

has changed its focus from executing an exit strategy to lowering 

interest rates on reserves and possibly further ballooning its balance sheet with more asset purchases. 

This is especially concerning because the purchase of even more 

long-term assets may channel credit to favored segments of the 

markets at the expense of others. 

In the current environment in which the distinction between fiscal and monetary policy is sometimes blurred, Fed transparency 

about its plans I think is crucial. I believe that it is important for 

Congress to know what options are on the table and where the Fed 

may be headed. Chairman Bernanke, as the economic outlook has 

become a bit more cloudy of late, I look forward to hearing your 

views here today, and I am sure all of us have a number of questions for you. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator Shelby. 

Any of my colleagues want to be heard on this? Anyone here on 

the Democratic side? Senator Bunning. 

Senator BUNNING. Very short. 

Chairman DODD. Certainly. 

STATEMENT OF SENATOR JIM BUNNING 

Senator BUNNING. It is amazing to me how two people can differ 

on a financial reserve law than the Chairman and myself. Some of 

us think that we did not do enough and we did not hit the heart 

of the problem. We did not touch Fannie Mae or Freddie Mac. Derivatives, credit default swaps, we just barely skimmed the top. 

And we did not do anything but put into the law too big to fail. 

So, Chairman, I am anxious to hear what the outlook for the economy is. 

Thank you, Mr. Chairman. 

Chairman DODD. Anyone else wish to be heard? Any opening 

comments at all? 

Senator CORKER. Mr. Chairman, I do not want to make an opening comment. I know you know that well. But how long is the 

Chairman going to be with us today, just so we can organize our 

thinking about questions? And how long will the question period 

be? 
5 

Chairman DODD. Well, a good part of the afternoon, my guess. 

I do not know. Votes on the floor may disrupt us. I do not know 

what the Majority and Minority Leaders’ plans are for voting. I 

know there may be four or five votes at some point. And I think 

under the rules there are about 10 minutes—some five amendments that the minority has on the bill, and each amendment could 

take 10 minutes of debate, plus the vote itself. So I do not know 

when that will come. But that could disrupt the flow, I will tell you 

that much. 

Senator CORKER. Do you expect one round or two, do you know? 

Chairman DODD. I will stay as long as people want and try and 

get through as much as we can. 

Mr. Chairman, welcome. 

STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. BERNANKE. Thank you. Chairman Dodd, Senator Shelby, and 

Members of the Committee, I am pleased to present the Federal 

Reserve’s semiannual Monetary Policy Report to the Congress. 

The economic expansion that began in the middle of last year is 

proceeding at a moderate pace, supported by stimulative monetary 

and fiscal policies. Although fiscal policy and inventory restocking 

will likely be providing less impetus to the recovery than they have 

in recent quarters, rising demand from households and businesses 

should help sustain growth. In particular, real consumer spending 

appears to have expanded at about a 21⁄2-percent annual rate in 

the first half of this year, with purchases of durable goods increasing especially rapidly. However, the housing market remains weak, 

with the overhang of vacant or foreclosed houses weighing on home 

prices and construction. 

An important drag on household spending is the slow recovery in 

the labor market and the attendant uncertainty about job prospects. After 2 years of job losses, private payrolls expanded at an 

average of about 100,000 per month during the first half of this 

year, a pace insufficient to reduce the unemployment rate materially. In all likelihood, a significant amount of time will be required 

to restore the nearly 81⁄2 million jobs that were lost over 2008 and 

2009. Moreover, nearly half of the unemployed have been out of 

work for longer than 6 months. Long-term unemployment not only 

imposes exceptional near-term hardships on workers and their families, it also erodes skills and may have long-lasting effects on 

workers’ employment and earnings prospects. 

In the business sector, investment in equipment and software appears to have increased rapidly in the first half of the year, in part 

reflecting capital outlays that had been deferred during the downturn and the need of many businesses to replace aging equipment. 

In contrast, spending on nonresidential structures—weighed down 

by high vacancy rates and tight credit—has continued to contract, 

though some indicators suggest that the rate of decline may be 

slowing. Both U.S. exports and U.S. imports have been expanding, 

reflecting growth in the global economy and the recovery of world 

trade. Stronger exports have in turn helped foster growth in the 

U.S. manufacturing sector. 
6 

Inflation has remained low. The price index for personal consumption expenditures appears to have risen at an annual rate of 

less than 1 percent in the first half of the year. Although overall 

inflation has fluctuated, partly reflecting changes in energy prices, 

by a number of measures underlying inflation has trended down 

over the past 2 years. The slack in labor and product markets has 

damped wage and price pressures, and rapid increases in productivity have further reduced producers’ unit labor costs. 

My colleagues on the Federal Open Market Committee and I expect continued moderate growth, a gradual decline in the unemployment rate, and subdued inflation over the next several years. 

In conjunction with the June FOMC meeting, Board members and 

reserve bank presidents prepared forecasts of economic growth, unemployment, and inflation for the years 2010 through 2012 and 

over the longer run. The forecasts are qualitatively similar to those 

we released in February and in May, although progress in reducing 

unemployment is now expected to be somewhat slower than we 

previously projected, and near-term inflation now looks likely to be 

a little lower. Most FOMC participants expect real GDP growth of 

3 to 31⁄2 percent in 2010, and roughly 31⁄2 to 41⁄2 percent in 2011 

and 2012. The unemployment rate is expected to decline to between 

7 and 71⁄2 percent by the end of 2012. Most participants viewed uncertainty about the outlook for growth and unemployment as greater than normal, and the majority saw the risks to growth as 

weighted to the downside. Most participants projected that inflation will average only about 1 percent in 2010 and that it will remain low during 2011 and 2012, with the risks to the inflation outlook roughly balanced. 

One factor underlying the Committee’s somewhat weaker outlook 

is that financial conditions—though much improved since the depth 

of the financial crisis—have become less supportive of growth in recent months. Notably, concerns about the ability of Greece and a 

number of other euro-area countries to manage their sizable budget 

deficits and high levels of public debt spurred a broad-based withdrawal from risk taking in global financial markets in the spring, 

resulting in lower stock prices and wider risk spreads in the United 

States. In response to these fiscal pressures, European leaders put 

in place a number of strong measures, including an assistance 

package for Greece and 500 billion euros of funding to backstop the 

near-term financing needs of euro-area countries. To help ease 

strains in U.S. dollar funding markets, the Federal Reserve reestablished temporary dollar liquidity swap lines with the ECB and 

several other major central banks. To date, drawing under the 

swap lines has been limited, but we believe that the existence of 

these lines has increased confidence in dollar funding markets, 

helping to maintain credit availability in our own financial system. 

Like financial conditions generally, the state of the U.S. banking 

system has also improved significantly since the worst of the crisis. 

Loss rates on most types of loans seem to be peaking, and in the 

aggregate, bank capital ratios have risen to new highs. However, 

many banks continue to have a large volume of troubled loans on 

their books, and bank lending standards remain tight. With credit 

demand weak and with banks writing down problem credits, bank 

loans outstanding have continued to contract. Small businesses, 
7 

which depend importantly on bank credit, have been particularly 

hard hit. At the Federal Reserve, we have been working to facilitate the flow of funds to creditworthy small businesses. Along with 

the other supervisory agencies, we have issued guidance to banks 

and examiners emphasizing that lenders should do all they can to 

meet the needs of creditworthy borrowers, including small businesses. We also have conducted extensive training programs for our 

bank examiners, with the message that lending to viable small 

businesses is good for the safety and soundness of our banking system as well as for our economy. We continue to seek feedback from 

both banks and potential borrowers about credit conditions. For example, over the past 6 months we have convened more than 40 

meetings around the country of lenders, small business representatives, bank examiners, Government officials, and other stakeholders to exchange ideas about the challenges faced by small businesses, particularly in obtaining credit. A capstone conference on 

addressing the credit needs of small businesses was held at the 

Board of Governors in Washington last week. This testimony includes an addendum that summarizes the findings of this effort 

and possible next steps. 

The Federal Reserve’s response to the financial crisis and the recession has included several components. First, in response to the 

periods of intense illiquidity and dysfunction in financial markets 

that characterized the crisis, the Federal Reserve undertook a 

range of measures and set up emergency programs designed to provide liquidity to financial institutions and markets in the form of 

fully secured, mostly short-term loans. Over time, these programs 

helped to stem the panic and to restore normal functioning in a 

number of key financial markets, supporting the flow of credit to 

the economy. As financial markets stabilized, the Federal Reserve 

shut down most of these programs during the first half of this year 

and took steps to normalize the terms on which it lends to depository institutions. The only such programs currently open to provide 

new liquidity are the recently reestablished dollar liquidity swap 

lines with major central banks that I noted earlier. Importantly, 

our broad-based programs achieved their intended purposes with 

no loss to the taxpayers. All of the loans extended through the 

multiborrower facilities that have come due have been repaid in 

full, with interest. In addition, the Board does not expect the Federal Reserve to incur a net loss on any of the secured loans provided during the crisis to help prevent the disorderly failure of systemically significant financial institutions. 

A second major component of the Federal Reserve’s response to 

the financial crisis and recession has involved both standard and 

less conventional forms of monetary policy. Over the course of the 

crisis, the FOMC aggressively reduced its target for the Federal 

funds rate to a range of 0 to 1⁄4 percent, which has been maintained 

since the end of 2008. And as indicated in the statement released 

after the June meeting, the FOMC continues to anticipate that economic conditions—including low rates of resource utilization, subdued inflation trends, and stable inflation expectations—are likely 

to warrant exceptionally low levels of the Federal funds rate for an 

extended period. 
8 

In addition to the very low Federal funds rate, the FOMC has 

provided monetary policy stimulus through large-scale purchases of 

longer-term Treasury debt, Federal agency debt, and agency mortgage-backed securities, or MBS. A range of evidence suggests that 

these purchases helped to improve conditions in mortgage markets 

and other private credit markets and put downward pressure on 

longer-term private borrowing rates and spreads. 

Compared with the period just before the financial crisis, the 

System’s portfolio of domestic securities has increased from about 

$800 billion to $2 trillion and has shifted from consisting of 100 

percent Treasury securities to having almost two-thirds of its investments in agency-related securities. In addition, the average 

maturity of the Treasury portfolio has nearly doubled, from 31⁄2

years to almost 7 years. The FOMC plans to return the System’s 

portfolio to a more normal size and composition over the longer 

term, and the Committee has been discussing alternative approaches to accomplishing that objective. 

One approach is for the committee to adjust its reinvestment policy—that is, its policy for handling repayments of principal on the 

securities—to gradually normalize the portfolio over time. Currently, repayments of principal from agency debt and MBS are not 

being reinvested, allowing the holdings of these securities to run off 

as the repayments are received. By contrast, the proceeds from maturing Treasury securities are being reinvested in new issues of 

Treasury securities with similar maturities. At some point, the 

committee may want to shift its reinvestment of the proceeds from 

maturing Treasury securities to shorter-term issues so as to gradually reduce the average maturity of our Treasury holdings toward 

pre-crisis levels, while leaving the aggregate value of those holdings unchanged. At this juncture, however, no decision to change 

reinvestment policy has been made. 

A second way to normalize the size and composition of the Federal Reserve’s securities portfolio would be to sell some holdings of 

agency debt and MBS. Selling agency securities, rather than simply letting them run off, would shrink the portfolio and return it 

to a composition of all Treasury securities more quickly. FOMC 

participants broadly agree that sales of agency-related securities 

should eventually be used as part of the strategy to normalize the 

portfolio. Such sales will be implemented in accordance with a 

framework communicated well in advance and will be conducted at 

a gradual pace. Because changes in the size and composition of the 

portfolio could affect financial conditions, however, any decisions 

regarding the commencement or pace of asset sales will be made 

in light of the committee’s evaluation of the outlook for employment and inflation. 

As I noted earlier, the FOMC continues to anticipate that economic conditions are likely to warrant exceptionally low levels of 

the Federal funds rate for an extended period. At some point, however, the committee will need to begin to remove monetary policy 

accommodation to prevent the buildup of inflationary pressures. 

When that time comes, the Federal Reserve will act to increase 

short-term interest rates by raising the interest rate it pays on reserve balances that depository institutions hold at Federal reserve 

banks. To tighten the linkage between the interest rate paid on re-
9 

serves and other short-term market interest rates, the Federal Reserve may also drain reserves from the banking system. Two tools 

for draining reserves from the system are being developed and tested and will be ready when needed. First, the Federal Reserve is 

putting in place the capacity to conduct large reverse repurchase 

agreements with an expanded set of counterparties. Second, the 

Federal Reserve has tested a term deposit facility, under which instruments similar to the certificates of deposit could be auctioned 

to depository institutions. 

Of course, even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy 

accommodation, we also recognize that the economic outlook remains unusually uncertain. We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to 

full utilization of our Nation’s productive potential in a context of 

price stability. 

Last week, the Congress passed landmark legislation to reform 

the financial system and financial regulation, and the President 

signed the bill into law this morning. That legislation represents 

significant progress toward reducing the likelihood of future financial crises and strengthening the capacity of financial regulators to 

respond to risks that may emerge. Importantly, the legislation encourages an approach to supervision designed to foster the stability 

of the financial system as a whole as well as the safety and soundness of individual institutions. Within the Federal Reserve, we 

have already taken steps to strengthen our analysis and supervision of the financial system and systemically important financial 

firms in ways consistent with the new legislation. In particular, 

making full use of the Federal Reserve’s broad expertise in economics, financial markets, payment systems, and bank supervision, we 

have significantly changed our supervisory framework to improve 

our consolidated supervision of large, complex bank holding companies, and we are enhancing the tools we use to monitor the financial sector and to identify potential systemic risks. In addition, the 

briefings prepared for meetings of the FOMC are now providing increased coverage and analysis of potential risks to the financial 

system, thus supporting the Federal Reserve’s ability to make effective monetary policy and to enhance financial stability. 

Much work remains to be done, both to implement through regulation the extensive provisions of the new legislation and to develop 

the macroprudential approach called for by the Congress. However, 

I believe that the legislation, together with stronger regulatory 

standards for bank capital and liquidity now being developed, will 

place our financial system on a sounder foundation and minimize 

the risk of a repetition of the devastating events of the past 3 

years. 

Thank you, Mr. Chairman. I would be pleased to respond to your 

questions. 

Chairman DODD. Thank you very much, and what I will do is I 

will ask the Clerk to—let us try 7 minutes a round. Again, I won’t 

be banging down the gavel too hard, but if people try and keep 

them in that timeframe, it will be helpful since we have got a pretty good turnout, if we can. 
10 

Let me begin by raising the issue—Senator Shelby made note of 

the reference to the recent crisis in Europe. Let me start out there, 

if I can. As the European Union announced its financial stabilization program in May, you briefed us, in fact, here on the Committee on the Fed’s decision to temporarily reopen the dollar swap 

lines with the ECB and other foreign central banks to support liquidity in the dollar funding markets. Clearly, the Fed identified 

a need to protect the American economy from events in Europe. 

With continued downgrades of European sovereigns—I noticed 

Ireland, just the other day, they downgraded a bit—European bank 

stress test results expected this week, and again, there has been 

a lot written about that, how successful they may be, and the uncertainty about future economic growth, as well, what challenges 

lie ahead, in your view, for the efforts you and your counterparts 

in Europe have made to stabilize the financial system? 

Mr. BERNANKE. Well, Senator, as I mentioned, concerns about 

the European situation created some problems in financial markets 

this spring, which spilled over into our own financial markets, as 

well. The Europeans have been quite aggressive in addressing 

these problems. As you know, they, together with the IMF, have 

provided a financial program for Greece and they have collectively 

developed a stabilization fund of 500 billion Euros, together with 

additional funds potentially from the IMF, to be used to ensure 

that countries under fiscal stress will be able to make their payments and to finance their governments. And indeed, in the last 

few weeks, we have seen some of the troubled governments being 

able to go back to the market, which I think is encouraging. 

The Federal Reserve’s liquidity swap lines were a relatively 

minor part of that effort, but I think they have provided some assurance that dollar funding markets will be sufficiently liquid and 

have reduced the risks to our own financial system. 

The other thing that the Europeans are doing is trying to duplicate the success of the American bank stress tests of a little more 

than a year ago by conducting a set of stress tests whose results 

are supposed to be released later this week. Of course, it remains 

to be seen how effective those stress tests are, but it is clear that 

the Europeans are very focused and very committed to addressing 

these issues, and my sense is that the financial market concern 

about European problems has diminished to some extent recently, 

which is, in turn helpful to our economy. 

But we will at the Federal Reserve continue to be in close contact 

with our colleagues in Europe. I am going to Europe for this weekend. And we will continue to monitor developments and their potential impact to the U.S. economy. 

Chairman DODD. Well, I appreciate that, and I think the committee would probably as a general matter like to be kept abreast 

and informed as to your observations regarding their progress. Obviously, a lot of difficulty. While they share common currencies and 

so forth, the differences in fiscal policies in the various countries 

make their ability to resolve these in some sort of united fashion 

even more difficult, it seems. But I hope your assessment is correct. 

Let me, if I can, raise an issue that has been—and it is not your 

job, obviously, to get into policy debates here on specific legislative 

matters, so I am not going to try and pin you down on that. But 
11 

we are going through the debate here now. Obviously, we have got 

slow growth, as you pointed out, high unemployment, low interest 

rates, low inflation. And again, obviously, we have got deficits that 

are mounting. And so the debate back and forth is to where is the 

balance? How do we strike here, an austerity program or do we try 

and stimulate some economic growth in the country at the same 

time and how do we do that. 

You are a student of the Depression era, and there are many who 

have written about the failure of the New Deal administration 

after the first couple of years to not sustain a policy of economic 

growth, in fact, follow an austerity path, again, using that language. And those who have argued that because they did that, they 

delayed, of course, the second or more—or delayed recovery during 

that period of time. 

Give us your take on this as a general matter. And again, I am 

not asking you to engage in the debate about specific budget requests and the like. But stepping back sort of with a macro approach here, what do you advise us in the legislative branch as to 

how to approach this debate, because obviously it is tearing us a 

bit apart up here and we need to strike some balance in all of this. 

Deficit reduction is clearly a goal we have got to focus on, but also, 

simultaneously, we have got to try and stimulate economic growth 

in the country which requires some government activity, as well. 

Mr. BERNANKE. Mr. Chairman, as you know, this is very controversial and there has been a lot of debate on both sides. On the 

one hand, and I will come back to a kind of recommendation, but 

on the one hand, you have folks who are focusing on the need for 

government support in the current economic environment. Obviously, in the United States and in many other countries, we have 

a great deal of excess capacity. Private spending is weak. And so 

the argument is that additional fiscal support might be helpful to 

the economy. 

Chairman DODD. Right. 

Mr. BERNANKE. On the other side, you have people who are concerned about the longer-term deficit situation, are worried that financial markets might respond in an adverse way or confidence 

might respond in an adverse way to signals that any government 

is not committed to long-term fiscal sustainability. 

So there is some truth to both of those arguments. I think the 

right way to combine them is to think about the entire trajectory 

of fiscal policy. I do believe that at the current moment, that the 

large deficits, as unattractive as they are, are important for supporting economic activity and they were important also in restoring 

financial stability, and so I think they were justified in that respect 

and I would be reluctant to withdraw that support too precipitously 

in the near term. 

At the same time, to maintain confidence and keep interest rates 

low, it is very important that we have a strong and credible plan 

for reducing deficits over the next few years. 

So if we think of this instead of either/or and think of it as a 

combination and think about the trajectory, the best approach, in 

my view, is to maintain some fiscal support for the economy in the 

near term, but to combine that with serious attention to addressing 
12 

what are very significant fiscal issues for the United States in the 

medium term. 

Chairman DODD. Let me pick up on that, because again, you and 

I have chatted over the years and I have been very impressed with 

some of your writings about the long-term effects of unemployment. 

We have a tendency to see these matters where we have got a certain level of unemployment. Then things happen and we get people 

back to work. That is obviously the goal. 

But talk to us about the long-term effects of unemployment. 

What worries you about that, in a brief comment, if you would? 

Mr. BERNANKE. Well, this is part of the reason why I am concerned about the current situation and why I made reference in my 

remarks to the fact that, currently, about half of the unemployed 

have been unemployed for 6 months or more. So in terms of longterm unemployment, this is the worst labor market, the worst episode since the Great Depression. 

Of course, long-term unemployment is very stressful for the unemployed and their families, being without income or reduced income for such a long period of time. But even from the perspective 

of economic growth and stability, as we have seen in other countries, people who are unemployed for a long period of time often see 

their skills atrophy or see their skills become irrelevant to the new 

economy or the way the economy is developing, or they may become 

demoralized and may become separated from the labor market. Indeed, long-term unemployment sometimes becomes permanent unemployment. 

So not only for the sake of the unemployed and for the shortterm strength of the economy, but also for our long-term viability 

and international competitiveness, I think we need to be very seriously concerned about the implications of long-term unemployment 

for skills, for labor force attachment, for long-term earnings and 

employment opportunities. 

Chairman DODD. Well, I appreciate that, and obviously that was 

the point I was trying to make here. Your point is that there is 

enough empirical data on this and other examples that have occurred so that is not mere speculation about what can happen in 

terms of job skill levels and the ability of people then to recover 

and get back on their feet, not just individually, but overall the 

economy of a country is affected by it. 

Mr. BERNANKE. There is a good bit of research on this question. 

Chairman DODD. I thank you for that. 

Let me turn to Senator Shelby. 

Senator SHELBY. Mr. Chairman, we all, I think, agree that longterm unemployment problems is a cancer dealing with our economy 

and people’s operations. On the other hand, a spiraling deficit and 

accumulated debt like we are going through now is also a real 

problem. And the question is, how do we balance that and how 

much time do we have, isn’t it? 

Mr. BERNANKE. Well, Senator, as I responded to the Chairman, 

I absolutely agree that this is a concern, that if there is a loss of 

confidence in the financial markets that the United States is committed to and will achieve long-term fiscal sustainability, then the 

implications could be bad, not only for our long-term growth pros-
13 

pects, but they could actually hurt the current recovery for higher 

interest rates or higher inflation expectations. 

So it is very important to demonstrate as best we can, given the 

difficulties of committing future Congresses and so on, but to demonstrate as best we can that we are serious about addressing longterm issues. And so I don’t think it is either/or. I think you really 

need to do both. 

Senator SHELBY. But accumulating debt after debt each year is 

not good for anybody in this country, is it—— 

Mr. BERNANKE. I agree. 

Senator SHELBY. ——short term, right? 

Mr. BERNANKE. If the debt continues to accumulate and becomes 

unsustainable, as the Congressional Budget Office believes our current policies are, then the only way that can end is through a crisis 

or some other very bad outcome. 

Senator SHELBY. Do you, as Chairman of the Fed, do you believe 

that our current continuing to have these big deficits adding to our 

debt is unsustainable? 

Mr. BERNANKE. I do, and I think that view is widely shared. 

Senator SHELBY. Thank you. Mr. Chairman, the minutes of the 

June FOMC, the Federal Open Markets Committee meeting, stated, and I will quote, ‘‘The committee would need to consider whether further policy stimulus might become appropriate if the outlook 

were to worsen appreciably.’’ 

Aside from taking the Federal funds rate and the interest rate 

paid on reserves to zero, it is not clear to me what further policy 

stimulus would mean. If further stimulus were to involve more 

asset purchases that you alluded to by the Fed, would the Fed buy 

Treasuries or would they try to channel credit to specific segments 

of the financial markets, such as housing or perhaps even municipal debt? 

Mr. BERNANKE. Senator, I think it is important to preface the answer by saying that monetary policy is currently very stimulative, 

as I am sure you are aware. 

Senator SHELBY. Yes. 

Mr. BERNANKE. We have brought interest rates down close to 

zero. We have had a number of programs to stabilize financial markets. We have language which says that we plan to keep rates low 

for an extended period. And we have purchased more than a trillion dollars in securities. So certainly no one can accuse the Fed 

of not having been aggressive in trying to support the recovery. 

That being said, if the recovery seems to be faltering, then we 

will at least need to review our options, and we have not fully done 

that review and we need to think about possibilities. But broadly 

speaking, there are a number of things that we could consider and 

look at. 

One would be further changes or modifications of our language 

or our framework describing how we intend to change interest 

rates over time, giving more information about that. That is certainly one approach. 

We could lower the interest rate we pay on reserves, which is 

currently one-fourth of 1 percent. 

The third class of things, though, has to do with changes in our 

balance sheet, and that would involve either not letting securities 
14 

run off, as they are currently running off, or even making additional purchases. 

We have not come to the point where we can tell you precisely 

what the leading options are. Clearly, each of these options has got 

drawbacks, potential costs. So we are going to continue to monitor 

the economy closely and continue to evaluate the alternatives that 

we have, recognizing that policy is already quite stimulative. 

Senator SHELBY. Some people believe that the Fed is running out 

of options. From what you just said, you believe you still have some 

options, depending on the circumstances. 

Mr. BERNANKE. I think we do still have options, but they are not 

going to be the conventional options and so we need to look at them 

carefully and make sure we are comfortable with any step that we 

take. 

Senator SHELBY. I want to get into the area of small business 

lending. Mr. Chairman, I hear reports of a credit crunch for small 

businesses and calls by other people to initiate more government 

programs to jump start lending in this area. I have two questions 

related to small business credit. 

First, is there some market failure or regulatory failure inhibiting the flow of small business credit which requires even more 

government intervention? 

Second, is there any slow down in small business credit because 

of weaker demand, because of a deterioration in financial conditions of small businesses and values of the collateral that they 

hold, or because of regulators somehow inhibiting or preventing 

good loans from being made? In other words, do we know the definitive reason for the slow down in credit flow to small businesses 

and what is your take? 

Mr. BERNANKE. Senator, we have done a great deal of work on 

this and the addendum to my remarks gives you some of the findings of our meetings around the country on this issue. Certainly, 

a significant part of the reduction in lending to small business is 

the result either of lower demand, because firms don’t want to expand, they don’t have the final demand to grow—— 

Senator SHELBY. Uncertainty, perhaps? 

Mr. BERNANKE. I am sorry? 

Senator SHELBY. Uncertainty in the economy? 

Mr. BERNANKE. Uncertainty and other factors. In other cases, the 

firm might like to expand, but its collateral value has declined and 

it is financially weaker and it is no longer viewed as being creditworthy at the current credit standards. So there are certainly a 

number of reasons why the demand for credit or the attractiveness 

of some borrowers has declined in this recession. 

At the same time, we want to be sure that every creditworthy 

small business or borrower is able to obtain credit, and while there 

are many issues to look at as regulators, one that we are particularly concerned about is that bank regulators might somehow be 

putting the thumb on the scale on the wrong side and being excessively cautious about not letting banks issue what are even marginally risky loans and not taking into account the importance to 

our economy that creditworthy borrowers receive credit. 

And so much of our effort has been focused on instructing and 

training our examiners to take a balanced approach, where they 
15 

both are taking appropriate caution, but also making sure that 

creditworthy borrowers can get credit. 

Senator SHELBY. My time is running and has run. GSE debt reform—do you believe that the debt of Fannie and Freddie is backed 

by the full faith and credit of the United States of America? 

Mr. BERNANKE. Well, not technically or legally, but, of course, 

the—— 

Senator SHELBY. Do you believe—— 

Mr. BERNANKE. Legally, I don’t know what the legal status is. I 

don’t think it has been given that status by the Congress. But, of 

course—— 

Senator SHELBY. Do you believe the market has given that status? 

Mr. BERNANKE. The market, I think, takes appropriate comfort 

from the fact that there is a considerable amount of appropriated 

funds backing up those two companies. 

Senator SHELBY. What risk does the Fed face in holding GSE 

debt? 

Mr. BERNANKE. Well, for exactly the reason you just raised, that 

the Treasury is providing backstop support for the mortgages, we 

are taking essentially no credit risk. There is some interest rate 

risk, if interest rates were to rise sharply. But on the other side 

of that, with our very low cost of funding, we have actually been 

earning a fairly high income from our holdings and have been remitting that to the Treasury. 

Senator SHELBY. Last, do you believe that it is important for 

Congress to act quickly to reform the GSEs and provide certainty 

and clarity to our Nation’s housing policies? 

Mr. BERNANKE. And I have said so before and I agree with that, 

Senator. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much. 

Senator Reed. 

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

Thank you, Chairman Bernanke. As you pointed out, the President signed the financial reform bill this morning and there are 

many that thought we could not do it, get it passed. But it is a tribute to Senator Dodd’s leadership, actually, the collaboration of everyone on this committee, including many of my Republican colleagues. People thought we couldn’t do it, and I think there is a 

sizable population out there that believes that the regulators might 

undo much of what we have done. 

So could you give us your sense of how procedurally and substantively you and your fellow regulators will prevent or at least 

ensure that the regulated community doesn’t have an inappropriate 

influence on the rules and regulations that are going to be developed? 

Mr. BERNANKE. Well, speaking for myself and the Federal Reserve, we think that the framework in this bill is very constructive. 

It addresses many of the gaps and problems that we saw in the crisis, and for our part, we intend to write rules that will implement 

the intent of Congress and that will be sufficiently tough to ensure 

that the risk of another crisis is very low. 
16 

A lot of the effectiveness of this bill, of course, depends on the 

implementation, not just the rule writing, but also the actual supervision and execution of those rules, and we are taking this very 

seriously. We are restructuring our entire supervisory framework, 

both intellectually and in management terms, to make sure that we 

are able to address risks to the broader financial system as this bill 

envisions and that we are able to support the FDIC in its winddown function and the CFTC and SEC in their oversight of central 

counterparties, et cetera. So we are very committed to making this 

work and we think it gives us the tools that will allow us to do 

that. 

Senator REED. Just to follow up, I think you understand that 

there is a very—the high degree of skepticism. And you go into 

this, I presume, acknowledging that in the public, so that your efforts have to be transparent and not only for the substance, but 

also the appearance of the deliberation is not influenced by anyone, 

is that a fair—— 

Mr. BERNANKE. That is absolutely right. I would add that we are 

also working with our international colleagues on capital liquidity 

standards, which I think will be an additional strength of the overall reform package. 

Senator REED. Mr. Chairman, I have been made aware, and others have, too, that there is roughly $2 trillion on the balance sheets 

of American companies that is not being deployed in new product 

research, investment, expansion of jobs. Can you give us an indication of why that is happening? And also, it would seem to me that 

this recovery is going to either be led by very aggressive Federal 

policy to support employment or private policy, and the private 

money is there but it is not happening. 

Mr. BERNANKE. Well, the larger corporations, in particular, have 

had a significant rebound in their profits. They have been able to 

refinance their debt at quite favorable terms, given the low interest 

rates in corporate bond markets. And, of course, they have been reluctant to make large capital investments in an environment where 

they have a lot of excess capacity. And so for all those reasons and 

also for reasons of caution, those cash balances have built up. 

My presumption is that as uncertainty declines, as firms become 

more confident in the recovery, that they will deploy those funds 

and that will be an important source of growth for our economy. 

Senator REED. Mr. Chairman, let me talk about another area 

which could be and in some cases already is a potential drag on 

the economy, and that is State and local governments who are 

being faced with significant budget challenges. Are you concerned 

that they might, indeed, collectively counteract what you and what 

we are trying to do to move the economy forward? 

Mr. BERNANKE. Well, as you know, the Federal Government has 

already provided a great deal of support to the State and local governments. Notwithstanding that, they are still in a cutting mode 

and seem likely to cut several hundred thousand jobs going forward. So that is a drag on the economy, no question about it. 

I suppose that one small piece of good news is that municipal 

bond markets are functioning reasonably well and rates are pretty 

low, so that most States are able to obtain funding if they need it. 
17 

But it certainly is one of the factors which is reducing the recovery 

speed that we are experiencing. 

Senator REED. The final sort of area of concern is you have spoken about and my colleagues have spoken about the need to address the deficit and the need to do things that will not contribute 

to the long-term deficit. Is it useful to think about those policies 

that add to the structural deficit versus those policies, such as unemployment compensation, that does not add to the structural deficit, that it is typically emergency spending that will be made up 

as the economy recovers, employment recovers? And in that regard, 

proposals to once again extend the Bush tax cuts would, I think, 

add to the structural deficit, since they are unconditional, but temporary assistance to States, temporary assistance to workers would 

not add to that structural deficit. Is that a fair way to look at it? 

Mr. BERNANKE. I think it is useful to distinguish cyclical and 

structural deficits and it is consistent with what I was saying before, is that right now, some fiscal support for the economy is probably a constructive thing, whereas over the medium term, we need 

to reduce our fiscal deficits, which is consistent with lowering the 

structural component of our deficits. But I would urge you not just 

to leave the structural deficit alone. I mean, it is too high and anything we can do to reduce the structural deficit, not just leave it 

alone, would be positive for the markets and would make it easier 

for the markets to accept any shorter-term actions you might want 

to take. 

Senator REED. The unconditional extension of the Bush tax cuts 

would add further to a structural deficit that is much too high at 

the moment, is that your opinion? 

Mr. BERNANKE. Well, the CBO would do that holding everything 

else constant. But I don’t want to be interpreted as recommending 

one policy or another policy. As you know, I am not—— 

Senator REED. Your colleague was not that reticent. 

Mr. BERNANKE. Well—— 

Senator REED. Or your predecessor. 

Mr. BERNANKE. I don’t think it is really my place to tell Congress 

which specific tax and spending policies to choose. I prefer to address the broader trajectory of fiscal stimulus. 

Senator REED. Well, the trajectory would be made better or 

worse if those provisions were extended without condition? 

Mr. BERNANKE. Well, if no other changes were made, it would increase the cyclical, or maintain the cyclical and also increase the 

structural. Now, of course, there is always the possibility of taking 

other measures to offset whatever you do on any particular program. 

Senator REED. Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator. 

Senator Bunning. 

Senator BUNNING. Thank you, Mr. Chairman. 

Thank you, Chairman Bernanke, for being here. There are so 

many things I would like to ask you. 

First of all, the job of the Federal Reserve is monetary policy. I 

want to clear that up. 

Mr. BERNANKE. That is part of our job, but we also have financial 

stability responsibilities, in my view. 
18 

Senator BUNNING. But the main thrust of the Federal Reserve is 

to conduct the monetary policy of the United States of America. 

Mr. BERNANKE. I don’t think it is the exclusive—— 

Senator BUNNING. I didn’t say it was exclusive. 

Mr. BERNANKE. It is very important and unique to the Federal 

Reserve to do monetary policy. 

Senator BUNNING. If I got into monetary policy, you would get 

mad, as a Congressman. 

Mr. BERNANKE. I think it is important for the Fed to have independence in making monetary policy. 

Senator BUNNING. OK. I just want to reemphasize something 

that my Ranking Member said. Several news stories in the last few 

weeks, senior Federal Reserve officials, presumably you or someone 

close to you, have explained three actions the Fed could take to 

boost the economy if conditions get worse, and you have talked 

about them, lowering the interest reserve rates to zero, not 1⁄4, but 

zero; extending the period of time for a near-zero Fed fund rate; 

and using proceeds from previous asset purchases to buy more 

mortgage-backed securities. However, many commentators and 

even some officials at the Fed doubt that these actions would have 

much of an impact. 

Do you share their concerns, and what are we going to do if these 

options do not work? Are you out of bullets? 

Mr. BERNANKE. Well, I don’t think so. We need to continue to 

evaluate those options. As I said, we are not prepared to take any 

specific steps in the near term, particularly since we are still also 

evaluating the recovery and the strength of the recovery. But I do 

think that there is some potential for some of those steps to be effective and we will continue to look at them, recognizing your concerns. You raised the issue of credit allocation, for example, with 

the MBS, and a number of members of the FOMC agree with your 

concern. 

Senator BUNNING. In evaluating some monetary policy in your 

discussion of your own testimony, you said that you were looking 

for 3 to 31⁄2 in 2011 for growth and 4 to 41⁄2 in 2012. Is that accurate? 

Mr. BERNANKE. I don’t think those were quite the numbers I had, 

but—— 

Senator BUNNING. Oh, I am sorry—— 

Mr. BERNANKE. ——they are in the testimony. I think it is threeand-a-half—— 

Senator BUNNING. I wrote them down. 

Mr. BERNANKE. Three-and-a-half to four-and-a-half, I believe was 

the number. 

Senator BUNNING. OK, that is close. Over the 2 years? 

Mr. BERNANKE. For 2011 and 2012, yes. 

Senator BUNNING. Thank you. OK. And 7.5 percent unemployment by the year 2012? 

Mr. BERNANKE. By the end of 2012, 7.1. 

Senator BUNNING. Seven-point-one, OK. You know, in this regulatory bill, we have given the Fed a lot more power. You know, in 

1994, we gave the Fed a lot of power. We gave them total control 

over bank mortgages and mortgage brokers, 1994 law we passed, 
19 

this Congress. And, you know, for 14 years, they didn’t write a regulation. Not one. Not until you did after your second year in office. 

Now, if we give you all that power in this new regulatory bill 

that has just passed and you sit on your hands for 14 years, it isn’t 

going to do us any good, is it? 

Mr. BERNANKE. You are absolutely right. 

Senator BUNNING. Well, I am really concerned because we are at 

approximately 90 bank failures this year in the United States of 

America—90. I don’t know what it is going to—what August, September, October, November, and December will bring. But the 

FDIC has to resolve those banks or the Comptroller of the Currency, or whichever is the regulator of that bank. 

Now we have handed you a job, in my mind, that is damn near 

impossible. You are going to have to pick and choose who is too big 

to fail. You and a group of so many people, but you particularly. 

And it is a subjective view. It is not—it doesn’t say, these are the 

categories. It says that you should decide who is too big to fail. Is 

that accurate? Do you accept that as an accurate review of what 

is in the—— 

Mr. BERNANKE. No, Senator. What we have to determine is 

which firms are systemically critical, but they will be subject to 

this resolution regime, which means that they will fail and the 

creditors will lose money. 

Senator BUNNING. But it is subjective. It is not objective. 

Mr. BERNANKE. I think it will be important for us to develop as 

many criteria, clear criteria as we possibly can. 

Senator BUNNING. Oh, I think—— 

Mr. BERNANKE. Obviously, it will be partly subjective, yes. 

Senator BUNNING. OK. You know, we are $13 trillion going to 

$14 trillion in our debt. And if you count agency debt—that is public debt. If you count agency debt, just in Social Security, we are 

at $1 trillion. So if we add that to the $13 trillion, agency debt plus 

public, that is $14 trillion already. This year, we are not going to 

have a $14 trillion GDP, not unless we have an unbelievable recovery in the second half of this year. Isn’t that pretty close to where 

Greece was? 

Mr. BERNANKE. Well, I think that, first of all, adding the GSE 

debt is not entirely appropriate, because on the other side of the 

balance sheet are assets, mortgages, that are worth something. 

Senator BUNNING. But don’t we have to make good those trust 

fund mortgages like Social Security? Don’t we, as a government, 

have to make good on those pieces of paper that are up in West 

Virginia? 

Mr. BERNANKE. But if we have 5 or 10 percent losses, we will 

still have 90 or 95 percent assets there. So it is not as if we had 

borrowed the $5 trillion of the outstanding MBS and had no assets 

to show for it. 

Senator BUNNING. But we did spend the money. 

Mr. BERNANKE. We spent several hundred billion, but not five 

trillion. 

Senator BUNNING. Well, as the Chairman of the Social Security 

Subcommittee, when I was there, they were spending every penny 

they got from the Social Security Administration for other purposes. That means that we have to make up the difference. 
20 

I just am worried where we are heading and I am worried about 

the tools that you have to counter where we are heading. I surely 

don’t want us to not recover fully from this recession, because that 

is the—I mean, lack of jobs is the secret. We have got to create 

jobs. Small business creates jobs, and if this Congress doesn’t act, 

we are not going to create those jobs. So I wish you good well. 

Mr. BERNANKE. Thank you. 

Senator BUNNING. Good luck. 

Chairman DODD. Thank you, Senator. Let me just say here, if we 

were in the status quo and had not passed this bill and the tools 

that existed 2 years ago, we would be a lot more vulnerable today 

than we are without this, so I thank you. 

Senator Bayh. 

Senator BAYH. Mr. Chairman, this may be my last opportunity 

to interact with you in this capacity, and I just want to take this 

moment to thank you for your service to our country once again 

and to say it has been a pleasure working with you on some of 

these issues. 

My first question has to—there have been a lot of comments here 

about our budget deficits and debt, which is accurately described, 

as you pointed out, as unsustainable. I would like to ask about another unsustainable disequilibrium, and that is our current account 

deficit and the corresponding current account surpluses in China 

and other parts of the developing world. 

Many observers believe that it was this disequilibrium that gave 

rise to a glut of global capital that undergirded the asset bubble 

that led to some of the problems that we have seen. There were 

some signs it was beginning to be self-correcting. Savings rates in 

our country were going up. Consumption in China is rising. But the 

most recent data suggests that perhaps the current account imbalance is once again on the rise. So my question to you is: How concerned about this should we be? And given the apparent return to 

the status quo ante in terms of the gap, is this going to be self-correcting, or do other measures need to be taken? 

Mr. BERNANKE. Well, first, on the forecast, the current account 

deficit did drop from about 6 percent of GDP to about 3 percent of 

GDP, and it has increased slightly, but our view is that in the medium term it is not going to go back to where it was, that we have 

made some progress in that respect. But to continue with the 

progress, we need to continue to have global adjustment, and that 

essentially means that surplus countries like China and others 

need to increase their reliance on domestic demand and, where appropriate, have flexible exchange rates. And the United States has 

to do its part, and this ties back to your first comment about sustainability, which is that in order to reduce our current account 

deficit, we have to increase our national saving. Better fiscal position is part of that. Higher household and business saving is part 

of that. So that is an important imperative, one that the IMF and 

other international agencies continue to focus on, and I absolutely 

agree with you that if the current account deficit were to return to 

5 or 6 percent of GDP, that would be a very worrisome situation. 

Senator BAYH. Well, let us hope we can get some bipartisan cooperation around here in getting our fiscal house in order, which 
21 

will help with the savings issue. Let us hope the Chinese will continue to move in the area of currency flexibility. 

So as you look out to the future, you think that 3 percent—is 

that going to be about where it will be, do you think? And if so, 

that is—clearly not 5 or 6. Is that sustainable, the 3 percent rate? 

Mr. BERNANKE. For the next few years. That is our estimate, but 

it is just forecast. 

Senator BAYH. OK. I just saw the monthly figures last month, so 

hopefully that does not augur a return to something more—— 

Mr. BERNANKE. We do not focus on bilateral trade deficits for 

U.S.–China. We look at the overall, and that is somewhat different. 

Senator BAYH. My second question has to do with the Greek debt 

crisis once again, and as you pointed out, the Europeans moved 

very aggressively and things seem to have calmed down a fair 

amount there. But I look with some alarm, even if they implement 

all these austerity measures that they are thinking about, and as 

you can see there is a fair amount of political turmoil around all 

that, it looks as if they are still going to be at about 130 percent 

or so of debt-to-GDP ratio, even after they have implemented all 

these steps. And just putting my political hat on, it could be pretty 

hard for them to go substantially beyond that. So that still looks 

like it is going to be pretty hard to sustain a situation like that. 

So I do not expect you to comment upon the likelihood of restructuring or anything like that. But you had mentioned that the whole 

episode, while it caused some disturbance, we have now kind of 

gone beyond that. 

So my question would be: In the event of an orderly restructuring of Greek debt at some point, I assume that it would also 

have only a marginal impact upon our own markets? 

Mr. BERNANKE. Well, what I think is important is that at least 

for the next few years, the Europeans have provided enough funding to assure no restructuring, no default, and that is important because we remain vulnerable in our recovery and in our financial 

markets to the kind of stress that would cause. So I am encouraged 

by the commitment of the Europeans in the large amount of funding. 

The other side of their program is also to create what the IMF 

would call conditionality, which is that they are within European 

mechanisms for achieving fiscal sustainability within their members. So the countries that receive assistance will also be under a 

lot of pressure from their peers within the euro zone or within the 

EU to make appropriate adjustments. 

Senator BAYH. That actually leads me to my final question. I will 

make one comment I do not expect you to respond to, but a skeptic 

might look at all this and say what was really at work here was 

a choice between an eventual orderly restructuring or a disorderly 

restructuring that could have been very destabilizing, and so what 

the Europeans are attempting to do is to recapitalize their banks 

and get them in better shape for the eventual haircut that may lie 

down the road at some point. So that is just an observation some 

have made about what is transpiring there, and hopefully the 

world economy will be in a stronger position and be willing to absorb all of that if, in fact, something like that happens. 
22 

But we had a great hearing yesterday, and I want to thank you 

for making Mr. Tarullo available. His testimony was very candid, 

very insightful, very helpful, and that was about the importance— 

since we passed our financial regulatory response to the crisis, the 

importance of global harmonization and convergence about standards and enforcement mechanisms and all that. And you mentioned 

the—I am sure many of the Europeans, particularly the Germans, 

wish that they had focused a little bit more on some of the enforcement mechanisms with regard to government fiscal policy at the 

time they had formed the common currency. 

And so my question to you, Chairman, my final question would 

be: How important is it to our country that we continue to have, 

you know, harmonization of standards and particularly that there 

are enforcement mechanisms in place to ensure that those standards are abided by most of the time? Because that is going to be 

important to, I think, avoiding a recurrence of the crisis at some 

point. And, second, there are some competitiveness aspects with regard to this that could affect American institutions? 

Mr. BERNANKE. Well, it is very important. We are not going to 

have perfect harmonization because countries are in different situations. They have different banking systems, different financial 

systems. But we are making good progress in negotiating with our 

colleagues a strengthening of capital liquidity standards that will 

help make our banking system more stable in the event of another 

stress event, as we recently saw. 

We do not really have binding mechanisms to enforce the agreements across borders. Every country applies the Basel standards 

within its own borders according to its own decisions. But we do 

work closely together and apply peer pressure and other mechanisms to try to keep the standards very similar, and, indeed, our 

very key objective over the next few months is to come up with an 

international agreement on capital liquidity standards that will 

both be tough—and the United States is leading the way in looking 

for a very tough set of rules—but also that will be acceptable and 

agreed upon across the major countries. 

Senator BAYH. Capital liquidity standards, resolution protocols, 

how we handle derivatives, all those kinds of things, it is just important that we harmonize as much as possible. Otherwise, we 

could see a repetition of the Greek phenomenon, not in the sovereign debt situation but when it comes to financial regulations. So 

we have taken some major steps here, and if we are going to really 

get the full fruits of that, it is important we try and get as much 

of the rest of the world to go along, and I thank you for your efforts 

in that regard. And, again, thank you for making Mr. Tarullo available, and thank you for your service to our country. 

Mr. BERNANKE. Thank you. 

Chairman DODD. Thank you, Senator, very much. 

Just on that point, we had regulatory arbitrage. You could end 

up with sovereign arbitrage in a sense if we do not try and harmonize those rules. That will be an important question. 

Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. I was thinking, the 

last time the Federal Reserve Chairman was in and today, the difference between the way the Federal Reserve was being looked at 
23 

6 months ago and the outcome as it relates to this regulatory bill. 

He should have spiked the ball before he sat down, but I guess 

Federal Reserve Chairmen do not show emotion in that way. But 

I know things have changed tremendously from that time, and I 

certainly appreciate you coming back and would want to talk to 

you a little bit about the report that you gave obviously was disappointing to the markets. I think people are a little concerned 

about where we are. 

Do you discuss much in your meetings the probability of a double 

dip? And can you give us some sense as to the future there? 

Mr. BERNANKE. Well, we certainly try to talk about all contingencies, and the committee has identified some downside risks to 

the recovery, including problems of credit availability, small business, the high level of unemployment, which in turn has affected 

consumer confidence and their willingness to spend. So there are 

certainly some risks. 

But I would like to emphasize that our forecast, our expectation 

is still for a moderate recovery, the numbers I gave today of 3, 31⁄2

percent, depending on the horizon, which will over time bring down 

the unemployment rate. So that is still our main scenario, that the 

economy will continue to grow and that the final demand, private 

final demand will take over from inventory building and fiscal policy as the drivers of growth. 

Senator CORKER. The Ranking Member asked you a question, 

you know, obviously sort of the customary tools that you have or 

you have used in the past for easing, you know, with low rates, I 

think right after your testimony today the 10-year Treasury went 

to 292, rates are low, the Fed fund target is low, a lot of the sort 

of customary things are kind of gone. So he asked the question 

about what you may be thinking about, and you mentioned some 

nonconventional things. I know that then you alluded to some projections into the future that you all might use to maybe spur things 

along. 

I know in a 2002 speech you talked about the ability of the Fed 

to create inflation, and I am just wondering what you were saying, 

in essence, to the Ranking Member and what you might be referring to as it relates to projecting into the future. 

Mr. BERNANKE. Well, my 2002 speech pointed out that there 

were other things the Federal Reserve could do besides lowering 

the overnight interest rate to try to stimulate the economy, and 

those things included making commitments or statements about 

the length of time that rates would be low. They included purchasing securities. They included intervening in financial markets 

that were dysfunctional, as we did during the worst parts of the 

crisis. And those are all things that we actually did in the last couple of years. And I continue to believe that there are additional 

steps that could be taken, but obviously we do need to think about 

them very carefully and also to evaluate the state of the economy 

before taking any further action. 

Senator CORKER. What would be the hurdle or threshold that you 

would have to cross over before you would begin tightening? 

Mr. BERNANKE. Well that has certainly got to be a committee decision, but I would say that certainly one important criterion would 

be whether the recovery is sustainable, whether it is fading and not 
24 

being self-propelling. If the recovery is continuing at a moderate 

pace, then the incentive to take extraordinary actions would be 

somewhat less. But certainly we would want to make sure that the 

economy continues to move back toward a more normal state of resource utilization. 

Senator CORKER. So I know a lot of people up here have tried to 

sort of take you in whatever direction they think they would like 

to take you as it relates to the deficit. I want to sort of ask it in 

a neutral way, and that is, look, we have got a debt commission 

right now that is looking at long-term issues. It is bipartisan. No 

doubt in my opinion the administration has added to our concerns 

in that regard. But if you really look at where our debt is, a lot 

of that has just been building for years because of many entitlements and other things. 

As a matter of fact, when you look at where we are over the next 

10 years, regardless of what the factors are, I think the American 

people look at deficit reduction almost academically today, and yet 

in the near term, we are talking about draconian things having to 

occur. I know Erskine Bowles talked about getting to 21 percent of 

GDP. Some of us would like to see it at 18 to 20 as it relates to 

expenditures. But even getting to that level is going to take draconian steps. 

So my question gets back to monetary policy. I think you all 

know full well where we are headed, and I think the American people have not really digested what it means for us to get our house 

in order. I am not sure if any of us really have digested fully what 

that means. 

But how does that impact the decisions that you all make as it 

relates to monetary policy? I mean, you know that is coming. You 

know it is going to be draconian to deal with it in an appropriate 

way. How is it affecting your internal discussions as it relates to 

monetary policy? 

Mr. BERNANKE. Well, it is a risk factor. Depending on how markets respond to developments in the debt and deficit, it could potentially be a drag on recovery if interest rates were to rise, for example. But in the near term, we are mostly focused on the business 

cycle, the state of the economy, the level of inflation. 

For the most part, I think of these fiscal issues as being medium 

term. For example, the objective of the Commission is to get the 

deficit down I think to about 3 percent, 31⁄2 percent by the middle 

of the decade, something like that. And that is the kind of objective 

we want. We want to get the deficit down to a point where the 

ratio of debt to GDP sort of stabilizes, and that would, I think, be 

very good for confidence in the markets. 

Senator CORKER. Evan Bayh mentioned at the hearing we had 

yesterday with Mr. Tarullo, he did a good job presenting. One of 

the things that we—in preparing for the meeting, we had somebody 

come in who is dealing with a lot of the foreign ministers and others, with the G-20, somebody that I think is respected by both sides 

of the aisle. And one of the things that he mentioned was the fact 

there was a lot of discussion by people in other countries regarding 

the legislation that we did just pass, and the fact that many of 

them saw the opportunity for jobs to migrate out of this country 

into theirs or for their particular institutions to fill in the gaps, to 
25 

be able to take on additional business because of some of the things 

that we have done. 

I know that you and others are going to attempt to assure that 

we have sort of a worldwide set of regulations that work together. 

One of the things he specifically spoke to was the Volcker Rule, 

and there was a lot of resistance around the world community regarding that. And I am just wondering what your thoughts are on 

that and, you know, is there a concern in your mind today about 

us not achieving that and the fact that we may, in fact, lose financial system jobs here in the country? 

Chairman DODD. Just answer that quickly, if you would. 

Mr. BERNANKE. Well, the Volcker Rule was, I think, constructed 

in a reasonable way in that it allows continued hedging and market-making activities, which are critical activities for banks and 

other financial institutions. I think it is evident that the European 

banks will not adopt the same rule because they are universal 

banks and they have a different mode of operation. But our banks 

have been able to compete with European and other banks pretty 

effectively even though there have been differences in powers and 

other requirements. I do not see a major change in that competitiveness. 

Chairman DODD. Very good. Senator Akaka. 

Senator AKAKA. Thank you very much, Mr. Chairman. I want to 

add my welcome to Chairman Bernanke back to the Committee. 

We share a commitment to improving the lives of working families 

by better educating, protecting and empowering consumers. 

This is a great day for America and the American people. The 

Dodd-Frank Wall Street Reform and Consumer Protection Act became law today. One section of the act that will provide economic 

opportunities for working families is Title 12, which authorized 

programs intended to improve access to mainstream financial institutions and affordable small loans. 

Please share with the Committee the challenges that the 

unbanked and underbanked are confronted with, and explain why 

it is important that more people utilize banks and credit unions. 

Mr. BERNANKE. Well, Senator, you have been a leader in this 

area for a very long time, and, of course, you are well aware that 

many people, particularly in many cases immigrants or minorities, 

are utilizing nonmainstream financial institutions, like payday 

lenders or check cashers, and that frequently that is very costly for 

them and may involve getting trapped in a cycle of debt where they 

have to continue taking out more loans at high interest rates in 

order to pay back their previous loans. 

So I think it is very important—and you and I have had this discussion on a number of occasions—to bring the broader public into 

the mainstream financial system, not only for deposits but for credit, for saving, for all the important functions of the financial system 

for families. 

I agree that there are some useful things in the bill that will address that, including financial literacy provisions as well. I believe 

the Consumer Protection Bureau will have some education and literacy components. That is very complementary. The Consumer Bureau will certainly be active in trying to eliminate deceptive, misleading advertising or products, but that alone is really not suffi-
26 

cient for people to make the best use of financial markets and financial products. They have to be educated as well. And, you know, 

I think that is very positive that we are going to increase the commitment to that training. 

Senator AKAKA. Thank you. Chairman Bernanke, as you mentioned financial literacy, the recently enacted law includes a provision to establish the Office of Financial Education within the newly 

created Bureau of Consumer Financial Protection. The office will 

craft a strategy to develop and implement initiatives to improve financial literacy among consumers. 

What do you think must be done to ensure that consumers are 

able to make informed financial decisions? 

Mr. BERNANKE. Well, as I indicated, I think this is a very important component of consumer protection, and I look forward to seeing the proposals and the ideas that come out of this office. 

I am very happy about the trend that we see across the country 

that more and more high schools are offering financial literacy 

courses. We have more organizations like Junior Achievement and 

others that are working with schools to increase financial literacy. 

I would have to say in all honesty that there are still some very 

difficult challenges in figuring out how best to educate people. 

Many of the programs that have been tried in the past have not 

been so successful based in terms of subsequent testing or evaluation of people who have taken those courses. So there are some difficult problems still in figuring out how best to transmit this information, how best to make sure people absorb it. 

One of the best ways to do that is to put financial literacy in the 

context of actual decisions that people make. If people are involved 

in buying a house or a car, they are much more involved and much 

more interested in the issues than they are if they are learning 

something in a high school class perhaps. So counseling and other 

kinds of support for people making financial decisions might be a 

good direction. But as I said, I applaud that the bill did not neglect 

financial literacy, and I hope that the Federal Reserve will be able 

to cooperate with the Bureau. As you know, we have our own programs, and we will continue to press education in this area. 

Senator AKAKA. Chairman Bernanke, many hard-working immigrants send a portion of their earnings to relatives living abroad. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act 

establishes long overdue requirements for simple, meaningful, and 

relevant disclosures about the cost of sending remittances. Additionally, the act requires that the Federal Reserve work with the 

Department of Treasury to expand the use of the automated clearinghouse system and other payment mechanisms for remittance 

transfers to foreign countries, and I look forward to continuing to 

work with you on this important issue. 

Mr. Chairman, what are the benefits of having consumers utilize 

banks and credit unions for remittances? And what must be done 

to encourage greater use of the mainstream financial institutions 

for sending remittances? 

Mr. BERNANKE. Well, this is an issue I have spoken on in the 

past. We were just speaking about ways of getting particularly immigrant communities to get them into the mainstream financial 

system. Remittances, which is a very common practice for immi-
27 

grants who are sending money home, is one natural way to get people into the mainstream financial system, and we have encouraged 

and we have seen many financial institutions improve their remittance services and use that as a way of attracting the interest of 

minority or immigrant groups. So I think it is a very useful way 

to make the transition from nonmainstream to mainstream finance. 

So we do support that, and you mentioned the ACH. The Federal 

Reserve has been involved a long time in developing better ways 

of transmitting remittances, and we have agreements with the 

Bank of Mexico to reduce the cost and increase the efficiency of remittances to that country. So we certainly are eager and prepared 

to expand those services, as is required by the new legislation. 

Senator AKAKA. Thank you very much for your responses, Chairman Bernanke. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator, very much. 

Senator Gregg. 

Senator GREGG. Thank you, Mr. Chairman. It is a pleasure to see 

you. I appreciate the good job you do for this Nation, and I am glad 

you are still independent. 

Obviously, you have brought us some information that is in some 

ways not all that optimistic: unusual uncertainty. Interesting term. 

Let me try to get to a couple of hopefully positive certainties. One 

would be if we were to do—if you look at the banking financial institutions today, the major ones, and you reflected in the terms of 

a stress test, which is what the Europeans are going through and 

what we have been through, do any of our banks have stress test 

issues of any significance right now? 

Mr. BERNANKE. I am not quite sure what you mean by stress test 

issues, but we did do stress tests of 19 of the largest banks—— 

Senator GREGG. I am talking about the largest banks. 

Mr. BERNANKE. ——in the United States, and some of them were 

required to raise additional capital, all of which did. Since then, 

large banks have become increasingly profitable. Their losses on 

most categories of loans seem to have peaked, and in some cases 

they are reducing their reserves against loan losses. So the overall 

capital levels and the quality of the capital of large banks is certainly much improved over the last couple of years. 

Senator GREGG. The Chairman referred to an extraordinary 

quantity of excess reserves, which would imply that the banking 

system is fairly aggressively capitalized right now. Do you see that 

as being true? I mean the major banking system. 

Mr. BERNANKE. Well, the excess reserves, which is about $1 trillion held by the Federal Reserve, does not count—it is an asset. It 

does not count as capital. It is really a form of liquidity, and it 

helps to ensure that banks have all the access to liquid funds that 

they might need, and that it is another belt-and-suspender protection for the banking system. 

They have so far been reluctant to make use of those reserves, 

probably because they view the demand for credit as being weak 

or the quality of borrowers as being weak, or in some cases because 

they are uncertain about how much capital they will need in the 
28 

longer term and are, therefore, being cautious about putting their 

capital to work. But capital reserves are different quantities. 

Senator GREGG. But they all reflect the strength of the system? 

Mr. BERNANKE. Well, the excess reserves in particular, which are 

created by Federal Reserve purchases of securities in the open market, are a strength of the system in the sense that they ensure that 

banks have easy access to large amounts of liquidity. But it is a 

separate issue from capital. 

Senator GREGG. Well, I guess my point is: Isn’t our financial 

structure in pretty good shape right now compared to where it was 

a year and a half ago? And isn’t it moving in the right direction? 

And so when you say ‘‘unusual uncertainties,’’ isn’t at least one certainty that at least that element of the crisis which we confronted 

a year and a half ago has been settled out and is moving in the 

right direction? 

Mr. BERNANKE. Yes, I took note of that in my remarks, that both 

the banking system and the financial markets more generally are 

in considerably better shape than they were 2 years ago. 

Senator GREGG. Senator Reed referred to $2 trillion on asset balance sheets across this country in corporate America. Now, I have 

heard this refrain a series of times from the other side of the aisle 

now. It is almost as if that $2 trillion should be ours, it should be 

the Federal Government’s and we should get it reallocated right 

now because it is sitting there. But isn’t it really a reflection of the 

fact that we are poised for some positive activity if confidence can 

return to the markets? In other words, there are resources for capital expansion and for economic expansion sitting on the books. 

Mr. BERNANKE. That is right. The availability of funding or credit is not a constraint for most large firms. 

Senator GREGG. What is the constraint, of course, is the unusual 

uncertainties that are facing American business today, and small 

business especially, but all business, and that is that we are facing 

a Government that has got a long-term debt which is 

unsustainable, and so there is a huge uncertainty as a result of 

that. In the short term, it is a two-step dance. We understand that 

in the short term there is a stimulus event here that is occurring. 

But in the long term, we have an unsustainable debt. Is that not 

true? 

Mr. BERNANKE. Yes. 

Senator GREGG. And that within the next year, it is the administration’s position that major tax events will occur which will significantly dampen the creation of capital. Specifically, capital gains 

rates will go up by 50 percent; dividend tax rates will go up by 150 

percent on some earners; and top marginal rates will go up from 

35 percent to 42 percent, which dampens capital formation. Doesn’t 

a major tax event like that in a slow economy dampen capital formation? 

Mr. BERNANKE. Well, again I do not want to be recommending 

for or against specific taxes, but obviously, as you look at the Tax 

Code, thinking about this not only in the short term but in terms 

of demand stimulus and long term in terms of efficiency and effectiveness, I hope you look at it from both perspectives. 

Senator GREGG. Well, if you tax the formation of capital over the 

next 6 to 8 months at a rate which is 50 percent higher than it 
29 

is today or 150 percent higher than it is today, you are probably 

going to slow economic activity. That is rhetorical. 

And then, of course, you have the issue of the financial reform 

bill. I mean, there is going to be a period here where people are 

not going to—a lot of the banking industry is not going to know 

what sort of capital reserves it should actually be holding, which 

will constrain its willingness to go out and lend; where the derivatives market is going to be frothy, to be kind, because it will not 

really know where it is ending up and what type of derivatives 

have to have margins; and where under the Volcker Rule a large 

amount of proprietary trading which used to be available will no 

longer be available to American banks, although ironically it will 

be available to international banks. All of that will contract credit 

to some degree in the market, will it not, over the next 6 months 

to 2 years as people sort out their responsibilities here? 

Mr. BERNANKE. Those are legitimate concerns, and for that reason the Federal Reserve is going to do the best we can to get these 

things resolved as quickly as possible. 

Senator GREGG. So if you want to look at what is really causing—maybe the uncertainty that is causing this $2 trillion to stay 

on the balance sheets, it is the fiscal policies of the Government. 

Mr. BERNANKE. Policy uncertainties are no doubt part of it, but 

there is also economic uncertainties, just uncertainty about how 

labor markets will evolve, how consumer spending will evolve, how 

the global economy will evolve and so on. So there is a lot of uncertainty, and that is certainly an issue. 

Senator GREGG. If you were doing a formula, I think the percentage that would be assigned to Federal fiscal policy would be fairly 

high for creating uncertainty as a result of our unwillingness to 

face the long-term debt problems we have, the tax policies which 

are coming at us which will penalize capital formation, and the uncertainty about what sort of capital you have to have on your books 

in order to make loans in the financial institutions for at least the 

next 6 months to 2 years. 

Chairman DODD. Let me just point out before I turn to Sherrod 

Brown, because we are losing some members, but I say this to the 

staff in the room, as well, in consultation with Senator Shelby, I 

would like to be able to move our nominees for the Federal Reserve 

out of committee before the August break, and I know they were 

with us a few days ago. So if my colleagues have questions for 

them in addition to what they asked during the confirmation hearing, if you haven’t submitted questions, I would urge you to do so. 

I haven’t scheduled anything yet. I am obviously going to stay in 

touch with all of you. Just let me know whether or not you have 

had questions answered or not so that we could try and get those 

done before—at least out of the committee. I am not trying to get 

it up before the full Senate, obviously, before we leave, but at least 

set it up. So I would urge you to submit questions if you have 

them, to members, and I thank you for that. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

Chairman Bernanke, welcome. Last time you were here, several 

months ago, you and I talked about manufacturing, its role in our 

economy, that manufacturing, typically automotive but manufac-
30 

turing generally is the vehicle, if you will—pardon my pun there— 

to lead us out of recession. I mentioned to you that 30 years ago, 

more than a quarter of our GDP was manufacturing and financial 

services made up only about a tenth of our GDP, and in the last 

30 years, we have seen that flip and we know where that got us. 

It got us a shrinking middle class. It got us our financial crisis, in 

part, not quite that simple, but we know that if we don’t make 

things in this country, that it is a significant problem of getting out 

of a recession and beyond that. 

Also in the last several months, the International Trade Commission, signed of on more or less by the President and the Commerce 

Department, made two rulings, one of them on Chinese tires, one 

of them on—that was last fall. Since you have been in front of this 

committee, they made a country on oil country tubular steel. Each 

of those rulings found that the Chinese weren’t playing fair on subsidies, dumping. Each of those rulings resulted immediately in 

American companies in my part of the country and beyond, in tires, 

especially, hiring several hundred people. 

Back in December 2006, and this gets me to comments that Senator Bayh touched on, in December 2006 at the U.S.–China Strategic Economic Dialogue, you described China’s undervalued currency, quote, ‘‘as an effective subsidy for Chinese exporters.’’ You 

know how many jobs depend on our trade deficit, or we hope 

shrinking deficit—not a lot of evidence for that long term that I can 

see, although you touched on that. 

But explain whether you believe, in your words, effective subsidy 

is still in place and whether the G-20’s commitment to rebalance 

growth can be achieved with this apparently slow and gradual appreciation of the yuan. 

Mr. BERNANKE. Well, this is related to my answer to Senator 

Bayh about the current account deficit. There are two tools to address imbalances. One is exchange rate flexibility. The other is to 

rebalance your economy so that it is more dependent on domestic 

demand rather than on exports. 

On the latter, the Chinese have made some progress. Through 

fiscal policy and other policy actions, they have increased somewhat their dependence on their own domestic demand rather than 

excessive reliance on exports, to some extent. I mean, there has 

been progress in that direction. 

On the exchange rate they have recently begun again to undertake this controlled float that they have. Obviously, it hasn’t moved 

the exchange rate very far, and I would agree with you that we 

would like to see them move it considerably further so that it 

would both create a level playing field, as your concern addresses, 

but also from the perspective of China, to give them a more balanced domestic economy and more independence of their monetary 

policy. So it is really something that is important for both sides. 

Senator BROWN. One thing China seems to understand better 

than we when they make these very, very small baby steps on currency appreciation is time. Thirty year ago, Zhou Enlai was asked 

what he thought of the French Revolution and he said it was too 

early to tell. It just seems to me that China plays us out on this 

currency and continues its—it is, as you say, an effective subsidy. 
31 

I assume you haven’t changed your mind that it is an effective subsidy. You would use that term again? 

Mr. BERNANKE. Yes. 

Senator BROWN. OK. Would you agree with many, many economists who have been parts of both Democratic and Republican administrations that the subsidy approaches 40 percent? 

Mr. BERNANKE. I don’t know exactly. There is a range of estimates that are—— 

Senator BROWN. Would you give me your range of estimate? 

Mr. BERNANKE. The numbers that you see in the literature range 

between 10 and 30 percent. 

Senator BROWN. No, they range—many say 40. 

Mr. BERNANKE. I don’t think that is the center of the distribution 

but there is a wide range. 

Senator BROWN. Well, 10 to 30, I am not asking the center—— 

Mr. BERNANKE. Right. Sorry. 

Senator BROWN. ——ten to 40, the center is still not 40. You are 

pretty good at math, so what is the range and where do you come 

down? I want you to be more specific than 10 to something. 

Mr. BERNANKE. Could I come back to you with some numbers? 

Senator BROWN. Could you discuss it a little more now? So the 

range is—I am sorry I interrupted you. The range is something. 

Give me the range that you see—— 

Mr. BERNANKE. So the range—— 

Senator BROWN. ——and where you might—— 

Mr. BERNANKE. ——that I have seen through a variety of ways 

of calculating it is generally, in my recollection, somewhere between 10 and 30 percent. 

Senator BROWN. OK. Does that mean that Chinese goods sold 

into this country are underpriced 10 to 30 percent? 

Mr. BERNANKE. Yes, holding constant some other things like 

wages, which have started to rise, for example. But broadly speaking, yes. 

Senator BROWN. And doesn’t that mean that it should be no surprise we have this sort of this huge bilateral trade deficit with 

China? 

Mr. BERNANKE. Well, it is a function both of the exchange rate, 

and I am not disagreeing with you, but it is also a function of savings and investment policies. And again, China has made some 

progress toward increasing the dependence of its economy on its 

own domestic demand. 

Senator BROWN. If we were to enforce two issues where there 

have been petitions through the Commerce Department, one on 

coated paper, another on aluminum, two actually fairly major industries in the country, if we were to make the decision and enforce the laws that there is, in fact, as we do this study, that there 

is, in fact—or this investigation—a currency subsidy, if you will, is 

it fair to assert that absolutely would mean job growth, that it 

would mean job growth in this country, our country? 

Mr. BERNANKE. There would certainly be a short-run effect on 

those particular industries, but I would point out that there is not 

much correlation over a longer period of time between overall employment or unemployment and our current account deficit, that 

where resources are not being utilized in one industry, they tend 
32 

over time to be deployed in other industries. So maybe there is 

some misallocation across industry, but overall employment doesn’t 

depend too much on the current account. 

Senator BROWN. That is a story that would ring hollow to lots of 

cities in my State, large and small alike, like your city in South 

Carolina, understanding how capital moves and families can’t 

often. 

But if, in fact, and I will wrap up with this, Mr. Chairman. I see 

my time has expired. Current account deficit notwithstanding, if 

the currency is so, your term, if the undervalued currency is an effective subsidy, doesn’t that always mean lost jobs in a bilateral relationship when trade is going back and forth—more back than 

forth—on these commodities or these manufactured goods? 

Mr. BERNANKE. It could mean that there is a transfer of jobs 

across different industries. It doesn’t necessarily mean overall, that 

jobs are lost. 

Senator BROWN. But when the overall net effect—you can talk 

about it is not like we are losing jobs in paper, we are losing jobs 

in chemicals, we are losing jobs in steel, we are losing jobs in aluminum, we are losing jobs in glass and we are picking it up in 

other manufacturing. I mean, the net loss is manufacturing writ 

large, correct? 

Mr. BERNANKE. Well, what is happening is that the jobs are 

being picked up in nontraded areas, in goods and services that we 

don’t trade abroad. 

Senator BROWN. Perhaps. Thank you. 

Chairman DODD. Thank you, Senator. 

Senator Tester. 

Senator TESTER. Thank you, Chairman Dodd. 

Welcome, Ben. I appreciate you being here. I want to step back 

to some questions that were asked earlier, and you said—I think 

it was in response to Chairman Dodd, but it may have been in your 

opening statement, where you talked about the expenditures being 

made now were necessary to keep the economy propped up and 

keep it going, and correct me if I am wrong. And then another 

question was asked shortly thereafter. You had said that the deficits are unsustainable right now. Those seem to be competing 

statements, although they can go together. The question is, from 

your perspective, the expenditures we are doing right now, regardless of the deficit, are necessary? 

Mr. BERNANKE. Broadly speaking, yes. I don’t think that there is 

really much benefit to trying to reduce the 2010 deficit substantially. I think that that is supporting the economy. Those two statements are not inconsistent. It has to do with the timeframe. 

Senator TESTER. OK. I just want to make sure that that is the 

case, because I think sometimes we interpret them as being diametrically opposed when they are not. 

Mr. BERNANKE. I would much prefer to see consolidation or cuts 

over the medium term as opposed to immediately. 

Senator TESTER. Let me get to that, because we all know that 

large and unsustainable deficits, as you have pointed out in the 

past, ultimately, we are going to have to make some tough decisions. Ultimately, we are going to have to make some choices, none 
33 

of which will be easy, whether you are talking about cutting expenditures or increasing the income. 

What are the indicators that you would use to determine when 

we start addressing those issues, and is today the day we start or 

when do we start? 

Mr. BERNANKE. Well, I think if you look at, for example, the CBO 

and other projections, they have deficit-to-GDP ratios from, say, 

2013 to 2020, somewhere in the four to 7 percent range. Assuming 

that the economy is back to close to full employment by 2013 or 

2014, that four to 7 percent is the medium-term structural deficit 

and that is too high to keep the debt-to-GDP ratio constant over 

time. It is going to lead to an unsustainable situation. 

So in particular, the Deficit Commission has been tasked to bring 

the deficit down to 3 or 31⁄2 percent, something in that range, by 

2015. I think we ought to be shooting for a sustainable path, 3 percent, maybe even less, of GDP as a deficit starting 2 or 3 years 

from now and going out for the next decade, would be one broad 

trajectory that would be reassuring to the financial markets. 

Senator TESTER. Is 3 to 31⁄2 percent of GDP sustainable? 

Mr. BERNANKE. It depends on lots of different things, but you 

don’t have to have a zero deficit for sustainability. You just need 

the deficit to be roughly equal to the interest payments that you 

make. So if interest payments are 2 to 3 percent of GDP, then a 

permanent deficit of that amount is, in fact, sustainable. Yes. 

Senator TESTER. OK. The G-20 met recently and they set up a 

timeframe for deficit reduction. Do you think that that timeframe 

is appropriate? 

Mr. BERNANKE. It is 2015, I believe? 

Senator TESTER. I think half the deficit by 2013. 

Mr. BERNANKE. A majority of them are emerging market economies, many of which are actually growing pretty quickly right now, 

so I am not sure I would want to impose a single standard on all 

the members of the G-20. The important thing is the overall trajectory. Is there some evidence that the debt will begin to stabilize 

within the next few years? 

Senator TESTER. OK. Investors have been—I mean, the Treasury 

bonds have been pretty solid, and that is maybe an understatement. How long do you think this will remain this way, and is it 

dependent on what is going on in Europe right now that they are 

solid, or is there another reason for it? 

Mr. BERNANKE. Well, there are a number of reasons why the 

yield is under 3 percent—— 

Senator TESTER. Right. 

Mr. BERNANKE. ——currently. They include low inflation expectations, low growth expectations, but very importantly, also safe 

haven effects. That is, the U.S. dollar or U.S. debt is considered to 

be very liquid, very safe instrument, and given the amount of risks 

in the financial markets around the world, many investors have decided to acquire U.S. dollars, including many foreign governments 

who want to hold dollar reserves. So those are some of the reasons. 

Clearly, the bond market at this point is not focused on longterm deficits, at which point it would become more concerned. It is 

very hard to know. 
34 

Senator TESTER. Some have said that there is going to be—there 

is strong potential for another dip due to commercial real estate 

and other things. What impact does that have on the Treasury 

bonds? 

Mr. BERNANKE. Well, just to be clear—— 

Senator TESTER. If it would happen. 

Mr. BERNANKE. Just to be clear, the Federal Reserve’s forecast 

is for moderate recovery. But if, for whatever reason, there were a 

significant slowdown, then presumably Treasury yields would fall 

further. 

Senator TESTER. OK. So, I mean, so Treasury doesn’t—and I am 

happy to hear you say yes to this question—Treasury doesn’t see 

another dip due to commercial markets? 

Mr. BERNANKE. The Federal Reserve? 

Senator TESTER. The Federal Reserve, I mean. I am sorry. 

Mr. BERNANKE. No, we don’t think that a double—— 

Senator TESTER. That is good. 

Mr. BERNANKE. ——is a high probability event. 

Senator TESTER. That is good news. You had talked about—in 

fact, it was Ranking Member Shelby who had some questions on 

the credit crunch and the reason for it. You had talked about lower 

demand. You had talked about collateral, the value decline. You 

talked about regulators being especially cautious. I want to touch 

onto that. You said that you were instructing regulators to be 

more—have more consistency in their regulation. Consistency goes 

to stability goes to better lending. How are you evaluating that? 

Mr. BERNANKE. Well, first, in terms of what we are doing, we 

have put out a lot of specific guidance in terms of how you go about 

making these evaluations with lots of practical real world examples, and we have put out guidances about commercial real estate, 

about small business, and a number of other key areas. And we 

have been following that up with very intensive training of the examiners to make sure they understand that there needs to be an 

appropriate balance between appropriate prudence and making 

loans to creditworthy borrowers. 

In terms of evaluation, we are doing this a number of ways. We 

are gathering more data. For example, we are now gathering on a 

quarterly basis lending to small businesses instead of annually. We 

are contributing questions to the NFIB’s Survey of Small Businesses to try to understand what problems they see. Very importantly, as I mentioned in my testimony, we have had a series of 

40 meetings around the country, meeting with banks, small businesses, and other relevant parties to talk about the issues, and we 

have put together an addendum to my testimony which includes a 

number of findings and recommendations to address this. 

So we have been both qualitatively and quantitatively trying to 

assess the effects of our guidances and training on bank activity. 

Senator TESTER. OK. Just one last thing, Mr. Chairman, if I 

might, and then I will throw it over, because it is on this issue. I 

continually, when I go into the State of Montana every weekend or 

when I come back here, I am continually getting calls from banks, 

community banks, that are saying the regulation isn’t consistent. 

It is not consistent between agencies. It is not applied across the 

board within agencies in a consistent way. I said, you know what? 
35 

I would love to call these guys up. And they said, don’t use our 

name. If you use our name, it will be worse. 

There has got to be a way that you, being the person you are, 

can go out and dig down and get that information, because quite 

honestly, I believe the banks because I hear it from every one of 

them. So if you could do that, I would certainly appreciate it. 

Mr. BERNANKE. I invite those comments. If they are unwilling to 

talk to their Federal Reserve Bank in their district, we have an 

Ombudsman here in Washington who will be happy to take those 

comments, and our Bank Supervision Department will be happy to 

take those comments. So we want to hear that. 

Senator TESTER. Once again, thank you for being here, Chairman 

Bernanke. Thank you. 

Chairman DODD. Senator Bennet. 

Senator BENNET. Thank you, Mr. Chairman. Thank you for holding this hearing, and to the Ranking Member, thank you, and 

thank you for being back here, Mr. Chairman. 

I actually want to pick up right where Senator Tester left off, because the last time we were together, I asked whether or not we 

might have some metrics where we could start to look at things 

and be able to distinguish between lending that is not happening 

because of loan demand, lending that is not happening because of 

regulators’ overreach, lending that is not happening because we are 

in a different leverage environment, all that stuff, and I was 

pleased to see that in the addendum you have talked about it a few 

times. 

There is a section on research and data, what you are going to 

start collecting, what you have heard from people that might make 

it more meaningful, and for the life of me, there are a million 

things in here that I don’t know why we haven’t done already, but 

we haven’t. We haven’t had the focus on small business lending 

that we need to have. I don’t think the administration has had the 

focus on it that they need to have. 

But my question is—and my anecdotal evidence in Colorado continues to be exactly the same as Senator Tester’s, which is that 

small businesses that assert that they can pay on their loans can’t 

get credit, and banks are saying that the reason they can’t extend 

the credit is because the regulators have swung too far over to one 

side. It is a consistent theme. Every now and then, you hear somebody say, well, there is not really loan demand, or they will say, 

Michael, look and see if people are actually paying off their letters 

of credit and they are returning capital to banks. 

So my question for you is, you talked about the training and the 

guidance, wanting people to take a balanced approach. In the evidence that you have collected so far that you were just talking 

about, what is the evidence? What does it tell you about what is 

happening here? 

Mr. BERNANKE. Well—— 

Senator BENNET. Or do we not even now—— 

Mr. BERNANKE. I don’t know if I could give you a completely final 

answer on this. I think we are pretty confident that a lot of the reduction in lending is not regulatory constraint, that a lot of it has 

to do either with reduced demand from small businesses or from 

the fact that their financial and economic position has been weak-
36 

ened so that it is more difficult for them to get a loan with the 

tighter standards which now exist in the banking system. So that 

is a big part of it. 

I don’t have definitive answers for you that you would want on 

the regulatory, but let me give you an example of something which 

we are currently doing that I didn’t mention to Senator Tester, 

which is we have done baseline analyses, evaluations. We have 

gone out to 200 or more banks and asked them how they dealt with 

commercial real estate problems, workouts, relending, refinancing, 

and so on, and we are doing a follow-up subsequent to our guidance 

on this issue. And what we want to try to do is identify whether 

there have been changes in behavior. So we are trying to get the 

metrics that you are—— 

Senator BENNET. Is your sense that the—and what I hear a lot 

is we used to reserve 10 percent. The requirement is now 12 percent, or it was 9 percent, it is now 12 percent. Do you think that 

the regulators are striking the right balance there? 

Mr. BERNANKE. I am sorry, I didn’t understand the question. 

Senator BENNET. They are saying that the assets that they have 

to reserve that they can’t lend have increased from, I think it is 

9 percent to 12 percent. 

Mr. BERNANKE. There is no simple rule like that. There is an 

evaluation of the overall quality of the loan, which depends on a 

variety of things, so there is not—— 

Senator BENNET. OK. They feel like—in my State, they feel like 

there is a simple rule like that. 

Mr. BERNANKE. So there are data. Some of the data that we look 

at are a survey we do of 100 banks of loan officers and ask them 

whether they are tightening or easing standards, and they have 

been tightening for quite a while. So some of this surely is the 

banks’ decision to tighten their lending standards. Now, recently, 

we have seen a cessation of tightening. That is, standards are no 

longer getting tighter. In some places, they are getting a little bit 

easier. So there is some stabilization there. We have also seen that 

small business lending is still dropping, but more slowly than before. 

So there are some indications that credit is becoming more available. Whether that has to do with regulatory decisions or whether 

it has to do with the fact that the economy is looking a little better 

is hard to say. 

Senator BENNET. I wanted to, just before I lose my chance here, 

also talk a little bit about the deficit and the debt situation. You 

talked about how the markets need to see a compelling—that we 

are taking it seriously. You have testified to that before. Actually, 

they are not the only ones. My daughters have heard me talk about 

this so much that they are enormously agitated about this question 

themselves, because they don’t want to make these decisions that 

we are failing to make. 

But Congress after Congress after Congress have failed to make 

the decisions, and we now have $13 trillion debt on the balance 

sheet. What is appalling about it, among other things, is that we 

really don’t have much to show for it, I don’t think. We haven’t invested in this country’s infrastructure, for example. We haven’t 

built the 21st century energy infrastructure that we need. So the 
37 

hole is actually even greater than I think we imagine from a fiscal 

point of view. 

You mentioned at the very beginning the difficulty of having one 

Congress bind the next Congress and the next Congress. What kind 

of thing do you think about when you are not here but in your office that we could do that would show that we are serious about 

this, that we are actually putting ourselves on a path of sustainability, knowing that we can’t fix this overnight? What is it that 

we—what will do we need to demonstrate and how do we need to 

demonstrate it? I realize—I am not asking for specific policies, but 

what do you say to yourself? 

Mr. BERNANKE. Well, Congress has over time moved toward 

multiyear budgeting plans, and you try to look at projected trajectories over a 10-year window. So those kinds of exercises, where 

you are looking at how programs will affect the deficit over a 10- 

year period is certainly one way to demonstrate commitment, and 

a future Congress could reverse what you did, but they at least 

would have to take active action to do that, and you could demonstrate your commitment to gradual deficit reduction over a period of time. 

At some point, you are going to have to address in some way or 

other the unfunded liabilities associated with entitlements. The 

problem there is that it doesn’t seem likely that you would want 

to change those for people who are near retirement. 

Senator BENNET. Right. 

Mr. BERNANKE. Even any changes you would make today are 

going to only take effect relatively far in the future. And so part 

of the challenge is to find things that will affect the trajectory, say, 

between now and 2020, which is what the Commission is looking 

at. 

Senator BENNET. Mr. Chairman, may I ask one more question, 

or are we done—— 

Chairman DODD. Yes, very quickly, if you can. 

Senator BENNET. Do you think—one of the things that I worry 

about is that as we recover, we forget that we have got these obligations that we have got to deal with, and people will cut taxes and 

not pay for it or spend money and not pay for it. Do you think that 

it would be possible to create a legislative instrument to help manage our deficit to a percentage of GDP, that we would be saying 

to ourselves that we have a policy objective that says, by such and 

such a year, the budget deficit can’t be greater than 3 percent of 

GDP or lower? 

Mr. BERNANKE. It is certainly possible. There have been a variety 

of different kinds of rules over the years that Congress has tried 

to impose on itself, sometimes successful, sometimes less. You have 

a created Congressional Budget Office, which is a neutral arbiter 

and which has been very useful in trying to make sure people are 

making an honest assessment of the costs of their programs or tax 

cuts. 

So, yes, I think there probably are a range of ways of constraining future deficits, and if you look around the world, many 

countries either have constitutional provisions or they have a nonpartisan office that enforces certain constraints. Of course, the 
38 

States have balanced budget requirements which are not perfectly 

enforced, but do constrain their spending, obviously. 

Senator BENNET. Thank you. Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator. 

Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Thank you, Chairman Bernanke, for your service. I always believe the starting point always has consequence, and I hear a lot 

about spending, which I agree is a challenge and something we 

need to tackle, but I also hear it in the abstract. So let me just do 

a very quick history line with you. 

You came to us in the end of 2008 with Secretary Paulson and 

you said to this Congress, we need to act or otherwise we will have 

financial institutions collapse and that collapse will mean an entire 

systemic risk to the entire country and maybe we will even have 

a global financial meltdown. Is that true? 

Mr. BERNANKE. Absolutely. 

Senator MENENDEZ. So that was necessary. 

Mr. BERNANKE. Yes. 

Senator MENENDEZ. And then we asked you in the beginning of 

2009, when President Obama—that happened before President 

Obama took office. And then President Obama takes office in 2009 

and we have an economy that has flat-lined, is that fair to say? 

Mr. BERNANKE. You have a—— 

Senator MENENDEZ. An economy that was flat-lined, with absolutely no—— 

Mr. BERNANKE. Yes. 

Senator MENENDEZ. We had negative growth. 

Mr. BERNANKE. Very weak, yes. 

Senator MENENDEZ. We were losing three-quarters of a million 

jobs in January and February and March of 2009. 

Mr. BERNANKE. That is correct. 

Senator MENENDEZ. We had negative GDP growth, is that correct? 

Mr. BERNANKE. Yes. 

Senator MENENDEZ. And then we needed to stimulate that economy because it just had no private sector activity, for all intents 

and purposes, is that correct? 

Mr. BERNANKE. Yes. 

Senator MENENDEZ. And, therefore, that was necessary. 

Mr. BERNANKE. Well, I never specifically endorsed any particular 

program, size, composition, and so on—— 

Senator MENENDEZ. But you then assisted to stimulate the economy. 

Mr. BERNANKE. ——but stimulus was certainly beneficial, or certainly was useful in the context of the weak economy we had at the 

beginning of last year. 

Senator MENENDEZ. Well, if we had done nothing, would it have 

been worse? 

Mr. BERNANKE. Probably, yes. 

Senator MENENDEZ. OK. So it was necessary. So I have a little 

difficulty in understanding some of our colleagues from their starting point. Let me ask you now, now, if we do absolutely nothing, 

what is the economy going to look like? 
39 

Mr. BERNANKE. Well—— 

Senator MENENDEZ. What is the job picture going to look like? 

Mr. BERNANKE. Our baseline analysis is that there will not be 

another large fiscal stimulus, and based on that, we have come up 

with the forecast which I reported today which is for moderate recovery. 

Senator MENENDEZ. But you are also looking at monetary policy 

as a way, possibly, to see if you can further stimulate—my word— 

the economy, not? 

Mr. BERNANKE. That is correct. 

Senator MENENDEZ. Well, that is an action that will have somewhat of a cost. So it is—we have choices here. We could have done 

nothing, spent nothing and had a global financial meltdown, or we 

could have acted and prevented that because the consequences 

would have been far greater. A global financial meltdown means a 

depression in the 21st century. That would have been far different 

than the depression that you studied under Roosevelt, would that 

not be true? 

Mr. BERNANKE. Senator, I have never objected to the spending 

that was done to address—— 

Senator MENENDEZ. I know you haven’t. I am just trying to get 

the record here straight. 

Mr. BERNANKE. Right. I think that the fact that we have a 10- 

percent GDP deficit this year is completely understandable given 

what we have been through. 

Senator MENENDEZ. So we are looking at debt and deficits now, 

and I agree we need to tackle that. So adding another $680 billion 

to the debt, is that a good idea? 

Mr. BERNANKE. It depends on—— 

Senator MENENDEZ. Well—— 

Mr. BERNANKE. Everything else being equal, raising the debt is 

a negative. 

Senator MENENDEZ. So raising the debt is a negative. And if I 

do that in a way in which I don’t offset that, that would be a negative, would it not be? 

Mr. BERNANKE. From the debt perspective, yes. 

Senator MENENDEZ. From the debt perspective. 

Mr. BERNANKE. Yes. 

Senator MENENDEZ. Now, but that is, in essence, what some of 

our colleagues want us to do in extending the tax cuts that are expiring and not pay for them. And so I just don’t understand how 

we reconcile those views. 

Is it permissible never to pay for tax cuts than what they drain 

the Treasury of? Is that a good fiscal policy? 

Mr. BERNANKE. If you don’t control the deficits over time, eventually, the markets won’t lend to you at reasonable interest rates. 

Senator MENENDEZ. Now, speaking about lending at reasonable 

interest rates, if we continue—you know, my colleagues from Montana and Colorado, I could echo in New Jersey the reality of what 

banks tell us, particularly community banks and others. So it gets 

to be a little wide swath of the same set of statements that are 

being made, which always make me think a little bit about the 

truthfulness in terms of there seems to be more voracity when I 

continuously get from a wide range of entities the same answer. 
40 

But if you can borrow from the Federal Reserve at, what is it, 

one point? 

Mr. BERNANKE. The discount window is 75 basis points, but we 

are not making many loans through that. 

Senator MENENDEZ. But if you can borrow incredibly low and 

then go buy Treasury bills, why would you take risk to make loans? 

Mr. BERNANKE. It is still profitable. If you can make a good loan, 

it is still profitable. Buying Treasury bills with short-term money 

is not an arbitrage. It is a risky way of making short-term profits 

at the risk of long-term capital losses. 

Senator MENENDEZ. Let me ask you this. Why is it that we hear 

from bank after bank after bank after bank that in the regulatory 

aspect, we are telling, for example, in commercial loans that are 

performing—performing—that, however, they need to be recapitalized. Well, if we do that, we are going to dry up an enormous 

amount of capital, especially as we are looking at a commercial 

mortgage market problem that I think is going to be incredibly 

troublesome. 

Mr. BERNANKE. Senator, if I may make a couple of comments. 

One is that there are a number of different bank regulators, as you 

know, and there may be differences among the regulators in terms 

of how aggressive they have been at trying to maintain this appropriate balance. I don’t know. 

Speaking for the Federal Reserve, which oversees about 10 percent of community banks, we have made a very strenuous effort to 

try to achieve that appropriate balance. It is also possible, I mean, 

that the banks may be blaming examiners when, in fact, it is their 

own reluctance to lend which is really the problem. But I agree 

with the basic point that we need to do everything we can to make 

sure that banks make good loans, that if a creditworthy borrower 

comes, that they can get credit. 

With respect to your particular point, one of the specific elements 

of our guidance is that a decline in the value of the property, the 

commercial real estate is in itself not a reason not to make a loan 

if the cash-flow is adequate to make repayment. So we have been 

clear about that particular issue. 

Senator MENENDEZ. Finally, I hear from the business community 

that they need certainty. Well, it seems to me they have certainty 

in the health field as a result of the law. They now have certainty 

in financial services regulations, or, I should say, the financial 

services, the Wall Street reform legislation. And I just want to 

make sure that my colleagues look at your testimony where you 

say that legislation represents significant progress toward reducing 

the likelihood of future financial crises and strengthening the capacity of financial regulators to respond to risks that may emerge, 

and you go on to say, I believe that the legislation, together with 

stronger regulatory standards for bank capital and liquidity now 

being developed will place our financial system on a sounder foundation and minimize the risk of a repetition of the devastating 

events of the past 3 years—the past 3 years. I think it is incredibly 

important to highlight that part of your testimony. Thank you for 

it. 

I thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator Menendez. 
41 

Let me, if I can, Judd Gregg, who I have a lot of respect for, 

raised the issue that uncertainty in fiscal policy was the, as he sees 

it, is one of the reasons for the lack of activity here. I am wondering if it is also—I mean, it seems to me that you are getting 

businesses with this low-growth capacity, where they are just—the 

demand isn’t there. It seems to me that is as much of a factor here 

as anything else. I wonder if you might comment on that. Again, 

I am not trying to engage you into taking a side on this debate one 

way or the other. I think there is clearly some uncertainty out 

there, as you have described it. But it seems to me, as well, if people aren’t—there isn’t the capacity, the growth capacity, there is no 

demand. Therefore, people are not—the economy is not growing. 

How much of this can describe that? 

Mr. BERNANKE. Demand is certainly very important, absolutely. 

Firms have a lot of excess capacity. They are not making use of the 

factories and the buildings and the equipment they have now, and 

so that reduces their incentive to invest further. 

Chairman DODD. Well, we have a lot of buildings that are just 

sitting idle, vacant. 

Mr. BERNANKE. That is right. 

Chairman DODD. So the utilization is—capacity utilization, there 

is no demand for it, it seems to me. That has an awful lot to—I 

just think that has to be added as a major factor in all of this. I 

gather you agree with that. 

Mr. BERNANKE. Certainly the lack of demand, even the small 

businesses we were talking about, when they talk about what is 

their number one problem, it actually is not credit. It is lack of demand. 

Chairman DODD. Let me jump, if I can—I did not get into this 

stuff. Several members raised questions with you about, in the financial reform bill, the role of the Federal Reserve. I wanted to 

raise the issue of the responsibility to impose that heightened capital liquidity and leverage standards on bank holding companies 

and designated nonbank financial companies, and obviously the 

harmonization issue, which we have talked about, is going to be 

critically important. 

But, in your view, will such standards need to be set significantly 

higher than they are at present in order to reduce the likelihood 

of another fiscal or financial crisis? 

Mr. BERNANKE. We are trying simultaneously to think about the 

small versus large bank or systemically critical versus noncritical 

bank capital issues. At the same time, we are looking with our colleagues internationally to try and establish relationships between 

capital standards across countries. So I do not think we really have 

come to a conclusion there. It is not a straightforward thing to answer that question, in part because large banks and small banks 

have such different portfolios and such different activities that they 

will have different capital levels even for the same set of rules. We 

are committed by the legislation and by our own approach, to requiring more capital of systemically critical firms, and in a progressive way as firms become even more critical, interconnected, essential to the functioning of the system that they need to both have 

higher capital and to be subject to tougher prudential regulation 

because of the effects they have on the whole system if they fail. 
42 

Chairman DODD. Well, let me ask you this, because there has 

been—we will get a lot of Monday morning quarterbacking on the 

bill, I presume for years to come. There was a proposal in one of 

the versions of the bill to actually set standards in the legislation. 

I opposed that idea because of the very answer you just gave to my 

question. And I am drawing the conclusion there that you think we 

did the right thing by not trying to set a specific standard in the 

legislation but allow for more nuanced response to it, again, based 

on the size of the institution we are talking about, the kind of risks 

they pose. 

On a related matter, the same question has been raised on we 

left a lot to the regulators, and, again, I am the first to admit exactly we did that, because, again, a set of proposed rules with commentary periods, all of the factors and processes we go through to 

determine how best to set these up. As someone who has been not 

only a student and a practitioner in all of this—and obviously a 

regulator, but aside from that, stepping back from the regulator 

role, was that generally the right approach in your view that we 

took with this matter rather than trying to write in a sense rigid 

standards in the legislation that would have, I think, been more 

constraining in terms of our ability to have a more measured response? 

Mr. BERNANKE. On the specifics of capital there are some rules, 

the Collins amendment and so on. But it was very important that 

we have at least some flexibility in order to negotiate and collaborate with our international colleagues on developing an international set of capital standards. So that was very important. 

Inevitably in a bill this complex that is addressing so many complex issues, if you want it to be responsive to changes in the environment, to deal with a lot of technical details, I think inevitably 

the regulators have to play a role. But Congress certainly has an 

oversight role. You are certainly going to be seeing what we do, and 

if you are dissatisfied, I am sure you will let us know. 

Chairman DODD. Well, in fact, I want to do that, but I am not 

going to set the hearing date today, but I want to put my colleagues on notice here that my view would be that even as early 

as September—again, on the assumption we will be leaving here in 

October for the elections, but in September at some point—I will 

give people enough time, so probably toward the end of the month, 

conduct a series of hearings, either one or two of them anyway, 

with yourself and others to come before us and more specifically lay 

out what steps exactly are being taken by the various regulators 

under the proposed legislation so we get some sense of where 

things are heading at that time. That may be helpful. 

In that regard, I just wanted to ask you, the financial reform bill 

creates the Financial Stability and Oversight Council, which you 

know, and the Office of Financial Research to provide it with data 

and analysis on overall financial market conditions. And I think 

particularly, despite the criticism of some, I think the Office of Financial Research will be a real asset for us in terms of that kind 

of real-time data that ought to be, I hope, of real assistance to you 

and others. But do you think that the macroprudential supervision 

of the economy can help to prevent a financial crisis in the future? 

And how do you foresee—and this may be the more important of 
43 

the two questions. How do you foresee the interaction of 

macroprudential supervision with the traditional bank-by-bank 

microprudential supervision of banking regulators? 

Mr. BERNANKE. Mr. Chairman, there has been some commentary 

which says that the bill relies too much on prescient or 

omnicompetent regulators to identify risks that are emerging. In 

fact, there are multiple aspects of this bill. First, there is the 

macroprudential aspect which asks the regulators to look for 

emerging risks. 

Chairman DODD. Right. 

Mr. BERNANKE. I think the regulators would have had a better 

chance of identifying some of the problems that arose in this recent 

crisis with that kind of framework that you have created. But beyond that macroprudential aspect, there is also a number of steps 

to strengthen the system, make it more resilient, to put more derivatives through central counterparties, to increase capital and so 

on, so that whatever the source of a future crisis, even if it is not 

identified and defused, the system will be better able to withstand 

that effect. 

And then, finally, if we get unfortunately to the firefighting 

stage, there are additional tools there. So I think it is a useful approach to have multiple ways of addressing crises, both preventive 

and resilience and firefighting. 

So the macroprudential part is very important. It is difficult. It 

is going to require coordination among different regulators, but it 

is a direction that regulators around the world and academics and 

others looking at this really believe is the right direction, and there 

is quite a bit of thinking already out there about how we could do, 

for example, stress tests that look at the whole system, which combine the results for individual firms, as you mentioned, but also are 

able to infer from that how the system as a whole might perform 

if a certain set of stresses arose. 

So there is clearly a relationship between the micro- and 

macroprudential part, but there is a lot of challenging work to be 

done there. 

Chairman DODD. Well, I agree, and, again, you have already addressed this in passing, so I will leave it for a later gathering to 

look at all of this and how supervisory functions need to change 

under our legislation—I know you are giving a lot of thought to 

that already—as well as how we ought to handle the expanded 

mandates that we have saddled you with. And, again, I have a 

great deal of confidence it can be done, and I appreciate your response to Senator Bunning when he asked the question of whether 

or not you can do this. I am confident you can. Again, we have differences of opinions because I was looking at this a bit differently 

with more of a single prudential regulator where we sort of evolved 

from that back in November to what we have ended up here, and 

I accept that. That is how the process works here with people. I 

think even my views changed and were modified a bit as we went 

through the process. So I started out in one place. I would have 

been closer maybe to where I started out from than what we ended 

up, but, nonetheless, I accept the fact we are where we are and believe the capacity exists to get this right. And the fact that there 

is more of a holistic approach to this thing, where we have the ca-
44 

pacity and the ability of talented people all driving toward the 

same goals, maintaining a strong, safe, and sound financial system 

with the kind of stability that is necessary in it, as well as restoring that level of trust and confidence in the system, which to me 

is the most critical element of all, that if the American people and 

others feel that sense of trust and confidence in our financial system, that in itself will have its own reward. 

So, again, I am very grateful to you and your staff and others 

for the tremendous amount of work you have put into this effort. 

I appreciate it very much. I look forward to getting together with 

you again in a couple of months here to really get down to the details of how this is going to work. 

Senator Shelby. 

Senator SHELBY. Mr. Chairman, some observers warn of growing 

risk in the $2.8 trillion municipal debt market. Parts of California 

as well as municipalities in Illinois, Michigan, and New York seem 

to have been vulnerable to market-driven widening of spreads on 

their bonds relative to Treasuries, especially when market anxiety 

over fiscal conditions in the euro zone grew. I have two questions 

regarding municipal debt. 

What is your assessment of the state of the U.S. municipal debt 

markets? Second, do you believe there is any merit to a recent 

characterization by Warren Buffett that there is potentially ‘‘a terrible problem’’ ahead for municipal bonds? 

Mr. BERNANKE. Well, first, it is certainly true that States and localities are under a lot of fiscal and financial stress. Their revenues 

have fallen considerably, and they are trying to maintain services 

and so on. So clearly we have seen some deficits and some cuts at 

the State and local level. 

My view is first of all that the municipal debt market is functioning pretty well, that at least States and localities that have 

good credit or seem to be sound are not having any difficulty accessing the municipal market, and that yields are pretty low, which 

is fortunate because there are a number of States and localities 

that are being forced to borrow under the current circumstances. 

Certainly there may be some localities in particular that will 

have trouble, but I would draw a distinction between say California 

and Greece, which is that because of these budget balance requirements, the outstanding debt of States is generally much less than 

the United States or other countries. 

So we always have to pay close attention, and there are a lot of 

stresses at the State and local level, but I do not at this point view 

the municipal debt market as being a major risk to the economy. 

Senator SHELBY. Deflation and the Japanese experience, some 

people express fear that the U.S. could find itself in a period of deflation and, like Japan, have difficulty escaping. What do you believe are the differences between the U.S. and Japan in terms of 

structure of economic policy that would ensure that we do not follow the Japanese experience? And is that a concern of the Fed? 

Mr. BERNANKE. Again, forecasts are very uncertain, but I do not 

view deflation as a near-term risk for the United States. If you look 

at inflation expectations as measured by Government bond markets 

or by surveys, there has not really been much decline in expected 

inflation, and that stability of inflation expectations is one impor-
45 

tant factor that will keep inflation from falling very much. So, 

again, the forecasts of the FOMC are for a gradual increase of inflation toward a more normal, say 2-percent level, and there is not 

at this point, a very high probability that deflation will become a 

concern. 

I think there are very important differences between the U.S. 

and Japan. Some of them are structural. The Japanese economy 

has been relatively low productivity in recent years. It has got a 

declining labor force, and so its potential growth rate is lower than 

the U.S., and it has been a less vibrant economy in that respect. 

Also in Japan are much longer-lived problems with their banking 

system, which were not addressed for some years. For better or 

worse, we were very aggressive in addressing our banking system 

issues, and I think, as I mentioned to a couple of folks our system 

is strengthening and looks to be doing much better. So I do not 

think that will be a source of long-term drag either. 

And, finally, I would comment that I think the Federal reserve 

does have the capacity, the tools, should deflation occur—which I 

do not believe is very likely—to reverse it, and we would be assiduous in doing that. 

So I do not consider this to be a very high risk at this point, but, 

of course, we will continue to monitor the economy and the price 

level. 

Chairman DODD. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman, and, Mr. Chairman, 

I thank you for your testimony and coming here today. And I know 

there has been a lot of probings about monetary policy, and I very 

much appreciate the fact that you stayed consistent with your report. So I want to probe in another area, and that is, Senator 

Brown was pursuing the whole issue of China, and I do think 

that—and I know you said we should focus on the overall trade 

deficits, not the bilateral deficits. But I do think with the economy 

being as it is and just the relationship as it is, there may be attempts to try to deal with that legislatively. I do not know. And I 

just wondered if you would share with us the fact is—I mean, you 

did say it is a subsidy, and it is, to the Chinese people to have a 

currency valuation relative to the dollar that allows them to export 

to us. 

What are the things that all of us who want to make sure we 

try to do good things, what are the things we should think about 

as it relates to the Chinese currency? And what are some of the 

unintended consequences we should also be aware of? 

Mr. BERNANKE. Of the—— 

Senator CORKER. Well, I mean, there are people looking at— 

there are all kind of things, and I understand, especially folks who 

come from textile orientations and all of that. I know Chuck Schumer and Lindsey Graham have looked at some things. I think there 

is going to be a push. I just think as this economy moves along 

slowly and that trade gap widens, I think there may be some legislative efforts to deal with that. I am not saying I am going to be 

a part of that or not part of that, but what are the things that as 

legislators we should think about as it relates to that issue and 

some of the unintended consequences of dealing with it inappropriately? 
46 

Mr. BERNANKE. Well, I fully understand the concern, and again, 

it is felt more probably in specific industries than it is for the economy as a whole or for employment as a whole. 

Senator CORKER. Say that again? I did not hear it. 

Mr. BERNANKE. I understand the concern. I think that as Senator 

Brown was pointing out, it is easier to identify effects on specific 

industries than it is to find effects of the currency policy on the 

economy as a whole or unemployment as a whole, because there is 

not much relationship between our unemployment rate and our 

current account deficit. 

Just to take an obvious example, unemployment has soared recently while the current account deficit has actually come down. 

But I do understand the concern. 

All I can really say is that to take some of the steps that have 

been suggested would be quite severe steps and would cause considerable concern about our overall relationship with China and 

other countries and about our trading policies. 

Again, I understand the concern, but I would just reiterate first 

that this is a complex problem and that it is not just the currency 

that is involved. The Chinese are also involved in trying to restructure their economy to become more reliant on domestic demand, 

first of all. Second, I would note that the United States has got a 

vibrant bilateral relationship in terms of our dialog, for example, 

the strategic and economic dialog which has been going on was created by Secretary Paulson, has been expanded and continued by 

the current administration. And one of the things that is evident 

from that is that the U.S. and China have a wide range of issues, 

not just the currency but a wide range of issues relating to energy 

and environment and tourism and investment and trade and many 

other things where we have common interests, where we need to 

work cooperatively together. So I hope that Congress will think 

very carefully before taking any strong action. 

At the same time, I recognize that particularly the Treasury has 

a special role here because they are the spokesman for the currency, but for the Federal Reserve as well to try to maintain a constant dialogue to persuade the Chinese and to apply pressure to 

them that they need to adjust their currency, which is their current 

policy distorts capital flows globally, but it is not even good for 

China in the longer term. It distorts their economy as well and 

makes them too reliant on exports and reduces their own domestic 

consumption and also makes their monetary policy less independent. So there are a lot of costs to them as well, and we are 

hopeful that they have become more appreciative of those concerns 

over time. 

Senator CORKER. In most recent statements that they made, they 

gave a tilt, if you will, prior to some G-20 meetings, as to what they 

may be doing. What do you read into that? And what is your sense 

as you talk to counterparts about what their longer-term efforts 

will be? 

Mr. BERNANKE. With respect to the currency? 

Senator CORKER. Yes. 

Mr. BERNANKE. Well, as you know, they have gone back to the 

managed float which allows for small changes in the currency. I 

think that the amount that they let it move will depend on their 
47 

own views of the stability of their own economy and global growth. 

We are going to have to see. I honestly do not know exactly what 

their plans are. I suspect that they will be responding to how they 

view the evolution of global economic conditions. 

Senator CORKER. Well, Mr. Chairman, I thank you for coming 

and certainly look forward to talking to you about those issues 

going down the road. We had a good hearing yesterday that Senator Bayh chaired, and I think in any bill that passes there are 

good things and bad things, and people have to make decisions 

about how they voted based on the net effect. 

I do think that all of us are hopeful that as it relates to our relations with the other countries, we end up with a regulatory regime 

that works well for all of us, and I wish you well in those efforts 

and look forward to talking to you as you move ahead. Thank you. 

Mr. BERNANKE. Thank you, Senator. 

Chairman DODD. Thank you 

Let me ask, Mr. Chairman—and, again, this goes to the same 

sort of question that Senator Corker has raised. Some have suggested that we would have been better off had we not acted in this 

area of financial reform, that if we had just let the market continue 

the status quo. In fact, some have even suggested that given the 

opportunity they would like to repeal this effort we have all gone 

through over the last year and a half. 

Assuming that what you are talking about is repealed is basically going back to the status quo, are we better off, in your view, 

with this legislation—I know a lot of work needs to be done—than 

we would be if we would have just maintained the status quo as 

things were prior to the passage of this legislation? 

Mr. BERNANKE. Yes, I think we are. I think there were important 

gaps in our regulatory system which became painfully evident during the crisis and that substantial progress has been made to closing those gaps. We have increased our capacity to take a 

macroprudential approach, which I think is an important complement to our current institution-by-institution approach. And the 

ability to wind down large firms and avoid the bailout problem or 

avoid the situation where we have to choose between a bailout and 

a financial crisis, I think that is an important step also. 

Now, all those things are going to require a lot of work to make 

them effective and useful tools, but it was very important to address those problems. 

Chairman DODD. And so, therefore, it would be imprudent to repeal what we have talked about, what we have done here? 

Mr. BERNANKE. No, I would not support repeal. 

Chairman DODD. Thank you very much. This Committee will 

stand adjourned. Thank you, Mr. Chairman. 

Mr. BERNANKE. Thank you. 

[Whereupon, at 4:37 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 
48 

PREPARED STATEMENT OF BEN S. BERNANKE 

CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

JULY 21, 2010 

Chairman Dodd, Senator Shelby, and Members of the Committee, I am pleased 

to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress. 

Economic and Financial Developments 

The economic expansion that began in the middle of last year is proceeding at a 

moderate pace, supported by stimulative monetary and fiscal policies. Although fiscal policy and inventory restocking will likely be providing less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should help sustain growth. In particular, real consumer spending appears 

to have expanded at about a 21⁄2 percent annual rate in the first half of this year, 

with purchases of durable goods increasing especially rapidly. However, the housing 

market remains weak, with the overhang of vacant or foreclosed houses weighing 

on home prices and construction. 

An important drag on household spending is the slow recovery in the labor market and the attendant uncertainty about job prospects. After 2 years of job losses, 

private payrolls expanded at an average of about 100,000 per month during the first 

half of this year, a pace insufficient to reduce the unemployment rate materially. 

In all likelihood, a significant amount of time will be required to restore the nearly 

81⁄2 million jobs that were lost over 2008 and 2009. Moreover, nearly half of the unemployed have been out of work for longer than 6 months. Long-term unemployment not only imposes exceptional near-term hardships on workers and their families, it also erodes skills and may have long-lasting effects on workers’ employment 

and earnings prospects. 

In the business sector, investment in equipment and software appears to have increased rapidly in the first half of the year, in part reflecting capital outlays that 

had been deferred during the downturn and the need of many businesses to replace 

aging equipment. In contrast, spending on nonresidential structures—weighed down 

by high vacancy rates and tight credit—has continued to contract, though some indicators suggest that the rate of decline may be slowing. Both U.S. exports and U.S. 

imports have been expanding, reflecting growth in the global economy and the recovery of world trade. Stronger exports have in turn helped foster growth in the 

U.S. manufacturing sector. 

Inflation has remained low. The price index for personal consumption expenditures appears to have risen at an annual rate of less than 1 percent in the first 

half of the year. Although overall inflation has fluctuated, partly reflecting changes 

in energy prices, by a number of measures underlying inflation has trended down 

over the past 2 years. The slack in labor and product markets has damped wage 

and price pressures, and rapid increases in productivity have further reduced producers’ unit labor costs. 

My colleagues on the Federal Open Market Committee (FOMC) and I expect continued moderate growth, a gradual decline in the unemployment rate, and subdued 

inflation over the next several years. In conjunction with the June FOMC meeting, 

Board members and Reserve Bank presidents prepared forecasts of economic 

growth, unemployment, and inflation for the years 2010 through 2012 and over the 

longer run. The forecasts are qualitatively similar to those we released in February 

and May, although progress in reducing unemployment is now expected to be somewhat slower than we previously projected, and near-term inflation now looks likely 

to be a little lower. Most FOMC participants expect real GDP growth of 3 to 31⁄2

percent in 2010, and roughly 31⁄2 to 41⁄2 percent in 2011 and 2012. The unemployment rate is expected to decline to between 7 and 71⁄2 percent by the end of 2012. 

Most participants viewed uncertainty about the outlook for growth and unemployment as greater than normal, and the majority saw the risks to growth as weighted 

to the downside. Most participants projected that inflation will average only about 

1 percent in 2010 and that it will remain low during 2011 and 2012, with the risks 

to the inflation outlook roughly balanced. 

One factor underlying the Committee’s somewhat weaker outlook is that financial 

conditions—though much improved since the depth of the financial crisis—have become less supportive of economic growth in recent months. Notably, concerns about 

the ability of Greece and a number of other euro-area countries to manage their sizable budget deficits and high levels of public debt spurred a broad-based withdrawal 

from risk-taking in global financial markets in the spring, resulting in lower stock 

prices and wider risk spreads in the United States. In response to these fiscal pressures, European leaders put in place a number of strong measures, including an as-
49 

1See 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. 2For more information, see Ben S. Bernanke (2010), ‘‘Restoring the Flow of Credit to Small 

Businesses’’, speech delivered at ‘‘Addressing the Financing Needs of Small Businesses,’’ a forum 

sponsored by the Federal Reserve Board, Washington, July 12, www.federalreserve.gov/ 

newsevents/speech/bernanke20100712a.htm. 

sistance package for Greece and ÷500 billion of funding to backstop the near-term 

financing needs of euro-area countries. To help ease strains in U.S. dollar funding 

markets, the Federal Reserve reestablished temporary dollar liquidity swap lines 

with the ECB and several other major central banks. To date, drawings under the 

swap lines have been limited, but we believe that the existence of these lines has 

increased confidence in dollar funding markets, helping to maintain credit availability in our own financial system. 

Like financial conditions generally, the state of the U.S. banking system has also 

improved significantly since the worst of the crisis. Loss rates on most types of loans 

seem to be peaking, and, in the aggregate, bank capital ratios have risen to new 

highs. However, many banks continue to have a large volume of troubled loans on 

their books, and bank lending standards remain tight. With credit demand weak 

and with banks writing down problem credits, bank loans outstanding have continued to contract. Small businesses, which depend importantly on bank credit, have 

been particularly hard hit. At the Federal Reserve, we have been working to facilitate the flow of funds to creditworthy small businesses. Along with the other supervisory agencies, we issued guidance to banks and examiners emphasizing that lenders should do all they can to meet the needs of creditworthy borrowers, including 

small businesses. 1 We also have conducted extensive training programs for our 

bank examiners, with the message that lending to viable small businesses is good 

for the safety and soundness of our banking system as well as for our economy. We 

continue to seek feedback from both banks and potential borrowers about credit conditions. For example, over the past 6 months we have convened more than 40 meetings around the country of lenders, small business representatives, bank examiners, 

government officials, and other stakeholders to exchange ideas about the challenges 

faced by small businesses, particularly in obtaining credit. A capstone conference on 

addressing the credit needs of small businesses was held at the Board of Governors 

in Washington last week. 2 This testimony includes an addendum that summarizes 

the findings of this effort and possible next steps. 

Federal Reserve Policy 

The Federal Reserve’s response to the financial crisis and the recession has involved several components. First, in response to the periods of intense illiquidity 

and dysfunction in financial markets that characterized the crisis, the Federal Reserve undertook a range of measures and set up emergency programs designed to 

provide liquidity to financial institutions and markets in the form of fully secured, 

mostly short-term loans. Over time, these programs helped to stem the panic and 

to restore normal functioning in a number of key financial markets, supporting the 

flow of credit to the economy. As financial markets stabilized, the Federal Reserve 

shut down most of these programs during the first half of this year and took steps 

to normalize the terms on which it lends to depository institutions. The only such 

programs currently open to provide new liquidity are the recently reestablished dollar liquidity swap lines with major central banks that I noted earlier. Importantly, 

our broad-based programs achieved their intended purposes with no loss to taxpayers. All of the loans extended through the multiborrower facilities that have 

come due have been repaid in full, with interest. In addition, the Board does not 

expect the Federal Reserve to incur a net loss on any of the secured loans provided 

during the crisis to help prevent the disorderly failure of systemically significant financial institutions. 

A second major component of the Federal Reserve’s response to the financial crisis 

and recession has involved both standard and less conventional forms of monetary 

policy. Over the course of the crisis, the FOMC aggressively reduced its target for 

the Federal funds rate to a range of 0 to 1⁄4 percent, which has been maintained 

since the end of 2008. And, as indicated in the statement released after the June 

meeting, the FOMC continues to anticipate that economic conditions—including low 

rates of resource utilization, subdued inflation trends, and stable inflation expecta-
50 

3See, Federal Reserve Board of Governors (2010), ‘‘FOMC Statement’’, press release, June 23, 

www.federalreserve.gov/newsevents/press/monetary/20100623a.htm. 

tions—are likely to warrant exceptionally low levels of the federal funds rate for an 

extended period. 3

In addition to the very low Federal funds rate, the FOMC has provided monetary 

policy stimulus through large-scale purchases of longer-term Treasury debt, Federal 

agency debt, and agency mortgage-backed securities (MBS). A range of evidence suggests that these purchases helped improve conditions in mortgage markets and 

other private credit markets and put downward pressure on longer-term private borrowing rates and spreads. 

Compared with the period just before the financial crisis, the System’s portfolio of domestic securities has increased from about $800 billion to $2 trillion and has 

shifted from consisting of 100 percent Treasury securities to having almost twothirds of its investments in agency-related securities. In addition, the average maturity of the Treasury portfolio nearly doubled, from 31⁄2 years to almost 7 years. The 

FOMC plans to return the System’s portfolio to a more normal size and composition 

over the longer term, and the Committee has been discussing alternative approaches to accomplish that objective. 

One approach is for the Committee to adjust its reinvestment policy—that is, its 

policy for handling repayments of principal on the securities—to gradually normalize the portfolio over time. Currently, repayments of principal from agency debt 

and MBS are not being reinvested, allowing the holdings of those securities to run 

off as the repayments are received. By contrast, the proceeds from maturing Treasury securities are being reinvested in new issues of Treasury securities with similar 

maturities. At some point, the Committee may want to shift its reinvestment of the 

proceeds from maturing Treasury securities to shorter-term issues, so as to gradually reduce the average maturity of our Treasury holdings toward precrisis levels, 

while leaving the aggregate value of those holdings unchanged. At this juncture, 

however, no decision to change reinvestment policy has been made. 

A second way to normalize the size and composition of the Federal Reserve’s securities portfolio would be to sell some holdings of agency debt and MBS. Selling agency securities, rather than simply letting them run off, would shrink the portfolio and 

return it to a composition of all Treasury securities more quickly. FOMC participants broadly agree that sales of agency-related securities should eventually be used 

as part of the strategy to normalize the portfolio. Such sales will be implemented 

in accordance with a framework communicated well in advance and will be conducted at a gradual pace. Because changes in the size and composition of the portfolio could affect financial conditions, however, any decisions regarding the commencement or pace of asset sales will be made in light of the Committee’s evaluation of the outlook for employment and inflation. 

As I noted earlier, the FOMC continues to anticipate that economic conditions are 

likely to warrant exceptionally low levels of the Federal funds rate for an extended 

period. At some point, however, the Committee will need to begin to remove monetary policy accommodation to prevent the buildup of inflationary pressures. When 

that time comes, the Federal Reserve will act to increase short-term interest rates 

by raising the interest rate it pays on reserve balances that depository institutions 

hold at Federal Reserve Banks. To tighten the linkage between the interest rate 

paid on reserves and other short-term market interest rates, the Federal Reserve 

may also drain reserves from the banking system. Two tools for draining reserves 

from the system are being developed and tested and will be ready when needed. 

First, the Federal Reserve is putting in place the capacity to conduct large reverse 

repurchase agreements with an expanded set of counterparties. Second, the Federal 

Reserve has tested a term deposit facility, under which instruments similar to the 

certificates of deposit that banks offer their customers will be auctioned to depository institutions. 

Of course, even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain. We will continue to 

carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization 

of our Nation’s productive potential in a context of price stability. 

Financial Reform Legislation 

Last week, the Congress passed landmark legislation to reform the financial system and financial regulation, and the President signed the bill into law this morning. That legislation represents significant progress toward reducing the likelihood 

of future financial crises and strengthening the capacity of financial regulators to 
51 

respond to risks that may emerge. Importantly, the legislation encourages an approach to supervision designed to foster the stability of the financial system as a 

whole as well as the safety and soundness of individual institutions. Within the Federal Reserve, we have already taken steps to strengthen our analysis and supervision of the financial system and systemically important financial firms in ways 

consistent with the new legislation. In particular, making full use of the Federal Reserve’s broad expertise in economics, financial markets, payment systems, and bank 

supervision, we have significantly changed our supervisory framework to improve 

our consolidated supervision of large, complex bank holding companies, and we are 

enhancing the tools we use to monitor the financial sector and to identify potential 

systemic risks. In addition, the briefings prepared for meetings of the FOMC are 

now providing increased coverage and analysis of potential risks to the financial system, thus supporting the Federal Reserve’s ability to make effective monetary policy 

and to enhance financial stability. 

Much work remains to be done, both to implement through regulation the extensive provisions of the new legislation and to develop the macroprudential approach 

called for by the Congress. However, I believe that the legislation, together with 

stronger regulatory standards for bank capital and liquidity now being developed, 

will place our financial system on a sounder foundation and minimize the risk of 

a repetition of the devastating events of the past 3 years. 

Thank you. I would be pleased to respond to your questions. 
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHUMER 

FROM BEN S. BERNANKE 

Q.1. Effect of Stimulus—The economy has been growing for several 

quarters now, but that growth has been significantly boosted by tax 

cuts and government spending under the Recovery Act. Economists 

think the boost was as much as 21⁄2 percentage points and the 

Council of Economic Advisors last week estimated that Recovery 

Act programs created and saved 2.5 to 3.6 million jobs. 

It’s always hard to speculate on counterfactual scenarios, but 

how much do you think the Recovery Act programs—tax cuts and 

spending—have boosted GDP growth so far? 

What do you think the state of our economy, including the unemployment rate, would be right now if we hadn’t passed the stimulus 

bill? 

A.1. As noted by your question, it is difficult to confidently determine the effects of the 2009 American Recovery and Reinvestment 

Act (ARRA) on economic activity. In particular, it is not possible to 

establish with certainty the counterfactual of what households and 

State and local governments would have spent in the absence of receiving stimulus funds. That said, the available economic evidence 

suggests that the tax reductions and increases in transfers for 

households have likely provided support to consumer spending— 

relative to what it would have been otherwise—as households, 

since the enactment of the ARRA, have faced sluggish income 

growth, an extremely weak labor market, losses in wealth, and 

tight credit conditions. Also, the stimulus grants for states and localities appear to have helped these governments maintain their 

spending—relative to what it would have been otherwise—in the 

face of very weak tax receipts. The Congressional Budget Office 

(CBO) has provided what I think is a reasonable range of estimates 

of the effects of the ARRA on macroeconomic activity. The CBO’s 

estimates suggest that the ARRA boosted the rate of change in real 

GDP by between 11⁄2 and 31⁄2 percentage points last year and 

added around 1⁄4 to 1 percentage point to real GDP growth in the 

first half of this year; the unemployment rate is estimated to have 

been reduced by between 3⁄4 and 2 percentage points by the middle 

of this year. 

The fiscal policy actions taken to address the extraordinary challenges imposed by the recent recession and the financial crisis have 

contributed to significantly wider Federal deficits since last year. 

These actions were necessary to help mitigate the overall loss of 

employment and income that otherwise would have occurred thereby laying the groundwork for a self-sustaining, broad-based recovery. But maintaining the confidence of the financial markets and 

the public requires that plans now begin to be put into place for 

the restoration of fiscal balance in the medium term in order to 

avoid the economic costs and risks associated with persistently 

large deficits that cause the Federal debt to expand significantly 

faster than the economy. 
73 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM BEN S. BERNANKE 

Q.1. Back in December 2006, during the U.S.–China Strategic dialogue, you described China’s undervalued currency as ‘‘an effective 

subsidy for Chinese exporters.’’ During your testimony you confirmed that you believe this to still be the case. Do you agree with 

many economists that the subsidy approaches 40 percent? If not, 

what is the price subsidy range, and what evidence are you using 

to support this conclusion? 

A.1. This note briefly summarizes the professional literature that 

seeks to assess the undervaluation of the Chinese renminbi (RMB). 

While this literature has generated an array of estimates, most 

studies put the extent of this undervaluation in the range of roughly 10 percent to 30 percent. 

For many reasons, when discussing currency misalignments and 

their implications for current account balances, economists generally prefer to focus on the behavior of the real effective exchange 

rate (which takes into account the value of a country’s currency 

against the currencies of all of its trading partners and adjusts for 

cross-country differences in rates of inflation) rather than on bilateral nominal exchange rates. The estimates reported here, therefore, focus on the extent of undervaluation of the real effective Chinese exchange rate, rather than of the nominal value of the RMB 

vis-a-vis the dollar. 

There is no single accepted methodology for determining whether 

a country’s exchange rate is appropriately valued. Studies have employed a variety of approaches to measure a currency’s misalignment, including the following: 

• One approach seeks to estimate how far the real effective exchange rate is from the level that would ensure a sustainable 

current account balance over the medium term. 

• Another approach aims to estimate how out of line a country’s 

real effective exchange rate is compared with those of other 

countries, taking into account the country’s level of development, income, and other macroeconomic and financial considerations. 

• Yet a third approach attempts to gauge how far a country’s 

real effective exchange rate is from the level that would be necessary to stabilize the country’s net creditor position at a reasonable level relative to the size of its GDP. 

Using these approaches, researchers have found a wide range of 

estimates for the extent of undervaluation of the Chinese RMB. 

There are some outlier estimates that put the Chinese currency at 

being even 5 percent overvalued and, at the other extreme, at as 

much as 60 percent undervalued. The bulk of the studies, however, 

fall in the range of 10 percent to 30 percent, undervaluation. For 

example, a very recent study, Cline and Williamson (2010), follows 

the first approach described above and obtains the result that the 
74 

1William R. Cline and John Williamson, ‘‘Estimates of Fundamental Equilibrium Exchange 

Rates, May 2010’’, Peterson Institute for International Economics, Policy Brief Number PB10- 

15. 2They take the forecasted value of China’s current account from the International Monetary 

Fund’s World Economic Outlook, April 2010 with some adjustments. 3Last year, when the IMF was forecasting a bigger medium-term current account surplus for 

China, Cline and Williamson’s estimate of the degree of undervaluation of the real effective 

RMB was a little over 20 percent. 4Morris Goldstein, ‘‘A (Lack of) Progress Report on China’s Exchange Rate Policies’’, Peterson 

Institute for International Economics, Working Paper 07-5. This study updates results from 

Morris Goldstein and Nicholas Lardy, ‘‘China’s Exchange Rate Policy Dilemma’’, American Economic Review, Vol. 96, No. 2 (May, 2006), pp. 422–426, which provides more details of the methodology used. 5 ‘‘People’s Republic of China: 2010 Article IV Consultation’’, International Monetary Fund, 

IMF Country Report No. 10/238, July 2010. 

RMB is approximately 15 percent undervalued. 1 Cline and 

Williamson arrive at this result by assuming China’s sustainable 

(or ‘‘target’’) current account surplus to be about 3 percent of GDP 

and using a forecasted value of the current account surplus in the 

absence of any exchange rate adjustment of about 7.5 percent of 

GDP. 2 They then estimate that the amount of real effective appreciation of the RMB that would be necessary to move the current 

account from 7.5 percent of GDP to 3 percent of GDP is about 15 

percent. 3

Another study, Goldstein (2007), finds that ‘‘the RMB is now 

grossly undervalued—on the order of 30 percent or more against an 

average of China’s trading partners.’’ 4 However, this finding uses 

data that go only through 2006. Generally, estimates using more 

recent data find a somewhat smaller degree of undervaluation. The 

IMF staff has also determined that the ‘‘renminbi remains substantially below the level that is consistent with medium-term fundamentals.’’ 5 Clearly, these estimates and other estimates in this 

literature are quite sensitive to a number of underlying assumptions about which there is often not much consensus, as well as to 

the approaches used to compute the undervaluation and the exact 

vintage of Chinese data used in the analysis. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR DEMINT 

FROM BEN S. BERNANKE 

Q.1. In the past months, the European Central Bank has spent billions of dollars to purchase sovereign debt from overleveraged EU 

countries, in essence bailing out these countries by supporting their 

ability to continue to finance further debt rather than impose needed budgetary discipline. Prior to this program, the ECB, through 

liquidity facilities, was accepting sovereign debt collateral from European banks. Here at home in the U.S., some States and municipalities have similarly overleveraged themselves and failed to make 

the difficult decisions necessary to get their finances in order—the 

clearest example being the States of Illinois and California. Being 

concerned that the Federal Reserve could choose to pursue a similar course, is it your opinion that the Fed has the authority: 

a. To accept municipal debt as collateral from commercial or investment banks? 

b. To create a special lending facility for private-sector purchases 

of municipal bonds, similar to what the Fed did in 2009 for commercial real estate securitizations? 
75 

c. To guarantee or directly purchase municipal bonds in the secondary market, similar to the purchase program for the more than 

$1 trillion of mortgage-backed securities now on the Fed’s balance 

sheet? 

d. To lend directly to overleveraged States or municipalities? 

A.1. Answer not received by time of publication. 

Q.2. If your answer to any of Question Number 1’s subparts is yes, 

please explain, for each and with specific references, from where 

this authority is derived? 

A.2. Answer not received by time of publication. 

Q.3. Would you ever support any of the following courses of action 

for the Federal Reserve: 

a. To accept municipal debt as collateral from commercial or investment banks? 

b. To create a special lending facility for private-sector purchases 

of municipal bonds, similar to what the Fed did in 2009 for commercial real estate securitizations? 

c. To guarantee or directly purchase municipal bonds in the secondary market, similar to the purchase program for the more than 

$1 trillion of mortgage-backed securities now on the Fed’s balance 

sheet? 

d. To lend directly to overleveraged States or municipalities? 

A.3. Answer not received by time of publication. 

Q.4. If your answer to any of Question Number 3’s subparts is yes, 

please explain your rationale for each. 

A.4. Answer not received by time of publication. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM BEN S. BERNANKE 

Q.1. Chairman Bernanke, I am deeply disturbed by the most recent 

quarterly report to Congress from the Special Inspector General for 

the Troubled Asset Relief Program. In this report, SIGTARP Neil 

Barofsky tells Congress that reductions in current outstanding balances of TARP and TARP-related programs ‘‘have been more than 

offset in the past 12 months by significant increases in expenditures and guarantees in other programs, with the total current outstanding balance increasing 23 percent, from approximately $3.0 

trillion to $3.7 trillion. This increase can largely be attributed to 

great support for the Government-sponsored enterprises (GSEs), 

the housing market, and the financial institutions that participate 

in it’’ despite the fact that the banking crisis, by an reasonable 

measures, subsided. How long do you perceive a need for extraordinary taxpayer support for the housing market? 

A.1. As your question suggests, declining balances in, and closing 

of, some financial-sector support programs are positive developments that are indicative of a gradual healing in the financial system. The stock of other assets acquired by the Federal Government 

related to extraordinary support of the financial system has increased significantly over the past year, including purchases of 

Treasury, agency, and agency-guaranteed mortgage-backed securi-
76 

ties under the Federal Reserve’s large scale asset purchase program, and purchases by Treasury of preferred shares in Fannie 

Mae and Freddie Mac as those GSEs continue to operate in conservatorship. Other housing-related guarantees, commitments, and 

outlays by the Government have also grown significantly over that 

period, although some are probably better understood as reflecting 

extraordinary conditions in the housing finance market more than 

extraordinary actions to support the financial system. In particular, 

mortgage loans and mortgage-backed securities guaranteed by FRA 

and the GSEs have continued to rise substantially, as the privatelabel mortgage securitization market remained essentially closed. 

The programs described above, along with continuing low mortgage interest rates and the effects of the first-time homebuyer tax 

credit, have helped support housing market conditions and thus to 

blunt some of the damage of the financial crisis. Nonetheless underlying weaknesses remain in the housing and home finance markets. As noted in my testimony, for example, housing construction 

has continued to be weighed down by weak demand, a large inventory of distressed or vacant houses, and tight credit conditions for 

builders and some potential buyers. For their part, RAMP and nonRAMP foreclosure mitigation loan modification programs have 

made a positive contribution, reducing debt service obligations for 

many struggling borrowers. Over the longer horizon, it remains too 

early to assess the overall effect of these programs, including the 

extent to which borrowers with RAMP permanent modifications, or 

other loan modifications and refinancings, may subsequently default on these obligations. 

As economic and financial conditions gradually improve, the extraordinary conditions and need for extraordinary Government actions will of course diminish. When that time comes, as with the 

Federal Reserve’s purchases of agency-guaranteed mortgage-backed 

securities, the withdrawal of extraordinary support should be managed carefully so that it can be achieved with a minimum of associated dislocation. Congress has a direct/public policy role to play in 

some aspects of this eventual withdrawal, including as it considers 

the future role of Government-sponsored enterprises in the market 

for housing finance. 

The non-TARP program estimates published in SIGTARP reports 

are assembled directly by SIGTARP staff across non-TARP programs they deem relevant, drawn from public sources. Without 

speaking directly to the figures you reference, the SIGTARP estimates cited in your question can reasonably be interpreted as consistent with this assessment. 

Q.2. Chairman Bernanke, you have indicated that the Federal Reserve may undertake additional asset purchases. What kind of assets will the Fed purchase if it decides to undertake a second quantitative easing? How will you ensure that the Federal Reserve adequately protects itself in pricing those asset purchases and how 

long would the Fed hold those assets on its balance sheet? What 

metric will you use to determine that additional easing is necessary? 

A.2. Consistent with its statutory mandate to foster maximum employment and stable prices, the Federal Reserve would consider ad-
77 

ditional steps to provide monetary accommodation if economic developments suggested that it was appropriate to do so. As noted in 

the minutes of recent FOMC meetings and in speeches by Federal 

Reserve officials, purchasing additional assets would be one of the 

options that the Federal Reserve could implement in such a situation. The Federal Reserve’s legal authority largely limits Federal 

Reserve purchases of securities to Treasury, agency, and agencyguaranteed securities. As a result, additional Federal Reserve purchases of securities, if deemed necessary, would likely be of these 

general types. Decisions about the specific securities that would be 

purchased within this general class of securities would depend on 

a number of factors, including the implications of purchases for the 

general level of longer-term interest rates, the effect of purchases 

on market liquidity and functioning, and policymakers’ preferences 

for the long-run composition of the Federal Reserve’s balance sheet. 

As in the past, the Federal Reserve would employ a competitive 

bidding process in purchasing securities to ensure that such purchases are conducted at market prices. 

The evidence suggests that the Fed’s earlier program of purchases of securities was effective in improving market functioning 

and lowering long-term interest rates in a number of private credit 

markets. The program (which was significantly expanded in March 

2009) made an important contribution to the economic stabilization 

and recovery that began in the spring of 2009. Indeed, the FOMC’s 

recent decision to keep constant the Federal Reserve’s securities 

holdings reflects the conviction that these holdings can promote financial conditions that help support the recovery. Decisions regarding how long these assets or any newly acquired assets will be held 

on the Federal Reserve’s balance sheet will be based on an assessment of the outlook for economic activity and inflation. 

There are no simple metrics that the Federal Reserve can employ 

in determining whether additional policy easing is necessary and, 

if so, whether additional purchases of securities would be appropriate. As always, a wide range of economic indicators informs the 

Federal Reserve’s view about the outlook for economic activity and 

inflation. Any decision to acquire additional securities would need 

to weigh the potential benefits of such purchases against the potential costs. Regarding potential benefits, additional purchases could 

further lower the costs of borrowing for households and businesses 

and thereby provide needed support for spending and economic 

growth. On the other hand, further purchases of securities could reduce public confidence in the ability of the Federal Reserve to exit 

smoothly from a very accommodative policy stance at the appropriate time. Even if unjustified, a reduction in confidence might 

lead to an undesired increase in inflation expectations and so to 

upward pressure on actual inflation. The Federal Reserve will 

weigh these and other considerations and carefully monitor economic and financial developments in judging whether additional 

asset purchases are warranted. 

Q.3. A number of economists, market watchers and Members of 

Congress have speculated that U.S. firms are reluctant to invest 

and hire, though they may have the cash on their balance sheets 

to do so, because of uncertainty over a dramatic reshaping of the 

health care and financial regulatory regimes. How large of a role 
78 

do you believe this uncertainty is playing in companies’ decisions 

on how and when to deploy their capital? And, do you think the 

uncertainty over future tax rates also factors in? 

A.3. Several factors are likely to influence hiring and capital spending decisions. Typically, a firm’s sales prospects and the expected 

rate of return to an investment—either in new equipment or new 

workers—are key elements in the decision. In some cases, access 

to credit also might affect decisions to invest and hire. In addition, 

uncertainty about the economic environment or expected returns 

can also influence the willingness of a firm to make spending commitments. 

Recent surveys of businesses provide some insights into these 

issues and suggest that many firms are concerned about the overall 

economic environment and their company’s own sales prospects. 

Two examples are presented in the table. As shown on line 1, 36 

percent of respondents to the latest Duke CFO survey cited consumer demand as the most important problem facing their business. Fortunately, concerns about consumer demand have diminished from a year ago, but they remain the most frequently cited 

problem. Similarly, as shown on line 3 of the table, respondents to 

the latest survey of small businesses, conducted by the National 

Federation of Independent Business (NFIB), pointed to poor sales 

as their most important problem, but that concern also has diminished from a year ago. In addition, the S&P 500 volatility index 

(VIX), an indicator of uncertainty in financial markets, also is down 

from its previous peaks, although it remains relatively elevated by 

historical standards. 

It is difficult to know the extent to which uncertainty specifically 

related to future taxes, the recently enacted health care legislation, 

or financial regulatory reform is affecting business capital spending 

and hiring decisions. However, both the Duke CFO survey and the 

NFIB allow respondents to cite government policies more generally 

as the most important problem facing their business. These responses are shown on lines 2 and 4 of the table. In addition, line 

5 presents the data on the extent to which taxes are a pressing 

business concern. Of course, these responses are not direct indicators of uncertainty. Moreover, the figures presented in the table are 

from only two surveys and may not present a complete picture of 

whether greater uncertainty about Government policies is restraining capital spending and hiring. 
79 

Q.4. Are you concerned that keeping interest rates this low, for 

such an extended period of time, will have negative or dangerous 

consequences? Why, or why not? 

A.4. The FOMC has established a very low level of short-term interest rates to foster its statutory objectives of maximum employment and stable prices. The FOMC has been very explicit in stating that the current very accommodative stance of monetary policy 

is conditional on the economic outlook, which includes low anticipated rates of resource utilization, subdued inflation trends, and 

stable inflation expectations. The explicit conditionality of the Federal Reserve’s policy stance should help to guard against adverse 

outcomes such as a buildup in inflationary pressures or imbalances 

in financial markets. As the economy recovers, investors, seeing 

that the conditions supporting the current stance of policy have 

changed, will likely begin to anticipate the removal of policy accommodation; such anticipations of policy firming will, in turn, boost 

longer-term interest rates immediately, helping to damp any buildup in inflationary pressures. Of course, the Federal Reserve must 

be able to validate expectations of policy firming at the appropriate 

time. To do so, the Federal Reserve has a number of tools at its 

disposal. First, the Federal Reserve will put upward pressure on 

short-term interest rates by raising the rate it pays on the reserve 

balances held by depository institutions. Second, the Federal Reserve has developed reserve draining tools that can be employed to 

reduce the quantities of reserves outstanding and thereby tighten 

the relationship between the rate paid on reserve balances and 

short-term market rates. Finally, the Federal Reserve can sell assets at an appropriate time and pace to further tighten the stance 

of monetary policy. In short, the Federal Reserve has the tools necessary to effectively remove policy accommodation when such actions are warranted by the economic outlook. As always, the Federal Reserve is sensitive to the risks surrounding the outlook, and 

we are mindful of the possibility that very low interest rates could, 

if maintained for too long, lead to adverse economic outcomes. At 

the same time, there are risks that the premature removal of policy 

accommodation could undermine the economic recovery and contribute to unwelcome disinflationary pressures. The Federal Reserve will be monitoring economic and financial developments carefully to ensure that its policy actions appropriately balance these 

risks. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR HUTCHISON 

FROM BEN S. BERNANKE 

Q.1. During initial Senate consideration of financial regulatory reform legislation, I was very concerned that State-chartered community banks and small-and medium-sized bank holding companies 

would no longer be able to choose supervision from the Federal Reserve. I worried that community banks in Texas and across the 

country would lose access to the Federal Reserve, and, likewise, 

that the Fed would lose the important data that these important 

financial institutions provide on economic and banking conditions 

in communities in Texas and across the country. 
80 

I was proud to sponsor Amendment 3759 during Senate consideration to ensure that State-chartered banks and small- and mediumsized bank holding companies could retain Federal Reserve supervision. I appreciate the support that you and many of the regional 

Federal Reserve presidents demonstrated to help my amendment 

pass with overwhelming support; 

I worked hard to ensure that community banks would not be unduly penalized as a result of the new regulations which will come 

from the Dodd-Frank Wall Street Reform and Consumer Protection 

Act. However, I continue to hear from many Texas community 

bankers sharing concerns about the possible effects of this legislation. The regulatory burden on community banks, particularly 

small banks in rural locations, was already significant prior to the 

enactment of legislation. Many in the Texas banking community 

fear that the rules soon to be written by the new Consumer Financial Protection Agency will be the tipping point for many community banks, making the regulatory burden too great to operate effectively. Texas community bankers are concerned that greater regulation will ultimately lead smaller community banks to succumb 

to larger banks, which would make the big bigger and wipe out the 

smaller banks. 

As a Member of the Committee on Banking, Housing, and Urban 

Affairs having oversight over the enactment of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act, I respectfully 

ask the following: 

Which provisions of the Dodd-Frank Act require careful monitoring from the Committee because their respective implementation 

could be especially burdensome to community banks? 

A.1. Although adjustments were made to moderate the impact of 

the Collins amendment, the effect of this provision (section 171) on 

the ability of smaller banking organizations to access capital from 

the public markets warrants close monitoring. You are correct that 

the impact on community banks of various portions of the DoddFrank Act, such as the Title VII derivatives provisions and the 

Title X Consumer Financial Protection Bureau provisions, will depend in part on the regulatory implementation of those provisions. 

As I mentioned often during the debate, small community banks 

play a key role in our financial system. Close connections with community bankers enable the Federal Reserve to better understand 

the full range of financial concerns and risks facing the country. 

The community banking perspective is also critical as we assess 

the burden and effectiveness of financial regulation. 

Q.2. What proposals do you have to help our Nation’s community 

banks withstand the onslaught of new regulations so that they can 

remain competitive and avoid potential arbitrage in the future by 

larger banks? 

A.2. Through implementation of provisions addressing the ‘‘too-bigto-fail’’ problem, the Dodd-Frank Act should help to level the playing field between small and large banks. The Federal Reserve supported such provisions—including implementation of a resolution 

regime for large, interconnected firms and the imposition of more 

rigorous capital, liquidity, and supervisory requirements for large 

systemically important banking firms and nonbank financial insti-
81 

tutions—in part because of the disparate treatment that resulted 

for banks of different sizes. Under the new law, the competitive position of community banks may be improved as implicit ‘‘too-big-tofail’’ subsidies from which the largest banks previously benefited 

are removed through the higher supervisory costs and requirements placed on institutions that are or become large and systemically important. 
82 

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