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THE NEAR–TERM OUTLOOK

FOR THE U.S. ECONOMY

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, JANUARY 17, 2008

Serial No. 110–27

Printed for the use of the Committee on the Budget

(

Available on the Internet: 

http://www.gpoaccess.gov/congress/house/budget/index.html 

(II)

COMMITTEE ON THE BUDGET 

JOHN M. SPRATT, JR., South Carolina, Chairman 

ROSA L. DELAURO, Connecticut, 

CHET EDWARDS, Texas 

JIM COOPER, Tennessee 

THOMAS H. ALLEN, Maine 

ALLYSON Y. SCHWARTZ, Pennsylvania 

MARCY KAPTUR, Ohio 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL BLUMENAUER, Oregon 

MARION BERRY, Arkansas 

ALLEN BOYD, Florida 

JAMES P. MCGOVERN, Massachusetts 

NIKI TSONGAS, Massachusetts 

ROBERT E. ANDREWS, New Jersey 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

BOB ETHERIDGE, North Carolina 

DARLENE HOOLEY, Oregon 

BRIAN BAIRD, Washington 

DENNIS MOORE, Kansas 

TIMOTHY H. BISHOP, New York 

GWEN MOORE, Wisconsin 

PAUL RYAN, Wisconsin, 

Ranking Minority Member 

J. GRESHAM BARRETT, South Carolina 

JO BONNER, Alabama 

SCOTT GARRETT, New Jersey 

MARIO DIAZ–BALART, Florida 

JEB HENSARLING, Texas 

DANIEL E. LUNGREN, California 

MICHAEL K. SIMPSON, Idaho 

PATRICK T. MCHENRY, North Carolina 

CONNIE MACK, Florida 

K. MICHAEL CONAWAY, Texas 

JOHN CAMPBELL, California 

PATRICK J. TIBERI, Ohio 

JON C. PORTER, Nevada 

RODNEY ALEXANDER, Louisiana 

ADRIAN SMITH, Nebraska 

[Vacancy] 

PROFESSIONAL STAFF

THOMAS S. KAHN, Staff Director and Chief Counsel 

AUSTIN SMYTHE, Minority Staff Director 

(III)

C O N T E N T S

Page 

Hearing held in Washington, DC, January 17, 2008 ............................................ 1

Statement of: 

Hon. John M. Spratt, Jr., Chairman, House Committee on the Budget ..... 1

Hon. Paul Ryan, ranking minority member, House Committee on the 

Budget ............................................................................................................ 2

Hon. Marcy Kaptur, a Representative in Congress from the State of 

Ohio, prepared statement of ........................................................................ 4

Hon. Adrian Smith, a Representative in Congress from the State of 

Nebraska, prepared statement of ................................................................ 5

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

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

Prepared statement of ............................................................................... 9

Hon. Rosa L. DeLauro, a Representative in Congress from the State 

of Connecticut, question for the record ....................................................... 53

(1)

THE NEAR–TERM OUTLOOK FOR THE U.S. 

ECONOMY 

THURSDAY, JANUARY 17, 2008

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to call, at 10:00 a.m., in room 210, 

Cannon House Office Building, Hon. John M. Spratt Jr. [chairman 

of the committee] presiding. 

Present: Representatives Spratt, DeLauro, Edwards, Cooper, 

Allen, Schwartz, Kaptur, Becerra, Doggett, Blumenauer, Boyd, 

McGovern, Tsongas, Andrews, Scott, Etheridge, Hooley, Baird, 

Moore of Kansas, Bishop, Moore of Wisconsin, Ryan, Barrett, 

Bonner, Garrett, Diaz-Balart, Hensarling, Lungren, Simpson, 

McHenry, Mack, Conaway, Campbell, Tiberi, Porter, Alexander, 

and Smith. 

Chairman SPRATT. Call the hearing to order. Chairman Bernanke, thank you for coming today. We welcome you and your staff, 

and look forward to hearing your perspective on the downturn in 

our economy, on actions the Fed has taken and has available to it 

for the future, and on the role of fiscal policy as a complement to 

monetary policy in order to keep our economy moving. 

It has become increasingly clear that our economy is beginning 

to slow down, entering a slump if not a recession. Here are just a 

few of the recent signs. Net job creation during December equaled 

a meager 18,000 jobs. As a result, unemployment spiked, rising 

from 4.7 percent to 5 percent, a substantial increase for just 1 

month. 

Consumer spending seems to be losing steam, certainly as indicated by the all-important holiday season. Retail sales in December 

were expected to be flat, but instead fell four-tenths of a percentage 

below the prior month. 

Foreclosures are being filed at rates not seen in years, home val- ues are falling, and the price of gasoline is over $3 a gallon. American households are getting squeezed on all sides, and certain 

major corporations are booking record losses, running into billions 

of dollars. Meanwhile, wholesale prices for 2007 rose 6.3 percent, 

the highest increase in 26 years. 

The Federal Reserve has been responsive to these conditions. 

You have eased the monetary supply and access to credit, and most 

forecasters expect further rate reductions to come. But monetary 

policy has limits, such as inflation, inherent lags due to the time 

it takes interest rates to translate into spending and investment. 

And no one wants to be the bearer of bad tidings, but there are omVerDate 0ct 09 2002 15:42 Mar 24, 2008 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 J:\DOCS\HEARINGS\110TH\110-27\HBU017.000 HBUD1 PsN: DICK
2

inous indicators all around us. And all in all, it seems that a compelling case is emerging for some form of fiscal stimulus on top of 

the monetary stimulus that the Fed has already provided and will 

continue to supply. 

You acknowledge in your testimony that if fiscal policy action is 

taken it could be helpful in principle, but you warn us that design 

and implementation are critically important, as is timing. Speaking 

for our side, we heed that warning. To borrow a phrase from Larry 

Summers, we believe that a stimulus plan has to be timely, targeted, and temporary. To be effective, fiscal stimulus needs to be 

timely, arriving during and not after the downturn, and it needs 

to be targeted, directed at those most likely to spend it quickly. To 

be credible, it needs to be temporary, otherwise it runs the risk of 

becoming counterproductive, of driving up structural deficits and 

interest rates, and undermining confidence in our commitment to 

fiscal discipline. 

Chairman Bernanke, as we ponder the near term economy, the 

subject of your presentation today, and the need for counter-cyclical 

policies, we look to you and the Fed for guidance, and hope that 

in the course of this hearing you can address a few fundamental 

questions. First of all, what are your views and the views of the 

Fed on the ominous signs I have just cited and other indications? 

Do these portend a recession, or at least a significant decline in the 

economy? 

Next, what actions has the Fed taken to date to avoid the risk 

of recession? How successful have these been? And is your monetary toolbox, the tools available to you, adequate to the task? 

Third, are there limits to the monetary policy that fiscal policy 

in this case can complement? 

Fourth, what monetary and fiscal policies are most likely to be 

efficacious? 

Fifth, to what extent is the distressed market in securitized 

mortgages and complex financial instruments impeding the economy? If this is a source of the problem, should a counter-cyclical 

package deal directly with this aspect of the problem? 

And finally, how serious is the risk of a downward, vicious spiral 

in which foreclosures drive down housing prices and low prices 

complicate workouts, resulting in still more foreclosures and even 

lower prices? 

We look forward to hearing your insights on these and other 

questions on the strength of the near-term economy. But before you 

begin, let me turn to Mr. Ryan for his opening statements. 

Mr. Ryan. 

Mr. RYAN. Thank you, Mr. Chairman. And thank you for organizing this hearing. It is well timed. And I can’t think of a more 

authoritative witness to discuss the state of the economy than you, 

Chairman Bernanke, and thank for coming. 

Clearly, the Fed faces a particularly challenging environment 

right now. Americans have genuine and legitimate concern about 

the expectations of slower economic growth in the months ahead. 

Last week I held 15 listening sessions in my district in Wisconsin. 

As I would imagine everybody else finds in their districts, the economy was a key topic at every one of these. People are concerned. 

3

Lately, it seems that the Fed has been focused on employment 

growth as its primary objective. We in Congress are focused on job 

growth as well, given that we have jurisdiction over fiscal policy. 

As such, we are all in the midst of discussing a short-term economic growth package. But the Fed has the sole responsibility for 

monetary policy. And many would argue the primary mandate of 

the Fed is price stability. 

Data released showed that the Consumer Price Index rose more 

than 4 percent last year, the largest annual increase since 1990. 

Oil prices have soared, food prices have increased, and just this 

week the price of gold, which is a traditional hedge against inflation, jumped to a nominal all-time high. Meanwhile, the Fed’s softer money policy stance and the prospect of future rate cuts have 

contributed to a further decline in the dollar, which can raise import prices further, stoking inflation. My concern is that these interest rate cuts could lead to even more inflation down the road. 

And history has shown that once inflation pressures are in the 

pipeline and expectations rise, they can prove costly to deal with. 

The Fed risks having to put the brake on economic growth later on 

via higher interest rates in order to wring that inflation out of the 

system. 

In your testimony, Chairman Bernanke, you point to the Fed’s 

dual mandate of promoting maximum sustainable employment and 

price stability. In this respect, it is appropriate to highlight the balance of risks associated with policy reactions and to make sure that 

the benefits of any short-term measures are not dwarfed by the 

costs of our long-term economic health. Meanwhile, Congress and 

the administration, Republicans and Democrats, are considering 

additional responses to the fiscal policy. And like you, we face similar risks and trade-offs. 

In considering our strategy for crafting an economic growth plan, 

there are several key principles that we need to keep in mind. 

First, do no harm. I am concerned that in our rush to help we talk 

ourselves into a quick feel good hit today that will leave us with 

a bigger budgetary hangover tomorrow. 

The worst thing we can do right now is raise taxes. And we simply cannot spend our way into prosperity. Whatever short-term responses Congress undertakes should aim at reinforcing the prospects for long-term, sustainable growth. 

Second, we ought to play to our strengths. The strength of our 

economy lies in its people, its innovation, productivity, and resilience, and all flow from sound policies aimed at sustained growth. 

These policies include a low tax burden and a stable rate of inflation, a reliance on the private sector before the government, an attractive investment climate, and a dynamic labor force. Growth 

also requires tax certainty so that American businesses and families can count on the future. And Congress can do something about 

this. Right now Congress can act to make the current tax laws permanent, thereby avoiding the largest tax increase in our Nation’s 

history. And we can address the AMT earlier this year, giving middle class families peace of mind that they won’t face a much higher 

tax bill next year. Unfortunately, I understand the majority has already taken that particular growth proposal off the table. 

4

And finally, we should not add to our entitlement crisis. I am 

particularly concerned that Congress may be tempted to use the excuse of fiscal stimulus in the short run to push through new entitlement spending proposals, further worsening the outlook for 

these programs, building up the spending baseline that worsen our 

economic future. Expert after expert has warned this committee 

that our largest entitlement programs, particularly Social Security, 

Medicare, Medicaid, pose the greatest threat to our Nation’s future 

prosperity, and this problem will remain long after the economy 

works through its near-term problems. 

In short, we believe that in addressing the current economic concerns we have got to keep our focus on good economic policy that 

lasts beyond the next few quarters, that is consistent with longterm growth. And that is the best recipe for long-term sustainable 

economic growth, which ought to be our ultimate goal. 

This is a very well-timed hearing. And Mr. Chairman, I appreciate you having this hearing at this time. And I look forward to 

your testimony, Chairman Bernanke. 

Chairman SPRATT. Thank you, Mr. Ryan. And let me ask unanimous consent that all members be allowed to enter, if they wish, 

an opening statement for the record at this point. Without objection, so ordered. 

[The prepared statement of Ms. Kaptur follows:]

PREPARED STATEMENT OF HON. MARCY KAPTUR, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OHIO

I would like to thank Chairman Spratt and Ranking Member Ryun for this timely 

hearing. I would also like to extend my thanks to Chairman Bernanke, whose insight into the current economic downturn is invaluable. It heartens me that this 

body, and the Fed, have recognized the anguish of the American people, who are 

facing dire circumstances, soaring inflation, and a possibly bleak economic outlook. 

I hope that as a result of this hearing, the steps Congress can take to rectify this 

situation will become more obvious, and that Congress can work closely with the 

Fed to effectively stimulate the economy in the short term, and to regain American 

financial security in the long term. 

America is facing an economic situation that has the potential to be catastrophic. 

Because of the poor judgment and intense greed of a few banks, companies, organizations, and, indeed, politicians, the average American has been thrust into economic insecurity. The sub-prime mortgage crisis, perpetuated by profit-hungry lenders and those who traded these loans, contributed heavily to the problems we are 

discussing today. But the problem is larger than just the housing bubble—the problem lies in the securitized culture of lending and in the inherent flaws of the global 

finance system in its current incarnation. 

People in my district are not simply suffering because of the rising foreclosure 

rates—though Ohio ranks among the top three states for foreclosures—they are facing a more general economic downturn, or, dare I say it, recession, and must watch 

while Wall Street and even the American government parcel off our national security and sell it to the highest bidder. 

As a result of faulty judgment, bad planning, and corporate greed, the mortgage 

crisis has taken a huge chunk from Citigroup, Merrill Lynch, J.P. Morgan, and the 

rest of Wall Street. Now, these banks are turning to Saudi princes, Chinese banks, 

and the government of Singapore to come to their aid. 

I realize, Chairman Spratt, that Chairman Bernanke can only influence monetary 

policy, but I will be eager to hear his thoughts on possibilities for fiscal stimulus. 

In my view, we must focus on using infrastructure projects to create jobs, we must 

encourage Americans to spend, but to spend on American products and American 

agriculture, and we must curb our reliance on foreign companies and governments 

to bail us out and become further and further indebted to their interests. 

I look forward to working with Chairman Bernanke and with this Committee to 

bring new, lasting wealth to the people of Ohio’s Ninth Congressional District, and 

to working Americans around the country.

5

[The prepared statement of Mr. Smith follows:]

PREPARED STATEMENT OF HON. ADRIAN SMITH, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF NEBRASKA

Good morning. There are a number of challenges facing our economy, and I thank 

you, Chairman, for holding this hearing today on the Near-Term Outlook for the 

U.S. Economy. 

As Congress begins the fiscal year 2009 budget process, we must rise to address 

our economic challenges in a bipartisan fashion. Rushing to a solution, however, 

could prove more costly than our current situation. We must not hamstring our 

economy by increasing taxes to pay for more federal spending, as some have suggested. 

We must ensure the prosperity of the last several years continues for future generations. It is my sincere desire to see Congress take the steps necessary to reduce 

spending and instead stimulate economic growth. 

I appreciate the Committee for holding this hearing today. Thank you to Chairman Bernanke for testifying before the Committee. What we learn here today will 

play a critical role in the decisions we make for the future of the country. 

Chairman, I look forward to continuing to work with you to achieve real economic 

growth, and I thank you for your time.

Mr. Chairman, again, we welcome you to the hearing today. And 

let me note for the record that your complete testimony will be filed 

and made part of the record. You can summarize it as you see fit, 

but the floor is yours. Thank you again for coming. We look forward to your testimony. 

STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. BERNANKE. Thank you, Chairman Spratt, Representative 

Ryan, and other members of the committee. I am pleased to be 

here to offer my views on the near-term economic outlook and related issues. Since late last summer, financial markets in the 

United States and in a number of other industrialized countries 

have been under considerable strain. Heightened investor concerns 

about the credit quality of mortgages, especially subprime mortgages with adjustable interest rates, triggered the financial turmoil. Notably, as the rising rate of delinquencies of subprime mortgages threatened to impose losses on holders of even highly rated 

securities, investors were led to question the reliability of the credit 

ratings for a range of financial products, including structured credit 

products and various special purpose vehicles. As investors lost 

confidence in their ability to value complex financial products, they 

became increasingly unwilling to hold such instruments. As a result, flows of credit through these vehicles have contracted significantly. 

As these problems multiplied, money center banks and other 

large financial institutions, which in many cases had served as 

sponsors of these financial products, came under increasing pressure to take the assets of the off-balance-sheet vehicles onto their 

own balance sheets. Bank balance sheets were swelled further by 

holdings of nonconforming mortgages, leveraged loans, and other 

credits that the banks had extended but for which well-functioning 

secondary markets no longer existed. Even as their balance sheets 

expanded, banks began to report large losses, reflecting marked declines in the market prices of mortgages and other assets. Thus, 

banks too became subject to valuation uncertainty, as could be seen 

in the sharp movements in their share prices and in other market 

6

indicators such as quotes on credit default swaps. The combination 

of larger balance sheets and unexpected losses prompted banks to 

become protective of their liquidity and balance sheet capacity, and 

thus to become less willing to provide funding to other market participants, including other banks. Banks have also evidently become 

more restrictive in their lending to firms and households. More expensive and less available credit seems likely to impose a measure 

of restraint on economic growth. 

To date, the largest effects of the financial turmoil appear to 

have been on the housing market, which, as you know, has deteriorated significantly over the past 2 years or so. The virtual shutdown of the subprime mortgage market and a widening of spreads 

on jumbo mortgage loans have further reduced the demand for 

housing, while foreclosures are adding to the already elevated inventory of unsold homes. New home sales and housing starts have 

both fallen by about half from their respective peaks. The number 

of homes in inventory has begun to edge down, but at the current 

sales pace the months’ supply of new homes has continued to climb, 

and home prices are falling in many parts of the country. The slowing in residential construction, which subtracted about one percentage point of growth from the growth rate of real domestic product 

in the third quarter of 2007, likely curtailed growth even more in 

the fourth quarter, and it may continue to be a drag on growth for 

a good part of this year as well. 

Recently, incoming information has suggested that the baseline 

outlook for real activity in 2008 has worsened, and that the downside risks to growth have become more pronounced. In particular, 

a number of factors, including continuing increases in energy 

prices, lower equity prices, and softening home values, seem likely 

to weigh on consumer spending as we move into 2008. Consumer 

spending also depends importantly on the state of the labor market, as wages and salaries are the primary source of income for 

most households. Labor market conditions in December were disappointing. The unemployment rate increased by three-tenths of a 

percentage point to 5.0 percent from 4.7 percent in November, and 

private payroll employment declined. Employment in residential 

construction posted another substantial reduction, and employment 

in manufacturing and retail trade has also decreased significantly. 

Employment in services continued to grow, but at a slower pace in 

December than in earlier months. It would be a mistake to read 

too much into 1 month’s data. However, developments in the labor 

market will bear close attention. 

In the business sector, investment in equipment and software appears to have been sluggish in the fourth quarter, while nonresidential construction grew briskly. In light of the softening in economic activity and the adverse developments in credit markets, 

growth in both types of investment spending seem likely to slow in 

coming months. Outside the United States, however, economic activity in our major trading partners has continued to expand vigorously. U.S. exports will likely continue to grow at a healthy pace 

in coming quarters, providing some impetus to the domestic economy. 

Financial conditions continue to pose a downside risk to the outlook. Market participants still express considerable uncertainty 

7

about the appropriate valuation of complex financial assets and 

about the extent of additional losses that may be disclosed in the 

future. On the whole, despite improvements in some areas, the financial situation remains fragile, and many funding markets remain impaired. Adverse economic or financial news thus has the 

potential to increase financial strains and to lead to further constraints on the supply of credit to households and businesses. 

Even as the outlook for real activity has weakened, some important developments have occurred on the inflation front. Most notably, the same increase in oil prices that may be a negative influence on growth is also lifting overall consumer prices. Last year, 

food prices also increased exceptionally rapidly by recent standards, further boosting overall consumer price inflation. The most 

recent reading on overall personal consumption expenditure inflation showed that prices in November were 3.6 percent higher than 

they were a year earlier. Core price inflation, which excludes prices 

of food and energy, has stepped up recently as well, with November 

prices up almost 21⁄4 percent from a year earlier. Part of this rise 

may reflect pass-through of energy costs to the prices of core consumer goods and services, as well as the effects of the depreciation 

of the dollar on import prices, although some other prices, such as 

those for some medical and financial services, have also accelerated 

lately. 

Thus far, the public’s expectations of future inflation appear to 

remain reasonably well anchored, and pressures on resource utilization have diminished a bit. Further, futures markets suggests 

that food and energy prices will decelerate over the coming year. 

Given these factors, overall and core inflation should moderate this 

year and next, so long as the public’s confidence in the Federal Reserve’s commitment to price stability is unshaken. However, any 

tendency of inflation expectations to become unmoored or for the 

Fed’s inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and would reduce the 

central bank’s policy flexibility to counter shortfalls in growth in 

the future. Accordingly, in the months ahead we will be closely 

monitoring the inflation situation, particularly inflation expectations. 

The Federal Reserve has taken a number of steps to help markets return to more orderly functioning and to foster its economic 

objectives of maximum sustainable employment and price stability. 

Broadly, the Federal Reserve’s response has followed two tracks: 

Efforts to improve market liquidity and functioning and the pursuit 

of our macroeconomic objectives through monetary policy. 

To help address the significant strains in short-term money markets, the Federal Reserve has taken a range of steps. Notably, on 

August 17th, The Federal Reserve Board cut the discount rate, the 

rate at which it lends directly to banks, by 50 basis points, or onehalf percentage point, and it has since maintained the spread between the Federal funds rate and the discount rate at 50 basis 

points rather than the customary 100 basis points. In addition, the 

Federal Reserve recently unveiled a term auction facility, or TAF, 

through which prespecified amounts of discount window credit can 

be auctioned to eligible borrowers. The goal of the TAF is to reduce 

the incentive for banks to hoard cash, and thus to increase their 

8

willingness to provide credit to households and firms. In December, 

the Fed successfully auctioned $40 billion through this facility. 

And, as part of a coordinated operation, the European Central 

Bank and the Swiss National Bank lent an additional $24 billion 

to banks in their respective jurisdictions. This month, the Federal 

Reserve is auctioning $60 billion in 28-day credit through the TAF, 

to be spread across two auctions. TAF auctions will continue as 

long as necessary to address elevated pressures in short-term funding markets, and we will continue to work closely and cooperatively 

with other central banks to address market strains that could hamper the achievement of our broader economic objectives. 

Although the TAF and other liquidity-related actions appear to 

have had some positive effects, such measures alone cannot fully 

address fundamental concerns about credit quality and valuation, 

nor do these actions relax the balance sheet constraints on financial institutions. Hence, they alone cannot eliminate the financial 

restraints affecting the broader economy. Monetary policy; that is, 

the management of the short-term interest rate, is the Fed’s best 

tool for pursuing our macroeconomic objectives; namely, to promote 

maximum sustainable employment and price stability. 

Monetary policy has responded proactively to evolving conditions. 

As you know, the Federal Open Market Committee, or FOMC, cut 

its target for the Federal funds rate by 50 basis points at its September meeting and by 25 basis points each at the October and December meetings. In total, therefore, we have brought the Federal 

funds rate down by one percentage point from its level just before 

the financial strains emerged. The Federal Reserve took these actions to help offset the restraint imposed by the tightening of credit 

conditions and the weakening of the housing market. However, in 

light of recent changes in the outlook for and the risks to growth, 

additional policy easing may well be necessary. The FOMC will, of 

course, be carefully evaluating incoming information bearing on the 

economic outlook. Based on that evaluation, and consistent with 

our dual mandate, we stand ready to take substantive additional 

action as needed to support growth and provide adequate insurance 

against downside risks. 

Financial and economic conditions can change quickly. Consequently, the FOMC must remain exceptionally alert and flexible, 

prepared to act in a decisive and timely manner and, in particular, 

to counter any adverse dynamics that might threaten economic or 

financial stability. 

A number of analysts have raised the possibility that fiscal policy 

actions might usefully complement monetary policy in supporting 

economic growth over the next year or so. I agree that fiscal action 

could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone. But the design and implementation of the 

fiscal program are critically important. A fiscal initiative at this 

juncture could prove quite counterproductive if, for example, it provided economic stimulus at the wrong time or compromised fiscal 

discipline in the longer term. 

To be useful, a fiscal stimulus package should be implemented 

quickly and structured so that its effects on aggregate spending are 

felt as much as possible within the next 12 months or so. Stimulus 

9

that comes too late will not help support economic activity in the 

near term, and it could be actively destabilizing if it comes at a 

time when growth is already improving. Thus, fiscal measures that 

involve long lead times or result in additional economic activity 

only over a protracted period, whatever their intrinsic merits might 

be, will not provide stimulus when it is most needed. Any fiscal 

package should also be efficient, in the sense of maximizing the 

amount of near-term stimulus per dollar of increased Federal expenditure or lost revenue. Finally, any program should be explicitly 

temporary, both to avoid unwanted stimulus beyond the near-term 

horizon and, importantly, to preclude an increase in the Federal 

Government’s structural budget deficit. As I have discussed on 

other occasions, the Nation faces daunting long-run budget challenges associated with an aging population, rising healthcare costs, 

and other factors. A fiscal program that increased the structural 

budget deficit would only make confronting those challenges more 

difficult. 

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

[The prepared statement of Ben S. Bernanke follows:]

PREPARED STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF

THE FEDERAL RESERVE SYSTEM

Chairman Spratt, Representative Ryan, and other members of the Committee, I 

am pleased to be here to offer my views on the near-term economic outlook and related issues. Developments in Financial Markets 

Since late last summer, financial markets in the United States and in a number 

of other industrialized countries have been under considerable strain. Heightened 

investor concerns about the credit quality of mortgages, especially subprime mortgages with adjustable interest rates, triggered the financial turmoil. Notably, as the 

rising rate of delinquencies of subprime mortgages threatened to impose losses on 

holders of even highly rated securities, investors were led to question the reliability 

of the credit ratings for a range of financial products, including structured credit 

products and various special-purpose vehicles. As investors lost confidence in their 

ability to value complex financial products, they became increasingly unwilling to 

hold such instruments. As a result, flows of credit through these vehicles have contracted significantly. 

As these problems multiplied, money center banks and other large financial institutions, which in many cases had served as sponsors of these financial products, 

came under increasing pressure to take the assets of the off-balance-sheet vehicles 

onto their own balance sheets. Bank balance sheets were swelled further by holdings of nonconforming mortgages, leveraged loans, and other credits that the banks 

had extended but for which well-functioning secondary markets no longer existed. 

Even as their balance sheets expanded, banks began to report large losses, reflecting marked declines in the market prices of mortgages and other assets. Thus, 

banks too became subject to valuation uncertainty, as could be seen in the sharp 

movements in their share prices and in other market indicators such as quotes on 

credit default swaps. The combination of larger balance sheets and unexpected 

losses prompted banks to become protective of their liquidity and balance sheet capacity and thus to become less willing to provide funding to other market participants, including other banks. Banks have also evidently become more restrictive in 

their lending to firms and households. More-expensive and less-available credit 

seems likely to impose a measure of restraint on economic growth. 

THE OUTLOOK FOR THE REAL ECONOMY

To date, the largest effects of the financial turmoil appear to have been on the 

housing market, which, as you know, has deteriorated significantly over the past 

two years or so. The virtual shutdown of the subprime mortgage market and a widening of spreads on jumbo mortgage loans have further reduced the demand for 

housing, while foreclosures are adding to the already-elevated inventory of unsold 

homes. New home sales and housing starts have both fallen by about half from their 

respective peaks. The number of homes in inventory has begun to edge down, but 

at the current sales pace the months’ supply of new homes has continued to climb, 

10

1Prices for some financial services are implicit; for example, depositors may pay for ‘‘free’’ 

checking services only indirectly, by accepting a lower interest rate on their deposits. The Bureau of Labor Statistics uses estimates of such prices, as well as other nonmarket prices, in calculating the inflation rate. 

and home prices are falling in many parts of the country. The slowing in residential 

construction, which subtracted about 1 percentage point from the growth rate of real 

gross domestic product in the third quarter of 2007, likely curtailed growth even 

more in the fourth quarter, and it may continue to be a drag on growth for a good 

part of this year as well. 

Recently, incoming information has suggested that the baseline outlook for real 

activity in 2008 has worsened and that the downside risks to growth have become 

more pronounced. In particular, a number of factors, including continuing increases 

in energy prices, lower equity prices, and softening home values, seem likely to 

weigh on consumer spending as we move into 2008. Consumer spending also depends importantly on the state of the labor market, as wages and salaries are the 

primary source of income for most households. Labor market conditions in December 

were disappointing; the unemployment rate increased 0.3 percentage point, to 5.0 

percent from 4.7 percent in November, and private payroll employment declined. 

Employment in residential construction posted another substantial reduction, and 

employment in manufacturing and retail trade also decreased significantly. Employment in services continued to grow, but at a slower pace in December than in earlier 

months. It would be a mistake to read too much into one month’s data. However, 

developments in the labor market will bear close attention. 

In the business sector, investment in equipment and software appears to have 

been sluggish in the fourth quarter, while nonresidential construction grew briskly. 

In light of the softening in economic activity and the adverse developments in credit 

markets, growth in both types of investment spending seems likely to slow in coming months. Outside the United States, however, economic activity in our major 

trading partners has continued to expand vigorously. U.S. exports will likely continue to grow at a healthy pace in coming quarters, providing some impetus to the 

domestic economy. 

Financial conditions continue to pose a downside risk to the outlook. Market participants still express considerable uncertainty about the appropriate valuation of 

complex financial assets and about the extent of additional losses that may be disclosed in the future. On the whole, despite improvements in some areas, the financial situation remains fragile, and many funding markets remain impaired. Adverse 

economic or financial news thus has the potential to increase financial strains and 

to lead to further constraints on the supply of credit to households and businesses. 

Even as the outlook for real activity has weakened, some important developments 

have occurred on the inflation front. Most notably, the same increase in oil prices 

that may be a negative influence on growth is also lifting overall consumer prices. 

Last year, food prices also increased exceptionally rapidly by recent standards, further boosting overall consumer price inflation. The most recent reading on overall 

personal consumption expenditure inflation showed that prices in November were 

3.6 percent higher than they were a year earlier. Core price inflation (which excludes prices of food and energy) has stepped up recently as well, with November 

prices up almost 21⁄4 percent from a year earlier. Part of this rise may reflect passthrough of energy costs to the prices of core consumer goods and services, as well 

as the effects of the depreciation of the dollar on import prices, although some other 

prices—such as those for some medical and financial services—have also accelerated 

lately.1

Thus far, the public’s expectations of future inflation appear to have remained 

reasonably well anchored, and pressures on resource utilization have diminished a 

bit. Further, futures markets suggest that food and energy prices will decelerate 

over the coming year. Given these factors, overall and core inflation should moderate this year and next, so long as the public’s confidence in the Federal Reserve’s 

commitment to price stability is unshaken. However, any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be 

eroded could greatly complicate the task of sustaining price stability and reduce the 

central bank’s policy flexibility to counter shortfalls in growth in the future. Accordingly, in the months ahead we will be closely monitoring the inflation situation, particularly inflation expectations. 

MONETARY POLICY RESPONSE

The Federal Reserve has taken a number of steps to help markets return to more 

orderly functioning and to foster its economic objectives of maximum sustainable 

11

employment and price stability. Broadly, the Federal Reserve’s response has followed two tracks: efforts to improve market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy. 

To help address the significant strains in short-term money markets, the Federal 

Reserve has taken a range of steps. Notably, on August 17, the Federal Reserve 

Board cut the discount rate—the rate at which it lends directly to banks—by 50 

basis points, or 1⁄2 percentage point, and it has since maintained the spread between 

the federal funds rate and the discount rate at 50 basis points, rather than the customary 100 basis points. In addition, the Federal Reserve recently unveiled a term 

auction facility, or TAF, through which prespecified amounts of discount window 

credit can be auctioned to eligible borrowers. The goal of the TAF is to reduce the 

incentive for banks to hoard cash and increase their willingness to provide credit 

to households and firms. In December, the Fed successfully auctioned $40 billion 

through this facility. And, as part of a coordinated operation, the European Central 

Bank and the Swiss National Bank lent an additional $24 billion to banks in their 

respective jurisdictions. This month, the Federal Reserve is auctioning $60 billion 

in twenty-eight-day credit through the TAF, to be spread across two auctions. TAF 

auctions will continue as long as necessary to address elevated pressures in shortterm funding markets, and we will continue to work closely and cooperatively with 

other central banks to address market strains that could hamper the achievement 

of our broader economic objectives. 

Although the TAF and other liquidity-related actions appear to have had some 

positive effects, such measures alone cannot fully address fundamental concerns 

about credit quality and valuation, nor do these actions relax the balance sheet constraints on financial institutions. Hence, they alone cannot eliminate the financial 

restraints affecting the broader economy. Monetary policy (that is, the management 

of the short-term interest rate) is the Fed’s best tool for pursuing our macroeconomic 

objectives, namely to promote maximum sustainable employment and price stability. 

Monetary policy has responded proactively to evolving conditions. As you know, 

the Federal Open Market Committee (FOMC) cut its target for the federal funds 

rate by 50 basis points at its September meeting and by 25 basis points each at the 

October and December meetings. In total, therefore, we have brought the federal 

funds rate down by 1 percentage point from its level just before the financial strains 

emerged. The Federal Reserve took these actions to help offset the restraint imposed 

by the tightening of credit conditions and the weakening of the housing market. 

However, in light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary. The FOMC will, of course, be carefully 

evaluating incoming information bearing on the economic outlook. Based on that 

evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks. 

Financial and economic conditions can change quickly. Consequently, the FOMC 

must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten 

economic or financial stability. 

A number of analysts have raised the possibility that fiscal policy actions might 

usefully complement monetary policy in supporting economic growth over the next 

year or so. I agree that fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary 

policy actions alone. But the design and implementation of the fiscal program are 

critically important. A fiscal initiative at this juncture could prove quite counterproductive, if (for example) it provided economic stimulus at the wrong time or compromised fiscal discipline in the longer term. 

To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within 

the next twelve months or so. Stimulus that comes too late will not help support 

economic activity in the near term, and it could be actively destabilizing if it comes 

at a time when growth is already improving. Thus, fiscal measures that involve long 

lead times or result in additional economic activity only over a protracted period, 

whatever their intrinsic merits might be, will not provide stimulus when it is most 

needed. Any fiscal package should also be efficient, in the sense of maximizing the 

amount of near-term stimulus per dollar of increased federal expenditure or lost revenue. Finally, any program should be explicitly temporary, both to avoid unwanted 

stimulus beyond the near-term horizon and, importantly, to preclude an increase in 

the federal government’s structural budget deficit. As I have discussed on other occasions, the nation faces daunting long-run budget challenges associated with an 

aging population, rising health-care costs, and other factors. A fiscal program that 

12

increased the structural budget deficit would only make confronting those challenges more difficult. 

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

Chairman SPRATT. Thank you, Mr. Chairman. I note that you 

have to be careful in the terms you use, and in particular of using 

terms that might become self-fulfilling prophecies. But as you look 

at all of these dire conditions and the recent events that I described 

just earlier, how does the Fed sum it up? What is the Fed’s overall 

diagnosis of the course of the economy over the next year to 18 

months? 

Mr. BERNANKE. Well, we currently see the economy as continuing 

to grow, but growing at a relatively slow pace, particularly in the 

first half of this year. As the housing contraction begins to wane, 

as it should sometime during this year, the economy should pick 

up a bit later in this year. But we believe we will see below-trend 

growth certainly in 2008, and probably early into 2009 as well. 

Chairman SPRATT. You indicate in your testimony that conditions appear to be worsening in 2008? 

Mr. BERNANKE. Yes. The latter half of 2007 was actually reasonably good. The third quarter we saw growth of about 5 percent. 

Growth slowed significantly in the fourth quarter, but is still moderate. Recent indications suggest, though, that the economy has 

softened somewhat, and that the growth prospects for 2008 are certainly below that of last year. 

Chairman SPRATT. But as I listened to you read the first several 

pages of your testimony describing the conditions in the financial 

markets in particular, the swollen nonconforming mortgage portfolios, the lack of investor confidence in the valuation of their investments, then the lack of confidence in institutions holding those 

assets, a long litany of fairly distinct and unique problems, it 

doesn’t appear to be your garden variety business cycle recession 

of the kind we were used to in the years after the end of the last 

war. 

Mr. BERNANKE. Well, again, we are not forecasting recession, but 

rather at this point slow growth. But you are absolutely correct, 

Mr. Chairman, that there are a number of characteristics of this 

period that are somewhat unique, including the financial market 

turmoil we have seen, pressures on the banks. We are hit on the 

other side by these rapid increases in oil and commodity prices, 

which create some inflation risk and create a problem on that side. 

The housing sector, of course, has been in a very sharp contraction 

and relatively unusual pattern that we have seen there as well. So 

there really is a confluence of different events that makes this a 

difficult combination of circumstances. 

I think it is important, as we are concerned about the slowing 

growth of the economy, that the U.S. economy remains extraordinarily resilient. It is very diversified. It has a strong labor force, 

excellent productivity and technology, and a deep and liquid financial market that is in the process of trying to repair itself. So I 

think we need to keep in mind also that the economy does have inherent strengths, and that those will certainly surface over a period of time. 

Chairman SPRATT. Would you agree that the confluence, as you 

put it, of these dire events calls for something broader than moneVerDate 0ct 09 2002 15:42 Mar 24, 2008 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-27\HBU017.000 HBUD1 PsN: DICK
13

tary policy, and gives us particular reason for using a fiscal policy 

stimulus in this particular set of circumstances? 

Mr. BERNANKE. As I said, Mr. Chairman, I think a fiscal stimulus package could be helpful in the current circumstances. It 

would provide a broader base of support to the economy than just 

that afforded by monetary policy. It would in some sense diversify 

our policy tools as we attempt to address the situation. It might 

have somewhat different timing, different effects over—on the economy than monetary policy. So I think it could be helpful. But as 

I emphasized in my testimony, it needs to be done quickly, to be 

temporary, and to be effective in the sense that for every dollar put 

into stimulus we get a reasonable response in terms of extra activity during the next year or so. 

Chairman SPRATT. Given the structural problems in the financial 

markets, do you think that the fiscal policy solution or package 

should go to the source of the problem, as you put it, where the 

existing events were triggered, and attempt some sort of structural 

fix as well as providing some aggregate demand increases? 

Mr. BERNANKE. Well, there are a whole range of issues that we 

will be looking at over the next couple of years. And the financial 

markets will be wanting to review whether regulatory and accounting policies need to be changed in light of what we have seen in 

the last couple of years. I am sure there will be continued attention 

to the housing market and mortgage market and the issues that 

were raised in the recent experience there. But I think from the 

perspective of fiscal stimulus, if we are able to provide some additional strengths in the near term in the economy, that that will be 

beneficial broadly. For example, if the economy is growing more 

quickly, then the stresses on the housing market, on the financial 

market would be correspondingly reduced. 

Chairman SPRATT. Could you take just a second and explain to 

us how it is that a problem so pervasive and so serious was able 

to crop up or arrive under the radar without being detected sooner 

by the regulators? 

Mr. BERNANKE. Well, there was—as I said, there was a combination of factors. The economy was reaching its full employment point 

a couple years ago, and the Federal Reserve was very focused on 

trying to help the economy go along an expansion path without inflation. We were very focused on that. But we have, just as I said, 

a confluence of factors. One of the key factors has been the housing 

boom and bust that we have seen. House prices and house construction are obviously on the down trend. That in turn has 

interacted with mortgage markets, and particularly subprime mortgages, as I have discussed, and created—particularly in the category of subprime mortgages with adjustable rates, has created 

high rates of delinquency. That in turn has fed into the financial 

system and created pressures in the banking sector which are then 

being felt in terms of their profitability, their capital, and their 

willingness to extend credit. So it has been a complicated interaction of factors that have led to this situation. 

Chairman SPRATT. Has the prevalence of securitized mortgage 

packages made it more difficult to find a regulatory solution to the 

problems in the financial market? 

14

Mr. BERNANKE. In some respects it has. Mortgages are no longer 

generally held by the lender who made the mortgage. Instead, the 

mortgages have been sliced and diced and sold throughout the financial system as part of structured credit products, or as part of 

mortgage-backed securities. We have found some complexity arising from that in terms of loan modifications and workouts. It has 

been somewhat more difficult for the servicer to work out a loan 

with a troubled borrower when the servicer doesn’t own the mortgage. It has to essentially meet the requirements and the interests 

of all the holders of the mortgage. 

We at the Federal Reserve, along with the other regulators, have 

been working hard trying to find solutions to that. We have tried 

to address technical problems such as accounting rules that might 

impede servicers from modifying loans. We have provided letters of 

encouragement essentially to servicers and to banks encouraging 

them to do loan modifications wherever feasible. Of course the 

Treasury and the HUD have undertaken this HOPE NOW initiative to try to increase the scale and scope of renegotiation and loan 

modifications. 

So there are many efforts underway to try and increase the scale 

and to address more effectively the problem of troubled borrowers. 

But I think it is fair to say that the securitization and the distribution of mortgage ownership very widely has to some extent complicated that process, and that is something we will have to be 

thinking about as we review the lessons of this period. 

Chairman SPRATT. One final question, just to go back over your 

testimony, as to the contents and configuration of a fiscal stimulus 

policy package, what do you think the contents should be? I know 

you can’t get prescriptive of a specific, but could you give us a 

broad outline? And in particular, can you address at all whether 

or not the structural package should include the renewal of the expiring tax cuts? 

Mr. BERNANKE. Mr. Chairman, I, as you know, in light of the 

nonpartisan character of the Federal Reserve, I am going to try 

very hard today to avoid taking positions in favor of any specific 

tax or——

Chairman SPRATT. I wanted to offer you the opportunity, but I 

understand your reasons. 

Mr. BERNANKE. But I do think that you should be looking at a 

number of different things that—a program that combine a number 

of elements, you know, might in some sense address the problem 

from a number of different angles and be more effective than one 

that was only a single element. 

Chairman SPRATT. Thank you, sir. 

Mr. Ryan. 

Mr. RYAN. Thank you, Chairman. Mr. Chairman, I find it interesting that Europe is also facing signs of a slowdown in growth and 

feeling the effects of the credit market turmoil, yet last week the 

European Central Bank opted not to lower interest rates due to its 

concerns over inflation. To what should we attribute the difference 

in policy action between the Fed and the ECB given somewhat 

similar economic circumstances? 

Mr. BERNANKE. Well, I don’t think the circumstances are entirely 

similar. In particular, Europe has not faced this 2-year decline in 

15

the housing market, with all its implications for construction activity, for construction jobs, for homeowners’ prices—homeowners’ equity, and for the credit quality of mortgages in the banks. They 

have experienced some credit issues, in part because of the international nature of financial markets. And some have worried that 

that might imply some restraint on their economies. But we at the 

Federal Reserve, we follow, of course, all of our major trading partners, and we try to develop forecasts and analyses of their economies. And we do not see in Asia or in Europe the slowdown in 

growth that potentially we will be seeing here in the United States. 

And so I think the circumstances are rather different. And that, 

you know, potentially leads to a different policy response. 

Mr. RYAN. Has the Fed given us an estimate, or has the Fed 

come up with an estimate of the total dollar value loss associated 

with the housing correction and the subprime market fallout? 

Mr. BERNANKE. Well, you hear a lot of numbers being cast about. 

And I think part of the problem is that people are comparing apples and oranges. Some people want to include not just losses in 

the subprime mortgage area, but throughout all credit areas. 

Mr. RYAN. Right. 

Mr. BERNANKE. Some people are double counting because they 

are counting not only the credit losses, but also the losses to the 

holders of derivatives, the credit default swaps and the like. So 

there are a lot of numbers out there which are not really comparable. 

So the facts are the following, that in the subprime adjustable 

rate mortgage market there are about 5 million mortgages, with a 

total market value of—a total principal value of about a trillion dollars. Currently, about 20 percent of those mortgages are delinquent. If you assume that all of those mortgages go into foreclosure, which is an exaggeration, and you are pessimistic about recovery and say that only 50 percent of the value will be recovered, 

that would give you so far about a hundred billion dollars in losses 

in that category. 

Now, our expectations is that delinquencies will go higher and 

that there will be ongoing losses in the subprime area. There are 

also moderate additional losses in, for example, subprime mortgages with fixed rates and in other mortgages as well. But the 

thrust, the largest part of the problem so far has been in subprime 

mortgages with adjustable rates. As I said, I see so far about a 

hundred billion dollars, but it could be certainly several multiples 

of that as we go forward, and the delinquency rates and foreclosure 

rates rise. 

Mr. RYAN. So to try and get an assessment of that specific damage, we are looking at a hundred billion now, possibly more hundreds, but not eclipsing the trillion dollar mark in an economy, a 

$14 trillion economy. Is that just the proper way to put this into 

perspective? 

Mr. BERNANKE. That is correct. Within the specific category of 

subprime adjustable rate mortgages, the total outstandings are 

about a trillion dollars, so the limits to possible losses——

Mr. RYAN. Right. 

Mr. BERNANKE [continuing]. Must be less than half of that. 

16

Mr. RYAN. So given that you have these different tools in your 

toolbox, you have the discount window, you have the TAFs, and 

then you have just broad interest rate policy, are you concerned 

that there is a point at which a moral hazard occurs with these 

policies? The discount window and the TAF is more of a liquidityproducing policy, but the broader interest rate policy, do you fear 

that this could reignite another housing bubble down the road if 

the Fed goes too far and creates a moral hazard within those policies? 

Mr. BERNANKE. Well, we are going to be certainly alert to moral 

hazard issues. But at the moment, I don’t think that is a major 

concern for a couple of reasons. First of all, let me just say in terms 

of what our objectives are, as I talked about in my remarks, for example, in Jackson Hole in August, it is not the Federal Reserve’s 

job to protect investors from decisions they made. And we are certainly not trying to do that. However, we do want to make sure 

that if the financial markets are in distress, that that distress does 

not result in innocent bystanders, so to speak, the rest of the economy, suffering. And therefore, we do want to try to address the 

problem of keeping the economy as stable as possible. 

Recently, the interbank markets have been quite dysfunctional; 

that is, interest rates that banks lend to each other have been 

quite high. That reduces the effectiveness of monetary policy. That 

makes banks much less willing to lend. And therefore, it is counterproductive from the point of view of our objectives of stabilizing the 

economy. Our liquidity measures have attempted to reduce those 

tensions. And I think we have had some success in that direction, 

which is very positive, will make banks more willing to lend and 

will help strengthen the economy going forward. 

With respect to moral hazard, again, as I said, we certainly have 

not prevented banks from taking losses, as you can see by the 

write-downs that have been coming for the last several months 

now. And I would say in addition, that as we go forward and as 

we look at the new bank regulations under Basel II and so on, that 

we are going to want to be particularly sure going forward that 

banks maintain adequate liquidity, adequate capital. And so we 

will directly ensure that they are not taking advantage of this program to skimp on their necessary protective measures. 

Mr. RYAN. On the inflation side of the ledger book, can you give 

us a good sense of how we ought to measure inflationary expectations? You know, we are using the traditional measurements, we 

see gold at a nominal all time high, we see other commodity prices 

that are post-cyclical indicators showing us possible concerns of inflation. In your testimony you mention that you think we will see 

a deceleration of those prices in the second half of this year. We 

really haven’t had to deal with this since the Volcker era. And so 

this is new. And the economy is global and different than it was 

during that Volcker era. What does the Fed look at to try and 

measure inflationary expectations? Because if those expectations 

come into the economy then we have a real problem on our hands. 

And I am assuming you would have to have a tightening regime 

to follow. So what is it that the Fed looks at to measure expectations in this new global economy we have? 

17

Mr. BERNANKE. Congressman, you make a very good point. We 

do look at variables like gold and other commodities. They do have 

some information in them. But it is not pure information about inflation because gold, for example, responds to a whole variety of 

concerns, geopolitical and others. Commodities have been rising 

certainly in significant part because of the increased demands by 

China and India and other emerging market economies for these 

inputs. So that is by itself, I think, not sufficient to evaluate the 

inflation situation. 

We generally have two sources of information about expectations. 

The first comes from financial markets. There are a number of different financial instruments that give some information about inflation expectations. 

Mr. RYAN. Futures contracts, things like that? 

Mr. BERNANKE. The one that is most clear is the return on the 

Treasury Inflation-Protected Securities, the TIPS, bonds. By comparing the yields on TIPS bonds to non-indexed bonds you can get 

an assessment of what investors think that long-term inflation expectations are going to be—long-term inflation is going to be. When 

you do that, you find that investors have not ratcheted up their expectations for long-term inflation, which is somewhat encouraging. 

The other type of information we get is through various surveys 

of either firms or households, asking people directly what their expectations are. And what we see there is that people have increased their inflation expectations for the very near term, which 

is understandable given what is happening to oil prices, and therefore to gasoline prices. But generally speaking, both firms and 

households have kept pretty much unchanged their views of what 

inflation is likely to be over the longer period, say the next 5 to 10 

years. And we take some comfort from that as well. 

But having said that, we recognize that inflation expectations are 

not fixed. They depend on our policies and our actions, and it is 

very important for us to keep a close eye on inflation as we go forward. 

Mr. RYAN. Yes. I think the concern is that it will happen so fast 

before it—you know, after it is too late to do anything about it. So 

I guess the final question is—I want to be sensitive to other members’ time, I know you have a hard leave time—is do you believe 

that your indicators, these tools you use to measure expectations 

give you enough lead time to make the policy adjustments necessary to prevent inflation? 

Mr. BERNANKE. I believe they do. Besides those expectational 

measures, we obviously have direct measures of inflation and price 

change, and we monitor those very closely. And we use things like 

the futures markets, as you mentioned. So inflation generally 

moves in a fairly slow way, at least the underlying inflation. We 

are watching it very carefully. And it has got to be part of the 

equation as we look forward and try to judge our policy actions. 

Mr. RYAN. Thank you, Mr. Chairman. I yield. 

Chairman SPRATT. Thank you, Mr. Ryan. We may have votes on 

the floor. In that event, unless they are serious votes, I plan to continue the meeting, the hearing onward because the Chairman has 

to leave at 12:30 today. 

Mr. Edwards of Texas. 

18

Mr. EDWARDS. Chairman Bernanke, to address our present shortterm economic challenges some in Congress have suggested that we 

make permanent tax cuts that aren’t scheduled to expire until 

2010. I have two questions to you regarding that proposal. One, in 

your opinion, without talking about the long-term consequences of 

that, in your opinion would making permanent tax cuts that aren’t 

going to expire for 3 years, would that have any significant impact 

on our present economic slowdown? 

And my second question is given your focus and your testimony 

and importance of maintaining long-term fiscal discipline, if these 

tax cuts scheduled for 3 years, that would start going into effect 3 

years from now, if they are not paid for by spending cuts or other 

tax increases, if they are paid for primarily by borrowing money, 

including borrowing from foreign nations and by significantly increasing the Federal deficit, is there a risk that that policy could 

actually hurt future economic growth? 

Mr. BERNANKE. Well, Congressman, it is possible that making 

the tax cuts permanent might have some near-term effect. For example, making dividend relief permanent could affect today’s stock 

market as the market looks forward in terms of dividend payments. 

But I think there is a whole range of issues, including tax policy, 

budget balance, tax reform that the Congress has to look at, entitlements, which are very important, but also very long run in nature. And I think those who support making the President’s tax 

cuts permanent would say that the primary reasons for advocating 

that would be for long-term growth purposes. And so, you know, 

our discussion today is about short-term stimulus. And I think 

from the point of view of getting stimulus in the next few months, 

I think that the evidence suggests that measures that involve putting money in the hands of households and firms that will spend 

it in the near term would be more effective. 

Again, I am not taking a view one way or the other on the desirability of those long-term tax cuts being made permanent. But I 

think they are a part of a set of very important long-term issues 

on fiscal structure and fiscal stability that this committee and the 

Congress needs to have. 

Mr. EDWARDS. Could you address for a moment a bit more specifically my second question, that if those tax cuts were not paid 

for by other spending cuts or tax increases, they were paid for by 

increasing the Federal deficit significantly and by borrowing money 

from others, including foreign nations, could that actually harm 

long-term economic growth in this country? 

Mr. BERNANKE. Well, I will answer this way, which is I think 

that we need to have long-term fiscal responsibility. And so those 

who want to have low taxes, and low taxes have many benefits, 

also need to support a very disciplined spending side as well. Those 

who want to spend more need to find the revenues to support that. 

So as I have said a number of occasions, the law I am most in favor 

of is the law of arithmetic. That, you know, what comes in at least 

has to equal what goes out at some point. And as you think about 

the various alternatives that the Congress has over the longer period, I hope the law of arithmetic will be part of your consideration. 

Mr. EDWARDS. Perhaps that is a law we should pass in Congress. 

Mr. Chairman, could I ask in just the 1 minute remaining that I 

19

have, some have said that in a $14 trillion economy, a hundred billion dollar stimulus package would be nothing but window dressing. You testified a moment ago that if done properly, it could actually assist us in trying to improve our present economic situation. 

Would that impact, a hundred billion dollars in a $14 trillion economy, be directly economic or psychological on improving consumer 

confidence? What would be the potential positive impact of a hundred billion dollar or so stimulus package? 

Mr. BERNANKE. It would be—it would be significant. If you did 

a hundred billion dollars of stimulus, and let us say for sake of argument that 60 or 70 billion of that was actually spent by say early 

2009, and that was added to the GDP, that the effects on the 

growth rates in the second half of the year and early 2009 would 

be significant. It would be certainly measurable, would not be window dressing. 

Mr. EDWARDS. Thank you, Mr. Chairman. 

Chairman SPRATT. Mr. Garrett? 

Mr. GARRETT. Thank you, Mr. Chairman. And I appreciate your 

holding the hearing. And I would like to thank Chairman 

Bernanke as well for your testimony so far. As we all know, one 

of the main reasons we are facing these current economic 

downturns, as you already indicated, is the housing market. And 

while I know there has been a lot of criticism by some as to why 

we, if you want to say that, the government didn’t act any sooner 

or faster to head it off, as you indicated, and others have said as 

well, many people never saw the breadth of the problem we are 

currently experiencing coming. Even your predecessor, Mr. Greenspan, was under the false impression that a decline in the housing 

industry could precipitate broader economic problems. In February 

of 2005, I asked that then-Chairman about the possibility of a nationwide housing bubble, not in this committee but over in Financial Services. He responded, saying, I think we are running into 

certain problems in certain localized areas. We do not have the 

characteristics of a bubble in certain areas—or we do have the 

characteristics of a bubble in certain areas, but not, as best as I 

can judge, nationwide. I don’t expect that we will run into anything 

resembling a collapsing bubble. I do believe that it is conceivable 

we will get some reduction in overall prices than we have had in 

the past, but that is not a particular problem. 

It is obvious it has become a problem, and I want to compliment 

you now for your—and your colleagues at the Fed for your hard 

work, for example, in a proposed rule to amend the provisions of 

Regulation Z in an effort to prevent some of the bad practices that 

have occurred in the mortgage market over the last several years 

from happening again. 

I also want to applaud the administration and the Treasury Secretary Paulson for their efforts in bringing together all the different 

participants in the mortgage loan process to work with each other 

under HOPE NOW. It is to keep more people in their homes, provide investors a maximum return on their investment, and prevent 

the current mortgage market from trickling into other parts of the 

economy. 

That said, while I am pleased with the appropriate government 

agencies that are focusing on the issues, I do want to issue a word 

20

of caution. Whenever the government overly interferes with the 

marketplace there is a potential, as Mr. Ryan has already indicated, I believe, that a so-called moral hazard that can affect future 

economic decisions and transactions. It is very plausible to suggest 

that if government bails everyone out of this mess that we will continue to bail out bad actors in the future, and any market discipline that currently remains will further erode. 

Now, two or three questions I have in my time here. On the last 

point that was just raised, would the possibility of a stimulus package that would consist of infusing the number was thrown out 

about a hundred billion dollars, and what impact it would have, 

you suggested that would have some impact—I don’t know whether 

you used the word ‘‘significant’’ or not—and you suggested that 

about 60-some odd percent of it might be actually used for current 

spending. I think we have to go by history on that to see what has 

occurred in the past. My understanding in the past was that when 

the dollars were given back out earlier in this decade that about 

a third of it went to pay off credit card debt and other debt, which 

is what I think most Americans would do right now, especially if 

you are in a foreclosure. Another third of it just went into savings 

accounts or otherwise. Basically, two-thirds of the money was set 

aside and was not any stimulus package at all. The remaining 

amount of money, therefore, was left over. And that was only a 

third of the percentage of the dollars spent. So if we gave everybody a hundred dollars, that means they would have about $30 to 

spend to go out and buy a toaster of some sort. 

So my first question is where do you come up with the suggestion 

that this time around there would be twice as much revenue spent 

than we have had in the past occasions? 

My other question goes to a comment that you made back in November. November 8th, in your testimony before the Joint Economic Committee, you said that a large increase in net taxes would 

tend to be a drag on consumer spending and on the economy 

through a number of different channels. So my question here is in 

the light of the fact that we may have some suggestions of offsetting any spending packages that we do here, perhaps potentially 

with taxes, do you still believe an increase in taxes would have 

such a deleterious impact on the overall economy? 

Mr. BERNANKE. Thank you, Congressman. Well, first on the magnitudes, let me just say first of all that there is a lot of uncertainty 

about exactly what the spending impact would be. And there is a 

range of estimates out there. There has been some very interesting 

recent work that looks at credit card balances and how the credit 

card balances adjusted after the checks were disbursed in 2001, 

which suggests a somewhat higher response than I think you were 

indicating. And that is described—the Congressional Budget Office 

has a recent publication which gives a nice overview of some of the 

issues and some of the evidence relating to different types of spending impacts. But I certainly take your point that there is a lot of 

uncertainty in terms of how big the effect would be and how quickly it would be felt, which is one of the reasons for considering perhaps a combination of issues, a combination of programs to kind of 

diversify your risk, so to speak. 

21

My presumption is that if this stimulus package was undertaken, 

and again to be of value it would need to be timely and well implemented and well designed, that it would result in a near-term increase in the budget deficit, and not an increase in taxes. That 

would be counterproductive to increase taxes as part of this program. There could be offsets, you know, at further horizons. And 

so this could or could not, may or may not be consistent with the 

PAYGO approach, for example. But certainly to be effective under 

the usual analysis it would have to increase the deficit in the near 

term. 

Chairman SPRATT. Mr. Cooper of Tennessee. 

Mr. COOPER. Thank you, Mr. Chairman. Mr. Chairman, I welcome your testimony. Thank you for giving Congress some guidance on the outlines of an overall stimulus package. I think most 

of us agree with you that it should be timely and well designed. 

I am hoping that we are not only getting a congressional-Fed consensus here, but a Democratic-Republican consensus, because I 

think there has been a lessening of tensions on this important 

issue. We heard from Larry Summers earlier in the week, and to 

put it bluntly, he said well, we would get a gold medal if we got 

economic stimulus to hit the streets by March or April. We would 

get a silver medal if it were June or July. And maybe no medal at 

all if it was next September. You seem to have indicated in your 

testimony that we might have 12 months to work within. Do you 

think in general the quicker the better as long as it is well designed, or do we have 6 months or more to actually get the money 

working on the streets of America? 

Mr. BERNANKE. The 12 months, Congressman, the 12 months I 

was referring to is the amount of time over which the spending effects would be felt. 

Mr. COOPER. Okay. 

Mr. BERNANKE. I think in order for this to be effective, you need 

to move very quickly. There are some constraints in terms of how 

quickly—for example, if you have rebates to consumers, there are 

some technical issues about how quickly the IRS could gear up to 

do that. You know, it could be as much as a couple of months depending on how much resources are put into it. But I think in 

order for this to be useful, you would need to act quite quickly. 

Mr. COOPER. Promptly. And that will necessitate some sort of a 

bipartisan agreement so that we can move this very quickly. Fortunately, the AMT relief was given last year, so between now and 

April 15th taxes will not be going up. And that is $52 billion of 

help for some 27 million Americans. And that is good. On the design of the package, that is the key question. And you were talking 

earlier to Mr. Garrett, saying that this could be accommodated 

within PAYGO. Because PAYGO only says that things have to be 

paid for sometime within the next 5 years. And that gives us until 

2013 to pay for this. And my preference would be to pay for things 

through spending cuts. There are other ways to pay for things. But 

I am very much hopeful that this well-designed package can be in 

fact paid for, because exactly as you say in your testimony, we 

should do nothing to exacerbate the longer-term financial problems, 

the structural deficit problems that our Nation faces. 

22

So I think that is going to be the key challenge for policymakers 

today to go ahead and have the short-term fiscal stimulus, but to 

make sure not only that we do no harm in the long-term future, 

but that we actually try to improve the long-term outlook. Because 

I was very disturbed last week when Moody’s joined Standard and 

Poor’s, who had indicated a year earlier projecting that the U.S. 

Treasury bond might lose its AAA credit rating in about 10 years. 

And that seems like a long time away, but when you are dealing 

with 5- and 10-year horizons, that is probably within reach of the 

term of the next President of the United States. So long-term situations cannot be ignored as we debate this short-term fiscal stimulus. 

So I welcome your testimony, and I appreciate your guidance for 

this Congress. Thank you. 

Chairman SPRATT. Mr. Hensarling of Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. Welcome, Chairman Bernanke. In looking at recent economic history, when I 

looked at the recession that we were facing in ’01, and I look at 

the rebates that were given, I believe that in many cases they were 

important. 

But Chairman, as I look at those rebates, my reading of history 

is that although consumer spending temporarily increased, that 

capital investment spending perhaps decreased by roughly the 

same amount, and that after that package was passed, that the 

economy did not overall improve. It wasn’t until ’03 that you had 

the lowering of marginal rates and the significant cap gains tax relief and dividends relief that you really stimulated the economy 

that has led to the longest period I think of uninterrupted job 

growth perhaps in our Nation’s history. And certainly one of the 

most robust periods of economic growth. And I see a similar phenomena in the 1981 package, where again marginal rates were lowered. And so although it may be important, some type of rebate 

package, since we all know that we have constituents who are 

struggling to pay their healthcare premiums, send a child to college, keep a roof over their head, I am not sure that rebates equate 

to long-term economic stimulus. 

And so one, my question is what is your reading of the history 

of the ’01 and ’03 tax relief packages? And when we talk about 

stimulus, is it more important to stimulate temporary consumer demand, or is it more important to stimulate long-term sustainable 

job growth? 

Mr. BERNANKE. Congressman, on the history—and let me just reiterate what I said before, which is that economics is not that precise a science. So there is plenty of room for disagreement about 

how big these effects have been. 

My judgment and I think the judgment of most of the empirical 

analyses that have been done was that the rebates in 2001 did 

have some impact on spending and that that was of some assistance in keeping the 2001 recession relatively moderate. 

It is true that capital spending was quite weak. Indeed, the 2001 

recession was in some sense a business-led or investment-led recession, and the interpretation that most economists gave of that fact 

was that following a huge amount of investment during the stock 

market run-up in the late 1990s, that there was a capital overhang 

23

and that businesses didn’t see much reason to invest. And so they 

pulled back their investment quite significantly. 

In 2003, tax policy again, I believe, did help stimulate the economy. Monetary policy also was quite stimulative in 2003. And those 

things helped the economy recover, as well as its natural recuperative powers. So again I think there were a number of factors at 

work. 

In no way do I want to express lack of concern with the critical, 

long-run issues of achieving an efficient, fair, simple Tax Code and 

of achieving a well-balanced and fiscally responsible government 

budget. I think those are critical elements; and I hope and expect 

that this Congress over the next—this session and the subsequent 

sessions will be looking very closely at these important issues. They 

are critical issues, and in terms of our long run health, they are 

clearly quite important. 

The topic that we are discussing today, though, is the very near 

term and the risk of a significant slowdown associated with the 

housing bust and with problems in financial markets and the like. 

And the question has been raised to me and others whether or not 

some kind of temporary stimulus might be helpful in avoiding a 

slowdown or a more significant slowdown, and that is what I am 

addressing today. And I think——

Mr. HENSARLING. Chairman Bernanke, in that regard, on page 3 

of your testimony you say that outside the United States economic 

activity in our major trading partners has continued to expand vigorously. 

As I look at the EU and other industrialized nations, I see that 

over the course of the last few years, many of these nations have 

slashed their corporate tax rates, and I think, with the exception 

of Japan, we have the highest business tax rate of any industrialized nation in the world. And so, as we see their economies expand vis-a-vis our own, is there a lesson to be learned from that, 

particularly juxtaposed against the threatened tax increases we 

have seen in this Congress, including the one announced by the 

chairman of the Ways and Means Committee, his alternative minimum tax plan that could increase taxes for 90 percent of Americans at 3.5 trillion in tax increases over 10 years? 

So the question is, is there something to be learned about expanding economies that are lowering their business tax rates? Is 

there something to be learned about tax certainty so that businesses know, long term, they won’t be socked with these long tax 

increases; and what is that connection to long-term economic job 

growth? 

Mr. BERNANKE. Well, first, we are in different stages of the business cycle. Over the last 5 or 10 years, the U.S. compares very well 

with other countries in terms of its long-term growth and productivity growth, so we have a strong economy, resilient economy. 

We rely on the market system. We do try to keep taxes low. I 

think all those things are important. And I again am in no way 

taking one side or the other in terms of these issues of fiscal stability and an efficient tax system. I think they are very, very important, and I hope that Congress will continue to work on trying 

to improve our tax competitiveness and our fiscal stability and our 

fiscal strength. 

24

But again, in terms of the very near-term cyclical factors, I think 

that those things that you are talking about are important, but 

they are more about the long-term growth rate of the economy and 

not about the next 6 months. 

Chairman SPRATT. Ms. Kaptur. 

Ms. KAPTUR. Thank you. 

Welcome, Mr. Chairman. I can’t see you, but I know you are 

there. I thought I might begin with a brief perspective, having been 

here over two decades now, and then ask a series of four questions 

that can be answered very briefly or for the record. 

In the last two decades, what I have witnessed here in the housing finance sector as a result of legislation passed by this Congress 

is a great power shift in housing finance and a great responsibility 

shift. And that power shift has been from local communities and 

local community banks to financial centers very far from where my 

constituents live. We have seen local banking institutions eliminated. Our thrifts, which used to promote savings and provide 

housing finance no longer exist. 

Wall Street was empowered, and we have gone as an economy 

from a prosavings to a prodebt consumer credit, credit card—I 

think delinquencies are at all-time highs. We have changed the 

whole way we thought about savings and investment, including in 

the most important sector that any family holds savings and that 

is in their home. 

The theory back when all of this happened, which I fought 

against and didn’t win, was that we would never have to worry 

again about housing crunches leading this Nation into recession because securitization was going to save us; and it was offered as a 

cure-all to prevent recession. The old mantra of, well, the local 

community banker who looked at character, collateral and collectability, as well as community responsibility was gone; and we have 

moved into an era now, a very—cursory credit evaluations, very 

risky subprime and accounting practices and securitization. 

So the whole system was turned inside out. Local portfolio lending was replaced by international securitization. Many communities like those I represent became derivative. They basically had 

no local institutions left but for some credit unions and some small 

rural banks, and all that power shifted to the megabanks and investment houses. 

Here are my questions. Number one, what firms on Wall Street 

and which financial regulatory agencies here in the Nation’s Capital are most responsible for the securitization of subprimes into 

the international market? Number one, which firms and which regulatory agencies are most responsible for the creation of those practices? 

Number two, in order to pay for this fiscal stimulus that we are 

talking about here, should the bankers, financiers and board members of those institutions who brought us to this subprime debacle 

and were hugely rewarded while obviously failing to do even the 

most minimal due diligence, be required to pay back their salaries 

and bonuses to the people of the United States? 

Number three, seeing as how you were the former CEO of Goldman Sachs, what percentage——

25

Mr. BERNANKE. No. You are confusing me with the Treasury Secretary. 

Ms. KAPTUR. I have got the wrong firm? Paulson. Oh, okay. 

Where were you, sir? 

Mr. BERNANKE. I was the CEO of the Princeton Economics Department. 

Ms. KAPTUR. Oh, Princeton. Oh, all right. Sorry. Sorry. I got you 

confused with the other one. I am sorry. Well, I am glad you clarified that for the record. 

What percentage level of investment in a bank or investment 

house do you consider to constitute effective control—10, 20, 30, 50 

percent? 

And finally, as we consider this fiscal stimulus package, how can 

we design it, structure it, to create the greatest wealth creation in 

our country and prevent the draining off of those precious dollars 

toward hollow expenditures by consumers or by the Government of 

the United States? How can we create wealth creation with whatever small portion we are able to direct towards investment in this 

country? Thank you. 

Mr. BERNANKE. Congresswoman, that is quite a list of questions. 

You are quite correct that there has been a major shift in mortgage lending from what is called portfolio lending, banks who lend 

from their own portfolio, including community banks, to a 

securitization model. By the way, I think the important institution 

that was involved in that was Fannie Mae, which essentially created the securitization market for mortgages. That was used very 

positive, I still think it is basically positive because it makes the 

mortgage market less dependent on flows of deposits into particular banks or thrifts. There were periods in the past when, for 

whatever reason, deposits flowed out of local banks and thrifts, and 

that made mortgage credit more difficult to obtain; and so the idea 

that there would be essentially direct access to capital markets was 

viewed as an important step in terms of freeing up the housing 

market and housing market finance. 

Now, as we have learned and you correctly point out, the 

securitization model is not without its problems, and we have seen 

some of them, the so-called originate-to-distribute model, which is 

what we have been seeing. In particular, the question arises when 

you have one firm making the loan and another investor holding 

the loan, does the firm that makes the loan have appropriate incentives to make sure it is a good loan—a well-underwritten loan. 

If you are making the loan for your own portfolio, you have a 

strong incentive to do so. If you are making it just to sell it off, you 

may have much less incentive; and that clearly has been part of 

the problem that we saw in the subprime situation, going back. 

Ms. KAPTUR. Sir, could I ask you, does Freddie Mac have as 

much responsibility as Fannie Mae in the change in that 

securitization——

Mr. BERNANKE. Freddie came later, but it has played, also, an 

important role. That is essentially what those two firms do: They 

buy mortgages from banks and other lenders and they sell them on 

the secondary market. They securitize essentially. So as we go forward, I think we are going to have to look very carefully at that 

originates-to-distribute model, make sure that incentives are propVerDate 0ct 09 2002 15:42 Mar 24, 2008 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-27\HBU017.000 HBUD1 PsN: DICK
26

erly aligned and make sure that transparency is adequate so that 

people know—investors know what they are buying. 

I do want to indicate and take note of the fact that the Federal 

Reserve has recently put out for comment an extensive set of rules 

and regulations that would apply to all lenders of the United 

States that would try to prohibit some of the practices and underwriting practices that contributed to some of these problems. But 

I do think that there is a major set of issues here that we have to 

look at going forward. 

I am not going to comment on the CEO question. I don’t think 

that is really my department. 

Ms. KAPTUR. But do you think that they might have responsibility? Do they have some responsibility? 

Mr. BERNANKE. Well, some of them have been fired. Some of 

them have lost money. Certainly their firms have taken significant 

write-downs. 

So again, as I said before, it is hardly the case that these firms 

are protected from the consequences of what they have done. And 

it is not our intention either as a central bank or as a regulator 

to protect those who made mistakes from the consequence of those 

mistakes. 

Chairman SPRATT. Mr. Chairman, Ms. Kaptur, we have got to 

move on because he has to leave here at 12:30. So we have got to 

move ahead with the——

Ms. KAPTUR. Could I just ask the Chairman, what percentage 

level of investment and banker investment house would the Chairman consider effective control—10, 20, 30, 50? 

Mr. BERNANKE. It depends very much on the governing structure, how many directors and what role the investor plays in the 

management of the firm. If you are thinking of the recent capital 

investments by a number of foreign wealth funds, for example, 

those have been relatively small and they have, in general, not involved any control rights in the firm. 

Ms. KAPTUR. And finally, how can we target fiscal stimulus? 

Chairman SPRATT. Whoa, whoa. We have got to move on, Ms. 

Kaptur. 

Mr. Campbell of California. 

Mr. CAMPBELL. Thank you, Chairman Spratt and Chairman 

Bernanke. 

Yesterday we saw that inflation was up and growth has been declining. If those two trends were to continue, we would head towards a classic stagflation scenario which, as Mr. Ryan alluded to, 

is not something we have seen since Jimmy Carter was President 

or something we have had to deal with. 

How do you deal with inflation when we have declining growth 

and encourage growth while dealing with this inflation, particularly if the inflation, as it appears to be, is driven by international 

commodity prices? 

Or conversely, how do you—through monetary policy or we 

through fiscal policy—encourage growth while not igniting this inflation and heading us towards a stagflation scenario? 

Mr. BERNANKE. Well, you put your finger on a very difficult problem. We have two objectives and one instrument, and we need to 

balance those risks appropriately. 

27

It is our sense that—as I said before, that inflation expectations 

are reasonably well anchored. We are looking at forecasts made in 

futures markets of oil and other foods and other commodities. And 

so our sense—and again, monetary policy has to look forward because it works only with a lag, and therefore our forecast is critical 

to our policy action. 

Our anticipation is that both headline and core inflation will 

moderate over the next year or two to a level which we view as 

consistent with price stability. 

Having said that, we recognize that the futures markets—and accordingly, therefore, the Federal Reserve—has consistently underestimated the amount of increase in the oil prices, for example, and 

that our ability to be effective in addressing growth shortfalls is 

critically dependent on our maintaining our credibility for keeping 

inflation low; and so in no way are we going to ignore that issue. 

We are going to have to make sure that inflation remains controlled and that our credibility for keeping inflation in medium 

term at levels consistent with price stability is not impaired. 

But you are absolutely right that the last few months have been 

very challenging because we have had on the one hand growth 

issues; we have had inflation issues and we have had financial 

market turmoil as well. And so we have had to balance off a number of different risks as we try to choose the right set of policies, 

going forward. 

Mr. CAMPBELL. I will fire two more questions at you and that 

way I won’t—make sure I won’t run out of time. 

The first is, you have done a lot of monetary policy—you have 

done a lot at the window. You have lowered rates and you obviously can lower rates some more. Other than that, lowering rates 

some more, are there any tools left in your monetary bag, if you 

will, relative—clubs left in that bag relative to this economic 

growth side? 

And the second question is somewhat unrelated. But as relative 

to this potential fiscal stimulus package, wouldn’t some kind of 

business tax-related stimulus have more of a multiplier effect on 

the economy? I mean, in the end, if you give someone a few hundred dollars, that helps, but if you give someone more confidence 

that there is going to be a job or that jobs will increase because 

there is business activity—and there is a lot of money sitting on 

the sidelines now not knowing where to go; if there are some things 

that encourage that money to come off the sidelines, wouldn’t that 

create a greater multiplier effect in providing stimulus over time? 

Mr. BERNANKE. In your first question, Congressman, we are focused right now on liquidity provision and other measures to try 

and help the markets work better, and our monetary policy. And 

I think for now those are really our two main tools, and we are 

going to continue to apply those to try to meet our objectives. 

On business tax relief, again a lot depends on the structure. With 

respect to short-term business tax relief, should you choose to do 

that, the experience has been that temporary measures like temporary partial expensing, for example, or bonus depreciation, 

whereas it is not particularly helpful in the very long run because 

it is only temporary. 

28

The fact that it is temporary may induce firms to bring up spending they might otherwise have done into the current period and 

therefore add to spending in the economy. And it has the advantage that to the extent they do that, you also create more capital 

in the economy which supports job creation. So that is an alternative direction. 

And again, as I said before, what the Congress might well want 

to consider is a diversified mix of elements as you try to craft a 

package. 

Chairman SPRATT. Mr. Becerra. 

Mr. BECERRA. Mr. Chairman, thank you very much for joining 

us. I want to thank you for your thoughtful testimony. 

Legislating, like economics, is a very imprecise science, and some 

would say I am being generous even in that description. So let me 

ask you to do me a favor. I am going to give you one last chance 

to retract your statements that you made today. And just to be 

sure you are clear, I am going to look at your testimony and see 

if you still want to stand by these statements: 

To be useful, a fiscal stimulus package should be implemented 

quickly and structured so that its effects on aggregate spending are 

felt as much as possible within the next 12 months or so. Are you 

okay with that? 

Mr. BERNANKE. I am fine. 

Mr. BECERRA. Fiscal measures that involve long lead times or result in additional economic activity only over a protracted period, 

whatever their intrinsic merits might be, will not provide stimulus 

when it is most needed. 

Mr. BERNANKE. Of course I support that—I believe that—and I 

want to emphasize intrinsic merits. I have tried to make some distinction between long-term ventures and short-term stimulus. 

Mr. BECERRA. That, I understand. And you have tried to explain 

that a little, and I am not going to get too much into that. I just 

want to make sure you are going to stand by these statements, because obviously a lot of folks will cover what you say today. 

You also want to say any program should be explicitly temporary? 

Mr. BERNANKE. Correct. 

Mr. BECERRA. A fiscal program that increased the structural 

budget deficit would only make confronting those challenges—the 

challenges of the aging population, rising health care costs and 

other factors—more difficult. 

Mr. BERNANKE. I agree. 

Mr. BECERRA. You agree. Those are your statements. 

Finally, a fiscal initiative at this juncture could prove quite counterproductive if, for example, it provided economic stimulus at the 

wrong time or compromised fiscal discipline in the longer term. 

Mr. BERNANKE. Correct. 

Mr. BECERRA. Can you give me a quick definition of ‘‘longer 

term’’? 

Mr. BERNANKE. Well, you know, it is very difficult to forecast 

where the economy is going to be way down the road. 

Mr. BECERRA. Let me make it easier for you. Less than or more 

than a year? 

Mr. BERNANKE. More than a year. 

29

Mr. BECERRA. Okay. That is plenty fine. 

Now, let me ask you this. In your testimony and in your responses to comments, you talk about the possibility of monetary 

policy being complemented by some prudent fiscal policy, fiscal policy that pursuant to your statements gets the money into the 

hands of those who will spend it wisely, consume it wisely, quickly? 

Mr. BERNANKE. That is right. 

Mr. BECERRA. That doesn’t mean only a reduction in someone’s 

taxes through a tax rebate, but it could also be something that puts 

money in your hand to buy food today or to keep your ability to 

buy your clothes even if you might be on the verge of losing your 

unemployment insurance benefits? 

Mr. BERNANKE. There are a range of possible ways to give 

money. 

Mr. BECERRA. And so that could include food stamps for those 

who are trying to figure out a way how to buy the next meal for 

the family or how to make sure that you can buy the clothes your 

child needs to go back to school, if you are about to lose your unemployment benefits because you were a victim of this latest downturn? 

Mr. BERNANKE. Those are all possibilities, but they differ in details; and it is up to Congress to put it together. 

Mr. BECERRA. Possibilities, not necessarily what you do, but possibilities. Thank you. I want to just broach for a second—it seems 

to me that we now have to tell the American people that that is 

it. Did you see it? Because we just passed the best of times of this 

economic boom that we were experiencing over these last few 

years. We saw the best of times, I think most would agree; and I 

think your comments would also concur with this, that we are now 

probably going to see some worse times. 

And so, if that is it, it is hard to believe that during the best of 

times we saw the rate of poverty actually—the number of people 

in poverty in this country actually go up. We saw the number of 

people in this country increase by millions in being uninsured for 

health, and that was during the best of times. 

And so as we talk about what we do—and as you said, we should 

do something that is temporary and timely, and it seems targeted—I have a figure from the Congressional Budget Office that 

shows that the Bush tax cuts of 2001 and 2003—between the year 

2001 to the year 2017—so over the course of about 16, 17 years—

will have cost the American public and taxpayers about $3.4 trillion. How much we have gotten from them, that is to be measured, 

but I think most economists agree that most tax cuts don’t pay for 

themselves. And if we were to extend those tax cuts and make 

them permanently over that same course of 16 or 17 years to the 

year about 2017, it would cost the American taxpayer about $7.2 

trillion. 

So given what you are saying, we have to have temporary, timely 

and targeted tax cuts—I am not going to ask you to respond if enacting or extending permanently the Bush tax cuts would be wise 

policy, but I would just ask you, do you disagree much with the 

CBO’s figures on how much the tax cuts have cost to date? 

Mr. BERNANKE. I agree that tax cuts generally do not pay for 

themselves. 

30

But the real question is to balance the efficiency or growth benefits of lower taxes against the need to cut spending if you have 

lower taxes. So again, it is the law of arithmetic. Low taxes are a 

good thing generally, but you have to be willing to make the spending cuts to go along with it. 

Mr. BECERRA. I find myself concurring with you. 

Chairman SPRATT. Mr. Lungren. 

Mr. LUNGREN. Thank you, Mr. Chairman. 

And thank you, Mr. Bernanke, for your testimony. I am a lawyer; 

I am not an economist. The only thing more imprecise than an 

economist are noneconomists trying to talk economy. 

I have to come here to be educated to understand that when the 

government doesn’t tax me as much, it costs me? My God, the tax 

cuts cost the American people. I hope the average American understands that if we allow you to keep money in your pocket, we have 

cost you money. 

That is what I just heard, and I had to come here after 4 years 

of college and 3 years of law school and practicing law to learn 

that. It is a novel idea. 

Mr. Chairman, I tuned in television this morning, and I heard 

the same litany of the terrible news of the economy. I am not a Pollyanna. There is bad news out there. But when I hear this drumbeat every single day, every single day, and you deal with the psychology of the American people and the expectations of inflation or 

the expectations of the economy and therefore confidence, that has 

to have an impact. 

And so a lot of people are tuning in to watch you today to ask 

you, What is the state of the economy? And as I read your testimony, you have pointed out the difficulties that we are under right 

now and that we will see for the foreseeable short term. But I 

thought I heard you say the underlying strengths of the economy 

remain in terms of productivity, in terms of our advances in technology, in terms of our unemployment rate at the present time—

even though it has gone up, the basic employment status. And I 

wonder if you would talk a little bit about that, because I think the 

American people need to hear a little bit about the broader picture 

as we look at the serious issues that are there. 

What are the underlying strengths that the American people 

ought to understand so that we don’t accelerate our emphasis on 

the negative such that the American people don’t fully appreciate 

the full picture? 

Mr. BERNANKE. Congressman, I agree with you. I think we have 

some short-term issues associated with our dynamics of our housing market and some of these issues in financial markets, and so 

we are looking at a slowdown. 

But over longer periods of time, the U.S. economy has shown remarkable and consistent growth. Particularly in the last decade or 

so, productivity growth has been outstripping other industrial 

countries quite consistently. We have a very diverse and flexible 

workforce. We have a highly productive economy, strong technology, many factors that are encouraging. 

I think, over the longer term, that the economy will perform 

quite well; I think we have challenges as well. Obviously, we need 

to address some of these fiscal issues. We need to address our eduVerDate 0ct 09 2002 15:42 Mar 24, 2008 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-27\HBU017.000 HBUD1 PsN: DICK
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cation system. There are issues about health care. Those are all 

very important. 

But the U.S. economy for the last—indeed, for more than a century, has shown its tremendous resilience and ability to grow despite all kinds of challenges. So in no way do I want to detract from 

that. And, indeed, it is interesting that as people express pessimism about the economy and so on, they often say that their own 

personal situation looks okay or they are more optimistic about 

their own personal situation. 

So I am not here at all to be saying negative things about the 

long-term potential of the U.S. Economy. I think it is excellent. I 

think we have important challenges. But every economy goes 

through ups and downs, and right now we are in a slow period. 

And the question is, what policy actions might be helpful. 

Mr. LUNGREN. And one of the things I am most concerned about 

is the long-term economic growth of this country, because it is not 

only important to us now, it is important to our children and our 

grandchildren. And if you look at the overall trends over the last 

decade in terms of inflation, you see that we are actually in pretty 

good shape, comparatively speaking—unemployment rates and so 

forth—and I will probably end up voting for some stimulus package. 

But I think we ought to be honest. A stimulus package is an economic vitamin B-12 shot. It is going to make you feel a little bit 

better for a short period of time. But in terms of the true impact 

on the overall health of the economy, it is not that significant, is 

it? 

Mr. BERNANKE. Well, I think we would all prefer to have steady 

growth over the next year rather than, you know, growth that is 

too slow, and that it would have an impact on people who are looking for work, will have impacts on family incomes. So the Federal 

Reserve is mandated to try and support maximum sustainable employment growth, and we want to do that. So to the extent that we 

can prevent the economy from slowing unduly, even over a relatively short period, I see benefit in doing that. 

But as I have indicated, in some sense the critical issues are the 

long-term issues in terms of our market system, our education, our 

Tax Code, our technology, all the things that contribute to longterm growth. That said, I don’t think we should ignore the shortterm issues, and certainly the Federal Reserve is very focused on 

them. 

Chairman SPRATT. Thank you, Mr. Lungren. 

Mr. McGovern of Massachusetts. 

Mr. MCGOVERN. Thank you, Mr. Chairman. 

Thank you, Chairman, for being here. I think we all get it, that 

we need to enact a targeted, timely and temporary stimulus package and we need to act sooner rather than later. And I think it is 

also clear that we need to enact a stimulus package that adds up 

to more than just helping the rich get richer, that we need to have 

a more broad-based approach to providing relief to people across 

the country. 

And experts across the political ideological spectrum seem to be 

coming to consensus that we need to develop a plan that also helps 

the most vulnerable people and households and that allows curVerDate 0ct 09 2002 15:42 Mar 24, 2008 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-27\HBU017.000 HBUD1 PsN: DICK
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rency to flow. Many of these experts believe strongly that any stimulus plan should include a temporary increase in food stamp benefits. And I know my colleague from California, Mr. Becerra, kind 

of raised that issue. 

My colleagues on this committee have heard me talk about rising 

hunger and the moral need to ensure that nobody in this country 

is without food or without adequate food. And I understand that to 

kind of deal with that challenge, it requires a long-term strategy. 

And today we are focused on talking about the best way to jumpstart our economy. It seems clear to me that an increase in food 

stamps not only should be part of any economic stimulus package, 

but really needs to be. Increasing food stamp benefits for the current recipients can be done quickly and, particularly now with electronic benefit transactions, very efficiently. 

Fraud is not an issue today like it was under the old food stamp 

program. The money goes to people who have trouble with their 

food and other bills, and more importantly, these people will spend 

this money and these funds go directly into the economy. 

Based on USDA research, we know that every food stamp dollar 

generates nearly twice that in economic activity, and according to 

the CBO, and I quote, ‘‘The vast majority of food stamp benefits are 

spent extremely rapidly, and because food stamp recipients have 

low income and few assets, most of any additional benefits would 

probably be spent quickly,’’ end quote. 

Administrative costs of such an increase are negligible, meaning 

that the majority of the stimulus would go directly into the economy. Currently, over half of all benefits go to the 39 percent of food 

stamp households whose income was less than or equal to half the 

poverty line. 

During fiscal year 2006, approximately 27 million people received 

food stamp benefits. Each month nearly all benefits went to 87 percent of food stamp households that were in poverty. And according 

to the Center on Budget and Policy Priorities, many low-income 

consumers do not receive unemployment insurance and are not tax 

filers, and thus would receive no help from extended unemployment insurance benefits or a tax rebate. So a food stamp increase 

would reach a significant portion of this group. 

And I have read quotes from former Treasury Secretary Larry 

Summers and Martin Feldstein, a former economic adviser to 

President Reagan. All kind of seem to agree that this would be a 

major help in terms of stimulus. 

So my questions are—I mean, do you agree with these assessments? Does this fit into the categories that you are talking about 

in terms of what would constitute real stimulus? What role do you 

see the food stamp program playing in any economic stimulus 

package? And in your opinion, what would be the effect of including 

in the stimulus package a temporary increase in the food stamp 

program? 

Mr. BERNANKE. Congressman, I don’t want to usurp Congress’ 

prerogative in terms of figuring out the best ways to get money——

Mr. MCGOVERN. That is okay. You can do that if you want. 

Mr. BERNANKE [continuing]. So I think what I will say is, I think 

there is good evidence that cash that goes to low- and moderateincome people is more likely to be spent in the near term. And so 

33

I think that logic carries through. But the exact way that you deliver—if you decide to do that, the exact way you deliver an exact 

mix, I think is up to you. 

I guess I would also comment that food stamps and some of these 

other things are relatively small compared to the overall size of a 

package, and so it certainly could not be the—if you were doing 

that, it couldn’t be the only mechanism. 

Mr. MCGOVERN. No. And I appreciate that. 

But again, listening to what you were saying here today about 

what could constitute an important stimulus, getting benefits to 

people quickly, we know that we saw how—how we were able to 

do that in Hurricane Katrina; and there was a big snowstorm in 

Buffalo, New York, and we were able to respond with food stamps 

quickly, you know, knowing that this generates more economic activity. 

I am not saying this should be the only thing in the stimulus 

package, but clearly it seems to me that it should be an important 

thing. And I wanted to make sure it fit into what you were talking 

about in kind of general categories of what would help the economy 

move forward. 

Mr. BERNANKE. Getting money to people quickly is good. And 

getting money to low- and moderate-income people is good in the 

sense of getting bang for buck. 

Mr. MCGOVERN. Thank you. 

Chairman SPRATT. Mr. Conaway. 

Mr. CONAWAY. Thank you, Mr. Chairman. 

And, Chairman Bernanke, thank you for being with us this 

morning. One quick technical thing. You mentioned in the testimony a ‘‘term auction facility.’’ Does the Fed guarantee that principle? What is the attraction there for banks to go to that window 

and buy that—swap those dollars with each other? 

Mr. BERNANKE. We have collateral. The banks put collateral at 

our window, at our discount window, and they borrow against that 

collateral. And since that makes the loan safe for us, we can afford 

to——

Mr. CONAWAY. Less the discount rate, what the TAF——

Mr. BERNANKE. The TAF is essentially the discount window, except delivered through an auction format rather than through a direct loan format. 

Mr. CONAWAY. Thanks. 

Some of this issue has been created by folks borrowing money 

they can’t pay back, whether it is on housing or credit cards or 

whatever it is. Much of your testimony focused on helping provide 

more credit, extending more credit. 

Is there evidence, either empirically or anecdotally, where qualified borrowers are, in fact, unable to borrow money and that we 

can continue to debt our way out of this issue? Am I misunderstanding that? 

Mr. BERNANKE. First of all, the fiscal proposals don’t involve anyone increasing their debt. It would just involve either tax rebates 

or some other——

Mr. CONAWAY. But your monetary side, where——

Mr. BERNANKE. Yes. So I think it is a concern if banks—you 

want banks to make sound loans. You want them to do good underVerDate 0ct 09 2002 15:42 Mar 24, 2008 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-27\HBU017.000 HBUD1 PsN: DICK
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writing. But if banks get to a position where they simply decline 

to take on new customers, for example, or they are extraordinarily 

tight in their standards because they are afraid of using up their 

available capital, then that can be a restraint on the economy. We 

want to have a balance. 

Mr. CONAWAY. I understand that. But we want to make sure the 

medicine is for the right disease. And do we have a credit issue 

with respect to banks, in general, being unable to lend to good, 

qualified customers that you want, underwriting standards, the 

character that Ms. Kaptur was talking about, the local guy knows? 

Are we at that point? 

Mr. BERNANKE. The biggest problems right now are in mortgage 

markets where terms and conditions have tightened considerably 

and banks are relatively reluctant, for example, to make good, 

jumbo, prime loans. They charge a significant premium for those. 

For low- and moderate-income people, there is such a thing as 

good subprime lending. It has been done responsibly and can be 

done responsibly, but essentially, at this point, there is none being 

done at all because they know they can’t securitize it. So particularly in the mortgage market, but to some extent in other markets 

we are seeing some tightening of credit conditions. 

I agree with you that you want to have good, strong underwriting 

and make sure it is the best borrowers who get loans. But we just 

don’t want to have banks sort of overshooting, so to speak, and 

making it difficult even for qualified borrowers to get loans. 

Mr. CONAWAY. But that is something you would watch for, qualified borrowers unable to get—I spent a brief bit of time in my career in banking and loaning money to people who pay you back was 

the idea, and not loaning to folks who hadn’t paid other folks back 

was generally a red flag to not do that kind of stuff. 

Back on the tax side and certainty of our Tax Code, whatever it 

might or might not be, you mentioned that business incentives, 

higher depreciation, bonus depreciation, are the kinds of things 

that immediately would accelerate that. Can we also infer from 

that that future tax increases either threatened or in the Code now 

would lead businesses to delay investment into those periods where 

their tax rates go higher? 

Mr. BERNANKE. There is a theoretical possibility there that if——

Mr. CONAWAY. If next year’s tax rate is going to be higher and 

I have got to build something or buy something, wouldn’t it be to 

my advantage to delay that purchase into a period where the tax 

depreciation rules are more favorable or the rate is higher, and 

that makes the depreciation I am going to get more valuable to me? 

Mr. BERNANKE. I think your point in principle is certainly correct. I am not sure that—are you contemplating raising——

Mr. CONAWAY. I am not, but everybody else on the other side is. 

Mr. BERNANKE. I see. In terms of trying to stimulate near-term 

capital spending, I think the general view is that using taxes that 

apply—tax provisions that apply directly to capital formation, such 

as depreciation or investment tax credits, have a bigger bang for 

the buck than do just general corporate tax rates. 

So if you are going to do that, if you are going to try to make 

investment spending part of this package, then temporary measVerDate 0ct 09 2002 15:42 Mar 24, 2008 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-27\HBU017.000 HBUD1 PsN: DICK
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ures that provide incentive to firms to bring up their—increase 

their capital spending are probably the most effective. 

Mr. CONAWAY. Thank you, Mr. Chairman. 

Thank you, Mr. Spratt. 

Chairman SPRATT. Mr. Andrews. 

Mr. ANDREWS. Thank you, Mr. Chairman. 

Thank you, Chairman Bernanke. I think you have done the country a really good service by your laying out of the problem and 

some principles to help us solve it. You have obviously learned well 

from your time on the Montgomery Township, New Jersey, Board 

of Education. We appreciate that. 

There are three ideas on the table for short-term stimulus that 

we have heard members talk about. One is accelerating some business tax reduction, whether it is expensing or what have you. The 

second is direct consumer tax rebates. The third is some expansion 

of programs, such as food stamps. 

Are there any data that suggest that among those three there is 

one that is better than the others in terms of multiplier effect, in 

terms of effectiveness? 

Mr. BERNANKE. Well, there are multiple considerations. I think 

just in terms of the effect on—for each dollar spent on spending, 

the highest multipliers are probably from tax rebates or other payments to low- or moderate-income people, who are likely to spend 

quickly. 

The immediate impact through, for example, accelerated depreciation is more disputatious. There are different views on that. But 

there are other considerations, such as the fact that you create 

more capital and that is beneficial. 

So none of these things depends only on the multiplier. But I 

think most packages we have seen in the past have included at 

least some component of tax rebates to low- and moderate-income 

people. 

Mr. ANDREWS. Given the fact that that is a desirable option, are 

there data on efficiency levels of spending by quartile of income 

group? In other words, do the people at the bottom quarter spend 

more of that rebate more quickly than people at the top? 

Mr. BERNANKE. There are some studies which suggest—and 

again, I really need to emphasize the uncertainty associated with 

econometric estimates and so on, but the studies do suggest that 

people of lower incomes or those who are ‘‘liquidity constrained,’’ 

which means they find it difficult to borrow for one reason or another, are more likely to spend in the near term than people, for 

example, that have extensive assets to draw on and therefore don’t 

need to adjust their spending to their income. 

Mr. ANDREWS. I think I heard you say there are some pretty 

solid data that tax rebates to consumers are an effective stimulus, 

given the way we are defining effectiveness in this discussion; and 

second, that tax rebates that, I won’t say disproportionately, but at 

least to a fair share go to the people at the bottom ladder are also 

quite effective in achieving that short-term bump that we are looking for; is that correct? 

Mr. BERNANKE. In terms of stimulus, because people who are of 

low income or have few assets or find it difficult to borrow are more 

36

likely to spend the money in the near term? That has that benefit 

from the stimulus point of view. 

Mr. ANDREWS. One of the things that is striking about your testimony is this balance that we have to find between the short-term 

needs that we have and avoiding long-term harm. It is sort of like 

steroids, that you want to address an infection quickly, but you 

don’t want to create an adverse impact. 

I guess this is a timely week to be raising that issue around 

here. 

Chairman SPRATT. On that note, I think we had better move on, 

Mr. Andrews. 

Mr. ANDREWS. Yes, Commissioner. 

The question, if I can just quickly ask, is there a way that we 

could do some short-term stimulus that actually helps to solve one 

of our structural long-term problems? For example, energy, is there 

any argument for the proposition that there should be a steeper 

subsidy or a larger rebate if what is purchased is something that 

uses renewable fuels, for example? In other words, would we want 

to have a policy that encourages the purchase of automobiles that 

are more efficient vis-a-vis other——

Chairman SPRATT. Mr. Andrews, let’s get the answer to that 

question, and then we will move on. 

Dr. Bernanke. 

Mr. BERNANKE. As I said in my testimony, there are many intrinsically interesting or useful things that may not be part of a 

stimulus package. And the issue you need to address there is how 

quickly would spending take place and what would be the marginal 

amount of spending that such a program would produce. 

Mr. ANDREWS. Thank you. 

Chairman SPRATT. Mr. Barrett of South Carolina. 

Mr. BARRETT. Thank you, Chairman Spratt. 

Chairman, great to see you. Here I am. We are jumping around 

over here. Thank you for being here today. 

Reading your testimony, quote, ‘‘economic stimulus at the wrong 

time or compromised fiscal discipline in the longer term’’—and you 

are talking about a stimulus package, fiscal initiatives and stuff 

like that. Fiscal discipline in the longer term is what I want to concentrate on, Chairman. And this is not a Republican problem, this 

is not a Democrat problem, because I can tell you when we were 

in charge, we did it too. We are doing it now. 

Does the Congress spend too much money, Mr. Chairman? 

Mr. BERNANKE. That is not my call. My call is to say that—government spending——

Mr. BARRETT. It is a nonpartisan question, Mr. Chairman. 

Mr. BERNANKE. No, it is not a nonpartisan question. There are 

value judgements there. 

If you spend on a certain kind of program, you have got to make 

a judgment: Is it—is the value of this to society worth the extra 

taxes you need to pay for it? And that is something that only the 

elected leaders of our country can represent the people’s views on. 

That is not a value-neutral question. 

My concern is that we have, I think, a pro-growth Tax Code, one 

that is efficiently designed and fair and simple. I am also concerned 

37

that we have budget balance in the long run. Those are the things 

that are important for growth. 

But in terms of whether an additional program is worth the 

extra taxes, that is for Congress. And I really don’t have——

Mr. BARRETT. I appreciate it. We need to get you back down to 

South Carolina a little bit more, because I can tell you in South 

Carolina they think we spend too much money. I think this is a 

nonpartisan. 

What about uncertainty in our fiscal policy? If we had some 

sense of certainty out there in the free market, don’t you think—

no matter what the policy is, if there was certainty, that certainly 

would help in our potential growth. Would you agree with that? 

Mr. BERNANKE. I think certainty is helpful, yes. 

Mr. BARRETT. Good. That is a good one. 

Moving right along, trying to get us out of this recession when 

we are thinking about a package, some people have said, okay, let’s 

give the money back in a bulk sum, so we can give some instant 

stimulus; some people have said long-term tax cuts or looking at 

fiscal policy. 

Does it make sense, Mr. Chairman—and I am—again, I am not 

saying one is better than the other. What I am saying is, does it 

make sense to look at both of them and maybe have a balance in 

our policy that may have a combination of both? 

Mr. BERNANKE. Between spending and tax cuts? 

Mr. BARRETT. Yes, sir. Like a tax credit as part of it in the short 

term, and in the long term having some type of long-term tax cut 

fiscal policy, something like that, so we could do a combination in 

a package. Does that make sense to look at both of those? 

Mr. BERNANKE. Well, as I have indicated, I think there are some 

really important long-term issues which this fiscal stimulus 

doesn’t—is not necessarily designed directly to address. And I think 

there is a political question about whether or not—you know, within the short period of time we are talking about, the Congress can 

address all these very difficult long-term issues. They have to be 

addressed, and if you can do so, that is terrific. 

Mr. BARRETT. And I don’t mean to cut you off, Chairman, because my time is short. 

You know as well as I do, sometimes having the opportunity to 

address some of these things, you know, timing is everything. So 

if there would be a way we could address both of these issues in 

the same package, would it make sense to do that? 

Mr. BERNANKE. If you can address the stimulus and at the same 

time make good decisions about long-term tax policy and long-term 

fiscal balance, that would be a terrific thing. 

Mr. BARRETT. Good. Thank you. 

Last question, I think is all I am going to have time for: High 

prices in oil coupled with the weak dollar, kind of tell me how that 

affects what we are doing and if there is anything we can do in the 

short term with the price of oil and the devaluing dollar. 

Mr. BERNANKE. I don’t think there is that much that can be done 

in the short term. The most important factors affecting oil prices 

are supply and demand, and we have a growing world demand for 

oil and for energy and for commodities, and supply is limited. So 

that is difficult. That is another one of the long-term issues that 

38

Congress needs to address in terms of energy, energy efficiency and 

security. 

For us at the Federal Reserve, high oil prices are a real bane because they create inflationary pressure at the same time that they 

take away spending and income and tend to depress the economy. 

So they make it very difficult for us. 

Mr. BARRETT. The falling dollar, does it concern you, Chairman, 

that maybe someday we will wake up and the world will say, Hey, 

guess what, guys, we are not using the dollar as the world standard anymore; we are going to use something else? 

Mr. BERNANKE. I always have to begin by saying that the Secretary of the Treasury is the official spokesman on the dollar. 

Mr. BARRETT. I understand. I understand. 

Mr. BERNANKE. My view on that is that—at the Federal Reserve 

is that we need to make this economy strong and have price stability. And if we do that, then in the medium term, the dollars will 

reflect the strength of the U.S. economy, which I have a lot of confidence in, again in the medium term, as we discussed before. 

Mr. BARRETT. Good. Thank you, Chairman. 

Chairman SPRATT. Mr. Allen. 

Mr. ALLEN. Thank you, Mr. Chairman. 

And thank you, Chairman Bernanke, for being here. I want to 

just follow up and say, it may seem like Economics 101, but you 

said that cash, whether it is tax rebates or other money going to 

low- and moderate-income people is more likely to be spent quickly, 

that is the phenomenon of the multiplier. 

But could you just explain the multiplier enough to help us understand why it is true that money going to those groups is more 

likely to create—have a stimulative effect on the economy? 

Mr. BERNANKE. Well, one of the concerns that people have right 

now is that the consumer is pulling back and that consumer spending is not going to grow as quickly, which would tend in the short 

term to depress the economy because consumption spending is 

about 70 percent of total spending. So the question is, can we find 

a way to get the consumer to be a little less hesitant to spend. 

In terms of who is most likely to spend, if you are somebody who 

has lots of financial assets and you receive an extra dollar, you 

may not change your spending much because you can simply either 

put the dollar in your bank account or take out a dollar as you 

need it. If you are somebody who lives paycheck to paycheck, you 

are more likely to spend that extra dollar. The evidence seems to 

be consistent with that. 

Now, I want to be clear that people at all levels of income do 

seem to respond to some extent to extra cash. But both sort of economic logic and the empirical work we do have suggested that effect is somewhat stronger for people with low financial assets or 

low and moderate income. 

Mr. ALLEN. Thank you. 

My state, like many others, has seen an erosion of middle-class 

jobs in recent years, with particular losses in the manufacturing industries. And in your testimony, you remark on recent changes in 

the labor market, stating that while employment in the service sector has continued to show slow growth, there were significant decreases in residential construction, manufacturing and retail trade. 

39

And though you say we shouldn’t read too much into one month’s 

data—but it is—it sure looks as if job losses in construction, manufacturing and retail trade indicate we are losing middle-class jobs, 

we are losing the kinds of jobs that people could support a family 

with. Do you agree with that? 

Mr. BERNANKE. Well, those categories contain a wide range—construction can include labor, it can include a foreman. Retail can include a salesclerk, it can include the CEO of Sears. So there is a 

quite a range of people who are in these different categories. 

Manufacturing, you mentioned specifically. Manufacturing does 

tend to be cyclical. So when the economy overall slows, manufacturing tends to slow generally by more, and therefore the loss of 

manufacturing jobs, as we have seen recently, is partly indicative 

of a slowing economy. 

Now, more generally—I don’t want to take all of your time—but 

more generally, of course, we have seen a long-term downward 

trend in manufacturing jobs—a lot of reasons for that. One of them 

is simply the fact that U.S. manufacturing is so productive and has 

become so much more productive that even though we produce as 

much stuff now as we did 20 years ago, we can do it with many 

fewer workers, and that productivity gain reduces the number of 

workers that are needed. 

Mr. ALLEN. Let me just conclude with this question. 

As we think about different components of a stimulus package, 

can you comment on whether there are some components that 

might drive job creation more than others? 

Mr. BERNANKE. Well, as I have noted, I have noted the spending 

propensities of lower- and moderate-income people, and I think 

that is one consideration. But you also have to look at all of the 

factors involved. For example, the business-oriented cuts create 

capital formation, which has additional benefits. So you need to 

look at a variety of factors. 

And also you need to think about the fiscal implications. For example, you might be inclined to say, well, the bigger the package 

the better, which might be true up to a certain point in terms of 

near-term stimulus, but it isn’t obviously the case if you are taking 

into account the need to offset that or at least eliminate that deficit 

implication going into the future. 

Mr. ALLEN. I guess I will just conclude by thanking you for being 

one in a long line of economists who have sat there and testified 

that tax cuts don’t pay for themselves. We have such a challenge 

in getting to balance, as you put it, and making sure that whatever 

we do right now with a stimulus package provides the maximum 

amount of stimulus in the short term, but doesn’t increase the 

long-term financial condition of the United States, make it worse 

than it is today. 

I yield back. Thank you. 

Chairman SPRATT. Mr. Bonner. 

Mr. BONNER. Thank you, Mr. Chairman. 

Mr. Chairman, welcome. I have sat here this morning listening 

to you and I had the privilege of doing so with your predecessor 

a few years ago. And I must tell you, it is an amazing country we 

live in. I have a 9-year-old son and a 12-year-old daughter, and I 

have a very difficult time most times convincing them that what 

40

I have to say has merit and value and that they need to listen to 

me. And yet as Chairman of the Board of Governors of the Federal 

Reserve, the world is watching, and certainly the people of this 

country and Wall Street and others, and we are hanging on every 

word you say and what color tie you wear and whether you feel 

good. And I think that is a statement about where we are as a 

country; I guess also a statement about the important role that you 

play in our country and as the world leader—economic leader in 

the world. 

There has been some conversation earlier about tax cuts, and you 

did say that tax cuts do cost money. I think most everyone here, 

Republicans and Democrats, concede that point. But I guess from 

your perspective, do tax cuts cost the American people money or do 

tax cuts cost the American Government money? And to that end, 

in your view, which historically—as we are talking about a shortterm stimulus package, which historically have been most influential in making a difference in our economy, taxpayers or government spending? 

Mr. BERNANKE. Well first, let me say my children don’t listen to 

me either. So tax cuts, I think whether they pay for themselves is 

not the issue. The question is whether you have well-designed 

taxes that promote efficiency, promote growth, promote saving, promote productive economic activity. That is very, very important. 

The challenge, and I hate to fall back on this law of arithmetic 

point again, but you know, government spending does have value, 

of course, and we all have programs that we think are producing 

good things for society, and the military, and national parks, and 

many other things that we want to spend money on. And the challenge is finding the right balance. How big a share of the Nation’s 

GDP do we want to flow through the government? If we really 

want low taxes, and that certainly has benefits, we also have to 

make a judgment about what—you know, be very tough about 

what government programs we are willing to spend on. There is 

some who think that government programs can be very productive, 

and point to many different things. That is fine, that is the prerogative of a Congressperson to make that judgment on behalf of their 

constituents. But again on that side you then have to take the 

higher taxes that go with it. 

So I am just trying to say that you need to make—it is up to you 

as representatives of the people to make a judgment about how big 

a share of the economy should be devoted to government spending. 

A lot does depend—it is not just a share of the economy that is controlled by the government, a lot of it depends on how well the 

money is used and how well the taxes are collected. If you have an 

efficient tax system, that will support growth. On the spending 

side, all else equal, you are better off if you put money into things 

that promote growth, like technology and education, and things of 

that sort. So those are all, you know, tough decisions that you have 

to make. 

Mr. BONNER. Could you also share, just shifting gears briefly, at 

the beginning of this Congress the price, average national price for 

a gallon of gas was $2.22. Today the average national is $3.04 a 

gallon, an $.80 increase. Oil a year ago at this time was $45 a barVerDate 0ct 09 2002 15:42 Mar 24, 2008 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-27\HBU017.000 HBUD1 PsN: DICK
41

rel. It is today $89.60 in the United States. World price is over 

that. It has been over a hundred dollars a barrel. 

What influence, in your view, if any, has the fact that we have 

not, Republicans and Democrats alike, taken a real bold step toward energy independence in this country in terms of its impact on 

the economic situation we find ourselves in today? 

Mr. BERNANKE. Well, certainly oil and gas are still, obviously, a 

huge part of our energy portfolio. And people are still driving and 

using oil and gas despite these high prices. I guess one of the advantages of high prices is that ultimately they are going to induce 

people to conserve, and it is going to make it profitable for firms 

to come up with alternative energy sources. And I think the government should support that activity. Government can help support basic research, for example, that can help us find different 

ways to provide energy. The government can provide regulatory 

clarity and certainty so that, for example, if you want nuclear 

plants, can they be constructed in a safe way, but that meets regulatory scrutiny? And to some extent, you know, the government can 

try to encourage specific approaches. But I think, as painful as 

high oil prices are, and they certainly are painful and causing a lot 

of problems, they do have one benefit, which is that they do provide 

a strong incentive, both for suppliers and demanders, to find alternative sources of energy. And I hope that is going to be the case 

over the next 10, 15 years. 

Mr. BONNER. Thank you, Mr. Chairman. 

Chairman SPRATT. Thank you, Mr. Bonner. 

Mr. Doggett of Texas. 

Mr. DOGGETT. Thank you, Mr. Chairman, and thank you for your 

testimony. You know, some people spend so much time here in 

Washington they lose sight of what low and moderate income people means in this country. What do you mean by that term? 

Mr. BERNANKE. Well, the median income in the U.S., I believe I 

have got this right, is about $48,000 for a family. 

Mr. DOGGETT. So you are talking about people $48,000 and below 

in——

Mr. BERNANKE. Well, it is not a sharp cutoff. I think, again, people of lower income will tend to spend more out of these rebates. 

But as I said, even relatively high income people do spend some out 

of a rebate. And so it is more like a continuous line than a 

sharp——

Mr. DOGGETT. Sure. When you talk about the best multiplier effect for a stimulus being for low and moderate income people, you 

are really talking about, you know, $50, $55,000 and below, aren’t 

you, in terms of the maximum multiplier effect? 

Mr. BERNANKE. Again, weighting towards low or moderate income people for multiplier purposes is beneficial. I think you are 

going to have to think about the problem of how to distribute the 

money in a timely way. 

Mr. DOGGETT. Sure. 

Mr. BERNANKE. For example, if you—one way to do it would be 

to use tax filers, because we obviously have that data available and 

the IRS can send checks. But of course if you do only tax filers, you 

would be excluding some people who don’t file taxes. 

Mr. DOGGETT. Right. 

42

Mr. BERNANKE. So there is some question about how the best 

way to get money out quickly is. 

Mr. DOGGETT. And in terms of the fiscal stimulus that you feel 

would be desirable, given the economic conditions we have today to 

supplement what you are doing with monetary policy, how big a 

fiscal stimulus is too big in terms of a total amount of stimulus? 

Mr. BERNANKE. I don’t think I can—you know, the numbers that 

have been thrown around, between say 50 and 75 up to 150, all 

those things are——

Mr. DOGGETT. Within a range? 

Mr. BERNANKE [continuing]. Within a range that from a macroeconomic viewpoint is, you know, reasonable. Obviously, you get 

more stimulus the more dollars you throw at it. 

Mr. DOGGETT. But if you go overboard, and that is my concern——

Mr. BERNANKE. Right. 

Mr. DOGGETT [continuing]. With all these lobby groups lining up 

to get their program in——

Mr. BERNANKE. I certainly hope that Congress can resist having, 

you know, a huge list of different things that should be kept separate, I mean may be valid, but should be kept separate from——

Mr. DOGGETT. Just in terms of a range, up to 150, 50 to 150, in 

a broad range like that would not be unreasonable? 

Mr. BERNANKE. Those are all reasonable ranges. But again, one 

of the issues you are going to have to think about is the fiscal implication, and how you—if you are going to pay for it, are you going 

to pay for part of it and——

Mr. DOGGETT. And that is really an important part of your testimony, because the first hearing that this committee had was back 

on December 5th. And we had three very diverse economists, as I 

think you know, Dr. Feldstein, Fred Bergsten, Peter Orszag, all say 

that it is possible to have a significant stimulative effect from fiscal 

policy and still pay for it within the requirements of our PAYGO 

rules. And you agree with that? 

Mr. BERNANKE. I do. 

Mr. DOGGETT. And as far as the way we got into the problems 

that we have today, we would not have any need for fiscal stimulus 

at all today had it not been for the collapse of the home mortgage 

market, would we? 

Mr. BERNANKE. Well, the combination of the housing cycle and 

subprime mortgages and the interaction between those two has 

been a big part of it, yes. 

Mr. DOGGETT. And you believe that in addition to any fiscal stimulus steps we take we should be looking at the regulatory issues 

that are associated with that whole subprime debacle that got us 

into this problem? 

Mr. BERNANKE. I do, although I would point out again that the 

Federal Reserve has already issued for comment an extensive set 

of rules addressing subprime lending, which at perhaps some other 

occasion I would be happy to discuss with you. 

Mr. DOGGETT. And certainly it would—you conclude in your written testimony, I think quite appropriately, by expressing concern 

about the structural budget deficit. If we put in place significant 

long-term, not temporary but long-term tax cuts, you think that 

43

would be undesirable in terms of increasing—unpaid long-term tax 

cuts, in increasing the structural budget deficit? 

Mr. BERNANKE. Again, I think you need to look at the overall 

budget and, you know, make some tough decisions about the combination of taxes and spending which promote our national goals 

the most effectively. 

Mr. DOGGETT. But I gather from your testimony when you talk 

about a fiscal program that increased the structural budget deficit 

would only make confronting the challenges more difficult, that 

whether it is unpaid for spending or unpaid for long-term tax cuts, 

the effect is the same, it increases the structural budget deficit, 

and you don’t want either? 

Mr. BERNANKE. If you want low taxes you need to find ways to 

keep spending low. And if you want high spending, you need to 

find ways to raise the revenue. 

Mr. DOGGETT. Exactly. Thank you. 

Chairman SPRATT. Mr. Tiberi. 

Mr. TIBERI. Thank you, Mr. Chairman. Your testimony was excellent today. And I would like to follow up on some of the comments that you have made and some of the comments that have 

been talked about today. I agree with everything you said with respect to short-term stimulus. A year from now when you come back 

and testify before us, after we get behind this issue, we are looking 

at the next year, 2 years, what effect does tax uncertainty going 

forward in the next 2 to 3 years have on taxpayers? On savers? On 

investors? On entrepreneurs? When they hear over and over on TV, 

on news shows that the tax cuts that were passed earlier this decade are going to expire, and if they are not repassed taxes will go 

up on a variety of different things, what does that uncertainty do 

for those taxpayers, investors, workers, and entrepreneurs? 

Mr. BERNANKE. I am sure that uncertainty causes some problems. And I don’t know how to quantify that exactly. And there are 

many dimensions of that. I mean, another example would be—I 

know you are referring to the President’s tax cuts. But yet another 

example is the Alternative Minimum Tax——

Mr. TIBERI. Right. 

Mr. BERNANKE [continuing]. Which has been patched 1 year at 

a time, and there has been no sort of long-term resolution of that. 

I think this does—I mean I think the fact that the Code keeps 

changing and that there is uncertainty about that does have some 

adverse effects. So to the extent that as part of, you know, going 

forward you can find a more stable, you know, long-term solution 

to our tax and spending priorities, that would obviously be helpful. 

Mr. TIBERI. If you look at the tax cuts that are set to expire in 

a couple years, which would you look at as having, if they do expire, and go up, pro-growth taxes, which could do the economy 

most harm by going up if you look at people’s behavior in terms 

of pro-growth economics? 

Mr. BERNANKE. If you wouldn’t mind, I would prefer not to get 

into that. Again, I would be—again, I am concerned about at this 

point, particularly in this discussion of fiscal stimulus, about taking a strong position on one side or another. But that is a very 

complicated issue. And there are a lot of factors that I could talk 

about, but——

44

Mr. TIBERI. But it does have impact on people’s behavior? 

Mr. BERNANKE. Certainly taxes obviously have impact on people’s behavior, and I would certainly agree as a general matter that 

low taxes tend to stimulate efficient economic behavior and stimulate growth. And the trade-off one faces is between low taxes on the 

one hand and higher spending on the other. 

Mr. TIBERI. Thank you. Thank you, Mr. Chairman. I will ask you 

that question a year from now. 

Mr. BERNANKE. Okay. 

Mr. TIBERI. The other avenue I wanted to head down is with respect to this housing issue that you have talked about. And you 

made a comment earlier. As a former realtor, I found it interesting 

that there was good subprime and bad subprime, which I think has 

been missed in the national media. Would you concur there are 

people in homes today, and in fact we have home ownership levels 

at all time highs, which also gets failed to be mentioned, that there 

are people in homes today who would have never been in homes 

in terms of their economic status 20 and 30 years ago because of 

the change in the way that the American marketplace has worked 

with respect to lending, and that there are people in homes today 

that have subprime loans given to them that are fine, and they are 

living in their homes, and they are absolutely fine, and they 

wouldn’t be if it weren’t for that loan product? And that the housing—the credit crunch and the housing slump is more complicated 

than just blaming it on bad, and there are bad, subprime loans? 

Mr. BERNANKE. Well, I have been to many communities where I 

have seen, for example, cooperation between lending institutions 

and local community groups that have been extraordinarily effective in making subprime loans with low rates of default and high 

rates of home ownership. So I know from personal experience that 

it can be effective. If you look at the aggregate data, you will see 

that there has been this huge increase in delinquency rates among 

subprime mortgages with adjustable rates which adjust to very 

high levels, but if you look at subprime mortgages with fixed rates 

there has been some increase but they remain on the whole, reasonably stable. I don’t think there is any reason why people of—

you know, with less complete credit histories cannot qualify for 

home ownership or for a mortgage. And there is plenty of experience to show that it can be done well. Obviously, it was not done 

well in many cases in the last couple of years. 

Mr. TIBERI. Thank you, Mr. Chairman. Thank you. 

Chairman SPRATT. Mr. Moore. 

Mr. MOORE OF KANSAS. Mr. Chairman, thank you for being here 

and for your testimony. Our country has a $9.2 trillion national 

debt, a debt which has increased $3 trillion over the past 7 years. 

I am concerned that this unprecedented increase in debt, along 

with the long-term fiscal challenges our country faces will hurt our 

country’s economic future and force my eight grandchildren and 

other children their age and future generations in our country to 

bear the burden of the debts that we are incurring now. As our 

debt has grown, the United States has relied more on foreign investors to purchase our debt. In fact, foreign investors have doubled 

their holdings of U.S. debt since 2001. Today they hold a substantial portion of our public debt outstanding, which increases our 

45

economy’s vulnerability to potential political or economic instability 

from abroad. 

Mr. Chairman, if the Federal Government continues to run consistently large deficits, and accumulates more debt, what impact 

could this have on economic growth in our future and in our country, and both in the short and long term? Would you agree that ongoing deficits are a serious threat to the health of our economy? 

Mr. BERNANKE. I do. And I think that the $9 trillion that you cite 

in some sense understates the problem because it doesn’t include 

the unfunded liabilities of——

Mr. MOORE OF KANSAS. Right. Social Security and Medicare? 

Mr. BERNANKE. Social Security and Medicare, which are enormous, in fact dwarf the $9 trillion. 

Mr. MOORE OF KANSAS. Yes, sir. 

Mr. BERNANKE. The fundamental thing is that we are an aging 

society, we are the boomers who are going to be retiring, and our 

children are going to have to find a way to support us one way or 

another, through private or public means. And we need to address 

that problem by finding ways to, you know, maintain the long-term 

fiscal stability. That is a very, very tough challenge. But if we don’t 

do that, we are going to come to a crisis at some point, because you 

can’t grow the debt of the government indefinitely. Eventually, at 

some point it begins to explode in some sense, and we can’t continue to finance it. 

So CBO, for example, has done a number of studies, different 

scenarios showing how the debt would increase over the next 20, 

25 years. And it is not more than two decades away before we will 

be reaching levels that are really unsustainable. And we need to 

begin, as I said in another testimony 10 years ago, if possible to 

try to address these issues. 

Mr. MOORE OF KANSAS. Mr. Chairman, should we be concerned 

about foreign nations such as China, which holds almost a trillion 

dollars of our debt now, about their influence in our country and 

how—what that might portend for our country in the future? Do 

you have any concerns about that, or is that something you feel 

comfortable commenting on? 

Mr. BERNANKE. Well, China holds our debt for their own economic purposes. They use it for foreign exchange reserves——

Mr. MOORE OF KANSAS. Right. 

Mr. BERNANKE [continuing]. And sovereign wealth funds and the 

like. I don’t think they have any particular incentive, for example, 

to see——

Mr. MOORE OF KANSAS. Sure. 

Mr. BERNANKE [continuing]. The value of that debt fall sharply. 

So, you know, given that we are, as a country that we are investing 

more than we are saving, we are not saving enough——

Mr. MOORE OF KANSAS. Yes, sir.

Mr. BERNANKE [continuing]. We have to borrow from someone. 

And it is good that we have creditors who will extend us the credit. 

But obviously, as you point out, we need to move in the direction 

of greater balance. And what you are referring to is the trade balance——

Mr. MOORE OF KANSAS. Right. 

46

Mr. BERNANKE [continuing]. Which is somewhat different from 

the government deficit. I think the good news is that there has 

been some tendency for improvement in the trade balance over the 

last couple of years. And I think that is going to continue for a 

while. The bad news is it is still quite large, and therefore the foreign debt, not just to the Chinese but by many other creditors as 

well, is continuing to accumulate. 

Mr. MOORE OF KANSAS. Thank you, sir. 

Chairman SPRATT. Mr. McHenry. 

Mr. MCHENRY. Thank you, Mr. Chairman, and thank you, Chairman Bernanke, for being here. I think you should be commended 

by Congress and the American people for your actions in August 

of this past year that significantly strengthened our ability to get 

through these challenging times in the marketplace, and so thank 

you for your leadership there. 

There are some things you touched on in your testimony, you 

have touched on them in speeches you have made around the country, that the crisis we are facing, the mortgage crisis as some of 

the media have called it, and I want to touch on this just for a few 

minutes, I want to get your feedback on it. 

Are there things that Congress can do actively, do you have any 

suggestions in broad terms, you know, I am not asking you specific 

policy areas, but in broad terms are there things that Congress can 

do that can be helpful and constructive? And I am not asking for 

a yes-no question, but are there thoughts that you have that you 

would like to offer? 

Mr. BERNANKE. Well, in terms of loan modifications and workouts, I guess there are a few things. We at the Federal Reserve are 

working with community groups and counselors in trying to help 

people work with their lenders to get their loans modified. And to 

the extent the Federal Government wants to support those kinds 

of activities, that is one direction. You have the initiatives from the 

Treasury, the HOPE NOW initiative, which is trying to find ways 

to create a voluntary large-scale renegotiations and loan modifications to try to reduce some of the financial stress coming out of this 

situation. 

Beyond those kinds of measures, one possibility that I have discussed in the past is to continue to expand and modernize the Federal Housing Administration, the FHA. Its market share has 

dropped to a very low level. If it had a more user-friendly front 

end, if it had a diverse set of products that some of them—like 

shared appreciation mortgages, for example, that could be useful to 

low- to moderate-income homeowners, then it might be possible for 

more people to refinance their mortgages or to obtain new mortgages through that agency. So that is one area where I hope Congress will take a look. 

Mr. MCHENRY. Likewise, are there things that could have a negative effect on the liquidity in the mortgage marketplace based on 

congressional action? Are there negative actions that Congress 

could take? 

Mr. BERNANKE. Well, as I mentioned, we, the Fed, have done a 

set of regulations which are out for comment. And what we have 

tried to do there is walk a fine line, strike a balance between setting up rules that will protect consumers, but will not be so puniVerDate 0ct 09 2002 15:42 Mar 24, 2008 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-27\HBU017.000 HBUD1 PsN: DICK
47

tive or onerous that they will simply shut the market down. And 

I think as Congress considers measures it might take, assuming 

that you agree with me that subprime lending if done properly is 

a positive thing, I hope that you will think about, you know, whether the measures that are being taken are consistent with the market actually flourishing and continuing to operate in the future 

when we are past this particular crisis. 

Mr. MCHENRY. For instance, if we changed the legal liabilities 

that CDOs, mortgage-backed securities have, for instance, you 

know, a number of different changes have been contemplated and 

discussed, could that have a negative effect on liquidity in the 

mortgage marketplace? 

Mr. BERNANKE. You are talking about so-called assignee liability, 

which would give investors responsibility for what happens at the 

front end of the transaction. As I have discussed in earlier testimonies, if assignee liability is used in order to avoid this chilling 

effect that you are describing, there should be very tightly delineated provisions, safe harbors and the like, in those occasions 

where there have not been sharply drawn lines. For example, the 

State of Georgia had an experience. Then you may find that lenders are simply unwilling to participate in the market. And so——

Mr. MCHENRY. Likewise, if judges have been given the power to 

change loan terms, would that have potentially a negative effect? 

Mr. BERNANKE. You are addressing now the possibility of 

changes in the bankruptcy laws. And that is a very, very complex 

question. The Federal Reserve did not take a position on the earlier 

round of bankruptcy legislation, and I think I am going to stay out 

of that this time as well. But I do recognize that there are issues 

on both sides of that, including the possible effect on the cost of 

credit in that market. 

Mr. MCHENRY. So rising costs of credit in a tough economic time 

is sort of a fact of it. It would increase the cost of getting credit? 

Chairman SPRATT. Mr. McHenry, we have got to move on. 

Mr. MCHENRY. Well——

Chairman SPRATT. We will let him answer that question, and 

then we will move ahead. 

Mr. BERNANKE. Possibly it would, but again I am not taking a 

position one way or another on that particular proposal since there 

are considerations in terms of what benefits it might have as well. 

Chairman SPRATT. Mr. Etheridge. Mr. Etheridge, could you hold 

your questions to about 4 minutes? We will shave a minute or two. 

Mr. ETHERIDGE. I will try to do that. Thank you, Mr. Chairman. 

And thank you for being here. And let me join the others in thanking you for your openness and being available. It is helpful. Let me 

ask a couple of questions very quickly. And you have touched on 

this, but if you have an opportunity to expand on it I would appreciate it, because I realize we got here through the subprime. But 

I would be interested in your comments of how much the economic 

downturn may have been exacerbated by the continual high prices 

of gasoline. Because that affects the confidence level of the consumer. You only buy a house, hopefully, in a lifetime, but you buy 

gas several times a week. And when you see it at $3, and especially 

for the people who are working every day, and I go by and purchase my gasoline as others do it in the service station, and I see 

48

people who buy $3, $5. And at three bucks, that is just over a gallon. And people buy just enough to get to work. And then they buy 

enough to get home. I would be interested in how that is impacting 

the economy. Because if you had a drop in December of the consumer purchasing, there has got to be a direct correlation—they 

are going to put money in that vehicle to get to work—and how 

that has impacted on the working family. 

Mr. BERNANKE. Congressman, as I mentioned in my testimony, 

that is an important issue. The increases this year have been so 

great—or 2007 have been so great that conceivably it has had as 

much as half a percentage point of an effect on growth. And that 

really is a drag on the consumer going forward. So along—I should 

have mentioned that—along with housing, subprime issues, financial issues, that is another factor that is contributing to the slowing 

in the economy. 

Mr. ETHERIDGE. And that being said, you know, the stubbornness 

of it staying there is, you know, is a confidence issue. And you keep 

seeing it on TV. And let me come back to the housing piece. You 

know, we talk about the subprime piece, but the truth is, as you 

spoke a few minutes ago, it has had an impact. I remember when 

my wife and I, we bought our first home. That was a big deal. It 

was a big deal for a lot of folks. And it still is today, as part of the 

American dream. That being said, with the drop in savings as we 

are having today—I was able to take benefit of the VA guarantee. 

And I am afraid today we aren’t using those, and the FHA, as you 

indicated earlier. I think we need not forget the tremendous challenge we face, because the housing market is a tremendous mover 

in this economy. And you may not want to comment on this, but 

it seems to me we could take a hard look, we ought to be looking 

at the long term as well as the short term. And I agree with you, 

the three T’s, timely, targeted, et cetera. But over the long haul, 

we need to look at our infrastructure in this country, not only roads 

and bridges, but also schools and other things that we could help 

facilitate that would help in downturns like this. I would be interested in your comments in this area for the long-term look as we 

look at our overall tax structure, looking at these pieces for public 

investment across America. 

Mr. BERNANKE. Well, Congressman, you are putting out the case 

for the other side of what we have been talking about. I mean it 

is important to keep taxes low——

Mr. ETHERIDGE. No, I am not talking doing it now. I am talking 

about we ought to be looking——

Mr. BERNANKE. Talking about the long run. In the long run, we 

have to make that hard decision about how big a share of the economy we want to pass through the government. And there are valuable things the government can do. And that includes public infrastructure, for example. I agree with that. So on the other hand, you 

want to make sure that the projects you pick are highly productive 

ones, and will be useful and will be valuable. So that is the balancing act that only Congress can do, which is to balance the size 

of the tax burden against the size of those public spending elements. 

Mr. ETHERIDGE. Thank you, sir. I yield back. 

49

Chairman SPRATT. Mr. Scott. And I would say the same thing to 

you. If you could sort of shave your——

Mr. SCOTT. Thank you, Mr. Chairman. And thank you, Mr. 

Chairman. You know, it seems we have an agreement, we have 

been using the terms ‘‘timely, targeted, and temporary.’’ Your remarks said it ought to be implemented quickly, be efficient, and be 

temporary. So I think we have an agreement as to what the framework ought to be. We have heard the fact that a $150 billion stimulus package would be minuscule in a $15 trillion economy, but I 

think you pointed out that if the growth rate is 2 or 3 percent, that 

$150 billion, just one little percent would change the growth rate 

30 to 50 percent, which would be a significant impact on the economy. So that we ought not disparage—although it is just 1 percent, 

we ought not disparage the impact it could have. And we have 

heard comments about what—how quickly people would spend 

money if it were injected through the Food Stamp Program. They 

would spend that money almost immediately. Unemployment compensation would be spent immediately. Summer jobs to low income 

teenagers, I assume you would have the same comment about that, 

that would go right into the economy. 

We have heard tax cuts as if all tax cuts were the same. You 

mentioned accelerated depreciation. The thing I like about accelerated depreciation, that over a 5- or a 10-year period, the corporation would eventually deduct the same amount of money. The only 

cost to the government is the time value of money. So that that is 

a very inexpensive way, particularly if you target it just to increases in capital expenditures over say a 5-year average so you 

are getting actual new spending and not just a—actually, you are 

rewarding a stimulus. 

Could you say a word about capital expenditures, roads, new 

buildings, housing, or the gentleman from New Jersey mentioned 

investments in things like solar panels? I know the solar panel industry went out of business when the tax cuts expired. If we renewed the solar panel tax credit, not only would you have an incentive to get solar panels, but that industry, with all the jobs attendant to it, would come back into existence. Could you say a word 

about what effect capital expenditures might have? 

Mr. BERNANKE. Well, on infrastructure generally or on solar energy-related spending, in terms of stimulus, as long as it is productive spending, that is positive. But the issue I would just want you 

to keep in mind is the time frame. And the question is, you know, 

whether the program you have in mind would be implemented, the 

funds disbursed, and result in actual spending and activity within 

the sort of 1-year time frame. If so, then it would meet those criteria that you mentioned. 

Mr. SCOTT. Well, the thing I like about accelerated depreciation 

is when you pass the bill the spending gets done. The government 

doesn’t actually spend the money until next year, when people take 

their deductions. So that is about as quick as you can get some 

money into the economy. We also heard you say tax cuts ought to 

be aimed at low and moderate income. And hopefully we will follow 

that admonition, too. 

Mr. Chairman, out of respect to my colleagues, I will yield back. 

50

Chairman SPRATT. Thank you very much. Mr. Chairman, we 

have two more questioners, two more people. If you could indulge 

us, if we could impose upon you for about 5 minutes. 

Mr. BERNANKE. Certainly. 

Chairman SPRATT. We will limit their time. And we would very 

much appreciate it. Thank you. 

Ms. Schwartz. 

Ms. SCHWARTZ. Thank you. And thank you, Mr. Chairman. And 

Mr. Chairman, I appreciate your giving us an extra few minutes. 

You have been really very clear today, and I really appreciate that 

very much, about how important it is to make sure that whatever 

we do, and there is a diversity of what we do, variety as you pointed out, that we do it quickly, and that we target it to, particularly 

on the individual side or the family side, to people who will put 

that money in the economy quickly. So I appreciate your saying 

that and making it really, really clear. And I have just one quick 

question about that, and I really wanted to focus on the business 

side of it if I could, because we haven’t talked about that very 

much. We just started to with Mr. Scott. But just one quick question on the individuals or the family side. 

Does it matter what they spend it on? I mean if they are spending it on credit card debt, are they spending it to pay their heating 

costs, if they are spending it to pay for health insurance premiums 

so they don’t lose their health coverage versus other kinds of commodities rather than buying food or a new TV? I mean does it matter in terms of the economy? 

Mr. BERNANKE. Well, you would hope they would spend it on 

things that are domestically produced so the spending power 

doesn’t go elsewhere. 

I guess I would add the point that although usually paying down 

your credit card debt is a negative in this kind of story because it 

doesn’t involve immediate spending, I think given the financial 

pressures that we are seeing, broadly speaking, that reduced—people paying down debts, you know, has some benefits of its own. 

Ms. SCHWARTZ. Okay. Well, I appreciate that, because I think, as 

you know, at other times we are trying to encourage people to 

think about those immediate expenses, and they are really 

stretched obviously, and just being able to meet those needs. 

My question about some of the ideas that have been proposed on 

helping businesses be able to make the kind of investments, how 

do we make sure in that case as well that we—should we be targeting smaller businesses that might be more on the—more marginal in the sense of where they make capital investments? Would 

that be a smart thing to do? I assume it is important for us to 

make sure that they are doing—as well that they are going to go 

out there and spend the money rather than be money they spent 

last year, benefiting that—it wouldn’t help at all, I assume. It has 

to be moving ahead and making sure that they are actually making 

those kinds of investments now. 

Could you comment on that, and how we might be able to target 

those kinds—any kind of help we give to businesses to be able to 

spend those dollars to make those kind of investments? And is 

there any way for us to do it so that it might actually encourage 

them to create new jobs? 

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Mr. BERNANKE. I think Congress has already in the past structured these tax credits in ways that favor small businesses. And 

that reflects a value judgment on the part of Congress about where 

they want to provide the support. There may be some, but I am 

honestly not aware of any evidence on, you know, which type of 

business is most likely to invest given a tax credit. So I couldn’t 

give you general advice about how to—you know, which type of 

business to favor. It is true, for example, though, that equipment 

is more likely—you know, there is a shorter lead time, can more 

quickly be purchased than a new building, for example. And so frequently these types of programs have an emphasis on equipment 

and software as opposed to structures. One would hope that this 

would involve new jobs. I think it would both directly and indirectly, indirectly in that the people who produce the capital then 

have more demand, and they would hire people, and that process 

would continue. And those companies that hire more capital and 

have more capacity may, although not necessarily, hire more workers to work with that capital. 

Ms. SCHWARTZ. And just if you have a real quick comment, one 

of the other thoughts is that if we could speed up some of the public infrastructure projects. We did this once in Pennsylvania a number of years ago. We called Jump Start. It was on transportation 

projects actually, although it could be on school construction, it 

could be any number of things. Projects that are almost already in 

the works, so it is a short lead time to be able to try and speed 

that up so that that would put people to work. Is there any comment about that kind of public infrastructure? 

Mr. BERNANKE. Well, the question is whether or not that can be 

done in a timely way. It would have—obviously, building things 

takes long lead times because you have to plan and design and get 

permits, et cetera. So it would have to be—and I am not sure how 

common this would be—something that was essentially ready to go 

but had been delayed and could be brought up more into the 

present. I don’t know how often or frequent that kind of situation——

Ms. SCHWARTZ. But if it were practical we might be able to do 

that? 

Mr. BERNANKE. If it were possible. 

Ms. SCHWARTZ. Thank you very much. 

Chairman SPRATT. We have to move ahead. The last questioner, 

member of our committee, is Ms. Moore of Wisconsin. 

Ms. Moore, you weren’t here, but the Chairman has to leave by 

12:30, and we are almost imposing on his time already. If you could 

limit your time to 4 minutes, I thank you very much. 

Ms. MOORE OF WISCONSIN. Thank you very much. Thank you for 

your generosity for being here today. We find ourselves in a conundrum here, because we—I think everybody appreciates the notion 

that we need to target our assistance to get down to low-income 

families and to help them. I guess my question is, you know, what 

vehicle? The vehicles that have been proposed don’t really seem to 

be able to accomplish or achieve that. We have a 5.2 percent national unemployment rate. But when you disaggregate those numbers in my district, those people, for example, who are not receiving 

unemployment compensation insurance, but who have just given 

52

up looking for jobs for the longest period of time, I find that 17 percent, three times, over three times the national average, 17 percent 

of white males in my district are unemployed, 23 percent of Hispanics in my district are unemployed, and 47 percent of African 

American men in my district are unemployed. Twenty-eight thousand African Americans in my district—we have the highest incarceration rate in the Nation—are under some sort of Department of 

Corrections supervision, and we really need to help them. They 

may not be heads of households because they don’t have jobs, so 

food stamps are not going to help them. The unemployment compensation insurance will help some of them, but some of them have 

been unemployed for so long that even if we look back 6 months 

that may not help them. The low income heating program, that is 

a great vehicle. And if we give it to State and local governments, 

the only suggestions that have been made is that we help them underwrite their Medicaid program. 

Can you tell me how we get this money—and I haven’t even 

talked about the women who are on welfare and the time limits 

and the clock may hit them. Can you suggest for me some sort of 

vehicle to get the truly poor and the truly needy folk that I have 

described some of this assistance? 

Mr. BERNANKE. Congresswoman, you have put your finger on an 

important problem. You have listed most of the vehicles that people 

could think about. If we want to get the money out quickly, you 

know, the easiest way is to go through the tax system or one of the 

existing programs. I don’t have a good suggestion for you. 

Ms. MOORE OF WISCONSIN. And these are not tax filers. Don’t 

you agree it would be really a bang for the buck if we could figure 

out how to get assistance to these people? I mean there are—it is 

not like we don’t have lists of these people who have in the past 

received general assistance through the counties. It is not like we 

don’t know who these 28,000, for example in my community, men 

are who are on probation, living with their mommas, living with 

their sisters, living with a live-in girlfriend. It is not like—and living off them. So it is not like we don’t know who they are. But I 

just want to hear that it would be worth the effort to try to figure 

out a vehicle to help these folks in terms of the impact of an economic stimulus. 

Mr. BERNANKE. I do want to draw a distinction, which is that we 

need to address these problems as part of long run policy. I mean 

obviously poverty is a problem. And there is a whole, you know, 

range of things that could be done and should be done to try to address it. We are not going to fix that with, you know, with a check, 

with one check. So we clearly want to make that part of our longterm policy issue, policy priorities. 

With respect to current fiscal stimulus, as I said, the evidence 

does suggest, and I have said a number of times, that low and moderate income people are more likely to spend the money in the near 

term. So from the fiscal stimulus point of view, there is some benefit to finding ways to providing money to people in that category. 

Timeliness, though, is an issue, and we need to find ways to do it, 

you know, that will not take us, you know, well into 2009. 

Ms. MOORE OF WISCONSIN. Thank you. And thank you, Mr. 

Chairman. 

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Chairman SPRATT. Mr. Chairman, thank you very much indeed, 

not just for your clear and helpful answers, but for your patience 

and forbearance. You have added to our knowledge of the subject 

matter. We said we would come here looking for your advice and 

guidance about how to do this, if we do it, and you have given it 

to us forthrightly. And we very much appreciate that. Thank you. 

Mr. BERNANKE. Thank you, Mr. Chairman. 

Chairman SPRATT. One final housekeeping matter before wrapping up the hearing. I ask unanimous consent that members who 

did not have the opportunity to ask questions of the witness be 

given 7 days to submit questions for the record. 

[Question for the record submitted by Ms. DeLauro follows:]

QUESTION SUBMITTED TO CHAIRMAN BERNANKE FROM CONGRESSWOMAN DELAURO

FOLLOWING THE HEARING

Question: Henry Kaufman, who spent 26 years with Solomon Brothers where he 

served as the managing director and the last 20 years where he has been president 

of Henry Kaufman & Company, warned in the Wall Street Journal back in October 

that the subprime is only part of a far larger problem in the way our credit markets 

function. Kaufman argues that the Federal Reserve and U.S. Treasury Department 

have failed to keep pace with fundamental changes in the market. He states, ‘‘Today’s regulatory system is largely a historical artifact left over from the era when 

financial markets and institutions were much more fragmented and insulated from 

one another.’’ Can you comment on Mr. Kauffman’s observation and whether you 

believe The Fed, under your predecessor, was negligent when it failed to regulate 

private sector players, such as Goldman Sachs, who were making these subprime 

loans and packaging them into risky securities that ultimately failed? In light of fact 

that the Fed’s inaction helped create the crisis, what do you plan to do as chair of 

the Fed to fix the problem and prevent it from happening in the future?

Answer: I agree with Mr. Kaufman that the manner in which credit is provided 

to businesses and to households has changed substantially in recent decades. 

Whereas commercial banks used to be the primary source for many businesses or 

households, a considerable volume of credit is now intermediated through the financial markets. As with banks, investors in private financial securities have strong incentives to understand the credit risks to which they are exposed. Nonetheless, it 

has become evident that, in the past couple of years, some market participants 

failed to perform adequate due diligence, particularly in regard to investments in 

a variety of structured finance products. Too many investors seemed to rely heavily 

on the risk assessments of others and apparently were complacent about their exposures. 

A variety of private and public efforts are underway to address the revealed deficiencies. Ratings agencies are reevaluating their methods for rating structured finance products and considering significant changes to how credit risk on those products will be communicated to investors. Regulatory oversight of the mortgage industry has become more challenging as the breadth and depth of the market has grown 

over the years, and as the role of nonbank lenders, particularly in the subprime 

market, has expanded. To address this challenge, the Federal Reserve, together with 

other federal and state agencies, launched a pilot program last summer to conduct 

reviews of consumer protection compliance and impose corrective or enforcement actions, as warranted, at selected non-depository lenders with significant subprime 

mortgage operations. In December 2007, the Federal Reserve used its authority 

under the Home Ownership and Equity Protection Act to propose new rules that 

address unfair or deceptive mortgage lending practices. 

The proposal addresses abuses related to prepayment penalties, failure to escrow 

for taxes and insurance, stated-income and low-documentation lending, and failure 

to give adequate consideration of a borrower’s ability to repay. Our proposal is comprehensive, covering most mortgage loans with certain protections and the entire 

subprime market with other, more specific regulations. In addition, we drafted the 

proposal to ensure that protections remain strong over time as loan products and 

lending practices continue to evolve. 

The Federal Reserve works closely with other government agencies to promote the 

efficient functioning of capital markets. As you know, the Federal Reserve System 

has supervisory and regulatory authority over bank holding companies, state-chartered banks that are members of the System, foreign branches of member banks, 

54

and U.S. branches of foreign banks. We do not have supervisory or regulatory authority over broker-dealers or their holding companies; that authority rests with the 

Securities and Exchange Commission.

There being no further business, the committee is adjourned. 

[Whereupon, at 12:39 p.m., the committee was adjourned.]

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