U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

53–244 PDF 2010

MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JULY 21, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–64 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

July 21, 2009 ..................................................................................................... 1 

Appendix: 

July 21, 2009 ..................................................................................................... 61 

WITNESSES 

TUESDAY, JULY 21, 2009 

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

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

APPENDIX 

Prepared statements: 

Bachmann, Hon. Michele ................................................................................. 62 

McCarthy, Hon. Carolyn .................................................................................. 63 

Paul, Hon. Ron .................................................................................................. 64 

Watt, Hon. Melvin ............................................................................................ 65 

Bernanke, Hon. Ben S. ..................................................................................... 68 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachus, Hon. Spencer: 

‘‘Consensus Principle-Based Policy Statement’’ ............................................. 79 

Bernanke, Hon. Ben S.: 

Monetary Policy Report to the Congress, dated July 21, 2009 ..................... 82 

Written responses to questions submitted by Representative Green ........... 135 

(1) 

MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

Tuesday, July 21, 2009 

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

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

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

the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Waters, 

Maloney, Watt, Meeks, Moore of Kansas, Baca, Lynch, Scott, 

Green, Cleaver, Moore of Wisconsin, Hodes, Ellison, Klein, Wilson, 

Perlmutter, Donnelly, Foster, Carson, Speier, Minnick, Adler, Kilroy, Kosmas, Grayson, Himes, Maffei; Bachus, Castle, Royce, 

Lucas, Paul, Biggert, Miller of California, Capito, Hensarling, Garrett, Barrett, Neugebauer, Price, McHenry, Campbell, Putnam, 

Bachmann, Marchant, McCotter, McCarthy, Posey, Jenkins, Lee, 

Paulsen, and Lance. 

The CHAIRMAN. The hearing will come to order. 

This is the second semiannual hearing that the Financial Services Committee holds according to the Humphrey Hawkins Act. We 

alternate with the Senate committee as to which committee goes 

first. This time, it is this committee’s responsibility to lead off, and 

we will be doing that. 

I just want to announce to my Democratic members as a housekeeping matter that given the large size of this committee, we have 

a problem with who gets to ask questions. Those members who 

asked questions of Mr. Bernanke at the first hearing, with the exception of the subcommittee chairman, Mr. Watt, will not be called 

on today until we have gone to others who did not get a chance to 

ask questions. We hope to go—well, we may have some votes. 

A very important event will take place at 2:00 p.m.; America is 

waiting for it; Internet sites throughout the country are on edge, 

for the congressional class picture that will be taken at 2:00 p.m. 

and instantly distributed across the country. So we do know we 

will be breaking then, and they want to have votes before that on 

the assumption that not everybody is dying to be in that picture 

and votes are needed to get people there. So we will go until sometime after 1:00 with the Chairman, and then we will have votes 

and we will break. We have another hearing at 2:00 p.m. 

One other announcement—I received a letter from the Republican side asking for a postponement of the markup on executive 

compensation. They make the valid point that we have a very 

heavy schedule of hearings this week. And, for a variety of reasons, 

2 

I put aside several markup days for the end of this year. We will 

not be needing all of them. So we are going to postpone that markup. Maybe it will be next Tuesday or next Thursday, but we will 

at least have a few more days for members to—really, it is not a 

long bill, and some of it is familiar, but it is still a reasonable point 

with all the hearings. 

With that— 

Mr. BACHUS. Mr. Chairman, you are not delivering your opening 

statement? 

The CHAIRMAN. No. 

Mr. BACHUS. Let me say this in response. I want to express my 

appreciation to you for postponing that markup. We have simply 

been overwhelmed with the health care matters, with just literally 

such substantial issues under consideration. I think the membership is simply overwhelmed. Because many of these are unprecedented, and there are proposals, they are complex, the ramifications are hard to gauge. And I believe that slowing this whole process down would be in the best interest of not only this committee 

but also our country as we consider these very weighty matters. 

The CHAIRMAN. I appreciate it. And I will acknowledge that 

when I set the schedule, I was aware that it was on the heavy side. 

It did seem to me that the aspiration of moving was going to help 

us move more quickly. But there is no harm if we delay. 

It has also been the case that when I was originally talking 

about this, I was anticipating we might be on the Floor with some 

issues, but the appropriations bills are taking up the Floor time. 

I was told by my leadership a couple of weeks ago that none of 

what we are talking about in the financial regulatory restructuring 

would hit the Floor before September, and I have taken that into 

account. 

And let me, while we are at it, also announce, for that reason, 

at the request of a lot of members, the markup for this will occupy 

the day that the consumer agency would have taken. I was informed that we weren’t going to go to the Floor, anyway. And, 

given that, we will be having hearings on the consumer agency, but 

the markup on that will wait until September. 

We still have to finish the markup on the voucher bill, and we 

will have that markup to conclude, although I think we are in a 

fairly well-structured situation where one major vote will decide a 

set of issues outstanding. And then, among other things, we will 

have the hearings. We will continue, I think, at a pretty heavy 

pace, and we definitely will be marking up the exec comp bill before we leave. 

With that, I will now begin the hearing on substance. 

I welcome the Chairman, and I think it is very important and 

I was pleased to see his article in the Wall Street Journal about 

a question that is very much on people’s minds. The United States 

Government, including the Federal Reserve, indeed, with the Federal Reserve in the lead for a variety of reasons, mostly not of its 

choosing, the Federal Government is deeply engaged in increasing 

liquidity, i.e., putting money out into the economy particularly to 

replace a constriction of credit. And there are people who are concerned that this will be inflationary. 

3 

I think the Chairman has shown consistently, as have Secretaries of the Treasury Paulson and Geithner, an awareness of this; 

and they are prepared to deal with it. But it is an important question, because when you are talking about inflation, you are talking 

not just about a reality, but about perception. If people think there 

is going to be inflation, that is inflationary; and it is very important 

that the Chairman address, as he has been doing in a very 

straightforward way, these concerns. 

I am persuaded by the Chairman and others that we are able in 

an orderly way to undo what we had to do so that there will not 

be that inflationary impact. I also believe that the inflation danger 

is not the current most important one, but it is I think a very good 

opportunity for the Chairman to address it. 

But I also want to talk about another matter here, and I want 

to make a confession apparently of the ravages of age. Apparently, 

my vision is deteriorating more rapidly than I hoped it would be. 

I have looked carefully at the deliberations we have seen about the 

Bank of America-Merrill Lynch issue, and our colleagues on the 

Government Reform Committee have had a number of hearings on 

that. I must say, one of the most interesting and potentially instructive things that came out of it was Secretary Paulson’s explaining that he could not produce e-mails because he has never 

sent them. That is a practice I recommend to many others, along 

with myself. 

But as I studied all of this, here is my problem. I cannot find a 

villain. Now, many of my colleagues have found various villains. 

They tend to be private sector or public sector, depending on the 

ideology of the finder. But as I look at what happened, what I see 

is a very difficult situation that threatens further severe damage 

to an economy already damaged, a repetition of the attack on the 

credit system which is so central to the functioning of our economy 

which we had seen in earlier failures, and I believe we had people 

faced with a difficult situation. 

I have to say to some of my Democratic friends who have been 

very critical of Bank of America, as I have been in other areas, 

they have not done what they should in modifying mortgages. I will 

have plenty of criticism to make of our friends in the financial industry and the rest of them as well. 

But people have said, well, why was he not focused entirely on 

the shareholders? Many of my colleagues who have made that criticism have also said they don’t want private-sector people looking 

only at the narrowest interests of the shareholders, but they do 

want to take into account the broader impact of what they do, probably on the grounds that a terrible credit crunch would hurt their 

shareholders. 

As to the Chairman of the Federal Reserve and the Secretary of 

the Treasury, I think they had a very important responsibility not 

to see a repetition of what happened when Lehman Brothers failed, 

and the collapse of Merrill Lynch by Bank of America walking 

away I think would have had very negative consequence. 

I think there is one thing that people need to remember: Solutions cannot be qualitatively more elegant than the problems they 

seek to resolve. When you have a terrible mess, it is unlikely that 

4 

those who try to alleviate the danger of that mess will come out 

looking clean. 

Not for the first time as an elected official, I envy economists. 

Economists have available to them in an analytical approach the 

counterfactual. Economists can explain that a given decision was 

the best one that could be made, because they can show what 

would have happened in the counterfactual situation. They can 

contrast what happened to what would have happened. No one has 

ever gotten re-elected with a bumper sticker that said, ‘‘It Would 

Have Been Worse Without Me.’’ You probably get tenure with that, 

but you can’t win office. 

I understand that reality, but we should not let it distort us. And 

it would not I think hurt us every so often to admit that not every 

action by every public official was a bad thing, and sometimes we 

should give people credit for trying to cope with an unpleasant reality the best they can. 

The gentleman from Alabama. 

Mr. BACHUS. I thank the chairman. 

Chairman Bernanke, thank you for appearing before the committee today, for your professionalism, and your service to our 

country. All of us in Congress appreciate your willingness to make 

yourself available on countless numbers of occasions, both to congressional committees and the individual members, as we have 

confronted this crisis. So I thank you. 

Over the past year, we have witnessed unprecedented government involvement in the financial markets, for sometimes Republicans on this committee have expressed a growing unease over the 

magnitude of Federal Government involvement and manipulations 

of our economy. Trillions of dollars of capital commitments, guarantees, loans have been extended. What started out last year as a 

large but temporary stabilization effort to prevent a financial collapse has evolved month by month into seemingly a permanent 

government intervention regime. This included ad hoc bailouts of 

institutions deemed too-big-to-fail. Many of the competitors of those 

too-big-to-fail corporations deemed too-small-to-save are no longer 

in business. 

Today, I read with interest your op-ed in the Wall Street Journal 

acknowledging the need for an exit strategy, something Republicans have called for since last fall. 

Simultaneously, the Obama Administration has been spending a 

staggering amount of money to fund an economic recovery and 

stimulus that is slow in coming. It has been almost half a year 

since Congress passed a $787 billion so-called stimulus bill, and yet 

we continue to see record job losses. Unemployment has spiked at 

9.5 percent and seems headed higher. Your testimony predicts that 

the elevated unemployment will last through not only this year but 

next year, confirming that; and that is despite the Administration’s 

assurances that if we passed a stimulus package, unemployment 

would peak at 8 percent. 

Other Federal Government interventions have failed as well. The 

Administration’s $75 billion foreclosure prevention initiative, intended to keep 3 to 4 million homeowners in their homes, has so 

far offered only 220 trial loan modifications. At the same time, the 

private sector and private efforts have resulted in millions of homeVerDate Nov 24 2008 12:05 Feb 04, 2010 Jkt 053244 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\53244.TXT TERRIE
5 

owners staying in their homes. The American people can be forgiven for increasingly asking tough questions about these enormous 

government outlays and interventions because so far, Mr. Chairman, there has been very little bang for the taxpayers’ buck. 

It is not only these past expenditures that give us pause, but it 

is the multitude of new proposals coming from the Obama Administration and their allies in Congress calling for more government 

control and management from health care to energy to financial 

services. One of the central questions the committee needs to answer as it considers reforms to our financial regulatory system is 

whether regulatory powers should be centralized in the Federal Reserve at a time when our country is facing unparalleled fiscal and 

monetary challenges. 

The Fed made some big mistakes, and historically the Board has 

done a poor job of identifying and addressing systemic risks before 

they become crises. A prime example of this is troubled lender CIT, 

which was allowed to convert to a bank holding company last December and was placed under the Fed’s supervision only after the 

Fed declared it was adequately capitalized. This inability to assess 

risk once again threatens to undermine our fragile economy and 

erase the $2.5 billion in taxpayer funds provided CIT under TARP. 

The Obama Administration has proposed a regulatory restructuring plan that would make the Fed responsible for first identifying and then regulating those financial firms that, in the Fed’s 

view, are systemically significant and for preventing systemic 

shocks. Republicans believe that the Fed’s core mission, the conduct of monetary policy, will be seriously undermined if its regulatory responsibilities are expanded in this way. 

Let me conclude by saying, at a time when our economy faces serious structural problems and the threat of inflation if we maintain 

our current fiscal course and spending patterns, a distracted and 

overextended central bank subject to potential political interference 

is a luxury we cannot afford. Republicans believe that relieving the 

Federal Reserve of its current regulatory responsibilities and focusing it on the core monetary policy mission would enhance the Fed’s 

ability to execute an effective exit strategy and ensure it sets interest rates that greatly affect both individuals and small businesses 

with a single goal in mind: sound monetary policy. With the proper 

conduct, the monetary policy is the best way the Fed can serve the 

American people. Asking the Fed to serve as a systemic regulator 

is just inviting a false sense of security that inevitably will be shattered at the expense of the taxpayer. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from North Carolina is recognized for 3 minutes. 

Mr. WATT. Chairman Bernanke, I look forward to your discussion 

of the status of monetary policy and the economy. 

It is good news that many experts are saying that the economy 

has improved since the last time you were before this committee 

in February. To the extent that is true, the Federal Reserve certainly deserves some of the credit. 

Unfortunately, my constituents are not yet feeling it. Growing 

unemployment, foreclosures all around, and the lack of much, if 

any, rebound in the value of their investments continue to feed 

6 

their sense of anxiety and uncertainty about whether we have in 

fact turned the corner. 

But the Fed has been a sturdy, methodical hand. More public exposure of what the Fed does has also stimulated discussions about 

some other things that a lot of people had taken for granted: the 

level of independence from political influence by the Legislative 

and the Executive Branches of government that is appropriate for 

the Fed to have in order to achieve its long-term policy goals; the 

extent to which the Fed’s operation, even its monetary policy discussions and decisions, should be subject to regular audit; the extent to which the various parts of an operation of the Fed should 

be subject to more transparency; whether the Fed, having failed, 

along with other financial regulators, to pay equivalent attention 

to its consumer protection responsibilities as it did to other responsibilities, should be stripped of these responsibilities in favor of a 

new consumer protection agency focused solely on consumer protection; and, whether, as proposed by the Obama Administration, the 

Fed should be delegated even more powers and responsibilities for 

systemic risk regulation. 

This certainly is a critical juncture for the Fed, and I want to assure my colleagues on the full committee that our Subcommittee on 

Domestic Monetary Policy, which I chair, with the knowledgeable 

input of Ranking Member Ron Paul, has been grappling seriously 

and consistently with all of these issues. For a change, we have 

even had some members who are not on our subcommittee showing 

up at our subcommittee hearings. Imagine that. 

In the wake of the Great Depression, Congress drafted rules that 

served us well for 75 years. We are facing another once-in-a-generation opportunity to fashion rules that should serve us well for 

the next 75 years, and Chairman Bernanke’s testimony today is yet 

another step in arming us with the knowledge and information we 

need to address these important issues. 

I welcome the Chairman, and I yield back the balance of my 

time. 

The CHAIRMAN. The gentleman from Texas. 

There are 2 minutes remaining on the Republican side. We will 

make it 21⁄2 minutes. 

Dr. PAUL. Thank you, Mr. Chairman. 

Good morning, Chairman Bernanke. 

The Federal Reserve, in collaboration with the giant banks, has 

created the greatest financial crisis the world has ever seen. The 

foolish notion that unlimited amounts of money and credit created 

out of thin air can provide sustained economic growth has delivered 

this crisis to us. Instead of economic growth and stable prices, it 

has given us a system of government and finance that now threatens the world’s financial and political institutions. 

Real unemployment is now 20 percent, and there has not been 

any economic growth since the onset of the crisis in the year 2000, 

according to nongovernment statistics. Pyramiding debt and credit 

expansion over the past 38 years has come to an abrupt end, as 

predicted by free market economists. Pursuing the same policy of 

excessive spending, debt expansion, and monetary inflation can 

only compound the problems and prevent the required corrections. 

7 

Doubling the money supply didn’t work. Quadrupling it won’t work 

either. 

The problem with debt must be addressed. Expanding debt when 

it was a principal cause of the crisis is foolhardy. Excessive government and private debt is a consequence of loose Federal Reserve 

monetary policy. 

Once a debt crisis hits, the solution must be paying it off or liquidating it. We are doing neither. Net U.S. debt is now 372 percent 

of GDP, and in the crisis of the 1930’s, it peaked at 301 percent. 

Household debt services require 14 percent of disposable income, at 

an historic high. Between 2000 and 2007, credit debt expanded 5 

times as fast as GDP. 

With no restraint on spending, and revenues dropping due to the 

weak economy, raising taxes will be poison to the economy. Buying 

up the bad debt of privileged institutions and dumping worthless 

assets on the American people is morally wrong and economically 

futile. Monetizing government debt, as the Fed is currently doing, 

is destined to do great harm. In the past 12 months, the national debt has risen over $2 tril- lion. Future entitlement obligations are now reaching $100 trillion. 

U.S. foreign indebtedness is $6 trillion. Foreign purchase of U.S. 

securities in May were $7.4 billion, down from a monthly peak of 

$95 billion in 2006. The fact that the Fed had to buy $38 billion 

worth of government securities last week indicates that it will continue its complicity with Congress to monetize the rapidly expanding deficit. The policy is used to pay for the socialization of America 

and for the maintenance of an unwise American foreign policy and 

to make up for the diminished appetite of foreigners for our debt. 

Since the attack on the dollar will continue, I would suggest that 

the problems we have faced so far are nothing compared to what 

it will be like when the world not only rejects our debt but our dollar as well. That is when we will witness political turmoil, which 

will be to no one’s benefit. 

The CHAIRMAN. The time for opening statements has expired 

and, for once, I think not before the patience of the audience. 

The Chairman of the Federal Reserve is now recognized for his 

statement. 

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

SYSTEM 

Mr. BERNANKE. Thank you, Mr. Chairman. 

Chairman Frank, Ranking Member Bachus, and other members 

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

semiannual Monetary Policy Report to the Congress. 

Aggressive policy actions taken around the world last fall may 

well have averted the collapse of the global financial system, an 

event that would have had extremely adverse and protracted consequences for the world economy. Even so, the financial shocks that 

hit the global economy in September and October were the worst 

since the 1930’s; and they helped push the global economy into the 

deepest recession since World War II. 

The U.S. economy contracted sharply in the fourth quarter of last 

year and the first quarter of this year. More recently, the pace of 

8 

decline appears to have slowed significantly; and final demand and 

production have shown tentative signs of stabilization. The labor 

market, however, has continued to weaken. Consumer price inflation, which fell to low levels late last year, remain subdued in the 

first 6 months of 2009. 

To promote economic recovery and foster price stability, the Federal Open Market Committee last year brought its target for the 

Federal funds rate to a historically low range of zero to one-quarter 

percent, where it remains today. The FOMC anticipates that economic conditions are likely to warrant maintaining the Federal 

funds rate at exceptionally low levels for an extended period. 

At the time of our February report, financial markets at home 

and abroad were under intense strains, with equity prices at 

multiyear lows, risk spreads for private borrowers at very elevated 

levels, and some important financial markets essentially shut. 

Today, financial conditions remain stressed, and many households 

and businesses are finding credit difficult to obtain. 

Nonetheless, on net, the past few months have seen some notable 

improvements. For example, interest rate spreads and short-term 

money markets, such as the interbank market and the commercial 

paper market, have continued to narrow. The extreme risk aversion 

of last fall has eased somewhat, and investors are returning to private credit markets. 

Reflecting this greater investor receptivity, corporate bond 

issuance has been strong. Many markets are functioning more normally, with increased liquidity and lower bid-asked spreads. Equity 

prices, which hit a low point in March, have recovered to roughly 

their levels at the end of last year; and banks have raised significant amounts of new capital. 

Many of the improvements in financial conditions can be traced 

in part to policy actions taken by the Federal Reserve to encourage 

the flow of credit. For example, the decline in interbank lending 

rates and spreads was facilitated by the actions of the Federal Reserve and other central banks to ensure that financial institutions 

have adequate access to short-term liquidity, which in turn has increased the stability of the banking system and the ability of banks 

to lend. 

Interest rates and spreads on commercial paper dropped significantly as a result of the backstop liquidity facilities that the Federal Reserve introduced last fall for that market. Our purchases of 

agency mortgage-backed securities and other longer-term assets 

have helped to lower conforming fixed mortgage rates. And the 

Term Asset-Backed Securities Loan Facility, or TALF, which was 

implemented this year, has helped to restart the securitization 

markets for various classes of consumer and small business credit. 

Earlier this year, the Federal Reserve and other Federal banking 

regulatory agencies undertook the Supervisory Capital Assessment 

Program (SCARP), popularly known as the stress test, to determine 

the capital needs of our largest financial institutions. The results 

of the SCAP were reported in May, and they appear to increase investor confidence in the U.S. banking system. Subsequently, the 

great majority of institutions that underwent the assessment have 

raised equity in public markets; and, on June 17th, 10 of the largVerDate Nov 24 2008 12:05 Feb 04, 2010 Jkt 053244 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\53244.TXT TERRIE
9 

est U.S. bank holding companies, all but one of which participated 

in the SCAP, repaid a total of nearly $70 billion to the Treasury. 

Better conditions in financial markets have been accompanied by 

some improvements in economic prospects. Consumer spending has 

been relatively stable so far this year, and the decline in housing 

activity appears to have moderated. Businesses have continued to 

cut capital spending and liquidate inventories, but the likely slowdown in the pace of inventory liquidation in coming quarters represents another factor that may support a turnaround in activity. 

Although the recession in the rest of the world led to a steep drop 

in the demand for U.S. exports, this drag on our economy also appears to be waning as many of our trading partners are also seeing 

signs of stabilization. 

Despite these positive signs, the rate of job loss remains high, 

and the unemployment rate has continued its steep rise. Job insecurity, together with declines in home values and tight credit, is 

likely to limit gains in consumer spending. The possibility that the 

recent stabilization in household spending will prove transient is 

an important downside risk to the outlook. 

In conjunction with the June FOMC meeting, Board members 

and Reserve Bank presidents prepared economic projections covering the years 2009 through 2011. FOMC participants generally 

expect that, after declining in the first half of this year, output will 

increase slightly over the remainder of 2009. The recovery is expected to be gradual in 2010, with some acceleration in activity in 

2011. Although the unemployment rate is projected to peak at the 

end of this year, the projected declines in 2010 and 2011 would still 

leave unemployment well above FOMC participants’ views of the 

longer-run sustainable rate. All participants expect that inflation 

will be somewhat lower than recent years, and most expect it to remain subdued over the next 2 years. 

In light of the substantial economic slack and limited inflation 

pressures, monetary policy remains focused on fostering economic 

recovery. Accordingly, as I mentioned earlier, the FOMC believes 

that a highly accommodative stance of monetary policy will be appropriate for an extended period. 

However, we also believe that it is important to assure the public 

and the markets that the extraordinary policy measures we have 

taken in response to the financial crisis and the recession can be 

withdrawn in a smooth and timely manner as needed, thereby 

avoiding the risk that policy stimulus could lead to a future rise 

in inflation. The FOMC has been devoting considerable attention to 

issues relating to its exit strategy, and we are confident that we 

have the necessary tools to implement that strategy when appropriate. 

To some extent, our policy measures will unwind automatically 

as the economy recovers and financial strains ease, because most 

of our extraordinary liquidity facilities are priced at a premium 

over normal interest rate spreads. Indeed, total Federal Reserve 

credit extended to banks and other market participants has declined from roughly $1.5 trillion at the end of 2008 to less than 

$600 billion, reflecting the improvement in financial conditions that 

has already occurred. In addition, bank reserves held at the Fed 

10 

will decline as the longer-term assets that we own mature or are 

prepaid. 

Nevertheless, should economic conditions warrant a tightening of 

monetary policy before this process of unwinding is complete, we 

have a number of tools that will enable us to raise market interest 

rates as needed. 

Perhaps the most important such tool is the authority that the 

Congress granted the Federal Reserve last fall to pay interest on 

balances held at the Fed by depository institutions. Raising the 

rate of interest paid on reserve balances will give us substantial leverage over the Federal funds rate and other short-term market interest rates, because banks generally will not supply funds to the 

market at an interest rate significantly lower than they can earn 

risk-free by holding balances at the Federal Reserve. Indeed, many 

foreign central banks use the ability to pay interest on reserves to 

help set a floor on market interest rates. The attraction of this to 

banks of leaving their excess reserve balances with the Federal Reserve can be further increased by offering banks a choice of maturities for their deposits. 

But interest on reserves is by no means the only tool we have 

to influence market rates. For example, we can drain liquidity from 

the system by conducting reverse repurchase agreements, in which 

we sell securities from our portfolio with an agreement to buy them 

back at later dates. Reverse repurchase agreements, which can be 

executed with primary dealers, Government-Sponsored Enterprises, 

and a range of other counterparties, are a traditional and well-understood method of managing the level of bank reserves. 

If necessary, another means of tightening policy is outright sales 

of our holdings of longer term securities. Not only would such sales 

drain reserves and raise short-term interest rates, but they could 

also put upward pressure on longer-term rates by expanding the 

supply of longer-term assets. 

In sum, we are confident that we have the tools to raise interest 

rates when that becomes necessary to achieve our objectives of 

maximum employment and price stability. Our economy and financial markets have faced extraordinary near-term challenges, and 

strong and timely actions to respond to those challenges have been 

necessary and appropriate. 

I have discussed some of the measures taken by the Federal Reserve to promote economic growth and financial stability. The Congress also has taken substantial actions, including the passage of 

a fiscal stimulus package. Nevertheless, even as important steps 

have been taken to address the recession and the intense threats 

to financial stability, maintaining the confidence of the public and 

financial markets requires that policymakers begin planning now 

for the restoration of fiscal balance. Prompt attention to questions 

of fiscal sustainability is particularly critical because of the coming 

budgetary and economic challenges associated with the retirement 

of the baby boom generation and the continued increases in the 

costs of Medicare and Medicaid. 

Addressing the country’s fiscal problems will require difficult 

choices, but postponing those choices will only make them more difficult. Moreover, agreeing on a sustainable long-run fiscal path now 

could yield considerable near-term economic benefits in the form of 

11 

lower long-term interest rates and increased consumer and business confidence. Unless we demonstrate a strong commitment to 

fiscal sustainability, we risk having neither financial stability nor 

durable economic growth. 

A clear lesson of the recent financial turmoil is that we must 

make our system of financial supervision and regulation more effective, both in the United States and abroad. 

In my view, comprehensive reform should include at least the following key elements: a prudential approach that focuses on the stability of the financial system as a whole and not just the safety and 

soundness of individual institutions, and that includes formal 

mechanisms for identifying and dealing with emerging systemic 

risks; stronger capital and liquidity standards for financial firms, 

with more stringent standards for large, complex, and financially 

interconnected firms; the extension and enhancement of supervisory oversight, including effective consolidated supervision to all 

financial organizations that could pose a significant risk to the 

overall financial system; an enhanced bankruptcy or resolution regime, modeled on the current system for depository institutions, 

that would allow financially troubled, systemically important 

nonbank financial institutions to be wound down without broad 

disruption to the financial institution’s system and to the economy; 

enhanced protections for consumers and investors in their financial 

dealings; measures to ensure that critical payment, clearing, and 

settlement arrangements are resilient to financial shocks, and that 

practices related to the trading and clearing of derivatives and 

other financial instruments do not pose risk to the financial system 

as a whole; and, finally, improved coordination across countries in 

the development of regulations and in the supervision of internationally active firms. 

The Federal Reserve has taken and will continue to take important steps to strengthen supervision, improve the resiliency of the 

financial system, and to increase the macroprudential orientation 

of our oversight. For example, we are expanding our use of horizontal reviews of financial firms to provide more comprehensive understanding of practices and risks in the financial system. 

The Federal Reserve also remains strongly committed to effectively carrying out our responsibilities for consumer protection. 

Over the past 3 years, the Federal Reserve has written rules providing strong protections for mortgage borrowers and credit card 

users, among many other substantive actions. Later this week, the 

Board will issue a proposal using our authority under the Truth in 

Lending Act, which will include new, consumer-tested disclosures 

as well as rule changes applying to mortgages and home equity 

lines of credit. In addition, the proposal includes new rules governing the compensation of mortgage originators. 

We are expanding our supervisory activities to include risk-focused reviews of consumer compliance in nonbank subsidiaries of 

holding companies. Our community affairs and research areas have 

provided support and assistance for organizations specializing in 

foreclosure mitigation, and we have worked with nonprofit groups 

on strategies for neighborhood stabilization. The Federal Reserve’s 

combination of expertise in financial markets, payment systems, 

and supervision positions us well to protect the interests of conVerDate Nov 24 2008 12:05 Feb 04, 2010 Jkt 053244 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\53244.TXT TERRIE
12 

sumers and their financial transactions. We look forward to discussing with the Congress ways to formalize our institution’s 

strong commitment to consumer protection. 

The Congress and the American people have a right to know how 

the Federal Reserve is carrying out its responsibilities and how we 

are using taxpayer resources. The Federal Reserve is committed to 

transparency and accountability in its operations. We report on our 

activities in a variety of ways, including reports like the one I am 

presenting to Congress today, other testimonies, and speeches. The 

FOMC releases a statement immediately after each regularly 

scheduled meeting and detailed minutes of each meeting on a timely basis. We have increased the frequency and scope of the published economic forecast of FOMC participants. We provide the 

public with detailed annual reports on the financial activities of the 

Federal Reserve System that are audited by an independent public 

accounting firm. We also publish a complete balance sheet each 

week. 

We have recently taken additional steps to better inform the public about the programs we have instituted to combat the financial 

crisis. We expanded our Web site this year to bring together already available information as well as considerable new information on our policy programs and financial activities. In June, we 

initiated a monthly report to the Congress that provides even more 

information on Federal Reserve liquidity programs, including 

breakdowns of our lending, the associated collateral, and other facets of programs established to address the financial crisis. These 

steps should help the public understand the efforts that we have 

taken to protect the taxpayer as we supply liquidity to the financial 

system and support the functioning of key credit markets. 

The Congress has recently discussed proposals to expand the 

audit authority of the GAO over the Federal Reserve. As you know, 

the Federal Reserve is already subject to frequent reviews by the 

GAO. The GAO has broad authority to audit our operations and 

functions. The Congress recently granted the GAO new authority 

to conduct audits of the credit facilities extended by the Federal 

Reserve to ‘‘single and specific’’ companies under the authority provided by section 13(3) of the Federal Reserve Act, including the 

loan facilities provided to, or created for, AIG or Bear Stearns. The 

GAO and the Special Inspector General have the right to audit our 

TALF program, which uses funds from the Troubled Asset Relief 

Program. 

The Congress, however, purposefully—and for good reason—excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, 

including open market and discount window operations. In doing 

so, the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank 

in the making and execution of monetary policy. Financial markets, 

in particular, likely would see a grant of review authority in these 

areas to the GAO as a serious weakening of monetary policy independence. Because GAO reviews may be initiated at the request of 

Members of Congress, reviews or the threat of reviews in these 

areas could be seen as efforts to try to influence monetary policy 

13 

decisions. A perceived loss of monetary policy independence could 

raise fears about future inflation and lead to higher long-term interest rates and reduced economic and financial stability. We will 

continue to work with the Congress to provide the information it 

needs to oversee our activities effectively, yet in a way that does 

not compromise monetary policy independence. 

Thank you, Mr. Chairman. 

[The prepared statement of Chairman Bernanke can be found on 

page 68 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Chairman. 

Let me begin with one question, because I am pleased that you, 

as I said, responded to the fears of inflation, because I think you 

are well capable of holding them under control. And I also think 

it is important that they not be invoked prematurely when the 

greater problem I believe the Federal Reserve economists think is 

still further on the negative side, and one looming threat which we 

hear about a lot is the commercial real estate issue. 

There is a great deal of fear that there will be in commercial real 

estate a series of failures, that some of the economic problems of 

the home mortgage will be reproduced. I know we have discussed 

this. What is your current posture? Do you expect there to be problems? And how are you and other elements of the government 

ready to respond to them? 

Mr. BERNANKE. Mr. Chairman, we are watching that situation 

very carefully. There are a lot of CRE loans which are coming up 

for refinance, and the capacity to refinance them is limited, which 

poses the possibility of foreclosures in the commercial space, much 

as in the residential situation. We are urging banks to continue to 

make loans to credit-worthy borrowers, and our examiners are presenting a balanced view in their discussions with banks. 

The other step we have taken to try to address this problem, Mr. 

Chairman, is that we have recently added to our TALF program 

both new and legacy commercial mortgage-backed securities. By 

doing that, we hope to open up the mortgage-backed securities 

market, which is an important source of funding and finance for 

the CRE market. 

The CHAIRMAN. I am pleased with that, because I know there are 

some who have been critical that you have been doing too much. 

I don’t share that. On the other hand, in some cases even some of 

those same people have said, yes, but what about commercial real 

estate? And the fact is that you are ready there to do some more. 

Let me ask you now—I was interested in reading the report. On 

page 1, you note that consumer spending has been supported recently by the boost of disposable income from the tax cuts and increases in benefit payments that were part of the 2009 stimulus 

package. In regard to State and local borrowing, you note: ‘‘Interest 

rates on long-term municipal bonds declined in April, as investors 

concerned about the credit quality appeared to ease somewhat with 

the passage of the fiscal stimulus plan, which included a substantial increase in the amount of Federal grants to States and localities.’’ 

Then in the discussion of the labor market there was reference 

to the fact that, ironically, one of the things that makes the rate 

go higher is that the participation rate has gotten higher. And that 

14 

is a good thing, in part, because you note, the emergency unemployment insurance program introduced last July has contributed 

to the higher participation rate. 

I am pleased that these are three references by you to the positive impact in reference to intervening in the economy, in terms of 

boosting consumer spending and helping State and local governments, both directly by revenue and then by that keeping down 

their interest costs. 

So I do want to ask you one of those counterfactuals that you get 

to have fun with and I want to share a little of it. 

We have problems—and I think, as I said, it is good to know that 

you can unwind. I think a premature unwinding would be a great 

mistake. But the counterfactual is, had we not passed the economic 

recovery plan in February of this year, would the economy be better or worse? 

Mr. BERNANKE. Mr. Chairman, as you described, we think that 

income has affected consumer sums, and that the revenues to State 

and local authorities may improve their situations somewhat. So, 

in that respect, there has been some positive impact. But I would 

withhold an overall judgment since we have only seen a quarter or 

less of the money being disbursed. I think there is still some time 

to wait and see how significant the impact will be. 

The CHAIRMAN. But the expectation would be then that the disbursement would have a positive effect in this current atmosphere? 

Mr. BERNANKE. You would expect that higher income would tend 

to raise consumption. Yes. 

The CHAIRMAN. I appreciate those two points that you have mentioned. 

Let me just ask one last question. If the resolving authority— 

strange semantically. Resolve does appear to mean dissolve. If that 

authority were vested in the appropriate agencies of the Federal 

Government, would the AIG and Lehman Brothers and Merrill 

Lynch situations have come out differently? 

Mr. BERNANKE. Would they have— 

The CHAIRMAN. Come out differently. 

Mr. BERNANKE. Yes. Of course. 

The CHAIRMAN. Would the financial authorities have responded 

differently? 

Mr. BERNANKE. It would not have been necessary for the Fed or 

even the Treasury and the TARP to intervene in those situations. 

With a good resolution authority, we could have wound down those 

companies, had the creditors take losses to eliminate or reduce the 

too-big-to-fail problem, while at the same time avoiding the very 

destructive effects, particularly in the case of Lehman, on the 

broader financial system. 

The CHAIRMAN. Thank you. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you. 

Chairman Bernanke, Chairman Frank asked you about the commercial real estate market. You mentioned the TALF programs for 

the new and legacy program. The new program has been in operation about a month, is that right, taking loans? 

Mr. BERNANKE. Yes. That is right. 

Mr. BACHUS. And the legacy just about a week. Is that right? 

15 

Mr. BERNANKE. Yes, sir. 

Mr. BACHUS. I notice you are going to cut those off December 

31st? 

Mr. BERNANKE. The program, as of right now, is slated to end at 

the end of the year, but we will be reviewing those programs and 

others to assess whether or not they are needed beyond that time. 

Mr. BACHUS. I noticed several others run through the end of 

2010. So it is sort of— 

Mr. BERNANKE. We extended several, sir, to I think February, 

2010, not to the end of 2010. 

Mr. BACHUS. Okay. What is the state of the commercial real estate market? 

Mr. BERNANKE. Well, for a good bit of the recent years the commercial real estate market was actually pretty strong even as the 

residential market was weakening. But as the recession has gotten 

worse in the last 6 months or so, we are seeing increased vacancy, 

declining rents, falling prices, and so more pressure on commercial 

real estate which is raising the risk of lending to commercial real 

estate. So that is certainly a negative. 

As I was mentioning to the chairman, the facilities for refinancing commercial real estate, either through banks or through 

the commercial mortgage-backed securities market, seem more limited; and so we are somewhat concerned about that sector and paying close attention to it. We are taking the steps that we can 

through the banking system and through the securitization markets to try to address it. 

Mr. BACHUS. I definitely think that may be the wild card. I know 

Deutsche Bank this week came out with a report and Smith Barney last week that obviously raised concerns. 

You have talked about a resolution authority for nonbank financial institutions, and you have referred to that as expedited bankruptcy. Would it be within the Bankruptcy Code? Would it be part 

of the bankruptcy regime? 

Mr. BERNANKE. It would be a special regime that would be invoked only under circumstances of financial stress and would be 

analogous to the laws we currently have for resolving failing banks, 

which allow the regulators to intervene before the actual bankruptcy occurs to avoid the negative impact of a disorderly bankruptcy on the market. So, yes, it could be in the broader bankruptcy regime, but it would be a special category of bankruptcy 

that would be invoked only during financial crisis. 

Mr. BACHUS. You know, Enron, WorldCom, Drexell worked very 

well, the bankruptcy regime. Do you agree that it is very important 

that you force creditors to internalize the cost of their credit decisions? 

Mr. BERNANKE. Absolutely. Otherwise, you have a too-big-to-fail 

institution, which doesn’t have any discipline other than the regulatory oversight. 

Mr. BACHUS. So this regime would totally reject the too-big-tofail? I mean, you would not be asking taxpayers to guarantee or 

backstop losses? 

Mr. BERNANKE. Absolutely. I think too-big-to-fail is an enormous 

problem. If we don’t do anything else, we need to solve that problem. This is a critical element in solving it, because it would mean 

16 

that creditors would take losses. If there are resolution costs, the 

presumption is that they would be paid by assessments on other 

financial companies. 

Mr. BACHUS. The Republicans have proposed—our financial services regulatory reform proposal includes an expedited bankruptcy 

within the Bankruptcy Code, and I would ask you to pay particular 

attention to that. 

One thing that I am also concerned about is even having the financial system take those losses, or the taxpayers, and would hope 

that we would preserve a true—if we call it expedited bankruptcy, 

it in fact is expedited bankruptcy. 

I think the Chairman for his testimony. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. 

Chairman Bernanke, let me inquire into two areas that I just 

need a little more clarification on. On page 8 of your testimony this 

morning, you say that you are expanding our supervisory activities 

to include risk-focused reviews of consumer compliance in nonbank 

subsidiaries of holding companies. 

What is the authority for that? I had been under the impression 

that one of the reasons that was not done previously is that the 

Fed didn’t have that authority. Is there new authority? Or under 

what authority are you acting there? 

Mr. BERNANKE. Well, the Gramm-Leach-Bliley law is a bit vague. 

There is a presumption that you will defer to the functional regulator in dealing with nonbank subs. In many cases, the functional 

regulator would be either a State regulator or the FTC, and we 

have done this in collaboration with those bodies, particularly the 

State regulators. 

The pilot program we ran to do examinations of nonbank subs 

was done in collaboration with these other bodies, and we believe 

that in the cooperative spirit and in looking at our responsibilities 

to enforce these consumer laws, we believe a somewhat proactive 

stance is justified. 

That being said, I think that Congress ought to clarify the presumption of the ability of the consolidated supervisor to look into 

these subs. 

Mr. WATT. But it is clear that the Fed had not been real 

proactive in that area prior to this crisis. Is that right? 

Mr. BERNANKE. For nonbank subs, that is right. 

Mr. WATT. All right, on page 5 of your testimony, you talk about 

the payment of interest on reserve balances, which we authorized 

last fall. Had the Fed not had that authority prior to last fall at 

all? 

Mr. BERNANKE. No, we did not. 

Mr. WATT. That seems to me to be a perhaps even more powerful 

tool than the adjustment of the Fed fund interest rates, and I guess 

I am a little surprised at why some central banks had that authority previously and the Fed did not. Can you just give us a little history lesson on that? 

Mr. BERNANKE. Certainly. Most central banks do have this authority, and they set a Fed funds equivalent rate in the open market, but they use the interest on reserves rate as sort of a floor or 

backstop. The Fed’s authorities go back to the 1930’s, and we are 

17 

actually somewhat more limited on a number of these areas than 

other central banks. Other central banks have somewhat broader 

power to buy assets, to pay interest on reserves, and to lend to financial institutions. For example, we had to invoke the 13.3 authority to lend to the primary dealers and the investment banks. 

Whereas in Europe, for example, any financial institution can borrow from the central bank. 

Mr. WATT. Am I overstating the power of that as a potential tool 

for the Fed to use, or do you perceive it in much the same way? 

Mr. BERNANKE. Many central banks around the world use what 

is called a corridor system, where they have an interest rate on reserves as the floor and then a lending rate like the discount window rate as the ceiling, and that keeps the market interest rate between those two levels. A lot of banks use that. 

So, yes, it is a very powerful tool; and we would not have been 

able to expand our balance sheet as we have if we had not had that 

tool to help us with the exit. 

Mr. WATT. So you are saying, until last fall, actually, the Fed— 

the extent of the Fed’s power before we granted this authority was 

actually substantially less than a lot of Federal banks—a lot of central banks around the world? 

Mr. BERNANKE. Yes, that is right. 

Mr. WATT. Well, I guess that is a double-edged sword from some 

of my colleagues on—that it gives the Fed more authority that they 

would likely fear. Your assessment is that, as we wind down these 

positions, that would be as important or more important than the 

Fed fund rate? 

Mr. BERNANKE. Well, that interest on reserves rate will help us 

control the Fed funds rate. They should be very closely together. 

So they should be closely tied, and they should affect longer-term 

interest rates. So they will be working together. 

Mr. WATT. Thank you, Mr. Chairman. 

The CHAIRMAN. Let me just say—if I can have unanimous consent for 30 seconds. The gentleman from Alabama reminded me 

that the decision to grant the Fed power was wholly bipartisan; 

and, in fact, it first passed the House when the Republicans were 

in the majority. The gentleman from Alabama was the chairman 

of the Appropriations Subcommittee. It did not pass the Senate. 

There is a lot of that going around. And it then came up again, and 

it was again passed. So that has been broadly supported in this 

committee, although not unanimously. 

Which brings me to the gentleman from Texas, Mr. Paul. 

Dr. PAUL. Thank you, Mr. Chairman. 

In the past, most members of the Federal Reserve Board, including your predecessor, when they come before the committee they 

endorse in general the idea of transparency. They don’t just say we 

are against transparency. It is the definition that really counts. 

Most members then would also argue for independence, which generally means that they don’t want the Congress to know it is actually what they are doing. 

But I saw the article today in the Wall Street Journal, not your 

editorial but an article, and there were a few quotes there that I 

wanted to ask you about. I do know that all of us can get misquoted in the newspaper, but I want to clarify this, because it is 

18 

either misleading or somebody is confused, and I want to see if I 

can figure this out. 

The first one has to do with you saying that Mr. Paul’s bill, 

which is 1207, the transparency bill, would interfere with the Fed’s 

interest rate decision. 

And since I wrote the bill, I know what the intentions are. It has 

nothing to do with monetary policy or interest rate manipulation. 

There is nobody in the Congress who is going to be monitoring the 

Federal Open Market Committee. It is after the fact that an audit 

can occur and find out what transpired. There is no management. 

So is that your position that this bill, if it were to be passed, 

would interfere directly with interest rates, setting interest rates? 

Mr. BERNANKE. Well, Congressman Paul, at some point, as you 

know, we are going to have to start raising interest rates to avoid 

inflation. And people have talked about the politics of that and 

whether the Fed will be able to do that without intervention or interference. 

If we were to raise interest rates at a meeting and someone in 

the Congress didn’t like it and said, I want the GAO to audit that 

decision, wouldn’t that be viewed as an interference or at least an 

ex post— 

Dr. PAUL. I wouldn’t think so. This is just reviewing it. And you 

can do what you want. 

What about today? Interest rates are artificially low. Could there 

be any political pressure to keep interest rates artificially low? 

Historically, that has been well known. It has been documented 

and written about how other Federal Reserve chairmen, you know, 

they are on the verge of reappointment, and they know the President, and all of a sudden—so it is not like it is not politicized now. 

Just the fact that they can issue a lot of loans and special privileges to banks and corporations, that is political. But this idea that 

it would be political because we know what happened afterwards 

just doesn’t seem to add up. 

Since time is short, I want to go on to the next quote, which I 

find fascinating, because hopefully I can agree with you on this 

one. This is an actual quote. It says, ‘‘We absolutely will not monetize the debt.’’ Well, that is one of the major reforms sometime in 

the distant future that would be beautiful, because that would stop 

all this chaotic monetary policy, inflations and depressions and recessions and all the mess that we have. But you say you will not. 

At the same time, you know, I quoted the $38 billion that was 

bought last week and the plan to buy $300 billion of U.S. securities. These securities are bought by dollars you create. And if you 

are buying U.S. securities, what is that if it is not—and besides, 

if the markets really believed that, that you would absolutely not 

monetize debt, I think the markets would get hysterical. 

So it seems to me like—I would like to understand exactly what 

you mean by that. 

Mr. BERNANKE. Well, the purpose of our limited program was to 

address private credit markets, Congressman. When we complete 

the $300 billion program that we announced, we will have less 

treasuries on our balance sheet than we did 2 years ago, because 

we sold off a lot of treasuries in order to make room for these other 

things we were doing. 

19 

Secondly, after we complete that $300 billion, our share of outstanding treasuries will be at one of the lowest points in the postwar period. So we are not taking a significant portion of U.S. 

Treasuries. And we are not actively intervening or actively trying 

to make it easier for the government to issue debt. 

Dr. PAUL. So you are saying, if you buy $300 billion worth of U.S. 

Government debt, that is not inflationary. The true definition of 

‘‘inflation’’ is when you increase the money supply. And the immediate consequence is it sends out false, bad information to the marketplace. So whether it is when the bubble is being formed or afterwards, all you are doing is inflating constantly. You have doubled 

the money supply; interest rates are artificial. People make mistakes. 

So it seems to me that you are in the midst of massive inflation. 

But I guess you have a different definition. When you double the 

money supply, that is not inflation itself? Or are you looking at 

only prices? 

Mr. BERNANKE. May I respond? 

The CHAIRMAN. Briefly. 

Mr. BERNANKE. Inflation is the change in the consumer price 

level, which is very stable right now. And there are various measures of money, as you know. And the broad measures of money, the 

measures of money in circulation like M1 and M2, are not growing 

quickly. 

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

Mr. BACA. Thank you very much, Mr. Chairman. 

First of all, I want to thank you and I want to thank the ranking 

member for convening this hearing. 

And I want to thank Chairman Bernanke for taking the time to 

be here once again. 

My first question is in reference to the regulatory reform plan 

put forth by the Obama Administration. It puts a lot of faith in the 

Federal Reserve’s ability to oversee the largest, most interconnected firm in the marketplace to prevent against systemic failures. 

I have a question related to the Financial Oversight Council that 

will aid in this task. How do you envision the role of the Financial 

Oversight Council taking shape? That is one of the questions. 

And then it is my understanding that the council will play a 

purely advisory role, having no real power or weight in our regulatory issues. And can you describe how the Federal Reserve would 

work with the council under this proposed plan? 

Mr. BERNANKE. Yes, sir. There is, I think, a misapprehension 

that somehow this plan makes the Federal Reserve a super-regulator with untrammeled powers to go wherever it likes. In fact, 

there are multiple components, as you point out. 

A critical component is the council, which will oversee the overall 

strategy. It will look for emerging risks and advise regulators on 

what steps to take. And so, in particular, this issue about which 

large institutions the Fed would oversee, I think that would be appropriate for the council to make that determination, and not the 

Federal Reserve, for example. 

So the Federal Reserve will work closely with this council, which, 

again, would have broad-based ability to gather information, idenVerDate Nov 24 2008 12:05 Feb 04, 2010 Jkt 053244 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\53244.TXT TERRIE
20 

tify emerging risks, and look for gaps and problems in the regulatory system. 

Another major portion, by the way, of course, would be this resolution regime, which would not be administered by the Fed either. 

That would be the Treasury, the FDIC. That is very critical to 

winding down systemically relevant firms. 

The Fed’s role, as envisioned by the Administration, is a modest 

reorientation of our current system. Under our current system, the 

Federal Reserve is the umbrella supervisor of all bank holding companies and financial holding companies. So we are already the umbrella supervisor of essentially all the firms that would likely be 

identified as Tier 1 firms under the Administration’s proposal. 

So the main differences would be that we would have some additional authorities to add capital and liquidity requirements based 

on the systemic relevance of those firms and perhaps some stronger 

ability to look at nonbank subs, as we were discussing before, visa-vis Gramm-Leach-Bliley. 

The biggest challenge would be on our part, which would be to 

take a more macro-prudential approach. Rather than looking at 

each firm individually, the intellectual challenge for us would be to 

ask the question, not only is this firm safe in its own situation, but 

does its failure threaten other firms and other markets? And, if so, 

how should you adjust capital and other requirements to accommodate that? 

So it would be a challenging thing for us to do, but it does not 

radically reorient our set of powers. 

Mr. BACA. As a follow-up question, would you then be in favor 

of increasing the authority of the council? Or are you confident that 

the collaboration of the Fed and the council would work as stated 

in the white paper? 

Mr. BERNANKE. I am very open to discussing the role of the council. I think a very important role is to coordinate regulators, to 

oversee the system, to identify risks and so on. But there may be 

situations where the council can have authority to harmonize different practices or to identify problems and to take action. So I 

think the Congress should discuss what powers the council should 

have. 

Mr. BACA. Well, I hope we do in Congress here. 

But let me refer back to an article that appeared in the Wall 

Street Journal. This is July 20th. In here, you start out, ‘‘The depth 

of the global recession has required highly accommodative monetary policies,’’ and you go on and go on. And then it says, ‘‘We have 

greatly expanded the size of the Fed balance sheet through the 

purchase of long-term security through targeted lending programs 

aimed at restarting the flow of credit.’’ 

What do you mean by this? 

Mr. BERNANKE. Congressman, our policies, using our balance 

sheet, have been to try to improve the functioning of credit markets, which have been disrupted by the financial crisis. So, for example, we have been purchasing mortgage-backed securities, which 

has lowered mortgage rates for everyday Americans down to about 

5 percent. We have opened up a program that is called the TALF, 

which has helped increase funding and reduce rates on consumer 

loans like auto loans, student loans, and small business loans. We 

21 

have taken actions to improve the function of the commercial paper 

market. 

So all these various steps have tried to address the fact that, 

during the crisis, many markets have become disrupted, and our 

actions have been ways of trying to stimulate improvements. And 

we have been fairly successful in doing that. 

Mr. BACA. Okay. In the second paragraph, you state that, ‘‘These 

actions have softened the economic impact of the financial crisis. 

They have also improved the functioning of key credits, including 

the market for interbank lending, commercial papers, consumer, 

small lot, business credit, residential mortgages.’’ 

How does that impact, then, those whoe in foreclosure right now? 

The CHAIRMAN. Let me caution the members again. Your time 

expiring is not a good time to ask your big question. The chairman 

will have a few seconds to answer. But we can’t just extend it that 

way, in fairness to the other members. 

Mr. Chairman? 

Mr. BERNANKE. I just want to say that, in those markets, such 

as the mortgage market, consumer markets, interbank markets, we 

have brought down interest rates, increased availability, and improved the functioning of the markets in those areas. 

Mr. BACA. But how will it help those— 

The CHAIRMAN. No, the gentleman’s time has expired. 

The gentleman from Texas? 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Chairman Bernanke, way over here on the far right, your left. 

There you go. Thank you. 

One of the things that you mentioned in your testimony was 

about regulatory reform. You had bullet points there, and one of 

those bullet points was ‘‘enhanced protection for consumers and investors in financial dealings.’’ 

And then on page 8, you said, ‘‘We are expanding our supervisory 

activities to include risk-focused reviews of consumer compliance in 

non-bank subsidiaries of holding companies.’’ 

As you are aware, the Administration has laid out a Blueprint 

for Regulatory Reform. The chairman also has a bill. And one of 

the pieces of that is an interesting concept of separating the consumer compliance from the primary regulators and having a separate entity. 

The first question I would have is, what do you think about that 

structure? 

Mr. BERNANKE. Well, I understand the rationale and why people 

would like to have that, and I am not going to criticize it. But I 

just want to say that in my remarks, the point was that the Fed 

has been doing a good job for the past 3 years or so, and we are 

committed to doing it. And if you allow us to continue to work in 

that area, we would be interested in doing so. 

Mr. NEUGEBAUER. Are there some dangers of bifurcating the regulatory process, where you have one entity looking at consumer 

products and determining what products financial institutions can 

offer and endorsing those and then having another regulatory 

agency looking at safety and soundness? And how does that work? 

Mr. BERNANKE. Well, there are some costs to it, in that you 

would have double the exams. And there wouldn’t be as much coVerDate Nov 24 2008 12:05 Feb 04, 2010 Jkt 053244 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\53244.TXT TERRIE
22 

ordination between the safety and soundness and consumer protection issues. So there would be some issues related to that separation. 

Mr. NEUGEBAUER. And so, at a time when I guess we are all feeling like it is time to, kind of, tighten up the regulatory structure, 

make sure we plug the holes, and, moving forward, that if we had 

some places where we weren’t actually able to have the ability to 

or, in fact, doing our jobs, does separating those make sense? 

Mr. BERNANKE. Well, the argument for doing it, I think, is that 

those who believe that you need a separate agency that will be 

committed to consumer protection will have the institutional commitment outweigh some of these other costs. And I simply am noting that the Federal Reserve is also committed and wants to be 

committed to that goal. 

Mr. NEUGEBAUER. If you were writing the regulatory reform, 

would you keep them the same and not separate them? 

Mr. BERNANKE. If I were writing it, I would keep the consumer 

protection with the Federal banking agencies, with additional 

measures to ensure a strong commitment. 

Mr. NEUGEBAUER. Thank you for that. 

The second thing is, in some of your projections of looking forward, what you think the economy is going to be like in 2009 and 

2010 in relationship to jobs, for example, when you were using the 

numbers and assumptions you were using, did you assume that 

Congress would not continue this huge deficit spending where we 

are on track to literally double the national debt? Are your assumptions based on employment is going to get better if Congress has 

better fiscal policy? Or are your job assumptions based on continuing to spend money like drunken sailors? 

Mr. BERNANKE. Our forecasts are based on our best projections 

of what government spending is likely to be. And, in particular, it 

includes the fiscal stimulus package. 

Mr. NEUGEBAUER. And were your assumptions, then, that this 

would be the job situation assuming that Congress does not then 

do something about the current level of spending? 

Mr. BERNANKE. If the fiscal stimulus package didn’t exist, for example, we would anticipate there would be higher unemployment. 

Mr. NEUGEBAUER. We are not on the same page. I am not talking—the stimulus package is already done. I am talking about the 

fact that, for every dollar that this Congress is spending right now, 

we are borrowing 50 cents. 

If that trend continues in future appropriations, and some people 

are talking Stimulus 2, would that alter your job prediction down 

the road? 

Mr. BERNANKE. Down the road, it might. As I talked about in my 

testimony, I do think it is very important that we look at mediumterm fiscal sustainability, that we have a plan for getting back to 

reasonably low deficits and a sustainable debt-to-GDP ratio. Otherwise, we might see interest rates rise, which would be negative for 

the economy. 

Mr. NEUGEBAUER. So what you are saying is $2 trillion deficits 

a year for the next 4 or 5 years is not a sustainable— 

Mr. BERNANKE. No, sir, it is not. 

Mr. NEUGEBAUER. Thank you. 

23 

The CHAIRMAN. The gentleman from Missouri, Mr. Cleaver. 

Mr. CLEAVER. Mr. Chairman, thank you very much for being 

here. 

I read over the weekend that the unemployment rate in California is above 11 percent. And The Hill reported last week that 

the Federal Reserve reported that unemployment was between 9 

and 10 percent and would continue to rise. 

If this is, in fact, going to happen—and you look at California, 

Ohio, Michigan, with already double digits—should we expect another round of foreclosures? The chairman asked you earlier about 

commercial. I mean, doesn’t all of this almost make for a perfect 

storm for another avalanche of foreclosures? 

Mr. BERNANKE. The combination of unemployment and falling 

house prices, the double trigger does create a very high rate of foreclosures. 

Our assessment of the foreclosures is that it is likely to be—it 

is likely to peak in the second half of 2009, corresponding with the 

peak in the unemployment rate, and perhaps be somewhat less in 

2010. But, clearly, we are going to have very high levels of foreclosures, and the unemployment rate is a big reason for that. 

Mr. CLEAVER. This may be more theological or philosophical, but 

if you look at—I mean, you and others in the Federal Reserve and 

even in the Administration are saying that things are stabilizing, 

we are making progress. That is not quite compatible with what 

you hear with the talking heads on television. And nobody can control those. 

But our attitude toward the trouble may be more problematical 

than the trouble. And I am wondering, you know, what can we do 

to change the atmosphere in the country? Consumers are loathe to 

go out and buy. Employers, even if they are seeing things stabilize, 

are not inclined to go out and begin to hire or rehire. 

What can Congress do? What can be done to not just stabilize the 

economy but to stabilize our attitudes? 

Mr. BERNANKE. I am not sure what to suggest there, except, obviously, good leadership and good explanations help. But the public 

has been responding to some signs, some glimmers, if you will, of 

improvement. So consumer sentiment, for example, has improved 

somewhat as the stock market has gone up and as the outlook has 

looked better and as the job situation has at least stopped deteriorating quite as quickly as it was. 

But I want to be clear that we have a very long haul here, because even if the economy begins to turn up in terms of production, 

unemployment is going to stay high for quite a while, and so it is 

not going to feel like a really strong economy. 

Mr. CLEAVER. Thank you. 

I yield back the balance of my time, Mr. Chairman. 

The CHAIRMAN. The gentleman from Indiana. Oh, I am sorry, 

Mr. Cleaver just finished. 

Mr. Castle, I apologize, the gentleman from Delaware is recognized. 

Mr. CASTLE. Thank you, Mr. Chairman. 

Chairman Bernanke, let me just say in praise of you, because my 

questions may imply some negatives, I think you are doing a good 

job on monetary policy. And I think that meets one of the goals of 

24 

the Humphrey-Hawkins Act. Just looking at that Act, it outlines 

four goals for a strong economy: full employment; growth in production; price stability; and balance of trade and budget, of which 

I think price stability is the one that sort of stands out now. And 

I think that has a lot to do with what you do. 

And maybe this is Government 101, but I am not 100 percent 

sure what your role is with the Administration. We are watching 

a circumstance in which we have deficits creating greatly. Debt will 

go up over $10 trillion, according to the budget, in the next 10 

years or so. Appropriations are up dramatically, for this year at 

least and the ones we have passed in the House so far. The health 

care legislation that is being considered in the House and the Senate doesn’t seem to have any real cost controls in it, some maybe 

passing wave at that, but that is about the extent of it, and are 

probably in trouble because of that. 

My question to you is, does the Executive Branch of government, 

the White House, consult with you about any of these broader economic issues? 

I mean, part of your responsibility under Humphrey-Hawkins is 

to try to make progress towards these goals. And it seems to me 

just setting monetary policy won’t necessarily solve the problems of 

the full employment, the growth of production, and the balance of 

trade and budget. And I didn’t know if that is just off-bounds for 

you and for them or if there is any consultation going on. 

And, obviously, if you have any comments about your point of 

view on some of these expenditures which are going on, I would be 

interested in hearing them, as well. 

Mr. BERNANKE. Well, of course, the Federal Reserve is nonpartisan and independent. I do speak to the President’s advisors 

periodically, as I speak to Members of Congress and their staff. 

In terms of my policy positions, because I am nonpartisan I try 

not to get involved in the details of specific programs, fiscal programs in particular. But I have spoken to the issue of fiscal sustainability, which I did again today, and the importance of when 

thinking about the programs that one is undertaking, the time 

frames, the costs and so on, to think about the implications for the 

Federal budget, to make sure that we have a trajectory that will 

be sustainable in the medium term. 

And I have made that point several times, and I am sure that 

the Administration, as well as the Congress, are quite aware of 

that point. But achieving it, of course, requires some effort. 

Mr. CASTLE. Maybe we would be better served to let you go right 

now and run back over to the White House and keep making that 

point, based on what we have seen. 

Following up on something the gentleman from Texas, Mr. 

Neugebauer, asked on the financial protection agency that is being 

proposed, did I hear you say—did I hear correctly, perhaps, you 

saying that you would keep the consumer protection functions that 

you have at the Federal Reserve there at the Federal Reserve if 

you had your preference in that area? 

Mr. BERNANKE. As I have said, I am proud of the work we have 

done. I think we are well-placed to do it. We have a lot of talent. 

We have a wide range of people, in terms of economists, financial 

specialists, payment specialists, as well as lawyers and consumer 

25 

specialists. There are some complementarities with our supervisory 

activities. 

So if the Congress decides to consider that option, we are very 

interested in pursuing it ourselves. 

Mr. CASTLE. And you indicated that—you said several new rules 

you are working on, including rules on mortgage originators and 

that area. Can you go through that list again quickly? 

Mr. BERNANKE. We are having a meeting on Thursday where we 

will announce some new rules that are being circulated for comment. And they are primarily disclosure changes, consumer tests 

and disclosure changes for mortgages, mortgage originations, and 

for home equity lines of credit. 

And we are also going to address in that rulemaking Yield 

Spread Premiums, which is how brokers and other lenders are paid 

for making mortgages. So that is an issue we will be addressing as 

well. 

Mr. CASTLE. Thank you. 

At the governors conference which just took place, which is Republicans and Democrats, down in Alabama, I believe—Mississippi, 

I guess it was, actually—they indicated they were not interested in 

a second stimulus. That is obviously something that is a little bit 

hypothetical at this point. 

Would you agree with that? I mean, I have heard your reference 

to the fact that the first stimulus is still being spent out there and 

has a long ways to go. 

Mr. BERNANKE. Yes, I think it is very early. Less than a quarter 

of the first stimulus has been spent. We will have to see how the 

economy evolves. So I think it is premature to make any judgments 

about that. 

Mr. CASTLE. And they also indicated that they were concerned 

about a rush to a health care plan. They have Medicaid costs and 

other things they are concerned about. 

Do you have any—I am sorry, my time is up. I may submit a 

question in writing to you. Thank you. 

The CHAIRMAN. The gentleman from Indiana is next of those who 

haven’t questioned. 

Is the gentleman ready? 

Mr. DONNELLY. Thank you, Mr. Chairman. 

The CHAIRMAN. And we will then be going on the Democratic 

side in seniority from then on, everybody who has questions. 

Mr. DONNELLY. Fed Chairman Bernanke, thank you for being 

here. 

Let me ask you a question. I come from an area that does a lot 

of manufacturing and is reliant on credit. What would have happened last fall if we had just walked away and had not passed the 

program? 

Mr. BERNANKE. I think you would have had a very good chance 

of a collapse of the credit system. Even what we did see after the 

failure of Lehman was, for example, commercial paper rates shot 

up and availability declined. Many other markets were severely 

disrupted, including corporate bond markets. So even with the rescue and even with the stabilization that we achieved in October, 

there was a severe increase in stress in financial markets. 

26 

My belief is that, if we had not had the money to address the 

global banking crisis in October, we might very well have had a 

collapse of the global banking system that would have created a 

huge problem in financial markets and in the broad economy that 

might have lasted many years. 

Mr. DONNELLY. And have we lost any of the funds that the Fed 

has lent? 

Mr. BERNANKE. The Fed on book value is a little bit underwater 

on the AIG, Bear Stearns interventions, which we would very much 

not liked to have done, but we didn’t have the resolution regime. 

On all other lending and all other programs, which is more than 

95 percent of our balance sheet, we are making a nice profit, which 

we are sharing with the Treasury. 

Mr. DONNELLY. In regards to the TALF program, which is an 

area that we had hoped for some help on and that we had discussed before, at the present time none of it has gone to floor plan 

lending, as we discussed. 

What other areas do you think can help open up floor plan lending? We know the SBA has helped a little bit. What other avenues, 

if any, are being explored or do you think are available out there? 

Mr. BERNANKE. We are continuing to look at floor plan lending, 

and there are several possibilities. 

One in particular is we are doing a review right now of the credit 

rating agencies, the nationally recognized rating agencies, whose 

ratings we will accept and the criteria on which we will accept 

those ratings. Depending on what that list is and what views they 

have about floor plan lending, it may be that some floor plan deals 

can get the AAA rating that they need to be eligible for the TALF. 

But we will be putting out rules very soon on the criteria for 

choosing the rating agencies. 

Mr. DONNELLY. One of the other areas of concern on the TALF 

for us is what is called the haircut rate. And on floor plan, that is 

the highest of all. The reason for that? And is there a review of 

that, that might come down the road? 

Mr. BERNANKE. The haircuts are set based upon evaluations of 

the riskiness of the various assets. 

I think there is a lot of uncertainty right now about floor plans 

given the state of the industry and what is happening with GM 

and Chrysler and so on. And my hope is that, in the next few 

months, as the situation becomes somewhat clearer, it could be 

that ratings will be upgraded and that we will see a somewhat better situation. 

But right now there is just a lot of murkiness, in terms of the 

credit quality of the floor plan loans. 

Mr. DONNELLY. And we are looking at a December 31st termination date as of now. But I think approximately $27 billion out 

of a potential $1 trillion has been lent out. Has there been any look 

into extending that termination date? 

Mr. BERNANKE. We will extend it if conditions warrant. And we 

will try to give the markets plenty of advance notice. We are not 

going to necessarily try to hit any particular number. We are going 

to have to make a judgment whether the conditions in markets are 

still sufficiently disrupted that such an intervention is necessary. 

27 

Remember, this is based on a determination that conditions are 

unusual and exigent. And if markets normalize, we should no 

longer be using that kind of program. 

Mr. DONNELLY. And one last question: The small businesses in 

our area, they come up and say, ‘‘You know, we just can’t get the 

credit we need. We can’t get the help we need.’’ And I am not talking about the loans that shouldn’t have been made, but the loans 

to good businesses that aren’t being made. 

Approximately what timeframe do you think these small-business owners will be able to see the same kind of credit availability 

they had before? 

We have had so many credit organizations just walk away, can’t 

make loans anymore, don’t want to. 

Mr. BERNANKE. In terms of having the same terms and conditions that they had before the crisis, maybe that will never come 

back, because credit is sort of permanently tightened up in that respect. 

I am hopeful that as banks stabilize—and we are seeing some 

improvements in the banking system—and as the economy stabilizes to give more confidence to lenders, that we will see better 

credit flows. 

Mr. DONNELLY. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Florida, Mr. Putnam. 

Mr. PUTNAM. Thank you, Mr. Chairman. 

I want to thank Chairman Bernanke for his leadership. For all 

the criticisms about transparency and the Fed, many of which I 

share, you have always been a very plainspoken representative of 

the Fed, certainly much more clear and candid than your predecessor, who made the Oracle of Delphi seem downright verbose. 

To that end, in listening to the previous questions, you have referred to my friend, Mr. Cleaver, that it is not going to feel like a 

recovery. And we have talked about some of these issues, which 

begs the question: The last two recoveries, which admittedly were 

much more minor, more shallow recessions than what we are in 

now, they were characterized as jobless. 

Do you believe that this will be a jobless recovery, as well? And 

given the answer either way, what shape do you believe that recovery will take? 

Mr. BERNANKE. We expect a gradual recovery—I don’t know 

what letter that corresponds to—which will be picking up steam 

over time, perhaps well above the potential rate of growth by 2011. 

We do expect to see positive job creation near the end of this 

year, early next year. But it is going to take a while, given the pace 

of growth, for the unemployment rate to come back down to levels 

that, you know, we would be more comfortable with. So, in that respect, it should take some time for the labor market to return to 

normal. 

Mr. PUTNAM. In your op-ed in today’s Journal and in your testimony, you spend a great deal of time talking about the preparations that the Fed is making in terms of the exit strategy. What 

metric or metrics are most compelling that allow you to read a recovery? 

And, in your testimony, there is a correlation between inflationary fears and your prediction of when the recovery begins; esVerDate Nov 24 2008 12:05 Feb 04, 2010 Jkt 053244 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\53244.TXT TERRIE
28 

sentially, when that velocity kicks in in the money supply, that the 

recovery and the inflationary pressure are concurrent. So what 

metrics do you evaluate that allow you to get ahead of that curve 

when the knock on the Fed has always been that they are too late 

reading the trends? 

Mr. BERNANKE. It is a very difficult problem. And even though 

we have these unusual circumstances, it is really the same problem 

we always face, which you just pointed out, which is picking the 

right moment to begin to tighten and picking the appropriate pace 

of tightening. 

Since monetary policy takes time to work, the only way we can 

do that is by trying to make a forecast, make a projection. And we 

use large amounts of information, including qualitative information, anecdotes we receive, formal models, a whole range of techniques, to try to estimate where the economy is likely to be a year 

or a year and a half from now. It is a very uncertain business, but 

it is really all we can do. And based on that, we try to judge the 

right moment to begin to raise rates. 

So we will be looking to see more evidence of a sustained recovery that will begin to close the output gap and begin to improve 

labor markets. And we will be looking for signs of inflation or inflation expectations that would cause us to respond, as well. 

Mr. PUTNAM. Given the debate about overhauling regulatory reform structures and the role that you have played in that, as well 

as others, you are having to carve out a separate approach to these 

new non-bank financial institutions, which, to me, sort of raises the 

question, which is probably going to be one for historians to resolve: Should the barriers between banking and investments have 

ever been torn down? 

In other words, was Glass-Steagall the right approach after the 

Depression? Was Gramm-Leach-Bliley the wrong approach? Has 

enough time elapsed to have a good answer to that question, as we 

move forward with setting up an entirely new regime? 

Mr. BERNANKE. I don’t think that Glass-Steagall, if it had been 

enforced, would have prevented the crisis. We saw plenty of situations where a commercial bank on its own or an investment bank 

on its own got into significant problems without cross-effects between those two categories. 

On the other hand, I think that we do need to be looking at the 

complexity and scale of these firms and asking whether they pose 

a risk to the overall system? And if that risk is too great, is there 

reason or scope to limit certain activities? And I think that might 

be something we should look at. 

But I think the investment banking versus commercial banking 

distinction probably would not have been that helpful in this particular crisis. 

Mr. PUTNAM. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Colorado? 

Mr. PERLMUTTER. Thanks. 

And I appreciate Mr. Putnam’s question, because that is exactly 

what I was going to ask, you know, whether or not we can unring 

the bell, whether or not we should unring the bell of mixing trading and banking and whether that was, you know, part of what 

caused that—you know, I have been looking at all your charts in 

29 

this, and some of them are really pretty shocking as to what happened in the fall and has occurred. 

But I guess what you are saying is, no, we have to look at it as 

a whole in terms of the financial industry and just try to increase 

their margins or their capital when we see them in riskier products 

or getting very big. Is that sort of the bottom line for you? 

Mr. BERNANKE. That is generally right. But it could be that a 

company has too many lines of business that it can’t manage properly, that it can’t manage the risk appropriately. And, in that case, 

I think the supervisors would be justified in saying, ‘‘You have to 

get rid of this,’’ or ‘‘You have to cut that back.’’ Capital is not the 

only thing. You also have to have management and risk controls, 

as well as a buffer of capital. 

Mr. PERLMUTTER. Okay. 

Some of my friends on the other side of the aisle have sort of 

been questioning the value of the stimulus and what is happening, 

but, in looking through your report, I mean, I see some things that 

really look pretty positive. 

First of all, in 2005, we had a negative savings rate; now we 

have a very positive savings rate. Now, it happened almost overnight. But, at some point, how do you gauge the savings that is 

going on in the country right now? Is it positive or too much? 

Mr. BERNANKE. Well, families are, with good reason, saving 

more. They have lost wealth. Their house value is down, and so 

they can’t use the house as an ATM, as people did. They are more 

concerned about the future, and so they are putting more money 

aside in a precautionary way. 

Interestingly, the private saving has increased so much in this 

country that, despite the big increase in the government deficit, 

total national borrowing from abroad is actually lower now than it 

was the last few years. 

So there has been a big change in behavior in the private sector. 

And that is fine. It creates problems in the macro economy because, 

without consumer spending, the economy doesn’t grow as fast. But 

I wouldn’t advise families to worry about that. I think people need 

to get their balance sheets in order and their budgets in order. And 

that is a positive that will come out of this whole crisis. 

Mr. PERLMUTTER. And going along with that savings, there was 

a statement in your report at page 7, ‘‘The recent stimulus-induced 

jump in real disposable income and the improvement in equity 

wealth since this spring apparently has helped lift consumer sentiment somewhat from its very low levels at the end of the year.’’ 

And I am looking at today’s Wall Street Journal. Everybody 

keeps talking about the Wall Street Journal. They are showing the 

vital signs and a marked increase in 10 economic and financial indicators over the course of the last 2 or 3 months, showing real 

positive signs within the economy. 

And I appreciate you sitting there as the Chairman of the Federal Reserve, having to temper statements that you might make. 

But, within your report, we see the savings rate improved. There 

was really a sharp increase or—your chart number 25, on page 15, 

shows unemployment just falling off a cliff and then really a dramatic bounce back in the right direction beginning in April and 

May of this year. So, again, another positive sign. 

30 

The charts also show that the gap that we have had in terms of 

our trade balances has really shrunk. I mean, part of what has 

been going on here is we sent so much money overseas that we 

haven’t been a real productive society. But you can see production 

personally and as a Nation improving. 

Am I misreading your reports? 

Mr. BERNANKE. No. The economy has improved—the outlook has 

certainly improved since March, and we can see it—the stock market is up considerably since March. And, as I was mentioning before, the fact that we are saving more means we can borrow less 

from abroad. And that is exactly the decline in the current account 

that you were noticing. 

Mr. PERLMUTTER. My last question is on section 13(3) of the Act, 

which was used, I think, in a pretty dramatic way with Bear 

Stearns and then again in September. 

I mean, is there any—have you all talked about whether there 

should be some limitation on that, or is that mostly coming from 

us? 

And, with that, I would yield back and just ask him to answer 

the question. 

Mr. BERNANKE. First, I would say that in every usage of 13(3), 

we have consulted closely with the Treasury, and we have also apprised Congress whenever possible. 

I think if a resolution regime is created that would allow an orderly wind-down of a Bear Stearns or an AIG, our 13(3) authority 

ought to be subordinated to that and only used if the wind-down 

authority requests that the Fed participate in some way. 

Mr. PERLMUTTER. Okay. Thank you. 

The CHAIRMAN. The gentleman from New Jersey, Mr. Lance. 

Mr. LANCE. Thank you very much, Mr. Chairman. 

Thank you, Chairman Bernanke. 

On page 6 of your testimony, you have indicated that we do have 

to worry about fiscal balance. And Mr. Neugebauer and Mr. Castle 

have asked you questions, and I would like to follow up, if I might. 

You indicate, ‘‘Maintaining the confidence of the public and financial markets requires that policymakers begin planning now for 

the restoration of fiscal balance.’’ 

Given the fact that we have, I would imagine, an almost $2 tril- lion deficit this year—I think the projection at the moment is $1.8 

trillion, and we are in the last quarter of the fiscal year; my own 

judgment is that it may be as high as $2 trillion—and my own 

judgment is that next year’s annual deficit may be as high as $1.5 

trillion, what would you suggest that we do now regarding trying 

to achieve a restoration of fiscal balance? 

Mr. BERNANKE. Well, I don’t think there is much that can be 

done about this year’s deficit and probably not too much about next 

year’s deficit. But the Congress needs to develop a broad plan, 

which encompasses all the spending plans and taxation plans, that 

shows a moderation of the deficit over time to something sustainable, which I would guess would be something on the order of 2 or 

3 percent of GDP. 

Mr. LANCE. Two or 3 percent of GDP. And, of course, we are well, 

well above that at the moment. 

Mr. BERNANKE. That is right. 

31 

Mr. LANCE. And I concede the point that we will be unable to do 

anything for this fiscal year, obviously, since it ends in fewer than 

3 months. 

I am not trying yet to completely throw in the towel regarding 

next year. Obviously, if unemployment remains high—and your 

testimony is that, while it may get better, it is certainly not going 

to be where we are—that would further depress tax revenues, I 

presume. I see nothing that the Administration has done so far regarding restoration of fiscal balance. 

What would your view be after next year? You would like to get 

back to 2 to 3 percent by the fiscal year after next year, Mr. Chairman? 

Mr. BERNANKE. I don’t have an exact number. I think ‘‘mediumterm’’ means sort of 3 to 5 years, something in that range. But we 

need to show that we have a plan for getting back to a more sustainable level. 

Mr. LANCE. Thank you. My view is that the Administration 

ought to work with us in Congress on trying to show greater 

progress next year, beginning on the 1st of October. 

You have indicated that your purchase of T bills is a plan that 

will end, I believe, in this fiscal year, the $300 billion purchase. 

The completion of that will be at the end of September? Is that accurate, Mr. Chairman? 

Mr. BERNANKE. That is right. 

Mr. LANCE. And do you currently anticipate that you will be continuing to purchase at this level beginning in the new fiscal year? 

Mr. BERNANKE. That is really a decision that the FOMC, the 

Federal Open Market Committee, needs to make, because it has 

implications for monetary policy in general. But we will be talking 

about that as we go forward. 

Mr. LANCE. And, obviously, we do not favor monetizing the debt. 

I understand your point that you do not believe you are doing that. 

But we do have concerns in that regard; I have concerns in that 

regard. And I certainly look forward to working with you in that 

area. 

And, finally, Mr. Chairman—and then I will yield back the balance of my time after your response—how much, at the moment, 

are we in the hole regarding AIG and what you have done regarding AIG? 

Mr. BERNANKE. We have currently about $45 billion that we 

have lent directly to AIG, which I believe is well-secured. And we 

have less than $40 billion that has been lent to two Maiden Lane 

facilities which are holding securities which are underwater. And 

I don’t know the exact number, but it is several billion dollars. 

Mr. LANCE. Thank you. If you could get back to us through the 

chairman, I would appreciate it. 

Mr. BERNANKE. Certainly. 

Mr. LANCE. Thank you, Mr. Chairman. I yield back the balance 

of my time. 

The CHAIRMAN. Next—I have to apologize, I forgot that the seniority system here was designed by the choreographer of the 

Bunny Hop, and it goes this way. And I made a mistake. I told you 

I was getting old. So I am now at the gentlewoman from Wisconsin. 

Ms. MOORE OF WISCONSIN. Thank you, Mr. Chairman. 

32 

And thank you. 

I was really pleased to see in your testimony, under the regulatory reform section, that you realize that systemic risk is not just 

too-big-to-fail institutions, but activities and practices that provide 

systemic risk. 

Many of us—and, certainly, this article was given to me by Congresswoman Maxine Waters—have been reading the recent Rolling 

Stone article by Matt Taibbi, ‘‘The Great American Bubble Machine.’’ And while it is very critical of a particular firm, I think 

there are things that we all notice with respect to the housing bubble and the dot-com bubble and the oil bubble that all seem to be 

activities that seem to be systemic risks. For example, allowing an 

entity to sort of manipulate the price of an entity, of the housing 

prices, to ratchet the prices up and then just sort of hedge against 

their own products. 

So I guess I would like to ask your opinion about credit default 

swaps and also the practice of spinning, where executive compensation seems to be a systemic risk factor, as well. So can you tell us 

what we can do in our regulatory reform to prevent the creation 

of these bubbles? 

Mr. BERNANKE. Well, on the credit default swaps, there are a 

number of measures that have been proposed. One important step 

would be to get the majority of them standardized and traded on 

a central counterparty or an exchange, which would eliminate the 

risk that the seller of the CDS would not be able to make good, 

which is what happened with AIG, for example. So that is an example there. 

On executive compensation, I should let you know that the Federal Reserve is going to be proposing later this year guidance on 

executive compensation which will attempt to clarify that compensation packages should be structured in such a way as to tie reward to performance and to be such that they don’t create excessive amounts of risk for the firm. 

Ms. MOORE OF WISCONSIN. Thank you. 

With respect to standardizing, we are told by the smartest of 

these people that we just have to have customized the products, 

that it is just really going to be harmful in the marketplace if everything has to be standardized. What would be your advice on 

that criticism? 

Mr. BERNANKE. There are probably some products that, to be 

useful, need to be customized. But we should make sure that dealers or banks hold sufficient capital against them to make it attractive to move them onto exchanges and to standardize them whenever possible. 

Ms. MOORE OF WISCONSIN. Okay. Thank you. 

With respect to what we can’t unscramble, many of my colleagues have already talked about Gramm-Leach-Bliley and the 

CFTC reform. And here we are talking about too-big-to-fail, all 

these institutions that are allowed to perform several functions. 

What, in your opinion, can we not unscramble in order to continue to be innovative and profitable? What cannot be unscrambled? 

Mr. BERNANKE. Well, I don’t think I would break firms down to 

their elementary components; you know, commercial banks can 

33 

only loan and take deposits, for example. There are lots of benefits 

to having multiple services provided by one institution, or global 

services provided by one institution. But I do think we need to take 

considerable care that we are not creating institutions which are 

imposing risks on the broad financial system. 

Ms. MOORE OF WISCONSIN. Okay. So I have just one more question. Many of my Republican colleagues are critical and concerned 

about the Fed taking on the role of the systemic risk regulator, and 

then there are people like me who are undecided. 

And when I looked at the last page of your testimony and you 

say that you don’t want as much auditing of the Fed because it 

may interfere with your independence, I have to ask you why you 

think, then, that you should be able to perform the tasks of monetary policy and how that will not compromise your policy independence. I mean, you know— 

The CHAIRMAN. If the gentlewoman wants an answer— 

Mr. BERNANKE. Yes, independence varies. We have been supervisors for a long time, and we have all the same examinations, all 

the same oversight that the other supervisors have. 

Monetary policy is a special area which I would just put on the 

side here. But in terms of our systemic oversight and supervision, 

we would have exactly the same oversight that any other supervisor would have. 

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

Mr. ROYCE. Thank you, Mr. Chairman. 

Chairman Bernanke, the last time that you appeared we had an 

opportunity to talk about the budget deficit. And one of the things 

you said, which I think was very impactful to me, you said in response to a question I asked, ‘‘Certainly, trillion-dollar deficits as 

far as the eye can see would not be sustainable.’’ 

And we had the CBO Director, Mr. Elmendorf, he came out with 

his own analysis, which you are familiar with, sort of sounding the 

alarm. And he had a couple of observations. One, he said with respect to the growing expanse of the government at the expense of 

the private sector, he made some observations in terms of squeezing out in the future economic growth on the private-sector side. 

And then he said about the costs—for example, the health care 

bill that is moving, he said that legislation significantly expands 

the Federal responsibility for health care costs. He said, ‘‘The way 

I would put it is that the cost curve is being raised.’’ And he went 

on to express his concerns. 

I think one of them is, in the middle of a recession, we see the 

government shifting. We have a government-run economy, basically, or we are beginning to move in that direction, and the deficits are appreciably higher. You know, perhaps the deficits could 

reach as high as $2 trillion for the short term. 

Earlier this year, the CBO projected that the Federal Government would need to go out with $2 trillion in treasuries in order 

to fund the deficit. And that was the short run. If you combine 

short and long term, they were talking $4.5 trillion over the next 

2 years. 

The bond market has never seen such a large bond issuance in 

such a short period of time. So I was going to ask you about your 

perception on the ability of the bond market. Can we float that 

34 

much, $4.5 trillion over the next 2 years? What will the results be 

on that? 

And do you have a concern with the pace at which government 

is growing relative to the private sector here and the added responsibilities on the public purse that Congress is in the process of enacting? 

Mr. BERNANKE. I think the ability to float large amounts in the 

short to medium term depends on the credibility of a longer-term 

plan that brings the deficits down. If the markets don’t think that 

you are on a sustainable path, then they will bring forward in time 

their concern about future deficits. So it is important to have, as 

I said before, a medium-term sustainability plan. 

I must say one thing about health care costs, which is that is the 

most important determinant right now of our long-run fiscal situation. And even under the status quo, we have a very serious problem, and so, we do need to address that problem in some way. Because, given the aging of our population, the increases in medical 

costs are going to be a huge burden on our fiscal balance. 

Mr. ROYCE. Well, on that very subject, here is what the head of 

the CBO said about that. He said, ‘‘As a result of those deficits, 

Federal debt held by the public is going to soar from 41 percent of 

GDP to 60 percent at the end of the fiscal year 2010. This higher 

debt results in permanently higher spending to pay interest on that 

debt. Federal interest payments already amount to more than 1 

percent of GDP. Unless current law changes, that share will rise 

to 2.5 percent by 2020.’’ 

And he says, ‘‘The Federal budget is on an unsustainable path 

because Federal debt is going to continue to grow much faster than 

the economy over the long run, and large budget deficits would reduce national saving, leading to more borrowing from abroad and 

less domestic investment, which, in turn, would depress economic 

growth in the United States. Over time, accumulating debt would 

cause substantial harm to the economy.’’ 

‘‘Substantial harm.’’ Do you agree with the CBO’s estimate on 

that subject of accumulating that amount of debt? 

Mr. BERNANKE. If fiscal policy stays on an unsustainable path, 

I do agree with it, yes. 

Mr. ROYCE. Thank you very much, Chairman Bernanke. I appreciate your testimony here today. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Florida. 

Mr. KLEIN. Thank you, Mr. Chairman. 

And thank you, Mr. Chairman, for being with us today. 

I am going to bring the conversation back to what I continue to 

believe are the most current issues, and that is home foreclosures 

and lending to businesses. 

I have been a believer from the beginning that, when we started 

this process on dealing with the recession and dealing with the 

banking crisis, I think you and others said we need to deal with 

both, you can’t do one without the other, can’t make the investment 

in the recovery without making liquidity available to businesses, 

and you can’t fix the banks without stimulating and getting things 

moving on the private side. 

35 

What I also believe, and I support your position, is that we are 

going to have a slow, maybe a little bumpy recovery, but it is probably moving in the right direction. And what our goal, of course, 

as people in the public and private side, is to mitigate or reduce 

the amount of time it takes for the natural cycles to work their way 

through. 

That being said, I am from Florida, as you and I have talked 

about, and we are in a very precarious time. The banks are overexposed, in many ways. The residential markets are overexposed. 

And we do not see enough activity, movement. And that is speaking to Realtors on short sales and workouts and things like that 

on the residential side; and on the business side, real estate and/ 

or business, the lending practices. 

And there is a lot of frustration out there, maybe justified, maybe 

not justified, but certainly intuitively justified, that banks that received Federal assistance—and maybe they are in a separate category—but that they have a higher responsibility to work out this 

scenario. Nobody is pushing them to make unreasonable and unjustified underwriting decisions. But they really are not part of the 

process of solving the problem. 

Specifically on the foreclosure area, I think it was the Federal 

Reserve of Boston, did a paper that talked about 3 percent of the 

serious delinquent loans have been resolved since the 2007 period 

of time. That obviously is not working in any successful way. 

Can you share with us, whether it is the Federal Reserve or 

whether just your general experience, what we can do to deal with 

the foreclosure—what can we do to stimulate the banks to help 

work this out on a much more efficient, much more quick basis? 

Mr. BERNANKE. Well, we have a couple of government programs 

in place, as you know, the Making Homes Affordable Program 

using the TARP money, and the HOPE for Homeowners Program, 

which are different principles. One reduces payments; the other addresses the principal. Those programs are slowly ramping up. So 

I think it would be important to try to get that moving as quickly 

as possible. 

The bank regulators have been pushing the banks to expand 

their staffs and to be more responsive. We have heard from many 

consumer groups, for example, that banks are sometimes very slow 

in responding to requests for short sales or requests for modifications. 

So I think it is very important that the banks increase their capacity and move as quickly as possible to take advantage of these 

programs or other ways of working out borrowers and avoiding preventable foreclosures. 

Mr. KLEIN. I agree. But what can the Federal Reserve do, if anything, or through your relationships with FDIC or others? 

Mr. BERNANKE. Well, the Federal Reserve doesn’t oversee many 

of the big servicers who have large numbers of these mortgages. 

But we are working with our fellow bank regulators. We issued a 

statement in November, and we are working with the Federal bank 

regulators to try to push the banks to move more quickly and expand their capacity to work out loans. So I think that is very important. 

36 

The Fed is also working with communities. We have some 

projects to try to stabilize neighborhoods that are suffering from 

large numbers of foreclosures. But I think it is very important that 

the banks which are the servicers get involved as quickly as possible to work with these borrowers. 

Mr. KLEIN. You know, on the short sale issue, that is something 

that we had been told a while back there was going to be a streamlined process, which, you know, banks would have a uniform process, uniform documentation, could move a lot quicker. And I just 

wrote a letter to follow up on this. It doesn’t seem to be happening. 

So I guess I would just ask, as we move forward—and I understand we have programs out there, and they are working marginally. We just have to ramp this up in terms of voice, substance, and 

effort, and do that. 

Secondly, in the small business area, again, small businesses, 

particularly in my area and south Florida and other parts of the 

country, drive the train. And they will be probably the quickest 

ones to be able to respond. 

We understand unemployment lags, but there is this timeframe 

which is a cash-flow issue to work through a slow period. In Florida, we have a non-season point in time, where businesses need 

that ability to get through. And, again, they are having a difficult 

time, even what I would consider creditworthy people. Their ability 

to pay is there and otherwise. 

So if you could just quickly comment on that. 

Mr. BERNANKE. No, I agree. And we are working on that. We 

have in our TALF program a Small Business Administration loan 

program which is trying to provide funding for those loans, trying 

to help in that way. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Chairman Bernanke, welcome. 

In Chairman Frank’s questioning of you earlier, he asked about 

the positive aspects of the stimulus bill that was passed early in 

February. I believe what I heard you say is that you believed it had 

some marginal improvement on State and local tax revenues and 

some marginal improvement on consumer spending, but you were 

reserving judgment. 

Is that a fair assessment of what you told this committee? 

Mr. BERNANKE. We are still pretty early in the execution of this 

program. 

The CHAIRMAN. Would the gentleman yield? 

Mr. HENSARLING. I would be happy to yield to the gentleman. 

The CHAIRMAN. The word ‘‘marginal’’ was never uttered. He 

didn’t say ‘‘marginal.’’ The gentleman can read the report. It 

doesn’t say ‘‘marginal.’’ 

Mr. BERNANKE. It has had some effect, we believe. 

Mr. HENSARLING. Okay. It has had some effect. Okay. Well, the 

chairman has said ‘‘some.’’ So I appreciate the chairman’s distinction. 

Clearly, what you didn’t mention, as far as positive impacts, was 

employment. We know that, since this legislation has passed, that 

unemployment is now at a quarter-of-a-century high, that 2 million 

37 

jobs have been lost. Some believe that there is cause and effect on 

adding $1.1 trillion to the national debt. 

And on page 6 of your testimony, again you state, ‘‘Unless we 

demonstrate a strong commitment to fiscal sustainability, we risk 

having neither financial stability nor durable economic growth.’’ 

I have noticed, and please tell me if I am incorrect, the latest 

FOMC report indicates or estimates that we are looking at 9 to 10 

percent unemployment not only for the rest of this year, but for the 

rest of next year, as well. 

Did I read that report correctly? 

Mr. BERNANKE. That is right. 

Mr. HENSARLING. Okay. So, 9 to 10 percent unemployment. And 

this estimate is up from your earlier report. Is that also correct? 

Mr. BERNANKE. That is right, the one that was made in January. 

Mr. HENSARLING. Okay. I guess, Mr. Chairman, then the question is, yes, I would hope that if one committed $1.1 trillion, when 

you add in debt service, some good would come from it. Now, clearly, it hasn’t happened on the employment front. 

But I am also concerned that, no matter what the positive aspects are, without the strong commitment to fiscal sustainability, 

might it be possible that whatever short-term good comes out of 

that legislation is going to be outweighed by long-term damage, as 

many economists believe? 

Mr. BERNANKE. The deficit is obviously an issue. We have to 

worry about the long-term debt ratio, certainly. 

Mr. HENSARLING. In that regard, Mr. Chairman, as you know, 

Capitol Hill, Congress is considering health care legislation. Clearly, I think all Americans agree that the status quo is unsustainable 

over the long term. 

The legislation that is presently before Congress, CBO Director 

Elmendorf has said, ‘‘We do not see the sort of fundamental 

changes that would be necessary to reduce the trajectory of Federal 

health spending by a significant amount. And, on the contrary, the 

legislation significantly expands the Federal responsibility for 

health care costs.’’ He goes on to estimate essentially the table 

stakes cost of the program, if you will, at $1 trillion. 

Now, again, I would hope that some benefit would come from 

that program. But, one, do you agree with Director Elmendorf’s assessment, if you have looked at the cost of that legislation? If you 

haven’t, assuming he is correct, would you be concerned about the 

impact that this would have on our Nation’s commitment to fiscal 

sustainability? 

Mr. BERNANKE. I have not done an independent evaluation of the 

cost. I think, as I said earlier, that a critical element of fiscal sustainability in the long term is the cost of health care and the fiscal 

share in health care costs. So whether we adopt a new program of 

reform or whether we stick with the status quo, I do think we need 

to address that 2.5 percent faster than per capita income growth 

and per capita health care costs. 

Mr. HENSARLING. Mr. Chairman, in your most recent survey of 

small businesses finances, I believe the Federal Reserve indicated 

that approximately 77 percent of small business owners use credit 

cards. A recent report in USA Today has indicated that in the first 

4 months of this year alone, we have seen a 38 percent drop in the 

38 

issuance of new credit cards. Now, presently Congress is considering legislation aimed at consumer financial products. But given 

that a large number of small business owners use credit cards for 

business purposes, might an unintended consequence of the wrong 

legislation lead to a further contraction of credit to small business? 

Mr. BERNANKE. Well, I hope that small business can move to 

somewhat less costly forms of credit over time. 

The CHAIRMAN. The gentleman from Illinois. 

Mr. FOSTER. The title of this hearing involves monetary policy, 

but the subject seems to be the overall health of the economy. And 

I am struck by the underemphasis in this discussion of the importance of the real estate market, which I believe was the dominant 

driving force in this economic downturn. Much more wealth has 

been destroyed by the drop in real estate values than in the stock 

market or the near collapse of our banking system. And the same 

was also true of the Great Depression, where more wealth was destroyed in the real estate bust following the stock market crash 

than the stock market crash itself. And so I have sort of two questions along these lines. 

First, do you think it might be appropriate to have more information in future releases of this about the real estate market and projections? And also, if you could say a little bit about what the Fed 

does in terms of projecting. How much manpower do you put into 

looking forward projections of the real estate market, given what 

I believe is of extreme importance to future economic conditions. 

Mr. BERNANKE. No. I agree it is very important, and I am surprised that we don’t have much coverage. I think we certainly do 

put a lot of resources into projecting construction, house prices, 

land prices, and the like. And I agree, it is very important. 

Mr. FOSTER. And the second point is, do you think that the Fed 

is necessarily helpless to mitigate future real estate bubbles? For 

example, in this week’s Economist Magazine, they discuss China’s 

response. And of course, as you know, they are pushing very heavily on monetary policy and credit availability and so on, but at the 

same time, to avoid reinflating a real estate bubble they are turning up the mortgage origination requirements. You now have to put 

40 percent down and so on, and so that they are independently operating both of those. 

Do you think that actually there is a reasonable role for the Fed 

or some other regulator to try to make this happen? 

Mr. BERNANKE. I think that could be addressed under the systemic risk regulation rubric that we have been discussing with the 

Council or with the Fed overseeing large financial institutions, that 

when you have an asset whose prices is rising quickly, you could 

require greater capital against it, for example, or greater 

downpayments. So even if you don’t know there is a bubble or not, 

that still might be a prudent thing to do. So I do think that looking 

at asset price fluctuations in a supervisory context could be very 

helpful. 

Mr. FOSTER. Thank you. I yield back. 

The CHAIRMAN. If the gentleman would yield to me, I did want 

to then continue a couple of points. 

One, I would ask you, Mr. Chairman, on page 16 you mentioned 

that the emergency unemployment that we adopted last year has 

39 

ironically contributed to a higher unemployment number in terms 

of the rate because it has increased the participation rate. I think 

people ought to be clear about that. The unemployment rate goes 

up when more people are trying to find jobs. Would it be possible 

to get an estimate of the extent to which that was statistically a 

factor? 

Mr. BERNANKE. We can send it to you. My recollection is about 

a half a percentage point. 

The CHAIRMAN. That is interesting, a half percent of the 9.5 percent. 

Secondly, I did just want to reiterate. Our friend from Texas said 

in two cases, said there were marginal improvements. The word 

‘‘marginal’’ doesn’t appear even in the margins here. It is certainly 

not in the text. 

So on page 1 of the first column there is an unqualified statement that consumer spending has been supported by the 2009 

stimulus. On page 13 it says interest rates have declined because 

investors concerned about credit quality eased with the passage of 

the stimulus plan. It then did say that, in addition to that, it aided 

the finances somewhat. So, or it is somewhat. 

If the gentleman wants the time of the gentleman from Illinois. 

Mr. Bachus. Oh. 

The CHAIRMAN. The gentleman from Illinois yielded me his time. 

So those are both cases. I also remember in response to a question of the gentleman from Texas, sometimes you get answers you 

don’t want. The Chairman said that the passage of the stimulus 

bill had reduced unemployment. So obviously it is not totally the 

answer, but I don’t think it is trivial to object to the insertion of 

‘‘marginal’’ when it was never there in the entry point. 

The other point I want to make is this. The Chairman talked 

about the recommendations they are preparing on executive compensation. I would just note that those will dovetail with the legislation I hope this committee will be adopting next week, because 

we will be empowering the SEC statutorily to enact certain rules. 

And so the information and the recommendation of the Federal Reserve, frankly my sense is that absent our statute there wouldn’t 

be the statutory authority to put all those in effect. So these work 

very well together. We will be giving the SEC the statutory authority, I hope, before the end of the year to incorporate those recommendations. 

The gentleman from New Jersey. 

Mr. GARRETT. Before I begin, let the record therefore reflect that 

there is a significant difference between the definition of ‘‘marginal’’ and ‘‘somewhat.’’ I take away from that. 

Thank you, Mr. Chairman. We have some charts which sort of 

go to this point as far as looking at the economic issues and the 

stimulus issues and how you sort of judge these things. As you 

know, the President’s Economic Policy Advisor has suggested that, 

as soon as this passed, that, quote, it will start adding jobs rather 

than losing them. Majority Leader Hoyer said there will be an immediate jolt. 

And so if you look up, I know it is hard from where you are sitting—great. It is even easier then. This is what the original projections were. With the recovery plan is the dark line on the bottom. 

40 

But if you don’t do anything, things would be worse, the top line 

above there. And that is why, of course, we borrowed $800-plus billion to try to fix it. 

Now, the next slide, slide two, shows what really happened. The 

two other lines are still there, but now you see where the unemployment numbers actually were in March of 2009 and April of 

2009. And we don’t have this on the little screen but we do have 

it on a board to show where it went after March, April. I guess it 

goes up to May and June, if I am not mistaken. I don’t seen it here. 

Basically, what that tells me, not as an economist, just as a layman, that they, as the Vice President said, misread the economy 

and their projections in regard to where things would happen if we 

did nothing or if we had spent $800 billion. And things are actually 

worse than they projected, and we would have been better off, if 

their original charts were right, to have done absolutely nothing. 

So your comment on that—and also, I understand your earlier 

comment when I stepped out of the room was that it is too early 

to tell. When will we be able to tell? And if their focus was on job 

creation, and that was the entire focus in all their comments on 

this was job creation, isn’t that an indicator that we should be able 

to look at here approximately a half a dozen months later? 

Mr. BERNANKE. Well, as Chairman Frank mentioned earlier, the 

economist’s fallback is always the counterfactual: Where would we 

be without the program? And it is difficult to know. 

Clearly, the forecast that was made in January of this year was 

too optimistic. And then the question is, where would we be without the program? And it is very hard to know. Some sense of the 

uncertainty is given by the CBO’s estimate, which has at the end 

of 2010 the impact of the program being anywhere between .6 of 

1 percent unemployment to 1.9 percentage point of unemployment. 

So it is likely that it would reduce unemployment, but the scale is 

very hard to know. And we should know better next year, but it 

is very early at this point. 

Mr. GARRETT. I fear then that the argument on the counterfactual will always be the argument that will always be thrown up to 

us to suggest that maybe there was a better way. And even a year 

from now, or a year-and-a-half from now, when we get into the last 

dollar going out the door, they will always say it could have been 

worse. So how would you retort to that argument? 

Mr. BERNANKE. You have to use the best analysis that you can 

get. To the extent that you are seeing outcomes unrelated to unemployment that are worse that you expected, that is indicative that 

the whole economy is worse than you expected. But I am sympathetic to the fact that it is very hard to know what the impact is. 

Mr. GARRETT. And so any discussion right now as far as going 

forward with additional spending or additional stimulus would also 

therefore be too early to make those suggestions as well? 

Mr. BERNANKE. That is right. 

Mr. GARRETT. Let’s change subjects and go to the issue of monetary policy. I know in your report today and in your op ed as well, 

and you have previously stated that you have concerns about the 

independence of the Fed both on monetary policy and your other 

regulatory roles as well; therefore, you do not like the idea of audits and what have you, intrusive audits on various other aspects 

41 

of the Fed than it has right now. I would just suggest that, in two 

areas, that maybe the Fed over its history has not been as independent as some would suggest. In the area of monetary policy, I 

know we have had this chairman on at least a half a dozen occasions encourage that the Fed, both the current Fed and the previous Chair, lower interest rates to keep the economy going, what 

have you. And of course you have heard a number of economists 

who make the argument that it was the low interest rates that 

helped either cause or at least exacerbate the problem. So there is 

one area where Congress and at least the chairman is trying to 

weigh in and influence the Fed. And certainly the other areas on 

the regulatory role and the consumer protection area, for about 8 

years under Republican leadership we took a position that was not 

the appropriate position to try to better the economy. Then, under 

2 years of Democrat leadership and what some would say is a 

pounding on the Fed in this area to go in that direction, suddenly 

the Fed goes in that area. 

So is it fair to say that the Fed may not be, even under current 

constrictors, as totally independent that some would suggest that 

it is? And do you think that it is helpful for the Congress to weigh 

in on setting monetary policy and setting consumer policy as well? 

Mr. BERNANKE. On monetary policy, we do not take political considerations into account. We look only to the economy. You have 

the transcripts 5 years later. You won’t see any discussion of politics. And I assure you that we make those decisions based on the 

long run health of the economy. 

On regulation, I think the rules are somewhat different in the 

sense that Congress sets statutes, and those statutes create presumptions for what the regulators are going to do. With respect to 

regulatory policy, our independence is important, but it is not to 

the extent that monetary policy independence is. We have a similar 

relationship as other supervisors and regulators do to the Congress. 

The CHAIRMAN. The gentleman from Minnesota. 

Mr. ELLISON. Thank you, Mr. Chairman. 

Thank you, Chairman Bernanke. I appreciate you being here and 

your work. 

If the Federal Reserve is given the authority to oversee systemically significant firms, what additional powers would it need to 

completely and successfully carry out those duties? For example, 

what about the authority to review accounting policies, particularly 

those who direct and potentially procyclical implications on banks? 

And what about enhanced authority to examine the safety and 

soundness of nonbank subsidiaries within bank holding companies? 

And what about oversight of credit rating agencies? 

Mr. BERNANKE. The Fed would need some authority perhaps in 

conjunction with the council to add capital liquidity and other requirements to make sure that the institutions were not only safe 

and sound but did not pose a risk to the broader financial system. 

As part of that, the Fed would need some enhanced authority to 

look at nonbank subs, as you mentioned. 

The other things that you mentioned, like accounting policy and 

credit rating agencies, would not be part of this. Those are the kind 

of things that the council would be responsible for looking at. 

42 

Mr. ELLISON. I introduced a bill that would give the Federal Reserve oversight over credit rating agencies when they analyzed the 

rating structure of financial products. This authority would build 

upon powers that the Fed has already assumed as part of the administration of the TALF program. Do you have any reaction to 

that? 

Mr. BERNANKE. Well, currently the SEC has those authorities, 

and I guess I would like to get your judgment about why you would 

want to transfer them. 

Mr. ELLISON. Well, because they have an important—the Fed 

does have, is looking to, perhaps would take on some responsibility 

of systemic risk, and clearly credit rating agencies have an important role to play in that regard. So my thought would be if we are 

going to address, if we are going to confer this authority with the 

Fed, don’t they need all the tools that would be necessary to 

achieve their ends? 

Mr. BERNANKE. As I indicated earlier, we are not asking for, the 

Administration is not asking for, broad-based authority over the 

entire system. It is a very specific limited set of authorities over 

the systemically critical firms, which is similar to our current umbrella supervision authority. So the broad issues that you are referring to I think would be better served by being looked at by a council of regulators. 

Mr. ELLISON. Do you believe that inflation concerns are misguided, given the large quantity of excess reserves in the banking 

industry? 

Mr. BERNANKE. I think they are misguided in the sense that we, 

as I have described today and in various other contexts, the Federal Reserve is able to draw those reserves out and raise interest 

rates at an appropriate time to make sure that we don’t have an 

inflation problem. 

Mr. ELLISON. Should Congress consider setting a leverage ratio? 

Mr. BERNANKE. That is something we should look at. I think 

there is room here for the regulators, the Treasury and others, the 

Congress, to think about our capital regulation plan and see what 

changes might be made. But I wouldn’t want to give an offhand 

comment on that. Of course we already have a leverage ratio, but 

the question is whether to raise it or change its format in some 

way. 

Mr. ELLISON. I would like to ask you about consumer protection 

issues. Ed Yingling of the American Bankers Association indicated 

that consumer protection in the financial system, safety and soundness are two sides of the same coin. But I wonder sometimes if that 

coin sometimes is at odds within itself, because it seems to me that 

if you take, for example—and I used this example before—overdraft 

fees. I think a safety and soundness regulator might not be distressed about what I would call excessive overdraft fees, because 

that means profitability and a stream of income for the bank, 

which would make the bank more safe and sound. But from a consumer standpoint, it could present some real issues. You know, $35 

for a bounced check might—I think some consumer advocates 

might find that excessive. 

So then, and this is an example and I know that there are many 

others in which the consumer, a consumer advocate and a prudenVerDate Nov 24 2008 12:05 Feb 04, 2010 Jkt 053244 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\53244.TXT TERRIE
43 

tial regulator might see things very differently. Do you see a conflict between, say, what a consumer advocate, a consumer advocate 

might look at and feel is important and that of a safety and soundness regulator? 

Mr. BERNANKE. On that particular example, the Fed has taken 

a number of actions about overdraft fees, even though we are also 

a safety and soundness regulator. I think there are also examples 

where consumer protection and safety and soundness are complementary. An example would be underwriting standards. Good 

underwriting standards, well documented, making sure there is 

enough income, those sorts of things, that is good for safety and 

soundness and it is also good for the consumer. So there is also situations where there they are complementary. 

Mr. ELLISON. And— 

The CHAIRMAN. The red light means time is up. The gentlewoman from Illinois. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Thank you for being here, Mr. Chairman. You talked a little bit 

about the TALF program and said that it was off to a slow start. 

What are the expectations and the benchmarks with the TALF facility? Will it be sufficient and timely enough to facilitating private 

investing and lending? Or are you considering other programs? 

Mr. BERNANKE. The amount loaned is lower than we expected, 

but I wouldn’t say it is off to a slow start because it has been very 

effective. We have consumer asset-backed securitizations at almost 

the same levels they were before the crisis and considerable improvement in the spreads in those securities. We have just begun 

the commercial mortgage-backed security program, so it is a little 

early to judge there. But we have seen even in that category, we 

have seen the spreads come in, the rates come down. So I do think 

that even though the amounts loaned are not that enormous, there 

have been benefits in the market. So I think we will continue to 

focus on that instrument. 

Mrs. BIGGERT. I think that with the securitized lending, how do 

you plan to address the reality? I think that there have been some 

that have flagged that the market experts and some of the participants that the markets need to know now and not at year’s end 

whether the programs will be extended in order to see any usefulness in the next several months. Would you agree with that statement? 

Mr. BERNANKE. We will certainly want to give the markets plenty of advanced warning. You are absolutely right there. And we are 

looking at that and making a judgment. 

Mrs. BIGGERT. And how do you address the commercial real estate? You talked about that as being— 

Mr. BERNANKE. Well, one of the main problems with commercial 

real estate finance is that commercial mortgage-backed 

securitization was an important source of funding for that commercial real estate, and that has completely shut down. Our TALF program is now accepting both new and legacy CMBS. It takes a bit 

of time to put those deals together, and so we haven’t quite yet 

seen the scale that we anticipate, but we are hopeful that that will 

be at least one contributing factor to improving the commercial real 

estate market. 

44 

Mrs. BIGGERT. So have you contemplated extending the TALF 

program? 

Mr. BERNANKE. We are looking at some alternative assets, but 

they are very complex, many of them, once you get beyond the categories we have already included. 

Mrs. BIGGERT. So if you go to that, then will you not extend the 

TALF program, if you go to these others? 

Mr. BERNANKE. We may not. It depends on our judgment on 

some of the alternative asset classes that we are currently reviewing. 

Mrs. BIGGERT. Thank you. Then it is my understanding that we 

talk so much about small businesses as being the basis of jobs and 

about 60 to 80 percent of the net new jobs according to the CBA’s 

Web site. If this is the case, what is going to be the effect of requiring small businesses to pay for the health care program? In other 

words, if they pay as individuals the rates, how is this going to affect the health care for small businesses? And shouldn’t we be providing incentives for small businesses to grow rather than to have 

to have a tax increase in effect? 

Mr. BERNANKE. All else equal, if you raise taxes on a particular 

kind of firm, that will be detrimental to the firm. But I think, in 

fairness, you have to look at the overall issue, which is how to provide broad-based health care. And there is a problem, which is that 

a lot of small firms don’t offer health care. And then the question 

is, how do you provide that? So there is an issue of financing that, 

and maybe there are alternative ways to do that. 

Mrs. BIGGERT. But isn’t it going to be that the small businesses 

would actually have much less chance to do it if they are having 

to have increased taxes to pay, the amount of money if they are 

making over—I don’t know what it is now, between $250,000 or $1 

million, whatever is going to be the amount. 

Mr. BERNANKE. If there are extra costs, that would be obviously 

a cut into profits. 

Mrs. BIGGERT. Thank you. Thank you for being here. I yield 

back. 

The CHAIRMAN. The gentlewoman from California, Ms. Speier. 

Ms. SPEIER. Thank you, Mr. Chairman. 

Mr. Chairman, thank you for your service. I know you have 

spent a lot of time up here in a number of hearings in Government 

Oversight among others, and we have been tough on you. And I 

want you to know that even though we have been tough, I truly 

respect what you have done over the last 12 months. I think you 

are a man of good will and good faith, and we are indebted to you 

as the American people. 

Let me ask you this question. Are we enduring the greatest 

world depression right now? 

Mr. BERNANKE. This is the worst global recession in the postwar 

period. It is not as great as the 1930’s, but since World War II, yes. 

Ms. SPEIER. The $700 billion of TARP money, you indicated that 

we are underwater with AIG and Bear Stearns. How much can the 

taxpayers expect to have returned to them of the $700 billion? 

Mr. BERNANKE. I was referring to the Fed loans and not to the 

TARP. But TARP is also underwater, probably, in AIG. 

45 

I don’t know the answer. We have of course $70 billion just paid 

back. It is much more complicated now because, as you know, the 

TARP money is being used for a number of different purposes, including foreclosure avoidance and the auto companies and so on. So 

it is hard for me to make a judgment. I would say that of the 

money put into, as capital into banks, particularly through the capital purchase program, which is money given out to healthy banks, 

I would say that virtually all of that money will come back. For 

troubled firms like AIG, it depends on how markets evolve and how 

the firm does going forward. 

Ms. SPEIER. You said earlier that you didn’t really think GlassSteagall, if it were in place, would have protected us from all that 

took place. However, it would have protected us from the debacle 

at AIG, and the taxpayers would not have had to put up $200 billion. That is true, is it not? 

Mr. BERNANKE. I don’t think so. Glass-Steagall separates commercial banking and investment banking. I don’t think it would 

have prevented AIG from— 

Ms. SPEIER. Well, AIG is an insurance company. And the only 

way it was able to then move into credit default swaps was by purchasing a thrift in Delaware that then gave it the opportunity to 

play in that marketplace. 

Mr. BERNANKE. I would have to check on the legalities. They 

were treating, they were calling credit default swaps a form of insurance. So maybe they would have argued it was a type of insurance and therefore fell under their purview. 

Ms. SPEIER. It wasn’t regulated by insurance commissioners 

around the country. It was really regulated through the Office of 

Thrift Supervision, was thrift supervision, so therefore it was the 

banking entity that was really the regulator for it. 

There is a hearing we are going to have this afternoon on what 

is too-big-to-fail, and one of the individuals who is going to testify 

makes the statement that for companies that are under $100 billion as a rough threshold, that we can allow them to fail without 

it creating havoc in our financial services industry. Would you 

agree with that? 

Mr. BERNANKE. I wouldn’t want to give a single number. I think 

it depends also on the complexity and interconnectedness of the 

firm, and it also depends on what is happening in the broader markets. There may be be times of stability when a firm can fail and 

wouldn’t cause broad problems, but during a period of intense instability letting the firm fail would be a problem. So I hesitate to 

give a single number. 

Ms. SPEIER. But is that around the threshold, would you say? 

Mr. BERNANKE. Again, I don’t want to give a single number. I 

think it is a multi-dimensional question. It depends on a number 

of different things. 

Ms. SPEIER. Now, Bank of America is $2.3 trillion in assets now. 

It is too-big-to-fail, isn’t it? 

Mr. BERNANKE. The government intervened, provided TARP 

money in January. 

Ms. SPEIER. Well, it is a definition of a company that is too-bigto-fail, because we have injected much money into it. Correct? 

46 

Mr. BERNANKE. Yes. And, again, I think it is very important for 

us to have a resolution regime that will avoid that problem in the 

future. 

Ms. SPEIER. So how do we make these financial institutions, because there is a handful of them now because there has been concentration in the marketplace because of the failures. How do we 

make these companies smaller? 

Mr. BERNANKE. If you impose both the consolidated supervision 

of the Fed or another authority over these firms and make them 

bear the cost of their size through extra capital liquidity and risk 

management requirements, first, and secondly, if you have a resolution regime which allows the possibility that creditors could lose 

money if the company failed, then both of those things would tend 

to make being big less attractive because, on the one hand, you 

have to bear more capital requirements, and on the other hand, 

you don’t get the cheap financing that you get from being too-bigto-fail. 

So those things would tend to make firms choose to be smaller. 

And in addition, supervisors could choose to tell firms that they 

needed to limit certain activities if they thought it was a danger 

to the broad system. 

Ms. SPEIER. My time has expired. 

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

Mr. MARCHANT. Thank you, Mr. Chairman. 

We have had an interesting phenomena where we had several investment banks and broker-dealers that decided to become bank 

holding companies and banks. Is there a possibility that these bank 

holding companies and banks can make another decision to go back 

to be only broker-dealers and investment banks? And does the Fed 

have any control over their decision to do that? And what would 

be the implications of that? 

Mr. BERNANKE. They could do that. And if they did, the Fed 

would no longer be their supervisor. One of the benefits of the idea 

of determining that a certain set of firms are so-called Tier 1 firms 

is that if you were one of those firms you couldn’t escape. You 

would still be supervised by the Fed no matter what your charter 

was. 

Mr. MARCHANT. So that would be a very important part of the 

reform package? 

Mr. BERNANKE. That is right, to avoid that problem. Yes. 

Mr. MARCHANT. With the savings rate at 8 percent and going 

possibly to 10 and the strong demand for treasuries, is it possible 

that the Fed could make the decision to divest itself of the treasuries and the government securities that it has been buying as long 

as that savings rate and that demand for treasuries remains high? 

Mr. BERNANKE. We don’t have any near-term plans to divest ourselves. The Fed normally has on its balance sheet a considerable 

amount of treasuries. And, as I mentioned, the purchases we are 

making right now will only bring us back to somewhere where we 

were a few years ago. 

Mr. MARCHANT. Is it possible that we would have treasury rates 

low and interest rates low, and inflation raise its head, and we 

could actually be in the place of having to raise interest rates without there being any employment gains? 

47 

Mr. BERNANKE. Well, one concern that we always have to pay attention to is if there were for some reason a loss of credibility, 

which might come about because of loss of independence of the Fed, 

and inflation expectations rose for no reason connected to the economy but just because of investors thinking that inflation is going 

to be higher. That would pose a serious problem for the Fed because it would require us to respond to that to avoid its being 

transmitted into actual inflation. And that could be happening at 

a time when the economy had not yet recovered. So inflation expectations and the credibility of the Fed are actually very important. 

Mr. MARCHANT. Is there a time in financial history since the 

Great Depression where you actually had consumer spending and 

the savings rate go up simultaneously? 

Mr. BERNANKE. That is unusual but it is not impossible. If income is rising fast enough, then you can both save more and consume more. But normally when savings rates go up, people are obviously cutting back on their spending. 

Mr. MARCHANT. Thank you. 

The CHAIRMAN. The gentleman from Idaho, Mr. Minnick. 

Mr. MINNICK. Mr. Chairman, I wanted to return to the next shoe 

to drop and the chairman’s concern about commercial real estate. 

Would it be possible to provide a new assist providing liquidity for 

lenders and a floor to deteriorating market values by giving authority, statutory authority to Freddie Mac, Fannie Mae, or perhaps a 

new agency to guarantee loans of developed property, perhaps at 

75 percent of the lower of today’s active market fair market value, 

or today’s replacement value using today’s real estate and construction costs, and perhaps a similar guarantee for yet to be developed 

property at perhaps 50 percent of the lower of those two values? 

The advantage of this would be to prevent bankruptcy of commercial developers and commercial property owners who are unable to 

secure, take out financing, or to get development loan renewals, to 

reduce the downward pressure on rental rates of commercial property by reducing the number and price of distressed property sales, 

and to reduce failure rates of banks and commercial lenders by reducing the size and number of problem nonperforming commercial 

loans? 

I would like your opinion with respect to whether this is something we in the Congress should pursue. 

Mr. BERNANKE. I think you would have to make the balance between helping out this market and the fact that would probably involve some financial risk on the part of the Federal Government/ 

taxpayer. But you might make the determination that it was beneficial on that, so you would have to balance those two things off. 

Mr. MINNICK. But you would not as a matter of sound fiscal and 

monetary policy think that an inappropriate step to take if that 

were to be our judgment in the legislature? 

Mr. BERNANKE. I think it is really Congress’ choice. 

Mr. MINNICK. Thank you, sir. I yield back. 

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

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

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

you are behind the gentleman standing in the front row. I wouldn’t 

want your job for anything in the world right now. I think, and I 

48 

know what you have to say you have to be very cautious about because anything you say could be misread or applied inappropriately 

to the economy. But oftentimes we tend to gloss over I think the 

real situation we are in today. I hear some say that the economy 

seems to be improving. I think we are in far worse shape than people want to recognize and understand truly. I heard people say 

there are signs of stabilization. You didn’t mention that you think 

there has been a peak in unemployment. I guess a peak that has 

gone from 680,000 a month down to 500,000 a month, we are losing 

jobs. That is still significant. And I think as time goes on you are 

going to lose fewer and fewer jobs each month because fewer people 

are going to be able to be laid off. 

But we have gone from the subprime debacle, and it seems like 

now we are going through a second round in the residential, and 

that is individuals who have had good loans. They are losing their 

jobs or business. People are basically running down their reserves 

and they are losing their homes also. But it is an unusual situation. Banks aren’t making loans. And we can say, well, some are. 

But when you talk to people in the private sector, they are having 

a very difficult time getting loans. And I see a different situation 

in banks also don’t want deposits. You go to them with large CDs, 

and they really don’t want to take them. I think they generally accept the liability. 

Savings have increased. I think just because people realize they 

can’t replace the money today if they spend it. I think there is a 

very cautious economy going on out there, and people look at that 

and they are afraid to basically spend their money, and I think a 

certain amount of money are being forced in the stock market because you can’t go to the bank and get anything for your savings. 

But there has been a comment about a perfect storm, and there 

has been some mention about what the commercial real estate 

market is going to be doing. I think I started saying that about a 

year ago. You are looking at about a $6 trillion market out there 

with loans in the commercial sector, and default rates beginning 

this year were about a quarter of 1 percent. Today they are about 

2 percent. I think in the next 30 days, and I know you probably 

don’t want to talk about this, there is going to be a spike in the 

next 3 years. It can go between 12 and 15 percent. I don’t know 

any lenders out there today who want to make loans on commercial 

real estate. 

Now, commercial mortgage-backed securities were about $240 

billion in 2007 sold, last year was about $12 billion, and I think 

you know today they are flat. There are zero mortgage-backed securities and there isn’t a credit flow. 

This year there is about $400 billion worth of commercial real estate that is due. By 2012, that increases to about $1 trillion. What 

honest projection do you see for this commercial real estate market? Now, the economy has really been hit hard with the residential, especially on the subprime. The second round I think is hitting 

and you can see it now. Now, this is going to be dumped on the 

back of the economy. And we have kind of glossed over, but I think 

this is more severe than most people are giving credibility to. 

Could you address that a little? 

49 

Mr. BERNANKE. No, I agree; it is a sector we are paying a lot of 

attention to. The fundamentals are weakening and the financing 

situation is very tough. So we will see some problems there, I am 

sure. We are seeing some banks, if not making new loans, working 

out old ones and trying to extend, for example, the terms of those 

loans. And we also, as I mentioned, have added the commercial 

mortgage-backed securities to our TALF program. And it is too 

early to say how effective that will be, but we have had some success in other types of securitizations. 

So we are making some efforts in that direction, but, again, I 

think that is a scenario we need to play close attention to. 

Mr. MILLER OF CALIFORNIA. And what you said there is very important, we are trying to work out loans. In February of last year, 

I introduced an amendment on the bill to require the Federal Reserve and the SEC to revise mark-to-market to try to deal with 

that. The problem I think we are going to see in the banking industry today, especially with regulators, is the cap rate has gone from 

7 percent in 2006 to about 10 percent today. How are you going to 

deal with a builder or an individual who owns a commercial center 

and owes $14 million on his first? All of a sudden, based on markto-market, it is worth 7 and they only will lend 5. How do you deal 

with that? 

Mr. BERNANKE. It is the same principle as with a borrower. If it 

is cheaper to reduce the payments and to keep the money coming 

in as opposed to getting a foreclosure, then it might be worth working it out. So it really depends. If the borrower can maintain a 

lower level of payments, then it might be in the bank’s interest to 

do it. 

Mr. MILLER OF CALIFORNIA. Are the regulators going to allow 

that bank to extend the 5-year call when that note is due, to extend 

that loan when the loan is 14 million, based on current value the 

loan should be 5? 

Mr. BERNANKE. You take a loss on it. But we are working with 

banks in the residential context to try not to create accounting incentives to foreclose as opposed to work out. The same principle 

ought to apply in commercial real estate. 

Mr. MILLER OF CALIFORNIA. But we are not starting where we 

did with the banks where they had adequate liquidity originally, 

when they got started to get hit with defaults. We are talking 

about banks today that don’t want to lend money. They are trying 

to keep the reserves and they don’t want deposits. They don’t have 

the reserves. 

Mr. BERNANKE. I agree, it is a problem. 

Mr. MILLER OF CALIFORNIA. Thank you. 

The CHAIRMAN. The gentleman from New Jersey. 

Mr. ADLER. Thank you, Mr. Chairman. 

Mr. Chairman, welcome back. 

The CHAIRMAN. Let me just say, we will be able to accommodate 

everybody who is here, and the staff is encouraged to bar any member who tries to come in besides those who are here. 

The gentleman from New Jersey. 

Mr. ADLER. Thank you, Mr. Chairman. 

First, I want to commend you. I think your work with TALF in 

particular has been ingenious, I think very, very helpful in creating 

50 

markets where there was an absence of credit. So I really give you 

enormous credit for trying to provide credit through the Federal 

Government. 

I know you have spoken with a couple of members this morning 

about Federal spending and the potential looming threat it poses 

to our economy longer term. I am hearing from many of my constituents in Ocean County, New Jersey, that they are very greatly 

concerned about that spending pattern, the trajectory of spending 

we are on as a country, and that it may create deficits and Federal 

debt that is sustainable long term, that raises interest rates inevitably as the cost of government financing becomes unbearable. 

Can you revisit this topic with me? I know you have talked to 

some other people about it, but maybe you could allay my concerns 

that it is not a looming crisis facing our country. 

Mr. BERNANKE. I don’t think I can allay your concerns. We are 

going from about a 40 percent debt to GDP ratio before the crisis 

to somewhere 60 or above by next year, and it will probably continue to rise further. 

Putting aside all the issues being discussed now about health 

care reform and so on, just on the prior scenario the Congressional 

Budget Office shows an unsustainable fiscal path going out because 

under current law, there is something on the order of $40 trillion 

of unfunded health care liabilities for the U.S. Government and a 

significant amount also for pensions. 

So, as I was saying earlier, reform is important. We need to 

think about different ways to deliver health care and so on. But we 

do need to think hard about finding ways to control the costs, because the cost of health care is the single most important determinant of the long-term fiscal situation and we really need to address that. Otherwise, we are already in an unsustainable situation. Forget about additional things we might want to do. 

Mr. ADLER. Would you agree that cost containment concept applies not just but in health care context but in the overall government spending context, that we have to at some point level off our 

amount of Federal spending to manage our Federal debt and not 

have it balloon beyond what we can sustain? 

Mr. BERNANKE. Certainly. But health care is particularly problematic because it is 15 percent of the economy, it is a big portion 

of government spending, and because health care costs have been 

rising now for many years at a very rapid rate, much faster than 

the average income. 

Mr. ADLER. Frankly, I very deeply share your concern about cost 

containment being the single most important feature of health care 

reform. So I thank you for that. 

You spoke with the gentleman from California a moment ago 

about liquidity issues. I am aware from studies that we have 

maybe as much as $1.2 trillion of private earnings sitting in banks 

overseas, principally in Europe. I am wondering, knowing that 

there are difficult political questions involving having that money 

coming back in this country, what would you recommend? And 

wouldn’t you agree that having some of that money come back in 

would improve balance sheets for banking institutions in our own 

country and allow them to lend more fully than they have been 

doing over the last number of months? 

51 

Mr. BERNANKE. I would have to know more about the specific 

proposal. I do know that there was a proposal, it was a law passed 

recently that allowed for a period of time repatriation at a tax favored rate, and a good bit of money was repatriated under that 

rule. 

Mr. ADLER. Do you have any sense of how much money might 

be out there that we could bring back in? 

Mr. BERNANKE. I don’t have a number. I am sorry. 

Mr. ADLER. I thank you for your testimony. I yield back the balance of my time. 

The CHAIRMAN. The gentleman from Florida. 

Mr. POSEY. Thank you very much, Mr. Chairman. 

Mr. Chairman, of all the testimony we hear in this committee, 

I enjoy yours the most. You are always very interesting. We have 

an awful lot of academics who come in here and try to convince us 

that a circle is a square and vice versa, and I appreciate your forthrightness. 

I was a little bit perplexed today by your answers to the first 

gentleman from Texas’ questions. First, about inflation. I heard you 

talk about how you use pricing as a reference, and that purely 

printing more money doesn’t cause inflation, which was really new 

news to me. And I wonder if you would tell me what you think 

causes inflation? 

Mr. BERNANKE. Well, let’s be clear what is going on. The Federal 

Reserve is not putting money out into the economy. What we are 

doing is creating bank reserves. That is money that the banks hold 

with the Fed. So it is just sitting there idly. It is not chasing any 

goods. So as long as those bank reserves are sitting idly, broader 

measures of money that measure the circulation of money— 

Mr. POSEY. But it won’t sit there idly forever. 

Mr. BERNANKE. Right. 

Mr. POSEY. The purpose is not to sit there idly forever. 

Mr. BERNANKE. Right. 

Mr. POSEY. And while there may be a time lapse, certainly unless that money gets sucked back in and out of circulation, it is 

going to cause inflation. There is no denying it. 

Mr. BERNANKE. If it is not sucked back in. But as I was describing, we have ways of sucking it back in. 

Mr. POSEY. How? 

Mr. BERNANKE. Well, one way to do it is by raising the interest 

rate we pay on those reserves, which induces banks to keep the 

money with us instead of lending it out or circulating it through 

the economy. Another way to do it is through various open market 

operations that we can do that essentially pull those reserves out 

and bring them back into the Fed. So we do have a number of tools 

to do it. And we are quite aware of this issue, and we will not allow 

the broad measures of money circulating in the economy to rise at 

a rate rapid enough that would cause inflation eventually. 

Mr. POSEY. I would appreciate if you could maybe give the members of this committee a little memo and more extensive explanation on how you plan to do that without damaging the economy 

that we are trying to fix now. 

Mr. BERNANKE. There is a chapter in the policy report that covers it. 

52 

Mr. POSEY. Thank you. The second question was in response to 

the audit of the Fed. As you well know, the statutes are this thick 

of exemptions to Federal audit, of audit to the Fed. Just about 

every agency can be audited. I think I heard the gentleman from 

Texas say, if it wants, a citizen can find out more about the operations of the CIA than it can the Fed. And I don’t know that I am 

denying that, or that you would really want to deny that. But he 

is talking about post facto audit, not interfering with daily decisionmaking, much like we do with many confidentiality exemptions 

where you say, no. What they do now, when they negotiate this 

contract it is secret, but when the contract is over it should be 

opened up to public scrutiny. And I think really the public does 

have a right to know historically how we determined the monetary 

policy of this country, for better or for worse. I mean, I don’t expect 

it to be 100 percent on target all the time, but I think it is a matter 

of transparency. I think it is a matter of accountability. And I 

would like your thoughts on that. 

Mr. BERNANKE. Well, first of all, on things outside monetary policy, we are open and very willing to work with you. The GAO right 

now is doing an audit of our annual financial statement, it is doing 

an audit of our information security controls, it is doing an audit 

of our assistance to AIG and many other things. So let me answer 

your question. 

Mr. POSEY. These are the policymaking decisions. The minutes of 

the meetings that any government body might want to have off the 

record while they are having critical decisions, but eventually 

should be put open to the public. 

Mr. BERNANKE. Eventually. Well, we put out a whole transcript 

in 5 years. I think that is fine. But if it is done within days or even 

weeks of the decision, it is going to look like Congress is saying we 

disagree with that decision. 

Mr. POSEY. I agree with that. It shouldn’t interfere with daily decisionmaking, but I don’t know how after the fact auditing and all 

the exemptions that are there being eliminated for a period of time, 

and it could say 6 months, a year afterwards, I just don’t see why 

there shouldn’t be 100 percent crystal clear transparency of every 

single function of the Fed after the fact. 

Mr. BERNANKE. Because we have to be extraordinarily careful 

that the markets and the public don’t think that Congress is trying 

to influence monetary policy decisions. 

Mr. POSEY. If we do it a year, if we do it in a year in arrears, 

we don’t know really whether the best decisions made a year ago 

or 2 years ago or 5 years ago or 20 years ago, we don’t know if they 

are the best decisions. We don’t know who the Fed picked to be 

winners and losers. And I think the public really has a right to 

know that some day. 

Mr. BERNANKE. On issues relating to our 13(3) authority, those 

sorts of things, where we are putting out money and lending money 

and so on, we can work that out. I agree with you that where we 

are putting out taxpayer money, there should be ways for the Congress to be assured that we are doing it in a safe way that has appropriate financial controls and so on and so on. So I agree with 

that. Monetary policy is a very specific element, though, of that. 

53 

The CHAIRMAN. The gentleman’s time has expired. The gentlewoman from Ohio. 

Ms. KILROY. Thank you, Mr. Chairman. 

And thank you, Chairman Bernanke, for being here. I had questions for you as well about the Federal Reserve’s role and the need 

for accountability and transparency versus the conflicting need for 

independence and to be free of political pressures. And it seems to 

me what the public is more concerned about is not the Federal Reserve’s role on monetary policy but the Federal Reserve’s role in 

bailing out certain entities like AIG and Bear Stearns, and questions about how decisions get made about who is saved or who is 

allowed to fail. So maybe you could help me with what kind of 

transparency and accountability, the maximum that we can give 

our taxpayers that would still leave the Federal Reserve with the 

appropriate amount of insulation from political pressure and the 

appropriate independence that you need to carry out your essential 

mission. 

Mr. BERNANKE. On the issue you mentioned, Congress has already acted. Congress passed and the President signed a law which 

allows the GAO to audit all loans made to specific companies in 

rescue operations, including AIG and Bear Stearns. That has been 

done. And we are quite open to discussing any kind of extraordinary lending that we do in terms of making sure that Congress 

is comfortable that we are taking all the steps necessary to protect 

the taxpayer and to do the appropriate thing with those loans. 

So that one area, and to go back to our previous conversation, 

the one area where it is particularly sensitive is about the Congress second-guessing in the very short period of time the monetary 

policy decisions being made by the Federal Reserve with the sense 

that displeasure from the Congress would put pressure on the Fed 

to try to anticipate the political preferences of the Congress. 

Ms. KILROY. There was other discussion this morning about 

when inflation might begin to rear its head and some concerns 

about that. As I understand the answer, inflation is not presently 

a worry that you are concerned about. But—and certainly I think 

housing and unemployment are much bigger worries for the greater economy right now than concern about inflation. But I was wondering what your judgment—whether fear of inflation is holding 

back banks, some of which have seem to be recovered. They want 

to give their TARP money back. Goldman Sachs is showing profits, 

and bonuses are being offered to some players in the financial services markets. But whether the fear of inflation is keeping banks 

from making the kind of loans that are needed for small business 

and others to help us restore the economy, particularly out on Main 

Street, so to speak. 

Mr. BERNANKE. I don’t think that is a major factor. For one 

thing, if you look in the financial markets, interest rates like longterm government interest rates are still quite low. If the financial 

markets were really worried about inflation, those rates would be 

much higher. So I don’t think that the financial markets are indicating a great deal of concern about inflation. And from the banks’ 

perspective, they are much more concerned about credit worthiness, the state of the economy, and losses they have already taken 

than they are about inflation, I think. 

54 

Ms. KILROY. In terms of the state of the economy, what steps can 

the Fed take to address the unemployment rates that we are seeing 

going up? I certainly share your view that the recovery money has 

not fully had its impact in the greater economy and we will see 

some gains there. But still, we want to see some places where 

Americans can actually make things in this country and that we 

can generate those kind of jobs in our economy as well. 

Mr. BERNANKE. Well, the Fed is being very aggressive. We are 

trying very hard to support the economy. We have lowered interest 

rates almost to zero, and we have a whole set of other programs 

to try and get credit markets working. So we are doing our best 

to provide support to this economy. 

Ms. KILROY. Do you think we have sufficiently addressed the 

issue of certain risky behaviors that help do damage to the economy, like the credit default swap, naked default swaps? 

Mr. BERNANKE. No. Not yet. We have to do I think a very substantial reform of the financial regulatory system to address all the 

problems that were revealed by the crisis. 

Ms. KILROY. Thank you. I yield back. 

The CHAIRMAN. The gentlewoman from Florida. 

Ms. KOSMAS. Thank you, Mr. Chairman. And thank you for being 

here. As the chairman said, I represent the Central Florida area, 

and have been sort of raising the flag for quite a few months since 

Florida is one of the highest in mortgage foreclosures and also one 

of the highest now in unemployment. But I have been concerned 

about what I saw as a deeper problem in the economy looming over 

Florida as well as the Nation with regard to commercial lending 

and the renewing or rolling over of commercial loans for larger 

businesses. Some are smaller businesses. But when we look at our 

economy in Florida and we recognize that it is a $70 billion tourism 

trade, and we have situations where resorts, hotels, timeshares, 

cruise ships, and even our leisure parks are relying of course on 

commercial credit lines in order to function, and the numbers of 

people that they employ and the factor of the potential for them to 

be in jeopardy is quite frightening to me. 

So I have been trying to raise that red flag for several months 

here and talking to people about it, while at the same time people 

are dealing with other issues. 

I know that the TALF program was intended to provide an opportunity for increased securitized debt in those markets. And I 

was wondering whether you might be—and some of this I think 

was addressed by an earlier question but I will ask mine anyway. 

Do you feel that the TALF program is large enough and sufficient 

enough? Is it working? And is it working quickly enough, that we 

could consider that it might alleviate some of these looming credit 

problems for commercial real estate? 

Mr. BERNANKE. It is a bit early to say on commercial real estate, 

because we have just opened up the program to that, and we have 

not yet seen a number of deals coming through. So ask me again 

in another month or two. 

But I do think that what we have seen in the consumer ABS 

area is it doesn’t take an enormous amount of capacity to actually 

have a difference, because it is really a question of breaking the 

ice. Right now, nobody is bringing commercial mortgage-backed seVerDate Nov 24 2008 12:05 Feb 04, 2010 Jkt 053244 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\53244.TXT TERRIE
55 

curities to market. If this creates more activity in the market, then 

it creates more interest and you can get things going again. So I 

don’t think we need to have an enormous program to stimulate the 

improvement in the CMBS market. But exactly how effective our 

program will be, I think we need to wait just a bit longer. But a 

number of your colleagues have raised this issue, and it is certainly 

a very important one. 

Ms. KOSMAS. And I apologize if I am repeating a question that 

was asked by someone else. But I think it was mentioned that up 

to $400 billion of CRE loans are coming due in this year to mature 

and over $1 trillion by 2012. That represents a very huge potential, 

as I say, for—and I am talking specifically to business people who 

are having trouble with perfectly performing lines of credit that 

have met all their terms and obligations, and their lenders are refusing that rollover, if you will, or renegotiation of the mortgage, 

and that is a very serious problem that I see looming. 

So I am hoping that you are going to be taking a very, very close 

look at it. Are you considering other problems beyond what is currently on the plate for TALF? That will be one question. And then 

with the lag time in getting things going in that marketplace, 

would you expect that that might be extended beyond year’s end? 

Mr. BERNANKE. We have already included both new CMBS and 

legacy CMBS in the TALF. We are looking at some other asset 

classes, but as I mentioned, they are more complex than the ones 

we have already included. We will give the markets plenty of notice 

about the extent of the program. We have to make judgments 

about whether markets are normalizing. If things return to normal, 

which I don’t expect in the very near term, then we would have to 

think about scaling it down. But, otherwise, we will try to give 

plenty of notice to the markets about the time frame for these programs. 

Ms. KOSMAS. Okay. I appreciate it. Thank you very much. 

The CHAIRMAN. The gentleman from Florida. 

Mr. GRAYSON. Thank you, Mr. Chairman. 

Chairman Bernanke, I am looking at the report that you handed 

out this morning. And I was wondering if you could take your copy 

and turn to page 26. 

Mr. BERNANKE. Okay. 

Mr. GRAYSON. There is a table on page 26 which consists of your 

balance sheet. And one of the entries on the balance sheet is, under 

assets, ‘‘central bank liquidity swaps,’’ which shows an increase 

from the end of 2007 from $24 billion to $553 billion and change 

at the end of 2008. 

What is that? 

Mr. BERNANKE. Those are swaps that were done with foreign 

central banks. Many foreign banks are short dollars. And so they 

come into our markets looking for dollars and drive up interest 

rates and create volatility in our markets. 

What we have done with a number of major central banks like 

the European Central Bank, for example, is swap our currency, dollars, for their currency, euros. They take the dollars, lend it out to 

the banks in their jurisdiction. That helps bring down interest 

rates in the global market for dollars. And, meanwhile, we are not 

56 

lending to those banks; we are lending to the central bank. The 

central bank is responsible for repaying us. 

Mr. GRAYSON. So who got the money? 

Mr. BERNANKE. Financial institutions in Europe and other countries. 

Mr. GRAYSON. Which ones? 

Mr. BERNANKE. I don’t know. 

Mr. GRAYSON. Half a trillion dollars and you don’t know who got 

the money? 

Mr. BERNANKE. The loans go to the central banks, and they then 

put them out to their institutions to try to bring down short-term 

interest rates in dollar markets around the world. 

Mr. GRAYSON. Well, let’s start with which central banks got the 

money? 

Mr. BERNANKE. There are 14 of them, which are listed in our reports. 

Mr. GRAYSON. All right. So who actually made that decision to 

hand out a half a trillion dollars that way? Who made that decision? 

Mr. BERNANKE. The Federal Open Market Committee. 

Mr. GRAYSON. Okay. And was it done at one time or in a series 

of meetings? 

Mr. BERNANKE. Series of meetings. 

Mr. GRAYSON. And under what legal authority? 

Mr. BERNANKE. We have a longstanding legal authority to do 

swaps with other central banks. It is not an emergency authority 

of any kind. 

Mr. GRAYSON. Do you happen to know anything specific about it? 

Mr. BERNANKE. My counsel says section 14 of the Federal Reserve Act. 

Mr. GRAYSON. All right. We actually looked at one of the ar- rangements, and one of the arrangements is $9 billion for New Zealand. That works out to $3,000 for every single person who lives 

in New Zealand. 

Seriously, wouldn’t it have been better to extend that kind of 

credit to Americans rather than New Zealanders? 

Mr. BERNANKE. It is not costing Americans anything. We are getting interest back—it is not at the cost of any American credit. We 

are extending credit to Americans. 

Mr. GRAYSON. Well, wouldn’t it necessarily affect the credit markets if you extend half a trillion dollars in credit to anybody? 

Mr. BERNANKE. We are lending to all U.S. financial institutions 

in exactly the same way. 

Mr. GRAYSON. Well, look at the next page. The very next page 

has the U.S. dollar nominal exchange rate, which shows a 20 percent increase in the U.S. dollar nominal exchange rate at exactly 

the same time that you were handing out half a trillion dollars to 

foreigners. 

Do you think that is a coincidence? 

Mr. BERNANKE. Yes. 

Mr. GRAYSON. All right. Well, the Constitution says, ‘‘No money 

shall be drawn from the Treasury but in consequence of appropriations made by law.’’ 

Mr. BERNANKE. This money was not drawn from the Treasury. 

57 

Mr. GRAYSON. Well, let’s talk about that. Do you think it is consistent with the spirit of that provision in the Constitution for a 

group like the FMOC to hand out half a trillion dollars to foreigners without any action by this Congress? 

Mr. BERNANKE. Congress approved it in the Federal Reserve Act. 

Mr. GRAYSON. When was that? 

Mr. BERNANKE. Quite a long time ago. I don’t know the exact 

date. 

Mr. GRAYSON. A hundred years ago? 

The CHAIRMAN. The original Act is 1914, I believe. 

Mr. BERNANKE. I don’t know whether this provision was in 1914 

or not, but the Federal Reserve Act was in 1913. 

Mr. GRAYSON. All right. And at that time the entire gross national product of this country was well under half a trillion dollars, 

wasn’t it? 

Mr. BERNANKE. I don’t know. 

Mr. GRAYSON. Is it safe to say that nobody in 1913 contemplated 

that your small little group of people would decide to hand out half 

a trillion dollars to foreigners? 

Mr. BERNANKE. This particular authority has been used numerous times over the years. 

Mr. GRAYSON. Well, actually, according to the chart on page 28, 

virtually the entire amount that is reflected in your current balance sheet went out starting in the last quarter of 2007. And before 

that, going back to the beginning of this chart, the amount of lending was zero to foreigners. Is that— 

Mr. BERNANKE. It was zero before the crisis, yes. This was part 

of the process, working with other central banks, again, to try to 

get dollar money markets working normally in the global economy. 

Mr. GRAYSON. All right. My time is very limited. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from New York. 

Mr. MAFFEI. Thank you very much, Mr. Chairman. 

And thank you, Chairman Bernanke, for being here and for indulging all of the members. I am the most junior member, so I presume I am the last to question. 

I am sure that you have seen some of the reports about credit 

card companies increasing their rates and charges in anticipation 

of the upcoming new credit card laws and Federal Reserve regulations taking effect. This seems to me to run counter to, certainly, 

the intent, if not the letter of the recently enacted regulations by 

your group and laws. 

We have heard that the credit card companies have asked—they 

asked us when we were putting the bill together, as they asked 

you, for a delay so that they could implement these sort of things. 

And instead, they seem to be using these delays to generate more 

profits on the backs of the consumers. 

Is there anything that you can do, from your perspective at the 

Federal Reserve, to speed up the regulations to try to take care of 

these people? 

Mr. BERNANKE. Yes. We just announced the first tranche of regulations under the credit card act that was passed by Congress and 

signed by the President. And it sets, as required by law, a deadline 

of August 20th. After August 20th, in order to raise interest rates 

58 

on a customer, the company has to give the customer 45 days’ notice. And then the customer has the right to opt out of that increase by paying back his balance. So that first step has been 

taken for August. 

Mr. MAFFEI. Is there anything you can do to communicate to 

these companies that it would not be in their best interests to try 

to, you know, raise these rates and charges right up to the deadline? 

Mr. BERNANKE. There is another provision in the law passed by 

Congress that requires revisiting interest rate increases back to the 

1st of January of 2009. So, at some point, there will have to be 

some looking again at those rates. 

Mr. MAFFEI. Thank you. 

I have one quick question about the TALF. I have heard reports 

in my congressional district about the smaller investment firms, 

more locally owned investment firms that don’t have a preexisting 

relationship with any sort of ‘‘primary dealer’’ having difficulty getting access to the program, which of course would give the larger 

firms a market advantage, if that were true. 

Has anything been done or could anything be done to increase 

the access to the TALF for these smaller investment firms, say, you 

know, 10 to 30 employees? 

Mr. BERNANKE. Yes, and we have done so in two ways. First, we 

have encouraged more investors. And the minimum investment is 

half a million dollars, which is within the scope of many investment firms. 

Secondly, working with Congresswoman Waters, we have expanded our set of agents who are putting together the deals, to include six to eight smaller firms, many of which are minority- or 

women-owned. 

So we are trying to expand both the investors and the agents in 

this program. 

Mr. MAFFEI. And how can local firms apply for this? Is there a 

Web site or a procedure? 

Mr. BERNANKE. Yes, there are Web sites. 

Mr. MAFFEI. All right. So they should just get on the Web site. 

Well, could your staff communicate with us and let us know? 

Mr. BERNANKE. We will do that. 

Mr. MAFFEI. Because I know a lot of firms in my district who 

have felt that they have gotten no advantage to any of these bailouts would very much appreciate access to these funds, and particularly given that they now have to compete with other firms that 

have gotten other advantages from the TARP and TALF programs. 

Mr. BERNANKE. Okay. 

Mr. MAFFEI. Thank you very much, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Any further comments in closing? 

If not, I thank the chairman for his indulgence. 

Does the gentleman from Alabama have a— 

Mr. BACHUS. I would just like to say something. 

The CHAIRMAN. Sure. 

Mr. BACHUS. Chairman Bernanke, I think I speak for others as 

well as myself. It is not, I know, my nature to criticize, because I 

think you have done an exemplary job, and I admire your abilities 

59 

and your intellect. But it is time, it is necessary as part of our job 

to—because we all, in the future, we want to try to avoid these 

things. And so I think, you know, that is simply a part of trying 

to make sure that we build the best system we can. 

The CHAIRMAN. I thank the gentleman. 

I thank the Chairman. 

And the hearing is adjourned. 

Mr. BACHUS. Mr. Chairman, if I could ask unanimous consent to 

introduce a document? 

The CHAIRMAN. Without objection, all members will have the 

right to submit any further documentation of any sort that they 

wish, and to submit further questions to the Chairman to be answered in writing. 

Mr. BACHUS. Mr. Chairman, if I could, just because this is a little 

unusual, I think you and I, we were both shared a copy of this document from 16 different real estate groups, concerning—it is a consensus principle-based policy statement on the commercial real estate market. 

The CHAIRMAN. Fine. We will enter it into the record. 

Mr. BACHUS. Thank you. 

[Whereupon, at 1:06 p.m., the hearing was adjourned.] 

(61) 

A P P E N D I X 

July 21, 2009 

62 


53244.001
63 


53244.002
64 


53244.003
65 


53244.004
66 


53244.005
67 


53244.006
68 


53244.007
69 


53244.008
70 


53244.009
71 


53244.010
72 


53244.011
73 


53244.012
74 


53244.013
75 


53244.014
76 


53244.015
77 


53244.016
78 


53244.017
79 


53244.018
80 


53244.019
81 


53244.020
82 


53244.021
83 


53244.022
84 


53244.023
85 


53244.024
86 


53244.025
87 


53244.026
88 


53244.027
89 


53244.028
90 


53244.029
91 


53244.030
92 


53244.031
93 


53244.032
94 


53244.033
95 


53244.034
96 


53244.035
97 


53244.036
98 


53244.037
99 


53244.038
100 


53244.039
101 


53244.040
102 


53244.041
103 


53244.042
104 


53244.043
105 


53244.044
106 


53244.045
107 


53244.046
108 


53244.047
109 


53244.048
110 


53244.049
111 


53244.050
112 


53244.051
113 


53244.052
114 


53244.053
115 


53244.054
116 


53244.055
117 


53244.056
118 


53244.057
119 


53244.058
120 


53244.059
121 


53244.060
122 


53244.061
123 


53244.062
124 


53244.063
125 


53244.064
126 


53244.065
127 


53244.066
128 


53244.067
129 


53244.068
130 


53244.069
131 


53244.070
132 


53244.071
133 


53244.072
134 


53244.073
135 


53244.074