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MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JULY 16, 2008 

Printed for the use of the Committee on Financial Services 

Serial No. 110–128 

( 

(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, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

DON CAZAYOUX, Louisiana 

TRAVIS CHILDERS, Mississippi 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

July 16, 2008 ..................................................................................................... 1 

Appendix: 

July 16, 2008 ..................................................................................................... 51 

WITNESSES 

WEDNESDAY, JULY 16, 2008 

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

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

APPENDIX 

Prepared statements: 

Paul, Hon. Ron .................................................................................................. 52 

Bernanke, Hon. Ben S. ..................................................................................... 53 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bernanke, Hon. Ben S.: 

‘‘Monetary Policy Report to the Congress, July 15, 2008’’ ............................ 63 

Written responses to questions from Hon. J. Gresham Barrett ................... 111 

Written responses to questions from Hon. John Campbell ........................... 116 

Written responses to questions from Hon. Adam Putnam ............................ 120 

(1) 

MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

Wednesday, July 16, 2008 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

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

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

Members present: Representatives Frank, Waters, Maloney, 

Gutierrez, Velazquez, Watt, Sherman, Capuano, McCarthy of New 

York, Baca, Miller of North Carolina, Scott, Cleaver, Moore of Wisconsin, Davis of Tennessee, Hodes, Ellison, Klein, Wilson, 

Perlmutter, Donnelly, Foster, Carson, Speier, Childers; Bachus, 

Pryce, Castle, Royce, Paul, Manzullo, Biggert, Shays, Miller of California, Capito, Hensarling, Garrett, Brown-Waite, Barrett, 

Neugebauer, Davis of Kentucky, McHenry, Campbell, Putnam, 

Bachmann, Roskam, Marchant, McCarthy of California, and Heller. 

The CHAIRMAN. The hearing will come to order. This is a hearing 

pursuant to law on monetary policy and the state of the economy. 

It is one of two hearings we have every year according to statute 

on the state of the economy under the Humphrey-Hawkins Act. 

Let me say preliminarily before we get into the opening statements that there was a good deal of interest in the recent proposal 

from the Bush Administration involving some standby financial authority for dealing with the situation in Fannie Mae and Freddie 

Mac. Obviously, Members are free to ask whatever they wish. I intend to focus here on the macroeconomy. We did, of course, have 

the Chairman before us last week on the Board of Regulatory Authorities. Members are free to ask, obviously, whatever they wish. 

I would note that the official subject is the macroeconomy, and that 

is what I intend to discuss. Members will use their time as they 

wish. 

We will have four opening statements; two 5-minute statements 

by myself and the ranking member, and two 3-minute statements 

from the chairman and the ranking member of the subcommittee. 

I will begin my statement now, so we can start the clock. 

I am sorry; kill the clock for a minute. 

Let me also explain that on the Democratic side—I take from the 

ranking member the order in which questions are asked on their 

side—we have been following the procedure of going first in this 

hearing to members who did not get reached when we did the questioning in the first hearing this year. So we will begin with those 

2 

members who did not get a chance to ask questions during the first 

round. 

With that, we will start the clock, and I will begin my statement. 

I want to focus on the very difficult situation facing a great majority of Americans, people who work for other people for a living. 

Unemployment this year has become a serious problem. If you look 

at the numbers for the unemployment figures, if the second half of 

this year is not better economically than the first half, and I don’t 

see any reasons to believe that it will be, although we obviously 

hope it will be, but if the numbers on unemployment in the second 

half are no better than the first half, we are on track to lose nearly 

1 million jobs this year, which means 1 million fewer people on the 

official employment rolls than at the beginning of the year. 

It is not only a case of jobs being lost. There is also a continued 

erosion in the real earnings per hour of working people. We had a 

debate in this country, in this committee, for several years about 

whether that was true or not. It is now conceded that even in those 

periods when we were generating wealth, and this continues to be 

a wealthy country with a great capacity to generate wealth through 

our free markets, the distribution was badly skewed. No one expects equality. Equality is not a good thing, and you can’t have an 

economy that works if everything is equal. But too much inequality 

also has negative consequences. 

Former Commerce Secretary Don Evans, a close friend of the 

President, commissioned a study which showed how the overwhelming majority of the wealth generated in the good times went 

to a handful of people. 

Here is the report of the Federal Reserve, the Monetary Policy 

Report to the Congress, dated yesterday, when Chairman Bernanke 

testified first before the Senate. On page 20, the section begins: 

‘‘Productivity and Labor Compensation. Gains in labor productivity 

have moved up significantly.’’ 

Let me go to page 21. People who wonder about the state of people’s feelings are those who think that the American people are just 

whiners and that the troubles are all in their mind. For those who 

wonder why we have resistance to further globalization without 

changes in the basic policies of this country, this sentence should 

help them understand it. This is a direct quote from the Monetary 

Report on page 21: ‘‘Broad measures of hourly labor compensation 

have not kept pace with the rapid increases in both overall consumer prices and labor productivity, despite a labor market that, 

until recently, had been generally tight.’’ 

I want to emphasize, hourly labor compensation has not kept 

pace either with consumer prices or with productivity. 

People who worry about inflation should understand from this 

that no part of the blame for inflation, if it comes, can be put on 

workers, because, as the Chairman has acknowledged previously, 

and as economists understand, wages which rise along with productivity at the same level are not inflationary. 

We have increased productivity and compensation lagging productivity. Working Americans are producing more wealth for this 

country than they are being allowed to share, and that has been 

exacerbated by the fact that prices are going up. So the situation, 

according to the report of the Federal Reserve, is one in which 

3 

workers have increased their productivity, in cooperation with the 

employers, and have failed to be compensated either to keep up 

with the productivity or to keep up with prices. 

The point to the business community is very clear. How can you 

understand this, how can you look at our being on track to lose 

nearly a million jobs this year, how can you note that workers are 

getting less compensation than they are earning for the economy 

and less than is needed to come up with prices, and wonder why 

you can’t get trade bills through, wonder why there is resistance 

to outsourcing? 

I believe that full participation in the global economy is a good 

thing, but if it continues to go forward on terms which give a disproportionate share of the benefits to a relatively small number, 

and the great majority are not simply even—even here, they are 

falling behind, despite increased productivity, then we have to stop 

and get our own house in order before we go further. 

I now recognize the gentleman from Alabama. 

Mr. BACHUS. I thank the chairman. 

Chairman Frank, I am going to follow your lead and restrict my 

remarks to the real economy, which is the purpose of this hearing, 

and not some of the recent developments in the past week or two. 

Chairman Bernanke, looking at the economy, we had an overextension of credit. We had too easy of credit, it wasn’t properly underwritten, and the risks were not taken into account. As a result 

of that, we have had, I think, massive debt accumulation in this 

country, and we are going through what is inevitable when people 

borrow more than they can repay. 

I think a second factor, and it may be in your remarks or questions, you can address this, but a tremendous amount of leverage 

and risk-taking and other risky and speculative investment practices and a lot of fortunes were made on the way up, but there is 

pain on the way down. As I see it, it is not an easy thing to go 

through, but it is a part of a market cycle. 

The third factor, and this is a factor that I think is the most important, is the high commodity prices, and particularly energy 

prices that have been a particular hardship on importing nations, 

and we are obviously an importing Nation. It has been a financial 

windfall to exporting countries. 

I have been to Abu Dhabi and Dubai, and the fabulous wealth 

that has been created out of really a desert society there in the 

past 40 years is just almost beyond belief. I think T. Boone Pickens, he is running a commercial right now, and he calls this, I 

think rightly so, the largest transfer of wealth in the history of the 

world. 

That, to me, and the effect it is having on Americans day-to-day, 

is our biggest problem. I believe it is the largest source of instability in our financial markets. I think that the consumers are 

stressed, they are paying high gas prices, high diesel prices, and 

they can’t pay their other bills. They are even having trouble putting food on their tables. 

Finally, while we require the American people to live within 

their budget, we had deficit spending here, and have for some time, 

and there is a tremendous lack, I think, in Washington of financial 

discipline. The Federal Government has more obligations than it 

4 

can fund today, but it continues to obligate itself, it continues to 

expand and create new programs, and it continues to assume responsibility for funding services that were traditionally in the province of local or State governments or families themselves. 

Obviously, all of these problems, the problem of tremendous 

mushrooming of extension of credit and debt accumulation, of 

overleveraging and risk-taking, of high energy costs, high food 

costs, high gas prices, and then a Federal Government that spent 

beyond its means, obviously there is no single approach we can 

take to getting ourselves out of this. 

I think the banks have repriced for risk. There has been a lot 

of—they have raised capital. I will state right here that I know 

there is a debate in this country on the overall financial stability 

of our financial system, but I, for one, think that we are well on 

our way to recovery in the financial system. 

I think the present stock prices of our banks don’t accurately reflect the value of those banks. I think the stock prices are too low. 

The banks are sound, they are solid. I think the stock prices, right 

now you may have—I think there is a real—it is just a confidence 

factor. 

Anyway, we have had a retrenching and a correction, and I do 

worry about some attempts that we are doing to short-circuit the 

correction and the period of adjustment. I think long term they can 

deepen the damage. 

But, in contrast, there is something that I think we should do, 

and we can do now, and that is to address high energy prices. High 

energy prices mean higher production and transportation costs. 

Those increases are passed on to the consumers, and we saw that 

this morning, causing inflationary pressures. Particularly hard hit 

are those Americans, a million-and-a-half Americans, whose adjustable-rate mortgages are adjusting. Those families are facing a double whammy. 

To sum up, what I believe is needed now is a concerted bipartisan effort by Congress and the Administration to develop and implement a comprehensive energy and conservation initiative. It 

needs to be done now. It should have been last year or the year 

before that. I believe until we get a handle on our dependency on 

foreign oil, we are going to continue to have real severe problems. 

Thank you. 

The CHAIRMAN. The gentleman from Illinois. 

Mr. GUTIERREZ. Thank you, Mr. Chairman. 

Welcome back, Chairman Bernanke. 

There is a lot of debate about whether or not we are in the midst 

of a recession, but to most people out there, it is really a moot 

question as they look at their bank accounts. And we all know 

IndyMac went under, and everybody else is really worried. There 

are a lot of calls at the office, should I check my savings account, 

my bank account, is it insured, do they have enough money? Then 

there is word that there might be another 90 banks. Some people 

say they are small. We don’t know. Nobody is ever going to really 

tell us. 

So, recession? When gasoline pops up to $4.50 in Chicago, and 

your real earnings haven’t increased, it seems like a recession to 

them. 

5 

Most folks say, well, I wasn’t in the stock market. Most folks, because we have done so much good work at purchasing homes, have 

lost a lot of their net value. Their house isn’t worth what it was 

worth last year. It seems like a recession to them. 

GM is on the verge of bankruptcy. Let’s hope it doesn’t go under. 

I don’t want to be a pessimist, but things are not good. Tens of 

thousands of retirees heard from GM yesterday that it is so bad 

that their health care insurance is being canceled after 35 or 40 

years of working at GM. 

It is bad. I don’t know if we are in a recession, but if you came 

out to my district and saw the foreclosure signs, literally the foreclosure signs everywhere. They say it is really worse on the east 

or the west coast. I think it is worse in those neighborhoods where 

people were finally getting a leg under and finally moving forward. 

So I hope today, as we look at gas prices and food prices and 

what they really mean, and I know a lot of this is very familiar 

to you, I would like to know your thoughts on inflation in the current environment. With stagnant wages, we are not entering into 

a wage spiral, and inflation is running high when measured by personal consumption expenditures, and with gasoline and consumer 

energies even higher, inflation seems to be a real threat in the near 

term. 

I understand the markets need to grow, and that means lower 

interest rates, but at the same time, specifically with the sharp increases in commodity prices, inflation has had to play a larger role 

in Federal Reserve decisionmaking. 

So, Mr. Bernanke, in the past you have discussed inflation targets, and I would like to know if you think such targets might be 

appropriate in this environment. 

I am also concerned about the weak dollar. We went to the Middle East on a congressional delegation to look into sovereign wealth 

funds, and it was suggested by some of these sovereign wealth 

managers, and I guess they would know since they have so much 

oil and the petrodollars, they say about 25 percent of it is due to 

the weakening of the dollar. 

So I look forward—and I do want to close by saying thank you 

for allowing the GSEs access to the discount window. I was really 

happy to read and hear about the decisions you made in terms of 

stopping predatory lending. I specifically ask you for that as we 

move forward. 

Thank you so much, Chairman Bernanke. 

The CHAIRMAN. The gentleman from Texas. 

Dr. PAUL. I ask unanimous consent to submit a written statement at this time. 

The CHAIRMAN. Without objection, it is so ordered. 

Dr. PAUL. Thank you, Mr. Chairman. 

The CHAIRMAN. The Federal Reserve doesn’t get to object. 

Dr. PAUL. I think everybody recognizes today that our financial 

markets are in a big mess, and I have complained for many years 

about the Federal Reserve System. But I would have to say that 

Chairman Bernanke himself is not responsible for this mess. Not 

that I think he has the answers in this deeply flawed monetary 

system, but obviously the seeds of this mess have been planted 

6 

over a long period of time. It is more a reflection of the system 

rather than that of one individual. 

It is amazing how panicky people have been getting, and how everybody is wringing their hands, and yet our government tells us, 

well, there is no recession, so things must be all right. A lot of people are very angry. Yet we know there is something seriously 

wrong, with all the mess that we have in the financial markets. 

And now we see this morning that inflation is roaring back, yet it 

is still way below what the private economists are saying about 

what inflation is really doing. But the consumer knows all about 

it. 

It seems like around here, whether it is from Treasury or the 

Federal Reserve or even in the Congress, all we need now is to 

have a world-class regulator that is going to solve all our problems, 

and I think that is so simplistic. From my viewpoint, what we need 

is a world-class dollar, a dollar that is sound, not a dollar that continues to depreciate, and not a system where we perpetually just 

resort to inflation and deficit financing to bail out everybody. This 

is what we have been doing. It hasn’t been just with this crisis, but 

an ongoing crisis. We have been able to pull ourselves out of these 

nosedives quite frequently. One of the worst with the dollar was in 

1979. We patched it together. 

I think the handwriting on the wall is there is a limit to how 

many times we can bail the dollar out, because conditions are so 

much worse today than they have ever been. 

We talk a lot about predatory lending, but I see the predatory 

lending coming from the Federal Reserve. Interest at 1 percent, 

overnight rates, loaning to banks, encouraging the banks and investors to do the wrong things causes all the malinvestment. These 

conditions were predictable. They were predicted by the Austrian 

free market economists. It should surprise nobody, yet nobody resorts to looking to those individuals who are absolutely right about 

what was coming and what we should have done. 

Even as early as 7 years ago, I introduced legislation that would 

have removed the line of credit to the Treasury, which was encouraging the moral hazard and the malinvestment. Here, it looks like 

now we are going to need $300 billion of new appropriations. 

So we need to look at the monetary system and its basic fundamental flaws that exist there, and then we might get to the bottom 

of these problems we are facing today. 

The CHAIRMAN. Now, Mr. Chairman, I did want to join the chairman of the subcommittee in thanking you for the action you took 

on Monday, a very important set of steps with regard to the 

subprime. With that, let me welcome you again to your alternate 

office and invite you to proceed. 

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

SYSTEM 

Mr. BERNANKE. Thank you, Chairman Frank, Ranking Member 

Bachus, and members of the committee. I am pleased to present 

the Federal Reserve’s Monetary Report to the Congress. 

The U.S. economy and financial system have confronted some 

significant challenges thus far in 2008. The contraction in housing 

7 

activity that began in 2006 and the associated deterioration in 

mortgage markets that became evident last year have led to sizable 

losses at financial institutions and a sharp tightening in overall 

credit conditions. The effects of the housing contraction and of the 

financial headwinds on spending and economic activity have been 

compounded by rapid increases in the price of energy and other 

commodities, which have zapped household purchasing power even 

as they have boosted inflation. Against this backdrop, economic activity has advanced at a sluggish pace during the first half of this 

year, while inflation has remained elevated. 

Following a significant reduction in its policy rate over the second half of 2007, the Federal Open Market Committee eased policy 

considerably further through the spring to counter actual and expected weakness in economic growth and to mitigate downside 

risks to economic activity. 

In addition, the Federal Reserve expanded some of the special liquidity programs that were established last year and implemented 

additional facilities to support the functioning of financial markets 

and foster financial stability. 

Although these policy actions have had positive effects, the economy continues to face numerous difficulties, including ongoing 

strains in financial markets, declining house prices, a softening 

labor market, and rising prices of oil, food, and some other commodities. 

Let me now turn to a more detailed discussion of some of these 

issues. Developments in financial markets and their implications to 

the macroeconomic outlook have been a focus of monetary policymakers over the past year. In the second half of 2007, the deteriorating performance of subprime mortgages in the United States 

triggered turbulence in domestic and international financial markets as investors became markedly less willing to bear credit risk 

of any type. 

In the first quarter of 2008, reports of further losses and writedowns in financial institutions intensified investor concerns and resulted in further sharp reductions in market liquidity. By March, 

many dealers and other institutions, even those that had relied 

heavily on short-term secured financing, were facing much more 

stringent borrowing conditions. 

In mid-March, a major investment bank, The Bear Stearns Companies, Inc., was pushed to the brink of failure after suddenly losing access to short-term financing markets. The Federal Reserve 

judged that a disorderly failure of Bear Stearns would pose a serious threat to overall financial stability and would most likely have 

significant adverse implications for the U.S. economy. 

After discussions with the Securities and Exchange Commission, 

and in consultation with the Treasury, we invoked emergency authorities to provide special financing to facilitate the acquisition of 

Bear Stearns by JPMorgan Chase & Company. In addition, the 

Federal Reserve used emergency authorities to establish two new 

facilities to provide backstop liquidity to primary dealers, with the 

goals of stabilizing financial conditions and increasing the availability of credit to the broader economy. 

We have also taken additional steps to address liquidity pressures in the banking system, including a further easing of the 

8 

terms for bank borrowing at the discount window and increases in 

the amount of credit made available to banks through the Term 

Auction Facility. The FOMC also authorized expansion of its currency swap arrangements with the European Central Bank and the 

Swiss National Bank to facilitate increased dollar lending by those 

institutions to banks in their jurisdictions. 

These steps to address liquidity pressures, coupled with monetary easing, seem to have been helpful in mitigating some market 

strains. During the second quarter, credit spreads generally narrowed, liquidity pressures ebbed, and a number of new financial institutions raised new capital. However, as events in recent weeks 

have demonstrated, many financial markets and institutions remain under considerable stress in part because of the outlook for 

the economy and thus for credit quality, which remains uncertain. 

In recent days, investors became particularly concerned about 

the financial condition of the Government-Sponsored Enterprises 

(GSEs) Fannie Mae and Freddie Mac. In view of this development, 

and given the importance of these firms to the mortgage market, 

the Treasury announced a legislative proposal to bolster their capital, access to liquidity, and regulatory oversight. As a supplemental to the Treasury’s existing authority to lend to the GSEs, 

and as a bridge to the time when Congress decides how to proceed 

on these matters, the Board of Governors authorized the Federal 

Reserve Bank of New York to lend to Fannie Mae and Freddie 

Mac, should that become necessary. Any lending would be 

collateralized by U.S. Government and Federal agency securities. 

In general, healthy economic growth depends on well-functioning 

financial markets. Consequently, helping the financial markets to 

return to more normal functioning will continue to be a top priority 

of the Federal Reserve. 

I turn now to current economic developments and prospects. The 

economy has continued to expand, but at a subdued pace. In the 

labor market, private payroll employment has declined, falling at 

an average pace of 94,000 jobs per month through June. Employment in the construction and manufacturing sectors has been particularly hard hit, although employment declines in a number of 

other sectors are evident as well. The unemployment rate has risen 

and now stands at 51⁄2 percent. 

In the housing sector, activity continues to weaken. Although 

sales of existing homes have been about unchanged this year, sales 

of new homes have continued to fall, and inventories of unsold new 

homes remain high. In response, homebuilders continue to scale 

back the pace of housing starts. Home prices are falling, particularly in regions that experienced the largest price increases earlier 

this decade. The declines in home prices have contributed to the 

rising tide of foreclosures. By adding to the stock of vacant homes 

for sale, these foreclosures have in turn intensified the downward 

pressure on home prices in some areas. 

Personal consumption expenditures have advanced at a modest 

pace so far this year, generally holding up somewhat better than 

might have been expected, given the array of forces weighing on 

households and attitudes. In particular, with the labor market softening and consumer price inflation elevated, real earnings have 

been stagnant so far this year. Declining values in equities have 

9 

taken their toll on household balance sheets, credit conditions have 

tightened, and indicators of consumer sentiment have fallen sharply. More positively, the fiscal stimulus package is providing some 

timely support to household incomes. Overall, consumption spending seems to be constrained over coming quarters. 

In the business sector, real outlays for equipment and software 

were about flat in the first quarter of the year, and construction 

of nonresidential structures slowed appreciably. In the second 

quarter, the available data suggests that business fixed investment 

appears to have expanded moderately. Nevertheless, surveys of 

capital spending plans indicate that firms remain concerned about 

the economic and financial environment, including sharply rising 

cost of inputs and indications of tightening credit, and they are 

likely to be cautious with spending in the second half of this year. 

However, strong export growth continues to be a significant boon 

to many U.S. companies. 

In conjunction with the June FOMC meeting, Board Members 

and Reserve Bank Presidents prepared economic projections covering the years 2008 through 2010. On balance, most FOMC participants expected that over the remainder of this year, output 

would expand at a pace appreciably below its trend rate, primarily 

because of continued weakness in housing markets, elevated energy prices, and tight credit conditions. Growth is projected to pick 

up gradually over the next 2 years as residential construction bottoms out and begins a slow recovery, and as credit conditions 

gradually improve. However, FOMC participants indicated that 

considerable uncertainty surrounded their outlook for economic 

growth and viewed the risks to their forecasts as skewed to the 

downside. 

Inflation has remained high, running at nearly a 31⁄2 percent annual rate over the first 5 months of this year as measured by the 

price index for personal consumption expenditures. And with gasoline and other consumer energy prices rising in recent weeks, inflation seems likely to move temporarily higher in the near term. 

The elevated level of overall consumer inflation largely reflects a 

continued sharp run-up in the prices of many commodities, especially oil, but also certain crops and metals. The spot price of West 

Texas intermediate crude oil soared about 60 percent in 2007, and 

thus far this year has climbed an additional 50 percent or so. The 

price of oil currently stands at about 5 times its level toward the 

beginning of this decade. Our best judgment is that the surge has 

been driven predominantly by strong growth in underlying demand 

and tight supply conditions in global oil markets. 

Over the past several years, the world economy has expanded its 

fastest pace in decades, leading to substantial increases in the demand for oil. Moreover, growth has been concentrated in developing and emerging market economies, where energy consumption 

has been further stimulated by rapid industrialization and by government subsidies that hold down the price of energy faced by ultimate users. 

On the supply side, despite sharp increases in prices, the production of oil has risen only slightly in the past few years. Much of 

the subdued supply response reflects inadequate investment and 

10 

production shortfalls in politically volatile regions where large portions of the oil reserves are located. 

Additionally, many governments have been tightening their control over oil resources, impeding foreign investment and hindering 

efforts to boost capacity and production. 

Finally, sustainable rates of production in some of the more accessible oil fields, such as those in the North Sea, have been declining. 

In view of these factors, estimates of long-term oil supplies have 

been marked down in recent months. Long-dated oil futures prices 

have risen, along with spot prices, suggesting that market participants also see oil supply conditions remaining tight for years to 

come. 

The decline in the foreign exchange value of the dollar has also 

contributed somewhat to the increase in oil prices. The precise size 

of this effect is difficult to ascertain, as the causal relationships between oil prices and the dollar are complex and run in both directions. However, the price of oil has risen significantly in terms of 

all major currencies, suggesting that factors other than the dollar, 

notably shifts in the underlying global demand for and the supply 

of oil, have been the principal drivers of the increase in prices. 

Another concern that has been raised is that financial speculation has added markedly to upward pressures on oil prices. Certainly, investor interest in oil and other commodities has increased 

substantially of late. However, if financial speculation were pushing above the levels consistent with the fundamentals of supply 

and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. But, in 

fact, available data on oil inventories show notable declines over 

the past year. 

This is not to say that useful steps could not be taken to improve 

the transparency and functioning of futures markets, only that 

such steps are unlikely to substantially affect the prices of oil or 

other commodities in the longer term. 

Although the inflationary effect of rising oil and agricultural 

commodity prices is evident in the retail prices of energy and food, 

the extent to which the high prices of oil and other raw materials 

have been passed through to the prices of nonenergy, nonfood finished goods and services seems thus far to have been limited. But 

with businesses facing persistently higher input prices, they may 

attempt to pass through such costs into final goods and services 

more aggressively than they have so far. 

Moreover, as the foreign exchange value of the dollar has declined, rises in import prices have been greater upward pressure on 

business costs and consumer prices. In their economic projections 

for the June FOMC meeting, monetary policymakers marked-up 

their forecast for inflation during 2008 as a whole. FOMC participants continue to expect inflation to moderate in 2009 and 2010, 

as slower global growth leads to a cooling of commodity markets, 

as pressures on resource utilization decline, and as longer-term inflation expectations remain reasonably well-anchored. 

However, in light of the persistent escalation of commodity prices 

in recent quarters, FOMC participants viewed the inflation outlook 

as unusually uncertain and cited the possibility that commodity 

11 

prices will continue to rise as an important risk to the inflation 

forecast. 

Moreover, the currently high levels of inflation, if sustained, 

might lead the public to revise up its expectations for longer-term 

inflation. If that were to occur, and those revised expectations were 

to become embedded in the domestic wage and price-setting process, we would see an unwelcome rise in actual inflation over the 

longer term. 

A critical responsibility of monetary policymakers is to prevent 

that process from taking hold. At present, accurately assessing and 

appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policymakers. The 

possibility of higher energy prices, tighter credit conditions, and a 

still deeper contraction in housing markets all represent significant 

downside risks to the outlook for growth. At the same time, upside 

risks to the inflation outlook have intensified lately as the rising 

prices of energy and some other commodities have led to a sharp 

pickup in inflation, and some measures of inflation expectations 

have moved higher. 

Given the high degree of uncertainty, monetary policymakers 

will need to carefully assess incoming information bearing on the 

outlook for both inflation and growth. In light of the increase in upside inflation risk, we must be particularly alert to any indications, 

such as an erosion of longer-term expectations, that the inflationary impulses are becoming embedded in the domestic wage and 

price-setting process. 

I would like to conclude my remarks by providing a brief update 

on some of the Federal Reserve’s actions in the area of consumer 

protection. At the time of our report last February, I described the 

Board’s proposal to adopt comprehensive new regulations to prohibit unfair or deceptive practices in the mortgage market, using 

our authority under the Home Ownership and Equity Protection 

Act of 1994. 

After reviewing the more than 4,500 comment letters we received 

under the proposed rules, the Board approved the final rules on 

Monday. The new rules apply to all types of mortgage lenders and 

will establish lending standards aimed at curbing abuses, while 

preserving subprime lending and sustainable homeownership. 

The final rules prohibit lenders from making higher-priced loans 

without due regard for consumers’ ability to make the scheduled 

payments, and require lenders to verify the income and assets on 

which they rely when making the credit decision. Also, for higherpriced loans lenders now will be required to establish escrow accounts so that property taxes and insurance costs will be included 

in consumers’ regularly monthly payments. 

The final rules also prohibit prepayment penalty for higherpriced loans in cases in which the consumer’s payment can increase 

during the first few years and restrict prepayment penalties or 

other higher-priced loans. Other measures address coercion of appraisers, servicer practices, and other issues. We believe the new 

rules will help to restore confidence in the mortgage market. 

In May, working jointly with the Office of Thrift Supervision and 

the National Credit Union Administration, the Board issued proposed rules under the Federal Trade Commission Act to address 

12 

unfair or deceptive practices for credit card accounts and overdraft 

protection plans. Credit cards provide a convenient source of credit 

for many consumers, but the terms of credit cards loans have become more complex, which has reduced transparency. 

Our consumer testing has persuaded us that disclosures alone 

cannot solve this problem. Thus, the Board’s proposed rules would 

require card issuers to alter their practices in ways that will allow 

consumers to better understand how their own decisions and actions will affect their costs. 

Card issuers will be prohibited from increasing interest rates 

retroactively to cover prior purchases except under very limited circumstances. For accounts having multiple interest rates, when consumers seek to pay down their balance by paying more than the 

minimum, card issuers will be prohibited from maximizing interest 

charges by applying excess payments to the lowest rate balance 

first. 

The proposed rules dealing with bank overdraft services seek to 

give consumers greater control by ensuring that they have ample 

opportunity to opt out of automatic payments of overdrafts. The 

Board has already received more than 20,000 comment letters in 

response to these proposed rules. 

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

The CHAIRMAN. Thank you. 

[The prepared statement of Chairman Bernanke can be found on 

page 53 of the appendix.] 

The CHAIRMAN. We will put the clock back on. 

I want to repeat again my appreciation of the very thoughtful 

steps you are taking with regard to consumer protection. They 

haven’t done everything we would do, but they go very far in that 

direction. I think they are very important. They don’t totally obviate the need for legislation, but I did want to acknowledge that. I 

have to say if the Federal Reserve Board, before you became the 

Chair, had promulgated the rules that you promulgated on Monday, I do not think we would be in this dire situation we are in 

now. 

Now, on the macroeconomy, on the job situation, and you note 

this in the report, the total report of jobs lost for the first 6 months 

is well over 400,000; 438,000, but you also note private sector job 

loss is 564,000. In other words, the public sector has mitigated job 

loss this year, and that is very relevant because one of the things 

that we will be considering, and I think conditions clearly call for, 

is a second stimulus. In fact, I think the argument for a stimulus 

is somewhat reinforced by your presentation because we have depended a great deal on monetary easing to help the economy, but 

whatever people think, it does seem to be clear we have reached 

a limit on monetary easing, at least according to what the Federal 

Reserve Board is willing to do. I believe further attention to a very 

lagging economy is necessary, and it is going to have to come on 

the fiscal side. 

One of the arguments that I think is supported by these numbers 

is that we should be giving aid to State and local governments. Aid 

to State and local governments has a twofold benefit. It improves 

the quality of life. They provide police services and fire services, 

13 

education, sanitation, and quality-of-life improvements. They also 

are, as the numbers show, a significant source of employment. 

Now, the problem is that the subprime crisis has eroded the ability of State and local government to carry out that function. Property taxes in many parts of this country have been impinged by the 

foreclosure process and by the drop in house prices. 

So there are several arguments that combine to say that aid to 

municipalities and States is very important. We believe aid to help 

them buy up foreclosed property is an important part of that. But 

I think the numbers clearly show that. 

I want to get to the whole question of the constraints on monetary policy. You say here that you have this dilemma, and you do, 

where there are both inflationary fears and still some downside 

risks to the economy. Without reference to the current situation, I 

think an important point comes out of this conversation. There is 

an argument for monetary policy increasing restraint, both to deal 

with inflation and to deal with the drop in the dollar, which contributes directly to energy prices. 

I should note that at the request of the ranking members of the 

full committee and the subcommittee, we are scheduling a hearing 

to talk about the relationship of the low currency to oil prices and 

energy prices. That hearing is going to go forward in the last week 

that we are here. 

But here is the problem: Your European counterparts have been 

able to be much more rigorous in raising interest rates. They, in 

fact, have a different statute. You have a dual mandate, which is 

very important, to worry about unemployment and inflation. They 

are mandated to do inflation. Western Europe is not necessarily 

less socially conscious than we are. I don’t expect extensive comments from you, but I think here is the problem. 

As you contemplate the possible need for raising interest rates to 

slow down the whole economy, you face a situation which the social 

consequences of that will be more negative than they would be in 

Europe; that is, the existence of better social safety nets in Europe, 

I think, gives monetary policy more political and social freedom 

than it has in the United States. 

If you raise rates and slow down the economy, we have people 

who are going to lose health care. That doesn’t happen in most European countries. There is a better provision of alternative income 

supports. 

So one of the things I think we should understand is the relative 

insufficiency of our social safety net vis-a-vis what you have in 

Western Europe constrains monetary policy unduly. No one wants 

to see people thrown out of work. There are times when an increase in interest rates is necessary from the standpoint of the currency, and the gap between the European interest rates and our 

rates have contributed to a deterioration of the currency, which 

contributes to the energy problem. 

So one of the things I recommend, and I have deliberately not 

asked you to comment because it goes beyond your mandate, I just 

want to note that to the extent that we improve the social safety 

net in this country, which is important on its own, I think we also 

give more flexibility to monetary policy, because the Federal Reserve would then be freer in times when it felt it was necessary for 

14 

other reasons to slow down the economy in the knowledge that this 

would not have, as it has today, a disproportionately negative effect 

on a lot of the people who are more vulnerable economically. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you. 

Chairman Bernanke, you talked about the significant increase in 

the CPI this morning, and the challenge that high energy prices 

present to the Fed and to our economy. Would you agree that the 

failure of this country to develop a comprehensive and sustainable 

energy initiative to reduce our dependency on foreign sources of oil 

represents a major threat to our economy? 

Mr. BERNANKE. I do think it is very important for us—and I 

agree with you, Congressman, that it would have been better to 

have addressed this some time ago. I think it is very important for 

us to have an energy strategy, and that would have multiple dimensions: government support for research and development; clarification of regulatory policy; and, of course, letting the market respond to these prices. The only silver lining to these high prices is 

that they do induce lots of incentives to conserve, incentives to provide alternatives, and incentives to find and develop other oil 

sources. 

So I agree with you absolutely that a more aggressive energy policy could be useful, and maybe even in the shorter term than one 

might guess, because these future markets are very forward-looking, and to the extent that there is a sense that the United States 

and other industrial countries are aggressively tackling their energy problems, it could sort of lessen concern about the long-term 

supply and demand balance in oil. 

Mr. BACHUS. Representative Paul mentioned the weak dollar. 

Obviously, it is helping us with our exports, and it is moving some 

consumption inward. Obviously, our constituents are being terribly 

stressed by the high energy costs. I believe one factor may be the 

weak dollar. What is your policy regarding exchange rate intervention? 

Mr. BERNANKE. Well, our principal policy toward the dollar is to 

have a strong economy. The Federal Reserve is mandated to provide strong growth and price stability. My belief is that if we work 

effectively to achieve that objective, the dollar strength in the medium term will reflect that healthy underlying economy. 

Market intervention is a policy that has been undertaken a few 

times. I think it is something that should be done only rarely, but 

there may be conditions where markets are disorderly where some 

temporary action might be justified. 

I think the dollar in the long term depends really on the fundamentals, and it is up to us to get the fundamentals right. 

Mr. BACHUS. We talk about Bear Stearns and about the GSEs, 

about systemic risk because of large financial institutions. Is there 

a downside to the belief that I think is taking hold in the marketplace that the Federal Reserve and the Treasury will be lenders of 

last resort for the entire financial system? Don’t we run the risk 

of a moral hazard? And when we do that, what do we do about 

where private investors participate in the profits? It seems that we 

are socializing the losses, or the public is assuming those losses. 

Could you comment on those two things? 

15 

Mr. BERNANKE. Certainly. 

The recent financial crisis, which has been quite severe, as you 

know, has revealed a number of weak points in our economy, in our 

financial system, and they have required attention because we 

need to have a stable, well-working financial system in order for 

the economy to recover. In the longer term, I agree that market 

discipline is the best source of strength in the financial system. We 

need to take action to make sure that moral hazard doesn’t induce 

excessive risk-taking. 

I spoke on this subject last week in a speech, and I indicated 

three directions forward that we could take to make sure that 

moral hazard is constrained in the future. The first is, now that the 

investment banks have received some support, in particular they 

have received access to, at least temporarily, to the discount window, I believe that we need to have legislated consolidated supervisory oversight over those firms that would ensure that they have 

adequate capital, adequate liquidity, and adequate risk management so they would not be taking advantage of any presumed backstop that they might otherwise see. 

Secondly, I talked about the need to strengthen our financial infrastructure. Part of the reason that it was a big concern to us 

when Bear Stearns came to the brink of failure was that we were 

concerned that there were various markets where the failure of a 

major counterparty would have created enormous strains on the financial system. 

One way to address the problem, and I discussed that at some 

length in my speech and I would be happy to talk more about it, 

is to make sure that the financial infrastructure, the systems 

through which lending and borrowing takes place, as well as the 

risk management of the lenders is strengthened to the point that 

the system could better withstand a failure, and therefore there 

would be less expectation of support in that situation. 

Finally, I think the issues we have approached like the investment banks, these circumstances were not contemplated in other 

areas like deposit-insured banks. There is a procedure, a set of 

rules, prompt corrective action, systemic risk, those sorts of things 

which tell the regulators how Congress wants them to proceed and 

create clarity in the market about under what circumstances assistance would be forthcoming. 

As Secretary Paulson has also indicated, I think we ought to be 

looking at clarifying the congressional expectations for how we 

would resolve—were the situation to arrive again, how to resolve 

such a problem. 

The CHAIRMAN. The gentleman from Massachusetts. 

Mr. CAPUANO. Chairman Bernanke, I have been listening to the 

GSE issue, and some people think this is nothing more than a crisis of confidence; maybe we should not do anything and let it wait. 

It amazes to me to hear this when I have an oil crisis, a food crisis, 

a Consumer Price Index going up through the roof, job losses all 

over the place, a trade deficit, a budget deficit going through the 

roof, corporate losses all across-the-board, and the stock market 

shaky every single day. 

I would argue very clearly that this is a little more than a crisis 

of confidence; I think we have a crisis of leadership. When I say 

16 

that, I want to except you from that position. I say that because 

of the actions you have taken. They have been dramatic, bold, and 

courageous. That doesn’t mean I agree with every little detail; I 

don’t want to pretend that. But as far as I am concerned, you have 

been the leader in this Congress in proving that taking bold action, 

sometimes action that is a little bit on the edge, helps the economy. 

It is something that is necessary. 

I think you are following in the footsteps of some people who 

really saved this country from disaster in the 1930’s. People tend 

to forget this. In the 1930’s, there was no one action, no one silver 

bullet that pulled us out of the Depression. It was a series of actions, over a decade. Many of those actions were to correct prior actions that maybe they made a mistake on, maybe they acted too 

quickly and had to adjust it. 

I don’t see that there is anything we can do, unless anyone has 

a single action that this Congress and this country should take. I 

think we need more action, and that includes Congress as well. I 

think we are going to try to do something in the next week or so. 

We need it from the regulators. I personally think we need more 

action from the SEC. I think we need faster action by everybody. 

I think we need more dramatic action by everybody. And I think 

we need more coordinated action by everybody. Right now, I think 

we have too many people running around on their own. 

All that being said, again, I want to thank you for what you have 

done thus far and to thank you for your bold and courageous 

moves, as I see it, most recently in the predatory lending area. I 

would just like to hear your opinion in general, not about the specific proposals we have. I guess I can’t escape them right now when 

the GSE proposal is floating around in all its different iterations. 

In general, in the crisis that we are in, do you believe that government—that includes Congress, regulators, and everybody 

across-the-board—but that government should be acting relatively 

quickly, or do you think that we should simply sit back and say it 

is a confidence problem and people just need to get over it? Because, honestly, especially in the last day or so, I have been 

shocked at the number of people who have pretty much said that. 

I understand people differ as to what we should do. That is fair. 

That is what this is all about. But to imply or to state that no action is necessary, to me, is completely wrong, and I would just like 

to hear your opinion on that issue. 

Mr. BERNANKE. Well, you want to take the right actions. 

Let me say a word about GSEs. The GSEs are adequately capitalized. They are in no danger of failing. However, the weakness 

in market confidence is having real effects as their stock prices fall. 

It is difficult for them to raise capital. If their debt spreads widen, 

it will increase the borrowing costs. 

As I said yesterday, I think the housing market is really the central element of this crisis, and anything we can do to strengthen 

the housing market or to strengthen mortgage finance would be 

beneficial. Therefore, I do think this is one area where Congress 

needs to think hard about how to restore confidence in the GSEs 

to make sure that they can carry out the function of supporting the 

mortgage market, which, right now, except for the FHA-Ginny Mae 

combination, they are the entire securitization market for mortVerDate Aug 31 2005 12:30 Oct 28, 2008 Jkt 044901 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\44901.TXT TERRIE
17 

gages. I think that is an area particularly where action is needed 

and justified. 

Mr. CAPUANO. With that, I yield back the rest of my time because that was the answer I wanted. 

The CHAIRMAN. The gentleman from Texas, who may not be 

quite so lucky in getting the answer that he wants. 

Dr. PAUL. Thank you, Mr. Chairman. 

I want to address the subject of the inflation being actually a tax. 

Today, most of us who go home and talk to our constituents hear 

a major complaint, and that is the rising cost of living, especially 

the cost of gasoline, medical care, food, and education. Most economists from all fields, whether they are monetarists or Keynesians, 

they generally recognize that inflation is a monetary phenomenon. 

But it is interesting that once we get rising prices, very few people 

talk about the real source and the cause of the inflation, and they 

go to saying, well, it’s the oil companies. They charge too much. 

That is inflation. Labor makes too much money, and it is a labor 

problem. Others just say, well, it’s just pure speculation, if we 

didn’t have the speculators, we wouldn’t have the inflation. 

Yet, most people conclude not that we have too much money, but 

that we don’t have enough. If we only had more money, we could 

pay all these bills, which I think is absolutely the wrong conclusion. What we need is more value in the money. In terms of gold 

and other commodities, prices aren’t really going up. Sometimes 

they actually even go down. In terms of paper money worldwide, 

whether the euro or the dollar, the prices are going up. 

But I maintain really that inflation is a tax. If the Federal Reserve and you as Chairman have this authority to increase the 

money supply arbitrarily, you are probably the biggest taxer in the 

country. You are a bigger taxer than the Congress, because they 

are talking now about a bailout package of $300 billion, and we 

will have to raise the national debt to accommodate to take care 

of the housing crisis. But you as the Federal Reserve Chairman 

and the Federal Reserve Board and the system create hundreds of 

billions of dollars without even the appropriations process. Then 

this money gets circulated, and some people benefit—the people 

who get to use it first benefit, and the people who get to use it last 

suffer the consequence of the higher prices. 

So every time people go and complain about these higher prices, 

they should say to themselves, I am paying a tax. Because whether 

you are monetizing debt or whatever or catching up for buying up 

securities, we have had a free ride for all these years. We have 

been able to export our inflation. We have the Chinese buying up 

our securities. We haven’t had to monetize it. But now it is coming 

home, and you have to buy these things to prop them up. 

So I maintain that inflation, as the increase in the supply of 

money for various reasons is a tax, it is an unfair tax, it is a regressive tax, it hurts the poor, it hurts the retired people more because labor never goes up and keeps up with inflation. We never 

keep up with the need for retired individuals to keep up with the 

cost of living. 

So I would like you to comment on this. Is this completely off 

base, or is there something really to this? Every time we see the 

cost of living going up, we indirectly are paying a tax. 

18 

Mr. BERNANKE. Congressman, I couldn’t agree with you more 

that inflation is a tax and that inflation is currently too high, and 

it is a top priority of the Federal Reserve to run a policy that is 

going to bring inflation to an acceptable level consistent with price 

stability as we go forward. 

I would make one distinction, which is that what the Federal Reserve can control is the increase in prices on the average, over the 

overall basket of consumer goods and services. The enormous 

jumps in oil prices and other commodity prices are to some extent 

at least due to real factors out of the control of the Federal Reserve. The Federal Reserve cannot create another barrel of oil. It 

is the global supply and demand conditions which are affecting 

those particulars things to the most significant extent, but to the 

extent that the Fed does have influence on the overall inflation 

rate, you are absolutely right that it is very important to maintain 

price stability, and I take that very seriously. 

Dr. PAUL. But if the oil prices were going up for another reason 

other than monetary reasons, other prices would have to come 

down because there would be a limit in the money supply. I 

think—and the prices are going up today, like I indicated in my 

opening statement, not necessarily because of the monetary policy 

of the last year but maybe for the last 15 or 20 years and the fact 

that we were able to export, so to speak, our inflation. Now it is 

coming home. Those people who have been holding these dollars 

are not wanting to buy them as readily. Fortunately, foreign central banks are still not dumping them but even the other central 

banks might not be as cooperative. 

So I still see tremendous pressure. I don’t see any signs that you 

are able to do very much because all we hear about is more inflation. You know, it is not so much that they are too big to fail. It 

just means that everybody needs to be propped up. Congress participates in it. And all the pressure is put on the dollar. It is a dollar bubble. And I think what we are seeing is the unraveling of a 

dollar bubble that had been building for more than 35 years. 

The CHAIRMAN. The gentlewoman from New York. 

Mrs. MCCARTHY. Thank you. And again, I thank you for the 

work that you have been doing in the last couple of weeks. I imagine it has been very stressful. I want to just ask a couple of questions and see how prepared we are. 

When I think about the small community banks, the regional 

small banks, they are going under the same crunches as our, you 

know, what we are concerned about as far as the larger banks, 

Wall Street. And even my retirees or those of us who are thinking 

of retiring in the next 5 to 10 years who have put money away into 

our IRA, I don’t think a lot of people realize that it is only back 

to $250,000. Is that going to put a lack of confidence in those who 

are putting money into the IRA? Because this is a country that 

does not save, and we have been trying to encourage people to save 

for their retirement. So those who put money into the IRA are now 

all of a sudden finding a lot of that money is gone again. Is there 

anything that Congress should be doing for the future? And what 

tools do you have to help the small regional banks that don’t have 

the ability to go to the Fed for money to help make loans for those 

who can actually buy homes to get the housing market to go? 

19 

Mr. BERNANKE. Well, to the extent that your constituents have 

part of their IRA in the form of deposits, you know, they should 

understand what the limits are of the FDIC protection. Of course, 

one strategy if they have any concerns whatsoever would be to 

break up their money across banks or in different accounts and so 

on. There are obviously ways to get that protection, if that is what 

you are concerned about. And you know, I have complete confidence in the FDIC, as we all should, in that the deposits that are 

insured by the FDIC are completely safe and there is not even any 

break in time between if there were a problem, when you would be 

able to access your money. 

So I think we all need to reassure the public that the FDIC is 

protecting deposits and that there is no need to be concerned about 

those deposits. 

With respect to borrowing, all banks can borrow from the discount window, including small banks. Normally they don’t as 

much. They tend to be well-capitalized and strong and they sometimes come to the window. But if they want to, they certainly are 

free to do so. 

Mrs. MCCARTHY. So the school of banks do have the opportunity 

to go to the discount window? 

Mr. BERNANKE. Yes, they do. 

Mrs. MCCARTHY. Okay. I didn’t actually know that. So I thank 

you for that information. Thank you very much. I yield back. 

The CHAIRMAN. The gentleman from Illinois. 

Mr. MANZULLO. Thank you, Mr. Chairman. Chairman Bernanke, 

earlier this week you took an action to crack down on a range of 

shady lending practices that have hurt the Nation’s riskiest 

subprime borrowers and also have caused a tremendous amount of 

economic distress in this country. Among other things, the Fed 

issued regulations that would prohibit lenders from lending without considering the borrower’s ability to repay and also would require creditors to verify their income and assets at the time of the 

borrowing. These are pretty basic. 

Although hindsight is a 20/20 issue, and it is easy to sit here and 

say the Fed should have done this a long time ago, the evidence 

of this housing bubble has been going on for some time. And my 

question is, what took the Fed so long to act? And then the regulation you are coming out with is not going to be effective until October 1st of next year. Those are the issues just involving in the 

subprime borrowers. As to the regular borrowers, you came up with 

another landmark regulation that says, whenever a borrower gives 

a check to the bank that the bank has to credit it that day to the 

borrower’s account. I mean, this shows knowledge of some very 

basic problems that have been wrong in the housing industry. But 

what took the Fed so long to act? And why wait 15 months before 

the regulations go into effect? 

Mr. BERNANKE. Well, the regulatory process itself imposes certain time constraints. We obviously have to make sure the rules 

are consistent with existing law, including State as well as Federal 

law, that they take make sense economically, and so on. It does 

take some time to develop these proposals. They are quite elaborate. 

20 

Mr. MANZULLO. Sir, these are not elaborate proposals. These are 

very basic statements that say that nobody can take out a loan on 

a house unless he can afford to pay it. What is so elaborate about 

that statement? 

Mr. BERNANKE. It raises issues according to what kinds of liabilities might be associated with that. Are there circumstances in 

which—say we have a long-time relationship between a bank and 

a customer where you don’t go through the paperwork, those kinds 

of questions are still there. 

And I was just going to add that under any kind of circumstance, 

we have to have a comment period to get input from the public. We 

have to revise our regulations. 

Mr. MANZULLO. But you didn’t start until December. 

Mr. BERNANKE. So there are two questions. What is the length 

of the regulatory process, which is basically what we have to do to 

follow congressional— 

Mr. MANZULLO. The question is, why did you take so long? You 

didn’t do anything until December of last year. 

Mr. BERNANKE. I described in my testimony here in July that we 

were going to do a top-to-bottom review of all these issues and we 

were going to act as quickly and as effectively as possible. We 

began that process and we have supplemented it, as you know, 

with considerable work on the credit card side. We have worked 

also in— 

Mr. MANZULLO. Chairman Bernanke, a lot of people in this country are losing their homes. The Fed has the responsibility and the 

authority. You could have moved a long time ago and stopped a lot 

of this. I mean why does it take months, if not years, to have a 

very simple statement that you can’t buy this house unless you can 

afford to make the mortgage? These regulations are not that revealing. You talk about—you need a top-to-bottom review for something this simple? This is inexcusable on the part of the Fed. Notice that I said on the part of the Fed, not you. 

Mr. BERNANKE. Well, at the current moment, as we all know, the 

subprime market is pretty moribund, and so these rules are important but they are not having much impact on the market. What we 

hope to do is have rules in place so that when the market comes 

back, as it some day will, that the lending will be done in a way 

that is prudent and also supportive of homeownership among people with a more modest means. That is our intention, and we have 

followed the regulatory principles in order to do that. 

Mr. MANZULLO. And then with regard to regular loans, you have 

proof, do you not, that homeowners are making payments to lending institutions and the lending institutions are holding on to the 

checks while the interest grows on the loan and waiting days before applying that money to the principal balance of the mortgage, 

isn’t that correct? 

Mr. BERNANKE. We have addressed in our regulations some 

issues about servicers and how quickly they have to apply the 

money to make sure that it is fair and transparent. 

Mr. MANZULLO. It simply says— 

The CHAIRMAN. The gentleman can’t ask questions after the 5- 

minute rule. We have a full, full rostrum. 

21 

The gentlewoman from New York, I ask you to give me 15 seconds. Chairman Bernanke, quickly, when did you become Chairman of the Federal Reserve? 

Mr. BERNANKE. In the beginning of 2006. 

The CHAIRMAN. And when did you start working on these regulations that were just being discussed? 

Mr. BERNANKE. In 2007. 

The CHAIRMAN. And when did Congress give the Fed the authority to do it? 

Mr. BERNANKE. 1994. 

The CHAIRMAN. 1994. I don’t think the delay is fairly laid at your 

doorstep given those numbers. The gentlewoman from New York. 

Ms. VELAZQUEZ. Chairman Bernanke, thank you for being here. 

Since June of 2006, the Federal Reserve has acted consistently 

with a series of aggressive cuts to the Federal funds rate. However, 

with the rate now at 2 percent and with rising indicators of inflationary risk, what can the Fed do to support the U.S. economy and 

force the further decline in the markets? 

Mr. BERNANKE. Congresswoman, as I indicated in my testimony, 

we at this point are balancing various risks to the economy. And 

as we go forward, my colleagues and I are going to have to, you 

know, see how the data come in and how the outlook is changing 

and try to find the policy that best balances those risks and best 

achieves our mandate of sustainable growth and price stability. So 

I don’t know how to answer beyond that, other than to say that we 

are going to be responsive to conditions as they evolve. I noted 

today the importance of not letting inflation from commodities 

enter into a broader and more persistent and more pernicious inflation. That is certainly an important priority. But in general, we are 

going to have to just keep evaluating the new information and see 

how it affects the outlook. 

Monetary policy works with a lag. We can’t look out the window 

and do something that will affect the economy today. So the best 

we can do is try to make forecasts and try to adjust our policy in 

a way that brings the forecast towards the desired outcome. 

Ms. VELAZQUEZ. Well, Mr. Chairman, I understand all the steps 

and actions taken by the Fed. But it seems to me that the lending 

tools are proving to be ineffective at this point. Doesn’t this prove 

that the current economic conditions have moved beyond a liquidity 

crisis that can be mitigated through Federal lending and is now 

proven to be a capital crunch? 

Mr. BERNANKE. Well, as the earlier questioner mentioned, dealing with these kinds of problems is multi-dimensional. Monetary 

policy is one element. Lending is one element. Regulatory policy, 

both initiated by the regulators and by Congress, is another element. I think we need to address the Fannie Mae/Freddie Mac situation to try to strengthen the mortgage markets. There are many 

other steps. We have done the fiscal stimulus package. 

So I absolutely agree that there is no single solution. If there 

were, of course we would have used it by now. What we need to 

do is have a sensible, coordinated, and proactive approach that is 

going to allow us to get through this difficult period and return to 

the strong underlying growth of this economy, in which I have 

great confidence. 

22 

Ms. VELAZQUEZ. Okay. Many believe that the losses from the 

housing market could spill over into consumer and business credit, 

indicating that the worst may be yet to come. What is your take 

on that? 

Mr. BERNANKE. Well, there has been a problem in that many 

banks that have suffered losses from mortgage credit and therefore 

have had their capital reduced, they either have to raise more capital or if they don’t do that, they have to shrink their balance 

sheets or at least be reluctant to make new loans. So there is some 

risk of that, that it would spill over to other kinds of credit. In fact 

we have seen credit tightening in a number of dimensions. Of 

course there is another factor as well, which is as the economy 

slows it is natural for banks to be more cautious in their lending 

because with a slower economy, credit risks tend to rise. 

So that is a very important issue. We want to be sure that banks 

are sound and that they have enough capital so that they cannot 

just be safe and sound, which of course is critical, but beyond that 

so that they can expand credit in a safe and sound way to promote 

the recovery and strength of the economy. 

Ms. VELAZQUEZ. Mr. Chairman, every day we hear stories about 

small businesses being impacted by the credit crunch. And the Fed 

used to provide the Survey of Small Business Finances. And you 

have been critical to many policy decisions both at the Federal Reserve and here in Congress. If the survey is discontinued, what alternative sources of information will your agency use to make its 

report to Congress on the availability of credit to small businesses? 

Mr. BERNANKE. Yes, we did cancel that survey for budgetary reasons. But we did so also in the understanding that we could get 

almost all the necessary information through other means. And we 

in fact discussed this with Congress. We discussed this with various groups of interest in this area. The most important alternative 

is the Survey of Consumer Finances, which is a Fed-managed product which surveys families periodically on all aspects of their balance sheets and income. That is an excellent survey instrument for 

asking small business owners what their situation is, do they have 

access to credit, what is their net worth, and so on. 

So what we have tried to do—and I believe this will be successful—is to integrate the key elements of that small business survey 

into the Survey of Consumer Finances that will allow us to recover 

most of the information. And then we have a variety of other 

sources of information that I think will make it possible for us to 

get a good picture of small business. 

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

The CHAIRMAN. The gentleman from Nevada. 

Mr. HELLER. Thank you, Mr. Chairman. I appreciate the opportunity to spend some time here with Chairman Bernanke. I will try 

to stay on some of the macro issues as you led us earlier in the 

hearing. I don’t think there is a newspaper out there today that is 

not talking about the bad economic news that is out there—the 

Washington Post, the New York Times, the Wall Street Journal. 

You read them and it is talking about yesterday’s hearings. I have 

a copy of USA Today in front of me that talks about the signs of 

growing crisis, the Dow being down, inflation being up, the U.S. 

dollar down, foreclosures being up. All of this, I think, was reVerDate Aug 31 2005 12:30 Oct 28, 2008 Jkt 044901 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\44901.TXT TERRIE
23 

flected in your testimony as you spoke with us earlier in this hearing. The only good news I am hearing out there is that by December 31st, the year should be over. 

I guess what I want to do is touch on a concept or a statement 

that I hear too often, and that is too big to fail and the systemic 

economic impact of these financial institutions and their ability to 

survive or not. And we have obviously recent examples—Bear 

Stearns, the Fed steps in; IndyMac, the Fed steps in; GSEs, the 

Fed steps in. I receive a lot of calls from constituents who are concerned about their deposits in other banks including Wachovia, 

Bank of America, and Wells Fargo. I guess the question I have— 

and I have heard you say in the past, correct me if I am wrong, 

that some of these financial institutions should be allowed to fail. 

I guess my question is, what is the threshold between a financial 

institution that the Fed should step in versus one that should be 

allowed to fail? 

Mr. BERNANKE. Well, first of all, IndyMac did fail, and the Fed 

did not do anything about that. I would add to your constituents, 

as I mentioned earlier, that all insured deposits were available immediately and no insured depositor is going to take any loss from 

that. 

We have in this episode just been confronted with weaknesses 

and problems in the financial system that we didn’t fully—we collectively, the regulators, the Congress, the economists did not fully 

anticipate. And in the interest of the broader financial system and 

particularly as always, always the ultimate objective is the 

strength of the economy and the conditions for—economic conditions for all Americans. We found weaknesses and we had to respond in crisis situations. I think that—while I certainly would defend the actions we have taken, I would much prefer in the future 

not to have to take such ad hoc actions and, as I described, I think 

to Ranking Member Bachus, the best solution is to have a set of 

rules that govern when a bank can be or other institution can be, 

you know, put through a special process. In particular, we already 

have such a process for depository institutions, which is a fiduciary 

process where the requirement is that the government resolve that 

bank at the least cost to the taxpayer unless a determination by 

a broad range of financial officials that a systemic risk exists, in 

which case other measures could be taken. 

So I think it wouldn’t be appropriate for me to try to give you 

any guidelines right now. I think what we are doing right now is 

trying to do the best we can to make sure the financial markets 

continue to improve, and that they begin to function at a level 

which would be supportive of the economy. I think what is critical 

is as we go forward, we take stock from the lessons we have 

learned from this experience and try to set up a system that will 

be less prone to these kinds of difficult decisions that we have had 

to make. 

Mr. HELLER. I appreciate your feedback. When we are talking 

about 1.5 million foreclosures last year, we are talking about 2.5 

million foreclosures in this calendar year. And one of the concerns 

that I get back—keep in mind that I am from Nevada and the impact that foreclosures are having on all of Nevada, especially southern Nevada, and their concern is that as the Fed is stepping in in 

24 

the Bear Stearns issues, the IndyMacs, the GSEs and they don’t 

feel like the Fed is stepping in enough for the 2.5 million people 

who are finding themselves without homes. Any comments or reflections on that? 

Mr. BERNANKE. Well, on two dimensions, one is that, as I said, 

the actions we have taken—obviously it is not always crystal clear 

to the public. But we have always taken our actions with an eye 

to helping all Americans. And in particular, if—when we do take 

actions to try to promote stability in the financial system, we are 

thinking about the availability of credit, the safety of investments, 

mortgage credit, all those things which do affect people’s lives. So 

for example, in these discussions of Fannie Mae and Freddie Mac, 

I have no particular concern about the companies per se but they 

are very critical right now to the U.S. mortgage markets and there 

are people out there who would want to get a mortgage, people out 

there who would hope the housing market can come back, and that 

can only happen if there is renewed interest and availability to buy 

homes. So these actions are intended to make our system work for 

the benefit of all Americans. 

Now with respect to foreclosures specifically, within our powers 

we have done what we can to try to address that. We have, for example, given guidance to banks that we encourage them to do 

workouts. I have talked about the need for loan modifications. 

When other more temporary measures do not succeed in avoiding 

foreclosure, the Federal Reserve has also been extraordinarily active at the local level. All of our 12 reserve banks and collectively 

the entire system have been working closely with NeighborWorks 

and other institutions to try to assist locally in terms of training, 

in terms of helping communities deal with foreclosure clusters and 

the like. So wherever we can, given our national footprint, we have 

been involved in trying to help. 

So you know, I would argue that we are addressing this on two 

fronts. I am first of all trying to help the economy get stronger but 

also addressing this issue directly. 

Mr. HELLER. Thank you very much. 

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

we will go to Mr. Sherman and Mr. Scott on our side. Mr. Baca. 

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

a combination of declining wealth, a weak job market probably because of all of the outsourcing and its impact that it has had on 

working families, rising gas, food prices, and foreclosures have created a downward turn on the economy. To put it into perspective: 

94,000 jobs have been lost each month this year; 8,500 families are 

in foreclosure each day; 2.5 million foreclosures are expected in the 

year 2008; home prices have fallen, stripping away household 

wealth and equity; the value of the dollar has dropped between 20 

to 30 percent; inflation is raising quickly; unemployment has risen 

to 5.5 percent; and the real wages have fallen to the level of 2001 

value. 

More importantly is the real impact these numbers have on families. I go back home and my constituents are asking me, what are 

you doing to bring down the gas prices and what are you doing to 

help stop the foreclosures? Families are struggling to make ends 

meet. They are forced to pick and choose between basic necessities 

25 

that they can afford each month, food, house payments, child care 

or gas. You stated that the growth in the second half of this year 

would be well below the trend due to continued weakening in the 

house markets, elevated energy prices, and tight credit conditions. 

But you stopped short at predicting a recession. 

Question number one: Is the worst yet to come? And how would 

you explain to the average American and to the working families 

who are feeling the impact every day that we are not in a recession? 

Mr. BERNANKE. Well, Congressman, first I would like to respond 

quickly to something about your initial statement. You talked 

about outsourcing and the like. Probably the key source of the job 

loss we have had is the decline in the housing market, which has 

laid off construction workers and has had spillover effects through 

the financial system and so on. At this moment, our trade sector 

is actually one of the bright spots in our economy that is creating 

new opportunities for exports and job growth. 

With respect to whether this is a recession or not, that is a technical determination that a group of economists will make at some 

point in the future. It has to do with the various criteria. I think 

I agree with the premise of your question, which whether it is a 

technical recession or not is not all that relevant. It is clearly the 

case that for a variety of reasons, families are facing hardships in 

terms of higher energy costs, declining wealth, and all of the things 

that you mentioned. So this is clearly a rough time. Whether it is 

a recession or not, as you point out, is not— 

Mr. BACA. Do you believe that we are in a recession? 

Mr. BERNANKE. I don’t know. And I don’t know if the—in fact, 

I am quite confident that the people who officially will determine 

that don’t know either. In the past— 

Mr. BACA. Do you feel like the people who are impacted feel like 

we are in a recession? 

Mr. BERNANKE. Again, I think I would not put much weight on 

this technical terminology. I mean, I think it is clear that growth 

has been slow, and that the labor market is weak. And so conditions are tough on families. I have no doubt whether it is technically a recession or not, and I don’t see how that makes a great 

deal of difference. 

As far as the projection is concerned, we see continued growth, 

positive growth but weak for the rest of the year. Looking at the 

housing market, it is beginning to stabilize, at some point around 

the end of the year, early next year. And with the hope that we 

can continue to strengthen the financial system, we would hope to 

see recovery back to more normal levels of growth in 2009. But like 

all economic forecasting, there are uncertainties in both directions. 

But with respect to the current situation, again, whether it is a recession or not doesn’t really play in our policy decisions. 

Mr. BACA. Well, let me ask you the other question before my 

time runs out. You mentioned the housing sector together with the 

oil is the heart of the current economic uncertainty. How would we 

eliminate the uncertainty and cause people to have a greater degree of confidence? And should we do something to address the 

market speculation in oil to help drive down the gas prices? 

26 

Mr. BERNANKE. Well, let me address the oil price situation. I discussed this a bit in my testimony. There are multiple causes, no 

doubt, for energy price increases. But the most important cause is 

the global supply and demand balance. The fact that oil, for whatever reason and there are a number of reasons, has not kept up 

with—oil production has not kept up with the growth in demand 

for oil particularly in emerging countries which are growing quickly 

and industrializing. So that suggests that probably the best thing 

we as a country can do about this is to—perhaps working with 

other countries, is to promote conservation, alternatives, new energy exploration, all the measures that will help bring us to a more 

sustainable situation as far as energy is concerned. 

On speculation, I also discussed this in my testimony. The Federal Reserve is working as part of a task force with the CFTC to 

look at these issues empirically. But my sense, based on the information I have at this point, is that speculation or, more properly 

defined, manipulation is not a major cause of oil price increases at 

this juncture. 

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

The CHAIRMAN. The gentlewoman from Ohio. 

Ms. PRYCE. Thank you, Mr. Chairman. And I want to thank you, 

Chairman Bernanke, for being with us today. Thank you for your 

activity over the last several months. It has certainly been a tumultuous few months. My concern is that we as a Nation, you as the 

Fed, the Administration, and the Congress seems to be working in 

a reactionary mode, in crisis mode, that everything that has happened as a result of events. Now I know that you have no crystal 

ball any more than we have a crystal ball. But we as a committee 

have responsibility for oversight of the safety and soundness of our 

financial system. And I just want to ask a very simple question because I just haven’t found an answer for it yet. And that is, why 

did such sophisticated market participants misjudge so badly the 

risk in the U.S. housing market? Is there an answer that you can 

impart to the committee to help us understand why we blinked and 

missed this one? 

Mr. BERNANKE. Well, as we look back on it, we see that there 

were just some serious failures in the management of risks. There 

were many firms that had exposure to the housing market in a variety of ways across the firm, including holding mortgages and 

other ways. And they didn’t fully appreciate that in the contingency 

that the housing boom would turn around, that house prices would 

begin to drop; they didn’t fully appreciate their exposure to that situation. 

The regulators bear some responsibility on that. It is our job to 

make sure that they measure and manage their risks appropriately. We have been working on that for a number of years related to bank supervision initiatives like the Basel Initiative, for 

example, and so on. But it is clear that we need to redouble our 

efforts to make sure that the risk management is sound, that the 

underwriting is sound, and that we don’t get ourselves into this 

kind of situation again. 

Ms. PRYCE. Well, you mentioned Basel. Are there further risks 

ahead to our system and therefore the overall economy that might 

arise, and the new capital adequacy standards in Basel? You know, 

27 

if we are trying to have this happen simultaneously, could that create new risk to the system? Effects of a crisis in any overseas market, could that affect our system in a negative way? Further decline 

in the dollar. There is a list of many things that could potentially 

happen. 

One of the things I would like your comment on is the commercial real estate market. You know, many banks astutely avoided 

the subprime lending, and they instead expanded their commercial 

real estate lending. So everywhere we turn we see increased vacancy signs and downward pressure on rents. And do we expect another wave of pressure from that market? And are we planning 

ahead as a country to address these things as opposed to, you 

know, being reactionary as it seems that we have had to be of late? 

Mr. BERNANKE. Well, on commercial real estate, this was an area 

where the Federal Reserve and other Federal bank regulators 

issued guidance several years ago requiring banks that held very 

high concentrations of commercial real estate to make sure that 

they were underwriting properly, that they had good risk management. And I believe that guidance, which some people complained 

about at the time, I think that is going to help us in the near term 

as we face the situation. 

Certainly as the economy weakens there is going to be a somewhat weaker performance of commercial real estate. But to this 

point, we are not seeing anything remotely like, you know, what we 

have seen in the mortgage market. But it is obviously something 

we are going to have to keep our eye on. 

Ms. PRYCE. Can you comment on anything that is happening at 

the Fed in terms of future planning out for other contingencies? 

You know what I mean. So that we have less of, you know, a reactionary mode in the future? 

Mr. BERNANKE. Well, we are working with our international 

counterparts in trying to strengthen the regulatory system. You 

mentioned my mention of Basel. Clearly we learned some of these 

in this last year and the Basel Committee is looking at places 

where they should strengthen capital requirements, strengthen liquidity management requirements, and so on. So as that becomes 

rolled in over time, it will reflect what we have learned from the 

past year. So even as we are trying to manage the current difficulties, we are also working with other regulators and with Congress 

to try to make sure that our system would be stronger and that we 

will emerge from this with a system that is a lot more resilient 

than we saw in the last year. 

The CHAIRMAN. The gentleman from California. 

Mr. SHERMAN. Thank you. First, a few comments. I would like 

to join the chairman with regard to his comments on your consumer protection efforts. Your statements say that the new rules 

will apply to all types of mortgage lenders. So for the record I will 

ask you to refine that a little bit. I can’t imagine that those rules 

will apply to individuals who make loans in order to sell their 

homes or whatever. 

I would also note that in your statement you say that despite a 

sharp increase in prices, production of oil has risen only slightly. 

And then you go on a couple pages to go on to explain why oil production has only risen slightly. I would add to that—and I am surVerDate Aug 31 2005 12:30 Oct 28, 2008 Jkt 044901 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\44901.TXT TERRIE
28 

prised that you didn’t mention the fact that OPEC exists for the 

exact purpose of preventing increases in supply and that the 

Saudis have oil fields ready to go. They could turn on the spigot 

and they have refused to do so. Talking about oil prices, there is 

a lot of talk here in Congress about, well, what can we do to decrease demand by 10,000 barrels a day? Or how can we go drill and 

get 500,000 barrels a day? 

There is a worldwide price for oil. And what level of production, 

or in the case of the SPRO not acquiring for reserves, how many 

barrels a day would the United States have to deal with in order 

to really affect the world price of oil? And in contrast, there is a 

North American price for natural gas. What percentage increase or 

decrease in supply or demand of natural gas would it take to have 

a perceptible effect on the prices consumers pay? 

Mr. BERNANKE. Well, first on the lending rules, the Federal Reserve normally issues guidance and rules for the banks that it supervises. But of course as the mortgage market has evolved, more 

and more mortgage lending took place in nonbank companies, various kinds of mortgage companies, brokers and the like. And our 

rules will apply to all of those types of companies. In some cases, 

when they are outside of our enforcement authority, we have to 

rely on State and other regulators to enforce the rules. And therefore, as part of this effort, we are working closely with them, doing 

some joint examination exercises, and so on, to try to help them ensure that they will enforce these rules. 

You made a good point, that the global oil market, about 84 million barrels a day, is large. And so it takes—you know, that very 

small change in oil supply and demand would not necessarily have 

a big effect. But I would make a couple of comments on that. One 

is that the fact that we have to import most of our oil hurts our 

trade balance, forces us to send money overseas, so to speak. It 

would be better for the dollar and better for our economic prosperity here at home if we had more sources of energy domestically. 

So that is one consideration. The other consideration is that— 

and we can see this in the tremendous movements in oil prices up 

and down, over a short-term period even though there is a large 

market, the elasticity of supply and demand, the ability of suppliers or demanders to change their behavior in the short run is 

quite limited. So sometimes relatively small events like a strike or 

political unrest in a given country can have a big effect on the price 

because there is so little spare capacity. So to the extent that that 

spare capacity could be enlarged and have more flexibility, that 

could have— 

Mr. SHERMAN. Is there any way to give a numerical answer? 

Would half a million barrels a day affect the price, a quarter million? 

Mr. BERNANKE. Well, any— 

Mr. SHERMAN. Can you give me figures on natural gas? 

Mr. BERNANKE. But the short-term elasticity is sort of that a 1 

percent increase in supply could lower prices as much as 10 percent. 

Mr. SHERMAN. Is that your natural gas answer or does that answer apply to oil as well? 

29 

Mr. BERNANKE. I assume natural gas is similar. Natural gas has 

more flexibility to use it in electricity generation and so on. So I 

am not sure it is quite the same. 

Mr. SHERMAN. Okay. Now a question for the record relating to 

Bear Stearns. The rules of capitalism which are applied with a 

vengeance on Main Street would have said that in a situation like 

that, the shareholders and the subordinated debt holders should 

take the losses long before anybody else. But in the deal that was 

worked out, not only did the shareholders get $10 a share, which 

I realize is far less than they had hoped for, but the subordinated 

debt holders are going to get every penny with interest. And I wonder whether giving you the right to demand the conservatorship 

immediately would put us in a position where we could impose the 

risks and costs not on the taxpayer but on those who are supposed 

to bear them. 

Mr. BERNANKE. I agree. We need some kind of resolution regime 

that will help us do this in a more orderly and predictable way. 

The CHAIRMAN. The gentleman from Delaware. 

Mr. CASTLE. Thank you, Mr. Chairman. And Chairman 

Bernanke, I am going to talk about something else that you mentioned that concerns me in terms of our economic future. At the 

very end of your testimony, you mentioned that the Board worked 

with the Office of Thrift Supervision and the National Credit Union 

Administration to issue proposed rules under the Federal Trade 

Commission Act to address unfair deceptive practices for credit 

card accounts and overdraft protection plans. You suggested credit 

card issuers should alter their current practices. You also note that 

the Fed has received over 20,000 comments on the proposed UDAP 

rules. 

I hope the Fed will be deliberate and take time to closely scrutinize these comments. I presume you share my concern that while 

we want to protect consumers, we likewise want to maintain a 

competitive credit card market, and not further damage the standing of the financial services industry. 

Any comments you have beyond that I would appreciate. 

Mr. BERNANKE. Only to agree with you that both in our mortgage 

rules and in the credit card rules we want to strike an appropriate 

balance between increasing clarity and eliminating bad practices 

on the one hand versus making sure the credit is still available on 

the other. And that has always been our balance and has always 

been our concern. 

With respect to credit cards, we have been using consumer testing quite a bit to see what people could understand, what they do 

understand about their statements and about the provisions of 

their contract. And we find that there are some elements that it 

is just very difficult to explain, like double cycle billing for example. 

And you know markets work best when people understand what 

they are buying. And so there may be some circumstances where 

the market will actually work better and produce more credit in 

situations where there is not so much distrust and confusion about 

what it is exactly that is in the contract. And that is the kind of 

thing we have been trying to tackle. 

Mr. CASTLE. Thank you. On another subject, Mr. Ackerman and 

I have introduced legislation which was numbered H.R. 6482 to deVerDate Aug 31 2005 12:30 Oct 28, 2008 Jkt 044901 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\44901.TXT TERRIE
30 

termine what kind of structured finance investments are eligible to 

receive ratings from National Recognized Statistical Rating Organizations. We feel measures like these would contribute to restoring 

confidence in financial markets. 

Would you agree that small steps like this one could contribute 

to the overall stability of our market or any other comments you 

may have concerning the credit rating agencies and their role, particularly in the housing circumstance? 

Mr. BERNANKE. Well, the SEC has been quite active in this area 

with support from us and the President’s working group and international regulatory agencies. There is a wide variety of steps that 

they have taken, including looking out for potential conflicts of interest, providing guidelines for increasing transparency to investors 

so they can better know how to use the credit ratings; discussing 

the idea of making credit ratings for different types of instruments, 

corporate bonds versus structured credit versus municipals; having 

different rating schemes and so on. 

So we recognize, as I said earlier, this episode has shown a lot 

of areas where our financial system wasn’t as effective and strong 

as we thought it was. And this is one of those areas. And you know 

I think there is a lot of activity underway to strengthen the credit 

rating agencies. 

At the same time I think we have learned—and this is true both 

in a regulatory context as well as in an investor context—that 

there really is no substitute for direct due diligence. The investor 

has to do their own work, and that includes more than just looking 

at the credit rating. 

Mr. CASTLE. Well, not to argue with you or to beg the question, 

I would agree with you except it is very hard and complex for many 

investors to do that. And I am thinking of the pension funds and 

others who are making relatively big decisions as well as individuals. So it concerns me a little bit. There is a dependency on the 

credit rating agencies’ reports, I believe. 

Mr. BERNANKE. Then you can have a fiduciary or an investment 

manager that can provide advice. 

Mr. CASTLE. One final area, and I just read this in the papers 

today, but the whole question of the GSEs and their future. I have 

read what your recommendations are and obviously we need to consider that with respect to loans or capitalization or whatever. But 

a further question is, are they sound at this point? I mean, are 

they well-capitalized? Should we consider a privatization or nationalization of these entities? Are we going in the right direction with 

respect to Fannie Mae/Freddie Mac in particular? 

Mr. BERNANKE. Well, they are adequately capitalized at this 

point. And you know the OHFEO says that they are fine and they 

can continue to operate and there is nothing about to happen. But 

we want these firms not just to be, you know, solvent, which is of 

course is critical, but beyond that we want them to play an active 

role in strengthening and stabilizing our mortgage market because 

they really are a big part of what is going on in mortgage markets 

right now. And to the extent that—even if regulatory criteria are 

met, to the extent that markets have lost confidence and shares 

have come down and spreads widen, we need to restore that confidence so they can have the financial strength they need to not 

31 

only be solvent, which they are, but to go ahead and be more 

proactive in strengthening our mortgage markets. 

On the broad issue, you know based on the discussions I have 

had and my own thinking, it looks like the best solution at this 

point is to maintain their current form but to increase the supervisory oversight, make it much stronger, which is part of the bill 

that has been looked at in both the House and the Senate, and to 

take whatever steps are needed to try to restore confidence in the 

markets, that these are in fact strong institutions going forward. 

Mr. CASTLE. Thank you. 

The CHAIRMAN. The gentleman from Georgia, I would just ask 

him for 10 seconds to say that yes, that is exactly right. The bill 

this House passed in April of last year gives all of those new powers to the regular Fannie Mae and Freddie Mac, including the right 

to put them in a conservatorship. All the powers of the gentleman, 

that the Chairman has asked for with regard to being able to resolve other issues, they are in the bill that we hope to pass soon 

and send to the President regarding the GSEs. 

The gentleman from Georgia. 

Mr. SCOTT. Thank you, Mr. Chairman. Chairman Bernanke, let 

me first start by complimenting you as well. I think you have done 

a remarkable job in responding. Your views, your tools very wisely 

of the rate cuts and your action to protect our Fannie and Freddie 

are very, very important to send a signal to the world that we are 

going to keep our markets as stable as we can. 

Let me just assure you that this economy is deeply in a recession 

certainly, and in many parts of our country they are hovering 

around the elements of a depression. Many American families are 

just basically hanging on by their fingernails. And you touched on 

two major areas of concern to that, which of course are housing and 

energy. 

Let me start with a series of questions. First of all, I believe 

strongly—you have touched very excellently on the oil and the energy concerns that we have, especially our overwhelming dependency on oil, which I was very delighted to hear you say we need 

to wean ourselves off of. But we are not doing that quickly enough, 

Chairman Bernanke. And one area in which we are failing miserably is in the area of quickly, the most effective way I believe we 

can bring down immediately the cost of gasoline, and that is what 

the American people want. They want immediate answers now. 

Drilling is not that answer. None of that is our answer. What is 

our answer is getting some alternatives on the market quickly that 

will cut our demand on foreign oil. And nowhere is that more precise than in ethanol. 

And with that, I would like to ask you why, for example, it would 

take a tremendous downward pressure and immediately lower the 

price of gasoline at the pump today if we would remove the 54 

cents per gallon tariff that we have on ethanol coming in from 

Brazil made from sugarcane, the most potent, the most effective 

form of ethanol. That would help immediately increase the available supply. If they are running the automobiles in Brazil, 90 percent of them off of ethanol made from sugarcane, and they have 

plenty of that, that would make a lot of sense for us to immediately 

lower that 54 cents and bring in as much of that ethanol as we can 

32 

so it would offset this great need and gluttony that we have for this 

imported oil and would send a loud message over to OPEC. 

First of all, would you recommend that? Is that not a smart thing 

to do, to take that 54 cents a gallon tariff off of the imports of ethanol made from sugarcane from Brazil? 

Mr. BERNANKE. Congressman, I do support free trade, and I 

think that would be a good step to take. I think it would be helpful. 

I wouldn’t want to overstate it because of course Brazil is using a 

lot of its ethanol for its own country. And indeed they have been 

remarkably successful. They are essentially energy self-sufficient 

based on ethanol and their own oil sources and so on, which is a 

very different situation from where they were in the 1970’s. 

Mr. SCOTT. Absolutely. Let me get to my other point. I am glad 

to hear you say that. And I think we should move to do that. 

In other areas, in biodiesel fuel, for example, I have not heard 

any incentives, any cries from the Administration or anybody to increase the output of biodiesel fuel. We have advances being made, 

for example, in my own district in Georgia, in Clayton County. In 

Ellenwood, we have a biodiesel plant that is making biodiesel not 

from petroleum, not from oil, not from fossil material, but from the 

fatty parts of chicken and pork. And Chairman Bernanke, they are 

producing 18 million gallons of it a year, going directly to the market, not on a world market, but going directly to the points of distribution in that area. 

Where are the incentives for biodiesel fuel when we have the 

mechanisms for that? If we have that one plant that is producing 

18 million gallons going directly to the market, wouldn’t it make 

sense to get behind this movement? It would create more jobs and 

help stimulate the economy. 

Before my time is out, I wanted to ask you another question— 

The CHAIRMAN. Excuse me, gentleman. There won’t be time to 

get an answer. I apologize. We have 5 minutes. If you can make 

it quick. 

Mr. SCOTT. I have two points. Your answer on the economic stimulus package, how good was it, is it good, and given the weakness 

of the economic forecast, wouldn’t it make sense perhaps to extend 

another round of that economic stimulus package to get some 

checks more directly into the hands of the American people? 

The CHAIRMAN. The Chairman can answer that. 

Mr. BERNANKE. First of all, what is the incentive for biofuels? 

The high price of oil is a pretty strong incentive. As long as there 

is regulatory clarity about what is involved, I think there will be 

plenty of market-driven movement in that direction. 

On the fiscal stimulus, I believe the one that was done is having 

some effects. But it is somewhat early to make that judgment. And 

so you know I certainly think that we should consider all options. 

At the moment I think it is a bit premature. With all due respect, 

what I suggest at this point is that the most pressing need is in 

the housing sector and the Fannie issue and in the housing measures, and that is where I would urge you to look now. 

The CHAIRMAN. The gentleman from California. 

Mr. ROYCE. Thank you, Mr. Chairman. Chairman Bernanke, for 

a better part of a decade there has been a push to improve what 

is a very weak regulator in OHFEO over Fannie and Freddie. And 

33 

I remember the week after you took your position we talked about 

this issue. We were in agreement. Here on this committee I have 

raised this issue countless times. In 2003, I introduced the first legislation which sought to bring Fannie and Freddie and the Federal 

Home Loan Bank System under one strong regulator within the 

Federal Government. 

Back in 2005, I introduced an amendment on the House Floor to 

give the new regulator the authority to review and adjust the 

GSEs’ retained portfolios in order to mitigate against systemic 

risks. This is the same thing we are trying to do now with an independent regulator. And we are now witnessing what the current 

weak regulator, without the ability to mitigate against systemic 

risk, means for these two institutions and our broader capital markets. 

I will just mention that the majority of my colleagues voted 

against that amendment on the Floor of the House. But as we go 

forward with an episode here that could have been prevented long 

ago had your counsel or the counsel of those of us pushing this had 

been taken, we move closer now to passing legislation to strengthen the regulator for Fannie and Freddie. 

And I must again express my sincerest opposition and frankly my amazement to the inclusion of a roughly $600 million affordable 

housing fund and a $300 billion bailout for lenders and speculators 

that has been put in the bill. And I said this since its inception, 

this affordable housing fund is straight out of Central Planning 

101. It should not be accepted by my colleagues. It should not be 

accepted by this Administration. And much of this money, pushed 

for by certain NGOs, will most likely end up in the pockets of a 

group of radical activist organizations with history of both voter 

fraud and anti-free market advocacy nationwide. 

So even if the money is used to promote affordable housing, because it is fungible, the American taxpayers will be indirectly subsidizing the most egregious actions taken by certain radical groups. 

So unfortunately, the safeguards in the bill meant to prevent 

abuses are far from sufficient. As a recent Wall Street Journal editorial noted, if later investigations prove the taxpayer funds were 

misused, the bill provides that recipients can simply return the 

amount of the grant with no further financial penalty. 

And Chairman Bernanke, I know you are not an advocate for 

this fund. So I will spare you a line of questioning to address that 

part of the issue, but I would like to get your thoughts on an additional issue, and that has to be on stability in the economy. As we 

watch our capital markets, as we watch this economy struggle, I 

believe there is plenty Congress could do to help in the recovery. 

And I think if we are able, I believe we should provide certainty 

to the environment in which our companies operate. And part of 

that certainty, if we go back to a speech that you gave as Chairman 

of the Council of Economic Advisors, you mentioned the 2001 tax 

cuts. And you said, additional tax legislation passed in 2002 and 

2003 provided incentives for businesses to expand their capital investments and reduce the cost of capital by lowering tax rates on 

dividends and capital gains. 

Well, with those cuts looking to expire in 2010, it would seem 

critical to give the markets the certainty necessary to recover fully 

34 

in the coming months. So I would ask, Chairman Bernanke, do you 

still agree with your previous assessment of the impact of the 2002 

and 2003 cuts on the economy? And what would be the effects of 

an increase in the capital gains and dividends rate of 20 percent 

or higher as being discussed, what would that effect be on our already weak capital markets, especially considering the much lower 

rates that exist around the world? 

That would be my question to you now. 

Mr. BERNANKE. Thank you. First, let me just agree with you on 

the regulator. He fought a good fight. The Federal Reserve, my 

predecessor for many years raised these issues. And you know, it 

would have been helpful if we had been able to do that. I don’t generally in my current capacity comment on tax policy, but I do think 

and I expect that the Congress as they think about all these things, 

all these packages, you know, will be looking—I am sure you will 

be looking at the cyclical situation and trying to see what impact 

that has along with any other fiscal steps you might be taking. 

Mr. ROYCE. Thank you, Chairman Bernanke. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLEAVER. Thank you, Mr. Chairman. I have some curiosity 

about the radical groups my colleague was talking about, but I will 

suppress that and move on. 

Mr. Chairman, because our economy seems to have so many economic moving parts and with connections to the world economy, is 

it possible any more for us to bring forth a clear forecast? I mean, 

has forecasting just been tossed out of the window? 

Mr. BERNANKE. Forecasting is always very difficult, and it is extremely difficult when you have the kind of financial issues that we 

have had recently because it is just hard to know which way that 

is going to go. 

Unfortunately, for monetary policy purposes, because monetary 

policy works with a lag, even if our forecasts aren’t very good, we 

have to take our best stab because we have to have a sense of 

where the economy will be when the monetary policy actions begin 

to take effect. So we have at the Federal Reserve just about the 

best team of forecasters anywhere, and they have done a very good 

job over the years. But they are facing a very, very tough environment both because of the global issues that you mentioned and because of the changes in financial situation. 

Mr. CLEAVER. That question actually was a setup for the next 

question. And to some degree it may have been asked in various 

forms. Each night since this has started I have been taking piles 

of stuff home and reading it and essentially dropping a rock down 

in a well, and I have been waiting to hear the sound of a splash 

and I haven’t. I am wondering if you have. I mean, is there a bottom? And if so, how long before we hear a splash? My concern, the 

airline industry is now hemorrhaging and crying. It appears as if, 

you know, one—we are having a domino effect. And you know I 

think as the cries go up, more and more people are becoming 

afraid. I used to say that we had a transportation-based economy. 

Now I am wondering if we have a confidence-based economy. Help 

us, please. 

Mr. BERNANKE. Well, Congressman, it is the nature of my testimony. I am supposed to be reporting on the next 6 months and the 

35 

immediate period ahead, so I tend to have a very short-term focus. 

Obviously, we have a lot of challenges in the near term. 

I can’t predict precisely the contour of economic activity going 

forward, but I am personally very confident that we will return to 

a strong growth path. I think it is very striking that even during 

all that uproar, U.S. labor productivity has continued to grow faster than almost any other industrial country. It just shows how 

strong this economy is. We will work our way through these financial storms, we will work our way through this cyclical movement 

that we have, and the economy will return to good growth, but we 

just have a few things to work through on the way to doing that. 

Mr. CLEAVER. This is a rhetorical question, I think. We need action immediately with regard to the housing bill that is in the 

hands now of our chairman and leadership. 

Mr. BERNANKE. I would advise prompt action on housing issues, 

including Fannie and Freddie. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

The CHAIRMAN. If he would yield, the Chairman again said, and 

we should be proud of this, that American worker productivity is 

growing faster than anywhere else in the world. Worker compensation is failing to grow comparably, and that is a fundamental social 

and economic issue we have to address. 

The gentlewoman from Illinois. 

Let me say to people that we are going to have to vote soon, so 

I am prepared personally to miss the vote on the previous question 

on the intelligence bill, which will give us maybe 20 minutes from 

the time of the first vote. Anyone who wants to stay and continue 

to ask questions is welcome to do that. But there are a series of 

votes, so we will have to end it at that point. So about 20 minutes 

after the bell rings, we will have that amount of time. 

The gentlewoman from Illinois. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Chairman Bernanke, thank you for being here. I would like to 

thank you for your work to update the regulations to protect consumers; in particular, thank you for taking action on the credit 

card regulations, Reg Z and UDAP, and recently finalizing the 

HOEPA regulations that protect consumers and I think restore 

confidence in the mortgage market. 

I think that you published on July 14th final rules amending 

Regulation C. When do you anticipate that the credit card regulations will be finalized? 

Mr. BERNANKE. My understanding—and if I am mistaken, we 

will follow up—my understanding is that we aim to complete that 

this year, later this year. We are trying to coordinate our Reg Z 

disclosure package with the UDAP rules so that companies can implement all this at the same time. So those two things ought to be 

released at the same time. We are looking to do that, to my knowledge, this year. 

Mrs. BIGGERT. One aspect of the proposal would require creditors 

to provide transaction-specific mortgage loan disclosures, such as 

the APR and payment schedule for all home-secured closed-end 

loans no later than 3 days after application. This proposal sounds 

very similar to HUD’s efforts to reform RESPA. I just wondered if 

you had worked with HUD in preparing this regulation. 

36 

Mr. BERNANKE. We have worked with HUD on these issues, the 

mortgage disclosure issues, because we both have responsibilities 

in this area, and obviously the more coordinated we can be, the 

better off the public will be. So we have worked with HUD for a 

number of years as we have looked at their changes in their disclosures. But there is no joint approval process. This is our product. 

The CHAIRMAN. If the gentlelady would yield. She has asked two 

very important questions. But you are going to make a regulation 

so the HOEPA regulations and HUD’s RESPA, we hope there can’t 

be any conflict there. 

Mr. BERNANKE. It has been our interest to do that for a number 

of years. 

The CHAIRMAN. When the gentlewoman asked about credit cards, 

and you said you would try to coordinate, is that true of the overdraft? Are they all going to be done at the same time? The credit 

cards and the overdraft, are they also on the same timeline? 

Mr. BERNANKE. The overdraft is on the same timeline as far as 

comment is concerned. Frankly, I don’t know whether there is a 

possibility of breaking that off and releasing that earlier. 

Mrs. BIGGERT. Thank you. 

When you were doing the disclosure rules, there was a real focus 

on the consumer testing. Was there similar consumer testing done 

as you put out the proposal on unfair and deceptive card practices? 

Mr. BERNANKE. There was consumer testing, and it was precisely 

that consumer testing that led us to conclude that there were certain practices that could not be made adequately transparent 

through disclosures that did not have direct beneficial effects to 

consumers. That outweighed whatever problems that might arise. 

That was the reason that we, in some cases, chose prohibition over 

disclosure. 

Mrs. BIGGERT. There has always been this worry that this is 

going to limit credit, some of the regulations are, whether there 

was going to be legislation. Do you think that this will, the regulations will, result in a reduction of the credit that can be offered? 

Mr. BERNANKE. We are going to monitor that closely. As I said 

before, we always want to try to balance availability of credit 

versus having a transparent marketplace. I do think that markets 

work better when the information is good. So even if the equilibrium amount of credit is a little different, maybe people will be 

getting products that are better for their needs and that they better understand. So it may be in some sense more effective and 

more helpful credit than we had before. 

Mrs. BIGGERT. So education is a big part. 

Mr. BERNANKE. Education is very important, but I have become 

persuaded over time now that you need three things: education on 

the consumers’ part; good, effective consumer-tested disclosures; 

and as a last resort, when those two things do not adequately protect the consumer, then you need to use the ability to ban certain 

practices. 

Mrs. BIGGERT. Thank you. 

I yield back. 

The CHAIRMAN. The gentlewoman from Wisconsin. 

Ms. MOORE OF WISCONSIN. Thank you, Mr. Chairman. 

37 

And thank you, Mr. Chairman, for all the work that you did over 

the weekend for sort of cooling out the housing crisis. 

I read through your testimony, and I was very interested in your 

comments regarding the commodities market. You say that you 

doubt that financial speculation is the cause, a causal factor, in the 

upward pressures on oil prices, but you find that you are baffled 

by what it could be. You say that ‘‘this is not to say that useful 

steps could not be taken to improve the transparency and functioning of futures markets, only that such steps are unlikely to substantially affect the prices of oil and other commodities in the 

longer term.’’ 

I was curious. I would like for you to expand on that and explain 

that to me. 

Mr. BERNANKE. About the possible steps? 

Ms. MOORE OF WISCONSIN. Yes. 

Mr. BERNANKE. Well, with respect to possible steps, as I indicated, the Federal Reserve is part of a task force being led by the 

CFTC, which is trying to get as much clarity as we can on exactly 

this question, and that includes right now we and the CFTC in particular has been gathering information from other petroleum futures exchanges like the ones in U.K., has been gathering information on the activities of swaps dealers and index traders who invest 

in these economies. We are trying to understand how these investments are made and how they relate to price movements, those 

sorts of things. So we are looking at that seriously. 

It is possible that the CFTC may decide, and, of course, it is their 

province to do so, that changes in the information requirements or 

in positions, limits or things of that sort might be justified under 

certain circumstances. 

There is a lot of evidence, though, on which I base my earlier 

statement in the testimony that makes it seem unlikely that speculation or, better termed, manipulation is driving up energy prices. 

I mentioned the absence of inventories. There are a number of 

other things. For example, there seems to be no empirical relationship between long, open positions by noncommercial traders and 

movements in prices. It is striking that there are many or at least 

some commodities which are not even traded on future markets 

which have had big price run-ups, like coal and iron ore, for example. 

So it doesn’t seem to us to be the central issue. It does mean that 

energy prices in the very short run can respond quite sensitively 

to news that comes in because they begin to trade like a stock 

price, for example. But that is not necessarily a bad thing; that 

means that information is being incorporated into those prices, and 

that helps suppliers and demanders know how better to respond. 

Ms. MOORE OF WISCONSIN. Mr. Chairman, thank you for that. 

Is the SEC a part of this committee that is looking at the commodities irregularities? 

Mr. BERNANKE. I believe so. Yes. 

Ms. MOORE OF WISCONSIN. All right. I know that the CFTC and 

the SEC have been having talks. Do you think—this committee, by 

the way, doesn’t have jurisdiction over the CFTC, and I think most 

of the questions have been related to commodities. Do you think 

that we need to modernize our regulatory system by having these 

38 

commodities come under the same jurisdiction as the SEC? I know 

the CFTC and SEC have been talking about such a collaboration 

or merger, and I am wondering, do you think there would be any 

benefit in that? 

Mr. BERNANKE. I know that they work very closely, and there are 

areas where there is some overlap of responsibility and jurisdiction. 

The Treasury Blueprint for reform envisions that we would merge 

at some point. I don’t really have a recommendation to make on 

that. I think it would depend in part on the overall plan for regulatory reform if, in fact, that takes place in the context of that 

broader plan. 

Ms. MOORE OF WISCONSIN. Well, I just only say that because so 

many of these commodities are paper transactions and futures contracts versus bringing your hog to the marketplace to sell. It seems 

to me that the modern thing would be to bring these together and 

have perhaps a better regulatory framework. 

I yield back. 

The CHAIRMAN. I will say in the 10 seconds I will borrow from 

the gentlelady, my jurisdiction proposal is we leave with the Agriculture Committee jurisdiction over all those futures and things 

you can eat, and we get the rest. 

The gentleman from California. 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. 

I kind of enjoyed the comments that the Federal Reserve is getting blamed for not dealing with the predatory issue as it applies 

to subprime. But I recall 5 years ago, I repeatedly tried to introduce language to effectively define what predatory was versus 

subprime and included the issues you have dealt with finally. So 

I feel guilty blaming you for something 5 years ago we should have 

done and didn’t. 

The purpose and intent of the GSEs was to inject liquidity into 

the marketplace, which we have done. If you look at the amount 

of loans that are out there, I think it has proven to be very beneficial to the housing market. 

Having been a developer for over 35 years, I have been through 

the 1970’s recession, 1980’s, 1990’s. Any time you see a housing 

boom, you know eventually there is a going to be a housing recession occurs. It has happened repeatedly. This one is a little different, but every one I have been through has been somewhat different. 

In the stimulus package we passed recently, I think the most important part on the economy was increasing conforming loan limits 

for FHA and GSEs. Sending people a check, yes, there is a benefit 

to that. But the main reason I think for the situation the economy 

is in today is because of the housing recession we have gone 

through. I think raising conforming loan limits in high-cost areas 

has gone a long way to mitigating an impact that could have been 

worse than it was. Especially in California and other areas there 

are many lenders that will not make a loan today if it is not conforming because they don’t have the assets basically to tie their 

capital up if they can’t make the loan and sell the loan off. 

Now, there has been discussion about after December 31st, we 

are going to be dropping those limits down to much lower levels. 

I believe that is going to have a major detrimental impact on the 

39 

housing market because it sends—even the discussion and debate 

about doing that sends a message that we are not going to be committed in the future to trying to create liquidity in these high-cost 

areas. 

I would like to have your opinion on that issue. 

Mr. BERNANKE. First, you are correct about the centrality of the 

housing market. The issue you raise should be predicated on 

Fannie and Freddie being strong and effective and having good supervisors. I think that is really the first step. 

I recognize that there is disagreement about where the loan limits should be. I think in the near term that there is some benefit 

to having a bit more scope, but I recognize there is disagreement 

about that. So my main hope is that you will come to a good consensus and get legislation out. 

Mr. MILLER OF CALIFORNIA. Let me rephrase my question so 

maybe you can answer it then. The reality is that many lenders in 

areas will only make loans that are conforming because they lack 

liquidity of their own because of the market requirements placed 

on them, and that they are making loans today that, and am I not 

correct, if GSEs are out of the marketplace, those loans otherwise 

could not be made? Is that a fair assumption? 

Mr. BERNANKE. Not a universally fair assumption because there 

are lenders that make loans and hold them on their balance sheets. 

Where you are correct is that the normal securitization function 

whereby a lender would make a loan, a jumbo loan, and then sell 

it to be securitized, that that securitization function for loans that 

don’t conform to Fannie and Freddie has broken down, and it is a 

reason why there is a fairly unusually high premium or a differential in the mortgage rates on jumbo loans relative to conforming 

loans. 

Mr. MILLER OF CALIFORNIA. Now, when GSEs and FHA got into 

the marketplace in the stimulus, rates dropped 400 percent basis 

points below what they were. The way I see it, in the economy 

where a housing market is depressed to begin with, we are going 

and making loans in areas that the housing market has actually 

declined in value, which are actually safer loans, but the individuals are saving a tremendous amount of money on their payments 

because the GSE loan is at a much lesser interest rate than a normal jumbo loan. Do you not see that as a benefit to turning the 

housing market as it exists today? 

Mr. BERNANKE. The Fannie and Freddie function of securitizing 

mortgages and getting them into the secondary market, providing 

a new source of capital for mortgage lending, is clearly the most 

valuable thing that they do. I am not quite sure I understood all 

of your question, but I do want to reiterate my support for making 

it possible for them to continue to do that on an expansive scale. 

Mr. MILLER OF CALIFORNIA. My goal is to say that the more liquidity we can inject into the marketplace will create a higher percentage of—higher possibility that the marketplace will turn much 

more rapidly and create more stability, and should we do things to 

create less liquidity in the marketplace that will also have the opposite effect? 

Mr. BERNANKE. Providing mortgage credit to all qualified borrowers by itself will not necessarily turn the housing market 

40 

around, because there are a lot of other fundamental issues. But 

to the extent we can make mortgage credit available to those who 

want to buy homes and who are credit-qualified, I think that is 

something we should try to do. 

Mr. MILLER OF CALIFORNIA. Thank you. 

The CHAIRMAN. The gentleman from Tennessee. 

Mr. DAVIS OF TENNESSEE. Mr. Chairman, thank you very much. 

Chairman Bernanke, thank you for being here. This is the second 

day, I understand, that you have been on the Hill. It would be my 

hope, and I think all of us on this committee and certainly on the 

other side, that you could solve our problems overnight with these 

2 days of hearings. But thank you for being here and offering and 

being willing to make suggestions, and for your leadership with the 

Fed. 

Our country is readjusting to living in the world with far less 

available credit and high energy prices. Either would be a problem, 

but both at the same time guarantees a long period, in my opinion, 

of uncertainty as business adapts. The evidence is increasingly 

clear that the economy fell into a near recession in January, which 

set off a significant contraction in lending. Our hopes that the tax 

rebates here in Congress would spur a recovery by midyear have 

been dashed, in my opinion, at the feet of $150-a-barrel oil. 

Now, new signs of problems that lenders, large and small, are beginning to surface despite very wide interest margins. The failure 

of inflation to spill over into wages has left consumers stripped of 

buying power. By the combination of the credit crunch and oil 

prices, businesses are becoming increasingly cost-conscious in the 

face of weak volume growth and inability to pass on oil inflation. 

The result is weaker jobs in the district I represent, job growth, 

more defaults, tighter credit, and a growing spiral of economic 

weakness and, in my opinion, not inflation. 

As you noted earlier, we have seen payroll employment fall 

62,000 jobs in June, with downward revisions for another 52,000 

for the 2 previous months. This was the 6th consecutive month 

with declining jobs. 

While I understand that it is politically more expedient for you 

to keep emphasizing inflation concerns, while watching the data as 

it develops in coming months, this is a clear signal from the job 

market that the U.S. economy is slowing to stalled speed, and that 

the risk is not just inflation, but rather of a slide into a full-blown 

recession. 

The inflation hogs constantly reinforce the argument that maintaining a low and stable inflation rate is the best way to achieve 

maximum sustainable growth. Yet, to the man on the street, the 

rising unemployment rate, in my opinion, is the key indicator. I 

think we need to start adjusting so we are thinking about inflation 

as being the major problem that we have today. 

The question I want to ask—and I want to make a statement basically about what happened to the Nikkei average in 1989 and 

1990. We saw reluctance of lenders and a reluctance of the National Bank of Japan to address, I think, the main issue there was 

over-inflated prices of homes, mortgages, high interest rates. When 

you look at the value of the land around the Emperor’s palace, 

41 

some folks said it actually brought in currency more than the entire appraised value, tax-assessed value, of the State of California. 

When you study and other economists study the almost near collapse of the Nikkei average from up 40,000, down to roughly 8,000, 

an 80 percent drop, as you have looked at that, have you also studied the regulatory authorities demanded by the Government of 

Japan to be sure that never happened again? And have we put in 

place and are you recommending that some of those regulatory authorities be established here in the United States? 

Mr. BERNANKE. That was a very difficult episode for Japan when 

the bubbles in both the stock market and in property prices collapsed at the same time. I think the key lesson that we learned 

from that experience was that in Japan, banks had very wide holdings in land and equity and other assets whose values came down, 

and so the banks were in very, very bad financial condition, but 

they were not required to disclose or inform the public about what 

their actual condition was. 

For many, many years they kind of limped along. The same with 

the companies they lent to. They didn’t call those loans because 

they knew they couldn’t be paid. So it was a situation in which 

there was a reluctance to act and in which transparency was quite 

limited. 

I think one benefit of our current system here in the United 

States is that as painful as it is to see the losses that financial institutions are suffering, at least they are getting that out, they are 

providing that information to the public, and they have been 

proactive in raising capital to replace those losses. In order to avoid 

a prolonged stagnation, as in Japan, it is important for us to get 

through this period of loss and readjustment and get back to a 

point where the financial system can again support good, strong, 

stable growth for the United States. 

The CHAIRMAN. The gentleman from Texas. 

Mr. HENSARLING. Thank you. 

Chairman Bernanke, last week on Thursday when you were before our committee, I asked you a question about the criteria by 

which the Fed chooses to open the discount window to nondepository institutions. As part of your answer you said, ‘‘I don’t want to 

do it again.’’ But clearly, 4 days later you did. So it hadn’t happened in 70 years. It has now happened twice, I guess, in the last 

3 to 4 months. So I have a couple of questions related to that. 

One, I am very concerned on where does the moral hazard end. 

And to, I guess, capture a phrase of our ranking member, I think 

there is the danger of us adopting nationally a system where if you 

are big enough, if you are interconnected enough, if somehow the 

interplanetary economic stars align just right, you are in a position 

to privatize your profits, but socialize your losses to where the taxpayers end up picking up the tab. 

My theory is that we could have even greater S&L debacles, 

greater Fannie and Freddie debacles. I know since I have been 

here for almost 6 years, people have been raising a hue and cry, 

including myself, about how big these institutions are getting, how 

they are increasing their risk profile. Your predecessor spoke fervently about the systemic risk, yet we find ourselves here today. 

42 

So I guess my question is it is still somewhat unclear to me what 

is the criteria by which you open this discount window to nondepository institutions. I think I heard in a response to the gentleman from Nevada, it sounded like either one objective criteria 

doesn’t exist today, and it is done on an ad hoc basis, or perhaps 

you are being purposely ambiguous in hopes that the institutions 

will not feel that they qualify, in the hopes that we don’t have the 

moral hazard problem. 

So if you could give me further illumination as of today, this moment in time, what is the criteria for which the discount window 

is open to nondepository institutions? 

Mr. BERNANKE. In the case of Fannie and Freddie, our attention 

was very, very limited. The Treasury Secretary had a bunch of proposals to ask Congress to take steps to restore market confidence 

in Fannie and Freddie. Our intention was to just provide a bit of 

bridge to the point where Congress could make its decision about 

how to restructure those firms. 

Mr. HENSARLING. Mr. Chairman, let me interrupt. Did representatives of either Fannie or Freddie approach you to have the discount window open? 

Mr. BERNANKE. No. 

Mr. HENSARLING. So they did not request this, to the best of your 

knowledge. 

Mr. BERNANKE. Not to my recollection, no. 

Mr. HENSARLING. Thank you. Continue on. 

Mr. BERNANKE. So we have used it very sparingly in our history. 

We have done so in this current episode in situations where we 

thought it was helpful to the broad financial stability of the economy. 

I agree with you 100 percent about moral hazard, but I think the 

time to think about that is in advance. We need to take steps going 

forward to clarify exactly when the Congress wants us to take 

these kind of actions and under what circumstances that would 

eliminate moral hazard. 

I mentioned previously the importance of strong, consolidated supervision of the investment banks, of strengthening the infrastructure, of developing resolution regime. The reason the savings and 

loans crisis went the way it did is because there was a forbearance, 

regulatory forbearance. There were no guidance or rules or laws 

about how the regulators ought to treat companies that were under 

water. 

Mr. HENSARLING. Mr. Chairman, at this time if we can’t say precisely who would qualify for the discount window, I suppose the 

converse is true as well, we can’t say who doesn’t qualify. I mean, 

for example, would Anheuser-Busch qualify? Many Americans 

might consider them more mission-critical to the Nation than 

Fannie and Freddie. 

Mr. BERNANKE. We have to make findings of unusual and exigent circumstances. I think our criterion has been—and, again, despite what I said last week, I will say again, I hope we don’t ever 

have to do this anymore—my criterion would be to provide liquidity 

and support in circumstances where we thought there were concerns about the systemic risks associated. 

43 

Mr. HENSARLING. Speaking of not having to do this again today, 

nobody wants to see Fannie and Freddie fail. They are too big to 

fail today, but I want to ensure they are not too big to fail tomorrow on the taxpayer dime or perhaps, more precisely, the taxpayers’ $5 trillion. In your professional opinion, is there anything 

inherent about the secondary mortgage market that would prevent 

Congress from considering reconstituting these companies as part 

of the quid pro quo for their charters, from perhaps busting them 

up into a dozen different companies or over a 3- to 5-year period 

totally privatizing them? 

Mr. BERNANKE. There are certainly a number of different possibilities ranging from outright nationalization, to privatization, to 

breaking them up. In the near term, thinking about the needs of 

the housing market, I think the right solution is to keep them in 

their current form, but to provide very strong oversight that will 

assure adequate capital going forward. 

Mr. HENSARLING. Thank you. 

The CHAIRMAN. The gentleman from Minnesota. 

Mr. ELLISON. Mr. Bernanke, can you tell what you think 30 

years of wage stagnation, how that contributes to the current burgeoning debt that consumers are carrying today? 

Mr. BERNANKE. Well, I don’t think it is accurate there has been 

30 years of wage stagnation. There has been a pretty substantial 

increase in real wages and in consumption over the last 30 years 

or so. Clearly, in the most recent past, energy prices, a slowing 

economy, and other factors have caused wages to stagnate, which 

is a serious problem. 

Mr. ELLISON. Wages didn’t stagnate in the late 1990’s, but in the 

1980’s and 1970’s. 

Mr. BERNANKE. If we compare today to 1978, 30 years ago, you 

would see some significant rises, particularly if you look at a particular individual or family as opposed to the fact that you always 

have a shift and change. 

Mr. ELLISON. What about average hourly wage? What did those 

numbers look like over the past, say, 30 years? 

Mr. BERNANKE. I wouldn’t want to take a wild guess. 

Mr. ELLISON. You don’t have to guess, because I think they have 

been pretty stagnant. 

Mr. BERNANKE. They are not static. They have risen considerably 

over the last 30 years. 

Mr. PERLMUTTER. Would the gentleman yield for 1 second? 

Mr. ELLISON. Go ahead. 

Mr. PERLMUTTER. You have a lot of very interesting graphs in 

your report, and one of these is on page 9, which shows the personal savings rate. I think that falls right in line with what the 

gentleman from Minnesota has been talking about, the fact that 

wages have been fairly steady, things have been going up, and people can’t save. 

Mr. Chairman, my question to you is how are we going to get 

people to start saving? 

Mr. ELLISON. Reclaiming my time, that is where I am going with 

it. The fact is we have had recorded negative savings rates, and I 

believe that the stagnancy of wages—will you grant me 2000, will 

you agree with that, stagnant wages since then—I think that helps 

44 

to explain part of the problem that Americans are having right 

now. That is why we are doing the refis, the payday loans, the 

credit cards, things like that. 

I just want to know from you to what degree does stagnant 

wages help contribute to the present situation even with regards 

to people getting into exotic mortgage products, credit cards, all of 

these loan products? Does it play a role, in your view? 

Mr. BERNANKE. I think there are a lot of factors. 

Mr. ELLISON. What role does stagnant wages play, Mr. Chairman? 

Mr. BERNANKE. Obviously it is more difficult to save if your family income is not rising, I agree with that. 

Mr. ELLISON. Doesn’t the Fed have a mandate to try to promote 

full employment and keep inflation down? I mean, is that part of 

your mandate? 

Mr. BERNANKE. Absolutely. 

Mr. ELLISON. What are we going to do to increase real wages for 

people so they have enough money to buy the things they need as 

opposed to borrowing the money? 

Mr. BERNANKE. I think that—and I have expressed this in detail 

in another context—the only long-term solution is to help those 

people who are not getting appropriate training and skills because 

those are the people who are being left out of the globalized economy. People who have high levels of skills have lots of opportunities and potential for high wages. That is beyond the power of monetary policy to do that. 

Mr. ELLISON. Are you familiar with the livable wage movement? 

Mr. BERNANKE. Yes. 

Mr. ELLISON. Does it have the power to help improve wages for 

average working people? 

Mr. BERNANKE. Again, this is somewhat out of my department, 

but I think I would rely on markets, plus give the workers the 

tools, the skills, the education they need, plus, if necessary, some 

assistance in getting retrained if they are displaced. 

Mr. ELLISON. What do we do to help people save more money? 

Mr. BERNANKE. This has been a long-term issue. Part of the reason that people didn’t save for awhile, it is not relevant now, but 

for awhile people were letting their houses do their saving for them 

because they were looking at appreciation. Now they are under 

pressure because house prices are no longer rising, and they need 

to find savings under their current income. 

In terms of policy measures to help people save, there are very 

few, if any, magic bullets for that. There have been some suggestions about having people opt out of 401(k) plans. Suppose we allow 

for a more widespread access to tax-preferred retirement plans and 

ask people to opt out rather than to opt in. There is some evidence 

that that helps people save more. It gets them to participate more. 

The low saving problem, this is a low-saving country, and it is 

part of the reason we are borrowing a lot from abroad, it is a significant one, and I don’t have an answer. Again, the Federal Reserve’s mandate is to maintain employment, but we can’t guarantee 

necessarily high-paying jobs. Those jobs have to come because— 

high-paying jobs have to come because workers have the skills, and 

the training, the education they need to get those kinds of jobs. 

45 

The CHAIRMAN. The gentleman from New Jersey. 

Mr. GARRETT. I thank the chairman. 

I thank you, Chairman Bernanke, for being with us today. I 

would like to begin by complimenting you for your foresight in 

warning this committee and actually all of Congress today, but 

your foresight in the past. You have been before this committee on 

numerous occasions speaking of the risk posed by the GSEs, by 

Fannie and Freddie. During those times, you spoke about their current form and their current regulatory framework, or maybe lack 

thereof, and the potential that that could bring somewhere down 

the road, potentially putting them at risk and also the taxpayer at 

risk as well. So I compliment you on that. And it was you and the 

President and the Secretary of Treasury has also emphasized this 

point repeatedly, and they have also emphasized the point that we 

have to move quickly as possible to address this issue of a comprehensive GSE reform. 

Maybe it is because of that knowledge that we need to do something that the chairman and others, when regulatory reform had 

been going through in the 110th Congress, had added on as some 

of us call extraneous measures to the legislation above and beyond 

just the basic regulatory framework; the housing fund, the $4 billion rehabilitation assistance. These add-ons have led to, I believe, 

the GSE reform legislation being slowed down not here in the 

House so much, but over in the Senate, where such extraneous 

matters sort of complicated the process of trying to get it through, 

when at the end of the day we simply wanted to have that proverbial world-class regulator in place. Some say if you had that done 

earlier on, maybe we wouldn’t be having this discussion and other 

actions that we have done with this. 

The chairman says the GSEs are struggling due to a lack of investor confidence. I believe if that is the case, passing a strong 

stand-alone, world-class regulator would be the best thing in Congress to address that. For that reason, later today I will be actually 

dropping in a strong stand-alone piece of legislation, without anything else on it, basically taken from the Senate compromise that 

mirrors the compromise on the GSE reform language that doesn’t 

have anything else on it. 

So my first question to you is, would that stand-alone bill, if we 

pass it through this week, since we have already passed that similar language and the Senate has as well—would that stand-alone, 

world-class regulator be important to get moving on this process to 

bring some relief to the GSEs and the overall economic market? 

Mr. BERNANKE. Congressman, I really can’t advise you on legislative tactics, but I would certainly say that getting a strong regulatory bill through in whatever context you can do it has always 

been important and now is particularly important, and I hope that 

you will act in an expeditious way. 

Mr. GARRETT. One of the things that needs to be addressed 

through the regulator or however else is the capital requirements 

for the GSEs. As I understand it, it would be better had they begun 

to raise more capital. Fannie did, Freddie didn’t, I guess, to some 

extent. But capital increase would be beneficial, correct, for the 

survivability of the GSEs? You are shaking your head yes. 

Mr. BERNANKE. Yes. 

46 

Mr. GARRETT. Part of the issue, though, with the bills that we 

have that is going through potentially this week is that they 

have—some called it a tax, extraneous measures, whatever, that 

would potentially draw some of the revenue from the GSEs and use 

it for other purposes. My understanding—correct me if I am 

wrong—my understand would be that would impact potentially 

negatively upon their ability to do what is necessary, and that is 

to build their capital. Is that a correct understanding? 

Mr. BERNANKE. Well, I have stayed away of this issue of the 

housing fund because it is part of the log-rolling process. I don’t 

how exactly how it will play into the legislation. My main concern 

is the regulator be able to have bank-like capital powers. 

Mr. GARRETT. I understand that. But if the regulators have all 

the powers, but some of the funds are being extracted from it to 

use it for other funds, could that have a detrimental effect on their 

ability to raise capital? 

Mr. BERNANKE. It will affect their retained prospects, from that 

respect. Again, these are trade-offs that Congress has to make. 

Mr. GARRETT. On the political side, my last question, last week 

I sent one question to you that I didn’t get the answer to, and that 

is with regard to your powers under section 13. Are there any limitations on your powers going forward? You told us last week that 

you hoped this wouldn’t happen again, but, of course, it didn’t. 

So would you use those powers in the future? Are there any limitations right now until we say don’t do anything or put some restrictions on you to as to your powers under that section? 

Mr. BERNANKE. I can tell you what the legislation says. Under 

Section 13.3 of the Federal Reserve Act, we can lend to an individual partnership or corporation if conditions are unusual and exigent, and other credit accommodation is not available. So there are 

some conditions on that, on 13.3, somewhat less restrictive in that 

respect, but the collateral can only be treasuries or agencies. 

The CHAIRMAN. The gentleman from Colorado, I ask him to yield 

me 1 minute, if I can, because the gentleman from New Jersey’s 

history is deeply flawed. The Affordable Housing Fund, which people are opposed to for philosophical reasons, for the slowing down 

of the GSEs, makes no historical sense. In the previous Congress, 

controlled by the Republicans, there was no Affordable Housing 

Fund attached to GSE reform, and the Senate didn’t act on it. Any 

kind of historical experiment, you look for control. In fact, under 

the Republican Congress, GSE reform passed the House, it went to 

the Senate, and they didn’t act on it. 

By the way, the Senate bill, which the Senate Republicans put 

forward, did have an Affordable Housing Fund. They were prepared to accept it, and the bill didn’t go forward. In fact, it is now 

under a Democratic Congress we are on the verge of passing legislation that the Republic Congress wouldn’t pass. But to blame the 

Affordable Housing Fund ignores the history that in a previous 

Congress the House passed the bill, sent it to the Senate with an 

appropriate set of regulations, and the Senate didn’t act on it under 

Republican rule, and it was not in any way, shape, or form the 

problem of the Affordable Housing Fund. 

I thank the gentlemen from California. 

47 

Mr. GARRETT. Would the gentleman yield since he referenced my 

motives? 

The CHAIRMAN. It is the gentleman from Colorado’s time. 

Mr. PERLMUTTER. Ten seconds. 

Mr. GARRETT. Thank you. Since the gentleman did indicate with 

respect to my motives because I am ideologically driven on this, I 

am not ideologically driven on this, I just want to set the record 

straight, and the bills did pass in the House previously in the last 

Congress. It went to the Senate and was held up there by the Democrat opposition. What we need to do now is move as expeditiously 

as possible. 

Mr. PERLMUTTER. I will take my time back. 

The CHAIRMAN. The Republicans controlled the Senate, they 

didn’t pass the bill, and it was not because of the Affordable Housing Trust Fund. 

As to motives, I am surprised the gentleman takes exception to 

my noting that he is philosophically opposed to that. 

Mr. PERLMUTTER. First, Mr. Chairman, just thank you for the 

time that you have given to us. Thank you for rolling up your 

sleeves, working with the Secretary of the Treasury, and working 

with our chairman to try to deal with a lot of tough problems you 

have out there. There is no minimizing what those problems are. 

Like I said, I found a wealth of information in your report, some 

of it pretty disturbing. I don’t know if you have it in front of you, 

but on page 25 of the report, there are several graphs there, and 

I just ask you about on the commercial paper it looks like everything is going along hunky-dory, and then boom, there is an earthquake in the summer of 2007. That same thing applies in the 

graph below it. 

What happened in the summer of 2007 that just has caused this 

tremendous upheaval right now? 

Mr. BERNANKE. Well, the media trigger was the refusal of a bank 

to allow withdrawals from the hedge funds because it said it 

couldn’t value the assets. Basically, more broadly, it was about that 

time that losses related to subprime mortgages and CDOs and 

other structured products became apparent, and there was a real 

change in risk perception and in risk attitude at that juncture last 

August. 

There were many off-balance-sheet vehicles, structured investment vehicles and so on that were holding CDOs, for example, that 

were financed by short-term money or commercial paper, creating 

a maturity mismatch. That was perceived to be fine as long as 

there was sufficient credit quality. Once the credit quality appeared 

to deteriorate, the overnight funders of those particular types of instruments withdrew, and they had either to be dissolved or taken 

off the balance sheet. So that whole class disappeared. 

You will notice that conventional commercial paper, unsecured or 

commercial paper, issued by corporations was much more stable because that wasn’t the new part. The part that was proven to have 

some real flaws is once we began to see credit losses from subprime 

and other types of structured— 

Mr. PERLMUTTER. That was the time the market realized that 

housing prices weren’t always going to go up. That is the way I 

48 

would describe it. A lot of it was just based on increased housing 

prices over time. 

Mr. BERNANKE. Partly also the recognition that those losses were 

going to be greater than expected, and that these complicated 

structured credit products did not have as much cushion, as much 

coverage as the investors thought they did. 

Mr. PERLMUTTER. Do you think we need more regulation within 

that market of creating these very complicated things? 

Mr. BERNANKE. Certainly the kind of regulation we do have is at 

least two types. One is the bank regulators have been and already 

have considered increasing capital requirements and toughening up 

standards to allow these kind of vehicles. And then the accountants 

themselves also are looking at under what circumstances should 

you bring those things on the balance sheet, under what circumstances should they be kept separate. 

The CHAIRMAN. Will the gentleman yield? 

Mr. PERLMUTTER. I will yield. 

The CHAIRMAN. I am going to recognize the gentleman from Connecticut and, in an act of unprecedented bipartisanship, leave him 

in charge while I go vote. 

Mr. SHAYS. [presiding] You are safe, Mr. Chairman. 

First, I want to thank you, Mr. Chairman, and Senator Dodd, 

and our ranking members. The House and Senate and the White 

House, both you, Mr. Bernanke, and Mr. Paulson, you are all trying to work together because I think we know this is a very serious 

time. I have some pride in seeing how Republicans and Democrats, 

both Chambers, and the White House and Congress are trying to 

work together. 

I wrestle with, and I would like a fairly short answer, we keep 

talking about how we need to consume more. I just get the feeling 

like that is something we do too much of, and that we need to be 

investing and saving more. Just a quick comment about that. 

Mr. BERNANKE. Certainly. There is a difference between the 

short run and the long run. In the short run, if consumption spending drops sharply, and there is no other type of demand to pick it 

up, then most of the saving will be dissipated because you will just 

have a slowing economy. What we need is an economy that is better balanced, less consumption, more investment, more exports. 

That should take place over time, but in a very short period of 

time, unless you get the other compensating sources of demand, 

you will just get a slowdown in the economy, which is part of what 

is happening. 

Mr. SHAYS. So in the short run, we need consumption up? 

Mr. BERNANKE. We are, in fact, getting a lot of benefit now from 

trade and exports. As we shift from producing for domestic consumers and towards producing for exports, that is the kind of direction that will in the longer term get us where we want to go. 

Mr. SHAYS. When we dealt with Enron, it was clear what we 

were doing to countries that were under the 1933 and 1934 acts, 

but the GSEs weren’t. Then there was an effort by me and others 

to put them under it. They voluntarily decided they would be under 

the 1934 act. Should they be under the 1933 act as well? 

Mr. BERNANKE. I don’t have a view on that as well. I leave that 

to the SEC. 

49 

Mr. SHAYS. Let me ask you in regards to energy, I think you 

have voiced an opinion, but I would like to clarify it a little bit. 

There are many of us who have said that we need to conserve 

more, we need alternative fuels, but that when we did that, that 

we should also be looking to increase supply. 

You said that, I think, you favored a comprehensive approach. It 

is my sense then you want to see conservation, you want to see alternative fuels, and you want to see increased production, whether 

it is nuclear, whether it is some drilling offshore, maybe on land, 

but that you need to see the United States pick up its production 

and mining of oil. Would that be a fair statement? 

Mr. BERNANKE. Congressman, there are always trade-offs Congress makes between environmental and other concerns and energy 

exploration. That is the prerogative of Congress to do that. But I 

think to the extent possible there is a multidimensional approach 

to this problem that high prices will, in fact, encourage those actions. 

Mr. SHAYS. If the market sees a comprehensive approach, do you 

think it would have an immediate impact on the speculators and 

what they think will happen in the future and what they will price 

oil today? 

Mr. BERNANKE. It is hard to judge how much and how fast, but 

it is the case that there is a forward-looking element to the futures 

markets, obviously. And to the extent that traders become more optimistic about the long-term supply and demand balance, it should 

be helpful even in the near term. 

Mr. SHAYS. I am told that if we know when the bottom is to the 

housing market, there are plenty of resources that will come into 

it, but they need to know the bottom. There are some articles that 

I am starting to read that say we are getting very close to the bottom. 

Have you voiced an opinion when I was out of the committee 

about that issue; and if so, what would it be? 

Mr. BERNANKE. It is difficult to judge with any certainty. It looks 

as though the construction activity will begin to stop falling, will 

begin to bottom out probably later this year or early next year. The 

more difficult judgment is how much further house prices might decline. There still are significant overhangs of inventories of unsold 

new homes. 

I agree absolutely, once there is some confidence that the market 

has found its level, that there will be considerable improvement in 

financial conditions and probably a stronger economy as well. 

Mr. SHAYS. One last point, and that is on the whole issue of 

loans to students. If students aren’t able to get loans this fall, Congress is going to hear it big time. What do you think is the most 

important thing we can do to provide liquidity to that market? 

Mr. BERNANKE. Well, my understanding is that Congress has addressed that to some extent by allowing direct lending or backup 

lending. 

Mr. SHAYS. I guess the question will be: Do you think it will 

work? 

Mr. BERNANKE. That is a bit outside of my expertise, but I believe it is going to go a significant part of the way, and also some 

private-sector lenders will still participate in that market. 

50 

Mr. SHAYS. Thank you for your graciousness and for being here. 

I thank the chairman for allowing me to ask these questions. 

With that, we will adjourn this hearing. Thank you very much, 

Mr. Bernanke. 

[Whereupon, at 12:52 p.m., the hearing was adjourned.] 

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