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S. HRG. 111–206 

NOMINATION OF BEN S. BERNANKE 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

ON 

THE NOMINATION OF BEN S. BERNANKE, OF NEW JERSEY, TO BE CHAIRMAN

OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

DECEMBER 3, 2009 

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

( 

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

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

JUDD GREGG, New Hampshire 

EDWARD SILVERMAN, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

MARC JARSULIC, Chief Economist 

AMY FRIEND, Chief Counsel 

JULIE CHON, Senior Policy Adviser 

JOE HEPP, Professional Staff Member 

LISA FRUMIN, Legislative Assistant 

DEAN SHAHINIAN, Senior Counsel 

MARK F. OESTERLE, Republican Chief Counsel 

JEFF WRASE, Republican Chief Economist 

DAWN RATLIFF, Chief Clerk 

DEVIN HARTLEY, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)
C O N T E N T S 

THURSDAY, DECEMBER 3, 2009 

Page 

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

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 4 

Senator Johnson 

Prepared statement ................................................................................... 76 

NOMINEE 

Ben S. Bernanke, of New Jersey, to be Chairman of the Board of Governors 

of the Federal Reserve System ............................................................................ 6 

Prepared statement .......................................................................................... 76 

Biographical sketch of nominee ....................................................................... 79 

Responses to written questions of: 

Senator Shelby ........................................................................................... 92 

Senator Johnson ........................................................................................ 93 

Senator Bayh ............................................................................................. 94 

Senator Menendez ..................................................................................... 95 

Senator Merkley ........................................................................................ 98 

Senator Bunning ....................................................................................... 105 

Senator Vitter ............................................................................................ 140 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter submitted by Senator Shelby ...................................................................... 157 

(III)

(1) 

NOMINATION OF BEN S. BERNANKE, 

OF NEW JERSEY, TO BE CHAIRMAN 

OF THE BOARD OF GOVERNORS OF THE 

FEDERAL RESERVE SYSTEM 

THURSDAY, DECEMBER 3, 2009 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:02 a.m., in room SD–106, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. We are here 

this morning to consider the nomination of Ben Bernanke to be the 

Chairman of the Federal Reserve. 

Mr. Chairman, let me begin by welcoming you once again to the 

Senate Banking Committee. You have been before us on numerous 

occasions over the last couple of years, and we welcome your participation, and we want to thank you for joining us again here 

today. 

Today we are faced with, as I see it, two separate questions—and 

before I begin, let me just say, for the purposes of Members’ information, we are going to have a series of votes on the floor of the 

Senate. My intention would be to go until about 11:45, the next 

hour and 45 minutes, adjourning at 11:45, and then coming back 

at 1 p.m., because we will have these series of votes, Mr. Chairman, and rather than having it sort of be disjointed going back and 

forth, we will have it in two parts. And we will get as much done 

as we can. 

When it comes time, I am going to have just opening statements 

by Senator Shelby and me, and then we will hear the statement 

by the Chairman, and then I am going to have 8 minutes to 10 

minutes for questions. What I will do is put the yellow light on at 

8, and, again, I have never been rigid about banging a gavel down, 

but I would ask Members to try and keep their questions in that 

timeframe so we can get to as many of our colleagues as possible 

and limit, to the extent possible, this afternoon. 

Obviously, if you want a second round, we will do that as well. 

I do not want to deprive any Members of the opportunity to be 

heard. But that is the way in which we will proceed. 

So, again, today we are faced, as I see it with this nomination, 

with actually two separate questions. First, should Ben Bernanke 
2 

here, our nominee, stay on as the Chairman of the Federal Reserve? And, second, as this Committee works to create a financial 

regulatory structure for the 21st century, what should be the role 

of the institution that our Chairman here, the nominee, would 

oversee? Does the existing structure of the Federal Reserve deserve 

to be maintained? Too often that question has been dominated by 

the personality of the Fed Chairman. But in my view, this is not 

about the nominee or the Chairman, nor is it about the Members 

of this Committee, including the Chairman of this Committee. This 

is about the institution that will be around long after the nominee 

or the Members of this Committee are gone. What makes the most 

sense for the success of this institution, the Federal Reserve? 

So first let me address the nomination for another term as Chairman of the Federal Reserve. This is an incredibly important job 

during a crucial time in our Nation’s history, as we all know. Over 

the last year, our Nation has been rocked by a devastating economic crisis. This Committee has met dozens of times to talk about 

its impact on our constituents, the millions of Americans who have 

lost their jobs, families who have lost their homes, and those who 

have watched their wealth evaporate as home values dropped and 

investments were wiped out. 

Under your leadership, Mr. Chairman, the Federal Reserve has 

taken extraordinary actions to right the economy, providing liquidity to depositories, sustaining the commercial paper market, working with the United States Treasury to restart the asset-backed securities market, and providing very critical support to the housing 

market. These efforts have played, in my view, a very significant 

role in arresting the financial crisis, and financial markets have 

begun to recover. 

For that, Mr. Chairman, you and the Federal Reserve deserve, 

in my view, praise for your acumen and gratitude for the role in 

preventing a far worse outcome than we might have otherwise 

seen. And I believe that you deserve another term as Chairman of 

the Federal Reserve, and I intend to vote for your nomination, both 

in this Committee and on the floor of the U.S. Senate, because I 

believe that you are the right leader for this moment in our Nation’s economic history, and I believe your reappointment sends the 

right signal to markets. 

And while I congratulate you for these efforts, I remain very concerned, as you know, about the weaknesses in the overall financial 

regulatory system that allowed the financial collapse to occur in 

the very first place, which brings me to the second question. 

Does the structure of the institution you will oversee deserve to 

be maintained as it presently is constituted? Today we have a regulatory structure, as I see it, created by historic accidents as Government reacted to problems with piecemeal solutions over nearly 

a century. You and I, I think, agree that the Federal Reserve 

should be strong and very, very independent—and I feel very 

strongly about that second word—and be able to perform its core 

functions: conducting monetary policy, supervising payment systems, and acting as the lender of last resort. 

I worry that over the years loading up the Federal Reserve with 

too many piecemeal responsibilities has left important duties without proper attention and exposed the Fed to dangerous 
3 

politicization that threatens the very independence of this institution. 

Congress gave the Federal Reserve the authority to protect consumers in mortgage markets in 1994. We have talked about this 

many, many times in this Committee. But for many years, many 

of us in the Senate were frustrated in our efforts to get the Fed 

to address predatory lending, and the Federal Reserve failed to develop meaningful mortgage guidelines and regulations until the 

housing bubble burst. 

There have been other lapses in consumer protections with the 

Fed doing little, in my view, over the years to protect users of credit cards and checking accounts from abusive company practices. 

In addition, in my view, the Fed failed to rein in excessive risk 

taking by some of the largest holding companies which it supervised. Many of the firms whose irresponsible actions contributed to 

the crisis and ultimately required a taxpayer-funded bailout did so 

under the Fed’s watch. 

The lesson I believe we can learn from these mistakes is that the 

country is best served by a strong, focused central bank, not one 

that is saddled with too many diverse missions and competing responsibilities, that its independence and competency—when its 

independence and competency are called into question. 

It has been proposed that the Fed assume yet another role in 

controlling threats to overall financial stability. But I fear these additional responsibilities would further distract from the Fed’s core 

mission and leave it open to dangerous politicization, undermining 

its critical independence. 

And so as Congress takes up the financial reform this year, I 

have proposed creating new entities outside the Federal Reserve to 

focus responsibilities for bank regulation, consumer protections, 

and systemic risk so these important duties will not need to compete for the Federal Reserve’s attention. Appreciating that conducting effective monetary policy requires full access to information 

on banks, my proposal, our proposal, preserves and expands the 

Fed’s involvement and ability to access information directly from financial institutions and the new bank regulators, the ability to 

participate in bank exams, new authority to regulate systemically 

important payment and financial utilities, and a seat on the boards 

of the bank regulator, the systemic risk agency. 

What I am proposing does not exclude the Fed from involvement 

in these issues but, rather, expands the participants in this effort. 

We share the goal of a strong, focused, independent Federal Reserve that can operate successfully as part of a new regulatory 

framework that will restore our Nation’s economic security, and I 

look forward to working with you on this very important task. 

I know there are many important issues that my colleagues, of 

course, want to discuss here today with you as they consider your 

nomination. Again, I think you are deserving of renomination and 

confirmation by the U.S. Senate. I believe you have done a very 

good job in helping us avoid the kind of catastrophe that could 

have occurred in this country. But I also believe we bear responsibility to consider the institution which you lead beyond the role of 

our tenure, either as Chair of this Committee or Chair of the Federal Reserve, and that is why I raise these issues as part of an 
4 

overall reform of the financial regulatory structure that has been 

the desire of many people over many, many years. And in the absence of the situation we find ourselves in today, I suspect we 

would not be dealing with it. 

So, again, I welcome your participation here today, congratulate 

you on the work you have done, and let me turn to Senator Shelby 

for any opening comments. Then we will hear from you and proceed with questions. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Chairman Dodd. Welcome, Mr. 

Chairman. 

We all know Chairman Bernanke’s academic accomplishments 

prior to joining the Board of Governors, first as a member and then 

as its Chairman. He was and remains one of our Nation’s leading 

scholars on the Great Depression. I believe that his expertise in 

this area has served him well during our current crisis. 

It is important to note, however, that every crisis has a beginning, a middle, and an end. And while we learned a great deal 

about crisis management from the Great Depression, it appears 

that we have learned precious little about how to avoid the situation in the first place. 

Prior to the recent financial crisis, the Federal Reserve kept interest rates, I believe, far too low for too long, encouraging a housing bubble and excessive risk taking. In addition, the Fed failed to 

use its available powers to mitigate those risks. 

Congress also bears some responsibility. Often over my objections 

here, we enacted housing policies that imprudently encouraged 

homeownership to levels we now know were unsustainable. We 

also failed to curtail the activities of the housing GSEs—Fannie 

Mae and Freddie Mac. My record on that topic I think is well 

known here. 

After the recession that ended in 2001, which was preceded by 

the bursting of the dotcom bubble, the Fed was concerned about a 

sluggish economy and the specter of deflation. Given those concerns, the Fed chose to hold interest rates remarkably low for 

years. Indeed, the effective Federal funds rate was well below 2 

percent between 2001 and November of 2004. 

During most of that period, now-Chairman Bernanke served as 

a member of the Board of Governors of the Federal Reserve and 

supported the low interest rate policies. In 2002, then-Governor 

Bernanke warned of deflation. He stated, and I will quote, 

. . . the Fed should take most seriously . . . its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first 

economist to emphasize the potential connections between violent financial 

crises, which lead to ‘‘fire sales’’ of assets and falling asset prices, with general declines in aggregate demand and the price level. A healthy, well-capitalized banking system and smoothly functioning capital markets are an 

important line of defense against deflationary shocks. I believe the Fed 

should and does use its regulatory and supervisory powers to ensure that 

the financial system will remain resilient if financial conditions change rapidly. 

The Governor’s warning was clear. Deflation is a potential danger which could ignite a financial crisis. The policy prescriptions 

seem equally clear: keep interest rates low, liquidity flows high, 
5 

and lean against deflation pressures. However, while keeping interest rates low for a protracted period of time, the Fed appeared remarkably unconcerned about the possibility of igniting a financial 

crisis by inflating the housing price bubble, which, ironically, led 

to the same result: a violent financial crisis and a fire sale of assets. 

As housing prices soared and risk taking escalated, Wall Street 

investors pressed on as if a ‘‘Fed put’’ was assured. The notion was 

that in adverse market conditions, the Fed would absorb faltering 

assets and flood the markets with liquidity. Indeed, Governor 

Bernanke at that time assured markets that the Fed stood ready 

to use the discount window and other tools to protect the financial 

system, a reassurance that the ‘‘Fed put’’ was in place. 

In 2004 and 2005, Chairman Bernanke and other members of the 

Board of Governors spoke of the possibility of a great moderation 

involving potential permanent reduction in macroeconomic volatility and risk, no doubt a result of vigilant and adept monetary 

policy. 

In retrospect, this misperception left market participants believing that large risks had been mitigated, opening the door for greater risk taking. In the face of rising home prices and risky mortgage 

underwriting, the Fed failed to act. The Fed chose not to use its 

rulemaking authority over mortgages to arrest risky lending and 

underwriting practices. And although numerous statutes such as 

TILA, HOEPA, the Equal Credit Opportunity Act, the Real Estate 

Settlement Procedures Act—RESPA—and the Home Mortgage Disclosure Act gave the Fed the authority to act, nothing was done. 

The Fed also made major forecasting errors leading up to the recent crisis. Then after the housing market bubble began to burst 

in 2006, the Fed was slow to entertain possible spillovers from the 

housing sector into the general economy and the financial system. 

Finally, in response to the growing crisis, the Fed took actions that 

often appeared to be ad hoc and piecemeal. 

Many of the Fed’s responses, in my view, greatly amplified the 

problem of moral hazard stemming from too-big-to-fail treatment of 

large financial institutions and their activities. In addition, some 

Fed actions were taken in concert with the Treasury, blurring the 

distinction between fiscal policy functions of the Congress and 

Treasury and the central bank’s monetary policy and lender of last 

resort functions. 

Under Chairman Bernanke’s watch, the Federal Reserve vastly 

expanded use of its discount window, including the provision of 

funds to some institutions over which the Fed had no oversight. 

The Fed also created new lending facilities to channel liquidity and 

credit to markets that were deemed most stressed and systemically 

important. 

Consequently, the Fed’s balance sheet has ballooned from a precrisis level of around $800 billion to more than $2.2 trillion through 

credit extensions and purchases of risky private assets, GSE debt, 

and U.S. Treasury debt. Many Fed actions were innovative ways to 

provide liquidity to a wide variety of financial institutions and market participants. Some actions, however, amounted to bailouts. 

When dealing with individual institutions deemed systemically important by the Fed, shareholders were wiped out and management 
6 

replaced. However, in many instances, bond holders were made 

whole even though they were not legally entitled to such favorable 

treatment. Using powers granted under Section 13(3) of the Federal Reserve Act, the Fed made it explicit that certain institutions 

and activities would not be allowed to fail. 

Recently, certain Fed Governors have stated that private risk absorbed by the Fed involved only a small portion of its enormous 

asset holdings. Furthermore, some have suggested that the Government might even make money on some of its risky bills. And while 

some of this might be true, I do not believe potential profit is the 

appropriate metric for evaluating Government support of private 

risk. Taxpayers simply should not be subjected to possible losses 

from private risk. 

Mr. Chairman, for many years I held the Federal Reserve in very 

high regard. I had a great deal of respect for not only its critical 

role in the U.S. monetary policy, but also its role as a prudential 

regulator. I believe it to be the Nation’s repository of financial expertise and excellence, and over the years we have enacted a number of laws which demonstrated our confidence in your institution. 

We trusted the Fed to execute those laws when deemed prudent 

and necessary. I fear now, however, that our trust and confidence 

were misplaced in a lot of instances. 

The question before us now, Mr. Chairman, is: What are we to 

do about it? Currently, the Committee is discussing, as Senator 

Dodd said, the future of our regulatory system. To the extent that 

we can identify weaknesses that contribute to the crisis, we should 

address them. But not everything that went wrong can be blamed 

on the system because the system also depends on the people who 

run it. It is those individuals who need to be accountable for their 

actions or their failure to act. 

Mr. Chairman, I believe in accountability. The Senate’s constitutional authority to advise and consent can be a highly effective 

means by which this body can hold individuals accountable. It is 

a process through which we can express our disapproval of past 

deeds or our lack of confidence in future performance. 

We continue to face considerable challenges, including still 

stressed financial markets, rising nonperforming commercial real 

estate loans, tight credit conditions, record high mortgage delinquency rates, double-digit unemployment, hemorrhaging deficits 

and public debt, and concerns about the size of the Fed’s balance 

sheet, the value of the dollar, and the possibilities of yet more bubbles. 

Certainly, we are still deep in the woods, Mr. Chairman. The 

question before us is whether Chairman Bernanke is the person 

best suited to lead us out and keep us out of trouble. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Chairman Bernanke, welcome again to the Committee. 

STATEMENT OF BEN S. BERNANKE, OF NEW JERSEY, TO BE 

CHAIRMAN OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

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

Members of the Committee, I thank you for the opportunity to ap-
7 

pear before you today. I would also like to express my gratitude to 

President Obama for nominating me to a second term as Chairman 

of the Board of Governors of the Federal Reserve System and for 

his support for a strong and independent Federal Reserve. Finally, 

I thank my colleagues throughout the Federal Reserve System for 

the remarkable resourcefulness, dedication, and stamina they have 

demonstrated over the past 2 years under extremely trying conditions. They have never lost sight of the importance of the work of 

the Federal Reserve for the economic well-being of all Americans. 

Over the past 2 years, our Nation, indeed the world, has endured 

the most severe financial crisis since the Great Depression, a crisis 

which in turn triggered a sharp contraction in global economic activity. Today, most indicators suggest that financial markets are 

stabilizing and that the economy is emerging from the recession. 

Yet our task is far from complete. Far too many Americans are 

without jobs, and unemployment could remain high for some time 

even if, as we anticipate, moderate economic growth continues. The 

Federal Reserve remains committed to its mission to help restore 

prosperity and to stimulate job creation while preserving price stability. If I am confirmed, I will work to the utmost of my abilities 

in the pursuit of those objectives. 

As severe as the effects of the financial crisis have been, however, the outcome could have been markedly worse without the 

strong actions taken by the Congress, the Treasury Department, 

the Federal Reserve, the Federal Deposit Insurance Corporation, 

and other authorities both here and abroad. For our part, the Federal Reserve cut interest rates early and aggressively, reducing our 

target for the Federal funds rate to nearly zero. We played a central role in efforts to quell the financial turmoil, for example, 

through our joint efforts with other agencies and foreign authorities to avert a collapse of the global banking system last fall; by 

ensuring financial institutions adequate access to short-term funding when private funding sources dried up; and through our leadership of the comprehensive assessment of large U.S. banks conducted this past spring, an exercise that significantly increased 

public confidence in the banking system. We also created targeted 

lending programs that have helped to restart the flow of credit in 

a number of critical markets, including the commercial paper market and the market for securities backed by loans to households 

and small businesses. Indeed, we estimate that one of the targeted 

programs—the Term Asset-Backed Securities Loan Facility—has 

thus far helped finance 3.3 million loans to households—excluding 

credit card accounts—more than 100 million credit card accounts, 

480,000 loans to small businesses, and 100,000 loans to larger businesses. And our purchases of longer-term securities have provided 

support to private credit markets and helped to reduce longer-term 

interest rates, such as mortgage rates. Taken together, the Federal 

Reserve’s actions have contributed substantially to the significant 

improvement in financial conditions and to what now appear to be 

the beginnings of a turnaround in both the U.S. and foreign economies. 

Having acted promptly and forcefully to confront the financial 

crisis and its economic consequences, we are also keenly aware 

that, to ensure longer-term economic stability, we must be pre-
8 

pared to withdraw the extraordinary policy support in a smooth 

and timely way as markets and the economy recover. We are confident that we have the necessary tools to do so. However, as is always the case, even when the monetary policy tools employed are 

conventional, determining the appropriate time and pace for the 

withdrawal of stimulus will require careful analysis and judgment. 

My colleagues on the Federal Open Market Committee and I are 

committed to implementing our exit strategy in a manner that both 

supports job creation and fosters continued price stability. 

A financial crisis of the severity we have experienced must 

prompt financial institutions and regulators alike to undertake unsparing self-assessments of their past performance. At the Federal 

Reserve, we have been actively engaged in identifying and implementing improvements in our regulation and supervision of financial firms. In the realm of consumer protection, during the past 3 

years, we have comprehensively overhauled regulations aimed at 

ensuring fair treatment of mortgage borrowers and credit card 

users, among numerous other initiatives. To promote safety and 

soundness, we continue to work with other domestic and foreign 

supervisors to require stronger capital, liquidity, and risk management at banking organizations, while also taking steps to ensure 

that compensation packages do not provide incentives for excessive 

risk taking and an undue focus on short-term results. Drawing on 

our experience in leading the recent comprehensive assessment of 

19 of the largest U.S. banks, we are expanding and improving our 

cross-firm, or horizontal, reviews of large institutions, which will 

afford us greater insight into industry practices and possible 

emerging risks. To complement on-site supervisory reviews, we are 

also creating an enhanced quantitative surveillance program that 

will make use of the skills not only of supervisors, but also of 

economists, specialists in financial markets, and other experts 

within the Federal Reserve. We are requiring large firms to provide 

supervisors with more detailed and timely information on risk positions, operating performance, and other key indicators, and we are 

strengthening consolidated supervision to better capture the firmwide risks faced by complex organizations. In sum, heeding the lessons of the crisis, we are committed to taking a more proactive and 

comprehensive approach to oversight to ensure that emerging problems are identified early and met with prompt and effective supervisory responses. 

We also have renewed and strengthened our longstanding commitment to transparency and accountability. In the making of monetary policy, the Federal Reserve is highly transparent, providing 

detailed minutes 3 weeks after each policy meeting, quarterly economic projections, regular testimonies to the Congress, and much 

other information. Our financial statements are public and audited 

by an outside accounting firm, we publish our balance sheet weekly, and we provide extensive information through monthly reports 

and on our Web site on all the temporary lending facilities developed during the crisis, including the collateral that we take. Further, our financial activities are subject to review by an independent Inspector General. And the Congress, through the Government Accountability Office, can and does audit all parts of our operations, except for monetary policy and related areas explicitly ex-
9 

empted by a 1978 provision passed by the Congress. The Congress 

created that exemption to protect monetary policy from short-term 

political pressures and thereby to support our ability to effectively 

pursue our mandated objectives of maximum employment and price 

stability. 

In navigating through the crisis, the Federal Reserve has been 

greatly aided by the regional structure established by the Congress 

when it created the Federal Reserve in 1913. The more than 270 

business people, bankers, nonprofit executives, academics, and 

community, agricultural, and labor leaders who serve on the boards 

of the 12 Reserve Banks and their 24 branches provide valuable insights into current economic and financial conditions that statistics 

alone cannot. Thus, the structure of the Federal Reserve ensures 

that our policymaking is informed not just by a Washington perspective or a Wall Street perspective, but also by a Main Street 

perspective. 

If confirmed, I look forward to working closely with this Committee and the Congress to achieve fundamental reform of our system of financial regulation and stronger, more effective supervision. 

It would be a tragedy if, after all the hardships that Americans 

have endured during the past 2 years, our Nation failed to take the 

steps necessary to prevent a recurrence of a crisis of the magnitude 

we have recently confronted. And as we move forward, we must 

take care that the Federal Reserve remains effective and independent, with the capacity to foster financial stability and to support a return to prosperity and economic opportunity in a context 

of price stability. 

Thank you again for the opportunity to appear before you today. 

I would be happy to respond to your questions. Thank you, Mr. 

Chairman. 

Chairman DODD. Thank you very much, Mr. Chairman. Again, I 

will ask the clerk to keep an eye on the clock here so we move 

along with the questions this morning. 

Let me begin, in a sense, in talking about both systemic risk obligations as well as the whole issue of the supervisory authority. You 

wrote your piece for The Washington Post a few days ago in which 

you raised the concern that if you lacked the supervisory capacity 

here, it would directly affect your ability to conduct monetary policy. And yet we have had witnesses before this Committee over the 

last number of months, including the former Fed Vice Chair Alice 

Rivlin, former Fed Monetary Affairs Director Vince Reinhart, and 

Alan Meltzer, who is a long-time scholar of the Fed, among others. 

And their testimony says that the Fed’s bank supervisory authority 

plays very little role in the formation of monetary policy. 

Under the proposal that we have proposed and put before the 

Committee, the Fed would not be a bank supervisor, but it would 

have access, which was not necessarily reflected in your piece, but 

it would have access, as you know, to all the information it currently has about banks, could participate in examinations of any 

bank or bank holding company, and would be part of the systemic 

risk regulator. 

Wouldn’t this information allow you to carry out the Fed’s core 

functions of setting monetary policy and acting as the lender of last 

resort since it is the access to the information that really is critical 
10 

for the conduct of monetary policy and, therefore, the objections to 

the proposal we have made here are really not as well founded as 

they might appear to be in the piece? 

Mr. BERNANKE. Thank you Mr. Chairman. As you know, I do 

think that taking the Federal Reserve out of active bank supervision would be a mistake for the country. First, I think it should 

be noted that the Federal Reserve has unparalleled expertise that 

arises from its work in monetary policy. We have a great group of 

economists, financial markets experts, and others who are unique 

in Washington in their ability to address these issues. And as we 

go forward, as we try to supervise complex, multi-company firms, 

holding companies, and as we try to look at the system as a whole 

from a so-called macroprudential perspective, which involves looking at the interactions of companies and markets, we need not just 

bank supervisors who can go in and read a loan file, but also financial market experts and economists who can create the context and 

the supplementary analysis that will make these more difficult 

analyses possible. And we demonstrated the value of this in the 

stress tests earlier this year. 

The second argument, the one that you alluded to specifically, 

Mr. Chairman, has to do with the benefits to the Federal Reserve 

of having these supervisory authorities. You mentioned monetary 

policy. There is some benefit to monetary policy, and I can give instances. But I think the greater benefit is actually to our ability to 

help maintain financial stability and to be an effective lender of 

last resort. 

In the current crisis, for example, our ability to respond to the 

crisis, to address problems in the banking system, to help stabilize 

key markets was critically dependent on our ability to see what 

was going on in the banking system and to have the expertise inside the Federal Reserve to evaluate what was happening. There 

is no way we could have been as involved or effective in this crisis 

if we did not have that expertise and that information. 

If you go back into history, there are many other examples. Just 

to give one more, after 9/11, the Federal Reserve played a central 

role in restoring the financial system to operational capacity, and 

our knowledge of what was happening in the banks, their funding 

positions, their need for liquidity, the risks that they faced operationally and otherwise, was absolutely critical in our ability to do 

that. And there are many other examples. 

So I do believe that monetary policy is benefited, but financial 

stability is even more important in that the ability of the Fed to 

play its role in stabilizing the financial system and being lender of 

last resort, in addition we need to be able to look at collateral and 

understand the solvency of banks to make loans to banks, requires 

our involvement in bank supervision. 

My belief, and looking at other countries where now the trend is 

very much toward reversing earlier decisions to strip regulatory 

powers from central banks, the trend now is to go back exactly the 

opposite direction. In Europe and the United Kingdom, for example, the political discourse is leaning very heavily toward increasing and adding the supervisory and macroprudential responsibilities to the central bank, and that comes from an experience of the 

last couple of years where the inability to have complete informa-
11 

tion greatly hampered the function of those central banks in addressing the financial stability issues. 

Being on a board, having the ability to go along on an exam will 

never substitute for having your own expertise, your own information, your own ability to go in when you believe that there is an 

issue. Mr. Chairman, I understand your objectives here, but I do 

believe it is a very, very serious matter to take the Fed essentially 

out of financial stability management, which this I think would do. 

Chairman DODD. Well, it is not our intention to take it out, at 

all, but rather expand the number of eyes that are looking at these 

situations so we have better judgments, because clearly, one of the 

problems occurred in the supervisory role of bank holding companies, of course, that was an abysmal failure. Now, I am talking 

about before your tenure. 

But nonetheless, looking at systemic risk and while we are examining ways to have resolution mechanisms here that will avoid the 

kind of moral hazards associated with giving the implicit backing 

of the Federal Government should an institution become deeply 

troubled, it seems to me it is in our interest to try to avoid that 

occurrence from happening, and the way they do that, obviously, is 

having the kind of supervisory function here that would allow a decision to be made where an institution was getting precariously 

close to causing systemic risk—and again, my concern is here about 

institutional issues rather than the individuals involved in decision 

making. 

But here we were at a time when we are now looking back, all 

the signs were so blatantly clear, and yet in conducting its supervisory capacity within the Fed, it failed terribly, and giving us the 

kind of warnings that we should have had as a country of where 

we were headed, particularly in the bank holding company area. 

And so my concerns about this are based on recent history where 

there has been a failure in performing that function, and therefore 

the concerns that maybe we ought to be looking at something different that would provide us with the greater warnings, the predictions, the ability to respond so you are not spending the last 2 

years as we were. 

And I admire what you have done over the last 2 years, but it 

shouldn’t have gotten to that. We never should have arrived at that 

moment. We shouldn’t have had to go through what we did for the 

last 2 years had there been cops on the street doing their job, telling us what was going on and allowing us to avoid the problem in 

the first place. 

Why should I give an institution that failed in that responsibility 

the kind of exclusive authority we are talking about here? 

Mr. BERNANKE. Mr. Chairman, it is true that there were weaknesses in that supervision, and I described in my testimony some 

of the steps we are taking to strengthen it. But the Federal Reserve was not the systemic regulator. It had a very narrowly described set of supervisory responsibilities, bank holding companies, 

primarily, as you point out. But if you look at the firms and the 

markets and the instruments that caused the problems, a great 

number of them, and Senator Shelby mentioned one or two, were 

mostly outside of the Federal Reserve’s responsibility. 
12 

And so there was a failure across the system, and we all have 

to do better, that is for sure. But in terms of changing the structure, I think what we need is not only to do a better job, but we 

need to make a structure whereby we are looking at the system as 

a whole, that we are not looking just individually at each individual institution. We are trying to look at the whole system collectively. And I believe that the changes that have been proposed that 

will create a Systemic Risk Council and so on would do that and 

would help us, independent of who is Chairman or who is head of 

the FDIC or the SEC, would help us have a better chance of identifying those system problems in advance. 

Chairman DODD. Let me jump quickly, because time is about up 

here for me and I don’t want to exceed it, and I am sure others 

will ask you about the commercial real estate. Senator Shelby has 

already raised it. And the jobs picture, which if I had had exclusive 

time with you, I just want to talk about where we are going with 

jobs. 

But let me raise the issue, because an economist by the name 

of—I may mispronounce his name—Roubini, who correctly, we are 

told, predicted the global financial crisis that we are now in, and 

many other economists are concerned that the world’s central 

banks are flooding the financial institutions with too much cash, 

setting the stage for another asset bubble burst. I don’t know if you 

have been familiar with his predictions at all or not. With interest 

rates near zero in the United States, the dollar has dropped 12 percent in the past year against a basket of six major currencies. According to Mr. Roubini, investors worldwide are borrowing dollars 

to buy assets, including equities and commodities, fueling huge 

bubbles that may spark another financial crisis. 

Quickly, can you tell us whether or not you think this threat has 

legitimacy, and if so, what we are doing about it? 

Mr. BERNANKE. It is certainly something we want to pay close attention to, but let me distinguish between the United States and 

abroad. In the United States, of course, it is inherently very difficult to know if asset prices are appropriate or assets are correctly 

valued, but we have been trying to do our best to look at valuation 

models and other metrics and we do not see at this point any extreme mis-valuations of assets in the United States. Of course, all 

that is contingent on your beliefs about where the economy is going 

to go. Mr. Roubini is very pessimistic about the economy, and, of 

course, if the economy were to weaken tremendously, then asset 

prices would be overvalued where they are today, but only in that 

case. 

There have been complaints about U.S. monetary policy contributing to bubbles abroad, and I think it needs to be understood that 

the United States monetary policy is intended to address both financial and economic issues in the United States and countries 

which have their own tools to address bubbles in their own economies, including the flexibility of their exchange rate, their own 

monetary policies, their own fiscal policy, their own supervisory 

policies. So it really is not the United States’s responsibility to 

make sure that there are no misalignments in every economy in 

the world when those countries have their own tools to address 

them. 
13 

Chairman DODD. Well, thank you, but this is an issue we want 

to stay in close contact with you and others on this matter to see 

if this thing emerges as a growing problem as this economist and 

others are warning us. 

Senator Shelby. 

Senator SHELBY. Thank you, Chairman Dodd. 

I want to stay on some of the subjects, Chairman Bernanke, that 

Senator Dodd has raised. In the past, you have argued—and still 

do—that there are certain synergies between supervision and regulation of financial firms and the conduct of monetary policy and the 

Fed’s lender of last resort function. If we were to go back, Mr. 

Chairman, and review the minutes and transcripts of all FOMC 

meetings between 2003 and 2008, I wonder what fraction of the 

time would have been devoted to issues involving supervision and 

regulation of, say, your holding companies, or our holding companies. Was it half the time? Was it a fourth of the time? An eighth 

of the time? A tenth of the time? In other words, give us your judgment on that. 

Mr. BERNANKE. Well, in a typical meeting, there would be very 

little discussion. Let me take that back. Recently, we have talked 

about it quite a bit because of the financial—— 

Senator SHELBY. Sure. 

Mr. BERNANKE. ——financial crisis. But it depends on the situation. There are periods like recently, but also, for example, in the 

early 1990s—when the banking system faced what were called the 

financial headwinds and were holding back economic growth— 

where those issues were important and were discussed. Under normal circumstances, they would be discussed much less. That is absolutely right. 

But to reiterate what I said to Chairman Dodd, although I do 

think that the bank supervision is helpful in monetary policy, it 

provides us with information we otherwise wouldn’t have, and 

there are some academic studies which show that there is a link 

between bank supervision information and Fed monetary policy responses, I again would put a much heavier weight on the financial 

stability function whereby in order to be a lender of last resort and 

to know how to respond to an ongoing crisis or threat of crisis, we 

need to have the expertise, information, and authorities associated 

with being a bank supervisor. 

Senator SHELBY. Would it be fair to say that before the crisis in 

the last couple of years, that not a lot of time was spent on regulatory supervision—— 

Mr. BERNANKE. Well—— 

Senator SHELBY. ——talking, discussion? 

Mr. BERNANKE. Let me remind you of the structure of the Fed. 

The Federal Open Market Committee is about monetary policy primarily, and so the general economy—inflation, unemployment, and 

so on—are the primary issues—— 

Senator SHELBY. It is foremost, is it not? 

Mr. BERNANKE. I am sorry? 

Senator SHELBY. That would be foremost what you—— 

Mr. BERNANKE. That would be the foremost issues in the FOMC. 

Of course, the Board of Governors, as opposed to the FOMC, has 

responsibility for overseeing the system’s bank supervision activi-
14 

ties, and, of course, there, that activity is ongoing, and particularly 

recently, as we worked hard to try to both address the crisis and 

to correct the problems, it has been a major priority for the Federal 

Reserve. 

Senator SHELBY. Mr. Chairman, do you believe—you have been 

on the Fed for quite a while now and you have been Chairman, this 

is your fourth year—do you believe that the Federal Reserve, even 

under your tenure, not your predecessor’s, before the crisis hit, 

when you first went there, the first year or two, was doing more 

than an adequate job of supervising and regulating the holding 

companies which subsequently got in such trouble, not just 

Citicorp, but a lot of them, and that was all under your watch at 

the Fed as a regulator? 

Mr. BERNANKE. Well, again, as I said before, there are failures 

all through the system. We heard this morning the Bank of America is paying back its TARP—— 

Senator SHELBY. Good news. 

Mr. BERNANKE. ——that is good news—— 

Senator SHELBY. When are they going to pay it back? 

Mr. BERNANKE. Immediately. 

Senator SHELBY. Any day? 

Mr. BERNANKE. In its entirety, immediately. 

Senator SHELBY. OK. 

Mr. BERNANKE. So as we go through the bank holding companies, 

as I said, we ran a stress test through the bank holding companies 

in the spring, and of the 19, I think it was nine were declared to 

be in good health and they paid back their TARP and then the rest 

have all raised capital. So those firms, in some sense, have not 

been the crux of the crisis. The real problems have been mostly 

outside of the bank holding companies. 

Senator SHELBY. Let us go back just to your tenure, 2005, 2006, 

early 2007. Where was the Fed as a regulator to try to prevent the 

crisis? Do you believe that the Federal Reserve knew what was 

going on with, say, the holding companies, and if so, why the debacle if they really knew? They either knew or they didn’t know. A 

lot of people believe—Senator Dodd alluded to this—that the Fed 

has done a horrible job as a regulator, and now yet you are wanting to continue as a regulator, which is only part of your real 

job—— 

Mr. BERNANKE. Well, Senator, it was an extraordinary crisis 

which has tested every single regulator, both here and abroad. Did 

we do everything we could? Absolutely not. I talked in my testimony about things we were doing to improve. 

I think the question that lies before you, if you fight a battle and 

you lose the battle, does that mean you never use an army again? 

You have to improve and fix the situation. You don’t have to necessarily eliminate the institution. 

So I think that we did certainly not a perfect job, by any means, 

but I don’t think we stand out as having done a worse job than 

other regulators. And again, many of the critical firms and markets 

that were the worst problems were outside of our purview. 

Senator SHELBY. Do you believe that a bank should have a role 

or a say in any way of who their regulator might be, such as the 

Reserve banks? 
15 

Mr. BERNANKE. No, I don’t, and in the—— 

Senator SHELBY. Do you believe that 13 Act should be changed? 

Mr. BERNANKE. Well, of course, the Congress created that structure, but—— 

Senator SHELBY. Absolutely. 

Mr. BERNANKE. ——but the way it actually functions is that 

there is no connection—the Reserve banks—the banks who are 

members of the boards of the 12 Reserve banks select—vote for—— 

Senator SHELBY. Explain to the audience and the Committee 

again how the members of the Reserve banks, say the Federal Reserve of Atlanta, Richmond, New York, San Francisco—— 

Mr. BERNANKE. I would be glad to do that—— 

Senator SHELBY. Tell them how they are selected on the Board. 

Mr. BERNANKE. OK. So—— 

Senator SHELBY. Who does the nomination? 

Mr. BERNANKE. Yes, sir. So again, as provided by the Federal Reserve Act, each of the 12 Reserve banks has a Board of Directors 

with a chairman. The directors, 12 at each bank, are in three classes. One class is drawn from banks in the district. Most of them are 

community banks. The second class, so-called B class, are people 

who are technically elected by the banks. And the C class is supposed to represent the general public. 

Senator SHELBY. Elected by the banks who they supervise, right? 

Mr. BERNANKE. But let me describe how the process actually 

works. The way the process actually works is that, first, the directors are chosen for the most part by the leadership of the Reserve 

bank. They are nominated by the leadership of the Reserve bank 

in order to be a wide representative cross-section of economic and 

community leaders in the district. So, for example, among the 70 

or so B and C directors, there are three from financial services. 

There are many more from manufacturing, wholesale, retail trade, 

agriculture, all different kinds of areas. They are not bankers. 

Then, moreover, both the directors and the Reserve bank president 

must be approved by the Board of Governors in Washington. 

Senator SHELBY. But, Mr. Chairman, we understand that. But do 

you believe that anybody that is going to be supervised by a banking regulator should have a say-so in choosing that regulator? It 

seems to me and others it is an inherent conflict of interest and 

an incestuous financial relationship that is not good for the Federal 

Reserve. It is not good for banks. It shows conflicts of interest to 

me. 

Mr. BERNANKE. Well, I can see why in terms of the way the law 

is written, you might think that, but the way it has actually been 

structured, the way it actually operates is that the boards of directors are drawn in practice from a wide cross-section of the public 

and I should add, that there are very strong firewalls. They have 

no ability to influence or even be informed about supervisory policy. 

Senator SHELBY. I know my time is up, but last, do you believe 

that the Federal Reserve Bank, say the Federal Reserve of New 

York and Richmond, San Francisco, and so forth, that they basically are the regulator and that you, as the Chairman of the Board 

of Governors, have outsourced that to the Reserve banks? 

Mr. BERNANKE. Absolutely not. 

Senator SHELBY. Why haven’t you? 
16 

Mr. BERNANKE. The Board of Governors has the legal authority 

and responsibility to manage that supervision. They function as 

operational arms of the Board of Governors, but we set the policy, 

we do the quality control, we do the reviews, we set the budgets. 

So your earlier criticism, to the extent you are correct, the buck 

stops here, we are responsible for that and we are, if anything, continuing to strengthen, centralize, and continuing to work to make 

sure that that supervision is as strong as possible. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Senator Johnson. 

Senator JOHNSON. Welcome to the Committee, Chairman 

Bernanke. I want to join Chairman Dodd in voicing support for 

your confirmation. While I certainly think that transparency is important, it is the Fed’s independence and its ability to carry out 

day-to-day decisions about monetary policy without intrusion of 

Congress that strengthens the Fed’s credibility and allows it to follow policies that maximize price stability and economic stability. 

What do you think about current proposals being considered by 

Congress to audit the Fed’s monetary policy decisions and to 

change the way that boards of regional Fed Reserve banks are chosen by making them political appointees? If agreed to, how would 

these proposals change the way the Fed operates? 

Mr. BERNANKE. Senator, first of all, thank you for the question. 

I think there is, at least among the public, some misunderstanding 

of the word ‘‘audit.’’ Audit sounds like a financial term. I believe 

that the Congress should have all the information it needs about 

the Federal Reserve’s financial operations, its financial controls, to 

have appropriate oversight of our use of taxpayer money. We are, 

in fact, very transparent about our financial operations and I have 

listed some of the things in my testimony that we provide, including an audited balance sheet, regular reports, and the like. 

In addition, the GAO has the authority to audit every aspect of 

the Federal Reserve except for monetary policy and related functions, as provided for by an exemption passed by the Congress in 

1978. And the GAO is, in fact, actively engaged in looking at supervision and many other aspects. We have currently 14 engagements 

with the GAO, including looking at our consolidated supervision 

and some of the things that Senator Shelby referred to. 

So to be very, very clear, I in fact I welcome transparency about 

the Fed’s activities and the Fed’s financial position, both to the 

public and to the Congress. I am, however, concerned with the auditing of monetary policy. What that means is that the GAO would 

be empowered to come in essentially immediately after a policy decision to look at all the policy materials prepared by staff, to interview members, and to basically second-guess the Fed’s decision in 

very short order with very few protections. 

My concern is that, as you mentioned, Senator, the Fed’s credibility depends on the market’s perception that we are independent 

in making monetary policy decisions and we will not be influenced 

by short-term political considerations. My fear is that if we were 

to take what might be perceived as an unpopular step, that Congress would order an audit, which would be a way, essentially, of 
17 

applying pressure, or be perceived as a way of providing pressure 

to our policy decisions. 

And so I would ask the Congress to consider retaining the 1978 

exemption, which is a very wise exemption. It allows full access to 

our financial operations and controls and access to almost all of our 

policy activities, but gives the appropriate distance to monetary 

policy to maintain the independence and credibility of that policy. 

Senator JOHNSON. I am very concerned that if banks aren’t lending to small business, we will not be able to create the jobs we need 

to decrease our Nation’s unemployment. What is the Fed doing to 

encourage banks that lend to small businesses that are ready to 

hire? 

Mr. BERNANKE. Senator, first of all, I very much agree with you. 

I talked about this in a speech in New York a couple of weeks ago. 

Many of the credit markets are functioning much better and larger 

firms are pretty well able to get access to credit, as Bank of America showed overnight. But firms that are dependent on banks, like 

small businesses, are having much more difficulty. And since small 

businesses are such a major source of job creation, particularly in 

an upswing like we are hoping will continue from here, their being 

constrained by lack of access to credit has direct implications for 

employment growth and it is very significant. 

The Fed has been very much engaged in trying to improve credit 

access for small businesses. We have provided guidance to banks 

which emphasizes that it is very important that they not be so 

over-conservative, that they not make loans to creditworthy borrowers, including small businesses. And we have backed up that 

guidance with, first, training programs for our examiners to make 

sure that they understand the importance of taking a balanced perspective, that while we want banks to be very careful and prudent, 

we don’t want them to fail to make loans to creditworthy borrowers, such as small businesses. 

We recently put out guidance which is relevant here to banks on 

how to manage commercial real estate. This is relevant because 

many small businesses borrow against their premises, against real 

estate collateral. In that guidance, we showed in quite a bit of detail how examiners and banks should work together to make sure 

that there is not undue pressure put on banks not to make loans, 

that good loans are not marked down inappropriately, that loans 

that can pay off even if the collateral value has declined can still 

be made. And so a small business that uses its store or its place 

of business as collateral can still get credit. 

So we continue to work with the banks. We have urged them to 

raise capital, as you know. As I mentioned, the stress test led to 

an enormous amount of capital raising by the banks, which will 

over time improve their ability to lend, as well. And even more directly, we have been working to increase the flow of funds from investors to small businesses, primarily through our TALF program, 

which has been trying to restart the securitization markets. That 

TALF program, as I mentioned in my testimony, has greatly improved the ability for SBA loans to be securitized and sold to investors and has led to extension of hundreds of thousands of small 

business loans. In addition, we are also helping to securitize commercial mortgage-backed securities, which again help small busi-
18 

nesses to the extent that it frees up the commercial real estate financing situation and allows them to borrow against their place of 

business, for example. 

Senator JOHNSON. There has been much discussion about the effectiveness of the economic stimulus package that was enacted in 

February to create and save jobs. In your judgment, is the stimulus 

package creating jobs and vindicating some of the effects of the economic crisis? Are there additional fiscal policy responses that Congress can take to help the current economic situation? 

Mr. BERNANKE. Senator, I think it should first be noted that only 

about 30 percent of the funds that were authorized last February 

have been disbursed, and probably something less than that have 

actually been spent. And so in some sense, it is still rather early 

to make a judgment. 

The judgment is also made more difficult by the fact that you 

have to ask the question, where would we be without this package? 

What would the counterfactual be? And that, of course, requires 

models and analysis which reasonable people can disagree about. 

So I think it is a little bit early to make a strong judgment, a little 

bit early to decide whether or not to do additional fiscal actions. 

But we will continue to analyze it and try to estimate the effects 

on the economy. 

Senator JOHNSON. Mr. Chairman, I yield back. 

Chairman DODD. Thank you very much. 

Senator Bennett. 

Senator BENNETT. Thank you, Mr. Chairman. 

Welcome, Chairman Bernanke. I am not going to go down the 

same road as many of my colleagues because I think that ground 

is going to be pretty well plowed, to mix two metaphors here. 

[Laughter.] 

Senator BENNETT. So I am going to discuss something I think 

somewhat different, and let me set the stage for it. We all talk 

about the Great Depression. I was born during the Great Depression, but I have no memory of it. But I was running a business during the Great Inflation and I have a very clear memory it. And the 

speed with which the Great Inflation disappeared from our economy has somewhat removed the pain, but my memory is still very 

strong. 

In the Carter years, and one of your predecessors had to deal 

with that, Mr. Volcker, I remember going to a bank and begging, 

and that is the operative word, for a loan to allow me to meet payroll after having maxed out my credit card, because I was the CEO 

of that company, and being absolutely delighted when the banker 

finally gave it to me at 21 percent interest. Mr. Volcker, with some 

assist—let the historians work out who gets most of the credit— 

from President Reagan ultimately broke the back of the Great Inflation and set the stage for a long period of economic growth that 

came after that. 

We are now looking ahead in a circumstance that many economists say are laying the groundwork for the next Great Inflation. 

Let me quote from Bob Samuelson’s column this morning. He says 

this week’s White House Jobs Summit will try to revive economic 

growth, but it will be a hard slog. Job creation is fundamentally a 
19 

private sector process and the private economy is experiencing a 

broad retreat from credit-driven spending. 

Mark Zandi of Moody’s reports this astonishing figure. Since last 

spring, the number of bank credit cards has dropped 100 million, 

about 25 percent. Banks are tightening credit standards, partly in 

reaction to new credit card legislation designed to protect borrowers from rate increases, and consumers are canceling cards. 

Meanwhile, empty office buildings, shuttered retail stores, and 

underutilized factories have depressed business investment spending. In the third quarter, it was down 20 percent from its 2008 

peak. Despite huge Federal budget deficits, total borrowing in the 

economy dropped in the first half of this year. This hasn’t happened in statistics since 1952. 

Then he goes on, in the short run—and this will take me where 

I am going—Zandi doesn’t worry about the effects on the Federal 

budget deficit because borrowing by consumers and companies is so 

weak. But the perception that the administration will tolerate, despite rhetoric to the contrary, permanently large deficits could ultimately rattle investors and lead to large, self-defeating increases in 

interest rates. There are risks in over-aggressive government job 

creation programs that can be sustained only by borrowing or 

taxes. 

All right. As I look at the projections we are getting out of the 

administration, they are saying that the deficits are going to run 

at 4.2 percent of GDP as far as the eye can see, and I don’t see 

the economy growing any faster than, say, 2 percent, at least in the 

foreseeable future. And that, to me, is a recipe for the Japanese 

disease, where this economy becomes like the Japanese economy 

and ultimately for major inflation. 

Now, if we confirm you, that is going to be on your plate, maybe 

not in the next six to 12 months, but certainly during your 4-year 

term. Is inflation going to come back? And if it comes back because 

of these massive Federal deficits to which Samuelson refers, how 

are you going to deal with it and what do you see in your crystal 

ball? 

Mr. BERNANKE. Thank you, Senator. Let me just first say that 

in terms of your reminiscences about the 1970s, I remember those 

periods, too, although I wasn’t a businessman at the time, and inflation is very corrosive. It is very bad for the economy. And I just 

want to reiterate that the Fed has a strong commitment to price 

stability and we will maintain that commitment. In particular— 

you didn’t ask about this, and I won’t go into detail—we are thinking a great deal about our exit strategy from our current monetary 

policy actions, including the size of our balance sheet and our special programs. 

I can’t help but just take the opportunity to—your reference to 

Chairman Volcker. Nineteen-seventy-eight was when the Congress 

passed the law that made monetary policy independent of GAO audits. Subsequently, the support of President Carter and President 

Reagan for Chairman Volcker to let him do what he had to do, was 

the reason that inflation was conquered and it did set the stage for 

many years of prosperity. Again, it is just a case study of why Federal Reserve policy independence is so critical. 
20 

With respect to deficits, and though I agree very much that we 

cannot continue to have deficits that make our debt relative to our 

GDP rise indefinitely, we need to come down, deficits that are closer to 2 to 3 percent at most, not 4 or 5 percent. If we do that in 

the medium term, we can begin to stabilize the amount of debt 

growth to GDP. It is—— 

Senator BENNETT. Let me interrupt you—— 

Mr. BERNANKE. Sure. 

Senator BENNETT. ——to make this point. 

Mr. BERNANKE. Yes. 

Senator BENNETT. I am an appropriator, which is maybe not a 

good thing to be in this election year, but I am an appropriator. 

The Appropriations Committee has influence over one-third of the 

Federal budget. The other two-thirds is on automatic pilot in mandatory spending for entitlement programs. We are discussing on 

the floor of the Senate the creation of another major entitlement 

program, and the percentage that we have any control over keeps 

going down. Further, of the one-third, half is the defense budget. 

So in terms of discretionary spending on domestic—well, not entirely domestic, this includes all our embassies overseas, the National Parks, education, transportation, everything else—is roughly 

one-sixth of the Federal budget. 

So as you are commenting on, gee, we need some fiscal discipline, 

the trajectory is entirely in the other way as mandatory spending 

takes over. And I think you are going to be looking at a situation 

where the Congress will be unable to provide any kind of fiscal discipline because of the mandatory spending. This year, Federal revenue is projected at $2.2 trillion. Mandatory spending at $2.2 trillion. Every single thing we spend money on in the government 

other than mandatory spending, we have had to borrow every single dime, and I don’t see that structural circumstance changing. I 

see it going in the other direction, and that puts an enormous burden on your plate. 

Mr. BERNANKE. Well, Senator, I was about to address entitlements. I think you cannot tackle this problem in the medium term 

without doing something about getting entitlements under control, 

reducing the costs particularly of health care. It is only mandatory 

until Congress says it is not mandatory, and we have no option but 

to address those costs at some point, or else we will have an 

unsustainable situation. 

As far as the Fed is concerned, we will not monetize the debt. 

We will maintain price stability. But we would not be able to do 

anything about interest rates going up if creditors began to lose 

confidence in the U.S. Fiscal sustainability. This is obvious, but I 

think it is worth saying, and you are right to raise it, that we need 

not only an exit strategy from monetary policy; we very much need 

an exit strategy from fiscal policy in the sense we need to get back 

to—we need to have a plan, a program to get back to a sustainable 

fiscal trajectory in the next few years. 

Senator BENNETT. If I may, Mr. Chairman, very quickly, when 

you say the Fed will not monetize it, that means that if my son 

starts a business in a few years, he is going to be paying 21-percent 

interest rates as well? 
21 

Mr. BERNANKE. No, sir, not if the 21 percent comes from inflation, which is where a lot of that came from in the 1970s. We are 

not going to support inflation, but we might not be able to stop 

rises in real interest rates even given a stable price level. 

Senator BENNETT. Thank you. 

Chairman DODD. Thank you very much, Senator. 

Senator Reed. 

Senator REED. Welcome, Mr. Chairman. Was the trajectory of 

Federal spending and Federal Reserve policy more appropriate at 

the end of 2000 or the end of 1999 than it is today? 

Mr. BERNANKE. Well, we have certainly faced a lot more challenges since then. 

Senator REED. I seem to recall we had a surplus. 

Mr. BERNANKE. We did have a surplus. 

Senator REED. And we had unemployment rates that were about 

4.6 percent. We had economic growth and income growth across the 

spectrum at every level. So what happened? 

Mr. BERNANKE. Well, going back to some of the themes that Senator Shelby raised, the stock market boom was not sustainable. It 

popped, and that contributed to the recession of 2001. And now, of 

course, we have had a financial crisis and a deep recession, which 

has dragged down tax revenues and created needs for supporting 

people out of work and other important objectives. 

So a lot of what is happening right now, of course, these enormous deficits we have this year and next year are not permanent. 

They are reflecting the current situation. But some of it will be permanent unless we begin to address particularly the entitlement 

issue and the aging issue. 

Senator REED. So you would concur that our effort today to pass 

health care reform is critical to our economic future. 

Mr. BERNANKE. I am not going to comment on the overall health 

care bill. What I will just say is that I think an essential element 

would be to try to reform health care in a way that controls costs 

going out, and that is going to be essential. 

Senator REED. And that is what the CBO has concluded in their 

evaluation of the Senate plan before us. Is that correct? 

Mr. BERNANKE. They have talked about some premiums. I do not 

think they have made a strong statement about the share of GDP 

devoted to health care, for example. 

Senator REED. They have indicated that going forward there 

would be cost savings. I think from my view, the faster we get this 

accomplished, then we can move on to some of the other issues we 

have talked about today. 

I recall in the 1990s, because I was here, that there was only 

really two ways you can deflect this deficit, and that is either by 

cutting expenditures or raising income taxes or other forms of 

taxes. Can you think of another way? 

Mr. BERNANKE. To reduce deficits? 

Senator REED. Yes. 

Mr. BERNANKE. Well, just logically, there are other kinds of taxes 

besides income taxes. 

Senator REED. No, no. I concede that. Some type of tax. 

Mr. BERNANKE. And on the spending side, again, you know, 

Willie Sutton robbed banks because that is where the money is, as 
22 

he put it. The money in this case is in entitlements. Those are the 

programs which are growing. At the rate we are going, in about 15 

years the entire Federal budget will be entitlements and interest, 

and there will not be any money left over for defense or any of the 

other activities. 

So, clearly, we are facing a very difficult structural problem in 

that we have an aging society and rising health care costs, and the 

Government has very substantial obligations. I am not in any way 

advocating unfair treatment of the elderly who have worked all 

their lives and certainly deserve our support and help. But if there 

are ways to restructure or strengthen these programs that reduce 

costs, I think that is extraordinarily important for us to try to 

achieve. 

Senator REED. Would you take taxes off the table? 

Mr. BERNANKE. I would not do anything. Those decisions are up 

to Congress. 

Senator REED. Well, your predecessor signaled very strongly that 

the tax cuts in 2000 were appropriate. 

Mr. BERNANKE. I have not done that. I have done my best to 

leave that authority where it belongs—with the Congress. 

Senator REED. One of the most pressing issues that we face 

across the country is employment, frankly, and you have made the 

point that you will begin to reduce the stimulus, the aid that the 

Fed is providing at some point. That will be done, I hope, with the 

recognition that until we restore employment across the country, 

we have not brought back the economy. We have not restored confidence in the economy, and we have not made it productive for the 

working people of this country. Is that your view? 

Mr. BERNANKE. Yes. I think jobs are the issue right now, and I 

think it is not just today’s incomes, today’s production. It is also 

about the future. We have a situation where 30 percent of African 

American young people are unemployed, very high fractions of 

young people in general. People who begin their work careers without a job, obviously, are going to be losing opportunities to gain onthe-job training, to learn skills, and it will affect them for many 

years down the road. 

So there are very severe, long-lasting costs associated with unemployment rates at the level we are seeing and with the duration 

of unemployment we are seeing, and it really is the biggest challenge, the most difficult problem that we face right now. 

Senator REED. What do we do about it? I mean, I do not want 

to be glib, but there are both fiscal and monetary consequences, 

and what we have seen, particularly in the last several months, is 

that the actions of the Federal Reserve together with fiscal actions, 

are effective, we hope, in some cases. So what would you propose 

to do about the employment situation? 

Mr. BERNANKE. Well, on the Federal Reserve side, we have continued to keep interest rates close to zero to try to stimulate 

growth, and we have seen now positive growth in output, which 

will translate into jobs, we are hoping soon. 

I think a very important issue is credit. If there is not credit, 

then that affects the ability of people to buy autos and other goods 

and services. It affects the ability of small businesses to hire and 

maintain their inventories. So I have discussed earlier some of the 
23 

steps we are taking to try to unfreeze credit, including pushing 

banks to give creditworthy borrowers access to loans, have banks 

raise capital, try to restart securitization markets and other steps. 

So the Fed has a program we are employing which is focused on 

getting jobs created. 

Now, on the fiscal side, obviously there are a whole number of 

different options. Christina Romer had an op-ed in The Wall Street 

Journal—I think it was yesterday—where she listed some of the 

things that the administration is thinking about. Obviously, all of 

these issues will have fiscal consequences, and, again, the Congress 

will have to make those trade-offs. 

Senator REED. Let me get to an issue that is under your control, 

that is, your supervisory responsibility with some of the largest financial institutions in the country, and some of the data I have 

seen suggest that local community banks are much more aggressive in terms of lending through the Small Business Administration, in lending to those small companies that are creating jobs, at 

least maintaining jobs. And if you look at the bigger financial institutions, they are not doing enough. Can you, through your supervisory responsibilities, get them to perform better, frankly? 

Mr. BERNANKE. Well, first, on the small banks, that is not uniform. But it is true that, for the most part, the small banks did not 

engage in some of the activities that got the big banks into trouble. 

They do have commercial real estate issues, many small banks do. 

But it is also true that in many cases where large banks have withdrawn or reduced their lending, small banks have stepped up and 

have provided credit, particularly to small business, and that is one 

of the reasons why community banks are such a valuable part of 

our banking system. 

We face a dilemma, which is we want banks to lend, and we are 

encouraging them to lend, but we certainly do not want them to 

make bad loans because, of course, that is what got us in trouble 

in the first place. And so as I described earlier, we are pushing 

banks to make loans to creditworthy borrowers. We are making 

sure our examiners are appropriately balancing the needs of the 

borrowers in the economy against avoiding excessive risk aversion. 

We are pushing banks to raise capital, as the Bank of America example shows, and we have done quite a bit to restore the 

securitization market, which is very important in the United 

States. That is about a third of our credit system, and that was 

mostly shut down during the crisis, except for the Governmentguaranteed mortgage markets. And our activities both in small 

business lending and also in commercial real estate have gotten 

those markets to look like they are in better shape and starting to 

function, and that is very important because it provides a source 

of funding for the banks that they can then pass on into loans. 

Senator REED. Thank you, Mr. Chairman. 

Chairman DODD. Thank you. Just 30 seconds, Jim, before I turn 

to you. The Bank of America you mentioned to Senator Shelby and 

just again referenced here. Are you supportive of their decision to 

pay off these TARP monies? And do you see any negative implications of them doing so? 

Mr. BERNANKE. We as their supervisor, along with OCC and others, evaluated their situation, and we felt that it was safe and rea-
24 

sonable and appropriate for them to pay off the TARP, and we 

signed off on that. 

Chairman DODD. Thank you very much. 

Senator Bunning. 

Senator BUNNING. Thank you, Mr. Chairman. 

Four years ago, when you came before the Senate for confirmation to be Chairman of the Federal Reserve, I was the only Senator 

to vote against you. In fact, I was the only Senator to even raise 

serious concerns about you. I opposed you because I knew you 

would continue the legacy of Alan Greenspan, and I was right. But 

I did not know how right I would be and could not imagine how 

wrong you would be in the following 4 years. 

The Greenspan legacy on monetary policy was breaking from the 

Taylor rule to provide easy money and, thus, inflation bubbles. Not 

only did you continue that policy when you think control of the 

Fed, but you supported every Greenspan rate decision when you 

were on the Fed earlier this decade. Sometimes you even wanted 

to go farther to provide easier money than Chairman Greenspan. 

As recently as a letter you sent me 2 weeks ago, you still refuse 

to admit Fed action played any role in inflating the housing bubble 

despite the overwhelming evidence and the consensus of economists 

to the contrary. And in your effort to keep filling the punch bowl, 

you cranked up the printing presses to buy mortgage securities, 

Treasury securities, commercial paper, and other assets from Wall 

Street. 

Those purchases, by the way, led to some nice profits for the 

Wall Street banks and dealers who sold them to you, and the GSE 

purchases seemed to be illegal since the Federal Reserve Act allows 

only the purchase of securities backed by the Government. 

On consumer protection, the Greenspan policy was, ‘‘Do not do 

it.’’ You went along with his policy before you were Chairman, and 

you continued it after you were promoted. The most glaring example is it took you 2 years to finally regulate subprime mortgages 

after Chairman Greenspan did nothing for 12 years. Even then you 

only acted after pressure from Congress and after it was clear 

subprime mortgages were at the heart of the economic meltdown. 

On other consumer protection issues, you only acted as the time 

approached for your renomination to be Fed Chairman. Alan 

Greenspan refused to look for bubbles or to try to do anything 

other than to create them. Likewise, it is clear from your statements over the last 4 years that you failed to spot the housing bubble, despite many warnings. 

Chairman Greenspan’s attitude toward regulating banks was 

much like his attitude toward consumer protection. Instead of close 

supervision of the biggest and most dangerous banks, he ignored 

the growing balance sheets and increasing risk. You did no better. 

In fact, under your watch, every one of the major banks failed or 

would have failed if you had not bailed them out. 

On derivatives, Chairman Greenspan and other Clinton administration officials attacked Brooksley Born when she dared to raise 

concerns about the growing risk. They succeeded in changing the 

law to prevent her or anyone else from effectively regulating derivatives. 
25 

After taking over the Fed, you did not see any need for more substantial regulation of derivatives until it was clear that they were 

headed into the financial meltdown thanks in part to those products. 

The Greenspan policy on transparency was talk a lot, use plenty 

of numbers, but say nothing. Things were so bad, one TV network 

even tried to guess his thoughts by looking at the briefcase he carried to work. 

You promised Congress more transparency when you came to the 

job. You promised more transparency when you came begging for 

TARP. To be fair, you have published more information than before, but those efforts are inadequate, and you still refuse to provide details on the Fed’s bailout last year on all the toxic waste 

that you have bought. And Chairman Greenspan sold the Fed’s 

independence to State through the so-called Greenspan put. Whenever Wall Street needed a boost, Alan was there. 

But you went even farther than that when you bowed to political 

pressure of the Bush and Obama administrations and turned the 

Fed into an arm of the Treasury. Under your watch, the Bernanke 

put became a bailout for all large financial institutions, including 

many foreign banks, and you put the printing presses into overdrive to fund the Government spending and hand out cheap money 

to your masters on Wall Street, which they used to rake in record 

profits while ordinary Americans and small businesses cannot even 

get loans for their everyday needs. 

Now I want to read a quote to you, Mr. Greens—Mr. Bernanke. 

[Laughter.] 

Senator BUNNING. That is a Freudian slip, believe me. 

Here is the quote: 

I believe that the tools available to the banking agencies, including the ability to require adequate capital and an effective banking receivership process, are sufficient to allow the agencies to minimize the systemic risks associated with large banks. Moreover, the agencies have made clear that no 

bank is too big too fail, so that bank management, shareholders, and uninsured debt holders understand that they will not escape the consequences 

of excessive risk taking. In short, although vigilance is necessary, I believe 

the systemic risk inherent in the banking system is well managed and well 

controlled. 

That should sound familiar to you since it was part of your response to a question I asked about the systemic risk of large financial institutions at your last confirmation hearing. I am going to 

ask that the full question and answer be included in today’s hearing record. 

Q.8. The Fed has been on the record with their fears of Fannie Mae and 

Freddie Mac being systemic risks to our financial system. Are you worried 

about other large financial institutions with portfolios similar to the GSE’s 

being systemic risks? 

A.8. Market discipline is typically the governing mechanism that constrains 

leverage and ensures that firms do not undertake excessive risks. The market system generally relies on the vigilance of creditors and investors in financial transactions to assure themselves of their counterparties’ current 

condition and the soundness of their risk management practices. 

Because of the availability of deposit insurance, market discipline is not by 

itself sufficient to control risk-taking in the banking system; for this reason, 

the Federal Reserve and the other banking agencies supervise and regulate 

banks. I believe that the tools available to the banking agencies, including 

the ability to require adequate capital and an effective bank receivership 
26 

process are sufficient to allow the agencies to minimize the systemic risks 

associated with large banks. Moreover, the agencies have made clear that 

no bank is too-big-too-fail, so that bank management, shareholders, and uninsured debtholders understand that they will not escape the consequences 

of excessive risk-taking. In short, although vigilance is necessary, I believe 

the systemic risk inherent in the banking system is well-managed and wellcontrolled. 

In the case of the GSE’s, market discipline is problematic. Market participants recognize that the GSE’s are closely tied to the Federal Government 

and such ties create a view among market participants that the GSE’s are 

implicitly backed by the Federal Government, thereby weakening market 

discipline. Consequently, strong regulatory authority and controls on GSE 

risk-taking are needed to ensure that they do not create systemic risks. Unfortunately, the GSE regulator’s constrained capital authority, the ineffective receivership process, and other limitations weaken regulatory oversight 

of GSE’s. Capping the size of GSE portfolios, which beyond a certain size 

do not contribute to the GSEs’ housing mission, is also important for controlling potential systemic risk. 

Senator BUNNING. Now, if that statement was true and you had 

acted according to it, I might be supporting your nomination today. 

But since then, you have decided that just about every large bank, 

investment bank, insurance company, and even some industrial 

companies are too big to fail. Rather than making management, 

shareholders, and debt holders feel the consequences of their risk 

taking, you bailed them out. In short, you are the definition of a 

moral hazard. 

Instead of taking that money and lending it to consumers and 

cleaning up their balance sheets, the banks started to pocket record 

profits and pay out billions of dollars in bonuses to their management. Because you bowed to pressure from the banks and refused 

to resolve them or force them to clean up their balance sheets and 

clean up the management, you have created zombie banks that are 

only enriching their traders and executives. You are repeating the 

same mistakes of Japan in the 1990s on a much larger scale while 

sowing the seeds for the next bubble. 

In the same letter where you refused to admit any responsibility 

for inflating the housing bubble, you also admitted you do not have 

an exit strategy for all the money you have printed and the securities you have bought. That sounds to me like you intent to keep 

propping up the banks for as long as they want. 

Even if that were not true—and I am a little over my time, but 

this is very important—the AIG bailout alone is reason enough to 

send you back to Princeton. First, you told us AIG and its creditors 

had to be bailed out because they posed a systemic risk, largely because of the credit default swap portfolio. Those credit default 

swaps, by the way, are over-the-counter derivatives that the Fed 

did not want regulated. 

Well, according to the TARP Inspector General, it turns out the 

Fed was not concerned about the financial conditions of the credit 

default swap partners when you decided to pay them off at par— 

not at a discount, but at 100 percent. In fact, the Inspector General 

makes it clear that no serious efforts were made to get the partners 

to take haircuts, and one bank offered to take a haircut and you 

declined it. I can only think of two possible reasons you would not 

make then-New York Fed President Geithner try to save the taxpayers some money by seriously negotiating or at least taking up 

UBS on their offer of a haircut. 
27 

Sadly, those two reasons are incompetence or a desire to secretly 

funnel more money to a select few firms, notably Goldman Sachs, 

Merrill Lynch, and a handful of large European banks. I cannot understand why you did not seek European governments’ contribution 

to this bailout of their banking system. 

From monetary policy to regulation, consumer protection, transparency, and independence, your time as Fed Chairman has been 

a failure. You state time and again during the housing bubble that 

there was no bubble. After the bubble burst, you repeatedly 

claimed the fallout would be small, and you clearly did not support 

the systemic risk that you claimed the Fed was supposed to be 

looking out for. 

Where I come from, we punish failure, not reward it. That is certainly the way it was when I played baseball, and it is the way 

across all America presently. Judging by the current Treasury Secretary, some may think Washington does reward failure, but that 

should not be the case. 

I will do everything I can to stop your nomination and drag out 

this process as long as I can. We must put an end to your and the 

Fed’s failure, and there is no better time than now. Your Fed has 

become the creature from Jekyll Island. 

Thank you. 

Chairman DODD. Would you care to respond to that? 

[Laughter.] 

Mr. BERNANKE. Let me just correct one point. 

First, I think there was some misunderstanding or misinterpretation of the SIGTARP’s report, but we absolutely believed that 

AIG’s failure would be an enormous systemic risk and would have 

imposed enormous damage not just on the financial system—and 

this is the key point—but on the entire U.S. economy and on every 

American. It is not reasonable to talk about letting large firms fail 

as if that would have no effect on credit extension and on the 

broader economy. The Lehman example should be enough for everybody. 

With respect to the counterparties, there is a long discussion 

there which I will not go into, but I will just point out one issue 

you raised. UBS offered a 2-percent discount if and only if all the 

other counterparties would accept one. That was not the case. We 

did our best to get a reduction there, but given that AIG was not 

bankrupt and given that we were not going to abuse our supervisory power, we really had no way to create a substantial discount. 

Senator BUNNING. Mr. Chairman, may I? I do not want to take 

any more time, but the fact of the matter is AIG was 80 percent 

owned at that time by the Federal Government. 

Chairman DODD. I want to just say—and then I am going to 

quickly turn to others, let me say I disagree with my friend and 

colleague from Kentucky about the conclusion of what ought to 

happen to your nomination. But I got to tell you, Mr. Chairman, 

I mean, going through that period at that time when all the headlines were about the $168 million in bonuses that went out to AIG 

and virtually no reporting whatsoever on the counterparty issue, 

and the fact of the matter that we allowed 100 cents on the dollar 

to go out to the counterparties with little or no negotiation just is— 
28 

I have raised the issue with others before. I do not understand that 

at all, and most Americans do not. That was billions of dollars. One 

company alone was $12.5 billion. And it is just hard to accept the 

notion that we could not negotiate with the counterparties at that 

time. 

Mr. BERNANKE. We had no leverage. If we did not pay off, they 

would say, ‘‘You are bankrupt,’’ and that would—— 

Chairman DODD. We wrote a check for $180 billion to AIG. If we 

had not done that, they would have been in trouble. 

Mr. BERNANKE. To AIG, but not—— 

Chairman DODD. The counterparties would have been in trouble, 

too. 

Mr. BERNANKE. Well, that is all true, but most—— 

Chairman DODD. A good deal—— 

Mr. BERNANKE. Most of the firms were foreign. We had no authority or leverage over them. 

Chairman DODD. You are the Chairman of the Federal Reserve. 

You have got power. 

Mr. BERNANKE. I do not abuse my supervisory power. 

Chairman DODD. Apparently not in that case. 

Senator Bayh. 

Senator BAYH. Well, where to begin? 

I am struck by the fact that Senator Bunning and Senator Sanders find themselves in agreement on this question, perhaps proving 

the old adage that ideology may be circular rather than linear. 

Some of us, however, Mr. Chairman, find ourselves—and I associate myself with the position of Chairman Dodd—in a different position on the question of your nomination. I will support you, not 

because I think you did not make mistakes—as you have admitted 

here today, you did—not because I do not think we should hold everyone accountable for doing better—I think we should—but because I think you are in the best place to improve the situation, 

to maximize the chances that we do not have a recurrence of some 

of these things, including the AIG situation that Senator Dodd 

mentioned. 

You know, there is a lot of culpability to go around. The Fed 

made mistakes, as you have indicated. The Treasury made mistakes. Virtually every other regulatory body made mistakes. Congress made mistakes. Those on the left made mistakes. Those on 

the right made mistakes. Virtually every other government and 

their institutions made mistakes. Virtually every institution of any 

magnitude in the private sector made mistakes. 

So should there be accountability? Absolutely. Do we need to 

maintain a sense of urgency to change those things that led to 

those mistakes? You bet. But some degree of modesty and introspection I think is in order, and perhaps even a good long look in 

the mirror, before engaging in too much Monday morning quarterbacking. Clairvoyance is an attribute in short supply around here, 

all the way around. 

So my question to you is: With the benefit of hindsight, what 

would you have done differently? 

Mr. BERNANKE. Well, there are two areas. Senator Dodd has alluded to both of them. First, I think—and Senator Bunning—we 

were slow on some aspects of consumer protection. Senator 
29 

Bunning was not exactly correct. We did have nontraditional mortgage guidance and subprime guidance out very early in my term, 

and it took a year to do the HOEPA rules, and that is why it took 

until 2008 for those to come out. But I think that is an area where, 

if we had been more proactive—we, the Federal Reserve, had been 

more proactive—it would have been helpful, because I believe— 

again, responding to Senator Bunning—that it was not monetary 

policy so much as problems in the mortgage market that led to the 

housing boom and bust. 

Second, while, again, as you kindly put it, there were mistakes 

made all around, including other regulators, the private sector, 

Congress, and so on, in the area where we had responsibility in the 

bank holding companies, we should have done more. We should 

have required more capital, more liquidity. We should have required tougher risk management controls. 

You talked about clairvoyance. I did not anticipate a crisis of this 

magnitude and this severity. But given that it happened, many of 

the banks—but not all of them, certainly, but at least some of 

them—were not adequately prepared in terms of their reserves, in 

terms of their liquidity. That is a mistake we will not make again, 

and I advocate not only strengthening regulation and strengthening supervision, but restructuring the nature of our financial regulatory system in a way that it will provide a more holistic 

macroprudential approach so that we are not reliant on each individual regulator in their own narrow sphere, that we have some 

broad interaction among regulators that allows us to assess problems that are arising in the system as a whole. 

Senator BAYH. I know you are concerned about the independence 

of the Fed and perhaps the risk that there could be some 

politicization, for lack of a better term, of some of the functions 

that you perform if we do not institute the appropriate reforms 

going forward. My own view is that the last thing that we want is 

the political branches of Government getting, you know, more involved in setting these policies on a day-to-day basis, and yet at the 

same time we have to have accountability and we have to have 

oversight. 

What is it about some of the proposals that have been made that 

you believe go too far in the direction of oversight that run the risk 

of politicizing the functions of the Fed? 

Mr. BERNANKE. Well, first, I would draw a distinction between 

our supervisory functions and so on and our monetary policy functions. As a supervisor, we have exactly the same status as every 

other supervisor, which is that Congress controls the regulatory environment. It controls the objectives. It is responsible for ensuring 

accountability. And the independence is at the level of making individual decisions about individual institutions and so on where you 

don’t want politics there. But there, we don’t claim any special exemption or protection beyond what any supervisor or, in fact, any 

regulatory agency would use. 

Senator BAYH. You are overseen and just as accountable as anybody else—— 

Mr. BERNANKE. Exactly. 

Senator BAYH. ——for those—— 
30 

Mr. BERNANKE. Exactly. On monetary policy, there is something 

of a special case, which is that monetary policy by its very nature 

has to look ahead over a longer period of time, whereas political necessities sometimes push for a shorter horizon. And so there is a 

very, very strong finding—one of the major contributors is Larry 

Summers—I am sure you know him in other contexts—which 

shows that countries that have independent central banks, that 

make monetary policy without political intervention, have lower inflation, lower interest rates, and better performance than those in 

which the central bank is subject to considerable political control. 

Now, the Federal Reserve is a very transparent central bank 

with respect to monetary policy. We are, for example, the only 

major central bank to my knowledge that provides detailed minutes 

of each meeting 3 weeks after the meeting. We provide extensive 

quarterly projections, a monetary policy report twice a year, testimonies, all kinds of information which gives Congress and the public all the opportunities that would reasonably be needed to evaluate what we are doing and to second guess us, as always happens. 

What I am concerned about is a set of policies that would create 

the right of Congress essentially to send in investigators whenever 

a monetary policy decision potentially went against their shortterm preferences, and I believe that the signal that would send to 

the markets and to the public is that Congress is no longer respecting that zone of independence and is making its will known and 

intends to influence and to effect short-term monetary policy decisions, which would not be constructive and again is very inconsistent with what we have learned about central banking around 

the world in the last 20, 25 years. 

Senator BAYH. It might have the ironic consequence of making 

interest rates higher—— 

Mr. BERNANKE. Absolutely. 

Senator BAYH. ——because there would be an additional element 

of risk in the marketplace. 

My final question, Mr. Chairman, has to deal with your testimony regarding your role in both setting monetary policy and as 

the occasional lender of last resort and the importance of having 

not just theoretical models, but some empirical evidence and understanding about what is going on in the marketplace in terms of 

performing those two functions. 

My concern would be that the Fed would become, if we just completely removed that authority, it becomes sort of an isolated entity 

completely divorced from an understanding of how your decisions 

were playing out in the real world. So my question to you would 

be twofold. Number one, how would you preform a function of lender of last resort if you didn’t have some insight into the goings on 

in these institutions that you were being asked to perhaps support, 

number one. How would that be possible? Number two, how important is some empirical data, a hands-on understanding of what is 

going on in the financial sector? How important is that to maximizing the chances you get monetary policy right? 

Mr. BERNANKE. Well, on the discount window lending, I guess if 

we didn’t have any examination authority, we would have to rely 

on the good will of other supervisors. I think we much prefer to 

have our own information and our own knowledge of what is hap-
31 

pening in those banks. More significantly, in periods of crisis or 

stress, as the Fed uses its lender of last resort authority to try to 

stabilize a troubled financial system, in order to do that accurately 

and effectively, we need to know what the funding positions are of 

individual banks, what is going on in those markets, what the solvency position is. 

I gave the example of 9/11, when the Fed opened up its discount 

window to provide liquidity to help the financial system begin to 

function again. We could not have done that effectively without the 

information we got on the ground from our supervisors in the 

banks. The 1987 stock market crash is another example where our 

information from the banking system helped us to address potential threats to the integrity of the clearinghouses that cleared futures contracts. 

Recently, an example of this kind of problem in the U.K., over 

the past few years, the Government of Britain removed from the 

Bank of England most of its supervisory authorities and invested 

them in the Financial Supervisory Authority, the FSA. But when 

the crisis hit, and, for example, when Northern Rock Bank came 

under stress, the Bank of England was completely in the dark and 

was unable to address effectively what turned into a very disruptive run and a problem for the British economy. 

So currently, the trend in the U.K. and elsewhere is quite the opposite to take away those authorities. It is to give the central bank 

the information and authorities it needs to know what is going on 

in the banking system. 

Now, Senator Shelby asked me about the role in monetary policy 

and I would say that the role in monetary policy is there. It is more 

unusual. It doesn’t happen all the time. But for financial stability 

maintenance, I think it is very, very important that the Fed have 

that kind of information and insight into the banking system. 

Senator BAYH. Thank you, Mr. Chairman. 

Chairman DODD. Let me just quickly, before I turn, on both of 

those points, Mr. Chairman, I say respectfully, if we looked over in 

the G20, more than half of our colleagues in the G20 separate supervisory and monetary policy. In fact, the countries that have 

weathered the storm rather well over the last couple of years have 

been countries that have separated both. 

The British system, the FSA was what they call the light touch 

in regulation. They didn’t have deposit insurance very well, so you 

had the problem there. And frankly, they didn’t have the information. When they set up the system, they basically didn’t allow the 

central bank even to get information. I think both of those factors 

contributed more to what happened in Great Britain than the fact 

that you had a separation of supervisory and monetary policy. 

I say that—I mean, that is a legitimate debate and discussion, 

but I don’t think it can be said with absolute certainty that the 

other was true. 

Senator Crapo. 

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

Mr. Chairman, I want to focus during my questions on how we 

should establish our financial regulatory system. As you know, this 

Committee is working on financial regulatory reform right now and 

one of the biggest concerns I have is that as we move forward in 
32 

that, that we do not institutionalize the ‘‘too big to fail’’ syndrome. 

I, for one, believe that we have allowed companies that should have 

been resolved to continue with being propped up by the Federal 

Government or by the Fed and that that has led to a moral hazard 

that we need to deal with in our structuring of our system. 

You have very often said that we need a new resolution authority 

so that you and others can have the tools to deal with allowing 

large institutions to be wound down or resolved. And yet at the 

same time, I believe in your testimony you indicate that you believe that we need to have the ability, and you and others need to 

have the ability to provide necessary liquidity at times of crisis. 

There is obviously a problem there, and my question to you is 

how do we make the determination of what systemic risk is? And 

maybe to put it a different way, how do we make the determination 

of when it is that we should provide liquidity as opposed to when 

it is that we should—to sustain and maintain an institution as opposed to when we should wind down or resolve an institution? 

Mr. BERNANKE. Well, Senator, first, on the liquidity function, 

that is to be very sharply distinguished from bailouts. The liquidity 

provision is short-term credit which is fully collateralized and 

which is made only to sound institutions and is meant only to provide a backstop when sources of short-term funding for whatever 

reason disappear. In the old days, when retail depositors ran on a 

bank, this was a way to prevent the collapse of a bank just because 

of lack of liquidity. 

Senator CRAPO. Well, let me interrupt right there. Do you believe 

that we could structure a resolution authority and a systemic risk 

regulator in such a way that we could achieve that kind of assurance that liquidity efforts would be limited in that way? 

Mr. BERNANKE. I do. I do, and I think it is very, very important. 

Let me just say, to be absolutely clear, the actions we took last fall 

to stabilize these firms were done extremely reluctantly and only 

because we had no good mechanism to allow them to fail without 

having severe consequences for the financial system and the broader economy. It is imperative, the most important thing that Congress can do is find a way to solve the ‘‘too big to fail’’ problem. 

I think that is absolutely essential. And the only way to do that 

is to find a way to let those firms fail. 

And I do believe that that can be done. It can be done in a way 

also that forces creditors to take losses, shareholders and other 

creditors to take losses, and done in a way that is sufficiently predictable that it will not cause as much disruption as the problems 

that we had last year. So I do believe it is possible and I think the 

model we can use is the model we already have for resolving failing 

banks, that the FDIC has, just applied to larger, more complex institutions. 

Senator CORKER. And what type of institution would you say 

should have that authority? Would it be the Fed or would it be a 

council of regulators or would it be a new financial regulator that 

we should establish? 

Mr. BERNANKE. I think the institution with the most experience 

in these kinds of resolutions is the FDIC. So I think the FDIC 

should play a significant role. The Treasury should probably play 
33 

a significant role, as well, just to represent the political end of the 

decision making. 

The Fed is not interested in being part of this process except insofar as Congress views a temporary liquidity provision as part of 

the wind-down process, as being appropriate. But we—let me just 

say this as strongly as possible—we do not want any more AIGs. 

We do not want any more Lehman Brothers. We want a well established, well stated, identified, worked out system that can be used 

to wind down these companies, allow them to fail, let the creditors 

take losses, let counterparties, like the AIG counterparties, take 

losses, but without completely destabilizing the whole economy, as 

can happen. 

Senator CRAPO. As a part of all of this, I am concerned that we 

will not reestablish the kinds of proper approaches and the principle of moral hazard until we end TARP, provide an exit strategy 

from the recent government guarantees, and decide how we are 

going to proceed with Fannie Mae and Freddie Mac. Wouldn’t you 

agree with that? 

Mr. BERNANKE. I do agree with that. Fannie Mae and Freddie 

Mac are particular problems and issues have to be addressed. But 

under the current situation, the TARP was used to bail out companies and make all creditors whole—except for the shareholders— 

under a well-designed resolution regime. Many creditors could— 

would—should lose money, which would create market discipline 

going forward, which is what is desperately needed to avoid the 

moral hazard problem that you are referring to. 

Senator CRAPO. The recent SIGTARP quarterly report states that 

there is $317.3 billion of unobligated TARP funds available right 

now. Do you support allowing the TARP authority to expire on December 31, 2009? 

Mr. BERNANKE. Well, I think it is very appropriate to begin winding it down. I think we should be clarifying what additional needs, 

if any, are still remaining to make sure that the financial system 

is still stable and will not run into any new problems. But I certainly think that the TARP has mostly served its purpose and that 

it is time to start thinking about how we are going to unwind that 

program. In addition, as I have noted several times, many banks 

are paying back the TARP and a lot of the money that was put out 

is now coming back to the Treasury. 

Senator CRAPO. Do you believe that we will ultimately recover all 

the TARP dollars? 

Mr. BERNANKE. I won’t speak about the auto industry loans or 

those sorts of things. If you look at the money that was put into 

financial institutions specifically, I think, overall, we are going to 

end up pretty close to break even, maybe somewhat in the red, but 

not too much. And considering what was achieved in terms of stabilizing the U.S. financial system and avoiding the collapse of our 

system, I think that would be a good outcome. So I do think that, 

unlike some of the scare stories about $700 billion being thrown 

away, the financial institutions collectively will, in the end, be 

something close to a break-even there. 

Senator CRAPO. Well, thank you. For my last question, I would 

like to shift to derivatives, and I appreciate the fact that recently 

you got back to me with a progress report on our efforts to 
34 

strengthen the infrastructure for our over-the-counter derivatives 

markets. In that response, you stated that from the perspective of 

end users, there will always be occasions when the end users’ risk 

management needs cannot be met by cleared OTC products or by 

exchange-traded products. Thus, an important issue is to preserve 

the ability of counterparties to contract customized deals while 

properly managing the risk of these deals. End users have not typically created the large exposures to counterparties that are the 

focus of efforts to reduce systemic risk through broader clearing. 

The question I have is, do you believe that, again, as we try to 

structure how we are going to approach our financial regulatory 

system, that we can effectively avoid the AIG-type issues and the 

concerns that we need to deal with in that context from the legitimate need for end users to have the flexibility to hedge their 

unique business and risks through customized derivatives? 

Mr. BERNANKE. I think we can. I think we do need some scope 

for customized derivatives for certain users. Those derivatives that 

can be standardized should be traded on exchanges, and I think 

that is the plan. But I would add that unlike AIG, which did not 

have significant oversight at all of their derivatives business, that 

we should be very clear that between the SEC, CFTC, and the 

bank regulators, that banks, for example, who create customized 

derivatives will also be carefully watched to make sure they have 

adequate capital and risk management for those positions so we 

don’t get something like the AIG situation, where they had an 

enormous one-way bet with no capital behind it. 

Senator CRAPO. Thank you. 

Chairman DODD. Senator Crapo, thank you very much. Good 

questions. 

I am going to turn to Senator Schumer, and just to notify the 

Committee, there is a vote that has started, and what I announced 

earlier, we will come back at 1 p.m. rather than having this backand-forth. We have got a series of votes here, Mr. Chairman, and 

I don’t want to just have it be so disjointed. So we will go to Senator Schumer for his line of questioning and then the Committee 

will reconvene at 1 p.m. 

Senator Schumer. 

Senator SCHUMER. Thank you, Mr. Chairman, and thank you, 

Mr. Chairman. 

First, I want to say to you that I sat in the room with many others, Senator Dodd and Senator Shelby, I believe, and some others 

in this room, when we were told about the imminent collapse of the 

financial system and panic was in the air. We have lots of problems. This economy is not moving well enough from my purposes, 

or, I think, anybody’s here, but we are not in the Great Depression 

which we might have been. 

And in a sense, you are a victim in this society when you solve 

a problem, you are better off than you avoid a problem, even 

though society is better off that the problem was avoided, and I 

think people forget how important that is. It is easy to criticize. It 

is easy to say it could have been done a different way. But at that 

moment, action was needed and needed quickly or we would have 

had financial collapse, and you did act quickly and I think, you 

know, that—well, I talked to Warren Buffet. He said the govern-
35 

ment deserves a high grade for its efforts to prevent the collapse 

of the financial system and rescue the economy from imminent free 

fall, and you played a major role there, and I hope my colleagues 

will remember that. 

My question is on—my first question is on something that I have 

been very critical of the Fed in the past, and that is consumer protection. As you know, I think the Fed dropped the ball on consumer 

protection issues. I support the creation Senator Dodd has proposed 

of a strong, independent Consumer Financial Protection Agency. 

Now, every day, we find a new way—banks are in trouble. We 

know that. Many of them, their profits are being squeezed here and 

there and their reaction is to raise all kinds of fees and recoup on 

the backs of consumers. There has been a new report that has 

come out on ATM fees released by BankRate.com, and according to 

that report, the average ATM fee rose 12.6 percent in 2009 to 

$2.22. That is a heck of a lot. Plus, not only will the bank that 

owns the ATM charge you, your own bank now probably charges 

you a fee for withdrawing money at ATMs owned by other banks. 

The average cost of the fee for using someone else’s ATM is $1.32. 

Over 70 percent of banks charge customers this fee. Together with 

massive increases in credit card interest rates and other fees, like 

these overdraft fees that we are seeing, consumers are bearing a 

disproportionate burden in maintaining the health of banks’ balance sheets. 

So I believe the Fed should conduct a thorough review of ATM 

fees to ensure that consumers are protected from excessive ATM 

fees, especially the double-whammy fee for using another bank’s 

ATM. What is your opinion on this? You probably saw the study. 

And will the Fed agree to conduct its own study and get us some 

answers on it pretty quickly? 

Mr. BERNANKE. Well, first, Senator, as you know, we have just 

put out some rules on overdraft protection in general as it applies 

to ATMs and debit cards. And it will require banks to get an optin from the consumer before they can charge them for an overdraft, 

and that will address one of those issues. 

We will definitely take a look at ATM fees and just at least try 

to verify what is happening and what the patterns are and we will 

get back to you with that information. 

Senator SCHUMER. Good, and could you just make some suggestions, at least, as to what should be done if you can’t do them yourself? 

Mr. BERNANKE. We will look at it and see what we learn. 

Senator SCHUMER. OK. Do you—just from your preliminary look 

at the report, do you think what is happening in ATM fees is similar to what is happening with credit cards and others, that fees are 

going up at a much greater rate than they did in the past? 

Mr. BERNANKE. I would like to get back to you on the numbers. 

Senator SCHUMER. OK. 

Mr. BERNANKE. I certainly find it plausible. I believe that the 

fees are going up. I think, in part, banks are trying to find ways 

to make revenue, basically—— 

Senator SCHUMER. You bet. 

Mr. BERNANKE. ——but we will look at it. 
36 

Senator SCHUMER. OK. My second question relates to the next 

bubble. Senator Dodd talked about the international bubbles and 

what has happened in Dubai, but I would like to talk about the potential bubbles here in this country. This last crisis was a result 

of a massive bubble focused probably on real estate, and there has 

been a lot of attention lately on the Fed’s zero interest rate policy 

and whether it is helping create new bubbles. The worry, of course, 

is is it going to be an instant replay, different actors, different 

script, same horrible outcome in terms of the horror movie we just 

went through. 

Raising interest rates is one answer to deal with the bubble, but 

that is obviously tricky. I would be worried about raising interest 

rates because it would hurt getting people back to work, which 

should be our number one concern. So could you talk a little bit 

about what can be done to deal with these potential bubbles before 

they burst, given that you don’t have the tool of interest rates as 

easily available because of the difficult economic situation, and 

then give us a little bit of your thinking on whether and when interest rates should be raised to deal with these potential bubbles. 

Mr. BERNANKE. Well, ideally, the way we should deal with bubbles, at least the first line of defense, ought to be supervision and 

regulation. If we have appropriate risk controls that force banks 

not to pile into overcrowded positions, for example, or to take excessive risks, or if we have a Systemic Risk Council which looks at 

emerging asset price increases or concentrations of risk across the 

banking system, I think that is the first best way to try to address 

bubbles. 

That is something, in my very first speech as a Governor in 2002, 

I said. You know, the first line of defense ought to be regulation 

and supervision, and that has the benefit that it can help protect 

the system even if you are not sure that the increase in asset 

prices is a bubble or not. 

Unfortunately, we do not now have that system, and I, therefore, 

think that monetary policy has to pay some attention to this situation. We are looking at it. I have said in the past, and I continue 

to believe, that it is extraordinarily difficult to know in real time 

if an asset price is appropriate or not. But given that caveat, we 

are doing our best to try to look at the major credit and stock markets, use the valuation models we have, use the standard indicators that we have and try to look for misalignments. 

Senator SCHUMER. Are there any other tools other than interest 

rates that might work? 

Mr. BERNANKE. In some countries, they have had special measures, for example, where there have been house price increases, 

there have been things like mandatory increases in downpayments, 

things of that sort. So I suppose those are ideas that could address 

specific types of problems. But for a general bubble, I think basically that supervision and regulation of the financial system is the 

strongest, most effective approach and I do not rule out using monetary policy as necessary if that situation does become worrisome 

and threatening to our dual mandate, which is growth and inflation. 

Senator SCHUMER. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 
37 

I appreciate your indulgence, Chairman Bernanke, here in breaking this up a little bit, but I thought it maybe better served your 

interests and ours, as well, to have some continuity to it. So we will 

take a break, hope you get a bite to eat, and we will see you back 

here in about an hour. 

The Committee will stand in recess until 1 p.m. 

[Whereupon, at 12 p.m., the Committee recessed, to reconvene at 

1 p.m., this same day.] 

Senator JOHNSON [presiding]. This Committee will come to order. 

Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. I am getting my 

thoughts together. I apologize. I just came from another meeting. 

Mr. Chairman, thank you for being here and for your service and 

for always being available at the other end of the phone when 

questions arise. I appreciate that very much. 

I am going to spend most of my time today trying to understand 

more on a go-forward basis what needs to happen from a regulatory process. I know that many of us here on the Committee are 

trying to work through appropriate reg reform, and obviously, the 

Fed has been playing a big role in that. 

Let me just start with the Reg W issue. Paul Volcker recently 

has been quoted as saying, you know, that banks have been engaged in risky behavior. We have had people in our offices saying 

that—and if Mr. Volcker is listening, this is not me saying it. I am 

just repeating it, OK?—that he is not really saying the way things 

are, let me put it that way. And yet we have looked back—you 

know, I know Senator Warner and I in particular have spent a lot 

of time on the resolution issue, and the problem that occurs with 

the resolution and what you were dealing with at the time a year 

ago was the fact that a commercial bank inside a highly complex 

bank holding company is very hard to sort of take out. And yet the 

23A and B regulations, which basically say that a bank’s deposit 

cannot be used—the depositors’ money cannot be used to engage in 

other things with their affiliates that might pose risk, there have 

also been some statements made that maybe you loosened that activity over the last year or so, couple years, and the fact is that 

bank deposits have been used more aggressively with affiliates 

than they had in the past. 

The reason it is important, it is important to know, number one; 

but it is also important as we look at resolution, if banks are doing 

this and they are highly involved with other entities, it is very difficult to unwind one of the organizations if, in fact, the bank’s depositors’ money has been used in other activities in the bank itself. 

So that is a very long-winded question. If you could give a fairly 

short answer, since I just have 8 minutes, I would appreciate it. 

Mr. BERNANKE. I will try. The 23A exemptions allow the holding 

company—typically what happens—to put assets down into the 

bank to be financed by deposits. We do not grant those very often. 

We generally consult with the FDIC to make sure they are comfortable. When that is done, it is done in a way that makes sure 

the bank is not taking additional risk, that it is whole. So it is not, 

I think, a general issue. It is something that we have done in some 

of the mergers and some of the things that have happened, conversion to bank holding company status, those sorts of things. But it 
38 

is not something that happens often. I do not think it is going to 

be generally an issue with resolution. 

There are lots of ways, though, which holding companies and 

banks are intertwined. For example, they might share an IT system or—— 

Senator CORKER. IT, right. 

Mr. BERNANKE. ——risk controls or all kinds of other things. And 

in that respect, both operationally, but also in some ways financially, there are linkages that make it more complicated. 

The basic fact, which I am sure you appreciate—not everyone 

does—is that the FDIC law applies only to banks; whereas, a bank 

holding company does not have a resolution mechanism, and losing 

the bank holding company can be a very serious problem. 

Senator CORKER. And I realize the management issue and the IT 

and, just look, I mean, the reason these organizations are put together is so they can work together in a more synergistic way. Let 

us face it. But should we draw a stiffer line, if you will, between 

those? And should there be any flexibility? Should we eliminate 

that so there is not either the perception or the substance behind 

the fact that some of those deposits may be used for more risky behavior than most people thought they otherwise would have been? 

Mr. BERNANKE. No, I think we are in a reasonable place right 

now. Again, whenever assets are transferred down to the bank, 

there have to be guarantees, protections, backstops to make sure 

that the bank is not at risk of taking losses. And the purpose of 

those things is to segregate the bank for the purpose of protecting 

the FDIC’s insurance fund, for example. 

If we go forward and have a resolution regime that addresses the 

whole company, I think these issues are still there, but they are 

less of a concern because the whole company will be addressed. 

Senator CORKER. You have talked a great deal about there is— 

well, you have talked a great deal about the Fed maintaining supervision over some of the larger entities in the country, and some 

people have put theories out that, you know, the Fed ought to look 

at the—ought to supervise the top 25 entities in America. You 

know, that has been a number that has been thrown out. 

As we look back at Citi and the fact that Citi was under corrective action until 2003, and then the Fed basically lifted that, the 

Fed was watching Citi—I mean, that is like Prime A, you know, 

the prime example of what the Fed is supposed to show prudential 

regulation over. And yet Citi, let us face it, turned out by all counts 

to be an absolute disaster from the standpoint of the activities they 

got involved in. It was the primary type of institution that the Fed 

should be supervising. And I do not say this to beat a dead horse, 

but it does make one wonder. I know a lot of people talk about the 

Fed being the adult in the room and all those kind of things, but 

it does make one wonder, you know, why that happens to be a good 

idea. And I wonder if you might expand on that. 

Mr. BERNANKE. Well, there are two separate issues. The first is 

the performance of the duties and how effective a particular supervisor is. And I talked earlier about some of the things that we have 

done in our self-assessments, what mistakes we have made and 

problems we have found and how we are fixing them, and we are 
39 

taking a lot of steps to try to strengthen our supervision and our 

regulation. 

But, you know, there were problems throughout the entire regulatory system, and if you are going to preclude anyone from participating in future regulation because they made mistakes in the crisis, you are going to be cutting about most of the—— 

Senator CORKER. We wouldn’t have any regulators. 

Mr. BERNANKE. You wouldn’t have any regulators left. That is 

right. So, really, one question is: Can the Fed fix the problems? I 

believe we have made a lot of progress, and I would be happy to 

talk to you offline in more detail or give you a summary now. 

There is a discussion in my testimony. You know, we have done a 

lot to strengthen the regulation, increase capital, increase liquidity, 

to improve risk management oversight—many of the issues in the 

company you mentioned, but other companies as well. 

But then there is a second issue, which I call the structural 

issue. When you are setting up for the future a structure of how 

regulation should work, what is the role of the central bank? And 

the central bank was created to address financial instability, to 

stop panics. That followed the 1907 panic, was what caused the 

Fed to be set up in the first place. We have the lender of last resort 

facility. We have the breadth of expertise. 

So I think, assuming that we and other regulators can correct 

the problems that we have discovered, the appropriate structure 

should be one where the Fed is involved because without being involved, we will not have the expertise, we will not have the information, we will not have the insight that will let us be effective in 

addressing systemic issues. 

Senator CORKER. So I want to talk to you some more about that. 

My time is about to end. I know that you have stated you are going 

to quit buying the mortgage-backed securities that you are buying 

right now from Fannie and Freddie in March, and other institutions. There are a lot of people saying that when you do that, interest rates on home mortgages are going to go up a couple hundred 

basis points. And I think it would be really good for all of us to 

know whether you really are going to do that or not. I mean, I 

think it would be appropriate for—you have stated it is going to 

end in March. I think it would be appropriate for people to know 

so they can be making other plans, because I think it is going to 

have a huge impact on the market. I think a lot of people question 

whether that is within Section 14 of the Fed’s charter in the first 

place, but I would love to have a response to that. 

And then, second, if we could, since my time is out and I am kind 

of filibustering, one of the things that you and I have talked a 

great deal about is just the political involvement in monetary policy. And I am concerned about people like us getting involved in 

monetary policy. I have stated that all the way through, and I 

think most people in this Committee would be very concerned 

about us getting involved in monetary policy. 

On the other hand, I wonder if it should go both ways, and what 

I mean by that is when the Bush administration, you know, touted 

this stimulus back in May of their last year, which most people saw 

on the surface was ridiculous—I mean, we are going to spread $160 

billion around the country and drop it out of helicopters. I think 
40 

most people thought it was—I will not say ‘‘most people.’’ A lot of 

people thought it was a pretty silly idea. And yet you championed 

that, and that affects people here because the Chairman of the Fed 

is thought to be a really intelligent, important person. And, of 

course, you are. 

The same thing happened with this last stimulus, which in my 

opinion was absolutely not a stimulus. It is proven now it did not 

do what it was supposed to do. But, again, when you speak and say 

it ought to happen, people up here vote that way. 

So I guess I would just ask, if we are not to be involved in monetary policy, should you be used as a tool by whether it is a Republican administration or a Democratic administration that caused an 

agenda to come forth that, you know, is really a political agenda, 

not something that is necessarily good for our country? And, Mr. 

Chairman, I thank you for the generosity of letting me go a little 

longer. 

Mr. BERNANKE. May I just say quickly—— 

Senator CORKER. Well, I would like for you more than quickly to 

answer both. 

Mr. BERNANKE. Both, all right. On the mortgage-backed securities, we have a longstanding authorization to do that. I do not 

think there is any legal issue. We have said that the current program is going to come to an end at the end of the first quarter. It 

is a monetary policy decision. The Committee will have to see how 

the economy is evolving and whether or not we need to do more. 

The several hundred basis points, there is a lot of uncertainty 

about exactly what the impact will be. I think that is very much 

at the high end of what estimates are, but we will have to see how 

that plays out. 

On the fiscal part, I think you—— 

Senator CORKER. So people involved in home mortgages will just 

know when they know? 

Mr. BERNANKE. Well, we do not know. We do not know exactly 

what the effect will be. 

Senator CORKER. So saying it is going to end in March is just 

kind of like saying we are going to withdraw troops in Afghanistan 

in 18 months, just kind of saying it. I am just—— 

Mr. BERNANKE. Well, in order to try to mitigate the effects, we 

have been tapering it off very slowly, and so far we have not seen 

much effect, but we will see how it evolves, and the committee is 

prepared to respond, if necessary. 

On the other thing, I think you are absolutely right. As a general 

matter, I have tried to stay out of fiscal policy, and I do not make 

specific recommendations. I did not make any recommendations 

about the size or composition or any of those things. But you are 

absolutely right, and I will continue my practice of leaving fiscal 

decisions to the Congress. 

Senator JOHNSON. Senator Menendez. 

Senator MENENDEZ. Well, thank you, Mr. Chairman. 

Chairman Bernanke, I just want to start for purposes of memory, 

because we often seem to have short-term memory here, in November of 2008 and the time—and I think you referenced it to some 

degree in your opening statement. In November of 2008, after those 

Presidential elections, you and Secretary Paulson came before 
41 

Members of this Committee and basically said, you know, we have 

an emerging set of circumstances and we need you to act, to do so 

boldly; and in the absence of doing that, that we would have a global financial meltdown. 

So I want to start there because it is the beginning of what has 

then transcended since then. Is that pretty much a fair statement? 

Mr. BERNANKE. Yes, sir, except that it was October. It was early 

October. 

Senator MENENDEZ. October, OK. And then the actions took 

place thereof, because I often get from my constituents back in 

New Jersey, you know, ‘‘Senator, when I make a mistake, I have 

to pay for it, and it seems when these financial institutions make 

a mistake, I have to pay for it, too.’’ 

And I think that the difficulty is creating the connection between 

why we acted based upon the expertise of yourself and others who 

said we needed to do so because, otherwise, there would be a global 

financial meltdown, and that obviously has real-life consequences 

to Main Street in New Jersey, or for that fact, across the country. 

Is that a fair statement? 

Mr. BERNANKE. Of course. 

Senator MENENDEZ. Now, which brings me to where we are 

today, and I want to get a sense from you: Do you believe that the 

American economy is recovering? 

Mr. BERNANKE. It is beginning to grow again. We would like it 

to grow faster. We would like jobs to come back faster. But I do 

believe we avoided an even far worse situation by avoiding the collapse of the financial system, as you indicated. 

Senator MENENDEZ. And to give us a sense, when we say we 

avoided—because, you know, I think Senator Bayh mentioned that, 

or maybe Senator Schumer or both, mentioned that sometimes 

when you avoid harm from happening, you get no credit for it. But 

give us a sense of what would have happened had we just said, you 

know, ‘‘Let the markets do it on their own. Let them figure it out.’’ 

Mr. BERNANKE. Well, my professional career before I came to the 

Fed was as a scholar, an academic studying financial crises and 

their effects on the economy, including the Great Depression. And 

there is a lot of evidence, not just in the United States but in many 

other countries, that when the financial system collapses or melts 

down, it has very, very serious effects on the broad economy. And 

I think just the fact that Lehman Brothers and the associated instability around that period contributed to a global recession is evidence for that point. 

It is my belief that if we had not acted, if Congress had not supported our actions to stabilize the system, if we and our partners 

in other countries had not worked together in those weeks in October to prevent what in my view would have been a collapse, a meltdown of many of the major banks in the world, that we could very 

well be in a Depression-like situation with much higher unemployment than today, very deep decline in output, and no immediate 

prospects for a recovery, unlike the situation we have today where 

we do see the economy growing. 

So I think the risks of allowing that meltdown were enormous, 

and the costs to the economy, to the taxpayer, to the average worker, to the average person of allowing the financial system to col-
42 

lapse—the financial system is like the nervous system of the economy, and if it breaks down, you get much broader consequences. 

So it has been a very hard message to explain, but it is extraordinarily important to understand that I did not intervene because 

I care about Wall Street. I am not a Wall Street person. I am an 

academic. I come from a small town. I did it because I knew from 

my studies that the collapse of the financial system would have extraordinarily bad consequences for Main Street. And that is why 

we did what we did, and I firmly believe we did the right thing. 

Senator MENENDEZ. So now in December of 2009, I asked you 

whether the economy was recovering, and you answered, ‘‘It is 

growing.’’ Growth does not necessarily mean recovery then. 

Mr. BERNANKE. Well, it is technically a recovery in that it is 

growing and that we are no longer declining, but it is certainly not 

a satisfactory situation since we have a 10-percent unemployment 

rate. 

Senator MENENDEZ. We agree on that. So what do you believe is 

the most significant threat to our economic expansion both in the 

short term and in the long term? 

Mr. BERNANKE. Well, there are multiple concerns. Certainly one 

of them is that it still remains difficult to get credit, particularly 

for bank-dependent firms. That is preventing small businesses from 

hiring and from expanding. 

The high unemployment rate is a major concern because we are 

seeing not just 10-percent unemployment, but we are seeing very 

long duration of unemployment. We are seeing a lot of people on 

part-time work or on short hours, and that has implications not 

just for the short term, but for the skills and labor market attachment of workers going forward. It is going to affect people for 

many, many years. 

There are additional issues like our external trade deficit, the fiscal deficit, and so on that we do need to address. But in terms of 

the immediate recovery, as I talked about in a speech I gave in 

New York a couple of weeks ago, I think the two issues we need 

to watch most closely are the return, the healing of the credit system, particularly for smaller borrowers, and the labor market, 

which is, of course, still in great stress. 

Senator MENENDEZ. And we seem not to have succeeded at dealing with the credit market in a way that meets some of our goals 

that are critical to also deal with our unemployment consequences. 

You know, I look at where some of the major institutions are getting credit. They are getting credit, you know, easily two points 

lower than some strong regional entities, and that is probably what 

is keeping them largely afloat. But the question is, as you do that 

at the Fed, where is the movement here—the hammer, for lack of 

a better—you know, to get them to loosen up the credit? And what 

can the Fed do to move it in a direction that also is going to begin 

to make a real significant impact on unemployment, the two things 

that you say are critical? 

Mr. BERNANKE. Well, on unemployment we have a range of policies, including low interest rates and mortgage-backed securities 

purchases and a variety of other things. 

On credit, it is a difficult thing. I think it is a mistake to tell 

banks, ‘‘You must lend such-and-such amount,’’ because we got into 
43 

trouble in the first place with bad loans. We want them to make 

good loans. We want to make loans to creditworthy borrowers. So 

the Fed and the other banking agencies have been working with 

the banks to try to make sure that they are not, either by examiners or on their own account, failing to make loans to creditworthy 

borrowers. So we have issued guidance about the importance of 

doing that. We have trained our examiners to look at both sides to 

make sure that banks are giving full weight to the importance of 

continuing relationships that they have with, for example, small 

business borrowers. 

We have issued guidance with detailed examples for how to deal 

with a borrower who may be making payments, but whose collateral, which may be his business, has declined in value, that it still 

might be important to continue lending to that person or to that 

business. 

And, in addition, we have been trying to strengthen what is 

called the shadow banking system through our program to increase 

securitization of small business loans, commercial real estate loans, 

and the like. 

So we are addressing this. We did the stress tests to get banks 

to raise capital. 

So we are working at this. We understand the critical, central 

importance of this. It is not going to be a quick improvement, but 

I do think we are seeing some improvement, and as the economy 

strengthens, there will be a mutually beneficial improvement in the 

economy and in the credit markets. 

Senator MENENDEZ. Well, this is clearly the singular most important—— 

Mr. BERNANKE. I agree. 

Senator MENENDEZ. I know there are many other issues that the 

Fed deals with, you know, but this is the singular most important 

issue that your chairmanship is going to be critical over in terms 

of helping us move this country forward in a way that its economy 

is recovering more robustly, that unemployment is being reduced, 

and that we give people back the dignity of work, which is ultimately the opportunity to sustain their hopes and dreams and aspirations. So I am going to be looking at what you are doing in that 

respect incredibly closely. 

Mr. BERNANKE. Absolutely. 

Senator MENENDEZ. And my time is up, but I do want to visit 

with you about the Consumer Financial Protection Agency. When 

you came to see me, we had some original conversations about 

that. But, you know, my one criticism—I think you have done a lot 

of hard work in difficult times, but my one criticism—which really 

precedes your time even, but continued during your time—is that 

the Fed had broad powers in consumer financial protection, and it 

just did not use it in a timely fashion. And so there are many of 

us who question that leaving that there is not necessarily in the 

best interests of the country. 

So I will look forward to having a discussion with you on that. 

Mr. BERNANKE. Senator, just quickly, I do not disagree with we 

were late in using those powers, but over the past 3 years or so 

under my chairmanship, we have actually been very active in a 

wide variety of areas of consumer protection. 
44 

Senator JOHNSON. Senator DeMint. 

Senator DEMINT. Thank you Mr. Chairman, and thank you, Mr. 

Chairman, for being here today and for your service. 

When Congress created the Federal Reserve, they created, arguably, the most powerful institution in the whole world. Our whole 

economy, all our prosperity, wealth, rest on the soundness of the 

dollar, as does much of the economic systems all around the world. 

So as we consider your renomination, it is important that we ask 

some difficult questions—not just of you, but to ourselves—because 

no one can say that there have not been major failures, and I think 

a lot of us have to admit that the Federal Government, the Federal 

Reserve, let down the American people and a lot of people have 

been hurt. 

I will take exception to one of the arguments that I have heard 

today and I have heard often about what we heard last October 

and what actually happened. We were told if we did not appropriate nearly $1 trillion to buy toxic assets, the worldwide economic 

system was likely to collapse. We appropriated nearly $1 trillion, 

and we never bought one toxic asset, and the world economic system did not collapse. 

Now, we can make a case and debate all we want about whether 

or not twisting banks’ arms and forcing more money in the banking 

system actually helped us. We could talk about that all day. But 

the premise that we used to create this TARP program was never 

followed through on. It is difficult for me to find credibility in the 

arguments that we saved our economy. 

But I would like to ask a few questions, Mr. Chairman, and I 

would appreciate short answers. I want to cover some territory 

today. But we do not know a lot about the operation of the Federal 

Reserve, and for that reason, I think the way to judge performance 

is to look at outcomes, particularly outcomes based on the goals 

that you have set for yourself. 

In your confirmation hearing in 2005, you specifically listed four 

duties of the Federal Reserve, and I would just like to mention 

those and just ask you how you think we have done. 

One of them was fostering the stability of the financial system 

and containing systemic risks that may arise in the financial markets. Has the Federal Reserve under your leadership accomplished 

that goal? 

Mr. BERNANKE. No, but we also have lots of other co-conspirators 

in that problem. 

Senator DEMINT. Another duty you listed, supervising and regulating the banking system to promote the safety and soundness of 

the Nation’s banking system and financial system. Has the Federal 

Reserve under your leadership accomplished that goal? 

Mr. BERNANKE. We found some mistakes, and we have tried to 

improve them. 

Senator DEMINT. I appreciate your short answers. 

Another duty you listed was conducting the Nation’s monetary 

policy in pursuit of the statutory objective of maximum employment. Do you feel the Federal Reserve under your leadership has 

accomplished that goal? 
45 

Mr. BERNANKE. We have moved monetary policy as much as possible to try to support employment growth, but, obviously, a 10-percent unemployment rate is not very satisfactory. 

Senator DEMINT. Again, I appreciate your answers. 

For me, perhaps the biggest failure in the Federal Reserve in the 

political side here in Washington is that amid all of these failures, 

the politicians, the folks in the administration, and Federal Reserve have claimed credit for saving the system while blaming capitalism and unrestrained free markets for our problems. That has 

justified the positions that are now being taken here in Congress 

in many ways to come back and even extend the control, the intrusion of the Federal Government further into the private sector. I 

think you have been a big part of orchestrating that and shifting 

the blame onto the private sector. No one is arguing that there is 

not blame to go around everywhere. But the biggest failure I have 

seen is the failure for us to recognize the role that we played in 

the lack of our oversight of Fannie Mae, who created a lot of these 

toxic assets and sold them around the world; the loose monetary 

policy that created chronically low unemployment rates and high 

leverage across the economy. But not taking some of the blame and 

making sure the public is aware of that, we have undermined the 

system that made this country prosperous, and I think that is an 

egregious error. 

I would like to just mention a few things. What you say, predictions you make are critically important because we act on them, 

the whole world acts on them. I would just like to mention a couple 

of these as we go along. 

On March 28, 2007, when asked about the subprime market, you 

said, and I quote, ‘‘The impact of the broader economy on financial 

markets of the problems in the subprime market seems likely to be 

contained.’’ 

A little later, May 17, 2007, you said, ‘‘We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.’’ 

A little later, February 28, 2008, on the potential bank failures, 

I quote, ‘‘Among the largest banks, the capital ratios remain good, 

and I do not expect any serious problems of that sort among the 

large internationally active banks that make up a very substantial 

part of our banking system.’’ 

Again, June 9, 2008, I quote, ‘‘The risk that the economy has entered a substantial downturn appears to have diminished over the 

past month or so.’’ 

On July 16, 2008, right before our crash, speaking of Fannie Mae 

and Freddie Mac, you said, ‘‘They are adequately capitalized and 

in no danger of failing.’’ 

To a large degree, the oversight that we are responsible for here 

in this Congress, we did not accomplish because of assurances that 

we had gotten over the years from your predecessor and from yourself. And by doing that, I think we have egregiously failed the 

American system. 

Let me mention a few things here as I run out of time. Capitalism depends on capital, and I would like to ask a couple of 

questions about the Federal Reserve and capital. Is the Federal Reserve an instrument of the Government? 
46 

Mr. BERNANKE. It is an agency of the Government, yes. 

Senator DEMINT. Do you believe money is an instrument of Government to be manipulated as necessary to calibrate the collective 

economic behavior of the public with the perceived financial needs 

of Government? 

Mr. BERNANKE. The monetary policy is intended to follow the 

mandate the Congress gave the Federal Reserve, which is to 

achieve maximum employment and price stability. That is what we 

try to achieve. 

Senator DEMINT. Do you believe that employment should be a 

mission, a goal of the Federal Reserve? 

Mr. BERNANKE. Yes, I think the Federal Reserve can assist keeping employment close to its maximum level through adroit policies. 

Senator DEMINT. Should the Government or an agency established by the Government have the power to distort the purchasing 

power of money? 

Mr. BERNANKE. The Federal Reserve is mandated to achieve 

price stability, and one thing you did not mention in your list was 

inflation. Inflation has been low, and in that respect, the purchasing power of the dollar has been good, has been stable. 

Senator DEMINT. In a free market economy, you would think 

that the cost of capital would fluctuate based on supply and demand, yet a big part of the role of the Federal Reserve is to try 

to fix those interest rates. Is that a function that has been employed properly? And is that something that needs to be reconsidered? 

Mr. BERNANKE. Well, we always need to improve our execution, 

but I think that, as evidenced by the fact that every major country 

in the world has a central bank and uses monetary policy, I think 

that is the system that we have determined is the most effective 

at this point. 

Senator DEMINT. Again, I appreciate your testimony. I would 

again, as you and I have talked personally, ask you to consider the 

need to make the Federal Reserve more transparent. There is no 

reason that independence needs to mean secrecy. The confidence in 

the Federal Reserve, the mistrust around this country has reached 

new heights, and we need to do something to restore the faith that 

the American people have in their monetary system, their financial 

system, and that responsibility is at the Federal Reserve as well 

as in the Congress. But I would encourage you again to consider 

what type of openness or audit, as you and I have talked about, 

would be appropriate in order to reassure the American people that 

we are not looking at another Fannie Mae situation, that over 

years we were told not to worry, not to worry, everything is OK, 

and now we saw what it did. We cannot allow that to happen with 

the Federal Reserve. 

Again, Mr. Chairman, thank you very much, and I yield back. 

Mr. BERNANKE. May I quickly respond to that? 

Senator DEMINT. Yes, sir. 

Mr. BERNANKE. Senator, on Fannie and Freddie, the Federal Reserve had been raising concerns about Fannie and Freddie for 

many, many years. We were on the side of concerns about that. 

In terms of transparency, I think the Congress should have access to all of our financial information, financial operations and the 
47 

like, and we have made every effort to do that, and whatever remains to be done, we want to work with you to do that. Our main 

concern is about the independence of monetary policy itself and not 

about any financial aspect. So we are very much committed to 

transparency in all financial aspects of the Federal Reserve. 

Senator DEMINT. Thank you, Mr. Chairman. 

Senator JOHNSON. Senator Akaka. 

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

Chairman Bernanke, I want to add my welcome to you and your 

family to the Committee today. I feel you have demonstrated tremendous skill in addressing the extraordinary economic crisis and 

challenges that we have. 

As you know, I have always greatly appreciated your capacity 

and dedicated efforts to improve the financial literacy of students 

and consumers. The true costs of financial illiteracy have been 

made all too apparent by this financial crisis. One of the core 

causes of the crisis was that families were steered into mortgages 

with risks and costs they could not afford or even understand, and 

that has been already expressed. We share a firm commitment to 

trying to better educate, protect, and empower consumers. 

I appreciated your advocacy and the efforts of the Federal Reserve to promote the use of financial institutions for lower-cost remittances. In Hawaii, we have many families that send portions of 

their wages to family members living in the Philippines or other 

countries. Unfortunately, too often, consumers fail to take advantage of the lower-cost remittance services found at banks and credit 

unions. 

My question to you is, what must be done to, one, better inform 

consumers about costs associated with sending money, and two, to 

encourage mainstream financial institutions to provide low-cost remittances? 

Mr. BERNANKE. Well, Senator, first, let me just agree with you 

wholeheartedly about financial literacy. The Federal Reserve has 

been committed to working on this for a long time, as you know, 

and, of course, the recent crisis illustrates abundantly how important it is that people understand the contracts, the financial instruments that they are taking on. So we will continue to work with 

that and we will continue to also try to provide consumer protections that provide the information, the disclosures, the protections 

that help people get into the right product, which is very important. 

I agree with you about remittances. That has been an interest 

of mine for some time. The Federal Reserve has been working on 

that. We have worked, for example, with some other countries to 

try to reduce the cost of sending money to home countries. But I 

think one of the valuable lessons here is that many of the remittance services that people have are quite expensive and they may 

involve costs associated with exchange rates and the like. 

We have encouraged institutions, where possible, to reach out, 

because if we can persuade immigrants to use mainstream financial institutions for remittances, they may become interested in 

having a checking account or a savings account or taking out a 

loan, if necessary. So it is a way of introducing people who may not 

be that familiar with the banking system into the mainstream 
48 

banking system and, in many cases, reducing the costs that they 

face dealing with payday lenders and the like. So we do encourage 

that, and I think I would encourage financial institutions to use 

that tool as a way of attracting new customers from immigrant 

communities. 

Senator AKAKA. Chairman Bernanke, there are too many 

unbanked individuals that lack a formal relationship with a bank 

or credit union. As you mentioned, without access to mainstream 

financial institutions, working families miss out on opportunities 

for savings, borrowing, and low-cost remittances. I personally understand this issue because I grew up in an unbanked family. In 

addition to encouraging the use of banks and credit unions for lowcost remittances, can you tell me what else must be done to bank 

the unbanked? 

Mr. BERNANKE. Well, the government can provide various incentives, encouragements, to banks to do what in many cases is really 

in their own interest, which is to try to reach out to these communities. For example, the Community Reinvestment Act, which gives 

credit to banks for providing services, including branches in low- to 

moderate-income communities, is one way to encourage banks to 

take those sort of actions. We encourage banks to have multilingual employees, again, to establish those relationships. 

But I would hope that banks would see that expanding those 

services into immigrant areas, low- and moderate-income communities, is really a way of expanding their customer base and increasing the deposits and is really a profitable business strategy. 

So that, I think, fundamentally is the motivation for banks to go 

beyond the narrow groups that they are serving now and try to 

branch out more broadly. 

Senator AKAKA. You did mention about predatory lenders. Working families are having trouble accessing affordable credit. Unfortunately, many working families, of course, turn to predatory payday 

lenders for small loans. My question is, what must be done to protect consumers from high-cost payday loans, and two, to encourage 

the development of affordable alternatives? 

Mr. BERNANKE. Well, the Federal Reserve doesn’t directly regulate payday lenders. I think that in most cases, they are regulated 

by States who set requirements in terms of the information they 

provide. It is very important for people to understand what the cost 

actually is. If you are paying a certain number of dollars until payday, you may not realize that as an interest rate, that may be 

many hundreds of a percent or more. So regulatory work at the 

State level or wherever the appropriate level is to make sure that 

customers understand the cost of the credit they are obtaining and 

learn about the alternatives, I think is a very positive direction. 

And in general, as we were discussing earlier, to the extent that 

mainstream banks can come in and provide the alternatives and 

the competition to check cashing and payday lending and the like, 

the better the chance that families will have good access to credit 

and reasonable terms. 

Senator AKAKA. Thank you very much for your responses. Thank 

you, Mr. Chairman. 

Senator JOHNSON. Senator Vitter. 
49 

Senator VITTER. Thank you, Mr. Chairman, very much for being 

here. The Fed’s current policy of extremely low, near-zero interest 

rates is certainly helping banks recover in certain ways. I mean, 

they can use money to recapitalize through buying long-term government bonds. But at the same time, that scenario is discouraging, in many ways, getting credit out to businesses, to citizens 

who need it, to the recovery. What is your concern about that and 

how do you balance those objectives? 

Mr. BERNANKE. Well, as I have discussed earlier in the testimony, we have seen a lot of improvement in the broad credit markets, in the corporate bond markets and the stock market and the 

like, which means that larger firms have pretty good access now 

to credit. But there is still a big problem for people who are bankdependent, small businesses and consumers and the like. It is not 

an easy problem because we don’t want to tell banks to make bad 

loans. We want them to make good loans and loans to creditworthy 

borrowers. 

We have, however, done everything we can, or at least we are 

trying very hard to encourage banks to do that, in particular by 

telling our examiners, training our examiners to work with banks 

to take a balanced perspective. That is, we don’t want you to make 

a risky, imprudent loan, but if you have a longstanding relationship with a customer who has been paying, if you have a creditworthy borrower, you should make the loan. It is good for you. It 

is good for the economy. It is good for the borrower. 

So we are supporting that with our examination policy, with our 

guidance. We recently provided some commercial real estate guidance which gave examples for how, say, a small business who 

wants to borrow against their place of business, and the value of 

the store has gone down but they can still make the payments, why 

that should be considered still a good loan and why you should still 

make that loan. 

On top of that, we have certainly pushed the banks to add capital. You know, since our stress test in the spring, there has been 

a very big increase in the amount of private capital raised by the 

banking system. And we have, as you know, increased support of 

their funding through the discount window and through our efforts 

to get the securitization market running again, in particular our 

program to help investors link up with small business lenders, 

credit card and other consumer-type loans. 

So we are attacking this from a number of dimensions. We are 

not where we want to be, but we are seeing some improvement and 

expect things to get better as the economy improves. 

Senator VITTER. Well, I guess my more focused question was, 

isn’t having extremely near-zero interest rates, in fact, an impediment to banks putting more money out to small business and others? 

Mr. BERNANKE. No, I don’t think so. To the extent the banks use 

the money to buy Treasuries, it is because they don’t see a good 

lending alternative. So we want them to look at the lending alternatives to put out the money. The lower interest rates stimulate 

the demand for credit. Part of the reason—not the entire reason, 

of course, but part of the reason—that bank credit is contracting 

is that the demand for automobiles and houses and furniture and 
50 

other things has fallen in the recession and lower interest rates 

make it more attractive for people to buy a car, for example, and 

that increases the demand for credit and brings people to the bank 

to take out a loan. 

So the purpose of the low interest rates is to strengthen the economy, to support employment, and to get us going again. As the 

economy strengthens, that will improve the credit situation. It will 

make credit risk lower, and that should, in turn, make banks more 

willing to lend. So I do think it is constructive. 

Senator VITTER. OK. We have talked about the following before, 

but as I have told you before, months ago, it seems to me, and it 

still seems to me, unfortunately, there is a huge disconnect between a lot of the discussions we have here and a lot of the discussions you have and others have at the Fed in terms of trying to, 

within strong safety and soundness parameters, trying to get credit 

out the door and what the regulators down on the ground and folks 

visiting particular institutions are doing in terms of really moving 

in exactly the opposite direction by being so cautious in reaction to 

what has happened in the last year that they are making it virtually impossible for community banks to loan new money. 

Just my anecdotal experience is that that hasn’t changed, hasn’t 

gotten any better since we talked about it several months ago. 

What more can any of us here or the Fed do to bridge that divide? 

Mr. BERNANKE. Well, we should provide you, Senator, with a description of all the various measures we are taking in terms of regular conference calls, meetings, manuals, instructions to the examiners about how they should be proceeding, and I think one useful 

step that we have taken, for example, in the latest commercial real 

estate guidance is to give lots of examples. Here is an example of 

what a loan might look like, and here are the things you should 

be looking at. It helps people concretely to think about how to deal 

with a loan that may not be perfect but still is worth making. 

So we are making a very hard effort to do it. I am sure there 

is some slip between Washington and the grass roots, but we understand that issue and the Fed actually has, over a long period 

of time because of our macroeconomic responsibilities and our attention to the broad economy, has had a pretty good record, I believe. So I don’t know which regulators your bankers are talking 

about. We have had a pretty good record of trying to balance the 

needs of the economy and the needs for safety and soundness. 

Senator VITTER. Well, again, this is all anecdotal, but the experience in Louisiana, particularly in community banks, is that the 

regulators on the ground who are actually dealing bank by bank 

are giving almost all of the signals in the opposite direction and 

they are often reacting to whole categories of loans, like anything 

to do with real estate, and just saying, you know, your book is 

above the line we are drawing now, so don’t consider anything new, 

without getting to the merits of the loan, even when their portfolio 

is solid and not falling apart. So I would just make that comment 

again in the same vein that we had that discussion several months 

ago. 

Mr. BERNANKE. I appreciate that. 

Senator VITTER. As I am sure you know, The Wall Street Journal 

has criticized you for being part of the mistake of too much liquid-
51 

ity and credit around 2003 to 2005 and has doubted that you will 

have the ability or the discipline to rein that in at the appropriate 

time. How do you respond to that criticism, and what factors going 

forward will you be particularly focused on in terms of changing 

that monetary policy over time? 

Mr. BERNANKE. Well, Senator, there are really two issues. Let 

me talk about first going forward. Clearly, we have put a lot of 

stimulus in the economy in order to try to get growth back and get 

jobs created and credit flowing. But we understand that there is 

another side to it and that includes making sure that we keep 

prices stable, that we don’t have inflation issues, and even though 

ideally the financial regulatory system would be the first line of defense against bubbles or other misalignments in asset markets, 

given that we do not have currently a financial regulatory structure that is really designed to prevent those misalignments, I do 

think monetary policy has to pay some attention to those issues. 

And as I mentioned earlier, we are following valuations using 

standard models and metrics to see if we see anything that is particularly out of line. It is very difficult to know if an asset price is 

appropriate or not, but we are factoring that into our discussion, 

as was mentioned in our last minutes, in fact. 

On the retrospective issue, it remains controversial. You know, 

my own view is that the conventional wisdom in some quarters 

that Federal Reserve monetary policy in 2003 to 2005 was a principal or major source of the housing bubble, I just don’t think the 

evidence is that clear. There are a lot of very good economists on 

the other side of that. One example is Robert Shiller, who—perhaps the maven of the housing bubble—in his view has said it had 

more to do with mortgage financing and psychology than it had to 

do with monetary policy. 

It is very striking that if you look across countries, for example— 

and the IMF just did a study on this—there is no correlation between monetary policy during this period and housing prices. So, 

for example, Canada had similar monetary policy to the U.S. as did 

Germany via the ECB, but neither Canada nor Germany had a 

housing bubble, whereas the United Kingdom had somewhat tighter policy and they had a housing bubble. So the correlations are 

quite weak. Now, that is not to say that is not an interesting issue 

we should continue to pursue, but I just want to raise some doubt 

in your mind that this is an established fact. 

But the Federal Reserve certainly has a responsibility to understand the role of monetary policy in bubbles and to think about 

how we can identify those, as difficult as it is, and to try and take 

that into consideration, where we can, in making monetary policy. 

Senator VITTER. OK. In terms of regulatory reform, and in particular resolution authority that we are considering, if we have an 

appropriate, in your mind, resolution regime, new resolution regime otherwise, would you support taking away 13–3 and other 

type authority to send taxpayer dollars to specific firms? 

Mr. BERNANKE. Yes, I would. 

Senator VITTER. And would there be any subcategory of that sort 

of authority which would send—from either the Fed or other entities—to send dollars to individual firms that you think we should 

accept and retain? 
52 

Mr. BERNANKE. Well, currently, if the FDIC resolves a failing 

bank, there may be rare circumstances under which the Fed would 

assist by providing short-term liquidity to that bank as part of the 

resolution process. So it is conceivable, and I am not saying it has 

to be that way, but it is conceivable that in the resolution authority 

there might be provisions under certain circumstances where the 

Fed would lend on a short-term collateralized basis to the entity. 

But that is a decision for Congress to make. You want to figure out 

the best way to structure the resolution authority. 

I think that if the resolution authority is there, though, to go 

back to your original question, the Fed does not want to be involved in bailouts. I mean, we got involved in them only because 

there was not a good legal structure for dealing with these firms, 

and in the future, we have no interest in doing that. 

We think there may be some value in having lending programs 

that apply to the economy generally under emergency circumstances, but not to individual firms. 

Senator VITTER. OK. Well, again, my concern, as I tried to say, 

is individual firms going—— 

Senator JOHNSON. Would the Senator leave the following questions to a second round? 

Senator VITTER. Sure. Thank you. 

Senator JOHNSON. Senator Tester. 

Senator TESTER. Yes, thank you, Mr. Chairman, and I want to 

thank you for being here today, Chairman Bernanke. Over the next 

4 years, if you are confirmed, you will play, and we have referenced 

it already, a key role in job creation in this country. 

Last week, I spent 2 days visiting five of Montana’s bigger cities—Kalispell, Missoula, Billings, Helena, Great Falls—to discuss 

the economy and jobs. I heard one message consistently in each 

town, and that is we need to allow our local banks the opportunity 

to lend, an issue that Senator Vitter and others have brought up. 

At the same time, I am hearing that Fed regulators are sending 

mixed messages. From DC, it is to lend, but from the field offices, 

it is buildup capital, don’t consider commercial loans. I have heard 

from several banks that claim the FDIC and Fed examiners are 

overzealous and overreaching and in some case reversing State regulatory exams demanding write-downs and reclassifications of 

loans and assets. 

You have made claims here today and before that you are pushing banks to lend. The folks on the ground are seeing, for the most 

part, the exact opposite. I believe that Congressman Minnick and 

the House Financial Services Committee sent you a letter at the 

end of October talking about common sense regulation on the 

ground in these economic times. You have talked about conference 

calls. You have talked about meetings. You have talked about what 

you are doing. 

I guess the question is, is there anything more you can do, because from what I am hearing, it is not working. 

Mr. BERNANKE. Well, I appreciate the feedback, and all I can say 

is we will take another look at it and try to step it up further because it is important to have a balanced perspective. 

Senator TESTER. But you do agree that these local banks play a 

critical role and the capital they provide play a critical role in job 
53 

creation, and if they are bound up and do not loan money because 

regulators are putting the boots to them, the economic recovery is 

going to be slow in coming? 

Mr. BERNANKE. That is true, but we do have to make sure that 

they are making good loans. We don’t want to go back into a situation where they are making bad loans and then it ends up costing 

money for the Deposit Insurance Fund. But subject to that, obviously, we want them to make good loans. 

Senator TESTER. I would agree with that. I guess the real question then becomes, what is the definition of a good loan? 

Mr. BERNANKE. One that gets paid back. 

Senator TESTER. OK, and so what determines that? 

Mr. BERNANKE. Well, a set of criteria about—— 

Senator TESTER. And have those criteria changed? 

Mr. BERNANKE. The criteria haven’t changed. What has changed 

is the economic environment. You have people whose business has 

deteriorated or whose asset values have declined and it makes 

them less creditworthy. But again, we have tried through our policies, to identify the key issue—the ability to repay—which may not 

be the same, for example, as the collateral value. So we want to 

identify criteria that will help banks make loans to people who will 

repay and can repay, but be careful obviously about not making 

loans that are not likely to be good. 

Senator TESTER. There is also a perspective out there that the 

playing field is tilted to the big guys. Could you comment on that? 

I am talking about the big financial institutions, and that the little 

guys who really didn’t create the problem are doing all the suffering and the big guys are back making incredible profits and that 

the playing field is tilted toward them. Could you talk about that 

for a second? 

Mr. BERNANKE. I will. We have an enormous too big to fail problem in this country. All the problems that people are talking about, 

the bonuses, the unfair playing field, government backstops, moral 

hazard, all of that follows from too big to fail, and the best thing 

that we can do to solve that problem, to create market discipline 

for those big firms, to force them to compete on an even playing 

field, is through regulatory reform that will address too big to fail, 

and I think that basically has two components. 

One component is tougher regulation for these large firms, higher capital requirements, tougher liquidity, supervision, and risk 

management requirements on the one hand, but on the other hand, 

going back to Senator Vitter’s comments and others, a resolution 

regime that will allow the government in a situation of crisis to 

wind down, allow a firm to fail, and allow creditors to take losses 

without having all the collateral damage to the financial system 

and the economy that we saw last fall. 

Senator TESTER. OK. And if you have already stated an answer 

to this question, I apologize, but I really don’t know this. The 

Chairman of this Committee put out a regulatory reform bill. Does 

it adequately deal with the too big to fail issue? 

Mr. BERNANKE. I believe it addresses the resolution issues. Senator Dodd knows that I disagree about the Federal Reserve’s role 

on the regulatory side. We think we both have the appropriate ex-
54 

pertise and the need to know, so to speak, that we should be involved in oversight of the banking system. 

Senator TESTER. OK. So taking the turf issue out, if you can do 

that, because I know you are looking to be confirmed for this job, 

taking the turf issue off the table, does that bill adequately address 

the too big to fail? 

Mr. BERNANKE. Well, it is not a turf issue, it is a fundamental 

issue about the soundness of the plan. But putting that aside, at 

least on one side, which is the resolution regime, I don’t want to— 

let me be quite frank. I haven’t read the latest version and I know 

right now we are in discussions and so on—— 

Senator TESTER. There is still work—— 

Mr. BERNANKE. ——but broadly speaking, it had the features 

that a firm would be able to be wound down, that losses could be 

imposed. If I understand that correctly, then that is where we 

should be heading, in that general direction. 

Senator TESTER. OK. Well, there is some—— 

Chairman DODD [presiding]. I take that as a wild endorsement. 

Senator TESTER. Yes, exactly. 

[Laughter.] 

Mr. BERNANKE. It is a strong endorsement, Senator. 

Senator TESTER. I was trying to help you out, Mr. Chairman. 

While some of the folks in Congress recommend using TARP 

funds to spur lending in local markets, Montana is only one of two 

States that receive no Capital Purchase Program funds. Our banks 

don’t want TARP funds. So what other recommendations would you 

propose to spur some small business lending, rather than TARP? 

Mr. BERNANKE. Well, I think we have to address your regulatory 

issue that you raised. We are trying to strengthen the secondary 

market so that banks that make a small business loan can then 

package it and sell it; we have made a lot of progress in restoring 

the secondary market for SBA loans and also for commercial real 

estate loans. Those are the main suggestions I have. 

Senator TESTER. All right. I just need to know your thoughts on 

an idea that has been bounced around here a bit, was bounced 

around a little bit in Montana, the New Employee Tax Credit concept, providing business a credit if they bring on a new employee 

and keep them for 2 or 3 years or whatever that arbitrary figure 

might be. It has been done before. What is your perspective on it? 

Mr. BERNANKE. Well, I don’t think we have a clear answer to 

that question, unfortunately. The historical record is mixed. Some 

have been perceived as successful, some not so successful. So there 

is not a clear enough consensus that I would want to make a recommendation to you, particularly since I just promised Senator 

Corker I wasn’t going to make fiscal policy recommendations. 

Senator TESTER. But we are talking jobs. 

Mr. BERNANKE. Yes, I know, and there are a lot of different ways 

to approach jobs and I am sure you have seen the list. I mentioned 

earlier Christina Romer’s op-ed in The Wall Street Journal which 

listed the five or six items that people are looking at. I would have 

to say that some of the others she mentioned are more straight forward and we would have a better sense of what the effect would 

be, but the Jobs Tax Credit, one of the drawbacks is we don’t have 
55 

a sense of how strong an effect that would have or how permanent 

the effect would be. 

Senator TESTER. Regardless of how it is structured? 

Mr. BERNANKE. Well, it would depend a lot on how it is structured and how it is publicized and to whom it applies and so on, 

and that is part of the reason I can’t give you a clear answer. 

Senator TESTER. OK. If we had a more concrete proposal, you 

could? 

Mr. BERNANKE. We could help you analyze it. But again, I am 

reluctant to make a—— 

Senator TESTER. I understand. 

Mr. BERNANKE. ——a clear recommendation. 

Senator TESTER. Sounds good. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator, very, very much. 

Senator Johanns. 

Senator JOHANNS. Mr. Chairman, thank you for being here. I will 

just show bias to start out. I have always believed that less government and lower taxes helps create jobs. But let me pursue something with you. 

I think the biggest challenge that you face in your job is maybe 

not what you have been through, although that was significant, it 

is what you do from here, because at some point, there has to be 

a very artful exit strategy. You have done some things, or the Fed 

has done some things that have really, really been unprecedented. 

It has gotten a lot of debate, a lot of concern. Some have agreed 

with you. Some have vehemently disagreed with you. I think that 

is reflective of what has happened with the Committee today. 

I would like you to just walk us through the things that the Fed 

has in place, everything from your policy with Treasuries to interest rates, and talk to us about the exit strategy, number one, and 

what timing—and I am not necessarily looking for, by June 1, we 

will do this. What I am looking for is what economic signals will 

cause you to reach a conclusion that we can pull back from this or 

we can do that? So talk to us a little bit about that. 

Mr. BERNANKE. Certainly. Well, first, as you know, the Federal 

Reserve created a number of special programs to try to address 

problems in specific markets, like the commercial paper, the interbank market, the money market mutual funds, a variety of areas 

where there were stresses, we created special facilities and the like 

to try to reduce those stresses. 

As things have improved, the demand for funding from these programs has dropped significantly. We are down now to about 15 percent of the peak in terms of the dollars outstanding through these 

various programs. So we have made a lot of progress just through 

the fact that demand has gone away as the markets have improved 

in reducing all these programs, and, we will be cutting back the 

size and closing them, first, as market conditions normalize, as 

they continue to do, and in particular, those programs are justified 

only under so-called unusual and exigent circumstances, and as 

markets normalize, from a legal perspective we will need to be 

thinking about closing them down, and we are moving in that direction. And, again, we have made a lot of progress in that direction at this point. 
56 

Beyond that, our major programs have been asset purchases. We 

had a Treasury purchase program which brought our holding of 

Treasury bonds about back to where it was before the crisis, so we 

really have not increased our holdings of Treasuries. But we have 

also had a very big program of purchasing Fannie Mae, Freddie 

Mac, and other GSE mortgage-backed securities. We have announced that the current program will be wound down, tapered off 

through the first quarter of next year, and that is currently on 

schedule. 

So what we have is, if you will, a rolling exit process whereby 

the special programs are running off just because of lack of interest, and they will be shut down over time. We have bought a lot 

of Treasuries and MBS, though at this point we have announced 

tapering off of those programs. 

The next step at some point, when the economy is strong enough 

and ready, will be to begin to tighten policy, which means raising 

interest rates. We can do that by raising the interest rate we pay 

on excess reserves. Congress gave us the power to pay interest on 

reserves that banks hold with the Fed. By raising that interest 

rate, we will be able to raise interest rates throughout the money 

markets. And we can support that through a number of mechanisms that we have developed to reduce the size of the balance 

sheet and the amount of reserves in the system. And so we will do 

that gradually over time. 

So from a technical perspective, we have plenty of clarity about 

how we can exit from all these programs and how we can tighten 

policy and how we can, you know, raise interest rates, remove the 

accommodation at the appropriate time so that we get a sustainable recovery without inflation. 

Of course, as always, the communication, the timing, and so on 

is difficult. It always is, coming out of a recession. But it is not especially difficult in the sense that all these various programs and 

unusual steps we have taken we have good means now of reversing 

them and unwinding them as the time comes. 

Senator JOHANNS. As we look out to just next year, let us say, 

the next 12 months, we already have unemployment that has now 

gone over 10 percent, probably—well, not probably. It is much 

higher than that if you count people who have just given up. That 

number is in the 17-, 17.5-percent range, from what I understand. 

We are a consumer-driven economy, so if you have got a whole 

bunch of consumers very much on the sidelines just trying to keep 

things together as best they can. You have got a whole bunch of 

other consumers worried about losing their jobs. 

As you look out there over the next 12 months, what is your expectation when it comes to unemployment numbers? And is this 

going to get worse before it gets better, is kind of the bottom line 

of where I am headed with that question? 

Mr. BERNANKE. Well, the unemployment rate is very high, and 

it is a tremendous problem, and it obviously means a lot of hardship for a lot of people and some very long-term scars in the labor 

market. 

The rate at which the unemployment rate comes down is going 

to essentially depend on how fast the economy grows and then also 

how much confidence employers have to bring more workers on. 
57 

We have an employment number tomorrow. We will get a nearterm reading of what is happening. I do not know what the number 

is, but most forecasts right now are still for job loss. But as the 

economy continues to grow, we should begin to turn that corner 

and start to see job creation. However, because we have people 

coming into the labor market all the time, you need to have a certain amount of growth just to absorb the new entrants into the 

labor market. So you probably need something like 2.5 percent 

growth in the economy just to absorb those new entrants and keep 

the unemployment rate more or less stable. 

Right now, the FOMC expects growth next year to be fairly moderate, somewhere in the 3.5-percent range, and what that suggests 

is that over next year we will see the unemployment rate declining 

but, unfortunately, slower than we would like. It depends also in 

part, again, on employers. Employers have been very effective in 

increasing productivity and reducing the amount of labor that they 

need to produce output. Our sense is that they cannot keep up that 

kind of cost saving indefinitely. At some point, as the economy begins to expand, they will have to bring back some workers. But to 

the extent that cost savings and those kinds of labor reductions 

continue, that will be another drag. 

So the bottom line is we do not really know—our forecasting is 

far from precise—but if, in fact, the economy grows at a moderate 

pace, as we expect, the unemployment rate should peak and then 

come down, but only slowly. 

Senator JOHANNS. My last question. One of the things I hear as 

I talk to the business community, not only in my home State of Nebraska but those who come into my office, is they just feel there 

is a tremendous amount of uncertainty that is causing anxiety 

about decision making in terms of investment, capital expansion. 

Even when they see the business pick up, they are very, very reluctant to add people. And here is the uncertainty that they talk to 

me about. They talk to me about climate change legislation and the 

impact that that will have. They talk to me about card check and 

the impact that that would have on their business, the impact of 

regulatory reform, the impact of health care reform, and that has 

a real financial impact on them. 

How big a problem is that in terms of our economy starting to 

find its equilibrium, stabilize itself, with all of those, you know, 

really exorbitant things going on out there impacting that psychology of the marketplace? 

Mr. BERNANKE. Well, we have heard the same thing in our discussions. You know, the FOMC has Reserve Bank presidents from 

around the country, they talk to business people as well, and they 

bring that message to us, and they have heard a lot about concerns 

about uncertainty. 

One place where it is particularly relevant to the Federal Reserve is as we think about financial regulatory reform and capital 

requirements and so on, one reason why banks may be a little bit 

reluctant to lend is that they do not know what the capital standard is going to be, they do not know what the regulatory standard 

is going to be, and that creates some uncertainty for them as well. 

So it is an issue. 
58 

I do not have any real way of measuring in percentage points 

how big an effect this is. It is certainly something we hear a lot. 

My guess is that it will not be in itself a reason that the economy 

cannot grow. But it does probably mean that firms will wait a bit 

longer to hire. Maybe they will start with temporary workers. 

Maybe they will start by bringing back part-time workers to work 

full-time. Maybe they will use some overtime. 

So I do think it may contribute to some extent to the slowness 

at which firms make the commitment to make new capital investments and to bring workers back that they have let go. 

Senator JOHANNS. Thank you, Mr. Chairman. 

Chairman DODD. Senator, thank you very, very much. 

Senator Bennet. 

Senator BENNET. Thank you, Mr. Chairman, and welcome, Mr. 

Chairman. Thank you for hanging in there with us today. I am a 

little under the weather. 

One of the great benefits of being at the end of this horseshoe 

is that you get to hear everybody else’s questions and your answers. One of the enormous frustrations to me over the last months 

and weeks—and I am sure it is frustrating to you, too—is to sit 

here and listen to Senator after Senator, myself included, talk 

about what we are hearing anecdotally on the ground about lending to small business, to hear the stories of small businesses that 

are maxing out their credit cards because they cannot get access 

to capital of the banks, to hear from community banks that they 

are unable to lend because they believe the examiners are not giving them the headroom they need to lend. And every time we have 

this conversation, you answer, wisely and well, which is you say we 

are doing training, we have guidelines, and, of course, we do not 

want people to lend poor loans, and no one here wants that either. 

And I guess my question for you is: Is there a way we can move 

beyond this conversation to a place where we can actually acquire 

evidence of whether or not lending is going on in our communities? 

Is the tightness of the credit related to the fact that we do not have 

good credit risks? Or is it that we are overcautious? I mean, how 

will you evaluate that? How do you know that your training has 

worked? How do you know that your guidelines have worked? How 

do you know what is actually going on in the State of Colorado or 

the other States that are here? Because what I do not want to do 

is go through another hearing and another month and another 

week where we do not know what the evidence really is of what 

is going on on the ground. 

Mr. BERNANKE. Well, it is intrinsically very difficult to have statistics on how many good loans were not made, because obviously 

if we knew which loans were good, we could just instruct the banks 

to make them, and it is their credit judgments which are so difficult. 

What we do, one metric we have—— 

Senator BENNET. I might agree with you prospectively, but, I 

mean, even retroactively, if we could look at what has happened— 

your choice on the period of time—so that we could take the anecdotal evidence that we have and the efforts that you have made 

and try to see whether those efforts are successful or not. Because 

if it has not been successful, if people go to the trainings and then 
59 

come back and do not follow the guidelines that you have given 

them, or if we are being too conservative—and, believe me, I would 

not—I stipulate to the view that we should not do bad loans. How 

are we going to know that or not? And the reason it is so important 

to me is I do not see any way to get this unemployment rate down 

without having our small businesses have access to credit. And I 

think you have heard that universally today. 

Mr. BERNANKE. I have heard it, and I will give it some more 

thought. I think one statistic that we have is we do survey the senior loan officers of a large number of banks on a quarterly basis, 

and we ask them a whole bunch of questions about demand for 

loans and what they are seeing and so on. 

Senator BENNET. Right 

Mr. BERNANKE. And one thing that has been very clear is that 

the tightness of lending standards imposed by the banks themselves are at record tight levels, so it is not just the regulators. 

Senator BENNET. So here is what I—I mean, first of all, I for one 

would be very willing to work with you and your staff on this because we have got to move past this he said/she said aspect of what 

is going on. You know, you have the regulators or the examiners 

saying one thing is true. We have an observation like the one you 

just made about banks holding onto capital saying that that is the 

issue. 

I just feel like we are being guided by sort of vague impressions 

of what might be going on out there when the people that actually 

cannot keep their doors open and feel that they are good credit and 

that they are able to pay cannot get access to credit. And they may 

be wrong. In other words, their credit may not be good, but I can 

tell you there is an avalanche of that feeling that is out there, and 

I would like to be in a better position to say here is what is really 

going on, or at least to be able to say, you know, the examiners and 

the banks and the people in Washington have somehow convened 

together to try to diagnose the issue so that a month from now we 

can say things are getting better, or we can say things are getting 

worse, or we have not moved off dead center. But we have no—the 

frustration is that we have no measuring stick at all, really, other 

than people’s impressions. 

Mr. BERNANKE. Other than surveys and data on the kinds of 

loans being made. The Fed staff did work—— 

Senator BENNET. But we would not run our business that way. 

I mean, it would not be just based on survey data. Survey data is 

useful, but it—— 

Mr. BERNANKE. I was going to add—I am sorry. I was going to 

add—— 

Senator BENNET. I apologize. 

Mr. BERNANKE. The Fed staff did work with the Treasury trying 

to develop metrics for the TARP program to what extent did it lead 

to higher lending. And there was, I think, some progress made 

there. But your point is very well taken. I have heard this many 

times, as you can imagine, and I will take this back to our staff 

and see if we can figure out some more useful metrics or ways of 

thinking about this problem. 
60 

Senator BENNET. OK. I think, again, it is because of the consequence of my sitting here at the end that I can hear the same 

conversation over and over and over again. Other people may not. 

Mr. BERNANKE. As you can imagine, I have heard it many times. 

Senator BENNET. I know. And I just think it would be useful to 

everybody if we were able to agree upon a set of metrics going forward. And, again, I would offer to help. 

You mentioned something early in your testimony this morning 

about the importance of withdrawing from this economy in a way 

that creates jobs. I may be putting language in your—I think I 

wrote it down. ‘‘In a manner that promotes job creation’’ is what 

you said, something like that. Could you talk a little bit about 

that? 

Mr. BERNANKE. Withdrawing the policy accommodation you 

mean? 

Senator BENNET. I just wanted to know what you—no. Withdraw 

your balance sheet from our economy. 

Mr. BERNANKE. Right. So as part of the normalization of monetary policy, right now monetary policy is quite supportive of economic growth. We have near zero interest rates. We have a large 

balance sheet. We have a number of programs to try to keep down 

interest rates or to improve functioning in key credit markets. 

As I was describing to Senator Johanns, we will have to unwind 

those programs, and we have a set of ways of doing that. But basically the trade-off is the same one that we usually face when we 

come out of a recession, which is that at a certain point we have 

to begin to scale back the amount of stimulus we are providing for 

the economy so that we do not overshoot and create inflation or 

other problems down the road. And that is a judgment call because 

monetary policy takes some time to work. 

So all I was saying there was that we are going to have to find 

sort of the right moment, the right communication, so that we can 

begin the withdrawal of stimulus or continue—we have already 

really in some sense begun that process by reducing some of the 

size of our programs, for example—how to withdraw that stimulus 

in a way that will avoid any side effects like inflation or asset bubbles or any other problem, but at the same time be consistent with 

a sustainable and increasing expansion. That is the challenge that 

we always face at this stage. 

Senator BENNET. OK. Thank you, Mr. Chairman. I appreciate it, 

as always. 

Chairman DODD. Senator Bennet, thank you very, very much. 

Senator Gregg. 

Senator GREGG. Actually, I think Senator Hutchison was here 

earlier, came back, and—— 

Chairman DODD. I apologize. You are correct. 

Senator Hutchison, I apologize to you. Senator Hutchison, my 

apologies. 

Senator HUTCHISON. Thank you, Mr. Chairman, and thank you, 

Senator Gregg. I appreciate that note. 

Thank you, Mr. Bernanke, for coming to be with us in what has 

obviously been a long hearing, and I appreciate that you are here. 

During your appearance before the Committee in July, we spoke 

about the effect that the proposed health care reform would have 
61 

on our fiscal policy and the economy as a whole. At that time, you 

said that when considering health care reform, cost must be an 

issue, must be the issue. 

The Democrats’ proposal has now come to the floor, and we see 

that it has a $2.5 trillion price tag over the 10 years from when 

it starts in 2014 to 2023. Yet according to the CBO the huge Government takeover of health care is not going to lower health care 

costs, and, in fact, insurance premiums for every individual and 

family will go up, and I think if we are going to look at how we 

can change that cost curve, we need to have the ability to determine not only how to do it, but what is going to be the long-term 

effect of the $2.5 trillion price tag that is going to be on it on our 

long-term economic situation. And I would like to ask you what you 

think it will be. 

Mr. BERNANKE. Well, Senator, as I said last time, I think the 

real issue is health care costs—not just the total bill in some sense, 

but what does it do to the industry, what does it do to the cost of 

care per person. And what we have seen over the last 30 years or 

so is that health care costs per person are rising about 2.5 percent 

a year faster than income, and that is not sustainable. Obviously, 

at some point health care would become the entire economy. 

So what I consider to be the key issue, given that the Government has exposure to Medicaid, Medicare, and other costs, is finding ways perhaps not immediately but over a number of years to 

bring down the cost per person of health care. 

I have not read the CBO study. I know enough to know that 

health care economists have differed quite a bit about implications 

of different proposals and different measures. So I am not going to 

weigh in with a number. I do not have a good number to give you, 

only to repeat what I have said before, which is that as part of this 

process, it is very, very important that we do our best not to reduce 

the quality of care or reduce coverage or to make health care 

worse. This is a very inefficient system, and there must be ways 

to reduce the cost of delivering the health care, and many ideas 

have been suggested, ranging from information technology to various incentive payments to experimental or evidence-based medicine. 

I just want to reiterate that because it is critical that we get a 

stable and sustainable fiscal trajectory going forward, we do need 

to address this issue, and I do not think we can get a sustainable 

fiscal situation without addressing the issue. But, again, in terms 

of the specifics, there is a lot of disagreement about exactly how 

much effect on individual health care costs this bill will have. But 

I would just urge Congress to continue to look for savings, ways of 

reducing that cost. 

Senator HUTCHISON. Well, if I understand, what you are saying 

is that you have not looked at the numbers yourself, but if it is, 

in fact, going to increase the costs of premiums to every family and 

the overall cost to every individual, every business, as well as to 

the Government, that would have a harmful effect on our economy 

long term? 

Mr. BERNANKE. If that is the case, higher costs to the private sector increase the cost of doing business, reduce wages. Higher costs 

to the Government means a higher fiscal deficit, all else equal, and 
62 

that has potentially significant consequences for interest rates and 

for capital formation and for the health of the economy. 

So, clearly, it is a very, very crucial issue that we try to address 

the cost issue in health care. 

Senator HUTCHISON. Thank you. We share your concern. 

Let me move to the financial regulatory policies that Chairman 

Dodd has put a bill forward. A bill has also come out of the House. 

And one of the issues is the too-big-to-fail issue, and I think every 

one of us is concerned about it. We have different approaches to 

that issue, but let me ask you this: In Chairman Dodd’s proposal, 

there is a systematic risk resolution mechanism that would allocate 

the risk, attempts to allocate the risk, and it would exempt community banks at the $10 billion or below level. 

I have concerns about using the asset test because at $10 billion 

you could include funds that are highly leveraged and inherently 

risky to our financial system. But you would also exclude assetheavy mid-market community banks that pose no threat. 

Do you have a recommendation, as we are working through this, 

for how you could measure a financial institution’s risk so that we 

ensure that it is not a safe and sound community bank that is paying for the too-big-to-fail policy risk that it will not have a part in 

producing nor profiting from? Because I do not think any of us 

wants another taxpayer bailout. Many of us are very concerned 

about the one that is before us now and not being used the way 

we were told it would be used. But, second, I am very concerned 

about putting any more burden on our community banks, which 

are trying to lend and trying to have an impact for business that 

would give them liquidity. And so I want to protect those community banks from having to pay for the risk of too big to fail so that 

the taxpayer does not have to do it, nor do they. 

What would you suggest is the best measure to determine who 

should pay for the risk so that taxpayers will not going forward? 

Mr. BERNANKE. Well, a relatively simple thing to do—and this is 

just one suggestion—would be to exempt all insured deposits, that 

is, do not make people do a liability test, but excluding deposits for 

which the premiums are being paid to the FDIC, which seems fair. 

And beyond that, it would in practice exempt most community 

banks that have primarily deposit-based funding, and perhaps 

some additional exemption above that. So that would be one approach. 

A more difficult approach would be to try to do the analogy to 

what the FDIC does now, which is to make the premiums riskbased in some way, have it depend on some estimate of how the 

firm would be affected if the financial crisis did hit the system, and 

that would depend on things like the riskiness of the positions that 

the bank takes, which affects the FDIC premium. It might be affected by its funding mix. It might be affected by the complexity 

of its operation and a variety of things. 

As you can see by my answer, I think that would be a very complicated thing to do, so my first guess would be to try to find a formula that exempts deposit-funded or community-sized banks for 

the most part and it puts most of the weight on firms that do a 

lot of proprietary training and do a lot of riskier types of activities. 

Doing it based on uninsured deposits would be one first cut at that. 
63 

Senator HUTCHISON. My time is up, but I thank you very much. 

Chairman DODD. Thank you, Senator, very much. 

Let me turn to Senator Gregg. 

Senator GREGG. Am I it? 

Chairman DODD. Well, you may be. I think maybe my colleague 

from Alabama may have another question or two. Senator Merkley 

is coming back, as well, so you are not the last person. 

Senator GREGG. Mr. Chairman, first, I want to say thank you, 

thank you on behalf of people who live on Main Street in New 

Hampshire. The simple fact is that if you hadn’t been there and 

been willing to take extraordinary action last fall and into last winter and the early spring, along with Secretary Paulson and Secretary Geithner, this country would be in a catastrophic financial 

situation right now, and it is very likely we would be experiencing 

a depression or potentially a depression, but certainly a recession 

which would be radically more severe than what we have experienced, which has been bad and terrible for a lot of people. 

The way I describe it is it is like people driving over a bridge 

that was about to fall down. They didn’t know that there was somebody under there who fixed it so it didn’t. They don’t give you credit. But the fact is, you did take the action that was necessary and 

it was a very aggressive and creative action, as you have acknowledged. Over $2 trillion, it looks like to me, from your portfolio went 

into trying to make sure that our financial institutions remained 

liquid during this difficult time. 

So I respect what you did. I obviously don’t agree with 100 percent of it, would have done some things differently, but I didn’t 

hold the magic wand, nor did any of us at this table, and I think 

the proof is in the pudding, which is that we are coming out of this 

recession and the world didn’t devolve into chaos, fiscal chaos, 

which it might well have done had you not taken that type of initiative. 

There are a lot of big issues now pending as a result of that as 

we try to reorder the way that we approach the structure of our 

financial institutions in this country, and what I think is critical, 

and I have said it before on this Committee, is that as we do that, 

we not undermine what is our great and unique strength as a nation, which is that we are able to create credit, we are able to create capital, and we are able to advance credit and capital to entrepreneurs in a manner that no other nation has ever done. And as 

a result, people who have ideas and they are willing to go out and 

take chances and create jobs can find the resources to do it. 

And as we advance this effort in the area of financial regulation, 

we have got to be careful we don’t create unintended consequences 

of limiting that advantage that we have against the rest of the 

world. The rest of the world has some advantages over us. That is 

one of our big advantages over them. 

And so how the Fed is postured in this is critical, because you 

are at the epicenter of the structure of our financial institutions, 

of our credit institutions, and of our monetary policy, obviously. 

And thus, I am concerned, deeply concerned about this, I call it 

pandering populist movement out there to basically step onto monetary policy, have the political entities of this country step onto 

monetary policy. 
64 

You have already spoken out against it well and eloquently. I 

just want to second what you said. I know Secretary Summers did 

a study on this. You have obviously studied it as an economic historian. But I can’t think of a nation where the value of its currency 

was turned over to or even marginally or significantly influenced 

or even marginally influenced by elected officials that that nation 

has prospered. Usually, that is an absolute recipe for inflation and 

an absolute recipe for other nations looking at the nation that allows its political process to set the value of its money as risky, if 

not detrimental. And we are too big and too important to the rest 

of the world to allow that to happen here. 

And I understand it is an easy political vote. Go out and beat up 

on the Fed. You are that mysterious event. You could be in a Dan 

Brown novel, I guess. But the simple fact is that you are there because we recognized early as a Nation in this century—the last 

century—that it was important to keep monetary policy separate 

from fiscal policy, and monetary policy independent. So that is a 

long explanation of support for your position and unalterable opposition to stepping into this issue. 

You are, as you said, audited in every area in a very open and 

aggressive way, and we have the access to those audits, everybody 

has the access to those audits except on the issue of monetary policy and that is the way it should be. 

I want to get into this too big to fail issue, because I haven’t figured out how we address this yet, but there is a proposal that came 

out of the House Banking Committee that said that healthy, well 

capitalized, vibrant, energized institutions which have no definable 

risk to them will be subject to the potential break-up, and that 

break-up will be determined by an independent group of politically 

appointed people, or maybe even Members of Congress, for all I 

know, under the structure, arbitrarily. I mean, that, to me, is a European model of governance that is very threatening because there, 

big is not necessarily bad. In fact, in many instances, it makes for 

a competitive advantage. If these institutions are solvent and they 

are structured well and they are competing, they give us an economic advantage. 

It would be incredible industrial policy for a group of politicians 

to come in and say, well, you are too big, and we don’t like you because you are too big, therefore, we are going to break you up. I 

mean, where does that stop? Does it stop with Wal-Mart because 

we don’t like the fact that they aren’t unionized? Does it stop with 

Coca-Cola because they produce a product that some people think 

adds to obesity? Does it stop obviously with Altera? I mean, where 

does that stop, when you get on that slippery slope of functioning, 

strong companies that are big, but represent no risk because they 

are functioning and they are strong? 

So I guess I would ask you, obviously, too big to fail is a big issue 

for us and it has got to be addressed, but shouldn’t that be addressed on the issue of the institution being a risk as versus the 

institution just plain being big? 

Mr. BERNANKE. So my preferred approach to too big to fail, which 

I agree with you is perhaps the central issue in financial reform 

or certainly one of the very biggest ones, has two or two-and-a-half 

components, depending on how you count. One is to offset some of 
65 

the incentives to become too big to fail and to take into account the 

additional risks that a very large firm may pose to the system—— 

Senator GREGG. By raising their capital requirements over 

other—— 

Mr. BERNANKE. By raising capital requirements or making sure 

they are safe, making sure they have enough liquidity—— 

Senator GREGG. Which is a function of making them safe. 

Mr. BERNANKE. So that is the regulatory approach, and I think 

that should be part of it. 

The other part is to have market discipline, and the way to have 

market discipline is to have the ability to fail. We have talked 

about this several times today, but it is absolutely crucial that 

when people lend money to a large financial institution, that they 

are doing due diligence and looking at the riskiness and the activities and the profitability of that institution and not making their 

loan based on assumed government support of that institution. And 

so—— 

Senator GREGG. There is no implied guarantee that an entity can 

survive, that the stockholders are at risk, as are the—— 

Mr. BERNANKE. Under our current system, when we say that we 

are going to let these firms fail, it is not entirely credible because 

everybody sort of knows that if we come to a huge crisis and we 

are trying to protect the system, we might intervene, as we did. So 

we need to make it credible, and one way to make it credible is to 

have a set of rules and laws that allow us safely to let firms fail 

so that their failure doesn’t affect the broad system and the broad 

economy. So those two items. 

And on size, et cetera, I agree size is not a particularly good indicator of riskiness or even danger to the financial system. I think 

it would be worthwhile to consider, for example, whether regulators 

might prohibit certain activities. If a financial institution cannot 

demonstrate that it can safely manage the risks of a particular 

type of activity, for example, then it could be scaled back or otherwise addressed by the regulator under some circumstances. 

But I think those are the elements that would solve the problem, 

particularly the first two, the tougher regulation and the resolution 

regime. 

Senator GREGG. Well, I will take your comments, then, as saying 

that simply because a company is large is not a reason a group of 

politicians should step in and break it up. 

Mr. BERNANKE. No, I think we should all recognize that size and 

complexity often have economic benefits and we should, as much as 

possible, let the market decide. And one of the many advantages 

of getting rid of too big to fail is that ability to obtain funding and 

sell shares, et cetera, depends not on the government’s backstop, 

but on the economic value of the operation. 

Senator GREGG. If I might be indulged for one more second, not 

to imply that the Chairman’s proposal falls in that category of 

what I am concerned about. What I am concerned about is the 

Kanjorski, I think is his name, the language that came out of the 

House. How do you feel about this idea of requiring large institutions to have a living will? Does that create a—is that a situation 

where you have, almost by saying, well, you have got to have a living will, therefore you are maybe being given the imprimatur of too 
66 

big to fail, or does it actually give the opportunity to say that that 

is not the case? 

Mr. BERNANKE. I think living wills, while they are not a panacea, 

can be a useful adjunct to supervision. What a living will does is 

essentially describe how the bank or financial institution would unwind itself. And the reason that can be important, as we found out 

with Lehman Brothers and others, is that in many cases for tax 

reasons or for international reasons, whatever, financial institutions are extremely complicated from a legal perspective and it is 

very, very difficult and complicated to unwind them when the time 

comes. 

So it would be helpful, even in a planning sense, for us to understand how the firm is structured, what its legal connections are, 

and in situations where extraordinarily complex legal structures 

are there for tax avoidance or other less economic reasons, maybe 

there would be a case for looking for a simpler structure in some 

cases. But I think it would be a useful tool, not only in the actual 

crisis or in the actual wind-down, but in the process of understanding how the firm works and whether or not simplification in 

terms of its structure might be beneficial. 

Senator GREGG. Thank you. 

Chairman DODD. Thank you very much, and just for the purposes of the public, we are not talking about death panels here now 

in living wills. 

[Laughter.] 

Chairman DODD. That is a separate hearing. That is another 

committee that deals with those issues here. 

Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair, and thank 

you for your testimony, Chair Bernanke. 

Several times today when you have been asked about too big to 

fail, you have emphasized the power to unwind the institution. You 

mentioned in passing in one of your replies the issue of risk that 

goes from one company to another, but I don’t think you specifically talked about it in terms of the role of derivatives. There are 

folks who would say that derivatives are the issue in too big to fail 

because that is why we intervened. It is not to save this one financial institution, but because through derivatives, the consequences 

of their failure are transported to so many other financial institutions. 

And so I was wondering if you could maybe elaborate on that 

piece of the puzzle, of the role of derivatives in too big to fail and 

how you think that we reduce that risk. 

Mr. BERNANKE. I don’t think that derivatives are by any means 

the only issue. One example would be that we have had very destructive financial crises in the 1930s and in other contexts where 

derivatives weren’t really much of an issue at that point. But clearly in this crisis, they were a big issue, and one of the main problems was that they weren’t appropriately overseen, which meant in 

many cases they were not protected by capital reserves. The classic 

case would be AIG, which had a lot of one-way bets, one-directional 

bets, but even though it was a kind of insurance they were selling, 

because it wasn’t regulated, they didn’t have reserves or capital be-
67 

hind that, and then, of course, when the bet went wrong, then the 

company came under a lot of pressure. 

One thing that the AIG example illustrates, by the way, is that 

derivatives have not only the risk associated with the outcome of 

the underlying security, but also counterparty risk, so that those 

people who were holding AIG insurance faced not only the possibility of loss because of the underlying, but also because of the possibility that AIG could not pay. So clearly, making derivatives 

safer, both in an operational sense, in the way they are traded, but 

also in terms of protecting against counterparty risk, is a very important part of this reform. 

I agree with proposals that have been made that derivatives that 

can be standardized, and that is quite a few of them, and are accepted by central counterparties or exchanges or clearinghouses for 

clearing on those institutions should be traded on a central 

counterparty, which would be an organization which, by taking 

margin and holding capital, essentially ensures against 

counterparty risks, protects the participants against counterparty 

risks. 

Also, by having trading on a clearinghouse, we will have a much 

more transparent situation. People will know what outstanding positions look like. There will be no problems, as we had with credit 

default swaps, with transactions which are not cleared in a timely 

way so there is confusion about who owes what to whom. 

So I do think that strengthening the infrastructure generally— 

settlements, payments, clearing—but in particular, making sure 

derivatives are traded, where possible, on a central counterparty or 

on an exchange, is an important step to making the system stronger, and it ties into too big to fail in a couple of ways. One is if you 

get rid of the counterparty risk, you reduce the contagion. So in the 

case of AIG, if AIG had failed, the implications for the counterparties would have been less because the counterparty risk would have 

been eliminated. 

And second, you should be regulating those derivatives to make 

sure that you don’t have a situation where a company is essentially 

betting the bank, saying that if the coin comes up heads, then we 

make a lot of money. If the coin comes up tails, then the government bails us out. I mean, that is not a situation that we want to 

have. 

So good regulation of derivatives positions, including 

uncustomized derivatives, would also be part of a new regime. 

Senator MERKLEY. If I could summarize what you just said, you 

said you support moving to an exchange, and as you put it, for all 

the derivatives that could be standardized. Of course, we have the 

challenge of deciding to what degree derivatives can be standardized. We have a lot of end users who are also very resistant to the 

idea of going to an exchange because they feel that the margin 

costs would impede their ability to hedge, and that might be an argument that is coming forward regardless of the ability to standardize. Any thoughts about that issue? 

Mr. BERNANKE. Well, I think the case for exceptions is not the 

margin costs. So that is an appropriate cost of just protecting 

against the counterparty risk. The case for not putting everything 

on the exchange is that some risks are not hedgeable through 
68 

standard derivatives. It could be that I, as a municipality, want to 

hedge against some complicated set of events that might occur and 

there is no way that a derivative can be written that would be 

standardizable that would meet my needs. So there are going to be 

circumstances where derivatives are not customizable and they are 

still providing a useful hedging service. 

There are a couple of practical issues that come up there. I think 

one of them is what exemptions do you give on the end user side, 

and I think the main goal there is to avoid getting around the regulations through indirect means of setting up these deals. For legitimate end users who are nonfinancial companies who need to 

hedge some specific risks, we ought to try to make it possible for 

them to do that. 

But on the other side, if they are transacting, for example, with 

a bank or a dealer, the bank or the dealer should face regulations 

or capital requirements both to make sure that they are safe in the 

positions that they are taking, but also to internalize the cost, the 

potential cost to the system. There is a risk associated with these 

derivatives not traded on central counterparties. If the bank knows 

that it has to hold a certain amount of capital against its nonstandardized positions, that will increase its effective cost of offering those positions and that will, in some sense, balance the scales 

so there is not an artificial incentive to create noncustomized derivatives. 

So it is a balancing act, but we do want to leave some space for 

derivatives that are specialized for individual needs. 

Senator MERKLEY. So the challenge of drawing that line between 

what is customized and providing that opportunity, if you will, to 

address it, also, then, the challenge that I think this is—I think 

this is what you are saying, but I will just repeat it and make sure 

I understand—is that you want to have appropriate boundaries on 

that to prevent that exception from being something that the entire 

derivative market is driven through. 

Mr. BERNANKE. That is right. 

Senator MERKLEY. And then were you saying that there need to 

be fees based on OTC derivatives as part of that inherent risk to 

the system? 

Mr. BERNANKE. Well, not necessarily fees, but to the extent that 

you have nonstandardized OTC derivatives, there should be sufficient capital behind them and sufficient oversight of their positions 

so that, A, the institution is not being put into mortal danger by 

its positions that it has taken, and B, the extra capital is, in fact, 

a kind of cost, and that would tend to even the playing field between customized and noncustomized derivatives. 

Senator MERKLEY. Mr. Chair, can I put in one more question 

here? 

Chairman DODD. Yes, quickly. We have got a vote here coming 

up. 

Senator MERKLEY. A quick question, then. You referred earlier to 

the fact that you didn’t feel in the AIG situation that you all had 

much leverage in terms of asking institutions to take a haircut. It 

is a little hard for ordinary Americans and some of us, myself included, to get my hands around that, because if the risk is that 

folks might have a tremendous loss, it seems like they would be 
69 

ready to come to the table and say, we will mitigate that by taking 

some share. But let us just say that in that crisis, that moment, 

the need to move fast, that wasn’t possible. Are there things that 

we should do in structuring this bill that in the future, when that 

situation arises that gives the sort of leverage that would make 

sense to enable the Fed to drive a better deal, if you will? 

Mr. BERNANKE. Absolutely. My earlier response, I didn’t want to 

convey that we didn’t want to get the haircut. We really did and 

we tried. The problem under the existing system is that the only 

way to get the haircut is to have a credible threat that, well, if you 

don’t take the haircut, we are going to go bankrupt and you are 

going to lose everything. But, of course, since we had intervened to 

prevent AIG from going bankrupt and everybody knew that the collapse of AIG would have catastrophic implications for the financial 

system, it just wasn’t credible that we would let that happen and 

so we didn’t have the leverage. 

So it was a bad outcome, absolutely, I agree, but we really didn’t 

have much choice given the legal structure we were in. By all 

means, the reform ought to fix that, and in particular, when the 

government comes in, the Treasury, the FDIC comes in to unwind 

a systemically critical financial firm, it should be using a special 

bankruptcy procedure, not the usual one, a special procedure which 

allows the government to, under perhaps some specified rules in 

advance, to take haircuts, not to protect the equity holders, the 

subordinated debt holders, for example, at the same time that you 

are still having a safe wind-down. 

So I think if you structure this resolution authority, one of the 

many benefits of it will be that the government will be able to put 

the cost on the creditors. It will be able to renegotiate contracts, 

including bonuses and things of that sort. Those are all the things 

we needed, but we didn’t have in the current system. 

Senator MERKLEY. Thank you. Thank you very much. 

Chairman DODD. Thank you very much. 

We are going to briefly turn to my colleague from Alabama and 

then have brief closing remarks. But then Senator Corker wants to 

come back and he has a question or two for you, as well, Mr. Chairman. 

Senator SHELBY. Thank you, Mr. Chairman. I will try to be brief, 

Mr. Chairman. 

Chairman Bernanke, I believe that the last few years have provided us with ample evidence to conclude that the current regulatory structure that we have, one in which the Fed serves as the 

preeminent regulatory body, requires considerable restructuring. In 

fact, I believe the American people realize that. I also believe, too, 

that the Fed’s monetary policy independence is crucial and it must 

be preserved. Very important to the central bank. 

Fortunately, the regulatory reform process gives us here, I think, 

a chance to develop a better, more accountable regulatory structure 

and enhance the real and perceived independence of the Federal 

Reserve as a monetary policy setting entity. Very important. 

But to achieve these ends, I think the Fed will have to give up 

some of the regulatory authority, as Senator Dodd has proposed. I 

would hope that you, as the Chairman, in the interest of achieving 

better regulation and better monetary policy and independence of 
70 

the Fed, would put the monetary policy ahead of your interest, of 

the Fed’s interest, in protecting turf. 

Mr. Chairman, I do have, and this is just a short letter and I 

want to share it and I would like it to be made part of the record. 

Chairman DODD. Without objection. 

Senator SHELBY. This is a letter in The Washington Post today, 

and some of you have probably read it, but it was written by Vincent Reinhart. He is a resident scholar at the American Enterprise 

Institute and it has to do with the proposals Chairman Dodd has 

made. 

It says, ‘‘Regarding Federal Reserve Chairman Ben Bernanke’s 

November 29 Sunday Opinion commentary, ‘The Right Reform for 

the Fed,’ ’’ that you wrote, ‘‘As a result of legislative convenience, 

bureaucratic imperative and historical happenstance, a variety of 

responsibilities have accreted to the Fed over the years. In addition 

to conducting monetary policy, the Fed also distributes currency, 

runs the system through which banks transfer funds, supervises financial holding companies and some banks, and writes rules to 

protect consumers in financial transactions. Mr. Bernanke argues 

that preserving this melange is not only efficient but crucial to protecting the Fed’s independence. 

‘‘Apparently,’’ the letter goes on, ‘‘the argument runs, there are 

hidden synergies that make expertise in examining banks and writing consumer protection regulations useful in setting monetary policy. In fact, collective diverse responsibilities in one institution fundamentally violates the principle of comparative advantage, akin to 

asking a plumber to check the wiring in your basement.’’ 

‘‘There is an easily verifiable test,’’ he writes. ‘‘The arm of the 

Fed that sets monetary policy, the Federal Open Market Committee, has scrupulously kept transcripts of its meetings over the 

decades,’’ and this man writing this says, ‘‘I should know, I was the 

FOMC Secretary for a time.’’ And then, ‘‘After a lag of 5 years, this 

record is released to the public. If the FOMC made materially better decisions because of the Fed’s role in supervision, there should 

be instances of informed discussion of the linkages. Anyone making 

the case for beneficial spillover should be asked to produce numerous relevant excerpts from that historical resource. I don’t think 

they will be able to do so.’’ 

He writes further, ‘‘The biggest threat to the Fed’s independence 

is doubt about its competence. The more the Congress expects the 

Fed to do, the more likely will such doubts blemish its reputation.’’ 

I ask that this letter be put in the record. 

Chairman DODD. Without objection, it will be included. 

Mr. Chairman, Senator Corker will come over and close up here, 

but let me—first of all, I want to thank Senator Shelby for his comments about the effort we are making, and I want to thank you, 

as well, and your staff. You have been tremendously helpful already and very constructive. 

I was one of those people in that room on the night of September 

18 when you and Hank Paulson came into the room, and there are 

a lot of people going back, and I will go to my grave believing that 

what you did—what we did—over that 2-week period, sort of the 

economic equivalence almost of 9/11 in ways as you described it 

that evening in a very straightforward, monotone voice—I will 
71 

never forget your words—will go down as the right thing to have 

done. And he is not here now, but Judd Gregg, Bob Corker, Jack 

Reed, Chuck Schumer, on this side, anyway, we met along with 

some others and worked with you and others in putting that proposal together. You deserve, in my view, a great deal of credit for 

moving that forward and then the creative ideas that kept us out 

of the difficulty. Proving a negative is always hard, and obviously 

we don’t ever want to be in a situation to have to prove that. But 

nevertheless, I think we did by the actions that were taken. 

I also want to underscore something Judd said about the idea of 

having something big is bad. I think that is a bad idea and we 

don’t include that. I think the idea that you have described in how 

you require capital standards and so forth to make sure that you 

don’t have an institution be at risk makes a lot of sense, as well. 

And the door is open here. Look, we are very much in the process. This is a dynamic process we are engaged in. I strongly support your confirmation. And as I said at the outset, I believe you 

are the right person at the right time to do this job. But I want 

you to know the door is open as we are trying to evaluate how best 

to do this. 

I think all of us here very much appreciate this is a unique moment we are getting. There have been many others before us who 

have talked about doing this, but there was never the will to do 

it. If there is any silver lining in what we have been through, and 

the fact that we had 52 hearings this year on this subject alone in 

this Committee, it is because we are in this moment. If we wait too 

long, the moment passes. And people will say, well, look, things are 

going well. Why bother? If we had acted too early, we might have 

overreacted, in my view, and that would have been bad, as well. 

So we are right in this kind of sweet spot in which I think we 

have a chance, and I believe there is a common determination by 

virtually everybody on this Committee, Democrat and Republican, 

not seeing this ideologically, but what works, what doesn’t, what is 

right, what is wrong, and we invite you and your staff and others 

to be at that table with us as we go through this, not to suggest 

that we are going to agree on everything, but I want you to know 

that door is open. 

Senator SHELBY. Mr. Chairman, could I say one thing? 

Chairman DODD. Yes, sir. 

Senator SHELBY. I agree with Senator Dodd. I don’t think big is 

necessarily bad. 

Chairman DODD. No. 

Senator SHELBY. But I do believe big is bad when it has an implicit—— 

Chairman DODD. I agree. 

Senator SHELBY. ——response out there with the marketplace 

that the government is backing it. 

Chairman DODD. I agree with that. 

Senator SHELBY. That is bad, Mr. Chairman. 

Mr. BERNANKE. I agree, as well. 

Chairman DODD. We all agree on that. 

Senator Corker, you are—— 

Senator CORKER. Thank you. 
72 

Chairman DODD. I am going to go over and vote. You are in 

charge. 

Senator CORKER. When you come back, you will never know what 

may have happened to this place. 

[Laughter.] 

Senator CORKER. But I will try to behave like a gentleman, sir. 

Chairman DODD. Thank you, Mr. Chairman. 

Mr. BERNANKE. Thank you. 

Senator CORKER [presiding]. Mr. Chairman, I thank you for 

being with us so long, and I think you know that I was happy that 

the administration decided to renominate you. And I think you 

knew coming into these confirmations, unless something really 

strange happened, that I was going to support you, and I am. OK? 

I am becoming slightly frustrated, though, and I know that you 

are probably going to be confirmed, and I do not know when that 

is going to happen. You know, it may be held off until after reg reform occurs, as I mentioned to you the other day on the phone. It 

may happen before. You are the Fed Chairman regardless. I mean, 

I think you are the Fed Chairman until another Fed Chairman is 

nominated and approved, and I think that is the case. Your staff 

is nodding no, but that is debatable, I guess. 

But I have worked very closely with you over the last year, which 

I appreciate, or year and a half. And we have talked about a lot 

of things important to our country. And what I have appreciated 

about you is I absolutely do not believe you have a political cell in 

your body, as I have said publicly many times, and I really believe 

you wake up every day trying to do what you think is best for our 

country. 

But I am concerned—and I am becoming sort of frustrated with 

it—that the activity—I mean, you have worked very closely with 

both administrations. This is not partisan. I think much of that has 

hurt your credibility some. And just as you mentioned, as we 

talked earlier in our last exchange, on the fiscal side I do think 

that you end up getting used as a tool for administrations to advance policies that they think is good, it is outside the monetary 

policy issue. And I just would caution you, I think that hurts you. 

OK? 

The Bush, the stimulus was ridiculous. I mean, it was silly. It 

was sophomoric, and it had no effect, and you supported it. And 

when you support it, I mean, what happens on the Senate floor 

when Ben Bernanke says that he supports something, because of 

the respect not only of you but the position, that has an effect. 

Same thing with the Obama stimulus, which, you know, regardless 

of what people say, it did not accomplish what they said it would 

do, and I think it was certainly less than a stimulus. And we can 

debate that. It does not really matter. That is not what matters. 

What matters to me is that you weighed in, and when you weigh 

in on something, it is like it gets the Moody’s rating—not that 

Moody’s rating matters much anymore. But that is what it does. 

I think the same thing is happening right now in financial regulation. And as I said way back when, long before this, 6 to 8 

months ago, at maybe the last Humphrey Hawkins meeting, I 

think to the extent that the Fed continues to thrust itself in the 

middle of things, you know, being the systemic regulator, which, 
73 

again, we are going to have another systemic risk, we are going to 

have another failure, we are going to have—I do not care who the 

Fed Chairman is. I do not care what kind of reg bill we pass. It 

is going to happen. And it just seems to me that the more you 

thrust yourself in the middle of those things that are outside of 

monetary policy and outside of being lender of last resort, the more 

you do things to damage the institution. 

And I say that because I respect the institution, and just like 

Judd Gregg said and just like I think I said in my comments, I do 

not want us involve in monetary policy. I think that would be a disaster not only for our country, but for every country that does business with us, which is every country. 

So I am becoming—you know, I know you are lobbying us heavily 

right now as far as what the Fed role should be in regulation. And 

on a private basis, I want to hear that. I mean, just a minute ago, 

I know that you alluded to Chairman Dodd’s bill, and I have to tell 

you—and everyone on his staff knows this—I very much appreciate 

what he is doing to try to work out a bipartisan bill, and I think 

we are going to do that. At least I am going to keep saying I think 

we are going to do that until I think we are not, OK? But just like, 

for instance, saying a minute ago that you think this bill absolutely 

solves too big to fail. Well, at least that is what was reported to 

me, and I—— 

Mr. BERNANKE. No, I—— 

Senator CORKER. Please clarify that, because as much as I respect him, I think there are some frailties in the legislation. 

Mr. BERNANKE. I only talked about some general elements. I certainly did not endorse the bill. 

Senator CORKER. Good. I got an e-mail in another meeting, and 

I am glad—well, I just think that you are highly respected, the position is highly respected. I think the more the Fed throws itself 

in the middle of things that are outside the categories that it is 

charged to do, the chances are—maybe not you but the next person 

down the road—the Fed’s independence ends up being undermined. 

And there is no question to me that the efforts by Congressman 

Paul and others to do the things that are occurring right now, I 

know his longer-term goal is—I understand he is a gold standard 

person. I understand there are other goals behind that. But I do 

think that much of what has happened recently and the hyperactivity of some of 13.3 issues, with Maiden Lane and AIG, I mean, 

you know, that is kind of questions. It ended up sort of being equity, and I do not mean that, again, to poke jabs, but that type of 

activity ends up hurting the Fed, an institution that, like Judd 

Gregg and others, I respect, you I respect. And I guess over the last 

45 days or so, I have become very nervous about that activity. And 

I just want to tell you that. And I am nervous about us and what 

we might do, but I am also beginning to be nervous about the powers that you at the Fed want to take on, that Treasury is encouraging you to take on, and I just wondered if you might respond to 

that knowing that I am somebody who, unless the sky falls in, I 

am going to support your nomination. And I respect your abilities 

and intellect, and I appreciate what you have tried to do on behalf 

of our country. But I am concerned about what that is actually 

doing to the Fed itself. 
74 

I do not now if you are understanding. I do not know if I am expressing myself well. 

Mr. BERNANKE. You expressed yourself well, Senator. I would 

like to respond briefly, if I could. First of all, I thank you for the 

conversations we have had. It has been very good to work with you. 

First, your point on fiscal policy, I have tried to stay out of fiscal 

policy. I will be more vigilant in the future. I think there is an appropriate division of labor: Congress and the administration, fiscal 

policy; Federal Reserve, monetary policy. And I will try to do that, 

although I should say that I think there are some broad general 

issues like the deficit, for example, where the Federal Reserve 

Chairman does have some responsibility to speak up, and I think 

I will have to continue to do that. 

Senator CORKER. And I am speaking more to specific policy proposals. 

Mr. BERNANKE. Right. 

Senator CORKER. And I think—— 

Mr. BERNANKE. Well, even in the cases you cite, I never said anything more than maybe it is time to think about this general thing. 

I never endorsed any particular plan. I never endorsed any components of it or any size or anything like that. But I take your point. 

Second, some of the steps we have taken, like the AIG episode, 

for example, obviously have hurt the Fed a lot politically. We know 

that. And I think that should just be proof that we did it for the 

good of the country. We did not do it for ourselves, because it obviously has hurt the Federal Reserve in the public’s view. We did it 

because we felt that there was no other way to avoid what a number of your colleagues have called the risk of a catastrophic collapse 

of the financial system. And so we did what we did knowing it 

would be politically unpopular, knowing it would bring down problems for the Federal Reserve, but because we did not have an alternative. And one of the things we are hoping, of course, that the 

Congress will come up with will be some framework that will allow 

this to be done in a more orderly way and will leave the Federal 

Reserve completely out of it. And we would like to be left out of 

it. 

On financial stability, I would like to differ just a little bit, which 

is that the Federal Reserve actually was founded in 1913 for financial stability purposes, not monetary policy, and it has been a big 

part of financial stability for 100 years almost. We have not been 

lobbying. What we have been doing, if anything, is trying to provide advice and our reasoned views on the subject. And what some 

might think of as turf in my view is an important component of 

thinking about how a successful financial stability program ought 

to be structured. 

So given that that is very much in our domain, I do not want 

to use undue influence, but to the extent that we have arguments 

and positions to take, I only ask you to believe that we do it based 

on what our view is of the appropriate public policy and not because of turf. And you will notice that we have not used the same 

kind of energy on some other aspects, that this has been the thing 

which we view as critical, and I actually do believe that if the Federal Reserve is completely eliminated from financial stability pol-
75 

icy, it will have very negative consequences at some time in the future when neither you nor I may be here. 

So I hope you will understand that on that particular issue we 

do feel we have a stake and an expertise and that we are trying 

just to get the right policy. 

Senator CORKER. Well, I appreciate that, and I also apologize for 

being given some information about the hearing a minute ago that 

apparently was off base, and certainly I am very glad you cleared 

that up. And I would just echo the same thing that Chairman Dodd 

just said, and that is, I think that we, all of us here, just are trying 

to get it right, and I think it is really hard. I think the resolution 

piece and the too-big-to-fail piece is the most important. If we do 

nothing else over the course of the next several months but solve 

that, I think it is the most important thing, and in my opinion, if 

we only did that, that would be fine. 

I hope that you will, you know, continue to talk with us in our 

offices, both privately and in any other setting, to help us work 

through this. And my comments today, again, are not in any way 

to—they are just to say that, look, my antenna right now makes 

me feel nervous about the hyperactivity and the unintended consequences of what could happen down the road. I mean, you responded aggressively during this last cycle, and as has been said, 

you know, you are being criticized for responding aggressively. And 

I think if we allow the Fed’s role in our financial system to become 

something far greater than it should be—there is an appropriate 

level, I understand—but far greater than it should be, we are going 

to set ourselves up to do some ultimate longer-term damage to our 

country. 

Anyway, thank you for letting me talk with you. I know all of 

us could Monday morning quarterback the many zillion calls that 

you have had to make over the last year or so, and with little information and little time. I respect you for what you are doing. I 

thank you for coming and being so patient with us today, and I do 

look forward to over the next couple months with Chairman Dodd’s 

staff and Ranking Member Shelby’s staff and all of us working together to try to get it right, and I thank you. 

Mr. BERNANKE. Thank you. 

[Whereupon, at 3:13 p.m., the hearing was adjourned.] 

[Prepared statements, biographical sketch of nominee, responses 

to written questions, and additional material supplied for the 

record follow:] 
76 

PREPARED STATEMENT OF SENATOR TIM JOHNSON 

Thank you Chairman Dodd and Ranking Member Shelby for holding the nomination hearing for Ben Bernanke to serve another term as Chairman of the Federal 

Reserve Board of Governors. This will be one of the most important nomination 

hearings the Banking Committee will hold all year, as the Administration and Congress continue to look for ways to restore our Nation’s financial stability, promote 

economic recovery, and work on legislation to ensure that another economic crisis 

like the one we faced last year never happens again. 

While there has certainly been criticism of the Federal Reserve for not doing 

enough to protect consumers and for the unprecedented actions it took during the 

financial crisis, there is also consensus that Mr. Bernanke kept our Nation out of 

a Depression and has kept inflation in check. As our Nation recovers, and faces additional challenges in the months ahead, there is no doubt that having one of the 

world’s foremost experts on the Great Depression at the helm of the Federal Reserve 

is a benefit to our Nation as a whole. 

As it is the Fed’s independence and its ability to carry out day-to-day decisions 

about monetary policy without the intrusion of Congress that strengthens the Fed’s 

credibility in the eyes of the private sector and allows it to follow policies that maximize price stability and economic stability, I do question what other responsibilities 

the Fed should have. Should the Fed supervise the biggest banks? Were the stress 

tests effective? Has the Fed constrained excessive risk-taking in the financial sector? 

Has the Fed done enough since the crisis to improve its oversight of bank holding 

companies and to be able to predict and prevent the next crisis? Does the Fed have 

too much power and responsibility and should Congress designate some of the Fed’s 

obligations to other agencies? These are all questions that this Committee must consider in the coming weeks with regulatory reform legislation. Finding the right answers to these questions is important to our Nation’s economic stability. 

All this said, the Fed has economic and financial expertise that is unrivaled, and 

I believe that Mr. Bernanke has rightly been renominated for this post. I look forward to the opportunity to hear Mr. Bernanke’s testimony, and to hear his responses to my questions and my colleagues’ questions. 

PREPARED STATEMENT OF BEN S. BERNANKE 

TO BE CHAIRMAN, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, 

DECEMBER 3, 2009 

Chairman Dodd, Senator Shelby, and Members of the Committee, I thank you for 

the opportunity to appear before you today. I would also like to express my gratitude to President Obama for nominating me to a second term as Chairman of the 

Board of Governors of the Federal Reserve System and for his support for a strong 

and independent Federal Reserve. Finally, I thank my colleagues throughout the 

Federal Reserve System for the remarkable resourcefulness, dedication, and stamina they have demonstrated over the past 2 years under extremely trying conditions. They have never lost sight of the importance of the work of the Federal Reserve for the economic well-being of all Americans. 

Over the past 2 years, our Nation, indeed the world, has endured the most severe 

financial crisis since the Great Depression, a crisis which in turn triggered a sharp 

contraction in global economic activity. Today, most indicators suggest that financial 

markets are stabilizing and that the economy is emerging from the recession. Yet 

our task is far from complete. Far too many Americans are without jobs, and unemployment could remain high for some time even if, as we anticipate, moderate economic growth continues. The Federal Reserve remains committed to its mission to 

help restore prosperity and to stimulate job creation while preserving price stability. 

If I am confirmed, I will work to the utmost of my abilities in the pursuit of those 

objectives. 

As severe as the effects of the crisis have been, however, the outcome could have 

been markedly worse without the strong actions taken by the Congress, the Treasury Department, the Federal Reserve, the Federal Deposit Insurance Corporation, 

and other authorities both here and abroad. For our part, the Federal Reserve cut 

interest rates early and aggressively, reducing our target for the Federal funds rate 

to nearly zero. We played a central role in efforts to quell the financial turmoil, for 

example, through our joint efforts with other agencies and foreign authorities to 

avert a collapse of the global banking system last fall; by ensuring financial institu-
77 

tions adequate access to short-term funding when private funding sources dried up; 

and through our leadership of the comprehensive assessment of large U.S. banks 

conducted this past spring, an exercise that significantly increased public confidence 

in the banking system. We also created targeted lending programs that have helped 

to restart the flow of credit in a number of critical markets, including the commercial paper market and the market for securities backed by loans to households and 

small businesses. Indeed, we estimate that one of the targeted programs—the Term 

Asset-Backed Securities Loan Facility—has thus far helped finance 3.3 million loans 

to households (excluding credit card accounts), more than 100 million credit card accounts, 480,000 loans to small businesses, and 100,000 loans to larger businesses. 

And our purchases of longer-term securities have provided support to private credit 

markets and helped to reduce longer-term interest rates, such as mortgage rates. 

Taken together, the Federal Reserve’s actions have contributed substantially to the 

significant improvement in financial conditions and to what now appear to be the 

beginnings of a turnaround in both the U.S. and foreign economies. 

Having acted promptly and forcefully to confront the financial crisis and its economic consequences, we are also keenly aware that, to ensure longer-term economic 

stability, we must be prepared to withdraw the extraordinary policy support in a 

smooth and timely way as markets and the economy recover. We are confident that 

we have the necessary tools to do so. However, as is always the case, even when 

the monetary policy tools employed are conventional, determining the appropriate 

time and pace for the withdrawal of stimulus will require careful analysis and judgment. My colleagues on the Federal Open Market Committee and I are committed 

to implementing our exit strategy in a manner that both supports job creation and 

fosters continued price stability. 

A financial crisis of the severity we have experienced must prompt financial institutions and regulators alike to undertake unsparing self-assessments of their past 

performance. At the Federal Reserve, we have been actively engaged in identifying 

and implementing improvements in our regulation and supervision of financial 

firms. In the realm of consumer protection, during the past 3 years, we have comprehensively overhauled regulations aimed at ensuring fair treatment of mortgage 

borrowers and credit card users, among numerous other initiatives. To promote safety and soundness, we continue to work with other domestic and foreign supervisors 

to require stronger capital, liquidity, and risk management at banking organizations, while also taking steps to ensure that compensation packages do not provide 

incentives for excessive risk-taking and an undue focus on short-term results. Drawing on our experience in leading the recent comprehensive assessment of 19 of the 

largest U.S. banks, we are expanding and improving our cross-firm, or horizontal, 

reviews of large institutions, which will afford us greater insight into industry practices and possible emerging risks. To complement on-site supervisory reviews, we 

are also creating an enhanced quantitative surveillance program that will make use 

of the skills not only of supervisors, but also of economists, specialists in financial 

markets, and other experts within the Federal Reserve. We are requiring large 

firms to provide supervisors with more detailed and timely information on risk positions, operating performance, and other key indicators, and we are strengthening 

consolidated supervision to better capture the firmwide risks faced by complex organizations. In sum, heeding the lessons of the crisis, we are committed to taking a 

more proactive and comprehensive approach to oversight to ensure that emerging 

problems are identified early and met with prompt and effective supervisory responses. 

We also have renewed and strengthened our longstanding commitment to transparency and accountability. In the making of monetary policy, the Federal Reserve 

is highly transparent, providing detailed minutes 3 weeks after each policy meeting, 

quarterly economic projections, regular testimonies to the Congress, and much other 

information. Our financial statements are public and audited by an outside accounting firm, we publish our balance sheet weekly, and we provide extensive information 

through monthly reports and on our Web site on all the temporary lending facilities 

developed during the crisis, including the collateral that we take. Further, our financial activities are subject to review by an independent inspector general. And the 

Congress, through the Government Accountability Office, can and does audit all 

parts of operations, except for monetary policy and related areas explicitly exempted 

by a 1978 provision passed by the Congress. The Congress created that exemption 

to protect monetary policy from short-term political pressures and thereby to support our ability to effectively pursue our mandated objectives of maximum employment and price stability. 

In navigating through the crisis, the Federal Reserve has been greatly aided by 

the regional structure established by the Congress when it created the Federal Reserve in 1913. The more than 270 business people, bankers, nonprofit executives, 
78 

academics, and community, agricultural, and labor leaders who serve on the boards 

of the 12 Reserve Banks and their 24 Branches provide valuable insights into current economic and financial conditions that statistics cannot. Thus, the structure of 

the Federal Reserve ensures that our policymaking is informed not just by a Washington perspective, or a Wall Street perspective, but also a Main Street perspective. 

If confirmed, I look forward to working closely with this Committee and the Congress to achieve fundamental reform of our system of financial regulation and 

stronger, more effective supervision. It would be a tragedy if, after all the hardships 

that Americans have endured during the past 2 years, our Nation failed to take the 

steps necessary to prevent a recurrence of a crisis of the magnitude we have recently confronted. And, as we move forward, we must take care that the Federal 

Reserve remains effective and independent, with the capacity to foster financial stability and to support a return to prosperity and economic opportunity in a context 

of price stability. 

Thank you again for the opportunity to appear before you today. I would be happy 

to respond to your questions. 
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM BEN S. BERNANKE 

Q.1. With respect to the failure of Lehman Brothers, you stated in 

a speech delivered on August 21 of this year that: ‘‘As the Federal 

Reserve cannot make an unsecured loan, and as the government as 

a whole lacked appropriate resolution authority or the ability to inject capital, the firm’s failure was, unfortunately, unavoidable.’’ 

However, in the case of American International Group (AIG), it 

was judged that the firm had assets that were adequate to secure 

an $85 billion line of credit. Would the Chairman provide any documents prepared by the Fed detailing or analyzing the adequacy of 

collateral in the case of Lehman Brothers and in the case of AIG? 

A.1. We are working with your staff and Committee staff to respond to requests for documents, which include information related 

to valuations of the assets that are collateral for the extensions of 

credit to AIG or related to AIG assets. 

Q.2. Former New York Insurance Commissioner Eric Dinallo has 

testified that ‘‘the crisis for AIG did not come from its State regulated insurance companies.’’ Does the Federal Reserve agree? 

A.2. Many factors contributed to the imminent liquidity crisis that 

faced AIG in the fall of 2008. Among these factors were limitations 

on the authority of the State insurance commissioners to monitor 

and regulate significant risks that were taken by AIG (the parent 

holding company) and its unregulated subsidiaries, in particular 

AIG Financial Products. These risks imperiled the entire organization and, because of the scope, size, and interconnectedness of AIG, 

the financial system. A disorderly failure of AIG clearly would have 

placed additional pressures on, and magnified the risks facing, 

AIG’s insurance subsidiaries, as well as financial markets and financial institutions generally. The resulting uncertainty could have 

led to a run by policyholders and creditors on the insurance industry as a whole. 

Q.3. Former New York Insurance Commissioner Eric Dinallo has 

testified that ‘‘AIG life insurance companies would not have been 

insolvent’’ because of losses related to AIG’s securities lending program. Does the Federal Reserve agree? 

A.3. As the functional regulator of the New York-domiciled insurance subsidiaries of AIG, former Commissioner Dinallo would have 

been in the best position to determine whether the losses incurred 

as a result of AIG’s securities lending program would have caused 

the New York-domiciled insurance subsidiaries to be insolvent 

under State insurance law and regulations. However, the securities 

lending program did create risks for the AIG organization and increased the liquidity pressures on AIG for the reasons noted above 

and in my previous testimonies. In addition, AIG’s insurance subsidiaries had substantial derivatives exposures to AIG Financial 

Products and were interconnected with the parent company and its 

unregulated affiliates in a variety of operational and other ways. 

The failure of AIG during the period of severe financial and economic stress in the autumn of 2008 would have had severe consequences on AIG’s insurance subsidiaries and the financial system. 
93 

Q.4. It is often mentioned that large systemically important firms 

should face higher capital, liquidity, or other requirements to reflect risks that they pose to the system. How exactly could the systemic risks be measured and the special requirements be tailored 

to effectively internalize systemic externalities that might arise 

from such firms? If it had the authority, would the Federal Reserve 

impose any special systemic-risk-based requirements on any institution that it oversees today? 

A.4. One of the clear lessons of the crisis is that the capital, liquidity and risk-management requirements for large, interconnected 

firms need to be strengthened both to improve the safety and 

soundness of the individual institutions and to reflect the risks that 

these organizations pose to the financial system as a whole. As I 

have noted in speeches and testimonies, we are in the process of 

strengthening the prudential standards for the large financial institutions we supervise, working in collaboration with relevant domestic and foreign supervisors, and of adjusting our supervisory practices to take greater account of macroprudential considerations. 

The best methods of measurement and implementation of standards based on the systemic importance of organizations are still 

being worked out, and will likely require that regulators collect additional data from firms, but the need for heightened standards for 

systemically important institutions remains clear. 

Q.5. In September 2008, the Treasury created a new ‘‘supplemental 

financing account,’’ which, at its inception, held $500 billion obtained by the Treasury from selling a special issue of Treasury bills 

to the public. What was the reason for this large injection of funds 

by the Treasury into the Federal Reserve? Did the Federal Reserve 

ask the Treasury to establish a new supplemental financing account? 

A.5. In September 2008, the Federal Reserve requested that the 

Treasury establish a Supplementary Financing Program (SFP) to 

help the Federal Reserve manage the balance sheet effects of the 

credit and liquidity initiatives that the Federal Reserve had undertaken to address severe strains in financial markets. Specifically, 

the SFP has facilitated the Federal Reserve’s implementation of 

monetary policy by enhancing its control over the supply of bank 

reserves. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHNSON 

FROM BEN S. BERNANKE 

Q.1. Section 109 of the recently enacted ‘‘Credit Card Accountability Responsibility and Disclosure Act of 2009’’ rightly requires 

card issuers to consider the ability of a consumer to make required 

payments on an account before opening the account or increasing 

an existing line of credit. Recently, the Fed released its proposed 

regulations to implement Section 109. Can you describe the process 

undergone by the Board in writing the proposed regulations to implement Section 109? What considerations were made when the 

Board decided to further define the ‘‘the ability of a consumer to 

make required payments’’? Can you please describe the benefits associated with consideration of income instead of consideration of 
94 

‘‘ability to pay’’? Can you also describe to the Committee the benefits associated with the consideration of a consumer’s income or assets in connection with a credit card loan and compare them to the 

potential operational and other costs associated with such a requirement, such as reduced credit availability? Do you think your 

rule for Section 109 appropriately weighs the costs and benefits of 

this change? 

A.1. Our implementation of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (‘‘CARD Act’’) followed the 

process used by the Board in other rulemakings. After reviewing 

the statutory language and legislative history of the Act, including 

Section 109, we conducted outreach meetings with both industry 

representatives and consumer groups to inform our judgments 

about the best way to implement the statute. We also drew on our 

recent experience in developing mortgage regulations that require 

creditors to consider consumers’ ability to make the scheduled loan 

payments. We are currently in the process of considering the comments received on the proposed rules in order to develop final 

rules. 

Section 109 requires card issuers to consider a consumer’s ability 

to make the required payments under the terms of the account before opening the account or increasing an existing credit limit. 

Under the Board’s proposal, a card issuer must, at a minimum, 

consider the consumer’s ability to make the required minimum 

periodic payments after reviewing the consumer’s income or assets 

as well as the consumer’s current obligations. The proposed rules 

specify, however, that card issuers may also consider other factors 

traditionally used by the industry in determining creditworthiness, 

such as the consumer’s payment history, credit report, or credit 

score. These additional factors provide creditors with useful information about a consumer’s past propensity to pay. As we develop 

the final rule, the Board will carefully consider the public comments and weigh the operational and other burdens created by the 

rule against the potential benefits to consumers. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BAYH 

FROM BEN S. BERNANKE 

Q.1. The United States Mint recently issued a report that concluded that its State Quarters Program—honoring each State with 

a quarter bearing symbols emblematic of that State on its reverse 

side—had realized $6.3 billion dollars in profit to the government 

from seigniorage. [Seigniorage occurs when coins are taken out of 

circulation by collectors and the government realizes the difference 

between the coin’s face value and the per unit production cost—a 

profit of more than 23 cents per quarter.] 

This profit was realized because the Federal Reserve provided 

adequate supplies of each new quarter to its member banks so that 

the public could easily obtain and collect those coins. Because of diminished demand during the recession, the Fed has reduced the 

volume of their purchases from the Mint. But, more importantly, 

the Fed has also refused to make coins available by design. In 

other words, they will not allow member banks to order specific 

coins (such as the Guam quarter) to make them available to their 
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customers. This combination of policies has greatly reduced the 

availability of individual coins to the collecting public. 

A new series honoring the Nation’s national parks will begin in 

2010. If the Federal Reserve continues its policies, it will reduce 

the availability of these new quarters to everyday collectors. This 

in turn will jeopardize the potential profit to the government, resulting in nowhere near the $6.3 billion generated for the Treasury 

by its predecessor, the State quarter. 

While it is the U.S. Treasury that reaps the benefits of seigniorage, not the Federal Reserve, the Fed is in a position to greatly improve the profit that can be realized by the government for the new 

national parks quarters to be released in 2010. Would the Fed consider making each of these coins available by design for an initial 

period after their release? In this way, the public would have the 

ability to obtain and collect these coins from circulation, providing 

much greater distribution than will be achieved by the Mint alone. 

A.1. The Federal Reserve has supported the previous commemorative circulating coin programs that Congress has created and will 

support future programs, including the new national parks quarters program that begins next year. The method of providing such 

support, however, requires a careful balancing of costs and benefits, with a focus on inventory management. At present, the Reserve Banks have sufficient inventories of quarters to meet banking 

industry demand for about 3 years. Because of these inventory levels, which are very high by historical standards, the Reserve Banks 

will likely not be ordering large quantities of each of the new quarter designs. That said, as was done with the Westward Journey 

nickel series, the Abraham Lincoln Bicentennial pennies, and the 

State Quarters program, the Reserve Banks will override their normal first-in first-out process, and will provide to depository institutions new-design quarters until those supplies are exhausted before 

fulfilling remaining demand using other available inventory. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ 

FROM BEN S. BERNANKE 

Q.1. The measures you have taken to put the financial system back 

on track have left a handful of banks larger than they were prior 

to the crisis, and those banks are still unwilling to lend money, and 

apparently still engaging in some of the same risky investing behavior that led to the mess we’re in. If they were too big to fail this 

time around, they will be even bigger in the event of a future calamity. The current situation only encourages reckless speculation 

by the major banks who have been assured that they will never be 

held accountable for their actions. What will you do to reduce the 

incentives of these banks to engage in reckless behavior if they 

think taxpayers will always bail them out? 

A.1. The belief by market participants that some firms may be too 

big to fail has many undesirable effects. A critical first step to 

counteracting the moral hazard problem to which you refer is to 

ensure that all systemically important institutions are subject to effective consolidated supervision. Second, a more macroprudential 

approach needs to be incorporated into the existing framework for 

supervision and regulation. A macroprudential approach would 
96 

consider the interdependencies among firms and markets that 

could threaten the financial system and the real economy. Such an 

approach would lead to strengthened capital, liquidity, and riskmanagement requirements for systemically important firms. Another important step to counteracting moral hazard is to create a 

resolution process that would allow the government to wind down 

in an orderly way a systemically important firm the disorderly failure of which would impose substantial costs. Importantly, the process should allow the government to impose ‘‘haircuts’’ on certain 

creditors and shareholders of such firms. 

Q.2. Banking supervision, consumer protection, and monetary policy are all very different jobs. There is a real danger that all of 

these important functions could detract from one another if they 

are all given to the Fed. Given the Fed’s many significant monetary 

policy responsibilities, can the Fed really take on significant responsibilities in other areas as well, such as supervision of all systemically significant institutions, even those that are not banks? Or 

more consumer protection authority than it has now? 

A.2. Many independent agencies within the U.S. government have 

two or more missions or goals. The Federal Reserve believes that 

it can effectively conduct monetary policy, macroprudential regulation, and consumer protection and, indeed, that there are valuable 

synergies among these responsibilities. 

The conduct of monetary policy and macroprudential regulation 

share important similarities. Both are addressed at conditions in 

the overall economy and financial system. Partly for this reason, 

the two endeavors overlap in terms of relevant data and analytical 

techniques, as well as the necessary staff expertise. Over the past 

2 years, supervisory expertise and information have helped the 

Federal Reserve to better understand the emerging pressures on financial firms and markets and to use monetary policy and other 

tools to respond to those pressures. Conversely, the Federal Reserve economists primarily employed to support monetary policy 

contributed importantly to the success of the Supervisory Capital 

Assessment Program. The Federal Reserve also views consumer 

protection as complementary to, rather than in conflict with, its 

other central bank responsibilities, such as prudential supervision 

and fostering financial stability. For example, sound underwriting 

benefits consumers as well as lenders, and strong consumer protections can add certainty to the markets and reduce risks to financial 

institutions. 

Q.3. The Fed has not succeeded on many consumer protection 

fronts, most notably in failing to regulate mortgages. Since 1994, 

the Fed has had the power—indeed the duty—under the Home 

Ownership and Equity Protection Act to prohibit loans that are 

‘‘unfair, deceptive,’’ or ‘‘otherwise not in the interest of the borrower.’’ This sweeping power could have curtailed many of the abusive and predatory mortgage lending tactics that triggered a massive wave of foreclosures on subprime and Alt-A mortgages, but it 

was not invoked until 2008, long after the foreclosure crisis became 

apparent. 

When did you first encourage the Board of Governors to invoke 

this law? 
97 

Has the Board of Governors conducted any assessment of its failure to invoke the law before it did? 

Why should we believe that the Fed will exhibit a better track 

record on consumer protection than it has in the past? Shouldn’t 

we give those responsibilities to an independent Consumer Financial Protection Agency that is focused on protecting American consumers as its primary mission? 

In the wake of the Fed’s failure to act in this crucial area, why 

has the Fed remained neutral when it comes to the creation of a 

Consumer Financial Protection Agency? 

A.3. In the past several years, the Board has taken several actions 

under the Home Ownership and Equity Protection Act (HOEPA) to 

respond to various consumer protection concerns that have arisen 

in the mortgage marketplace since HOEPA was enacted in 1994. 

The Federal Reserve initially published rules to implement 

HOEPA in 1995. In response to the increase in the number of 

subprime loans, the Board held a series of public hearings in 2000, 

focused on the abusive lending practices occurring at that time and 

the need for additional rules. The information surfaced at those 

hearings formed the basis for the revision to the HOEPA rules 

issued by the Board in December 2001, which strengthened consumer protection, applied HOEPA’s protections to a larger number 

of high-cost loans, and addressed practices occurring in the market 

place at that time. 

The 2001 rules also strengthened HOEPA’s prohibition on 

unaffordable lending by requiring that creditors generally document and verify consumers’ ability to repay a high-cost HOEPA 

loan. In addition, the Board used the rulemaking authority in 

HOEPA to prohibit practices that are unfair, deceptive, or associated with abusive lending. Specifically, to address concerns about 

‘‘loan flipping,’’ the Board prohibited HOEPA lenders from refinancing one high-cost loan with another high-cost loan within the 

first year unless the refinancing is in the borrower’s interest. The 

2001 final rules also addressed other issues, such as concerns about 

costly credit insurance. 

During the summer of 2006, shortly after I became Chairman, 

the Board conducted a series of public hearings to gather information about new lending practices that had emerged as the subprime 

market continued to grow. In response, in 2007, the Board and 

other Federal financial regulatory agencies published interagency 

guidance addressing certain risks and emerging issues relating to 

subprime mortgage lending practices, particularly adjustable-rate 

mortgages. The agencies recognized that issuing guidance was the 

swiftest way to respond to these concerns. Also in 2007, the Board 

held another hearing to consider ways in which the Board might 

use its HOEPA rulemaking authority to further curb abuses in the 

home mortgage market, including the subprime sector. This became the basis for the new HOEPA rules that the Board proposed 

in December 2007 and finalized in July 2008. 

While we should have taken some actions sooner, I believe that 

the Federal Reserve has shown that it can write strong, effective 

consumer regulations, as we have done for both credit cards and 

mortgages. In addition, we recently announced an examination program for nonbank subsidiaries of bank holding companies. We are 
98 

strongly committed to the importance of consumer protection in 

maintaining financial stability and restoring consumer confidence. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM BEN S. BERNANKE 

Q.1. Regulatory Approach—When people think of the Federal Reserve, they usually think of monetary policy. But under the system 

we have today, the Fed holds a central position in our bank regulatory system and is being asked by the Administration and the 

House of Representatives to hold a larger position. The Federal Reserve made a series of decisions that led directly to this crisis, including: 

• Refusing to provide basic consumer protections on mortgages; 

• Fighting regulation of the over-the-counter derivatives market; 

• Permitting regulated banks to use off-balance sheet vehicles to 

hold large amounts of assets; 

• Permitting overreliance on short-term funding market (‘‘repo’’); 

• Driving the development of risk-based capital, first Basel I 

which was too reliant on rating agencies and then Basel II, 

which the SEC applied to the investment banks and 

outsourced to the banks the evaluation of their own capital 

adequacy; and 

• Permitting the rise of unregulated highly complex 

securitization—CDOs and CDO squareds—which when combined with Basel I, were used by banks to game regulatory 

capital. 

Certainly not all of these were your decisions, but you were on 

the Board for a substantial period of the time while these decisions 

were made and in 2006, just before this very crisis, you spoke on 

record in favor of many of these regulatory approaches. Has your 

regulatory philosophy fundamentally changed because of this crisis, 

and if so, how? 

A.1. The crisis has reinforced some elements of my regulatory philosophy and changed others. I have long believed that, because of 

their access to the safety net, bank holding companies are not subject to effective market discipline and therefore need robust consolidated supervision. The financial crisis has demonstrated that, because they may be perceived as too big to fail, very large complex 

nonbank financial institutions must also be subject to robust consolidated supervision. Furthermore, the crisis has made clear to me 

that consolidated supervision needs to take into account 

macroprudential as well as microprudential considerations. Finally, 

the crisis has convinced me that we must take steps to enhance 

market discipline on large banks and nonbank financial institutions. The critical step in that regard is to create authority for resolving such firms that carries with it a credible threat that their 

creditors will bear significant losses in the event the firm becomes 

insolvent. 

Q.2. Systemic Risk—Proprietary Trading—Even as this economic 

crisis only begins to abate, I am particularly concerned that certain 

large banks engage in a substantial amount of proprietary trading 
99 

even though they are guaranteed by the Federal safety net. Even 

though banks are making billions trading on own accounts, it only 

takes a day or two of large losses to cause a failure. Moreover, I 

continue to hear about serious conflicts of interest between banks 

as client-oriented broker-dealers and hedge fund-like principal investors. 

I am pleased that Chairman Dodd’s discussion draft includes a 

vigorous GAO study on this issue, but we need to get ahead of the 

curve. What is to prevent another Long-Term Capital Management 

or Barings, where a large bank’s trading positions get it jammed 

by an unexpected turn in the market? 

A.2. ‘‘Proprietary trading’’ or a banking organization’s active trading and position taking in financial instruments for its own account 

occurs in several forms. In the normal course of making markets 

to meet customers’ needs for financial assets and liabilities, banking organizations must maintain inventories of securities that may 

or may not be hedged. As a result, a certain amount of inventory 

position taking is inherent in the investment banking and marketmaking business. Banks may also take positions above the levels 

required for market-making activity with the hope of generating 

additional income. When such positions occur within the same accounts used for customer accommodation, it can be difficult to segment the positions taken for market-making purposes from those 

taken for other purposes. More explicitly, proprietary trading can 

also occur when banks employ multiple desks of traders devoted 

solely to position taking for the bank’s own account. Both types of 

trading operations, market making and proprietary position taking 

are subject to conflicts of interest requirements dictated by regulation and supervisory guidance, as well as by industry adopted 

sound practices. 

Customer accommodation and proprietary trading operations at 

banking organizations are also subject to requirements on the adequacy of their internal risk management processes including the 

need for board of directors and senior management oversight of established risk tolerances, limits on risk taking, risk measurement 

systems and various types of internal controls. Banks are expected 

to employ multiple measures and limits on the risk exposures of 

their trading operations and are encouraged to avoid over-reliance 

on any single measure or limit. Minimum capital requirements and 

other regulatory constraints are also important safeguards in controlling the potential impacts of losses in proprietary risk taking, 

as is the market discipline that arises from appropriate disclosure 

of the scale of proprietary trading at banking organizations. 

The recent crisis has surfaced a number of areas for improvement, and both international and U.S. supervisors are moving forward to address these issues. For example, the Basel Committee on 

Bank Supervision (BCBS) has released international standards for 

stress testing all of a bank’s material risk exposures. The BCBS 

has also substantively revised the risk management and capital 

standards applied to banks’ trading activities and will shortly propose new global standards for bank liquidity management that 

should significantly affect the scope and size of banks’ proprietary 

risk taking. 
100 

Q.3. Consumer Protection: Interest Rates and State Usury Laws— 

One of the defining features of our financial system in recent decades has been the spread of financial products that carry extraordinarily high interest rates. 

I grew up in a working class family—my dad was a millwright. 

My parents and our neighbors worked hard to send their kids to 

good schools and to own their own homes, and it angers me when 

I see schemes and scams that seem almost exclusively geared towards unfairly stripping money out of the pockets of working families. When I was Speaker in the Oregon legislature, we capped the 

interest that payday lenders could charge—but we couldn’t act in 

other areas because we were told its Federal regulation that we 

couldn’t touch. 

It’s widely known that just in the payday lending industry, 75 

percent of customers are repeat customers—they come in again and 

again because they are trapped in a cycle of high-interest debt that 

they simply cannot escape from. I am hopeful that we will see the 

creation of a strong Consumer Financial Protection Agency to police some of these products, but none of the proposals give the 

agency the power to set a national usury rate, nor does there seem 

to be much interest in giving States the power to set the usury rate 

for lending from national banks. 

Would you agree that interest rates on some financial products, 

such as payday loans and even some credit cards, are simply too 

high? Why not let States determine the highest rate of interest for 

consumers in their State, and if the citizens of a State wish to 

adopt policies that restrict their own credit, let that be the decision 

of that State? 

A.3. The maximum interest rate that a national bank can charge 

is generally the highest rate allowed by the laws of the State where 

the bank is located. This is dictated by the National Bank Act, and 

the Supreme Court has held that a national bank may charge the 

rate allowed by its home State to customers in other States. However, if the Congress determined that national banks should follow 

the laws of each State when doing business in that State, it could 

amend the National Bank Act. 

On the one hand, States often are good laboratories for new consumer protections to address troublesome products and practices. 

In fact, the Federal Reserve looked at State predatory lending laws 

in developing our HOEPA rules. States can also address concerns 

that are regional in nature. On the other hand, there is some benefit and efficiency to a national standard, as long as that standard 

is strong enough to adequately protect consumers. 

With respect to payday loans, they do appear to be a very expensive form of credit, and some States have legislated in this area by 

adopting restrictions for such loans. The Federal Reserve encourages mainstream banks to reach out to unbanked consumers, especially in low- and moderate-income neighborhoods, to offer them 

more cost-effective products; and we support financial literacy programs to help consumers make better choices. 

Q.4. Trade and Monetary Policy—For a long time, I’ve been concerned about the regulatory arbitrage inherent in international 

trade between countries with sound labor and environmental laws 
101 

and those without, and how that affects our employment situation. 

More recently, I’ve also become concerned about how international 

trade imbalances affect our monetary policy. 

Failures in consumer protection turned the housing bubble into 

a foreclosure and financial crisis, but as you have noted, the existence of the housing bubble itself comes from the global savings 

glut, mostly emanating from trade imbalances coming from Asia. 

The challenge is that traditional monetary tools might not even address problems emanating from trade imbalances. 

Are you concerned about the monetary policy implications of 

global trade imbalances, and if so, what monetary tools do you 

have to deal with the imbalance going forward? Do you also think 

that we should reduce regulatory arbitrage in trade by requiring 

our trade agreements include stronger provisions to raise global 

labor and environmental rules? 

A.4. Policymakers should be concerned about the potential implications of global imbalances for the sustainability of economic growth 

as well as the stability of the financial system. Countries with 

large current account surpluses should reduce the gap between saving and investment by strengthening domestic demand and reducing their dependence on external demand. The United States, 

which runs sizeable current account deficits, should increase national savings, importantly by committing to reduce Federal budget 

deficits over time and establishing a sustainable trajectory for the 

public debt. 

The goal of monetary policy in the United States, as mandated 

by Congress, is to pursue maximum sustainable employment and 

stable prices. Global imbalances affect the formation of monetary 

policy insofar as they have implications for financial markets, economic activity, employment, and inflation. However, monetary policy, by itself, is not well suited to address external imbalances. 

Rather, the goal of the Federal Reserve, as given to us by Congress, 

is to pursue maximum employment and stable prices, not to 

achieve a particular level of the trade balance. Our role is to ensure 

the strongest possible macroeconomic environment, by pursuing the 

two legs of our mandate, and to work with fiscal and other policymakers to create conditions that will foster a sustainable external 

position. Toward this end, the Federal Reserve participates actively 

in the G20 and other international organizations in a cooperative 

effort to devise strategies for dealing with these issues. 

Whether labor and environmental standards should be required 

in trade agreements is a matter of public policy to be determined 

by the Executive and Legislative branches. Clearly, policymakers 

should resist both unfair trade practices and protectionist measures. We must also find ways to assuage the pain of dislocation 

that trade may bring to some households, firms, and communities. 

But at the same time, we must not lose sight of the fact that our 

participation in a free and open international trading system allows us to enjoy both a more productive economy and higher living 

standards. 

Q.5. Federal Reserve Transparency—Many of my constituents are 

deeply angry with the way this financial crisis has unfolded. $30 

billion in direct asset purchases were provided so JPMorgan could 
102 

acquire Bear Stearns. $300 billion in loan guarantees were provided to Citibank, and of course $80 billion in direct lending was 

provided to rescue AIG. And that is just from the Fed alone—not 

even counting TARP. All the while, banks have reduced lending 

and foreclosed on peoples’ homes. 

While the Federal Reserve’s actions kept the banking system 

from collapse, many people are deeply concerned that the Fed could 

deploy this amount money without any checks and balances and 

without any oversight. I recognize that GAO review of monetary 

policy would be unwise, but when the Fed is engaged in propping 

up failed institutions, that is not monetary policy: that’s a bailout 

and should be subject to robust audit. 

For a democratic citizenry to have trust in its government, transparency is absolutely essential. You have stated your willingness to 

work with us, and I appreciate the receptivity that you have shown 

to my staff as we have worked on these issues. Are you ready to 

accept a robust audit of the Fed’s actions relating to emergency 

bailouts, even as we acknowledge that legitimate monetary policy 

should remain independent? 

A.5. I agree that, in a democracy, any significant degree of independence by a government agency must be accompanied by substantial accountability and transparency. Federal Reserve policymakers are highly accountable and answerable to the government 

of the United States and to the American people. As you know, the 

financial statements of the Federal Reserve System (including the 

Reserve Banks) are audited on an annual basis by an independent 

public accounting firm and these audited statements are provided 

to the Congress and made publicly available. In addition, the Federal Reserve provides the Congress and the public substantial information concerning our actions and operations, including the actions we have taken during the crisis to protect the stability of the 

financial system and promote the flow of credit. For example, Federal Reserve officials regularly testify before Congress and we publish a detailed balance sheet on a weekly basis. We also provide 

Congress and the public detailed monthly reports on our liquidity 

programs that detail, among other things, the number and distribution of borrowers under each facility; the value, type, and 

quality of the collateral that secures advances under each facility, 

including the loans to prevent the disorderly failure of Bear 

Stearns and AIG; and trends in borrowing under the facilities. 

Moreover, the GAO already has full authority to audit the credit 

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

Reserve Act. These facilities include the loans provided to, or created for, AIG, Bear Stearns, and Citigroup under section 13(3). 

We believe permitting the GAO to review the operational integrity of the broadly available credit facilities established under section 13(3) could provide Congress and the public additional comfort 

regarding the manner in which the Federal Reserve is exercising 

its responsibilities and protecting the taxpayer in its operation of 

these facilities without endangering our ability to independently 

determine and implement monetary policy. A review of the operational integrity of these facilities could be structured so as not to 

involve a review of the monetary policy aspects of the facility, such 
103 

as the decision to begin or end the facility or the choices made regarding, the structure, scope, design, or terms of the facility. We 

remain willing to work with you and other members of Congress 

to implement and perfect such an approach. As you recognize, in 

doing so it is vitally important that the independence of monetary 

policy be preserved. Actions that are viewed as weakening monetary policy independence likely would increase inflation fears and 

market interest rates and, ultimately, damage economic stability 

and job creation. 

Q.6. Federal Reserve Governance—Although Chairman Dodd’s legislations strips the Federal Reserve System of its role as a banking 

regulator, the Administration and the House have increased the responsibility of the Fed for oversight of bank holding companies and 

other systemically significant firms. While the Board of Governors 

in Washington is ultimately responsible for this supervision, the 

day-to-day supervision is conducted by the Reserve Banks under 

the direction of each Reserve Bank president. Although the selection of each Reserve Bank’s president is overseen by the Board of 

Governors, the boards of directors of the Reserve Banks, which are 

dominated by the member banks, play critical roles and effectively 

have veto power to prevent a regulator they see as too tough. If the 

Federal Reserve does maintain its regulatory authority, do you 

think it is time to change Reserve Bank governance or regulatory 

oversight structure so that the bankers do not have any say over 

who their primary regulator is? 

A.6. Under the policies of the Board and the Reserve Banks, the 

boards of directors of the Reserve Banks play no role in the supervision or regulation of banking organizations by the Federal Reserve and do not have a veto over any supervisory or regulatory 

policy. Supervisory and regulatory policy, directions, and decisions 

are vested in the Board of Governors of the Federal Reserve System, all the members of which are appointed by the President of 

the United States and confirmed by the U.S. Senate. The Board of 

Governors has and retains full and unfettered authority to remove 

any officer of a Reserve Bank, including the president of a Reserve 

Bank and any examiner or supervisor employed by the Reserve 

Bank, that does not abide by and fully implement the policies, directions, or decisions of the Board of Governors regarding supervision and regulation of banking organizations. 

The structure of the Federal Reserve, which the Congress enacted, has worked well for nearly 100 years and has added great 

strength to the Federal Reserve System. It allows the Federal Reserve Board to meet its responsibilities for supervising and regulating a diverse group of banking organizations throughout the 

United States. At the same time, it allows the Federal Reserve System to benefit from contacts in numerous local communities 

throughout the United States in collecting information related to 

monetary policy. This access to a broad array of community and 

business contacts throughout the United States adds real ‘‘Main 

Street’’ anecdotes and information to the economic statistics collected nationally. 

Q.7. Mortgage-Backed Securities Purchases—One of the more creative applications of monetary policy in this crisis is the Federal 
104 

Reserve’s purchases of agency mortgage-backed securities. By directly purchasing mortgage backed securities, the Fed has supported the availability of credit in the housing market. Only a few 

weeks ago, the Fed’s purchases of these agency MBS topped $1 trillion, and the program was announced to remain in effect through 

March. Moreover, TALF, which supports the private label 

securitization markets, has been extended through June of 2010. 

When will the housing and other securitization markets be 

strong enough to operate on their own? What risk is the Fed taking 

on in these purchases? Is this an appropriate type of monetary policy action over the long term, one that you expect to use again? 

A.7. Financial market functioning has, in general, improved substantially since the spring of this year. For example, spreads between yields on private debt securities and Treasury debt have returned toward more normal levels at both short and long maturities even as corporate bond issuance this year has exceeded last 

year’s issuance. In private-label securitization markets, issuance of 

shorter-term asset-backed securities backed by consumer and small 

business loans has increased: Some of those issues were supported 

by TALF; others were not. Recently, the TALF financed the first 

new commercial mortgage-backed security (CMBS) since 2008; 

other CMBS have since come to market without TALF support. 

While usage of the TALF has continued to expand at a modest 

rate, usage of the Federal Reserve’s other credit and liquidity facilities has declined rapidly as market functioning improved. 

In light of the ongoing improvement in financial market functioning, usage of the Federal Reserve’s liquidity facilities has declined dramatically, and a number of these facilities are scheduled 

to close early next year. We also anticipate ending the current program of MBS purchases at the end of the first quarter. The Board 

and the FOMC will of course continue to evaluate the evolving economic outlook and conditions in financial markets and are prepared to extend some or all of its programs if that proves necessary. 

With respect to risks the Federal Reserve has taken on, we have, 

as noted in the question, purchased agency-guaranteed MBS. Because of the agency guarantee, the Federal Reserve has no exposure to credit losses stemming from defaults on the underlying 

mortgages. However, the fair market value of MBS can and does 

vary in response to movements in longer-term interest rates. 

Finally, the Federal Reserve believes that the TALF, other liquidity and credit facilities, and large-scale asset purchases were 

appropriate steps in light of the severe financial dysfunction and 

contracting economic activity, as well as the fact that the Federal 

Reserve had taken the Federal funds rate essentially as low as possible. In general, these steps would be neither necessary nor appropriate in more normal times, and I certainly hope conditions will 

not warrant using them again. 
105 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM BEN S. BERNANKE 

Q.1. Please provide: 

a. Unreleased transcripts of all FOMC meetings you participated 

in as a Governor or Chairman. 

b. Unreleased transcripts of all Board of Governors meetings you 

participated in as a Governor or Chairman. 

c. Transcripts and minutes of meetings of the board of the Federal Reserve Bank of New York during your tenure as Chairman of the Board of Governors. 

d. Details, including any unreleased administrative notices, on 

any exemptions granted or denied to Federal Reserve Act sections 23(a) and 23(b) during your tenure as Chairman. 

e. Details of all discount window transactions during your tenure 

as Chairman, including the date, amount, identity of the borrower, details of any collateral posted, explanation of the valuation of any collateral posted, any analysis of the health of the 

borrower at the time of the transaction, and any legal opinions 

regarding the transaction. 

f. Details of all transactions at facilities created under section 

13(3) of the Federal Reserve Act during your tenure as Chairman, including the date, amount, identity of the borrower, details of any collateral posted, explanation of the valuation of 

any collateral posted, any analysis of the health of the borrower at the time of the transaction, and any legal opinions regarding the transaction. 

g. Copies of any swap or other agreements with foreign central 

banks, legal opinions related to those agreements, and any 

analysis of the agreements or the need for the agreements. 

h. Any economic analysis or policy materials regarding the need 

for or effectiveness of any Federal Reserve facilities created 

under Federal Reserve Act section 13(3). 

i. Any economic analysis or policy materials regarding the need 

for or effectiveness of unconventional monetary policy facilities 

or actions taken during your tenure as Chairman. 

j. Any transcripts, minutes, details, legal opinions, economic 

analysis, phone call logs, policy materials, or any other relevant information from the FOMC, the Board of Governors, 

the Federal Reserve Bank of New York, or other relevant body 

not provided under the above requests regarding the use of 

Federal Reserve Act section 13(3) or actions and decisions regarding AIG, Bank of America, Citigroup, Bear Stearns, Lehman Brothers, General Motors, Chrysler, CIT, or GMAC. 

A.1. Without addressing every specific item, I believe that the release of much of the information requested would inhibit the policymaking process or reduce the effectiveness of policy and thus would 

not be in the public interest. 

Making public the information you request regarding policy deliberations (including meeting transcripts and related documents) 

could stifle the Federal Reserve’s policy discussions, limiting the 

ability of participants to engage in the candid and free exchange 
106 

of views about alternative approaches that is necessary for effective 

policy. Although transcripts are not released for 5 years (and I believe that we are the only major central bank that does make transcripts public), we provide extensive information about our deliberations, including through Committee statements, minutes, quarterly economic projections, testimonies, speeches, the semi-annual 

Monetary Policy Report to the Congress, and other vehicles. 

The detailed information you have requested regarding participation in Federal Reserve’s broad-based lending programs would significantly undermine the usefulness of such programs. The critical 

purpose of these programs is to provide institutions that have temporary liquidity needs with a means to meet those needs by coming 

to the Federal Reserve. Releasing the names of institutions that 

borrow would stigmatize such borrowing, making firms less willing 

to come to the Federal Reserve and so make it more difficult for 

the Federal Reserve to respond to financial market strains. Moreover the Federal Reserve has been highly responsible in its use of 

these programs. For example, our discount window loans are fully 

collateralized, and we have never lost a penny on such operations. 

Likewise, the loans made under section 13(3) have been fully secured. We provide extensive information regarding the number of 

institutions to which we are lending under each of our credit programs, and the type of collateral we have accepted, on our Web 

site, as well as information on exemptions granted under sections 

23A and 23B of the Federal Reserve Act. 

Finally, the release of staff analyses could have adverse effects 

on Federal Reserve policy. In order for the Federal Reserve staff to 

be able to provide its best policy analysis and advice to policymakers, it is necessary for some staff analysis to be kept confidential for a period of time. Release of such information could expose 

Federal Reserve staff to political pressure. Such pressure could 

lead the staff to omit more sensitive material from its policy analyses and more generally might cause the staff to skew its analyses 

and judgments. That outcome could have serious adverse effects on 

Federal Reserve policy decisions, to the detriment of the performance of our economy. 

The Federal Reserve is very transparent. On a weekly, monthly, 

quarterly, semi-annual, and annual basis, the Federal Reserve provides to the public in-depth and detailed information regarding its 

operations, activities, and policy decisions. These materials include: 

• Weekly Balance Sheets—H.4.1 Release (See December 10, 

2009, Release, attached as Ex. 1, tab A) (also available on our 

public Web site: http://www.federalreserve.gov/ 

monetarypolicy/bstlfedsbalancesheet.htm); 

• Monthly Transparency Reports (See November 2009 Report, 

attached as Ex. 1, tab B) (also available on our public Web site: 

http://www.federalreserve.gov/monetarypolicy/files/ 

monthlyclbsreport200911.pdf); 

• Policy statements released immediately following each FOMC 

Meeting (See November 4, 2009, Release, attached as Ex. 1, 

tab C) (also available on our public Web site: http:// 

www.federalreserve.gov/newsevents/press/monetary/ 

20091104a.htm); 
107 

• Minutes of each FOMC Meeting (See November 3–4, 2009 Minutes, attached as Ex. 1, tab D) (also available on our public 

Web site: http://www.federalreserve.gov/monetarypolicy/files/ 

fomcminutes20091104.pdf); 

• Semiannual Monetary Policy Report and Testimony (See July 

2009 Report, attached as Ex. 1, tab E) (also available on our 

public Web site: http://www.federalreserve.gov/ 

monetarypolicy/files/20090721lmprfullreport.pdf); 

• Annual audit of the Federal Reserve’s financial statement provided by independent accounting firm (See Audit, published in 

Annual Report and attached separately as Ex. 1, tab F) (also 

available on our public Web site: http:// 

www.federalreserve.gov/boarddocs/rptcongress/annual08/pdf/ 

audits.pdf); and 

• Voluminous information on policy actions available on our public Web site: http://www.federalreserve.gov/monetarypolicy/ 

bst.htm. 

In addition, the Federal Reserve has submitted one statement for 

the record and testified before Congress 43 times this calendar 

year, including: 

• Thirteen appearances by the Chairman; 

• Three appearances by the Vice Chairman; 

• Nine appearances by the Governors; 

• Twelve appearances by the Staff of the Board of Governors; 

and 

• Six appearances by the Presidents, Vice Presidents, and Staff 

of the Reserve Banks. 

Further, the Federal Reserve has already been audited numerous 

times in 2009, including: 

• The Annual Audit (as mentioned); and 

• GAO Audits of nonmonetary policy, which total 33 to date—24 

completed and 9 in process (reports of the audits are available 

on GAO’s Web site: http://www.gao.gov/docsearch/ 

repandtest.html). 

Q.2. Treasury published the names of banks that received TARP 

funds without causing a panic. Why would disclosing the names of 

companies that borrow at the discount window or other Fed facilities be different, especially if only released after a time delay? 

A.2. It is essential that participants in our liquidity programs remain confident that their usage of these programs will be held in 

confidence. If borrowers instead fear that market participants and 

others may learn about their usage of these programs, then they 

will be less inclined to borrow, reducing the effectiveness of the 

programs for countering pressures in financial markets. This is not 

just a theoretical possibility. When the strains in financial markets 

erupted in August 2007, banks were quite reluctant to utilize the 

primary credit program out of concern that their borrowing would 

be discovered by market participants and interpreted as a sign of 

financial weakness. Indeed, that stigma significantly reduced the 

effectiveness of the primary credit program, and prompted the Fed-
108 

eral Reserve to establish the Term Auction Facility and other programs to more directly address liquidity pressures. 

Q.3. What was the involvement of the Board of Governors in each 

transaction by the New York Fed under Federal Reserve Act section 13(3)? Did the Board materially alter the terms of any such 

transaction? Did the Board approve each transaction before the 

New York Fed began negotiations? Please provide other relevant 

information and documentation. 

A.3. As required by section 13(3) of the Federal Reserve Act, the 

Board of Governors considered and approved, by an affirmative 

vote of not less than the required number of members, each credit 

facility established under the authority of that provision, after 

making the required determination that unusual and exigent circumstances existed. Prior to Board of Governors approval of these 

facilities, Board of Governors and New York Federal Reserve Bank 

staff worked together to structure the proposal that was presented 

to the Board of Governors for approval. As authorized by section 

13(3), the Board of Governors imposed specific limits and conditions on these credit facilities as appropriate to the particular facility. Detailed information concerning each of the credit facilities authorized by the Board under section 13(3) is available on the 

Board’s public Web site. 

Q.4. Did anyone, including the White House or Treasury, request 

commitments from you surrounding your renomination? Did you 

make any commitments regarding your renomination? 

A.4. No one has requested any commitments from me in connection 

with my renomination, nor have I made any commitments other 

than what I said in my statement before the Senate Banking Committee that, if reappointed, I will work to the utmost of my abilities 

in the pursuit of the monetary policy objectives established by Congress to promote price stability and maximum employment. 

Q.5. We saw the crowding out of the private mortgage market 

caused by Freddie and Fannie’s overwhelming control of mortgages 

during 2002 to 2006 period. Do you think there is a danger to allowing an extended public-controlled mortgage market? And what 

steps is the Fed taking to reestablish a private mortgage market? 

A.5. The U.S. mortgage market has had extensive government involvement for many decades, including Fannie Mae, Freddie Mac, 

the Federal Housing Administration, Ginnie Mae, and the Federal 

Home Loan Banks. That involvement has had important benefits, 

including the development of the mortgage securitization market. 

However, as the placing of Fannie Mae and Freddie Mac into conservatorship shows, the under-capitalization of the GSEs together 

with the implicit government guarantee has also imposed heavy 

costs on the taxpayer. The Congress will need to address the appropriate role of the GSEs in the future of the mortgage market. 

The Federal Reserve’s agency debt and mortgage-backed securities purchase programs stabilized the functioning of private secondary mortgage markets during the height of the financial turmoil. These actions also provided significant benefits to primary 

mortgage markets. 
109 

Q.6. Time and energy in macroeconomic analysis is spent attempting to measure business and consumer confidence. Confidence 

measures are part of macroeconomic forecasting and directly impact monetary policy decisions. Likewise, certain market movements reflect investor confidence or lack of confidence. Gold is at 

an all-time high because investors have lost confidence in policymakers’ handling of fiat currencies. How is the Fed incorporating 

this market information into its analytical framework? Does the 

lack of confidence in fiat currencies have the potential to impact 

monetary policy? 

A.6. Gold is used for many purposes, including as a reserve asset, 

as an investment, and for use in electronics, automobiles, and jewelry. Thus, fluctuations in the price of gold can reflect changes in 

demand associated with any of these uses, as well as changes in 

supply. In monitoring the price of gold, the Federal Reserve must 

attempt to interpret which of these factors is responsible for its 

fluctuations at any point in time. One of the ways we do this is by 

consulting other indicators of market sentiment. A number of 

measures of expected future inflation in the United States, including measures taken from inflation-protected bonds and surveys of 

consumers and professional forecasters, have been well contained. 

Accordingly, increases in the price of gold do not appear to reflect 

increases in the expected future of U.S. inflation. 

Q.7. Paul Krugman recently wrote about the problem policymakers 

will face in the future because of the public’s lack of trust. The public backlash regarding what it sees as unwarranted bailouts of 

banks is well-known. What is the Fed doing to restore public confidence and what are the potential negative implications of this 

lack of trust on the Fed’s ability to conduct monetary policy? 

A.7. The public’s frustration with the support provided banks and 

certain other financial institutions is understandable. Unfortunately, withholding the support would have resulted in a substantially more severe economic recession with significantly greater job 

losses. My colleagues and I on the Federal Reserve Board are taking every opportunity, including through speeches and Congressional testimony, to explain to the public the reasons for the Federal Reserve’s actions. Moreover, we fully support the efforts under 

way—in particular, strengthening supervision of systemically critical institutions and developing a regime to prevent the disorderly 

failure of systemically important nonbank financial institutions 

while imposing losses on the shareholders and creditors of such 

firms—to reduce the odds that similar support will be needed in 

the future. 

Most critical for the Federal Reserve’s ability to conduct monetary policy is the public’s confidence in our commitment to achieving our dual mandate of maximum employment and price stability. 

The public’s confidence in our commitment should be bolstered by 

the Federal Reserve’s swift and forceful monetary policy response 

to the financial crisis and resulting recession and by our careful development of tools that will facilitate the firming of monetary policy 

at the appropriate time even with a large Federal Reserve balance 

sheet. 
110 

Q.8. What are the limits on the ability of the Fed to engage in 

quantitative easing? 

A.8. A central bank engages in quantitative easing when it purchases large quantities of securities, paying for them with newly 

created bank reserve deposits, to increase the supply of bank reserves well beyond the level necessary to drive very short-term 

interbank interest rates to zero. The Federal Reserve’s large-scale 

asset purchases have been intended primarily to improve conditions in private credit markets, such as mortgage markets; the increase in the quantity of reserves is largely a byproduct of these 

actions. In any case, while large-scale asset purchases can help 

support financial market functioning and the availability of credit, 

and thus economic recovery, excessive expansion of bank reserves 

could result in rising inflation pressures. Congress has given the 

Federal Reserve a dual mandate to promote maximum employment 

and stable prices. That mandate appropriately gives the Federal 

Reserve flexibility to engage in quantitative easing to combat high 

unemployment and avoid deflation while requiring that it avoid 

quantitative easing that would be so large or prolonged that it 

could cause persistent inflation pressures. 

Q.9. In 2002–2005 period, we learned that there is a cost to keeping interest rates too low for too long. And, we learned it is much 

more difficult to tighten policy/raise interest rates after a period of 

low rates for a long time. Now, you have taken rates to unprecedented low levels and have also intervened in the mortgage market 

to produce historic low mortgage rates. If the U.S. economy bounces 

back more strongly than currently anticipated, isn’t the Fed going 

to have a very tough time raising interest rates without once again 

impacting asset prices, especially the housing market? 

A.9. Federal Reserve policymakers consistently have said, in the 

statements that the Federal Open Market Committee releases immediately after each of its meetings and in their speeches, that the 

Federal Reserve will evaluate its target for the Federal funds rate 

and its securities purchases in light of the evolving economic outlook and conditions in financial markets. In that regard, we announced that we plan to end our purchases of mortgage-backed securities at the end of the first quarter of 2010; we also announced—and have implemented—a gradual reduction in the pace 

of our purchases of such securities. More recently, we made clear 

that the low target for the Federal funds rate is conditional on low 

rates of resource utilization, subdued inflation trends, and stable 

inflation expectations. As the economy continues to recover, it will 

eventually become appropriate to raise our target for the Federal 

funds rate and perhaps take other steps to reduce monetary policy 

accommodation. Our continuing communication about monetary 

policy should ensure that market participants and others are not 

greatly surprised by our actions and thus help avoid sharp adjustments in asset prices. 

Q.10. What is the Fed’s current thinking about using asset price 

levels in monetary policy analysis? Does the Fed need to anticipate 

asset bubbles? How can the Fed incorporate asset prices into their 

analysis? 
111 

A.10. Asset prices play an important role in the analysis that underpins the conduct of monetary policy by the Federal Reserve. We 

carefully monitor a wide range of asset prices (as well as other aspects of financial market conditions) and assess their implications 

for the goal variables that the Congress has given us, namely inflation and employment. There is a widely held consensus that central 

banks should counteract the effects of asset prices on the ultimate 

goal variables in this manner. 

What is less clear is whether the Federal Reserve should attempt 

to use monetary policy to ‘‘lean against’’ bubbles in asset prices by 

tightening monetary policy more than would be indicated by the 

medium-term outlook for real activity and inflation alone. To be 

sure, the experience of the past 2 years provides a vivid illustration 

of the economic devastation that can be wrought by an asset price 

bubble first building up and then bursting. However, three important challenges would have to be surmounted before tighter monetary policy could be deemed an effective response to bubbles: First, 

we would have to be confident in our ability to detect bubbles at 

an early stage in their development, given substantial lags in the 

effects of monetary policy on real activity and inflation, and the 

general need for policy to ease in response to the economic weakness that follows a bubble’s collapse. Second, we would have to be 

confident that the steps we took to restrain a bubble in one sector 

would not cause so much harm in other sectors as to leave the 

economy worse off, on net, than if we had not acted. Finally, we 

would have to be confident that an adjustment in the stance of 

monetary policy would be effective in restraining the bubble itself. 

It is not clear that these conditions can all be met. And even if they 

could, we would still have to determine that some alternative to 

tighter monetary policy would not be a better way of responding to 

the problem. 

At this stage, it seems to me that the exercise of regulatory and 

supervisory policy is likely to be a more effective approach to addressing issues posed by possible bubbles. Regulators have an ongoing responsibility to ensure the safety and soundness of the institutions under their care; and this responsibility implies a need to 

monitor closely the actions of the firm that might cause it to be exposed to risks of all types, including those actions that might contribute to the development of a bubble as well as the possible effects on the firm of the bursting of an asset price bubble. On balance, therefore, I see a comprehensive and aggressive 

macroprudential regulatory framework as likely to be the more 

promising means of preventing and restraining asset-price bubbles. 

All that said, we are giving the issue fresh consideration and attempting to incorporate into our analysis the lessons of the last 2 

years in this regard. 

Q.11. The Fed appears to have coordinated some of its actions in 

the past year or so with other policymakers globally. Does the Fed 

have an obligation to disclose any of these agreements or coordinated efforts? When the Fed engages in agreements with foreign 

policymakers, it has the potential to abrogate its authority. What 

procedures are in place to make sure this doesn’t happen? What 

checks and balances are in place? 
112 

A.11. In the past year or so, the Federal Reserve has implemented 

and disclosed policy actions that have been coordinated with actions taken by policymakers from other countries. These actions include both the use of central bank liquidity swaps, which have been 

in place since December 2007, and a reduction in the target for the 

Federal funds rate in October 2008, which occurred in conjunction 

with similar rate actions by other central banks. The Federal Reserve announced these actions in press releases and maintains detailed information with respect to them on our Web site. 

The authority for these operations is well established. Policy rate 

operations clearly fall within the purview of the monetary policy 

authority of the Federal Reserve, and the Federal Reserve Act and 

longstanding historical precedent support the authority of the Federal Reserve to engage in swap operations with foreign central 

banks. We are committed to being as transparent as possible about 

our policies and operations without undermining our ability to effectively fulfill our monetary policy and other responsibilities. The 

Federal Reserve regularly reports to the Congress and provides 

both the Congress and the public with a full range of detailed information concerning its policy actions, operations, and financial accounts, including arrangements with foreign central banks such as 

the liquidity swaps. The Chairman of the Federal Reserve Board 

testifies and provides a report to the Congress semiannually on the 

state of the economy and on the Federal Reserve’s actions to carry 

out the monetary policy objectives that the Congress has established, and Federal Reserve officials frequently testify before the 

Congress on all aspects of the Federal Reserve’s responsibilities 

and operations, including economic and financial conditions and 

monetary policy. 

Q.12. China is playing a larger and larger role in the growth trajectory of the global economy. And, China is one of the largest U.S. 

creditors. Yet, the macroeconomic data from China is notoriously 

untrustworthy. How is the Fed conducting its analysis of the Chinese macroeconomic outlook without access to good data? 

A.12. While macroeconomic data from China vary in quality, their 

reliability appears to be improving, and they now provide a reasonable picture of what is going on. In addition to data from China, 

one can also examine Chinese international trade by looking at the 

statistics produced by its major trading partners, including the 

United States. At the Federal Reserve, we monitor a wide range of 

Chinese and international data in analyzing Chinese economic and 

policy developments. We also closely follow studies on China performed by independent experts, and keep regular contact with 

these experts, Chinese academics and authorities, and other U.S. 

agencies. Through all these means, we are able to put together a 

satisfactory assessment of the performance of the Chinese economy, 

allowing us to make an informed projection of the country’s economic outlook and its implications for the U.S. economy. 

Q.13. There are a number of macro trends at work that do not 

seem sustainable—(1) the substantial accumulation of foreign exchange reserves by surplus/creditor nations, (2) the escalation of 

public debt levels in many of the developed market economies, and 

(3) excess and deficient savings ratios. These trends do not seem 
113 

likely to reverse on their own. Rather, they require tough decisions 

and compromise on the part of governments around the world. 

What is the role of the Fed in this rebalancing process? 

A.13. To achieve more balanced and sustainable economic growth 

and to reduce the risks of financial instability, economies throughout the world must act to contain and reduce global imbalances. In 

current account surplus countries, including most Asian economies, 

authorities must act to narrow the gap between saving and investment and to raise domestic demand, especially consumption. As a 

country with a current account deficit, the United States must increase its national saving rate by encouraging private saving and, 

more importantly, by establishing a sustainable fiscal trajectory, 

anchored by a clear commitment to substantially reduce Federal 

deficits over time. By the same token, other countries experiencing 

large increases in public debt must implement credible fiscal consolidation policies. 

Monetary policy, by itself, is not well suited to address external 

imbalances. Rather, the goal of the Federal Reserve, as given to us 

by Congress, is to pursue maximum employment and stable prices, 

not to achieve a particular level of the trade balance. Our role is 

to ensure the strongest possible macroeconomic environment, by 

pursuing the two legs of our mandate, and to work with fiscal and 

other policymakers to create conditions that will foster a sustainable external position. Toward this end, the Federal Reserve participates actively in the G20 and other international organizations 

in a cooperative effort to devise strategies for dealing with these 

issues. 

Q.14. Please explain the legality of each version of the AIG bailout/ 

loans. How were each of the loans to AIG collateralized? 

A.14. Each of the facilities established by the Federal Reserve was 

authorized and established under section 13(3) of the Federal Reserve Act (12 U.S.C. §343). Section 13(3) permits the Board, in unusual and exigent circumstances, to authorize a Federal Reserve 

Bank to provide a loan to any individual, partnership, or corporation if, among other things, the loan is secured to the satisfaction 

of the Reserve Bank and the Reserve Bank obtains evidence that 

the individual, partnership or corporation is unable to secure credit 

accommodations from other banking institutions. 

As described in more detail in the Board’s Monthly Report on 

Credit and Liquidity Programs and the Balance Sheet and the reports filed by the Board under section 129 of the Emergency Economic Stabilization Act of 2008, the: 

• Revolving Credit Facility with AIG is secured by the pledge of 

assets of AIG and its primary nonregulated subsidiaries, including AIG’s ownership interest in its regulated U.S. and foreign subsidiaries; 

• The loan to Maiden Lane II LLC (ML-II) is secured by all of 

the residential mortgage-backed securities and other assets of 
114 

1 Upon establishment of the ML-II facility, the securities borrowing facility that the Federal 

Reserve had established for AIG in October 2008 was terminated. Advances under this securities borrowing facility were fully collateralized by investment grade debt obligations. 

ML-II, as well as by a $1 billion subordinate position in MLII held by certain of AIG’s U.S. insurance subsidiaries; 1 and 

• The loan to Maiden Lane III LLC (ML-III) is secured by all of 

the multi-sector collateralized debt obligations and other assets 

of ML-III, as well as a $5 billion subordinated position in MLIII held by an AIG affiliate. 

Q.15. The most recent changes to the AIG bailout give the New 

York Fed equity in AIG subsidiaries in exchange for loan forgiveness. Under what section of the Federal Reserve Act are those equity stakes permissible? Please provide any legal opinions on the 

subject. 

A.15. The Federal Reserve Bank of New York received the preferred equity in the two special purpose vehicles established to hold 

the equity of two insurance subsidiaries of AIG in satisfaction of 

a portion of AIG’s borrowings under the revolving credit facility established under section 13(3) of the Federal Reserve Act. As a result of the receipt of these preferred interests, AIG’s borrowings 

under the revolving credit facility were reduced by $25 billion, and 

the maximum amount available under the facility was reduced 

from $60 billion to $35 billion. The amount of preferred equity received by the Federal Reserve was based on valuations prepared by 

an independent valuation firm. The revolving credit facility continues to be fully secured by nearly all of the remaining assets at 

AIG. We continue to believe, based on these valuations and collateral positions, that the Federal Reserve will be fully repaid. 

Q.16. The most recent changes to the AIG bailout give the New 

York Fed equity in AIG subsidiaries in exchange for loan forgiveness. Does that indicate that the original ‘‘loans’’ were not really 

collateralized loans at all, rather they were equity stakes? 

A.16. No. The revolving credit facility established for AIG in September 2008 was and is fully secured by assets of AIG and its primary nonregulated subsidiaries, including AIG’s ownership interest 

in its regulated U.S. and foreign subsidiaries. 

The facility is fully secured by the assets of AIG, including the 

shares of substantially all of AIG’s subsidiaries. The loan was extended with the expectation that AIG would repay the loan with 

the proceeds from the sale of its operations and subsidiaries. AIG 

has developed and is pursuing a global restructuring and divestiture plan that is designed to achieve this objective and a number 

of significant sales already have occurred. The credit agreement 

stipulates that the net proceeds from all sales of subsidiaries of 

AIG must first be used to pay down the credit extended by the Federal Reserve. 

Q.17. When the first nine large banks received the initial 125 billion TARP dollars, Secretary Paulson and you said those nine 

banks were healthy. Do you now agree with the TARP Inspector 

General’s finding that Citigroup and Bank of America should not 

have been considered healthy by you and Secretary Paulson? 
115 

A.17. On October 14, 2008, the Federal Reserve joined in a press 

release with Treasury and the FDIC to announce a number of steps 

to address the financial crisis, including announcing the implementation of the Capital Purchase Program (‘‘CPP’’). The first nine 

banks to receive CPP funds were selected because of their importance to the financial system at large. In fact, the SIGTARP report 

notes that approximately 75 percent of all assets held by U.S.- 

owned banks were held by these nine institutions. In addition, 

these first nine institutions were considered to be viable, though 

some were financially stronger than others. The press release referred to these nine systemically important institutions as 

‘‘healthy’’ to indicate that these institutions were viable and were 

not receiving government funds because they were in imminent 

danger of failure. 

Q.18. In 2008, you came to Congress and warned of a catastrophic 

financial collapse if we did not authorize TARP. One major problem 

you predicted was that companies would not be able to sell commercial paper. However, the Fed has the authority to buy that 

same commercial paper and in fact, you created a lending facility 

to buy commercial paper the week after TARP was approved. Did 

the Fed already have plans to implement this facility before you 

and Secretary Paulson came to Congress requesting TARP? 

A.18. The commercial paper market was severely disrupted by the 

financial crisis, in particular after Lehman Brothers failed on September 15, 2008, and a large money fund broke the buck the following day. The Federal Reserve created three facilities in response 

to the dislocation in money markets, each of which was designed 

to finance purchases of commercial paper. The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility 

(AMLF) was announced on September 19, 2008. The Commercial 

Paper Funding Facility (CPFF) was announced on October 7, 2008. 

And the Money Market Investor Funding Facility (MMIFF) was announced on October 21, 2008. Your question refers to the CPFF, 

which was announced the week after the TARP was approved. All 

of these facilities helped address strains in money markets, but 

they did not replace the commercial paper market completely, and 

the ability of firms to sell commercial paper was severely impaired. 

On September 18, 2008, Secretary Paulson and I met with Congressional leadership to discuss the financial situation and explain 

our view that the global financial system was on the verge of a collapse. We expressed concern about a number of areas of the economy and financial markets, including as one example the potential 

collapse of the commercial paper market. At that time, the Federal 

Reserve was working towards developing the AMLF. The Federal 

Reserve began to think about constructing the CPFF after observing the effects of the failure of Lehman Brothers on the commercial 

paper market. The limitations on the Federal Reserve’s ability to 

address the numerous problems that were rapidly emerging in financial markets in the fall of 2008 spurred the decision by thenSecretary Paulson and me to approach the Congress. As we explained to Congress, the tools available to the agencies at the time 

were insufficient to address the serious stresses facing the financial 

markets, and action by Congress was necessary to stem the crisis. 
116 

Q.19. When you came to Congress last September requesting Congress to pass TARP, did you have any inclination that those funds 

would be used for something else besides buying toxic assets? 

A.19. Last September, the financial and economic situation was 

evolving very rapidly. In particular, the situation—which was already very grave when Secretary Paulson and I began our intensive consultations with the Congress—had deteriorated sharply further by the time when the legislation authorizing the TARP was 

enacted. What was clear from the outset of those intensive consultations was that the financial system was in substantial danger 

of seizing up in a way that had not occurred since at least the 

Great Depression, and that would have led to an even worse economic collapse than the one that we have actually experienced. 

What was not clear, however, was the strategy that would be most 

effective in arresting that process of seizing up. Initially, the strategy that, indeed, received the most attention envisioned using the 

resources anticipated to be provided under the TARP to purchase 

so-called toxic assets off the balance sheets of private financial institutions, in order to improve the transparency of those balance 

sheets and to create the capacity for the private institutions to engage in new lending. Even until Lehman Brothers fell, the issues 

plaguing the financial system were closely linked to mortgages, and 

indeed so too were the options being considered most seriously. 

Only after the aftershocks of Lehman’s failure sapped confidence in 

the broader set of financial institutions, and interbank markets 

seized up, did it become clear to Treasury that providing large 

amounts of capital to viable banks would be a superior response to 

the profound and rapid deterioration that had become the immediate concern, in substantial part because capital injections could 

be implemented much more quickly than asset purchases. These 

capital injections provided a means to reinforce confidence in the 

banking system and its ability to absorb potential losses while retaining an ability to lend to creditworthy borrowers. The Federal 

Reserve supported the Treasury’s decision to adopt the capital-purchase strategy. 

Q.20. In your discussions with Ken Lewis about Bank of America’s 

acquisition of Merrill Lynch, did you mention the consequences he 

could face regarding his employment if Bank of America did not go 

through with this deal? 

A.20. As I indicated in my June 2009 testimony before the House 

Committee on Oversight and Government Reform, in my discussions with senior management of Bank of America about the Merrill Lynch acquisition, I did not tell Ken Lewis, the CEO of Bank 

of America, or the other managers of the institution that the Federal Reserve would take action against the board of directors or 

management of the company if they decided not to complete the acquisition by invoking a Material Adverse Change (MAC) clause in 

the acquisition agreement. It was my view, as well as the view of 

others, that the invocation of the MAC clause in this case involved 

significant risk for Bank of America, as well as for Merrill Lynch 

and the financial system as a whole, and it was this concern I communicated to Mr. Lewis and his colleagues. The decision to go for-
117 

ward with the acquisition rightly remained in the hands of Bank 

of America’s board of directors and management. 

A recent report by the Special Inspector General for the Troubled 

Asset Relief Program with regard to government financial assistance provided to Bank of America and other major banks confirmed, after review of relevant documents, that there was no indication that I expressed to Mr. Lewis any views about removing the 

management of Bank of America should the Merrill Lynch acquisition not occur. 

Q.21. Why was the SEC not notified of the Bank of America/Merrill 

Lynch deal? 

A.21. The SEC was fully aware of the deal by Bank of America 

Corporation (BAC) to acquire Merrill Lynch. Chairman Cox was 

present in New York when BAC announced the deal in September 

2008. The SEC staff discussed details of the Merrill Lynch acquisition with BAC. The SEC was not a party to the arrangement by 

the Treasury, Federal Reserve, and FDIC to provide a ring fence 

for certain assets of BAC in mid-January 2009 and therefore had 

no role in negotiating the arrangement, though it was informed of 

the arrangement. 

Q.22. When was the first time you became aware of AIG’s potential 

vulnerability? Did anyone raise any kind of red flag to you about 

AIG exploiting regulatory loopholes? 

A.22. The Federal Reserve did not have, and does not have, supervisory authority for AIG and therefore did not have access to nonpublic information about AIG or its financial condition before being 

contacted by AIG officials in early September 2008, concerning the 

company’s potential need for emergency liquidity assistance from 

the Federal Reserve. 

Q.23. According to the TARP Inspector General, the Fed Board approved the New York Fed’s decision to pay par on AIG’s credit default swaps. What was your role in that decision, and why was it 

approved? 

A.23. I participated in and supported the Board’s action to authorize lending to Maiden Lane III for the purpose of purchasing the 

CDOs in order to remove an enormous obstacle to AIG’s future financial stability. I was not directly involved in the negotiations 

with the counterparties. These negotiations were handled primarily 

by the staff of FRBNY on behalf of the Federal Reserve. 

With respect to the general issue of negotiating concessions, the 

FRBNY attempted to secure concessions but, for a variety of reasons, was unsuccessful. One critical factor that worked against successfully obtaining concessions was the counterparties’ realization 

that the U.S. government had determined that AIG was systemically important and accordingly would act to prevent AIG from undergoing a disorderly failure. In those circumstances, the government and the company had little or no leverage to extract concessions from any counterparties, including the counterparties on 

multi-sector CDOs, on their claims. Furthermore, it would not have 

been appropriate for the Federal Reserve to use its supervisory authority on behalf of AIG (an option the report raises) to obtain concessions from some domestic counterparties in purely commercial 
118 

transactions in which some of the foreign counterparties would not 

grant, or were legally barred from granting, concessions. To do so 

would have been a misuse of the Federal Reserve’s supervisory authority to further a private purpose in a commercial transaction 

and would have provided an advantage to foreign counterparties 

over domestic counterparties. We believe the Federal Reserve acted 

appropriately in conducting the negotiations, and that the negotiating strategy, including the decision to treat all counterparties 

equally, was not flawed or unreasonably limited. 

It is important to note that Maiden Lane III acquired the CDOs 

at market price at the time of the transaction. Under the contracts, 

the issuer of the CDO is obligated to pay Maiden Lane III at par, 

which is an amount in excess of the purchase price. Based on valuations from our advisors, we continue to believe the Federal Reserve’s loan to Maiden Lane III will be fully repaid. 

Q.24. Did Fed regulators of Citi approve the $8 billion loan Citi 

made to Dubai in December of last year, which was well after the 

firm received billions of taxpayer dollars? Do you expect we will get 

that money back? 

A.24. With the exception of mergers and acquisitions, the Federal 

Reserve does not pre-approve individual transactions of the financial institutions we supervise. Whether Citi is able to recover this 

or any other loan it extends is a function of the standards it applied when it underwrote the loan. Nevertheless, the U.S. government’s recovery of the TARP funds provided to Citi would not hinge 

on Citi’s ability to collect on one individual debt, but rather on 

Citi’s ability to manage its credit and other risk exposures, which 

is where the Fed’s supervision has and will continue to focus. We 

are currently in discussion with Citi as well as other recipients of 

TARP funds to determine the appropriateness of TARP repayment. 

Q.25. In response to a question posed by Chairman Dodd, you stated you can give instances where the Fed’s supervisory authority 

aided monetary policy. Please do so with as much detail as possible. 

A.25. As a result of its supervisory activities, the Federal Reserve 

has substantial information and expertise regarding the functioning of banking institutions and the markets in which they operate. The benefits of this information and expertise for monetary 

policy have been particularly evident since the outbreak of the financial crisis. Over this period, supervisory expertise and information have helped the Federal Reserve to better understand the 

emerging pressures on financial firms and markets and to use 

monetary policy and other tools to respond to those pressures. This 

understanding contributed to more timely and decisive monetary 

policy actions. Supervisory information has also aided monetary 

policy in a number of historical episodes, such as the period of ‘‘financial headwinds’’ following the 1990–91 recession, when banking 

problems held back the economic recovery. 

Even more important than the assistance that supervisory authority provides monetary policy, in my view, is the 

complementarity between supervisory authority and the Federal 

Reserve’s ability to promote financial stability. Our success in helping to stabilize the banking system in late 2008 and early 2009 de-
119 

pended heavily on the expertise and information gained from our 

supervisory role. In addition, supervisory expertise in structured finance contributed importantly to the design of the Commercial 

Paper Funding Facility, the Money Market Investor Funding Facility, and the Term Asset-Backed Securities Loan Facility, all of 

which have helped to stabilize broader financial markets. Historically, our ability to respond effectively to the financial disruptions 

associated with the September 11, 2001, terrorist attacks, to the 

1987 stock market crash, as well as a number of other episodes, 

was greatly improved by our supervisory expertise, information, 

and authorities. At the same time, the Federal Reserve’s unique expertise developed in the course of making monetary policy can be 

of great value in supervising complex financial firms. 

Q.26. In response to a question posed by Chairman Dodd, you stated ‘‘we do not see at this point any extreme mis-valuations of assets in the United States.’’ Does that mean you believe the price 

of gold is not artificially inflated or out of line with fundamentals? 

If so, what does the rise in the gold price signify to you? 

A.26. Gold is used for many purposes. It is an input into the production of electronics, automobiles, and jewelry; it is held as reserve asset by governments; and it represents an investment for 

private individuals. With fluctuations in the price of gold reflecting 

changes in demand associated with any of these uses, as well as 

changes in supply, it is extremely difficult to gauge whether or not 

price changes are consistent with fundamentals. The most recent 

increases in the price of gold likely reflect diverse influences, including investor concerns about the many uncertainties facing the 

global economy; however, it is also the case that the rise in gold 

prices has not been much out of line with the increases in other 

commodities. According to the Commodity Research Bureau, after 

fluctuating in a broad range for the previous 11⁄2 years, the price 

of gold has risen 22 percent since early July, while the CRB’s index 

of overall commodity prices has risen 17 percent. These increases 

appear to reflect the recovery of the global economy, and it is not 

clear they have been out of line with fundamentals. 

Q.27. In response to a question posed by Senator Johnson, you indicated your concern about the GAO possibly gaining access to ‘‘all 

the policy materials prepared by staff.’’ What is your concern about 

Congress and the public having the same understanding of the 

issues surrounding monetary policy decisions as you and the rest 

of the Fed have? 

A.27. I think it desirable and beneficial for Congress and the public 

to have the same understanding of issues surrounding monetary 

policy decisions that I and my colleagues on the FOMC have. To 

that end, we explain our policy decisions in frequent testimony and 

reports to Congress as well as in press releases, minutes, and 

speeches. In addition, the Federal Reserve makes a great deal of 

policy-related data and research material, including materials prepared by Federal Reserve staff, readily available to the Congress 

and the public. But, in order for the Federal Reserve staff to be 

able to provide its best policy analysis and advice to monetary policymakers, it is necessary for some staff analysis to be kept confidential for a period of time. If instead this material were turned 
120 

over to the GAO, that could ultimately lead to political pressure 

being applied directly to the Federal Reserve’s staff. Such pressure 

could lead the staff to omit more sensitive material from its policy 

analyses and more generally might cause the staff to skew its analyses and judgments. That outcome could have serious adverse effects on monetary policy decisions, to the detriment of the performance of our economy. Also, investors and the general public would 

likely perceive a requirement to turn confidential staff analyses 

over to the GAO as undermining the independence of monetary policy, potentially leading to some unanchoring of inflation expectations and thus reducing the Federal Reserve’s ability to conduct 

monetary policy effectively. 

Q.28. In response to a question posed by Senator Corker, you stated ‘‘On the mortgage-backed securities, we have a longstanding authorization to do that. I do not think there is any legal issue.’’ 

Please provide the Fed’s legal analysis on the authority to purchase 

such securities, particularly those issued by Fannie Mae and 

Freddie Mac, which are not fullfaith-and-credit obligations of the 

United States. 

A.28. Section 14(b)(2) of the Federal Reserve Act (12 U.S.C. 355) 

authorizes the Federal Reserve Banks, under the direction of the 

FOMC, to ‘‘buy and sell in the open market any obligation which 

is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.’’ The Board’s Regulation 

A (12 C.F.R. 201) has long defined the Federal National Mortgage 

Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage 

Association (Ginnie Mae) as agencies of the United States for purposes of this paragraph. All mortgage-backed securities (MBS) acquired by the Federal Reserve in its open market operations are 

fully guaranteed as to principal and interest by Fannie Mae, 

Freddie Mac, and Ginnie Mae. 

Q.29. In response to question posed by Senator Johanns regarding 

an exit strategy, you said ‘‘The next step at some point, when the 

economy is strong enough and ready, will be to begin to tighten 

policy, which means raising interest rates. We can do that by raising the interest rate we pay on excess reserves. Congress gave us 

the power to pay interest on reserves that banks hold with the Fed. 

By raising that interest rate, we will be able to raise interest rates 

throughout the money markets.’’ 

In response to a written question I posed to you at the July 22 

monetary policy hearing, you said the Fed at that time had no 

plans to switch to using the new interest on reserves power as the 

means of setting the policy rate. However, in your response to Senator Johanns you sound inclined to use the reserve interest rate as 

the policy rate. Is that correct, and if so, what has changed in the 

last few months? 

A.29. In my written response to the question you posed on July 22, 

I indicated that the Federal Reserve currently expects to continue 

to set a target (or a target range) for the Federal funds rate as part 

of its procedure for conducting monetary policy. We are already 

using the authority that the Congress provided to pay interest on 

reserve balances, and we anticipate continuing to use that author-
121 

ity in the future. For example, when the time is appropriate to 

begin to firm the stance of monetary policy, the Federal Reserve 

could increase its target for the Federal funds rate. As I indicated 

in my response to Senator Johanns, the Federal Reserve could affect the increase in the Federal funds rate partly by increasing the 

interest rate that it pays on reserves. The Federal Reserve also has 

a number of additional tools for managing the supply of bank reserves and the Federal funds rate, and these tools could be used 

in conjunction with the payment of higher rates of interest on reserves. 

Q.30. In response to a question posed by Senator Gregg, you stated 

‘‘it would be worthwhile to consider, for example, whether regulators might prohibit certain activities. If a financial institution 

cannot demonstrate that it can safely manage the risks of a particular type of activity, for example, then it could be scaled back 

or otherwise addressed by the regulator.’’ Do you have examples of 

such activities in mind? Are there some activities that we should 

prohibit banks or other financial institutions from engaging in outright? 

A.30. Congress traditionally has sought to limit the ability of insured depository institutions to engage, directly or through a subsidiary, in potentially risky activities. Therefore, banking supervisors have emphasized safety and soundness, banking organizations’ management of risks associated with their activities, and the 

adequacy of their capital to support those risks. In that regard, the 

Federal Reserve has the authority to take a series of actions to ensure that bank holding companies and State member banks operate 

in a safe and sound manner. 

As evidenced by the recent subprime lending crisis, even traditional banking activities such as lending may pose significant risks 

if not safely managed. These activities do not lend themselves to 

general prohibitions, but rather to institution-specific consideration. The Federal Reserve considers whether a banking organization can effectively manage the risk of its regular or proposed activities through its ongoing supervisory process as well as its analysis of proposals to engage in new activities. Going forward, the 

Federal Reserve will continue to consider actions under our authority to restrict any activities that present safety and soundness concerns. Such actions that we might take include, but are not limited 

to: 

• Imposing higher capital requirements to address weaknesses 

in asset quality, credit administration, risk management, or 

other elevated levels of risk associated with an activity; 

• Requiring a banking organization to make more detailed and 

comprehensive public disclosures regarding a particular activity; 

• Exercising our enforcement authority to limit the overall nature or performance of an activity, such as by imposing concentrations limits; and 

• Issuing cease and desist orders to correct unsafe or unsound 

practices. 
122 

Q.31. In response to a question posed by Senator Corker, you mentioned you could provide more detail about problems at the Fed 

and the actions you are taking to correct them. What specific shortcomings have you identified and what specific steps have you taken 

to address them? 

A.31. The financial crisis was the product of fundamental weaknesses in both private market discipline and government supervision and regulation of financial institutions. Substantial risk 

management weaknesses led to financial firms not recognizing the 

nature and magnitude of the risks to which they were exposed. 

Neither market discipline nor government regulation prevented financial institutions from becoming excessively leveraged or otherwise taking on excessive risks. Within the United States, every 

Federal regulator with primary responsibility for prudential supervision and regulation of large financial institutions saw firms for 

which it was responsible approach failure. 

At the Federal Reserve, we have extensively reviewed our performance and moved to strengthen our oversight of banks. We have 

led internationally coordinated efforts to tighten regulations to help 

constrain excessive risk taking and enhance the ability of banks to 

withstand financial stress through improved capital and liquidity 

standards. We are building on the success of the Supervisory Capital Assessment Program (the ‘‘stress tests’’) to reorient our approach to large, interconnected banking organizations to incorporate a more ‘‘macroprudential’’ approach to supervision. As such, 

we are expanding our use of simultaneous and comparative crossfirm examinations, and drawing on a range of disciplines—economists, market experts, accountants and lawyers—from across the 

Federal Reserve System. We are also complementing our traditional on-site examinations with enhanced off-site surveillance programs, under which multi-disciplinary teams will combine supervisory information, firm-specific data analysis, and market-based 

indicators to identify emerging issues. 

Q.32. What was your role in including in the TARP proposal the 

ability to purchase ‘‘any other financial instrument’’? Was inclusion 

of such a provision your suggestion? 

A.32. Apart from stating the need for it, I was not involved in the 

negotiations between the Administration and the Congress on the 

terms of the TARP. However, the flexibility afforded the TARP to 

purchase financial instruments as needed to promote financial stability proved crucial in allowing a rapid response to the quickly deteriorating financial conditions in October 2008. 

Q.33. What was your role in the decision to make capital investments rather than toxic asset purchases with TARP funds? 

A.33. It became apparent in October 2008 that the plan to purchase toxic assets was likely to take some months to implement 

and would not be available in time to arrest the escalating global 

crisis. Following the approach used in a number of other industrial 

countries, the Treasury made capital available instead to help stabilize the banking system. The Treasury consulted closely with the 

Federal Reserve on this decision. 
123 

Q.34. As a general matter I do not think the Fed Chairman should 

comment on tax or fiscal policy, so please respond to this from the 

perspective of bank supervision and not fiscal policy. Are there any 

provisions of the tax code that unwisely distort financial institutions’ behavior that Congress should consider as part of financial 

regulatory reform? For example, the tax code allows deductions for 

the interest paid on debt, which may cause firms to favor debt over 

equity. Do you have concerns about that provision? Are there other 

provisions that influence companies’ behavior that concern you? 

A.34. The taxation of businesses and households is a fundamental 

part of fiscal policy. I have avoided taking a position on explicit tax 

policies and budget issues during my tenure as Chairman of the 

Federal Reserve Board. I believe that these are decisions that must 

be made by the Congress, the Administration, and the American 

people. Instead I have attempted to articulate the principles that 

I believe most economists would agree are important for the longterm performance of the economy and for helping fiscal policy to 

contribute as much as possible to that performance. In that regard, 

tax revenues should be sufficient to adequately cover government 

spending over the longer-term in order to avoid the economic costs 

and risks associated with persistently large Federal deficits. But 

the choices that are made regarding both the size and structure of 

the Federal tax system will affect a wide range of economic incentives that will be part of determining the future economic performance of our Nation. 

In assessing the lessons of the recent financial crisis, it is difficult to find evidence that the tax treatment of financial institutions played a role in the problems that developed. In particular, 

the tax structure faced by these institutions did not change prior 

to the onset of these problems and did not appear to be associated 

with the buildup of leverage and risk taking that occurred. The 

more important remedial steps must be taken in the regulatory 

sphere, and I have outlined a comprehensive program aimed at ensuring that a crisis of this kind does not recur. 

Q.35. Do you think a cap on bank liabilities is appropriate? For example, do you think limiting a bank’s liabilities to 2 percent of 

GDP is a good idea? 

A.35. In the policy debate about how best to control the systemic 

risk posed by very large firms, restriction on size is one of the solutions being discussed. However, a cap on a bank’s liabilities linked 

to a measure such as GDP may not be appropriate. In pursuing a 

size restriction, policymakers would need to carefully analyze the 

metric that was used as the basis for the restriction to ensure that 

limits on lines of business reflect the risks the activities present. 

Broadbased caps applied without such analysis potentially could 

limit the banking system’s ability to support economic activity. 

Q.36. AIG still has obligations to post collateral on swaps still in 

force. Will the Fed post collateral if the deteriorating credit conditions at AIG or general credit market issues require it? 

A.36. No. The Federal Reserve can only lend to borrowers on a secured basis; the Federal Reserve cannot post its own assets as collateral for a third party. AIG is obligated to continue to post collateral as required under the terms of its derivatives contracts with 
124 

its counterparties. AIG may borrow from the revolving credit facility with the Federal Reserve to meets its obligations as they come 

due, including to meet collateral calls on its derivative contracts. 

AIG itself is obligated to repay all advances under the revolving 

credit facility, which is fully secured by assets of AIG, including the 

shares of substantially all of AIG’s subsidiaries. 

Q.37. If TARP and other bailout actions were necessary because 

the largest financial firms were too big to fail, why have the largest 

few institutions actually been allowed to grow bigger than they 

were before the bailouts? Does it concern you that those few institutions write approximately half the mortgages, issue approximately two-thirds of the credit cards, and control approximately 40 

percent of deposits in this country? 

A.37. I am concerned about the potential costs to the financial system and the economy of institutions that are perceived as too big 

to fail. To address these costs, I have detailed an agenda for a financial regulatory system that ensures systemically important institutions are subject to effective consolidated supervision, that a 

more macroprudential outlook is incorporated into the regulatory 

and supervisory framework, and that a new resolution process is 

created that would allow the government to wind down such institutions in an orderly manner. In addition, high concentrations 

might raise antitrust concerns that consumers would be harmed 

from lack of competition in certain financial products. For this reason, antitrust enforcement by bank regulators and the Department 

of Justice would preclude mergers that are considered likely to 

have significant adverse effects on competition. 

Q.38. On May 5, 2009, in front of the Joint Economic Committee, 

you said the following about the unemployment rate: ‘‘Currently, 

we don’t think it will get to 10 percent. Our current number is 

somewhere in the 9s.’’ In November it hit 10.2 percent, and many 

economists predict it will go even higher. This is happening despite 

enormous fiscal and monetary stimulus that you previously said 

would help create jobs. What happened after your JEC testimony 

in May that caused your prediction to miss the mark? 

A.38. At the time of my testimony before the JEC, the central tendency of the projections made by FOMC participants was for real 

GDP to fall between 1.3 and 2.0 percent over the four quarters of 

2009 and for the unemployment rate to average between 9.2 and 

9.6 percent in the fourth quarter. As it turned out, we were too pessimistic about the overall decline in real GDP this year and too optimistic about the extent of the rise in the unemployment rate. Although we indicated in the minutes from the April FOMC meeting 

that we saw the risks to the unemployment rate as tilted to the 

upside, we underestimated the extent to which employers were 

able to continue to reduce their work forces even after they began 

to increase production again. These additional job reductions have 

contributed to surprisingly large gains in productivity in recent 

quarters and to the unexpectedly steep rise in the unemployment 

rate. 
125 

Q.39. In his questioning at your hearing, Senator DeMint mentioned several of your predictions about the economy that proved 

inaccurate. For example: 

• March 28, 2007: ‘‘The impact on the broader economy and financial markets of the problems in the subprime markets 

seems likely to be contained.’’ 

• May 17, 2007: ‘‘We do not expect significant spillovers from the 

subprime market to the rest of the economy or to the financial 

system.’’ 

• Feb. 28, 2008, on the potential for bank failures: ‘‘Among the 

largest banks, the capital ratios remain good and I don’t expect 

any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our 

banking system.’’ 

• June 9, 2008: ‘‘The risk that the economy has entered a substantial downturn appears to have diminished over the past 

month or so.’’ 

• July 16, 2008: Fannie Mae and Freddie Mac are ‘‘adequately 

capitalized’’ and ‘‘in no danger of failing.’’ 

I do not bring these up to criticize you for making mistakes. 

Rather, it is important to examine the reason for mistakes to learn 

from them and do better in the future. Have you or the Fed examined why those predictions were wrong? Have you or the Fed 

changed anything such as your models, forecasts, or data sets as 

a result? What has the Fed done to revamp its analytical framework to better anticipate potential macroeconomic problems? 

A.39. The principal cause of the financial crisis and economic slowdown was the collapse of the global credit boom and the ensuing 

problems at financial institutions. Financial institutions suffered 

directly from losses on loans and securities on their balance sheets, 

but also from exposures to off-balance sheet conduits and to other 

financial institutions that financed their holdings of securities in 

the wholesale money markets. The tight network of relationships 

between regulated financial firms with these other institutions and 

conduits, and the severity of the feedback effects between the financial sector and the real economy were not fully understood by 

regulators or investors, either here or abroad. Our failure to anticipate the full severity of the crisis, particularly its intensification in 

the fall of 2008, was the primary reason for the forecasting errors 

cited by Senator DeMint. 

We also are expanding our use of forward-looking aggregate macroeconomic scenario analysis in supervisory practices to enhance 

our understanding of the consequences of changes in the economy 

for individual firms and the broader financial system. In addition, 

we are conducting research to augment our macroeconomic forecasting tools to incorporate more refined channels by which information on possible financial market stresses would feed back to the 

macroeconomy. 

Q.40. Derivatives such as credit-default swaps played an important 

role in the financial crisis, and they are central to the financial reforms currently being contemplated. During the Senate Banking 

Committee’s hearing in November 2005 to confirm you as Alan 
126 

Greenspan’s successor, you had the following exchange with Senator Paul Sarbanes: 

SARBANES: Warren Buffett has warned us that derivatives are time bombs, both for the parties that deal in 

them and the economic system. The Financial Times has 

said so far, there has been no explosion, but the risks of 

this fast growing market remain real. How do you respond 

to these concerns? 

BERNANKE: I am more sanguine about derivatives than 

the position you have just suggested. I think, generally 

speaking, they are very valuable. They provide methods by 

which risks can be shared, sliced, and diced, and given to 

those most willing to bear them. They add, I believe, to the 

flexibility of the financial system in many different ways. 

With respect to their safety, derivatives, for the most part, 

are traded among very sophisticated financial institutions 

and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions 

it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed 

and do not create excessive risk in their institutions. 

Do you still agree with that statement? If not, why do you think 

you were wrong? 

A.40. I continue to believe that OTC derivative instruments are 

valuable tools for the management of risk and that they are an important part of our financial markets. Events of the last 2 years 

have demonstrated, however, that there were significant weaknesses in the risk management systems and procedures for these 

derivatives at some market participants and that supervisors did 

not fully appreciate the interconnections among regulated dealers 

and their unregulated counterparties that magnified these weaknesses. Supervisors have recognized that financial institutions 

must make changes in their risk-management practices for OTC 

derivatives by improving internal processes and controls and by ensuring that adequate credit risk-management disciplines are in 

place for complex products, regardless of the form they take. Efforts are under way to improve collateralization practices to limit 

counterparty credit risk exposures and to strengthen the capital regime. Regulators both in the United States and abroad also are 

speeding the development of central counterparties (CCPs) that 

offer clearing services for some OTC derivative contracts. These 

CCPs offer financial institutions another tool for managing the 

counterparty credit risk that arises from OTC derivatives. 

Q.41. An important factor in the financial crisis (and a large part 

of the ultimate cost to taxpayers) was the implicit government 

guarantee of the GSEs. In part because of decisions you made, 

there is now an explicit government guarantee of every large firm 

on Wall Street. Has moral hazard increased or decreased over the 

past year? 

A.41. The actions by Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve were taken to stabilize financial 
127 

markets during a time of unprecedented turmoil. These actions 

mitigated the effect of financial market turmoil on the U.S. economy more generally. Moral hazard has been, and continues to be, 

a significant concern with respect to large financial institutions. 

The Secretary of the Treasury has proposed significant reforms 

that include enhanced supervision of systemically important financial firms, a focus on macroprudential supervision and new resolution authority over systemically important financial firms. These 

reforms would mitigate moral hazard and I strongly support them. 

Q.42. Via the FDIC, the American public now explicitly guarantees 

the bonds of Wall Street firms where bonuses are surging and individual employees can be paid millions of dollars a year. What is 

your opinion on the morality of this guarantee? 

A.42. The Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program (TGLP) is one of many necessary actions taken to stabilize financial markets during a time of unprecedented financial stress. These actions helped support the flow of 

credit and mitigated the most severe potential effects of the turmoil 

on the economy. Many households and businesses benefited from 

these guarantees. These and similar actions were taken with the 

sole objective of better achieving the mandate given to us by the 

Congress, namely (for the FDIC) to mitigate serious systemic risks 

and (for the Federal Reserve) to promote financial stability, price 

stability, and maximum employment. Hence, they were justified— 

indeed necessary and appropriate under our Congressional mandate. 

Q.43. The importance you place on the output gap is well known. 

You have often cited ‘‘excess slack’’ in the economy to justify loose 

monetary policy, arguing that a large output gap lowers the risk 

of inflation. But economists such as Allan Meltzer have noted that 

there are ‘‘lots of examples of countries with underutilized resources and high inflation. Brazil in the 1970s and 1980s.’’ Moreover, in a new paper dated December 2009 and titled ‘‘Has the Recent Real Estate Bubble Biased the Output Gap?’’, researchers at 

the Federal Reserve Bank of St. Louis state ‘‘Because this (predicted) output gap is so large, several analysts have concluded that 

monetary policy can remain very accommodative without fear of inflationary repercussions. We argue instead that standard output 

gap measures may be severely biased by the bubble in real estate 

prices that, according to many, started around 2002 and burst in 

2007.’’ They conclude with a warning: ‘‘We offer a word of caution 

to policymakers: Policies based on point estimates of the output gap 

may not rest on solid ground.’’ Please comment on (1) Allan 

Meltzer’s point and (2) the St. Louis Fed’s research paper. Why do 

you continue to put such a high priority on the output gap? 

A.43. I do find the evidence compelling that resource slack, as 

measured by an output or unemployment gap, is one factor that influences inflation. But it is not the only such factor, and Allan 

Meltzer is correct that there have been examples of underutilized 

resources coinciding with high or rising inflation. This was the case 

in the United States in the 1970s, for example, when large increases in the price of imported oil both raised inflation and held 

down production. Furthermore, estimates of the output gap are in-
128 

herently uncertain, and I agree that it is important to keep that 

uncertainty in mind when we make decisions about monetary policy. Some estimates, such as the one you cite from researchers at 

the St. Louis Fed, suggest that the output gap is not large at 

present. However, the bulk of the evidence indicates that resource 

slack is now substantial, as evidenced by an unemployment rate of 

10 percent and a rate of manufacturing capacity utilization of only 

68 percent—lower than seen at the trough of every postwar recession prior to the current one. Thus, I continue to expect slack resources, together with the stability of inflation expectations, to contribute to the maintenance of low inflation in the period ahead. 

Q.44. In a scenario in which unemployment remains uncomfortably 

high, but the dollar continues to fall and commodities including oil 

and gold continue to rise, what would the Fed do? At what point 

do market signals take priority over hard-to-measure statistics like 

the output gap? 

A.44. The output gap is only one of many economic signals, including a broad array of economic data and market indicators, that the 

FOMC consults in setting policy. It is difficult to predict what actions the FOMC would take in some future situation. Certainly it 

would be mindful of its dual mandate to foster price stability and 

maximum sustainable employment. If declines in the dollar and increases in commodity prices were creating upward pressures on 

consumer prices and causing expectations of future inflation to rise, 

those developments would be taken extremely seriously by the 

Committee, and would have to be balanced against the high rate 

of unemployment that you posit in your hypothetical. But the clear 

lesson from the experience of the 1970s and from that of other 

countries is the high cost that a nation pays in terms of macroeconomic performance when it loses sight of the importance of 

maintaining a credible plan for the achievement of price stability 

and maximum sustainable employment in the medium and longer 

terms. 

Q.45. The Fed has a dual mandate: maximum employment and 

price stability. But unemployment is at its highest level in decades. 

And in early and mid-2008, with oil at $150 a barrel and prices of 

basic staples skyrocketing, opinion polls showed that inflation was 

the public’s highest concern, even more so than jobs or the housing 

market. Why has the Fed failed so badly in its mandate? Is employment an appropriate objective for monetary policy? Should the 

Fed have a single mandate of price stability? 

A.45. The Federal Reserve’s performance should be judged in terms 

of the extent to which its policies have fostered satisfactory outcomes for economic activity and inflation given the unanticipated 

shocks that have occurred. For example, while U.S. consumer price 

inflation was temporarily elevated by shocks to the prices of energy 

and other commodities during early and mid-2008 and then 

dropped sharply after the intensification of the global financial crisis, the Federal Reserve’s policies have been successful in keeping 

the longer-term inflation expectations of households and businesses 

firmly anchored throughout this period. Moreover, while the financial crisis led to a severe economic contraction and a steep rise in 

unemployment, the Federal Reserve’s extraordinary policy meas-
129 

ures have been crucial in averting a global financial collapse that 

would have been associated with far higher rates of unemployment. 

I support the Federal Reserve’s dual mandate of maximum employment and price stability. These congressionally mandated goals 

are appropriate and generally complementary, because price stability helps moderate the short-term variability of employment and 

contributes to the economy’s employment prospects over the longer 

run. Under some circumstances, however, there may indeed be a 

temporary trade-off between the elements of the dual mandate. For 

example, an adverse supply shock might cause inflation to be temporarily elevated at the same time that employment falls below its 

maximum sustainable level. In such a situation, a central bank 

that focused exclusively on bringing inflation down as quickly as 

possible might well exacerbate the economic weakness, whereas a 

monetary policy strategy consistent with the Federal Reserve’s dual 

mandate would aim to foster a return to price stability at a lower 

cost in terms of lost employment. 

Q.46. In February 2009, Janet Yellen, president of the San Francisco Fed, said that the Fed needed to fight back against the argument that its liquidity efforts would eventually lead to higher inflation and higher interest rates, calling the notion ‘‘ludicrous.’’ Since 

then, the dollar has fallen precipitously, oil has almost doubled in 

price, and gold has surged to all-time highs. Do you share your colleague’s view on inflation? 

A.46. The dollar serves as an international reserve currency; hence, 

short-term fluctuations in the foreign exchange value of the dollar 

are often linked to global developments rather than to U.S. monetary policy or inflation. Indeed, the intensification of the global economic and financial crisis in the second half of 2008 was associated 

with a substantial rise in the foreign exchange value of the dollar 

as investors increased their holdings of relatively safe dollar-denominated assets. As financial markets have recovered this year 

and the world economy has stabilized, that appreciation has gradually unwound and the foreign exchange value of the dollar has essentially returned to its level prior to the events of the fall of 2008. 

The prices of energy and other commodities are also closely linked 

to global economic developments; for example, the spot price for 

West Texas intermediate crude oil dropped sharply from around 

$130 per barrel in July 2008 to around $40 per barrel at the turn 

of the year, but it has subsequently rebounded to about $75 per 

barrel as the global economic outlook has improved. The Commodity Research Bureau’s index of overall commodity prices indicates that the rise in the price of gold over the past few months 

is in line with the increased prices of other commodities over the 

same period. 

I do not believe that the Federal Reserve’s credit and liquidity 

programs will lead to higher inflation. Longer-term inflation expectations appear stable, and as I have emphasized in the past, the 

Federal Reserve has the tools it needs to withdraw the current substantial degree of monetary policy stimulus when it is appropriate 

to do so. The Federal Reserve will adjust the stance of policy as 

needed to fulfill its dual mandate of fostering price stability and 

maximum employment. 
130 

Q.47. What does the surge in gold mean to you? At what price level 

would it begin to worry you, if it doesn’t already? Does gold have 

any impact on the Fed’s policy deliberations? 

A.47. As mentioned in response to questions #6 and #26, gold is 

used for many purposes. Movements in the price of gold are determined by changes in the demand for gold for its various uses and 

changes in supply conditions. Therefore, assessing why gold prices 

have recently risen and whether the increase is consistent with 

fundamentals is very difficult. Accordingly, it is also difficult to 

specify a particular level of the price of gold which, if exceeded, 

would indicate particularly worrisome developments. As also mentioned earlier, the Federal Reserve looks at a wide array of indicators of market sentiment and inflation expectations. Among those 

indicators is the price of gold, but for the reasons just noted, its 

movements are often harder to interpret than those of some of the 

other indicators. Nonetheless, we will continue to monitor the price 

of gold going forward. 

Q.48. Why does the Fed insist on waiting 5 years before it releases 

transcripts of FOMC meetings to the public? 

A.48. The effectiveness of monetary policy deliberations is facilitated by the policy of maintaining the confidentiality of FOMC 

meeting transcripts for 5 years, so that participants can have a 

candid and free exchange of views about alternative policy approaches. It is noteworthy that the 5-year interval prior to publication of FOMC meeting transcripts is much shorter than required 

under the Federal Records Act, which directs such records to be 

transmitted to the National Archives and made public after a 30- 

year period. Moreover, from an international perspective, the Federal Reserve is virtually unique with regard to this aspect of its 

transparency; no other major central bank publishes transcripts of 

its monetary policy meetings. 

Q.49. Has the Fed ever had an internal debate about how monetary policy contributes to geopolitical tensions via the rising oil 

prices caused by a falling dollar? 

A.49. Monetary policy may exert some effect on oil prices through 

a number of channels, including: the cost of carrying inventories 

and of investing in productive capacity, the pace of economic 

growth, and the exchange rate. However, the effects of changes in 

interest rates and exchange rates on oil prices appear to be relatively small. Accordingly, my sense is that variations in monetary 

policy have played only a limited role in the wide swings in oil 

prices observed in recent years. 

Q.50. Before the financial crisis there was a widespread sense, especially on Wall Street trading desks, that the stock market was 

strangely resilient. This encouraged excessive risk-taking in various types of assets. Do you have direct or indirect knowledge of 

the Federal Reserve or any government entity or proxy ever intervening to support the stock market (or any individual stock) via futures or in any other way? If yes, who decides the timing of such 

intervention and with what criteria? How is it funded? Which Wall 

Street firm handles the orders, and who sees them before they are 

executed? 
131 

A.50. The Federal Reserve has not intervened to provide support 

to the stock market or individual stocks by trading in futures or 

any other financial instrument. I have no knowledge of any other 

U.S. government entity providing such support. 

Q.51. You have repeatedly stated your concern that an audit of the 

Fed will undermine the independence of the Fed in monetary policy. What do you fear influence from Congress will lead to, tighter 

or looser policy? 

A.51. Broadening the scope of the GAO to include a review of monetary policy functions would undermine the safeguards that Congress put in place in 1978 to promote monetary policy independence and insulate the Federal Reserve from short-run political 

pressures. As a result, households, businesses, and investors might 

well conclude that the Federal Reserve would not be in a position 

to combat inflation pressures as effectively as in the past. This loss 

of confidence could lead to higher inflation expectations, hence 

boosting interest rates and raising the cost of credit for households 

and businesses. Moreover, inflation expectations would be more 

likely to rise in response to monetary policy accommodation undertaken to address high unemployment and weak economic activity. 

This potentially greater sensitivity of inflation expectations to accommodative monetary policy could limit the Federal Reserve’s 

ability to combat high unemployment and economic weakness without an undesirable boost in inflation. 

Q.52. Do you believe our banking system is facing a future like Japan’s system faced in the 1990s, with zombie banks as an obstacle 

to economic prosperity? Why or why not? 

A.52. I do not believe that the U.S. banking system is facing a future akin to that of Japanese banks in the 1990s. Japanese authorities took a long time to take the steps that were necessary to 

deal with zombie banks and ensure a sound banking system, because they first had to construct a strong system of bank supervision and regulation. It wasn’t until the late 1990s that new laws 

were passed to deal with bank insolvencies and the Financial Supervisory Agency, which later became the Financial Services Agency (FSA), was established. And it was not until 2002 that the FSA 

conducted its first round of examinations of major banks aimed at 

ensuring that they were adequately identifying and provisioning 

against nonperforming loans. 

In contrast, U.S. authorities, including the Federal Reserve, have 

been able to quite rapidly take strong steps to address bank weakness. First, the Commercial Bank Examination Manual and the 

Bank Holding Company Supervision Manual have long contained 

guidance for bank and bank holding company (BHC) examiners on 

evaluating the adequacy of loan loss reserves, and examiners continue to follow this guidance. In addition, earlier this year, the Federal Reserve and other Federal bank supervisors completed a comprehensive forward-looking capital assessment exercise—the Supervisory Capital Assessment Program (SCAP)—on the largest 19 U.S. 

BHCs. This exercise went further than a regular BHC examination 

(which produces a snapshot of current BHC health), because it involved estimating losses that might arise over a period of 2 years 
132 

under more-adverse-than-expected economic assumptions, and because it ensured consistency across institutions. 

Q.53. Do you believe the Fed’s policies are enabling banks to put 

off recognizing their losses? 

A.53. The Federal Reserve’s policies are not enabling banks to 

defer recognizing incurred loan losses or overstating income. We require institutions to prepare regulatory reports in accordance with 

generally accepted accounting principles (GAAP). Currently, GAAP 

requires estimated incurred loan losses to be recognized in the financial statements. We have issued numerous reminders in the 

form of supervisory guidance that reiterate the need for institutions to take appropriate loan losses. Most recently, we issued guidance on commercial real estate lending that encouraged institutions to work with borrowers while reiterating the importance of 

recognizing loan losses on restructured loans as appropriate. By no 

means have we been suggesting any type of forbearance on loan 

loss recognition. However, we believe that the accounting loan loss 

model needs to be modified to improve recognition of credit losses. 

Q.54. What was your rationale for letting Lehman fail? 

A.54. Concerted government attempts to find a buyer for Lehman 

Brothers or to develop an industry solution proved unsuccessful. 

Moreover, providers of both secured and unsecured credit to the 

company were rapidly pulling away from the company and the 

company needed funding well above the amount that could be provided on a secured basis. As you know, the Federal Reserve cannot 

make an unsecured loan. Because the ability to provide capital to 

the institution had not yet been authorized under the Emergency 

Economic Stabilization Act, the firm’s failure was, unfortunately, 

unavoidable. The Lehman situation is a clear example of why the 

government needs the ability to wind down a large, interconnected 

firm in an orderly way that both mitigates the costs on society as 

whole and imposes losses on the shareholders and creditors of the 

failing firm. 

Q.55. Reportedly, the Fed is requiring banks to report their derivatives positions to the Fed. Does the Fed have the expertise and analytical capacity to understand and act on that information? 

A.55. Yes. The Federal Reserve has staff members with both financial economics and financial analysis expertise. These staff members contribute both to the analysis of financial data at the macro 

or market level and to the understanding of models used by individual institutions in their derivatives activities. 

Q.56. Given that some economic conditions have worsened beyond 

what was assumed in the ‘‘stress tests’’ earlier this year, do you 

still believe the stress tests to be useful or accurate representations 

of the institutions examined? 

A.56. I believe that the stress tests are still a useful representation 

of the risks of the examined institutions in a more stressful environment than expected. It is true that since the scenarios for the 

stress tests were specified, the unemployment rate has risen sharply and will be above the rate that was assumed for 2009 in the 

more adverse scenario. However, the latest private forecasts indicate that the unemployment rate next year will be noticeably below 
133 

the rate assumed in the more adverse scenario, and the rebound 

in real GDP next year will be larger than was assumed. Further, 

incoming data on house prices have been considerably better than 

expected, which should reduce losses, and a significant part of the 

estimated losses in the stress tests at the examined institutions 

were related to the substantially lower house prices assumed in the 

more adverse scenario. 

Q.57. In your recent Washington Post op-ed, you recognized that 

the Fed ‘‘did not do all that it could have’’ under your leadership 

to prevent the financial crisis, why should the public have any confidence that the next time the Fed will do all it can? 

A.57. The regulatory framework that was in place at the onset of 

the crisis had not kept pace with dramatic changes in the structure 

and activities of the financial sector. Specifically, U.S. and global 

regulations did not adequately address the possibility of significant 

losses in the trading book, securitizations, and some other capital 

market activities that had become a significant feature of the financial system. The Federal Reserve has already taken steps, 

working with domestic supervisors and the Basel Committee on 

Bank Supervision, to increase capital requirements for trading activities and securitization exposures. The Federal Reserve is moving toward agreement with international counterparts on measures 

to improve the quality of capital, with a particular emphasis on the 

importance of common equity. We are also discussing options under 

which systemically important firms could supplement their capital 

base in times of stress through instruments that, for example, 

would trigger conversion into common equity when economic conditions or a firm’s individual condition had weakened substantially. 

In addition, we are implementing strengthened guidance on liquidity risk management to better capture the complex financing characteristics of large, wholesale funded institutions, and are weighing 

proposals for quantitatively based requirements. It is important to 

couple these enhancements with legislative action to redress gaps 

in the regulatory framework by, for example, extending the perimeter of regulation to ensure that firms like AIG and Lehman Brothers are subject to robust consolidated supervision. 

Q.58. Are you concerned that the debt to GDP ratio in this country 

is more than 350 percent? Do you believe a high debt to GDP ratio 

is reason for tightening Fed policy? Why or why not? 

A.58. The current ratio of public and private debt to GDP, including not only the debt of the nonfinancial sector but also the debt 

of the financial sector, is about 350 percent. (Many analysts prefer 

to focus on the debt of the nonfinancial sectors because, they argue, 

the debt of the financial sector involves some double-counting—for 

example, when a finance company funds the loans it provides to 

nonfinancial companies by issuing bonds. The ratio of total nonfinancial debt to GDP is about 240 percent.) Private debt has been 

declining as households and firms have been reducing spending 

and paying down pre-existing obligations. For example, households, 

who are trying to repair their balance sheets, reduced their outstanding debt by 1.3 percent (not at an annual rate) during the 

first three quarters of this year. 
134 

In contrast, public debt is growing rapidly. Putting fiscal policy 

on a sustainable trajectory is essential for promoting long-run economic growth and stability. Currently, the ratio of Federal debt to 

GDP is increasing significantly, and those increases cannot continue indefinitely. The increases owe partly to cyclical and other 

temporary factors, but they also reflect a structural Federal budget 

deficit. Stabilizing the debt to GDP ratio at a moderate level will 

require policy actions by the Congress to bring Federal revenues 

and outlays into closer alignment in coming years. The ratio of government debt to GDP does not have a direct bearing on the appropriate stance of monetary policy. Rather, the stance of monetary 

policy is appropriately set in light of the outlook for real activity 

and inflation and the relationship of that outlook to the Federal 

Reserve’s statutory objectives of maximum employment and price 

stability. Of course, government indebtedness may exert an indirect 

influence on monetary policy through its potential implications for 

the level of interest rates consistent with full employment and low 

inflation. But in that respect, fiscal policy is just one of the many 

factors that influence interest rates and the economic outlook. 

Q.59. The FDIC is seeing significant losses on the mortgages of 

failed banks. Why shouldn’t we assume the Fed will see similar 

losses on the mortgages on the Fed’s balance sheet? How is the Fed 

valuing those assets? 

A.59. In conducting open market operations to support the availability of mortgage financing to households, the Federal Reserve 

has purchased only mortgage-backed securities (MBS) that are 

fully guaranteed as to principal and interest by Fannie Mae, 

Freddie Mac, and Ginnie Mae; accordingly, the Federal Reserve 

has no exposure to credit losses on the mortgages that underlie 

these MBS. Each week, the Federal Reserve publishes, in its H.4.1 

statistical release, the current value of these securities, measured 

as the remaining principal balance on the underlying mortgages. 

The Federal Reserve also reports, in the Monthly Report on Credit 

and Liquidity Programs and the Balance Sheet, the end-of-month 

fair market value of these MBS. The fair market value is determined using market values obtained from an independent pricing 

vendor. 

The Federal Reserve also holds mortgage loans, MBS, and 

collateralized debt obligations that are backed by mortgage-related 

assets through Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC. At the end of each quarter, the assets of these 

entities are revalued and the fair value of the assets is reported in 

the H.4.1 statistical release and in the Monthly Report on Credit 

and Liquidity Programs and the Balance Sheet. As explained in the 

Appendix to the Monthly Report, because of the mix of assets held 

by these entities, the terms on which the Federal Reserve acquired 

these assets, the equity or subordinated debt positions in these entities held by others, and the longer term nature of these facilities 

(which allows the assets to be held to maturity or sold as markets 

stabilize and asset values recover), the Board does not anticipate 

that the Federal Reserve or taxpayers will incur any net loss on 

the Federal Reserve’s loans to these entities. 
135 

Q.60. I am concerned about the falling value of the dollar. China 

has disclosed that it has taken as much as a $350 billion loss on 

its dollar holdings since March, and believes it may take another 

$220 billion should the dollar fall a further 10 percent. Under what 

scenario do you see China continuing to buy our debt when your 

actions, along with Treasury’s, wipe out half a trillion dollars of 

value in the assets purchased from us? 

A.60. Since March, the value of China’s dollar holdings as measured in its own currency has not been affected by fluctuations in 

the U.S. dollar against other currencies, because operations by Chinese authorities in their foreign exchange markets have kept the 

value of the renminbi essentially unchanged against the U.S. dollar 

over this period. The cited losses of $350 billion may represent the 

gains China would have recorded had all of its foreign holdings 

been in currencies other than the dollar, but this is a hypothetical 

measure of foregone value rather than a realized loss, and, in any 

event, would just offset gains recorded as the dollar rose between 

the summer of 2008 and March 2009. 

Absent a policy shift in China that entails a discontinuation of 

official operations to resist upward pressure on the country’s currency, China will continue to accumulate external assets and thus 

likely will continue to invest in U.S. assets. In fact, China has continued to purchase U.S. Treasuries in recent months. More generally, U.S. balance of payments data show that purchases of 

Treasury securities this year by all foreign official entities have 

been sizable, even during times when the dollar moved lower. Foreign countries, including China, find Treasury securities attractive 

because the market for U.S. government securities is one of the 

deepest and most liquid markets in the world and because the U.S. 

dollar is widely accepted as the premier reserve currency. 

Q.61. Some observers see a new asset bubble forming in the stock 

market. Does it concern you that under some measures the current 

price to earnings ratio on the S&P 500 is considerably higher than 

the ratio when Alan Greenspan gave his ‘‘irrational exuberance’’ 

speech? 

A.61. While assessing the fundamental values of financial assets is 

inherently very difficult, there is not much evidence to suggest that 

the stock market is currently in a bubble. Broad stock-price indexes 

have increased markedly since their troughs early this year. However, share prices have yet to retrace all their losses since September 2008, and are substantially below their peaks in 2007. Even 

more to the point, measures of risk premiums on broad stock-price 

indexes, despite having narrowed substantially relative to their 

record highs in late 2008, are still very wide by historical standards, suggesting that investors are not overly sanguine about the 

risks of investing in the stock market. Consistent with that view, 

implied volatilities on broad stock-price indexes have hovered at 

elevated levels in recent months, even as the economy has begun 

to recover. All that said, stock values ultimately depend on the evolution of company earnings, which in turn depend on the path of 

the economy. Because economic forecasts are inherently very uncertain, the appropriate valuations of stocks are also uncertain. 
136 

Q.62. According to the transcript of the June 24–25 FOMC meeting 

you said ‘‘Ambiguity has its uses but mostly in noncooperative 

games like poker. Monetary policy is a cooperative game. The 

whole point is to get financial markets on our side and for them 

to do some of our work for us. In an environment of low inflation 

and low interest rates, we need to seek ever greater clarity of communication to the markets and to the public.’’ If you still believe 

that, why are you concerned about opening more information about 

monetary policy to the public eye through an audit or other means 

of increasing transparency? 

A.62. I believe that transparency is critical to the effective conduct 

of monetary policy. Indeed, over the past several years, the Federal 

Reserve has taken significant steps to enhance the clarity of its 

communications to the public and the Congress. In the autumn of 

2007, the FOMC began publishing the economic projections of Committee participants four times per year rather than semiannually. 

In early 2009, the FOMC extended the horizon of these forecasts 

to include longer-run projections, which provide information about 

participants’ estimates of the longer-run sustainable rates of economic growth and unemployment and about their assessments of 

the longer-run average inflation rate that best fulfills the Federal 

Reserve’s dual mandate. Last June, the Federal Reserve began 

publishing a monthly report entitled ‘‘Credit and Liquidity Programs and the Balance Sheet’’ that presents detailed information 

about the Federal Reserve’s programs to foster market liquidity 

and financial stability. 

Moreover, the Congress—through the Government Accountability 

Office—can and does audit all aspects of the Federal Reserve’s operations except for deliberations on monetary policy and related 

issues. The Congress specifically exempted those deliberations to 

protect monetary policy from short-term political pressures. The repeal of this exemption could lead households, businesses, and investors to conclude that the Federal Reserve would not be in a position to combat inflation pressures as effectively as in the past. As 

a result, inflation expectations would likely move higher, boosting 

interest rates and raising the cost of credit for households and 

businesses. 

Q.63. Did you or anyone else at the Fed realize the extent to which 

bailing out AIG would benefit European banks? 

A.63. At the time the decisions were made to provide financial assistance to AIG and subsequently to restructure that assistance, we 

knew that the company was a very large, diversified financial services company that had extensive interconnections with the financial markets in this country and globally. As I indicated in my testimony earlier this year before the House Financial Services Committee, the range of parties that had potential exposure to AIG was 

sweeping: millions of policyholders of its insurance subsidiaries in 

the United States and elsewhere, State, and local governments, 

workers whose 401(k) plans had purchased insurance from AIG, 

banks and investment banks that had loans or lines of credit to the 

company, and money market funds and others that held AIG’s outstanding commercial paper. Those with AIG exposure consisted of 

individuals and businesses, financial institutions and commercial 
137 

enterprises, private and governmental entities, and domestic and 

foreign parties. 

Q.64. Did the effect of a failure of AIG on European banks in any 

way contribute to the decision to rescue AIG? If so, why did you 

not request European governments provide financial assistance as 

well? 

A.64. As noted in the answer to question 63, the decisions to provide financial assistance to AIG and subsequently to restructure 

that assistance were based on a wide range of factors, including the 

potential exposure of a broad spectrum of financial market participants to the company. During the recent financial markets crisis, 

the Federal Reserve has coordinated with foreign central banks 

and bank regulators in implementing measures to stabilize the 

banking system globally. Several European governments provided 

financial assistance to banks within their jurisdictions as part of 

these efforts. 

Q.65. Why were the monoline insurers allowed to fail while AIG 

was rescued, when they had significant derivatives exposure just 

like AIG? 

A.65. AIG’s near-failure occurred at an extraordinary time. Global 

financial markets were under unprecedented strains. Major financial firms were under intense stress and three very large firms— 

Fannie Mae, Freddie Mac, and Lehman Brothers—had recently 

failed or been placed into conservatorship. The Federal Reserve 

and the Treasury judged that, given the severe market and economic stresses prevailing at that time, the failure of AIG would 

have posed an unacceptable risk for the global financial system and 

our economy. A disorderly failure on the part of AIG would have 

directly affected insurance policyholders in the United States and 

worldwide, State and local government entities that had lent to 

AIG, 401(k) plans that had purchased insurance from AIG, financial institutions with large exposures to AIG, and money market 

mutual funds and others that had invested in AIG’s commercial 

paper. More broadly, AIG’s failure would have further damaged already fragile market confidence and could have precipitated a 

broad-based run on financial institutions around the world. 

In contrast to AIG, the monoline insurers came under substantial 

pressure in an earlier period when market and economic strains 

were much less pronounced, and the effects of the failure of 

monolines were judged as being less likely to have serious adverse 

effects on the financial system and the economy. 

Q.66. In November 2009, the AIG bailout was revised to give the 

New York Fed ownership of several AIG subsidiaries in exchange 

for a reduced balance owed on loans by the New York Fed. What 

was the valuation used by the Fed for these subsidiaries, and how 

was that valuation determined? Did the Fed or AIG try to sell the 

subsidiaries to private entities? If so, what was the result, and if 

not, why not? What is the Fed’s plan to dispose of the equity 

stakes? 

A.66. The revolving credit facility is fully secured by all the 

unencumbered assets of AIG, including the shares of substantially 

all of AIG’s subsidiaries. The loan was extended with the expecta-
138 

tion that AIG would repay the credits with the proceeds from the 

sale of its operations and subsidiaries. The credit agreement stipulates that the net proceeds from all sales of subsidiaries of AIG 

must first be offered to pay down the credit extended by the Federal Reserve. AIG has developed a plan to divest its noncore business in order to repay U.S. government support. 

Most recently, AIG has begun the process of selling two of its insurance subsidiaries with significant business overseas, American 

International Assurance Co. (AIA) and American Life Insurance 

Company (ALICO). The step taken last week by the Federal Reserve to accept shares in two newly created companies that hold 

the common stock of AIA and ALICO, respectively, in satisfaction 

of a portion of the credit extended by the Federal Reserve facilitates the sale of these two companies and the repayment of the 

Federal Reserve. The value of the Federal Reserve’s preferred interests represents a percentage of the market value of AIA and 

ALICO, based on valuations provided by independent advisers. AIA 

has announced plans for an initial public offering in 2010 and 

ALICO has announced that it has positioned itself for an initial 

public offering or a sale to a third party. AIG also continues to pursue the sale of other subsidiaries, the net proceeds of which would 

be applied to repay the AIG loan. 

Q.67. Have you recommended any candidates to fill the empty 

seats on the Board of Governors? If so, who? 

A.67. No. The selection of Board members of the Federal Reserve 

is the responsibility of the President of the United States. Every 

President takes this responsibility seriously and I am therefore 

confident he is committed to filling the vacant seats with wellqualified individuals. 

Q.68. Andrew Haldane, head of financial stability at the Bank of 

England, argues that the relationship between the banking system 

and the government (in the U.K. and the U.S.) creates a ‘‘doom 

loop’’ in which there are repeated boom-bust-bailout cycles that 

tend to get cost the taxpayer more and pose greater threat to the 

macroeconomy over time. What can be done to break this loop? 

A.68. The ‘‘doom loop’’ that Andrew Haldane describes is a consequence of the problem of moral hazard in which the existence of 

explicit government backstops (such as deposit insurance or liquidity facilities) or of presumed government support leads firms to 

take on more risk or rely on less robust funding than they would 

otherwise. The new financial regulatory structure that I and others 

have proposed to counteract moral hazard would address this problem. In particular, a stronger financial regulatory structure would 

include: a consolidated supervisory framework for all financial institutions that may pose significant risk to the financial system; 

consideration in this framework of the risks that an entity may 

pose, either through its own actions or through interactions with 

other firms or markets, to the broader financial system; a systemic 

risk oversight council to identify, and coordinate responses to, 

emerging risks to financial stability; and a new special resolution 

process that would allow the government to wind down in an orderly way a failing systemically important nonbank financial institution (the disorderly failure of which would otherwise threaten the 
139 

entire financial system), while also imposing losses on the firm’s 

shareholders and creditors. The imposition of losses would reduce 

the costs to taxpayers should a failure occur. 

Q.69. Mervyn King, governor of the Bank of England, argued in his 

recent Edinburgh speech that re-regulating the financial system 

will not effectively reduce its risks. And history suggests that Big 

Finance always gets ahead of even the most able regulators. Governor King insists instead that the largest banks should be broken 

up, so they are no longer ‘‘too big to fail.’’ Paul Volcker and Alan 

Greenspan, in recent statements, have supported the same broad 

approach. Can you explain why you differ from Mervyn King, Paul 

Volcker, and Alan Greenspan on this policy prescription? 

A.69. I agree that no financial institution should be too big to fail. 

The policy of the Federal Reserve is that systemically important institutions should be regulated in a way that recognizes the full 

panoply of risks that they present to the financial system and to 

the economy more broadly. Such risks include but may not be limited to credit, liquidity, operational, and systemic risks. A difficulty 

of the prior regulatory framework is that sufficient charges and requirements were not imposed on such institutions, leaving them 

with an inappropriate incentive to become large and complex for 

the sake of possibly becoming recognized as too big to fail. The regulatory approach we are currently working to develop and implement seeks to correct this important shortcoming by imposing a 

comprehensive and robust set of safeguards, capital charges, and 

other measures that are designed to reflect the full range of risks 

posed by large, complex organizations. While significant challenges 

to developing and implementing such an approach exist, an appropriately calibrated system along these lines should help reduce the 

potential for any firm to be too big to fail. An important complement to stronger regulation and supervision, however, is the development of an effective resolution regime that would allow the 

government to wind down in an orderly way a troubled financial 

firm even in cases where a disorderly failure would pose a threat 

to the financial system and the economy. 

Q.70. In the time between the bailout of Bear Stearns and the failure of Lehman, should you or the Treasury have more clearly communicated that firms should not expect government assistance? 

Why do you think Lehman, AIG, and others continued to act like 

there would be such assistance? Are there any lessons we should 

learn from that period that are applicable to efforts to reform our 

financial regulation? 

A.70. Between the time of the near failure of Bear Stearns and the 

collapse of Lehman, a number of troubled financial institutions did 

in fact fail or were acquired by other financial institutions in private transactions. Moreover, in the aftermath of JPMorgan Chase’s 

acquisition of Bear Stearns, many financial firms took steps to 

strengthen their financial positions, including writing down troubled assets, raising capital, and reducing leverage. However, these 

steps were not sufficient in many cases to allow the firms to survive the worsening of the financial crisis in the fall of 2008. Our 

decisions at that time, like those we took at each stage of the crisis, 

depended critically on the details of the circumstances then pre-
140 

vailing. As I have outlined elsewhere, a concerted effort was made 

to find a private-sector solution to the problems at Lehman. Had 

a viable buyer emerged, the Federal Reserve would have strongly 

supported the sale, but in the event, no such buyer was forthcoming. Moreover, providers of both secured and unsecured credit 

to the company were rapidly pulling away from the company and 

the company needed funding well above the amount that could be 

provided on a secured basis. Before the enactment of the legislation 

authorizing the TARP, the government lacked the ability to inject 

capital to prevent the disorderly collapse of a failing systemically 

important nonbanking institution. In light of these circumstances, 

failure was the only possible outcome for Lehman. Two critical lessons should be gleaned from the Lehman experience. First, Congress must ensure that all systemically important firms are subject 

to robust consolidated supervision. Second, going forward, there is 

an acute need for the Congress to enact a resolution regime that 

would allow the government to wind down a failing systemically 

important nonbank financial institution in an orderly way, and to 

impose losses as appropriate on shareholders and creditors. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM BEN S. BERNANKE 

Q.1. The current policy of the Federal Reserve is keeping interest 

rates near zero. This is allowing banks to earn a lot of money by 

buying long term government bonds and using that money to recapitalize the banks—which is a good thing—but, if the Federal Reserve continues this policy for an extended time, why would banks 

lend to consumers when even the least risky consumer is far 

riskier than buying U.S. Treasuries? Doesn’t this Federal Reserve 

policy discourage the lending Washington policy makers say they’re 

trying to promote? 

A.1. In response to the sharp decline in economic activity late last 

year, the FOMC lowered its target for the Federal funds rate to a 

range of 0 to 1⁄4 percent. This action, along with the Federal Reserve’s other policy initiatives, was taken to foster the Federal Reserve’s dual objectives of maximum employment and stable prices. 

As is usually the case, long-term interest rates did not decline by 

as much as short-term rates in response to the cuts in the funds 

rate. However, the relatively high interest rates on longer-term securities do not provide banks or other investors with an easy and 

low-risk source of profits, because investments in such securities 

involve a significant degree of interest rate risk; therefore, relatively high longer-term yields are unlikely to be an important reason for the current reluctance of banks to lend. Instead, that reluctance appears to be due more to the banks’ concerns about the economic outlook, credit risks associated with that outlook, and to 

some extent, to the banks’ own capital positions. The contraction in 

bank loans outstanding is also attributable in part to low demand 

for bank credit, which in turn is also largely a result of the economic downturn and concerns about the outlook. As part of our effort to support appropriate bank lending, the Federal Reserve and 

the other Federal banking agencies issued regulatory guidance in 

November 2008 to encourage banks to meet the needs of their cred-
141 

itworthy customers. We have also encouraged banks to raise private capital to support more lending. In particular, the Federal Reserve led the Supervisory Capital Assessment Program (or ‘‘stress 

test’’) of the largest bank holding companies last spring; the results 

of the stress test increased confidence in the banking system and 

helped many banks raise private capital and repay TARP funds. 

We have also eased lending conditions by providing banks with 

ample short-term funding and by helping to revive securitization 

markets. We expect that, as economic activity picks up, the demand for loans should increase, credit conditions are likely to ease, 

and banks will likely step up their crucial intermediation activities. 

Q.2. In July, as part of your last appearance before this Committee, you were asked if you plan to hold the Treasury and GSE 

securities on your books until maturity. You responded, ‘‘the evolution of the economy, the financial system, and inflation pressures 

remain subject to considerable uncertainty. Reflecting this uncertainty, the way in which various monetary policy tools will be used 

in the future by the Federal Reserve has not yet been determined. 

In particular, the Federal Reserve has not developed specific plans 

for its holdings of Treasury and GSE securities.’’ Basically, you had 

no plan to unwind this swollen portion of the Fed balance sheet. 

Do you have a plan yet, Mr. Chairman? 

A.2. Broadly, our plan is to manage the System’s portfolio of securities over time in a way that fosters the achievement of the Federal 

Reserve’s statutory objectives of maximum employment and stable 

prices. As with other aspects of the conduct of monetary policy, the 

way in which the System’s portfolio evolves will be determined by 

the emerging outlook for the economy, inflation, and financial markets. For example, it is possible that the Federal Reserve’s holdings 

of Treasury and GSE securities will decline gradually, reflecting 

prepayments and maturing issues. In this case, the payment of interest on reserves along with reserve management tools may prove 

adequate for the implementation of appropriate policy adjustments. 

Depending on how economic and financial conditions evolve, however, the FOMC could determine that a more rapid reduction in the 

size of the portfolio would be desirable and so choose to sell some 

of the securities. That judgment would involve weighing many factors including the implications that such actions would have for 

long-term interest rates, including mortgage rates, and the related 

effects on economic growth, inflation, and financial markets. 

Q.3. Over the last year, the Federal Reserve has introduced $1 trillion into the banking system. The Federal Reserve continues to expand its purchases of mortgage backed securities. Chairman 

Bernanke, in past testimony before this Committee you have said 

that part of the plan to rein in this excess liquidity is to pay banks 

interest on reserves. What rate of interest will you have to pay in 

order to accomplish this and what will that do to the economy? 

A.3. The Federal Reserve is well positioned to remove the current 

extraordinary degree of monetary policy accommodation at the appropriate time. The Federal Open Market Committee (FOMC) sets 

a target level of the Federal funds rate that it believes will best foster the Federal Reserve’s statutory objectives of maximum employment and price stability in view of its outlook for economic activity 
142 

and inflation. The current and expected future values of the Federal funds rate influence longer-term interest rates and other asset 

prices. And those changes in turn affect household and business 

spending decisions. Currently, the FOMC has expressed its target 

for the Federal funds rate as a range from 0 to 1⁄4 percent. The interest rate paid on reserves helps to keep the Federal funds rate 

close to the target set by the FOMC because banks will not ordinarily lend to one another in the Federal funds market at rates 

below what they can earn on balances maintained at the Federal 

Reserve. The interest rate paid on bank reserves will be set over 

time at a level that is consistent with, and in practice very close 

to, the FOMC’s target Federal funds rate. As required by law, the 

interest rate paid on reserves must not exceed the general level of 

short-term interest rates. 

Q.4. On Monday, the Dubai government said that it would not 

guarantee the debts of state-owned Dubai World. A senior finance 

official said, ‘‘Creditors need to take part of the responsibility for 

their decision to lend to the companies. They think Dubai World is 

part of the government, which is not correct.’’ Dubai world has 

since offered to restructure $26 billion in debts. As a result, no 

great crisis has erupted in the markets. What lesson have you 

drawn from this? 

A.4. The announcement by Dubai World that it would seek to restructure a portion of its debt payments caught many investors by 

surprise. Because the company is wholly owned by the government 

of Dubai, some investors had believed that the government would 

back its debt. While this news initially had some negative impact 

on global financial markets, those markets have recovered as market participants came to perceive that the losses associated with 

the restructuring likely would be contained. However, Dubai 

World’s announcement has seriously affected the terms and availability of credit for the government and corporations in Dubai: Interest rates on debt issued by both the government and government-affiliated corporations have increased sharply, credit ratings 

of many of those corporations have been downgraded, and their 

ability to raise new funds has been seriously impaired. These developments reinforce the lesson that lenders will charge steep premiums if they have concerns that borrowers will fail to fully repay 

their investments. 

Q.5. Tuesday, a New York Times report highlighted the fact that 

on December 14, 2008, well after receiving an injection of TARP 

money from the taxpayer, Citi announced $8 billion of financing for 

public sector entities in Dubai. Chairman Bernanke, did you know 

that Citi made this investment with the help of taxpayer funds? 

What scrutiny did the Federal Reserve give this transaction given 

the fact that Citi was forced to take tens of billions of dollars of 

TARP funds? 

A.5. With the exception of mergers and acquisitions, the Federal 

Reserve does not pre-approve individual transactions of the financial institutions we supervise. We also note that cash in an institution is fungible, so it would not be accurate to state that TARP 

funds were used for this or any other individual investment. In 

many large deals like this one, the lead bank arranges the deal and 
143 

then syndicates it to other investors, oftentimes removing a large 

share of the risk from its balance sheet. 

Q.6. More than a year after the Federal Reserve bailed out the failing insurance giant; taxpayers deserve to know what the exit strategy is. Just this week the Federal Reserve Bank of New York 

bought two life insurance companies from AIG in exchange for reducing the debt the company owes the Fed by $25 billion. It seems 

like a positive step, but owning two life insurance companies is 

hardly an exit from the morass of AIG. Will taxpayers get their 

money back from AIG and how much can they reasonably expect 

to get back? 

A.6. The revolving credit facility is fully secured by all the 

unencumbered assets of AIG, including the shares of substantially 

all of AIG’s subsidiaries. The loans were extended with the expectation that AIG would repay the credits with the proceeds from the 

sale of its operations and subsidiaries. The credit agreement stipulates that the net proceeds from all sales of subsidiaries of AIG 

must first be offered to pay down the credit extended by the Federal Reserve. 

Most recently, AIG has begun the process of selling two of its insurance subsidiaries with significant business overseas, American 

International Assurance Co. (AIA) and American Life Insurance 

Company (ALICO). The step taken last week by the Federal Reserve to accept shares in two newly created companies that hold 

the common stock of AIA and ALICO, respectively, in satisfaction 

of a portion of the credit extended by the Federal Reserve facilitates the sale of these two companies and the repayment of the 

Federal Reserve. The value of the Federal Reserve’s preferred interests represents a percentage of the market value of AIA and 

ALICO, based on valuations provided by independent advisers. AIA 

has announced plans for an initial public offering in 2010 and 

ALICO has announced that it has positioned itself for an initial 

public offering or a sale to a third party. AIG also continues to pursue the sale of other subsidiaries, the net proceeds of which would 

be applied to repay the AIG loan. 

The loans made to Maiden Lane II LLC (ML II) and Maiden 

Lane III LLC (ML III), which are two special purpose vehicles 

formed to help stabilize AIG, will be repaid with the proceeds from 

the liquidation and disposition of the portfolio holdings of these two 

entities. If the portfolio holdings were liquidated today, based on 

fair value, the Federal Reserve would recover fully on its loan to 

ML III and incur a modest loss on its loan to ML II. However, the 

loans to ML II and ML III are not structured or designed for the 

immediate sale of collateral assets. Instead, the loans are designed 

to allow the sale of the collateral over a longer period that allows 

for the recovery of markets and the intrinsic asset values. In addition, AIG has a $1 billion subordinated position in ML II and a $5 

billion subordinated position in ML III. These subordinated positions are available to absorb first any loss that ultimately is incurred by ML II or ML III, respectively. On this basis, the Board 

does not anticipate that the loans to ML II or ML III will result 

in the realization of any losses to the Federal Reserve or the taxpayers. 
144 

Each of these matters is described more fully in the monthly reports filed with Congress by the Federal Reserve under section 129 

of the Emergency Economic Stabilization Act of 2008, and can be 

found on the Board’s Web site. 

Q.7. Mr. Chairman, as I’m sure you know by now, the recent report 

issued by the Special Inspector General of the Troubled Asset Relief Program on payments made to AIG counterparties says that 

‘‘the Federal Reserve Bank New York’s negotiating strategy to pursue concessions from counterparties offered little opportunity for 

success, even in light of the willingness of one counterparty to 

agree to concessions.’’ How involved were you in the decision made 

by the Federal Reserve Board of New York to pay these counterparties at par? 

A.7. I participated in and supported the Board’s action to authorize 

lending to Maiden Lane III for the purpose of purchasing the CDOs 

in order to remove an enormous obstacle to AIG’s future financial 

stability. I was not directly involved in the negotiations with the 

counterparties. These negotiations were handled primarily by the 

staff of Federal Reserve Bank of New York (FRBNY) on behalf of 

the Federal Reserve. 

With respect to the general issue of negotiating concessions, the 

FRBNY attempted to secure concessions but, for a variety of reasons, was unsuccessful. One critical factor that worked against successfully obtaining concessions was the counterparties’ realization 

that the U.S. Government had determined that AIG was systemically important and would prevent a disorderly failure. In those 

circumstances, the government and the company had little or no leverage to extract concessions from any counterparties, including 

the counterparties on multi-sector CDOs, on their claims. Furthermore, it would not have been appropriate for the Federal Reserve 

to use its supervisory authority on behalf of AIG (an option the report raises) to obtain concessions from some domestic counterparties in purely commercial transactions in which some of the foreign 

counterparties would not grant, or were legally barred from granting, concessions. To do so would have been a misuse of the Federal 

Reserve’s supervisory authority to further a private purpose in a 

commercial transaction and would have provided an advantage to 

foreign counterparties over domestic counterparties. We believe the 

Federal Reserve acted appropriately in conducting the negotiations, 

and that the negotiating strategy, including the decision to treat all 

counterparties equally, was not flawed or unreasonably limited. 

It is important to note that Maiden Lane III acquired the CDOs 

at market price at the time of the transaction. Under the contracts, 

the issuer of the CDO is obligated to pay Maiden Lane III at par, 

which is an amount in excess of the purchase price. Based on valuations from our advisors, we continue to believe the Federal Reserve’s loan to Maiden Lane III will be fully repaid. 

The episode starkly illustrates the need for a special resolution 

regime for failing, systemically critical companies that will allow 

the government to protect the financial system while still being 

able to obtain concessions from shareholders, creditors, counterparties, and management. As I said at my hearing: ‘‘We do not want 

any more AIGs. We do not want any more Lehman Brothers. We 
145 

want a well established, well stated, identified, worked out system 

that can be used to wind down these companies, allow them to fail, 

let the creditors take losses, let counterparties, like the AIG 

counterparties, take losses, but without completely destabilizing 

the whole economy, as can happen.’’ 

Q.8. In your last appearance before this Committee, Mr. Chairman, 

you and I talked about the proposal for GAO audits of the Federal 

Reserve. As you know, I support full, delayed audits of the Federal 

Reserve. The argument you and others make in opposition to these 

audits is that they would compromise the ability of the Federal Reserve to make monetary policy independently. Yet, you now support 

audits of emergency, 13(3) facilities even though you said that, ‘‘because supporting economic growth when the economy has been adversely affected by various types of shocks is a key function of monetary policy, all of the facilities that are available to multiple institutions can be considered part of the Federal Reserve’s monetary 

policy response to the crisis.’’ How is it that you feel that some 

GAO audits of monetary policy are ok and others are not? 

A.8. We have indicated our willingness to work with the Congress 

to enhance the review of the operational integrity of the temporary 

market credit facilities that we established under section 13(3) in 

a way that would not endanger our ability to independently determine and implement monetary policy. A review of the operational 

integrity of these facilities could be structured so as not to involve 

a review of the monetary policy aspects of the facility, such as the 

decision to begin or end the facility or the choices made regarding 

the structure, scope, design, or terms of the facility. The GAO already has the authority to conduct reviews of Federal Reserve lending under section 13(3) to single and specific entities, such as Bear 

Stearns, AIG, Citigroup and Bank of America Corporation, and we 

have been working with GAO to facilitate their audit of these facilities. 

We continue to be very concerned, however, about the proposals 

that would broadly authorize GAO to audit the Federal Reserve’s 

monetary policy and discount window decision making and implementation. As you know, the Federal Reserve is already fully subject to audit by the GAO in virtually all of its other areas of responsibilities. The limited exceptions for monetary policy and discount 

window operations were adopted to ensure that the Federal Reserve could, in the words of the Senate committee report at the 

time, ‘‘independently conduct the Nation’s monetary policy.’’ 

Monetary policy independence enables policymakers to look beyond the short term as they weigh the effects of their monetary 

policy actions on price stability and employment and reinforces 

public confidence that monetary policy will be guided solely by the 

objectives laid out in the Federal Reserve Act and not by political 

concerns. Financial markets likely would see a GAO audit or the 

threat of a GAO audit of monetary policy as an attempt by Congress to intrude on the Federal Reserve’s monetary policy judgments and to try to influence subsequent monetary policy decisions. 

Households, businesses, and financial market participants would 

understandably be uncertain about the implications of the GAO’s 

findings for future decisions of the FOMC, thereby increasing mar-
146 

ket volatility and weakening the ability of monetary policy actions 

to achieve their desired effects. Actions that are viewed as weakening monetary policy independence likely would increase inflation 

fears and market interest rates and, ultimately, damage economic 

stability and job creation. Thus, maintaining an independent monetary policy is important not because it benefits the Federal Reserve, but because of the important public advantages it provides 

households, families, small and large businesses and the Nation as 

a whole. 

The Federal Reserve is highly transparent and is committed to 

providing Congress and the public with the information it needs to 

oversee the activities and decisions of the Federal Reserve without 

undermining our ability to effectively fulfill our monetary policy 

and other responsibilities. For example, the Federal Reserve is already subject to a full audit of its financial statements by an independent public accounting firm. These audited financial statements 

are published annually and reported to Congress. In addition, the 

Federal Reserve publishes a detailed balance sheet on a weekly 

basis—unique among central banks—showing all of its assets and 

liabilities as well as changes in entries on its financial statements 

from the previous week. This allows Congress and the public full 

access to information on the assets and liabilities incurred by the 

Federal Reserve on a regular and consistent basis. We also make 

substantial, detailed information available on our Web site and in 

regular public reports regarding the programs, credit facilities and 

monetary policy decisions of the Federal Reserve. 

Q.9. Mr. Chairman, in the House Financial Services Committee’s 

consideration of the systemic regulation bill, it narrowly adopted an 

amendment that requires a 20 percent haircut for all secured creditors in the case of an institution identified as systemically important. The sponsors stated that the intent was to prevent secured 

lenders from requiring additional collateral as the institution 

failed. Also the FDIC, who supports, the amendment argues it 

would incentivize secured lenders to review secured borrowers 

more closely. It appears to me that the proposal would significantly 

increase cost of secured borrowing and be potentially disruptive of 

a number of secured lending markets such as the repurchase agreements, advances from the Federal Home Loan Banks, and possibly 

some of the Fed’s own activities. Also, it is my understanding that 

secured creditors spend significant resources today assessing the 

creditworthiness of the borrowers as well as the value of the 

pledged collateral. Have you had a chance to review the proposal 

and form an opinion on the impact it has on the institutions and 

the market? 

A.9. Based on an initial review of the proposal, the Federal Reserve 

has concerns regarding the destabilizing effect the proposal could 

have on financial markets and institutions. If implemented, the 

proposal could make liquidity crises more frequent, more rapid, and 

more severe. It could create incentives for secured creditors of a 

systemically important institution to ‘‘rush to the exits’’ at early 

signs of financial difficulties, shutting the institution off from useful sources of liquidity and perhaps turning temporary financial 

problems into terminal ones. Moreover, introducing change into the 
147 

secured financing markets should be done with great care and consideration of potential ramifications. The Federal Reserve relies 

upon deep and liquid secured financing markets in its implementation of monetary policy. Policymakers should carefully evaluate the 

implications of any proposal to change established market practices 

on market functioning and potentially on the conduct of monetary 

policy. 

Q.10. Can you cite an example of when in its history the Federal 

Reserve was early about doing something on a looming banking crisis? 

A.10. In the period leading up to the crisis, the Federal Reserve 

and other U.S. banking supervisors took several important steps to 

improve the safety and soundness of banking organizations and the 

resilience of the financial system. For example, following the September 11, 2001, terrorist attacks, we took steps to improve clearing and settlement processes, business continuity for critical financial market activities, and compliance with Bank Secrecy Act, antimoney laundering, and sanctions requirements. Other areas of 

focus pertained to credit card subprime lending, the growth in leveraged lending, credit risk management practices for home equity 

lending, counterparty credit risk related to hedge funds, and effective accounting controls after the fall of Enron. These are examples 

in which the Federal Reserve took aggressive action with a number 

of financial institutions, demonstrating that effective supervision 

can bring about material improvements in risk management and 

compliance practices at supervised institutions. 

In addition, the Federal Reserve, working with the other U.S. 

banking agencies, issued several pieces of supervisory guidance before the onset of the recent crisis—taking action on nontraditional 

mortgages, commercial real estate, home equity lending, complex 

structured financial transactions, and subprime lending—to highlight emerging risks and point bankers to prudential risk management practices they should follow. Moreover, we identified a number of potential issues and concerns and communicated those concerns to the industry through the guidance and through our supervisory activities. 

Q.11. Chairman Bernanke, what share of the blame does the Federal Reserve bear for the catastrophe of last year? 

A.11. As I stated in a speech on October 23, entitled, ‘‘Financial 

Regulation and Supervision after the Crisis: The Role of the Federal Reserve,’’ this crisis was an extraordinarily complex event with 

multiple causes. Weaknesses in the risk-management practices of 

many financial firms, together with insufficient buffers on capital 

and liquidity, were clearly an important factor in the crisis. Unfortunately, regulators and supervisors did not identify and remedy 

many of those weaknesses in a timely way. All financial regulators, 

including of course the Federal Reserve, must take a hard look at 

the experience of the past 2 years, correct identified shortcomings, 

and improve future performance. Over the past several months, the 

Federal Reserve has taken several significant steps to strengthen 

its regulatory and supervisory framework. 
148 

Q.12. Chairman Bernanke, what was the biggest mistake you 

made over the last year? 

A.12. It is an extraordinary privilege to work at the Federal Reserve. I work with some of the most talented individuals one would 

find in either the private or public sector. Although I try to take 

every opportunity to thank my colleagues, given the extraordinary 

challenges they have confronted the past few years, I am sure I 

could have said it more often. 

As I testified before the Committee, a financial crisis of the severity we have experienced must prompt financial institutions and 

regulators alike to undertake unsparing self-assessments of their 

past performance. Clearly, financial regulators, including the Federal Reserve, did not do enough to prevent excessive risk-taking in 

our financial system. At the Federal Reserve, we have been actively 

engaged in identifying and implementing improvements in our regulation and supervision of financial firms. In the realm of consumer 

protection, during the past 3 years, we have comprehensively overhauled regulations aimed at ensuring fair treatment of mortgage 

borrowers and credit card users, among numerous other initiatives. 

To promote safety and soundness, we continue to work with other 

domestic and foreign supervisors to require stronger capital, liquidity, and risk management at banking organizations, while also taking steps to ensure that compensation packages do not provide incentives for excessive risk-taking and an undue focus on short-term 

results. Drawing on our experience in leading the recent comprehensive assessment of 19 of the largest U.S. banks, we are expanding and improving our cross-firm, or horizontal, reviews of 

large institutions, which will afford us greater insight into industry 

practices and possible emerging risks. To complement on-site supervisory reviews, we are also creating an enhanced quantitative 

surveillance program that will make use of the skills not only of 

supervisors, but also of economists, specialists in financial markets, 

and other experts within the Federal Reserve. We are requiring 

large firms to provide supervisors with more detailed and timely 

information on risk positions, operating performance, and other key 

indicators, and we are strengthening consolidated supervision to 

better capture the firmwide risks faced by complex organizations. 

In sum, heeding the lessons of the crisis, we are committed to taking a more proactive and comprehensive approach to oversight to 

ensure that emerging problems are identified early and met with 

prompt and effective supervisory responses. 

Q.13. Given the benefit of hindsight, would you still bail out Bear 

Stearns in the way that you did last year? What would you do differently? 

A.13. At the time of the near collapse of the investment bank Bear 

Stearns, Federal Reserve lending under section 13(3) of the Federal 

Reserve Act was the only tool available to the U.S. Government to 

prevent the disorderly collapse of the company. A disorderly failure 

of Bear Stearns in early 2008 could have had seriously adverse effects on financial markets and financial institutions, effects that— 

as later demonstrated in the case of Lehman Brothers—could have 

been extremely difficult to contain. The adverse effects would not 

have been confined to the financial system but would have been 
149 

felt broadly in the real economy through their effects on asset values and credit availability. In light of these facts, I believe the Federal Reserve, with the full support of the Treasury Department, 

acted appropriately in providing secured loans to facilitate the acquisition of Bear Stearns by JPMorgan Chase. 

The events associated with Bear Stearns clearly highlight the 

need for strong, consolidated supervision of all systemically important firms—not just those that own a bank. They also demonstrate 

the need for a resolution regime that would allow the orderly wind 

down or restructuring of a financial firm the disorderly failure of 

which would otherwise threaten financial stability and the economy. 

Q.14. On November 24, 2009, Reuters reported that the U.S. Federal Reserve asked banks that were part of its so-called ‘‘stress 

tests’’ to submit plans to repay government money lent to them 

under the Trouble Asset Relief Program (TARP). 

Without going into specifics on individual financial institutions 

or naming names, do you foresee any financial institutions that 

will have trouble repaying their TARP money? How will you handle 

companies that face challenges in repaying taxpayer money? 

A.14. With respect to the firms that participated in the ‘‘stress 

test,’’ 18 of the 19 had TARP preferred stock. Of those 18 firms, 

10 have now fully redeemed their TARP capital. Each of those 

firms issued significant common equity in connection with the 

TARP redemption. The Federal Reserve and other supervisors are 

in discussions with the remaining 8 SCAP firms that have outstanding TARP capital in order to facilitate reduced reliance on 

TARP capital, while ensuring they can maintain capital levels consistent with supervisory expectations after any proposed redemption. 

Among the many companies that received TARP Capital Purchase Program investments, which include firms not subject to 

SCAP, it is likely that some will have trouble repaying their TARP 

funds. Indeed, some institutions that received TARP investments 

have since reported significant financial deterioration and have already deferred payment of interest/dividends on their TARP securities in order to preserve capital. The banking agencies will address 

companies that face challenges in repaying TARP investments in 

the same manner that they address other companies facing capital 

constraints. To the extent that the repayment of TARP instruments 

or payment of dividends on the TARP funds would raise questions 

about the adequacy of capital at an insured depository or its consolidated parent company, the banking agencies may object to the 

payout and require the institution to retain the investment in order 

to preserve its resources and meet obligations to insured depositors. 

Q.15. On December 3, 2009, The Wall Street Journal reported that 

the Bank of America is set to repay its TARP funds. Given that 

news, along with the Federal Reserve’s request that financial institutions submit plans for repayment and the critical role that you 

played lobbying Congress for the creation of TARP I am interested 

in your opinion on the need to continue the program. As you know 

the authority to purchase new troubled assets under TARP expires 
150 

on December 31, 2009, but that it can be extended for almost another year. Do you believe that the stability of our Nation’s financial system necessitates an extension of this bailout program? 

A.15. The TARP program has contributed significantly to the improved conditions in financial markets. By providing capital to be 

invested in numerous financial institutions and establishing programs to restore the flow of credit, TARP has been a key stabilizing 

factor for the financial system. But more progress is needed. Far 

too many Americans are without jobs, and unemployment could remain high for some time even if, as we anticipate, moderate economic growth continues. Small businesses continue to face challenging credit conditions although, as I noted in my testimony before the Banking Committee, the Term Asset-Backed Securities 

Loan Facility has made an important contribution by helping to finance some 480,000 loans to small businesses. More broadly, the 

financial system has not yet fully recovered and remains vulnerable to unexpected shocks in the near future. Indeed many of the 

favorable indications in financial markets remain linked to the 

presence of TARP and other government initiatives, including the 

extraordinary actions taken by the Federal Reserve under its monetary policy and financial stability authorities that I outlined in my 

testimony. In his recent letter to the Congress about the extension 

of the TARP, Secretary Geithner struck a reasonable balance in 

stating his intention to dedicate most of the remaining TARP funds 

to deficit reduction while maintaining for a period the capacity to 

respond should financial conditions unexpectedly worsen. 

Q.16.a. The Wall Street Journal reported on some questions that 

different economists felt that you should answer. Let me borrow 

from some of those and I will credit them with their questions accordingly: 

Anil Kashyap, University of Chicago Booth Graduate School of 

Business: With the unemployment rate hovering around 10 percent, the public seems outraged at the combination of three things: 

(a) substantial TARP support to keep some firms alive, (b) allowing 

these firms to pay back the TARP money quickly, (c) no constraints 

on pay or other behavior once the money was repaid. Was it a mistake to allow (b) and/or (c)? 

A.16.a. TARP capital purchase program investments were always 

intended to be limited in duration. Indeed, the step-up in the dividend rate over time and the reduction in TARP warrants following 

certain private equity raises were designed to encourage TARP recipients to replace TARP funds with private equity as soon as practical. As market conditions have improved, some institutions have 

been able to access new sources of capital sooner than was originally anticipated and have demonstrated through stress testing 

that they possess resources sufficient to maintain sound capital positions over future quarters. In light of their ability to raise private 

capital and meet other supervisory expectations, some companies 

have been allowed to repay or replace their TARP obligations. No 

targeted constraints have been placed on companies that have repaid TARP investments. However, these companies remain subject 

to the full range of supervisory requirements and rules. The Federal Reserve has taken steps to address compensation practices 
151 

across all firms that we supervise, not just TARP recipients. Moreover, in response to the recent crisis, supervisors have undertaken 

a comprehensive review of prudential standards that will likely result in more stringent requirements for capital, liquidity, and risk 

management for all financial institutions, including those that participated in the TARP programs. 

Q.16.b. Mark Thoma, University of Oregon and blogger: What is 

the single, most important cause of the crisis and what is being 

done to prevent its reoccurrence? The proposed regulatory structure 

seems to take as given that large, potentially systemically important firms will exist, hence, the call for ready, on the shelf plans 

for the dissolution of such firms and for the authority to dissolve 

them. Why are large firms necessary? Would breaking them up reduce risk? 

A.16.b. The principal cause of the financial crisis and economic 

slowdown was the collapse of the global credit boom and the ensuing problems at financial institutions, triggered by the end of the 

housing expansion in the United States and other countries. Financial institutions have been adversely affected by the financial crisis 

itself, as well as by the ensuing economic downturn. 

This crisis did not begin with depositor runs on banks, but with 

investor runs on firms that financed their holdings of securities in 

the wholesale money markets. Much of this occurred outside of the 

supervisory framework currently established. An effective agenda 

for containing systemic risk thus requires elimination of gaps in 

the regulatory structure, a focus on macroprudential risks, and adjustments by all our financial regulatory agencies. 

Supervisors in the United States and abroad are now actively reviewing prudential standards and supervisory approaches to incorporate the lessons of the crisis. For our part, the Federal Reserve 

is participating in a range of joint efforts to ensure that large, systemically critical financial institutions hold more and higher-quality capital, improve their risk-management practices, have more robust liquidity management, employ compensation structures that 

provide appropriate performance and risk-taking incentives, and 

deal fairly with consumers. On the supervisory front, we are taking 

steps to strengthen oversight and enforcement, particularly at the 

firm-wide level, and we are augmenting our traditional microprudential, or firm-specific, methods of oversight with a more 

macroprudential, or system-wide, approach that should help us better anticipate and mitigate broader threats to financial stability. 

Although regulators can do a great deal on their own to improve 

financial regulation and oversight, the Congress also must act to 

address the extremely serious problem posed by firms perceived as 

‘‘too big to fail.’’ Legislative action is needed to create new mechanisms for oversight of the financial system as a whole. Two important elements would be to subject all systemically important financial firms to effective consolidated supervision and to establish procedures for winding down a failing, systemically critical institution 

to avoid seriously damaging the financial system and the economy. 

Some observers have suggested that existing large firms should 

be split up into smaller, not-too-big-to-fail entities in order to reduce risk. While this idea may be worth considering, policymakers 
152 

should also consider that size may, in some cases, confer genuine 

economic benefits. For example, large firms may be better able to 

meet the needs of global customers. Moreover, size alone is not a 

sufficient indicator of systemic risk and, as history shows, smaller 

firms can also be involved in systemic crises. Two other important 

indicators of systemic risk, aside from size, are the degree to which 

a firm is interconnected with other financial firms and markets, 

and the degree to which a firm provides critical financial services. 

An alternative to limiting size in order to reduce risk would be to 

implement a more effective system of macroprudential regulation. 

One hallmark of such a system would be comprehensive and vigorous consolidated supervision of all systemically important financial firms. Under such a system, supervisors could, for example, 

prohibit firms from engaging in certain activities when those firms 

lack the managerial capacity and risk controls to engage in such 

activities safely. Congress has an important role to play in the creation of a more robust system of financial regulation, by establishing a process that would allow a failing, systemically important 

nonbank financial institution to be wound down in an orderly fashion, without jeopardizing financial stability. Such a resolution process would be the logical complement to the process already available to the FDIC for the resolution of banks. 

Q.16.c. Simon Johnson, Massachusetts Institute of Technology and 

blogger: Andrew Haldane, head of financial stability at the Bank 

of England, argues that the relationship between the banking system and the government (in the U.K. and the U.S.) creates a ‘‘doom 

loop’’ in which there are repeated boom-bust-bailout cycles that 

tend to get cost the taxpayer more and pose greater threat to the 

macro economy over time. What can be done to break this loop? 

A.16.c. The ‘‘doom loop’’ that Andrew Haldane describes is a consequence of the problem of moral hazard in which the existence of 

explicit government backstops (such as deposit insurance or liquidity facilities) or of presumed government support leads firms to 

take on more risk or rely on less robust funding than they would 

otherwise. A new regulatory structure should address this problem. 

In particular, a stronger financial regulatory structure would include: a consolidated supervisory framework for all financial institutions that may pose significant risk to the financial system; consideration in this framework of the risks that an entity may pose, 

either through its own actions or through interactions with other 

firms or markets, to the broader financial system; a systemic risk 

oversight council to identify, and coordinate responses to, emerging 

risks to financial stability; and a new special resolution process 

that would allow the government to wind down in an orderly way 

a failing systemically important nonbank financial institution (the 

disorderly failure of which would otherwise threaten the entire financial system), while also imposing losses on the firm’s shareholders and creditors. The imposition of losses would reduce the 

costs to taxpayers should a failure occur. 

Q.16.d. Brad Delong, University of California at Berkeley and 

blogger: Why haven’t you adopted a 3 percent per year inflation 

target? 
153 

A.16.d. The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations 

and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the 

longer-run inflation expectations of households and businesses 

have remained very stable over recent years. The Federal Reserve 

has not followed the suggestion of some that it pursue a monetary 

policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates 

and so stimulate spending and output. However, that theoretical 

argument ignores the risk that such a policy could cause the public 

to lose confidence in the central bank’s willingness to resist further 

upward shifts in inflation, and so undermine the effectiveness of 

monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course 

of three decades, and this stability cannot be taken for granted. 

Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations 

firmly anchored. 

Q.17. The Obama administration uses a phrase that, before the beginning of the year, I was not all that familiar with. They talk 

about jobs that are ‘‘created or saved.’’ As an economist, can you 

define what a ‘‘saved’’ job is? How would one measure how many 

jobs are being saved? Do you know of any economist or Federal 

agency that measures the number of jobs saved (if they do, please 

provide some detail as to when they decided to track that number 

and how they define it and measure it)? 

A.17. The Council of Economic Advisers has been compiling the Administration’s estimates of jobs created or saved, and can provide 

you with the details of their methodology. In general, the challenge 

in estimating jobs created or saved is the need to try to estimate 

how employment would have evolved in the absence of the policy 

being considered. 

Q.18. Section 109 of the recently enacted ‘‘Credit Card Accountability, Responsibility and Disclosure Act of 2009’’ (P.L. 111-24) requires card issuers to consider the ability of a consumer to make 

required payments on an account before opening the account or increasing an existing line of credit. The provision in Section 109 results from an amendment that was proposed to the underlying legislation. The original amendment would have required card issuers 

to consider income and similar metrics when evaluating an applicant’s or cardholder’s ability to make payments on a credit card account. Such specificity was deleted in the amendment that was ultimately adopted as part of the Credit CARD Act. Furthermore, 

again unlike in the mortgage context, obtaining income and asset 

information can be very difficult in the context of a credit card relationship, especially in connection with credit line increases and 

credit obtained at the point of sale. 

Could you explain why the Board’s proposed regulations to implement Section 109 reinserted the notion that card issuers must 

consider income or assets despite what appeared to be clear indications that Congress did not believe it was necessary? 
154 

Can you please provide the Committee any and all information 

the Board considered when it determined that the consideration of 

income/assets would result in a statistically significant improvement in the underwriting of credit card loans? If you do not have 

any such information, or if the Board cannot conclude that the consideration of income/assets results in a statistically significant underwriting improvement, please indicate such. 

Please quantify for the Committee the benefits associated with 

the consideration of a consumer’s income or assets in connection 

with a credit card loan and compare them to the operational and 

other costs associated with such a requirement. Please include, in 

particular, costs such as systems changes, reduced credit availability at the point of sale, the adverse selection of relying on consumers to request credit line increases, and consumer dissatisfaction that would result. 

Assume a credit card issuer obtains income information from an 

applicant, and obtains information from a consumer report about 

the consumer’s credit obligations. Would you please provide examples of what a card issuer should do with this information, and statistical (or other) evidence of how such information would demonstrably improve upon other underwriting mechanisms? 

A.18. Our implementation of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (‘‘Card Act’’) has followed 

the process used by the Board in other rulemakings. After reviewing the statutory language and legislative history of the Act, including Section 109, we conducted outreach meetings with both industry representatives (including retailers) and consumer groups to 

inform our judgments about the best way to implement the statute. 

We also drew on our recent experience in developing mortgage regulations that require creditors to consider consumers’ ability to 

make the scheduled loan payments. 

Section 109 requires card issuers to consider a consumer’s ability 

to make the required payments under the terms of the account before opening the account or increasing an existing credit limit. 

Under the Board’s proposal, a card issuer must, at a minimum, 

consider the consumer’s ability to make the required minimum 

periodic payments after reviewing the consumer’s income or assets 

as well as the consumer’s current obligations. The proposed rules 

specify, however, that card issuers may also consider other factors 

traditionally used by the industry in determining creditworthiness, 

such as the consumer’s payment history, credit report, or credit 

score. These additional factors provide creditors with useful information about a consumer’s past propensity to pay. 

The Board’s publication of the proposed rules did not reflect a 

final determination regarding the appropriate method for ensuring 

that a card issuer considers a consumer’s ability to make the required payments. Instead, the Board provided the public with an 

opportunity to comment on the advantages and disadvantages of 

the proposed rules. The comments we received raised many of the 

same issues you have raised. In particular, comments from card 

issuers and retailers generally stated that there are significant 

operational and other costs associated with collecting and considering information about a consumer’s income or assets. However, 

comments from consumer groups supported consideration of income 
155 

or asset information and urged the Board to go further by requiring 

that this information be verified through documentation or other 

means. The Board is currently in the process of considering these 

and other issues raised by the public comments in order to develop 

a final rule. 

Q.19. At your hearing you said that the Federal Reserve did not 

see any asset bubbles in the U.S. Why don’t you consider what is 

occurring in the gold market to be a bubble? Or, should we see it 

as a forward indicator of increasing inflation? 

A.19. Gold is used for a wide range of purposes, including as an 

investment, a reserve asset, or in the production of jewelry and 

other products. Accordingly, it is often unclear whether movements 

in gold prices owe to changes in supply or demand, and whether 

those movements are consistent with fundamentals or might indicate a bubble. However, the recent rise in gold prices has not been 

much out of line with the increases in other commodities, suggesting that increases in gold prices might well be consistent with 

fundamentals, perhaps reflecting the global economic recovery. 

Gold prices may also reflect general economic uncertainty. As 

measures of U.S. expected inflation drawn from inflation-protected 

bond yields and from surveys of consumers and professional forecasters have remained well contained, it seems unlikely that higher 

gold prices signal higher inflation expectations. 

Q.20. Are you concerned that Congress with various fiscal policies 

and the Federal Reserve with its various monetary policies, low 

Federal funds rate and purchasing mortgage backed securities and 

Treasuries, will re-inflate the housing bubble with even more liability for the taxpayer given the increase in federally guaranteed 

mortgages? 

A.20. Of course, the Federal Reserve needs to be alert to the full 

range of potential consequences of our policies, and we will continue to carefully monitor conditions in housing markets. That 

said, however, the prospect of a re-ignited housing bubble does not 

seem likely in the period ahead. The demand for housing appears 

to be strengthening gradually, supported by a variety of factors including low mortgage interest rates for the most creditworthy borrowers, home prices that have fallen considerably from their peaks, 

and various government tax and credit initiatives. But by no means 

does this gradual improvement signal an overheating in housing 

markets. Nationally, house prices have declined 30 percent from 

their peak. Futures markets foresee only tepid increases over the 

next year; similarly, respondents to the Reuters University of 

Michigan survey of consumers expect at best sluggish appreciation. 

Home sales are still at comparatively low levels, and credit availability remains difficult for many borrowers, far different from the 

situation prior to the financial crisis. In addition, mortgage markets now operate under revised Federal Reserve regulations restricting certain unfair, abusive, or deceptive lending activities that 

contributed to the earlier excesses in the housing market. Finally, 

the large number offoreclosures that are likely to come on the market represents a significant potential source of downward pressure 

on house prices that may linger for some time. 
156 

Q.21. Mr. Chairman, as you know the FHA is insuring somewhere 

between 30 to 40 percent of the new home loans made in the country at the same time that its loan reserves are below 2 percent and 

there is a real threat that the FHA runs out of money and has to 

come to Congress or the Treasury for an appropriation. 

What are the long term consequences of a mortgage market so 

heavily reliant on a guarantee by the Federal government? 

How do we transition back to a market without such a heavy reliance on the taxpayer? 

As a banking regulator, what views do you and the Federal Reserve have about the safety and soundness of loans made by banks 

with only a 3.5 percent downpayment? Should Congress be concerned that they are more risky than a loan made with a 10 or 20 

percent downpayment? 

A.21. The FHA is currently serving an important role in supporting 

housing demand because it is the main source of finance for homebuyers with less than 20 percent downpayments. According to data 

from the National Association of Realtors, the typical first-time 

homebuyer over the past few years has had a down payment of less 

than 10 percent of the purchase price of the home. In addition, the 

FHA provides an outlet for borrowers seeking to refinance out of 

loans held in subprime or alt-A mortgage-backed securities who 

have seen their initial equity cushions decrease. 

As house prices stabilize over the next couple of years, outsized 

losses at mortgage insurance companies and banks—the traditional 

alternatives to FHA loans—should diminish. Once the effects of the 

extraordinary credit boom and bust of this decade start to wane, 

private lenders will again likely find it profitable to enter the market for higher LTV loans and the mortgage market should return 

to its traditional structure, where the FHA plays an important, but 

limited, role. 

Higher LTV loans, including FHA loans, are obviously more exposed to house price movements than loans where the borrower has 

made a large downpayment. As a result, it is particularly important that all lenders underwrite higher LTV loans with particular 

caution; for example, by carefully verifying the borrower’s ability to 

repay and history of meeting credit obligations. (For banks, these 

risk mitigants, and other items, were contained in supervisory letters SR 06-15 and 07-12.) 

As always, banks, the FHA, the GSEs, and other institutions 

participating in the mortgage market should seek to accurately 

measure and appropriately price the risks they accept when making loans. For the FHA, the prudent underwriting of mortgages 

may also entail the development of new mortgage products and 

greater expenditures on technology and software resources that 

would allow it to better measure and manage its credit risk exposure. Otherwise, it may suffer from adverse selection as other lenders come back into the mortgage market. 
157 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

[FROM THE WASHINGTON POST, THURSDAY, DECEMBER 3, 2009—LETTER TO THE

EDITOR, P. A32] 

The Right Role for the Fed 

Regarding Federal Reserve Chairman Ben Bernanke’s Nov. 29 Sunday Opinion 

commentary, ‘‘The Right Reform for the Fed’’: 

As a result of legislative convenience, bureaucratic imperative and historical happenstance, a variety of responsibilities have accreted to the Fed over the years. In 

addition to conducting monetary policy, the Fed also distributes currency, runs the 

system through which banks transfer funds, supervises financial holding companies 

and some banks, and writes rules to protect consumers in financial transactions. 

Mr. Bernanke argues that preserving this melange is not only efficient but crucial 

to protecting the Fed’s independence. 

Apparently, the argument runs, there are hidden synergies that make expertise 

in examining banks and writing consumer protection regulations useful in setting 

monetary policy. In fact, collecting diverse responsibilities in one institution fundamentally violates the principle of comparative advantage, akin to asking a plumber to check the wiring in your basement. 

There is an easily verifiable test. The arm of the Fed that sets monetary policy, 

the Federal Open Market Committee (FOMC), has scrupulously kept transcripts of 

its meetings over the decades. (I should know, as I was the FOMC secretary for a 

time.) After a lag of 5 years, this record is released to the public. If the FOMC made 

materially better decisions because of the Fed’s role in supervision, there should be 

instances of informed discussion of the linkages. Anyone making the case for beneficial spillovers should be asked to produce numerous relevant excerpts from that 

historical resource. I don’t think they will be able to do so. 

The biggest threat to the Fed’s independence is doubt about its competence. The 

more the Congress expects the Fed to do, the more likely will such doubts blemish 

its reputation. 

VINCENT REINHART, 

Resident scholar at the American Enterprise Institute.