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MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JULY 13, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–46 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

July 13, 2011 ..................................................................................................... 1 

Appendix: 

July 13, 2011 ..................................................................................................... 49 

WITNESSES 

WEDNESDAY, JULY 13, 2011 

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

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

APPENDIX 

Prepared statements: 

Paul, Hon. Ron .................................................................................................. 50 

Bernanke, Hon. Ben S. ..................................................................................... 52 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bernanke, Hon. Ben S.: 

Monetary Policy Report to the Congress, dated July 13, 2011 ..................... 65 

Written responses to questions submitted by Representative Fitzpatrick .. 123 

Written responses to questions submitted by Representative Luetkemeyer ............................................................................................................. 126 

(1) 

MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

Wednesday, July 13, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

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

Rayburn House Office Building, Hon. Spencer Bachus [chairman of 

the committee] presiding. 

Members present: Representatives Bachus, Hensarling, King, 

Royce, Lucas, Paul, Jones, Biggert, Miller of California, Capito, 

Garrett, Neugebauer, McHenry, Pearce, Posey, Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, Hayworth, Renacci, 

Hurt, Dold, Schweikert, Grimm, Canseco, Stivers, Fincher; Frank, 

Waters, Maloney, Velazquez, Watt, Ackerman, Sherman, Meeks, 

Capuano, Clay, McCarthy of New York, Baca, Lynch, Miller of 

North Carolina, Scott, Green, Cleaver, Perlmutter, Donnelly, Carson, Himes, Peters, and Carney. 

Chairman BACHUS. This hearing will come to order. We meet 

today to receive the semiannual report to Congress by the Chairman of the Board of Governors of the Federal Reserve System on 

the conduct of monetary policy and the state of the economy. Without objection, all members’ written statements will be made a part 

of the record. For purposes of opening statements, I recognize myself for 5 minutes. 

Chairman Bernanke, welcome back to the committee. I want to 

commend you for your service to the country during these challenging economic times. America is confronted with many challenges, not least of which is a crisis of confidence. For the first time 

in the history of our country, the majority of Americans no longer 

believe that their children will be better off than they are. One 

great challenge is to preserve the American spirit of individual initiative and responsibility, what was once called the American ‘‘cando’’ spirit. I briefly looked over your testimony this morning, and 

I noticed you mentioned confidence on several occasions in your 

speech. Confidence is critical. It is critical for us to believe in ourselves, to believe in our future, to believe that it will get better. 

The uncertainty and lack of confidence are at the center of the 

failure of our economy to achieve a robust recovery with job creation, the job creation which will be necessary to support the continued improvement in our citizens’ lives that we have come to expect as Americans. The origin of this crisis of confidence is debatable. The great recession and its legacy of job losses and home foreVerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE
2 

closures is a contributing factor. Those are things we will have to 

work through. As your testimony said, it will be a long process. 

But in my opinion, the seeds of this lack of confidence were first 

sown in well-intentioned programs of the 1930s and of the Lyndon 

Johnson Great Society. I commend to you and to my colleagues 

here an article by Thomas Donlan in Barrons on June 25th. In that 

article, Donlan describes the historical underpinnings of the entitlement philosophy that has brought our budget to what you have 

called an ‘‘unsustainable path.’’ 

Let me quote from that article. Actually Lyndon Johnson recorded all his conversations, and they are there for us to see. And 

speaking in March of 1965 with his press secretary, Bill Moyers, 

on his motivation for Medicare, here is what he said: ‘‘I have never 

seen one’’—he is talking about the average worker—‘‘I have never 

seen one have too much health benefits. So when they come in to 

me and say we have to have $400 million more so we can take care 

of some doctor bills, I am for it on health. None of them ever get 

enough. They are entitled to it. That’s an obligation of ours. It’s 

just like your mother writing you and saying she wants $20. I always send mine $100 when she asks. I always did because I 

thought she was entitled to it.’’ 

We have. That is what we have been doing with Medicare. When 

Wilbur Mills called President Johnson to tell him that Medicare 

had passed, that conversation was recorded, too, and here is what 

Wilbur Mills said to President Johnson: ‘‘I think we’ve got you 

something that we won’t only run on in 1960 but will run on from 

hereafter.’’ 

It seems like the Congress and the Administrations have been 

running on entitlement programs ever since, and now the money 

has run out. President Johnson, as I said, he was quoted as saying 

that people are entitled to an unlimited amount of medical benefits. 

I have two charts during my questioning I want to show you and 

to my fellow colleagues on the committee, but you have said that 

the Federal entitlement programs and the deficit spending they 

cause are not—if they are not put on a sustainable path, things 

will come apart. I fear we are at that point. Things are coming 

apart. 

I want to give two other quotes I have. My time is running out. 

But let me just say this, the buck stops with this Congress, and 

if the Federal Reserve cannot address this problem, we have to. We 

have to confront our entitlement problems and take your advice. If 

we do not, we will not restore confidence. If we do not, we will not 

restore a future for our children and grandchildren. So I thank you 

for your testimony. I recognize the ranking member. 

Mr. FRANK. Thank you. Welcome, Mr. Chairman, and Mr. Chairman, thank you. I thank you, too, Mr. Chairman, for your bipartisan restraint because in blaming Franklin Roosevelt and Lyndon 

Johnson, you let Woodrow Wilson off the hook, and I think that 

was an act of generosity. 

The notion that the problems we are now facing are the fault of 

efforts begun under FDR and continued under LBJ with some others, Harry Truman and John Kennedy also helping, that is the 

cause of the current problem is a very hard one for me to understand. I guess it is particularly hard because apparently these terVerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE
3 

rible efforts by Roosevelt and Johnson to put a set of policies in 

place that help us have a middle class when people get old took a 

very long time to take effect. Apparently, these 1965 and 1930s decisions did not begin to blow up until fairly recently. I note the 

chairman said, oh, well, the great recession was a contributing factor. Here is where we differ in our analysis, and I think the history 

is pretty clear. We were doing very well. We did very well in the 

1990s, we did very well in the 1990s even though this Congress 

and Bill Clinton raised the marginal tax rate on the wealthiest people in the country. 

And predictions to the contrary notwithstanding, we then had 

some of the best economic years we have ever had because it 

turned out that raising the marginal rate from 36 percent to 39 

percent on the wealthiest 2 percent had no negative economic effect. It did not lead them to stop working on Saturdays or take 

longer lunch hours. They continued their productivity. 

The problem was, and Mr. Bernanke is here now, he was here 

in 2008 as an appointee of President Bush, and in good faith, and 

I believe quite appropriately came to this Congress as the chairman knows because he was there along with Secretary Paulson, 

George Bush’s Secretary of the Treasury, and said we are on the 

verge of a total economic collapse, and we suffered from 2008 until 

well into 2009 that serious economic collapse, a total lack of economic activity caused by the financial crisis. And to say that terrible set of events, the worst since the Great Depression, and they 

did not become worse only because of actions taken on a bipartisan 

basis to stave off even worse, that is a contributing factor, but it 

is really Lyndon Johnson’s fault, seems to me, to be very odd history at best. 

In fact, when President Obama came to office, he inherited the 

worst economy in 75 years. We have made progress. It has not 

been good enough. Part of the problem has been public policies that 

have retarded progress. Unemployment is much too high. As the 

Chairman of the Federal Reserve makes clear in his report, we 

have added about a million jobs so far this year in the private sector. Unfortunately, we have been simultaneously losing State and 

local jobs, teachers, police officers, firefighters, and public works 

employees because of the policies of my Republican colleagues. In 

fact, while unemployment is not what we would like it to be, beginning with the period of 2009 when the stimulus was at its height, 

we have since then lost a half a million jobs. That is, unemployment would be 0.4 percent lower if we had not lost State and local 

jobs. I am not talking about a failure to gain. I am talking about 

there being fewer State and local jobs because of a failure to differentiate between the need to do long-range deficit reduction and 

the counterproductive activity of forcing State and local governments to fire people in the short term and then complain about unemployment. 

And then I will address the problems financially. The chairman 

thinks it is Lyndon Johnson’s fault. No, I do not think that Medicare is a terrible thing. I do not think it has caused us a problem. 

I think the ability of the American people, when they get older, to 

have a decent middle-class life through Social Security and Medicare is something of which we should be very proud as a country. 

4 

And it is true at $580 billion a year, Medicare costs us a lot of 

money. Almost as much—well, not even almost as much, but perhaps the same order of magnitude as the Pentagon—almost $700 

billion will go to the military. And when Members of this House 

who voted to continue to spend money in the infrastructure program for Afghanistan, when there were people who appear to be 

arguing, and I will say this to my Administration that I support, 

the notion that they would go beyond George Bush and keep troops 

in Iraq next year when we are in such a terrible financial situation 

is a very hard one for me to understand. But Members who would 

not even—we talk about austerity. A majority of this House voted 

to give the Pentagon a $17 billion increase over this year for next 

year, $17 billion. Money spent in Afghanistan and Iraq. I do not 

believe that Members who are prepared to spend almost without 

limit in those wars that should have been ended and on the Pentagon ought to be telling older people to feel embarrassed about 

getting adequate medical care. 

Chairman BACHUS. I now recognize the subcommittee chair, Mr. 

Paul, and also acknowledge that he has announced that at the end 

of this term, he will be leaving Congress, and I am sure that came 

as quite a disappointment to the Federal Reserve. 

Mr. FRANK. Mr. Chairman, would you yield briefly, can I join because Mr. Paul and I have worked in opposition on some issues, 

and together on some others. He has been an extraordinarily valuable Member, and I will miss him. Could I also note, Mr. Chairman, that you have the honor of I think presiding for the first time 

in American history over a committee that has three declared Presidential candidates. I hope we will not soon have to have Secret 

Service replacing our Capitol policemen at the door, but I will miss 

Mr. Paul. 

Chairman BACHUS. And one of them is here today. 

Dr. PAUL. I thank the chairman for yielding. Somebody had told 

me that announcement would put a smile on Chairman Bernanke’s 

face. 

Chairman BACHUS. And his staff, they are all smiling. 

Dr. PAUL. But I thank the chairman for yielding and I welcome 

Chairman Bernanke. The country today has become very aware of 

how serious our problems are. I think everybody understands that 

it is very, very serious. It is critical, and from my viewpoint, I think 

the country is literally bankrupt, and we are not quite willing to 

admit that. But these are overwhelming problems that we do face. 

Unfortunately, from my viewpoint, I think we have more going on 

here on who to blame for the problems and who is going to benefit 

by blaming. I see it a little bit differently because I see it as a 

failed policy, a policy of central economic planning, and that has 

not been going on just with this Congress and this President. It has 

been going on for quite a few decades. I think that is what we have 

to address. 

Literally, the Congress appropriates the money and is a big 

blame. But also, the special interests have tremendous influence, 

and they are to blame, but also we have citizens groups who always want handouts and special benefits. They have some blame 

to assume as well. But also it is these wars that continue to go on, 

the undeclared war, the consonance of wars. Nobody can even tell 

5 

us exactly how many wars we are in today and when the next one 

is going to start or when the last one is going to end. And then all 

of this spending and pressure. 

Then we also have the Fed to deal with, too. And I see the Fed 

as a problem because I see so much of this other spending would 

not have gotten out of hand if we did not have a monetary system 

where the system provides the funds. We do not have to be responsible because we can always say, it is up to the Fed. If we did not 

have the Fed buying up our debt, interest rates would rise and everybody would yell and scream, but you know what it would do? 

It would put pressure on us here in the Congress to do something 

about it. But I see the monetary system and the Federal Reserve 

System as a facilitator for all these special interests, and for a good 

many decades, we have been able to get away with this. But we 

are not getting away with it anymore because we have run out of 

steam. We have run out of jobs. We have run out of productive capacity. 

Our Tax Code is all out of whack. The entitlements are out of 

control. Our good jobs are going overseas. We chase capital away, 

we have a deliberate policy of a weak currency. Weak currency 

chases away capital. So I see this has all added up to give us this 

crisis, and unfortunately we are still looking for who to blame for 

this. You cannot find one individual or one Administration. You 

have to blame the policy, and unfortunately central economic planning, whether of the Soviet style or whether of the style of the 

interventionist where we do it through congressional activity as 

well as central banking, the central economic planning is always 

flawed because it is never as smart as the market. That is why I 

object to the idea that we are knowledgeable enough to set interest 

rates and know what the money supply should be because that is 

information that should come from the market. When it does not 

come from the market, it is a failed policy and leads to the type 

of crisis we are now suffering from. 

Chairman BACHUS. I thank the subcommittee chair. At this time, 

I would like to recognize the ranking member of the Subcommittee 

on Monetary Policy, Mr. Clay, for 3 minutes. 

Mr. CLAY. Thank you, Mr. Chairman. I, too, want to say that I 

will miss my colleague, Dr. Paul. Perhaps he will remain in this 

town in some capacity. 

Let me thank you for holding this hearing on the conduct of monetary policy and the state of the economy. Also thank you, Chairman Bernanke, for once again appearing before us. The Full Employment and Balanced Growth Act of 1978, better known as the 

Humphrey-Hawkins Act, set forth benchmarks for the economy: 

full employment; growth in production; price stability; and a balance of trade and budget. To monitor progress towards these goals, 

the Act mandated that the Federal Reserve must present semiannual reports to Congress on the state of the U.S. economy and 

the Nation’s financial outlook. The Humphrey-Hawkins Act also 

charges the Federal Reserve with a dual mandate: maintaining stable prices; and promoting full employment. 

According to the Department of Labor, in June, the Nation’s unemployment rate was 9.2 percent. Over 14 million Americans are 

looking for work. Another 5 million are underemployed at jobs that 

6 

pay much less than they previously earned and offer few benefits. 

In urban areas, like the district that I represent in St. Louis, the 

unemployment rate among African Americans and other minorities 

is over 16 percent. The Majority party has been in power in the 

House for 190 days, and yet we have not seen one jobs bill, and 

America is still waiting. 

Chairman Bernanke, I am eager to hear what additional steps 

the Federal Reserve is willing to take to free up the flow of credit 

to small businesses and to encourage major banks to finally invest 

in the recovery instead of sitting on the sidelines with trillions of 

dollars that could be creating millions of new jobs. I also look forward to Chairman Bernanke’s comments regarding what other urgent steps Congress can take to spur private sector job growth and 

restore confidence in our economic future. 

With that, Mr. Chairman, I yield back. 

Chairman BACHUS. Thank you, Mr. Clay. I appreciate that opening statement. Before I recognize the Chairman, I would like to remind the members of the committee that traditionally, the Chairman is here until 12:30, and we will adhere to that today. To accommodate as many members as possible, I am going to strictly enforce the 5-minute rule. The opening statements will all be given 

within that time limit. Without objection, Chairman Bernanke, 

your written statement will be made a part of the record, and you 

are now recognized for a summary of your testimony. 

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

SYSTEM 

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

Frank, and other members of the committee, I am pleased to 

present the Federal Reserve’s semiannual monetary policy report to 

the Congress. I will begin with a discussion of current economic 

conditions and the outlook and then turn to monetary policy. 

The U.S. economy has continued to recover, but the pace of expansion so far this year has been modest. After increasing at an 

annual rate of 23⁄4 percent in the second half of 2010, real GDP 

rose at about a 2 percent rate in the first quarter of this year, and 

incoming data suggests the pace of recovery remained soft in the 

spring. At the same time, the unemployment rate, which had appeared to be on a downward trajectory at the turn of the year, has 

moved back above 9 percent. 

In part, the recent weaker-than-expected economic performance 

appears to have been the result of several factors that are likely 

to be temporary. Notably, the run-up in prices of energy, especially 

gasoline and food, has reduced consumer purchasing power. In addition, the supply chain disruptions that occurred following the 

earthquake in Japan caused U.S. motor vehicle producers to sharply curtail assemblies and limited the availability of some models. 

Looking forward, however, the apparent stabilization in the 

prices of oil and other commodities should ease the pressure on 

household budgets, and vehicle manufacturers report that they are 

making significant progress in overcoming the parts shortages and 

expect to increase production substantially this summer. 

7 

In light of these developments, the most recent projections by 

members of the Federal Reserve Board and the President of the 

Federal Reserve Banks prepared in conjunction with the FOMC 

meeting in late June reflected their assessments that the pace of 

economic recovery will pick up in coming quarters. Specifically, 

participants project for the increase in real GDP a central tendency 

of 2.7 to 2.9 percent for 2011 inclusive of the weak first half, and 

3.3 to 3.7 percent in 2012, projections that if realized, would constitute a notably better performance than we have seen so far this 

year. 

FOMC participants continue to see the economic recovery 

strengthening over the medium term, with the central tendency of 

their projections for the increase in real GDP picking up to 3.5 to 

4.2 percent in 2013. At the same time, the central tendencies of the 

projections of the real GDP growth in 2011 and 2012 were marked 

down nearly one-half percentage point compared with those reported in April, suggesting that FOMC participants saw at least 

some part of the first-half slowdown as persisting for a while. 

Among the headwinds facing the economy are the slow growth in 

consumer spending, even after accounting for the effects of higher 

food and energy prices, the continued depressed condition of the 

housing sector, still limited access to credits for some households 

and small businesses, and fiscal tightening at all levels of government. Consistent with projected growth and real output modestly 

above its trend rate, FOMC participants expected that over time, 

the jobless rate will decline, albeit only slowly, toward its longer 

term normal level. The central tendencies of the participants’ forecasts for the unemployment rate were 8.6 to 8.9 percent for the 

fourth quarter of this year, 7.8 to 8.2 percent at the end of 2012, 

and 7.0 to 7.5 percent at the end of 2013. 

The most recent data attests to the continuing weakness of the 

labor market. The unemployment rate increased to 9.2 percent in 

June and gains in nonfarm payroll employment were below expectations for a second month. To date, of the more than 81⁄2 million 

jobs lost in the recession, 13⁄4 million have been regained. Of those 

employed, about 6 percent, 8.6 million workers, report that they 

would like to be working full-time but can only obtain part-time 

work. Importantly, nearly half of those currently unemployed have 

been out of work for more than 6 months, by far the highest ratio 

in the post-World War II period. Long-term unemployment imposes 

severe economic hardships on the unemployed and their families, 

and by leading to an erosion of skills, it also impairs their lifetime 

employment prospects and reduces the productive potential of our 

economy as a whole. 

Much of the slowdown in aggregate demand this year has been 

centered in the household sector, and the ability and willingness of 

consumers to spend will be an important determinant of the pace 

of recovery in coming quarters. Real disposable income over the 

first 5 months of 2011 was boosted by the reduction in payroll 

taxes, but those gains were largely offset by higher prices for gasoline and other commodities. Households report that they have little 

confidence in the durability of the recovery and about their own income prospects. Moreover, the ongoing weakness in home values is 

8 

holding down household wealth and weighing on consumer sentiment. 

On the positive side, household debt burdens are declining, delinquency rates on credit cards and auto loans are down, and the 

number of homeowners missing a mortgage payment for the first 

time is decreasing. The anticipated pickups in economic activity 

and job creation, together with the expected easing of price pressures, should bolster real household income confidence and spending in the medium run. 

Residential construction activity remains at an extremely low 

level. The demand for homes has been depressed by many of the 

same factors that have held down consumer spending more generally, including the slowness of the recovery in jobs and income as 

well as poor consumer sentiment. Mortgage interest rates are near 

record lows, but access to mortgage credit continues to be constrained. Also, many potential homebuyers remain concerned about 

buying into a falling market, as weak demand for homes and the 

substantial backlog of vacant properties for sale and the high proportion of distressed sales are keeping downward pressure on 

house prices. 

Two bright spots in the recovery have been exports and business 

investment in equipment and software. Demand for U.S.-made capital goods from both domestic and foreign firms has supported 

manufacturing production throughout the recovery thus far. Both 

equipment and software outlays and exports increased solidly in 

the first quarter and the data on new orders received by U.S. producers suggests that the trend continued in recent months. Corporate profits have been strong and larger nonfinancial corporations with access to capital markets have been able to refinance existing debt and to lock in funding at lower yields. Borrowing conditions for businesses generally have continued to ease, although as 

mentioned, the availability of credit appears to remain relatively 

limited for some small firms. 

Inflation has picked up so far this year. The price index for personal consumption expenditures rose at an annual rate of more 

than 4 percent over the first 5 months of 2011 and 21⁄2 percent on 

a 12-month basis. Much of the acceleration was the result of higher 

prices for oil and other commodities and for imported goods. In addition, prices for motor vehicles increased sharply when supplies 

for new models were curtailed by parts shortages by the earthquake in Japan. Most of the recent rise in inflation appears likely 

to be transitory, and FOMC participants expect inflation to subside 

in coming quarters to rates at or below the level of 2 percent or 

a bit less, that participants view is consistent with our dual mandate of maximum employment and price stability. 

The central tendency of participants’ forecast the rate of increase 

in the PCE price index was 2.3 to 2.5 percent for 2011 as a whole, 

which would imply a significant slowing of inflation in the second 

half of the year. In 2012 and 2013, the central tendency of the inflation forecast was 1.5 to 2.0 percent. 

Reasons to expect inflation to moderate include the apparent stabilization in the prices of oil and other commodities, which is already showing through to retail gasoline and food prices. The still 

substantial slack in U.S. labor and product markets, which has 

9 

made it difficult for workers to obtain wage gains, and for firms to 

pass through their higher costs, and the stability of longer-term inflation expectations as measured by surveys of households, the 

forecasts of professional private sector economists and professional 

market indicators. 

The judgments of FOMC members, the pace of the economic recovery overcoming quarters will likely remain moderate, that the 

unemployment rate will consequently decline only gradually, and 

that inflation will subside are the basis for the committee’s decision 

to maintain a highly accommodative monetary policy. As you know, 

that policy currently consists of two parts: First, the target range 

for the Federal funds rate remains at zero to one-fourth percent, 

and as indicated in the statement released after the June meeting, 

the committee expects that economic conditions are likely to warrant exceptionally low levels of the Federal funds rate for an extended period. 

The second component of monetary policy has been to increase 

the Federal Reserve’s holdings of longer-term securities, an approach undertaken because the target for the Federal funds rate 

could not be lowered meaningfully further. The Federal Reserve’s 

acquisition of longer-term Treasury securities boosted the prices of 

such securities and caused longer-term Treasury yields to be lower 

than they would have been otherwise. In addition, by removing 

substantial quantities of longer-term Treasury securities from the 

market, the Fed’s purchases induced private investors to acquire 

other assets that serve as substitutes for Treasury securities in the 

financial marketplace, such as corporate bonds and mortgagebacked securities. 

By this means, the Fed’s asset purchase program, like more conventional monetary policy, has served to reduce the yields and increase the prices of those other assets as well. The net result of 

these actions is lower borrowing costs and easier financial conditions throughout the economy. We know from many decades of experience with monetary policy that when the economy is operating 

below its potential, easier financial conditions tend to promote 

more rapid economic growth. Estimates based on a number of studies as well as Federal Reserve analyses suggest that all else being 

equal, the second round of asset purchases probably lowered 

longer-term interest rates approximately 10 to 30 basis points. Our 

analysis further indicates that a reduction in longer-term interest 

rates of this magnitude would be roughly equivalent in terms of its 

effect on the economy to a 40-to-120 basis point reduction in the 

Federal funds rate. 

In June, we completed the planned purchases of $600 billion in 

longer-term Treasury securities that the committee initiated in November while continuing to reinvest the proceeds of maturing or redeemed longer-term securities and treasuries. Although we are no 

longer expanding our securities holdings, the evidence suggests 

that the degree of accommodation delivered by the Federal Reserve 

securities purchase program is determined primarily by the quantity and mix of securities that the Federal Reserve holds rather 

than by the current pace of new purchases. 

Thus, even with the end of net new purchases, maintaining our 

holdings of these securities should continue to put downward presVerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE
10 

sure on market interest rates and foster more accommodative financial conditions than would otherwise be the case. 

It is worth emphasizing that our program involved purchases of 

securities, not government spending, and as I will discuss later, 

when the macroeconomic circumstances call for it, we will unwind 

those purchases. In the meantime, interest on those securities is 

remitted to the U.S. Treasury. 

When we began this program, we certainly did not expect it to 

be a panacea for the country’s economic problems. However, as the 

expansion weakened last summer, developments with respect to 

both components of our dual mandate implied that additional monetary accommodation was needed. In that context, we believe that 

the program would both help reduce the risk of deflation that had 

emerged and provide a needed boost to faltering economic activity 

and job creation. The experience to date with the round of securities purchases that just ended suggests that the program had the 

intended effects of reducing the risk of deflation and shoring up 

economic activity. 

In the months following the August announcement of our policy 

of reinvesting maturities and redeemed securities, and our signal 

that we were considering more purchases, inflation compensation 

as measured in the market for inflation indexed securities rose 

from low to more normal levels, suggesting that the perceived risks 

of deflation had receded markedly. This was a significant achievement, as we know from the Japanese experience that protracted 

deflation can be quite costly in terms of weaker economic growth. 

With respect to employment, our expectations are relatively modest. Estimates made in the autumn suggested that the additional 

purchases could boost employment by about 700,000 jobs over 2 

years, or about 30,000 extra jobs per month. Even including the 

disappointing readings for May and June, which reflected in part 

the temporary factors discussed earlier, private payroll gains have 

averaged 160,000 per month in the first half of 2011 compared with 

average increases of only about 80,000 private jobs from the 

months of May to August 2010. Not all of the step-up in hiring was 

necessarily the result of the asset purchase program, but the comparison is consistent with our expectations for employment gains. 

Of course, we will be monitoring developments in the labor market 

closely. 

Once the temporary shocks that have been holding down economic activity pass, we expect to again see the effects of policy accommodation reflected in stronger economic activity and job creation. However, given the range of uncertainties about the strength 

of the recovery and prospects for inflation over the medium term, 

the Federal Reserve remains prepared to respond should economic 

developments indicate that an adjustment in the stance of monetary policy would be appropriate. 

On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that 

deflationary risks might reemerge, implying a need for additional 

policy support. Even with the Federal funds rate close to zero, we 

have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the Federal funds rate and the 

11 

balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase 

the average maturity of our holdings. The Federal Reserve could 

also reduce the 25 basis point rate of interest it pays to banks and 

their reserves, thereby putting downward pressure on short-term 

rates more generally. Of course, our experience with these policies 

remains relatively limited, and employing them would entail potential risks and costs. However, prudent planning requires that we 

evaluate the efficacy of these and other potential alternatives for 

deploying additional stimulus if conditions warrant. 

On the other hand, the economy could evolve in a way that 

would warrant a move to less accommodative policy. Accordingly, 

the committee has been giving careful consideration to the elements of its exit strategy, and as reported in the minutes of the 

June FOMC meeting, it has reached a broad consensus about the 

sequence of steps that it expects to follow when the normalization 

of policy becomes appropriate. In brief, when economic conditions 

warrant, the committee would begin the normalization process by 

ceasing the reinvestment of principal payments on its securities, 

thereby allowing the Federal Reserve’s balance sheet to begin 

shrinking. 

At the same time or sometime thereafter, the committee would 

modify the forward guidance in its statement. Subsequent steps 

would include the initiation of temporary reserve-draining operations, and when conditions warrant, increases in the Federal 

funds rate target. From that point on, changing the level or range 

of the Federal funds rate target would be our primary means of adjusting the stance of monetary policy in response to economic developments. 

Sometime after the first increase in the Federal funds rate target, the committee expects to initiate sales of agency securities 

from its portfolio, with the timing and pace of sales clearly communicated to the public in advance. Once sales begin, the pace of sales 

is anticipated to be relatively gradual and steady, but it could be 

adjusted up or down in response to material changes in the economic outlook or financial conditions. 

Over time, the securities portfolio and associated quantity of 

bank reserves are expected to be reduced to the minimum levels 

consistent with the efficient implementation of monetary policy. Of 

course, conditions can change, and in choosing the time to begin 

policy normalization as well as the pace of that process, should that 

be the next direction for policy, we would carefully consider both 

parts of our dual mandate. Thank you, and I am pleased to answer 

questions. 

[The prepared statement of Chairman Bernanke can be found on 

page 52 of the appendix.] 

Chairman BACHUS. Thank you, Chairman Bernanke. Chairman 

Bernanke, I mentioned our entitlement programs in my opening 

statement and what I consider sort of the genesis of our entitlement philosophy in this country, and I did quote President Johnson. His quote is that people are entitled to an unlimited amount 

of medical benefits. I think that is an admirable statement, but I 

think it has proven to be unaffordable, and you have actually, on 

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12 

mittee that an unsustainable budget path makes your job much 

harder, and I know that you, in your outline yesterday and this 

morning, have said that you remain flexible and accommodative, 

and I know you have been criticized by some for an accommodative 

monetary policy and for maintaining interest rates at such levels, 

but I want to commend you. I believe that probably the 1-in-5 jobs 

we have recovered we would not have recovered had we had higher 

interest rates. I think that is pretty much a given. And inflation 

appears to be transitional. We do not know. But I will say this, you 

have warned that if we do not get our budget in order, our deficit 

and our debt, that we will have higher inflation, we will have higher taxes, and we will have a weak economy. 

Let me put a chart up, and I have handed you in front. This is 

what I mean when I say unsustainable. That is Social Security, 

Medicaid, and Medicare, and most of that is Medicare, and that basically just tells you that is when I say unsustainable, and it did 

start in the 1970s. Before that, when I mentioned the New Deal 

or our agricultural subsidies, which I know have received criticism, 

we are talking now about tax revenues and tax spending, and a 

subsidy is tax spending, it is a cost of revenue, and that started 

with the AAA, where we paid farmers not to raise crops, and I believe that is part of the solution, as this idea of fighting three wars. 

I agree with the Chairman. 

But if we do not solve entitlements, I think we make your job a 

lot harder. I would just like you to—let me show you a second slide. 

And this is—I do not know that I blame anybody for this, medical 

technology may have as much to do with this as anything else, but 

the figure on the right is the growth in the GDP, our economy. The 

left and the right are the growth in Medicare and Medicaid. So 

they are actually—those prices are going up at 3 times what other 

prices are going up. And that is actually bankrupting the Federal 

Government. It is also that second figure—the State of Washington 

just recently said—the State of Washington has a Democratic governor and a Democratic legislature. They said, give us Medicaid, let 

us administer Medicaid. They say if you do not, you are going to 

bankrupt Washington State. Washington State is one of the more 

healthy States, but our Medicaid programs are bankrupting our 

State. 

So I would like you, once again, if you will, to give us your ideas 

on what are unsustainable budget paths, how they affect your job 

and how they affect the economy and what the result will be. 

Mr. BERNANKE. Thank you, Mr. Chairman. As the graphs point 

out, we have an aging society. Health care costs are rising more 

quickly than GDP, and as your picture shows, ultimately maintaining tax rates at the level they currently are will be inconsistent 

with maintaining those levels of benefits. You show a relatively 

long timeframe, but even within the next 10 to 15 years, we could 

be coming to a point where we would be making entitlement payments, paying interest, and that would be it, unless we raise taxes. 

So this imbalance is very worrisome. I think we certainly cannot 

continue on an unsustainable path. If we were to do so in the long 

term, clearly we would have higher interest rates, less capital formation, more foreign borrowing, slower growth in the economy, but 

I think we even risk worse if we were to lose the confidence of forVerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE
13 

eign creditors and to have a threat to our fiscal and financial stability. 

So I do think it is important to address these long-term issues. 

I would emphasize, as your graph shows, that these are long-term 

issues. It does not have to be solved today or tomorrow, but we 

need to take some important steps to look at this long-term perspective and to try to restore some stability and sustainability to 

our fiscal outlook. 

Chairman BACHUS. What I have advocated is simply turning 

these things into an insurance program where they are not unfunded but the premiums pay for the cost, turn what I think is an 

entitlement into an insurance program or pension program, which 

is what FDR proposed with Social Security, is that premiums will 

pay the cost. They do not today. Thank you. I recognize the ranking 

member. 

Mr. FRANK. Thank you, Mr. Chairman. I want to join your first 

remarks about the performance of the Chairman and the Federal 

Reserve with regards to interest rates and inflation. I appreciate 

your speaking out in support of this. I think that has been a great 

success. The predictions of gloom and doom that came, that it was 

going to cost us money or be inflationary have all been proven incorrect, and there will be some later reference to a very good study 

that came out from Allan Sloan about that, but I want to talk 

about the job picture. We have several issues here. 

And I welcome on the very first page of the testimony, Mr. Chairman, you note that the weaker-than-expected economic performance appears to have been the result of several factors that are 

likely to be temporary: The run-up in prices of energy, especially 

gasoline and food, supply chain disruptions, finally the earthquake 

in Japan. I think we would probably add the uncertainty that came 

from the problems with Greece and other European countries, and 

I stress those because those are all external in many ways to us, 

the Libyan situation, the Greek situation, the Japanese situation. 

So people who want to blame this Administration need to take 

into account that, as you have enumerated some of these things, 

they are external, and we hope to sort of deal with them. My own 

view is there is a big debate here, that if we were to able to fully 

implement last year’s bill and do some things about speculation in 

both energy and food that we could have a positive effect. But I 

want to talk more about the job situation and one thing in particular. 

You say these are temporary, but we hope you expect things to 

get better, but there are headwinds, and there is one headwind in 

particular that I want to talk to you about, and that is, a quote 

from page 2, fiscal tightening at all levels of government. As you 

know here, we have this year gained so far about a million jobs in 

the private sector. Now that is a good thing. It is not good enough. 

But that has been offset every month by a loss of jobs in the public 

sector. Of course, when those jobs are lost, you do not simply have 

those people unemployed, but there is a negative effect rather than 

a multiplier effect in terms of their ability to help generate other 

spending. And I was very pleased to hear you just make a clear distinction between the urgency of dealing with the deficit problem 

and the time horizon in which we have to do it. 

14 

And I would take these together to say that do I infer correctly 

from here that further fiscal tightening of the degree that we will 

ultimately need over the next 6 months, say, is problematic and 

could be—you assume those are headwinds, that if we would engage in very drastic fiscal tightening over the next few months, we 

increase the strength of the headwinds and that we should be 

doing longer-term things. 

I differ with my chairman, yes, we have spent some money. If we 

had not gone to war in Iraq, we would have a trillion dollars now 

to spend. I must say, when it comes to the debt limit, having voted 

against the war in Iraq and having voted against the Bush tax 

cuts, we are not up against my debt limit, I have a couple trillion 

left to go. I am going to be generous and vote to raise it because 

I think it would be disastrous, but people who voted for the war 

in Iraq and the Bush tax cuts and other things who act as if they 

are doing me a favor by paying for the debts they incurred over my 

objection puzzle me. 

But now, just to get back to the question, we can debate about 

how to do the longer-term thing. I would rather end the war in Afghanistan than cut Medicare, but—although we can make it more 

efficient. But let me ask what are the implications of your noting 

here that fiscal tightening at all levels of government is among the 

headwinds, and what is the balance we should achieve? We all 

agree there need to be reductions in the debt and that it has to 

come, I believe, both from some revenues and from some cuts. But 

what about the timing of this? What about the interrelationship of 

a policy in place that reduces the deficit over time, but the danger 

of increasing the headwinds, as you say, if you cut too much too 

soon right away? 

Mr. BERNANKE. There appears to be a contradiction between the 

need to maintain support for the recovery in the short term and 

the need to address fiscal issues in the longer term, but I do not 

think there is a contradiction if we recognize that we can take a 

long-term perspective on addressing the deficit and achieving the 

sustainability of our fiscal position. 

As the chairman pointed out, these increases in entitlement costs 

are very serious, but they take place over a long period of time. So 

we should be addressing those now. But it is a long-term proposition. 

We should also be looking at how our spending and tax policy affects our long-term growth. Those are important issues. We need 

to reform our Tax Code, we need to make sure that we are investing our government spending wisely. So there are some very substantial long-term issues. But I think we do need to take some care 

that we do not, by excessive restriction in the short term, hamper 

what is already a very slow recovery. Of course, that would be a 

very bad thing from the point of view of the unemployed, but it 

would also be a problem from the point of view of the Federal 

budget because if you slow economic growth, you affect tax collections as well. 

Mr. FRANK. People have talked about confidence. At this point, 

the greatest threat to confidence is the threat that we will not raise 

the debt limit with all of what that would mean. Would you agree 

with that? 

15 

Mr. BERNANKE. I think it is a concern, along with European 

issues and others, but as I have argued, we need both an increase 

in the debt limit, which will prevent us from defaulting on obligations which we have already incurred and which would create tremendous problems for our financial system and our economy, but 

we also need to take a serious attack on the unsustainability of our 

fiscal position. I think both of those things can be accomplished. 

Chairman BACHUS. Thank you, Mr. Chairman, and thank you, 

ranking member. At this time, I recognize Mr. Paul, the subcommittee chair, for 5 minutes. 

Dr. PAUL. Thank you. I thank you, Mr. Chairman. We hear that 

in the future we are going to have a better economy, and everybody 

hopes so, but it is hard to believe, it is hard for me to believe, anyway, because I look back on our past 3 years, and what Congress 

has done and what the Fed has done, we have literally injected 

about $5.3 trillion, and I do not think we got very much for it. The 

national debt went up $5.1 trillion. Real GDP grew less than 1 percent. So I do not think we have gotten a whole lot. Unemployment 

really has not recovered. We still have 7 million people who have 

become unemployed, and one statistic that is very glaring, if you 

look at the chart, is how long people are unemployed. The average 

time used to be 17 weeks. Now it is nearly 40 weeks they stay unemployed. So nothing there reassures me. 

And also when we talk about prices, we are always reassured 

there is not all that much inflation, and we are told that they 

might start calculating inflation differently with a new CPI. Of 

course, we changed our CPI a few years back. There is still a free 

market group that calculates the CPI the old-fashioned way. They 

come up with a figure in spite of all this weak economy that prices 

have gone up 35 percent, 9.4 percent every year. I think if you just 

went out and talked to the average housewife, she would probably 

believe the 9 percent rather than saying it is only 2 percent. 

So I would say what we have been doing is not very reassuring 

with all this money expenditure. But my question is related to the 

overall policy. Spending all this money has not helped, and yet 

many allies that would endorse so much of what has been going on, 

whether it is the Fed or the Congress, they recognize that consumer spending is very, very important. And they concentrate on 

that. But the $5.1 trillion did not go to the consumers, it went to 

buying bad assets, it went to bailing out banks, it went to bailing 

out big companies, and lo and behold, the consumer did not end up 

getting this. They lost their jobs and they lost their houses and 

mortgages, and they are still in trouble. 

But my question is, if you took that $5.1 trillion and said that 

consumer spending is good, you could have given every single person in this country $17,000. Why is it the program of both the Congress and the Fed to direct the money to the people who have been 

making a lot of money instead to the people who, if you argue that 

the consumer needs to spend the money, I obviously do not advocate this, but I would suggest that maybe it could have worked better—it could not have worked any worse. But what is the reason 

we directed it towards the banks and the big corporations too-bigto-fail and we do not pay that much attention to the consumer, if 

16 

it is true, and I do not know if you agree with that or not that consumer spending is an important issue? 

Mr. BERNANKE. It is an important issue, Congressman, but you 

are mistaken in saying that the Federal Reserve has spent any 

money. You say $5 trillion. We have lent money. We have purchased securities. That is not buying, that is not dissipating the 

money. We have gotten all the money back. As an article over the 

weekend by Allan Sloan showed, in fact, the Fed has been a major 

profit center for the U.S. Government. We have turned over profits 

in the last 2 years of $125 billion. We are not costing any money 

in terms of budget deficits or anything like that. 

In terms of what we were trying to do, the reason the Federal 

Reserve was founded a century ago was to try to address the problems arising from financial panics which did, by the way, occur in 

an unregulated environment in the 19th Century. We provided liquidity and short-term loans to help financial systems stabilize. We 

did that not because we particularly care about the managers or 

the shareholders of financial firms. 

Dr. PAUL. I hate to interrupt, but my time is about up. I would 

like to suggest that you say it is not spending money, but it is 

money out of thin air. You put it into the market and you hold assets, and the assets are diminishing in value when you buy up bad 

assets. 

But very quickly, if you could answer another question because 

I am curious about the price of gold today is $1,580. The dollar during these last 3 years was devalued almost 50 percent. When you 

wake up in the morning, do you care about the price of gold? 

Mr. BERNANKE. I pay attention to the price of gold, but I think 

it reflects a lot of things. It reflects global uncertainties. I think the 

reason people hold gold is as a protection against what we call tail 

risk, really, really bad outcomes. To the extent that the last few 

years have made people more worried about the potential of a 

major crisis, then they have gold as a protection. 

Dr. PAUL. Do you think gold is money? 

Mr. BERNANKE. No, it is not money; it is a precious metal. 

Dr. PAUL. Even if it has been money for 6,000 years, somebody 

reversed that and eliminated that economic law? 

Mr. BERNANKE. It is an asset. Would you say Treasury bills are 

money? I do not think they are money either, but they are a financial asset. 

Dr. PAUL. Why do central banks hold it? 

Mr. BERNANKE. It is a form of reserves. 

Dr. PAUL. Why do not they hold diamonds? 

Mr. BERNANKE. It is tradition, a long-term tradition. 

Dr. PAUL. Some people still think it is money. I yield back. My 

time is up. 

Chairman BACHUS. Thank you. At this time, I recognize Mr. 

Clay, the subcommittee ranking member. 

Mr. CLAY. Thank you, Mr. Chairman. Chairman Bernanke, has 

the Federal Reserve analyzed the impact on the economy if the 

debt ceiling is not lifted by August 2nd? Yesterday, President 

Obama stated that VA benefits may not get to recipients and that 

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17 

iors. Has the Federal Reserve examined what may happen on another level on August 3rd if we do not lift the debt ceiling? 

Mr. BERNANKE. Yes, of course we have looked at it and thought 

about making preparations and so on. The arithmetic is very simple. The revenue that we get in from taxes is both irregular and 

much less than the current rate of spending. That is what it means 

to have a deficit. So immediately there would have to be something 

on the order of a 40 percent cut in outgo. The assumption is that 

as long as possible the Treasury would want to try to make payments on the principal and interest of the government debt because 

failure to do that would certainly throw the financial system into 

enormous disarray and have major impacts on the global economy. 

So just as a matter of arithmetic, fairly soon after that date there 

would have to be significant cuts in Social Security, Medicare, military pay or some combination of those in order to avoid borrowing 

more money. 

If we ended up defaulting on the debt, or even if we did not, I 

think it is possible that simply defaulting on our obligations to our 

citizens might be enough to create a downgrade in credit ratings 

and higher interest rates for us, which would be counterproductive 

because that makes the deficit worse, but clearly if we went so far 

as to default on the debt, it would be a major crisis because the 

Treasury security is viewed as the safest and most liquid security 

in the world. It is the foundation for much of our financial system, 

and the notion that it would become suddenly unreliable and illiquid would throw shock waves through the entire global system. 

Mr. CLAY. And higher interest rates would also impact the individual American consumer; is that correct? 

Mr. BERNANKE. Absolutely. The Treasury rates are the benchmark for mortgage rates, car loan rates, and all other types of consumer rates. 

Mr. CLAY. Thank you for that response. In the area of unemployment, according to the Labor Department, our unemployment rate 

in June was 9.2 percent. What can the Federal Reserve and Congress do to put Americans back to work? Any suggestions? 

Mr. BERNANKE. It is a difficult problem. I would like to make it 

very clear that I think we have two crises in the economy. One of 

them is the fiscal set of issues that you are all paying a lot of attention to right now, but I think the job situation is another crisis. 

What is particularly bad about it is that so many people have been 

out of work for so long that it is going to be hard to get them back 

to anything like the kind of jobs they had when they lost their jobs 

back in the beginning of the recession. So it is a major problem. 

The Federal Reserve is doing quite a bit. As I described in my 

testimony, we have lowered interest rates almost to zero; we have 

done additional policy measures, including purchases of several 

trillion dollars of securities; we are prepared to take further steps 

if needed. 

We are operating in other dimensions, like trying to promote 

lending to small business and other things that could potentially 

help. So we are very focused on jobs. We think that is an incredibly 

important part of the current economic crisis, and it is one of the 

two parts of our dual mandate. 

18 

I need to be careful not to endorse specific programs, etc., but as 

I mentioned, one thing to take into account is to try to avoid sharp 

contractions in the near term that might weaken the recovery. 

I think there are areas where attention might be paid. And just 

to name three I have talked about before, one would be to try to 

address unemployment through training or other types that might 

help workers get back into the job market. A second problem is the 

housing market. Clearly, that is an area that should get some more 

attention because that has been one of the major reasons why the 

economy has grown so slowly. And I think many of your colleagues 

would agree that the Tax Code needs a look to try to improve its 

efficiency and to promote economic growth as well. 

So there are a number of areas where Congress could be looking, 

and I hope that we will keep in mind that we have two sides to 

this crisis. There is a jobs crisis and there is a fiscal set of issues 

as well. 

Mr. CLAY. Thank you so much for your response. 

Mr. Chairman, my time is up. 

Chairman BACHUS. Mr. Royce, a senior member of the committee, is recognized for 5 minutes. 

Mr. ROYCE. Hello, Chairman Bernanke. I think one of the realities you also face is that when we look at these numbers and the 

deficits you are borrowing at a historically low cost over at Treasury, maybe your borrowing costs are 21⁄2 percent. If those go up to 

the average over the last 20 years, you are suddenly more than 

doubling the costs of borrowing. So the deficits we are talking 

about that are projected are going to get a lot worse. 

If we could go back to the chart that shows the climb in entitlement costs, this is one of the concerns we have. If we go back to 

the 1970s and that argument over having both guns and butter 

under LBJ, the Vietnam War and the new entitlement spending 

and all the social welfare spending. We tried to do both, and at 

that time the Federal Reserve was a party to trying to assist in 

that. This is one of the arguments that some of your allies have 

made or your colleagues have made on the Federal Reserve. 

When they look back at the policies at that time, they say, the 

Fed tried to help accommodate the solution to that. Clearly, it 

couldn’t be paid for at the time. So one of the things they did was 

they put in place monetary policy that helped eventually create 

what was called the great inflation of the 1970s. 

I think you might concur with this. As we move forward, we are 

sort of in the same position, and as we draw down and draw out 

the troops from Iraq and Afghanistan, as we draw this down, that 

is one thing we have to face, is reducing again the costs of the military budget. 

But we are also going to have to face this entitlement question. 

Some of these were set up on the premise that they would be partly 

sort of an insurance program where people would pay in, right? 

Now, they morph into a situation where eventually they gobble up 

such a huge percentage of the budget that it has to be faced as 

well. Otherwise, we put you in the untenable position of perhaps 

doing what was done in the late 1960s and early 1970s by the Fed, 

which might end up again with a great inflation. 

19 

These are my concerns. I would like for you to speak for a minute 

about this issue and about the deficit and the steps that need to 

be taken on entitlements. 

Mr. BERNANKE. Certainly. First, you are absolutely right about 

the interest rate problem. We are seeing that in Europe where investors lose confidence in a country’s fiscal situation. That drives 

up interest rates, that makes the deficit higher, so you have a vicious circle that can be very hard to break. 

On entitlements, you are also correct that they are not true insurance programs. I think many Americans think the money they 

put in Social Security or in Medicare is somewhere in the bank 

someplace. That is not really quite right. What is happening mostly 

is that younger generations are paying through their taxes for 

older generations’ benefits. And that worked okay as long as the 

population was shaped more like a pyramid, instead of more like 

a rectangle, as is becoming now the case. 

On monetary policy, we have learned the lesson of the 1970s. We 

are in much better shape now because inflation expectations are 

much better anchored after many years of low and stable inflation 

since Paul Volcker brought inflation down in the 1980s. 

Mr. ROYCE. But what if Congress doesn’t do its part? What if we 

don’t tackle entitlement spending and what if this chart that we 

have up in terms of what drives our debt, what if that entitlement 

ramp-up continues unabated? What then? 

Mr. BERNANKE. I think there are different views on this, and we 

can get very deeply into the discussion, but I believe if the Fed refuses to accommodate or pay for this extra spending by money creation, that we can maintain control of inflation. But what will still 

happen will be much higher interest rates, which will have a very 

negative effect both on the deficit and on the private economy. 

Mr. ROYCE. So it is imperative that we tackle it now. And would 

you say a small solution to this will take care of the problem, or 

do we need to reach for that overarching true reform of entitlements that take care in the long haul of what is going to happen 

with Social Security and Medicare and so forth? 

Mr. BERNANKE. I recognize that these are complicated matters 

that may not be able to be done in a few weeks. But I, like many 

other people who watch the budget developments, have been very 

excited by the idea that a very big program might be feasible and 

that we might do something that would stabilize our debt over the 

next decade. That would be a tremendous accomplishment if Congress can find a way to do that. 

Mr. ROYCE. I think if you can articulate the consequences if we 

don’t, it might help the goal of getting the entitlement reforms 

done. 

Thank you, Mr. Chairman. 

Mr. BERNANKE. Thank you. 

Chairman BACHUS. Thank you. 

At this time, I recognize Mr. Green of Texas for 5 minutes. 

Mr. GREEN. ‘‘It was a low down, no good, God-awful bailout, but 

it paid.’’ This is the style of an article written by Allan Sloan and 

Doris Burke. They contend that the bailout, which was accorded 

after we had two votes in the House—the first vote, Mr. Chairman, 

I remember. I was there on the Floor of the House and I saw after 

20 

that first vote the stock market start to spiral out of control. They 

contend that the bailout not only worked, but they contend it paid. 

They contend it will make taxpayers $40 billion to $100 billion. 

They contend that the 3 percent, which was TARP, gets 97 percent 

of the attention. 

My question to you is this: Is William Cullen Bryant right? He 

reminds us that truth will be crushed to Earth, but he also says 

that it will rise again. Will truth crushed to Earth rise again? Is 

this the opportunity to tell the truth about TARP and about the 

bailout and what it actually did? That these many persons who say 

that it was not needed, it was not useful, it didn’t benefit us, can 

truth crushed to Earth rise again today? 

Your response, please? 

Mr. BERNANKE. I hope truth will come out. I understand why 

Americans were unhappy with this. It seemed very unfair to see 

money going to large financial institutions. But just a few facts. 

First, we know from a lot of history that the collapse of the financial system will bring down the whole economy, and we saw the 

damage that even a partial collapse of the system brought in 2008 

and 2009. So in attempting to stabilize the financial system, the 

Fed, the Treasury, the Congress were trying to stabilize the economy and trying to protect the average American citizen. That is 

point number one. 

Point number two, the program was successful. We did stabilize 

the system. We avoided a massive collapse, like we saw in the 

Great Depression, and it was a global effort. We worked together 

to provide the assistance needed to avoid a meltdown of the global 

financial system. 

The third fact I would like people to understand is that historically, it often is very expensive to stabilize financial systems, somewhere between 5 and 20 percent of GDP in many cases. The country of Ireland is having fiscal problems right now because of the 

money it put into its banking system and didn’t get back. 

In the United States, essentially all of the investments made by 

the TARP and certainly all the investments made by the Fed were 

repaid or are being repaid with interest and dividends, and as far 

as the direct financial costs to taxpayers is concerned, there are 

none. It will be a profit and a reduction of the U.S. Federal deficit 

relating to these activities. 

Mr. GREEN. Just as an additional commentary, Mr. Chairman, I 

had an experience with this bailout that I would like to share with 

you. It is very brief. The calls coming into our office were overwhelmingly opposed to it, the initial vote. I had people call and say, 

‘‘If you vote for this, we will run you out of town.’’ 

I did not vote for it. I saw what happened to the stock market. 

And the next day I got calls, Mr. Chairman. ‘‘What is wrong with 

you? We are going to run you out of town. You voted against the 

bailout.’’ 

I mention this to you because memories seem so short. I don’t 

know whether that is by accident or design, but they seem so short. 

They don’t seem to recall that we were on the edge of a disaster 

unlike we have seen since the Great Depression. And I am honored 

that you would take the time today just to clear the record so that 

21 

William Cullen Bryant, so that he will truly know that we believe 

in him and he was right, truth crushed to Earth will rise again. 

Thank you. Mr. Chairman, I also want to share this with you. 

I think history will be kind to you. I think that you have taken the 

helm at a tough time in this country’s history, and I believe history 

will be kind to you. 

Thank you very much. 

I yield back, Mr. Chairman. 

Chairman BACHUS. Thank you, Mr. Green. 

At this time, I recognize Mr. Lucas, the chairman of the Agriculture Committee, for 5 minutes. 

Mr. LUCAS. Thank you, Mr. Chairman. 

My first goal is to make sure that we don’t become history as a 

result of what we do. That said, Mr. Chairman, I represent essentially the northwest half of the great State of Oklahoma, a place 

where in the course of the last 3 years, unemployment rates have 

run about 3 points less than the rest of the country. We are, as you 

and I discussed before in past years, a commodity-driven economy; 

oil, gas, wind energy, livestock, grain, fiber on the ag production 

side. So I am a little sensitive about maintaining the investment 

in those industries. 

That said, we are a very capital intensive district. The view of 

many of my constituents and the level of economic activity we have 

at home compared to the rest of the country essentially is, we 

didn’t make this mess. We shouldn’t be a part of sorting this mess 

out. It is their mess. 

Could you expand on your comments to both Representative Clay 

and to Representative Royce and now to me in that regard what 

my constituents would expect in the event that some grand understanding dealing with the national debt ceiling, dealing with Federal spending, if some grand understanding is not achieved, what 

does that do not just to the Treasury bond rate here in New York 

City, but what impact does that have in a place like the northwest 

half of the great State of Oklahoma? 

Mr. BERNANKE. The risk is, first, that interest rates will begin 

to rise as our creditors lose confidence in our ability to repay or 

willingness to repay. When Treasury rates rise, that makes the deficit worse, as we were discussing before, and it makes the problem 

even worse. But interest rates on Treasury debt also feed into all 

other interest rates in our economy, including farm mortgages, including capital for oil or natural gas exploration, and including consumer loans of all kinds, student loans and the like. So it would 

weaken our economy, it would make the deficit worse, and it would 

hurt confidence and be a negative. 

So I am very much in favor of us trying to address this problem 

in a big way, again taking a long-term perspective and understanding that this is a long-term problem. But I think there would 

be real benefits certainly over time to your constituents as well as 

to all other Americans. 

Mr. LUCAS. So it is fair to say then, summarizing what you have 

said, that if there is not an agreement worked out in a big way 

that has a long-term impact, not only would my constituents see 

a reduced demand for the commodities they produce, both ag and 

energy, but they would also see the interest rates that affect—beVerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE
22 

cause we are a capital-starved area—we would see the interest 

rates that affect their ability to invest in their businesses and grow 

and expand go up. Is that a fair statement, sir? 

Mr. BERNANKE. We don’t know the exact timing of that, but ultimately, that would be the case, yes. 

Mr. LUCAS. And is it also fair to say to back home, to note that 

at some point if big, bold tough decisions are not made, at some 

point the markets will begin to conclude that maybe we don’t have 

the capacity to make those decisions and they will begin to adopt 

a defensive posture. Is that a fair statement, Mr. Chairman? 

Mr. BERNANKE. That is right, yes. 

Mr. LUCAS. And when that defensive posture begins, then we all 

together see what is right around the corner. 

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

Chairman BACHUS. Mr. Perlmutter? 

Mr. PERLMUTTER. Thanks. I always like following my friend Mr. 

Lucas, because we agree on a lot of things. Sometimes, there is a 

sort of a different approach that we might have. But I think we 

have to have a big bold approach to dealing with our full faith and 

credit, dealing with our budget. And I would like you to take a look 

at a couple of your charts. I always like looking through your monetary book. 

I want to start with chart number 22 on page 14, Federal receipts and expenditures, 1991 to 2011. And I think one of the 

places though where Mr. Lucas and I might have a difference is 

how we deal with this big bold plan that we have to have going 

forward to show people we really mean business about the fiscal 

strength of this country. 

In 1999, 2000, 2001, receipts exceeded expenses. We in effect had 

a surplus for a time there. And then we had tax cuts. So I think 

my question is going to focus on the revenue side of any big bold 

plan. And I noticed you were very careful in the choice of words 

you used when Chairman Bachus was questioning Medicare and 

entitlements, and you said, based on the current revenue stream, 

those are unsustainable. 

Back in 2001–2002, we had a series of tax cuts that dropped that 

revenue stream, isn’t that right? 

Mr. BERNANKE. Yes. 

Mr. PERLMUTTER. And has as the Federal Reserve figured out 

how much of a reduction to revenue over the last 10 years that has 

been to this country? 

Mr. BERNANKE. I think I would leave that to the Congressional 

Budget Office, but they have scored fairly significant numbers. 

Mr. PERLMUTTER. A couple trillion dollars, as I understand it. So 

as part of this big bold plan, which I agree with Mr. Lucas I think 

this country must undertake, it has to have a revenue side to it as 

well as Chairman Bachus’ concerns about entitlements. Would you 

agree? 

Mr. BERNANKE. I hope you understand that I am not going to 

take sides on this issue. I want to see the numbers add up. I want 

to see the revenues and the expenditures balance. It is your job, 

and that is why you get the big bucks. 

23 

Mr. PERLMUTTER. Mr. Green was asking about William Cullen 

Bryant, whether history will be kind to him. Do you think Paul 

Giamatti was kind to you? 

Mr. BERNANKE. I haven’t seen the show. 

Mr. PERLMUTTER. You haven’t seen the show? 

Mr. BERNANKE. No, I haven’t. 

Mr. PERLMUTTER. I think he did a great job. His beard is precisely the way yours is. 

Let me turn to chart number 23, because this was some of the 

questioning that you received too as to the fiscal restraints and the 

fiscal restrictions that have come into play. 

Can you tell me, it looks like in 2008 there was a huge surge of 

Federal spending. Am I reading that right? 

Mr. BERNANKE. It looks like 2009. I see what you are saying. 

Mr. PERLMUTTER. 2008–2009. 

Mr. BERNANKE. I see what you are saying. Yes, sir. 

Mr. PERLMUTTER. Then there was a big expenditure in 2008, 

2009, 2010. But in the first quarter of this year, a substantial drop. 

Am I reading that right? 

Mr. BERNANKE. Yes. 

Mr. PERLMUTTER. I guess the other thing, and coming from my 

law practice I did a lot of Chapter 11 bankruptcy work, and when 

you—and I don’t think this country is anywhere near bankruptcy. 

We have some fiscal management we have to undertake, but you 

don’t, as you come out of a tough time, you don’t pay every bill 

overnight, because that just puts you back into the troubles you 

were already in. You have to invest and you have to believe that 

you are going to keep going, and I believe this country is going to 

keep going. 

How would you describe these cuts that occurred in this first 

quarter? Is that the direction you would like to see our fiscal policy 

go? 

Mr. BERNANKE. I am sorry not to be able to be too direct. I want 

to get into the details here. 

I think some of the big spike in 2008, I think the way the TARP 

was scored was that it was counted as an expenditure when it went 

out and then it was treated as a receipt when the money actually 

came back, which it did. So that kind of obscures a little bit what 

happened. 

Part of what is happening here is that the stimulus in the spring 

of 2009 ramped up spending for a while, and that as that spending 

is now beginning to come down you are seeing a drop in total 

spending. 

So this is what I said in my remarks, that there is at this point 

a net drag, and that is what that picture shows, in terms of the 

government component of total demand in the economy. And this 

is why I just urge some attention and caution to the timing of your 

work on the fiscal sustainability issue so that you don’t unnecessarily weaken what is at this point still not a very strong recovery. 

Mr. PERLMUTTER. Thank you. 

Chairman BACHUS. Thank you. 

Mr. Hensarling? 

Mr. HENSARLING. Thank you. Good morning, Mr. Chairman. 

Mr. BERNANKE. Good morning. 

24 

Mr. HENSARLING. I believe we have seen the greatest fiscal and 

monetary stimulus thrown at our economy in the history of our 

country, perhaps the history of the world. Regardless of where we 

were in September of 2008, to round out some of the analysis in 

your testimony, we now are at 29 consecutive months of unemployment being above 8 percent, when the President told us if we 

passed the stimulus bill, it would not exceed 8 percent. We know 

that we have had 3 months now where unemployment has been on 

the rise above 9 percent. 

Since the President has taken office, there has been a 40 percent 

increase in the number of Americans who receive food stamps, one 

in seven. The average number of weeks it takes to find a job, according to the Bureau of Labor Statistics, is 39.9 weeks, the longest 

in recorded history. And now, entrepreneurship or new business 

starts apparently are at a 17-year low. 

So after the largest monetary and fiscal stimulus in history, if I 

have my figures right, and I believe they came from the Fed, public 

companies are sitting on roughly $2 trillion of excess liquidity. 

Banks have about $1.5 trillion of excess reserves, I believe, that is 

according to your data. 

In your testimony you mention a lack of consumer confidence, 

but nowhere in your testimony did I hear a lack of business confidence. And what I believe I am seeing is the economy is not so 

much suffering from a lack of capital, but a lack of confidence. So 

either you and I are looking at different business surveys and talking to different people, but I was curious why that was not part of 

your testimony? 

Mr. BERNANKE. The business confidence picture I think is more 

mixed. I mentioned in my testimony that equipment and software 

investment has actually been quite strong, which suggests that 

firms are not hunkering down completely. They have been very 

slow to hire though; you are correct. 

In terms of the surveys, some of the recent purchasing manager 

surveys have been at least positive, but the small business confidence has been weak, and I think that would be consistent with 

what you are saying. 

Mr. HENSARLING. Mr. Chairman, having spoken to a number of 

‘‘Fortune 50’’ CEOs, very large investment fund managers, the people who are most important to me, small business people in east 

Texas that I represent, I can tell you the anecdotal evidence is 

overwhelming that job creators and investors lack confidence in 

this economy. 

We can argue about the underlying cause. What I am hearing is 

the fear and uncertainty surrounding the President’s health care 

plan, frankly, major portions of the Dodd-Frank legislation, the tax 

snap-back that is already in current law, regulatory overkill from 

the EPA, and then, last but not least, certainly the national debt 

that looms before us. So, again, perhaps we are speaking to different people. 

Speaking of the national debt, and the Nation is somewhat focused on the debt ceiling, although I think the investment community is still somewhat focused on the Eurozone, I believe that August 2nd is a very, very serious date. But I do want to separate 

fact from fiction. 

25 

When people speak of debt, I believe—rather, of default, I see 

that as something very different from sovereign default. In your 

opinion, does the President, does this Administration lack either 

the will, the means or the authority to keep bondholders current? 

Mr. BERNANKE. Let me just say one word about the previous 

thing, which is I don’t think we are in all that much disagreement. 

There are a lot of uncertainties in the economy, regulatory, fiscal, 

and also about the sustainability of this recovery. So I agree with 

you on that. 

On the ability to pay debtors, I think there are some operational 

risks and concerns, but I think for at least a while, the Administration will do all that it can to pay the debt. The question arises if 

to do that we stop paying other obligations to government contractors— 

Mr. HENSARLING. The question was specifically on default on sovereign debt. My time is just about to run out. But the President 

2 days ago on the 11th said, ‘‘And what I have tried to explain to 

them is, number one, if you look at the numbers, then Medicare in 

particular will run out of money and we will not be able to sustain 

that program no matter how much taxes go up.’’ 

My time has expired. But perhaps in writing, you could respond 

to the extent whether you agree with the President and to what extent— 

Chairman BACHUS. We actually have allowed people to give a response to your question. So if you want to respond? 

Mr. HENSARLING. In dealing with the long-term structural debt— 

Chairman BACHUS. I will let him answer then. 

Mr. BERNANKE. As you know, Medicare is not a fully funded program. The premiums that are paid in only cover a portion of the 

costs. There is a trigger when the reserves get into a certain point, 

which forces Congress to look at it. But I think from a fundamental 

economic point of view, it is clear that the increase in health costs 

and the aging of the population make this a larger and larger part 

of our economy and it is going to be very, very difficult to find the 

revenues to finance it in its current form. 

Chairman BACHUS. Thank you. 

At this time, Mr. Cleaver is recognized for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Thank you, Mr. Chairman. Like Mr. Hensarling, I am a native 

Texan. In fact, I was born not far from where he lives. So, believe 

it or not, there is a town in Texas called Cut and Shoot, and I grew 

up in public housing and it is a little rough, so I learned the term 

‘‘cut and run home.’’ So now we are having a new version put up, 

it is called ‘‘cut and grow.’’ 

I am just wondering if that is real, if we can cut spending dramatically and then the economy grows, if that is an accurate description? Can you help me understand it, cut and grow? 

Mr. BERNANKE. I think you have to maybe look at it on several 

different dimensions. First, we have a fiscal sustainability problem 

over the long term so we need to take a long-term perspective on 

that. But we do have a problem and we do need to address that. 

Secondly, in terms of longer-term growth, we really just don’t 

want to cut, cut, cut or we just want to look at what we are cutting 

and how we are cutting. We want to make sure that we are doing 

26 

the things, making the investments that will help the economy 

grow, and that includes things like fixing the Tax Code and so on. 

But in terms of the very short term, as we were discussing a little bit earlier, I think that you need to be a little bit cautious about 

sharp cuts in the very near term because of the impact, potential 

impact, on the recovery. That doesn’t at all preclude, in fact, I believe it is entirely consistent with a longer-term program that will 

bring our budget into a sustainable position. 

Mr. CLEAVER. Thank you. A couple of quick ones, if I can get 

them in. If cutting taxes creates jobs, and we cut taxes over the 

last 10 years and fell into a recession, an historically impactful recession, is it then logical that if we continue to cut taxes, that all 

of a sudden we will grow because we said tax cutting will somehow 

create jobs? 

Mr. BERNANKE. The very severe recession which we have recently experienced and which we are still trying to recover from 

was caused primarily by the financial crisis, and that had many, 

many causes, regulatory, private sector behavior and so on. So I 

think of that as sort of something that happened that wasn’t really 

directly related very much to tax policy, for example, except very 

indirectly. So I wouldn’t draw that connection. 

I think taxes can be viewed as having two roles. One is that like 

the payroll tax cut, they provide some extra income to consumers 

in a period of very weak consumer spending to give them more income to help provide demand for the economy. In the longer term, 

you want to have a Tax Code which promotes good economic decisions, work effort, saving, investment, efficient choices and so on. 

So they are somewhat different. You don’t want to conflate those 

two. Depending on the state of the economy, those two sources of 

benefits from tax cuts are somewhat different. 

Mr. CLEAVER. But if we paid $1.3 trillion in wars that shouldn’t be continuing, we took $250 billion out of the economy with Medicare Part D that we just gave the American public without paying 

for it, I am convinced that all of that put together with the tax cuts 

and some other factors that you mentioned created the problem. 

We are not able to create jobs right now, so here is what is happening I think in my district in Missouri, the Kansas City, Missouri, area. Somebody lays off 10 workers, line workers, and then 

they decide they are going to hire again, and this time they hire 

2, maybe 3 workers, in tech jobs, which means that most of those 

people who were laid off are never going to be able to get their job 

back. Is this the time that we probably should have some workforce 

retraining in order to make sure that we have a workforce that can 

actually compete with foreign companies for productivity? 

Mr. BERNANKE. As I mentioned earlier, I think one of the big 

problems we have, and it is going to last even beyond this recovery, 

is the fact that we have millions of people who have been out of 

work for 6 months or a year or more. We have millions of people 

who are insufficiently trained to work with new technologies and 

to compete on a global basis. 

There are many ways to help people get up to speed, through 

technical schools or a whole variety of programs. But I do think 

that one of the important things we need to do for our working people is to make sure they have the skills they need to get decent 

27 

work and that those skill requirements are only going to go up over 

time. 

Chairman BACHUS. Mr. Miller? 

Mr. MILLER OF CALIFORNIA. Thank you. It is good to have you 

here, Mr. Bernanke. I enjoyed your testimony. I agree that instability in the marketplace is having tremendous impact on the recovery, and historically about every recovery has been led by the 

housing industry. And you also say that people aren’t consuming 

because of the wealth lost in the housing sector, and I think you 

are absolutely correct in that. 

But there is a lack of confidence in the housing market today. 

Mortgage refinances continue to fall, as you said, mortgage purchases continue to decrease, and mortgage applications continue to 

fall. In my State of California, and many other high-cost States, 

raising the conforming loan limits like we have recently has had 

a positive impact on the marketplace. Yet at the same time now, 

we are going to decrease those loan limits in those high-cost areas, 

which on the other side is going to have a hugely negative impact 

on those markets. And the loans being made in those marketplaces 

right now seem to be some of the best producing loans that they 

are making. 

Without a doubt, Freddie Mac and Fannie Mae as they currently 

exist have to go away, but there has to be a viable replacement for 

them. To say we are just going to get rid of them without having 

a viable alternative is unrealistic. It is going to be counterproductive to the marketplace. But at the same time the housing 

action needs to be taking place at this point in time, a need for a 

viable secondary marketplace has to be established, taxpayers 

must be protected. Safety and soundness has to be a huge concern, 

but we must allow the private sector at the same time to stand up 

and be given an opportunity to stand up. 

Do you believe that now is the time for major reforms to the 

housing market? 

Mr. BERNANKE. Yes, sir. This was the main piece of unfinished 

business in the financial regulatory reform, the area not addressed. 

As you know, Treasury has put forth some propositions. A number 

of Members of Congress have put out plans. I think it would be 

very helpful if we could begin to get some clarity about that. It 

would probably increase confidence on the part of mortgage originators and so on to know they would be able to find secondary markets for their mortgages. 

Mr. MILLER OF CALIFORNIA. And lack of charity is killing the 

marketplace. Nobody knows what to expect tomorrow. Many are 

pulling back today because they don’t know what to expect. So do 

you see the potential in the future for private capital playing a 

strong role in the functioning market for mortgage lending? 

Mr. BERNANKE. Certainly. Many plans that have been proposed 

involve private capital. One example is so-called covered bonds, 

where banks sell bonds backed by mortgages to private investors. 

It doesn’t involve any government funding at all. Or we could have 

some system where the securitization function performed by 

Fannie and Freddie is done by private financial institutions. So I 

think it is entirely possible. 

28 

It should be noted that Fannie and Freddie were effectively subsidized and therefore a private market system is probably going to 

increase the cost of mortgages a little bit. But that is just the consequence of taking away a subsidy which in the end proved to be 

very costly to our economy. 

Mr. MILLER OF CALIFORNIA. The problem I have with the Freddie 

and Fannie hybrid concept was that the taxpayers were at risk and 

the private sector made all the profits. 

Mr. BERNANKE. That is right. 

Mr. MILLER OF CALIFORNIA. That is unacceptable. What do you 

see as barriers to private capital entering mortgage lending and 

the market for home loans? 

Mr. BERNANKE. Currently, there is not much private capital because of concerns about the housing market, concerns about still 

high default rates. I suspect though that when the housing market 

begins to show signs of life, there will be expanded interest. 

I think another reason, to go back to what Mr. Hensarling was 

saying, is that the regulatory structure under which securitization, 

etc., will be taking place has not been tied down yet. So there are 

a lot of things that have to happen. But I don’t see any reason why 

the private sector can’t play a big role in the housing market, 

securitization, etc., going forward. 

Mr. MILLER OF CALIFORNIA. Representative McCarthy and I introduced a bill last week that we believe does that. It sets up a 

function of the facility, recognizing housing is critical to stabilizing 

the economy. Private capital must be the dominant source of credit. 

The government must have some continuing role, but it must be 

protected, and safety and soundness of underwriting principles 

must be in place to protect the taxpayers. 

But the problem we have today is that most investors, you are 

looking at mortgage-backed securities, doubt the confidence in 

many that are put out by the private sector. The GSEs are the only 

ones that they have confidence in they will be paid their investment back and receive a return on it. But it seems like there needs 

to be a facility available that prioritizes safety and soundness but 

provides liquidity to the secondary market from the private sector. 

And we think that has to be done. The longer Fannie and Freddie 

go, the larger the losses are going to be, and that has to be terminated. 

I yield back. Thank you. 

Chairman BACHUS. Thank you. Mr. Ackerman? 

Mr. ACKERMAN. Thank you, Mr. Chairman. 

Chairman Bernanke, thank you. It is good to see you. 

All of us on this side of the table ran for office seeking the jobs 

that we have. Many of us told the people who put us here that we 

understood that their first priority had to do with jobs and we 

pledged to make jobs our first priority and to do everything that 

we could do to improve the job situation and increase the number 

of jobs and help to create jobs. Jobs are not just a concept. You 

don’t have to explain it to people. They understand the consequences of having one or not having one. 

Many of us also, to the great applause of some crowds, told people that we would never, and took blood oaths, never raise the debt 

ceiling, and the crowds yelled their approval. The debt ceiling is a 

29 

lot more difficult and is more conceptual to a lot of people and they 

don’t really understand it, and a lot of people use jingoistic phrases 

about sit around your kitchen table and balance your checkbook, 

and people say yes, that makes a lot of sense. A number of us 

pledged affirmatively on both the jobs and the debt ceiling. 

In a very short number of days, the rubber is going to hit the 

road or something is going to hit the fan or we are going to have 

one of those moments. But it is going to be very telling. If indeed 

the people who took the blood oath on the debt ceiling and swore 

to people on jobs refuse to move and we actually do not raise the 

debt ceiling, could you explain the correlation and how many jobs 

we would be creating? 

Mr. BERNANKE. First, the analogy about balancing your checkbook, getting your finances in order is wrong. The right analogy for 

not raising the debt limit is going out and having a spending spree 

on your credit card and then refusing to pay the bill. That is what 

not raising the debt limit is. 

Mr. ACKERMAN. I know you get it. 

Mr. BERNANKE. In terms of jobs, I think the worst outcome if we 

don’t raise the debt limit is that at some point, we default on the 

debt, and that would create, as I have said before, a huge financial 

calamity, which in turn would affect everybody and would set job 

creation back very significantly. But even if— 

Mr. ACKERMAN. What do you mean by significantly? Is that 

quantifiable? 

Mr. BERNANKE. We saw what happened in 2008–2009 when we 

had two consecutive quarters of 6 percent negative growth in the 

economy. I think something on that order of magnitude would be 

certainly conceivable. 

As to Mr. Hensarling’s question, even if we are able to maintain 

payments on the debt and the interest by prioritizing it and assuming that operational issues and so on are solved and confidence is 

retained, it still would involve a very substantial reduction in government payments, including Social Security checks and military 

pay and things of that sort that would force people to cut back on 

their spending, reduce their confidence. It would no doubt have a 

very adverse effect very quickly on the recovery. So even if we were 

able to continue to pay our debts, it would have a negative impact. 

Mr. ACKERMAN. So you just said we would lose jobs and not create jobs if we don’t— 

Mr. BERNANKE. If we don’t raise the debt ceiling. Yes, I am quite 

certain of that. 

Mr. ACKERMAN. I have a second question, not related, and that 

has to do with the conforming loan limits that are about to change. 

I represent one of the counties in the country, and there are 669 

such counties and they are in 42 different States, that are going 

to be affected by this. 

The housing market in one of my counties is pretty high. It 

doesn’t mean the houses are way above modest. It means that real 

estate prices are very high. It could be the regional market up in 

New York and on Long Island. These are not necessarily mansions, 

but there are many of them, as there are in the other 669 districts 

that have this kind of situation, that are affected. 

30 

You make note in your statement that the housing market and 

the low level of new home buys is a huge problem. The people looking for these homes are among the most qualified buyers by any 

set of standards and circumstances— 

Chairman BACHUS. Mr. Ackerman, I will let him answer the 

question. 

Mr. ACKERMAN. How do we reconcile the fact that these people 

are not going to buy homes when they are qualified to do so and 

to absorb so many of the homes on the market? 

Mr. BERNANKE. As far as Fannie and Freddie are concerned, 

there is a tradeoff there between supporting the higher priced 

homes and weaning the system off of unusual limits that were put 

on during the crisis. I understand that the private sector is taking 

at least a significant number of the so-called jumbo mortgages, but 

maybe at a higher cost, so it is a little bit of a tradeoff there. 

I don’t really have an answer, other than to say we have to get 

our housing finance system back into working order. 

Chairman BACHUS. Thank you. 

Mr. Westmoreland? 

Mr. WESTMORELAND. Thank you, Mr. Chairman. 

Mr. Bernanke, you made a statement that not raising the debt 

ceiling was like going out on a spending spree and then not being 

willing to pay your bill. Were these people on a spending spree 

drunk and didn’t understand that they were eventually going to 

have to pay it back? 

Mr. BERNANKE. I don’t know. The point was that the debt is to 

pay for tax decisions and spending decisions that the Congress has 

made and the President has signed and have been already implemented. 

Mr. WESTMORELAND. Because I know the debt ceiling was raised 

in June of 2010 after a spending spree of deficit spending. The Senate has not passed a budget in almost 800 days. We continued to 

operate our government by a continuing resolution until April of 

this year. So the people who were in charge of spending this money 

either didn’t care if we had to pay it back or they didn’t think we 

had to pay it back. There is something there. 

So I agree with you that it is not like paying your debt, but I 

don’t know if the people who accumulated this debt, what they had 

in mind for the program. To me, the people who spent the money 

and got us into this debt have come up with no solution to how we 

should fix it. So the people who didn’t run the debt up are the ones 

trying to come up with a solution. 

Let me ask you another question. You are talking about the 

housing market. I come from an area in Georgia that had a lot of 

new development, a lot of growth. We have had 65 bank failures 

in Georgia. A lot of those were due to the fact of people being so 

heavy into commercial real estate, acquisition and development 

and so forth. 

What is your take on a bank that either received TARP funds or 

a bank that came in under a loss share agreement, an acquiring 

bank, and fire-sold the assets of either their bank or the bank that 

they acquired by putting them on an auction, selling them for 30 

or 40 cents on the dollar, and by doing that, because they had a 

loss share agreement with the government, or because they had 

31 

gotten this TARP money, that the community banks that had loans 

in this same area on real estate, their values were deflated, 

knocked down. Homeowners who lived in these subdivisions that 

had bought these houses, their value was knocked down. They no 

longer had any equity, not out of any fault of their own, but because the government had given money to banks or entered into 

loss share agreements for them to come in and to flush these socalled troubled assets away. 

So we have had a lot of communities that have immediately, 

community banks, that have immediately had to write down these 

loans. They close them because they don’t have the capital. They 

can’t raise the capital reserve. So do you see a problem with that? 

Then the last question, and I will give you a chance to answer, 

on the Neighborhood Reinvestment Act, we just had a situation in 

my district where a county purchased some homes from a bank 

that had been foreclosed on, so they got the bank out of the deal. 

This is Federal money that we gave them for the neighborhood revitalization. It is an active neighborhood, it is a fairly new neighborhood. People have just moved in. There are still builders in 

there building. This county gets the money, goes in, rehabs the 

houses, and gives anybody that wants to buy one $20,000 for a 

downpayment. It kills the builders. It kills jobs. 

So those are three examples of government intervention coming 

in to try to do something good that has actually destroyed jobs, destroyed wealth, and destroyed communities. I have counties that 

don’t even have a community bank. 

Could you explain some of the thinking behind that? 

Mr. BERNANKE. I am not familiar with those specific cases. I do 

know that fire sales from failing banks or from banks that are just 

trying to get their capital position in better shape, or distressed 

sales of REO, real estate owned by banks, have brought down 

prices, have brought down appraisals, and that is one of the reasons that the housing market is weak, because it is hard to get a 

loan because your house doesn’t appraise at the level that you 

would think it would because of nearby houses which are in distressed condition. So I think that is a major issue and we need to 

address that. 

I didn’t quite understand the part about the downpayment. One 

of the things that is also harming home values is being in neighborhoods with a lot of foreclosed houses around. I think efforts to 

rehabilitate neighborhoods and perhaps to convert if necessary 

owned homes to rental homes or do whatever is necessary to restore the neighborhood, that is only going to be good for housing 

prices if you can do that. So it is really a question of executing 

these policies in a constructive way. 

Chairman BACHUS. Thank you. 

Mr. Carson? 

Mr. CARSON. Thank you, Chairman Bachus and Ranking Member Frank. Thank you, Chairman Bernanke. 

Some are still expressing concerns over an unduly lackluster 

economy and problems that will loom heavier, such as unemployment heading toward 10 percent. I did support TARP because I believed the consequences of inaction were far too grave to not reVerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE
32 

spond at all. However, banks are still not lending to the public and 

vital small businesses. 

How, sir, do you plan on, firstly, encouraging banks to lend to 

our Nation’s small businesses and the American public in general? 

And, secondly, as you know, more banks have indeed tightened 

their lending standards than have eased them. Does the Fed plan 

to keep interest rates low for an extended period of time? Are the 

Fed’s inactions here meaningless unless banks are willing to lend? 

And, lastly, what are your thoughts on the requirement of 20 percent as a downpayment and do you believe that this will impact 

homeowners significantly or not at all? 

Mr. BERNANKE. Banks have stopped tightening their lending 

standards according to our surveys and have begun to ease them, 

particularly for commercial and industrial loans and some other 

kinds of loans. Small business lending is still constrained, both because of bank reluctance, but also because either lack of demand, 

because they don’t have customers or inventories to finance, or because they are in weakened financial condition, which means they 

are harder to qualify for the loan. 

The Federal Reserve has been very focused on trying to promote 

small business lending. I don’t want to take all your time, but we 

have provided guidance to our examiners. We have worked with 

our examiners to tell them how to balance between the needs of 

safety and soundness and the needs of making good loans to small 

businesses. We have had meetings and conferences all over the 

country with small businesses trying to get their perspective. We 

have an ombudsman. If anybody wants to tell us about a problem, 

we would like to know about it. That is on our Web site. So we 

have been working hard to do that. 

Our low interest rates do support the economy through a number 

of mechanisms, including lowering mortgage costs and lowering car 

loans and other types of rates. 

On the 20 percent down, I think you are referring to the qualified residential mortgage, the QRM. This is a rule which we had 

out for comment and we are still listening to the comments. The 

idea was that Congress passes a risk retention requirement of 5 

percent, that if you sell a securitized package of mortgages, you 

have to keep 5 percent of that as a guarantee, essentially, you are 

guaranteeing those mortgages as being of good quality. The QRMs 

are the mortgages Congress intended to be exempt from that requirement, so presumably that should be mortgages that are very 

high quality. 

We looked at the criteria that affect mortgage delinquency rates, 

and high downpayments were one of the things that really stood 

out as being one of the factors that keeps delinquency rates down, 

because people have a lot more cushion if they have a big downpayment. 

We don’t think that this would necessarily block homeownership 

because there would still be a large market subject to the risk retention requirement where downpayment requirements would be 

set by the originators, as is now the case. 

But, again, we are taking comments on this and we will certainly 

listen carefully to whatever the public has to say. 

Mr. CARSON. Thank you, Chairman Bernanke. 

33 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mr. Huizenga? 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

Mr. Bernanke, I appreciate this opportunity. I plan on kind of 

talking fast and I may be sending out a letter with some additional 

questions. But I want to flash back a couple of, maybe a couple of 

weeks ago, a month ago, when the Republican Caucus met with the 

President at the White House. One of my colleagues, Reid Ribble 

from Wisconsin, who is the chairman of a new committee, a new 

caucus that he created I am a member of, the Small Business Owners Caucus, I will say the Job Creators Caucus, got up and said, 

‘‘Mr. President, there are three things that those of us in small 

business are looking for. One is consumer confidence, two is credit 

availability, and the third is certainty. We are looking for certainty 

so that we can plan.’’ 

That really would be the basis and the foundation for recovery. 

I want to try to work through a couple of those. And I appreciated 

my colleague from California talking about housing. My background is in real estate and developing and also in construction. 

My family has a ready mixed concrete company, and I own our 

gravel company and gravel-sand company. So I can tell you on page 

3 when you talk about residential construction is at extremely low 

levels, that might be the understatement of your remarks, especially coming out of Michigan where for a protracted time here, we 

have had some very difficult times. 

But I want to focus in on what I am concerned about, consumer 

confidence, which you reference on page 3 of your remarks as well. 

On page 8, you reference, ‘‘temporary shocks to the economy.’’ I am 

looking at that and I am seeing inflation, I am seeing oil prices 

which translate directly into at the pump, food and commodities 

and those types of things. 

Then on page 4, you also said that this rise in inflation is transitory and you expect inflation to subside. And I am curious, what 

is going to subside? Oil prices? Gas prices? Commodity prices? Are 

housing prices going to recover so people are going to have that 

cushion that you were just talking about? 

I am curious. I want to know what you believe is going to cause 

that confidence to increase. 

Mr. BERNANKE. On the question of inflation, we had substantial 

increases in oil prices earlier this year. There was about a $25 

jump per barrel in oil prices after the Libyan revolution began, so 

oil prices were driven up about $10 or $15 above where they are 

now. Since then, gas prices are down about 35 cents, something 

like that. So gas prices and oil prices were a very big part of the 

inflation that we saw, and that seems to be leveling off and coming 

down some. 

The same way with food. A lot of the increase in food prices had 

to do with bad weather, bad crops. There have been some expectations now of much bigger harvests, say, in corn, which is driving 

down those prices. So we are going to see some relief in food prices 

as well. 

Mr. HUIZENGA. I am sorry, I am running out of time and I want 

to quickly move on. I understand where you are going. I do need 

34 

to express though, I was recently in Iraq and Saudi Arabia. I had 

a chance to meet with the oil minister in Iraq, Mr. Shahristani, 

and the oil minister in Saudi Arabia. Both of them said after Libya, 

they actually ramped up their production. It is not a production 

issue. 

We were asking specifics about why gas prices were going to be 

coming in. And I broached the subject with his excellency, Mr. 

Shahristani, and said, ‘‘What about the U.S. dollar and the valuation of the U.S. dollar?’’ He paused and kind of looked at me. He 

said, ‘‘Congressman, I was trying to be polite.’’ 

They recognize that what we have done by devaluing our dollar 

as an artificial increase in oil prices, because oil is paid for in one 

way around the world—U.S. dollars. And I am concerned about 

that as well, and I am curious if you can address that? 

Mr. BERNANKE. The falling dollar, which has fallen for a lot of 

reasons, including our reduced safe haven demand and so on, has 

contributed some to the increase in oil prices. But if that were the 

only factor, prices in Euros and other currencies would be going 

down. In fact, prices are rising in all currencies. So it is not just 

the dollar. 

Mr. HUIZENGA. Not according to the two oil ministers. 

Mr. BERNANKE. It is a fact that prices are rising in all currencies. 

Mr. HUIZENGA. Maybe we can address that in some of our dialogue. I am concerned. My wife is from Canada originally; 18 years 

ago, when I had the opportunity to marry her, it took 64 cents U.S. 

to buy a Canadian dollar. Yesterday, it was $1.04 to buy a Canadian dollar. I simply don’t see how we are not going to avoid inflation in the future, and isn’t that sort of a consequence of some of 

our monetary policy as we are moving forward? 

Mr. BERNANKE. There are two separate concepts. The buying 

power of the dollar, which is inflation domestically, and then the 

exchange value of the dollar externally, which is what you are talking about. We have kept inflation low and steady since the eighties. 

Mr. HUIZENGA. Internally. 

Mr. BERNANKE. Internally, yes. And as far as the monetary policy is concerned, the one thing we could really do to support the 

dollar is keep our inflation rate low, and that is what we have 

done. So the reason the dollar is falling over long periods of time 

has to do with things like flows in the trade deficit and flows of 

capital in and out of the country. 

Mr. HUIZENGA. And not due to us printing money. 

Chairman BACHUS. Thank you. 

Mr. Himes? 

Mr. HIMES. Thank you, Mr. Chairman, and thank you, Chairman 

Bernanke, for being with us today. I have just a couple of questions. 

The first is based on the fact that it is a parlor game around 

here, perhaps no better exemplified by Mr. Westmoreland’s question about whether those people were drunk to you in making policy over the last couple of years to attach blame and to try to saddle either the President or the majority or the minority with full 

responsibility for the economy. 

I was struck by your testimony that in this quarter in particular 

there was a significant effect around temporary factors, the earthVerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE
35 

quake in Japan, oil prices, perhaps the drought. I wonder if you 

could elaborate on that for a minute or two and give us a sense for 

what the magnitude of that effect was over the roughly three quarter drop in GDP growth, and though you can’t obviously predict exogenous events in the future, how that is likely to taper off in the 

coming quarters? 

Mr. BERNANKE. We saw pretty significant effects on both the production and sales and prices of automobiles coming from the supply 

chain disruptions in Japan. There were also some effects on the 

tech industry as well, but much smaller. Oil price increases really 

hit, as you know, family budgets. Gasoline prices. And that was a 

reason that consumer spending in the second quarter was extremely weak. 

So we are looking at a first half growth rate of in the vicinity 

of 2 percent or maybe even a little bit less, which is not enough 

to bring down the unemployment rate. The Federal Reserve is expecting 3 percent plus growth in the second half. We will see if that 

is the case. That would represent in particular a resurgence in auto 

production and sales, coming from the fact that the supply chain 

problems are now being dealt with and gas prices are a little lower, 

and we expect to see consumers a little bit stronger because they 

have more disposable income after their energy costs. 

Mr. HIMES. Thank you. My second question is, I was struck that 

in your testimony you list four headwinds facing the economy. The 

fourth of those headwinds was fiscal tightening at all levels of government. I share with Mr. Lucas and Mr. Perlmutter the belief 

that we need to put together a large package that will involve cuts 

over time for fiscal sustainability, but there is also a current circulating in the Congress and elsewhere that there is a notion that severe cuts now will contribute to the health of the economy. Your 

listing as fiscal tightening at all levels of government as a 

headwind would seem to be a rebuttal of that notion. I am wondering if in fact you would consider that a rebuttal of the idea that 

severe cuts now are economically positive. 

Mr. BERNANKE. To the extent possible, we should make the cuts 

over a long term because this is a long-term problem. That is 

where the issue of sustainability is. I do think you need to be careful about sharp cuts in the very near term, exactly for the reason 

you mention, which is that the economy is still growing very slowly. For example, in the job market report just last week, the private 

sector job creation, which of course is very important, was a good 

bit better than the headline number because there were about 

40,000 jobs lost in State and local governments, and it is not just 

jobs in government. It also involves the indirect effects of procurements or tax cuts or whatever is working through the rest of the 

system. So I think some care needs to be taken there. 

I realize it is difficult, at the same time being credible and strong 

about the long-term addressing of the deficit problem. 

Mr. HIMES. Understood. No, and I agree with that. Would you 

agree with my playing back to you the notion that very significant 

cuts to government spending now, with its effect on aggregate demand, runs the risk of an adverse economic consequence? 

Mr. BERNANKE. I think that is a consequence that really needs 

to be taken into account. 

36 

Mr. HIMES. Thank you. The Simpson-Bowles proposal, which I 

thought was a good start on such a big package, suggested that significant cuts perhaps be postponed until late 2012 or early 2013. 

I wonder if in my remaining time you can give us a feel of your 

sense for from the standpoint of not doing damage to what is a 

hesitant recovery, how you might encourage us to think about the 

effects of different levels of cuts over time on the GDP. 

Mr. BERNANKE. That is a tough question. It depends in part on 

how quickly the economy recovers. We have been disappointed so 

far. If it is still growing very slowly, that will continue to be a problem. At some point, there is an issue of being credible and demonstrating that you are serious, and so I think beginning to phase 

in cuts, along the lines that Simpson-Bowles talked about or a couple years down the road is certainly something you may have to do 

in order to convince the markets that you are going to take action 

against the deficit problem. 

Mr. HIMES. Thank you. Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. Mr. Duffy? 

Mr. DUFFY. Thank you, Mr. Chairman, and hello, Chairman 

Bernanke. Just quickly, could you give me the exact number of 

what you mean by severe cuts? Are we talking billions over 10 

years, trillions over 10 years? 

Mr. BERNANKE. Oh, over the 10 years? 

Mr. DUFFY. Sure. 

Mr. BERNANKE. Several numbers have been put out. 

Mr. DUFFY. But just quickly, what is your number? 

Mr. BERNANKE. The so-called grand bargain that has been dis- cussed is something in the vicinity of $4 trillion over 10 years. 

Mr. DUFFY. Is that too much? 

Mr. BERNANKE. No, it is not too much. It has the advantage, if 

it can be done, it has the advantage that it will stabilize our debt, 

the ratio of our debt to GDP, and that will be a very encouraging 

development. 

Mr. DUFFY. Thank you for that because I want to make sure we 

are all on the same page of what severe means. We talk about 

these— 

Mr. BERNANKE. We are talking about timing also. I am talking 

about a 10-year window or a 12-year window. 

Mr. DUFFY. Would you like to see those all backloaded or do we 

need to have some of those cuts up front? 

Mr. BERNANKE. It can’t be completely backloaded for the reasons 

I have said. We have to be careful in the short term. 

Mr. DUFFY. Here is one of my concerns. I am talking to my job 

creators I represent the northwest quarter of Wisconsin. They talk 

about uncertainty in the marketplace and we have heard a lot 

about that today, but it comes from this health care reform bill, it 

comes from the stimulus bill, it comes from our government picking 

winners and losers, but more frequently I am hearing them talk 

about the massive debt, this $14 trillion-plus debt, the fact that we 

are going to borrow $1.5 trillion this year, and what I keep hearing 

them talk about, we are concerned about where interest rates are 

going and we are concerned about inflation. We are concerned 

about punishing tax increases to pay for this debt, and so if I am 

looking at expanding or growing my business, I do not know that 

37 

I am going to do that because of all the uncertainty that is created 

in the environment today. It does not necessarily hurt them. It 

hurts folks in our communities who need jobs. 

You have talked about certain numbers of how much we should 

cut and where we should go, but there has not been a lot of clarity 

on where we need to be today as we move forward. Right now, we 

are at 70 percent of debt to GDP in publicly held debt. Within 10 

years, within a decade we are going to be at 90 percent of debt to 

GDP. I think that is very concerning because that is going to have 

a real impact on our economy. 

Maybe this is a rhetorical question, but if we are not going to cut 

now, then when? If you look at the political difficulty that we face 

today, when we have a debt that is $200 trillion in interest payments, when we go back to historic norms, it is going to be 400- 

plus in interest payments. At what point is there going to be political courage to get the debt under control if we cannot do it today? 

And I think this whole conversation does come back to jobs, and 

my friends across the aisle talk about where is the Republican jobs 

plan. We tried the stimulus bill, nearly a trillion dollars of spending. It was their silver bullet, but the White House Council of Economic Advisers came out and told us really it was about $278,000 

in government spending per job that was created. I would submit 

that is not a very good investment for the American taxpayer. 

But my question goes to this. As we look at an unemployment 

rate of 9.2 percent, do you think that we can help our job seekers 

by taxing our job creators a little bit more? Will it put more people 

back to work if we raise our taxes? 

Mr. BERNANKE. Again, I am not going to get into the breakdown 

of the deal, but I want to agree with the points you made earlier, 

which is if you were to really do something significant to solve the 

fiscal sustainability problem, I think it would have benefits in the 

short term. 

Mr. DUFFY. But do you think we can put people back to work by 

raising taxes on folks? Does that sound economically— 

Mr. BERNANKE. There are tradeoffs between fairness, between efficiency. 

Mr. DUFFY. But putting people back to work, are we going to put 

more people back to work by raising taxes? 

Mr. BERNANKE. It depends what the alternatives are. It doesn’t 

just—the question— 

Mr. DUFFY. So maybe we will put more people back to work if 

we raise taxes? 

Mr. BERNANKE. I am talking hypothetically now because I am 

not taking sides in this issue. You also talked about the benefits 

of reducing the deficit, so if there was some tax increase with a lot 

of spending increases that reduce the deficit a lot, maybe that benefit would outweigh the other costs. 

Mr. DUFFY. Sure, and I was just isolating taxes and increasing 

taxes and what does that do. Let me move on to a different question. We had talked about the QE2 with Dr. Paul. When you buy 

assets, where does that money come from? 

Mr. BERNANKE. We create reserves in the banking system which 

are just held with the Fed. It does not go out into the public. 

38 

Mr. DUFFY. Does it come from tax dollars, though, to buy those 

assets? 

Mr. BERNANKE. It does not. 

Mr. Duffy. Are you basically printing money to buy those assets? 

Mr. BERNANKE. We are not printing money, we are creating reserves in the banking system. 

Mr. DUFFY. In your testimony—I only have 20 seconds left—you 

talked about a potential additional stimulus. Can you assure us 

today that there is going to be no QE3 or is that something that 

you are considering? 

Mr. BERNANKE. I think we have to keep all the options on the 

table. We don’t know where the economy is going to go. If we get 

to a point where we are like, the economy, recovery is faltering and 

we are looking at inflation dropping down towards zero or something where inflation issues are not relevant, then, we have to look 

at all the options. 

Mr. DUFFY. And QE3 is one of those? 

Mr. BERNANKE. Yes. 

Mr. DUFFY. Thank you. I yield back. 

Chairman BACHUS. Thank you. Mr. Peters? 

Mr. PETERS. Thank you, Mr. Chairman, and thank you, Chairman Bernanke, for being here today. In lieu of some of your comments that you have made through some of the questions regarding 

short-term fiscal policy and the importance of that in getting the 

economy stabilized, I would like to hear some of your comments on 

an issue that we are going to be taking up in Congress next week, 

which is a balanced budget amendment. 

As I know you are very aware, that with Federal policy and fiscal 

policy is at times of weak economy, oftentimes tax revenues are 

going to drop, and yet the demands for government will go up for 

unemployment compensation and other types of stabilizers are in 

place as a result of that. 

Do you have concerns about a balanced budget amendment and 

your ability as Federal Reserve Chairman to deal with a weak 

economy and unemployment issues in the future where fiscal policy 

is certainly a key component of that along with your monetary policy? Would you comment a little bit about a balanced budget 

amendment and are you concerned about that for the future? 

Mr. BERNANKE. Sure. First of all, let me just reiterate again because I don’t think everybody has heard me, that I am very much 

in favor of a substantial reduction in our fiscal deficits over time, 

and I think we need to do that, and it may very well be that some 

kind of structure, whether it is some kind of caps and triggers or 

whatever may be effective in helping Congress meet those goals. 

If you were to do something like a balanced budget amendment, 

I just would like to say that it would be very important to make 

it sufficiently flexible to deal with different contingencies. For example, what do you do during recession? What do you do during 

war? What do you do during a natural disaster? 

The Congressman mentioned so-called automatic stabilizers. One 

of the benefits of the budget as it is now is that when the economy 

weakens, tax revenues automatically decline, spending automatically rises and provides a little bit of stability to the economy. So 

I would not rule out, by any means, that kind of approach, but I 

39 

think it has to be written very carefully to create the necessary 

flexibility to deal with unforeseen circumstances. 

At the same time, and this is what makes it very hard, if there 

are no binding rules, no discipline, it is probably not going to help 

you very much. So it is a tough challenge to write an amendment 

like that that will accomplish everybody’s goals. 

Mr. PETERS. So flexibility obviously is very important. I know in 

this particular amendment, we need a three-fifths vote. I have been 

around long enough that a three-fifths vote is a pretty difficult 

thing to come by in this Congress. So that flexibility is not in that 

proposal, and it sounds as if you would have some concerns with 

that because of the lack of flexibility in order to deal with that. 

I want to switch gears a little bit and move to an article that 

Bruce Bartlett wrote yesterday that I thought was interesting. I do 

not know if you saw it. He was a senior policy adviser to Presidents 

Reagan and Bush, and it talked about the parallels of what we are 

seeing now to the 1930s, and I know you are a well known scholar 

of the Great Depression era in the 1930s. I would appreciate your 

comments. 

I quote a little bit here, he says Friday’s jobs report clearly indicates that the economy remains weak, yet the pressure to reverse 

stimulus and begin tightening fiscal and monetary policy has become overwhelming. He goes on to say, some economists are getting very nervous with the economy in a fragile state, and it may 

not take much to bring on another recession. Even a small amount 

of fiscal or monetary tightening may be enough to do that, and I 

thought it was interesting in his comparisons to 1937, and he goes 

on to say, the combination of fiscal and monetary tightening which 

conservatives advocate today, actually which is what they did in 

1937, brought on a sharp recession beginning in May of 1937 and 

ending in June of 1938, and according to the National Bureau of 

Economic Research, real GDP fell 3.4 percent in 1938 and unemployment rose to 121⁄2 percent from 9.2 percent in 1937. I believe 

we are at 9.2 percent right now. 

Do you see some parallels between what happened in the late 

1930s? 

Mr. BERNANKE. It is true that most historians ascribe the 1937– 

1938 recession to premature tightening of both fiscal and monetary 

policy, so that part is correct. I think every episode is different. We 

have to look at what is going on in the economy today. I think with 

9.2 percent unemployment, the economy still requires a good deal 

of support. The Federal Reserve is doing what we can to provide 

monetary policy accommodation. But as we go forward, we are 

going to obviously want to make sure that as we support the recovery that we also keep an eye on inflation, make sure that stays 

well-controlled. So we are aware of that lesson, but we have to take 

each situation as it plays out, and to see how the outlook varies 

according to new information that we receive. 

Mr. PETERS. I am glad you are aware of the lesson; hopefully 

Congress will also be aware of history so we don’t have to repeat 

it. 

I appreciate those comments. Thank you, Mr. Chairman. 

40 

Chairman BACHUS. Thank you, Mr. Peters. I do think that is one 

thing they did right in 1937 is what the Chairman refers to. I think 

that did help. 

I mean they made a mistake by tightening, I am sorry. That is 

one of the things they did right. 

Mr. Renacci? 

Mr. RENACCI. Thank you, Mr. Chairman. And thank you, Chairman Bernanke, for being here. I read in quarterly reports investor 

perspectives and industry research that patience and moderate 

meager expectations are necessary regarding growth and job creation, but with 9.2 percent unemployment nationwide, sitting at 10 

percent in my district, and the U6 up over 16 percent, my constituents can no longer really afford modest expectations or tolerate 

those. Patience is a virtue they can no longer afford to have. 

To me the whole thing we are doing here in Washington has to 

be about jobs, jobs, jobs. Tax reforms, stripping away harmful mandates and overburdensome regulations, getting our spending down 

to sustainable levels, free trade agreements, the whole thing all 

needs to be about economic growth and letting businesses create 

jobs. I believe, and my beliefs are not a political statement, my beliefs are from being a businessman for 28 years, employing over 

3,000 people, creating jobs, being the CPA for multiple businesses, 

that today the business community and the financial services sector are locked up in uncertainty. Our economy is drowning in 

unprecedency of new reforms with each wave of new regulations, 

and the regulations crashing down on their heads before the effects 

of the last wave can really be understood, evaluated, and properly 

implemented. 

The battering that our job market has taken by these waves has 

not gone unnoticed by me or by the unemployed and underemployed constituents in my district, and thankfully not by you either. You made some headlines about a month ago at a press conference when Jamie Dimon asked you about performing an examination of the cumulative effects of these new mandates—DoddFrank, Basel III, not to mention health care—on jobs and credit 

availability. As I recall, your response was that you cannot pretend 

that anybody really has because it is just too complicated. 

I learned a long time ago in my business career that anything 

I do and anything we do should be SMART. SMART is an acronym 

for specific, measurable, attainable, realistic, and timely. The measurable one is the one I have a problem with. It has been a month 

now, the banks are now looking at much higher capital standards, 

the small community banks are looking at a repeal of Regulation 

Q, everyone is facing higher compliance costs. 

Has the Fed begun such an examination study yet? Can we expect to see it? Can we expect to see some measurability of what 

these regulations are? 

Mr. BERNANKE. Yes. Let me first say that I agree with a lot of 

what you said about free trade, smart regulations, fiscal stability, 

all those things would help, and I hope the Congress will pursue 

those directions, a good Tax Code and so on. 

It is very difficult to figure out all of the interactions of a complex system, but I do want to be clear that the Fed does do costbenefit analyses of every rule that we put out, and we publish 

41 

those cost-benefit analyses. That is both by law and by our internal 

practice. And we are doing our very best to take the statute that 

Congress gave us and try to make it as unburdensome as possible 

and still achieve the objectives. We have a very difficult balancing 

act here. We do not want to hamstring the financial system because it is so critical to the economy, to growth. 

On the other hand, it has only been a couple of years since we 

had this enormous financial crisis which threw us into this deep recession, so we do have to take necessary steps to make sure it does 

not happen again, and I assure you that the Federal Reserve has 

always been very attentive to trying to make sure that the rules 

and regulations that we promulgate consistent with the statute are 

as cost-effective as possible, and we do cost-benefit analysis quantitatively on these rules. 

Mr. RENACCI. It is interesting, though, you said that based on 

the statutes you have been handed. Do you ever look at them and 

say, these just are not working and come back and say, it is not 

working, here are the problems? Because, again, we have so much 

uncertainty in the marketplace. We have to get some predictability 

here to get this job market created again. 

Mr. BERNANKE. We are working to get this done as clear and fast 

as possible. Broadly speaking, the statute addresses the main areas 

where there were problems, and there are certain parts of it that 

we may want to revisit. There are others we might learn more 

about over time. So I am not saying it is a perfect bill by any 

means. I am not claiming that at all. But I also agree with you that 

we need to make our regulations as clear and as effective and as 

quickly done as possible, and we are aiming to do that. 

Mr. RENACCI. I know some people have asked in previous questions, but do you put uncertainty as a concern? Again, being a business owner in the past, uncertainty will cause a lock-up. We could 

talk about the government cutting costs and cutting jobs, but the 

private sector, small business owners create almost 67 percent of 

our jobs. We have to give them the certainty so they can create 

jobs. 

Mr. BERNANKE. You are not interested in my Ph.D. thesis of 32 

years ago, but it was entitled, ‘‘Uncertainty in Investment,’’ and it 

was about how uncertainty can reduce investment spending, and I 

believe that. But there are many kinds of uncertainty. There is certainly uncertainty about regulation and those sorts of things, but 

there is also uncertainty about whether this is a durable recovery. 

People do not know whether to invest or to hire because they do 

not know whether the recovery is going to continue. So I think— 

obviously, we want to address the regulatory, trade, tax environment, absolutely fiscal environment. We also want to do whatever 

we can to make the economy grow faster and make people more 

confident. I think we will see a dynamic going forward. If the economy begins to pick up some, I think confidence will improve because people will have more certainty about the sense that this will 

be a durable recovery. I think that is a very important thing to be 

looking for. 

Mr. RENACCI. Thank you. 

Chairman BACHUS. Mr. Carney? 

42 

Mr. CARNEY. Thank you, Mr. Chairman, and thank you, Chairman Bernanke for coming today. I appreciate your remarks. It is 

obvious that when the Fed Chairman speaks, people listen. This 

rostrum was full when you started your testimony today, as was 

the room, and I think you have enlightened us with a lot of what 

you have said. I would like to review some of that and then try to 

explore some of these issues around coming up with a plan for fiscal discipline that makes sense, and we have had a little bit of back 

and forth with Mr. Duffy, Mr. Himes, and Mr. Peters as well. 

You said you support significant reduction in fiscal deficits, but 

you have also warned us against what you called, you cautioned us 

against what you called sharp cuts in the short term. Could you 

characterize in any kind of way the kinds of cuts, the kinds of programs? I know you have tried to shy away from that kind of a 

thing, but we have discretionary domestic spending, we have discretionary military spending, we have mandatory military and 

mandatory domestic, and then we have these big entitlement programs, and I would just like your view on those kinds of cuts as 

it relates to your caution about sharp cuts in the short term. 

Mr. BERNANKE. Let me preface this by saying that there is already a good bit of fiscal contraction going on in the sense that 

there was a big run-up in spending related to the stimulus and so 

on. That is now being withdrawn from the economy. Similarly, the 

States and localities have been under continuous pressure because 

of their limitations on their budgets, which has led them to be cutting, so we are already experiencing a good bit of fiscal tightening 

going on, and that is part of the reason why there are some 

headwinds in the economy. 

I cannot really pick and choose among programs. You certainly 

want to think about the efficacy and the desirability of these programs on their own merits, but I just want to be clear that cutting 

programs or raising taxes in ways that will reduce aggregate demand and spending and the ability of consumers to meet their bills 

and to purchase goods and services is going to slow the economy, 

and that is in turn going to offset some of the benefits of the cuts 

because it will reduce revenues and make the deficit worse in the 

short term. 

Mr. CARNEY. So let me suggest an approach based on the Chairman’s graph that he displayed on the screen, which showed basically entitlement programs spending that created the real challenge in the long-term deficits. You said yourself that the long-term 

deficits were really the problem. So is that to suggest that the 

structure of those entitlement programs is really what we ought to 

focus on in terms of the long term, and then in the short term 

maybe a different kind of an approach? 

Mr. BERNANKE. Yes. I do not think anybody is really proposing 

big cuts in, say, Medicare this year, but— 

Mr. CARNEY. But as the chairman pointed out and others, you 

just have to look at the graphs to see that Medicare and health 

care spending generally, whether you are talking about Medicare, 

Medicaid, military health care, is the big 10,000-pound gorilla. 

Mr. BERNANKE. That is right. I was going to say this graph 

shows a very long-run trend that we have to be worried about, but 

that means that this is a long-term problem that we have and we 

43 

need to address it over a period of time. Certainly, entitlements are 

part of the picture, and we will need to look at those and make 

sure that they are providing the support and medical care that 

they are intended to provide at the least possible cost. That is an 

important thing for us to be doing. 

But, again, that is a long-term issue. This is something that is 

going to take place over not just 10 years but maybe 20 or 30, but 

the more we can do now to persuade the markets and the public 

that we are serious about this and are making changes the better 

we will be. 

Mr. CARNEY. That is kind of the point with respect to having a 

plan in place when you raise the debt ceiling, right? It is important 

to raise the debt ceiling and it is important to have a plan in place 

is what I heard you say earlier. 

Mr. BERNANKE. Those are two legs, both important. 

Mr. CARNEY. So let me just explore with the 30 seconds I have 

left the interchange you had with Mr. Duffy. Mr. Duffy said putting 

people back to work—will we be able to put people back to work 

by raising taxes? I think I heard you say that it depends on how 

you do that, and if maybe I could reframe that, can we strengthen 

our economy in the long term with additional tax revenues maybe 

through tax reform or some other way? 

Mr. BERNANKE. Again, with the preface that these are congressional decisions, I think that taxes, the structure of the Tax Code 

matters a lot. So, the incentives are most affected by the marginal 

tax rates, and that is a very important thing to look at. There may 

be tax expenditures or tax exclusions, etc., which are maybe just 

government spending in disguise or just breaks that are not really 

achieving anything, and that might be a place that you would look 

and still be able to maintain or even lower marginal tax rates and 

improve the efficiency of the Tax Code in that way. I think most 

economists agree that broadening the base by eliminating breaks 

and cutting or at least maintaining marginal tax rates gives you 

a better tax system, promotes growth. 

Mr. CARNEY. So you think additional revenue has to be part of 

the picture? 

Mr. BERNANKE. Again, this is your decision, but I am just talking 

about how Tax Code should be structured. 

Mr. CARNEY. Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. We are going to go to Mr. 

Schweikert and Ms. Waters. We would like to end on a balance, if 

that would be possible. Those will be our last two questioners of 

the day. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. Chairman 

Bernanke, I would have been interested in your thesis from, what, 

32 years ago. Oh, come on, that was funny. 

In the uncertainty, you have how many, what, about 99 Ph.D. 

economists at the Fed? 

Mr. BERNANKE. Oh, I don’t know. More than that. 

Mr. SCHWEIKERT. Oh, okay. I have been struggling to try to find 

good data or someone who has actually modeled the uncertainty of 

a regulatory environment, and I know some of that is, it may not 

even be the reg, it is the promulgation of the reg, the rule writing, 

44 

and the dampening effect that may have on economic growth or velocity in money or people willing to engage in activities. 

When you are doing your modeling of saying here is where we 

are, here is what we see coming in the next year or next month, 

but here is what we see in the regulatory environment, whether it 

be Dodd-Frank, whether it be EPA, whether it be some of the other 

things, do you ever model on the dampening effect of rulemaking? 

Mr. BERNANKE. We have been trying to analyze that. Unfortunately, we can look at things like stock market volatility in banks: 

things of that sort that reflect the uncertainty that banks have. 

Unfortunately, it is really hard to disentangle the effects of regulatory uncertainty from other kinds of uncertainty, like just the 

state of the economy, but we have tried to find those kinds of effects, and it certainly plays a prominent role. If you read our minutes of the FOMC, you will see that we discuss that issue quite 

substantially. 

Mr. SCHWEIKERT. It is an area I have a real interest in, particularly rulemaking, sometimes we would be better off even trying to 

squeeze down the timeline because knowledge is much easier to do 

decision-making than what is coming. 

You touched on something earlier, and this is one of—you and I 

have actually had the opportunity to talk about this before, the 

overhang of nonperforming assets that are still on balance sheets, 

and this could be everything from the home down the street that 

is under foreclosure to the nonperforming to toxic paper that may 

still be sitting on balance sheets. From a personal philosophy, I am 

one of those who believes we would be much better off if we aggressively pushed through nonperforming mortgage debt and others 

through the economy, got them sold, whether it was sold to an investor or first-time home buyer. Do you have any personal opinion 

on how much overhang is being created by the nonperforming debt, 

and, am I right or wrong in your opinion on being somewhat of an 

evangelical, of pushing that through the system and getting it consumed? 

Mr. BERNANKE. The area where this is most relevant is in the 

housing market, where we want to do all we can to keep people in 

their houses, to avoid foreclosures, to stabilize neighborhoods and 

so on. With that being said, there have been very long delays because of servicing problems and so on, and moratoriums, etc., that 

have really slowed this process down, and it is true that as long 

as there is a large number of distressed properties overhanging the 

housing market, it would be very hard for the housing market to 

begin to recover, and so addressing that problem I think is a very 

important one. I agree with that basic point. 

Mr. SCHWEIKERT. And I know we have seen some charting that 

when some of the large servicers have actually gone into mortgage 

forbearance, we have had a robo-signing or other issues, we are 

going to hold for 90 days, we can actually see values coming down 

even more aggressively. I don’t know if it is the anticipation of another wave of foreclosures or that typical uncertainty. 

I have often heard in some of the discussions here were the 

positives of the Fed buying this much paper, the quantitative easing. Would you be willing to share, because for every positive side 

there is often some negative, what you would say would be the 

45 

dampening or some of the costs in the economy of the fairly rapid 

monetary expansion? 

Mr. BERNANKE. I think the main one is that there has been some 

contribution to commodity prices, which we anticipated. Again, I 

think that supply and demand factors globally were by far the 

more important, but that increase in commodity prices offsets some 

of the benefits that the lower interest rates and more accommodative financial conditions have for growth and for addressing the 

risks of deflation, which we saw last August. 

Mr. SCHWEIKERT. The inflationary pressures you saw on many 

commodity classes, were they within the range you expected? 

Mr. BERNANKE. No, they were much larger, but because the bulk 

of those movements can be attributed and quite directly—I recently 

gave a speech that went through some detail on this issue—to global supply and demand conditions. For example, on the oil side, it 

is very striking that the United States is using less oil today and 

importing less oil today than it was 10 years ago. All the growth 

in oil demand is in emerging markets, which are growing very 

quickly. That demand is going up very substantially. At the same 

time we have seen constrictions on supply. So those are some of the 

factors that have been important. We did not anticipate Libya, we 

did not anticipate Japan. 

Mr. SCHWEIKERT. So it is externalities outside of our national 

borders? 

Mr. BERNANKE. Right. That is right. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. The last thing I 

will throw out is I think the Chairman may have broke Chairman 

Paul’s heart when he said gold wasn’t money. 

Chairman BACHUS. Thank you. 

Mr. BERNANKE. I think he will survive. 

Chairman BACHUS. Yes. Ms. Waters? 

Ms. WATERS. Thank you very much. Thank you for being here, 

Mr. Bernanke. We are always pleased to see you. 

I would like to ask you a little bit about the tremendous power 

that you have. It seems that there are about 21,000 transactions 

that are being examined. Basically, it is about the billions that you 

were able to lend out to banks and, I don’t know, hedge funds, 

what have you. 

This article that I am sure you have seen in Rolling Stone called, 

‘‘The Real Housewives of Wall Street’’ mentions that the Fed spent 

billions in bailout to banks in places like Mexico, Bahrain, Bavaria, 

billions more to a spate of Japanese car companies, more than $2 

trillion in loans each to Citigroup and Morgan Stanley and billions 

more to a string of lesser millionaires and billionaires and on and 

on and on. It mentions loans you made in the Cayman Islands, 

which causes us all a little bit of concern. You know the reputation 

of the Cayman Islands. 

But this is what caught my eye. This so-called shadow budget. 

There was a loan that was reported under your TALF program to 

something called Waterfall TALF Opportunity, a company whose 

chief investors included the wife of Morgan Stanley Chairman John 

Mack and a widow of a close friend of Mr. Mack who served as the 

president of Morgan Stanley’s Investment Banking Division. Neither of these women had any business experience to amount to 

46 

anything, but yet for an investment of $15 million, they received 

$220 million in cash from the Fed to purchase asset-backed securities like student loans and commercial debt, with the investors 

keeping 100 percent of any gains and taxpayers taking 90 percent 

of all losses. 

The reason I point that out to you is you know I have been in 

your face for a long time about opening up opportunities to minority banks, for example, and the discount window, they are undercapitalized. If they had money, they would lend money to our businesses that would create jobs in the minority community. The unemployment rate is just unconscionable. Business cannot get any 

capital. 

How is it that in this TALF program you and the so-called shadow budget that they are referring to could make it possible for Waterfall Opportunity to end up with just a $15 million investment 

getting $220 million when I cannot get any money from you for 

these small and minority banks. Could you answer me that? 

Mr. BERNANKE. We will have to look at that story. I am very 

skeptical. 

Ms. WATERS. You mean you have not read this story and investigated in your house to see what happened? 

Mr. BERNANKE. What I do know is that this story completely 

misrepresented how this program worked and what the goal of it 

was. The goal of it was to get the asset-backed securities market 

working again, which we did very successfully and at no cost to the 

taxpayer. It worked very similarly to the PPIP program in the 

Treasury, where any U.S. company, minority or otherwise, if they 

purchased assets could use part of— 

Ms. WATERS. I don’t want to interrupt you, but I understand 

what TALF was all about. Remember, I was deeply involved in 

TARP and TALF and all of that. 

Mr. BERNANKE. Right. 

Ms. WATERS. But as I have talked with you over the years, you 

always remind me that minorities need to concentrate on education 

and training and competency, and as you know, I have created 

these opportunities for you to meet very competent investment 

bankers and asset managers, I have brought them to Washington. 

You have been very generous. You have come to our meetings. 

Why is it that something like this little company with these two 

women with no background, no experience, no education can end 

up because they are connected get this kind of money, and I cannot 

open up these opportunities for minorities? 

Mr. BERNANKE. That program was open to any U.S. company. 

Ms. WATERS. How many African Americans did you fund through 

the TALF program? 

Mr. BERNANKE. Any who qualified and— 

Ms. WATERS. No, no, no, Mr. Bernanke. 

Mr. BERNANKE. I don’t know the answer to your question offhand. We can certainly try to find out for you. 

Ms. WATERS. I don’t want to interrupt, but I really do need some 

answers. Can you tell me—if you cannot tell me today, can your 

office give to me the number of minorities, and African Americans 

in particular, who have been funded under the TALF program? 

Similar to the way these two women were who have no experience. 

47 

Mr. BERNANKE. Again, I do not think that story is very accurate. 

But, anyway, I am not sure we can because we lent to companies, 

and they have lots of shareholders, and I am not sure we can identify the race of the shareholders. 

Ms. WATERS. All right. I will follow up and expect to get some 

answers from you on that. Meanwhile, I have a few seconds here. 

The Bank of America is attempting to settle with investors in 

Countrywide mortgage-backed— 

Chairman BACHUS. Your time is actually over, but I will let you 

ask one more question if the Chairman is willing to indulge. 

Ms. WATERS. Thank you. For $8.5 billion, the New York Fed is 

one of the investors settling in this deal. Some have questioned 

whether the deal is very favorable to Bank of America and about 

conflicts of interest. Does the Federal Reserve Bank of New York 

have a conflict of interest? How can they both be the regulator of 

Bank of America and a party trying to exact a fair settlement in 

a lawsuit? The $8.5 billion settlement is for $174 billion in mortgages. This amounts to about a 5 percent liability rate for Bank of 

America. Given that independent investigation suggested that twothirds of the loans had representation and warranty problems, the 

$8.5 billion settlement seems awfully low. Can you explain that? 

Mr. BERNANKE. First of all, the Bank of America is not regulated 

by the Federal Reserve Bank of New York but by the Federal Reserve Bank of Richmond. The Federal Reserve Bank of New York 

led this lawsuit in order to recoup as much as possible for the taxpayer. That is what the objective of that was. 

Ms. WATERS. And that is all they could get? 

Mr. BERNANKE. Sorry? 

Ms. WATERS. All they could get is $8.5 billion? 

Mr. BERNANKE. No, we went for all we could. 

Ms. WATERS. Of $174 billion in mortgages? 

Mr. BERNANKE. This was a collective suit with many participants 

in it, and this is what the court said it was willing to award. 

Ms. WATERS. Thank you very much, Mr. Chairman, Mr. 

Bernanke. 

Chairman BACHUS. Chairman Bernanke, let me compliment you 

on your testimony and your answers to our questions. One thing 

that I do want to say, you have always stressed, and I agree with 

you, and I think Mr. Carney was saying, agreeing with you, I think 

there is agreement on both sides of the aisle that long-term structural changes in our programs, particularly our entitlement programs, and in our tax policy will bear short-term benefits, and I 

think you agree that if we do not make those long-term structural 

changes, there will be consequences, and they could be immediate. 

I think 4 years ago you said that that there would be a time 

when we would run out of time, and I hope that is not the case, 

and we all do appreciate the consequences of this country having 

never defaulted on its obligations, and I would hope that we can— 

we were all, some of us disappointed that we are not going to see 

a ‘‘grand bargain,’’ and I think that also what many members on 

this committee realize is that tax spending and tax subsidies, it is 

quite a different thing from an increase of the tax rates. In fact, 

that is sometimes more spending than it is a tax. We appreciate 

that. And I will say that the members on both sides, some of their 

48 

questions, and Mr. Peters talked about in 1937 your study that 

there was an overtightening or credit restriction, monetary policy, 

that can be very deflationary, it can be adverse on the economy, 

and I believe now some of our—we have gone from being too loose 

on our housing, some of our lending, particularly mortgage lending, 

to too restrictive. I do believe, particularly with 20 percent I hope 

qualified residential mortgages, the downpayment, and other 

things could be problematic. 

So we would appreciate continuing the dialogue we have had 

with you, and as I said, we, at least I think many of us on this 

committee, believe that your approach has been very beneficial and 

that I am glad that you are going to maintain some flexibility and 

that you do not get straitjacketed into not having some flexibility, 

which may be needed because we do not know what tomorrow 

brings. So thank you very much for your testimony. 

Mr. BERNANKE. Thank you, Mr. Chairman. 

Chairman BACHUS. The Chair notes that some members may 

have additional questions for Chairman Bernanke which they may 

wish to submit in writing, and without objection, the hearing 

record will remain open for 30 days for members to submit written 

questions to the him and to place his responses in the record. 

Chairman Bernanke, the committee appreciates your testimony 

today and your service to our country. This hearing is adjourned. 

Mr. BERNANKE. Thank you. 

[Whereupon, at 12:45 p.m., the hearing was adjourned.] 

(49) 

A P P E N D I X 

July 13, 2011 

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