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72–763 2012

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THE ECONOMIC OUTLOOK 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

OCTOBER 4, 2011 

Printed for the use of the Joint Economic Committee 

( 

(II) 

JOINT ECONOMIC COMMITTEE 

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] 

SENATE 

ROBERT P. CASEY, JR., Pennsylvania, 

Chairman 

JEFF BINGAMAN, New Mexico 

AMY KLOBUCHAR, Minnesota 

JIM WEBB, Virginia 

MARK R. WARNER, Virginia 

BERNARD SANDERS, Vermont 

JIM DEMINT, South Carolina 

DANIEL COATS, Indiana 

MIKE LEE, Utah 

PAT TOOMEY, Pennsylvania 

HOUSE OF REPRESENTATIVES 

KEVIN BRADY, Texas, Vice Chairman 

MICHAEL C. BURGESS, M.D., Texas 

JOHN CAMPBELL, California 

SEAN P. DUFFY, Wisconsin 

JUSTIN AMASH, Michigan 

MICK MULVANEY, South Carolina 

MAURICE D. HINCHEY, New York 

CAROLYN B. MALONEY, New York 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

WILLIAM E. HANSEN, Executive Director 

ROBERT P. O’QUINN, Republican Staff Director 

(III) 

C O N T E N T S 

OPENING STATEMENTS OF MEMBERS

Hon. Robert P. Casey, Jr., Chairman, a U.S. Senator from Pennsylvania ......... 1 

Hon. Kevin Brady, Vice Chairman, a U.S. Representative from Texas .............. 3 

WITNESSES

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

System, Washington, DC ..................................................................................... 5 

SUBMISSIONS FOR THE RECORD

Prepared statement of Chairman Robert P. Casey, Jr. ........................................ 46 

Prepared statement of Vice Chairman Kevin Brady ............................................ 47 

Prepared statement of Hon. Ben S. Bernanke ...................................................... 48 

Prepared statement of Representative Michael C. Burgess, M.D. ...................... 51 

Letter dated October 18, 2011, transmitting questions from Vice Chairman 

Kevin Brady to Hon. Ben S. Bernanke .............................................................. 52 

Letter dated January 25, 2012 transmitting responses by Hon. Ben S. 

Bernanke to Vice Chairman Kevin Brady ......................................................... 57 

(1) 

THE ECONOMIC OUTLOOK 

TUESDAY, OCTOBER 4, 2011 

CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, DC. 

The committee met, pursuant to call, at 10:00 a.m. in Room G– 

50 of the Dirksen Senate Office Building, the Honorable Robert P. 

Casey, Jr., Chairman, presiding. 

Senators present: Casey, Klobuchar, Sanders, DeMint, Coats, 

and Lee. 

Representatives present: Brady, Burgess, Campbell, Duffy, 

Amash, Mulvaney, Hinchey, Maloney, and Cummings. 

Staff present: Brenda Arredondo, Gail Cohen, Will Hansen, Colleen Healy, Jesse Hervitz, Madi Joyce, Matt Salomon, Ted Boll, 

Connie Foster, Robert O’Quinn, Sean Ryan, Jeff Schlagenhauf, Michael Connolly, and Rachel Greszler. 

OPENING STATEMENT OF HON. ROBERT P. CASEY, JR., 

CHAIRMAN, A U.S. SENATOR FROM PENNSYLVANIA 

Chairman Casey. The hearing will come to order. 

I look forward to Chairman Bernanke’s report on the state of the 

economy, his perspective on recent actions taken by the Federal 

Reserve, and his insights into the short- and long-term, long-run, 

I should say, challenges facing the United States economy. 

My hope for today’s hearing is to move beyond the partisan politics and finger pointing that sometimes colors discussions about the 

Federal Reserve and what it should or should not do. Instead, I 

think we should focus today on the economic challenges facing the 

country and the potential solutions to those problems. 

All of us on this Committee share a belief that Congress needs 

to take action to bolster the economy and to help Americans get 

back to work. Similarly, monetary policy has an important role to 

play in strengthening our economy. 

Millions of Americans are still struggling in the wake of the 

Great Recession. The economy is not growing fast enough or adding 

enough jobs to make significant progress in reducing unemployment. 

Just by way of example: 

Fourteen million Americans are unemployed and 6 million of the 

jobless—some 43 percent—have been out of work for 6 months or 

more. 

Second, private-sector job creation which had been well above 

200,000 a month in February, March, and April, fell to less than 

20,000 in August. 

2 

State and local governments are reeling as they lay off workers 

to meet balanced budget requirements. In the past 12 months 

alone, state and local government payrolls have been slashed by 

345,000. 

In my home State of Pennsylvania, the unemployment rate— 

after declining to 7.4 percent in May—has climbed back to 8.2 percent in August, with more than a half a million people out of work. 

Economic indicators also have been weakening abroad. With financial conditions in the Eurozone deteriorating, contagion spreading to other parts of the world is now a significant risk to the global economic outlook. 

The Fed has already used a variety of approaches to ease monetary policy. In the current economic environment, we need to use 

all available tools to support our economy in the short run. We also 

need to take the actions that will get our fiscal house in order in 

the medium and long term. The two reinforce each other. Getting 

our economy growing at a healthy pace is critical to sustained deficit reduction. 

As Chairman Bernanke observed in a September speech to the 

Economic Club of Minnesota—and I am quoting: ‘‘There is ample 

room for debate about the appropriate size and role for the government in the longer term, but—in the absence of adequate demand 

from the private sector—a substantial fiscal consolidation in the 

shorter term could add to the headwinds facing economic growth 

and hiring.’’ 

The Federal Reserve Act created the Federal Reserve System and 

established objectives for the Nation’s monetary policy: maximum 

employment and stable growth—stable prices, I should say. This is 

what is commonly referred to as the Fed’s dual mandate: maximum 

employment and stable prices. 

The Federal Reserve’s recent announcement that it will ease 

monetary policy further is consistent with that dual mandate. The 

Federal Open Market Committee said it will purchase $400 billion 

of long-term Treasury Securities and pay for those Securities by 

selling an equal amount of shorter-term government debt. In the 

so-called Operation Twist, the Fed is not expanding its portfolio but 

shifting its composition so that the average maturity of its holdings 

is longer. 

The goal of the Fed’s action is to bring down long-term interest 

rates further—reducing borrowing costs for businesses and consumers, sparking additional economic activity, and ultimately 

boosting employment. The Fed also affirmed that it will continue 

to pay close attention to inflation and inflation expectations. 

Some in Washington have called on the Fed to, quote, ‘‘resist further extraordinary intervention in the U.S. economy’’, unquote, arguing that action by the Fed could further harm the U.S. economy. 

I disagree. With so many Americans out of work, and with GDP 

growth having slowed to less than half of one percent annual rate 

in the first half of this year, additional actions are needed to 

strengthen the economy. 

Let me say a word before I conclude about an issue that is in 

front of the Senate right now: currency as it relates to China. 

This problem has had a substantial harmful impact on the U.S. 

economy and American jobs. A recent report by the Economic PolVerDate Nov 24 2008 12:07 Mar 26, 2012 Jkt 072763 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\DOCS\72763.TXT DPROCT
3 

icy Institute finds that the U.S. trade deficit with China—caused 

in large measure by China’s undervaluation of the yuan—has cost 

our economy 2.8 million jobs over the past decade. 

Chairman Bernanke, in testimony before this Committee in April 

of 2010, noted that, quote, ‘‘most economists agree that the Chinese 

currency is undervalued and has been used to promote a more export-oriented economy.’’ Unquote. The Chairman also said at the 

time that it would be, quote, ‘‘good for the Chinese to allow more 

flexibility in their exchange rate,’’ unquote, and that, quote, ‘‘we 

should continue to press for a more flexible exchange rate.’’ Unquote. 

I agree with those statements by the Chairman. This week the 

Senate has the opportunity to take action in response to China’s 

unfair trade practices when we vote on bipartisan legislation to 

crack down, at long last, on China’s currency manipulation. Last 

night the Senate passed the first procedural hurdle with a strong 

bipartisan vote to move forward with debate on the legislation. 

So to sum up briefly, more than two years after the recovery officially began, our economy remains very vulnerable. Unemployment 

is stuck above 9 percent, and long-term unemployment remains at 

near record levels. We need to use every weapon in our arsenal to 

support a stronger economic recovery. 

Chairman Bernanke, thank you for being here today. Thank you 

for your testimony that you are about to give in a few moments, 

and I look forward to working with you and others to make sure 

that we can focus on the economy, creating jobs, and putting America back to work. 

[The prepared statement of Senator Casey appears in the Submissions for the Record on page 46.] 

Vice Chairman Brady. 

OPENING STATEMENT OF HON. KEVIN BRADY, VICE 

CHAIRMAN, A U.S. REPRESENTATIVE FROM TEXAS 

Vice Chairman Brady. Chairman Casey, I join with you in welcoming Chairman Bernanke to today’s hearing on the economic 

outlook. 

Unfortunately, ominous clouds are gathering. Economic growth is 

nearly stagnant. We have 6.8 million fewer payroll jobs today than 

when the recession began in December 2007. 

According to economists Carmen Reinhart and Kenneth Rogoff, 

recoveries from financial crises are weak and vulnerable to external shocks that may trigger double-dip recessions. 

Republican Members of Congress recognize this. We are critical 

of the President’s expensive economic policies because not only 

have they failed to spur job growth and restore business and consumer confidence, but also, as we feared, they have left America 

susceptible to a double-dip recession. 

Today as we meet, America faces a growing risk from the European debt crisis. The United States and the European Union are 

major trading partners. I am very concerned about the effects of 

contagion from the euro crisis on American financial institutions 

and markets, as well as the broader economy. I am anxious, Mr. 

Chairman, to hear your assessment of the euro crisis and any steps 

that the Federal Reserve may take to quarantine any contagion. 

4 

In response to the financial panic, the Federal Reserve took extraordinary actions to stabilize U.S. financial institutions and markets during the fall of 2008. Many of these actions were both necessary and proper. Instead of rehashing the past, however, I would 

instead like to initiate a discussion on the framework for monetary 

policy in the future. 

Nobel Laureate economist Robert Mundell said, ‘‘If you want a 

certain policy outcome, you have to use the right policy lever.’’ Unfortunately, too many Washington policymakers are ignoring 

Mundell’s wisdom. 

Monetary policy affects prices. In contrast, budget, tax, and regulatory policies affect real output and jobs. While the Great Contraction from August 1929 to March of 1933 proved that bad monetary 

policy can shrink production and destroy jobs, good monetary policy 

cannot accelerate economic growth or foster job creation except in 

the very short term. 

Washington—Congress—affects business investment, production, 

and job creation through its budget, tax, and regulatory policies. If 

the prospects for a swelling federal debt, higher taxes, and additional costs from the President’s health care plan, as well as burdensome regulations, are deterring entrepreneurs from investing in 

new buildings, equipment, and software and therefore hiring more 

workers, there is little that the Federal Reserve can do to overcome 

this drag. 

Until 1978, the Federal Reserve’s mandate regarding monetary 

policy was merely to provide ‘‘an elastic currency.’’ That year, the 

Full Employment and Balanced Growth Act, known informally as 

the Humphrey-Hawkins Act, was enacted. This Act imposed a dual 

mandate on the Federal Reserve that gives equal weight to achieving both price stability and full employment. 

Since 1978, many countries have examined what a central bank 

should do and have opted for a single mandate for long-term price 

stability. By law, the 17 member states of the European Monetary 

Union and 13 other developed and major developing countries have 

enshrined mandates for price stability either as the sole goal or the 

primary goal with the subordination of other goals for their central 

banks. Moreover, Australia and Canada have adopted single mandates through published statements. 

The time has come for Congress to reconsider the Federal Reserve’s mandate. In my view, the dual mandate should be replaced 

with a single mandate for long-term price stability. I will introduce 

legislation to make this change in the near future. 

While some may mistakenly claim that a single mandate means 

maximizing employment is unimportant, history proves the best 

way for the Federal Reserve to maximize employment is to focus 

on achieving long-term price stability. 

Under a single mandate, the Federal Reserve would publicly announce an inflation target. The Federal Reserve would retain full 

operational independence from both Congress and the President to 

achieve that inflation target. 

While I may criticize certain actions that the Federal Reserve 

has taken, I want to be absolutely clear. For our economy’s sake, 

the Federal Reserve must remain independent and free from any 

undue political pressure in implementing monetary policy. 

5 

Congress should also reconsider the Federal Reserve’s lender-oflast-resort policy. I remain deeply concerned about the precedents 

set in 2008 regarding clearly insolvent financial institutions—especially AIG, Bear Stearns, Fannie Mae, and Freddie Mac. 

In 1913, Congress envisioned the Federal Reserve would act as 

lender-of-last-resort during financial crises. However, the Federal 

Reserve has never articulated a clear lender-of-last-resort policy. 

As celebrated economist Allan Meltzer observed: 

‘‘The absence of a [lender-of-last-resort] policy has three unfortunate consequences. First, uncertainty increases. No one can know 

what will be done. Second, troubled firms have a stronger incentive 

to seek a political solution. They ask Congress or the administration for support or to pressure the Federal Reserve or other agencies to save them from failure. Third, repeated rescues encourage 

banks to take greater risk and increase leverage. This is the wellknown moral hazard problem.’’ End of quote. 

If the Federal Reserve were to promulgate a clear statement 

about its lender-of-last-resort policy, it would go far to diminish uncertainty, reduce the likelihood of political interventions, and mitigate the moral hazard problem. 

Finally, many years ago Congress gave the responsibility for exchange rate policy to the Secretary of the Treasury. This is a vestige of the long defunct Bretton Woods system of fixed exchange 

rates. 

By controlling the money supply, the Federal Reserve directly affects the foreign exchange value of the U.S. dollar. Moreover, 

swings in exchange rates influence domestic prices. Thus, the responsibility for exchange rate policy should be moved from the Secretary of the Treasury to the Federal Reserve. 

Chairman Bernanke, I look forward to your testimony and the 

questions that follow it. 

I yield back. 

[The prepared statement of Representative Brady appears in the 

Submissions for the Record on page 47.] 

Chairman Casey. Thank you, Mr. Vice Chair. 

Chairman Bernanke, I would like to provide a brief introduction. 

Dr. Ben Bernanke began a second term as Chairman of the Board 

of Governors of the Federal Reserve System on February the first, 

2010. Dr. Bernanke also serves as Chairman of the Federal Open 

Market Committee, the System’s principal monetary policymaking 

body. He originally took office as Chairman on February the first, 

2006, when he also began a 14-year term as a member of the 

Board. Dr. Bernanke was Chairman of the President’s Council of 

Economic Advisers from June 2005 to January 2006. Prior to beginning public service, Dr. Bernanke was a Chaired Professor at 

Princeton University, and he has been a Professor of Economics 

and Public Affairs at Princeton since 1985. 

Dr. Bernanke, it is good to have you here. 

STATEMENT OF HON. BEN S. BERNANKE, CHAIRMAN, BOARD 

OF GOVERNORS, FEDERAL RESERVE SYSTEM 

Chairman Bernanke. Thank you. 

6 

Chairman Casey, Vice Chairman Brady, and other members of 

the Committee, I appreciate this opportunity to discuss the economic outlook and recent monetary policy actions. 

It has been three years since the beginning of the most intense 

phase of the financial crisis in the late summer and fall of 2008, 

and more than two years since the economic recovery began in 

June 2009. 

There have been some positive developments: 

The functioning of financial markets and the banking system in 

the United States has improved significantly. 

Manufacturing production in the U.S. has risen nearly 15 percent since its trough, driven substantially by growth in exports; indeed, the U.S. trade deficit has been notably lower recently than 

it was before the crisis, reflecting in part the improved competitiveness of U.S. goods and services. 

Business investment in equipment and software has continued to 

expand, and productivity gains in some industries have been impressive. 

Nevertheless, it is clear that overall the recovery from the crisis 

has been much less robust than we had hoped. Recent revisions of 

government economic data show that the recession was even deeper, and the recovery even weaker than previously estimated. Indeed, by the second quarter of this year—the latest quarter for 

which official estimates are available—aggregate output in the 

United States still had not returned to the level that it had attained before the crisis. Slow economic growth has in turn led to 

slow rates of increase in jobs and household incomes. 

The pattern of sluggish growth was particularly evident in the 

first half of this year, with real GDP estimated to have increased 

at an average annual rate of less than one percent. Some of this 

weakness can be attributed to temporary factors. 

Notably, earlier this year political unrest in the Middle East and 

North Africa, strong growth in emerging market economies, and 

other developments contributed to significant increases in the 

prices of oil and other commodities which damped consumer purchasing power and spending. And the disaster in Japan disrupted 

global supply chains and production, particularly in the automobile 

industry. 

With commodity prices having come off their highs, and manufacturers’ problems with supply chains well along toward resolution, growth in the second half of the year seems likely to be more 

rapid than in the first half. 

However, the incoming data suggest that other, more persistent 

factors also continue to restrain the pace of recovery. Consequently, 

the Federal Open Market Committee, the FOMC, now expects a 

somewhat slower pace of economic growth over coming quarters 

than it did at the time of the June meeting when Committee participants most recently submitted their economic forecasts. 

Consumer behavior has both reflected and contributed to the 

slow pace of recovery. Households have been very cautious in their 

spending decisions as declines in house prices and in the values of 

financial assets have reduced household wealth, and many families 

continue to struggle with high debt burdens or reduced access to 

credit. 

7 

Probably the most significant factor depressing consumer confidence, however, has been the poor performance of the job market. 

Over the summer, private payrolls rose by only about 100,000 jobs 

per month on average—half of the rate posted earlier this year. 

Meanwhile, state and local governments have continued to shed 

jobs as they have been doing now for more than two years. With 

these weak gains in employment, the unemployment rate has held 

close to 9 percent since early this year. Moreover, recent indicators—including new claims for unemployment insurance and surveys of hiring plans—point to the likelihood of more sluggish job 

growth in the period ahead. 

Other sectors of the economy are also contributing to the slowerthan-expected rate of expansion. The housing sector has been a significant driver of recovery for most recessions in the United States 

since World War II. This time, however, a number of factors—including the overhang of distressed and foreclosed properties, tight 

credit conditions for builders and potential home buyers, and the 

large number of ‘‘underwater’’ mortgages—have left the new rate of 

home construction at only about one-third of its average level in recent decades. 

In the financial sphere, as I noted, banking and financial conditions in the United States have improved significantly since the 

depths of the crisis. Nonetheless, financial stresses persist. 

Credit remains tight for many households, small businesses, and 

residential and commercial builders, in part because weaker balance sheets and income prospects have increased the perceived 

credit risk of many potential borrowers. 

We have also recently seen bouts of elevated volatility and risk 

aversion in financial markets, partly in reaction to fiscal concerns 

both here and abroad. Domestically, the controversy during the 

summer regarding the raising of the federal debt ceiling and the 

downgrade of the U.S. long-term credit rating by one of the major 

rating agencies contributed to the financial turbulence that occurred at about that time. 

Outside the United States, concerns about sovereign debt in 

Greece and other euro-zone countries, as well as about the sovereign debt exposures of the European banking system, have been 

a significant source of stress in global financial markets. 

European leaders are strongly committed to addressing these 

issues, but the need to obtain agreement among a large number of 

countries to put in place the necessary backstops and to address 

the sources of the fiscal problems has slowed the process of finding 

solutions. 

It is difficult to judge how much these financial strains have affected U.S. economic activity thus far, but there seems little doubt 

that they have hurt household and business confidence, and that 

they pose ongoing risks to growth. 

Another factor likely to weigh on the U.S. recovery is the increasing drag being exerted by the government sector. Notably, state 

and local governments continue to tighten their belts by cutting 

spending and employment in the face of ongoing budgetary pressures, while the future course of the federal fiscal policies remains 

quite uncertain. 

8 

To be sure, fiscal policymakers face a complex situation. I would 

submit that in setting tax and spending policies for now and the 

future, policymakers should consider at least four key objectives. 

One crucial objective is to achieve long-run fiscal sustainability. 

The federal budget is clearly not on a sustainable path at present. 

The Joint Select Committee on Deficit reduction formed as part of 

the Budget Control Act is charged with achieving $1.5 trillion in 

additional deficit reduction over the next 10 years on top of the 

spending caps enacted this summer. Accomplishing that goal would 

be a substantial step. However, more will be needed to achieve fiscal sustainability. 

A second important objective is to avoid fiscal actions that could 

impede the ongoing economic recovery. These first two objectives 

are certainly not incompatible, as putting in place a credible plan 

for reducing future deficits over the longer term does not preclude 

attending to the implications of fiscal choices for the recovery in 

the near term. 

Third, fiscal policy should aim to promote long-term growth and 

economic opportunity. As a Nation, we need to think carefully 

about how federal spending priorities and the design of the tax 

code affect the productivity and vitality of our economy in the 

longer term. 

Fourth, there is evident need to improve the process for making 

long-term budget decisions to create greater predictability and clarity while avoiding disruptions to the financial markets and the 

economy. 

In sum, the Nation faces difficult and fundamental fiscal choices 

which cannot be safely or responsibly postponed. 

Returning to the discussion of the economic outlook, let me turn 

now to the prospects for inflation. Prices of many commodities—notably oil—increased sharply earlier this year and, as I noted, led 

to higher retail gasoline and food prices. 

In addition, producers of other goods and services were able to 

pass through some of these higher input costs to their customers. 

Separately, the global supply disruptions associated with the disaster in Japan put upward pressure on prices of motor vehicles. 

As a result of these influences, inflation picked up during the 

first half of this year. Over that period, the price index for personal 

consumption expenditures rose at an annual rate of about 3–1/2 

percent, compared with an average of less than 1–1/2 percent over 

the preceding two years. 

As the FOMC anticipated, however, inflation has begun to moderate as these transitory influences wane. In particular, the prices 

of oil and many other commodities have either leveled off or have 

come down from their highs, and the step-up in automobile production has started to reduce the pressures on the prices of cars and 

light trucks. 

Importantly, the higher rate of inflation experienced so far this 

year does not appear to have become ingrained in our economy. 

Longer-term inflation expectations have remained stable according 

to surveys of households and economic forecasters, and the fiveyear-forward measure of inflation compensation derived from yields 

on nominal and inflation-protected Treasury Securities suggests 

9 

that inflation expectations among investors may have moved lower 

recently. 

In addition to the stability of longer term inflation expectations, 

the substantial amount of resource slack in U.S. labor and product 

markets should continue to restrain inflationary pressures. 

In view of the deterioration in the economic outlook over the 

summer and the subdued inflation picture over the medium run, 

the FOMC has taken several steps recently to provide additional 

policy accommodation. 

At the August meeting, the Committee provided greater clarity 

about its outlook for the level of short-term interest rates by noting 

that economic conditions were likely to warrant exceptionally low 

levels for the federal funds rate at least through mid-2013. 

And at our meeting in September, the Committee announced 

that it intends to increase the average maturity of the securities 

in the Federal Reserve’s portfolio. Specifically, it intends to purchase by the end of June 2012, $400 

billion of Treasury Securities with remaining maturities of 6 years 

to 30 years, and to sell an equal amount of Treasury Securities 

with remaining maturities of 3 years or less, leaving the size of our 

balance sheet approximately unchanged. 

This maturity extension program should put downward pressure 

on longer-term interest rates and help make broader financial conditions more supportive of economic growth than they would otherwise have been. 

The Committee also announced in September that it will begin 

reinvesting principal payments on its holdings of agency debt and 

agency mortgage-backed securities—into agency mortgage-backed 

securities, rather than into long-term Treasury Securities. 

By helping to support mortgage markets, this action too should 

contribute to a stronger economic recovery. The Committee will 

continue to closely monitor economic developments and is prepared 

to take further action as appropriate to promote a stronger economic recovery in a context of price stability. 

Monetary policy can be a powerful tool, but it is not a panacea 

for the problems currently facing the U.S. economy. Fostering 

healthy job growth and job creation—economic growth and job creation is a shared responsibility of all economic policymakers in 

close cooperation with the private sector. 

Fiscal policy is of critical importance, as I have noted today, but 

a wide range of other policies—pertaining to labor markets, housing, trade, taxation, and regulation, for example—also have important roles to play. 

For our part, we at the Federal Reserve will continue to work to 

help create an environment that provides the greatest possible economic opportunity for all Americans. 

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

[The prepared statement of Hon. Ben S. Bernanke appears in the 

Submissions for the Record on page 48.] 

Chairman Casey. Mr. Chairman, thank you very much. 

I want to note for the record that members’ statements will be 

made a part of the record. I would ask unanimous consent that 

they all be made part of the record. 

[No objections.] 

10 

Without objection. 

Mr. Chairman, I want to start close to where you left off with 

regard to the maturity extension program. I am looking at the top 

of page 6 of your testimony when you say, in pertinent part, quote, 

that the Fed ‘‘intends to purchase, by the end of June 2012, $400 

billion of Treasury securities with remaining maturities of 6 years 

to 30 years and to sell an equal amount of Treasury securities with 

remaining maturities of 3 years or less, leaving the size of our balance sheet approximately unchanged.’’ Unquote. 

That is described as the ‘‘maturity extension program.’’ I have 

two questions on that: 

Number one is, as a result of the implementation of that policy 

how much of a decline in long-term interest rates would you expect? 

Chairman Bernanke. Well we would expect something on the 

order of 20 basis points, approximately. We see this as being roughly equal to something like a 50-basis-point cut in the federal funds 

rate. In that respect it is a significant step, but not a game changer 

in some respect. 

Chairman Casey. And in terms of the intended or hoped-for 

economic boost from that, what is your sense of that? How can you 

assess that? 

Chairman Bernanke. Well we think this is a meaningful but 

not an enormous support to the economy. I think it will provide 

some additional monetary policy accommodation. It should help 

somewhat on job creation and growth. 

It is particularly important now that the recovery is close to faltering. We need to make sure that the recovery continues and does 

not drop back, and that the unemployment rate continues to fall 

downward. 

So I do not have a precise number, but I would just put it as a 

moderate support; not something that is expected to radically 

change the picture, but should be helpful both in keeping prices 

near the price stability level, but also providing some support for 

growth. 

Chairman Casey. I wanted to—I mean have some follow-ups 

with that, but I did want to move to the question of currency. It 

just happens to be a major issue and a front-burner issue for us 

this week. 

I am going to read you a statement that you made, going back 

into 2006. This is a part of a speech you made at the Chinese Academy of Social Sciences in December of 2006, and I’m quoting: 

‘‘Greater scope for market forces to determine the value of the 

RMB would reduce an important distortion in the Chinese economy. Namely, the effective subsidy that an undervalued currency 

provides for Chinese firms that focus on exporting rather than producing for the domestic market. 

A decrease in this effective subsidy would induce more firms to 

gear production toward the home market, benefitting domestic consumers and firms.’’ Unquote. 

I read that to you just by way of a reminder about things you 

have said about currency. When I talk to people in Pennsylvania, 

and beyond, but especially back home, there is a unanimity about 

this issue that is pretty rare, across regional, party lines, in terms 

11 

of the reality for people’s lives—the adverse impact that China currency policies have had on our jobs in our communities. 

I guess one question I wanted to ask you—and if you can answer 

the first one; the other two may be more difficult to answer—but 

has the Fed attempted to quantify the magnitude of the impact of 

this subsidy on the U.S. economy or U.S. jobs? Has there been a 

recent attempt to do that? 

Chairman Bernanke. No, I don’t think so. We have mostly followed work by the IMF and other international agencies, and also 

by think tanks, you know, like the Institute for International Economics, which have found that the Chinese currency is undervalued by a significant amount. The exact amount varies according 

to estimates. 

Chairman Casey. And do you have any sense of the aggregate 

number of jobs lost that you could attribute to this policy? 

Chairman Bernanke. I don’t have a number. It’s difficult to estimate because there are many direct as well as indirect effects. I 

mean, working through third-party, other trading nations, and so 

on. 

I think right now a concern is that the Chinese currency policy 

is blocking what might be a more normal recovery process in the 

global economy. In particular, we have a two-speed recovery where 

advanced industrial countries like the United States and Europe 

are growing very, very slowly and where emerging market economies are growing quite quickly. 

And a more normal recovery, a more balanced recovery, would 

have some more demand being shifted away from the emerging 

markets toward the industrial economies. The Chinese currency 

policy is blocking that process. And so it is to some extent hurting 

the recovery process. 

So it is certainly a negative. I am sorry I do not have an exact 

number. 

Chairman Casey. Thank you very much. Vice Chairman Brady. 

Vice Chairman Brady. Thank you, Chairman. As often as not, 

a country that undergoes a severe financial crisis as America did 

falls into a double-dip recession within the first two or three years 

afterwards. 

Given that America’s economy is not flying strong and steady at 

50,000 feet, but flying low and slow today, and given U.S. exposure 

in banks and money market accounts to Europe, do you have any 

concern that the turbulence from a financial crisis in Europe could 

trigger a double-dip recession here at home? 

Chairman Bernanke. I do have concerns about the European 

situation. I should say first that we have looked very carefully at 

bank exposures, both to foreign sovereigns and to foreign banks; 

and in particular the exposures of U.S. banks to the most troubled 

sovereigns—Portugal, Ireland, and Greece—is quite minimal. 

So the direct exposures there are not large. There are somewhat 

larger exposures in the money market mutual fund area, but there 

too they have moved mostly away from Portugal, Ireland, Greece, 

towards the other European countries like France and Germany. 

So it is not so much the direct exposures that concern me. Rather, market uncertainty about the resolution of the Greek situation, 

about the broader resolution of both sovereign debt issues and EuVerDate Nov 24 2008 12:07 Mar 26, 2012 Jkt 072763 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 C:\DOCS\72763.TXT DPROCT
12 

ropean banking issues has created an enormous amount of uncertainty and volatility in financial markets. And it is through that 

volatility and in direct effects I think that we are being affected 

now. 

I believe that one of the reasons that our recovery has been slower this year than it was last year is that we have faced a lot of financial volatility, and some of that is coming from the European 

situation. 

Vice Chairman Brady. If there is a liquidity run on European 

banks, if there is a financial crisis in Europe, what tools are you 

considering to mitigate and limit the adverse economic effects on 

the United States? 

Chairman Bernanke. Well first, in Europe there are substantial facilities to provide liquidity to European banks. First, the European Central Bank has enormous capacity to provide liquidity to 

European banks. 

And as you know, we have conducted a swap line with the European Central Bank whereby they give us euros, they give them dollars, and on their own responsibility and on their own credit risk 

they re-lend dollars as necessary to European banks that need dollars. 

So we are doing what we can to cooperate with the European 

Central Banks and other central banks to provide dollar funding 

for global dollar money markets. That is the first thing. 

Domestically, I think our main lines of defense would be to make 

sure that there is first adequate supervision of our banks, which 

we are very much engaged in, and I would have to say that the 

good news here is that U.S. banks have substantially increased 

their capital bases since the crisis three years ago. 

But secondly, we would make sure that we would stand ready to 

provide as much liquidity against collateral as needed as lender-oflast-resort for our banking system. 

Congressman, you mentioned earlier the lender-of-last-resort policy regarding AIG and other individual firms, and I basically agree 

with you. I would just note that Dodd-Frank has made that illegal. 

We could not do that again. We are not allowed to do any lending 

to individual firms, or to insolvent firms. 

What we could do with the permission of the Secretary of the 

Treasury, is to provide a broad-based lending program to try to address a run on our financial system, which we do not anticipate, 

but we will certainly be prepared to respond if anything eventuates. 

Vice Chairman Brady. I think the question is raised again because of Europe. In a financial crisis it is difficult to ascertain the 

difference between liquidity and insolvency. And without a clear 

lender-of-last-resort policy in advance, it lends itself to the uncertainty that we have seen obviously here in the United States and 

we are seeing I believe in Europe. 

Can I ask you, are there any other tools you are considering 

other than the swap lines, creating liquidity with the European 

Central Bank? Any other tools you are looking at should that crisis 

occur? 

Chairman Bernanke. Our basic tools are supervision and oversight and monitoring of our own financial system. And we are lookVerDate Nov 24 2008 12:07 Mar 26, 2012 Jkt 072763 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 C:\DOCS\72763.TXT DPROCT
13 

ing broadly at the financial system, not just at banks, as part of 

our macro prudential responsibilities under the new legislation. 

And secondly, standing ready, as central banks always have in 

financial crises, to provide backstop liquidity as necessary. 

Vice Chairman Brady. Can you answer this? We have just a 

short time left, but you have been reading the papers, as I have. 

There is some concern that the swap lines with the European Central Bank create in effect a back door bailout to European banks 

and leave exposure for U.S. Taxpayers. 

We have had swap lines in the past. My understanding is this 

lending is to the ECB, not to the banks themselves, but can you 

address the authority and the potential exposure that might occur? 

Chairman Bernanke. You said it exactly right, Congressman. 

The authority is given to the Federal Open Market Committee by 

the Congress and has been used many times in the past. There is 

no question about the authority. But in terms of the exposure, as 

you say, our loan is really not a loan, it’s a swap. Because what 

we are doing is we are swapping dollars for euros with the European Central Bank. 

We have a contract with the European Central Bank that they 

will return to us the full amount of dollars, plus interest, that we 

give them. So we do not face any exchange rate risk, or any interest rate risk. 

Moreover, they make the loans to their own banks about which 

they have appropriate information, supervisory information, and 

the like. And if there are any losses, they are responsible, not us. 

So Taxpayers are under no risk whatsoever through these swap 

lines, which by the way proved very, very helpful during the 2008 

crisis. 

Vice Chairman Brady. Thank you, Mr. Chairman. Yield back. 

Chairman Casey. Thank you, Vice Chair. Senator Sanders. 

Senator Sanders. Thank you, Mr. Chairman, and thank you 

very much for being here, Mr. Bernanke. 

Mr. Bernanke, let me start with a question coming from a slightly different direction. I think most Americans perceive today that 

the middle class is collapsing, poverty is increasing, real unemployment as you know is about 16 percent, 25 million people without 

jobs or underemployed, and yet at the same time we have growing 

inequality—income in wealth inequality in America. 

The top 1 percent earn more income than the bottom 50 percent. 

The wealthiest 400 people own more wealth than the bottom 150 

million Americans. That gap is the greatest of any major country 

on earth. 

Do you believe that this economy will recover so long as we continue to have this growing gap between the very, very rich and everybody else where some people have so much, and so many people 

have so little? Are you concerned about that issue? 

Chairman Bernanke. I am concerned, Senator. I have spoken 

on this issue. It is not a recent development. It has been happening 

since at least the late ’70s that the inequality has been increasing, 

and at the top in particular there has been increased income. 

There are a whole variety of reasons for it. I do not necessarily 

know that the short-term recovery of the economy is crucially tied 

to it, although it would help to have broader based purchasing 

14 

power throughout the economy. But I certainly agree that it is a 

real concern, and that it is something that we should try to address 

as a society. 

Senator Sanders. In a similar vein, let me ask you this: Today 

we have on Wall Street the six largest financial institutions who 

have assets equal to more than 60 percent of the GDP. 

Are you concerned that after we went through the disaster of toobig-to-fail a few years ago, that with that type of concentration of 

ownership where three out of the four largest financial institutions 

today are bigger than they were before we went through the bailout, (a) are you concerned that we are going to be in a position 

again where Congress is going to have to bail out these financial 

institutions who have not changed their ways, who are still into 

highly speculative activities; and (b) are you concerned, when you 

have so much concentration of ownership in these top institutions 

that this does not create in any way, shape, or form a competitive 

dynamic economy? 

Chairman Bernanke. Well, Senator, we very much supported 

the reforms in the Dodd-Frank Act which are intended to eliminate, or at least substantially reduce, the too-big-to-fail problem. 

And as I was saying to Congressman Brady, we no longer have the 

authority to bail out anybody. And, you know, it is our anticipation 

that Congress will never have to bail anybody out, because we have 

now put in resolution authority. We have put in extra supervision, 

more capital, and so on. 

Senator Sanders. Be that as it may, I am not quite so confident 

that that reality may not come again, but here is my question. 

When you have six financial institutions with that much economic 

power, why shouldn’t we break them up? 

I mean, do you believe that if an institution is too big to fail it 

should be allowed to continue? Why don’t we break them up? Provide more competitive aspects to the economy? 

Chairman Bernanke. Well, the authority is there. If we determine that they present a grave threat to the economy—— 

Senator Sanders. Do you believe—if you were sitting where we 

were, would you be supportive of breaking up these large financial 

institutions? 

Chairman Bernanke. I think I would look and see how the 

market works here. There are benefits to size. The 60 percent of 

GDP you mentioned is much smaller than many other countries 

that have banks that are bigger than their GDP. 

I think the right response is to put extra cost, extra supervision 

on these firms that will give them an incentive to eliminate unnecessary size, to eliminate unnecessary activities, and to reduce their 

risk taking. And that is what Dodd-Frank attempts to do. 

Senator Sanders. Let me, my last question is this: I secured a 

provision in Dodd-Frank, which you were not too enthusiastic 

about as I recall, which allowed for an audit of the Fed during the 

financial crisis. And what we learned is that the Fed provided, in 

a revolving way, some $16 trillion in low-interest loans to every financial institution in this country, many of the central banks 

throughout the world, many large corporations in America, many 

very wealthy individuals. My question is this: That at a time when 

large banks have parked over a trillion dollars at the Fed, why 

15 

aren’t we doing the same? Providing low-interest loans to small 

businesses so that they can create jobs? 

In other words, if you during the financial crisis provided $16 

trillion to banks all over this world, why are you not providing the 

kinds of money that small businesses now desperately need so they 

can expand and create jobs? 

Chairman Bernanke. Well, Senator, as you pointed out, this is 

revolving. So many of these loans were overnight. 

Senator Sanders. Yes, I understand that. 

Chairman Bernanke. And over and over again. The Federal 

Reserve was created in 1913 to address financial panics. And like 

all central banks around the world for 300 years, the way we do 

that is provide backstop liquidity during a panic when financial institutions lose their funding. 

And it is very much in the interests of the broader economy and 

to the average person that we prevent the collapse of the financial 

system. It is not our role, and we do not have the authority, to 

make general loans to the broader economy. 

Senator Sanders. But you do have the authority. Some would 

disagree that—whether you should have that authority—to deal 

with unemployment. Unemployment is a crisis situation now. Why 

aren’t you doing for small business what you did for the large financial institutions? 

Chairman Bernanke. Well we are addressing unemployment. I 

just discussed in my testimony the aggressive steps we are taking 

to ease monetary policy, which is our main tool to address—— 

Senator Sanders. Are you prepared to provide low-interest 

loans to small businesses in the same way you provided it to large 

financial institutions around the world? 

Chairman Bernanke. I don’t think that’s our role, and I am 

sure we don’t have the authority to do that. 

Senator Sanders. Thank you. 

Chairman Casey. Thank you, Senator Sanders. Representative 

Campbell. 

Representative Campbell. Thank you, Mr. Chairman, and 

Chairman Bernanke. 

I would like to first follow up a little bit on what Vice Chairman 

Brady was talking about on the European situation. You know, 

with all the issues relative to our economy, we have some modicum 

of control—you and us up here, of monetary policy and fiscal policy. 

But I think one of the frustrations is that we do not have any control over Europe’s decisions relative to their current problems and 

crises, but yet it can affect us here. 

To what extent would a default in Greece, or in some of the other 

countries, where that sovereign debt has some—those holders of 

that sovereign debt have some laws, is our financial system sufficiently protected from that that kind—a default in Greece and perhaps another country over there would not impact our financial 

system, at least? 

Chairman Bernanke. Well first it would depend on the conditions of the default. If it were done in a way where there were very 

substantial firewalls, backstop protections, done in a very orderly 

and controlled way, then that would be one thing. 

16 

If it was disorderly, unplanned, and disruptive, that would be a 

very different matter. 

As I said to Congressman Brady, the direct exposures of our 

banks to Greece are minimal, but if there were a disorderly default 

which led to runs or defaults of other sovereigns, or stresses on European banks, it would create a huge amount of financial volatility 

globally that would have a very substantial impact not only on our 

financial system, but on our economy. 

So it is a very, very serious risk if that were to happen. And that 

is why it is extremely important that the Europeans continue along 

the lines that they have been on, which is to try to address that 

situation. 

Representative Campbell. I understand that, as you say, if it 

affects their economy and demand there is reduced, that obviously 

affects the global economy and there is not that much, I would perceive—and if you disagree, say so—that we can do about that. 

But are there—you obviously are taking all the steps you believe 

you can, and that are prudent in order to create a firewall around 

our financial sector—is there anything we should be doing in that 

regard? Meaning Congress. 

Chairman Bernanke. Unfortunately, as you pointed out at the 

beginning, we are kind of innocent bystanders here. The Federal 

Reserve, the Treasury, and others, have been consulting with and 

been kept informed by our European colleagues. I am persuaded 

that they are very much aware of the risks associated with the situation. They are very much committed to trying to address it. 

The problems there are not really economic; they are essentially 

political because what they are trying to do is find solutions that 

will be acceptable to 17 different countries, which as you can imagine is very difficult. 

So I do not have any good suggestions other than to support their 

efforts and to continue to push them to move aggressively to put 

this behind us. Because even the current situation of just ongoing 

uncertainty has been I think a negative for our economy. 

Representative Campbell. Just switching gears for a moment, 

you mentioned housing, which I agree is one of the primary elements of the economy; that we cannot grow without housing, cannot grow robustly without housing being a part of that. And we 

never go into a recession without them contributing. 

What can and/or should we be doing at this point in order to aid 

that sector of the economy specifically? Should we be looking at a 

new system of housing finance past Fannie and Freddie, to replace 

Fannie and Freddie as they currently exist? Should we be looking 

at the foreclosure situation? What are your thoughts on that? 

Chairman Bernanke. This is a very important issue. I would 

just urge Congress to look carefully at what might be done. There 

are a lot of possibilities. 

One issue is the treatment of real estate owned, REO. As you 

know, one of the problems is such a big overhang of foreclosed and 

distressed properties. Would there be programs that would allow 

REO to be converted to rental, or to rent-to-own? Some way to 

manage the REO overhang? 

A second issue is refinancing. There are a lot of barriers to refinancing, including the fact that people who are underwater have 

17 

a great deal of difficulty refinancing. Would it be possible to help 

that happen? 

You mentioned Fannie and Freddie. I think for the near term it 

will be difficult to create a full-fledged alternative to Fannie and 

Freddie who are currently now the basic source of all securitization 

in the mortgage market. But to the extent that Congress is able to 

lay out a clear framework, or a clear path to a new housing finance 

system, I think that would create some certainty and maybe would 

allow some of the private sector securitization activities to resume. 

So I think there are things that can be done, and I am sure there 

are many other things that could be done, and I would urge you 

to think about, you know, what Congress could do. 

Representative Campbell. Thank you, Mr. Chairman. 

Chairman Casey. Thanks, Representative Campbell. Senator 

Klobuchar. 

Senator Klobuchar. Thank you very much, Chairman. 

Chairman Bernanke, I know you were recently in my State and 

spoke there, and I think you saw the strong and vibrant business 

community in our State. It is a community that works together 

well. It is one of the reasons we have an unemployment rate that 

is 2 points better than the national average, and it is a State that 

tends to believe in making things, and inventing things, and exporting to the world. 

And so you can imagine the frustration our business community 

has felt by some of the games that have been going on in Washington recently. I was thinking back to the last year that you testified, and you were talking about how, this was about a year ago, 

you indicated that the markets were signalling a lot of confidence 

in our political system to deliver a sustainable fiscal trajectory. 

What effect do you think that the debate this summer over the 

Nation’s debt limit, how that was handled, how this was simply 

handled even last week, I think it is something that the New York 

Times in an editorial last week called ‘‘governing by crisis.’’ They 

talked about how each one of these confrontations have a high cost. 

They eat up valuable legislative bandwidth. They add uncertainty 

to the financial system. They contribute to a cynicism and lack of 

confidence in the political system that damages everyone. 

And I would just like your opinion on how things have been handled in the last six months, and how they have—that has been inconsistent or consistent with the goals that you have laid out 

today? 

Chairman Bernanke. Well, Senator, first let me just say that 

I strongly support efforts to put our fiscal policy back on a longterm sustainable path. I am in no way putting down that very important objective. 

That being said, unfortunately the brinkmanship of the summer 

and at least the perception in the minds of some investors that the 

United States might actively consider defaulting on its debt, and 

more over the possibility that this might be recurring periodically, 

I think was a negative for the financial markets. 

It was the reason that the downgrade occurred. The S&P cited 

the political process more than the amount of debt outstanding. 

And it is really no way to run a railroad, if I might say so. So I 

very much support continued strong bipartisan efforts to bring our 

18 

long-term fiscal situation under control, but I do sincerely submit 

to you—that doing it in a way that raises the risk of default on our 

debt is going to be counterproductive. Because eventually it is 

going to lead to higher interest rates, which will make deficits 

worse, which goes against exactly the purpose of the exercise. 

Senator Klobuchar. Thank you. And I was actually one, I know 

also on this Committee, Senator Coats and Senator Warner, one of 

37 Senators, a bipartisan group that said we need to reach that $4 

trillion figure in debt reduction. 

Now I believe we need to do that with a balanced approach; that 

we need to do it with a mix of the spending cuts, which are very 

important as you have pointed out; but also closing some of the 

loopholes which would enable us to bring down the corporate tax 

rate leading to one of your other goals of the sustainable growth, 

as well as looking at some of these fairness issues that Senator 

Sanders has addressed. 

And do you see it as possible to moving forward with this $4 trillion debt reduction by doing it in a balanced way? 

Chairman Bernanke. Well it is up to the Congress exactly how 

you would like to do it. I laid out some goals. One is to achieve the 

sustainability. That can be done with a larger sized government or 

a smaller government. It depends on what you want the government to do. 

But I hope that as you think about—let me put it this way: As 

you think about reducing our deficits and putting us on a sustainable path, which is critically important, it is also important to 

think about how good is our tax system? How efficient and how effective is it? How equitable is it? How effective is our government 

spending? Is it producing the results we want? Is it supporting 

growth and recovery? 

So we should continue to think about the components of the 

budget, as well as the overall need for sustainability. 

Senator Klobuchar. Thank you. And one last thing that I have 

appreciated that you have talked about in some way, this need to 

focus on our country’s competitiveness and innovation. 

I saw a recent survey in my State that 46 percent of our businesses cannot find workers to serve in certain jobs. Our tech 

schools, some of them have 96 percent placement rates—and they 

are not your grandpa’s tech schools anymore. They are training 

students to learn to run computer systems that are running the assembly lines that are running our Nation’s papermills, or that are 

making our medical devices. 

I just wondered if you could briefly talk about, as you mentioned, 

exports are so important, the need to retool our workforce and not 

just pretend this is something on the side, but should be a major 

piece of our competitive agenda. 

Chairman Bernanke. This is where many of our exports are 

now, either in specialized high-tech capital goods, or professional 

services, for example. And so developing both the human capital, 

the expertise, the skills, and making sure that we retain our global 

leadership in research and development, I think these are incredibly important for productivity and living standards going forward. 

Senator Klobuchar. Thank you, very much. I appreciate you 

being here. 

19 

Chairman Casey. Thank you, Senator Klobuchar. Representative Burgess. 

Representative Burgess. Thank you, Mr. Chairman. 

Just picking up on what Senator Klobuchar just said, a brief 

commercial: The Food and Drug Administration is undergoing a reauthorization process next year. It will be tough, because it is a political year as well, but it is absolutely critical to our ability for the 

approval of new medical devices and is something where we are severely insufficient in this country. We are driving that business 

overseas, and that investment overseas. 

And at the same time, under the Affordable Care Act, we are 

going to be taxing that segment of our intellectual capital, and I 

just think it is unconscionable the way we have behaved. 

We hear a lot of talk about the trillion dollars sitting on the sidelines that corporations have, a trillion dollars that they are just 

waiting to see what is going to happen. Is that accurate? 

[The prepared statement of Representative Burgess appears in 

the Submissions for the Record on page 51.] 

Chairman Bernanke. I think it is more than that. I think it is 

more like $2 trillion. 

Representative Burgess. And what is it that they are waiting 

to see? 

Chairman Bernanke. Well, partly it is a liquidity preference 

from the crisis where they want to make sure they have enough 

cash on hand in case there are more financial issues. 

But more generally I think it is—— 

Representative Burgess. So are those capital requirements 

that you have imposed? 

Chairman Bernanke. I am talking now about corporations, not 

about banks. 

Representative Burgess. Okay. 

Chairman Bernanke. Corporations remain very uncertain 

about the strength of the recovery. At this point they are able to 

meet demand with their existing capital stocks and workforces, and 

they are looking to see a stronger recovery and greater clarity before they deploy some of those funds. 

Representative Burgess. And is that greater clarity from the 

Legislative Branch? Or from the Federal Reserve? Or from the Executive Branch? Where is that—— 

Chairman Bernanke. Well it comes from many areas. I think 

first and foremost will the recovery continue and be strong, or will 

it falter? And there is a lot of uncertainty about what the economy 

is going to do. 

Certainly, policy uncertainty is an important issue. As far as the 

Federal Reserve is concerned, we in our regulatory efforts are doing 

our best to move as quickly as possible to provide clarity about the 

regulatory framework that we are responsible for. 

Representative Burgess. Do you think tax policy influences it? 

Chairman Bernanke. It’s possible, yes. In general, the most 

clarity we can provide to firms and households, the more likely 

they are to make commitments of various sorts. 

Representative Burgess. Let me ask you a question. I need to 

move on because time is limited. 

20 

Do you think that the actions that have been taken over the last 

three years have prevented a recurrence of the events that we saw 

in September of 2008? Have we prevented the next meltdown? 

Chairman Bernanke. I think we made a substantial improvement in—— 

Representative Burgess. Wrong answer. Have we prevented— 

have we prevented? It is a ’yes’ or ’no’ question. 

Chairman Bernanke. If we had not taken those actions, we 

wouldn’t have had to prevent because we would have had a collapse. 

Representative Burgess. Let me ask you this: A lot of people 

talk about the reinstitution of Glass-Steagall. You mentioned 

‘‘moral hazard.’’ Do we need to draw that bright line again? 

Chairman Bernanke. I don’t think Glass-Steagall per se would 

have avoided the crisis. Many investment banks or commercial 

banks that were not combined had significant problems. 

We have made a lot of steps to try to address those issues. I 

know not everybody agrees on all of them, but I think we have 

made a lot of progress in getting our financial system back on a 

more stable footing. 

Representative Burgess. Let me ask you this: In your testimony, the second-to-the-last paragraph, the closing sentence, you 

said: 

‘‘The Committee will continue to closely monitor economic developments and is prepared to take further action. . . ’’. Do you have 

further arrows in your quiver at this point? Have most of them already been used? Is the only arrow you have left the printing 

press? 

Chairman Bernanke. Well the basic tool that the Federal Reserve has is operations in the open market that may or may not 

increase the money supply. But the attempts to reduce interest 

rates and to create more financial accommodation, we do have 

tools. But obviously we want to evaluate the costs and the benefits 

of any decisions we take, and we want to make sure that the economy is getting the appropriate amount of stimulus from us. 

Representative Burgess. So the answer to that question is: 

The printing press may be the only arrow left in your quiver? 

Chairman Bernanke. Well the printing press, I think that is 

a rather unfair characterization. The printing press literally is not 

actually involved. 

I mean what we are doing right now is selling short-term securities and buying long-term securities. We are not changing the size 

of our balance sheet, and we are not changing the size of the 

money supply in any significant way. 

Representative Burgess. As long as it works. 

Let me just ask you something unrelated, because my time is 

running out. You see protests both on the right and the left. Right 

now the protesters that are getting the headlines are on the left 

in New York. What does that protest say to you? What are you 

hearing from that activity in New York right now? 

Chairman Bernanke. Well I would say very generally, I think 

people are quite unhappy with the state of the economy and what 

is happening. They blame, with some justification, the problems in 

the financial sector for getting us into this mess. And they are disVerDate Nov 24 2008 12:07 Mar 26, 2012 Jkt 072763 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 C:\DOCS\72763.TXT DPROCT
21 

satisfied with policy response here in Washington. And at some 

level I can’t blame them. Certainly 9 percent unemployment and 

very slow growth is not a very good situation. That’s what they are 

protesting. 

Representative Burgess. And are you incorporating that into 

the remedies that you are proposing? 

Chairman Bernanke. I am taking into account the growth rate 

in the unemployment rate, as well as the inflation rate. I am not 

taking the protests into account, specifically, but like everyone else, 

I am dissatisfied with what the economy is doing right now. 

Representative Burgess. Thank you, Mr. Chairman. 

Chairman Casey. Thanks, Representative Burgess. Representative Hinchey. 

Representative Hinchey. Thank you very much, Mr. Chairman. 

Chairman Bernanke, thank you very much. Thanks for being 

here, and thanks for all the responsibilities that you are engaged 

in. 

I have a couple of simple questions to ask, one which expands 

upon what Mr. Sanders said just a few moments ago. We have a 

serious issue with distribution of wealth in this country, and that 

really needs to be addressed, and it needs to be straightened out. 

The top 1 percent of Americans hold 33 percent of the total 

wealth in this country. The top 5 percent hold nearly 60 percent 

of the total wealth. The top 10 percent hold 72 percent of the total 

wealth. The bottom 50 percent of Americans holds only 3 percent 

of the total wealth. 

All of that is a similarity and reminiscent to the deep Great Depression which our country suffered back in the 1930s. That needs 

to be overcome. 

So can you tell me candidly what accounts for the significant concentration of wealth in this country? And in your opinion, what is 

the most effective initiative that Congress can do to increase household wealth among the working and middle class? 

The working and middle class are the drivers of the economy of 

this country. When the working and middle class experience hardship, the entire economy declines. That is what we have got to concentrate on: working people, building them up, making them more 

successful. 

Chairman Bernanke. Well in the shorter term, clearly it is people with the middle class, but also the working class, who take the 

brunt of high unemployment. The Federal Reserve is taking strong 

actions to try to restore economic growth and try and bring down 

the unemployment rate. I think that would be a very important 

step to take. 

In the longer term, there are a number of reasons for this inequality which, as I pointed out to Senator Sanders, is not a new 

phenomenon. It has been growing for 30 or 40 years. A lot of it has 

to do with divergent educational and skill levels, and I think we 

have more diversity in terms of high quality and low quality educational systems in the U.S. than almost any industrial country, 

and we need to have stronger, more consistent training and education for everybody. 

22 

We need to make sure people have technical skills, because technological change has been one place where a lot of people are getting left behind. We need to help people learn how to save and to 

budget. Financial literacy is an important issue. 

People have talked about trade. Senator Casey mentioned the 

Chinese currency issue. I think we need to have open and fair 

trade. That would be helpful. 

So there are a variety of things that can be done to try to do 

that. Many of them, unfortunately, don’t happen overnight. But 

broadly speaking, I think we all agree that we want to create as 

much opportunity in this society as possible. And when there are 

people who do not have access to good education, they are kind of 

shut out from the beginning. 

Representative Hinchey. Well I would suggest that some of 

the things you can do is to recommend to this Congress positive 

things we can do. And the concentration of wealth was affected in 

1977–78, when Congress passed dramatic cuts In capital gains tax 

which primarily benefit wealthy people. That in and of itself has 

got to be dealt with, and dealt with effectively by this Congress to 

upgrade the quality of life for middle income people. That needs to 

be done. 

Let me just ask a little bit about the Volcker Rule. Since the passage of Dodd-Frank, the Federal Reserve has been working on implementing the Volcker Rule. This important provision limits 

banks’ ability to engage in proprietary trading. This Rule upholds 

the spirit of the important Glass-Steagall Act which separated commercial banking and investment banking until its unfortunate repeal back in 1999. That needs to be corrected. 

Recently, news reports have indicated that a draft final rule will 

include a significant loophole allowing banks to continue to make 

risky bets with their own capital to hedge against portfolio risks. 

This new exception significantly diminishes the impact of the 

Volcker Rule. 

How can we expect to see a change in bank behavior if we continue to allow proprietary trading through a watered down Volcker 

Rule? 

Chairman Bernanke. Well first let me just say, we are about 

to put out a proposed rule. I would say within a couple of weeks 

we should have something out that the public can look at and give 

us comments on it. 

It is a complicated rule, and we want to make sure it is workable. But at the same time, we certainly want to follow the spirit 

of the statute. There are in the statute provisions that allow banks 

to hedge their positions, which is something you want them to do 

because that reduces risk. 

I’m not sure I know exactly what you are referring to, but I assure you that we will look very carefully and respond to any comments that you might have about the actual rule when it comes 

out. 

Representative Hinchey. Well with regard to the Volcker Rule, 

it has been weakened. Now the question is, what are we going to 

do? Are we going to continue to allow it to be weakened? Or are 

we going to do something to correct that weakening and make it 

more effective, as it was intended? 

23 

Chairman Bernanke. I don’t know what you mean by ‘‘run 

down.’’ The rule is about to be put out. So when you see the rule, 

if you will tell us what your objections or concerns are, we will be 

happy to respond to them. 

Representative Hinchey. Well you can see clearly what it 

means by weakened, I think. 

Chairman Bernanke. If you’re referring to current activities by 

the financial institutions, of course the Volcker Rule is not in effect 

yet and it will take some time before it is in effect. But it is our 

intention to follow the spirit of the rule. After all, Chairman 

Volcker was the Chairman of the Federal Reserve, and I look at his 

picture every day. So we will certainly try to make sure that the 

spirit of the rule is enforced. 

Representative Hinchey. Thank you very much. 

Chairman Casey. Thank you, Representative Hinchey. 

Senator Coats. 

Senator Coats. Thank you, Mr. Chairman. 

Mr. Chairman, thank you for your service. Both sides of the financial houses here, the Congress and the Fed, face significant 

challenge. We are both sort of on the hot seat. I don’t think it is 

appropriate for one to blame the other for the problem, and you 

have not done that. 

It seems to me sometimes too much attention is focused on what 

the Fed should do when it is not within the Fed’s purview of doing; 

it is in ours; and we are deflecting the blame over to you. 

Nevertheless, you indicate in your opening statement here that— 

and I quote—‘‘The future course of federal fiscal policies remains 

quite uncertain’’, and that uncertainty is something we all hear as 

we go back to our states and talk to businesses and others. It is 

pervasive throughout industry, throughout business, throughout 

households. And I guess the question is: How can we together work 

to eliminate some of that uncertainty and restore confidence not 

only in the investment market but in the consumer market? 

Clearly that would have a positive impact in terms of our going 

forward. You outlined four key objectives in that regard in your 

statement, one of which is, as you describe, putting together a longterm fiscally sustainable credible plan. 

You state that what is before the Congress in terms of what has 

been done in August, and what the goals are for the Super Committee that is going to report in November, are far short of what 

we need to do. That is reinforced by the rating agencies. It is reinforced by the President. It has been reinforced by various economists and analysts, saying generally anything short of $4 trillion 

in spending, viable spending cuts, over a 10-year period of time is 

going to be inadequate to regain that confidence and achieve the 

goal of a fiscally sustainable plan. 

My question to you is, as others have suggested, you can’t get 

there just—to get that kind of a plan—just through spending cuts. 

You need certain reforms in the system, one of which is entitlement 

reforms to mandatory spending, another of which is comprehensive 

tax reform. 

My question is: How important is that to be part of a package 

that can be deemed what you would conclude to be long-term fiscally sustainable and credible? 

24 

Do you have some comments and thoughts on that? 

Chairman Bernanke. Yes. So first it would be a major achievement to have a credible plan that delivered stability and sustainability over the next decade. As I was indicating to Senator 

Klobuchar, the quality of the product also matters. It is not just the 

bottom-line numbers. In terms both of economic efficiency and 

growth and in terms of certainty, reforming the tax code would be 

very useful and very valuable. 

I think everybody agrees that it is a very complex and, in many 

ways, counterproductive system right now. 

And likewise, evaluating the quality of our programs. Is it possible, for example, to deliver health care to senior citizens at the 

same level, or the same quality for less cost? Those are some of the 

issues that we need to address. 

So I agree, the bottom-line number is critical, but so is whether 

or not we achieve some clarity and some improvement in both the 

tax and spending programs. 

Senator Coats. Now some say this is not—putting that comprehensive package together by the end of this year, the Congress 

voting on that and pushing it forward, is not attainable particularly with regards to the complexity of the entitlement, the reform, 

and the tax reform. 

Many suggest that, well, these are elements—these are initiatives that ought to be started up in 2013. Can we wait until then? 

Chairman Bernanke. Well, Senator, you are a better judge 

than I am of how quickly this could be done in Congress, but clearly the sooner the better. 2013 is a ways away, and at least giving 

some indication of the directions that you are going and the broad 

ideas that you would be incorporating I think would be helpful. 

Senator Coats. You state in your comments here that these difficult and fundamental fiscal choices cannot be safely or responsibly postponed. I assume you stand by that? 

Chairman Bernanke. Yes, sir. 

Senator Coats. And 2013, would that fall in that? Would you 

describe that as something that is safely and responsibly done? 

Chairman Bernanke. I think we would all like to see as much 

progress as possible. And if that involves now laying out some 

plans and beginning the discussion, I think that would be very useful. 

Senator Coats. My own belief is that at least some strong indication with some enforcement mechanism is necessary in that 

package now in order to assure the investment world and the consumer world that we are on the right path, and therefore have the 

psychological effect of improving confidence and helping move forward with some sustainable measures. 

Thanks very much for your testimony. 

Chairman Bernanke. Thank you. 

Chairman Casey. Thank you, Senator Coats. Representative 

Mulvaney. 

Representative Mulvaney. Thank you, Mr. Chairman. 

Mr. Bernanke, as difficult as it is for two Southerners to talk 

about anything in five minutes, I will do my best to speak a little 

faster than I would if you and I met back home, and also be a little 

more blunt than if we had met back in South Carolina. 

25 

You came to our Committee on the Budget back in the springtime and gave much the same presentation, and encouraged us at 

that time to do everything that we could to get our fiscal house in 

order. We have talked about that several times here today. 

In my opinion, we have woefully underperformed in that area 

and are continuing to make some of the mistakes that you brought 

to our attention last spring. We have not fixed the spending problem. We have not come up with a way to close the deficit. 

I would suggest to you, sir, that the Fed is part of the difficulty 

with that. And I encourage you to consider the fact that with all 

of the steps that you take to keep interest rates low, in the long 

term, in the short term, to encourage lending, you are also encouraging borrowing. 

You are encouraging the Federal Government to continue to do 

what we do. You have made our effective borrowing rate the lowest 

it has ever been in the history of the Nation, and therefore there 

are no consequences in the immediate term to our actions to continue borrowing money. 

So I would suggest to you, sir, that you do consider that when 

you all go forward on the Open Market Committee, that one of the 

unintended consequences of doing what you are doing is making it 

easier for us to continue to do what we are doing—which is, to borrow money. 

You make it more difficult for us to drive home to our colleagues 

the down side of incurring all of this significant debt. 

With that, I will move on to my question, which deals with inflation. I think we have seen that inflation has either been flat or up 

in the last 13 months. It is up each month I think this year. Yet 

we are looking at an environment where industrial capacity is still 

low, unemployment is still high, wages are flat, factory orders I 

think it was announced they were down last month—they announced that this morning. 

I recognize your comments about energy having some influence 

on inflation, recognizing that core inflation excludes raw energy 

costs; and also the Japanese auto market, the situation we had 

over there. But I think it is reasonable to suggest that monetary 

policy is having some inflationary pressures. 

Now, when you were before the Budget Committee last spring, 

I asked you if you were comfortable with your ability to turn off 

the flow, turn off the flow of money which you referred to as the 

flow into the punch bowl. Now, since then you have announced two 

fairly significant new plans—the program to reinvest in mortgagebacked securities instead of allowing the balance sheet to shrink, 

and also the Operation Twist of extending the maturities structure 

on the debt. 

I ask you, sir, if you believe that those two policies have in any 

way impaired your ability to deal with inflation should the need 

arise? 

Chairman Bernanke. Congressman, I need to respond to that 

first point. I don’t think that is a valid point. We keep interest 

rates down somewhat. I don’t think that eliminates the responsibility of Congress to take its own action. 

But putting that aside, looking at Europe we see the European 

Central Bank buying the debt of Greece, and the interest rate in 

26 

Greece is, whatever it is, 40 percent. If investors lose confidence in 

the U.S. fiscal situation, the Fed’s actions are not going to have any 

effect on that. 

Representative Mulvaney. And I would not suggest you are 

the only thing depressing our interest rates. Certainly the flight to 

quality out of Europe is depressing our borrowing costs, but I think 

you all represented 40 or 45 percent of our borrowings every month 

during QE–1 and QE–2. You all are a big part of where we go to 

get the money. 

And until you all start saying no, you can’t borrow any more, we 

are going to continue to do what we have done for the last 30 

years. 

Chairman Bernanke. Well, we need to keep interest rates low 

to provide support for the economy, which needs the support. On 

the inflation situation, the impact of energy and food prices, which 

arose from a large number of reasons early in the year, is now receding and inflation expectations in the financial markets from 

forecasters, from the public, are quite low and quite stable. 

I don’t expect inflation to be a problem going forward. As far as 

exiting our policies we laid out in June a exit strategy that was in 

our minutes and was widely discussed, and we have all the tools 

we need to reverse our policies at any time. And I really am quite 

confident about that. 

And when the times comes, we will certainly do what is necessary to maintain price stability. And right now, we are much further away from full employment than we are from price stability. 

Representative Mulvaney. My last question is this: We are operating now in an environment where inflation is above your target 

rate. Unemployment is above everybody’s target rate. Dealing with 

those two situations would, some would say, require two different 

things. It would take one thing to solve employment and that 

would actually make inflation worse, or you can help solve inflation 

and make employment worse. 

My question to you is this. Now, you talked a lot today about 

clarity, and I agree, and stability in the markets is what the Fed 

is supposed to provide. Would you be better positioned to provide 

clarity and stability if we were to remove one of your two mandates? 

Chairman Bernanke. Well, Congressman, it is a complicated 

question. I can’t answer it real quickly. I would say that we do 

have some ability to improve the employment situation, and I think 

the dual mandate has worked pretty well on average over time. 

I would also point out that central banks that have inflation as 

their primary, or technically only mandate, do pay attention to economic conditions if for no other reasons than that affects inflation 

expectations. 

So, I think our dual mandate is workable. Although, I agree that 

in the long run the only thing the Fed can control is inflation. In 

the long run, low inflation is the best thing we can do for growth. 

I agree with all that. 

So my bottom line is, I think we can make the dual mandate 

work. I think it has worked pretty well. But of course it is up to 

Congress. If you want us to change to a single mandate, we will 

do whatever you assign us to do. 

27 

Representative Mulvaney. Thank you, sir. 

Chairman Casey. Thank you, Representative Mulvaney. Representative Duffy. 

Representative Duffy. Thank you. 

And thank you for coming in, Mr. Chairman—over here on this 

side, now. I appreciate your testimony. 

Quickly, as I talk to a lot of folks who are studying what is happening in Greece, many of them will say it is kind of a foregone 

conclusion that Greece is going to default. I know you are not going 

to say that. 

But as we look here, I think your testimony today is basically 

saying we don’t have primary exposure to Greece or Italy, but we 

do have secondary exposure through the banking system. 

How great is that exposure? 

Chairman Bernanke. Well again, our banks have de minimis 

exposure to the sovereign debt of Portugal, Ireland, and Greece. 

They have quite modest exposure to the sovereign debt of Italy and 

Spain. They have much more substantial exposure to the banking 

systems of Italy, Spain, France. And of course, very substantial exposure to the economies, more broadly speaking. 

So the direct exposures to say Greece are quite small, but indirectly to the Continent and more generally through the stability of 

the financial markets overall, of course we have significant exposure. 

Representative Duffy. And we see that, I think you’ve indicated, it’s pretty clear that what the Europeans have to do to stave 

off this crisis, it is not an issue of do they know what to do, it is 

do they have the political will to actually step forward and do what 

is necessary. 

Do you think they are doing enough? Do you think they have the 

political will to get the job done? 

Chairman Bernanke. I think they appreciate how much is at 

stake. I mean, it is not just short-term stability; it is the continuation of their common European project. It is the continuation of 

their common currency. So I think there is a very strong desire and 

will to achieve success here. 

But again, the process has been slowed by the political complexities. 

Representative Duffy. And I think it is analogous to what we 

see here. I mean, we have a situation in this country where we look 

out into the future and you go: Listen, we are going to down the 

road have some serious issues with our debt. And we will all sit 

around these tables, and we have bipartisan discussions, but there 

is not a political will to get it done. 

And when we have our own conversations today about our debt, 

where it’s set at $14.5 trillion, and it’s pretty tough to get a political consensus to deal with it, do you think it gets more politically 

easier to deal with the debt when it is 10 years down the road, and 

$25 trillion? 

I mean, the more debt we rack up, the more politically difficult 

it gets, doesn’t it? 

Chairman Bernanke. I have great sympathy for you. These are 

very, very difficult problems. They involve very fundamental questions of what the government should do and how big it should be. 

28 

And I understand that there is an enormous amount of disagreement, and I hope that we will be able to find a common ground. 

Representative Duffy. But looking at what we see in Greece, 

I mean would you say it is fair that the alarm bells are going off 

with regard to American debt? 

Chairman Bernanke. Well there are two sides to that. On the 

one side, clearly as Mr. Mulvaney pointed out we have got flight 

to quality coming into U.S. debt. If people are seeing all kinds of 

problems in the global financial system, they are buying U.S. debt 

and driving yields of the U.S. debt down to very low levels. 

That being said, I think everybody appreciates now that you 

can’t run large deficits forever. We are seeing that in other countries. And in fact, S&P downgraded the U.S. Treasuries. So clearly 

this is an issue that we have to address, and it is not something 

that can wait 10 years. 

Representative Duffy. Okay, and I just want to quickly pivot 

to Operation Twist. You are in the process of selling short-term 

Treasuries, $400 billion, and are going to purchase long-term 

Treasuries. 

Are you doing a market-value to market-value? Or are you going 

market-value to par-value? 

Chairman Bernanke. It is going to be par to par, which means 

the market values are not going to exactly match. 

Representative Duffy. So is this going to be a minor QE–3 

that’s going to happen through these purchases? 

Chairman Bernanke. It is possible that the value of the securities holdings may change, but it would be very small and not significant in terms of stimulative effect. 

Representative Duffy. The last time we chatted in a hearing 

over the summer you indicated you were considering QE–3. Is that 

still on the table as one of your tools that you may use? 

Chairman Bernanke. We never take anything off the table because we don’t know where the economy is going to go. We can’t 

forecast what might happen in the future. But we have no immediate plans to do anything like that. 

Representative Duffy. I would yield back. 

Chairman Casey. Thank you, Representative Duffy. Senator 

Lee. 

Senator Lee. Thank you. Thank you, Chairman Casey, and Vice 

Chairman Brady. 

I don’t want to make a lengthy statement. I am far more interested in your testimony. But I do want to share just a couple of 

my own thoughts about the current state of our economy, and 

share some of my concerns about the Federal Reserve System. 

In 1977, Congress gave the Federal Reserve the dual mandate 

that Representative Mulvaney referred to, to promote both maximum employment and simultaneously promote stable prices. 

Unfortunately, since that time—and more recently, just in the 

last few years—we have had anything but maximum employment 

and stable prices. Most Americans believe, correctly I think, that 

prices of products and services they buy on a daily basis, things 

like gasoline, electricity, heating oil, health care services, have increased significantly in recent years and have grown more volatile. 

And at the same time, we have unemployment in excess of 9 perVerDate Nov 24 2008 12:07 Mar 26, 2012 Jkt 072763 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 C:\DOCS\72763.TXT DPROCT
29 

cent. And a lot of Americans, as a result of those factors, are struggling in this difficult economy. 

So the result of that, in my view, is the Federal Reserve may 

well be said to be failing in its Congressional Mandate, two-fold 

mandate, that we have just described. And I wonder whether some 

action ought to be taken to remedy that, or at least to bring the 

mandate more into line with reality. 

I would add that I am troubled by the Federal Reserve’s role in 

shoring up failing banks—some would say ‘‘bailing out,’’ others 

would say ‘‘shoring up’’ or engaging in some form of swaps. But regardless of what they are doing, they are arguably creating asset 

bubbles through policies that lead to artificially low interest rates 

and the general veil of secrecy under which the Federal Reserve 

typically operates is also of concern to me. 

So with some of those concerns in mind, I want to ask you a couple of questions. Given that many Americans are retirees, including 

the Baby Boom Generation getting ready to retire, those saving for 

retirement often invest in fixed-income products, including a lot of 

Treasury Securities. 

Are you concerned about the implications of these historically low 

interest rates on retirees and those saving for retirement? 

Chairman Bernanke. Congressman, could I please reply quickly to your earlier—— 

Senator Lee. Please feel free. 

Chairman Bernanke [continuing]. Statement on inflation. 

Inflation has come down over the last 30 years, and during my 

tenure it has been about 2 percent, which is essentially price stability. So I think the record on price stability has been very, very 

good according to BLS statistics. 

On unemployment, I would blame the current crisis mostly on 

the financial crisis. Obviously the Fed had some responsibility 

there but it was not, in my opinion, coming from the dual mandate; 

it came from financial oversight issues. 

We are not bailing anybody out. All central banks have a responsibility to provide backstop liquidity to solvent institutions only, 

fully collateralized. We do not lose any money. We do not take any 

risk. This is what central banks do to try to reduce financial stress 

and to help the economy. 

As far as Fed audits, we are very thoroughly audited at this 

point. I would refer everyone to our website which has an FAQ ‘‘Is 

the Fed audited?’’ We are audited by the GAO, by the Inspector 

General, by outside private accountants. We produce regular financial statements. All of our emergency lending facilities have been 

thoroughly audited and nobody has found any impropriety whatsoever. 

So that is really just an urban legend. 

Thanks for letting me respond to that. 

On the saving issue, it is a very difficult question. I guess one 

consolation for Treasury holders is they have had a lot of capital 

gains as interest rates have gone down. But more seriously than 

that, I understand that fixed income savers do often suffer from 

low interest rates. It is a consideration. It is something we think 

about. 

30 

But clearly if you are going to be investing in the U.S. economy 

you need a strong economy. And it is our view that the low interest 

rates over a period of time, not permanently, help have a stronger 

economy going forward, and that gives better opportunities for investment for all savers. 

And so ultimately, I think the short-term low rates are necessary 

to give the kind of economy we need that people can get ultimately 

high returns in. 

Senator Lee. What do you expect interest rates to do over the 

next few years? Or maybe I should direct it more specifically toward Treasury Yield Rates. Where do you expect those to go in the 

next five or six years? 

Chairman Bernanke. Well it depends very much on how the 

economy evolves. If the economy recovers gradually, as we currently anticipate, then over time Treasury Rates will go up. 

Senator Lee. I see my time has expired. Thank you, Chairman. 

Chairman Casey. Thank you, Senator Lee. Senator DeMint. 

Senator DeMint. Thank you, Senator Casey. 

And thank you, Mr. Chairman, thank you for your service to our 

country. It is a very difficult time, and I appreciate your calmness 

through the storm here. 

Over the past three years, the Federal Reserve has engaged in 

what seems to me like unprecedented action. Originally these actions were aimed at managing a financial crisis as a lender-of-lastresort. And we clearly were in crisis. 

But the Fed has continued to expand its balance sheet with multiple rounds of quantitative easing, Operation Twist, an exponential increase in monetary supply relative to the growth of the 

economy. And you’ve in effect become a major player in the private 

sector economy, much beyond banking, but a major economic player. 

My question is: If you had a single mandate of just protecting the 

value of the dollar itself, how much of the actions that you have 

taken in the last three years would change if you did not have the 

mandate of protecting employment? 

Because this may be the way we want it to be, but it does seem, 

when you combine Congressional and Executive policies with what 

the Fed has done in the markets, that it is getting to where the 

private sector players do not know what to expect from government. 

How much of that would change if you did not have a mandate 

to increase employment? 

Chairman Bernanke. Well at certain times there would be a 

difference in policy, certainly. But in this case, as I have mentioned, our forecast for inflation is that it will be somewhere 

around 2 percent next year, which is pretty close to what most central banks around the world, even those that have only a single 

mandate, define as price stability. 

Our second round of quantitative easing last August in 2010 was 

in response to an inflation rate that was below 1 percent and falling, and we were concerned about the risk of deflation. So the efforts just to keep inflation close to sort of the 2 percent target, the 

fact that it is close to 2 percent now, suggests we would have had 

31 

to do most of what we have already done just to keep inflation 

there. 

So the evidence is that all the things we have done have not 

driven inflation above the price stability level. 

Senator DeMint. Are we concerned that we are setting the 

stage for that to happen, though, in effect? It does seem that the 

dollar is okay for now because the euro is in such bad shape. And 

as you have said before in testimony, you understand as the economy grows you are going to have to withdraw the stimulus effect 

of monetary supply. 

Is this something we can really control at this point? As I think 

the monetary supply continues to increase dramatically, the Federal Reserve has bought through intermediaries a significant 

amount of our debt, as you have expanded your balance sheet. 

Is this something we can come back and control? And is that 

much control a good thing? 

Chairman Bernanke. Well, Senator, first the monetary base, 

which is the reserves the banks hold with the Fed, has grown tremendously, reflecting the size of our balance sheet. But the money 

supply that most Americans think about, currency in circulation, 

checking accounts, those things, has not grown unusually, first. 

But secondly, as we have discussed on a number of occasions, I 

have given several speeches and we have provided this exit strategy in the June minutes, we have a number of tools for exiting. We 

are very confident that on a technical level we can do so, and we 

will be paying very careful attention to inflation as we make that 

determination. 

So I assure you that we are quite confident that we can reverse 

our policies when necessary. 

Senator DeMint. Thank you, Mr. Chairman. Thank you, Senator Casey. 

Chairman Casey. Thank you, Senator DeMint. 

We will move to a second round of questioning now. They will be 

something approaching a lightning round, three minutes, so that 

everyone knows that. 

I will start, and then I will turn to our Vice Chair. I did not want 

to let too much time go by without re-emphasizing some of the good 

news in the early part of your testimony. We do not have enough. 

I t is good to have a list of good news items. 

I was just looking at page one. By my count there are at least 

four, maybe five, depending on how you break them up, but the 

functioning of financial markets and the banking system improved 

significantly. That is one you mentioned. 

Manufacturing production has risen 15 percent. 

The trade deficit is noticeably lower—notably lower, I should say, 

in your testimony. 

Business investment in equipment and software has continued to 

expand. 

And productivity gains in some industries have been impressive. 

So that is good news. But when you get to the point in your testimony where you have the four objectives, which again I think are 

helpful for us: 

Number one, long-term fiscal sustainability; 

Number two, avoiding actions that could impede a recovery; 

32 

Third, the fiscal policy aim should be on long-term growth; and 

then 

Four, improving the process of how we do things around here. 

I wanted to focus on kind of the first two or three, the focus on 

the long-term fiscal sustainability, which has been your focus, appropriately so. And you also say that we need short-term strategies 

as well. 

One of the strategies put in place back in December of 2010 was 

the payroll tax cut for the employee. And now there is a debate 

about the next step to take, whether we extend that or whether 

there is a cut put in place for the employer. 

I guess, other than a strategy like that, or maybe even extending 

unemployment insurance benefits—that is one that is on the table 

as well—not that you want to have a recitation of a long menu, but 

any other short-term strategies that you think would be helpful? 

Chairman Bernanke. I made reference to housing as an area 

where there might be various steps that could be taken to make 

the market work better. 

In terms of growth, considering investments in capital, whether 

it’s public capital, or supporting private capital formation, or 

human capital formation is one possibility. 

The unemployed obviously is a major area of concern. Perhaps 

assistance could be provided there. But on the tax side, a couple 

of people have mentioned tax reform, and that is something to look 

at that could provide more certainty and a more effective and efficient tax system going forward. 

Those are some ideas. Obviously, I am not endorsing specific policies, and I have no concerns about the creativity of your colleagues 

in finding strategies to work on. 

Chairman Casey. Thank you. Vice Chairman Brady. 

Vice Chairman Brady. Thank you. I am pleasantly pleased to 

get a second round, so we will do a lightning round with you, 

Chairman, if that is okay. 

Transparency is a major issue with the Fed, and we hear critics 

today. I’ve experienced you to be honest. You’ve been an advocate 

for transparency through the financial crisis, both in meetings here 

and in our meetings face to face as well. 

To that end, is there any logistical reason why the lag time between Open Market Committee meetings and the release of the 

transcripts shouldn’t be reduced from five to two years or less? Is 

there any reason we can’t see that sooner? 

Chairman Bernanke. There is no logistical reason. My concern 

is that two years is within a tightening or easing cycle. What we 

noticed when the transcripts were released with a five-year lag was 

that the meetings became much more constrained. People started 

reading their statements. There was just much less give and take. 

I think with that short a lag, I think you are actually going to 

inhibit discussion and you may have adverse impacts on markets. 

We provide a great deal of information in our minutes, in our testimonies, and speeches, and the like. And I am happy to meet with 

you and discuss issues that you might have. 

I think no other central bank in the world provides the transcripts with any lag, as far as I know. So this is actually quite a 

33 

transparent policy that we have. And I do think it would create 

some problems to shorten that considerably. 

Vice Chairman Brady. With China there is a focus on currency. But noting that the U.S. devalued its currency by a peak of 

about 15 percent over two years, it’s now closer to 12 percent today, 

and since the driver behind the currency legislation seems to be 

our trade deficit, what I hear from our businesses is that, while 

currency certainly is an issue especially for select industries, there 

are a number of trade barriers we face in China from theft of intellectual property rights, directed subsidies, closed capital account, 

restrictions on raw and rare export materials, on and on, choosing 

of national champions, on and on. 

If Congress is to tackle our trade deficit with China, isn’t it more 

important that we look at the whole range of trade barriers that 

restrict our sales into that growing market? 

Chairman Bernanke. On our currency, Congressman, the dollar is about the same place it was in the summer of 2008. It has 

gone up and down with flows of flights to safety, but it hasn’t been 

really on a trend. 

On your question, absolutely. I have been involved in the strategic and economic dialogue since its inception, and we talk every 

time with the Chinese about all these issues, and I think continue 

to press your discussion with them about these trade barriers and 

these related issues. I think it is very important and very constructive. 

Vice Chairman Brady. Thank you, Mr. Chairman. 

Chairman Casey. Thank you, Vice Chairman Brady. Senator 

Sanders. 

Senator Sanders. Thank you, Mr. Chairman. 

Mr. Chairman, as you know, there are people demonstrating 

against Wall Street in New York City and other cities around the 

country. And I think the perception on the part of these demonstrators, and millions of other Americans, is that as a result of the 

greed, the recklessness and the illegal behavior on Wall Street we 

were plunged into this horrendous recession we are currently in. 

Do you agree with that assessment? Did Wall Street’s greed and 

recklessness cause this recession that led to so many people losing 

their jobs? 

Chairman Bernanke. Excessive risk taking on Wall Street had 

a lot to do with it, and so did some failures on the part of regulators. 

Senator Sanders. Do you believe that we have made any significant progress since the collapse of Wall Street to suggest that 

we will not, either in the short term or the longer term, once again 

see a collapse on Wall Street and the necessity of a bailout? 

Chairman Bernanke. Senator, yes, we are making substantial 

progress, although I would point out that many of the rules implementing Dodd-Frank are not yet in force or fully implemented. But 

I believe as this process goes forward that we will have made a 

very substantial improvement, yes. 

Senator Sanders. Well I would respectfully disagree, but let me 

ask you this on another subject. 

I get calls in my Vermont office every week from people who are 

paying 25 or 30 percent interest rates on their credit cards. Some 

34 

would argue that that is usury, and yet that is the policy of the 

largest financial institutions in this country. 

Do you believe that if the Bank of America and Citigroup is 

charging somebody 30 percent interest rates that that constitutes 

usury and should be prohibited? 

Chairman Bernanke. I would have to know more information, 

Senator. The Congress just passed a whole set of rules requiring 

banks to be much clearer about the information they disclose on 

credit cards—— 

Senator Sanders. Disclosure, that’s correct. 

Chairman Bernanke. And on practices as well in terms of—— 

Senator Sanders. But the bottom line is, today there are people 

in America—and I think you won’t deny this—who are being 

charged 25 or 30 percent interest rates. Now Congress has passed 

legislation which has been in effect for many, many years limiting 

the interest rates that credit unions can charge to 15 percent. 

Credit unions are doing just fine. 

Can you give us any reason why Congress should not do the 

same for the large financial institutions? 

Chairman Bernanke. I think as long as there is complete clarity about the conditions of the card, and people understand what 

the provisions are, I am not quite sure what the basis would be. 

Senator Sanders. What the basis would be is that when people 

are in bad economic shape, they do not have a whole lot of money. 

They have to borrow. They have no alternative. And right now, the 

Bank of America and Citigroup are charging them 30 percent. That 

seems to me to be outrageous. It seems to me to be usurious. And 

it seems to me to be wrong. And I would urge your support to do 

what you can to make sure that those outrageous interest rates are 

done away with. 

The last point is, picking up on a point that I made earlier, I disagree with some of my colleagues here who think that the Fed 

should not continue to focus on unemployment. As I understand it, 

Section 13.3 of the Fed Reserve Act does allow you to provide emergency loans to any individual, partnership, or corporation under 

unusual and exigent circumstances. 

I would argue that when real unemployment today is 16 percent, 

those are unusual circumstances. I believe you do have the emergency authority to provide emergency loans to small businesses so 

that we can create millions of jobs. Would you give some consideration to doing that? 

Chairman Bernanke. Well again I think there are several 

other provisions besides unusual and exigent. They include, among 

other things, that the loans be fully secured. I mean you couldn’t 

just give a loan—— 

Senator Sanders. Right. 

Chairman Bernanke [continuing]. Without collateral, for example. 

Senator Sanders. Right. 

Chairman Bernanke. Of course with banks and financial institutions we supervise them, and we know what their financial condition is, and we know that they are solvent when we make them 

a short-term loan. 

35 

But we are not banks. We do not have any capacity to evaluate 

a small business. If you think that the banking system is not working, why wouldn’t Congress consider its own provision? 

Senator Sanders. Congress might, but I would just simply suggest that during the financial crisis you acted very, very boldly— 

$16 trillion in revolving loans. 

I would urge you to try to do the same, give the same line of 

thought, to the unemployment crisis right now. 

Thank you, Mr. Chairman. 

Chairman Casey. Thanks, Senator Sanders. Representative 

Campbell. 

Representative Campbell. Thanks, Mr. Chairman. I will stay 

on the same two topics I was on before. 

During 2008, we talked about too-big-to-fail, but also too-interconnected-to-fail. Dodd-Frank and some of us have other ideas to 

try to deal with that. 

Getting back to the European contagion, the risk to us is due to 

interconnectivity. I presume if they had a disorderly, I believe as 

you described it, default of Greece or some other thing there, is it 

international financial interconnectivity that puts us at risk? And 

if so, is there anything, obviously not in the short term, but that 

we ought to be thinking about that in the future? 

Because obviously it is frustrating you and frustrating up here 

as well that here is thing going on over which we have no control, 

but which could have a major impact on us. 

Chairman Bernanke. Well that is part of the issue. And there 

are provisions in the financial reform that penalize 

interconnectivity in various ways, and try to force more transparency about counterparties and those sorts of thing. But I think 

beyond that as we are seeing in the markets recently, just general 

pulling back, general risk aversion. 

In 2008, we saw an enormous impact on emerging market economies that had very little direct connection to what was happening 

in the U.S. in the financial markets. 

So just the general fear, and the general risk aversion would also 

be a very big effect. Even between institutions that were not interconnected in that sense that you are talking about. 

Representative Campbell. So the concern actually is almost 

more psychological, or as much psychological as it is purely economic? 

Chairman Bernanke. It is psychological, but also in the sense 

that when there are losses occurring, in a panic people will not 

know what is safe and what is not safe, and their general reaction 

is to just pull back from everything. 

Representative Campbell. Yes. Okay. Switching back to housing again, you mentioned about people being able to finance, or refinance who are currently underwater in their houses. 

One of the issues with that of course is the regulatory system 

that financial institutions have to deal with, Basel II and so forth. 

Do you have any thoughts or suggestions along that line of how 

you could do that and still maintain compliance with the international regulatory systems and so forth? 

Chairman Bernanke. Yes, I think that could be done. If I am 

mistaken I would be happy to look at it. The key here is if you are 

36 

refinancing your own loan, one that you made, then you don’t have 

to in some sense underwrite it from scratch. The credit risk is already yours. 

So the fact that it is an underwater loan, the refinance might actually make it more likely to pay off because the payments would 

be reduced, and maybe it could be combined with some kind of 

principal forgiveness that could be worked off as well. 

There are various ways to structure that. So I am not aware of 

any fundamental reason why a bank could not do that on its own 

loan. 

Representative Campbell. Thank you. 

Chairman Casey. Thank you, Representative Campbell. We are 

joined by Representative Cummings, and, Representative, we are 

down to the three-minute drill here but we are willing to extend 

yours another two minutes. 

Representative Cummings. Thank you very much, Mr. Chairman. I am sorry I couldn’t be here. I was ranking member at my 

main committee. 

Chairman Bernanke, I want to thank you for appearing before 

the Committee today, and I thank you for your service. And I really 

mean that. Whether the members of this Committee agree or disagree with the policies of the Federal Reserve Board, I think we 

all can agree that you have been tireless and steadfast in your efforts to use the Fed’s tools to address the extraordinary economic 

circumstances that continue to confront our Nation. And I thank 

you. 

Mr. Chairman, according to economist Mark Zandi, housing is 

ground zero for the economy’s problems, high unemployment, and 

lost jobs. A recent Wall Street Journal editorial declared that housing is to the United States what Greece is to the eurozone. Because 

just as the eurozone won’t prosper until Greece gets its act together, the United States recovery won’t gain traction until the 

housing sector deals with the excesses of the past. 

From the Federal Reserve’s standpoint, you have lowered interest rates first to unlock the credit markets, and currently to spur 

borrowing and spending. But as one observer recently stated regarding your most recent round of bond buying, and I quote: ‘‘The 

Fed is trying to pump air into a balloon that has a big hole in it, 

and that balloon is called housing.’’ End of quote. 

Mr. Chairman, how critical is the stabilization of the housing 

market to our economic recovery? And do you believe, Mr. Chairman, that we are doing enough to stabilize the housing market and 

end this foreclosure crisis that we are going through? 

Chairman Bernanke. You make a very good point. As I discussed in my testimony, housing is very central to the situation we 

have now. Housing is usually a big part of the recovery process, 

and here it is not doing anything. 

Moreover, many people are underwater. That is affecting them financially. Their loss of equity means that they are poorer. They are 

less willing to spend. So addressing the housing situation is very, 

very important. 

And indeed, as you point out, the Fed has done a lot to bring 

mortgage rates down, but it is not very effective if people cannot 

37 

get a mortgage loan. So I think a lot could be done to address the 

mortgage and housing situation. 

I mentioned a few things to Mr. Campbell earlier. Just to reiterate quickly, looking at the management of real estate owned by 

banks or by the GSEs to make sure that they are maintained, converted to rentals as appropriate, converted to rent-to-own, avoiding 

destabilization of neighborhoods from foreclosed houses, helping 

people who are underwater to refinance, removing unnecessary 

barriers to mortgage access. 

There are a whole range of things. Getting Fannie’s and 

Freddie’s future clarified so that people can plan and so that maybe 

the private sector will come back in and provide some more mortgage credit. I think there are a whole range of things, and I am 

sure that you and your colleagues have other ideas. And I do think 

that, relatively speaking, that what would seem like small measures could actually have a very positive effect in housing, and for 

the whole economy. 

Representative Cummings. Would you agree that it is going 

to be almost impossible to resolve our economic situation when you 

have people losing their houses at the rate they are losing them? 

Would you agree with that? 

Chairman Bernanke. I would agree with that, yes. 

Representative Cummings. Let me just ask you one other 

question. 

Mr. Chairman, do you agree with Director Elmendorf that there 

is no inherent contradiction between implementing policies that 

would boost economic growth in the short term and implementing 

policies that would impose fiscal restraint several years from now? 

Chairman Bernanke. I do agree with that. And I mentioned 

that also in my testimony, that we should be looking simultaneously at long-term consolidation, long-term fiscal stabilization; at 

the same time, trying to think about what actions we should take 

now to make sure the recovery continues. 

Representative Cummings. And finally, Mr. Chairman, do you 

believe that, given the fragile state of the United States economy, 

the most prudent course is to implement policies now that spur 

economic growth, and implement fiscal consolidation once the economy has recovered? 

Chairman Bernanke. Well I think you can do them simultaneously if you have a strong, credible plan for consolidating the fiscal situation over the next few years. But also, to take what actions 

are necessary—and I am not endorsing any specific one—but taking whatever actions are necessary to help the recovery in the near 

term. 

Representative Cummings. Thank you, Mr. Chairman. 

Chairman Casey. Thank you, Representative Cummings. Representative Burgess. 

Representative Burgess. Thank you, Mr. Chairman. 

Thank you, Chairman Bernanke, for staying with us for a second 

round. Let me just ask a follow-up to something that was asked a 

moment ago I think by Senator Sanders. It certainly comes up in 

every town hall that I do back home. 

You talked about a failure of the financial system, and a failure 

of the regulatory system. In your opinion, why wasn’t there a more 

38 

aggressive effort to find out what went wrong and who was responsible? Perhaps even prosecute someone for those failings? 

Chairman Bernanke. Well the Congress set up a Financial Crisis Inquiry Commission, and it provided a report. And, you know, 

that was your—— 

Representative Burgess. It was pretty ineffective, wasn’t it? 

And we certainly had nothing to compare with the Pecora Commission of the 1930s that arguably a lot of people wanted to see. Water 

under the bridge, and I acknowledge that. 

Let me ask you this. When we came up on that August 2nd deadline this summer and there was some concern as to whether or not 

the debt limit would be extended, what was keeping you awake at 

night then? And did you have any contingency plans that you were 

putting in place at the Fed to deal with the fact that Congress 

might not extend the debt limit? 

Chairman Bernanke. We certainly did have contingency plans. 

First of all, the Fed is the fiscal agent of the Treasury. We are 

technically responsible for getting the payments done. So we were 

working on plans on how we would address the situation if the government had to cut back on what it was paying. 

So we were dealing with that set of issues. And we were also 

looking at what we might be able to do to try to reduce the impact 

on financial markets and on the banking system. But we were 

quite concerned that the failure of the Congress to pass the debt 

limit in a timely way would create a crisis of confidence in the financial system, and we were not quite sure that we really had the 

tools to address that. 

Representative Burgess. I don’t mean to interrupt, but my 

time is short. Would that crisis of confidence in any way have mirrored or matched the crisis in confidence that occurred after the 

failure of Lehman Brothers? 

Chairman Bernanke. If there had been a default on U.S. debt, 

it is possible that you would have had something in the same order 

of magnitude, yes. 

Representative Burgess. And did you have tools to deal with 

that? 

Chairman Bernanke. We would have had some palliative tools, 

but we could not have prevented a very serious crisis, no. 

Representative Burgess. Well let me just ask you another 

question because we are all now focusing on the Debt Commission. 

Your predecessor, in talking to a group of us right before he left, 

a question came up about Medicare and long-term financial sustainability of Medicare. The Chairman thought for a moment and 

he said: I believe when the time comes Congress will make the necessary adjustments, and the sustainability of the Medicare Program will continue. 

He stopped for a minute, and then he said: What concerns me 

more is will there be anyone there to deliver the services that you 

require in that program. 

And that was a pretty powerful statement for him to make, and 

one that has concerned me in the now five or six years since. One 

of the things we are looking at in the Deficit Commission, if the 

targets are not met, one of the rescissions is going to be in the 

Medicare system, not to affect beneficiaries but likely be on proVerDate Nov 24 2008 12:07 Mar 26, 2012 Jkt 072763 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 C:\DOCS\72763.TXT DPROCT
39 

viders, which I would argue will ultimately affect beneficiaries. Do 

you have any thoughts or any concerns about that? 

Chairman Bernanke. Well there is a constraint, which is that 

physicians and hospitals do not have to take Medicare patients. 

And so you have to pay enough to induce them to do so. Which 

makes me think that the fundamental issue is getting health care 

costs down and making our health care sector more productive— 

not just in terms of Medicare, but in terms of our entire economy. 

Representative Burgess. And in your opinion is centralized 

command and control of the health care system the way to do that? 

Chairman Bernanke. There are lots of different ways to address health care, and lots of different models around the world. 

Representative Burgess. Maybe we can visit about that more 

later. 

Chairman Bernanke. We can speak about that later. 

Representative Burgess. Thank you, Mr. Chairman. 

Chairman Casey. Thanks, Representative Burgess. Representative Hinchey. 

Representative Hinchey. Thank you, Mr. Chairman. 

Chairman Bernanke, thank you very much for everything you 

are doing here. It is very interesting. I wanted to mention about 

unemployment and trade deficit. 

The U.S. economy has not been able to regain its footing since 

the near Wall Street collapse which came about in 2008. GPD is 

low. Unemployment remains stubbornly high. And we are still facing a significant foreclosure crisis across the country. 

Can you respond to how much of a current economic situation is 

due to a large trade imbalance this country has with China and 

other countries? And also, what effect does the trade deficits have 

on manufacturing jobs that are being outsourced into other countries, particularly to China? 

And also, how do you anticipate the current eurozone crisis will 

affect our already struggling economy? 

Chairman Bernanke. Well as I indicated in an earlier question, 

I do not have a number in terms of jobs, but I do think that the 

Chinese currency policy, besides creating problems for them—in 

particular, they have dealt with some inflation lately, which is a 

result to a large extent of their currency policy—has been to some 

extent preventing global adjustment. 

That is, we have a two-speed recovery where emerging market 

economies have been growing very quickly; advanced industrial 

economies have been growing very slowly. And some of the more 

balanced growth paths could be achieved if there was greater flexibility in currencies. 

China’s currency policy not only affects obviously U.S.-China relations, but it also affects third-party currency policies as well. 

You asked me about Europe. We have discussed Europe quite a 

bit. I would press my European colleagues to take strong actions 

to try to address that problem. I know that they are very concerned 

about it, and they are working hard to try to address it. 

Currently even now we are seeing a lot of volatility in the financial markets, which is no doubt a negative influence on the U.S. 

recovery, and unless the European situation is brought under control—which I anticipate it will be, but requires still considerable 

40 

more effort on the part of the Europeans—it could be a much more 

serious situation for the U.S. economy. 

Representative Hinchey. Well the fact that US multinational 

corporations can shield profits abroad encourages outsourcing of 

manufacturing outside of this country. This also had a negative effect. Are you interested in trying to get this changed? A lot of us 

here in Congress oppose it, but nevertheless it remains in effect. 

And that has a significant impact on more jobs leaving this country and going to other places. 

Chairman Bernanke. I’m not quite sure which specific issue 

you’re referring to. 

Representative Hinchey. I am referring to the fact that corporations can shield profits overseas avoiding US taxation. Are you 

interested in maintaining the jobs here in this country rather than 

exporting them outside of this country? And by doing so, by changing that tax shield, that encourages the exportation of jobs outside 

of this country? 

Chairman Bernanke. Well I certainly can agree that we want 

to encourage policies that maintain good jobs in the United States; 

absolutely. 

Representative Hinchey. Thank you very much. 

Chairman Casey. Thanks, Representative Hinchey. Representative Mulvaney. 

Representative Mulvaney. Dr. Bernanke, earlier today you 

said that the Committee will continue to closely monitor economic 

developments and is prepared to take further action as appropriate 

to promote a stronger economic recovery, in the context, obviously, 

of price stability. 

Given that we are already at the zero amount on federal funds 

rates, you have already announced the decision to reinvest the 

mortgage-backed security position instead of unwinding that, and 

you have announced Operation Twist earlier this month, or late 

last month, depending on what month today is—what’s left? When 

you talk about further additional activity, what other tools are you 

contemplating? 

Chairman Bernanke. Well, I talked about some of them in the 

Humphrey-Hawkins testimony. Generally speaking, there’s a variety of things under the heading of communication, giving information to the public about how long and under what conditions we 

would hold interest rates low. That is one way of providing more 

stimulus. 

Continuing to buy securities in the Open Market, would be a second way. 

A third relatively small step would be to reduce the interest that 

we pay on the reserves that banks hold with the Federal Reserve. 

Those are the main directions that I could cite. 

Representative Mulvaney. Gotcha. And in the little time I 

have left, I want to make clear from my earlier comments that I 

am not blaming the Fed for our inability in Congress to work out 

our fiscal situation. What I am saying is: 

As dysfunctional as this body is—and it is, there is no question— 

the laws of economics still apply to us. And if you participate in 

a process that allows us to borrow money at less than 2 percent, 

which is what our effective rate was last year, I can assure you 

41 

that we will do it. I have heard those discussions within my own 

party, within the Congress as a whole: Why not borrow money 

now? It’s so cheap, you would be stupid not to. 

I will assure you that there are other moral hazards out there 

other than just, for example, the banking community. There is a 

moral hazard as it applies to this institution as well. 

In layman’s terms, what effectively the government is facing 

right now is a teaser rate. We are able to borrow so much money 

right now at a reduced rate, there is a very strong impetus here 

to simply put off the tough decisions for another day. If the interest 

rates today were at the historical average and the government was 

paying 5 or 6 percent on its money, I can assure you we would be 

having a lot longer, more serious conversations about what to do 

about this debt than we are having today. 

But I in no way meant to imply that the Fed was responsible for 

our shortcomings. 

And with that, I yield back my time. 

Chairman Casey. Thank you, Representative. Senator Lee. 

Senator Lee. Thank you. Mr. Bernanke, I want to refer back to 

something that I understood you to have said earlier, which is 

roughly to the effect that Congress not engage in any deep spending cutting activities until such time as the economy recovers. If I 

understood you correctly, I think you were saying that if we engaged in too much deep cutting in the near term future that might 

thwart any recovery. 

First of all, did I understand you correctly in saying that? Was 

that—— 

Chairman Bernanke. I didn’t say that precisely. What I said 

was that you can do both. You can take policy actions which are 

supportive of recovery, and that would involve perhaps not doing 

sharp near-term cuts that might involve other things, other things 

that might be helpful like in the housing market. At the same time 

that you provide clarity and a strong and credible plan for achieving fiscal stability. Those two things are not incompatible. 

Senator Lee. Okay. So a strong and credible plan. Does that 

imply both spending cuts and tax reform? 

Chairman Bernanke. Well that is up to Congress. As I have 

said often before, I am in favor of the law of arithmetic. Spending 

cuts, tax increases, as long as it adds up and as long as the policies 

themselves make sense, I think that is what counts. 

Senator Lee. But do you have an opinion as to the rate at which 

that cutting might occur? I mean, are you suggesting not to cut 

more than a trillion dollars over the first three years? 

Chairman Bernanke. No, I don’t have specific numbers, except 

to say that I think as you look at the amount of cuts, and I think 

maybe Senator Casey mentioned $4 trillion over the next decade or 

so to get stability in the debt-to-GDP ratio, clearly that is something that can be done with an increasing effect over the decade. 

Senator Lee. Now there is a fair amount of empirical support 

for the notion that if you are wanting to help an economy recover, 

but you are also trying to balance the federal budget, that there 

are a couple of ways of going about it. 

One way is to increase taxes. The other way is to cut federal 

spending, or perhaps a combination of the two. But the empirical 

42 

evidence tends to support the notion that you will help the economy recover faster if you focus primarily on cutting expenses rather than on increasing taxes. Do you agree with that viewpoint? 

Chairman Bernanke. The empirical evidence is very complex. 

There is some literature which suggests that sharp budget cuts can 

lead to recovery. But that is only in limited circumstances. I do not 

think that is a general proposition. 

I think generally you ought to look at your tax and spending policies and ask are these policies doing what we want them to do for 

our economy? And are the tradeoffs that they engender good tradeoffs for us? 

Senator Lee. Okay. Thank you. 

Chairman Casey. Thanks, Senator Lee. Representative 

Cummings. 

Representative Cummings. Chairman Bernanke, on April 

13th, 2011, the Federal Reserve Board, along with the Office of the 

Comptroller of the Currency, the Office of Thrift Supervision, and 

to a limited extent the Federal Deposit Insurance Corporation, 

issued a joint report summarizing the results of a horizontal review 

of the foreclosure practices of the Nation’s 14 largest mortgage 

servicers. 

Specifically, you found, and I quote, ‘‘critical weaknesses in 

servicers,’’ end of quote. ‘‘Foreclosure practices, foreclosure document preparation processes, and oversight and monitoring of thirdparty vendors, including foreclosure attorneys, which individually 

or collectively resulted in unsafe and unsound practices in violations of applicable federal and state law and requirements.’’ End of 

quote. 

Simultaneously, you entered into consent orders with these 

servicers and third-party service providers which required servicers 

and providers to take steps to correct the problems identified in the 

review. Specifically, the banks were required to retain independent 

firms to conduct a thorough review of foreclosure actions that were 

pending any time from January 1, 2009, through December 31st, 

2010, to identify borrowers that have been financially harmed by 

deficient practices. 

I understand that the retention of these firms and the process by 

which these reviews are to be conducted was required to be spelled 

out in engagement letters that the regulators have to approve. 

This is my question: Mr. Chairman, what is the status of these 

engagement letters? 

Have all of the banks retained their independent firms and 

spelled out the manner in which they are going to identify borrowers who have been harmed by their improper and, in many instances, illegal practices? 

And, Mr. Chairman, how do you respond to the criticism that 

when the consent orders were released,the primary criticism was 

that they were overly vague and allowed the servicers to develop 

their own plans for identifying harmed borrowers and correcting 

deficiencies going forward. 

How do you respond to that criticism? What is the methodology 

that each servicer will use to ensure that looking back every single 

harmed borrower in our districts is identified and remediated? And 

43 

going forward, that this kind of industry-wide breakdown never occurs again? 

I know that is a lot, but you get the drift. 

Chairman Bernanke. Well the engagement letters with the 

consulting firms and the remediation plans are being developed 

and they will be carefully reviewed and approved by the supervisor—— 

Representative Cummings. Do we have a timetable on that? 

A timeline on when we expect that to happen? Because people are 

losing their homes, as you well know. 

Chairman Bernanke. Well the letters are being reviewed, and 

they will be, I think—I can assure you it will be very soon, but the 

point is that the process is already underway. 

Representative Cummings. Okay. 

Chairman Bernanke. The servicers are already reaching out to 

find people who had problems. In fact, there was something in the 

paper this morning about that. And they have already made 

progress in improving their operations and addressing some of the 

worst abuses. But we will continue to monitor them very carefully. 

So it is a process that has already begun, and we are well advanced 

in getting the formal agreements completed and reviewed. 

Representative Cummings. Thank you, Mr. Chairman. 

Chairman Casey. Representative Cummings, thank you. 

Mr. Chairman, thank you for your testimony. I just want to note 

for the record that for Members the record will be open for five 

business days to submit statements or additional questions in writing. And we are adjourned. 

[Whereupon, at 12:09 p.m., Tuesday, October 4, 2011, the hearing was adjourned.] 

(45) 

SUBMISSIONS FOR THE RECORD 

46 

PREPARED STATEMENT OF ROBERT P. CASEY, JR., CHAIRMAN, JOINT ECONOMIC

COMMITTEE

I look forward to Chairman’s Bernanke’s report on the state of the economy, his 

perspective on recent actions taken by the Federal Reserve, and his insights into 

the short- and long-run challenges facing the U.S. economy. 

My hope for today’s hearing is to move beyond the partisan politics and finger 

pointing that sometimes colors discussions about what the Federal Reserve should 

or shouldn’t do. Instead, we should focus on the economic challenges facing the 

country and the potential solutions. 

All of us on this Committee share a belief that Congress needs to take action to 

bolster the economy and help Americans get back to work. Similarly, monetary policy has an important role to play in strengthening our economy. 

Millions of Americans are still struggling in the wake of the Great Recession. The 

economy is not growing fast enough or adding enough jobs to make significant 

progress reducing unemployment. 

• 14 million Americans are unemployed and six million of the jobless (43 percent) 

have been out of work for six months or more. 

• Private-sector job creation, which had been well above 200,000 a month in February, March and April, fell to less than 20,000 in August. 

• State and local governments are reeling, as they lay off workers to meet balanced budget requirements. In the past 12 months alone, state and local government payrolls have been slashed by 345,000. 

• In Pennsylvania, the unemployment rate, after declining to 7.4 percent in May, 

has climbed back up to 8.2 percent in August (with more than 516,000 workers 

unemployed). 

Economic indicators have also been weakening abroad. With financial conditions 

in the Eurozone deteriorating, contagion spreading to other parts of the world is 

now a significant risk to the global economic outlook. 

The Fed has already used a variety of approaches to ease monetary policy. In the 

current economic environment, we need to use all available tools to support our 

economy in the short-term. We also need to take the actions that will get our fiscal 

house in order in the medium and long-term. The two reinforce each other. Getting 

our economy growing at a healthy pace is critical to sustained deficit reduction. 

As Chairman Bernanke observed in a September speech to the Economic Club of 

Minnesota: 

‘‘There is ample room for debate about the appropriate size and role for the 

government in the longer term, but—in the absence of adequate demand 

from the private sector—a substantial fiscal consolidation in the shorter 

term could add to the headwinds facing economic growth and hiring.’’ 

The Federal Reserve Act created the Federal Reserve System and established two 

objectives for the nation’s monetary policy—maximum employment and stable 

prices. This is what is commonly referred to as the Fed’s dual mandate. 

The Federal Reserve’s recent announcement that it will ease monetary policy further is consistent with that dual mandate. The Federal Open Market Committee 

said it will purchase $400 billion of long-term Treasury securities and pay for those 

securities by selling an equal amount of shorter-term government debt. In the socalled Operation Twist, the Fed is not expanding its portfolio, but shifting its composition so that the average maturity of its holdings is longer. 

The goal of the Federal Reserve’s action is to bring down long-term interest rates 

further—reducing borrowing costs for businesses and consumers, sparking additional economic activity and ultimately boosting employment. The Fed also affirmed 

that it will continue to pay close attention to inflation and inflation expectations. 

Some in Washington have called on the Fed to ‘‘resist further extraordinary intervention in the U.S. economy,’’ arguing that action by the Fed could further harm 

the U.S. economy. I disagree. With so many Americans out of work and GDP growth 

having slowed to a less than 1 percent annual rate in the first half of this year, 

additional actions are needed to strengthen the economy. 

Finally, I would like to address currency manipulation, especially on the part of 

China, because it has such a harmful impact on the U.S. economy and American 

jobs. A recent report by the Economic Policy Institute finds that the U.S. trade deficit with China—caused in large measure by China’s undervaluation of the yuan— 

has cost our country 2.8 million jobs over the past decade. 

Chairman Bernanke, in testimony before this Committee in April 2010, you noted 

that ‘‘most economists agree the Chinese currency is undervalued and has been used 

to promote a more export-oriented economy.’’ You also said that it ‘‘would be good 

47 

for the Chinese to allow more flexibility in their exchange rate’’ and that ‘‘we should 

continue to press for a more flexible exchange rate.’’ 

I agree. This week, the Senate has the opportunity to take action in response to 

China’s unfair trade practices when we vote on bipartisan legislation to crack down 

on China’s currency manipulation. Last night the Senate passed the first procedural 

hurdle, with a strong bipartisan vote to move forward with debate on the legislation. 

To sum up briefly: more than two years after the recovery officially began, our 

economy remains vulnerable. Unemployment is stuck above 9 percent and long-term 

unemployment remains at near-record levels. We need to use every weapon in our 

arsenal to support a stronger economic recovery. 

Chairman Bernanke, thank you for your testimony. I look forward to working 

with you as the committee continues to focus on strengthening the economy, creating jobs, and putting Americans back to work. 

PREPARED STATEMENT OF KEVIN BRADY, VICE CHAIRMAN, JOINT ECONOMIC

COMMITTEE

Chairman Casey, I join with you in welcoming Chairman Bernanke to today’s 

hearing on the economic outlook. 

Ominous clouds are gathering. Economic growth is nearly stagnant. We have 6.8 

million fewer payroll jobs today than when the recession began in December 2007, 

according to the Bureau of Labor Statistics. At the comparable point during the 

Reagan recovery, there were 5.4 million more payroll jobs. 

According to economists Carmen Reinhart and Kenneth Rogoff, recoveries from financial crises are weak and vulnerable to external shocks that may trigger doubledip recessions. Republican members of Congress recognize this. We are critical of 

the President’s expensive economic policies because not only they have failed to spur 

job growth and business confidence, but also, as we feared, they have left America 

susceptible to a double-dip recession. 

Today as we meet, America faces a growing risk from the European debt crisis. 

The United States and the European Union are major trading partners. I am very 

concerned about the effects of contagion from the euro crisis on American financial 

institutions and markets, as well as the broader economy. I am anxious to hear your 

assessment of the euro crisis and any steps that the Federal Reserve may take to 

quarantine any contagion. 

In response to the financial panic, the Federal Reserve took extraordinary actions 

to stabilize U.S. financial institutions and markets during the fall of 2008. Many 

of these actions were both necessary and proper, while some of them I question. Instead of rehashing the past, however, I would instead like to initiate a discussion 

with you on the framework for monetary policy in the future. 

Nobel laureate economist Robert Mundell said, ‘‘If you want a certain policy outcome, you have to use the right policy lever.’’ Unfortunately, too many Washington 

policymakers are ignoring Mundell’s wisdom. 

Monetary policy affects prices. In contrast, budget, tax, and regulatory policies affect real output and employment. While the Great Contraction from August 1929 

to March 1933 proved that bad monetary policy can shrink production and destroy 

jobs, good monetary policy cannot accelerate economic growth or foster job creation, 

except in the very short term. 

Washington affects business investment, production, and job creation through its 

budget, tax, and regulatory policies. If the prospects for a swelling federal debt, 


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48 

higher taxes, and additional costs from Obama-care and burdensome regulations are 

deterring entrepreneurs from investing in new buildings, equipment, and software 

and therefore hiring more workers, there is little that the Federal Reserve can do 

to overcome this drag. 

Until 1978, the Federal Reserve’s mandate regarding monetary policy was merely 

to provide ‘‘an elastic currency.’’ That year, the Full Employment and Balanced 

Growth Act, known informally as the Humphrey-Hawkins Act, was enacted. This 

act imposed a dual mandate on the Federal Reserve that gives equal weight to 

achieving both price stability and full employment. 

Since 1978, many countries have examined what a central bank should do and 

have opted for a single mandate for long-term price stability. By law, the 17 member-states of the European Monetary Union and 13 other developed and major developing countries have enshrined mandates for price stability either as the sole 

goal or the primary goal with the subordination of other goals for their central 

banks. Moreover, Australia and Canada have adopted single mandates through published statements. 

The time has come for Congress to reconsider the Federal Reserve’s mandate. In 

my view, the dual mandate should be replaced with a single mandate for long-term 

price stability. I will introduce legislation to make this change in the near future. 

While some may mistakenly claim that a single mandate means maximizing employment is unimportant, history proves that the best way for the Federal Reserve 

to maximize employment is to focus on achieving long-term price stability. 

Under a single mandate, the Federal Reserve would publicly announce an inflation target. The Federal Reserve would retain full operational independence from 

both Congress and the President to achieve the inflation target. 

While I may criticize certain actions that the Federal Reserve has taken, I want 

to be absolutely clear. For our economy’s sake, the Federal Reserve must remain 

independent and free from any undue political pressure in implementing monetary 

policy. 

Congress should also reconsider the Federal Reserve’s lender-of-last-resort policy. 

I remain deeply concerned about the precedents set in 2008 regarding clearly insolvent financial institutions, especially AIG, Bear Stearns, Fannie Mae, and Freddie 

Mac. 

In 1913, Congress envisioned that the Federal Reserve would act as lender of last 

resort during financial crises. However, the Federal Reserve has never articulated 

a clear lender-of-last-resort policy. 

As celebrated economist Allan Meltzer observed: 

The absence of a [lender-of-last-resort] policy has three unfortunate consequences. First, uncertainty increases. No one can know what will be done. 

Second, troubled firms have a stronger incentive to seek a political solution. 

They ask Congress or the administration for support or to pressure the Federal Reserve or other agencies to save them from failure. Third, repeated 

rescues encourage banks to take greater risk and increase leverage. This 

is the well-known moral hazard problem. 

President Dwight Eisenhower said, ‘‘In preparing for battle I have always found 

that plans are useless, but planning is indispensable.’’ Similarly, if the Federal Reserve were to promulgate a clear statement about its lender-of-last-resort policy, it 

would go far to diminish uncertainty, reduce the likelihood of political interventions, 

and mitigate the moral hazard problem. 

Finally, many years ago, Congress gave the responsibility for exchange rate policy 

to the Secretary of theTreasury. This is a vestige of the long defunct Bretton Woods 

system of fixed exchange rates. 

By controlling the money supply, the Federal Reserve directly affects the foreign 

exchange value of the U.S. dollar. Moreover, swings in exchange rates influence domestic prices. Thus, the responsibility for exchange rate policy should be moved 

from the Secretary of the Treasury to the Federal Reserve. 

Chairman Bernanke, I look forward to your testimony. 

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

THE FEDERAL RESERVE SYSTEM

Chairman Casey, Vice Chairman Brady, and other members of the Committee, I 

appreciate this opportunity to discuss the economic outlook and recent monetary 

policy actions. 

It has been three years since the beginning of the most intense phase of the financial crisis in the late summer and fall of 2008, and more than two years since the 

49 

1The figure of 100,000 private jobs per month adjusts for the effects of the two-week strike 

by communications workers at Verizon, which held down measured payrolls in August. 

economic recovery began in June 2009. There have been some positive developments: The functioning of financial markets and the banking system in the United 

States has improved significantly. Manufacturing production in the United States 

has risen nearly 15 percent since its trough, driven substantially by growth in exports; indeed, the U.S. trade deficit has been notably lower recently than it was before the crisis, reflecting in part the improved competitiveness of U.S. goods and 

services. Business investment in equipment and software has continued to expand, 

and productivity gains in some industries have been impressive. Nevertheless, it is 

clear that, overall, the recovery from the crisis has been much less robust than we 

had hoped. Recent revisions of government economic data show the recession as 

having been even deeper, and the recovery weaker, than previously estimated; indeed, by the second quarter of this year—the latest quarter for which official estimates are available—aggregate output in the United States still had not returned 

to the level that it had attained before the crisis. Slow economic growth has in turn 

led to slow rates of increase in jobs and household incomes. 

The pattern of sluggish growth was particularly evident in the first half of this 

year, with real gross domestic product (GDP) estimated to have increased at an average annual rate of less than 1 percent. Some of this weakness can be attributed 

to temporary factors. Notably, earlier this year, political unrest in the Middle East 

and North Africa, strong growth in emerging market economies, and other developments contributed to significant increases in the prices of oil and other commodities, 

which damped consumer purchasing power and spending; and the disaster in Japan 

disrupted global supply chains and production, particularly in the automobile industry. With commodity prices having come off their highs and manufacturers’ problems with supply chains well along toward resolution, growth in the second half of 

the year seems likely to be more rapid than in the first half. 

However, the incoming data suggest that other, more persistent factors also continue to restrain the pace of recovery. Consequently, the Federal Open Market Committee (FOMC) now expects a somewhat slower pace of economic growth over coming quarters than it did at the time of the June meeting, when Committee participants most recently submitted economic forecasts. 

Consumer behavior has both reflected and contributed to the slow pace of recovery. Households have been very cautious in their spending decisions, as declines in 

house prices and in the values of financial assets have reduced household wealth, 

and many families continue to struggle with high debt burdens or reduced access 

to credit. Probably the most significant factor depressing consumer confidence, however, has been the poor performance of the job market. Over the summer, private 

payrolls rose by only about 100,000 jobs per month on average—half of the rate 

posted earlier in the year.1 Meanwhile, state and local govenunents have continued 

to shed jobs, as they have been doing for more than two years. With these weak 

gains in employment, the unemployment rate has held close to 9 percent since early 

this year. Moreover, recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job 

growth in the period ahead. 

Other sectors of the economy are also contributing to the slower-than-expected 

rate of expansion. The housing sector has been a significant driver of recovery from 

most recessions in the United States since World War II. This time, however, a 

number of factors—including the overhang of distressed and foreclosed properties, 

tight credit conditions for builders and potential homebuyers, and the large number 

of ‘‘underwater’’ mortgages (on which homeowners owe more than their homes are 

worth)—have left the rate of new home construction at only about one-third of its 

average level in recent decades. 

In the financial sphere, as I noted, banking and financial conditions in the United 

States have improved significantly since the depths of the crisis. Nonetheless, financial stresses persist. Credit remains tight for many households, small businesses, 

and residential and commercial builders, in part because weaker balance sheets and 

income prospects have increased the perceived credit risk of many potential borrowers. We have also recently seen bouts of elevated volatility and risk aversion in 

financial markets, partly in reaction to fiscal concerns both here and abroad. Domestically, the controversy during the summer regarding the raising of the federal debt 

ceiling and the downgrade of the U.S. long-term credit rating by one of the major 

rating agencies contributed to the financial turbulence that occurred around that 

time. Outside the United States, concerns about sovereign debt in Greece and other 

euro-zone countries, as well as about the sovereign debt exposures of the European 

banking system, have been a significant source of stress in global financial markets. 

50 

European leaders are strongly committed to addressing these issues, but the need 

to obtain agreement among a large number of countries to put in place necessary 

backstops and to address the sources of the fiscal problems has slowed the process 

of finding solutions. It is difficult to judge how much these financial strains have 

affected U.S. economic activity thus far, but there seems little doubt that they have 

hurt household and business confidence, and that they pose ongoing risks to growth. 

Another factor likely to weigh on the U.S. recovery is the increasing drag being 

exerted by the government sector. Notably, state and local governments continue to 

tighten their belts by cutting spending and employment in the face of ongoing budgetary pressures, while the future course of federal fiscal policies remains quite uncertain. 

To be sure, fiscal policymakers face a complex situation. I would submit that, in 

setting tax and spending policies for now and the future, policymakers should consider at least four key objectives. One crucial objective is to achieve long-run fiscal 

sustainability. The federal budget is clearly not on a sustainable path at present. 

The Joint Select Committee on Deficit Reduction, formed as part of the Budget Control Act, is charged with achieving $1.5 trillion in additional deficit reduction over 

the next 10 years on top of the spending caps enacted this summer. Accomplishing 

that goal would be a substantial step; however, more will be needed to achieve fiscal 

sustainability. 

A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery. These first two objectives are certainly not incompatible, as 

putting in place a credible plan for reducing future deficits over the longer term 

does not preclude attending to the implications of fiscal choices for the recovery in 

the near term. Third, fiscal policy should aim to promote long-term growth and economic opportunity. As a nation, we need to think carefully about how federal spending priorities and the design of the tax code affect the productivity and vitality of 

our economy in the longer term. Fourth, there is evident need to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy. In sum, 

the nation faces difficult and fundamental fiscal choices, which cannot be safely or 

responsibly postponed. 

Returning to the discussion of the economic outlook, let me turn now to the prospects for inflation. Prices of many commodities, notably oil, increased sharply earlier 

this year, as I noted, leading to higher retail gasoline and food prices. In addition, 

producers of other goods and services were able to pass through some of their higher 

input costs to their customers. Separately, the global supply disruptions associated 

with the disaster in Japan put upward pressure on prices of motor vehicles. As a 

result of these influences, inflation picked up during the first half of this year; over 

that period, the price index for personal consumption expendituresrose at an annual 

rate of about 31⁄2 percent, compared with an average of less than 11⁄2 percent over 

the preceding two years. 

As the FOMC anticipated, however, inflation has begun to moderate as these 

transitory influences wane. In particular, the prices of oil and many other commodities have either leveled off or have come down from their highs, and the step-up 

in automobile production has started to reduce pressures on the prices of cars and 

light trucks. Importantly, the higher rate of inflation experienced so far this year 

does not appear to have become ingrained in the economy. Longer-term inflation expectations have remained stable according to surveys of households and economic 

forecasters, and the five-year-forward measure of inflation compensation derived 

from yields on nominal and inflation-protected Treasury securities suggests that inflation expectations among investors may have moved lower recently. In addition to 

the stability of longer-term inflation expectations, the substantial amount of resource slack in U.S. labor and product markets should continue to restrain inflationary pressures. 

In view of the deterioration in the economic outlook over the summer and the subdued inflation picture over the medium run, the FOMC has taken several steps recently to provide additional policy accommodation. At the August meeting, the Committee provided greater clarity about its outlook for the level of short-term interest 

rates by noting that economic conditions were likely to warrant exceptionally low 

levels for the federal funds rate at least through mid-2013. And at our meeting in 

September, the Committee announced that it intends to increase the average maturity of the securities in the Federal Reserve’s portfolio. Specifically, it intends to 

purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less, leaving the size of our balance 

sheet approximately unchanged. This maturity extension program should put downVerDate Nov 24 2008 12:07 Mar 26, 2012 Jkt 072763 PO 00000 Frm 00054 Fmt 6601 Sfmt 6621 C:\DOCS\72763.TXT DPROCT
51 

ward pressure on longer-term interest rates and help make broader financial conditions more supportive of economic growth than they would otherwise have been. 

The Committee also announced in September that it will begin reinvesting principal payments on its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities rather than in longer-term Treasury securities. By helping to support mortgage markets, this action too should contribute to 

a stronger economic recovery. The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability. 

Monetary policy can be a powerful tool, but it is not a panacea for the problems 

currently faced by the U.S. economy. Fostering healthy growth and job creation is 

a shared responsibility of all economic policymakers, in close cooperation with the 

private sector. Fiscal policy is of critical importance, as I have noted today, but a 

wide range of other policies—pertaining to labor markets, housing, trade, taxation, 

and regulation, for example—also have important roles to play. For our part, we at 

the Federal Reserve will continue to work to help create an environment that provides the greatest possible economic opportunity for all Americans. 

PREPARED STATEMENT OF REPRESENTATIVE MICHAEL C. BURGESS, M.D. 

Thank you Mr. Chairman for the recognition. I’m glad to be here today to discuss 

this important subject. 

Our economy is stuck in a rut, a major rut. Chairman Bernanke, the last time 

you appeared before our committee in April 2010 some of my Democratic friends 

were proclaiming that the economy was on a path to economic recovery, due in part 

to the Fed. Indeed you Chairman Bernanke stated an economic recovery had begun. 

Well unfortunately that’s not true anymore. 

We’re not moving forward or backward. The Federal Reserve has done a great 

deal in the last three years to fix this problem, whether it be lowering interest rates 

to historically low levels, buying treasury bonds and other securities to lower rates 

further, or the latest steps by the Fed. 

Unfortunately our economy is still not where we want it to be. Where the economy 

would be without the aforementioned steps, no one can be sure. However, what we 

do know is we need to move forward. 

I believe the best thing the federal government can do is get out of the way of 

businesses and let them create jobs. Republicans here in Washington have said a 

great deal recently about relieving the regulatory burden and with that I totally 

agree. But we also need to do more. We need to reform and simplify the tax code. 

We need to cut the debt. We need to increase domestic energy production of all 

types. We need to get corporate America to invest some of its $1 trillion in cash reserves into the economy. Finally, we need to repeal the health care law that will 

cost the federal government trillions of dollars. 

I am eager to hear from Chairman Bernanke today to hear what Congress can 

do to help, and also to hear his words to the American people about what they can 

be doing. Thank you Mr. Chairman and I yield back. 

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