[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
THE STATE OF THE U.S. ECONOMY
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, FEBRUARY 9, 2011
__________
Serial No. 112-2
__________
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COMMITTEE ON THE BUDGET
PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho Ranking Minority Member
JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri LLOYD DOGGETT, Texas
TOM COLE, Oklahoma EARL BLUMENAUER, Oregon
TOM PRICE, Georgia BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma TIM RYAN, Ohio
DIANE BLACK, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin GWEN MOORE, Wisconsin
BILL FLORES, Texas KATHY CASTOR, Florida
MICK MULVANEY, South Carolina HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas PAUL TONKO, New York
TODD C. YOUNG, Indiana KAREN BASS, California
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia
Professional Staff
Austin Smythe, Staff Director
Thomas S. Kahn, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, February 9, 2011................. 1
Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
Prepared statement of.................................... 3
Hon. Chris Van Hollen, ranking minority member, Committee on
the Budget................................................. 4
Prepared statement of.................................... 5
Hon. Ben S. Bernanke, Chairman, Board of Governors of the
Federal Reserve System..................................... 6
Prepared statement of.................................... 11
Responses to questions submitted by:
Mr. Honda............................................ 62
Mr. Calvert.......................................... 65
Hon. Michael M. Honda, a Representative in Congress from the
State of California, questions submitted for the record.... 61
Hon. Ken Calvert, a Representative in Congress from the State
of California, questions submitted for the record.......... 64
THE STATE OF THE U.S. ECONOMY
----------
WEDNESDAY, FEBRUARY 9, 2011
House of Representatives,
Committee on the Budget,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in room
210, Cannon House Office Building, Hon. Paul Ryan, [Chairman of
the Committee] presiding.
Members present: Representatives Ryan, Garrett, Campbell,
Akin, Cole, Price, McClintock, Chaffetz, Stutzman, Lankford,
Black, Ribble, Flores, Mulvaney, Huelskamp, Young, Amash,
Rokita, Guinta, Woodall, Van Hollen, Schwartz, Kaptur, Doggett,
Blumenauer, McCollum, Yarmouth, Pascrell, Honda, Ryan of Ohio,
Wasserman Schultz, Moore, Castor, Shuler, Tonko, Bass
Chairman Ryan. Before we begin I want to welcome
Representative Rob Woodall from Georgia, to the House Budget
Committee. We have a number of caucus and conferences ending
right now, so a number of members are going to be coming in.
But Mr. Woodall will be officially on board this afternoon with
the adoption of the House Resolution. I ask unanimous consent
that Representative Woodall be permitted to participate in this
morning's important hearing. He is our new Rules Committee
Member. Without objection, it shall be done.
Thank you, Chairman Bernanke, for coming to our committee
today to talk about the state of our economy. The U.S. economy
continues to suffer from slow growth, and unemployment remains
unacceptably high. Continued uncertainty about our economic
future is hindering job creation today. Washington is creating
much of this uncertainty. All one has to do is go home and talk
to a businessman, a businesswoman, and that is exactly what you
will hear. The explosive growth in our federal debt is by far
the biggest source of this uncertainty. By sowing doubt about
future taxes, interest rates, and price stability, government
is hindering business' ability to plan and invest, creating a
drag on economic growth today.
The purpose of today's hearing is to discuss the fiscal and
monetary policies that have led us here. On the fiscal side,
CBO projects a $1.5 trillion deficit this year with publicly
held debt raising to 69 percent of GDP by the end of the year:
that is up from 40 percent in 2008. In a few short years, the
CBO projects government spending to drive our debt to crisis
levels, overwhelming the entire economy and drowning the next
generation in red ink. Endless borrowing is not a strategy. We
must restore the foundations of economic growth: low taxes,
spending restraint, reasonable regulations, and sound money. To
help restart the engines of economic growth and job creation,
that is so essential. We must not neglect the sound money part
of the equation.
The Federal Reserve is undertaking another round of
quantitative easing, purchasing Treasury bonds in an attempt to
lower borrowing costs and stimulate the economy. My concern is
that the cost of the Fed's current monetary policy, the money
creation and massive balance sheet expansion, will come to
outweigh the perceived short-term benefits. I hope that is not
the case. These costs may come in the form of asset bubble and
price pressures. We are already witnessing a sharp rise in a
variety of key global commodity and basic material prices, and
we know that some producers and manufacturers here in the
United States are starting to feel the cost pressure as a
result.
According to the Core Price Indexes the Fed closely
watches, these cost pressures have not been yet passed along to
consumers, but the inflation dynamic can be quick to
materialize and painful to eradicate once it takes hold. The
steepening of the yield curve this week adds to these concerns
and fuels some of this speculation.
I'm concerned that normalizing monetary policy, when the
time comes, may be difficult, not only for the pure technical
challenges of shrinking the Fed's substantial balance sheet or
correctly judging economic turning points, but also for
political reasons. It's hard to overstate the consequences of
getting this wrong. The dollar is the world's reserve currency
and this has given us tremendous benefits in the global
economy. For the sake of our economy in particular, and the
global recovery as a whole, it is vital that we focus on dollar
stability if we are to prevent the kind of beggar-thy-neighbor
currency conflicts that can ultimately destroy a worldwide
economic recovery. Our currency should provide a reliable store
of value. It should be guided by the rule of law, not the rule
of men. There is nothing more insidious that a country can do
to its people than to debase its currency.
Chairman Bernanke, we know that you know this. We know that
you are focused and concerned about this. The Fed's exit
strategy and its future policy will determine how all of this
ends. Many of us fear that our monetary policy is on a
difficult track. We are very concerned about our fiscal policy
here, and we know that it is on a very, very dangerous track,
that is a very, very well-established fact.
I firmly believe that a course correction here in
Washington is sorely needed to help us get back on the right
path. While it won't be easy, Americans have risen to the
challenge, and we have prevailed in the past.
Thank you for your indulgence, thank you for your time in
coming here, we understand that you have to be out firm by
about 12:30, so we will ask our members to stick within the
time limit, and at this time I'd like to yield to our Ranking
Member, Mr. Van Hollen.
[The statement of Mr. Ryan follows:]
Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget
Before we begin, I want to welcome Rep. Bob Woodall from Georgia to
the House Budget Committee. He will be officially on board this
afternoon after the adoption of the House resolution. I ask unanimous
consent that Rep. Woodall be permitted to participate in this morning's
important hearing. Without objection.
Thank you, Chairman Bernanke, for coming before our Committee today
to talk about the state of the economy.
The U.S. economy continues to suffer from slow growth and
unemployment remains unacceptably high.
Continued uncertainty about our economic future is hindering job
creation today.
Washington is creating much of this uncertainty, and the explosive
growth of our federal debt is by far the biggest source of this
uncertainty.
By sowing doubt about future tax rates, interest rates, and price
stability, government is hindering businesses' ability to plan and
invest, creating a drag on economic growth today.
The purpose of today's hearing is to discuss the fiscal and
monetary policies that have led us here.
On the fiscal side, the CBO projects a $1.5 trillion deficit this
year with publicly-held debt rising to 69 percent of GDP by the end of
the year--up from 40 percent at the end of 2008.
In a few short years, the CBO projects government spending to drive
our debt to crisis levels, overwhelming the entire economy and drowning
the next generation in red ink.
Endless borrowing is not a strategy. We must restore the
foundations of economic growth--low taxes, spending restraint,
reasonable regulations, and sound money--to help restart the engines of
economic growth and job creation.
We must not neglect the ``sound money'' part of the equation. The
Federal Reserve has undertaken another round of quantitative easing--
purchasing Treasury bonds in an attempt to lower borrowing costs and
stimulate the economy.
My concern is that the costs of the Fed's current monetary policy--
the money creation and massive balance sheet expansion--will come to
outweigh the perceived short-term benefits.
These costs may come in the form of asset bubbles and price
pressures. We are already witnessing a sharp rise in a variety of key
global commodity and basic material prices, and we know that some
producers and manufacturers here in the United States are starting to
feel cost pressures as a result.
According to the core price indexes that the Fed watches closely,
these cost pressures have not yet been passed along to consumers--but
the inflation dynamic can be quick to materialize and painful to
eradicate once it takes hold. The steepening of the yield curve this
week certainly adds to these worries.
I'm concerned that normalizing monetary policy when the time comes
may be difficult--not only for the pure technical challenges of
shrinking the Fed's substantial balance sheet or correctly judging
economic turning points, but also for political reasons.
It is hard to overstate the consequences of getting this wrong. The
dollar is the world's reserve currency and this has given us tremendous
benefits.
For the sake of our economy in particular and the global recovery
as a whole, it is vital that we focus on dollar stability if we are to
prevent the kind of beggar-thy-neighbor currency conflicts that can
destroy economic recoveries.
Our currency should provide a reliable store of value--it should be
guided by the rule of law, not the rule of men.
There is nothing more insidious that a country can do to its
citizens than debase its currency.
Chairman Bernanke: We know you know this. The Fed's exit strategy
and future policy--it will determine how this ends.
We know you are concerned about this nation's fiscal trajectory. We
have asked you to come here today because our fiscal policy is on a
dangerous track. That is well established.
But, many of us fear our monetary policy is on a similar track as
well.
I firmly believe that a course correction here in Washington is
sorely needed to help get us back on the right track. While it won't be
easy, Americans have risen to greater challenges and prevailed in the
past.Thank you for your indulgence and at this time, I would like to
yield to the Ranking Member, Mr. Van Hollen.
Mr. Van Hollen. Thank you very much, Chairman Ryan, and
welcome, Chairman Bernanke. I want to thank you for your
service to our country during a period of great economic
turmoil. And I think we have been fortunate as a nation to have
a student of the Great Depression to help us avoid a second
Great Depression.
When you appeared before this committee two years ago,
President Obama had just recently been sworn in. He inherited a
terrible situation: the economy was in free-fall, spiraling
downward at a negative growth rate of six percent; Americans
were losing their jobs at the rate of 700,000 every month.
Two years later, things have improved substantially. The
economy grew at an annual rate of 3.2 percent in the last
quarter, and more than 1.3 million private sector jobs have
been created since the start of 2010. As you indicated in
testimony before this committee last year, the measures taken
by the Federal Reserve, the TARP solicitation by the Bush
Administration, and the Recovery Act by the Obama
Administration, averted, and I quote, ``An extraordinarily
severe downturn, perhaps a great depression.''
But we know that, while the economy has improved, millions
of Americans are still out of work, and the unemployment rate,
while coming down slightly, remains stubbornly and unacceptably
high. We must use all the tools at our disposal to help
businesses put people back to work, and I hope at some point
this Congress, through its legislative agenda, will stop re-
litigating Health Care Reform and start focusing on jobs. I
commend you and your colleagues at the Fed for using various
forms of monetary policy to promote maximum employment and
stable prices.
I find it astounding that at a time when millions of
Americans are out of work, some of our Republican colleagues
have introduced legislation to strip the Federal Reserve of
that part of its mandate that focuses on full employment and
putting people back to work.
Obviously the Fed must not waver in its commitment to price
stability, but to deprive you of the tools necessary to grow
the economy would be a huge mistake. People need to pay
attention to these proposals, and people need to know, at a
time when millions of Americans are out of work, some are
proposing that the Fed ignore the unemployment rate part of its
mandate. That would be taking us backwards, not forwards, on a
jobs agenda.
I also commend you for speaking out about the need to put
our country on a fiscally sustainable path. The President's
bipartisan Fiscal Commission and the Bipartisan Rivlin-Domenici
Commission have demonstrated that such plans are difficult, but
achievable. In his State of the Union Address, the President
indicated that his budget would include cuts of $400 billion in
non-security discretionary spending as a down-payment on that
effort. Clearly, other measures must be taken, including, I
believe, comprehensive tax reform.
But both bipartisan commissions also indicated that it
would be a big mistake to put our fragile recovery at risk by
slashing outlays too early in the short-term when millions of
Americans are still out of work, and the demand for goods and
services is still relatively weak. That commission indicated,
and I quote, ``In order to avoid shocking the fragile economy,
the commission recommends waiting until 2012 to begin enacting
programmatic spending cuts.'' The Rivlin-Domenici Commission
gave us the same advice.
Mr. Bernanke, this Congress will have to make difficult
decisions to put our nation on a fiscally sustainable path. We
must make those decisions in a responsible manner. One upcoming
decision involves dealing with the nation's debt ceiling.
Nobody in this Congress should be playing political games when
it comes to the full faith and credit of the United States. As
Speaker Boehner observed recently, the debt ceiling vote
requires an ``adult moment.''
Chairman Bernanke, you stated last week that the
implications of not raising the debt limit would be
``catastrophic'' for our financial system and our economy. You
urged the Congress, and I quote, Not to focus on the debt limit
as being a bargaining chip in this discussion, unquote. I hope
our colleagues heed your advice and don't engage in reckless
conduct that puts the entire economy at risk. I have been
surprised by the number of proposals put forward by some in the
House and the Senate that would not only jeopardize the credit-
worthiness of the United States, but would extend the full
faith and credit of the United States Government to China and
other foreign countries, but not to American businesses and our
servicemen and women.
Let's not gamble with the full faith and credit of our
nation; that would be a recipe for financial and economic chaos
and would destroy any hope of putting Americans back to work.
Thank you, Mr. Chairman, and thank you, Chairman Bernanke.
[The statement of Mr. Van Hollen follows:]
Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member,
House Committee on the Budget
Thank you Chairman Ryan and welcome Chairman Bernanke.
Thank you, Chairman Bernanke, for your service to our country
during a time of great economic turmoil. We have been fortunate to have
a student of the Great Depression at the helm of the Federal Reserve to
help prevent a second great depression.
When you appeared before this Committee two years ago, President
Obama had just recently been sworn in. He inherited a terrible
situation. The economy was in freefall, spiraling downwards at a
negative growth rate of 6 percent. Americans were losing jobs at the
rate of over 700,000 every month. Two years later, things have improved
substantially. The economy grew at an annual rate of 3.2 percent last
quarter and more than 1.3 million private sector jobs have been created
since the start of 2010.
As you indicated in testimony last year before this Committee, the
measures taken by the Federal Reserve, the TARP solicitation by the
Bush Administration, and the Recovery Act by the Obama Administration,
averted 'an extraordinarily severe downturn, perhaps a great
depression.'
But while the economy has improved, millions of Americans are still
out of work and the unemployment rate--while coming down--remains
stubbornly high. We must use all the tools at our disposal to help
businesses put people back to work. I hope at some point this new
Congress will stop re-litigating the health reform law and start
focusing on jobs.
I commend you and your colleagues at the Fed for using various
forms of monetary policy to promote maximum employment and stable
prices. I find it astounding that, at a time that millions of Americans
are out of work, a number of our Republican colleagues have introduced
legislation to strip the Federal Reserve of that part of its mandate
that focuses on full employment and putting people back to work.
Obviously, the Fed must not waver in its commitment to price stability,
but to deprive you of the tools necessary to grow the economy would be
a huge mistake. People need to pay attention to these proposals. The
American people need to know that, at a time that millions of Americans
are out of work, these proposals say that Fed policies should ignore
the unemployment rate. That would be going backwards, not forwards, on
a jobs agenda.
I also commend you, Chairman Bernanke, for speaking out about the
need to put our country on a fiscally sustainable path. We must put in
place a responsible plan to bring down and then eliminate the primary
budget deficit. The President's Bipartisan Fiscal Commission and the
bipartisan Rivlin-Domenici Commission have demonstrated that such plans
are difficult but achievable. In his State of the Union address, the
President indicated that his budget would include cuts of $400 billion
in non-security discretionary spending as a down payment on that
effort. Clearly, other measures must also be taken, including
comprehensive tax reform. But both bipartisan commissions also
indicated that it would be a big mistake to put our fragile economic
recovery at risk by slashing outlays too deeply in the short-term when
millions of Americans are still out of work and the demand for goods
and services remains weak. The President's Bipartisan Commission stated
that 'in order to avoid shocking the fragile economy, the Commission
recommends waiting until 2012 to begin enacting programmatic spending
cuts.' The Rivlin-Domenici Commission rendered the same advice. Deep
cuts now will not create a single job; in fact, Mark Zandi and other
economists have indicated that they will put thousands of American jobs
at risk.
I am also pleased that your testimony today calls upon the Congress
to promote research and development, provide necessary public
infrastructure, and invest in the skills of our workforce. Some of our
Republican colleagues have tried to make 'investment' a dirty word,
but, as you indicate, such investments can help build a more productive
economy.
This Congress will have to make difficult decisions to put our
nation on a fiscally sustainable path. We must make those decisions in
a responsible manner. One upcoming decision involves dealing with the
nation's debt ceiling. Nobody in this Congress should be playing
political games when it comes to the full faith and credit of the
United States. As Speaker Boehner observed recently, the debt ceiling
vote requires an 'adult moment.' Chairman Bernanke, you stated last
week that the implications of not raising the debt limit would be
'catastrophic' for our financial system and our economy. You urged the
Congress 'not to focus on the debt limit as being the bargaining chip
in this discussion.' I hope our colleagues heed your advice and don't
engage in reckless conduct that puts the entire economy at risk. I have
been amazed at a number of proposals put forward by Republicans in the
Senate and the House that would not only jeopardize the
creditworthiness of the United State, but would extend the full faith
and credit of the United States government to China and other foreign
governments, but not to American businesses and our service men and
women. Let's not gamble with the full faith and credit of our nation.
That is a recipe for financial and economic chaos that would destroy
any hope of putting America back to work.
Chairman Bernanke, I look forward to your testimony of these and
other pressing issues.
Chairman Ryan. Chairman Bernanke.
STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you very much. Chairman Ryan, Ranking
Member Van Hollen, and other members of the Committee, thank
you for inviting me. I am pleased to have this opportunity to
offer my views on the economic outlook, on monetary policy, and
on issues pertaining to the federal budget.
The economic recovery that began in the middle of 2009
appears to have strengthened in the past few months, although
the unemployment rate remains high. The initial phase of the
recovery, which occurred in the second half of 2009 and in
early 2010, was in large part attributable to the stabilization
of the financial system, the effects of expansionary monetary
and fiscal policies, and the strong boost to production from
businesses rebuilding their depleted inventories.
But economic growth slowed significantly last spring, and
concerns about the durability of the recovery intensified as
the impetus from inventory building and fiscal stimulus
diminished, and as Europe's fiscal and banking problems roiled
global financial markets. More recently, however, we have seen
increased evidence that a self-sustaining recovery in consumer
and business spending may be taking hold. Notably, real
consumer spending rose at an annual rate of more than four
percent in the fourth quarter. Although strong sales of motor
vehicles accounted for a significant portion of this pick-up,
the recent gains in consumer spending appear reasonably broad-
based.
Business investment in new equipment and software increased
robustly throughout much of last year, as firms replaced aging
equipment and as the demand for their products and services
expanded. Construction remains weak, though, reflecting an
overhang of vacant and foreclosed homes, and continued poor
fundamentals from most types of commercial real estate.
Overall, improving household and business confidence,
accommodative monetary policy, and more supportive financial
conditions, including an apparently increasing willingness of
banks to lend, seem likely to result in a more rapid pace of
economic recovery in 2011 than we saw last year.
While indicators of spending and production have been
encouraging on balance, the job market has improved only
slowly. Following the loss of about eight and three-quarter
million jobs from 2008 through 2009, private sector employment
expanded by little more than one million in 2010. However, this
gain was barely sufficient to accommodate the inflow of recent
graduates and other new entrants to the labor force, and
therefore not enough to significantly erode the wide margin of
slack that remains in the labor market.
Notable declines in the unemployment rate in December and
January, together with improvement in indicators of job
openings and firms' hiring plans, do provide some grounds for
optimism on the employment front. Even so, with output growth
likely to be moderate for a while, and with employers
reportedly still reluctant to add to payrolls, it will be
several years before the unemployment rate has returned to a
more normal level. Until we see a sustained period of stronger
job creation, we cannot consider the recovery to be truly
established.
On the inflation front, we have recently seen increases in
some highly visible prices, notably gasoline. Indeed, prices of
many industrial and agricultural commodities have risen lately,
largely as a result of the very strong demand from fast-growing
emerging market economies, coupled in some cases with
constraints on supply. Nonetheless, overall inflation is still
quite low, and longer-term inflation expectations have remained
stable. Over the 12 months ending in December, prices for all
the goods and services consumed by households increased by only
1.2 percent, down from 2.4 percent over the previous 12 months.
To assess underlying trends in inflation economists also
follow several alternative measures of inflation. One such
measure is so-called core inflation, which excludes the more
volatile food and energy components, and therefore can be a
better predictor of where overall inflation is headed. Core
inflation was only 0.7 percent in 2010, compared with about two
and a half percent in 2007, the year before the recession
began. Wage growth has slowed as well, with average hourly
earnings increasing only 1.7 percent last year. These downward
trends in wage and price inflation are not surprising given the
substantial slack in the economy.
Although the growth rate of economic activity appears
likely to pick up this year, the unemployment rate probably
will remain elevated for some time. In addition, inflation is
expected to persist below the levels that the Federal Reserve
policy makers have judged to be consistent over the longer term
with our statutory mandate to foster maximum employment and
price stability. Under such conditions, the Federal Reserve
would typically ease monetary policy by reducing its target for
the Federal Funds Rate; however, the target range for the
Federal Funds rate has been near zero since December 2008,
leaving essentially no room for further reductions. As a
consequence, since then we have been using alternative tools to
provide additional monetary accommodation. In particular, over
the past two years, the Federal Reserve has further eased
monetary conditions by purchasing longer-term securities,
specifically Treasury Agency and agency mortgage-backed
securities on the open market. These purchases are settled
through the banking system, with the result that depository
institutions now hold a very high level of reserve balances
with the Federal Reserve.
Although large-scale purchases of longer-term securities
are a different monetary policy tool than the more familiar
approach of targeting the Federal Funds Rate, the two types of
policies affect the economy in similar ways. Conventional
monetary policy easing works by lowering market expectations
for the future path of short-term interest rates, which in turn
reduces the current level of longer-term interest rates and
contributes to an easing in broader financial conditions. These
changes, by reducing borrowing costs and raising asset prices,
bolster household and business spending and thus increase
economic activity.
By comparison, the Federal Reserve's purchases of longer-
term securities do not affect very short-term interest rates,
which remain close to zero, but instead put downward pressure
directly on longer-term interest rates. By easing conditions in
credit and financial markets, these actions encourage spending
by households and businesses through essentially the same
channels as conventional monetary policy, thereby strengthening
the economic recovery.
Indeed a wide range of market indicators suggest that the
Federal Reserve securities purchases have been effective at
easing financial conditions, lending credence to the view that
these actions are providing significant support to job creation
and economic growth.
My colleagues and I have said that we will review the asset
purchase program regularly in light of incoming information and
will adjust it as needed to promote maximum employment and
stable prices. In particular, we remain unwaveringly committed
to price stability, and we are confident that we have the tools
to be able to smoothly and effectively exit from the current,
highly accommodative policy stance at the appropriate time.
Our ability to pay interest on reserve balances held at
Federal Reserve Banks will allow us to put upward pressure on
short-term market rates, and thus to tighten monetary policy
when needed, even if bank reserves remain high. Moreover, we
have developed additional tools that will allow us to drain or
immobilize bank reserves as needed to facilitate the smooth
withdrawal of policy accommodation when conditions warrant. If
necessary, we could also tighten policy by redeeming or selling
securities.
As I am appearing before the Budget Committee, it is worth
emphasizing that the Fed's purchases of longer-term securities
are not comparable to ordinary government spending. In
executing these transactions, the Federal Reserve acquires
financial assets, not goods and services; thus these purchases
do not add to the government's deficit or debt. Ultimately at
the appropriate time, the Federal Reserve will normalize its
balance sheet by selling these assets back into the market or
allowing them to run off. In the interim, the interest that the
Federal Reserve earns through its securities holdings adds to
the Fed's remittances to the Treasury. In 2009 and 2010, those
remittances totaled about $125 billion.
Fiscal policymakers also face significant challenges. Our
nation's fiscal position has deteriorated appreciatively since
the onset of the financial crisis and the recession. To a
significant extent, this deterioration is the result of the
effects of the weak economy on revenues and outlays, along with
the actions that the administration and the Congress took to
ease the recession and steady financial markets. However, even
after economic and financial conditions return to normal, the
federal budget will remain on an unsustainable path, with the
budget gap becoming increasingly large over time unless the
Congress enacts significant changes in fiscal programs.
For example, under plausible assumptions about how fiscal
policies might evolve in the absence of major legislative
changes, the CBO projects the deficit to fall from its current
level of about nine percent of GDP to five percent of GDP by
2015, but then to rise to about six and a half percent of GDP
by the end of the decade. In subsequent years, the budget
situation is projected to deteriorate even more rapidly, with
federal debt held by the public reaching almost 90 percent of
GDP by 2020 and 150 percent by 2030, up from about 60 percent
at the end of fiscal year 2010.
The long-term fiscal challenges confronting the nation are
especially daunting because they are mostly the product of
powerful underlying trends, not short-term or temporary
factors. The two most important driving forces behind the
budget deficit are the aging of the population and rapidly
rising health care costs. Indeed the CBO projects that federal
health spending will roughly double as a percentage of GDP over
the next 25 years. The ability to control health care spending
while still providing high quality care to those who need it
will be critical for bringing the federal budget onto a
sustainable path.
The CBO's long-term budget projections, by design, do not
account for the likely adverse economic effects of such high
debt and deficits, but if government debt and deficits were
actually to grow at the pace envisioned, the economic and
financial effects would be severe. Sustained high rates of
government borrowing would both drain funds away from private
investment and increase our debt to foreigners, with adverse
long-run effects on U.S. output, incomes, and standards of
living.
Moreover, diminishing investor confidence that deficits
will be brought under control will ultimately lead to sharply
rising interest rates and government debt and, potentially, to
broader financial turmoil. In a vicious circle, high and rising
interest rates would cause debt service payments and the
federal debt to grow even faster, resulting in further
increases in the debt-to-GDP ratio, and making fiscal
adjustment all the more difficult.
In thinking about achieving fiscal sustainability, it is
useful to apply the concept of the primary budget deficit,
which is the government budget deficit excluding interest
payments on the national debt. To stabilize the ratio of
federal debt to the GDP, a useful benchmark for assessing
fiscal sustainability, the primary budget deficit must be
reduced to zero. Under the CBO projection that I noted earlier,
the primary budget deficit is expected to be two percent of GDP
in 2015, and then rise to almost three percent of GDP in 2020,
and six percent in 2030. These projections provide a gauge of
the adjustments that will be necessary to attain fiscal
sustainability.
To put the budget on a sustainable trajectory, policy
actions, either reductions in spending, increases in revenues,
or some combination of the two, will have to be taken to
eventually close these primary budget gaps.
By definition, the unsustainable trajectories of deficits
and debt that the CBO outlines cannot actually happen, because
creditors would never be willing to lend to a government with
debt relative to national income that is rising without limit.
One way or the other, fiscal adjustments sufficient to
stabilize the federal budget must occur at some point. The
question is whether these adjustments will take place through a
careful and deliberative process that weighs priorities and
gives people adequate time to adjust to changes in government
programs or tax policies, or whether the needed fiscal
adjustments will come instead as a rapid and painful response
to a looming or actual fiscal crisis.
Acting now to develop a credible program to reduce future
deficits would not only enhance economic growth and stability
in the long run, but could also yield substantial near-term
benefits, in terms of lower long-term interest rates and
increased consumer and business confidence.
Plans recently put forward by the President's National
Commission on Fiscal Responsibility and Reform and other
prominent groups provide useful starting points for a much
needed national conversation. Although these proposals differ
in many details, they demonstrate that realistic solutions to
our fiscal problems do exist.
Of course, economic growth is affected not only by the
levels of taxes and spending but also by their composition and
structure. I hope that in addressing our long-term fiscal
challenges, the Congress and the Administration will undertake
reforms to the Government's tax policies and spending
priorities that serve not only to reduce the deficit, but also
to enhance the long-term growth potential of our economy: For
example, by reducing disincentives to work and to save, by
encouraging investment in the skills of our workforce as well
as new machinery and equipment, by promoting research and
development, and by providing necessary public infrastructure.
Our nation cannot reasonably expect to grow its way out of
our fiscal imbalances, but a more productive economy will ease
the trade-offs that we face.
Thank you, Mr. Chairman, Ranking Member. I'd be very
pleased to take your questions.
[The prepared statement of Ben S. Bernanke follows:]
Prepared Statement of Hon. Ben S. Bernanke, Chairman,
Board of Governors of the Federal Reserve System
Chairman Ryan, Ranking Member Van Hollen, and other members of the
Committee, I am pleased to have this opportunity to offer my views on
the economic outlook, monetary policy, and issues pertaining to the
federal budget.
THE ECONOMIC OUTLOOK
The economic recovery that began in the middle of 2009 appears to
have strengthened in the past few months, although the unemployment
rate remains high. The initial phase of the recovery, which occurred in
the second half of 2009 and in early 2010, was in large part
attributable to the stabilization of the financial system, the effects
of expansionary monetary and fiscal policies, and the strong boost to
production from businesses rebuilding their depleted inventories. But
economic growth slowed significantly last spring and concerns about the
durability of the recovery intensified as the impetus from inventory
building and fiscal stimulus diminished and as Europe's fiscal and
banking problems roiled global financial markets.
More recently, however, we have seen increased evidence that a
self-sustaining recovery in consumer and business spending may be
taking hold. Notably, real consumer spending rose at an annual rate of
more than 4 percent in the fourth quarter. Although strong sales of
motor vehicles accounted for a significant portion of this pickup, the
recent gains in consumer spending appear reasonably broad based.
Business investment in new equipment and software increased robustly
throughout much of last year, as firms replaced aging equipment and as
the demand for their products and services expanded. Construction
remains weak, though, reflecting an overhang of vacant and foreclosed
homes and continued poor fundamentals for most types of commercial real
estate. Overall, improving household and business confidence,
accommodative monetary policy, and more-supportive financial
conditions, including an apparently increasing willingness of banks to
lend, seem likely to result in a more rapid pace of economic recovery
in 2011 than we saw last year.
While indicators of spending and production have been encouraging
on balance, the job market has improved only slowly. Following the loss
of about 8\3/4\ million jobs from 2008 through 2009, private-sector
employment expanded by a little more than 1 million in 2010. However,
this gain was barely sufficient to accommodate the inflow of recent
graduates and other new entrants to the labor force and, therefore, not
enough to significantly erode the wide margin of slack that remains in
our labor market. Notable declines in the unemployment rate in December
and January, together with improvement in indicators of job openings
and firms' hiring plans, do provide some grounds for optimism on the
employment front. Even so, with output growth likely to be moderate for
a while and with employers reportedly still reluctant to add to their
payrolls, it will be several years before the unemployment rate has
returned to a more normal level. Until we see a sustained period of
stronger job creation, we cannot consider the recovery to be truly
established.
On the inflation front, we have recently seen increases in some
highly visible prices, notably for gasoline. Indeed, prices of many
industrial and agricultural commodities have risen lately, largely as a
result of the very strong demand from fast-growing emerging market
economies, coupled, in some cases, with constraints on supply.
Nonetheless, overall inflation is still quite low and longer-term
inflation expectations have remained stable. Over the 12 months ending
in December, prices for all the goods and services consumed by
households (as measured by the price index for personal consumption
expenditures) increased by only 1.2 percent, down from 2.4 percent over
the prior 12 months. To assess underlying trends in inflation,
economists also follow several alternative measures of inflation; one
such measure is so-called core inflation, which excludes the more
volatile food and energy components and therefore can be a better
predictor of where overall inflation is headed. Core inflation was only
0.7 percent in 2010, compared with around 2\1/2\ percent in 2007, the
year before the recession began. Wage growth has slowed as well, with
average hourly earnings increasing only 1.7 percent last year. These
downward trends in wage and price inflation are not surprising, given
the substantial slack in the economy.
MONETARY POLICY
Although the growth rate of economic activity appears likely to
pick up this year, the unemployment rate probably will remain elevated
for some time. In addition, inflation is expected to persist below the
levels that Federal Reserve policymakers have judged to be consistent
over the longer term with our statutory mandate to foster maximum
employment and price stability. Under such conditions, the Federal
Reserve would typically ease monetary policy by reducing its target for
the federal funds rate. However, the target range for the federal funds
rate has been near zero since December 2008, leaving essentially no
room for further reductions. As a consequence, since then we have been
using alternative tools to provide additional monetary accommodation.
In particular, over the past two years the Federal Reserve has further
eased monetary conditions by purchasing longer-term securities--
specifically, Treasury, agency, and agency mortgage-backed securities--
on the open market. These purchases are settled through the banking
system, with the result that depository institutions now hold a very
high level of reserve balances with the Federal Reserve.
Although large-scale purchases of longer-term securities are a
different monetary policy tool than the more familiar approach of
targeting the federal funds rate, the two types of policies affect the
economy in similar ways. Conventional monetary policy easing works by
lowering market expectations for the future path of short-term interest
rates, which, in turn, reduces the current level of longer-term
interest rates and contributes to an easing in broader financial
conditions. These changes, by reducing borrowing costs and raising
asset prices, bolster household and business spending and thus increase
economic activity. By comparison, the Federal Reserve's purchases of
longer-term securities do not affect very short-term interest rates,
which remain close to zero, but instead put downward pressure directly
on longer-term interest rates. By easing conditions in credit and
financial markets, these actions encourage spending by households and
businesses through essentially the same channels as conventional
monetary policy, thereby strengthening the economic recovery. Indeed, a
wide range of market indicators suggest that the Federal Reserve's
securities purchases have been effective at easing financial
conditions, lending credence to the view that these actions are
providing significant support to job creation and economic
growth.market expectations for the future path of short-term interest
rates, which, in turn, reduces the current level of longer-term
interest rates and contributes to an easing in broader financial
conditions. These changes, by reducing borrowing costs and raising
asset prices, bolster household and business spending and thus increase
economic activity. By comparison, the Federal Reserve's purchases of
longer-term securities do not affect very short-term interest rates,
which remain close to zero, but instead put downward pressure directly
on longer-term interest rates. By easing conditions in credit and
financial markets, these actions encourage spending by households and
businesses through essentially the same channels as conventional
monetary policy, thereby strengthening the economic recovery. Indeed, a
wide range of market indicators suggest that the Federal Reserve's
securities purchases have been effective at easing financial
conditions, lending credence to the view that these actions are
providing significant support to job creation and economic
growth.market expectations for the future path of short-term interest
rates, which, in turn, reduces the current level of longer-term
interest rates and contributes to an easing in broader financial
conditions. These changes, by reducing borrowing costs and raising
asset prices, bolster household and business spending and thus increase
economic activity. By comparison, the Federal Reserve's purchases of
longer-term securities do not affect very short-term interest rates,
which remain close to zero, but instead put downward pressure directly
on longer-term interest rates. By easing conditions in credit and
financial markets, these actions encourage spending by households and
businesses through essentially the same channels as conventional
monetary policy, thereby strengthening the economic recovery. Indeed, a
wide range of market indicators suggest that the Federal Reserve's
securities purchases have been effective at easing financial
conditions, lending credence to the view that these actions are
providing significant support to job creation and economic growth.\1\
---------------------------------------------------------------------------
\1\ For example, in August 2010 we announced our policy of
reinvesting principal payments on agency debt and agency-guaranteed
mortgage-backed securities in longer-term Treasury securities and
signaled that we were considering additional purchases of longer-term
Treasury securities. Since then, equity prices have risen
significantly, volatility in the equity market has fallen, corporate
bond spreads have narrowed, and inflation compensation as measured in
the market for inflation-indexed securities has risen from low to more
normal levels. Yields on 5- to 10-year Treasury securities initially
declined markedly as markets priced in prospective Fed purchases; these
yields subsequently rose, however, as investors became more optimistic
about economic growth and as traders scaled back their expectations of
future securities purchases. All of these developments are what one
would expect to see when monetary policy becomes more accommodative,
whether through conventional or less conventional means. Interestingly,
these developments are also remarkably similar to those that occurred
during the earlier episode of policy easing, notably in the months
following our March 2009 announcement of a significant expansion in
securities purchases.
---------------------------------------------------------------------------
My colleagues and I have said that we will review the asset
purchase program regularly in light of incoming information and will
adjust it as needed to promote maximum employment and stable prices. In
particular, we remain unwaveringly committed to price stability, and we
are confident that we have the tools to be able to smoothly and
effectively exit from the current highly accommodative policy stance at
the appropriate time. Our ability to pay interest on reserve balances
held at the Federal Reserve Banks will allow us to put upward pressure
on short-term market interest rates and thus to tighten monetary policy
when needed, even if bank reserves remain high. Moreover, we have
developed additional tools that will allow us to drain or immobilize
bank reserves as needed to facilitate the smooth withdrawal of policy
accommodation when conditions warrant. If necessary, we could also
tighten policy by redeeming or selling securities.
As I am appearing before the Budget Committee, it is worth
emphasizing that the Fed's purchases of longer-term securities are not
comparable to ordinary government spending. In executing these
transactions, the Federal Reserve acquires financial assets, not goods
and services; thus, these purchases do not add to the government's
deficit or debt. Ultimately, at the appropriate time, the Federal
Reserve will normalize its balance sheet by selling these assets back
into the market or by allowing them to run off. In the interim, the
interest that the Federal Reserve earns from its securities holdings
adds to the Fed's remittances to the Treasury; in 2009 and 2010, those
remittances totaled about $125 billion.
FISCAL POLICY
Fiscal policymakers also face significant challenges. Our nation's
fiscal position has deteriorated appreciably since the onset of the
financial crisis and the recession. To a significant extent, this
deterioration is the result of the effects of the weak economy on
revenues and outlays, along with the actions that the Administration
and the Congress took to ease the recession and steady financial
markets. However, even after economic and financial conditions return
to normal, the federal budget will remain on an unsustainable path,
with the budget gap becoming increasingly large over time, unless the
Congress enacts significant changes in fiscal programs.
For example, under plausible assumptions about how fiscal policies
might evolve in the absence of major legislative changes, the
Congressional Budget Office (CBO) projects the deficit to fall from its
current level of about 9 percent of gross domestic product (GDP) to 5
percent of GDP by 2015, but then to rise to about 6\1/2\ percent of GDP
by the end of the decade.\2\ In subsequent years, the budget situation
is projected to deteriorate even more rapidly, with federal debt held
by the public reaching almost 90 percent of GDP by 2020 and 150 percent
by 2030, up from about 60 percent at the end of fiscal year 2010.
---------------------------------------------------------------------------
\2\ This alternative fiscal policy scenario, which assumes, among
other things, that most of the tax cuts enacted in 2001 and 2003 are
made permanent and that discretionary fiscal outlays rise at the same
rate as gross domestic product, is presented in Congressional Budget
Office (2010), The Long-Term Budget Outlook (Washington: CBO, June
(revised August)), available at www.cbo.gov/
doc.cfm?index=11579&zzz=40884.
---------------------------------------------------------------------------
The long-term fiscal challenges confronting the nation are
especially daunting because they are mostly the product of powerful
underlying trends, not short-term or temporary factors. The two most
important driving forces behind the budget deficit are the aging of the
population and rapidly rising health-care costs. Indeed, the CBO
projects that federal spending for health-care programs will roughly
double as a percentage of GDP over the next 25 years.\3\ The ability to
control health-care spending, while still providing high-quality care
to those who need it, will be critical for bringing the federal budget
onto a sustainable path.
---------------------------------------------------------------------------
\3\ See the two long-term scenarios for mandatory federal spending
on health care shown in figure 2-3, p. 39, in CBO, The Long-Term Budget
Outlook, in note 2.
---------------------------------------------------------------------------
The CBO's long-term budget projections, by design, do not account
for the likely adverse economic effects of such high debt and deficits.
But if government debt and deficits were actually to grow at the pace
envisioned, the economic and financial effects would be severe.
Sustained high rates of government borrowing would both drain funds
away from private investment and increase our debt to foreigners, with
adverse long-run effects on U.S. output, incomes, and standards of
living. Moreover, diminishing investor confidence that deficits will be
brought under control would ultimately lead to sharply rising interest
rates on government debt and, potentially, to broader financial
turmoil. In a vicious circle, high and rising interest rates would
cause debt-service payments on the federal debt to grow even faster,
resulting in further increases in the debt-to-GDP ratio and making
fiscal adjustment all the more difficult.
In thinking about achieving fiscal sustainability, it is useful to
apply the concept of the primary budget deficit, which is the
government budget deficit excluding interest payments on the national
debt. To stabilize the ratio of federal debt to the GDP--a useful
benchmark for assessing fiscal sustainability--the primary budget
deficit must be reduced to zero.\4\ Under the CBO projection that I
noted earlier, the primary budget deficit is expected to be 2 percent
of GDP in 2015 and then rise to almost 3 percent of GDP in 2020 and 6
percent of GDP in 2030. These projections provide a gauge of the
adjustments that will be necessary to attain fiscal sustainability. To
put the budget on a sustainable trajectory, policy actions--either
reductions in spending, increases in revenues, or some combination of
the two--will have to be taken to eventually close these primary budget
gaps.
---------------------------------------------------------------------------
\4\ This result requires that the nominal rate of interest paid on
government debt equals the rate of growth of nominal GDP, a condition
that might plausibly be expected to hold over time. If the interest
rate on government debt is higher than the growth rate of nominal GDP,
as might happen if creditors become wary of lending, then a primary
budget surplus rather than primary balance would be needed to stabilize
the ratio of debt to GDP.
---------------------------------------------------------------------------
By definition, the unsustainable trajectories of deficits and debt
that the CBO outlines cannot actually happen, because creditors would
never be willing to lend to a government with debt, relative to
national income, that is rising without limit. One way or the other,
fiscal adjustments sufficient to stabilize the federal budget must
occur at some point. The question is whether these adjustments will
take place through a careful and deliberative process that weighs
priorities and gives people adequate time to adjust to changes in
government programs or tax policies, or whether the needed fiscal
adjustments will come as a rapid and painful response to a looming or
actual fiscal crisis. Acting now to develop a credible program to
reduce future deficits would not only enhance economic growth and
stability in the long run, but could also yield substantial near-term
benefits in terms of lower long-term interest rates and increased
consumer and business confidence. Plans recently put forward by the
President's National Commission on Fiscal Responsibility and Reform and
other prominent groups provide useful starting points for a much-needed
national conversation. Although these proposals differ on many details,
they demonstrate that realistic solutions to our fiscal problems do
exist.
Of course, economic growth is affected not only by the levels of
taxes and spending, but also by their composition and structure. I hope
that, in addressing our long-term fiscal challenges, the Congress and
the Administration will undertake reforms to the government's tax
policies and spending priorities that serve not only to reduce the
deficit, but also to enhance the long-term growth potential of our
economy--for example, by reducing disincentives to work and to save, by
encouraging investment in the skills of our workforce as well as new
machinery and equipment, by promoting research and development, and by
providing necessary public infrastructure. Our nation cannot reasonably
expect to grow its way out of our fiscal imbalances, but a more
productive economy will ease the tradeoffs that we face.
Thank you. I would be pleased to take your questions.
Chairman Ryan. Thank you, Mr. Chairman. First, let me lead
off with what you have concluded. Just to summarize, you do
believe that one of the best things we can do for short-term
economic growth is to put out a plan that actually stabilizes
our fiscal picture, that actually gets our liabilities under
control, and shows with confidence that we have a right
trajectory because we've addressed the programs, which are the
spending programs that are getting us out of control. Is that
the case?
Mr. Bernanke. That's correct.
Chairman Ryan. Okay. I want to talk to you about QE2. Last
time you came to the Committee to testify, you said that QE2 is
not an exercise in monetizing the debt. Now, the question
basically is this. I understand from your perspective you can
say that QE2 is not monetizing the debt because it is not
causing runaway inflation because the money you are creating is
not yet circulating in the broader economy, it is being held as
excess bank reserves. But isn't this sort of a distinction
without a difference? It seems to me that the argument here is
that the intention of QE2 is what we ought to be focusing on,
because the intention is to bring rates down to promote
economic growth, and therefore the intention is what should
matter here, but this is debt monetization, so isn't that
really a distinction without a difference?
Mr. Bernanke. No, sir. Monetization would involve a
permanent increase in the money supply to basically pay the
government's bills through money creation. What we are doing
here is a temporary measure which will be reversed so that at
the end of this process, the money supply will be normalized,
the amount of the Fed's balance sheet will be normalized, and
there will be no permanent increase, either in money
outstanding, in the Fed's balance sheet, or in inflation.
Chairman Ryan. So if we get this wrong, and if credibility
is diminished because of these moves, and if expectations form
around price increases, then we do have a big interest rate
problem. And if you look through our fiscal side of it, just
raising interest rates under normal, average predictions would
just be vicious to our balance sheet. The interest payments
alone in the current budget window, which assumes extremely low
interest rates for the decade, go from $200 billion this year
to a trillion at the end of the budget window. If interest
rates move up from their current projections, which I think
long bonds are about four to five percent throughout the budget
window, that is about one to anywhere from $6 trillion in extra
interest payments. So basically, this is all based on
confidence that what you are doing and saying will actually be
done, and confidence and credibility is just critical in all of
this.
What I'm trying to get at is, and just take a look at
today's Wall Street Journal: Inflation Worries Spread. You've
got, basically, inflation jitters spread through emerging
markets. In Brazil, Latin America's largest economy, the
government reported Tuesday that inflation is accelerating. You
know, we've got inflation popping up in other parts of the
world, after all, many countries peg their currencies to the
U.S. dollar, and my basic question is, to what extent do you
think the Fed's monetary policy stance has contributed to these
global inflationary pressures? Has this contributed to the hot
money flows abroad that have led to some of these global
imbalances that are not fully appreciating when we examine the
costs and benefits of your current QE2 monetary policy stance?
Mr. Bernanke. Mr. Chairman, your first sentence under the
headline was very revealing. The inflation is taking place in
emerging markets because that is where the growth is, that is
where the demand is, and that is where, in some cases, the
economy is overheating. It's the responsibility of the emerging
markets to set their monetary and exchange rate policies in a
way that will keep their economies on a stable path. The
increases in oil prices, for example, are entirely due,
according to the International Energy Agency, to increases in
demand coming from emerging markets; they are not coming from
the United States. So the bulk of the increase in commodity
crisis is a global phenomenon.
In the United States, inflation made here in the U.S. is
very, very low. Now, of course, that is a serious problem, but
monetary policy can't do anything about, for example, bad
weather in Russia, or increases in demand for oil in Brazil and
China. What we can do is try to get stable prices and growth
here in the United States.
Chairman Ryan. So, as you look at some of the leading
indicators: the yield curve, for instance, commodity prices, do
those not send you a warning that inflation is building in
America? Or are you still looking at core inflation as your
main guidepost measuring whether or not our monetary policy is
keeping prices in check? My basic question is, and my concern
is, using your output gap model, my fear is that you are going
to catch it before the cow is out of the barn. You are going to
see inflation after it has already been launched. And given
that you have a huge balance sheet, given that we are basically
in uncharted territory with respect to the Great Recession and
the responses that you put out there, that we are going to
catch this after it is too late.
Could you please give us a sense of what else you are
looking at to gauge inflation in America, other than core
inflation, which, as you know, there's a big debate as to
whether or not that is the proper tool we use or not. Even the
ECB uses broader definitions of inflation. So where are you
looking, outside of your core deflation, to give you a gauge as
to how to set monetary policy to prevent inflation from
actually getting unhinged here in America?
Mr. Bernanke. Mr. Chairman, let me say first, that there be
no doubt that we are unwaveringly committed to maintaining
price stability; that is a very, very strong goal and
objective, we will do so. In terms of what we are looking at,
first of all, overall inflation, including food and energy is
still very low, about one percent. But looking forward, you
asked about credibility and the yield curve, if you look, for
example, at inflation breakevens, which are a measure in the
inflation index bond market of what the markets think inflation
is going to be. The five year breakeven is about two percent,
2.1 percent last I looked. So there is not really any
indication in our financial markets that in the United States
there's an expectation of inflation.
That being said, we will look very carefully not only at
output gaps and those things that you mention, but also at
commodity prices, at interest rates, and all the other
indicators that will help us assess when inflation is becoming
a problem. It is always an issue, as you know, Mr. Chairman,
that in the recovery period you have to pick the right moment
to begin removing accommodation, taking away the punch bowl,
and we, of course, face that problem, as the Central Bank
always does, but we are committed to making sure that we do it
at the right time.
Chairman Ryan. So when you see the steepening of the yield
curve that has taken place recently, do you see that as market
participants showing some concerns about future inflation, or
do you see that as signs that an economic recovery is beginning
to take root?
Mr. Bernanke. The inflation breakevens have risen since we
began the QE2 program in August, but they have moved from very
low levels to about normal levels. The bulk of the increase in
interest rates has been, in the real side of the interest rate,
which means that, like the stock market, the bond market is
expecting greater future growth and is more optimistic about
the U.S. economy, and I think that is a good thing, obviously,
and I think our policies have contributed to that.
Chairman Ryan. So we obviously have a bigger punch bowl
than we normally have in these times, and if we were in a
cyclical situation, I don't think concerns would be as great as
they are right now. But I think part of our problem, as you
mentioned, on the fiscal policy side, is structural. We have a
tidal wave of debt we are running into. If interest rates begin
to leave the current projections, we have a serious problem on
our hands. And it just gets to a vicious cycle, like you have
described.
The punch bowl, your asset, your balance sheets: Have you
done a stress test on the Fed's balance sheet assets as an exit
strategy occurs with higher interest rates that perhaps result
from what has been going on? So, have you done a stress test on
your balance sheet? And what level of losses do you think are
acceptable as you withdraw?
Mr. Bernanke. We have done multiple stress tests. Under
most likely scenarios, the fiscal implications of the balance
sheet are positive. We've already turned in, in the last two
years, $125 billion to the Treasury, and given our low level of
cost, our low cost of financing, under most plausible scenarios
this policy will continue to be profitable. Of course, that is
not the main objective of it; the objective is to strengthen
the economy.
If short-term interest rates were to rise exceptionally
high, much more than we anticipate, then it could be that the
remittances to the Treasury would go down for a time, but in
that case, it would probably also be the case that the economy
was much stronger than expected, and tax revenues would more
than compensate for that loss. So our sense is that the net
expectation from a fiscal side is that this will actually be
constructive and reduce the federal deficit.
Chairman Ryan. I'd go on for a long time, but I want to be
fair to my colleagues. Mr. Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman, and again,
Chairman Bernanke, thank you for your testimony. Now, obviously
the United States as part of a global marketplace, but your
job, your mandate at the Fed is to watch out for the American
economy, is that right?
Mr. Bernanke. Yes, sir.
Mr. Van Hollen. And your testimony, as I understand it, is
that you are vigilant about looking out for inflation pressures
but your assessment right now is that we do not have an
inflation problem in the United States, is that correct?
Mr. Bernanke. We do not now have a problem, but I do want
to repeat that we are extremely vigilant, we will be very
careful to make sure that we don't wait too long.
Mr. Van Hollen. Right. And your policy known as QE2, you
had QE1, and QE2 was referenced, by your assessment how many
American jobs has that saved or created?
Mr. Bernanke. It is obviously very difficult to know
precisely. There have been a number of studies which have tried
to assess, using macroeconomic models and so on. A very careful
study done by Federal Reserve System economists suggests that
the total job impact of all of the QE programs, including QE1,
including the reinvestment, including QE2, could be up to three
million jobs. It could be less, it could be more, but the
important thing to understand is that it is not insignificant;
it is an important contribution to growth and to job creation.
And we are in a situation where we have almost half of the
unemployed being out of work for more than six months. And the
longer that people stay out of work, the more difficult it is
going to be for them to come back and rejoin the labor force at
a decent wage, and to return to their previous employment.
Mr. Van Hollen. Right. So as I understand you, that was a
credible study in your view, was it not?
Mr. Bernanke. It is, and there have been other studies as
well, which are comparable.
Mr. Van Hollen. Okay. And just focusing on QE2, my
understanding is that, just with respect to that, those
monetary decisions that created or saved between 600,000 and
700,000 jobs, is that correct?
Mr. Bernanke. The same study attributed, again
perspectively, in part, to the $600 billion QE2 about 700,000
jobs. Again, let me just emphasize that these are simulation
studies, but they do indicate that the potential impact is
significant.
Mr. Van Hollen. Right, but Mr. Chairman, simulation studies
are what the Feds, the OMB, the CBO, we all do, right?
Mr. Bernanke. Correct.
Mr. Van Hollen. Okay. With respect to that policy, if you
did not have those tools at your disposal and you were not able
to use them, I assume that would mean that you would not be
able to take action to save or create three million jobs, is
that correct?
Mr. Bernanke. That's correct because our interest rate is
essentially down to zero.
Mr. Van Hollen. Thank you. Now, I want to turn briefly to
the question of debt ceiling because this Congress is going to
face a very important decision coming up, and last week at the
National Press Club, you indicated that failure to raise the
debt ceiling would be, quote, Catastrophic for our economy and
financial system. I assume you have the same opinion today.
Mr. Bernanke. Yes, sir.
Mr. Van Hollen. Okay. You also indicated at the National
Press Club that it would be a mistake for, in your view, for
the Congress to use the debt ceiling as a, quote, Bargaining
chip, with respect to decisions on spending and tax, that we
should address those as part of our normal discussion but not
hold the debt ceiling hostage to that. I assume you still have
that view today.
Mr. Bernanke. To be clear, it is very important to address
these issues, but the risk of not raising the debt ceiling is
that interest would not be paid on outstanding government debt,
and if the United States defaulted it would have
extraordinarily bad consequences for our financial system, and
it would mean that we would face higher interest rates
essentially indefinitely because creditors wouldn't trust us to
make our interest payments.
Mr. Van Hollen. I mean it would be reckless from an
economic and financial perspective to allow, to essentially
default on our debts and question the creditworthiness and full
faith credit of the United States, correct?
Mr. Bernanke. We do not want to default on our debts; it
would be very destructive.
Mr. Van Hollen. Have you had an opportunity to look at some
of the legislative proposals that have been introduced on the
Senate and the House side that would purport to try and delay
those payments, and have you seen Secretary Geithner's comments
in a response?
Mr. Bernanke. We have just begun to look at the issue of
whether or not you could reorder, re-prioritize payments so
that the debt interest would be paid, but other things not
paid. This has not been done before and our early assessment is
that there would be some difficulties from just a purely
operational point of view. For example, you would have to
differentiate between Social Security payments, which
presumably would not be going out, versus interest payments to
individuals holding savings bonds, which would be going out,
and that might cause some operational issues, so we do have
some concerns on that score.
Mr. Van Hollen. Some of these proposals would actually
allow the full faith and credit of the United States to extend
to some of our foreign creditors, like China and other
governments, but not to U.S. businesses and American citizens.
Let me ask you a quick question on the fiscal policy, because I
think we all agree that the Congress should act now to put in
place a plan to get our deficit and debt under control. We need
to come up with a plan to put this country on a sustainable,
fiscal path.
And, as you indicated, you referenced the bipartisan
commission, the President's Commission, in your remarks. The
authors of that plan observed, and I quote, In order to avoid
shocking the fragile economy, the Commission recommends waiting
until 2012 to begin enacting programmatic spending cuts. Let me
just ask you this, Mr. Chairman: If you were to take a lot of
investment out of the economy at this particular point, when it
is fragile, could that create a drag on the economy and have a
impact on jobs?
Mr. Bernanke. If it were large enough, it could, but on the
other side, I just want to emphasize that the deficit-reduction
approach should be one that takes a long-term perspective, that
you are looking at a long-term window and addressing the whole
trajectory of spending, rather than looking only at the very
short-term.
Mr. Van Hollen. Okay. And I agree with that, Mr. Chairman.
Last question is I was pleased to see in your testimony that
you believe that certain investments, national investments in
our economy, can in fact lead to productivity and growth. There
are some who are trying to turn investment into a dirty word,
but as you indicate here, investments in our public
infrastructure, investments in education, and investments in
science and research can in fact have a positive, productive
impact on economic growth. Is that correct?
Mr. Bernanke. If they are well done, yes.
Mr. Van Hollen. Thank you, Mr. Chairman.
Chairman Ryan. Something tells me we are going to have a
big debate over the definition of investment over the next two
years. Mr. Garrett.
Mr. Garrett. There we go. And thank you, Mr. Chairman.
Following up on a couple of those questions, before I get to
some other ones. So, Mr. Ryan was asking an initial question to
your response back, with regard to monetary policy, whether
monetizing the debt and the like. You said your actions right
now have been short-term in nature, as opposed to permanent
actions, which, if I understand you, would be effectively
monetizing the debt. I guess, then, the question becomes, if
you had implemented permanent, there's nothing that would have
precluded the Fed, somewhere down the road, undo their actions
later on. You're not bound by your decisions today. So,
anything that is actually permanent is also changeable by the
Fed. Correct? There's nothing permanent that you would do
today, that you couldn't undo.
Mr. Bernanke. What's key here is expectations. And the
markets don't expect inflation, which means they expect us to
undo this process at the appropriate time.
Mr. Garrett. Right. And effectively what you have is a
difference between one's interpretation of what is permanent
and what is temporary. And I imagine that no Fed Chairman would
ever come to this witness table, and say, I am engaging in
permanent monetizing of the debt. That no matter how they would
describe it to us, they would describe it as, I'm only taking a
temporary action to get over this period that we are in right
now. Isn't that correct?
Mr. Bernanke. That's what we are doing. It's a temporary
action. But, of course, the Fed always buys securities for
various reasons. For example, that is how we create the
currency that Americans use every day.
Mr. Garrett. But this is obviously outside the norm as far
as your balance sheet.
Mr. Bernanke. That's right.
Mr. Garrett. And part of your opening comments was the fact
that one of the good signs we are in right now is that consumer
spending is going along, which is sort of pulling the economy
going forward, right?
Mr. Bernanke. Yeah.
Mr. Garrett. Is that in part because of exactly what you
are doing, whether we call it permanent or temporary, it is
because of that, basically, cheap money that is out there that
is encouraging all of us to say that, Hey, it is cheaper to
borrow right now, so I can actually increase my consumer
spending?
Mr. Bernanke. That's how monetary policy works all the
time. Not just now.
Mr. Garrett. Right. But in the area of housing, however,
you had said, not just last year with regard to housing policy
and the age old question of what caused us to get into this
situation. And you said, Well, I don't think it was really
monetary policy, I'm paraphrasing, here, that got us into this
situation. And I know the old line, that if you get three
economists in a room, you will come up with four different
definitions on what economic policy should be. When you were
saying that, about three-quarters of business economists were
just saying the opposite of that. They said that it was a cheap
monetary policy that was bringing us into this situation. So
you disagree on that point with a number of other economists,
as whether it was the low cost of money that actually
exacerbated the housing problem. Right?
Mr. Bernanke. Right.
Mr. Garrett. But now, you are basically, on the other hand,
saying, We're going to use that exact same policy, of basically
cheap money, to do what? To try to drive up the cost of the
housing, in order to pull us out of this economic morass.
Right?
Mr. Bernanke. The price of housing isn't responding at all
to the policy. It's going----
Mr. Garrett. But that is your ultimate goal here, isn't it?
Basically, if we have the cheap money, that people will be able
to start buying houses again, that it'll hit the bottom and the
housing prices will go back up again. Right?
Mr. Bernanke. Again, that is the way the monetary policy
works: by lowering rates of returns, so people will be more
willing to spend.
Mr. Garrett. I'm in this quandary here. On the one hand,
you are saying that, in the past when you had, not you but your
predecessor, had a cheap monetary policy, that really didn't
cause the problem because monetary policy really wasn't driving
the cost of the housing and causing the problems that we have
here. Now, however, you are going to use that exact same
formula to say, Yeah, well, actually it does have as
significant impact, or we should hope it has a significant
impact on the monetary policy. So I am at a quandary as to
which is it from the Fed: whether it had an impact in the past,
or will it have an impact in the future? If you don't think it
had an impact in the past, why do you think it is going to have
an impact now on housing?
Mr. Bernanke. It should have an effect that is
proportionate to the interest rate change. Now, the housing
bubble we saw earlier in this decade was far greater than can
be explained by the monetary policies of that time, which is
one of the reasons why I don't think that the monetary policy
was a major source of that bubble.
Mr. Garrett. Okay. Very quickly, last minute and 15
seconds, with regards to spending. Wouldn't significant
reductions, or addressing the short-term spending aspects, be
good for the market and the economy, despite some of the
critics on the other side that say this might be detrimental to
overall growth?
Mr. Bernanke. Well, again, I think it is really a question
of convincing the market that there's a long-term plan here,
and to the extent that that was part of a long-term plan, it
could be helpful, yes.
Mr. Garrett. Okay. Well, Moody's looking at what we are
doing in Washington. I guess they're optimistic about what we
will do, because they came out a month ago with their report
looking at the fiscal health, looking at three categories: the
debt to GDP, the debt to revenue, and the interest payment
revenue, and they said that the U.S. exceeds the median level
of AAA rated nations for all these other categories, and
concludes that it would expect to see, quote, Constructive
efforts to reduce the current deficits, as well as constructive
efforts to control long-term growth of entitlement spendings. I
guess they're optimistic as to what Washington does, making
those statements. Are you optimistic that we are going to be
able to make those hard choices, even if they make some
significant cuts in spending right now?
Mr. Bernanke. Well, I'm not certain. And that is why I'm
making this case. I hope that people will listen and take
seriously the responsibility to address this problem.
Mr. Garrett. I appreciate that. Thank you.
Chairman Ryan. Mr. Doggett.
Mr. Doggett. Thank you very much for your service, Mr.
Chairman. While it may be true that there are only two
certainties in life, death and taxes, I would think that a
close third would be gigantic bonuses for many at gigantic
Wall-Street financial enterprises. When you were here to
testify last, you responded to my question about that by
indicating that the Federal Reserve, under your direction, was
preparing a public report to the American people on bank
compensation structures that would be available at the end of
last year or early this year. About four months ago, your
general counsel testified here in the House, also, about the
importance of making that report public to the American people.
When can we expect to see the report?
Mr. Bernanke. I believe that will be soon. We certainly are
working in that direction. As you know, we put guidance out in
June 2010, and we are working to follow the requirements of the
Dodd-Frank Act to put out additional restrictions.
Mr. Doggett. I know there's been some discussion that the
public report that you testified to us about, and that your
general counsel testified about, would now be kept secret. But
it is your intent to make it fully public to the American
people.
Mr. Bernanke. That's my understanding, yes.
Mr. Doggett. And you think that will happen very soon.
Mr. Bernanke. I believe so, but I'd like to get back to
you, if I might, on the exact date.
Mr. Doggett. Please do, especially if any part of it will
be kept secret, as some have suggested. I think that kind of
reversal would be very troubling. Thank you, though.
Moving to the issue of the Consumer Financial Protection
Bureau, created in the Wall Street Reform Law, you are very
familiar with it, to arm the American people with information
that they need to make informed financial decisions. Many
question whether that Bureau should be located within the
Federal Reserve, given its traditional mission, and given
concern about the independence of the Bureau and the ability to
fulfill its mandate. With it set to begin full operations
shortly, in July, and with no Consumer Financial Protection
Bureau Director yet nominated, can you provide us assurances
that it will be sufficiently strong and independent to fulfill
its mandate, to offer consumer protection to the American
people, from the many credit abuses that they have faced in the
past?
Mr. Bernanke. Congressman, the CFPB is located in the
Federal Reserve, only in the narrow sense that the Federal
Reserve pays the bills. But we have no oversight or control.
The control really is coming from the Treasury, and I think
they are the ones who would be most appropriate to respond to
you about the nature of the Bureau.
Mr. Doggett. You and the Fed have no involvement in the
operation of the Bureau? You're just kind of the landlord and
the paymaster?
Mr. Bernanke. We're doing our best to help them get set up.
Obviously, there's a lot to be done, in terms of just hiring
people and setting up an IT system, and so on, but in terms of
policymaking, they are completely independent of the Federal
Reserve. We have no say whatsoever.
Mr. Doggett. And you are making no recommendations about
who the director should be, or how the Bureau will operate in
any way from a policy standpoint?
Mr. Bernanke. No sir, that is not part of our
responsibility under Dodd-Frank.
Mr. Doggett. Another major issue that perhaps involves the
Treasury some, and it involves you some, is the future of
Freddie Mac and Fannie Mae. Some are concerned that perhaps
most, if not all, of their functions would, again, be turned
over to a few large financial enterprises. What is your general
approach to the future of these two institutions?
Mr. Bernanke. Well, as you know, the Treasury is promising
us a set of proposals very soon, and it will be interesting to
see what they provide. There are various possibilities that we
could do, including making them a government utility, or
privatizing them, which would be two alternatives. One
suggestion, which I have made in previous remarks, is that if
the government is involved in providing credit guarantees, it
should do so only as a deep backstop. That is, the first losses
should be borne by the originators of the mortgages, or by the
securitizers. The government, if it does provide backstop
insurance, should do so for an actuarially fair premium, and
that would essentially allow the government to provide a
backstop in situations like we had in the last few years, where
the housing market came under enormous stress.
Mr. Doggett. Thank you. Thank you, Mr. Chairman.
Chairman Ryan. Mr. Campbell.
Mr. Campbell. Thank you Chairman Ryan and Chairman
Bernanke. Some things in economics are cyclical and others are
structural. You mentioned earlier today that you feared that
unemployment would remain elevated for an extended period of
time. How much of our current high unemployment, in your view,
is cyclical, and how much is structural?
Mr. Bernanke. I don't have a precise number, but we have
done a lot of work looking at this. And I would say that the
bulk of it is still cyclical. The risk is that if it goes on
long enough, it will start becoming structural as people lose
their skills and their connection to the labor force.
Mr. Campbell. Is it fair to say that you have control only
over monetary policy, not fiscal policy and government policy,
and that to the extent that unemployment is structural, that
that is something that is really out of your purview to deal
with, be it QE2, or any other form of monetary policy?
Mr. Bernanke. That's correct.
Mr. Campbell. I'd like to talk about what Mr. Ryan referred
to a minute ago, about this thing of spending and investment.
There's a lot of talk these days that what we need to grow the
economy is spending: government spending, spending by
individuals, spending by consumers. To me, there's a great
distinction. And the term investment is thrown around a great
deal, but investment means that someone puts money to work,
expecting a monetary return. And that is very different from
spending. In order to achieve long-term growth, stable
employment growth, isn't investment, from a true definition,
and savings where we should be trying to head, rather than just
focusing on consumer spending or government spending? You
mentioned earlier today that we should remove the disincentives
to saving and would. Shouldn't we be removing disincentives to
saving and investment, to get this long-term growth, rather
than all this focus on spending in both the public and private
sector?
Mr. Bernanke. Congressman, I mentioned, improving the tax
code to reduce disincentives for productive activity. I think
it is very important, for individuals and for businesses and
for investment. The government does have some role in providing
infrastructure and education and so on, obviously, but the way
that is done and the level which it is done is a matter for
Congress to decide.
Mr. Campbell. Do you believe that we currently, since you
mentioned disincentives to saving, have disincentives in place,
that block savings or investment from the private sector that
could add to growth?
Mr. Bernanke. I think there would be a lot of agreement
that our tax code is very complex, and is not conducive to the
most productive activities in many cases.
Mr. Campbell. Switching to QE2, the flavor of the day, as
it were, have you fully implemented QE2 yet?
Mr. Bernanke. No sir. We announced an intention to purchase
six-hundred-billion, between November and June, and so we are
about halfway through.
Mr. Campbell. About halfway through. When QE2 finishes,
presumably in June, and you mentioned that you could reverse it
or whatever, what are the metrics that you are following that
would lead you either to believe that you should have QE3 or
that you should reverse QE2?
Mr. Bernanke. Well, first, there's the question of
efficacy, and we are seeing the intended results in terms of
financial markets and in terms of financial conditions. So, in
that respect, we think that it is being successful. In terms of
looking forward, we will be trying to assess whether the
recovery is on a sustainable track. And things have moved in
that direction, which is encouraging. And we will be trying to
assess whether inflation is low and stable, at around two
percent or a bit less, which we think is about the right level,
and most other central banks think is about the right level.
And looking forward, if that appears to be the trajectory we
are on, then additional action would not be necessary. If we
are still in a situation where the recovery does not seem
established, and deflation risk remains a concern, then we
would have to think about additional measures.
Mr. Campbell. What's the trigger that causes reversal?
Mr. Bernanke. If the economy begins to grow very quickly
and inflation risk begins to rise, then we would reverse it.
Mr. Campbell. Okay. Final question. I think Mr. Ryan
alluded to this earlier. There's been fairly significant moves
in the 10-year and 30-year Treasury yields, just recently. What
do you think's causing that? And are you concerned? Or, what is
your opinion?
Mr. Bernanke. No, I'm not concerned. I think it reflects,
primarily, increasing optimism about the U.S. economy, and it
is natural for the term structure to move in that way when
investors become more optimistic about growth.
Mr. Campbell. Thank you.
Chairman Ryan. Mr. Blumenauer.
Mr. Blumenauer. Thank you, Mr. Chairman. Thank you for
joining us again. You come at a time when there are lots of
people, including in Congress, who are very interested in
helping you do your job better: critiquing it, maybe
undertaking some things that would constrain direct control.
But I got from your message that there are a couple of things
that Congress should be focusing on, and our primary job. One,
I guess we are all in the business of making sure there is
confidence in the United States Government, meeting its
obligations, not putting an undue cloud over it. Then you
referenced the aging population and health care, which, again,
is within our purview. There have been, it is no secret, a lot
of suggestions as we approach the debt ceiling and it is widely
acknowledged, no one disputes the need to extend it. There are
discussions about conditions and terms, under which some of it
might happen where we will change the scheduled debt repayment.
Has this been, in your experiences, both as head of the Federal
Reserve and as an economist and a scholar, has this been the
routine? Has Congress done this regularly in the past?
Mr. Bernanke. Well, there have been, in the past, political
battles, and both parties have done this, over whether or not
to raise the debt limit.
Mr. Blumenauer. Excuse me. I'm talking about, has Congress
ever, in the past, established conditions on limitations on the
debt ceiling, or the sequencing, changing the order of business
so we do not just honor our obligations and make sure that
there's adequate head room?
Mr. Bernanke. If you are talking about the prioritization
of payments, no, that is not happened, to my knowledge.
Mr. Blumenauer. Or have there been conditions attached to
debt ceiling increases in the past?
Mr. Bernanke. I don't know if there have been direct
conditions. Obviously, there have been negotiations about
budgetary matters which have preceded those decisions.
Mr. Blumenauer. Setting that aside. We will always do that.
That's our job. I think that is appropriate. And we will get
down into cases, in terms of cutting, and I think there may be
actually some bipartisan initiatives that would implement some
of the recommendations, for example, that came from the
President's Debt Commission. I'm just very interested in the
perception. If we are going to do something for the first time
that changes the repayment, or we are going to have some sort
of onerous conditions, or we are actually seriously threatening
not to raise the debt ceiling, to what extent does that impact
global perception, market confidence in the United States as
being a good repository for their investments?
Mr. Bernanke. We want to address our fiscal issues, but my
argument is that we don't want to cast any doubt or uncertainty
on the fact that the United States will make good its
obligations. I think that is critical.
Mr. Blumenauer. And I think it is clear if, well, I will
just say, I appreciate you have some limitations in terms of
what you say, but I think it is obvious that if we are going to
start playing games with something as routine as this, holding
out the prospect that we are not going to actually meet our
obligations, and even if it is seriously considered, not
negotiations, not disagreeing about some elements, but
considering that as the nuclear weapon. That has got to shake
that confidence.
You mentioned health care. And that is something that is
within our purview. There are some differences of opinion, some
are not interested particularly in advancing the reforms that
are in place as opposed to, perhaps an opportunity to
accelerate, to actually put teeth into what we are doing and
get down to cases to actually change that health care curve.
From your perspective, are we better off actually following
through on the commitment to deal with health care reform and
dealing with long-term costs or making this just one of these
areas that we continually talk about, push back and forth, and
make no progress?
Mr. Bernanke. It's out of my purview to support or not
support a specific plan, but I do think it is very important
and essential to the long-term fiscal situation that we address
the costs, both for the private economy, but also for the
federal budget, which are going to be increasingly a dominant
part of our spending.
Mr. Blumenauer. Thank you, sir.
Chairman Ryan. Mr. Chaffetz.
Mr. Chaffetz. Thank you, Mr. Chairman. Mr. Chairman, thank
you for being here. In January, you said that the Federal
Reserve would not bail out state and local governments. Is that
because you have no intention of bailing out the local
governments or that you physically can't do it because the law
precludes you from doing that?
Mr. Bernanke. I would say both.
Mr. Chaffetz. You mentioned that in page 8, at the very end
of your testimony here, you said you mentioned that enhancing
long-term growth potential of our economy, quote, by reducing
disincentives to work. What are the disincentives that you see
to work? What are the disincentives to work that you mentioned?
Mr. Bernanke. Well, I'm speaking generally about the tax
code and also transfer programs that create, essentially, a
very high marginal tax rate on earned income. And to the extent
that we can simplify our tax code, reduce rates, broaden the
base, eliminate the complexity, et cetera, in ways that would
make it more financially attractive for people to work, save,
invest, and so on; it is obviously good for our economy.
Mr. Chaffetz. Anything above and beyond the tax treatment
that you have looked at that fall into that category from your
perspective?
Mr. Bernanke. Again, tax and transfer policies would be the
ones. I don't know what else are you thinking of, but those are
the two that I would focus on.
Mr. Chaffetz. Thank you. The CBO records Fannie, and
Freddie, and Budget, and uses fair-value accounting to measure
the financial impact of the two GSEs. Moreover, not only does
the CBO consider Fannie and Freddie as federal government
entities, but it also treats the mortgages they guarantee as
obligations of the government, scoring them on a market-risk
adjusted present value basis. Do you agree with this budgetary
treatment?
Mr. Bernanke. It's important that we take into account, in
our budgetary planning, the cost and the prospective costs of
Fannie and Freddie. Now, there are different ways to do that.
As I understand it, the Fannie and Freddie are not fully
consolidated with the federal budget and that is a decision
that is been made to try to keep some separation between the
government and those two institutions. But clearly, as we think
about our budgetary situation, the costs that have already been
incurred and may still be incurred for Fannie and Freddie are
obviously something important to keep in mind.
Mr. Chaffetz. The Fed's been the biggest buyer of
treasuries over the last several months. And the reports are
that the Fed is now past China as the biggest owner of
treasuries. Does that distort the bond markets and create
dependency, and is this something that the Fed should be
worried about?
Mr. Bernanke. We've been very careful to not distort the
bond market. We've paid a lot of attention to that issue. We've
monitored the market function. We've made sure that we don't
own too high a fraction of any particular issue of government
bonds, and our clear sense is that the treasury markets are
functioning very normally, very liquid, and we don't see our
policy, which again, is a temporary policy, as creating any
particular problems for the market itself.
Mr. Chaffetz. There have, Mr. Chairman, there have been
discussions out there in the newspapers and whatnot, other
countries talking about pegging oil and whatnot to something
other than the dollar. What type of concern do you have about
this? Do you see this as a reality?
Mr. Bernanke. The currency in which goods are invoiced is
really of not much consequence. Another question, though, a
broader question is what currency is the reserve currency? The
currency that countries hold their international reserves in?
And the fact is that the U.S. dollar share of 60 percent plus
has been pretty stable, and I really don't see much likely
change in that. In fact, lately, given the problems of the
Euro, et cetera, the dollar and the perspective growth in the
U.S. economy, the dollar has actually been looking a little bit
more attractive relative to some of the other currencies in the
world.
Mr. Chaffetz. Thank you, Mr. Chairman. I yield back.
Chairman Ryan. Ms. McCollum.
Ms. McCollum. Thank you, Mr. Chairman. Chairman Bernanke,
thank you for being here. I believe that we have a lot of work
ahead of us, and I want to thank you for the work that you did
in stabilizing our economy in the past, and I look forward to
hearing some of your advice, suggestions, and ideas on how we
move forward with getting out of the Great Recession. And I
want to be part of the solution, and we hear a lot of talk here
in Congress about spending, but I'm also concerned about a lot
of the tax perks that lobbyists have been very successful in
getting for special interests in our tax code, and I think that
we need to put everything on the table.
But having said that, today, we've focused on spending
quite a bit, as some of the questions have come through. And in
fact, I'm going to paraphrase a popular Tea Party slogan; it
goes something like, quote, The federal government doesn't have
a revenue problem, it has a spending problem.
Now last week, Chairman Ryan put forward his best effort to
reduce the deficit with spending target cuts, that is $41
billion from the fiscal year 2011 budget. The Republican target
reduces the fiscal year 2011 projected deficit by about 2.5
percent. That leaves 97.5 percent of the deficit intact.
Now, in an extreme scenario, if all 176 Republican Study
Committee members were able to have their way and take control,
they would be allowed to cut four times what Chairman Ryan's
best effort is. But that would only then still only represent
10 percent of the federal budget deficit for fiscal year 2011,
still leaving more than 1.3 trillion.
Chairman Bernanke, it seems clear to me that the deficit is
not just a spending problem. Is it possible to reduce the
federal deficit to responsible levels without capping or
cutting defense spending and without looking at the tax perks
that many corporations and lobbyists have been successful in
getting?
And my second question is: With the type of cuts that are
being discussed, do you think that we need to be insightful
when making these spending decisions on what to cut, on the
impact of jobs as well as U.S. competitiveness, and the global
economy? I think we need to be careful of gutting domestic
investments in education, infrastructure, and R&D in the next
decade, because we might see reverses that would put us at a
competitive disadvantage.
Mr. Bernanke. Well, on your second question, I'm hoping to,
obviously, it is very important that the deficits be brought
under control, but it is not just a matter of total spending
and total revenues, it is also how smart is the spending and
how are we using it? And the tax code, are we doing it in a way
that is constructive for growth and for competitiveness?
So, I would urge the Congress not only to talk about total
budget numbers, but also to think hard about the various
programs and tax provisions to make sure that they are growth
friendly, and that is a very important part of your job.
In particular, you mentioned perks, et cetera. I think one
direction that at least should be considered would be, in the
corporate tax code, for example, to reduce a lot of loopholes,
to broaden the base, and therefore be able to lower the tax
rate, which is now soon going to be the highest in the
industrial world so that the decisions made by corporations are
based, you know, not on tax distortions, but rather on the
economics of where, for example, they should locate their
plants, and so on.
So, I do think that growth friendliness is a very important
part of this and that lower rates and broader base is something
that most economists would agree is a good direction to go in
the tax code.
On short-run versus long-run, I, again, I understand
there's a lot of focus on this year's budget. Without
commenting directly on that, I do think that in order to be
credible, given that the budgetary problems get worse over
time, that is as the baby boomers retire, as health care costs
rise, and so on, given that the prospective deficits are rising
over a long period of time, I would hope that a good bit of
your discussion will be about the long-term over the 10, 15, 20
year horizon and to the extent that you can change programs
that will have long-term effects on spending and revenues. That
will be a more effective and credible program than one that
focuses only on the current fiscal year.
Ms. McCollum. Thank you, Mr. Chairman. As you know, we are
setting the budget. We're setting the spending and Ways and
Means does its issues with the tax code and addressing what I
hope will be any tax perks. But I can't make a decision in
isolation, so I look to all of us to put everything on the
table so that we make a well-rounded decision as we move
forward with the budget. So, Mr. Chairman, I'll be looking to
see what your comment is.
Chairman Ryan. Thank you, Ms. McCollum, and I can only say
what we are doing right now is our best; it is our first effort
at getting fiscal control under this place. Mr. Ribble.
Mr. Ribble. Thank you, thank you, Chairman Ryan, and thank
you, Chairman Bernanke, for coming in today. I'm one of the new
freshman members. I have spent the last 30 years working in the
private sector owning my own business. My questions today are
going to relate around kind of two central areas. One is the
debt ceiling that will hopefully get some understanding there,
and then also, your take on lending a small business and inside
businesses. But first of all, and I understand it too, that it
might be reckless for the U.S. government to default on this
debt. Would you agree that that is a true statement?
Mr. Bernanke. Certainly.
Mr. Ribble. Okay. Is it not also reckless to have the level
of uncontrolled spending that the American people are
witnessing by this Congress in the last 20 years or so?
Mr. Bernanke. Absolutely, and I don't mean to imply you
shouldn't be addressing that, I just think you should do it as
a separate measure.
Mr. Ribble. Yeah, okay. Understood. As a business owner,
often, the lenders would impose their own debt limit on many
companies. If we were reckless in our spending and our balance
sheets didn't look very good, at some point they impose their
own debt limits. Is it not likely at some point that the
lenders to the U.S. Government are going to impose a debt
ceiling of their own?
Mr. Bernanke. The bankers' debt limit is really a spending
limit, it says you can't spend any more.
Mr. Ribble. Correct.
Mr. Bernanke. And you have already made decisions about
what the government is going to spend and what revenues it is
going to collect. That implies a deficit, and that has to be
financed. If you set a limit that is too low, that just means
basically that you can't borrow money that you have already
spent. So, it is really an extraneous thing, once you set
spending and once you set taxes, you essentially are, by
definition, defining how much you have to borrow. And if you
don't allow the government to borrow that, then, again, the
only way to do that is not to make the required interest
payments, which, your banker wouldn't like that, I'm sure.
Mr. Ribble. Correct, sure. Or the other alternative would
be to either increase revenue or decrease spending so that you
didn't exceed the debt. Correct?
Mr. Bernanke. If that can be done before the debt limit.
Mr. Ribble. Sure, sure. And my point is going back to the
discussion of long-term because you just mentioned moments ago
that it is important for us to look at a 10 or 20 year horizon.
The American people are cynical that we are able to actually do
that in such a way that in 20 years from now, we are still
having this same discussion over again. And I think the fear
that the American people have is that at some point, lenders
are going to say to us, That's all we are going to lend, or
We're going to price this at such a place that would be
catastrophic to the economy.
Mr. Bernanke. That's a risk, yes.
Mr. Ribble. Do you see that as a legitimate risk over the
next decade?
Mr. Bernanke. Yes.
Mr. Ribble. Okay. Thank you for that comment. There is
almost a constant stream of constituents coming into my office
since I have arrived here in Washington, D.C., discussing the
difficulty that they're having finding, financing, and lending;
their ability to borrow has been greatly restricted in the last
24 months.
Can you talk to us a little bit about what it might take
for local, medium, and national banks to begin to, once again,
to loan money? What's causing the restriction?
Mr. Bernanke. Well, first, part of it came from the fact
that banks, after the crisis, were deleveraging and cutting
back themselves. Part of it came from the fact that the economy
was very weak, and therefore, borrowers didn't look as
attractive in their cash flows, their collateral values were
less attractive than they were before the crisis.
So, there's both a supply and demand element to that. Now,
I think that both of those things are looking better. Banks
have increased their capital. They're feeling much more stable;
they're much more liquid. And our sense, and we do surveys, is
that banks, while they still have quite tight standards, are at
least beginning to ease those standards and beginning to look
more actively to find good borrowers. And so I think that is
improving somewhat.
And likewise, as the economy strengthens, and we are seeing
for example, increases in the prices of commercial real estate,
which is what many small businesses use as collateral, that
there'll be more small businesses that can qualify for credit.
So we think things will be getting better slowly. The Federal
Reserve is working very hard with both banks and small
businesses to try to make sure that, at least from a regulatory
point of view, that we are not preventing banks from making
loans that they should make. We want them to make good loans.
And we have been very clear about that in our instructions to
banks and our training of our examiners.
Mr. Ribble. Okay. Thank you very much. Thank you, Chairman
Ryan.
Chairman Ryan. Mr. Honda.
Mr. Ribble. Thank you, Mr. Chairman.
Mr. Honda. Thank you, Mr. Chairman. Welcome, Mr. Chairman.
In your speech to the National Press Club on February 3, you
noted that unemployment, which is, to me, the key economic
indicator for the well-being of American people, will remains
stubbornly high and that these conditions will improve
gradually.
You also noted that the trajectories of our national
deficit and debt are unsustainable. You went on to state that
among the course of corrections needed to address these
problems are investments in the skills of the workforce, which
I am going to simply call education, and policy changes to
reduce our deficits and debt.
I have two questions. My first question is in regard to the
latter. The current rules of the House have taken the War on
Terror off-budget, meaning that the costs of our conflict in
Iraq and Afghanistan and other actions associated with the so-
called War on Terror can be financed with debt.
Afghanistan alone represents the costs of approximately $10
million per hour, 325 million per day, and $150 billion per
year. Disturbingly, this is our country's largest long-term
investment. So my question is will the savings that resulted
from ending combat operations associated with the War on Terror
reduce projected deficits?
Mr. Bernanke. If those expenditures were not necessary, of
course they would reduce deficits, but I'm not qualified to
comment on whether or not we should be engaging in that
conflict.
Mr. Honda. But the budgetary action that we've taken, that
we put it aside as, in the past we call supplements. What
impact does that have on our debt and our deficits?
Mr. Bernanke. Well, clearly, additional spending for
military or any other purpose, all else equal will add to the
deficit.
Mr. Honda. So, if there's no revenue with sustaining that,
and we take it off budget, we are essentially creating an
automatic deficit and then a debt.
Mr. Bernanke. That's right.
Mr. Honda. Thank you. My second question, Mr. Chairman, is
that I think it is very important to note that among other
investments, including encouraging the scaling up of U.S.
manufacturing by incentivizing purchasing new machinery and
investment, promoting R&D, rebuilding public infrastructure,
you single out education as an area of public investment that
will promote economic growth. Would you explain to this
Committee how public investment in education promotes economic
growth?
Mr. Bernanke. Well, one of the key elements in economic
growth that a lot of economists have identified is the skills
of the workforce. And I would like to say that there are a lot
of ways to impart skills. There is K though 12 education and
college, certainly, but there's also junior colleges, community
colleges, technical schools, on the job training, a variety of
different ways, and that is always been a strength of the
United States, that we have a diverse set of ways to help
people get training. But I think that should be something we
should be at least paying some close attention to.
It may or may not be a matter of money. It may or may be a
matter of spending more wisely, but clearly, one of the
concerns we have about our society is the increase in
inequality between the richest and the poorest. There are many
reasons for that, but no doubt the largest reason is that
there's a part of our society which is not receiving the
training that they need to get good paying jobs, and that is
going to be a problem for us and it is a problem for our
economy.
Mr. Honda. With the education, I would probably call that
an investment. And, making that investment into education would
be something that we can count upon as far as a return on our
investments. And if we have an education system that is been
completely decimated, what kind of impact do you think it would
have on our investments, relative to the entire picture that we
have before us today?
Mr. Bernanke. Well, it is very important to have a good
education system, and we are not doing well on that count, and
to help people get skills, there's a lot of dispute about
exactly how to accomplish that, and you know, we could talk
about that for quite a long time. So, I think we need to think,
as a country, about how we can both increase the quality of our
training and also make sure that it is broadly spread, so that
everyone has a chance to get the skills they need.
Mr. Honda. Okay, and I understand that. Education comes in
a lot of forms. In our investment in R&D, and investment in the
other kinds of programs that we have, but the system of
education and the Department of Education would seem to be one
place where we can focus on this very complex problem of equity
and equal distribution resources. Would you agree on that or do
you have other comments on that?
Mr. Bernanke. Well, the Department of Education is
certainly one place that can help review, and understand, you
know, what's working, what's not working. I think, as a
country, we are having a sort of a crisis of confidence, so we
know how to provide broad based skills. So, I think that is
really part of the problem; it is not just resources, it is
also, you know, how do we do this better? And it is not clear
that our models are working very well right now.
Mr. Honda. I appreciate your response. Thank you, Mr.
Chairman.
Chairman Ryan. Mr. Huelskamp is next.
Mr. Huelskamp. Thank you, Mr. Chairman; I appreciate Mr.
Chairman being here today. And I had a couple questions,
particularly on the issue of job creation, and I'm a little
confused from the testimony. On one hand, you do indicate, in
your opinion, we are in a period of economic recovery. Is that
correct?
Mr. Bernanke. Yes.
Mr. Huelskamp. On the other hand, you do indicate that the
unemployment rate is apparently not where you would like it to
be. A couple questions on that. What is the targeted
unemployment rate that you would be comfortable with?
Mr. Bernanke. Well, the FOMC, the Federal Open Market
Committee, makes projections on what the long run sustainable
unemployment rate is, and currently those projections are
between five and six percent of the labor force. That would be
a more or less, a more normal level. That being said, I want to
be clear that that doesn't mean that we would maintain maximum
monetary policy accommodation until we reach that level. We
have to withdraw that accommodation at some point before we get
there, but that would be the area where we hope we could get
back to.
Mr. Huelskamp. So, five to six percent. Is there a
projected time period where that might occur?
Mr. Bernanke. At the rate we are going, it takes about two
and a half percent real growth just to keep even because you
need about that much growth just to make jobs for the new
entrants to the labor force. So, if we were to average, just
thinking hypothetically, four and a half percent growth, which
is quite ambitious, it would still take us another four years
or so to get down to the five to six percent range, so it could
take quite a long time.
Mr. Huelskamp. And at the two and a half percent level, how
many years would it take to reach?
Mr. Bernanke. It would take, essentially, I don't want to
say infinite, but it would be very, very slow.
Mr. Huelskamp. Okay. And our current rate of growth is what
for the last quarter?
Mr. Bernanke. In the last quarter, it was 3.2 percent, and
we are looking for 2011 to be somewhere between three percent
and four percent, so that should bring unemployment down over
the year, but not very quickly.
Mr. Huelskamp. And at 3.2 percent, how long would it take
to reach the five to six percent goal?
Mr. Bernanke. Well, that would lower unemployment by about
three to four tenths a year. So that would be about 10 years.
Mr. Huelskamp. Ten years, but you still think your policies
are promoting success if we are still projecting 10 years until
we reach a decent unemployment level.
Mr. Bernanke. I am not projecting them. You asked about the
fourth quarter, and that was 3.2 percent. We think that it is
going to pick up in 2011 and possibly even further in 2012,
depending on a variety of circumstances.
Mr. Huelskamp. And Mr. Chairman, I appreciate that. And we
are all hopeful it does that, but one thing you do note is that
you said, ultimately, at the appropriate time, the Federal
Reserve will normalize its balance sheets by selling these
assets back into the market.
A couple questions about that. If you believe it is a
thriving economic recovery, can you provide information why you
apparently believe that a sell-off would not have the opposite
effect?
Mr. Bernanke. Well, it is the same pattern that we always
see with monetary policy, which is that low interest rates help
stimulate the economy. Once the economy has a self-sustaining,
you know, once it sort of reached escape velocity, so to speak,
then that monetary fuel can be withdrawn. And usually, with
raising short-term interest rates, in this case it would
involve both raising short-term interest rates and reducing the
size of the balance sheets. So yes, as the economy begins to
get stronger and develops its own momentum, then it needs less
monetary policy support, and we have to begin to withdraw it,
otherwise we would risk inflation, as Chairman Ryan was
concerned about.
Mr. Huelskamp. So, even though we are kind of looking at
four percent growth, maybe three, and you are comfortable that
it won't take 10 years to return to normal employment levels;
you are not certain. Is it more like five years we might have
those normal employment levels?
Mr. Bernanke. It could be four or five years. I hope it is
less than that.
Mr. Huelskamp. Yeah, I do too, and so do my constituents,
Mr. Chairman, and my concern that if on one hand, you claim the
policy is driving economic growth, even though it is very, very
slow, from what would be the target, my fear would be that the
reverse policy would potentially have that other effect.
Last thing, a quick question. I know you picked $600
billion. Can you tell us again why you picked $600 billion
versus $500 billion or say, $750 billion for the target?
Mr. Bernanke. We tried to make an assessment. We asked a
hypothetical question: If we could lower this federal funds
rate, how much would we lower it? And a powerful monetary
policy action at normal times would be about a 75 basis point
cut in the federal funds rate. We estimate that the impact on
the whole structure of interest rates, from $600 billion, is
roughly equivalent to $75 basis point cut, so on that
criterion, it seemed that that was about enough to be a
significant boost, but not one that was excessive.
Mr. Huelskamp. Thank you, Mr. Chairman.
Chairman Ryan. Ms. Moore is next.
Ms. Moore. Thank you so much, Mr. Bernanke. I have seen you
many times on the Financial Services Committee, but I have had
such a low ranking that it is been such a hard time getting an
opportunity to actually ask you a question.
I do want to thank Mr. Huelskamp for his last question,
because I was very curious about how you say in your testimony
on page four that exit from the current, highly accommodative
policy, at an appropriate time, would be very easy, and I think
you may have answered my question when you spoke with him.
QE1 and QE2 have been very important, I think, in terms of
preventing a financial catastrophe, and QE2 has been supported
by a lot of economists. The Chamber of Commerce has endorsed
it, American manufacturing is grateful for it. As a matter of
fact, the manufacturer in my district, Harley Davidson, is
really grateful for a QE2 in terms of boosting their exports.
But, you have been accused of everything from creating an
environment for inflation with this QE2 policy. Everything from
that to causing the riots in Tunisia and Egypt, so I guess I
would like for you, because commodities are traded on dollars,
and they say that food prices, commodities have gone up and the
speculation on commodities have risen. So this QE2 policy
really has been very inflammatory with respect to destabilizing
the region. Can you please respond to that?
Mr. Bernanke. I'll be glad to. First of all, it doesn't
matter what commodities are priced in; what matters is the
currency of the country that is making the purchases, and they
don't use dollars in Egypt. They use Egyptian pounds, and when
the dollar weakens, which it has done very slightly, that would
make the pound stronger, make them better able to buy
commodities.
But I think the real issue in Egypt, for example, is the
fact that Egypt is the world's leading importer of wheat, and
we've just seen very bad harvests in Russia and Eastern Europe,
which are their primary sources of wheat. And that is what's
really happening, is that there are, on the agricultural side
there have been droughts and other problems around the world
that have affected crops.
Monetary policy can't add one bushel of corn to the world.
I mean, basically, that is determined by agricultural
productivity, and by the weather, and those factors. And we've
just seen on the agricultural side that a combination of supply
issues, like weather, crops, and increased demand from the
rapidly growing emerging markets has put pressure on those
supplies, and that is where that is coming from. I think
monetary policy in the United States has really very little to
do with the price of wheat in Egypt.
Ms. Moore. Good. And with respect to your creating an
environment for increased inflation with QE2 and creating an
inflation bubble here in the United States and traders being
leery over these inflation threats. I am wondering what your
response is to QE2. Because you say that you can exit this
monetary accommodation; because eventually you are going to
have to raise interest rates. Walk us through how you will exit
this without creating inflation.
Mr. Bernanke. Well first, both actual inflation and
expected inflation currently are low in the United States.
Markets are not expecting high rates of inflation. Like I said
before, the five year tips break even, which is a measure of
market expectations of inflation: it is a little bit over two
percent, which is about where we'd like it to be.
Obviously, we can't continue this level of monetary
accommodation indefinitely because at some point, it would
begin to create inflation concerns. And so, at some point, we
do have to unwind some of this stimulus. In terms of how we
would do it, of course, the usual question, the difficult
question is choosing the right moment. But once we've decided
when to do that, we can raise short-term interest rates as
normal. We would do that by raising the interest rate paid on
excess reserves to banks, which in turn would make them
unwilling to lend in short-term money markets below that rate,
so we can raise the short-term interest rate pretty much as we
always do when we tighten monetary policy.
In addition, we have a number of tools, which I have talked
about in great detail before the House Financial Services
Committee that can help us drain bank reserves out of the
system and reduce the liquidity in the system. For example, we
had just recently been testing a time deposit program, whereby
banks lock up their reserves with the Fed for a period of time
instead of having them liquid and available whenever they want
them.
So we do have the tools to do it. As always, we have to
make the right call about when, you know, when the balance of
risk is starting to shift, and we think the economy is strong
enough and inflation has risen, and it is time to take action
to avoid problems down the road, but it is really not all that
different from normal monetary policy, in that respect.
Ms. Moore. Thank you very much, sir.
Mr. Bernanke. Thank you.
Mr. McClintock. Turns out I'm next. Mr. Chairman, thank you
for being here. Earlier today, you testified before the
Committee that not raising the debt ceiling would be a very bad
thing because, and you specifically singled out, it would mean
that interest would not be paid on the debt. In January, you
told the Senate Budget Committee that we are not seeing
extraordinary stress in the municipal markets, which suggests
that investors still are reasonably confident that there won't
be any default among major borrowers. One reason they might
believe that is because most states have rules, which put debt
repayment and interest payment at a very high priority above
many other obligations of the state and locality. Wouldn't it
be a good idea if the federal government did the same thing?
Mr. Bernanke. Well, it would reduce the risk with the debt
limit, that is for sure. We haven't done that yet, of course.
This comment that it would take some time to change our systems
and computers, and so on, to make sure that we could change
that prioritization in an appropriate way, but doing that
would, I think, reduce some of the risks associated with the
debt limit. But again, let me just be clear that we would need
some notice to make that practical.
Mr. McClintock. But would you recommend it as a long-term
reform?
Mr. Bernanke. Frankly, I, again, I would just prefer that
you put the debt limit issue aside and just address directly
the long-term fiscal problems, which I admit, and I agree, and
in fact, I have been emphasizing, are very serious and need to
be addressed. I'm not in any way saying that you don't need to
address these problems; what I'm just saying is that that
particular device, you know, at least under current law, has
some risks in terms of the possibility that we would default on
debt.
Mr. McClintock. What is the percentage of U.S. debt held by
the public, that is held by American investors?
Mr. Bernanke. Less than half, I think.
Mr. McClintock. Roughly half.
Mr. Bernanke. Yeah.
Mr. McClintock. And what's the percentage of U.S. debt held
by China?
Mr. Bernanke. About a quarter.
Mr. McClintock. A quarter of the total debt held by the
public, my understanding is about 9.5 percent.
Mr. Bernanke. If you have the numbers there, you may be
right. But I think they hold more than two trillion of U.S.
Treasury, and that would be closer to 20, 25 percent.
Mr. McClintock. Okay. Well, nevertheless, giving priority
to debt repayment, we are still, apparently, overwhelmingly
favor American investors to Chinese, would it not?
Mr. Bernanke. Well, certainly. But, more importantly, the
financial markets globally are where we borrow and if investors
lose confidence in us, they won't lend to us in the future,
which means that we will have a fiscal crisis almost
immediately.
Mr. McClintock. Right, which means guaranteeing our debt
service would provide greater confidence to those investors,
would it not?
Mr. Bernanke. It would, again, subject to technical ability
to make that reprioritization effective in a short-time.
Mr. McClintock. Mr. Chairman, you also testified today that
as the economy begins to grow rapidly and inflation begins to
rise, the Federal Reserve would then reverse the qualitative
easing. And I'm just wondering how does the Fed intend to drain
$1 trillion in excess reserves.
Mr. Bernanke. Well first, we can raise interest rates
without even draining reserves, as I mentioned, by raising the
interest rate paid on excess reserves to banks. But we have
released three other tools for draining reserves.
Mr. McClintock. If I could just pause right there. How much
would you have to increase?
Mr. Bernanke. What we would do is we want to raise the,
say, we wanted to raise the short-term interest rate to one
percent. Then if we paid one percent on excess reserves to
banks, they would not be willing to lend money to the money
market at less than one percent, and that would essentially
achieve our objective right there. But there are other tools we
have to drain reserves, including time deposits, reverse repos,
asset sales, and perhaps others.
Mr. McClintock. As you do that, what's the impact on the
economy?
Mr. Bernanke. Well, it'll be a tightening monetary policy,
again, as interest rates will go up. And that will slow the
economy, but that is what taking away the punch bowl always
does. It means that the accommodation is no longer needed, the
economy can move forward on its own, and so the point there is
to try to normalize interest rates, normalize financial
conditions so that you can get back to a healthy growth path
without inflation.
Mr. McClintock. There are some of us long enough of tooth
to remember a day when we had, not only double digit
unemployment, but double digit inflation and interest rates at
21 percent. What can you tell us to allay our fears?
Mr. Bernanke. Well, I can also mention that since the early
1980s, between the early 1980s and 2007, when central banks
began to understand the critical importance of keeping
inflation low and stable, that the U.S. economy not only had
low inflation, but it also had a much more stable economy, and
that was a 25 year experience. So the difference is that we
have no illusions about it being not so bad to let inflation
rise. We are strongly committed to keeping inflation low and
stable, and we will do so.
Mr. McClintock. Next is Ms. Castor.
Ms. Castor. Thank you very much, and welcome, Chairman
Bernanke. Not unlike many places in the country, my home state
of Florida was hit particularly hard by the Great Recession. It
seemed like it started earlier in Florida, in 2007, because the
housing bubble burst, and we were so tied to real estate
development. And the job losses happened so quickly, at the end
of 2008 and early 2009, and we are still in the double digits
in Florida. You say in your testimony that there is some
optimism for on the unemployment front, but we need more.
I think folks at home look at the economic indicators, and
they see there is plenty of hope out there; corporate profits
are way up, consumer spending is up, we've had six straight
quarters of economic growth, but the bottom line for families,
it is that job. And they need the swifter job growth.
The economic drivers in my area, the port, the airport, the
universities, and research centers, the public schools, and
small businesses, and tourism, and businesses; and all of them
benefited by the Recovery Act investments. The Recovery Act
investments are coming to an end now and business owners and
others in the community are torn; they're hearing this
schizophrenic message from Washington.
They understand that we've all got to live within our
means, and they do it every day. But they also understand that
those infrastructure investments and keeping the colleges and
universities healthy and able to do the research, simply
attracts private investment and allows them to hire, in the
long run. So they're hearing a lot of talk about, We've got to
cut spending, cut spending, cut spending, but they are also, at
the same time, clamoring for additional public investment. It
is only government that can dredge the ports so that the oil
tankers can come in, the cruise ships can come in, all the
private businesses can continue there.
What can you share with them on this schizophrenia between
investment and living within our means and where we should be
headed here in future budget years?
Mr. Bernanke. Well, it is not an easy problem. Of course,
you know, the reason that the Federal Reserve is doing what we
are doing is to try to promote job creation, which we think is
a very serious concern. But Florida, like California, Nevada,
and a few other kind of States, were particularly hard hit
because of the real estate decline.
We do have to live within our means. The Congress needs to
try to find ways to make sure that, over the longer term, that
our revenues and our expenditures are close enough that debt
does not grow without limit. You know, we just really don't
have any choice about that; that is just something we have to
do. But as I tried to indicate in my remarks, at the end, that
doesn't mean we can't think about the money that we are
spending. Can we do it better? Can we use the money more
effectively? Can we do it in ways that will be more growth
promoting? And, you know, one way to do that, for example, is
to think hard about health care costs, which are so very high,
and see whether there are savings there that could be, for
example, that could be put into, sort of more growth friendly
types of investments.
But I appreciate your quandary. You know, we'd like to be
able to undertake all these different projects, but we have to,
at least in the longer term, we have to have a budget that will
be reasonably in balance.
Ms. Castor. So, it would be helpful for me and others to
explain back home what you have said in your testimony
regarding the long-term fiscal challenges confronting the
nation. The two most important driving forces behind the budget
deficit are the aging of the population; they'll like that in
Florida. And rapidly rising health care costs. And the CBO
projections of federal spending for health care programs will
roughly double as a percentage of GDP over the next 25 years,
and may be explained to business owners there that rely on
certain infrastructure investments, investments in education,
and innovation that the strategy is working together to
continue to make those strategic investments, but look at the
long-term issues, especially surrounding health care and the
aging population.
Mr. Bernanke. Yes.
Ms. Castor. Thank you very much. I yield back.
Chairman Ryan. Mr. Flores.
Mr. Flores. Thank you, Chairman. Mr. Chairman. Chairman
Bernanke, thank you for joining us today. I appreciate your
service to the country and to the Federal Reserve.
My first question starts with two principles. The first
principle is there's a natural debt level for any organization,
be it a country, a company, a family, whatever. They cannot be
exceeded without substantial turmoil, and I think you talked
about that in the past, about the turmoil our country will face
if we continue to live beyond our means.
The second principle is that interest rates are made up of
two components. The first component is expected inflation; the
second component is a risk premium, which investors in that
instrument want to receive for the perceived risk, the
instrument.
Treasury rates have gone up quite a bit in the last few
months. Your testimony today says that expected inflation is
going to be low, so that implies a substantial increase in risk
premium, which further implies that we are getting close to a
natural debt limit. So my question for you is: What is the
natural debt limit of the United States government? And you can
answer it in one of a couple forms, either an absolute number,
which would mean you ought to be in Las Vegas gambling, or as a
percentage of GDP. So, I'd like some help with that, please.
Mr. Bernanke. Well first, on interest rates, there is a
third component also, which is the expectation of future short
rates, which in turn, is tied to growth. So, one important
reason that rates have gone up so much, and stock market had
also gone up so much, is that markets are becoming more
optimistic about growth in the U.S. economy, so that is a good
thing.
Now, there may be part of the increase, I don't know how
much, maybe a little bit, that is related to concerns about
government fiscal policy, which is the other part of your
question. There's no magic number for what ratio of debt to GDP
is the limit. If we look around the world, we see that
countries in the 60, 70 range, which is where we are now, are
generally pretty comfortable.
If you look at Greece, which is 120 or Japan, which just
got downgraded, because it is at 200, you know, numbers above
100 then are certainly very concerning. Of course, you always
want to leave some space for a recession, or a war, or some
other kind of emergency. So, I hope that we can stabilize the
debt-to-GDP-ratio somewhere not too much higher than we are
now, would be the ideal thing. But, I don't think there's a
magic number, but the higher it gets, the more of your annual
appropriations are going to pay the interest on the debt. And
that is in a way, a drain on what the government could
otherwise be doing.
Mr. Flores. Thank you. Question number two is: You said
today that we are on an unsustainable path, but in testimony,
or in interviews you gave back in June of last year, you
indicated that you felt like it was inappropriate to reduce
spending or to increase taxes at that point in time.
But still, on the deficit, you said we need to reduce the
deficit. So, you put us, let me rephrase that. If you are in
our seat, there are not many tools left. So, which direction do
you go first? Do you reduce spending? Do you raise taxes?
What's the recommended approach?
Mr. Bernanke. Well, the spending versus taxes or the
composition of spending and taxes is a congressional
prerogative, a congressional responsibility. But what I think
is the right way to do this, which on the one hand, doesn't put
too much pressure on the recovery, which is still ongoing, but
at the same time, makes credible progress towards a balanced
budget and a sustainable fiscal trajectory, is to talk about
longer term windows and look at the 10 year window, for
example, and take actions which are credible, that will cut
spending, perhaps in the near term, but will cut spending more
as you go forward in time, or raise taxes, if that is the
decision that Congress makes.
So, this is a long-term problem. The numbers that we are
looking at go out to 2035, 2050, that is when the problem
really gets, basically, just unbearable. So anything that can
be done now to change that path, change that trajectory going
forward over the next decade or two decades, those are the
kinds of things that will be effective and will have good
impact on the current economy and current interest rates, as
well as restore confidence in our fiscal policy.
Mr. Flores. Thank you.
Chairman Ryan. Mr. Tonko.
Mr. Tonko. Thank you, Mr. Chair. Dr. Bernanke, thank you
for your expertise that you lend to this economic recovery.
When you came before this Committee last June, you predicted
that the economic growth rate, our GDP, would rise to an annual
rate of just over three percent for the last month of 2010, and
that it very well could increase over the course of 2011.
That's nearly a double digit turnaround from the six percent
downturn that we witnessed under the end of President Bush's
administration. Has your forecast, in your opinion, proven
accurate in terms of how you calculated it and its bottom line
result?
Mr. Bernanke. Well, we were disappointed over last summer,
as the economy slowed down, and that is why in August,
essentially, we basically began to take the steps towards this
second round of so-called quantitative easing. Since we've done
that, the markets have strengthened again and the outlook has
improved, and so the numbers you gave, the fourth quarter was
3.2 percent, and now, looking forward into 2011, you know, most
forecasters think between 3 and 4 percent is about right. And
of course, these things are very uncertain, but that does seem
to be about where we, at this point, were predicting.
Mr. Tonko. We hear on the Hill here in Washington, in
Congress, and certainly within the microcosm of the Budget
Committee in the House, different philosophical approaches or
programmatic responses to best grow the recovery of our
economy. That being said, some of our colleagues, from friends
across the aisle, have been very enthusiastic about these
numbers, claiming that the growth that we've seen in the last
three months is related to the outcome of the November
elections.
I would ask, is there, within your calculus for these
projections, was there a result in the November elections that
guided whatever your forecast would be? In other words, did you
need to know who would win the elections?
Mr. Bernanke. We don't take election results into account
in our forecasting, but I couldn't really make a judgment on
that.
Mr. Tonko. I agree with you, that it is more policy-driven
than politics. And so, can you cite for us, what did go into
your calculation, your forecast, on growth and employment? And
specifically, can you emphasize the main elements that we need
to focus on in order to best drive numbers to help the economy
improve and become more stable?
Mr. Bernanke. Well, in terms of what happened since the
late summer, there have been two policy initiatives at the
Federal Reserve, QE2, which really came into effect in August,
because that is when we began to re-invest our maturing
securities and we announced, at least we indicated that we were
seriously considering additional securities purchases. The
other step that is been taken, of course, is the agreement that
took place during the lame duck session about extending tax
cuts and creating a payroll rebate, tax rebate, and so on.
So those two things have, I think, been positive in terms
of near-term growth. Going forward, it is much more difficult
because the fiscal space and the monetary space, and both sets
of policies have much less room to operate than they would have
under normal circumstances. So, as I was saying before to Ms.
Castor, I think it is very important to think about the
composition of what you are doing. Is it growth friendly? Is it
going to increase confidence? And look for things that will,
you know, increase productivity, for example.
Mr. Tonko. Thank you. I appreciate your expertise and would
hope that, within the spirit of bi-partisanship and the growth
of consumer investor confidence, we can move forward with a
progressive bit of policy that will bolster this economic
recovery and lead to the best way to move forward.
Just a final question out of the median annual wage for
American workers, fall into some $26,000, means that just about
that half of our workforce is making less than that $26,000
figure. And at the end of 2010, we okayed a tax plan that
actually raised taxes on those individuals who make under
$20,000 per year, while relieving the tax burden on our
wealthiest families. Since those first payments came home in
mid-January, I have been hearing from dismayed and outraged
constituents on that outcome. If we continue to finance tax
breaks for the top 1 percent, at the expense of our bottom 50
percent of wage earners, how would that impact on the consumer
spending out there, that you noted is necessary to help lead us
out of the economic woes?
Mr. Bernanke. The distributional aspects of taxes are very
contentious. I am sorry I'm not going to be able to really give
you the answer you want, because I think, ultimately, there is
both decisions about equity and decisions about efficiency that
go into those tax code decisions.
So, I am going to leave that particular decision to the
Congress, only note that you have to pay attention to the
overall revenue collection as part of the plan for restoring
budget balance over time.
Mr. Tonko. Why, thank you very much.
Chairman Ryan. Mr. Lankford.
Mr. Lankford. Thank you, Mr. Chairman. Chairman Bernanke
thank you for coming. I'm sure it is your favorite day of the
week, every time that you come up to the Hill and get a chance
to spend the morning with us, so thank you for doing this.
In Oklahoma, where I represent, there have been a very
large community banks that I have chatted with, that are very
frustrated with the regulatory environment that is coming down.
They feel like some of the largest banks in America made some
mistakes, and they're being punished for it. Lending has slowed
down dramatically, and they look at a single element for that.
They look at the regulatory environment that is surrounding
them.
Personal perspective from you: Where do you think the
community banks stand, as far as any need to circle around in
capital requirements and change the rules from discretionary to
now? That is really what the rule is on areas. How do we free
up the flow of money and the lending in smaller community banks
in rural communities?
Mr. Bernanke. Well, first, community banks have really
shown their worth in this lending crisis. As many larger banks
withdrew from small communities or from small business lending.
A lot of community banks stepped up and began to make more
loans, and that just shows the value of their personal
connections and their knowledge of the local community, and so
on.
I absolutely agree with you that small banks should not
bear, and cannot bear, the same burden of regulation that the
largest banks bear. They certainly don't pose the same risk to
the financial system, for example. So what the Federal Reserve
is doing there is several parts. I mean, first, we have added
new committees and advisory groups to our regular routine,
where the board meets with outside committees to create special
roles for community banks. So, we have a new subcommittee on
community banking; we have a counsel of community bankers that
comes three times a year to meet with the board and talk about
their issues; and we want to make particularly sure that as we
implement the Dodd-Frank regulations, for example, which are
mostly aimed at large, systemically critical banks, that we are
very attentive to the possible implications for small banks.
And we do want to do that.
The other thing that we've tried to do, and this is for all
banks, is that we recognize that in some cases after a crisis,
that bank examiners can become very conservative, because they
don't want to see their bank, you know, fail, and be
responsible for that. And as a result, they may put pressure on
banks not to make, what would otherwise be potentially good
loans.
We've done all we can to fight against that by issuing
guidance to our examiners and to the banks, that we want loans
to be made to credit-worthy borrowers by training our
examiners, by having meetings all across the country with small
businesses and small banks. So we are very focused on that
issue, and I think we've made some progress and what I'm
hearing and what we are seeing from surveys is some modest
improvement now, in terms of the lending environment for small
business, and some growth among community banks.
Mr. Lankford. Well, let me just say to you, from the
Oklahoma perspective, there has been growth in that area. It
has been very modest, because there's continued frustration
with individuals that are saying, I need to lend and have
plenty of folks that want to be able to borrow, but I'm tapped
out in all these areas and my regulators are telling me this,
and I'm stuck. And companies in the local areas are saying, I'd
like to borrow, I'd like to expand, I'd like to hire more
people, but currently the bank is hiring more compliance
officers and we are doing less lending. And that is a very bad
formula for what is actually functional for us.
Mr. Bernanke. I agree with you.
Mr. Lankford. Let me mention a couple things. Right now,
you mentioned the high priority for you is dealing with
unemployment, which great on that. Then I'm sure there are
times in different quarters you deal with inflation. How do you
balance out what formula do you work through to say, I am going
to balance, this quarter is going to be more on inflation, this
quarter is going to be more on unemployment numbers. How do you
all make that decision?
Mr. Bernanke. We do it based on a variety of models and
other things that help us project forward, where we think the
economy is going to go. And right now, our models are showing
that unemployment is likely to stay high for some time, as I
was discussing earlier, and inflation, notwithstanding, we know
about the commodity price increases, of course we are paying
close attention to that, but notwithstanding that, underlying
inflation looks to be still pretty low. And so, based on that,
we think accommodative policies are still warranted.
We are very committed to price stability. We are not buying
into any idea that we can get some more employment by letting
inflation get higher than normal. We're not going to do that.
We want inflation to be somewhere around 2 percent, or a bit
less. So, as our models begin to suggest that the economy is
moving towards those desired levels, then, you know, just like
a quarterback has to lead a receiver, we have to begin to move
before the economy gets there because we've got to withdraw
that stimulus in advance of the point to where we get to where
we want to be. So, even though models, and projections, and
forecasts are obviously not always accurate, they are really
our best tool to try to analyze at what point we need to begin
to pull back on that support and begin to worry more about the
inflation side and less about the employment side.
Mr. Lankford. Okay, thank you, Mr. Chairman, I yeild back.
Chairman Ryan. Mr. Ryan.
Mr. Ryan of Ohio. Thank you, Chairman Ryan. I appreciate
it. Thank you, Dr. Bernanke. One of the mandates for the Fed is
to keep unemployment low. There are some folks in town who
think that that should no longer be the role of the Fed. How
would you have negotiated this crisis, and where would we be
today if you didn't have that mandate?
Mr. Bernanke. Well, our policies would probably have been
somewhat similar, because from both sides, I mean, we had both
high unemployment and low inflation, so both of those things
have moved us to be accommodative. That being said, in
situations like this, where unemployment is very high, and
inflation is low, I think that monetary policy does have some
scope to support recovery, and therefore, to help on the
employment side. So, I say that, but again, re-emphasizing that
just like other central banks, the Federal Reserve is very
committed to price stability, and we will make sure that that
happens as well.
Mr. Ryan of Ohio. Would we have the unemployment numbers
today if you didn't have the ability, or the mandate to look
out for unemployment and try to keep it low?
Mr. Bernanke. It is really very hard to tell, because
again, inflation is also very low, so we might have been, we
certainly would have had very easy policies anyway because of
the need to keep inflation away from the deflation zone, to
keep inflation away from zero. That being said, maybe it would
have been somewhat less accommodative.
Mr. Ryan of Ohio. Well I'm just concerned that if we get in
this situation again and the Fed doesn't have that ability,
that we could be in a worse scenario to recover and come out of
this stuff. One of the things that struck me, one of the
gentlemen from the other side asked you about, you said
ambitiously four and a half percent growth, and if we had that
ambitious growth, it would still take five years, and if we had
three-plus growth percent a year, we would take 10 years to get
out of here. That's a lost decade, as far as I can tell. We're
in the same position Japan was in during the 1980s. I mean,
that is unacceptable to me. I'm from Ohio; we have cities in my
district that are 10, 15 percent unemployment. Crime is going
up; we have all these social problems that are happening
because people are out of work. What else could we do here,
from the legislative side that could help drive that number
down quicker?
Mr. Bernanke. It's very difficult and no easy answers given
where we are. The one suggestion I have, and I have been trying
to reiterate this, is that even as you are looking at budget
cuts and balancing the budget, all of which is very important,
it is also important to be thinking about the composition. Can
you, for example, can you make the tax code more growth-
friendly? Can you improve the way your spending is allocated?
Mr. Ryan of Ohio. Put additional investments in
infrastructure, like you mentioned, you know, $50 billion, $100
billion in the next year or two for infrastructure that needs
to get done anyway in education, in job retraining that would
put people directly back to work. Is that something that would
help drive down this unemployment rate quicker?
Mr. Bernanke. What I would like to see it combined with a
longer-term perspective that maintains budget discipline over
the next few years. Otherwise, a risk might be that interest
rates would go up and that would undo some of the benefits.
Mr. Ryan of Ohio. I think we are all in agreement that the
long-term demographics and health care costs, and that is what
we tried to deal with the Health Care Reform Bill, which CBO
says will save us a $1 trillion in the second decade and almost
$200 billion in the first decade, that is what CBO is saying.
And also some disincentives to work that were mentioned
earlier. One of the disincentives to work I experience with
folks in my district is, they're better off being on Medicaid
because they have health care for their kids. Health care
reform is now an incentive to go back to work, because you will
be rewarded with health care. So I think those are two things
that need to be addressed. So I think we need additional fiscal
stimulus to drive unemployment down, we shouldn't be so worried
about inflation in places outside of our country so much, and I
think we've got to worry about jobs here at home.
One final question on Chinese currency, do you still
believe that the Chinese are manipulating their currency, and
if they are, is that fueling the inflation in China? And how is
the manipulation of Chinese currency affecting our ability to
recover here in the United States? So I just wrapped three into
one there.
Mr. Bernanke. Their currency, the renminbi is undervalued;
it would be both in our interest and in Chinese interest for
them to raise the value of their currency, and it would help
them with their inflation problem. One of the things that is
happening, which is a little surprising in a way, is that they
have an inflation problem and the way they are addressing it is
not by raising their currency value, which would reduce the
demand for their exports. Rather, they are leaving it where it
is, and they are instead trying to reduce domestic demand
through higher interest rates. And it would seem like a better
strategy would be to let domestic demand be what it is, and let
people enjoy a higher standard of living in China, and reduce
their exports via a higher exchange rate. So yes, it is a
counterproductive policy both for them and for us, and it is
contributing to the still-large global imbalances in terms of
current accounts that we see around the world. Thank you.
Mr. Ryan of Ohio. Thank you, Dr. Bernanke.
Chairman Ryan. Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mr. Chairman. Dr. Bernanke, it is
a privilege to be here and to bring you greetings from Dillon,
South Carolina, which I have the honor to represent. Thanks for
doing this. Very quickly, I'm going to try and bring us back to
the budget process because we are getting ready to start that
here right away. And one of the things that obviously we look
at, I know you have looked at, is the CBO baseline projections,
which were made available to us, I think, last week. And I'm
comparing it to what I'm seeing happen in the bond market, we
saw I think the 10-year Treasury go through 3.5 percent on
Monday, 3.7 yesterday, I understand as recently as 11:30 it was
still trading above 3.7. When you look at the CBO's projections
for what the interest rates will be over the course of this
year, they assume a 3.4 percent rate for the 10-year Treasury
for the balance of this year. Is it fair to say, sir, that the
CBO may have underestimated the interest-rate environment that
we are going to see for the balance of 2011?
Mr. Bernanke. I would say that since we are at 3.7 now,
that reflects anticipation of higher growth. Of course, as you
know, the rates change pretty radically. I don't happen to know
what the CBO expects for next year. I think for the longer-term
horizon, it is the whole path that matters. But as the economy
recovers and normalizes, you would expect interest rates to go
up.
Mr. Mulvaney. It's 3.8 percent for next year and roughly
3.5 percent over the course of the next several years. My
concern, obviously, is something that you referred to earlier,
which is that we are so exposed on our debt at roughly $14
trillion that they even admit, by the way, the CBO does, that
if they are off by just 1 percent on their estimates for
interest rates, it translates into an additional 1.3 trillion
dollars worth of debt over the next decade.
Brings me to the next issue which you have heard discussed
a couple times, which is the debt ceiling. And I have heard the
back-and-forth, and you said something that caught my
attention, which is that you were concerned, obviously, that
some of the proposals that may have been offered, including
Senator Toomey's, you had some questions about the workability
of that. About trying to prioritize spending amongst debt
repayment, interest repayment, and various benefit programs.
Given our fiscal situation, if we were able to figure out a way
to work through those workability problems, if we were able to
figure out a way to prioritize, would that assuage your
concerns about using the debt ceiling as an environment to have
some discussions about changing our fiscal policy?
Mr. Bernanke. Well, my concern, since I'm mostly involved
in the financial side, my concern is about, you know, not
defaulting on the debt, and I think that for me is a very high
priority. So that would help, on that count, very much. You
still would be in a position, of course, where you would be not
paying contractors, for example, you would be not putting out
Social Security and Medicare checks and those things, and if
you think that is something you are willing to do, that is
really up to Congress to decide.
Mr. Mulvaney. That's fair enough. Last question, we have
talked about your plans to exit this expansionary policy when
you see the need to do so, and you have talked about raising
rates, talked about redeeming some of the securities that you
hold. Are you satisfied that you will be able to do that
quickly enough to react to inflationary concerns?
Mr. Bernanke. Yes, we can raise short-term interest rates,
which are the main tool we have, essentially as quickly as we
like. Because we can raise the interest rate we pay on excess
reserves to banks. So yes, we don't have to sell off all our
assets to tighten policy. We can do it via our control over
short-term interest rates.
Mr. Mulvaney. Have you given serious consideration to not
completing the QE2 program?
Mr. Bernanke. We review that program at every meeting. We
have another meeting coming up in the middle of March. And we
will, as we always do, we are going to look at the outlook for
both employment and inflation, and it is certainly possible. We
take very seriously that this is a program that needs to be
looked at every meeting, and in light of however the economic
news comes in.
Mr. Mulvaney. Given that QE2 is more of the unusual and
extreme, extreme is not the right word, but the more unusual
tool that you are using this period. Would it be fair to say
that you would consider ending QE2 before raising short-term
rates?
Mr. Bernanke. Yes, I think that will be the most likely
outcome, yes.
Mr. Mulvaney. And the last question I have got; maybe it is
not a question, it is a point. There's another $1.4, $1.5-
trillion gorilla in the room, isn't there, in terms of the
amount that gets dumped in the system, the expansionary
policies that we are talking about, which is our fiscal policy.
You have no control over our fiscal policy and you could do
everything possible to tamp that inflation, to restrict
monetary expansion policy, and if we continue to spend a bunch
of money we don't have, we will be contributing to the
inflationary pressures, won't we?
Mr. Bernanke. Yes, but I think even more severely, you will
be contributing to financial problems, stress in the financial
markets.
Mr. Mulvaney. Thank you, sir.
Mr. Bernanke. And say hello to my friends in Dillon for me.
Mr. Mulvaney. I'd be happy to. Thank you.
Mr. McClintock. Mr. Pascrell is next.
Mr. Pascrell. Thank you Mr. Chairman, Dr. Bernanke, thank
you for laying bare some of the myths for us on both sides of
the aisle, about the financial situation that we face today and
the financial situation we actually faced a few years ago, and
hopefully, we will learn and move on.
I want to thank both Chairman Ryan and Ranking Member Van
Hollen because of this civil tone that the questions have
taken. I think it is struck me, maybe it is normal for all of
you. So, I will try to continue on that avenue. I will try my
best.
For the past several months, some folks have been promoting
the myth of a Europe, with an overrun health care system,
overbearing government, and economic stagnation. But not long
ago, some of these same people had nothing but praise for the
same country's low taxes, low spending economies. So, the
problem of this theory is that it is incorrect, I think.
Ireland ranked near the top of the Heritage Foundation's
so-called Economic Freedom Index, while sitting on a property
bubble, fueled by banks that had run wild. Then the bubble
burst, and the revenue dropped, and the public debt exploded.
We need to remember, my good friend, the mayor of New York,
who said a year and a half ago when he was running, that what
we need to do, it won't be too long before a return, it'll take
us four or five years before we return to where we were in
2006.
The point is, we don't want to return to what it was in
2006, because that is the problems that we did not address, and
we see the systemic and we see the results of not addressing
them. So, these countries are relying on the same theories of
slash-and-burn budgeting that is being talked about here, not
just today. The problem is it doesn't work.
For instance, Britain: its gross domestic product fell 0.5
percent in the last quarter of 2010, widespread losses in
construction, widespread losses in transportation, and in
services rendered to the public. So, I think we are all here to
roll up our sleeves, with your direction and advice, address
our long-term deficit. But we cannot pull the legs out from
under the recovery, and I think this is your message. Correct
me if I'm wrong. By taking a slash-and-burn approach to
government operations, or hold the full-faith credit of the
country hostage.
Mr. Chairman, what do you see as the results of the
immediate and drastic cuts to the federal budget? What would be
the result, in your view?
Mr. Bernanke. Well, I think if that is all that was done,
that the costs to the recovery would outweigh the benefits, in
terms of fiscal discipline. I think we really need to take a
long-term view. Now, maybe a little bit of a down payment is
needed, but we need to show that we have a plan that will carry
us forward for the next decade at least, that will produce
consistent reductions in that deficit over time, and it has the
benefit of allowing us to think it through, and to take the
time needed to change programs, et cetera. So, again, my
message is that, I think, that the best approach is to take a
longer term perspective.
Mr. Pascrell. This is not just the one or two year
solution.
Mr. Bernanke. It is not a one or two year thing. Nothing we
can do this year will serve this long-term problem.
Mr. Pascrell. I think folks on both sides of the aisle have
to understand that. On our side of the aisle as well. So, there
has to be cuts to the budget; there's no two ways about it. We
cannot continue, and we cannot continue to have tax cuts that
are not paid for, where we have no offsets, like we did in
2001, 2003. We were warned in those years; we were warned in
1999, before those things ever happened.
And obviously, we did not heed them. My last question is:
Is it your opinion that whatever deficit savings, we would find
an immediate and drastic slash approach to the budget, would be
lost to an economic downturn or stagnation? Do you agree with
that?
Mr. Bernanke. I don't know quantitatively, but I do think
there is a concern about only focusing on short-term cuts,
because of the recovery, which is, obviously, still not
complete. I think cuts, combined with a long-term perspective,
will be both less painful for the current recovery and also
more credible in the bond markets.
Mr. Pascrell. Thank you, I do appreciate it. Thank you,
Chairman.
Mr. McClintock. Our time is fleeting and the staff has
suggested and the minority has agreed that we go to three
minutes, if there's no objection, on the remaining questions.
So, without objection, we will next go to Mr. Akin.
Mr. Akin. Thank you, Mr. Chairman. It seems like when we
talk about dealing with the budget deficit, it reminds me a
little bit about these all kinds of imaginative weight-loss
programs, you know? It seems like when you get down to the
bottom line, you can either eat less or you can exercise more.
You're only given two alternatives. It seems like we are in the
same way, we can try and sugar-coat it, but the problem is that
either we are spending too much or we've got to tax a whole lot
more. The comment was made earlier, which I thought was an
amazing quotation from Ms. McCollum, The budget deficit is not
a spending problem. I found that amazing, because it seemed
like to me it sure is a big spending problems. We're just on
different planets, I suppose, but let's just assume, instead of
you are going to cut spending, that you are going to try to
increase taxes.
Now, my understanding is, I take a look at historic data,
our tax revenues run somewhere in that 18 percent range. My
understanding is if we were to double the tax rate on
everything across the board, we couldn't assume that we are
going to get double in revenue, federal revenue.
In fact, we may well do what you are saying, crash the
economy and get even less. I do recall, we did dividends,
capital gains, and death text in May 2003, and the
Congressional Budget Office said, Well, now you are going to
have less revenue, but in fact, there was more revenue because
the economy kind of got going.
So, my question is, when I take a look at this overall
problem that we are, you know, too heavy, in terms of like a
weight loss thing, it is pretty spooky to me because you add
all of the entitlements, the main ones, Medicare, Medicaid,
Social Security, and then the other kinds of entitlements, and
add debt service to that, and it seems, when I looked at the
numbers, it was looking like about 2.3, roughly, trillion. And
our revenue is about the same thing. So that says you get zero
defense, zero discretionary non-defense, and you are right now
just a parody. So, I don't understand. I guess my question to
you is, first of all, don't we have to, essentially, deal with
the entitlements, just by definition, or can you actually make
it up by just doubling taxes and hope there's going to be a ton
more revenue?
Mr. Bernanke. Well, I think that, as you point out, I mean,
that in the long run, the way we are going, entitlements plus
interest would basically be the entire government budget, and
so, unless you raise taxes considerably. Now it is up to
Congress to find the right balance between taxes, and cuts, and
so on, of course. But I think you need to look seriously,
particularly at the health care costs, which is of course, part
of what has been going on the last couple of years here in
Congress, but I think a focus on the cost side is important.
And, it would be difficult, I think. I'm very loath to
prescribe exactly how to address these issues; I do think that
it would be very difficult to leave health care programs
untouched and still achieve budgetary balance in the next 15
years.
Mr. Akin. Thank you. I think what I heard you saying is, is
you really got a deal with that rate of spending, and
particularly, in the entitlement, the health care piece is such
a big part of that, that has to be dealt with. And that raising
taxes, just to finish the question.
Mr. McClintock. I am sorry, we are out of time.
Mr. Akin. Thank you.
Mr. McClintock. Ms. Schwartz is next.
Ms. Schwartz. Thank you, and thank you, Chairman Bernanke,
for your good work over the last few years in helping the
economy begin to grow and to do your part; not easy decisions
on any of our parts, so, I appreciate what you have done.
And, some of your comments this morning were really very
important to us as we see this beginning of a recovery. And
some of your comments about your optimism may be too strong,
but your sense that we are growing and growing out of this.
You also made some comments I want to follow up on, which
was really about the debt ceiling and the recklessness of there
being politics played with raising the debt ceiling. None of us
want to raise the debt ceiling, I mean, we would much rather
not have be in this situation, but the two consequences of not
raising the debt ceiling, as you have pointed out, and I want
to confirm, the harm it would do to the United States and our
ability to borrow in the future, interest rates, and really,
defaulting on our not paying. It is just a huge consequence to
our economy, so I did want you to talk about that again, if you
would.
And secondly, as I think it is been pointed out and
President of the Chair, Mr. McClintock and Senator from
Pennsylvania, our new senator, Senator Toomey, have proposed
legislation that would make debt payment to our creditors, our
foreign creditors, the priority over paying, instead of paying,
our Social Security beneficiaries possibly not getting checks,
or our veterans not getting payments, U.S. contractors not
getting payments, so it would put the U.S. in a different
position of no longer having faith with American seniors,
American veterans, and of course, U.S. companies or creditors.
So, could you comment on both of those, and I think you
have commented very much on the first piece about how reckless
it would be. But of course the second one, to put us in a
position of losing faith with the American people who have
counted on us do that and leaving that prioritization, making a
statement very clearly that we would rather pay our foreign
creditors than actually pat the American people.
Mr. Bernanke. On the first, defaulting on the debt would
create probably an immediate financial crisis, a very severe
one, and would have very deep consequences for our economy.
And, even assuming that we were able to get through that, it
would probably lead to much higher interest rates for the
United States for many years to come, and that is been pointed
out by a couple of folks, that applying a higher interest rate
to our existing debt means that will be a very big step
backward, in terms of trying to balance our budget.
On the prioritization, that might help address the default
problem, which is very important. It is up to Congress, I
suppose, whether you think it is worth doing what you say,
which is you would be stopping Social Security checks and those
sorts of things. I just wanted to make the very narrow point,
but still important point, that there are operational problems
as well.
I mean, even if we were instructed, the Federal Reserve is
the agent of the Treasury. We make a lot of the payments on
behalf of the Treasury, and we would have to figure out how to
tell that this check is Mr. Jones is a payment on his interest,
and this check is the Social Security check. There would be
some practical, operational problems that we would like to
bring up, if we move in this direction.
Ms. Schwartz. So, you were saying, it is reckless. Thank
you very much. I appreciate your comments.
Mr. McClintock. Mr. Woodall is next.
Mr. Woodall. Mr. Chairman, hi.
Mr. Bernanke. Hi.
Mr. Woodall. I appreciate you are willing to spend this two
and a half hours, with us as a junior member and a tardy
member, I am the real beneficiary of your commitment to give us
that time. So, I'm grateful.
I have appreciated your comments about the economic impacts
of simplifying the tax codes, lowering rates, eliminating those
distortions that are there. I wanted to talk specifically about
those dollars that are overseas. I think back to the Wall
Street Editorial that the Cisco President and Oracle CEO put
together $1 trillion overseas that want to come back home, for
whatever odd reason. I'm new to this body: We'll tax you if you
try to bring that money and invest it in America but we will
let you invest it overseas for free. What do you think the
economic impact would be of having that tax holiday, to allow
those American companies who want to bring invest those dollars
in America?
Mr. Bernanke. Well, we've done that before, a few years
ago. And a lot of money did come back. Some of it went to
dividends and that sort of thing. Some of it probably went to
investment; it is a little hard to tell how much would go in
each direction. I think if you were going to do that, you might
want to consider the sort of more permanent alternative, which
is to do what other countries do, most other countries, and tax
on a territorial basis in the first place. But you certainly
would get a lot of repatriation if you did a holiday, no
question.
Mr. Woodall. And you have talked a lot about low long-term
bond rates. I think, when we did it back in 2003, the rate was
five and a quarter that you could repatriate it. Would we see a
substantial difference if that rate was zero and without those
limitations that we placed on that repatriation back in 2003,
or would it be substantially the same?
Mr. Bernanke. Either one is probably a good bit less than
the normal rate, so I think any low rate would create a lot of
repatriation. I don't really have more to add on that.
Mr. Woodall. There was a lot of discussion, back at that
time, about how many of those dollars went to dividends. Now,
you have talked a lot about the importance of consumer
spending, in terms of getting us out of our current situation.
Having those dollars go to dividends, is that a bad thing? Is
that just different from investment, but it is still going to
contribute.
Mr. Bernanke. Yes, dividends can be spent by consumers,
that is right.
Mr. Woodall. You also have talked about the importance of
asking the question of how smart is the spending. Is there any
spending out there that you would say is sacrosanct and should
not be examined? Or should we be looking at everything as we
are asking the question about how smart is the spending?
Mr. Bernanke. I hope you will look at everything.
Mr. Woodall. Thank you very much.
Mr. McClintock. Ms. Wasserman Schultz is next.
Ms. Wasserman Schultz. Thank you. Chairman Bernanke, it is
good to be with you. When you testified before the Senate
Budget Committee last month, you observed that the Recovery Act
funds will run out in 2011, and you acknowledged at that time,
that the expiration of those stimulus fund would worsen the
fiscal outlook of States and localities, and in your words,
present a headwind for the overall economy.
In addition, with the announcement of Chairman Ryan's
spending caps for Fiscal Year 2011, our colleagues on the other
side of the aisle are intending to further cut some types of
discretionary spending, that was such a critical component in
the Recovery Act. And so essentially, that is like an anti-
Recovery Act.
Given this headwind, what would you say the impact would
be, coupled with the inevitable cuts in state and local budgets
because of the deficits that they are now going to face,
because of the Recovery Act hole, combined with the draconian
spending cuts proposed by our Republican colleagues, is there
any way that solely cutting discretionary funding spending in
2011, which is Mr. Ryan's plan, is going to create jobs on its
own? And what impact is that going to have?
Mr. Bernanke. For state and local governments specifically,
their tax revenues have improved somewhat as the economy's
gotten better, which is obviously a help, but they are still
under considerable strain, and that reduction in employment and
spending at that level is going to be a negative for growth.
I can only come back to the point I have made a couple of
times, which is that I think it is very important to address
the deficit, but I hope that rather than doing a one-off kind
of thing, that you will look at a longer term window, a longer
term horizon, and in thinking about it, and keep in mind that
we are still coming out of the very deep recession right now,
but that doesn't, in any way, reduce the need to address these
long-term structural budget problems, and I hope that you will
do that in a very serious way.
Ms. Wasserman Schultz. Acknowledging that we do need to
address the deficit, but taking, by themselves, which is what
is proposed, draconian cuts from the Chairman of the Budget
Committee, combined with the impact of the Recovery Act funds
being phased out and no longer being available, what is that
likely to do to the jobs, our potential for creating jobs, and
the continued pace of the recovery?
Mr. Bernanke. Well, it would depend on the details, but
again, I just would like to re-iterate that it is better, I
think, to think about this in the context of a longer term
plan, a longer term trajectory for fiscal spending.
Ms. Wasserman Schultz. And, on health care, the Affordable
Care Act included numerous provisions to contain costs by
moving from a payment system that rewards quantity to one
rewards quality, and value and efficiency. Would you agree that
by giving providers incentives to coordinate care and reduce
wasteful spending, that we have the potential to generate real
savings there?
Mr. Bernanke. I'm not really able to make estimates. I know
there are some measures in the health care plan that are
intended to reduce costs. I don't know how effective they are
going to be. I think that is something that the Congress ought
to monitor very closely, and look for any additional ways that
you can find to control wasteful spending, which, of course,
there is a great deal, I think, in the health care industry.
So, since, as we were discussing earlier, since health care
spending is going to be an enormous part of the federal budget
in coming decades, finding anything you can do to reduce
unnecessary spending will be very, very helpful.
Chairman Ryan. Thank you, Chairman. Mr. Rokita.
Mr. Rokita. Thank you. I love it, how in Washington, D.C.,
cutting 2.5 percent of a budget deficit is draconian. I also
appreciate your thoughts about long-term reform, because it is
just the beginning, and I can't wait to get to some long-term
reforms. When you say you are going to be vigilant about
watching for inflation, can you name one time in your agency's
history where you got it right? Where you got on the brakes in
time to correct runaway inflation, do you have any track record
at all?
Mr. Bernanke. Absolutely. Ever since Paul Volcker conquered
inflation in the early 1980s, inflation has come down very
steadily.
Mr. Rokita. I feared that you were going to mention Paul
Volcker. I don't think you got to it in time.
Mr. Bernanke. Well, I'm saying after.
Mr. Rokita. Your goal is two percent or less.
Mr. Bernanke. By the time Chairman Volcker left office, he
came in with a 13 percent inflation rate. He left office with a
four percent inflation rate.
Mr. Rokita. After it went to
Mr. Bernanke. Thirteen percent was the highest. Then it
came down, over about eight years, under his stewardship, to
about four percent. Then, from there, under Chairman Greenspan,
until the late 1990s, it came down gradually, to about two
percent, and it is been there ever since.
Mr. Rokita. I don't think the agency got to inflation on
time, as you are proposing.
Mr. Bernanke. It has. It has, except in the 1970s, which,
of course, we've learned from.
Mr. Rokita. Okay, well, maybe we will beg to differ there.
The banks: there's a lot of government products on the street
to support this borrowing that we are doing. Doesn't it make
sense, at least, it does to me, that when banks have one of
your products to invest in on their balance sheets, versus the
small business down the street, they're going to go to your
product. And, so, couldn't you argue, then, to Mr. Lankford's
point that, my Lord, if we just stop these products from being
offered and let banks invest in the private sector, where you
get a better return on your money, that that could be a
solution? At least to Mr. Lankford's question?
Mr. Bernanke. No, I don't think so. First of all, we pay 25
basis points, one fourth of one percent. So, if there's any
attractive lending opportunity out there, banks would certainly
prefer to do that than put money with us.
Secondly, the existence of those reserves is the
counterpart to the purchase of securities that we are doing,
which, in turn, is lowering rates, and making it easier for
borrowers to get credit. So, you can't look at one side, and
not look at the other side. So, I think that is not correct. I
think it does help credit extension.
Mr. Rokita. Okay, thank you. Over the last three years, you
advocate over $1 trillion in government spending. Considering,
when government gets a dollar, we make 60 cents I think the
private sector record is for every dollar the private sector
makes $1.20 or $1.30. Can't you at least argue that taxing and
borrowing, and bigger government is not the most effective way
to grow the economy?
Mr. Bernanke. It's certainly true that taxation, in
particular, has what's called a dead-weight loss. And, so the
loss to the private sector is greater than the taxes actually
paid because of the distortions that are caused. And, as I have
said, I think anything that can be done to make the tax code
more efficient, fairer, lower rates, and so on, would be good
for the economy.
Mr. Rokita. I agree with you there. Thank you, sir.
Chairman Ryan. Commissioner Yarmuth?
Mr. Yarmuth. Thank you, Mr. Chairman. Chairman Bernanke,
thank you very much for your testimony. I want to return to
this issue of the possibility of not extending, or raising, the
debt ceiling, and focus on the economic consequences. The
American people, I think, would be repulsed by the idea that we
would default on our debt, just as a concept, and you have
called it catastrophic, we call it reckless, all in all, not a
good idea. But, the idea of prioritizing payments is
frightening to me, because wouldn't this essentially have the
effect of we would be paying China before we would be paying
our troops in Afghanistan?
Mr. Bernanke. Yes.
Mr. Yarmuth. It's a pretty scary concept. Talking about,
again, the impact on the economy, if we were to not raise the
debt ceiling, and we didn't do it for six months, in that
period of time, absent that, we would be spending about a $1.8,
$1.9 trillion, in the current levels, something like that,
during that six months. Wouldn't that be about right? Just
short of $4 trillion, overall, we'd be spending close to $2
trillion. And we are now borrowing 40 to 50 cents of every
dollar we spend. So, essentially, wouldn't we be taking
somewhere close to a trillion dollars out of the economy during
that six-month period? Which, essentially, is more than the
entire Recovery and Reinvestment Act?
Mr. Bernanke. Well, first of all, as you point out, some of
that money would be going overseas, and so on, but, I think
that effect would be just dwarfed by the financial crisis that
you would be engendering.
Mr. Yarmuth. All in all, pretty, draconian, is the word
that is been thrown around here, pretty draconian, and negative
impacts all around.
I wanted to clarify one thing that Mr. Akin raised about my
colleague, Ms. McCollum's, statement. I don't think she said
that it was not a spending problem. She said it is not solely a
spending problem. And, just recently, there was a report out
that we are at the lowest tax rate in this country in 60 years,
could you square the concept that we don't have at least
somewhat of a revenue problem, in terms of the budget deficit?
Mr. Bernanke. Well, we have a revenue problem right now, in
part, because we haven't recovered. And, so, the share of GDP
that were getting revenues is way below the historical average.
So, that is a temporary situation, we hope. And, we hope that
we will go back more towards the sort of 19 percent GDP that is
been normal. But, in the longer term, basically, Congress is
just going to have to decide where its values are, whether it
wants to raise taxes, whether it wants to cut spending, or
wants to make a combination. I hope you look at the whole set
of options, and try to think about what's best for the economy.
Mr. Yarmuth. I just want to make one comment, because you
referenced taxes that are growth-friendly. My brother is in the
barbecue business. He's done extremely well, paid a lot of
taxes. And, he said, when we were talking about whether to
extend the tax rate for the people making over a quarter of a
million dollars, which certainly includes him, he said, ``I
don't care what my tax rate is. I care that people can afford
barbecue. Because, if they can't afford barbecue, it doesn't
matter what my tax rate is.'' Thank you very much.
Chairman Ryan. Mr. Guinta.
Mr. Guinta. Thank you very much, Mr. Chairman. And, thank
you, Dr. Bernanke, for being here. I want to stay a little bit
on the subject matter of debt ceiling, and then I want to move
into state pension reform and state debt and deficit, and how
that may impact the decisions that Congress has to make.
Earlier, during the hearing, someone had referred to our
debt ceiling vote as quote ``routine.'' I happen to be one of
the people that believes that is part of the problem that we
are having. This notion that we are going to continue, as the
federal government, to borrow beyond our means, I think has a
direct impact to the global markets, to our markets here, and
to the consumers and employers and small business owners, that
are trying to have some predictability, who are the ones who
are going to really help us emerge stronger as a nation, and as
an economy. I also was concerned about some of the comments you
had made, or phrases that you had used; some, I appreciated and
agree with, and some concern me.
One was unwind some of this stimulus. I agree with that. I
think what you are saying is we should be stopping the use of
stimulus, and returning some of those dollars. But, you also
said, future spending must be quote ``smart'' spending. When
you say, future spending must be smart spending, how would you
categorize the spending up to this point, in the last two
years?
Mr. Bernanke. I was only making a point. What I'm afraid of
is that Congress will look only at the total spending, the
total revenue numbers, and then try to worry about how to make
those equal, which is important. But, it is also important to
look at the programs, look at the tax code, and make sure that
it is as effective as possible. I wasn't claiming that I could
identify waste, fraud, and abuse. But, clearly, whatever
changes you can make.
Mr. Guinta. It's a multi-pronged approach, then.
Mr. Bernanke. Yes.
Mr. Guinta. We have got to reduce our spending. We've got
to simplify the tax code, which I think I had heard you said
earlier. And we've got to sort of restore, or I would argue,
reduce some of the regulatory environment that is going to get
some of that private sector money, that is on the sideline,
back into the economy, which I think would replace the federal
spending that is being suggested as required for this economy
to move forward.
The second question I have, or concern I have, is according
to Census Bureau data, this is fiscal year 2008, we have four
percent of interest on debt as the share of state and local
expenditures, and we have fiscal year 2008 debt outstanding as
a share of GSP 18.2 percent. Can you comment briefly on those
levels? If they're appropriate, if they're high, if they're
low, and then compare it to our levels at the federal level?
Mr. Bernanke. Well, they're clearly lower than the federal.
I mean, it 18 percent versus 69 percent, and most of that debt
is associated with capital projects as well. So, in that
respect, the states are not as bad off, in some sense, as the
federal government.
On the other hand, they have a very difficult short-term
situation, because they do have balanced budget amendments, and
with the fallen tax revenues, they're having some very
difficult cuts they've had to make on spending and employment.
But, I would say, also, that 18 percent number doesn't take
into account some long-term issues, I think you have referred
to already, with pensions and health care; unfunded
liabilities, which are potentially much more significant.
Chairman Ryan. Thank you, sir. Ms. Kaptur?
Ms. Kaptur. Thank you, Mr. Chairman, very much. And, thank
you, Chairman Bernanke, for your long suffering today. I
apologize. I had to leave for another hearing. I have three
simple questions, that are probably just one-word answers, and
then a little bit longer one. Have you ever seen a recovery in
modern history that has not been led forward by housing and
construction?
Mr. Bernanke. It is normal for housing and construction to
be an important part of the recovery.
Ms. Kaptur. Thank you very much. Its absence is
particularly troubling to this member.
Number Two. With the instability in the Middle East, and
rising gas prices, could I ask you, at what level of gas prices
in our nation would we trigger a deep recession again? I put
that number about $4 a gallon. Where would you put it?
Mr. Bernanke. I don't think there's a single number. But,
it is absolutely true that as we move up above four that you
are beginning to take a significant amount of disposable income
away from people, and that acts like a tax, essentially, and
makes it more difficult for the economy to grow.
Ms. Kaptur. Thank you. I don't know if you have any ideas
about helping to put to work the unemployed you so aptly
identified in your opening statement; those who've been out of
work for more than six months. Thank you for recognizing that.
That lost productivity is of deep concern.
What, in your opinion, would be the most effective means to
re-employ them in the short-term, and to gain productivity in
this economy?
Mr. Bernanke. I don't have any good answers. As you know,
the Fed is trying to do our best to help improve the employment
situation. I guess one area to look at would be the
unemployment insurance system. Maybe there might be ways to use
some of the money to give training, for example, rather than
just simple income support.
Ms. Kaptur. Thank you very much for that. Longest question,
last December, Congress and the courts forced the Federal
Reserve to release its report on what it had done during the
financial crisis, and which financial institutions received
money through the Federal Reserve. You had opposed compiling
and releasing that report, claiming that making Federal Reserve
activities public would disturb the financial markets.
What we have learned is that the Federal Reserve really
wanted to keep secret that it had bought back, from German and
Swiss banks, more than a half of a trillion dollars of bad
mortgage-backed securities that Wall Street's megabanks had
pawned off to those banks. Clearly, this was something that the
Fed apparently didn't want the Congress and the public to know.
We now also know that private gains provided to Wall Street and
foreign banks were at the expense of massive social costs,
forced on our public in the form of growing debt from historic
levels of unemployment. Why shouldn't Congress and the public
know what the Fed is doing, especially when it puts onto the
U.S. financial system, and public system, such burdens as
buying back bad bonds from foreign banks?
And my questions are: Did you defend secrecy for the sake
of secrecy? Or, did you defend secrecy to protect the Fed from
the public's view of mistakes made by the Fed and its member
institutions?
Mr. Bernanke. There is no longer any secrecy. The discount
window, where there is some case to have secrecy during the
period of the crisis, all that information is now revealed,
with a two-year lag, under the Dodd-Frank Act. So, there is no
aspect of the Fed's operations now, which is permanently
secret. I have no idea what you are talking about with the
Swiss. We have not purchased mortgage bonds from anybody, other
than Fannie and Freddie, and we lent money to only banks that
had, through their U.S. operations, which is required by law,
that we treat all domestically operating banks the same. And
we'd lent against collateral, and we were paid in every single
case.
Ms. Kaptur. Thank You.
Chairman Ryan. I ask unanimous consent that all members
questions be included in the record and that the chairman
respond to them. Mr. Young.
Mr. Young. Mr. Chairman, thank you for visiting with us.
It's my privilege to be with you on behalf of my Southern
Indiana constituents. As you know, Japan recently had its
credit rating downgraded, in light of its fiscal situation.
Part of the justification for Standard & Poor's downgrade was
the fact that Japan has no coherent plan to deal with its
unsustainable fiscal situation.
Here in this country, like Japan, we have very low interest
rates, as compared to recent history. Our own deficits are
adding to our national debt at a remarkable rate. And, we too,
have no coherent plan to deal with this; at least in the long
term.
You have indicated that there is no magic number. I think
that is fair. I think history proves it out. There's no magic
debt to GDP number. That said, you no doubt, have some sense of
when we are getting close to unsustainable debt dynamics.
When are we getting close, and what are the main indicators
that we need to monitor, we, as members of Congress, you as the
Federal Reserve, to avoid a crisis?
Mr. Bernanke. We already have a considerable increase in
our debt-to-GDP-ratio, and we are heading towards ninety
percent by the end of 2020, I believe. I'm not sure. So, as we
move up beyond 90, as we move to a hundred, we are approaching
the levels of where some of the countries in Europe are now
that are having very serious problems. So, again there's not a
magic number. And problem is that you can't tell in advance
when the bond markets might begin to become worried.
I think the bond markets are looking not only, anyway, at
the debt to GDP number. They are looking, as you mentioned, at
the plan. Does the country have a plan? Does it have the
political will, and so on? I think if we demonstrate that we
have the political will, I think the markets will be quite
forgiving.
Mr. Young. I suspected that you would say that. So, it is
the very fact that this Congress does not implement a
bipartisan, coherent plan, to deal with that situation. To that
end, one of the things that is, no doubt, driving our debt to
GDP is our federal spending. Things like Medicare. And, I was
encouraged to hear my friend on the other side of the isle
indicate earlier, she wants to put everything on the table, as
we deal with this.
Medicare, why don't we take that, and put that on the table
as one example? Because you have recently indicated that we
have a choice. In your National Press Club comments, you said
we can either make adjustments, through a careful and
deliberative process, or, when this crisis hits, we are going
to have to do things very quickly, in a hasty way that maybe
most of our country is uncomfortable with. Do you agree that
Medicare is on an unsustainable path, and that it must be
addressed fairly quickly here?
Mr. Bernanke. It's going to be a very, very big share.
Medicare, Medicaid, all health care spending programs will be a
very big share of government spending, and of GDP over the next
10, 15, 20 years. And I think long-term budgetary stability,
and economic health of the United States in general, requires
us to look very, very hard at ways to save costs on health
care.
Mr. Young. Thanks so much. I regret my time is up.
Chairman Ryan. Ms. Bass.
Ms. Bass of California. Thank you. Thank you, Mr. Chairman.
I'd like to ask you questions about the consequences of not
lifting the debt ceiling I wanted to know if you could paint a
picture of the consequences?
Coming from the State of California, and in the State
Legislature, we were having to manage our budget crisis. When I
was first there a couple of years ago, our budget was a hundred
and $10 billion dollars. We cut it to $83 billion. And, now my
colleagues, that are still there, are left with a $23 billion
deficit. And, so, if we didn't lift the debt ceiling, what
would that do to the States? Would States be able to refinance
their debt?
Mr. Bernanke. Well, I think it is important to note that
California always paid its interest. I mean, it used Scrip, and
so on, for some employees, and for some payments, but it is
paid its interest. Even so, I think the risk premium on
California debt went up for a while; at least following that.
It's clear that the failure to pay interest on U.S. debt
would just create enormous crises of confidence in the
financial markets, and in the bond markets. It would, as a
practical matter, cascade through the system because banks and
other institutions who are counting on receiving the interest
in order to make their payments would not be able to make their
payments, and so you have a seizing up of the financial system
that could be quite detrimental to our economy. Even if that
was worked through somehow, and say for example, the debt
ceiling was raised for a few hours, the long-term consequences
in terms of the interest rate that the United States Government
would have to pay could be quite serious, which in turn would
make our debt payments, interest payments much higher, and make
the deficit all that much worse. On the States, I think there
will be some indirect effects because, after all, the Federal
Government does provide a good bit of income, revenue sharing,
et cetera, to the states, would make this situation worse as
well.
Ms. Bass of California. Would they have access to
alternative funding sources if it wasn't raised?
Mr. Bernanke. No doubt the bond markets would be very
disrupted, so if they were able to borrow at, very possible,
they would be at much higher rates than they are borrowing
today. But whether they would have access, I don't know.
Ms. Bass of California. What about intergovernmental
transfers from the Federal to the State Government, you might
have, you were addressing that a couple of seconds ago, but
could you elaborate?
Mr. Bernanke. Well, it depends on the prioritization. If
all payments are shut down other than interest payments on the
debt, which again, I think, has some serious technical concerns
associated with it, but then that would mean, presumably, that
payments to Social Security, Medicare recipients, contractors,
and to the States, would all be interrupted until such time as
the limit was raised.
Chairman Ryan. All right, thank you, just in the interest
of the Chairman's time, we have two more. Mr. Stutzman.
Mr. Stutzman. Thank you. Thank you, Mr. Bernanke, for being
here as well. I have really enjoyed the discussion and the
dialogue today. As a small business owner from back in northern
Indiana, for the last 15 years I have seen a lot of
fluctuations in several different sectors that we've been
involved in. And I guess I want to touch on just one thing,
real quick, because as a business owner, kind of going back to
what Ms. Bass was talking about with the debt.
Currently we do not prioritize debt, is that correct? Why
can't we change that, why can't we focus on making sure that
our current debt, our primary obligations be taken care of, and
then start, you know, basically by process of elimination,
moving down that ladder and saying, We're going to make sure
that we don't default, because I don't believe that we should
default either. Even though I'm a freshman Congressman, I think
that we do have an obligation for doing that.
Mr. Bernanke. The only point I make there is that there are
some technical difficulties. Because the Federal Reserve, as
the agent of the Federal Government, makes many of these
payments, including interest payments and other kinds of
payments as well. And we would have to find ways to make sure
that we were making the interest payments and not other kinds
of payments. So I think there would be some serious operational
concerns, particularly if this came with very short notice. So
I do raise that point for your attention. Beyond that, Congress
again has to make the determination whether you are willing to
stop Social Security payments and the like, as a temporary
measure.
Mr. Stutzman. But I think if we make that one of our
priorities, because people have paid into that for years,
making sure that is a priority, making sure military's a
priority, making sure that our interest is a priority. Can't we
then say to those that carry our debt, that we are going to
make sure that they're taken care of in moving down the ladder
and making sure our priorities are first and foremost at the
top of the list? It seems like, coming to Washington so far, it
is just a foregone conclusion that, well we've got to raise the
debt ceiling. Well, are we taking measures and steps to say
long-term, not just with a short-term notification that you all
would have to change operational infrastructure and things, but
long-term, wouldn't we be better off having some flexibility
like that?
Mr. Bernanke. Well, first, the amount of borrowing the
government has to do was already determined when you agreed on
how much you were going to spend and how much you were going to
tax. So it is like this debt was incurred already. The question
is, are we just going to make the payments that we owe or not.
That's what this is about. In terms of the prioritization,
given enough time I'm sure that that could be worked out, but I
really do want to make sure people understand that, if this is
a short-term thing, it might not be technically possible to
carry out.
Mr. Stutzman. Right. But long-term, you think it would be a
good thing?
Mr. Bernanke. I would just prefer, instead, that, again,
I'm sorry, I mean I think that this whole issue is very, very
important, but I think the best way to do it is to just sit
down and look at the long-term situation, look at each part of
the budget, and try to come to some decisions about how you are
going to address these imbalances.
Chairman Ryan. Ms. Black.
Ms. Black. Thank you. Thank you. And Mr. Bernanke, I
apologize for not being here during the entire hearing, but I
had another meeting, so, it seems to me that I continue to hear
over and over since I have come in, that you do agree that
there needs to be a long-term plan. And certainly looking at
more than half of our budget is not subject to the annual
approval by Congress, and it is on automatic pilot. As you talk
about there needs to be an overall plan, do you have an idea
about how we might reform the budget process to help us to
consider all of the expenses on a yearly basis?
Mr. Bernanke. Well, I think it is sensible to, and
particularly over a long-term plan, to drop the somewhat
artificial distinction between discretionary and mandatory
spending. You want to look at everything on the budget over a
longer term. In a speech I gave a few months ago, I talked
about fiscal rules. And a lot of countries around the world
have set up fiscal rules which describe, and this goes back to
Mr. Stutzman's question a little bit, that these rules, some of
them for example, would impound or sequester part of the
government's spending if the deficit exceeded a certain level,
for example.
So there are ways to set up rules that would force
Congress, essentially, to meet certain targets. Something
similar to that was the Gramm-Rudman-Hollings approach that was
used some time ago. So I don't have real specific suggestions
here, but I do think that thinking hard about your framework
and recognizing that the current approach, when you try to find
an offset, that is basically saying we are satisfied with the
deficit where it is. You need to have something that is better
than an offset. You need something that is going to allow for
the deficit actually to shrink over time relative to where the
current projections are, so it is very challenging to do that,
I understand. But, again, creating some kind of long-term
overall plan and then, within the context of that plan, fitting
in various programs, that is essentially what has to be done in
order to get us back on stable path.
Ms. Black. I know there has been a lot of talk about us
having a Balanced Budget Amendment, and of course that takes a
very long time to get there. What would you think, in the
meantime, about having a spending cap that we could only spend
to a certain level?
Mr. Bernanke. Well, that is up to Congress to do that, if
you want. I assume that that would be just a legislative action
as opposed to a Constitutional action. You could do that, but
then you would have to have a mechanism. This is similar to a
fiscal rule; I mean basically it says that you'd have to not be
allowed to appropriate more than a certain level. If more was
spent because, say, Medicare payments were higher than
anticipated, you'd have to find a way to deal with that. But
that is a form of rule that you could apply. And along with
consideration of how revenues are going to evolve, that could
help you structure the plan for reducing the deficit over time.
Ms. Black. Thank you, thank you, Mr. Chairman, I yield back
my time.
Chairman Ryan. Chairman, you have been very generous, we've
gone over your time, we know you are running late, and we
appreciate your indulgence. This hearing is adjourned.
Mr. Bernanke. Thank you, Mr. Chairman.
[Questions submitted for the record by Mr. Honda follow:]
Questions Submitted for the Record by Hon. Michael M. Honda, a
Representative in Congress From the State of California
In your speech to the National Press Club on February 3, you noted
that unemployment, which is to me the key economic indicator for the
well being of the American people, will remain stubbornly high and that
these conditions will only improve gradually.
You also noted that the trajectories of our national deficit and
debt are unsustainable.
You went on to state that among the course corrections needed to
address these problems are investments in the skills of the workforce,
which I am going to simply call education, and policy changes to reduce
our deficits and debt.
1. AFGHANISTAN
My first question is in regards to the latter. The current rules of
the House have taken the ``War on Terror'' off-budget, meaning that the
costs of our conflicts in Iraq and Afghanistan and other actions
associated with the so called ``War on Terror'' can be financed with
debt. Afghanistan alone represents a cost of approx. 10 million dollars
per hour, 325 million dollars per day and 150 billion dollars per year.
Disturbingly, this is our country's largest long-term investment. So my
question is:
Would the savings that resulted from ending combat operations
associated with the ``War on Terror'' reduce projected deficits?
2. EDUCATION
I think it was very important to note that among other investments
including encouraging the scaling up of US manufacturing by
incentivizing purchasing new machinery and investment, promoting R&D,
and rebuilding public infrastructure, you singled out education as an
area for public investment that would promote economic growth.
Can you explain to the Committee how public investment in education
promotes economic growth?
[Responses to Mr. Honda's questions follow:]
[Questions submitted for the record by Mr. Calvert follow:]
Questions Submitted for the Record by Hon. Ken Calvert, a
Representative in Congress From the State of California
Question #1: One area that I believe has a major impact on our
nation's economic recovery is the stability of the commercial real
estate industry. A healthy commercial real estate market provides more
than 9 million jobs and generates billions of dollars in federal, state
and local tax revenue. However our commercial real estate market
continues to suffer and this has a direct and lasting impact on the
stability of tens of thousands of small businesses and small and mid-
size banks.
Despite the October 2009 interagency guidance on Prudent Commercial
Real Estate Loan Workouts, anecdotal evidence shows that bank
regulators/examiners are still being inconsistent with regards to
commercial real estate workouts. Regions such as my area of southern
California continue to suffer as property owners seeking to refinance
existing loans find access to credit nearly nonexistent. I continue to
hear stories where capital calls on loans are occurring on property
that is near full capacity and where owners are paying their bills.
What else can be done to ensure that creditworthy borrowers, who
have the willingness and capacity to repay their debts, obtain the
necessary refinancing or term extension to stay afloat?
Question #2: The Financial Accounting Standards Board and
International Accounting Standards Board have proposed new accounting
rules that would force companies of all sizes to capitalize commercial
real estate leases onto their balance sheets, which could significantly
reduce the credit capacity of many borrowers. Are you concerned with
this proposal, especially in light of the current commercial real
estate credit crisis?
[Responses to Mr. Calvert's questions follow:]
[Whereupon, at 1:03 p.m., the committee adjourned subject
to the call of the Chair]