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MONETARY POLICY AND THE STATE OF THE ECONOMY HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TWELFTH CONGRESS FIRST SESSION JULY 13, 2011 Printed for the use of the Committee on Financial Services Serial No. 112–46 ( U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 67–941 PDF : 2012 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\67941.TXT TERRIE HOUSE COMMITTEE ON FINANCIAL SERVICES SPENCER BACHUS, Alabama, Chairman JEB HENSARLING, Texas, Vice Chairman PETER T. KING, New York EDWARD R. ROYCE, California FRANK D. LUCAS, Oklahoma RON PAUL, Texas DONALD A. MANZULLO, Illinois WALTER B. JONES, North Carolina JUDY BIGGERT, Illinois GARY G. MILLER, California SHELLEY MOORE CAPITO, West Virginia SCOTT GARRETT, New Jersey RANDY NEUGEBAUER, Texas PATRICK T. MCHENRY, North Carolina JOHN CAMPBELL, California MICHELE BACHMANN, Minnesota THADDEUS G. McCOTTER, Michigan KEVIN McCARTHY, California STEVAN PEARCE, New Mexico BILL POSEY, Florida MICHAEL G. FITZPATRICK, Pennsylvania LYNN A. WESTMORELAND, Georgia BLAINE LUETKEMEYER, Missouri BILL HUIZENGA, Michigan SEAN P. DUFFY, Wisconsin NAN A. S. HAYWORTH, New York JAMES B. RENACCI, Ohio ROBERT HURT, Virginia ROBERT J. DOLD, Illinois DAVID SCHWEIKERT, Arizona MICHAEL G. GRIMM, New York FRANCISCO ‘‘QUICO’’ CANSECO, Texas STEVE STIVERS, Ohio STEPHEN LEE FINCHER, Tennessee BARNEY FRANK, Massachusetts, Ranking Member MAXINE WATERS, California CAROLYN B. MALONEY, New York LUIS V. GUTIERREZ, Illinois NYDIA M. VELÁZQUEZ, New York MELVIN L. WATT, North Carolina GARY L. ACKERMAN, New York BRAD SHERMAN, California GREGORY W. MEEKS, New York MICHAEL E. CAPUANO, Massachusetts RUBÉN HINOJOSA, Texas WM. LACY CLAY, Missouri CAROLYN MCCARTHY, New York JOE BACA, California STEPHEN F. LYNCH, Massachusetts BRAD MILLER, North Carolina DAVID SCOTT, Georgia AL GREEN, Texas EMANUEL CLEAVER, Missouri GWEN MOORE, Wisconsin KEITH ELLISON, Minnesota ED PERLMUTTER, Colorado JOE DONNELLY, Indiana ANDRÉ CARSON, Indiana JAMES A. HIMES, Connecticut GARY C. PETERS, Michigan JOHN C. CARNEY, JR., Delaware LARRY C. LAVENDER, Chief of Staff (II) VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\67941.TXT TERRIE CONTENTS Page Hearing held on: July 13, 2011 ..................................................................................................... Appendix: July 13, 2011 ..................................................................................................... 1 49 WITNESSES WEDNESDAY, JULY 13, 2011 Bernanke, Hon. Ben S., Chairman, Board of Governors of the Federal Reserve System ................................................................................................................... 6 APPENDIX Prepared statements: Paul, Hon. Ron .................................................................................................. Bernanke, Hon. Ben S. ..................................................................................... ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Bernanke, Hon. Ben S.: Monetary Policy Report to the Congress, dated July 13, 2011 ..................... Written responses to questions submitted by Representative Fitzpatrick .. Written responses to questions submitted by Representative Luetkemeyer ............................................................................................................. (III) VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 50 52 K:\DOCS\67941.TXT TERRIE 65 123 126 VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\67941.TXT TERRIE MONETARY POLICY AND THE STATE OF THE ECONOMY Wednesday, July 13, 2011 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to notice, at 10 a.m., in room 2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the committee] presiding. Members present: Representatives Bachus, Hensarling, King, Royce, Lucas, Paul, Jones, Biggert, Miller of California, Capito, Garrett, Neugebauer, McHenry, Pearce, Posey, Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, Hayworth, Renacci, Hurt, Dold, Schweikert, Grimm, Canseco, Stivers, Fincher; Frank, Waters, Maloney, Velazquez, Watt, Ackerman, Sherman, Meeks, Capuano, Clay, McCarthy of New York, Baca, Lynch, Miller of North Carolina, Scott, Green, Cleaver, Perlmutter, Donnelly, Carson, Himes, Peters, and Carney. Chairman BACHUS. This hearing will come to order. We meet today to receive the semiannual report to Congress by the Chairman of the Board of Governors of the Federal Reserve System on the conduct of monetary policy and the state of the economy. Without objection, all members’ written statements will be made a part of the record. For purposes of opening statements, I recognize myself for 5 minutes. Chairman Bernanke, welcome back to the committee. I want to commend you for your service to the country during these challenging economic times. America is confronted with many challenges, not least of which is a crisis of confidence. For the first time in the history of our country, the majority of Americans no longer believe that their children will be better off than they are. One great challenge is to preserve the American spirit of individual initiative and responsibility, what was once called the American ‘‘cando’’ spirit. I briefly looked over your testimony this morning, and I noticed you mentioned confidence on several occasions in your speech. Confidence is critical. It is critical for us to believe in ourselves, to believe in our future, to believe that it will get better. The uncertainty and lack of confidence are at the center of the failure of our economy to achieve a robust recovery with job creation, the job creation which will be necessary to support the continued improvement in our citizens’ lives that we have come to expect as Americans. The origin of this crisis of confidence is debatable. The great recession and its legacy of job losses and home fore(1) VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 2 closures is a contributing factor. Those are things we will have to work through. As your testimony said, it will be a long process. But in my opinion, the seeds of this lack of confidence were first sown in well-intentioned programs of the 1930s and of the Lyndon Johnson Great Society. I commend to you and to my colleagues here an article by Thomas Donlan in Barrons on June 25th. In that article, Donlan describes the historical underpinnings of the entitlement philosophy that has brought our budget to what you have called an ‘‘unsustainable path.’’ Let me quote from that article. Actually Lyndon Johnson recorded all his conversations, and they are there for us to see. And speaking in March of 1965 with his press secretary, Bill Moyers, on his motivation for Medicare, here is what he said: ‘‘I have never seen one’’—he is talking about the average worker—‘‘I have never seen one have too much health benefits. So when they come in to me and say we have to have $400 million more so we can take care of some doctor bills, I am for it on health. None of them ever get enough. They are entitled to it. That’s an obligation of ours. It’s just like your mother writing you and saying she wants $20. I always send mine $100 when she asks. I always did because I thought she was entitled to it.’’ We have. That is what we have been doing with Medicare. When Wilbur Mills called President Johnson to tell him that Medicare had passed, that conversation was recorded, too, and here is what Wilbur Mills said to President Johnson: ‘‘I think we’ve got you something that we won’t only run on in 1960 but will run on from hereafter.’’ It seems like the Congress and the Administrations have been running on entitlement programs ever since, and now the money has run out. President Johnson, as I said, he was quoted as saying that people are entitled to an unlimited amount of medical benefits. I have two charts during my questioning I want to show you and to my fellow colleagues on the committee, but you have said that the Federal entitlement programs and the deficit spending they cause are not—if they are not put on a sustainable path, things will come apart. I fear we are at that point. Things are coming apart. I want to give two other quotes I have. My time is running out. But let me just say this, the buck stops with this Congress, and if the Federal Reserve cannot address this problem, we have to. We have to confront our entitlement problems and take your advice. If we do not, we will not restore confidence. If we do not, we will not restore a future for our children and grandchildren. So I thank you for your testimony. I recognize the ranking member. Mr. FRANK. Thank you. Welcome, Mr. Chairman, and Mr. Chairman, thank you. I thank you, too, Mr. Chairman, for your bipartisan restraint because in blaming Franklin Roosevelt and Lyndon Johnson, you let Woodrow Wilson off the hook, and I think that was an act of generosity. The notion that the problems we are now facing are the fault of efforts begun under FDR and continued under LBJ with some others, Harry Truman and John Kennedy also helping, that is the cause of the current problem is a very hard one for me to understand. I guess it is particularly hard because apparently these ter- VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 3 rible efforts by Roosevelt and Johnson to put a set of policies in place that help us have a middle class when people get old took a very long time to take effect. Apparently, these 1965 and 1930s decisions did not begin to blow up until fairly recently. I note the chairman said, oh, well, the great recession was a contributing factor. Here is where we differ in our analysis, and I think the history is pretty clear. We were doing very well. We did very well in the 1990s, we did very well in the 1990s even though this Congress and Bill Clinton raised the marginal tax rate on the wealthiest people in the country. And predictions to the contrary notwithstanding, we then had some of the best economic years we have ever had because it turned out that raising the marginal rate from 36 percent to 39 percent on the wealthiest 2 percent had no negative economic effect. It did not lead them to stop working on Saturdays or take longer lunch hours. They continued their productivity. The problem was, and Mr. Bernanke is here now, he was here in 2008 as an appointee of President Bush, and in good faith, and I believe quite appropriately came to this Congress as the chairman knows because he was there along with Secretary Paulson, George Bush’s Secretary of the Treasury, and said we are on the verge of a total economic collapse, and we suffered from 2008 until well into 2009 that serious economic collapse, a total lack of economic activity caused by the financial crisis. And to say that terrible set of events, the worst since the Great Depression, and they did not become worse only because of actions taken on a bipartisan basis to stave off even worse, that is a contributing factor, but it is really Lyndon Johnson’s fault, seems to me, to be very odd history at best. In fact, when President Obama came to office, he inherited the worst economy in 75 years. We have made progress. It has not been good enough. Part of the problem has been public policies that have retarded progress. Unemployment is much too high. As the Chairman of the Federal Reserve makes clear in his report, we have added about a million jobs so far this year in the private sector. Unfortunately, we have been simultaneously losing State and local jobs, teachers, police officers, firefighters, and public works employees because of the policies of my Republican colleagues. In fact, while unemployment is not what we would like it to be, beginning with the period of 2009 when the stimulus was at its height, we have since then lost a half a million jobs. That is, unemployment would be 0.4 percent lower if we had not lost State and local jobs. I am not talking about a failure to gain. I am talking about there being fewer State and local jobs because of a failure to differentiate between the need to do long-range deficit reduction and the counterproductive activity of forcing State and local governments to fire people in the short term and then complain about unemployment. And then I will address the problems financially. The chairman thinks it is Lyndon Johnson’s fault. No, I do not think that Medicare is a terrible thing. I do not think it has caused us a problem. I think the ability of the American people, when they get older, to have a decent middle-class life through Social Security and Medicare is something of which we should be very proud as a country. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 4 And it is true at $580 billion a year, Medicare costs us a lot of money. Almost as much—well, not even almost as much, but perhaps the same order of magnitude as the Pentagon—almost $700 billion will go to the military. And when Members of this House who voted to continue to spend money in the infrastructure program for Afghanistan, when there were people who appear to be arguing, and I will say this to my Administration that I support, the notion that they would go beyond George Bush and keep troops in Iraq next year when we are in such a terrible financial situation is a very hard one for me to understand. But Members who would not even—we talk about austerity. A majority of this House voted to give the Pentagon a $17 billion increase over this year for next year, $17 billion. Money spent in Afghanistan and Iraq. I do not believe that Members who are prepared to spend almost without limit in those wars that should have been ended and on the Pentagon ought to be telling older people to feel embarrassed about getting adequate medical care. Chairman BACHUS. I now recognize the subcommittee chair, Mr. Paul, and also acknowledge that he has announced that at the end of this term, he will be leaving Congress, and I am sure that came as quite a disappointment to the Federal Reserve. Mr. FRANK. Mr. Chairman, would you yield briefly, can I join because Mr. Paul and I have worked in opposition on some issues, and together on some others. He has been an extraordinarily valuable Member, and I will miss him. Could I also note, Mr. Chairman, that you have the honor of I think presiding for the first time in American history over a committee that has three declared Presidential candidates. I hope we will not soon have to have Secret Service replacing our Capitol policemen at the door, but I will miss Mr. Paul. Chairman BACHUS. And one of them is here today. Dr. PAUL. I thank the chairman for yielding. Somebody had told me that announcement would put a smile on Chairman Bernanke’s face. Chairman BACHUS. And his staff, they are all smiling. Dr. PAUL. But I thank the chairman for yielding and I welcome Chairman Bernanke. The country today has become very aware of how serious our problems are. I think everybody understands that it is very, very serious. It is critical, and from my viewpoint, I think the country is literally bankrupt, and we are not quite willing to admit that. But these are overwhelming problems that we do face. Unfortunately, from my viewpoint, I think we have more going on here on who to blame for the problems and who is going to benefit by blaming. I see it a little bit differently because I see it as a failed policy, a policy of central economic planning, and that has not been going on just with this Congress and this President. It has been going on for quite a few decades. I think that is what we have to address. Literally, the Congress appropriates the money and is a big blame. But also, the special interests have tremendous influence, and they are to blame, but also we have citizens groups who always want handouts and special benefits. They have some blame to assume as well. But also it is these wars that continue to go on, the undeclared war, the consonance of wars. Nobody can even tell VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 5 us exactly how many wars we are in today and when the next one is going to start or when the last one is going to end. And then all of this spending and pressure. Then we also have the Fed to deal with, too. And I see the Fed as a problem because I see so much of this other spending would not have gotten out of hand if we did not have a monetary system where the system provides the funds. We do not have to be responsible because we can always say, it is up to the Fed. If we did not have the Fed buying up our debt, interest rates would rise and everybody would yell and scream, but you know what it would do? It would put pressure on us here in the Congress to do something about it. But I see the monetary system and the Federal Reserve System as a facilitator for all these special interests, and for a good many decades, we have been able to get away with this. But we are not getting away with it anymore because we have run out of steam. We have run out of jobs. We have run out of productive capacity. Our Tax Code is all out of whack. The entitlements are out of control. Our good jobs are going overseas. We chase capital away, we have a deliberate policy of a weak currency. Weak currency chases away capital. So I see this has all added up to give us this crisis, and unfortunately we are still looking for who to blame for this. You cannot find one individual or one Administration. You have to blame the policy, and unfortunately central economic planning, whether of the Soviet style or whether of the style of the interventionist where we do it through congressional activity as well as central banking, the central economic planning is always flawed because it is never as smart as the market. That is why I object to the idea that we are knowledgeable enough to set interest rates and know what the money supply should be because that is information that should come from the market. When it does not come from the market, it is a failed policy and leads to the type of crisis we are now suffering from. Chairman BACHUS. I thank the subcommittee chair. At this time, I would like to recognize the ranking member of the Subcommittee on Monetary Policy, Mr. Clay, for 3 minutes. Mr. CLAY. Thank you, Mr. Chairman. I, too, want to say that I will miss my colleague, Dr. Paul. Perhaps he will remain in this town in some capacity. Let me thank you for holding this hearing on the conduct of monetary policy and the state of the economy. Also thank you, Chairman Bernanke, for once again appearing before us. The Full Employment and Balanced Growth Act of 1978, better known as the Humphrey-Hawkins Act, set forth benchmarks for the economy: full employment; growth in production; price stability; and a balance of trade and budget. To monitor progress towards these goals, the Act mandated that the Federal Reserve must present semiannual reports to Congress on the state of the U.S. economy and the Nation’s financial outlook. The Humphrey-Hawkins Act also charges the Federal Reserve with a dual mandate: maintaining stable prices; and promoting full employment. According to the Department of Labor, in June, the Nation’s unemployment rate was 9.2 percent. Over 14 million Americans are looking for work. Another 5 million are underemployed at jobs that VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 6 pay much less than they previously earned and offer few benefits. In urban areas, like the district that I represent in St. Louis, the unemployment rate among African Americans and other minorities is over 16 percent. The Majority party has been in power in the House for 190 days, and yet we have not seen one jobs bill, and America is still waiting. Chairman Bernanke, I am eager to hear what additional steps the Federal Reserve is willing to take to free up the flow of credit to small businesses and to encourage major banks to finally invest in the recovery instead of sitting on the sidelines with trillions of dollars that could be creating millions of new jobs. I also look forward to Chairman Bernanke’s comments regarding what other urgent steps Congress can take to spur private sector job growth and restore confidence in our economic future. With that, Mr. Chairman, I yield back. Chairman BACHUS. Thank you, Mr. Clay. I appreciate that opening statement. Before I recognize the Chairman, I would like to remind the members of the committee that traditionally, the Chairman is here until 12:30, and we will adhere to that today. To accommodate as many members as possible, I am going to strictly enforce the 5-minute rule. The opening statements will all be given within that time limit. Without objection, Chairman Bernanke, your written statement will be made a part of the record, and you are now recognized for a summary of your testimony. STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. BERNANKE. Thank you. Chairman Bachus, Ranking Member Frank, and other members of the committee, I am pleased to present the Federal Reserve’s semiannual monetary policy report to the Congress. I will begin with a discussion of current economic conditions and the outlook and then turn to monetary policy. The U.S. economy has continued to recover, but the pace of expansion so far this year has been modest. After increasing at an annual rate of 23⁄4 percent in the second half of 2010, real GDP rose at about a 2 percent rate in the first quarter of this year, and incoming data suggests the pace of recovery remained soft in the spring. At the same time, the unemployment rate, which had appeared to be on a downward trajectory at the turn of the year, has moved back above 9 percent. In part, the recent weaker-than-expected economic performance appears to have been the result of several factors that are likely to be temporary. Notably, the run-up in prices of energy, especially gasoline and food, has reduced consumer purchasing power. In addition, the supply chain disruptions that occurred following the earthquake in Japan caused U.S. motor vehicle producers to sharply curtail assemblies and limited the availability of some models. Looking forward, however, the apparent stabilization in the prices of oil and other commodities should ease the pressure on household budgets, and vehicle manufacturers report that they are making significant progress in overcoming the parts shortages and expect to increase production substantially this summer. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 7 In light of these developments, the most recent projections by members of the Federal Reserve Board and the President of the Federal Reserve Banks prepared in conjunction with the FOMC meeting in late June reflected their assessments that the pace of economic recovery will pick up in coming quarters. Specifically, participants project for the increase in real GDP a central tendency of 2.7 to 2.9 percent for 2011 inclusive of the weak first half, and 3.3 to 3.7 percent in 2012, projections that if realized, would constitute a notably better performance than we have seen so far this year. FOMC participants continue to see the economic recovery strengthening over the medium term, with the central tendency of their projections for the increase in real GDP picking up to 3.5 to 4.2 percent in 2013. At the same time, the central tendencies of the projections of the real GDP growth in 2011 and 2012 were marked down nearly one-half percentage point compared with those reported in April, suggesting that FOMC participants saw at least some part of the first-half slowdown as persisting for a while. Among the headwinds facing the economy are the slow growth in consumer spending, even after accounting for the effects of higher food and energy prices, the continued depressed condition of the housing sector, still limited access to credits for some households and small businesses, and fiscal tightening at all levels of government. Consistent with projected growth and real output modestly above its trend rate, FOMC participants expected that over time, the jobless rate will decline, albeit only slowly, toward its longer term normal level. The central tendencies of the participants’ forecasts for the unemployment rate were 8.6 to 8.9 percent for the fourth quarter of this year, 7.8 to 8.2 percent at the end of 2012, and 7.0 to 7.5 percent at the end of 2013. The most recent data attests to the continuing weakness of the labor market. The unemployment rate increased to 9.2 percent in June and gains in nonfarm payroll employment were below expectations for a second month. To date, of the more than 81⁄2 million jobs lost in the recession, 13⁄4 million have been regained. Of those employed, about 6 percent, 8.6 million workers, report that they would like to be working full-time but can only obtain part-time work. Importantly, nearly half of those currently unemployed have been out of work for more than 6 months, by far the highest ratio in the post-World War II period. Long-term unemployment imposes severe economic hardships on the unemployed and their families, and by leading to an erosion of skills, it also impairs their lifetime employment prospects and reduces the productive potential of our economy as a whole. Much of the slowdown in aggregate demand this year has been centered in the household sector, and the ability and willingness of consumers to spend will be an important determinant of the pace of recovery in coming quarters. Real disposable income over the first 5 months of 2011 was boosted by the reduction in payroll taxes, but those gains were largely offset by higher prices for gasoline and other commodities. Households report that they have little confidence in the durability of the recovery and about their own income prospects. Moreover, the ongoing weakness in home values is VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 8 holding down household wealth and weighing on consumer sentiment. On the positive side, household debt burdens are declining, delinquency rates on credit cards and auto loans are down, and the number of homeowners missing a mortgage payment for the first time is decreasing. The anticipated pickups in economic activity and job creation, together with the expected easing of price pressures, should bolster real household income confidence and spending in the medium run. Residential construction activity remains at an extremely low level. The demand for homes has been depressed by many of the same factors that have held down consumer spending more generally, including the slowness of the recovery in jobs and income as well as poor consumer sentiment. Mortgage interest rates are near record lows, but access to mortgage credit continues to be constrained. Also, many potential homebuyers remain concerned about buying into a falling market, as weak demand for homes and the substantial backlog of vacant properties for sale and the high proportion of distressed sales are keeping downward pressure on house prices. Two bright spots in the recovery have been exports and business investment in equipment and software. Demand for U.S.-made capital goods from both domestic and foreign firms has supported manufacturing production throughout the recovery thus far. Both equipment and software outlays and exports increased solidly in the first quarter and the data on new orders received by U.S. producers suggests that the trend continued in recent months. Corporate profits have been strong and larger nonfinancial corporations with access to capital markets have been able to refinance existing debt and to lock in funding at lower yields. Borrowing conditions for businesses generally have continued to ease, although as mentioned, the availability of credit appears to remain relatively limited for some small firms. Inflation has picked up so far this year. The price index for personal consumption expenditures rose at an annual rate of more than 4 percent over the first 5 months of 2011 and 21⁄2 percent on a 12-month basis. Much of the acceleration was the result of higher prices for oil and other commodities and for imported goods. In addition, prices for motor vehicles increased sharply when supplies for new models were curtailed by parts shortages by the earthquake in Japan. Most of the recent rise in inflation appears likely to be transitory, and FOMC participants expect inflation to subside in coming quarters to rates at or below the level of 2 percent or a bit less, that participants view is consistent with our dual mandate of maximum employment and price stability. The central tendency of participants’ forecast the rate of increase in the PCE price index was 2.3 to 2.5 percent for 2011 as a whole, which would imply a significant slowing of inflation in the second half of the year. In 2012 and 2013, the central tendency of the inflation forecast was 1.5 to 2.0 percent. Reasons to expect inflation to moderate include the apparent stabilization in the prices of oil and other commodities, which is already showing through to retail gasoline and food prices. The still substantial slack in U.S. labor and product markets, which has VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 9 made it difficult for workers to obtain wage gains, and for firms to pass through their higher costs, and the stability of longer-term inflation expectations as measured by surveys of households, the forecasts of professional private sector economists and professional market indicators. The judgments of FOMC members, the pace of the economic recovery overcoming quarters will likely remain moderate, that the unemployment rate will consequently decline only gradually, and that inflation will subside are the basis for the committee’s decision to maintain a highly accommodative monetary policy. As you know, that policy currently consists of two parts: First, the target range for the Federal funds rate remains at zero to one-fourth percent, and as indicated in the statement released after the June meeting, the committee expects that economic conditions are likely to warrant exceptionally low levels of the Federal funds rate for an extended period. The second component of monetary policy has been to increase the Federal Reserve’s holdings of longer-term securities, an approach undertaken because the target for the Federal funds rate could not be lowered meaningfully further. The Federal Reserve’s acquisition of longer-term Treasury securities boosted the prices of such securities and caused longer-term Treasury yields to be lower than they would have been otherwise. In addition, by removing substantial quantities of longer-term Treasury securities from the market, the Fed’s purchases induced private investors to acquire other assets that serve as substitutes for Treasury securities in the financial marketplace, such as corporate bonds and mortgagebacked securities. By this means, the Fed’s asset purchase program, like more conventional monetary policy, has served to reduce the yields and increase the prices of those other assets as well. The net result of these actions is lower borrowing costs and easier financial conditions throughout the economy. We know from many decades of experience with monetary policy that when the economy is operating below its potential, easier financial conditions tend to promote more rapid economic growth. Estimates based on a number of studies as well as Federal Reserve analyses suggest that all else being equal, the second round of asset purchases probably lowered longer-term interest rates approximately 10 to 30 basis points. Our analysis further indicates that a reduction in longer-term interest rates of this magnitude would be roughly equivalent in terms of its effect on the economy to a 40-to-120 basis point reduction in the Federal funds rate. In June, we completed the planned purchases of $600 billion in longer-term Treasury securities that the committee initiated in November while continuing to reinvest the proceeds of maturing or redeemed longer-term securities and treasuries. Although we are no longer expanding our securities holdings, the evidence suggests that the degree of accommodation delivered by the Federal Reserve securities purchase program is determined primarily by the quantity and mix of securities that the Federal Reserve holds rather than by the current pace of new purchases. Thus, even with the end of net new purchases, maintaining our holdings of these securities should continue to put downward pres- VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 10 sure on market interest rates and foster more accommodative financial conditions than would otherwise be the case. It is worth emphasizing that our program involved purchases of securities, not government spending, and as I will discuss later, when the macroeconomic circumstances call for it, we will unwind those purchases. In the meantime, interest on those securities is remitted to the U.S. Treasury. When we began this program, we certainly did not expect it to be a panacea for the country’s economic problems. However, as the expansion weakened last summer, developments with respect to both components of our dual mandate implied that additional monetary accommodation was needed. In that context, we believe that the program would both help reduce the risk of deflation that had emerged and provide a needed boost to faltering economic activity and job creation. The experience to date with the round of securities purchases that just ended suggests that the program had the intended effects of reducing the risk of deflation and shoring up economic activity. In the months following the August announcement of our policy of reinvesting maturities and redeemed securities, and our signal that we were considering more purchases, inflation compensation as measured in the market for inflation indexed securities rose from low to more normal levels, suggesting that the perceived risks of deflation had receded markedly. This was a significant achievement, as we know from the Japanese experience that protracted deflation can be quite costly in terms of weaker economic growth. With respect to employment, our expectations are relatively modest. Estimates made in the autumn suggested that the additional purchases could boost employment by about 700,000 jobs over 2 years, or about 30,000 extra jobs per month. Even including the disappointing readings for May and June, which reflected in part the temporary factors discussed earlier, private payroll gains have averaged 160,000 per month in the first half of 2011 compared with average increases of only about 80,000 private jobs from the months of May to August 2010. Not all of the step-up in hiring was necessarily the result of the asset purchase program, but the comparison is consistent with our expectations for employment gains. Of course, we will be monitoring developments in the labor market closely. Once the temporary shocks that have been holding down economic activity pass, we expect to again see the effects of policy accommodation reflected in stronger economic activity and job creation. However, given the range of uncertainties about the strength of the recovery and prospects for inflation over the medium term, the Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate. On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. Even with the Federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the Federal funds rate and the VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 11 balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks and their reserves, thereby putting downward pressure on short-term rates more generally. Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs. However, prudent planning requires that we evaluate the efficacy of these and other potential alternatives for deploying additional stimulus if conditions warrant. On the other hand, the economy could evolve in a way that would warrant a move to less accommodative policy. Accordingly, the committee has been giving careful consideration to the elements of its exit strategy, and as reported in the minutes of the June FOMC meeting, it has reached a broad consensus about the sequence of steps that it expects to follow when the normalization of policy becomes appropriate. In brief, when economic conditions warrant, the committee would begin the normalization process by ceasing the reinvestment of principal payments on its securities, thereby allowing the Federal Reserve’s balance sheet to begin shrinking. At the same time or sometime thereafter, the committee would modify the forward guidance in its statement. Subsequent steps would include the initiation of temporary reserve-draining operations, and when conditions warrant, increases in the Federal funds rate target. From that point on, changing the level or range of the Federal funds rate target would be our primary means of adjusting the stance of monetary policy in response to economic developments. Sometime after the first increase in the Federal funds rate target, the committee expects to initiate sales of agency securities from its portfolio, with the timing and pace of sales clearly communicated to the public in advance. Once sales begin, the pace of sales is anticipated to be relatively gradual and steady, but it could be adjusted up or down in response to material changes in the economic outlook or financial conditions. Over time, the securities portfolio and associated quantity of bank reserves are expected to be reduced to the minimum levels consistent with the efficient implementation of monetary policy. Of course, conditions can change, and in choosing the time to begin policy normalization as well as the pace of that process, should that be the next direction for policy, we would carefully consider both parts of our dual mandate. Thank you, and I am pleased to answer questions. [The prepared statement of Chairman Bernanke can be found on page 52 of the appendix.] Chairman BACHUS. Thank you, Chairman Bernanke. Chairman Bernanke, I mentioned our entitlement programs in my opening statement and what I consider sort of the genesis of our entitlement philosophy in this country, and I did quote President Johnson. His quote is that people are entitled to an unlimited amount of medical benefits. I think that is an admirable statement, but I think it has proven to be unaffordable, and you have actually, on many occasions, warned both the Budget Committee and our com- VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 12 mittee that an unsustainable budget path makes your job much harder, and I know that you, in your outline yesterday and this morning, have said that you remain flexible and accommodative, and I know you have been criticized by some for an accommodative monetary policy and for maintaining interest rates at such levels, but I want to commend you. I believe that probably the 1-in-5 jobs we have recovered we would not have recovered had we had higher interest rates. I think that is pretty much a given. And inflation appears to be transitional. We do not know. But I will say this, you have warned that if we do not get our budget in order, our deficit and our debt, that we will have higher inflation, we will have higher taxes, and we will have a weak economy. Let me put a chart up, and I have handed you in front. This is what I mean when I say unsustainable. That is Social Security, Medicaid, and Medicare, and most of that is Medicare, and that basically just tells you that is when I say unsustainable, and it did start in the 1970s. Before that, when I mentioned the New Deal or our agricultural subsidies, which I know have received criticism, we are talking now about tax revenues and tax spending, and a subsidy is tax spending, it is a cost of revenue, and that started with the AAA, where we paid farmers not to raise crops, and I believe that is part of the solution, as this idea of fighting three wars. I agree with the Chairman. But if we do not solve entitlements, I think we make your job a lot harder. I would just like you to—let me show you a second slide. And this is—I do not know that I blame anybody for this, medical technology may have as much to do with this as anything else, but the figure on the right is the growth in the GDP, our economy. The left and the right are the growth in Medicare and Medicaid. So they are actually—those prices are going up at 3 times what other prices are going up. And that is actually bankrupting the Federal Government. It is also that second figure—the State of Washington just recently said—the State of Washington has a Democratic governor and a Democratic legislature. They said, give us Medicaid, let us administer Medicaid. They say if you do not, you are going to bankrupt Washington State. Washington State is one of the more healthy States, but our Medicaid programs are bankrupting our State. So I would like you, once again, if you will, to give us your ideas on what are unsustainable budget paths, how they affect your job and how they affect the economy and what the result will be. Mr. BERNANKE. Thank you, Mr. Chairman. As the graphs point out, we have an aging society. Health care costs are rising more quickly than GDP, and as your picture shows, ultimately maintaining tax rates at the level they currently are will be inconsistent with maintaining those levels of benefits. You show a relatively long timeframe, but even within the next 10 to 15 years, we could be coming to a point where we would be making entitlement payments, paying interest, and that would be it, unless we raise taxes. So this imbalance is very worrisome. I think we certainly cannot continue on an unsustainable path. If we were to do so in the long term, clearly we would have higher interest rates, less capital formation, more foreign borrowing, slower growth in the economy, but I think we even risk worse if we were to lose the confidence of for- VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 13 eign creditors and to have a threat to our fiscal and financial stability. So I do think it is important to address these long-term issues. I would emphasize, as your graph shows, that these are long-term issues. It does not have to be solved today or tomorrow, but we need to take some important steps to look at this long-term perspective and to try to restore some stability and sustainability to our fiscal outlook. Chairman BACHUS. What I have advocated is simply turning these things into an insurance program where they are not unfunded but the premiums pay for the cost, turn what I think is an entitlement into an insurance program or pension program, which is what FDR proposed with Social Security, is that premiums will pay the cost. They do not today. Thank you. I recognize the ranking member. Mr. FRANK. Thank you, Mr. Chairman. I want to join your first remarks about the performance of the Chairman and the Federal Reserve with regards to interest rates and inflation. I appreciate your speaking out in support of this. I think that has been a great success. The predictions of gloom and doom that came, that it was going to cost us money or be inflationary have all been proven incorrect, and there will be some later reference to a very good study that came out from Allan Sloan about that, but I want to talk about the job picture. We have several issues here. And I welcome on the very first page of the testimony, Mr. Chairman, you note that the weaker-than-expected economic performance appears to have been the result of several factors that are likely to be temporary: The run-up in prices of energy, especially gasoline and food, supply chain disruptions, finally the earthquake in Japan. I think we would probably add the uncertainty that came from the problems with Greece and other European countries, and I stress those because those are all external in many ways to us, the Libyan situation, the Greek situation, the Japanese situation. So people who want to blame this Administration need to take into account that, as you have enumerated some of these things, they are external, and we hope to sort of deal with them. My own view is there is a big debate here, that if we were to able to fully implement last year’s bill and do some things about speculation in both energy and food that we could have a positive effect. But I want to talk more about the job situation and one thing in particular. You say these are temporary, but we hope you expect things to get better, but there are headwinds, and there is one headwind in particular that I want to talk to you about, and that is, a quote from page 2, fiscal tightening at all levels of government. As you know here, we have this year gained so far about a million jobs in the private sector. Now that is a good thing. It is not good enough. But that has been offset every month by a loss of jobs in the public sector. Of course, when those jobs are lost, you do not simply have those people unemployed, but there is a negative effect rather than a multiplier effect in terms of their ability to help generate other spending. And I was very pleased to hear you just make a clear distinction between the urgency of dealing with the deficit problem and the time horizon in which we have to do it. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 14 And I would take these together to say that do I infer correctly from here that further fiscal tightening of the degree that we will ultimately need over the next 6 months, say, is problematic and could be—you assume those are headwinds, that if we would engage in very drastic fiscal tightening over the next few months, we increase the strength of the headwinds and that we should be doing longer-term things. I differ with my chairman, yes, we have spent some money. If we had not gone to war in Iraq, we would have a trillion dollars now to spend. I must say, when it comes to the debt limit, having voted against the war in Iraq and having voted against the Bush tax cuts, we are not up against my debt limit, I have a couple trillion left to go. I am going to be generous and vote to raise it because I think it would be disastrous, but people who voted for the war in Iraq and the Bush tax cuts and other things who act as if they are doing me a favor by paying for the debts they incurred over my objection puzzle me. But now, just to get back to the question, we can debate about how to do the longer-term thing. I would rather end the war in Afghanistan than cut Medicare, but—although we can make it more efficient. But let me ask what are the implications of your noting here that fiscal tightening at all levels of government is among the headwinds, and what is the balance we should achieve? We all agree there need to be reductions in the debt and that it has to come, I believe, both from some revenues and from some cuts. But what about the timing of this? What about the interrelationship of a policy in place that reduces the deficit over time, but the danger of increasing the headwinds, as you say, if you cut too much too soon right away? Mr. BERNANKE. There appears to be a contradiction between the need to maintain support for the recovery in the short term and the need to address fiscal issues in the longer term, but I do not think there is a contradiction if we recognize that we can take a long-term perspective on addressing the deficit and achieving the sustainability of our fiscal position. As the chairman pointed out, these increases in entitlement costs are very serious, but they take place over a long period of time. So we should be addressing those now. But it is a long-term proposition. We should also be looking at how our spending and tax policy affects our long-term growth. Those are important issues. We need to reform our Tax Code, we need to make sure that we are investing our government spending wisely. So there are some very substantial long-term issues. But I think we do need to take some care that we do not, by excessive restriction in the short term, hamper what is already a very slow recovery. Of course, that would be a very bad thing from the point of view of the unemployed, but it would also be a problem from the point of view of the Federal budget because if you slow economic growth, you affect tax collections as well. Mr. FRANK. People have talked about confidence. At this point, the greatest threat to confidence is the threat that we will not raise the debt limit with all of what that would mean. Would you agree with that? VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 15 Mr. BERNANKE. I think it is a concern, along with European issues and others, but as I have argued, we need both an increase in the debt limit, which will prevent us from defaulting on obligations which we have already incurred and which would create tremendous problems for our financial system and our economy, but we also need to take a serious attack on the unsustainability of our fiscal position. I think both of those things can be accomplished. Chairman BACHUS. Thank you, Mr. Chairman, and thank you, ranking member. At this time, I recognize Mr. Paul, the subcommittee chair, for 5 minutes. Dr. PAUL. Thank you. I thank you, Mr. Chairman. We hear that in the future we are going to have a better economy, and everybody hopes so, but it is hard to believe, it is hard for me to believe, anyway, because I look back on our past 3 years, and what Congress has done and what the Fed has done, we have literally injected about $5.3 trillion, and I do not think we got very much for it. The national debt went up $5.1 trillion. Real GDP grew less than 1 percent. So I do not think we have gotten a whole lot. Unemployment really has not recovered. We still have 7 million people who have become unemployed, and one statistic that is very glaring, if you look at the chart, is how long people are unemployed. The average time used to be 17 weeks. Now it is nearly 40 weeks they stay unemployed. So nothing there reassures me. And also when we talk about prices, we are always reassured there is not all that much inflation, and we are told that they might start calculating inflation differently with a new CPI. Of course, we changed our CPI a few years back. There is still a free market group that calculates the CPI the old-fashioned way. They come up with a figure in spite of all this weak economy that prices have gone up 35 percent, 9.4 percent every year. I think if you just went out and talked to the average housewife, she would probably believe the 9 percent rather than saying it is only 2 percent. So I would say what we have been doing is not very reassuring with all this money expenditure. But my question is related to the overall policy. Spending all this money has not helped, and yet many allies that would endorse so much of what has been going on, whether it is the Fed or the Congress, they recognize that consumer spending is very, very important. And they concentrate on that. But the $5.1 trillion did not go to the consumers, it went to buying bad assets, it went to bailing out banks, it went to bailing out big companies, and lo and behold, the consumer did not end up getting this. They lost their jobs and they lost their houses and mortgages, and they are still in trouble. But my question is, if you took that $5.1 trillion and said that consumer spending is good, you could have given every single person in this country $17,000. Why is it the program of both the Congress and the Fed to direct the money to the people who have been making a lot of money instead to the people who, if you argue that the consumer needs to spend the money, I obviously do not advocate this, but I would suggest that maybe it could have worked better—it could not have worked any worse. But what is the reason we directed it towards the banks and the big corporations too-bigto-fail and we do not pay that much attention to the consumer, if VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 16 it is true, and I do not know if you agree with that or not that consumer spending is an important issue? Mr. BERNANKE. It is an important issue, Congressman, but you are mistaken in saying that the Federal Reserve has spent any money. You say $5 trillion. We have lent money. We have purchased securities. That is not buying, that is not dissipating the money. We have gotten all the money back. As an article over the weekend by Allan Sloan showed, in fact, the Fed has been a major profit center for the U.S. Government. We have turned over profits in the last 2 years of $125 billion. We are not costing any money in terms of budget deficits or anything like that. In terms of what we were trying to do, the reason the Federal Reserve was founded a century ago was to try to address the problems arising from financial panics which did, by the way, occur in an unregulated environment in the 19th Century. We provided liquidity and short-term loans to help financial systems stabilize. We did that not because we particularly care about the managers or the shareholders of financial firms. Dr. PAUL. I hate to interrupt, but my time is about up. I would like to suggest that you say it is not spending money, but it is money out of thin air. You put it into the market and you hold assets, and the assets are diminishing in value when you buy up bad assets. But very quickly, if you could answer another question because I am curious about the price of gold today is $1,580. The dollar during these last 3 years was devalued almost 50 percent. When you wake up in the morning, do you care about the price of gold? Mr. BERNANKE. I pay attention to the price of gold, but I think it reflects a lot of things. It reflects global uncertainties. I think the reason people hold gold is as a protection against what we call tail risk, really, really bad outcomes. To the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection. Dr. PAUL. Do you think gold is money? Mr. BERNANKE. No, it is not money; it is a precious metal. Dr. PAUL. Even if it has been money for 6,000 years, somebody reversed that and eliminated that economic law? Mr. BERNANKE. It is an asset. Would you say Treasury bills are money? I do not think they are money either, but they are a financial asset. Dr. PAUL. Why do central banks hold it? Mr. BERNANKE. It is a form of reserves. Dr. PAUL. Why do not they hold diamonds? Mr. BERNANKE. It is tradition, a long-term tradition. Dr. PAUL. Some people still think it is money. I yield back. My time is up. Chairman BACHUS. Thank you. At this time, I recognize Mr. Clay, the subcommittee ranking member. Mr. CLAY. Thank you, Mr. Chairman. Chairman Bernanke, has the Federal Reserve analyzed the impact on the economy if the debt ceiling is not lifted by August 2nd? Yesterday, President Obama stated that VA benefits may not get to recipients and that some Social Security checks may not get mailed to American sen- VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 17 iors. Has the Federal Reserve examined what may happen on another level on August 3rd if we do not lift the debt ceiling? Mr. BERNANKE. Yes, of course we have looked at it and thought about making preparations and so on. The arithmetic is very simple. The revenue that we get in from taxes is both irregular and much less than the current rate of spending. That is what it means to have a deficit. So immediately there would have to be something on the order of a 40 percent cut in outgo. The assumption is that as long as possible the Treasury would want to try to make payments on the principal and interest of the government debt because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy. So just as a matter of arithmetic, fairly soon after that date there would have to be significant cuts in Social Security, Medicare, military pay or some combination of those in order to avoid borrowing more money. If we ended up defaulting on the debt, or even if we did not, I think it is possible that simply defaulting on our obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us, which would be counterproductive because that makes the deficit worse, but clearly if we went so far as to default on the debt, it would be a major crisis because the Treasury security is viewed as the safest and most liquid security in the world. It is the foundation for much of our financial system, and the notion that it would become suddenly unreliable and illiquid would throw shock waves through the entire global system. Mr. CLAY. And higher interest rates would also impact the individual American consumer; is that correct? Mr. BERNANKE. Absolutely. The Treasury rates are the benchmark for mortgage rates, car loan rates, and all other types of consumer rates. Mr. CLAY. Thank you for that response. In the area of unemployment, according to the Labor Department, our unemployment rate in June was 9.2 percent. What can the Federal Reserve and Congress do to put Americans back to work? Any suggestions? Mr. BERNANKE. It is a difficult problem. I would like to make it very clear that I think we have two crises in the economy. One of them is the fiscal set of issues that you are all paying a lot of attention to right now, but I think the job situation is another crisis. What is particularly bad about it is that so many people have been out of work for so long that it is going to be hard to get them back to anything like the kind of jobs they had when they lost their jobs back in the beginning of the recession. So it is a major problem. The Federal Reserve is doing quite a bit. As I described in my testimony, we have lowered interest rates almost to zero; we have done additional policy measures, including purchases of several trillion dollars of securities; we are prepared to take further steps if needed. We are operating in other dimensions, like trying to promote lending to small business and other things that could potentially help. So we are very focused on jobs. We think that is an incredibly important part of the current economic crisis, and it is one of the two parts of our dual mandate. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 18 I need to be careful not to endorse specific programs, etc., but as I mentioned, one thing to take into account is to try to avoid sharp contractions in the near term that might weaken the recovery. I think there are areas where attention might be paid. And just to name three I have talked about before, one would be to try to address unemployment through training or other types that might help workers get back into the job market. A second problem is the housing market. Clearly, that is an area that should get some more attention because that has been one of the major reasons why the economy has grown so slowly. And I think many of your colleagues would agree that the Tax Code needs a look to try to improve its efficiency and to promote economic growth as well. So there are a number of areas where Congress could be looking, and I hope that we will keep in mind that we have two sides to this crisis. There is a jobs crisis and there is a fiscal set of issues as well. Mr. CLAY. Thank you so much for your response. Mr. Chairman, my time is up. Chairman BACHUS. Mr. Royce, a senior member of the committee, is recognized for 5 minutes. Mr. ROYCE. Hello, Chairman Bernanke. I think one of the realities you also face is that when we look at these numbers and the deficits you are borrowing at a historically low cost over at Treasury, maybe your borrowing costs are 21⁄2 percent. If those go up to the average over the last 20 years, you are suddenly more than doubling the costs of borrowing. So the deficits we are talking about that are projected are going to get a lot worse. If we could go back to the chart that shows the climb in entitlement costs, this is one of the concerns we have. If we go back to the 1970s and that argument over having both guns and butter under LBJ, the Vietnam War and the new entitlement spending and all the social welfare spending. We tried to do both, and at that time the Federal Reserve was a party to trying to assist in that. This is one of the arguments that some of your allies have made or your colleagues have made on the Federal Reserve. When they look back at the policies at that time, they say, the Fed tried to help accommodate the solution to that. Clearly, it couldn’t be paid for at the time. So one of the things they did was they put in place monetary policy that helped eventually create what was called the great inflation of the 1970s. I think you might concur with this. As we move forward, we are sort of in the same position, and as we draw down and draw out the troops from Iraq and Afghanistan, as we draw this down, that is one thing we have to face, is reducing again the costs of the military budget. But we are also going to have to face this entitlement question. Some of these were set up on the premise that they would be partly sort of an insurance program where people would pay in, right? Now, they morph into a situation where eventually they gobble up such a huge percentage of the budget that it has to be faced as well. Otherwise, we put you in the untenable position of perhaps doing what was done in the late 1960s and early 1970s by the Fed, which might end up again with a great inflation. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 19 These are my concerns. I would like for you to speak for a minute about this issue and about the deficit and the steps that need to be taken on entitlements. Mr. BERNANKE. Certainly. First, you are absolutely right about the interest rate problem. We are seeing that in Europe where investors lose confidence in a country’s fiscal situation. That drives up interest rates, that makes the deficit higher, so you have a vicious circle that can be very hard to break. On entitlements, you are also correct that they are not true insurance programs. I think many Americans think the money they put in Social Security or in Medicare is somewhere in the bank someplace. That is not really quite right. What is happening mostly is that younger generations are paying through their taxes for older generations’ benefits. And that worked okay as long as the population was shaped more like a pyramid, instead of more like a rectangle, as is becoming now the case. On monetary policy, we have learned the lesson of the 1970s. We are in much better shape now because inflation expectations are much better anchored after many years of low and stable inflation since Paul Volcker brought inflation down in the 1980s. Mr. ROYCE. But what if Congress doesn’t do its part? What if we don’t tackle entitlement spending and what if this chart that we have up in terms of what drives our debt, what if that entitlement ramp-up continues unabated? What then? Mr. BERNANKE. I think there are different views on this, and we can get very deeply into the discussion, but I believe if the Fed refuses to accommodate or pay for this extra spending by money creation, that we can maintain control of inflation. But what will still happen will be much higher interest rates, which will have a very negative effect both on the deficit and on the private economy. Mr. ROYCE. So it is imperative that we tackle it now. And would you say a small solution to this will take care of the problem, or do we need to reach for that overarching true reform of entitlements that take care in the long haul of what is going to happen with Social Security and Medicare and so forth? Mr. BERNANKE. I recognize that these are complicated matters that may not be able to be done in a few weeks. But I, like many other people who watch the budget developments, have been very excited by the idea that a very big program might be feasible and that we might do something that would stabilize our debt over the next decade. That would be a tremendous accomplishment if Congress can find a way to do that. Mr. ROYCE. I think if you can articulate the consequences if we don’t, it might help the goal of getting the entitlement reforms done. Thank you, Mr. Chairman. Mr. BERNANKE. Thank you. Chairman BACHUS. Thank you. At this time, I recognize Mr. Green of Texas for 5 minutes. Mr. GREEN. ‘‘It was a low down, no good, God-awful bailout, but it paid.’’ This is the style of an article written by Allan Sloan and Doris Burke. They contend that the bailout, which was accorded after we had two votes in the House—the first vote, Mr. Chairman, I remember. I was there on the Floor of the House and I saw after VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 20 that first vote the stock market start to spiral out of control. They contend that the bailout not only worked, but they contend it paid. They contend it will make taxpayers $40 billion to $100 billion. They contend that the 3 percent, which was TARP, gets 97 percent of the attention. My question to you is this: Is William Cullen Bryant right? He reminds us that truth will be crushed to Earth, but he also says that it will rise again. Will truth crushed to Earth rise again? Is this the opportunity to tell the truth about TARP and about the bailout and what it actually did? That these many persons who say that it was not needed, it was not useful, it didn’t benefit us, can truth crushed to Earth rise again today? Your response, please? Mr. BERNANKE. I hope truth will come out. I understand why Americans were unhappy with this. It seemed very unfair to see money going to large financial institutions. But just a few facts. First, we know from a lot of history that the collapse of the financial system will bring down the whole economy, and we saw the damage that even a partial collapse of the system brought in 2008 and 2009. So in attempting to stabilize the financial system, the Fed, the Treasury, the Congress were trying to stabilize the economy and trying to protect the average American citizen. That is point number one. Point number two, the program was successful. We did stabilize the system. We avoided a massive collapse, like we saw in the Great Depression, and it was a global effort. We worked together to provide the assistance needed to avoid a meltdown of the global financial system. The third fact I would like people to understand is that historically, it often is very expensive to stabilize financial systems, somewhere between 5 and 20 percent of GDP in many cases. The country of Ireland is having fiscal problems right now because of the money it put into its banking system and didn’t get back. In the United States, essentially all of the investments made by the TARP and certainly all the investments made by the Fed were repaid or are being repaid with interest and dividends, and as far as the direct financial costs to taxpayers is concerned, there are none. It will be a profit and a reduction of the U.S. Federal deficit relating to these activities. Mr. GREEN. Just as an additional commentary, Mr. Chairman, I had an experience with this bailout that I would like to share with you. It is very brief. The calls coming into our office were overwhelmingly opposed to it, the initial vote. I had people call and say, ‘‘If you vote for this, we will run you out of town.’’ I did not vote for it. I saw what happened to the stock market. And the next day I got calls, Mr. Chairman. ‘‘What is wrong with you? We are going to run you out of town. You voted against the bailout.’’ I mention this to you because memories seem so short. I don’t know whether that is by accident or design, but they seem so short. They don’t seem to recall that we were on the edge of a disaster unlike we have seen since the Great Depression. And I am honored that you would take the time today just to clear the record so that VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 21 William Cullen Bryant, so that he will truly know that we believe in him and he was right, truth crushed to Earth will rise again. Thank you. Mr. Chairman, I also want to share this with you. I think history will be kind to you. I think that you have taken the helm at a tough time in this country’s history, and I believe history will be kind to you. Thank you very much. I yield back, Mr. Chairman. Chairman BACHUS. Thank you, Mr. Green. At this time, I recognize Mr. Lucas, the chairman of the Agriculture Committee, for 5 minutes. Mr. LUCAS. Thank you, Mr. Chairman. My first goal is to make sure that we don’t become history as a result of what we do. That said, Mr. Chairman, I represent essentially the northwest half of the great State of Oklahoma, a place where in the course of the last 3 years, unemployment rates have run about 3 points less than the rest of the country. We are, as you and I discussed before in past years, a commodity-driven economy; oil, gas, wind energy, livestock, grain, fiber on the ag production side. So I am a little sensitive about maintaining the investment in those industries. That said, we are a very capital intensive district. The view of many of my constituents and the level of economic activity we have at home compared to the rest of the country essentially is, we didn’t make this mess. We shouldn’t be a part of sorting this mess out. It is their mess. Could you expand on your comments to both Representative Clay and to Representative Royce and now to me in that regard what my constituents would expect in the event that some grand understanding dealing with the national debt ceiling, dealing with Federal spending, if some grand understanding is not achieved, what does that do not just to the Treasury bond rate here in New York City, but what impact does that have in a place like the northwest half of the great State of Oklahoma? Mr. BERNANKE. The risk is, first, that interest rates will begin to rise as our creditors lose confidence in our ability to repay or willingness to repay. When Treasury rates rise, that makes the deficit worse, as we were discussing before, and it makes the problem even worse. But interest rates on Treasury debt also feed into all other interest rates in our economy, including farm mortgages, including capital for oil or natural gas exploration, and including consumer loans of all kinds, student loans and the like. So it would weaken our economy, it would make the deficit worse, and it would hurt confidence and be a negative. So I am very much in favor of us trying to address this problem in a big way, again taking a long-term perspective and understanding that this is a long-term problem. But I think there would be real benefits certainly over time to your constituents as well as to all other Americans. Mr. LUCAS. So it is fair to say then, summarizing what you have said, that if there is not an agreement worked out in a big way that has a long-term impact, not only would my constituents see a reduced demand for the commodities they produce, both ag and energy, but they would also see the interest rates that affect—be- VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 22 cause we are a capital-starved area—we would see the interest rates that affect their ability to invest in their businesses and grow and expand go up. Is that a fair statement, sir? Mr. BERNANKE. We don’t know the exact timing of that, but ultimately, that would be the case, yes. Mr. LUCAS. And is it also fair to say to back home, to note that at some point if big, bold tough decisions are not made, at some point the markets will begin to conclude that maybe we don’t have the capacity to make those decisions and they will begin to adopt a defensive posture. Is that a fair statement, Mr. Chairman? Mr. BERNANKE. That is right, yes. Mr. LUCAS. And when that defensive posture begins, then we all together see what is right around the corner. Thank you, Mr. Chairman. I yield back the balance of my time. Chairman BACHUS. Mr. Perlmutter? Mr. PERLMUTTER. Thanks. I always like following my friend Mr. Lucas, because we agree on a lot of things. Sometimes, there is a sort of a different approach that we might have. But I think we have to have a big bold approach to dealing with our full faith and credit, dealing with our budget. And I would like you to take a look at a couple of your charts. I always like looking through your monetary book. I want to start with chart number 22 on page 14, Federal receipts and expenditures, 1991 to 2011. And I think one of the places though where Mr. Lucas and I might have a difference is how we deal with this big bold plan that we have to have going forward to show people we really mean business about the fiscal strength of this country. In 1999, 2000, 2001, receipts exceeded expenses. We in effect had a surplus for a time there. And then we had tax cuts. So I think my question is going to focus on the revenue side of any big bold plan. And I noticed you were very careful in the choice of words you used when Chairman Bachus was questioning Medicare and entitlements, and you said, based on the current revenue stream, those are unsustainable. Back in 2001–2002, we had a series of tax cuts that dropped that revenue stream, isn’t that right? Mr. BERNANKE. Yes. Mr. PERLMUTTER. And has as the Federal Reserve figured out how much of a reduction to revenue over the last 10 years that has been to this country? Mr. BERNANKE. I think I would leave that to the Congressional Budget Office, but they have scored fairly significant numbers. Mr. PERLMUTTER. A couple trillion dollars, as I understand it. So as part of this big bold plan, which I agree with Mr. Lucas I think this country must undertake, it has to have a revenue side to it as well as Chairman Bachus’ concerns about entitlements. Would you agree? Mr. BERNANKE. I hope you understand that I am not going to take sides on this issue. I want to see the numbers add up. I want to see the revenues and the expenditures balance. It is your job, and that is why you get the big bucks. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 23 Mr. PERLMUTTER. Mr. Green was asking about William Cullen Bryant, whether history will be kind to him. Do you think Paul Giamatti was kind to you? Mr. BERNANKE. I haven’t seen the show. Mr. PERLMUTTER. You haven’t seen the show? Mr. BERNANKE. No, I haven’t. Mr. PERLMUTTER. I think he did a great job. His beard is precisely the way yours is. Let me turn to chart number 23, because this was some of the questioning that you received too as to the fiscal restraints and the fiscal restrictions that have come into play. Can you tell me, it looks like in 2008 there was a huge surge of Federal spending. Am I reading that right? Mr. BERNANKE. It looks like 2009. I see what you are saying. Mr. PERLMUTTER. 2008–2009. Mr. BERNANKE. I see what you are saying. Yes, sir. Mr. PERLMUTTER. Then there was a big expenditure in 2008, 2009, 2010. But in the first quarter of this year, a substantial drop. Am I reading that right? Mr. BERNANKE. Yes. Mr. PERLMUTTER. I guess the other thing, and coming from my law practice I did a lot of Chapter 11 bankruptcy work, and when you—and I don’t think this country is anywhere near bankruptcy. We have some fiscal management we have to undertake, but you don’t, as you come out of a tough time, you don’t pay every bill overnight, because that just puts you back into the troubles you were already in. You have to invest and you have to believe that you are going to keep going, and I believe this country is going to keep going. How would you describe these cuts that occurred in this first quarter? Is that the direction you would like to see our fiscal policy go? Mr. BERNANKE. I am sorry not to be able to be too direct. I want to get into the details here. I think some of the big spike in 2008, I think the way the TARP was scored was that it was counted as an expenditure when it went out and then it was treated as a receipt when the money actually came back, which it did. So that kind of obscures a little bit what happened. Part of what is happening here is that the stimulus in the spring of 2009 ramped up spending for a while, and that as that spending is now beginning to come down you are seeing a drop in total spending. So this is what I said in my remarks, that there is at this point a net drag, and that is what that picture shows, in terms of the government component of total demand in the economy. And this is why I just urge some attention and caution to the timing of your work on the fiscal sustainability issue so that you don’t unnecessarily weaken what is at this point still not a very strong recovery. Mr. PERLMUTTER. Thank you. Chairman BACHUS. Thank you. Mr. Hensarling? Mr. HENSARLING. Thank you. Good morning, Mr. Chairman. Mr. BERNANKE. Good morning. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 24 Mr. HENSARLING. I believe we have seen the greatest fiscal and monetary stimulus thrown at our economy in the history of our country, perhaps the history of the world. Regardless of where we were in September of 2008, to round out some of the analysis in your testimony, we now are at 29 consecutive months of unemployment being above 8 percent, when the President told us if we passed the stimulus bill, it would not exceed 8 percent. We know that we have had 3 months now where unemployment has been on the rise above 9 percent. Since the President has taken office, there has been a 40 percent increase in the number of Americans who receive food stamps, one in seven. The average number of weeks it takes to find a job, according to the Bureau of Labor Statistics, is 39.9 weeks, the longest in recorded history. And now, entrepreneurship or new business starts apparently are at a 17-year low. So after the largest monetary and fiscal stimulus in history, if I have my figures right, and I believe they came from the Fed, public companies are sitting on roughly $2 trillion of excess liquidity. Banks have about $1.5 trillion of excess reserves, I believe, that is according to your data. In your testimony you mention a lack of consumer confidence, but nowhere in your testimony did I hear a lack of business confidence. And what I believe I am seeing is the economy is not so much suffering from a lack of capital, but a lack of confidence. So either you and I are looking at different business surveys and talking to different people, but I was curious why that was not part of your testimony? Mr. BERNANKE. The business confidence picture I think is more mixed. I mentioned in my testimony that equipment and software investment has actually been quite strong, which suggests that firms are not hunkering down completely. They have been very slow to hire though; you are correct. In terms of the surveys, some of the recent purchasing manager surveys have been at least positive, but the small business confidence has been weak, and I think that would be consistent with what you are saying. Mr. HENSARLING. Mr. Chairman, having spoken to a number of ‘‘Fortune 50’’ CEOs, very large investment fund managers, the people who are most important to me, small business people in east Texas that I represent, I can tell you the anecdotal evidence is overwhelming that job creators and investors lack confidence in this economy. We can argue about the underlying cause. What I am hearing is the fear and uncertainty surrounding the President’s health care plan, frankly, major portions of the Dodd-Frank legislation, the tax snap-back that is already in current law, regulatory overkill from the EPA, and then, last but not least, certainly the national debt that looms before us. So, again, perhaps we are speaking to different people. Speaking of the national debt, and the Nation is somewhat focused on the debt ceiling, although I think the investment community is still somewhat focused on the Eurozone, I believe that August 2nd is a very, very serious date. But I do want to separate fact from fiction. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 25 When people speak of debt, I believe—rather, of default, I see that as something very different from sovereign default. In your opinion, does the President, does this Administration lack either the will, the means or the authority to keep bondholders current? Mr. BERNANKE. Let me just say one word about the previous thing, which is I don’t think we are in all that much disagreement. There are a lot of uncertainties in the economy, regulatory, fiscal, and also about the sustainability of this recovery. So I agree with you on that. On the ability to pay debtors, I think there are some operational risks and concerns, but I think for at least a while, the Administration will do all that it can to pay the debt. The question arises if to do that we stop paying other obligations to government contractors— Mr. HENSARLING. The question was specifically on default on sovereign debt. My time is just about to run out. But the President 2 days ago on the 11th said, ‘‘And what I have tried to explain to them is, number one, if you look at the numbers, then Medicare in particular will run out of money and we will not be able to sustain that program no matter how much taxes go up.’’ My time has expired. But perhaps in writing, you could respond to the extent whether you agree with the President and to what extent— Chairman BACHUS. We actually have allowed people to give a response to your question. So if you want to respond? Mr. HENSARLING. In dealing with the long-term structural debt— Chairman BACHUS. I will let him answer then. Mr. BERNANKE. As you know, Medicare is not a fully funded program. The premiums that are paid in only cover a portion of the costs. There is a trigger when the reserves get into a certain point, which forces Congress to look at it. But I think from a fundamental economic point of view, it is clear that the increase in health costs and the aging of the population make this a larger and larger part of our economy and it is going to be very, very difficult to find the revenues to finance it in its current form. Chairman BACHUS. Thank you. At this time, Mr. Cleaver is recognized for 5 minutes. Mr. CLEAVER. Thank you, Mr. Chairman. Thank you, Mr. Chairman. Like Mr. Hensarling, I am a native Texan. In fact, I was born not far from where he lives. So, believe it or not, there is a town in Texas called Cut and Shoot, and I grew up in public housing and it is a little rough, so I learned the term ‘‘cut and run home.’’ So now we are having a new version put up, it is called ‘‘cut and grow.’’ I am just wondering if that is real, if we can cut spending dramatically and then the economy grows, if that is an accurate description? Can you help me understand it, cut and grow? Mr. BERNANKE. I think you have to maybe look at it on several different dimensions. First, we have a fiscal sustainability problem over the long term so we need to take a long-term perspective on that. But we do have a problem and we do need to address that. Secondly, in terms of longer-term growth, we really just don’t want to cut, cut, cut or we just want to look at what we are cutting and how we are cutting. We want to make sure that we are doing VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 26 the things, making the investments that will help the economy grow, and that includes things like fixing the Tax Code and so on. But in terms of the very short term, as we were discussing a little bit earlier, I think that you need to be a little bit cautious about sharp cuts in the very near term because of the impact, potential impact, on the recovery. That doesn’t at all preclude, in fact, I believe it is entirely consistent with a longer-term program that will bring our budget into a sustainable position. Mr. CLEAVER. Thank you. A couple of quick ones, if I can get them in. If cutting taxes creates jobs, and we cut taxes over the last 10 years and fell into a recession, an historically impactful recession, is it then logical that if we continue to cut taxes, that all of a sudden we will grow because we said tax cutting will somehow create jobs? Mr. BERNANKE. The very severe recession which we have recently experienced and which we are still trying to recover from was caused primarily by the financial crisis, and that had many, many causes, regulatory, private sector behavior and so on. So I think of that as sort of something that happened that wasn’t really directly related very much to tax policy, for example, except very indirectly. So I wouldn’t draw that connection. I think taxes can be viewed as having two roles. One is that like the payroll tax cut, they provide some extra income to consumers in a period of very weak consumer spending to give them more income to help provide demand for the economy. In the longer term, you want to have a Tax Code which promotes good economic decisions, work effort, saving, investment, efficient choices and so on. So they are somewhat different. You don’t want to conflate those two. Depending on the state of the economy, those two sources of benefits from tax cuts are somewhat different. Mr. CLEAVER. But if we paid $1.3 trillion in wars that shouldn’t be continuing, we took $250 billion out of the economy with Medicare Part D that we just gave the American public without paying for it, I am convinced that all of that put together with the tax cuts and some other factors that you mentioned created the problem. We are not able to create jobs right now, so here is what is happening I think in my district in Missouri, the Kansas City, Missouri, area. Somebody lays off 10 workers, line workers, and then they decide they are going to hire again, and this time they hire 2, maybe 3 workers, in tech jobs, which means that most of those people who were laid off are never going to be able to get their job back. Is this the time that we probably should have some workforce retraining in order to make sure that we have a workforce that can actually compete with foreign companies for productivity? Mr. BERNANKE. As I mentioned earlier, I think one of the big problems we have, and it is going to last even beyond this recovery, is the fact that we have millions of people who have been out of work for 6 months or a year or more. We have millions of people who are insufficiently trained to work with new technologies and to compete on a global basis. There are many ways to help people get up to speed, through technical schools or a whole variety of programs. But I do think that one of the important things we need to do for our working people is to make sure they have the skills they need to get decent VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 27 work and that those skill requirements are only going to go up over time. Chairman BACHUS. Mr. Miller? Mr. MILLER OF CALIFORNIA. Thank you. It is good to have you here, Mr. Bernanke. I enjoyed your testimony. I agree that instability in the marketplace is having tremendous impact on the recovery, and historically about every recovery has been led by the housing industry. And you also say that people aren’t consuming because of the wealth lost in the housing sector, and I think you are absolutely correct in that. But there is a lack of confidence in the housing market today. Mortgage refinances continue to fall, as you said, mortgage purchases continue to decrease, and mortgage applications continue to fall. In my State of California, and many other high-cost States, raising the conforming loan limits like we have recently has had a positive impact on the marketplace. Yet at the same time now, we are going to decrease those loan limits in those high-cost areas, which on the other side is going to have a hugely negative impact on those markets. And the loans being made in those marketplaces right now seem to be some of the best producing loans that they are making. Without a doubt, Freddie Mac and Fannie Mae as they currently exist have to go away, but there has to be a viable replacement for them. To say we are just going to get rid of them without having a viable alternative is unrealistic. It is going to be counterproductive to the marketplace. But at the same time the housing action needs to be taking place at this point in time, a need for a viable secondary marketplace has to be established, taxpayers must be protected. Safety and soundness has to be a huge concern, but we must allow the private sector at the same time to stand up and be given an opportunity to stand up. Do you believe that now is the time for major reforms to the housing market? Mr. BERNANKE. Yes, sir. This was the main piece of unfinished business in the financial regulatory reform, the area not addressed. As you know, Treasury has put forth some propositions. A number of Members of Congress have put out plans. I think it would be very helpful if we could begin to get some clarity about that. It would probably increase confidence on the part of mortgage originators and so on to know they would be able to find secondary markets for their mortgages. Mr. MILLER OF CALIFORNIA. And lack of charity is killing the marketplace. Nobody knows what to expect tomorrow. Many are pulling back today because they don’t know what to expect. So do you see the potential in the future for private capital playing a strong role in the functioning market for mortgage lending? Mr. BERNANKE. Certainly. Many plans that have been proposed involve private capital. One example is so-called covered bonds, where banks sell bonds backed by mortgages to private investors. It doesn’t involve any government funding at all. Or we could have some system where the securitization function performed by Fannie and Freddie is done by private financial institutions. So I think it is entirely possible. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 28 It should be noted that Fannie and Freddie were effectively subsidized and therefore a private market system is probably going to increase the cost of mortgages a little bit. But that is just the consequence of taking away a subsidy which in the end proved to be very costly to our economy. Mr. MILLER OF CALIFORNIA. The problem I have with the Freddie and Fannie hybrid concept was that the taxpayers were at risk and the private sector made all the profits. Mr. BERNANKE. That is right. Mr. MILLER OF CALIFORNIA. That is unacceptable. What do you see as barriers to private capital entering mortgage lending and the market for home loans? Mr. BERNANKE. Currently, there is not much private capital because of concerns about the housing market, concerns about still high default rates. I suspect though that when the housing market begins to show signs of life, there will be expanded interest. I think another reason, to go back to what Mr. Hensarling was saying, is that the regulatory structure under which securitization, etc., will be taking place has not been tied down yet. So there are a lot of things that have to happen. But I don’t see any reason why the private sector can’t play a big role in the housing market, securitization, etc., going forward. Mr. MILLER OF CALIFORNIA. Representative McCarthy and I introduced a bill last week that we believe does that. It sets up a function of the facility, recognizing housing is critical to stabilizing the economy. Private capital must be the dominant source of credit. The government must have some continuing role, but it must be protected, and safety and soundness of underwriting principles must be in place to protect the taxpayers. But the problem we have today is that most investors, you are looking at mortgage-backed securities, doubt the confidence in many that are put out by the private sector. The GSEs are the only ones that they have confidence in they will be paid their investment back and receive a return on it. But it seems like there needs to be a facility available that prioritizes safety and soundness but provides liquidity to the secondary market from the private sector. And we think that has to be done. The longer Fannie and Freddie go, the larger the losses are going to be, and that has to be terminated. I yield back. Thank you. Chairman BACHUS. Thank you. Mr. Ackerman? Mr. ACKERMAN. Thank you, Mr. Chairman. Chairman Bernanke, thank you. It is good to see you. All of us on this side of the table ran for office seeking the jobs that we have. Many of us told the people who put us here that we understood that their first priority had to do with jobs and we pledged to make jobs our first priority and to do everything that we could do to improve the job situation and increase the number of jobs and help to create jobs. Jobs are not just a concept. You don’t have to explain it to people. They understand the consequences of having one or not having one. Many of us also, to the great applause of some crowds, told people that we would never, and took blood oaths, never raise the debt ceiling, and the crowds yelled their approval. The debt ceiling is a VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 29 lot more difficult and is more conceptual to a lot of people and they don’t really understand it, and a lot of people use jingoistic phrases about sit around your kitchen table and balance your checkbook, and people say yes, that makes a lot of sense. A number of us pledged affirmatively on both the jobs and the debt ceiling. In a very short number of days, the rubber is going to hit the road or something is going to hit the fan or we are going to have one of those moments. But it is going to be very telling. If indeed the people who took the blood oath on the debt ceiling and swore to people on jobs refuse to move and we actually do not raise the debt ceiling, could you explain the correlation and how many jobs we would be creating? Mr. BERNANKE. First, the analogy about balancing your checkbook, getting your finances in order is wrong. The right analogy for not raising the debt limit is going out and having a spending spree on your credit card and then refusing to pay the bill. That is what not raising the debt limit is. Mr. ACKERMAN. I know you get it. Mr. BERNANKE. In terms of jobs, I think the worst outcome if we don’t raise the debt limit is that at some point, we default on the debt, and that would create, as I have said before, a huge financial calamity, which in turn would affect everybody and would set job creation back very significantly. But even if— Mr. ACKERMAN. What do you mean by significantly? Is that quantifiable? Mr. BERNANKE. We saw what happened in 2008–2009 when we had two consecutive quarters of 6 percent negative growth in the economy. I think something on that order of magnitude would be certainly conceivable. As to Mr. Hensarling’s question, even if we are able to maintain payments on the debt and the interest by prioritizing it and assuming that operational issues and so on are solved and confidence is retained, it still would involve a very substantial reduction in government payments, including Social Security checks and military pay and things of that sort that would force people to cut back on their spending, reduce their confidence. It would no doubt have a very adverse effect very quickly on the recovery. So even if we were able to continue to pay our debts, it would have a negative impact. Mr. ACKERMAN. So you just said we would lose jobs and not create jobs if we don’t— Mr. BERNANKE. If we don’t raise the debt ceiling. Yes, I am quite certain of that. Mr. ACKERMAN. I have a second question, not related, and that has to do with the conforming loan limits that are about to change. I represent one of the counties in the country, and there are 669 such counties and they are in 42 different States, that are going to be affected by this. The housing market in one of my counties is pretty high. It doesn’t mean the houses are way above modest. It means that real estate prices are very high. It could be the regional market up in New York and on Long Island. These are not necessarily mansions, but there are many of them, as there are in the other 669 districts that have this kind of situation, that are affected. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 30 You make note in your statement that the housing market and the low level of new home buys is a huge problem. The people looking for these homes are among the most qualified buyers by any set of standards and circumstances— Chairman BACHUS. Mr. Ackerman, I will let him answer the question. Mr. ACKERMAN. How do we reconcile the fact that these people are not going to buy homes when they are qualified to do so and to absorb so many of the homes on the market? Mr. BERNANKE. As far as Fannie and Freddie are concerned, there is a tradeoff there between supporting the higher priced homes and weaning the system off of unusual limits that were put on during the crisis. I understand that the private sector is taking at least a significant number of the so-called jumbo mortgages, but maybe at a higher cost, so it is a little bit of a tradeoff there. I don’t really have an answer, other than to say we have to get our housing finance system back into working order. Chairman BACHUS. Thank you. Mr. Westmoreland? Mr. WESTMORELAND. Thank you, Mr. Chairman. Mr. Bernanke, you made a statement that not raising the debt ceiling was like going out on a spending spree and then not being willing to pay your bill. Were these people on a spending spree drunk and didn’t understand that they were eventually going to have to pay it back? Mr. BERNANKE. I don’t know. The point was that the debt is to pay for tax decisions and spending decisions that the Congress has made and the President has signed and have been already implemented. Mr. WESTMORELAND. Because I know the debt ceiling was raised in June of 2010 after a spending spree of deficit spending. The Senate has not passed a budget in almost 800 days. We continued to operate our government by a continuing resolution until April of this year. So the people who were in charge of spending this money either didn’t care if we had to pay it back or they didn’t think we had to pay it back. There is something there. So I agree with you that it is not like paying your debt, but I don’t know if the people who accumulated this debt, what they had in mind for the program. To me, the people who spent the money and got us into this debt have come up with no solution to how we should fix it. So the people who didn’t run the debt up are the ones trying to come up with a solution. Let me ask you another question. You are talking about the housing market. I come from an area in Georgia that had a lot of new development, a lot of growth. We have had 65 bank failures in Georgia. A lot of those were due to the fact of people being so heavy into commercial real estate, acquisition and development and so forth. What is your take on a bank that either received TARP funds or a bank that came in under a loss share agreement, an acquiring bank, and fire-sold the assets of either their bank or the bank that they acquired by putting them on an auction, selling them for 30 or 40 cents on the dollar, and by doing that, because they had a loss share agreement with the government, or because they had VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 31 gotten this TARP money, that the community banks that had loans in this same area on real estate, their values were deflated, knocked down. Homeowners who lived in these subdivisions that had bought these houses, their value was knocked down. They no longer had any equity, not out of any fault of their own, but because the government had given money to banks or entered into loss share agreements for them to come in and to flush these socalled troubled assets away. So we have had a lot of communities that have immediately, community banks, that have immediately had to write down these loans. They close them because they don’t have the capital. They can’t raise the capital reserve. So do you see a problem with that? Then the last question, and I will give you a chance to answer, on the Neighborhood Reinvestment Act, we just had a situation in my district where a county purchased some homes from a bank that had been foreclosed on, so they got the bank out of the deal. This is Federal money that we gave them for the neighborhood revitalization. It is an active neighborhood, it is a fairly new neighborhood. People have just moved in. There are still builders in there building. This county gets the money, goes in, rehabs the houses, and gives anybody that wants to buy one $20,000 for a downpayment. It kills the builders. It kills jobs. So those are three examples of government intervention coming in to try to do something good that has actually destroyed jobs, destroyed wealth, and destroyed communities. I have counties that don’t even have a community bank. Could you explain some of the thinking behind that? Mr. BERNANKE. I am not familiar with those specific cases. I do know that fire sales from failing banks or from banks that are just trying to get their capital position in better shape, or distressed sales of REO, real estate owned by banks, have brought down prices, have brought down appraisals, and that is one of the reasons that the housing market is weak, because it is hard to get a loan because your house doesn’t appraise at the level that you would think it would because of nearby houses which are in distressed condition. So I think that is a major issue and we need to address that. I didn’t quite understand the part about the downpayment. One of the things that is also harming home values is being in neighborhoods with a lot of foreclosed houses around. I think efforts to rehabilitate neighborhoods and perhaps to convert if necessary owned homes to rental homes or do whatever is necessary to restore the neighborhood, that is only going to be good for housing prices if you can do that. So it is really a question of executing these policies in a constructive way. Chairman BACHUS. Thank you. Mr. Carson? Mr. CARSON. Thank you, Chairman Bachus and Ranking Member Frank. Thank you, Chairman Bernanke. Some are still expressing concerns over an unduly lackluster economy and problems that will loom heavier, such as unemployment heading toward 10 percent. I did support TARP because I believed the consequences of inaction were far too grave to not re- VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 32 spond at all. However, banks are still not lending to the public and vital small businesses. How, sir, do you plan on, firstly, encouraging banks to lend to our Nation’s small businesses and the American public in general? And, secondly, as you know, more banks have indeed tightened their lending standards than have eased them. Does the Fed plan to keep interest rates low for an extended period of time? Are the Fed’s inactions here meaningless unless banks are willing to lend? And, lastly, what are your thoughts on the requirement of 20 percent as a downpayment and do you believe that this will impact homeowners significantly or not at all? Mr. BERNANKE. Banks have stopped tightening their lending standards according to our surveys and have begun to ease them, particularly for commercial and industrial loans and some other kinds of loans. Small business lending is still constrained, both because of bank reluctance, but also because either lack of demand, because they don’t have customers or inventories to finance, or because they are in weakened financial condition, which means they are harder to qualify for the loan. The Federal Reserve has been very focused on trying to promote small business lending. I don’t want to take all your time, but we have provided guidance to our examiners. We have worked with our examiners to tell them how to balance between the needs of safety and soundness and the needs of making good loans to small businesses. We have had meetings and conferences all over the country with small businesses trying to get their perspective. We have an ombudsman. If anybody wants to tell us about a problem, we would like to know about it. That is on our Web site. So we have been working hard to do that. Our low interest rates do support the economy through a number of mechanisms, including lowering mortgage costs and lowering car loans and other types of rates. On the 20 percent down, I think you are referring to the qualified residential mortgage, the QRM. This is a rule which we had out for comment and we are still listening to the comments. The idea was that Congress passes a risk retention requirement of 5 percent, that if you sell a securitized package of mortgages, you have to keep 5 percent of that as a guarantee, essentially, you are guaranteeing those mortgages as being of good quality. The QRMs are the mortgages Congress intended to be exempt from that requirement, so presumably that should be mortgages that are very high quality. We looked at the criteria that affect mortgage delinquency rates, and high downpayments were one of the things that really stood out as being one of the factors that keeps delinquency rates down, because people have a lot more cushion if they have a big downpayment. We don’t think that this would necessarily block homeownership because there would still be a large market subject to the risk retention requirement where downpayment requirements would be set by the originators, as is now the case. But, again, we are taking comments on this and we will certainly listen carefully to whatever the public has to say. Mr. CARSON. Thank you, Chairman Bernanke. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 33 Thank you, Mr. Chairman. Chairman BACHUS. Thank you. Mr. Huizenga? Mr. HUIZENGA. Thank you, Mr. Chairman. Mr. Bernanke, I appreciate this opportunity. I plan on kind of talking fast and I may be sending out a letter with some additional questions. But I want to flash back a couple of, maybe a couple of weeks ago, a month ago, when the Republican Caucus met with the President at the White House. One of my colleagues, Reid Ribble from Wisconsin, who is the chairman of a new committee, a new caucus that he created I am a member of, the Small Business Owners Caucus, I will say the Job Creators Caucus, got up and said, ‘‘Mr. President, there are three things that those of us in small business are looking for. One is consumer confidence, two is credit availability, and the third is certainty. We are looking for certainty so that we can plan.’’ That really would be the basis and the foundation for recovery. I want to try to work through a couple of those. And I appreciated my colleague from California talking about housing. My background is in real estate and developing and also in construction. My family has a ready mixed concrete company, and I own our gravel company and gravel-sand company. So I can tell you on page 3 when you talk about residential construction is at extremely low levels, that might be the understatement of your remarks, especially coming out of Michigan where for a protracted time here, we have had some very difficult times. But I want to focus in on what I am concerned about, consumer confidence, which you reference on page 3 of your remarks as well. On page 8, you reference, ‘‘temporary shocks to the economy.’’ I am looking at that and I am seeing inflation, I am seeing oil prices which translate directly into at the pump, food and commodities and those types of things. Then on page 4, you also said that this rise in inflation is transitory and you expect inflation to subside. And I am curious, what is going to subside? Oil prices? Gas prices? Commodity prices? Are housing prices going to recover so people are going to have that cushion that you were just talking about? I am curious. I want to know what you believe is going to cause that confidence to increase. Mr. BERNANKE. On the question of inflation, we had substantial increases in oil prices earlier this year. There was about a $25 jump per barrel in oil prices after the Libyan revolution began, so oil prices were driven up about $10 or $15 above where they are now. Since then, gas prices are down about 35 cents, something like that. So gas prices and oil prices were a very big part of the inflation that we saw, and that seems to be leveling off and coming down some. The same way with food. A lot of the increase in food prices had to do with bad weather, bad crops. There have been some expectations now of much bigger harvests, say, in corn, which is driving down those prices. So we are going to see some relief in food prices as well. Mr. HUIZENGA. I am sorry, I am running out of time and I want to quickly move on. I understand where you are going. I do need VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 34 to express though, I was recently in Iraq and Saudi Arabia. I had a chance to meet with the oil minister in Iraq, Mr. Shahristani, and the oil minister in Saudi Arabia. Both of them said after Libya, they actually ramped up their production. It is not a production issue. We were asking specifics about why gas prices were going to be coming in. And I broached the subject with his excellency, Mr. Shahristani, and said, ‘‘What about the U.S. dollar and the valuation of the U.S. dollar?’’ He paused and kind of looked at me. He said, ‘‘Congressman, I was trying to be polite.’’ They recognize that what we have done by devaluing our dollar as an artificial increase in oil prices, because oil is paid for in one way around the world—U.S. dollars. And I am concerned about that as well, and I am curious if you can address that? Mr. BERNANKE. The falling dollar, which has fallen for a lot of reasons, including our reduced safe haven demand and so on, has contributed some to the increase in oil prices. But if that were the only factor, prices in Euros and other currencies would be going down. In fact, prices are rising in all currencies. So it is not just the dollar. Mr. HUIZENGA. Not according to the two oil ministers. Mr. BERNANKE. It is a fact that prices are rising in all currencies. Mr. HUIZENGA. Maybe we can address that in some of our dialogue. I am concerned. My wife is from Canada originally; 18 years ago, when I had the opportunity to marry her, it took 64 cents U.S. to buy a Canadian dollar. Yesterday, it was $1.04 to buy a Canadian dollar. I simply don’t see how we are not going to avoid inflation in the future, and isn’t that sort of a consequence of some of our monetary policy as we are moving forward? Mr. BERNANKE. There are two separate concepts. The buying power of the dollar, which is inflation domestically, and then the exchange value of the dollar externally, which is what you are talking about. We have kept inflation low and steady since the eighties. Mr. HUIZENGA. Internally. Mr. BERNANKE. Internally, yes. And as far as the monetary policy is concerned, the one thing we could really do to support the dollar is keep our inflation rate low, and that is what we have done. So the reason the dollar is falling over long periods of time has to do with things like flows in the trade deficit and flows of capital in and out of the country. Mr. HUIZENGA. And not due to us printing money. Chairman BACHUS. Thank you. Mr. Himes? Mr. HIMES. Thank you, Mr. Chairman, and thank you, Chairman Bernanke, for being with us today. I have just a couple of questions. The first is based on the fact that it is a parlor game around here, perhaps no better exemplified by Mr. Westmoreland’s question about whether those people were drunk to you in making policy over the last couple of years to attach blame and to try to saddle either the President or the majority or the minority with full responsibility for the economy. I was struck by your testimony that in this quarter in particular there was a significant effect around temporary factors, the earth- VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 35 quake in Japan, oil prices, perhaps the drought. I wonder if you could elaborate on that for a minute or two and give us a sense for what the magnitude of that effect was over the roughly three quarter drop in GDP growth, and though you can’t obviously predict exogenous events in the future, how that is likely to taper off in the coming quarters? Mr. BERNANKE. We saw pretty significant effects on both the production and sales and prices of automobiles coming from the supply chain disruptions in Japan. There were also some effects on the tech industry as well, but much smaller. Oil price increases really hit, as you know, family budgets. Gasoline prices. And that was a reason that consumer spending in the second quarter was extremely weak. So we are looking at a first half growth rate of in the vicinity of 2 percent or maybe even a little bit less, which is not enough to bring down the unemployment rate. The Federal Reserve is expecting 3 percent plus growth in the second half. We will see if that is the case. That would represent in particular a resurgence in auto production and sales, coming from the fact that the supply chain problems are now being dealt with and gas prices are a little lower, and we expect to see consumers a little bit stronger because they have more disposable income after their energy costs. Mr. HIMES. Thank you. My second question is, I was struck that in your testimony you list four headwinds facing the economy. The fourth of those headwinds was fiscal tightening at all levels of government. I share with Mr. Lucas and Mr. Perlmutter the belief that we need to put together a large package that will involve cuts over time for fiscal sustainability, but there is also a current circulating in the Congress and elsewhere that there is a notion that severe cuts now will contribute to the health of the economy. Your listing as fiscal tightening at all levels of government as a headwind would seem to be a rebuttal of that notion. I am wondering if in fact you would consider that a rebuttal of the idea that severe cuts now are economically positive. Mr. BERNANKE. To the extent possible, we should make the cuts over a long term because this is a long-term problem. That is where the issue of sustainability is. I do think you need to be careful about sharp cuts in the very near term, exactly for the reason you mention, which is that the economy is still growing very slowly. For example, in the job market report just last week, the private sector job creation, which of course is very important, was a good bit better than the headline number because there were about 40,000 jobs lost in State and local governments, and it is not just jobs in government. It also involves the indirect effects of procurements or tax cuts or whatever is working through the rest of the system. So I think some care needs to be taken there. I realize it is difficult, at the same time being credible and strong about the long-term addressing of the deficit problem. Mr. HIMES. Understood. No, and I agree with that. Would you agree with my playing back to you the notion that very significant cuts to government spending now, with its effect on aggregate demand, runs the risk of an adverse economic consequence? Mr. BERNANKE. I think that is a consequence that really needs to be taken into account. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 36 Mr. HIMES. Thank you. The Simpson-Bowles proposal, which I thought was a good start on such a big package, suggested that significant cuts perhaps be postponed until late 2012 or early 2013. I wonder if in my remaining time you can give us a feel of your sense for from the standpoint of not doing damage to what is a hesitant recovery, how you might encourage us to think about the effects of different levels of cuts over time on the GDP. Mr. BERNANKE. That is a tough question. It depends in part on how quickly the economy recovers. We have been disappointed so far. If it is still growing very slowly, that will continue to be a problem. At some point, there is an issue of being credible and demonstrating that you are serious, and so I think beginning to phase in cuts, along the lines that Simpson-Bowles talked about or a couple years down the road is certainly something you may have to do in order to convince the markets that you are going to take action against the deficit problem. Mr. HIMES. Thank you. Thank you, Mr. Chairman. Chairman BACHUS. Thank you. Mr. Duffy? Mr. DUFFY. Thank you, Mr. Chairman, and hello, Chairman Bernanke. Just quickly, could you give me the exact number of what you mean by severe cuts? Are we talking billions over 10 years, trillions over 10 years? Mr. BERNANKE. Oh, over the 10 years? Mr. DUFFY. Sure. Mr. BERNANKE. Several numbers have been put out. Mr. DUFFY. But just quickly, what is your number? Mr. BERNANKE. The so-called grand bargain that has been discussed is something in the vicinity of $4 trillion over 10 years. Mr. DUFFY. Is that too much? Mr. BERNANKE. No, it is not too much. It has the advantage, if it can be done, it has the advantage that it will stabilize our debt, the ratio of our debt to GDP, and that will be a very encouraging development. Mr. DUFFY. Thank you for that because I want to make sure we are all on the same page of what severe means. We talk about these— Mr. BERNANKE. We are talking about timing also. I am talking about a 10-year window or a 12-year window. Mr. DUFFY. Would you like to see those all backloaded or do we need to have some of those cuts up front? Mr. BERNANKE. It can’t be completely backloaded for the reasons I have said. We have to be careful in the short term. Mr. DUFFY. Here is one of my concerns. I am talking to my job creators I represent the northwest quarter of Wisconsin. They talk about uncertainty in the marketplace and we have heard a lot about that today, but it comes from this health care reform bill, it comes from the stimulus bill, it comes from our government picking winners and losers, but more frequently I am hearing them talk about the massive debt, this $14 trillion-plus debt, the fact that we are going to borrow $1.5 trillion this year, and what I keep hearing them talk about, we are concerned about where interest rates are going and we are concerned about inflation. We are concerned about punishing tax increases to pay for this debt, and so if I am looking at expanding or growing my business, I do not know that VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 37 I am going to do that because of all the uncertainty that is created in the environment today. It does not necessarily hurt them. It hurts folks in our communities who need jobs. You have talked about certain numbers of how much we should cut and where we should go, but there has not been a lot of clarity on where we need to be today as we move forward. Right now, we are at 70 percent of debt to GDP in publicly held debt. Within 10 years, within a decade we are going to be at 90 percent of debt to GDP. I think that is very concerning because that is going to have a real impact on our economy. Maybe this is a rhetorical question, but if we are not going to cut now, then when? If you look at the political difficulty that we face today, when we have a debt that is $200 trillion in interest payments, when we go back to historic norms, it is going to be 400plus in interest payments. At what point is there going to be political courage to get the debt under control if we cannot do it today? And I think this whole conversation does come back to jobs, and my friends across the aisle talk about where is the Republican jobs plan. We tried the stimulus bill, nearly a trillion dollars of spending. It was their silver bullet, but the White House Council of Economic Advisers came out and told us really it was about $278,000 in government spending per job that was created. I would submit that is not a very good investment for the American taxpayer. But my question goes to this. As we look at an unemployment rate of 9.2 percent, do you think that we can help our job seekers by taxing our job creators a little bit more? Will it put more people back to work if we raise our taxes? Mr. BERNANKE. Again, I am not going to get into the breakdown of the deal, but I want to agree with the points you made earlier, which is if you were to really do something significant to solve the fiscal sustainability problem, I think it would have benefits in the short term. Mr. DUFFY. But do you think we can put people back to work by raising taxes on folks? Does that sound economically— Mr. BERNANKE. There are tradeoffs between fairness, between efficiency. Mr. DUFFY. But putting people back to work, are we going to put more people back to work by raising taxes? Mr. BERNANKE. It depends what the alternatives are. It doesn’t just—the question— Mr. DUFFY. So maybe we will put more people back to work if we raise taxes? Mr. BERNANKE. I am talking hypothetically now because I am not taking sides in this issue. You also talked about the benefits of reducing the deficit, so if there was some tax increase with a lot of spending increases that reduce the deficit a lot, maybe that benefit would outweigh the other costs. Mr. DUFFY. Sure, and I was just isolating taxes and increasing taxes and what does that do. Let me move on to a different question. We had talked about the QE2 with Dr. Paul. When you buy assets, where does that money come from? Mr. BERNANKE. We create reserves in the banking system which are just held with the Fed. It does not go out into the public. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 38 Mr. DUFFY. Does it come from tax dollars, though, to buy those assets? Mr. BERNANKE. It does not. Mr. Duffy. Are you basically printing money to buy those assets? Mr. BERNANKE. We are not printing money, we are creating reserves in the banking system. Mr. DUFFY. In your testimony—I only have 20 seconds left—you talked about a potential additional stimulus. Can you assure us today that there is going to be no QE3 or is that something that you are considering? Mr. BERNANKE. I think we have to keep all the options on the table. We don’t know where the economy is going to go. If we get to a point where we are like, the economy, recovery is faltering and we are looking at inflation dropping down towards zero or something where inflation issues are not relevant, then, we have to look at all the options. Mr. DUFFY. And QE3 is one of those? Mr. BERNANKE. Yes. Mr. DUFFY. Thank you. I yield back. Chairman BACHUS. Thank you. Mr. Peters? Mr. PETERS. Thank you, Mr. Chairman, and thank you, Chairman Bernanke, for being here today. In lieu of some of your comments that you have made through some of the questions regarding short-term fiscal policy and the importance of that in getting the economy stabilized, I would like to hear some of your comments on an issue that we are going to be taking up in Congress next week, which is a balanced budget amendment. As I know you are very aware, that with Federal policy and fiscal policy is at times of weak economy, oftentimes tax revenues are going to drop, and yet the demands for government will go up for unemployment compensation and other types of stabilizers are in place as a result of that. Do you have concerns about a balanced budget amendment and your ability as Federal Reserve Chairman to deal with a weak economy and unemployment issues in the future where fiscal policy is certainly a key component of that along with your monetary policy? Would you comment a little bit about a balanced budget amendment and are you concerned about that for the future? Mr. BERNANKE. Sure. First of all, let me just reiterate again because I don’t think everybody has heard me, that I am very much in favor of a substantial reduction in our fiscal deficits over time, and I think we need to do that, and it may very well be that some kind of structure, whether it is some kind of caps and triggers or whatever may be effective in helping Congress meet those goals. If you were to do something like a balanced budget amendment, I just would like to say that it would be very important to make it sufficiently flexible to deal with different contingencies. For example, what do you do during recession? What do you do during war? What do you do during a natural disaster? The Congressman mentioned so-called automatic stabilizers. One of the benefits of the budget as it is now is that when the economy weakens, tax revenues automatically decline, spending automatically rises and provides a little bit of stability to the economy. So I would not rule out, by any means, that kind of approach, but I VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 39 think it has to be written very carefully to create the necessary flexibility to deal with unforeseen circumstances. At the same time, and this is what makes it very hard, if there are no binding rules, no discipline, it is probably not going to help you very much. So it is a tough challenge to write an amendment like that that will accomplish everybody’s goals. Mr. PETERS. So flexibility obviously is very important. I know in this particular amendment, we need a three-fifths vote. I have been around long enough that a three-fifths vote is a pretty difficult thing to come by in this Congress. So that flexibility is not in that proposal, and it sounds as if you would have some concerns with that because of the lack of flexibility in order to deal with that. I want to switch gears a little bit and move to an article that Bruce Bartlett wrote yesterday that I thought was interesting. I do not know if you saw it. He was a senior policy adviser to Presidents Reagan and Bush, and it talked about the parallels of what we are seeing now to the 1930s, and I know you are a well known scholar of the Great Depression era in the 1930s. I would appreciate your comments. I quote a little bit here, he says Friday’s jobs report clearly indicates that the economy remains weak, yet the pressure to reverse stimulus and begin tightening fiscal and monetary policy has become overwhelming. He goes on to say, some economists are getting very nervous with the economy in a fragile state, and it may not take much to bring on another recession. Even a small amount of fiscal or monetary tightening may be enough to do that, and I thought it was interesting in his comparisons to 1937, and he goes on to say, the combination of fiscal and monetary tightening which conservatives advocate today, actually which is what they did in 1937, brought on a sharp recession beginning in May of 1937 and ending in June of 1938, and according to the National Bureau of Economic Research, real GDP fell 3.4 percent in 1938 and unemployment rose to 121⁄2 percent from 9.2 percent in 1937. I believe we are at 9.2 percent right now. Do you see some parallels between what happened in the late 1930s? Mr. BERNANKE. It is true that most historians ascribe the 1937– 1938 recession to premature tightening of both fiscal and monetary policy, so that part is correct. I think every episode is different. We have to look at what is going on in the economy today. I think with 9.2 percent unemployment, the economy still requires a good deal of support. The Federal Reserve is doing what we can to provide monetary policy accommodation. But as we go forward, we are going to obviously want to make sure that as we support the recovery that we also keep an eye on inflation, make sure that stays well-controlled. So we are aware of that lesson, but we have to take each situation as it plays out, and to see how the outlook varies according to new information that we receive. Mr. PETERS. I am glad you are aware of the lesson; hopefully Congress will also be aware of history so we don’t have to repeat it. I appreciate those comments. Thank you, Mr. Chairman. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 40 Chairman BACHUS. Thank you, Mr. Peters. I do think that is one thing they did right in 1937 is what the Chairman refers to. I think that did help. I mean they made a mistake by tightening, I am sorry. That is one of the things they did right. Mr. Renacci? Mr. RENACCI. Thank you, Mr. Chairman. And thank you, Chairman Bernanke, for being here. I read in quarterly reports investor perspectives and industry research that patience and moderate meager expectations are necessary regarding growth and job creation, but with 9.2 percent unemployment nationwide, sitting at 10 percent in my district, and the U6 up over 16 percent, my constituents can no longer really afford modest expectations or tolerate those. Patience is a virtue they can no longer afford to have. To me the whole thing we are doing here in Washington has to be about jobs, jobs, jobs. Tax reforms, stripping away harmful mandates and overburdensome regulations, getting our spending down to sustainable levels, free trade agreements, the whole thing all needs to be about economic growth and letting businesses create jobs. I believe, and my beliefs are not a political statement, my beliefs are from being a businessman for 28 years, employing over 3,000 people, creating jobs, being the CPA for multiple businesses, that today the business community and the financial services sector are locked up in uncertainty. Our economy is drowning in unprecedency of new reforms with each wave of new regulations, and the regulations crashing down on their heads before the effects of the last wave can really be understood, evaluated, and properly implemented. The battering that our job market has taken by these waves has not gone unnoticed by me or by the unemployed and underemployed constituents in my district, and thankfully not by you either. You made some headlines about a month ago at a press conference when Jamie Dimon asked you about performing an examination of the cumulative effects of these new mandates—DoddFrank, Basel III, not to mention health care—on jobs and credit availability. As I recall, your response was that you cannot pretend that anybody really has because it is just too complicated. I learned a long time ago in my business career that anything I do and anything we do should be SMART. SMART is an acronym for specific, measurable, attainable, realistic, and timely. The measurable one is the one I have a problem with. It has been a month now, the banks are now looking at much higher capital standards, the small community banks are looking at a repeal of Regulation Q, everyone is facing higher compliance costs. Has the Fed begun such an examination study yet? Can we expect to see it? Can we expect to see some measurability of what these regulations are? Mr. BERNANKE. Yes. Let me first say that I agree with a lot of what you said about free trade, smart regulations, fiscal stability, all those things would help, and I hope the Congress will pursue those directions, a good Tax Code and so on. It is very difficult to figure out all of the interactions of a complex system, but I do want to be clear that the Fed does do costbenefit analyses of every rule that we put out, and we publish VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 41 those cost-benefit analyses. That is both by law and by our internal practice. And we are doing our very best to take the statute that Congress gave us and try to make it as unburdensome as possible and still achieve the objectives. We have a very difficult balancing act here. We do not want to hamstring the financial system because it is so critical to the economy, to growth. On the other hand, it has only been a couple of years since we had this enormous financial crisis which threw us into this deep recession, so we do have to take necessary steps to make sure it does not happen again, and I assure you that the Federal Reserve has always been very attentive to trying to make sure that the rules and regulations that we promulgate consistent with the statute are as cost-effective as possible, and we do cost-benefit analysis quantitatively on these rules. Mr. RENACCI. It is interesting, though, you said that based on the statutes you have been handed. Do you ever look at them and say, these just are not working and come back and say, it is not working, here are the problems? Because, again, we have so much uncertainty in the marketplace. We have to get some predictability here to get this job market created again. Mr. BERNANKE. We are working to get this done as clear and fast as possible. Broadly speaking, the statute addresses the main areas where there were problems, and there are certain parts of it that we may want to revisit. There are others we might learn more about over time. So I am not saying it is a perfect bill by any means. I am not claiming that at all. But I also agree with you that we need to make our regulations as clear and as effective and as quickly done as possible, and we are aiming to do that. Mr. RENACCI. I know some people have asked in previous questions, but do you put uncertainty as a concern? Again, being a business owner in the past, uncertainty will cause a lock-up. We could talk about the government cutting costs and cutting jobs, but the private sector, small business owners create almost 67 percent of our jobs. We have to give them the certainty so they can create jobs. Mr. BERNANKE. You are not interested in my Ph.D. thesis of 32 years ago, but it was entitled, ‘‘Uncertainty in Investment,’’ and it was about how uncertainty can reduce investment spending, and I believe that. But there are many kinds of uncertainty. There is certainly uncertainty about regulation and those sorts of things, but there is also uncertainty about whether this is a durable recovery. People do not know whether to invest or to hire because they do not know whether the recovery is going to continue. So I think— obviously, we want to address the regulatory, trade, tax environment, absolutely fiscal environment. We also want to do whatever we can to make the economy grow faster and make people more confident. I think we will see a dynamic going forward. If the economy begins to pick up some, I think confidence will improve because people will have more certainty about the sense that this will be a durable recovery. I think that is a very important thing to be looking for. Mr. RENACCI. Thank you. Chairman BACHUS. Mr. Carney? VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 42 Mr. CARNEY. Thank you, Mr. Chairman, and thank you, Chairman Bernanke for coming today. I appreciate your remarks. It is obvious that when the Fed Chairman speaks, people listen. This rostrum was full when you started your testimony today, as was the room, and I think you have enlightened us with a lot of what you have said. I would like to review some of that and then try to explore some of these issues around coming up with a plan for fiscal discipline that makes sense, and we have had a little bit of back and forth with Mr. Duffy, Mr. Himes, and Mr. Peters as well. You said you support significant reduction in fiscal deficits, but you have also warned us against what you called, you cautioned us against what you called sharp cuts in the short term. Could you characterize in any kind of way the kinds of cuts, the kinds of programs? I know you have tried to shy away from that kind of a thing, but we have discretionary domestic spending, we have discretionary military spending, we have mandatory military and mandatory domestic, and then we have these big entitlement programs, and I would just like your view on those kinds of cuts as it relates to your caution about sharp cuts in the short term. Mr. BERNANKE. Let me preface this by saying that there is already a good bit of fiscal contraction going on in the sense that there was a big run-up in spending related to the stimulus and so on. That is now being withdrawn from the economy. Similarly, the States and localities have been under continuous pressure because of their limitations on their budgets, which has led them to be cutting, so we are already experiencing a good bit of fiscal tightening going on, and that is part of the reason why there are some headwinds in the economy. I cannot really pick and choose among programs. You certainly want to think about the efficacy and the desirability of these programs on their own merits, but I just want to be clear that cutting programs or raising taxes in ways that will reduce aggregate demand and spending and the ability of consumers to meet their bills and to purchase goods and services is going to slow the economy, and that is in turn going to offset some of the benefits of the cuts because it will reduce revenues and make the deficit worse in the short term. Mr. CARNEY. So let me suggest an approach based on the Chairman’s graph that he displayed on the screen, which showed basically entitlement programs spending that created the real challenge in the long-term deficits. You said yourself that the long-term deficits were really the problem. So is that to suggest that the structure of those entitlement programs is really what we ought to focus on in terms of the long term, and then in the short term maybe a different kind of an approach? Mr. BERNANKE. Yes. I do not think anybody is really proposing big cuts in, say, Medicare this year, but— Mr. CARNEY. But as the chairman pointed out and others, you just have to look at the graphs to see that Medicare and health care spending generally, whether you are talking about Medicare, Medicaid, military health care, is the big 10,000-pound gorilla. Mr. BERNANKE. That is right. I was going to say this graph shows a very long-run trend that we have to be worried about, but that means that this is a long-term problem that we have and we VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 43 need to address it over a period of time. Certainly, entitlements are part of the picture, and we will need to look at those and make sure that they are providing the support and medical care that they are intended to provide at the least possible cost. That is an important thing for us to be doing. But, again, that is a long-term issue. This is something that is going to take place over not just 10 years but maybe 20 or 30, but the more we can do now to persuade the markets and the public that we are serious about this and are making changes the better we will be. Mr. CARNEY. That is kind of the point with respect to having a plan in place when you raise the debt ceiling, right? It is important to raise the debt ceiling and it is important to have a plan in place is what I heard you say earlier. Mr. BERNANKE. Those are two legs, both important. Mr. CARNEY. So let me just explore with the 30 seconds I have left the interchange you had with Mr. Duffy. Mr. Duffy said putting people back to work—will we be able to put people back to work by raising taxes? I think I heard you say that it depends on how you do that, and if maybe I could reframe that, can we strengthen our economy in the long term with additional tax revenues maybe through tax reform or some other way? Mr. BERNANKE. Again, with the preface that these are congressional decisions, I think that taxes, the structure of the Tax Code matters a lot. So, the incentives are most affected by the marginal tax rates, and that is a very important thing to look at. There may be tax expenditures or tax exclusions, etc., which are maybe just government spending in disguise or just breaks that are not really achieving anything, and that might be a place that you would look and still be able to maintain or even lower marginal tax rates and improve the efficiency of the Tax Code in that way. I think most economists agree that broadening the base by eliminating breaks and cutting or at least maintaining marginal tax rates gives you a better tax system, promotes growth. Mr. CARNEY. So you think additional revenue has to be part of the picture? Mr. BERNANKE. Again, this is your decision, but I am just talking about how Tax Code should be structured. Mr. CARNEY. Thank you, Mr. Chairman. Chairman BACHUS. Thank you. We are going to go to Mr. Schweikert and Ms. Waters. We would like to end on a balance, if that would be possible. Those will be our last two questioners of the day. Mr. SCHWEIKERT. Thank you, Mr. Chairman. Chairman Bernanke, I would have been interested in your thesis from, what, 32 years ago. Oh, come on, that was funny. In the uncertainty, you have how many, what, about 99 Ph.D. economists at the Fed? Mr. BERNANKE. Oh, I don’t know. More than that. Mr. SCHWEIKERT. Oh, okay. I have been struggling to try to find good data or someone who has actually modeled the uncertainty of a regulatory environment, and I know some of that is, it may not even be the reg, it is the promulgation of the reg, the rule writing, VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 44 and the dampening effect that may have on economic growth or velocity in money or people willing to engage in activities. When you are doing your modeling of saying here is where we are, here is what we see coming in the next year or next month, but here is what we see in the regulatory environment, whether it be Dodd-Frank, whether it be EPA, whether it be some of the other things, do you ever model on the dampening effect of rulemaking? Mr. BERNANKE. We have been trying to analyze that. Unfortunately, we can look at things like stock market volatility in banks: things of that sort that reflect the uncertainty that banks have. Unfortunately, it is really hard to disentangle the effects of regulatory uncertainty from other kinds of uncertainty, like just the state of the economy, but we have tried to find those kinds of effects, and it certainly plays a prominent role. If you read our minutes of the FOMC, you will see that we discuss that issue quite substantially. Mr. SCHWEIKERT. It is an area I have a real interest in, particularly rulemaking, sometimes we would be better off even trying to squeeze down the timeline because knowledge is much easier to do decision-making than what is coming. You touched on something earlier, and this is one of—you and I have actually had the opportunity to talk about this before, the overhang of nonperforming assets that are still on balance sheets, and this could be everything from the home down the street that is under foreclosure to the nonperforming to toxic paper that may still be sitting on balance sheets. From a personal philosophy, I am one of those who believes we would be much better off if we aggressively pushed through nonperforming mortgage debt and others through the economy, got them sold, whether it was sold to an investor or first-time home buyer. Do you have any personal opinion on how much overhang is being created by the nonperforming debt, and, am I right or wrong in your opinion on being somewhat of an evangelical, of pushing that through the system and getting it consumed? Mr. BERNANKE. The area where this is most relevant is in the housing market, where we want to do all we can to keep people in their houses, to avoid foreclosures, to stabilize neighborhoods and so on. With that being said, there have been very long delays because of servicing problems and so on, and moratoriums, etc., that have really slowed this process down, and it is true that as long as there is a large number of distressed properties overhanging the housing market, it would be very hard for the housing market to begin to recover, and so addressing that problem I think is a very important one. I agree with that basic point. Mr. SCHWEIKERT. And I know we have seen some charting that when some of the large servicers have actually gone into mortgage forbearance, we have had a robo-signing or other issues, we are going to hold for 90 days, we can actually see values coming down even more aggressively. I don’t know if it is the anticipation of another wave of foreclosures or that typical uncertainty. I have often heard in some of the discussions here were the positives of the Fed buying this much paper, the quantitative easing. Would you be willing to share, because for every positive side there is often some negative, what you would say would be the VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 45 dampening or some of the costs in the economy of the fairly rapid monetary expansion? Mr. BERNANKE. I think the main one is that there has been some contribution to commodity prices, which we anticipated. Again, I think that supply and demand factors globally were by far the more important, but that increase in commodity prices offsets some of the benefits that the lower interest rates and more accommodative financial conditions have for growth and for addressing the risks of deflation, which we saw last August. Mr. SCHWEIKERT. The inflationary pressures you saw on many commodity classes, were they within the range you expected? Mr. BERNANKE. No, they were much larger, but because the bulk of those movements can be attributed and quite directly—I recently gave a speech that went through some detail on this issue—to global supply and demand conditions. For example, on the oil side, it is very striking that the United States is using less oil today and importing less oil today than it was 10 years ago. All the growth in oil demand is in emerging markets, which are growing very quickly. That demand is going up very substantially. At the same time we have seen constrictions on supply. So those are some of the factors that have been important. We did not anticipate Libya, we did not anticipate Japan. Mr. SCHWEIKERT. So it is externalities outside of our national borders? Mr. BERNANKE. Right. That is right. Mr. SCHWEIKERT. Thank you, Mr. Chairman. The last thing I will throw out is I think the Chairman may have broke Chairman Paul’s heart when he said gold wasn’t money. Chairman BACHUS. Thank you. Mr. BERNANKE. I think he will survive. Chairman BACHUS. Yes. Ms. Waters? Ms. WATERS. Thank you very much. Thank you for being here, Mr. Bernanke. We are always pleased to see you. I would like to ask you a little bit about the tremendous power that you have. It seems that there are about 21,000 transactions that are being examined. Basically, it is about the billions that you were able to lend out to banks and, I don’t know, hedge funds, what have you. This article that I am sure you have seen in Rolling Stone called, ‘‘The Real Housewives of Wall Street’’ mentions that the Fed spent billions in bailout to banks in places like Mexico, Bahrain, Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley and billions more to a string of lesser millionaires and billionaires and on and on and on. It mentions loans you made in the Cayman Islands, which causes us all a little bit of concern. You know the reputation of the Cayman Islands. But this is what caught my eye. This so-called shadow budget. There was a loan that was reported under your TALF program to something called Waterfall TALF Opportunity, a company whose chief investors included the wife of Morgan Stanley Chairman John Mack and a widow of a close friend of Mr. Mack who served as the president of Morgan Stanley’s Investment Banking Division. Neither of these women had any business experience to amount to VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 46 anything, but yet for an investment of $15 million, they received $220 million in cash from the Fed to purchase asset-backed securities like student loans and commercial debt, with the investors keeping 100 percent of any gains and taxpayers taking 90 percent of all losses. The reason I point that out to you is you know I have been in your face for a long time about opening up opportunities to minority banks, for example, and the discount window, they are undercapitalized. If they had money, they would lend money to our businesses that would create jobs in the minority community. The unemployment rate is just unconscionable. Business cannot get any capital. How is it that in this TALF program you and the so-called shadow budget that they are referring to could make it possible for Waterfall Opportunity to end up with just a $15 million investment getting $220 million when I cannot get any money from you for these small and minority banks. Could you answer me that? Mr. BERNANKE. We will have to look at that story. I am very skeptical. Ms. WATERS. You mean you have not read this story and investigated in your house to see what happened? Mr. BERNANKE. What I do know is that this story completely misrepresented how this program worked and what the goal of it was. The goal of it was to get the asset-backed securities market working again, which we did very successfully and at no cost to the taxpayer. It worked very similarly to the PPIP program in the Treasury, where any U.S. company, minority or otherwise, if they purchased assets could use part of— Ms. WATERS. I don’t want to interrupt you, but I understand what TALF was all about. Remember, I was deeply involved in TARP and TALF and all of that. Mr. BERNANKE. Right. Ms. WATERS. But as I have talked with you over the years, you always remind me that minorities need to concentrate on education and training and competency, and as you know, I have created these opportunities for you to meet very competent investment bankers and asset managers, I have brought them to Washington. You have been very generous. You have come to our meetings. Why is it that something like this little company with these two women with no background, no experience, no education can end up because they are connected get this kind of money, and I cannot open up these opportunities for minorities? Mr. BERNANKE. That program was open to any U.S. company. Ms. WATERS. How many African Americans did you fund through the TALF program? Mr. BERNANKE. Any who qualified and— Ms. WATERS. No, no, no, Mr. Bernanke. Mr. BERNANKE. I don’t know the answer to your question offhand. We can certainly try to find out for you. Ms. WATERS. I don’t want to interrupt, but I really do need some answers. Can you tell me—if you cannot tell me today, can your office give to me the number of minorities, and African Americans in particular, who have been funded under the TALF program? Similar to the way these two women were who have no experience. VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 47 Mr. BERNANKE. Again, I do not think that story is very accurate. But, anyway, I am not sure we can because we lent to companies, and they have lots of shareholders, and I am not sure we can identify the race of the shareholders. Ms. WATERS. All right. I will follow up and expect to get some answers from you on that. Meanwhile, I have a few seconds here. The Bank of America is attempting to settle with investors in Countrywide mortgage-backed— Chairman BACHUS. Your time is actually over, but I will let you ask one more question if the Chairman is willing to indulge. Ms. WATERS. Thank you. For $8.5 billion, the New York Fed is one of the investors settling in this deal. Some have questioned whether the deal is very favorable to Bank of America and about conflicts of interest. Does the Federal Reserve Bank of New York have a conflict of interest? How can they both be the regulator of Bank of America and a party trying to exact a fair settlement in a lawsuit? The $8.5 billion settlement is for $174 billion in mortgages. This amounts to about a 5 percent liability rate for Bank of America. Given that independent investigation suggested that twothirds of the loans had representation and warranty problems, the $8.5 billion settlement seems awfully low. Can you explain that? Mr. BERNANKE. First of all, the Bank of America is not regulated by the Federal Reserve Bank of New York but by the Federal Reserve Bank of Richmond. The Federal Reserve Bank of New York led this lawsuit in order to recoup as much as possible for the taxpayer. That is what the objective of that was. Ms. WATERS. And that is all they could get? Mr. BERNANKE. Sorry? Ms. WATERS. All they could get is $8.5 billion? Mr. BERNANKE. No, we went for all we could. Ms. WATERS. Of $174 billion in mortgages? Mr. BERNANKE. This was a collective suit with many participants in it, and this is what the court said it was willing to award. Ms. WATERS. Thank you very much, Mr. Chairman, Mr. Bernanke. Chairman BACHUS. Chairman Bernanke, let me compliment you on your testimony and your answers to our questions. One thing that I do want to say, you have always stressed, and I agree with you, and I think Mr. Carney was saying, agreeing with you, I think there is agreement on both sides of the aisle that long-term structural changes in our programs, particularly our entitlement programs, and in our tax policy will bear short-term benefits, and I think you agree that if we do not make those long-term structural changes, there will be consequences, and they could be immediate. I think 4 years ago you said that that there would be a time when we would run out of time, and I hope that is not the case, and we all do appreciate the consequences of this country having never defaulted on its obligations, and I would hope that we can— we were all, some of us disappointed that we are not going to see a ‘‘grand bargain,’’ and I think that also what many members on this committee realize is that tax spending and tax subsidies, it is quite a different thing from an increase of the tax rates. In fact, that is sometimes more spending than it is a tax. We appreciate that. And I will say that the members on both sides, some of their VerDate Nov 24 2008 17:39 Mar 16, 2012 Jkt 067941 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\67941.TXT TERRIE 48 questions, and Mr. Peters talked about in 1937 your study that there was an overtightening or credit restriction, monetary policy, that can be very deflationary, it can be adverse on the economy, and I believe now some of our—we have gone from being too loose on our housing, some of our lending, particularly mortgage lending, to too restrictive. I do believe, particularly with 20 percent I hope qualified residential mortgages, the downpayment, and other things could be problematic. So we would appreciate continuing the dialogue we have had with you, and as I said, we, at least I think many of us on this committee, believe that your approach has been very beneficial and that I am glad that you are going to maintain some flexibility and that you do not get straitjacketed into not having some flexibility, which may be needed because we do not know what tomorrow brings. So thank you very much for your testimony. Mr. BERNANKE. Thank you, Mr. Chairman. Chairman BACHUS. The Chair notes that some members may have additional questions for Chairman Bernanke which they may wish to submit in writing, and without objection, the hearing record will remain open for 30 days for members to submit written questions to the him and to place his responses in the record. Chairman Bernanke, the committee appreciates your testimony today and your service to our country. This hearing is adjourned. Mr. BERNANKE. Thank you. 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@FedFRASER