[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE
STATE OF THE ECONOMY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 27, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-3
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
February 27, 2013............................................ 1
Appendix:
February 27, 2013............................................ 57
WITNESSES
Wednesday, February 27, 2013
Bernanke, Hon. Ben S., Chairman, Board of Governors of the
Federal Reserve System......................................... 6
APPENDIX
Prepared statements:
Ross, Hon. Dennis............................................ 58
Bernanke, Hon. Ben S......................................... 61
Additional Material Submitted for the Record
Bernanke, Hon. Ben S.:
Monetary Policy Report to the Congress, dated February 26,
2013....................................................... 71
Written responses to questions submitted by Representative
Bachus..................................................... 129
Written responses to questions submitted by Representative
Fitzpatrick................................................ 133
Written responses to questions submitted by Representative
Garrett.................................................... 135
Written responses to questions submitted by Representative
Maloney.................................................... 142
Written responses to questions submitted by Representative
Mulvaney................................................... 147
Written responses to questions submitted by Representative
Ross....................................................... 150
Written responses to questions submitted by Representative
Royce...................................................... 152
Written responses to questions submitted by Representative
Stivers.................................................... 162
MONETARY POLICY AND THE
STATE OF THE ECONOMY
----------
Wednesday, February 27, 2013
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. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Miller,
Bachus, Royce, Capito, Garrett, Neugebauer, McHenry, Campbell,
Bachmann, Pearce, Posey, Fitzpatrick, Westmoreland,
Luetkemeyer, Huizenga, Duffy, Hurt, Grimm, Stivers, Fincher,
Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr,
Cotton; Waters, Maloney, Velazquez, Watt, Sherman, Meeks,
Capuano, Hinojosa, Clay, McCarthy of New York, Scott, Green,
Cleaver, Moore, Ellison, Perlmutter, Himes, Peters, Carney,
Sewell, Foster, Kildee, Murphy, Delaney, Sinema, Beatty, and
Heck.
Chairman Hensarling. The committee will come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
The Chair now recognizes himself for an opening statement.
We are clearly in the midst of the slowest and weakest
recovery in the post-war era, notwithstanding what we have
observed to be the largest fiscal and monetary stimulus in our
Nation's history. Although one quarter does not make a trend,
having negative economic growth in the last quarter was not
good news. Otherwise, we appear to be mired in 1\1/2\ to 2
percent economic growth, when 3 percent is the norm and,
clearly, 4 percent is the potential. This translates into
millions of lost jobs and hundreds of billions of dollars of
lost revenue to the Treasury.
But beyond the numbers, we have to look at the people. I
look at my constituents, I listen to them. They are concerned
about how they are going to fill up their pickup trucks, and
how they are going to afford groceries. Their health care
premiums have gone up. They are insecure in their paychecks.
They are not getting ahead.
So as we welcome Chairman Bernanke back for his semiannual
Humphrey-Hawkins testimony before our committee, many wonder,
where do we find the road forward?
After quadrupling its balance sheet, engaging in
unprecedented mortgage-backed security asset purchases, and
creating an extended negative real interest rate environment,
there is a growing consensus among economists that the Federal
Reserve's road has led us to the monetary ``Outer Limits.'' And
if one remembers that classic science fiction television
program, typically the episodes did not end well. They did not
have happy endings, and I fear this may prove true for the
current Federal Reserve policy.
For diminishing marginal benefits, the Federal Reserve's
unconventional strategy creates considerable risk. If the
balance sheet is not unwound at the right time and at the right
pace, we could be looking at another deep recession, soaring
inflation, or skyrocketing interest rates, all of which could
make us look longingly and nostalgically upon the Jimmy Carter
era of stagflation.
All central bankers are familiar with Walter Bagehot's
dictum of the central bank's lender-of-last-resort function,
``Lend freely at a high rate on good collateral.'' Many of us
believe the Fed has gone way beyond that. The extraordinary
measures of 2008 appear to have become the ordinary measures of
2013.
Walter Bagehot also said, ``What impresses men is not mind,
but the result of mind.'' And although the Federal Reserve
contains many impressive minds and many impressive public
servants, currently millions of unemployed and underemployed
Americans are not impressed with the results. I believe that is
because today the economic challenges of our nature are
essentially fiscal in nature, not monetary. They cannot be
solved by the Fed.
The reasons that the Nation is mired in the slowest,
weakest recovery in the post-war era are simple. Under this
President, we have seen a 53 percent increase in job-harming
Federal tape and regulations. They tend to fall into two
categories: those that create uncertainty; and those that
create certain harm. Under this President, we have witnessed a
spending spree, including the $1 trillion failed stimulus that
has grown government from 20 percent of GDP to 24 percent.
Under this President, a long-threatened $1.6 trillion tax
increase has just been imposed upon small businesses and many
working families. And under this President, more debt has been
created in 4 years on a nominal basis than in our Nation's
first 200 years, now weighing in at approximately $136,000 per
household.
So let's examine the tale of two recoveries. The 1981-1982
recession was deeper in terms of GDP contraction, and
unemployment was higher, and the recession was similar in its
financial nature. And, in this case, the economy faced a
dramatic contractionary monetary policy that pushed interest
rates over 20 percent. Yet, because President Reagan ushered in
a pro-growth tax relief, established budget discipline,
relieved much of the burden of foolish red tape, and promoted
and celebrated free-market capitalism, we witnessed one of the
quickest and most powerful recoveries in the Nation's history.
President Obama and the U.S. Senate could certainly profit from
this example. Again, today, our challenges are primarily fiscal
in nature, not monetary.
Finally, as I close, since I know both the Chairman and
many Members will speak to the pending sequester, I have no
doubt that our President is quite capable of designing the
meager budget savings represented in the sequester in such a
way as to maximize pain to the American people. But as a matter
of fact, even after the sequester, government outlays will be
$15 billion more next year, and 30 percent greater than the
year President Obama was first elected. Meanwhile, the national
debt clock to my right and to my left continues to spin out of
control, threatening our national security, our economic
recovery, and our children's future.
I now recognize the ranking member for 5 minutes for an
opening statement.
Ms. Waters. Thank you very much, Mr. Chairman. I am very
appreciative for the fact that you are holding this hearing.
But before I begin my statement today, I would like to take
a moment to recognize Mr. Dave Smith, the chief economist of
the Democratic staff of the Financial Services Committee, who
will be retiring at the end of this week. Dave has been an
invaluable resource to the members of this committee, and we
will certainly miss having his counsel and guidance. We thank
him for his dedication and extensive service and wish him all
the best in his future endeavors.
Mr. Dave Smith.
[applause]
Chairman Hensarling. Can you please restart the clock for
the ranking member?
Ms. Waters. And, with that, I am very pleased to welcome
Chairman Bernanke before the committee to present his report on
the conduct of monetary policy and the state of the economy, as
required twice a year by the Humphrey-Hawkins Act.
First, I would like to commend Chairman Bernanke for his
leadership and bold efforts, in cooperation with the Federal
Open Market Committee (FOMC), to foster the conditions that
stimulate lending, economic activity, and private sector job
creation.
While some have expressed concerns about the potential risk
involved in the Fed's aggressive quantitative easing programs,
I sincerely believe our central bank's actions have provided
critical support for our Nation's economic recovery. In fact,
the Fed's intervention may be one of the few actions protecting
that recovery from some of my colleagues' ongoing pursuit of
retractionary fiscal policies.
As we sit here today, yet another manufactured fiscal
crisis looms due to sequestration's automatic spending cuts
that are scheduled to take effect in just 2 days. And despite
those who wish to downplay the impact of sequestration, the
costs are real. The CBO estimates that 750,000 jobs are at
stake in 2013. The Bipartisan Policy Center projects the loss
of at least a million jobs over the next 2 years. And a recent
George Mason University study put the number at 2.14 million
jobs, over 950,000 of which would be attributable to losses by
small businesses.
It is my hope that both Republicans and Democrats can come
together to construct a more balanced approach to addressing
the deficit while protecting our Nation's ongoing recovery from
the worst financial crisis since the Great Depression.
With that in mind, I wanted to use this opportunity to note
a GAO report released last month which outlined the enormous
cost of the financial crisis to the U.S. economy. The GAO found
that the financial crisis' impact on economic output could be
as much as $13 trillion, and, in addition, the amount of home
equity wealth lost by U.S. homeowners reached $9.1 trillion.
And this is precisely why I believe it is imperative that
we fully implement the regulatory reforms within the Wall
Street Reform Act in order to ensure that we never again
experience a crisis like the one that occurred in 2008.
I look forward to Chairman Bernanke's insight on all of
these matters and, in particular, his perspective on how the
automatic spending cuts scheduled to take effect this week will
impact our Nation's recovery and economic growth.
Mr. Bernanke, members of this committee, and Chairman
Hensarling, I would like you to know that I take these
Humphrey-Hawkins reports that are done twice a year seriously.
As many of you know, Gus Hawkins was my predecessor. And when I
ran for office, I ran for office at the time that Gus Hawkins
was getting involved with this dual mandate that is the essence
of the Humphrey-Hawkins Act.
We know that Mr. Hawkins was concerned about jobs and he
was concerned about monetary policy. And because of his
concern, he worked very hard with Senator Hubert Humphrey to
make sure that jobs and monetary policy played an important
role in the deliberations and the debate and the discussions
that go on in the Congress of the United States of America.
And so, as we are faced with sequestration, we must
understand the negative impact that sequestration and these
cuts will have on jobs and the economy. And your being here
today, Mr. Bernanke, is extremely important, because no one
knows better than you about the impact of sequestration and
what it will do to our jobs and our jobs potential in this
country and, of course, the monetary policy that you have so
creatively and so expertly guided to help get us back on the
road to growth. And without what you are doing, we would not
have maintained growth, slow as it may be, without what you
have done and your leadership. I thank you very much.
And I yield back the balance of my time.
Chairman Hensarling. The Chair now recognizes the chairman
of the Monetary Policy and Trade Subcommittee, the gentleman
from California, Mr. Campbell, for 3 minutes.
Mr. Campbell. Thank you, Mr. Chairman.
And welcome, Chairman Bernanke.
You said yesterday, and you will say today, that you
believe the short-term benefits of the current loose monetary
policy exceed the longer-term risks. We know from the release
of the Federal Open Market Committee minutes last week that
there is some dissension within the FOMC on that viewpoint. I
am going to join in the chorus of dissension about that
viewpoint. And I would like to just quickly detail seven risks
that I believe exist which, together, are exceeding what I
believe are now the meager benefits of the current monetary
policy.
First of all, there are bubbles out there. I would argue
that there is one in high-yield bonds, perhaps in farmland, and
certainly in the Federal budget.
Second, where there are not bubbles, there are distortions,
as people are having a difficulty pricing risk, and there are
distortions in the economy. When these bubbles and distortions
unwind, those are going to create problems.
Third, I hear all the time that the major investment and
business strategy now is, don't fight the Fed. That is not a
real business strategy. That is not looking out at long-term
vision. That is not making decisions on where you think markets
will go. That is simply following the directive of an agency
that unfortunately has too great a footprint, in my opinion, in
the economy today.
Fourth, all of this is actually not injecting certainty
but, in my view, injecting uncertainty into decision-making in
the economy today.
Fifth, savers and retirees are being forced into riskier
assets in the search for some sort of yield. When this unwinds,
that is going to be a problem for our savers and retirees. We
all in economics learned early on, as you get older, take less
risk. But now what we find is as people are getting older, they
are having to violate that principle, and in search of some
kind of yield, are taking much, much greater risks, which could
be a problem in the future.
Sixth, for every 1 percent that the interest rates on
Treasury bills go up, it will add $1 billion of deficit to the
Federal budget.
And, seventh, the Federal Reserve itself has risks now,
with the large balance sheet and the large number of holdings
that the Federal Reserve has.
In this Member's opinion, Mr. Chairman, we have gone too
far in the monetary policy and the monetary easing, and it is,
in this Member's opinion, time to pull back.
I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the ranking member of the Monetary
Policy and Trade Subcommittee, the gentleman from Missouri, Mr.
Clay, for 3 minutes.
Mr. Clay. Thank you, Chairman Hensarling, for holding this
hearing on monetary policy and the state of the economy.
Also, thank you, Chairman Bernanke, for appearing today.
The Full Employment and Balanced Growth Act of 1978, better
known as the Humphrey-Hawkins Act, set four benchmarks for the
economy: full employment; growth in production; price
stability; and the balance of trade and budget. To monitor
progress toward these goals, the Full Employment and Balanced
Growth Act of 1978 mandated that the Board of Governors of the
Federal Reserve System present semiannual reports to Congress
on the state of the U.S. economy and the Nation's financial
welfare.
Humphrey-Hawkins charges the Federal Reserve with a dual
mandate: maintaining stable prices; and full employment.
Currently, the unemployment rate is 7.9 percent, down from 8.3
percent a year ago. Still, millions in this country would like
to work but cannot find work. Consumer price inflation has
increased as prices of consumer food and energy have increased
from the pace seen in previous months. Recent price increases
in retail gasoline have increased the cost of food.
All of these factors play a very important role in getting
America back to economic growth and prosperity. And I look
forward to Chairman Bernanke's comments.
Mr. Chairman, I yield back.
Chairman Hensarling. The gentleman yields back.
At this time, we will welcome our distinguished witness,
one of Washington's ablest public servants, Ben Bernanke, the
Chairman of the Board of Governors of the Federal Reserve
System. And, as the phrase goes, he needs no further
introduction.
Chairman Bernanke, you will be recognized for 5 minutes to
give an oral presentation of your written testimony. Without
objection, your written statement will be made a part of the
record.
Once you have finished presenting, each Member of the
committee will have 5 minutes within which to ask any or all
questions. I wish to inform all Members that Chairman Bernanke
will be allowed to exit at 1 p.m., and this chairman will ride
the gavel accordingly. So if you ask a question with 10 seconds
to go on the clock, do not expect an answer.
On the Republican side, I wish to inform our Members that,
should you not be able to ask questions of the Chairman today,
you will receive priority at the Chairman's next appearance
before our committee.
Chairman Bernanke, at this time, please proceed.
STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you, Mr. Chairman, Ranking Member
Waters, and members of the committee. I am pleased to present
the Federal Reserve's semiannual monetary policy report. I will
begin with a short summary of current economic conditions and
then discuss aspects of monetary and fiscal policy.
Since I last reported to this committee in mid-2012,
economic activity in the United States has continued at a
moderate, if somewhat uneven, pace. In particular, real GDP is
estimated to have risen at an annual rate of about 3 percent in
the third quarter but to have been essentially flat in the
fourth quarter.
The pause in real GDP growth last quarter does not appear
to reflect a stalling out of the recovery. Rather, economic
activity was temporarily restrained by weather-related
disruptions and by transitory declines in a few volatile
categories of spending, even as demand by U.S. households and
businesses continued to expand. Available information suggests
that economic growth has picked up again this year.
Consistent with the moderate pace of economic growth,
conditions in the labor market have been improving gradually.
Since July, non-farm payroll employment has increased by
175,000 jobs per month on average and the unemployment rate has
declined three-tenths of a percentage point to 7.9 percent over
the same period. Cumulatively, private sector payrolls have now
grown by about 6.1 million jobs since their low point in early
2010 and the unemployment rate has fallen a bit more than 2
percentage points since its cyclical peak in late 2009.
Despite these gains, however, the job market remains
generally weak, with the unemployment rate well above its
longer-run normal level. About 4.7 million of the unemployed
have been without a job for 6 months or more, and millions more
would like full-time employment but are able to find only part-
time work.
High unemployment has substantial costs, including not only
the hardship faced by the unemployed and their families but
also the harm done to the vitality and productive potential of
our economy as a whole. Lengthy periods of unemployment and
underemployment can erode workers' skills and attachment to the
labor force or prevent young people from gaining skills and
experience in the first place, developments that could
significantly reduce their productivity and earnings in the
longer term. The loss of output and earnings associated with
high unemployment also reduces government revenue and increases
spending, thereby leading to larger deficits and debts.
The recent increase in gasoline prices, which reflects both
higher crude oil prices and wider refining margins, is hitting
family budgets. However, overall inflation remains low. Over
the second half of 2012, the price index for personal
consumption expenditures rose at an annual rate of 1\1/2\
percent, similar to the rate of increase in the first half of
the year. Measures of longer-term inflation expectations have
remained in the narrow ranges seen over the past several years.
Against this backdrop, the FOMC anticipates that inflation over
the medium term will likely run at or below its 2 percent
objective.
With unemployment well above normal levels and inflation
subdued, progress toward the Federal Reserve's mandated
objectives of maximum employment and price stability has
required a highly accommodative monetary policy. Under normal
circumstances, policy accommodation would be provided through
reductions in the FOMC's target for the Federal funds rate, the
interest rate on overnight loans between banks. However, as
this rate has been close to zero since December 2008, the
Federal Reserve has had to use alternative policy tools.
These alternative tools have fallen into two categories.
The first is forward guidance regarding the FOMC's anticipated
path for the Federal funds rate.
At its December 2012 meeting, the FOMC provided more
explicit guidance on how it expects the policy rate to respond
to economic developments. Specifically, the December post-
meeting statement indicated that the current exceptionally low
range for the Federal funds rates ``will be appropriate as long
as the unemployment rate remains above 6\1/2\ percent,
inflation between 1 and 2 years ahead is projected to be no
more than half a percentage point above the Committee's 2
percent longer-run goal, and longer-term inflation expectations
continue to be well-anchored.''
An advantage of the new formulation relative to the
previous date-based guidance is that it allows market
participants and the public to update their monetary policy
expectations more accurately in response to new information
about the economic outlook. The new guidance also serves to
underscore the Committee's intention to maintain accommodation
as long as needed to promote a stronger economic recovery with
stable prices.
The second type of nontraditional policy tool employed by
the FOMC is large-scale purchases of longer-term securities,
which, like our forward guidance, are intended to support
economic growth by putting downward pressure on longer-term
interest rates. The Federal Reserve has engaged in several
rounds of such purchases since 2008.
Last September, the FOMC announced that it would purchase
agency mortgage-backed securities at a pace of $40 billion per
month. And in December, the Committee stated that, in addition,
beginning in January, it would purchase longer-term Treasury
securities at an initial pace of $45 billion per month.
These additional purchases of longer-term Treasury
securities replace the purchases we were conducting under our
now-completed Maturity Extension Program, which lengthened the
maturity of our securities portfolio without increasing its
size. The FOMC has indicated that it will continue purchases
until it observes a substantial improvement in the outlook for
the labor market in a context of price stability.
The Committee also stated that in determining the size,
pace, and composition of its asset purchases, it will take
appropriate account of their likely efficacy and costs. In
other words, as with all of its policy decisions, the Committee
continues to assess its program of asset purchases within a
cost-benefit framework.
In the current economic environment, the benefits of asset
purchases and of policy accommodation more generally are clear.
Monetary policy is providing important support to the recovery
while keeping inflation close to the FOMC's 2 percent
objective. Notably, keeping longer-term interest rates low has
helped spark recovery in the housing market and led to
increased sales and production of automobiles and other durable
goods. By raising employment and household wealth--for example,
through higher home prices--these developments have, in turn,
supported consumer sentiment and spending.
Highly accommodative monetary policy also has several
potential costs and risks, which the Committee is monitoring
closely. For example, if further expansion of the Federal
Reserve's balance sheet were to undermine public confidence in
our ability to exit smoothly from our accommodative policies at
the appropriate time, inflation expectations could rise,
putting the FOMC's price stability objective at risk.
However, the Committee remains confident that it has the
tools necessary to tighten monetary policy when the time comes
to do so. As I noted, inflation is currently subdued and
inflation expectations appear well-anchored. Neither the FOMC
nor private forecasters are projecting the development of
significant inflation pressures.
Another potential cost that the Committee takes very
seriously is the possibility that very low interest rates, if
maintained for a considerable time, could impair financial
stability. For example, portfolio managers dissatisfied with
low returns may reach for yield by taking on more credit risk,
duration risk, or leverage. On the other hand, some risk-
taking, such as when an entrepreneur takes out a loan to start
a new business or an existing firm expands capacity, is a
necessary element of a healthy economic recovery.
Moreover, although accommodative monetary policies may
increase certain types of risk-taking, in the present
circumstances they also serve in some ways to reduce risk in
the system, most importantly by strengthening the overall
economy, but also by encouraging firms to rely more on longer-
term funding and by reducing debt service costs for households
and businesses.
In any case, the Federal Reserve is responding actively to
financial stability concerns through substantially expanded
monitoring of emerging risks in the financial system, an
approach to the supervision of financial firms that takes a
more systemic perspective, and the ongoing implementation of
reforms to make the financial system more transparent and
resilient.
Although a long period of low rates could encourage
excessive risk-taking, and continued close attention to such
developments is certainly warranted, to this point we do not
see the potential cost of the increased risk-taking in some
financial markets as outweighing the benefits of promoting a
stronger economic recovery and more rapid job creation.
Another aspect of the Federal Reserve's policies that has
been discussed is their implications for the Federal budget.
The Federal Reserve earns substantial interest on the assets it
holds in its portfolio, and other than the amount needed to
fund our cost of operations, all net income is remitted to the
Treasury. With the expansion of the Federal Reserve's balance
sheet, yearly remittances have roughly tripled in recent years,
with payments to the Treasury totaling approximately $290
billion between 2009 and 2012.
However, if the economy continues to strengthen, as we
anticipate, and policy accommodation is accordingly reduced,
these remittances will likely decline in coming years. Federal
Reserve analysis shows that remittances to the Treasury could
be quite low for a time in some scenarios, particularly if
interest rates were to rise quickly.
However, even in such scenarios, it is highly likely that
average annual remittances over the period affected by the
Federal Reserve's purchases will remain higher than the pre-
crisis norm, perhaps substantially so. Moreover, to the extent
that monetary policy promotes growth and job creation, the
resulting reduction in the Federal deficit would dwarf any
variation in the Federal Reserve's remittances to the Treasury.
Mr. Chairman, I have a couple more pages on fiscal policy.
Will you allow me to complete it, or should I stop?
Chairman Hensarling. You can proceed, Mr. Chairman.
Mr. Bernanke. Thank you, Mr. Chairman.
Although monetary policy is working to promote a more
robust recovery, it cannot carry the entire burden of ensuring
a speedier return to economic health. The economy's
performance, both over the near term and in the longer run,
will depend importantly on the course of fiscal policy. The
challenge for the Congress and the Administration is to put the
Federal budget on a sustainable long-run path that promotes
economic growth and stability without unnecessarily impeding
the current recovery.
Significant progress has been made recently toward reducing
the Federal budget deficit over the next few years. The
projections released earlier this month by the CBO indicate
that under current law, the Federal deficit will narrow from 7
percent of GDP last year to 2\1/2\ percent in Fiscal Year 2015.
As a result, the Federal debt held by the public, including
that held by the Federal Reserve, is projected to remain
roughly 75 percent of GDP through much of the current decade.
However, a substantial portion of the recent progress in
lowering the deficit has been concentrated in near-term budget
changes, which, taken together, could create a significant
headwind for the economic recovery. The CBO estimates that
deficit-reduction policies in current law will slow the pace of
real GDP growth by about 1\1/2\ percentage points this year
relative to what it would have been otherwise.
A significant portion of this effect is related to the
automatic spending sequestration that is scheduled to begin on
March 1st, which, according to the CBO's estimates, will
contribute about six-tenths of a percentage point to the fiscal
drag on economic growth this year.
Given the still moderate underlying pace of economic
growth, this additional near-term burden on the recovery is
significant. Moreover, besides having adverse effects on jobs
and income, a slower recovery would lead to less actual deficit
reduction in the short run for any given set of fiscal actions.
At the same time, and despite progress in reducing near-
term budget deficits, the difficult process of addressing
longer-term fiscal imbalances has only begun. Indeed, the CBO
projects that the Federal deficit and debt as a percentage of
GDP will begin rising again in the latter half of this decade,
reflecting in large part the aging of the population and fast-
rising health care costs.
To promote economic growth in the longer term, and to
preserve economic and financial stability, fiscal policymakers
will have to put the Federal budget on a sustainable long-run
path that first stabilizes the ratio of Federal debt to GDP
and, given the current elevated level of debt, eventually
places that ratio on a downward trajectory.
Between 1960 and the onset of the financial crisis, Federal
debt averaged less than 40 percent of GDP. This relatively low
level of debt provided the Nation much-needed flexibility to
meet the economic challenges of the past few years.
Replenishing this fiscal capacity will give future Congresses
and Administrations greater scope to deal with unforeseen
events.
To address both the near- and longer-term issues, the
Congress and the Administration should consider replacing the
sharp, front-loaded spending cuts required by the sequestration
with policies that reduce the Federal deficit more gradually in
the near term but more substantially in the longer run. Such an
approach could lessen the near-term fiscal headwinds facing the
recovery while more effectively addressing the longer-term
imbalances in the Federal budget.
The sizes of deficits and debt matter, of course, but not
all tax and spending programs are created equal with respect to
their effects on the economy. To the greatest extent possible,
in their efforts to achieve sound public finances, fiscal
policymakers should not lose sight of the need for Federal tax
and spending policies that increase incentives to work and
save, encourage investment and workforce skills, advance
private capital formation, promote research and development,
and provide necessary and productive public infrastructure.
Although economic growth alone cannot eliminate Federal
budget imbalances in either the short or longer term, a more
rapidly expanding economic pie will ease the difficult choices
we face.
Thank you for your indulgence, Mr. Chairman.
[The prepared statement of Chairman Bernanke can be found
on page 61 of the appendix.]
Chairman Hensarling. Thank you, Mr. Chairman.
And the Chair will now recognize himself for 5 minutes for
questions.
Chairman Bernanke, I have both privately and publicly
complimented you and the Fed for much of what you did in 2008,
but, as you heard in my opening statement, I have a great fear
that the extraordinary has become ordinary and, indeed, we need
to examine these policies in, as you put it, a cost-benefit
framework. So, briefly, I want to inquire about the risks, the
benefits, and the cost.
In your testimony, you said, ``The Committee remains
confident that it has the tools necessary to tighten monetary
policy when the time comes to do so.'' But, Mr. Chairman, I
think you know that other predictions have not proven valid. In
May of 2006, you seemed to be confident that we were witnessing
``an orderly decline in the housing market,'' and in 2007 you
predicted ``a soft landing for the economy,'' neither of which
happened. The Fed has been fairly off on its GDP projections,
and as of 2 months ago, you stated, ``Well, I think it is fair
to say that we have overestimated the pace of growth.''
So, Chairman Bernanke, I guess I recall Casey Stengel's
quote, ``Never make predictions, especially about the future.''
I assume you will admit to being human and being fallible?
Mr. Bernanke. Yes, sir.
Chairman Hensarling. So that causes some of us to question
how much confidence we should have.
And as the gentleman from California, Mr. Campbell, pointed
out, it is not just members of this committee, but apparently
the voices of doubt and dissent within the Fed are growing more
vocal.
Jeffrey Lacker, President of the Richmond Fed: ``I think
that further monetary stimulus is unlikely to materially
increase the pace of economic expansion and that these actions
will test the limits of our credibility.''
Bloomberg has reported of Charles Plosser, Philadelphia Fed
President: ``Plosser said he favored halting additional bond
purchases because their benefits are pretty meager and there
are lots of risk.''
Closer to home, Richard Fisher, President of the Dallas
Fed: ``I will be asking myself, what good would it do to buy
more mortgage-backed securities or more treasuries when we have
so much money sitting on the sidelines and yet have no sense of
direction for the future of the Federal Government's tax and
spending policy? How could additional monetary policy be
stimulative?''
I clearly believe you disagree with these Fed Presidents;
is that correct?
Mr. Bernanke. Yes, sir.
Chairman Hensarling. Let's examine the benefits of your
current policy. Again, we know we are in a slow and weak
recovery. Here is the question I have, Mr. Chairman.
According to Fed data, banks are sitting on $1.6 trillion
in excess reserves, and in the latest quarter for which I have
data, the third quarter of 2012, non-financial corporations are
sitting on $1.7 trillion in liquid assets. So, arguably, that
is over $3 trillion of capital sitting on the sidelines. I
believe I have this right, at least for the last data I have
on, I believe, QE2: 80 percent of that QE ended up as excess
reserves.
So, given as much capital is sitting on the sidelines and
since we are essentially in a zero to negative real interest
rate environment, why do you believe that further quantitative
easing is somehow going to cause entrepreneurs and job creators
to put all this capital to work?
Mr. Bernanke. Thank you, Mr. Chairman.
First, on the disagreements on the committee, we have our
debates more or less in public, as you know. And I hope you
would take some comfort from the fact that a wide range of
views and points of view are represented on the committee. And
we--
Chairman Hensarling. I do take solace, and I hope you
listen to them carefully.
Mr. Bernanke. And we do discuss all these issues. Of
course, the significant majority of the committee is supportive
of the policies that we are taking.
You are absolutely also right that predicting the future is
always dangerous. But we are not talking here about a forecast
of the future. What we are talking about are the tools that we
have to unwind the balance sheet. And we have a variety of
different tools, including not just selling assets, but raising
the interest rate we pay on excess reserves and the use of
other draining tools, which, based on the experience of other
central banks, would be effective in allowing us to unwind that
policy.
Of course, doing it at the exact right moment is always
difficult, but--
Chairman Hensarling. Chairman, I am about out of time. I am
going to attempt to set a good example here. I want to ask one
last question, but you can submit the answer in writing.
You mentioned earlier that--or as I understand it from data
or reports from the Fed--you will cease remitting profits to
the U.S. Treasury and that, under your own analysis, the size
of deferred assets--I am always curious how a loss is a
deferred asset--could peak at $120 billion, but other
economists say it is closer to $372 billion of taxpayer money
that could exacerbate the debt.
So, in writing, I would like for you to respond whether or
not, indeed, the debt could be exacerbated by $372 billion
under a worst-case scenario.
At this time, I will recognize the ranking member for 5
minutes.
Ms. Waters. Thank you very much, Mr. Chairman.
Again, Mr. Bernanke, I would like to thank you for further
explaining and educating this committee on quantitative easing,
the policy that you have provided leadership on.
And I would like to make sure that the members of this
committee understand that this discussion about all of this
dissent is overblown. As I look at the voting on this action,
it appears that you, Mr. Bernanke--William C. Dudley, James
Bullard, Elizabeth Duke, Charles L. Evans, Jerome H. Powell,
Sarah Bloom Raskin, Eric Rosengren, Jeremy C. Stein, Daniel K.
Tarullo, and Janet L. Yellen all voted to support you and the
policies. There was only one person dissenting, and that was
Esther George.
So it seems to me you have strong support for the actions
that you are taking and the leadership that you are giving. And
I am very appreciative for that.
I am surprised at myself for the confidence and support
that I am showing, because you know I have disagreed with you
in the past on a number of things. But I also find myself a
little bit surprised that I am focused a lot on what happened
with a recent research note that was released last Friday by
the Bank of America's chief economist, Ethan Harris, where he
warned that harsh budget cuts due to start taking effect this
week would hammer the economy, potentially dragging the country
back down into a recession. Mr. Harris wrote that he expects
this painful shot of austerity to slow GDP growth to just 1
percent in the second quarter, with job growth averaging less
than 100,000 per month for those 3 months.
We also know that many Republican and Democratic State
Governors are demanding immediate action to stop the automatic
spending cuts, expressing concerns that sequestration would
force their State economies back into a recession.
So, while you have explained to us monetary policy that you
are providing this leadership on and while you have given us
great information today about what you feel would happen with
this economy if we did not stimulate it, somewhat in the way
that you are doing, I want to ask you, can you offer any
insight or more insight into what the potential impact would be
to our economy's recovery if the sequester were to take place
as scheduled on March 1st?
And can you elaborate on why you believe it is more
important to focus, as you have said today, on deficit
reduction over the long term rather than blunt austerity
measures in the short term? I would like to hear more about
this.
Mr. Bernanke. Yes, ma'am. I cited in my testimony just the
numbers from the Congressional Budget Office, which suggest
that fiscal measures will reduce growth this year by 1.5
percentage points, which is very significant.
If you look at the path of the deficit projected by the
CBO, you see that for the next few years, progress has been
made, and the debt-to-GDP ratio, in particular, doesn't look
like it is going to be rising for the next few years. Where the
problems arise which are the most serious are further out, when
our aging society, rising health care costs, and so on,
together with other costs, begin to bite.
My suggestion for your consideration is to align the timing
of your fiscal consolidation better with the problem. That is,
to do somewhat less in the very near term when it will have the
greatest impact on growth and jobs and where the Federal
Reserve doesn't have any scope to offset it, and instead to
focus on the longer term where the real problems, I think,
still remain.
Ms. Waters. So, you are not against cuts and you are not
saying that we should not be involved in making cuts where we
can make them. But what you are talking about is the level and
the amount of the cuts that perhaps are being made which will
slow down the growth in the economy.
And you think that if we concentrate more on job
development and stimulating the economy, that we should take a
long-term approach to the cuts. Is that basically what you are
saying?
Mr. Bernanke. I am very much in favor of getting our fiscal
house in order, but I think it is a long-run issue and I would
be supportive of a less front-loaded set of measures.
Ms. Waters. I think it is important to get that on the
record because I have heard some discussion about your
statement, even as it was made yesterday, and I think some
people were confused and thought you were saying we shouldn't
make any cuts. I think you are very clear about what you are
proposing. And I thank you very much.
And I yield back the balance of my time.
Mr. Bernanke. Thank you.
Chairman Hensarling. The Chair now recognizes the gentleman
from California, Mr. Campbell, for 5 minutes.
Mr. Campbell. Thank you, Mr. Chairman.
And, unlike the ranking member, I have generally agreed
with what you have said in the past, but now we diverge. So, it
is funny how that happens.
In the January 2013 FOMC meeting minutes which were just
released, it reads, in part, ``A number of participants stated
that an ongoing evaluation of the efficacy, costs, and risks of
asset purchases might well lead the committee to taper or end
its purchases before it judged that a substantial improvement
in the outlook for the labor market had occurred.''
If these voices are right and the unemployment does not
drop significantly or below your target and inflation does not
rise above your target, at what point do you decide to wind
this down, call it quits, and try something else?
Mr. Bernanke. As I said in my remarks, we have a cost-
benefit framework, and we are going to be looking at both sides
of that equation.
We will be looking at benefits, trying to assess whether we
are getting traction, whether the economy is benefiting from
these policy moves, whether we are seeing a stronger economy,
particularly in the labor market. On the cost side, we will be
looking at inflation concerns and financial stability concerns
that you mentioned in your opening remarks, Congressman.
They are perhaps less important than the first two, but the
remittances issue and perhaps some market functioning issues.
We will be looking at the whole set of these concerns and
trying to assess whether those costs are sufficient to induce a
less aggressive policy or whether there are alternative
measures--say, regulatory, supervisory, or other measures--that
could more effectively or in a more precise way address those
issues.
So that will continue. We plan to have a continual
discussion and review of both the costs and the benefits and
try to make sure that we are taking the right steps, given
those costs and benefits.
Mr. Campbell. Is it safe to say that if the unemployment
rate does not drop further as a result of these asset
purchases, that is an indication that the benefits are
declining?
Mr. Bernanke. If we see no progress for an extended period,
which I don't expect because we have already seen some
progress, then I think we will want to discuss the efficacy
side of the equation, is it working.
My sense at this point--and it is very early--is that we
are getting some traction in the housing market, which has
shown some strength in the last few days, some of the data most
recently. In automobiles and other durable goods, to some
extent in investment, to some extent perhaps in commercial real
estate, we have seen some signs of improvement. But we want to
keep evaluating and seeing if, in fact, we are getting benefits
from this policy.
Mr. Campbell. There seems to be, towards that end, the
benefits, a lot of evidence out there that the benefits of the
low interest rate and quantitative easing are accruing
primarily to the Federal Government, foreign governments, and
large banks. Now, I think, clearly, those are not the entities
that need to or that are doing the lion's share of hiring or
need to do the majority of hiring.
But do you agree with that view? And how do you rationalize
the QE, given that view out there that is who is benefiting
primarily from--
Mr. Bernanke. I completely disagree with that. This is very
much focused at the average American citizen. Our estimates are
that we have helped create many private sector jobs. Government
jobs, of course, have been declining quite significantly.
People are able to buy houses at very low mortgage rates or
refinance at low mortgage rates. People are able to get car
loans at low rates. Their house values have gone up so that
they feel more financially secure. So in a lot of dimensions we
have, I think, benefited Main Street, and that is certainly our
objective.
From the other sectors, we often get complaints. For
example, banks have complained about the low interest rates
squeezing their interest margin. I think the main benefits are
those that are affecting the broader economy, and that is the
broad group of Americans.
Mr. Campbell. In the final 30 seconds, there is some
concern that the agency MBS market is losing liquidity because
I believe you are on pace to own, the Fed is, 20 percent of
outstanding agency MBS and you are purchasing 40 percent of new
issuance and that you are the market, there is no other market.
Is that a concern?
Mr. Bernanke. The market functioning, the Treasury and MBS
market functioning, is something we do I wouldn't say every day
but every hour, because we are heavily engaged in those
markets, obviously. And, to this point, we don't see any
significant problems with those markets. But if we do see
problems, obviously we will react to that. But, to this point,
we haven't seen anything significant.
Mr. Campbell. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Clay, for 5 minutes.
Mr. Clay. Thank you, Mr. Chairman.
Chairman Bernanke, how would you describe the current
condition of the U.S. housing market? Have we bounced back? And
do you predict that we will witness significant employment
gains if and when the housing market rebounds?
Mr. Bernanke. As you know, the housing market took a
tremendous blow: about 30 percent or more declines in prices; a
massive decline in construction and sales. And that was a major
factor, obviously, in the severity of the recession.
As the chairman reminds me, it is difficult to make
predictions, but the evidence thus far is that the housing
market has hit the bottom and is recovering. We have seen
rising prices over the last year or so. We have seen some
significant increases in starts and sales. Foreclosures are
still too high, but they are coming down. The number of people
underwater in their mortgages is coming down.
So we are still far from where we would like to be, but the
evidence is that the housing market is strengthening and that
low mortgage rates are one reason for that strengthening.
And that should put people to work in several ways. It will
put construction workers back to work, obviously, and people
who work in factories that build appliances or other things
that are related to housing. But, in addition, the increase in
house prices and the increase in general economic activity
should benefit other industries as well.
Mr. Clay. Thank you for that response.
Another area that seems to be ahead of pace of our economy
is health care and the spiraling costs of health care. Do you
foresee prices stabilizing there, or will it just continue to
spiral out of control and hit consumers the hardest?
Mr. Bernanke. This is a critically important issue because
one of the main sources of our long-term budget problems is the
fact that health care costs have gone up a lot faster than
other costs over the last 40 years or so.
Recently, in the last 4 or 5 years, health care costs have
actually gone up somewhat more slowly. Part of that may be due
to the recession and the fact that fewer people are able to
afford or seek care.
So I think it remains to be seen whether this relative
decline in the pace of increase of health care costs is going
to persist or not. If it does, it will be very good news, not
only for Americans who are trying to afford health care, but
also for the Federal budget.
But I think there remains a lot to be done in the health
care area to improve incentives, to improve quality, and to
improve access.
Mr. Clay. Thank you for that response. And I am sure we
could have an entire hearing on just the cost of health care
and the long-term and short-term goals for that area.
Currently, the unemployment rate, according to the Labor
Department, is 7.9 percent. What can the Federal Reserve and
Congress do to put Americans back to work? I heard you say in
your testimony that we should continue investing in job
training and retraining. Any other suggestions?
Mr. Bernanke. On the fiscal side, I mentioned, first, the
notion of taking a longer-run perspective on addressing our
fiscal sustainability issues to avoid some of the adverse
effects in the near term of very sharp cuts and job losses.
And the second point, as you noted, is that I think
everyone would agree on both sides of the aisle that the money
we do spend and the taxes we do collect should be done in the
best way possible. We should be thinking about each program and
is it achieving the objectives that we set for it and is it
creating a better trained workforce, is it creating a more
productive economy, is it creating a more fair and equitable
and efficient Tax Code. Those are the kinds of issues that need
to be addressed, as well as simply the total spending and
revenue numbers.
Mr. Clay. And, as you are aware, the Dodd-Frank Wall Street
Reform and Consumer Protection Act required that Offices of
Minority and Women Inclusion (OMWI) be established within
agencies regulating financial institutions.
What action has the Federal Reserve System taken to meet
these requirements?
Mr. Bernanke. We have followed everything required by the
law. We have established an OMWI in the Fed and in each of the
12 Federal Reserve Banks. We are pursuing the supplier
diversity and other requirements of the law. And we are working
collectively, as we have been told to do, with the other
agencies to develop some criteria for assessment of diversity
practices in regulated institutions.
Mr. Clay. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the vice chairman of the
committee, the gentleman from California, Mr. Miller, for 5
minutes.
Mr. Miller. Thank you, Mr. Chairman.
It is good to have you here, Chairman Bernanke.
I know you care about unemployment and inflation. You have
expressed that in your statements over and over. And I know you
care about the economy. But I am having some concerns with some
of the regulations being proposed by the Fed right now.
You did state that the housing market is recovering, and I
agree with that, but it is very fragile, in my opinion. Some of
the new housing regulations are very concerning. The QM was
meant to protect consumers, but, as finalized, it really
prevents creditworthy consumers from getting a mortgage, in my
opinion. A recent study by CoreLogic says that 48 percent of
the 2010 mortgage originations would be eligible under QM. And
perhaps some of those shouldn't have been made, but that is a
scary number.
And I am concerned about the Federal Reserve's proposed
rule on ability to repay as defined as qualified mortgage. Any
loan that does not meet this requirement basically will not be
made in the marketplace. And a recent study by CoreLogic says
that is a huge problem.
On QRM, it is meant to make sure that lenders have skin in
the game. But, as drafted, the field will be so small that I am
not sure there is going to be a field by the time you get
through with it.
We sent a letter to you--I think 208 Members signed--
complaining about the 20 percent down. If QRM is too narrow, I
believe first-time home buyers will be driven out of the
marketplace, which will cause another dip in the housing
market. And Congress intended for mortgage insurance to be a
qualifying factor in QRM.
Could you please speak to that?
Mr. Bernanke. Certainly. As you know, we couldn't finalize
the QRM rules until the QM rules were completed because QRM can
be no broader than QM.
We have heard comments from Congress. We are considering
them very carefully. I would say that the idea that QRM should
be as broad or nearly as broad as QM is very much on the table.
And we appreciate the concerns of Congress that these criteria
should not so constraining as to prevent creditworthy borrowers
from obtaining a mortgage.
Mr. Miller. But you have lenders right now who are really
keeping capital out of the marketplace because they don't know
what is going to happen. At some point in time, we need to be
very proactive in getting some form of a message out as to what
the situation will be. Because it is really creating havoc in
the industry, in my opinion. Do you agree with that?
Mr. Bernanke. The uncertainty is certainly a problem, and
it is one of the reasons why we haven't seen a resurgence of
the private-label MBS market. But, again, now that QM is done,
the agencies can work quickly to finalize the QRM rule.
Mr. Miller. Okay.
Another concern I have is bank capital standards are one
issue, and insurance companies are completely different. The
U.S. insurance companies hold about $5 trillion in assets
today. And the Fed's proposed rule on capital standards based
on Basel III, the rule is designed by bank regulators, which
makes sense for banks, but they also apply to insurance
companies. Insurance and banking are very different, as I know
you agree. Strong capital standards are important, but they
must be appropriate for the business model to which they apply.
Will the Feds perform a qualitative impact study specific
to insurance before you finalize the standard rules, like the
QIS you do for banks?
Mr. Bernanke. We are discussing the feasibility of such a
study.
And we recognize that there are important differences
between banks and insurance companies. At the same time, of
course, we have statutory constraints, the Collins Amendment,
for example, that say that a certain amount of capital is
necessary. But we have also heard from Congress about this
insurance-banking distinction, and we are looking at it very
seriously.
We have been consulting, I should say, with the State
insurance regulators, with the Federal Insurance Office, with
the industry, and with a lot of other stakeholders to make sure
we understand these issues.
Mr. Miller. There is a tremendous amount of havoc in that
industry today because of what they don't know. And, again, I
think some action is pretty necessary in the immediate rather
than in the long term on that, wouldn't you agree?
Mr. Bernanke. Certainly. We want to get these rules out as
quickly as possible. But on the other hand, as you point out,
we need to make sure that they are appropriately set for the
insurance business model, and that will take some time to study
and understand.
Mr. Miller. Okay.
The last question you might not have time to answer, but
you announced the QE3 last September. You said you would keep
buying assets until there was substantial improvement in the
labor market. I think you addressed it earlier. You said that
mortgage-backed security purchases will boost economy by
driving down long-term interest rates.
But looking at the impact that QE3 has had on the mortgage
market rates, we are at historically low levels right now. I am
not seeing much change, but maybe that was the intent. But the
Fed's balance sheet, like you said, had $3 trillion of
holdings.
Do you think that the mortgage interest rates are where
they should be to meet the objectives of QE3, or do you think
they need to be lower?
Mr. Bernanke. I think they are low enough that they are
providing a lot of assistance, a lot of help to homeowners.
The low mortgage rates are a product not just of our latest
program but of all the previous programs and our policies
regarding short-term rates and the like. One of the paradoxes
is that the best way to get interest rates up is to have low
interest rates, because that promotes a stronger growing
economy and that causes interest rates to rise. In some ways,
the fact that interest rates have gone up a bit, and it happens
on the real, not the inflation side, is actually indicative of
a stronger economy, which, again, suggests that maybe this is
having some benefit.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, for 5 minutes.
Mrs. Maloney. Thank you. Welcome, Chairman Bernanke. I
believe this country owes you a debt of gratitude. Thank you
for your leadership during one of the worst recessions in my
lifetime. You took unprecedented measures which took our
economy that was in a total freefall, and we are now on the
road to recovery; however, I am deeply concerned about housing.
As we all know, the housing market and the foreclosure
crisis continues to be a major impediment to our economic
growth. Some economists have estimated that housing and its
related industries are 25 percent of our economy. So until we
get this straight, we are not going to really fully and
strongly recover, and that is why I want to spend my time this
morning asking you about the Federal Reserve's role in the
independent foreclosure review process. As you may know, I have
written you and the OCC 3 letters over the past 2 months, and I
would like permission if I may, Mr. Chairman, to place them in
the record.
Chairman Hensarling. Without objection, it is so ordered.
Mrs. Maloney. I know the deadline that I gave your office
was March 1st, but since we are only 48 hours away from that, I
thought I would take this opportunity to get some clarity.
First of all, how is it that in the past 18 months, over
$1.5 billion has been given to independent consultants, but
absolutely nothing has been given to the up to 4 million
injured homeowners, some of whom have lost their homes unjustly
during this 18-month review process? We have $9.3 billion in
aid that is not helping any distressed homeowners.
I have been told by parties involved in the process that
there was an agreement between all the institutions that no aid
would be given to help injured homeowners until all the
institutions were ready and able to make payments.
So first, who gave this order that no money would be paid
to borrowers, to the people who were injured, while at the same
time nearly $2 billion was generated in fees to private
contractors?
Mr. Bernanke. We agreed with you that plan was not working.
As you know, the way it was set up was that the private
consultants would evaluate the files and determine how much
damages were warranted. They had not made all that much
progress, frankly, and it was a very expensive cost per file
evaluated, and we were on a track--and we take responsibility
for this--where the money going to the consultants would be
some multiple of the money going to the borrowers. So as you
know, we have changed the process to a much quicker, more
streamlined process, which is going to cut out the consultants
and which will have checks going out to borrowers very, very
shortly, within weeks.
Mrs. Maloney. Don't you think that it would have been a
better process if you had, and certainly more effective, to
compensate borrowers whose harm was found and documented rather
than wait for the entire process to be completed or to make
this adjustment at midterm? We can put a person on the Moon.
Why in the world can't we solve this? This whole foreclosure
process is really dragging down the whole housing industry,
because no one knows what to do.
If you are going to send out checks soon, which I am glad
to hear, how did you make the determination of who should
receive these checks, and where are they going and what was the
criteria? And what are you going to do to clean up this backlog
and take this whole problem off and help the homeowners, which
was the intention of the settlement to begin with, yet 2 years
later no one has been helped?
Mr. Bernanke. No. You are absolutely right.
Mrs. Maloney. I can't tell you the stories I have heard of
people who have lost their homes, and no one even knows who
owns their home; it just sits there vacant. We have to get this
straightened out. Can you just give me some timeframe and how
we are going to fix this?
Mr. Bernanke. Yes. We have agreements with most of the
servicers, which will be made public shortly, because they are
being incorporated into the enforcement orders under which they
are operating. As you know, we have about a $9 billion
agreement, all of which will be reflected either in cash
payments or in mortgage relief to borrowers, none going to
consultants. That is very much under way.
My guess as to why the payments hadn't occurred until now
is that it was just such a slow, ungainly process, but I will
get you more information on that. On the criteria, we are going
to have to use some shortcuts, because we don't have a full
analysis.
Mrs. Maloney. Do you think we should fall back--
Chairman Hensarling. The time of the gentlelady has
expired.
And the Chair now recognizes the chairman emeritus, the
gentleman from Alabama, Mr. Bachus, for 5 minutes.
Mr. Bachus. Thank you, Chairman Bernanke. Chairman
Bernanke, I am going to ask you to reconsider the Fed's
Proposed Rule 165 as it relates to foreign banking
organizations which don't have a U.S. bank, but here in the
United States only operate a broker-dealer. And let me give you
four reasons. I don't want to engage you in a debate at this
time, but first, to have that approach is different from any
other regulatory regime that would apply to U.S. broker-dealers
of our American companies. So you are using a different
approach, but their broker-dealer doesn't have to be placed in
that.
Second, it is discriminatory, in my mind, because the
securities broker-dealer of the foreign banking organization
could have a higher capital standard because of the standard
imposed on the intermediate bank holding company.
We also have the longstanding principle of, I guess,
national treatment where you don't have disparate treatment,
and I think this violates that.
Also, you have an expressed statutory provision that
prohibits the Federal Reserve from overriding the capital
requirements of a functionally regulated subsidiary of a bank
holding company such as a broker-dealer subsidy whose capital
requirements are established by the SEC. So to me, it would
violate that.
Now, I would also tell you to look at Section 165(b)(3) of
Dodd-Frank, which says that in prescribing standards, the Fed
should also take into account whether a foreign bank owns an
insured bank as well as whether it has another primary
regulator.
So I would ask you, and I would think that you consulted
with the SEC, that you consulted with the foreign regulators,
but I just got back from Germany, and this was brought up on
three different occasions by both government officials and
European banks as to why are you treating us differently. I
know you have extended the comment period of this rule to April
20th, but I would like to just exchange a series of letters and
point out this in more detail.
Mr. Bernanke. Thank you for calling that to my attention.
Mr. Bachus. Thank you. And it is--there are over 100
foreign banks that are operating here that would be under--or
could be under a different capital requirement than our local
banks, and I think that could cause problems with our
international regulators. And I am sure you have heard from
some of them.
Let me say to the membership, both Republicans and
Democrats, and particularly those who have come here just in
the past 5 years, Chairman Bernanke told us today exactly what
he has told us for the last 5 years, and that is he has told us
to focus on long-term structural changes to our mandatory
spending programs, most of which are entitlements. And that
ought to be our focus, and he said that today. He said that it
will have a beneficial effect, a long-term beneficial effect,
it will not retard economic recovery.
Now, what have we done as opposed to what he has--and I
have asked that same question to you for 5 years. You have
always responded, focus on long-term structural changes,
because of the demographics.
What have we done? Last year, we had some success. This
Congress doesn't get the benefit of--we had $2.5 trillion worth
of cuts and revenue measures that reduced our debt for the next
10 years $2.5 trillion, and most people are saying we have
about another trillion, $1.5 trillion to go.
And I will say this. I know your hand is on the clock. This
sequestration was a bipartisan mistake by Members of both
parties. We were told it wouldn't go into effect. That is a
gamble we will lose on March 1st.
What we need to do is substitute these short-term changes
for maybe going up on the retirement age 2 months or some means
testing. This is not rocket science. And I say to the President
and to this Congress, quit fiddling around, get to work, and
let us come up with $85 trillion worth of long-term structural
changes.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman. Chairman Bernanke,
will you please help me out? Did you state in your testimony
that we need to make structural changes to entitlement programs
or did you say that front-loaded spending cuts required by the
sequestration with policies that reduce the Federal deficit
more gradually in the near term, but more substantially in the
longer run?
Mr. Bernanke. Yes. Congresswoman, I said that you need to
be looking at the long run--
Ms. Velazquez. Okay.
Mr. Bernanke. --which is where the problems are most
serious.
Ms. Velazquez. Mr. Chairman, as it has been stated, the
housing sector has continued to see improvement with increased
construction activity and higher home prices. As you know, the
rate of economic recovery relies heavily on a robust housing
market. And I am interested in hearing from you what will be
the impact or the effect to the economy if Fannie Mae, Freddie
Mac, and the FHA were scaled back or abolished, as some
policymakers have proposed?
Mr. Bernanke. Currently, Fannie, Freddie, and FHA are
pretty much the whole mortgage market. Other than portfolio
lending by banks, there is not much in the way of alternative
securitization. So simply shutting them down without doing
anything else would no doubt restrict credit quite
considerably, but I think we all agree--
Ms. Velazquez. And it would have an impact on job creation?
Mr. Bernanke. Yes. I think we all agree that over the
longer run, we need to come to a more acceptable set of
institutions, but right now, of course, they are providing most
of the support for the mortgage market.
Ms. Velazquez. Thank you. Mr. Chairman, past iterations of
the Basel allowed exemptions for community banks from the
complex capital rules imposed on large multinational banks. Was
that approach considered for this round of Basel?
Mr. Bernanke. I am not sure I quite understood. The--
Ms. Velazquez. In Basel I and Basel II, small banks,
community banks were exempted from those rules. Now in Basel
III, they were not. They were not the ones that created the
economic crisis.
Mr. Bernanke. Of course. The community banks have always
been subject to capital rules, of course. They are exempt from
many, many of the more complex rules which apply to large
internationally active banks, and that will continue to be the
case. And I am sure you are alluding to concerns that small
banks have raised about--
Ms. Velazquez. Right.
Mr. Bernanke. --the recent proposed rule. We have heard
that from Members on both sides of the aisle as well as from
the industry and other stakeholders, and we are looking at that
very carefully.
Ms. Velazquez. I am concerned about that, because when we
look at the survey of loan officers, it still shows that access
to capital for small businesses continues to hinder economic
growth, and community banks are the one that lend to small
businesses. I am concerned to know whether or not someone was
advocating for community banks when it comes to imposing
regulations on Basel III.
Mr. Bernanke. We are looking carefully both at community
banks and at small business lending, and we recognize the
importance of those two institutions.
Ms. Velazquez. Thank you.
Mr. Campbell [presiding]. Does the gentlelady yield back
her time?
Ms. Velazquez. I do.
Mr. Campbell. The gentlelady yields back her time.
Now, the chairwoman of the Financial Institutions and
Consumer Credit Subcommittee, the gentlelady from West
Virginia, Mrs. Capito, is recognized for 5 minutes.
Mrs. Capito. Thank you, Mr. Chairman. And thank you,
Chairman Bernanke, for being with us today. I would like to add
my voice of concern to the previous questioner, Ms. Velazquez,
on the issue of the Basel III and the effect it is having on
and could have on our community banks. We had a hearing several
months ago, and it was pretty unanimous in the hearing from all
voices that there is a serious concern on what impact this
could have on lending for small businesses and the ability
really for community banks to survive and flourish. I know you
have already answered that question, so I appreciate the fact
that you are keeping that in mind as we move forward on this
regulatory issue.
You talked about the sequester and talked about how you
would prefer it to go at a more gradual pace rather than the
more dramatic pace that it appears that it could be going at
this point, because of the influence of jobs.
I have a great idea. I live in an energy State. If we would
unleash the power of this country to really have a full and
flourishing energy economy, both including in my State, coal
and natural gas, but Keystone Pipeline and others, we would
have thousands of people, more people working, we would have
energy independence, we could have availability of natural gas
as a transportation fuel. It fuels our chemical industry and
our power generation.
So I would like, from your perspective, and I am very
frustrated by the regulatory issues and, I think the inability
of the Administration to move forward in full-out energy
independent policies that I think could create many, many jobs.
Where do you see energy as a part of the whole national
economy, energy independence and the job effects that an energy
economy can bring?
Mr. Bernanke. Energy has been one of the bright spots in
our economy in the last couple of years. We have seen
tremendous increases of production of natural gas, increasing
oil production. There is talk of coming close to energy
independence over the next few years. That has created a lot of
jobs and has been a positive factor in many parts of our
country.
Of course, there are always environmental issues which
arise, and I am frankly not qualified--
Mrs. Capito. Right.
Mr. Bernanke. --to give you a sense of how those balance
out against each other. I hope that solutions can be found
which will preserve the environment and also allow for the
development of our resources, because as you say, it creates
jobs and reduces our vulnerability to foreign energy sources.
Mrs. Capito. You mentioned gas prices as a reason that is
hurting our economy in general, and certainly all of our
constituents are feeling this very much. I think energy
economy, there again, could answer in a small way and maybe a
large way the issue of gasoline as we move towards energy
independence. So, I would like to hear you talk about the
energy economy more as part of our broader economy, because I
think you said it is a bright spot; let's feature it as a way
for us to pull ourselves out of a slower recovery. So I would
encourage you to do that.
My other question is on seniors. Many of us are in that
sandwich generation trying to help our parents, and our parents
are doing a pretty good job trying to help themselves, but they
are relying on their good planning and investments, if they
have been lucky enough to invest. The dividend and interest
availabilities to them are crushing our seniors as they see
their health care costs go up. And some of the policies that
you have put forward, I think, and that the Fed has caused
concern for those of us who are concerned about seniors who
don't have the ability to get another job--that is played out
for them.
What can I tell my seniors back home that is going to give
them some optimism that they are going to be able to rely on
that good planning that they had to carry them through to their
senior years?
Mr. Bernanke. I would say first that savers have many hats.
They may own fixed-income instruments like bonds, but they also
may own stocks or a house or a business. All of those other
assets benefit when the economy strengthens.
Mrs. Capito. Right.
Mr. Bernanke. And those values have gone up. The stock
market has roughly doubled, as you know, in the past 2 years.
So from an investment perspective, there are alternatives.
I think more importantly, though, you are not going to get
strong returns in an economy that is fundamentally weak. The
best way to get sustainable high returns to savers is to get
the economy back to running on all cylinders. And it is
somewhat paradoxical, but in some ways the best way to get
interest rates up is not to raise them too quickly, because by
keeping rates low now, we can help the economy get stronger, we
can create more jobs, we can create more momentum in the
economy. That is the way to get a sustainable higher set of
interest rates.
It is very striking that if you look at every other
industrial country around the world, interest rates are about
exactly where they are here, and that says something about the
fundamentals, which are very weak in most of these industrial
countries. And until we can get greater forward momentum, we
are not going to be able to see sustainable higher returns.
Mrs. Capito. All right. Thank you very much.
Mr. Campbell. The gentlelady's time has expired.
The gentleman from California, Mr. Sherman, is recognized
for 5 minutes.
Mr. Sherman. Chairman Bernanke, I want to thank you for the
wisdom to recognize that our country needs an expansionary
monetary policy, the fortitude to stick with it when apparently
you have some critics, and the creativity to go beyond your
traditional tools in carrying out that policy.
I listened carefully to my California Republican
colleagues. I want to associate myself with Mr. Miller in his
comments about a QRM definition that isn't too far from the QM
definition. I heard Mr. Campbell criticize the Fed because he
hears people saying that you shouldn't fight the Fed and it is
hard to price risk.
I am pretty old. I have seen your predecessors carry out
just about every kind of Fed policy I can imagine. Everybody is
always muttering, don't fight the Fed. And the only time they
ever say it is easy to price risk is when they are wrong. So
the mutterings that the gentleman from California hears are
fully consistent with not only your monetary policy, but every
other monetary policy you could imagine.
And Ms. Velazquez points out how important Fannie Mae and
Freddie Mac are, and FHA. We heard testimony here from Moody's
Analytics that if FHA hadn't been there, we would have seen
another 25 percent decline in home prices. In my view, if that
had happened, America would look somewhere between Greece and
Thunderdome. So it is fortunate that we have those
institutions.
We have a lot of capital on the sidelines, as the gentleman
from California pointed out. Investment needs funds, but it
also needs people willing to take a risk. Some criticize that
as reaching for yield, but if everybody is only willing to
invest in investments where the appropriate yield is 2 or 3
percent, we are not going to have any small business lending. I
have never seen a small business with a 98 percent chance of
success. We have banks out there, they have a lot of capital,
they face a lot of pressure to invest at 2 and 3 and 4 percent.
I am told by bankers that if they invest in something that
has, say, an 8 percent likelihood of default, they don't face
an 8 percent reserve or a 10 percent reserve or a 12 percent
reserve, they get 100 percent charge to capital.
What can the Fed do so that loans that are a bit--they are
not just the 2 or 3 percent loans, are valued conservatively
and the portfolio is valued conservatively, but not with a
penalty valuation?
Mr. Bernanke. I would like to continue that discussion with
you. The reserving practices are mostly tied to actual problems
with loans, not with loans that are made that may be risky, ex
ante. And, in fact, one of the issues that has been an issue
for a while is can banks put aside reserves against general
risk of credit loss as opposed to losses in specific loans.
So we have generally been supportive actually of banks
doing more reserving so they would have some reserves available
against losses not yet seen or understood, but I think maybe we
need to have a further conversation about this.
Mr. Sherman. I look forward to that. Timing is everything
in a lot of fields. This is a pretty ideological city right
now, and an ideologue either believes that it is always the
right time to cut taxes, always the right time to cut spending,
or always the right time to increase spending, or always the
right time to increase taxes, or always the right time to do
whatever their ideology requires.
In your opening statement, you point out that the Fed is
adopting a different approach. You actually have different
policies for different business conditions and your line is
6\1/2\ percent unemployment, along with some other factors.
The national debt is a growing cancer, but this is an
economy that suffered a heart attack in 2008. And you don't
administer chemotherapy while a patient is still in the cardiac
ICU.
Would the markets have confidence in Congress, and it is
hard to think of whether they would ever have confidence in
Congress, if we have statutory provisions which, like your
policies, had a trigger and moved toward a more contractionary
fiscal policy with, say, a 6\1/2\ percent unemployment rate?
Chairman Hensarling. The time of the gentleman has expired,
and the Chairman can answer the question in writing.
The Chair now recognizes the gentleman from New Jersey, Mr.
Garrett, for 5 minutes.
Mr. Garrett. I thank the chairman and I thank Chairman
Bernanke. Let me just try to run through in 5 minutes three
areas, what you talked about on remittances, what you talked
about as far as some of the positive results, and if we have
time, some of the effects of the somewhat current loose
monetary policy on an international state.
So on remittances, I think you already said that the
remittances are here, but they are potentially to go down in
the future. If you look at the consolidated balance sheet of
the Federal Reserve, we have capital of less than $55 billion,
and assets of more than $3 trillion, so that means that all you
need is about a 1 quarter of 1 percent increase in the interest
rates, and you basically wipe out what you basically have right
now, which is a 55 to 1 ratio, and you wipe that out.
So what is your prediction actually on that going forward
with regard to interest rates wiping that ratio out and the
effect on remittances to Congress? Can you be more specific on
the numbers?
Mr. Bernanke. Certainly. So currently, as I have said, we
have in the last 4 years, remitted $290 billion, we currently
have more than $200 billion of unrealized capital gains on our
balance sheet. The capital issue is irrelevant. We have
additional funding behind the capital. We have $3 trillion of
liabilities which are not callable liabilities, like cash, for
example.
Mr. Garrett. I guess I would just ask you if you could
follow up on detail on that, because that is not the way I
understand it, but I would ask you to put that in writing.
Mr. Bernanke. The main reality here is that if interest
rates rise very quickly, then there may be a period where we
don't pay any remittances at all to the Treasury. That is the
actual outcome. That is important.
Under most, and I would say virtually all scenarios, we
will be sending remittances to the Treasury substantially
higher than the norms established before the crisis.
Mr. Garrett. Since my time is limited, what we are looking
at here is around $90 billion in remittances if--you said we
could actually see that almost go down to eliminate it. Right
now, we are trying to do a sequester at $85 billion. So it sort
of puts us in perspective as to what the effect could be as far
as your policies there.
With regard to the positive indications that you have
indicated, you said the stock market and the housing market
have gone up because of your monetary policy, but previously
you said that the Fed's monetary policy actions earlier this
decade, in 2003-2005, did not contribute to the housing bubble
in the United States. So which is it? Is monetary policy by the
Fed not a cause of inflationary prices of housing, as you have
said in the past, or is it a cause of inflating prices of
housing? Can you have it both ways?
Mr. Bernanke. Yes.
Mr. Garrett. You can?
Mr. Bernanke. Yes, we can have it both ways, because they
are different phenomena.
The mortgage rate is a quantitative thing. House prices are
going up a reasonable amount, given the strengthening of the
housing market, given the strengthening of the economy, given
where mortgage rates are. But mortgage rates in the early part
of this last decade were around 6 percent. That can't explain
why house prices rose as much as they did. Maybe it was a small
contribution, but it certainly can't explain the big run-up and
then decline.
Mr. Garrett. But now it is.
So the other area you indicated why we should say your
policies are working in a cost-benefit analysis is the stock
market. I am sure you are familiar with Milton Friedman's work
that says that people only really consume off of their
permanent income, which basically means that you don't consume
increased consumption because your stocks have gone up in the
marketplace.
And to that point, I know Mrs. Capito asked the question as
to what seniors should do in this situation, and you said, take
it out of some fixed assets and put it into the stock market.
Heaven forbid that my 90-year-old mother would take her money
out of fixed markets and put it in the stock market. I think
that is probably the worst advice that is out there. And when
you consider that a 1 percent increase in the stock market only
has infinitesimal, maybe a 100 percent increase in GDP, I
really don't understand: first, how you can give that advice;
or second, how you can suggest that an increase in the stock
market is a positive indicator of your work in a cost-benefit
analysis to the rest of the economy.
Mr. Bernanke. I was not giving financial advice. I
apologize if I gave that impression. I was just saying--
Mr. Garrett. But she was asking you--
Mr. Bernanke. --that generally--
Mr. Garrett. She was asking you the question, what should
you be doing to benefit the seniors, what should we say to the
seniors. And your comments were--
Mr. Bernanke. What I was saying was that the economy will
get stronger because of good policies and that in turn will
cause rates to rise in a sustainable way. If we were to raise
rates prematurely, we would kill the recovery and rates would
come down and we would have a long-term situation with very low
rates.
Mr. Garrett. But wouldn't you have provided for the
certainty in the marketplace so you could have more price
transparency? Earlier, you said that some risk-taking in the
market is appropriate. That was one of your opening comments.
Sure, risk-taking is appropriate, but it is appropriate when
there is actual price discovery. When you have a market that is
distorted, as it is right now by the Fed's monetary policy, you
really don't have true price discovery. And so when you do
risk-taking now, it is based upon not really knowing what the
appropriate value is of land prices, equity markets prices, so
risk-taking now is worse than risk-taking is when the Fed's
actions do not distort the marketplace. If you would say--thank
you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New York, Mr.
Meeks, for 5 minutes.
Mr. Meeks. Thank you, Mr. Chairman. Chairman Bernanke, more
of us thank you for all of your work and what you do with
reference to our great country.
In your opening statement, you talked a lot and you
indicated about jobs, and I think that is the going subject
matter. Everybody is concerned about jobs on both sides of the
aisle, and the creation of jobs, yet we have had 35 straight
months of private sector job growth, but we are continuing to
have, as you said, high, and stubbornly high, unemployment
rates. And as I look at it, with that steady growth, we have
shed over 600,000 public sector jobs since the beginning of the
financial crisis in late 2008. In fact, The Wall Street Journal
estimated last year that the unemployment rate would be at
least one full percentage point lower if we still had those
jobs, those 600,000 jobs.
So my question to you is, what strains have these massive
public sector layoffs put on your ability to stabilize the
employment sector, and what do you think we need to do in
regards to that to replace those jobs?
Mr. Bernanke. Let me first say that I understand why States
and localities in particular laid off a lot of workers, because
their tax revenues went down, they had to balance their
budgets, and that was the only option they had, but it is true
that State and local governments, their retrenchment during the
recovery and their layoffs were a headwind for the broader
economic recovery. In fact, the fiscal retrenchment at the
State and local level in this recovery has been much more
severe than in virtually any other recovery.
So the good news, I guess, and one of the reasons why I
think we may have a somewhat stronger economy going forward is
that State and local governments seem now to have stabilized
their budgets, and as a result we don't expect to see those
ongoing layoffs to the extent that we have seen them in the
past.
But, yes, it is true that the contraction of State and
local government budgets, together with more recent cuts in the
Federal budget, has resulted in job loss certainly in those
sectors and in the economy more broadly.
Mr. Meeks. And sequestration as we see it right now on a
Federal level could exacerbate that with--
Mr. Bernanke. I have cited the Congressional Budget Office,
which I think has reasonable estimates, yes.
Mr. Meeks. Let me also go to a question, because you have
been asked about banks and banks lending, and Alan Blinder had
an op ed in The Wall Street Journal last year, if I recall,
pointing out that in an effort to spur lending by banks,
central banks in Europe are cutting their interest, cutting the
interest they pay on excess reserves to zero. In fact, the
Danish cut it to a negative 0.2 percent, meaning banks would
have to pay the central bank to keep reserves with them.
Now, this seems to me to be a powerful incentive to either
lend or put money to work in the markets. So my question is, do
you believe that this policy, if implemented here, would it
benefit the U.S. economy? And if not, why not?
Mr. Bernanke. Banks are currently being paid on their
reserves 25 basis points, one-fourth of 1 percent. They are
actually receiving less than that on net, because they also
have to pay FDIC premiums on the deposits that they hold on the
other side of their balance sheet, so they are receiving just a
few basis point on their reserves.
If we cut the interest on reserves, say, to zero or
slightly negative, which is possible, it would have a very,
very small effect in the right direction, but a very, very
small effect on the incentives of banks to make loans.
Basically, they are not finding as many loans as they would
like to make when they are earning 8 basis points on their
reserves. Would it help to get it down to zero? It is in the
right direction, as I said, but one of the reasons that we have
hesitated to do that is because it would also lower returns
throughout the money markets in our economy and would create
some problems in terms of the functioning of money markets, the
Federal funds market, and other short-term cash markets. So it
is not clear that the benefits in terms of more stimulus
outweigh the costs in terms of market functioning. That being
said, it has always been something that we have kept on the
table and talked about periodically.
Mr. Meeks. So it is something that is still on the table
and you are still talking about? Because I like movement in the
right direction.
Mr. Bernanke. It is not a powerful tool, though, in any
sense.
Mr. Meeks. I have 10 seconds left, I don't think I am going
to get my next question in, but the--because my next question
was basically what you were told--told Senator--
Chairman Hensarling. No, no. The gentleman cannot get his
next question in. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Neugebauer, for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman. And, Chairman
Bernanke, thank you for being here this morning. Mr. Chairman,
I want to walk through the proposed exit strategy that I think
was put forward in June of 2011 and see if you foresee taking
any different steps. I believe in that exit strategy you said
we would begin to cease reinvesting payments of principal on
security holdings, I guess as they matured. The second part of
that was raising the Fed funds rate while adjusting the
interest rate on excess reserves and levels of reserves in the
banking system to kind of bring those funds towards a targeted
rate. And then I think the third part of that was selling off
some of the Fed securities after the first increase in the
target for the Federal funds rate.
So according, though, to the most recent FOMC minutes
released, a number of participants discussed the possibility of
providing monetary accommodation by holding securities for a
longer period of time than what was originally envisioned by
the committee's exit principles, either to supplement or to
replace other asset purchases. This kind of suggests a
deviation from the course put forward in 2011, and I would
suspect there may be other changes that are being discussed
from the June 20th exit strategy as well.
So you have laid out this exit strategy, and now based on
these subsequent conversations and discussions that are going
on, how confident should investors and the business community
be that this exit strategy will be the same 6 months from now
or 3 years from now? And given the huge size of your balance
sheet and the potential uncertainty that changes in this exit
strategy could cause, are you concerned that we are creating
some additional uncertainty in an already uncertain economy?
Mr. Bernanke. No, I don't think so. We haven't done a new
review of the exit strategy yet. I think we will have to do
that some time soon. I am pretty confident the basic outline
that you just described would still be in force.
The one thing we could do differently, as you pointed out,
is hold some of the securities a little longer. We could even
let them just run off. I just want to be clear that even if we
don't sell any securities, it doesn't mean that our balance
sheet is going to be large for many years. It just would be
maybe an extra year. That is all it would take to get back down
to a more normal size.
So that is one issue, how long to hold the securities and
whether to use that as a substitute, an alternative to asset
purchases. I think that is something worth discussing, but I
don't see any radical shift in the way this is going to happen.
And, again, as I said earlier, we are quite comfortable
that we can exit in a way that is both smooth and in which we
provide lots of information to markets in advance so they will
know what is coming and be able to anticipate it.
Mr. Neugebauer. I thought it was kind of interesting when
you said that we need to take a slower approach to deficit
reduction and that the economy couldn't withstand a major
reduction in government spending. Don't you find it a little
disconcerting that we have let the government become so much of
the economy that cutting our deficit so that we don't mortgage
the future of our children and grandchildren should be even a
consideration in deficit reduction?
Mr. Bernanke. Government is an important part of every
advanced economy now. And I am not by any means saying that we
should not deal with the deficit problem. I am just saying we
should take a longer-term perspective.
Mr. Neugebauer. When people talk about fiscal policy and
monetary policy, you always say, I am in charge of monetary
policy, not fiscal policy, but Mr. Chairman, I almost find the
Fed to be a deficit enabler in the environment that we are in
right now. And the reason I would say that is the fact that
last year, I think you transferred about $90 billion back to
the Treasury. So basically, whatever securities that they
yield, you buy down their yield to almost zero. You have put
$90 billion additional money in the hands of the government,
yet we still ran a $1.2 trillion deficit. So we are almost
enabling the government to continue to spend, because we are
allowing them to have this borrowing habit at a very cheap
price because of the actions that you are taking at the Fed to
buy those yields down.
Chairman Hensarling. The time of the gentleman has--
Mr. Neugebauer. You can follow up and answer in writing.
Mr. Bernanke. Okay. I will follow up.
Chairman Hensarling. If you can follow up in writing,
please.
The gentleman from Massachusetts, Mr. Capuano, is
recognized for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman. And thank you,
Chairman Bernanke, for being here again. Mr. Chairman, I have
read most of the 57-page report and I have read your 9 pages,
and honestly every time any Fed Chairman has ever come before
here, it is like I get a headache before, during, and
afterwards. I love you dearly, but trying to parse all these
things that everybody is saying is very difficult for average
people, including me.
And I guess I want to read one sentence from your testimony
to make sure that I understand it correctly. This is from your
testimony: ``To address both the near and long-term issues, the
Congress and the Administration should consider replacing the
sharp front-loaded spending cuts required by the sequestration
with policies that reduce the Federal deficit more gradually in
the near term, but more substantially in the longer run.''
I think I read this correctly, but would it be fair for me
to paraphrase this to average people that the Chairman of the
Federal Reserve thinks that sequestration is stupid?
Mr. Bernanke. I wish you wouldn't do that. What I am
saying--
Mr. Capuano. But would it be fair?
Mr. Bernanke. What I am saying is that by a more gradual
approach but with more cuts in the longer term achieves both
objectives, not slowing the recovery by too much, but on the
other hand addressing these long-term issues that Congressman--
Mr. Capuano. Like I said, I am getting a headache again.
From what I just heard, you said, again to paraphrase, not to
quote, that you think sequestration is stupid. And I agree with
you. Don't worry. It is okay. Sequestration is going to get its
fair share of attention today and this week and next week, but
I want to focus on something that is a little bit more closely
related to directly what the Fed does, and that is the too-big-
to-fail.
I was reading your testimony from yesterday, and the
written testimony, and again I want to read your words as
reported relative to too-big-to-fail on the subsidy, relative
to the too-big-to-fail thing. And you say, the subsidy is
coming because of market expectations that the government would
bail out these firms if they failed, period. Those expectations
are incorrect.
That is a quote from you. Is that a fair--
Mr. Bernanke. Yes.
Mr. Capuano. Okay. So am I reading this correctly that you
believe that at least through legislative purposes, that too-
big-to-fail is just nonexistent anymore, not through the
market, but through the law?
Mr. Bernanke. We don't have--the tools that were used in
2008 are gone now. What we have instead is the Orderly
Liquidation Authority, which among other things would wipe out
all the shareholders of the company being liquidated.
Now, if we had a systemically large important firm fail
tomorrow, it still could be very damaging to our economy. And
we are working--
Mr. Capuano. I understand. We could do something--
Mr. Bernanke. --working in that direction.
Mr. Capuano. --but the law currently as drafted, after
Dodd-Frank and after all of the things we have been through,
today we do not have the tools that we used to implement too-
big-to-fail as it was in 2008.
Mr. Bernanke. The tools that the Federal Reserve used are
no longer available to us.
Mr. Capuano. I am glad to hear that. And I also agree with
you that regardless of what the law says, some people in the
marketplace, especially some of my friends on the other side of
the aisle, like to believe that it is still in existence. And I
accept that, not as a legal point, but as a fact of reality.
Some people think that the Moon is made of cheese, and that is
fine. To them, that is real. So for some people, too-big-to-
fail is still there, though there is no scientific or legal
proof that it is.
I guess what I am asking is, what do you suggest that we do
to address that misconception of the market and the
misconception of some of my own colleagues that too-big-to-fail
is still here? Because I think we all agree that we don't want
it to be here, it is not here. How do we address that
misconception to make it a reality?
Mr. Bernanke. Dodd-Frank as a strategy involves making big
institutions internalize, take account of their systemic costs
by tougher regulation, higher capital charges, and so on, the
Orderly Liquidation Authority and strengthening the entire
system. So there are steps that we are taking that are moving
in that direction. I think the markets will come to see that
these steps are effective. Of course, we can communicate it, we
can say it, but--
Mr. Capuano. But we have been saying it for years now, and
some people refuse to believe it. Do you accept the general--
and, again, not for the dollar, but there have been some
studies that put the subsidy that--the alleged subsidy that is
there for the too-big-to-fail that doesn't exist anyway, but
that market perception of a subsidy--
Mr. Bernanke. Yes. No. There still is some--I am sure there
is still some--
Mr. Capuano. And I accept that.
Mr. Bernanke. --market perception. It is declining, but we
need to be working in the direction of eliminating it entirely.
Mr. Capuano. And do you think that subsidy can be
quantified in a reasonable way?
Mr. Bernanke. With lots of assumptions and so on, you can
compare what large banks pay in the market to what small banks
pay, and that gives you some sense--
Mr. Capuano. Be prepared to get a request from me later on
to try to do that quantification.
Mr. Bernanke. Senator Warren cited some studies to me
yesterday, so maybe--
Mr. Capuano. Yes, but that is not your study. I want yours.
Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. McHenry, for 5 minutes.
Mr. McHenry. Thank you, Mr. Chairman. And, Chairman
Bernanke, thank you for your service to our government, and to
our people.
To follow up on my colleague from Texas' question about Fed
policy masking the true cost of our fiscal profligacy, now, the
question is, would the Fed buying 48 percent of U.S. debt for
Fiscal Year 2013 and with a zero or negative real interest
rate, isn't the Fed the great enabler of our debt? I understand
Congress and the President make fiscal policy, but isn't the
Fed's policy in essence masking the true cost of our debt?
Mr. Bernanke. If I can make three points. The first is that
as a share of all the debt outstanding, the Fed's ownership is
actually lower today than it was before the crisis. We own
about 15, 16 percent of all the debt outstanding. So those
interest rates you see on the debt comes from actual market
trading between private sector individuals.
The second point is that, as I have emphasized today, there
is a very long-term problem here. What is going to matter is
the interest rate not today, but the interest rate 5 years from
now, 10 years from now, 15 years from now. Congress, I hope,
has the foresight to see that interest rates will not be this
low forever and, therefore, they should take that into account.
And then, finally, I ask, what is the alternative? If we
raised interest rates substantially just to make it harder for
the Congress to borrow, if at the same time we do damage to the
economy and lower revenues and make the deficit even worse, I
don't see how that is really helpful to our fiscal situation.
So my hope is that Congress will recognize that interest rates
will rise over time as our economy recovers and that this is a
long-term proposition and they should take that into account in
their decisions.
Mr. McHenry. So in the short run, yes?
Mr. Bernanke. No. And, again, we only have about 15, 17
percent of the total debt outstanding. It is not the case that
we are buying, all the debt being--
Mr. McHenry. No, no. Just 48 percent this fiscal year.
Mr. Bernanke. Of the new debt--
Mr. McHenry. Yes.
Mr. Bernanke. --but not on average. Again, 85 percent of it
is circulating in private hands.
Mr. McHenry. Okay. Now, to go to a separate point,
Bloomberg reported that at your recent meeting of the Treasury
Borrowing Advisory Committee, which is a group of senior
bankers and investors, they received a presentation that warned
that the central bank's policies, and I am quoting from
Bloomberg News, may be inflating bubbles and speculative grade
bonds and other asset classes.
Is this an acceptable side effect of the Fed's expansionary
policies?
Mr. Bernanke. As I have mentioned, it is a cost of these
policies and it is one that we take very seriously. We look at
these possible mispricings and we ask ourselves, are they in
fact mispricings, how large are they? And if they are
mispricings, what is the vulnerability? For example, if an
asset is mispriced, is it being purchased using a lot of
leverage? Who is owning it? Would its change in its price
severely endanger our financial institutions? Those kinds of
things.
So we are examining this with a great of a deal of care.
And again, I ask, what is the alternative? Interest rates are
low for a good reason, but if in fact we have come to the
conclusion that the cost of these mispricings are sufficient,
then obviously we have to take that into account.
Mr. McHenry. So to this point about inflation, many of us
have this concern about how you are going to unwind this
unprecedented portfolio that you preside over, or how your
successor will unwind this, or your successor's successor. And
the concern that we have is that you only can see inflation
with hindsight.
And the question I have for you concerns the record of the
1970s: in 1973 expected inflation was 3.75 percent, that was
the market expectation, the Fed said 3.9 percent, the actual
was 6.2 percent; in 1974 expected inflation was 6.7 percent,
the Fed said 8 percent, yet the actual inflation was 11
percent; in 1979 expected inflation was 8.3 percent, the Fed
said 7.75 percent, the actual was 11.3 percent. And in 1980,
expected inflation was predicted at 11 percent, the Fed said
7.5 percent, yet the actual was 13\1/2\ percent.
The Fed has consistently gotten it wrong. Are your tools
better now to see inflation than they were then when we had
this great period of inflation?
Mr. Bernanke. Our tools are better, but the environment is
much better, because we now have 25 years of success in keeping
inflation low and stable, and not just in the United States but
around the world. Inflation expectations are very well-anchored
and wages are growing very slowly.
Chairman Hensarling. The tme of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott, for 5 minutes.
Mr. Scott. Thank you very much, Mr. Chairman. Over here,
Chairman Bernanke. How are you? It is good to see you again.
First, I want to commend you for the very courageous and bold
work that you have done in the aggressive quantitative easing
in which you have moved very forthrightly to strengthen our
economy with the purchasing of Treasury and GSA securities, and
I want to commend you for that.
But, Chairman, I have always known you to be a straight
shooter. I have great respect for you. We are on the eve of a
very, very dramatic moment in American history dealing with
this sequestration. And the President of the United States has
said it is a terrible thing to do. The Democrats have said it
is a terrible thing to do. We are fighting to avoid it. The
Secretary of Defense has come before us and said it is
threatening our national security, we better not do it. We have
had our Transportation Secretary, we have had Homeland Security
Secretaries, but yet we have Republicans who are saying, and
who are determined to move ahead and say, let's do it.
I want you to tell us today, who is right here? Who is
telling the truth here? Is sequestration something that we
should not do, as Democrats feel, or is it something we should
do, as Republicans feel? What is in the best interest of
America?
Mr. Bernanke. Congressman, you are asking me to make
decisions which are not mine to make. Those are congressional
decisions. Congress has to make those choices.
What I am advising is a more gradual approach. I am not
saying that we should ignore the deficit. I am not saying we
shouldn't deal with long-term fiscal issues, but I think from
the perspective of our recovery, a more gradual approach would
be constructive.
Mr. Scott. When you say ``gradual,'' what specifically
would gradual mean? Give us an example.
Mr. Bernanke. It works all in the same direction. The more
gradual this is, as long as there are offsetting changes in the
further horizon, the less the immediate impact will be on jobs
and growth in this recovery in 2013.
Mr. Scott. And do you agree that gradual approach should
contain both spending cuts and additional revenue?
Mr. Bernanke. That, again, comes back to what Congress is
responsible for. I am not going to comment on that.
Mr. Scott. I am very, very concerned about this, because my
home State of Georgia will suffer tremendously on this. I
represent a district that has Lockheed Martin, for example,
which has already come under tremendous job loss pressure. We
are looking at over 60,000 jobs immediately. We are looking--
and those jobs are teachers being laid off, firefighters being
laid off, critical, critical manpower that is needed.
Let me ask you: Friday comes, we go over the cliff with
sequestration. What should we do next? Should we then try to
consistently move to put something in place? How would you
advise us to do that, and what would that step entail?
Mr. Bernanke. Again, the specifics are up to you, but what
I would suggest would be replacing the sequester with something
that is smaller, takes hold more slowly, but is compensated for
by changes further out in the horizon.
Mr. Scott. And do you see a complicating factor with the
approaching deadline of the March CR? If, for example, we are
unable to reach an agreement in 4 months, what impact would we
have with sequestration moving rapidly through the system,
massive job layoffs, all of the predictions coming true that we
feel and then with our failure to reach agreement on the CR at
the end of March?
Mr. Bernanke. The CR, I guess, would continue government
services. I think there is some cost to the economy of these
repeated, I don't want to say crises, but these repeated
episodes where Congress is unable to come to some agreement,
and therefore some automatic thing kicks in. I think that is on
the whole not a good thing for confidence.
And, again, as I said yesterday, I realize that finding
bipartisan agreement is very difficult, but I hope that you
will work together to try to develop a less bumpy fiscal path
in the near term.
Mr. Scott. Thank you, Mr. Chairman.
Mr. Campbell. We now turn to the other gentleman from
Georgia, Mr. Westmoreland. He is recognized for 5 minutes.
Mr. Westmoreland. Thank you, Mr. Chairman.
Chairman Bernanke, the Federal Reserve at this point is
buying $85 billion worth of mortgage-backed securities a month,
is that correct?
Mr. Bernanke. No, sir, it is 40 of mortgage backed and 45
of treasuries.
Mr. Westmoreland. Okay, but a total of 85.
Mr. Bernanke. Yes, sir.
Mr. Westmoreland. Because all the talk we have had about
the sequester being $85 billion over a year for the whole
Federal Government, I think when you realize what we are doing
with these mortgage-backed securities, it kind of puts it in a
perspective that do we really need to be buying that kind of
securities every month?
Mr. Bernanke. This doesn't involve any new spending or
revenue.
Mr. Westmoreland. I understand. Just printing money, right?
Mr. Bernanke. It is acquiring securities in order to reduce
interest rates and ease financial conditions in the economy.
Mr. Westmoreland. Let me ask you, I know that you make the
decisions as far as what you think it will take, and I guess
the Board of Governors, for what you think it will take to run
the Federal Reserve, and as my colleague from Georgia
mentioned, we represent a State that has had more bank failures
than I think any other. I know my congressional district has
more than any other congressional district.
What is the Federal Reserve doing to let these banks which
are community banks and they know their communities and they
know their borrowers, what is the Federal Reserve doing to let
them have more latitude in making some of the decisions about
the banking needs of the community and how they can best solve
that? Because what we basically hear is that the regulators,
the FDIC, OCC, Federal Reserve, State regulators, are not
really letting them answer the needs of the community.
Mr. Bernanke. We are very interested in the success of
small community banks. We agree that they play a very important
role in communities. We have a whole list of things, I won't
have time, but we have a Community Bank Council that comes and
meets with the Board and gives their views. We have a special
subcommittee of our Supervision Committee that is particularly
focused on how rules can be made appropriate for smaller banks.
We train our examiners to take into account the size of banks
and their particular business models. We have all kinds of
outreach. We are looking at our rules with the understanding
that community banks can't manage the same level of regulatory
burden that large banks can handle.
So we are very committed to helping small community banks
succeed in this environment. You have my assurance that is
something we pay a lot of attention to.
Mr. Westmoreland. I know that as I meet with my community
bankers, and we have a little advisory board for the bank, and
they are very concerned about Basel III, they are very
concerned about the writedowns that they are having to do
immediately rather than having some time period to do it. And I
understand that you have all these things evidently in place to
try to help the community banks. I just haven't seen it.
Nobody, none of my community bankers have said, hey, the
Federal Reserve or the FDIC or anybody else is trying to help
us stay open, they are giving us some latitude. So I just don't
see a big help going there.
But I wanted to follow up on one of the questions that has
already been asked. What do you think the amount is for a bank
to be too-big-to-fail? Or is there an amount?
Mr. Bernanke. No. First of all, again, we are working again
to get rid of too-big-to-fail, so any bank that fails would be
subject to this Orderly Liquidation Authority. But in
designating firms, for example, as systemically important,
which is not the same as too-big-to-fail, we look at not just
the size, but also the complexity, the interconnectedness to
other banks, the kinds of activities they have and so on. So a
simple dollar number is not really adequate to describe whether
a bank is systemically critical or not.
Mr. Westmoreland. I hope that as we continue to talk about
too-big-to-fail, we will also look at the banks that are too-
small-to-save.
I yield back.
Mr. Campbell. The gentleman yields back.
The gentlelady from Wisconsin, Ms. Moore, is recognized for
5 minutes.
Ms. Moore. Thank you so much, Mr. Chairman, and thank you,
Chairman Bernanke, for appearing today and tolerating this long
testimony.
I have a couple of questions for you. One of the
consequences of our almost defaulting on our debt and the whole
debt crisis, raising the debt limit, was we saw a lot of
chatter around the world about abandoning the U.S. dollar as a
reserve currency, and I am wondering what your outlook is on
the economic growth or contraction of our economy were that to
occur, that we would lose our status, that the U.S. dollar
would lose the status of a reserve currency?
Mr. Bernanke. Let me say first that I don't see any sign
that is happening. The amount of reserves held in dollars is
actually growing, not shrinking. So I think that reserve
currency status at least for the foreseeable future is very
much intact. If we lost that, it would probably have some
effect on the interest rates that we pay because we would have
fewer holders for our bonds and that in turn might have some
impact on our economy. But, again, I don't think that this is a
very likely prospect in the foreseeable future.
Ms. Moore. Why did we have all the chatter about it, with
the larger economies, Latin America, China?
Mr. Bernanke. Of course, the world is evolving. The Chinese
would like their currency at some point to become a reserve
currency. There is some distance for them to go before they can
get to that point. But, as I said, at least in the near term,
pretty close to two-thirds of all global reserves are held in
dollars, and that doesn't seem to be changing very much.
Ms. Moore. Thank you.
Listen, I want to talk about too-big-to-fail as well,
global too-big-to-fail, and I want to say that I was really
pleased to see the FDIC and the European Commission working
together to establish a legal framework to create a global
system for unwinding large systemically important firms similar
to our Orderly Liquidation Authority that we created in Dodd-
Frank.
Is there more that this committee and Congress can do
towards this effort or other cross-border efforts? And I would
be interested in hearing about other efforts that the Fed is
undertaking to further coordinate global monetary policy,
particularly with bank regulation standards, and anti-money
laundering efforts. What other things are you doing?
Mr. Bernanke. On an Orderly Liquidation Authority, as you
mentioned the FDIC, which is leading this effort, has been
working with European counterparts. They published a paper with
the U.K. authorities, I believe it was a few months ago. The
Fed has been working very closely with the FDIC. Recently, for
example, I attended a table top exercise where we pretended
that there was a bank failing and asked ourselves what we would
do under the laws that Orderly Liquidation Authority provides.
The Financial Stability Board, which is an international body
of regulators, and other international bodies like the Basel
Committee and so on, have been discussing the issues related to
international banks and how they might be liquidated in a
crisis.
That is the most difficult issue, I think, that we still
have to work on. But we are making progress, and there is a lot
of international interest in finding ways to work together to
deal with the institution which crosses many borders. More
generally, the level of international cooperation in regulatory
matters is quite high. There are a number of international
bodies. The U.S., the U.K. and the other major banking centers
cooperate quite extensively on these issues. The CFTC and the
SEC are working on derivatives issues. So there is a lot of
work going on.
On monetary policy, we exchange ideas and discuss the
economy quite frequently in different settings, but we don't
directly coordinate monetary policy in the sense that we agree
as a general matter to take actions together or in some
sequence.
Ms. Moore. Thank you, Mr. Chairman. My time is limited so I
just want to make a comment. You may not have time to respond
to it. I did notice in your testimony that you noted that all
taxing and spending decisions that Congress makes, and I know
you don't like to comment on what we do, but that they are not
equal. So, for example, lowering taxes on the wealthy does not
necessarily have the same impact on our economy as giving
unemployment benefits to the unemployed. Yes or no?
Mr. Bernanke. Different taxes and different spending have
different implications.
Ms. Moore. Right.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentlelady from Minnesota,
Mrs. Bachmann, for 5 minutes.
Mrs. Bachmann. Thank you, Mr. Chairman, and thank you,
Chairman Bernanke, for being here today. I was reading your
testimony, and I thank you for giving it, especially on pages 7
and 8. On page 7, you talked about the sequestration and the
impact of the sequestration and your concerns about that impact
currently on the short term and the economic drag that could
bring about. Then on page 8, you talked about the fact that at
some point down the road we have to deal with our current debt
and our current overspending. You had also said in your
comments before us that we need to align our solutions with the
problem, meaning I take it that the spending reductions
shouldn't happen today, they should wait until tomorrow when we
really start to have problems.
So is that how you would quantify that, yes or no?
Mr. Bernanke. I didn't say we have to get rid of the
spending cuts today, but just more gradual introduction
combined with longer-term measures.
Mrs. Bachmann. So let me ask you--some very quick kind of
technical answers is what I am looking for. What was the United
States' deficit last year?
Mr. Bernanke. I have it right here. It was $1.09 trillion.
Mrs. Bachmann. $1.09 trillion. And what was our total
national debt for last year, or currently?
Mr. Bernanke. About $11 trillion.
Mrs. Bachmann. And what is our current total national debt
this year?
Mr. Bernanke. It is currently, I think, about $11.5
trillion.
Mrs. Bachmann. Not 16.5 trillion?
Mr. Bernanke. The $16 trillion includes intra-governmental
debt like the Social Security Trust Fund. But debt held by the
public as opposed to debt held between different parts of the
government is about $11.5 trillion.
Mrs. Bachmann. So you are saying the debt is about $11.5
trillion. And what are the unfunded net liabilities?
Mr. Bernanke. They are very large, particularly in the
Medicare area. I don't have a number, but they are probably
some greater than the actual official debt held by the public.
Mrs. Bachmann. And how much debt do we buy every day from
the Treasury, from the Federal Reserve?
Mr. Bernanke. Every day? About $1.5 billion?
Mrs. Bachmann. About $1.5 billion. So without the Fed
purchases of our debt from the Treasury, would we be able to
continue the spending level?
Mr. Bernanke. Yes, you could. As I said before, the Fed
only owns about 15 percent of the outstanding U.S. Government
debt.
Mrs. Bachmann. Where would we go? If we didn't have the Fed
buying that debt, where would we go?
Mr. Bernanke. Our debt is in great demand. Foreigners hold
about half of it. People think of U.S. Treasury debt as a safe
haven and as a secure investment. That is why, notwithstanding
what the Fed is doing, we can sell it at low interest rates.
Mrs. Bachmann. So the Fed wouldn't need to be buying all
these Treasuries then, we could find other buyers for our debt,
is that true?
Mr. Bernanke. Yes.
Mrs. Bachmann. So then why are we doing it?
Mr. Bernanke. To keep rates a little bit lower, to help
support housing, automobiles, and other parts of the economy
that need more support.
Mrs. Bachmann. But if there are other buyers, why the Fed?
Mr. Bernanke. To get rates a little bit lower than they
otherwise would be.
Mrs. Bachmann. So if my 18-year-old daughter was spending
40 percent more than what my husband and I were giving her, and
she didn't do that just this month, but she did it next month
and the next month and the next month, and finally my husband
and I said we are just not going to bail you out anymore, we
are just not going to continue to finance the overspending that
you are doing, and she said to me, mother, we need to align our
solution with the problem, in other words, you need to keep
giving me that money because it is really not a problem yet. I
would say I think you have a problem today. And the reason why
I would say that is because the analogy with the Federal
Government, in January of 2007 our debt was $8.67 trillion.
That debt today is closer to $16.5 trillion, with the intra-
government debts, according to your calculation.
Do you think that is a problem, that in 6 years we have
gone from $8.67 trillion to $16.5 trillion?
Mr. Bernanke. Certainly that is a problem, and that is why
I think it is important to have measures to bring it down over
time.
Mrs. Bachmann. But you said we need to align the solution
with the problem. It seems to me we have a big problem, and I
will tell you why. When I was home last week and talking to a
lot of women, they were telling me, ``I don't get this.
Gasoline at Christmastime was $2.99 a gallon. Now, it is $4 a
gallon.'' They said, ``I can't keep up with the price increases
at the grocery store. And we just got our health insurance
premium and it is going to be $300 a month more than what it
was.''
So all I want to say, Mr. Chairman, is that what I am
hearing from the people is that they are having to deal with
the inflationary problem.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Texas, Mr.
Hinojosa, for 5 minutes.
Mr. Hinojosa. Thank you, Mr. Chairman.
Chairman Bernanke, thank you for coming to visit with our
committee and thank you for your leadership and for your
foresight in the handling of our fiscal policy. Your testimony
comes at a pivotal time in our Nation's Capital.
While we want to address the long-term health of the
Federal balance sheet, the sequester cuts are so drastic and so
immediate that they greatly threaten economic growth. In your
remarks, you suggest Congress consider a longer-term horizon
for targeted fiscal changes, and I completely agree with you.
The sequester is totally unnecessary and illustrates a lack of
political courage by Members of Congress.
We have spent a lot of time in this committee attempting to
reduce uncertainty in the economy. We have done it by reducing
uncertainty for banks, by finalizing rules, and we have done it
by reducing uncertainty for small businesses by encouraging
lending. Uncertainty around effects of the sequester is no
doubt already chilling the economy and confusion over the
continuance of quantitative easing also creates uncertainty.
For example, when word spread on Wall Street that the Federal
Open Market Committee was considering ending or altering QE3,
the Dow Jones dropped significantly. We cannot throw more
uncertainty into such a fragile economy and have consumer
confidence erode.
Many of my friends across the aisle will argue that current
fiscal policy is causing the economy to overheat. At the same
time, all of us are concerned about still too high
unemployment. How can a so-called overheating economy see
employment grow so slowly? And furthermore, Chairman Bernanke,
I would like to ask you, do you think that our economy is
indeed overheating, and can you give us a sense of where the
economy would be had you not implemented quantitative easing?
Also discuss with us the impact of a sudden fiscal contraction
on economic uncertainty, and ultimately tell us about the
recovery that you foresee.
Mr. Bernanke. I don't think the economy is overheating.
There still seems to be quite a bit of unused resources, a lot
of people out of work who could be working, capital that could
be used that is not being used. So, again, I don't see any
overheating.
We believe that the monetary policies that we have
conducted have helped get stronger recovery and more jobs than
we otherwise would have had. There have been different studies
that give different numbers, but most of them do find a pretty
significant effect.
On the fiscal side, as I mentioned, the CBO attributes to
the sequester about six-tenths of a percentage point of growth
in 2013 which they connect to the full-time equivalent of about
750,000 jobs. So from the CBO's perspective, there is an
important job component or job effect arising from fiscal
contraction which, again, as I have said many times, the
Federal Reserve really can't overcome. We don't really have
tools sufficiently powerful to overcome the impact of those
types of fiscal actions.
Mr. Hinojosa. Do you believe that the sequester kicking in
on Friday would lead the markets to tumble?
Mr. Bernanke. The markets already know about the sequester.
It isn't news to them. So I don't think necessarily that the
markets will respond to the beginning of the sequester. But,
again, I think a good policy, one that would be good for the
economy and probably good for markets, would be one that,
again, takes a longer-term perspective and takes some
significant steps to address our longer-term fiscal imbalances
while phasing in more slowly some of the changes occurring at
the present time.
Mr. Hinojosa. I ask that question because I spoke to a lot
of teachers, a lot of people who have 401(k)s and saw what
happened in 2008 when the markets tumbled about 40 percent and
they lost so much equity, and they are concerned that might
happen again.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New Mexico, Mr.
Pearce, for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
Thank you, Chairman Bernanke, for being here, and for your
presentation today. I would like to echo what Mrs. Capito said
about the energy economy, and the three counties in the
southeast part of New Mexico where $100,000 jobs driving a
truck are going wanting. The Occupy People say they don't have
jobs, but they don't come out where they are. And they are good
paying jobs. At my last job fair, we were trying to bring
people and put them together with folks who were looking for
workers, and 14 driving jobs in one company went without being
filled, and 3,000 jobs at another job fair went wanting, and
the Nation treats this like it is some sort of secondary
effect. Nationwide, I would point out that the Bureau of Labor
Statistics shows 3.6 million jobs are available right now in
America, and yet we have 8 percent, 7.5 percent, whatever
percent unemployment, and I think at some point, the country
needs to deal with that.
I would also like to echo what Mrs. Capito said about the
seniors. Her seniors seem to be a little more gentle than mine.
I just had a telephone town hall last night and Susan from Los
Ninos and Leone from my district also were quite energized
about the whole concept of quantitative easing. And I know that
the price of gasoline and the price of groceries don't rise to
the level of importance to where the Feds would actually
measure those in the computations, but we are 47th per capita
income, and when we are told that inflation is not going up at
all, it is eating the lunch of our seniors who can't afford to
fill their fuel tanks and buy groceries.
Now, I would invite you to come and sit with me in an open
town hall in New Mexico. Would you be open to that? We could
contact your scheduler maybe.
Mr. Bernanke. You can talk to the scheduler to see if it is
possible.
Mr. Pearce. I would take that as a very positive sign that
you would be interested in talking to people on that end of the
economic ladder. But they don't buy these explanations that
quantitative easing is this great miracle that I am hearing
today, but they understand the creation of money out of thin
air depreciates what they have, and as always, inflation hurts
the poor worse than anyone else, and that is our district.
So Susan asked, would you put all your money--just so you
get the full benefit of zero interest rates, why don't you put
all of your money in savings accounts? Because many of these
people are unsophisticated investors, like Chairman Garrett
suggested. They are not comfortable. They don't know all these
risky things. They see Wall Street and they see all the
derivatives and all this jazz that got everybody hyped up and
cost us several trillion dollars to pay back those people who
took those risks, but they don't buy it.
And they are furious with the government. They say, ``We
lived our life right. We paid off our homes. We put money into
the bank. We had a nest egg that was sufficient at the going
rate of interest. And now our government is bragging that we
have zero interest and we are being punished after living our
lives correctly.'' My mom is in that category. She is 80-
something; I hope that she doesn't go out and start finding a
stock investor right now. So I think at some point it would be
nice for you to get out among people who have manure on the
bottom of their boots like we do in New Mexico.
You spend a lot of time on page 7 quoting the CBO about the
effects of the sequester. You even talked about it. But I was
unsure if you agree with the CBO or if you simply are quoting
the CBO. Are you in full agreement with the effects that you
have put into your paper?
Mr. Bernanke. Broadly speaking, yes.
Mr. Pearce. Fairly speaking, I am wondering, you also say
that there were temporary interruptions to the economy, the
weather-related interruptions to the economy. That is page one
of your testimony. I am seeing in the Financial Times that Wal-
Mart and all the other retailers are worrying about that price
increase or the payroll tax increase that was passed along at
the end of last year as being maybe as big an effect. The cost
is about the same, $95 billion more or less. And yet I don't
find any reference, I don't find a reference to the penalizing
effect that that tax increase had.
Mr. Bernanke. I did mention that the overall effect of all
the changes is about 1.5 percentage points, and that includes
the payroll.
Mr. Pearce. But you do mention the sequester. You use a
little bit different language. You don't actually come out and
say ``the sequester,'' but you do mention that our solutions
are going to cause great headwinds, but you don't mention the
headwinds from that other decision there to raise taxes.
Mr. Bernanke. I did mention those, yes.
Mr. Pearce. I find the omission very curious.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. Watt, for 5 minutes.
Mr. Watt. Thank you, Mr. Chairman, and I thank Chairman
Bernanke for being here. I apologize for being late. I was over
in the Supreme Court listening to the arguments on the voting
rights case. Sometimes, it is kind of difficult to be in two
places at one time, I have found.
I want to go back to the prior questioner because my
constituents obviously are living in a slightly different world
than his and are getting ready to live apparently in a more
significantly different world than his unless we do something
between now and Friday. We spent a lot of time in yesterday's
hearing talking about the impact of sequestration, and it is
really vexing a lot of people, although I confess that most
people don't know what a sequester is.
You say at the top of page 7 that monetary policy is
working to promote a more robust recovery but it can't carry
the entire burden of ensuring a speedier return to economic
health. The economy's performance, both over the near term and
in the longer run, will depend importantly on the course of
fiscal policy. That is something which is under the Congress'
control, as opposed to monetary policy, which is under the
Fed's control. And you make some observations about the short-
and long-term impact.
I am wondering if you have some views about the impact, the
likely impact, notwithstanding the monetary policies that the
Fed has implemented, of sequester in the form that it is about
to take effect if we don't do anything between now and Friday?
Mr. Bernanke. I haven't made any comment about the specific
allocation of cuts across different departments. Those are
issues for the Congress to debate. What I did was cite the CBO
numbers, which again I think are reasonable, which suggest that
all of the fiscal measures, including the payroll tax increase,
are equal to about 1.5 percentage points of drag this year, and
that the sequester by itself is about six-tenths of drag
according to the CBO and according to I think most standard
analyses.
Mr. Watt. And you said you generally agreed with the CBO's
analysis of that?
Mr. Bernanke. Yes.
Mr. Watt. All right. So you are saying that sequestration
could have six-tenths of one percentage impact--
Mr. Bernanke. On the growth rate. It brings the growth rate
down.
Mr. Watt. On the growth rate. Okay. And in this kind of
economy that is fragile, what would you project would be the
consequences of that?
Mr. Bernanke. The CBO suggests that the job impact in full
time equivalents would be about 750,000.
Mr. Watt. So that is 750,000 more people unemployed than
would otherwise be.
Mr. Bernanke. Than would otherwise be the case. Or an
unemployment rate that might stay where it is or go up a little
rather than coming down by the end of the year.
Mr. Watt. And what about the uncertainty associated from a
business and economic perspective? What would you project
there?
Mr. Bernanke. It is hard to measure the uncertainty
effects, but there has been a whole sequence of events going
back to the 2011 debt ceiling debate, and now we have had the
fiscal cliff and sequester and all these things, and what we
hear at least anecdotally from people around the country is
that it does create uncertainty and makes it more difficult for
them to plan, to hire, to invest.
Mr. Watt. More difficult for them to hire and invest. I
wanted to reemphasize that. So you think--
Chairman Hensarling. The time of the gentleman has expired.
Mr. Watt. I yield back.
Chairman Hensarling. The chairman recognizes the gentleman
from Pennsylvania, Mr. Fitzpatrick, for 5 minutes.
Mr. Fitzpatrick. Thank you, Mr. Chairman.
Mr. Bernanke, thank you for your time and your insight here
and your service to the people. When you were here last year,
the Bureau of Labor Statistics (BLS) indicated that the
unemployment rate was higher than it is today. Today, I think
the BLS is saying it is about 7.9 percent, although most people
throughout the country believe it is much higher, including
people in Bucks County, Pennsylvania, which I represent,
especially among younger workers, especially recent graduates,
just graduating from high school trying to get in the market.
I spoke earlier today on the other side of the city to the
American Legion about the increasing number of returning
veterans from Afghanistan, and some believe that the
unemployment rate among veterans is twice the national average,
and, of course, all of this is unacceptable. So from 2001 to
the present, our country has had a significant increase in
population. We have increasing numbers of veterans coming home
looking for work in a very difficult economy.
Some are suggesting because there are fewer people working
today than were working, employed today than were working in
2001, that our country may have just experienced a lost decade
similar to what Japan went through in the 1990s and the 2000s.
Do you agree with that? Are there any differences between what
happened in Japan and what is happening here in our country,
and if so, what policy suggestions would you make to address
it?
Mr. Bernanke. There obviously has been a very severe,
difficult, economic period. I don't know about calling it a
lost decade. There are important differences between the United
States and Japan. Japan has an even more rapidly aging society
than we do. Their workforce is actually declining. They have
had more difficulties with their banking sector. We were more
rapid in getting our banks up and running again, so to speak.
And, very importantly, the Federal Reserve has kept inflation
close to 2 percent and we have avoided deflation, which was the
major problem for the Japanese.
In terms of what to do about it, first of all, there are
many things that could be done to address our long-run economic
prosperity in terms of good tax policy, and good decisions
about encouraging public and private infrastructure, things
that I mentioned at the end of my testimony.
In the short term, it is our view that there is still a
good bit of slack in the economy, that we are not using all the
resources we have. As you mentioned, we have very high
unemployment in certain categories, and that is the basis both
for the accommodative monetary policy that we have, keeping
interests rates low and trying to stimulate housing and durable
goods and so on, and also for the recommendation that fiscal
policy go gradually as Congress tries to address the long-term
deficit issues.
Mr. Fitzpatrick. The Fed has indicated that it believes in
the long term, unemployment rates will settle at around 5.2 or
6 percent?
Mr. Bernanke. That is our best guess.
Mr. Fitzpatrick. I understand, and I heard testimony
earlier about predicting the future, but when would you say we
might get to around 6 percent? And also, the American people
believe natural unemployment is actually much lower than that,
given what we experienced in the 1990s, and maybe your
suggestion as to how we address that expectation?
Mr. Bernanke. Again, it is hard to predict, but a
reasonable guess for 6 percent would be around 2016, about 3
more years.
Mr. Fitzpatrick. In my remaining time, I just wanted to
address the issue of the Fed's bond buying program. You said in
your testimony last September that the FOMC announced it would
purchase agency-backed mortgage securities at the pace of $40
billion per month, additionally $45 billion per month for
Treasury securities. The FOMC has indicated it will continue
purchases until it observes a substantial improvement in the
outlook for the labor market in the context of price stability.
First of all, what would be the target improvement for the
slowdown?
Mr. Bernanke. We haven't given a specific number. We are
looking for improvements in terms of employment, in terms of
unemployment, in terms of a stronger economy that can deliver
more jobs. The reason we haven't given a specific number,
besides all the uncertainties involved, is that we are also
looking at the efficacy and costs as I have described in my
testimony. If all else is equal, if there are costs being
generated by this policy that are concerning, that would, all
else equal, make us do less. If it is more efficacious, then we
might do more.
Mr. Fitzpatrick. In my remaining 20 seconds, can you give
us what a proposed strategy would be for the acquired positions
that the Fed has right now, sales strategy?
Mr. Bernanke. For the assets?
Mr. Fitzpatrick. For the assets, right.
Mr. Bernanke. We have been clear that at the time we decide
to begin sales, we will give plenty of notice and proceed
slowly and do so in a way consistent with our macro objectives.
Mr. Fitzpatrick. I thank the chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Connecticut,
Mr. Himes, for 5 minutes.
Mr. Himes. Thank you, Mr. Chairman.
Mr. Chairman, let me add my voice to those who have
complimented you and thank you for your efforts over the last
years to restore our economy to vitality. I suspect that when
the history books are written, we will look at the twin engines
of monetary and fiscal policy in this country and you will
emerge as somebody who acted wisely and in good faith, and
those of us charged with fiscal policy certainly in the last 2
years will be regarded at best as having dithered and at worst
as having acted counterproductively to economic recovery. And I
appreciate that throughout your testimony as well as throughout
this report, you warn us of the dangers of premature sizable
fiscal contraction, something which I have heard from the other
side of the aisle over the course of the last 2 years is
regarded by them as essential to our recovery. We have a
theoretical discussion about that around Keynesianism and this
and that.
I do want to ask you a question though. In this report on
monetary policy, you talk about the Euro area, and the report
reads, ``The Euro area fell further into recession as fiscal
austerity and other things led it a reduction in spending.''
To take this discussion out of the theoretical, any number
of countries in the Euro area, Ireland, the U.K., Italy, Spain,
pursued fiscal policies significantly more contractionary than
our own. I wonder as you contemplate the Euro area, and here we
are looking at sort of a real-time experiment and policy
response, is there any country in the Euro area that pursued
more aggressively contractionary fiscal policies than our own
that has seen economic expansion, job creation, and meaningful
reduction in debt to GDP?
Mr. Bernanke. I don't think so.
Mr. Himes. So there is really no country that has pursued
the kind of austerity policies that we have heard some in this
institution call for that have experienced economic growth or a
reduction in the debt to their economy?
Mr. Bernanke. I think Germany has had the best experience,
but even there they have had a shrinking economy recently.
Mr. Himes. Thank you. I appreciate that answer.
To change topics here, I was very interested in the
exchange that you had in the Senate, I believe yesterday, on
the topic of Dodd-Frank. Senator Crapo, I think, asked to you
reflect on what elements of that legislation you thought were
good and perhaps which elements could stand improvement or that
this institution should perhaps revisit, and I think you
specifically highlighted Section 716 as an area that you
thought perhaps we could revisit.
I wonder, could you elaborate a little bit on Section 716,
but also I would love to have you extend that discussion just
based on what you have done in the last couple of years. What
other areas do you think perhaps we may have gotten wrong or
where perhaps we are experiencing unintended consequences or
have created problems for the regulators in terms of
implementation?
Mr. Bernanke. Section 716 requires the push-out of certain
kinds of derivatives, which means that banks can't manage those
derivatives, they have to be in a separate company, a separate
affiliate, and it is not evident why that makes the company as
a whole safer. What we do see is that it will likely increase
costs of people who use the derivatives and make it more
difficult for the bank to compete with foreign competitors who
can provide a more complete set of services. So there are some
concerns about that particular rule.
I think more generally though we want to ask the question,
can we achieve the same objectives more efficiently, and more
cheaply, and I think a review of some of the different elements
would be useful. A number of people have mentioned concerns
about community banks and small institutions, and I think an
inventory, a broad inventory of the regulations affecting small
banks would be worth doing in order to try to assess whether
there are places where we can simplify and reduce the burden
for those banks.
Mr. Himes. Thanks. That is helpful. Would you be willing to
comment in this context, Dodd-Frank and its subsequent
regulatory implementation, how you think about the extent to
which the broader too-big-to-fail problem has been addressed
and are there areas where you think we could do better or
differently?
Mr. Bernanke. Dodd-Frank has a pretty comprehensive
strategy for addressing too-big-to-fail. I think it is too
early to say. I think we have made some progress, but I think
it is too early to make a definitive conclusion because many of
the relevant regulations are not even in effect yet. But,
again, I think there is a strategy here and I think we ought to
continue to pursue it and see how it shakes out. If it doesn't
achieve the objective of eliminating too-big-to-fail, I think
we ought to come back and decide or ask Congress whether they
might take additional steps.
Mr. Himes. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
As a process point, the chairman will be the bearer of bad
news to some Members on our current schedule. To respect the
Chairman's schedule, it is likely that Representatives
Luetkemeyer, Carney, Huizenga, and Kildee will likely be the
last Members to be able to ask questions.
At this point, the Chair will recognize Mr. Luetkemeyer of
Missouri for 5 minutes.
Mr. Luetkemeyer. Thank you. Thank you, Mr. Chairman, and
thank you, Chairman Bernanke, for being here and enduring 3
hours of this again.
I have some concerns with regards to the way we are going
with quantitative easing from the standpoint that even in your
own report here you talk about Japan, you talk about England,
and you talk about China. All three have used quantitative
easing and yet all three of them have, even in your own
document here, their growth has continued to go the wrong
direction. And I am curious about that.
Even in The Wall Street Journal yesterday, it said that
China now has it its own debt bomb. And one of the statements
that it made in there is that through 2007, creating a dollar
of economic growth in China required just over a dollar of
debt. Since then, it is now taking $3 of debt to generate a
dollar's worth of growth. This is what you normally see in the
late stages of a credit binge as more debt goes into increasing
less productive investments.
So I guess my question is, while we are heading down the
same path as these other countries, and my neighbor here, my
friend to the left a while ago mentioned about Japan and their
20 years of trying this quantitative easing and now they have a
stagnant economy, they have weak industries, they have little
growth, and yet they have 200 percent of debt to GDP. We are
headed down that same road, and obviously even your own
documentation shows it is questionable whether it even works.
What would be your response?
Mr. Bernanke. I think the evidence for the United States is
that while it is not incredibly powerful that it does work, we
have seen a recovery that is not as fast as we would like, but
it is nevertheless stronger and more meaningful than many other
industrial countries.
One way of interpreting Japan on the monetary side is that
they were too cautious in that one of the most salient facts
about Japan is that they have had deflation, falling prices now
for quite a few years, and that is suggestive of a monetary
policy which is not achieving price stability. And, as you
know, the new prime minister and new governor of the Bank of
Japan are promising more aggressive policies to try to
eliminate deflation. So you could look at that either way.
It is a problem for us that our normal short-term interest
rate policies are no longer available because short rates are
close to zero and so we have had to go to different methods as
I described. But, again, our best estimates suggest that it has
had a meaningful beneficial effect, and I have tried to be
completely frank with this committee and talk about the
downside as well because I would like you to understand the
kind of cost-benefit analysis that we are doing.
Mr. Luetkemeyer. I have some concerns from the standpoint
that I don't know that we are doing things differently than
other countries here, but hopefully you feel that we do.
The other thing is you mentioned an exit strategy, and I
understood what you were saying a while ago when you were
talking about how there are different ways of going about it.
Has any other country ever done this, had this large increase
in the central bank's portfolio and then unwound it so that we
know that this is a tested strategy that would work?
Mr. Bernanke. Not in a precisely analogous way, because
Japan, after all, which is really the only other country prior
to the crisis which had used quantitative easing is still in
that situation. But the tools that we are using or propose to
use, such as the interest on reserves, for example, or the
draining of reserve tools that we have, those have been used
quite frequently by other central banks and they seem to work
in their context.
Mr. Luetkemeyer. Okay, one more quick question here before
my time runs out, and it is with regards to a statement or
comment you made in your opening statement, that the Federal
Reserve is responding accurately to the financial stability
concerns throughout substantially expanded monitoring of
emerging risks in the financial system and approach to the
supervision of financial firms that takes a more systemic
perspective and the ongoing implementation of reforms to make
the financial system more transparent and resilient.
Can you give me some examples of things that you are doing
with regards to systemic supervision, implementation of
reforms, give me some specific examples?
Mr. Bernanke. Sure. On the monitoring, we have greatly
increased resources just to monitor all the different sectors
of the financial markets. Both the Fed and the Financial
Stability Oversight Council are doing that.
In terms of macro-potential oversight, one good example is
the stress testing that we now do, where we ask the largest
banks to figure out what would happen to their capital if there
was a very severe downturn in the economy and a very big
decline in financial--
Mr. Luetkemeyer. Let me interrupt for one second. I am
running out of time here. Can you give me examples of reforms
to make the system more transparent and resilient?
Mr. Bernanke. The Basel rules, for example, require more
disclosure. Our stress tests, we publish the results so that
the markets know what the results are for each individual bank.
Mr. Luetkemeyer. Thank you very much. My time has expired.
Thank you very much for your answers.
Chairman Hensarling. The time of the gentleman has indeed
expired.
The Chair now recognizes the gentleman from Delaware, Mr.
Carney, for 5 minutes.
Mr. Carney. Thank you, Mr. Chairman, and thank you,
Chairman Bernanke, for your testimony today, for your report,
and really for your great leadership on monetary policy for our
country over the last several years. I think you are the right
person at the right time for what we needed. And you have given
us, frankly, great advice. We haven't really followed it with
respect to smart fiscal policy. We appreciate your comments on
that. You have consistently said that we need to be careful in
the short term, do no harm in the short term, if I may, and
address our long-term imbalances, fiscal imbalances in the
outyears.
In your testimony, you say specifically that the Federal
deficit and debt as a percentage of GDP will begin rising again
in the latter part of this decade, reflecting in large part the
aging of the population and fast rising health care costs.
Do you believe as I do that health care costs are the
primary driver of our outyear deficits?
Mr. Bernanke. They are. Yes.
Mr. Carney. From our perspective, we have Medicare,
Medicaid, Federal employees, military health care. What should
be our goal? What we should be focusing on? Have you thought
much about this as it relates to what the country needs to do
with these fiscal challenges?
Mr. Bernanke. As you know, health care is a very
complicated subject and nobody has a single answer. I think one
way of describing our problem is we have fee-for-service and
third-party pay together, which means that doctors can order as
many tests as they want and the patient doesn't care because
they know somebody else will pay for it. There are many
different ways to address that. One way is to have the consumer
bear some of the financial costs. Another way is to have
tighter controls from the government which is paying the cost.
So there are many different approaches. Certainly, we want to
be rewarding doctors and hospitals for quality. We want to have
more transparency about their processes.
Mr. Carney. How about health care as a sector? Should we be
looking at--we have these debates in my State of Delaware all
the time about somebody is expanding and building a new
hospital right down the street from where I live, a new surgery
center put here. And we talk a lot about economic development.
I think you could also see it as frankly an increase in
overhead. Those costs are going to be borne by somebody, and
they are either employers or the government it seems to me.
How would an economist look at that in terms of the health
care sector writ large and health care employment?
Mr. Bernanke. That is exactly right. We have scarce
resources. We don't have infinite amounts of money to spend on
health care. We want to deploy it in ways that have the
greatest benefit for the least cost, and there are different
ways to go about doing that. But clearly, getting the per
capita cost of health care under control would not only be very
good for the Federal budget, but it would be a terrific thing
for our economy more broadly because, of course, individuals
and companies also pay health care costs.
Mr. Carney. So you may not want to comment on this, but one
of the specific ideas that have been floated is to increase the
age for Medicare eligibility, which doesn't do anything for the
cost of the people who have that. As I see it, it just shifts
that cost from the government frankly or from that system to
the private sector or private payors. Do you have any thoughts
on that generally?
Mr. Bernanke. It relates to what I just said, which is this
is not just a Federal fiscal problem, it is an economy-wide
problem, and so the real solutions, the real lasting solutions
will involve changing the way we pay doctors and hospitals so
that they will have the incentives to keep costs under control,
whether it is the government paying it or whether it is a
private sector person paying it.
Mr. Carney. Thank you. One last question. You mentioned
earlier when we were talking about too-big-to-fail with
Representative Capuano that you no longer, under Dodd-Frank,
have the tools that were available to you in 2008. Do you need
additional tools? There has been a lot of discussion among
people that I have talked to about in addition maybe to Orderly
Liquidation Authority, which I guess a district judge would
order having some sort of enhanced financial bankruptcy, that
might be an option as well. Do you have any thoughts on
additional tools?
Mr. Bernanke. No, we are not asking for any additional
tools at this juncture. We continue to work on the Orderly
Liquidation Authority with the FDIC, and at some point it would
be a good idea for Congress to review that process and see if
you are comfortable with the approach that the FDIC in
particular has suggested for dealing with a failing firm.
Mr. Carney. Thank you, Chairman Bernanke.
I yield back.
Chairman Hensarling. The Chair recognizes the gentleman
from Michigan, Mr. Huizenga, for 5 minutes.
Mr. Huizenga. Thank you, Mr. Chairman. I appreciate that.
Chairman Bernanke, I appreciate you being here as well. I
am going to try to move quickly and express some opinions, but
I also have a couple of questions, and I too want to sort of
log my caution on what we have been doing with our monetary
policy and the easing that we have had.
There has been lots of discussion about this economy being
very fragile, I have heard a number of my friends and
colleagues over there, and why we ``can't allow the across-the-
board cuts to go in place.'' But it seems to me that no one is
really commenting on the tax increases proposed by the White
House or the increased regulation that we are seeing, whether
it is through the EPA, certainly through Dodd-Frank that this
committee is dealing with, et cetera, et cetera.
As one of my business owners back home put it to me, he
said, ``Look, it is not like this one little piece, this one
grain of sand, is going to stop the machine. But when you start
adding 10 or 20 or 30 or 40 or 50 and then you start pounding
it in with a mallet, suddenly that little grain of sand does
start grinding on that machine and it breaks it down.'' I think
that is exactly what we have seen with much of the regulation.
But in addition to that, we haven't talked about the hit
from the tax rate lapses, the so-called Bush/Obama tax rates
that were there, and I would like to see my friends have a
greater conversation about that. At the time, Ernst & Young put
out a study that letting tax rates for the wealthiest Americans
lapse would cost about 700,000 jobs, the exact same numbers
basically, and I am not trying to compare apples and oranges. I
think as one wise person said, we might be talking about red
apples versus green apples here. But we have to look at that
side of the equation as we are moving forward.
The long term, I want to talk a little bit about that, and
I have a specific question. On page 5, to quote your report
today, ``However, the committee remains--the committee being
you all--confident that it has the tools necessary to tighten
monetary policy when the time comes to do so,'' and I know you
have laid out 2015, 2016, that timeframe.
Exactly what tools do you believe that you are going to
employ to put that restraint back in place?
Mr. Bernanke. We earlier discussed the exit sequence. So,
first, we can simply allow securities on our balance sheet to
run off and not replace them as we currently are doing. Second,
we have a number of tools that can be used to drain reserves
from the system, such as reverse repos. Third, we can raise
interest rates even without reducing our balance sheet by
raising the interest rate we pay on excess reserves which will
in turn translate into higher interest rates in money markets.
And fourth and finally, and it is not the first resort, but
eventually we can sell the securities back into the market in a
slow predictable way.
Mr. Huizenga. This has not been done though, I think as we
talked about with Japan and others, correct? This is the theory
of how we are going to do this.
Mr. Bernanke. Each of the elements is something that we
have tested, that we have seen other countries use, so we think
we understand it pretty well.
Mr. Huizenga. So the thing I did appreciate is you laid out
three things that you wanted to have brought to light today,
and interest rates won't be this low forever was something I
think we were not living with the reality of or the recognition
of that. I am curious, because you talk about there, and I am
afraid that the headlines tomorrow are going to be, ``Bernanke
blasts across-the-board cuts,'' and/or, ``Bernanke calls for a
stoppage of the across-the-board cuts,'' when frankly, based on
what I read and what I have heard of the testimony today, I
think the headlines ought to be, ``Bernanke calls for long-term
reforms.'' And there is just a denial in this town in so many
ways about what is happening now and in the future.
What would you say to those who say we can't or shouldn't
reform these long-term programs?
Mr. Bernanke. I don't think we have any choice. I think I
have tried throughout this discussion to always have two parts
to the recommendation.
Mr. Huizenga. You are a good economist. One hand or the
other hand.
Mr. Bernanke. I have a third hand here, too. Anyway, with
the idea being that we want to reduce somewhat the fiscal drag
in 2013. And I am not speaking only about the sequester. I
talked about all of the fiscal actions which collectively are
about 1.5 percentage points, according to the CBO. But I am not
here to recommend that we just kick the can indefinitely down
the road. I still think it is very important to address the
long-range issues.
Mr. Huizenga. We have about 10 seconds. So this is
Medicare, Medicaid, Social Security reform?
Mr. Bernanke. The specifics are up to Congress, but
obviously--
Mr. Huizenga. Those are our long-term drivers of that. So
there you go, folks. The headline for tomorrow is, ``Bernanke
calls for long-term fixes.''
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Kildee, for 5 minutes.
Mr. Kildee. Thank you, Mr. Chairman, and in respect for the
time that Chairman Bernanke has provided us, I will ask one I
think very important question, and then if allowable, yield the
remainder of my time to my colleague, Mr. Ellison, to ask a
question.
Before I came to Congress, as I mentioned to you before the
hearing, I was in local government. I was the county treasurer
of Genesee County, Michigan, which is home to Flint, Michigan.
We have seen recently over the last couple of years, but even
in the last few weeks, a significant number of downgrades to
municipal debt which by itself is an issue that I am interested
in your thinking on, but I think also represents a symptom of a
much larger problem, and that is municipal insolvency
generally. We have seen Vallejo, California; Harrisburg,
Pennsylvania; Camden, New Jersey; my own hometown of Flint,
Michigan, and now we see Detroit facing this insolvency.
The solutions, the State-based solutions to these problems
typically have been replacing existing management with
different management that can presumably make different
decisions that result in outcomes that are more favorable. I
think what we are facing, in my opinion, in my work across the
country, is something much bigger than a failure of management
but a structural failure in what I think is potentially another
institutional failure in the urban setting, in municipal
governments.
I am interested in your thoughts about the implications for
that trend, if you agree that it is taking place on our
economy, what solutions the Federal Government might consider,
if any, to deal with that. And then a corollary to that, to the
extent that the sequester will disproportionately affect the
most vulnerable of our citizens, isn't it also logical to
assume that the sequester cuts might exacerbate what is already
a growing problem in urban America and make this insolvency
even more difficult to manage?
Mr. Bernanke. The last few years have been a very tough
time for State and local governments. Not only are income and
sales taxes down, but so are property taxes as property values
have come down as well. As a result, as I mentioned before,
State and local governments have cut workforces, have cut
spending, have cut capital projects. Some have been able to
steady the ship. Others are still under a lot of stress.
Obviously, in the short term trying to promote job creation
as the Fed is trying to do and as I am asking the Congress to
think about in their decisions is going to help a lot of these
areas by creating more economic activity and more tax revenues.
There are obviously some parts of the country where there
are longer-term, more structural problems that are not just
business cycle problems, and some of those may be in your
State. There I don't really have a solution. The Federal
Government has not in the past involved itself that much with
those distressed municipalities.
Mr. Kildee. I guess if I could just quickly follow up on
that, the Federal Government hadn't involved themselves in a
lot of things until the necessity appeared. What I am concerned
about the State governments may not have the capacity and the
cities failing will be a national problem one way or another. I
suggest perhaps at a different juncture we might pursue some
thought about how the Federal Government might intervene in
that case.
I would yield the remainder of my time to Mr. Ellison.
Mr. Ellison. Thank you, Mr. Kildee. I am very grateful.
Chairman Bernanke, I don't have much time so I am going to
ask you straight, Sheila Bair had an article in today's New
York Times focusing on income inequality. My question to you
is, does inequality matter in terms of the inefficiency and
functioning and growth of our economy?
Mr. Bernanke. It is very important in its own right. We
want everybody to have opportunities, we want a fair society. I
think it does. If people don't have--if talented people don't
have the ability to move up and get a good education and to
move into the middle class, that that is a loss for everyone,
not just for those individuals. So I think a society in which
there is greater equality of opportunity will be a more
productive and efficient society as well.
Mr. Ellison. Those points you made I think are absolutely
right, but 70 percent of our economy is consumer spending. If
folks on the bottom don't have--
Mr. Bernanke. But in the longer term, what matters is our
productive capacity. And there, human talent and skills are
really the most important thing. In this country, we had a
period where we brought women into the labor force, and that
brought a whole new set of skills and talents into our economy.
Chairman Hensarling. The time of the gentleman has expired
just under the wire. The last word will go to the gentleman
from Wisconsin. Mr. Duffy is recognized for 5 minutes.
Mr. Duffy. Thank you, Mr. Chairman. And good afternoon,
Chairman Bernanke. Yesterday in the Senate hearing, you had a
conversation about some of your concerns about Dodd-Frank. You
didn't have much time to answer that question. Would you mind
sending me in writing a little more detail on all of your
concerns with Dodd-Frank, maybe, say, in 2 weeks?
Mr. Bernanke. Sure. But we don't have a long list of
specifics at this point.
Mr. Duffy. That is okay.
Mr. Bernanke. I do think it would be a good thing for
Congress to review.
Mr. Duffy. But if you wouldn't mind sending the Fed's
concerns, I would appreciate that. Is that okay?
Mr. Bernanke. Certainly.
Mr. Duffy. In 2 weeks?
Mr. Bernanke. That would be fine.
Mr. Duffy. 2 or 3 weeks?
Mr. Bernanke. As soon as we can.
Mr. Duffy. You have a big team. All right. Quickly, I want
to talk about the debt. Roughly, we spend about, what, $225
billion a year to service our $16.5 trillion in debt. Is that
right? Roughly?
Mr. Bernanke. Sounds about right.
Mr. Duffy. Okay. And for the CBO, for every additional
point that our interest rates go up, it costs us an additional
$100 billion a year to service the debt. Does that sound right?
Mr. Bernanke. Yes.
Mr. Duffy. So if you stop with your accommodative monetary
policy, we could see interest rates rise 2 or 3 percent, right?
So we would have an additional $200 billion to $300 billion of
additional dollars going to service our current debt. Is that
fair to say?
Mr. Bernanke. That is right. CBO takes this into account in
their projections.
Mr. Duffy. And so, for me, I look at that and say, listen,
this is a half a trillion dollars a year to service our current
debt, $5 trillion over 10 years. I look at this and I see the
lights going off, the sirens are blaring, and I am almost
setting a proverbial can on my counter and you are kicking it
saying, listen, don't worry about $85 billion in cuts; do it a
different day.
I listened to what you are saying, and I think you are
giving cover to a set of policies that aren't responsible, and
we are all going to pay the price for the fiscal
irresponsibility. And instead of encouraging responsibility,
you come in and say, listen, to cut 2 percent of our budget,
you can't do it. It is going to have a great impact on our
economy. Mr. Chairman, that doesn't make sense to me.
Mr. Bernanke. I think most economists, including the CBO,
would say that this will cost a lot of jobs in the short run,
and you can address--you can achieve the same results with
longer-term programs.
Mr. Duffy. And so on that point, how many jobs are lost if
we cut the $27 million that go to Moroccan pottery classes or
the $2.2 billion in free cell phones? We pay $700 billion to
see how long shrimp can run on a treadmill. I believe we paid
for the travel expenses for the Watermelon Queen in Alabama.
There is fat in the budget, and I think every American
looks at how we spend our money and they say, I can cut 2
percent out of my family budget, small businesses can say, I
can cut 2 percent out of my budget, but you come in and tell
us, listen, I agree with the President. It is catastrophic, it
is catastrophic if you cut 2 percent, mass mayhem in our
economy, I find that to be unbelievable.
Mr. Bernanke. The sequester is not designed to cut wasteful
stuff. It is across-the-board.
Mr. Duffy. So, then, are you here telling us that if we cut
$85 billion in a more reflective way in the bad spending that I
just referenced, you would support it? It is a good idea if we
are not doing it by way of the sequester, but we have a little
more reflective analysis--
Mr. Bernanke. It would be better.
Mr. Duffy. --on the $85 billion?
Mr. Bernanke. It would be better.
Mr. Duffy. So is it better, or you would agree with us that
we should actually reduce spending?
Mr. Bernanke. I am still concerned about the short-run
impact on jobs. And you don't get as much benefit as you think,
because if you slow the economy, that hurts your revenues, and
that means your deficit reduction is not as big as you think it
is.
Mr. Duffy. So the revenues that we get from the Moroccan
pottery classes, then, and the $2.2 billion in free cell
phones, and the list goes on, Mr. Chairman, that is a great
driver of economic growth in our country? Is that your
position?
Mr. Bernanke. Most of the spending goes to the military and
to transfer programs like Social Security and Medicare.
Mr. Duffy. And there is a lot of fat and you can find 2
percent fat that doesn't affect our military, doesn't affect
our--
Mr. Bernanke. I also said in my testimony that not all
spending and taxes are the same. I very much advocate trying to
make good decisions about how you tax and how you spend.
Mr. Duffy. So you agree there is fat and that you would
encourage us to cut the fat, because if you weren't
interjecting your policy, this would be a half a trillion
dollar expense to the American Government, almost what we spend
on our military?
Mr. Bernanke. I think there is good--yes. It is obviously a
good idea to improve or fiscal budgeting and to make better
decisions, certainly.
Mr. Duffy. I know you like to say you stick to monetary
policy, but you do come in here and you talk about fiscal
policy all the time. And if you don't like our approach to try
and reduce how much we spend and you want to kick the can down
the road, if--and I don't have much time, 15 seconds--if you
wouldn't mind supplying in writing your plan for a long-term
fiscal approach, I would appreciate that, because you keep--
whenever we try to cut spending, you come at us and say, don't
cut spending today. No, no, no. Cut it tomorrow. If you have a
better plan on how we can have a long-term approach to fix this
problem, if you would submit that in writing, too, I would
appreciate it, Mr. Chairman. Thank you.
Mr. Bernanke. You bet.
Chairman Hensarling. The time of the gentleman has expired.
I would like to thank Chairman Bernanke for his testimony
today.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witness and to place his responses in the record. We
would ask you, Chairman Bernanke, to please respond as promptly
as you are able. Also, without objection, Members will have 5
legislative days to submit extraneous materials to the Chair
for inclusion in the record.
Without objection, the hearing is adjourned.
[Whereupon, at 1:08 p.m., the hearing was adjourned.]
A P P E N D I X
February 27, 2013
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