[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
__________
JULY 17, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-39
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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
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
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Page
Hearing held on:
July 17, 2013................................................ 1
Appendix:
July 17, 2013................................................ 59
WITNESSES
Wednesday, July 17, 2013
Bernanke, Hon. Ben S., Chairman, Board of Governors of the
Federal Reserve System......................................... 7
APPENDIX
Prepared statements:
Watt, Hon. Melvin............................................ 60
Bernanke, Hon. Ben S......................................... 61
Additional Material Submitted for the Record
Bernanke, Hon. Ben S.:
Monetary Policy Report to the Congress, dated July 17, 2013.. 70
Written responses to questions submitted by Representative
Bachus..................................................... 126
Written responses to questions submitted by Representative
Kildee..................................................... 132
Written responses to questions submitted by Representative
Mulvaney................................................... 133
Written responses to questions submitted by Representative
Pittenger.................................................. 135
Written responses to questions submitted by Representative
Rothfus.................................................... 138
Written responses to questions submitted by Representative
Stivers.................................................... 142
MONETARY POLICY AND THE
STATE OF THE ECONOMY
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Wednesday, July 17, 2013
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Miller,
Bachus, King, Royce, Lucas, Capito, Garrett, Neugebauer,
McHenry, Bachmann, Pearce, Posey, Fitzpatrick, Luetkemeyer,
Huizenga, Duffy, Hurt, Stivers, Fincher, Stutzman, Mulvaney,
Hultgren, Ross, Pittenger, Wagner, Barr, Cotton, Rothfus;
Waters, Maloney, Velazquez, Watt, Sherman, Meeks, Clay, Lynch,
Scott, Green, Cleaver, Perlmutter, Himes, Peters, Carney,
Sewell, Foster, Kildee, Murphy, Delaney, 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 5 minutes for an
opening statement.
Chairman Bernanke, welcome. We all know your term as
Chairman of the Federal Reserve is up at year's end, and, to
paraphrase Twain, we do not know if the rumors of your
departure are greatly exaggerated. I will not ask you to
comment, but I at least know there is a possibility this could
be your last appearance before the committee. I certainly hope
it is not. We have other matters to discuss with you and the
Fed.
But on the off possibility that it is, I did not want to
let the moment pass without stating clearly for the record
that, as one who has been in public office for 10 years, this
chairman considers you to be one of the most able public
servants that I have ever met.
I suspect that history will record that at a very perilous
point in our Nation's economic history, you acted boldly and
decisively and creatively, very creatively I might add, and
kept your head. And under your leadership, the Fed took a
number of actions that certainly staved off an even worse
economic event, and for that I believe our Nation will always
be grateful.
Now, my words are sincere, but they do not negate my
concern over the state of the economy today and the role that
the Fed is playing in it. In today's semi-annual Humphrey-
Hawkins hearing on the state of the economy, we once again face
the legacy of the President's economic policies, a failed
experiment in fiscal policy that will forever be remembered for
its three central pillars: persistent weak economic growth;
higher taxes on working families; and unsustainable, record
trillion-dollar deficits that one day our children must pay
off. Witness the debt clock on either side of the hearing room.
The Federal Reserve has, regrettably, in many ways enabled
this failed economic policy through a program of risky and
unprecedented asset purchases that has swollen its balance
sheet by more than $3 trillion. Our committee has an obligation
to carefully scrutinize the Federal Reserve's decisions and the
way it communicates those decisions to the American people.
Chairman Bernanke has correctly observed that credible
guidance about the future course of monetary policy is a vital
tool that the Fed must use to ensure that markets, consumers,
and producers can plan their own economic futures. My
constituents back in Texas are concerned about how much they
must save for retirement or for their children's college
tuition. They are left to wonder how much longer they will have
to endure the paltry, paltry returns on the savings created by
the Fed's current interest rate policy, which favors borrowers
over savers.
And yet, recent panicked responses by financial markets to
monetary policy communications and observations from a range of
economists suggest the Federal Reserve's forward guidance
clearly needs some improvement. The market's recent extreme
volatility resulting from the offhanded comments of one
individual, our witness today, is not healthy for an economy.
Again, it indicates a monetary policy guidance system that is
not working, and it begs the question: Are current equity
market values based upon the fundamentals or unprecedented
quantitative easing?
Former Fed Chairman William McChesney Martin once observed
that the Fed ``should always be engaged in a ruthless
examination of its own record.'' Today, we will ask Chairman
Bernanke to engage in such a ruthless examination of the Fed's
QE exit strategy, which is both untested and clearly not well
understood by market participants.
Based upon the economy's performance since the Federal
Reserve embarked upon its unprecedented campaign of monetary
stimulus, many economists have observed, and I would tend to
agree, that it is fair to conclude that rarely has so much been
spent in pursuit of so little, and rarely has so much been
risked in return for so little. The extraordinary measures of
2008 have become the ordinary, albeit unsustainable, measures
of 2013 and beyond. Again, as recent events demonstrate, it
remains very much an open question whether the Fed can
orchestrate an orderly withdrawal of monetary stimulus.
Finally, as the Federal Reserve approaches its 100th
anniversary later this year, it is incumbent upon this
committee to engage in an honest assessment of the Fed's
performance and consider just how we can improve the Federal
Reserve over the next century.
Chairman Bernanke, I appreciate your cooperation with the
committee's work. Thank you for being here today.
At this time, I will recognize the ranking member for an
opening statement.
Ms. Waters. Thank you very much, Mr. Chairman. I would
first would like to thank you, Mr. Chairman, for the words in
support of Chairman Bernanke's chairmanship.
And Chairman Bernanke, I would like to thank you for being
with us today.
Chairman Bernanke, under your leadership and actions taken
by the Federal Open Market Committee (FOMC), the recovery
continues to strengthen. Treasury yields and mortgage rates
have fallen to their lowest levels in decades, and home values
have in turn risen between 5 and 12 percent over the 12-month
period ending in April, resulting in a substantial reduction in
the number of borrowers with negative equity. Without the
dramatic actions you have taken to restore economic growth, the
economy simply could not have recovered to the extent it has
today.
Since your last appearance before this committee to discuss
the economy and the outlook for monetary policy back in
February, there has been much debate about when and to what
extent the FOMC might begin to slow the current pace of asset
purchases. As the economic outlook improves, I would urge you
not to scale back your monetary stimulus until it is absolutely
clear that the now-fragile recovery will hold and real progress
has been made in reducing unemployment.
Thanks to your efforts, the number of people who are
unemployed has steadily fallen since the height of the crisis.
However, we still have a long way to go before we have achieved
any reasonable measure of full employment. More than 11 million
Americans continue to search for work, and countless others
have either given up looking altogether or are stuck working
fewer hours than they need to get by. With inflation in check,
well below the 2 percent target, I would ask that you and your
colleagues on the FOMC continue to give the employment aspect
of your dual mandate the critical attention it deserves.
In addition to the important work you are doing to foster
economic growth, the Federal Reserve has also made significant
progress in implementing key reforms aimed at strengthening our
financial system. In particular, I was very pleased to see--
Chairman Hensarling. Would the gentlelady suspend?
Mr. Chairman and the audience, forgive us. As my 9-year old
would say, ``Awkward.'' But it appears that the problem has
been fixed.
If the ranking member wishes to start over, we would--
Ms. Waters. Thank you very much, Mr. Chairman. I would like
to start over.
Chairman Bernanke, under your leadership and through the
actions taken by the FOMC, the recovery continues to
strengthen. Treasury yields and mortgage rates have fallen to
their lowest levels in decades, and home values have in turn
risen between 5 and 12 percent over the 12-month period ending
in April, resulting in a substantial reduction in the number of
borrowers with negative equity. Without the dramatic actions
you have taken to spur economic growth, the economy simply
could not have recovered to the extent it has today.
Since your last appearance before this committee to discuss
the economy and the outlook for monetary policy back in
February, there has been much debate about when and to what
extent the FOMC might be able to slow the current pace of asset
purchases. As the economic outlook improves, I would urge you
not to scale back your monetary stimulus until it is absolutely
clear that the now-fragile recovery will hold and real progress
has been made in reducing unemployment.
Thanks to your efforts, the number of people who are
unemployed has steadily fallen since the height of the crisis.
However, we still have a long way to go before we have achieved
any reasonable measure of full employment. More than 11 million
Americans continue to search for work, and countless others
have either given up looking altogether or are stuck working
fewer hours than they need to get by. With inflation in check,
well below your 2 percent target, I would ask that you and your
colleagues on the FOMC continue to give the employment aspect
of your dual mandate the critical attention it deserves.
In addition to the important work you are doing to foster
economic growth, the Federal Reserve has also made significant
progress in implementing key reforms aimed at strengthening our
financial system. In particular, I was very pleased to see the
balanced approach taken by the Federal Reserve in issuing the
final Basel III rule, which appropriately takes into account
the unique needs of our Nation's community banks.
I look forward to your testimony today, and I yield back
the balance of my time.
And thank you, Mr. Chairman.
Chairman Hensarling. The chairman now recognizes the vice
chairman of the Monetary Policy and Trade Subcommittee, Mr.
Huizenga of Michigan, for 3 minutes.
Mr. Huizenga. Thank you, Chairman Hensarling, and Ranking
Member Waters. I appreciate you holding this hearing today to
discuss the semi-annual report on the state of the economy and
our fiscal welfare.
Additionally, Chairman Bernanke, I do want to thank you for
your distinguished service to our country. Certainly, as the
Chairman of the Board of Governors over the last 7 years, no
one questions your desire to help our country through some of
its most difficult times that we have seen in recent history.
Today, I am particularly eager to hear your insights on
monetary policy and the state of the economy. As I hear from
small-business owners across Michigan, and, frankly, being a
small-business owner myself in the construction and real estate
fields, it is abundantly clear that small businesses are still
feeling the negative impacts of the 2008 financial crisis.
The economy has been painfully slow to recover--in fact,
the weakest of any of the recent recoveries. And, in turn, job
creation has lagged. Too many Americans remain out of work,
while others have simply stopped looking for work altogether.
These are the forgotten casualties that are oftentimes
buried in government statistics. I am here to be their voice,
and not be a voice of Wall Street but to be a voice for Main
Street.
Additionally, Washington's addiction to spending remains
evident. As we can see up here, we are exceeding $17 trillion
in debt, and our chances for recovery as well as the outlook
for our children's prosperity dims. For too long, government
has in many forms looked upon itself to solve the social and
economic ills that our country faces. The Federal Reserve
hasn't been any different. Some would argue that may be because
of the dual mandate and other things.
The Federal Reserve has chosen to implement government-
based solutions instead of employing a market-based approach, I
would argue, whether it is artificially lowering and sustaining
a near-zero interest rate, QE2, Operation Twist, QE3, QE
Infinity, as some have quipped about, the government-knows-best
approach has only prolonged high levels of unemployment and
perpetuated a lack of consumer confidence that has, outside of
Wall Street, created an economic environment where investment
and growth remain stifled.
With our GDP stagnating and unemployment remaining at 7.5
percent or more since President Obama has taken office in 2009,
you don't see very many economists predicting the economy to
take off in the near future. The policies implemented and
prolonged by the Federal Reserve, I believe have worked hand-
in-glove with that, and have failed.
So when are these failed policies going to come to an end?
We know we have had lots of indications. I have already gotten
an update from The Wall Street Journal and a number of others
who are looking at your comments. But the FOMC says they are
planning on keeping the near-zero rate at least until sometime
in 2015, with a target of a 6.5 percent unemployment rate.
Questions that I think a lot of us have are: At what cost?
And if not at what cost, at what benefit? And there are many
who look at this analysis and have determined that you are
tilting to a ``dovish monetary easing policy,'' away from where
we have been going. As a proponent of the free market and
reducing the size of government, let me point out that is just
one of the many problems with the Administration's policies.
Chairman Bernanke, I thank you, and I appreciate, again,
your service and I look forward to today's hearing. Thank you.
Chairman Hensarling. The Chair now recognizes the
gentlelady from New York, Mrs. Maloney, for 2 minutes.
Mrs. Maloney. Thank you.
I understand this may be Mr. Bernanke's last testimony on
Humphrey-Hawkins, as his term expires in January, although I
hope it is not--I hope you are reappointed--but I did want to
join my colleagues in thanking you for your extraordinary
service during one of the most painful periods in the United
States' economic history.
You have been a creative, innovative leader. The one area
where you have always been consistent is you have never been
boring. As a former teacher, I appreciate your ability and
willingness to explain the Fed's extraordinary measures in
clear terms that all Americans can understand.
While talk of the Fed's tapering its asset-buying program
has dominated the headlines recently, and the United States is
still suffering from an unemployment crisis, it was reassuring
to read in your prepared testimony that the Fed will continue
its asset-buying program as long as economic conditions
warrant. So I am glad to see you are shaping Fed policy to help
people and not just based on rigid ideological dogma.
I also thank you for listening to the concerns in our
letter from Chairwoman Capito on the concerns we have for small
community and regional banks. We asked you to treat them
differently from large international banks, and that is
precisely the approach that the Basel III rules took. Community
banks did not cause the financial crisis, and I am glad that
the Fed came around to seeing our view on this issue.
Thank you for your extraordinary service.
Chairman Hensarling. The gentlelady yields back.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez, for 1\1/2\ minutes.
Ms. Velazquez. Thank you, Mr. Chairman.
Welcome, Chairman Bernanke. Thank you for your public
service.
When I am in my district each week, I hear from people who
are truly struggling in the current labor market. Some are
unemployed, others are underemployed, and many have stopped
looking for work altogether.
Adding insult to injury, they hear that the stock market
has recently achieved new highs and the housing market is
recovering. But for many, this has not translated into new
opportunities. Cuts to education and worker retraining programs
as well as reduced investment in job-creating infrastructure
projects have exacerbated what was an already dire situation.
The truth is that it is hard for many to remember that just 6
years ago, the unemployment rate was less than 4.5 percent.
And while these are anecdotes, the data shows that they are
reflective of the Nation as a whole. Unemployment has remained
above 7 percent since December 2008. Gallup is reporting that
17.2 percent of the workforce is underemployed, and the labor
participation rate is at a historical low.
While the Federal Reserve has a dual mandate, it is this
unemployment backdrop that must be given the greatest weight in
its deliberations. As the Fed considers when and how to
transition away from QE3, it must make certain that it does so
without making a challenging employment situation worse.
Thank you, Mr. Chairman.
Chairman Hensarling. The Chair now recognizes the gentleman
from North Carolina, Mr. Watt, for 1\1/2\ minutes.
Mr. Watt. Thank you, Mr. Chairman. And I want to--
Chairman Hensarling. If the gentleman would suspend, if
staff would please shut the door?
The gentleman is recognized.
Mr. Watt. I certainly join in the complimentary statements
about the chairman's service. And I have a prepared statement
which I will submit for the record, but I thought it might be
helpful to just reminisce about some of the changes that this
Chairman has made.
I was on this committee for a long, long time and never
knew where the Federal Reserve was until Chairman Bernanke
became the Chairman of the Fed. He opened up the process and
demystified what the Fed does.
Since that time, we have gone through this whole debate
about auditing the Federal Reserve, and substantially more of
the records and proceedings of the Federal Reserve are open to
the public. He speaks in plain language, as opposed to some of
the prior Chairs, who tried to make everything seem so
complicated and made it impossible for people to understand,
either on the committee or certainly in the public.
So I think he has contributed greatly to the image of the
Fed, and I just wanted to thank him for his service.
I will submit my official statement for the record.
Chairman Hensarling. Today, we welcome back to the
committee, in the words of the gentlelady from New York, the
never-boring, Honorable Ben Bernanke, Chairman of the Board of
Governors of the Federal Reserve System. I believe we all agree
he needs no further introduction, so he will not receive one.
I do wish to all Members that the Chairman will be excused
promptly at 1:00 p.m. And I wish to inform Members on the
Majority side that those who were not able to ask questions
during the Chairman's last appearance will be given priority
today.
Without objection, Chairman Bernanke, your written
statement will be made a part of the record. So, you are now
recognized for your oral presentation.
STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you. Chairman Hensarling, Ranking
Member Waters, and other members of the committee, I am pleased
to present the Federal Reserve's semi-annual ``Monetary Policy
Report to the Congress.'' I will discuss current economic
conditions and the outlook and then turn to monetary policy,
and I will finish with a short summary of our ongoing work on
regulatory reform.
The economic recovery has continued at a moderate pace in
recent quarters, despite strong headwinds created by Federal
fiscal policy. Housing has contributed significantly to recent
gains in economic activity. Home sales, house prices, and
residential construction have moved up over the past year,
supported by local interest rates and improved confidence in
both the housing market and the economy. Rising housing
construction and home sales are adding to job growth, and
substantial increases in home prices are bolstering household
finances and consumer spending while reducing the number of
homeowners with underwater mortgages.
Housing activity and prices seem likely to continue to
recover notwithstanding the recent increases in mortgage rates,
but it will be important to monitor developments in this sector
carefully.
Conditions in the labor market are improving gradually, yet
the unemployment rate stood at 7.6 percent in June, about a
half percentage point lower than in the months before the
Federal Open Market Committee initiated its current asset
purchase program in September. Nonfarm payroll employment has
increased by an average of about 200,000 jobs per month so far
this year. Despite these gains, the job situation is far from
satisfactory, as the unemployment rate remains well above its
longer-run normal level and rates of underemployment and long-
term unemployment are still much too high.
Meanwhile, consumer price inflation has been running below
the committee's longer-run objective of 2 percent. The price
index for personal consumption expenditures rose only 1 percent
over the year ending in May. This softness reflects, in part,
some factors that are likely to be transitory. Moreover,
measures of longer-term inflation expectations have generally
remained stable, which should help move inflation back up
toward 2 percent.
However, the committee is certainly aware that very low
inflation poses risks to economic performance--for example, by
raising the real cost of capital investment--and increases the
risk of outright deflation. Consequently, we will monitor this
situation closely, as well, and we will act as needed to ensure
that inflation moves back toward our 2 percent objective over
time.
At the June FOMC meeting, my colleagues and I projected
that economic growth would pick up in the coming quarters,
resulting in gradual progress toward the level of unemployment
and inflation consistent with the Federal Reserve's statutory
mandate to foster maximum employment and price stability.
Specifically, most participants saw real GDP growth
beginning to step up during the second half of this year,
eventually reaching a pace between 2.9 and 3.6 percent in 2015.
They projected the unemployment rate to decline to between 5.8
and 6.2 percent by the final quarter of 2015, and they saw
inflation gradually increasing toward the committee's 2 percent
objective.
The pickup in economic growth predicted by most committee
participants partly reflects their view that Federal fiscal
policy will exert somewhat less drag over time, as the effects
of the tax increases and the spending sequestration diminish.
The committee also believes that risks to the economy have
diminished since the fall, reflecting some easing of the
financial stresses in Europe; the gains in housing and labor
markets that I mentioned earlier; the better budgetary
positions of State and local governments; and stronger
household and business balance sheets.
That said, the risks remain that tight Federal fiscal
policy will restrain economic growth over the next few quarters
by more than we currently expect or that the debate concerning
other fiscal policy issues, such as the status of the debt
ceiling, will evolve in a way that could hamper the recovery.
More generally, with the recovery still proceeding at only a
moderate pace, the economy remains vulnerable to unanticipated
shocks, including the possibility that global economic growth
may be slower than currently anticipated.
With unemployment still high and declining only gradually
and with inflation running below the committee's longer-run
objective, a highly accommodative monetary policy will remain
appropriate for the foreseeable future. In normal
circumstances, the committee's basic tool to provide monetary
accommodation is its target for the Federal funds rate.
However, the target range for the Federal funds rate has been
close to zero since late 2008 and cannot be reduced
meaningfully further.
Instead, we are providing additional policy accommodation
through two distinct yet complementary policy tools. The first
tool is expanding the Federal Reserve's portfolio of longer-
term Treasury securities and agency mortgage-backed securities.
We are currently purchasing $40 billion per month in agency MBS
and $45 billion per month in Treasurys. The second tool is
forward guidance about the committee's plans for setting the
Federal funds rate target over the medium term.
Within our overall policy framework, we think of these
tools as having somewhat different roles. We are using asset
purchases and the resulting expansion in the Federal Reserves's
balance sheet primarily to increase the near-term momentum of
the economy, with the specific goal of achieving a substantial
improvement in the outlook for the labor market in a context of
price stability.
We have made some progress toward this goal, and, with
inflation subdued, we intend to continue our purchases until a
substantial improvement in the labor market outlook has been
realized. In addition, even after purchases end, the Federal
Reserve will be holding its stock of Treasury and agency
securities off the market and reinvesting the proceeds from
maturing securities, which will continue to put downward
pressure on longer-term interest rates, support mortgage
markets, and help to make broader financial conditions more
accommodative.
We are relying on near-zero short-term interest rates,
together with our forward guidance that rates will continue to
be exceptionally low--this is our second tool--to help maintain
a high degree of monetary accommodation for an extended period
after asset purchases end, even as the economic recovery
strengthens and unemployment declines toward more normal
levels. In appropriate combination, these two tools can provide
the high level of policy accommodation needed to promote a
stronger economic recovery with price stability.
In the interest of transparency, the committee participants
agreed in June that it would be helpful to lay out more details
about our thinking regarding the asset purchase program--
specifically, provide additional information on our assessment
of progress to date as well as the likely trajectory of the
program if the economy evolves as projected.
This agreement to provide additional information did not
reflect a change in policy. The committee's decisions regarding
the asset purchase program and the overall stance of monetary
policy depend on our assessment of the economic outlook and of
the cumulative progress toward our objectives. Of course,
economic forecasts must be revised when new information arrives
and are, thus, necessarily provisional.
As I noted, the economic outcomes that the committee
participants saw as most likely in their June projections
involved continuing gains in labor markets, supported by
moderate growth that picks up over the next several quarters as
the restraint from fiscal policy diminishes. The committee
participants also saw inflation moving back toward our 2
percent objective over time.
If the incoming data were to be broadly consistent with
these projections, we anticipated that it would be appropriate
to moderate the monthly pace of purchases later this year. And
if the subsequent data continued to confirm this pattern of
ongoing economic improvement and normalizing inflation, we
expected to continue to reduce the pace of purchases in
measured steps through the first half of next year, ending then
around midyear.
At that point, if the economy had evolved along the lines
we anticipated, the recovery would have gained further
momentum, unemployment would be in the vicinity of 7 percent,
and inflation would be moving toward our 2 percent objective.
Such outcomes would be fully consistent with the goals of the
asset purchase program that we established in September.
I emphasize that, because our asset purchases depend on
economic and financial developments, they are by no means on a
preset course. On the one hand, if economic conditions were to
improve faster than expected and inflation appeared to be
rising decisively back toward our objective, the pace of asset
purchases could be reduced somewhat more quickly. On the other
hand, if the outlook for employment were to become relatively
less favorable, if inflation did not appear to be moving back
toward 2 percent, or if financial conditions, which have
tightened recently, were judged to be insufficiently
accommodative to allow us to attain our mandated objectives,
the current pace of purchases could be maintained for longer.
Indeed, if needed, the committee would be prepared to
employ all of its tools, including an increase in the pace of
purchases for a time, to promote a return to maximum employment
in the context of price stability.
As I noted, the second tool the committee is using to
support the recovery is forward guidance regarding the path of
the Federal funds rate. The committee has said that it intends
to maintain a high degree of monetary accommodation for a
considerable time after the asset purchase program ends and the
economic recovery strengthens. In particular, the committee
anticipates that its current exceptionally low target range for
the Federal funds rate will be appropriate at least as long as
the unemployment rate remains above 6.5 percent and inflation
expectations remain well-behaved in the sense described in the
FOMC's statement.
As I have observed on several occasions, the phrase, ``at
least as long as,'' is a key component of the rate policy
guidance. These words indicate that the specific numbers for
unemployment and inflation in the guidance are thresholds, not
triggers. Reaching one of the thresholds would not
automatically result in an increase in the Federal funds rate
target. Rather, it would lead the committee to consider whether
the outlook for the labor market, inflation, and the broader
economy justifies such an increase.
For example, if a substantial part of the reductions in
measured unemployment were judged to reflect cyclical declines
in labor force participation rather than gains in employment,
the committee would be unlikely to view a decline of
unemployment to 6.5 percent as a sufficient reason to raise its
target for the Federal funds rate. Likewise, the committee
would be unlikely to raise the funds rate if inflation remained
persistently below our longer-run objective.
Moreover, so long as the economy remains short of maximum
employment, inflation remains near our longer-run objective,
and inflation expectations remain well-anchored, increases in
the target for the Federal funds rate, once they begin, are
likely to be gradual.
I will finish by providing you with a brief update on
progress on reforms to reduce the systemic risk of the largest
financial firms.
As Governor Tarullo discussed in his testimony last week
before the Senate Banking, Housing and Urban Affairs Committee,
the Federal Reserve, with the other Federal banking agencies,
adopted a final rule earlier this month to implement the Basel
III capital reforms. The final rule increases the quality and
quantity of required regulatory capital by establishing a new
minimum common equity Tier 1 capital ratio and implementing a
capital conservation buffer.
The rule also contains a supplementary leverage ratio and a
countercyclical capital buffer that apply only to large and
internationally active banking organizations, consistent with
their systemic importance.
In addition, the Federal Reserve will propose capital
surcharges on firms that pose the greatest systemic risk and
will issue a proposal to implement the Basel III quantitative
liquidity requirements as they are phased in over the next few
years.
The Federal Reserve is considering further measures to
strengthen the capital positions of large, internationally
active banks, including the proposed rule issued last week that
would increase the required leverage ratios of such firms.
The Fed also is working to finalize the enhanced prudential
standards set out in Sections 165 and 166 of the Dodd-Frank
Act. Among these standards, rules relating to stress-testing
and resolution planning already are in place, and we have been
actively engaged in stress tests and reviewing the first wave
of resolution plans. In coordination with other agencies, we
have made significant progress on the key substantive issues
relating to the Volcker Rule and are hoping to complete it by
year end.
Finally, the Federal Reserve is preparing to regulate and
supervise systemically important nonbank financial firms. Last
week, the Financial Stability Oversight Council (FSOC)
designated two nonbank financial firms. It has proposed the
designation of a third firm, which has requested a hearing
before the Council.
We are developing a supervisory and regulatory framework
that can be tailored to each firm's business mix, risk profile,
and systemic footprint, consistent with the Collins amendment
and other legal requirements under the Dodd-Frank Act.
Thank you, Mr. Chairman. I would be pleased to take
questions.
[The prepared statement of Chairman Bernanke can be found
on page 61 of the appendix.]
Chairman Hensarling. Thank you, Mr. Chairman.
The Chair will recognize himself for 5 minutes for
questions.
Mr. Chairman, the first question is probably, in some
respects, the most obvious question. You are aware better than
most that, as you testified before the Joint Economic Committee
on May 22nd, as The Wall Street Journal reports, the stock
market ``moved up when Mr. Bernanke's congressional testimony
was released in the morning, near-triple-digit gains when he
began taking questions, turned negative when the minutes were
released.'' On June 19th, at the mere hint of tapering, the Dow
Jones dropped almost 600 points in 2 days. And then recently,
your comments on July 10th have seen the S&P hit record highs.
A couple of questions result from this--a couple of quotes,
first. Warren Buffett has described our stock market as waiting
``on a hair trigger'' from the Fed. Dallas Fed President
Richard Fisher describes stock markets as ``hooked on the
drug'' of easy money.
You have described your thresholds as providing guidance to
the market, but you have also qualified that the thresholds
provide no guidance as to when or how the policy will change
once those thresholds have been reached. A recent survey of 55
economists by The Wall Street Journal gives the Fed a D-minus
for its guidance.
So can you comment on your guidance, and can you comment on
Mr. Buffett's and President Fisher's comments?
Mr. Bernanke. Certainly, Mr. Chairman.
We are in a difficult environment economically,
financially, and, of course, we are dealing with unprecedented
monetary policy developments. I continue to believe that we
should do everything we can to apprise the markets and the
public about our plans and how we expect to move forward with
monetary policy. I think not speaking about these issues would
risk a dislocation, a moving of market expectations away from
the expectations of the committee. It would have risked
increased buildup of leverage for excessively risky positions
in the market, which I believe the unwinding of that is part of
the reason for some of the volatility that we have seen.
And so I think it has been very important that we
communicate as best we can what our plans and our thinking is.
I think the markets are beginning to understand our message,
and that volatility has obviously moderated.
Chairman Hensarling. I hope you are right.
Let me change subjects. This committee tomorrow will have a
hearing on a bill designed to reform Fannie and Freddie. The
FHA put us on a path toward a sustainable housing policy in
America.
The Fed, a number of years ago, released a study that
estimated that Fannie and Freddie passed on a mere 7 basis
points subsidy in their interest rates. That was by economists
Passmore, Sherlund, and Burgess.
Does the Fed still stand by that study?
Mr. Bernanke. It was a good study, yes.
Chairman Hensarling. You have been quoted in the past with
respect to the GSEs, stating, ``Privatization would solve
several problems associated with the current GSE model. It
would eliminate the conflict between private shareholders and
public policy and likely diminish the systemic risk, as well.
Other benefits are that private entities presumably would be
more innovative and efficient than a government agency, in that
they could operate with less interference from political
interests.''
Do you still stand by that statement?
Mr. Bernanke. I stand by the view that the GSEs, as
constituted before the crisis, had very serious flaws in terms
of the implicit guarantee from the government that was not
compensated, the lack of capital, and the fact that they were
torn between public and private purposes. So I agree that the
GSEs were a significant problem.
Chairman Hensarling. Let me ask you about another one of
your statements. In 2008, you observed, ``GSE-type
organizations are not essential to successful mortgage
financing. Indeed, many other industrial countries without GSEs
have achieved homeownership rates comparable to that of the
United States. One device that has been widely used is covered
bonds.''
Do you still stand by that statement?
Mr. Bernanke. Yes.
Chairman Hensarling. Now, as I understand it, you do
believe that it is advisable to retain some type of government
backstop in times of great turmoil, as we saw in 2008. The Fed,
I believe, has put forth its own plan; is that correct?
Mr. Bernanke. No, the Fed hasn't put forth a plan.
Chairman Hensarling. Maybe it is Federal Reserve economists
Hancock and Passmore?
Mr. Bernanke. That would be an independent piece of
research that is not endorsed by the Board of Governors.
Chairman Hensarling. Okay.
Regrettably, I see my time has come to an end. The Chair
now recognizes the ranking member for 5 minutes.
Ms. Waters. Thank you, Mr. Chairman.
Mr. Chairman, I am interested in the survey that was done
by the IMF where they reported that the United States could
spur growth by adopting a more balanced and gradual pace of
fiscal consolidation, especially at a time when monetary policy
has limited room to support the recovery further.
Specifically, the IMF recommended that Congress repeal the
sequester, raise the debt ceiling to avoid any severe shocks,
and adopt a comprehensive, backloaded set of measures to
restore long-run fiscal sustainability.
Would you agree with the IMF's conclusion that the
austerity policies currently in place have significantly
depressed growth in the United States? And to what extent can
monetary policy offset the adverse consequences of the current
contractual fiscal policy?
Mr. Bernanke. As I have said many times, I think that
fiscal policy is focusing a bit too much on the short run, and
not enough on the long run. The near-term policies, which
include not only the sequester but the tax increases and other
measures, according to the CBO, are cutting about a percentage
point and a half, about 1.5 percentage points from growth in
2013. That would mean, instead of 2 percent growth, we might be
enjoying 3.5 percent growth. At the same time, Congress has not
addressed a lot of long-run issues, where sustainability
remains not yet achieved.
So, yes, my suggestion to Congress is to consider
possibilities that involve somewhat less restraint in the near
term and more action to make sure that we are on a sustainable
path in the long run. And I think that is broadly consistent
with the IMF's perspective.
Ms. Waters. I would like to ask you a question about
housing finance, since the chairman mentioned that we will be
meeting to hear about his bill that, among other things, winds
down the GSEs and effectively ends the government's guarantee.
While I support reducing the current government footprint
in the housing market, I am concerned that such a drastic
reduction will adversely affect homeowners, depress the broader
economy, and eliminate the 30-year, fixed-rate mortgage as we
know it.
How might ending the 30-year, fixed-rate mortgage affect
access to affordable mortgage credit, the housing markets
generally, and the Fed's need to continue its extraordinary
support of the housing market through quantitative easing?
Mr. Bernanke. I think it is very important that average
people in America have access to mortgage credit which allows
them to buy a home if that is what their financial situation
and their needs require. As long as the product is consumer-
friendly, consumer-safe, protected in that respect, and is
financially affordable, I don't think it necessarily has to be
in a specific form. I think there are different ways. Many
people use different types of mortgage structures.
I think the main thing, again, it is not the instrument
itself but, rather, the access of the average American to
homeownership and to mortgage credit.
Ms. Waters. To what extent is the structure of a country's
housing finance system a prime contributor to macroeconomic
volatility? Would you agree that housing finance systems with
variable-rate mortgages are the dominant product and more
vulnerable to extreme bubble-bust cycles in the housing market?
Mr. Bernanke. That is a good question. I haven't really
seen evidence on that. In the United States, unfortunately,
adjustable-rate mortgages were often sold to people who weren't
really able to manage the higher payments when the payments
rose, and they weren't very well disclosed. There are other
countries that have adjustable-rate mortgages where they
haven't had quite the same problems.
And I guess one small advantage is that when the central
bank changes interest rates, it shows up immediately in costs
of housing, and may be more powerful in that respect.
But I think the most important issue is disclosure and
underwriting, making sure that people can afford the costs of
the mortgage even when the payments go up.
Ms. Waters. Thank you very much.
I appreciate your comments about the different types of
structures. And I suppose your comments about variable-rate
mortgages are probably consistent with concerns we have about
no-documentation loans and other kinds of things where we know
we can't guarantee that those people taking out the mortgages
are able to repay them.
Mr. Bernanke. Was there a question? Sorry. I can't hear
very well.
Chairman Hensarling. The time of the gentlelady has
expired.
Ms. Waters. Thank you very much.
Chairman Hensarling. The Chair now recognizes the gentleman
from Michigan, Mr. Huizenga, for 5 minutes.
Mr. Huizenga. Thank you, Mr. Chairman.
And, Mr. Chairman, I want to quickly cover three areas:
one, talk a little bit about interest rates; two, talk about
too-big-to-fail; and three, briefly talk about the Taylor Rule.
Now, I would be reticent if I didn't pass along a question
one of my friends had: Should he refinance right now? I think
that is probably a question a lot of people have. I know I did,
not that long ago. You may answer if you would like.
Mr. Bernanke. I am not a qualified financial advisor.
Mr. Huizenga. That would be part of the problem with Dodd-
Frank. If you don't qualify, then nobody qualifies.
But I think there is that fear out there, with the increase
in mortgage interest rates. A lot of us, me coming out of a
real estate background, I think a lot of us finally said, maybe
we should be watching what your comments were going to be and
maybe get clued in.
But what I am really concerned about is that--and this is
at some risk to myself of maybe not having a very warm welcome
next time I am up in New York City visiting some of my friends
up there. But I am concerned that Wall Street is too dependent
on the Fed and sort of the signals that you are having, while
Main Street is really getting buffeted about, whether it is
interest rates, tax policy, certainly regulatory policy as
well. And we need to make sure that we are moving beyond that.
I am sure, who knows, maybe the market just took an uptick
based on my comments. Or maybe they took a downtick; who knows.
We know that they are going to be following your comments much
more closely. But we have to make sure that this is about Main
Street, not about Wall Street, and how this is going to be
affecting people back home.
On too-big-to-fail, we had a hearing last week regarding
too-big-to-fail, and President Lacker from the Federal Reserve
in Richmond testified about the new restrictions in Dodd-Frank
imposed on Section 13.3 of the Federal Reserve Act, an
emergency provision the Fed used to bail AIG out at the time.
And he said, ``I think it is an open question as to how
constraining it is. It says it has to be a program of market-
based access, but it doesn't say that more than one firm has to
show up to use it. But it certainly seems conceivable to me
that a program could be designed that essentially is only
availed of by one firm.''
Now, do you agree with President Lacker and the new
restrictions added in 13.3 will not be effective in limiting
the Fed's freedom to carry out future bailouts? Or even if it
did, would you have the authority to enforce those limitations?
Mr. Bernanke. So, on your first point, I just want to
emphasize that we are very focused on Main Street. We are
trying to create jobs, we are trying to make housing
affordable. Our low interest rates have created a lot of
ability to buy automobiles.
Mr. Huizenga. Is it fair to say, though, that Wall Street
has benefited more than Main Street has?
Mr. Bernanke. I don't think so. We are working through the
mechanisms we have, which, of course, are financial interest
rates and financial asset prices. But our goals are Main
Street, our goals are jobs, our goals are low inflation. And I
think we have had not all the success we would like, but we
have had some success.
I would like to respond to your second one, though, from
President Lacker.
Mr. Huizenga. Yes.
Mr. Bernanke. I don't think that 13.3, as significantly
modified by Dodd-Frank, could be used to bail out an individual
firm. According to Dodd-Frank, 13.3 has to be a broadly based
program. It has to be open to a wide variety of firms within a
category. It cannot be used to lend to an insolvent firm. It
requires both the approval of the Board and of the Secretary of
the Treasury to be used. And it must be immediately
communicated to the Congress.
I do not think that 13.3 could be used in that way.
Mr. Huizenga. Obviously, there may be some disagreement
within your organization, but I would love to work with you on
trying to tighten that up.
The other item, very quickly, in our last minute here, on
the Taylor Rule. A recent survey of 55 economists by The Wall
Street Journal gave the Federal Reserve a grade of D-minus for
its guidance. Now, I would hate to see what it had been
previously, 10 years ago, let's say.
But do you believe that these facts indicate a monetary
policy guidance function that needs more work?
Mr. Bernanke. I don't know what the grade refers to. It
could be the fact that there are many different voices at the
Fed. There are a lot of different views. And I think there is a
benefit to having a lot of different views. People can hear the
debate. On the other hand, if people are looking for a single
signal, it can be a little confusing.
I think we are doing a reasonable job of communicating our
intentions and our plans in the context of a complex monetary
policy strategy.
Mr. Huizenga. I'm sorry, I have 10 seconds, and so I will
make it more of a statement, but I would love to follow up with
you in writing. I think many of us are concerned that when you
rolled the threshold guidance out, you described it as Taylor
Rule-like, but many of us are afraid that it may not have as
much similarity to a rules-based approach. And I look forward
to working with you on that.
Thank you, Mr. Chairman.
Chairman Hensarling. The Chair now recognizes the gentleman
from Missouri, Mr. Clay, the ranking member of the Monetary
Policy Subcommittee.
Mr. Clay. Thank you, Chairman Hensarling.
And thank you, Chairman Bernanke, for being here.
As you know, the unemployment rate is 7.60 percent. The
economy added a little over 200,000 jobs per month for the
first 6 months of this year. In 2012, we averaged about 180,000
jobs per month. This is a slight increase. And the private
sector, I would say, added most of the jobs. Under the
sequester, State and Federal Governments have lost jobs. Any
forecast on, if the sequester stays in place, what the
condition of the economy will be in the next year or so?
Mr. Bernanke. The first observation which you made, which
is quite right, is that in this recovery, even as the private
sector has been creating jobs, governments at all levels have
cut something on the order of 600,000 jobs. In previous
recoveries, usually the government sector was adding jobs. So
that is one reason why the recovery has been slow.
Again, this year, the best estimate I have is the CBO's
estimate at 1.5 percentage points on growth this year. I can't
say we are certain about how long those effects will last, but
our anticipation is that later this year and into next year, as
those effects become less restrictive, that the economy will
begin to pick up, and we will see some benefits from that. But
of course that hasn't happened yet, and we have to keep
monitoring that.
Mr. Clay. Shifting to the housing market, which has been a
drag on the economy for the last couple of years, it has
recently begun to show signs of turning around. Do you believe
the increase in housing prices provide evidence that the Fed's
monetary policy is working, and is there a causal or
correlative relationship between the two?
Mr. Bernanke. Yes, I think so. Historically, the two areas
of the economy which have been most impacted by monetary policy
are housing and autos, and those are two of the areas right now
which are leading our recovery. And evidently low mortgage
rates have contributed, household formation and other factors
have also contributed, but the housing sector is certainly an
important component of the recovery at this point. And housing
prices going up are not only beneficial in terms of stimulating
more construction, but they also improve the balance sheets of
households and make them more confident, more willing to spend
on other goods and services.
Mr. Clay. And so you are not concerned that recent
increases in mortgage rates could jeopardize the fragile
housing recovery?
Mr. Bernanke. The mortgage rates remain relatively low, but
they are higher than they were, and we do have to monitor that.
Mr. Clay. And they are inching up.
Mr. Bernanke. We will see how they evolve, but we do have
to monitor that, and we will see how housing and house prices
go from here.
Mr. Clay. Do you believe the labor market in which the
unemployment rate hovers just below 8 percent reflects a new
normal, as some have suggested? What is a sustainable rate of
unemployment, in your view, over the medium and long term? And
what, in your view, could be done to strengthen the aspect of
the labor force beyond the rate of employment, including wages,
hours worked, and labor force participation?
Mr. Bernanke. No. I think we are still far above the
longer-run normal unemployment rate. To give you one
illustration, the projections of the participants of the FOMC
suggests that the long-run unemployment rate might be closer to
5.2 to 6 percent, but even beyond that, that amount of
unemployment reflects the fact that there are people who don't
have the right skills for the available jobs, who are located
in the wrong parts of the country. So training, education,
improving the functioning of the labor market, improving
matching, there are things that can be done through labor
policy, labor force policy, that could even lower unemployment
further than the Fed can through just increasing demand.
Mr. Clay. So say, for instance, in the African-American
community where male unemployment hovers around 13 or 14
percent, do you think the Labor Department and community
colleges and others need to do a better job of connecting job
training to targeted growth industries?
Mr. Bernanke. I have seen some very good programs where
employers, community colleges, and State governments work
together to try to link up people with jobs, and the community
college provides the right training.
Mr. Clay. My time is up. I thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Alabama, the
chairman emeritus of our committee, Mr. Bachus.
Mr. Bachus. Thank you, Mr. Chairman.
Chairman Bernanke, I have not seen a lot of discussion
concerning the reduction in Treasury issuance with the deficit
coming down. It seems like that would give you more latitude to
reduce your purchases of Treasurys. Would you like to comment
on that?
Mr. Bernanke. The Fed still owns a relatively small share
of all the Treasurys outstanding. It is true that as the new
issuance comes down, our purchases become a larger share of the
new flow of Treasurys coming into the market. But we have not
seen that our purchases are disrupting the Treasury market in
any way, and we believe that they have been effective in
keeping interest rates low. That being said, as I have
described, depending on how the economy evolves, we are
considering changing the mix of tools that we use to maintain
the high level of accommodation.
Mr. Bachus. Yes, but the fact that they probably will be
issuing less is, I think, a factor that you would consider.
Mr. Bernanke. We would consider that, but our view is that
what matters is the share of the total that we own, not the
share of the new issuance.
Mr. Bachus. All right. Chairman Bernanke, you mentioned
last year in Jackson Hole that you viewed unemployment as
cyclical. Do you still believe that it is cyclical and not
structural?
Mr. Bernanke. Just like my answer a moment ago, I think
that probably about 2 percentage points or so, say the
difference between 7.6 and 5.6 percent, is cyclical, and the
rest of it is what economists would call frictional or
structural.
Mr. Bachus. Have you done any studies--do you think maybe 5
percent structural and 2 percent cyclical?
Mr. Bernanke. Most importantly, so far we don't see much
evidence that the structural component of unemployment has
increased very much during this period. It is something we have
been worried about, because with people unemployed for a year
or 2 years or 3 years, they lose their skills, they lose their
attachment to the labor market, and the concern is they will
become unemployable. So far it still appears to us that we can
attain an unemployment rate--we, the country, can attain an
unemployment rate somewhere in the 5s.
Mr. Bachus. Again, the most recent FOMC minutes didn't
specifically address the 7 percent unemployment target, but you
mentioned it in your press conference after that. Was that 7
percent target discussed and agreed on in the meeting?
Mr. Bernanke. Yes, it was. Seven percent is not a target.
It was intended to be indicative of the amount of improvement
we want to see in the labor market. So I described a series of
conditions that would need to be met for us to proceed with our
moderation of purchases. We have a go-around where everybody in
the committee, including those who are not voting, get to
express their general views, and there was good support for
both the broad plan, which I described, and for the use of 7
percent as indicative of the kind of improvement we are trying
to get.
Mr. Bachus. Okay. Thank you.
The FOMC participants have stated, some of them, that their
assessment of the longer-run normal level of the Fed funds rate
has been lowered. Do you agree with that?
Mr. Bernanke. A rough rule of thumb is that long-term
interest rates are roughly equal to the inflation rate plus the
growth rate of the economy. The inflation rate, we are looking
to get to 2 percent. To the extent that in the aftermath of the
crisis and from other reasons that the economy had a somewhat
lower real growth rate going forward, that would imply a lower
equilibrium interest rate as well.
Mr. Bachus. Okay. You mentioned--GDP estimates also come
in. They were too optimistic.
Mr. Bernanke. Yes.
Mr. Bachus. I think you said earlier you believe one factor
is the policy decisions made by Congress to a certain extent,
the sequester, and failing to address the long-term structural
changes in the entitlement programs.
Mr. Bernanke. That is right, although I should say that we
all should keep in mind that these are very rough estimates,
and they get revised. For example, you get somewhat different
numbers when you look at gross domestic income instead of gross
domestic product. But, yes, as I have said a couple of times
already, I think that Congress would be well-advised to focus
more on the longer term.
Mr. Bachus. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney.
Mrs. Maloney. It is my understanding that we are going to
people who did not have the opportunity to ask questions at the
last hearing, so the next person would be Mr. Perlmutter.
Ms. Waters. Mr. Perlmutter was next on the list, not Mrs.
Maloney, so would you please call--
Chairman Hensarling. I am happy to do it. It is just the
list that we received from you, but we are very happy to
recognize the gentleman from Colorado for 5 minutes.
Mr. Perlmutter. Sure you are. I thank the Chair, and I
thank the gentlelady from New York.
Mr. Chairman, it is good to see you. As always, I think--I
just want to compliment you on being a steady hand through all
of this. In terms of fiscal policy, we had a very expansionary
policy, and now we have had a very contractionary policy. And
to sort of piggyback a little bit on Mr. Bachus' question and
Mr. Clay's, and I am looking at page 11 of your report where it
says, ``The Congressional Budget Office estimated that the
deficit-reduction policies in current law generating the 2\1/4\
percentage point narrowing in the structural deficit will also
restrain the pace of real GDP growth by 1\1/2\ percentage
points this calendar year, relative to what it would have been
otherwise.''
What does 1\1/2\ percent of real GDP mean in terms of jobs
and wealth? And, 1\1/2\ percent is just a number. What is that?
Mr. Bernanke. It is very significant. The CBO also
estimated that 1\1/2\ percentage points was something on the
order of 750,000 full-time equivalent jobs. I think with
another 1\1/2\ percentage point of growth, we would see
probably unemployment down another 7- or 8/10, something like
that. So it makes a very big difference. It is very
substantial.
Now, again, we are hoping that as the economy moves through
this period, we will begin to see more rapid growth later this
year and into next year.
Mr. Perlmutter. Okay. So let us talk about--you have a
graph, and I don't know if you have your report in front of
you, but the graph on the preceding page, 10, graph A, Total
and Structural Federal Budget Deficit 1980 to 2018. Do you see
that?
Mr. Bernanke. Yes.
Mr. Perlmutter. Can you explain that graph? It looks to me
like at some point there isn't--you project or there is a
projection here of no structural deficit in about 2017, 2018.
What does that mean?
Mr. Bernanke. That means taking away the effects of the
business cycle. The business cycle causes extra deficit,
because with the economy weak, you get less tax revenue. You
have more spending on social programs of various kinds. What
that is saying is that if we were at full employment, that in
2015, I believe it is, the structural deficit would be close to
zero. That is the CBO estimate.
Mr. Perlmutter. Okay. I now kind of want to turn to some
other questions, if I could. Mr. Huizenga and Mr. Clay were
also asking you about interest rates, and you said we are at
historically low interest rates. I would recommend to you, and
you probably already know about, an app that you guys have that
I can get on my iPad. It is called The Economy, and it shows--
this one shows how we have been doing over the last 40 years.
And we are--it was way up here in, like, 1980 at about 18
percent, and then way down here at about 3.3 percent about 2
months ago. And so we have come way down, except that in the
last 2 months--see, what is good about this app, you can also
do it on a 1-year basis. And on a 1-year basis, it shows that
from April 2013 to the end of June, we went about straight up,
about 33 percent increase in interest rates, which was from 3.3
percent to about 4.5 percent.
Mr. Bernanke. You are talking about mortgages now?
Mr. Perlmutter. Mortgage rates, yes, sir.
So how does that come about?
Mr. Bernanke. There will be three reasons for it. The first
is that the economic news has been a little better. For
example, there was a pretty strong labor market report that
caused yields to go up as investors became more optimistic.
A second factor is probably that some excessively risky or
leveraged positions unwound in the last month or two as the
Federal Reserve communicated about policy plans. The tightening
associated with that is unwelcome, but on the other hand, at
least there is the benefit of maybe perhaps reducing some of
those positions in the market.
Mr. Perlmutter. The concern I have, and I think it was
expressed by both Mr. Huizenga and Mr. Clay, is that one of the
underpinnings of this recovery, you said, is that now housing
is beginning to get much stronger. It was historically so weak,
but this kind of increase, if it continues, is going to slow
that down. Wouldn't you agree?
Mr. Bernanke. I agree that we need accommodative monetary
policy for the foreseeable future, and I have said that.
Mr. Perlmutter. Thank you.
And I thank the Chair. I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from California, Mr. Miller, for 5 minutes.
Mr. Miller. Mr. Bernanke, welcome. I want to thank you for
listening to us.
On the recent ruling on Basel III, you acknowledge
insurance companies are very different from banks, and you
postponed any negative decision on that. I think that was a
very, very wise move.
You are probably aware that the committee is about to
consider a housing finance reform bill. I have looked at the
GSEs in the past, and I have always had a problem with the way
they were fundamentally flawed. You had a hybrid situation
where the private sector made all the profits, and the
taxpayers took all the risk, which was problematic from the
beginning. You can go back to a time when you could say they
performed their function very well, but they created major
problems. In recent years, they didn't adhere to underwriting
standards. They were buying predatory loans rather than
conforming loans. They were chasing the market rather than
playing a countercyclical role, and that has been very
problematic.
Now we look at a situation and say, what do we do and where
do we go? And if the United States were to end the function of
the GSEs as it applies to conforming loans, would the private
market be able to provide liquidity to the market? And the
second part of that is, what about the time of crisis? Would
investors be there to purchase mortgage-backed securities, and
would interest rates tend to rise in that type of situation?
Mr. Bernanke. Let me first say that I agree with your
analysis of GSEs. And the Fed for many years was warning about
lack of capital, the implicit guarantee, the conflict between
public and private motives, and so we agree that is something
that needs to be fixed.
There are a number of plans out there for reform. I think
everyone agrees that one of the key questions is what role, if
any, the government should play. It seems pretty clear that the
private sector should be playing more of a role than it is now.
Right now, we have basically a government-run mortgage
securitization market, but in order to protect the taxpayer, to
increase efficiency, to allow for more product innovation and
so on, we would like to have more market participation.
But, again, the question is what role should the government
play? I don't know the answer to that, but I would say that,
first, if the government does play a role, it should be fairly
compensated; that is, instead of having an implicit guarantee
that it ended up having to make good on, like the FDIC or some
other similar institution, it should receive some kind of
insurance premium.
Mr. Miller. And I think that is important, because I have
argued for a position where if you are going to have a conduit,
let us say a facility to replace the GSEs, then the profits
from the g-fees should go into a reserve account to make sure
that is solvent. And then if you have a reinsurance fee when
the mortgage-backed security is sold, that should also go in a
reserve account. And when the account goes up large enough over
7 or 8 years, there is no need for a government guarantee,
because the reserves will be so huge based on the profits that
they would turn, based on what they historically have done, you
wouldn't put the taxpayer at risk.
But the problem we have had in the past, and I have always
had a problem with it, is when you have investors investing in
GSEs, the GSEs at that point in time chase market share to make
investors happy. That is not their role. Their role is to be
countercyclical.
But I am also concerned that if we make a mistake, the
government is still going to be there on the hook, because they
are not going to let the housing market crumble if something
goes wrong. So if you don't have some entity that is self-
sufficient, has huge capital to make sure that it can withstand
a downturn, we are going to end up in the situation again.
Maybe you can respond to that?
Mr. Bernanke. I think that is right. Either you have to be
100 percent confident in the private thing you set up, or
alternatively, if you think there is a scenario in which the
government would come in ex post, then it might be a good idea
to make sure the government gets paid appropriately ex ante,
and that the rules of the game are laid out in advance.
Mr. Miller. But instead of the government, if you can
create a facility that was independent of government, but
established by government, let us say, that the profits were
held, and they were not abused by Congress as a slush fund to
be able to take the money from, if you just look at the profits
that GSEs are making today, if there is an entity doing that of
an equivalent that was backed by some guarantee for ``X''
amount of years to allow the market to recover and stability to
occur, and those reserves--and the g-fee alone probably in 8 to
10 years would be $800 billion minimum if you charge a
reasonable reinsurance fee on the mortgage-backed securities,
that is probably $200 billion in 8 to 10 years. You have a
trillion dollars, which is 6 times the risk the government took
in the worst downturn we have ever seen, would that not add to
market security and stability?
Mr. Bernanke. The question there, I think, is whether this
new entity could charge those g-fees if you had competition,
and would you be allowing private-sector competition.
Mr. Miller. The goal is to allow the private sector in.
They are not crowding in today, and that is what we want to do.
We want to get them in, but we still need to provide a surety
and liquidity. That is my concern.
Mr. Bernanke. That is right.
Mr. Miller. Thank you. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Lynch.
Mr. Lynch. Thank you, Mr. Chairman.
And welcome, Chairman Bernanke, and thank you for your
service and your willingness to come before the committee and
help us with our work.
I want to stay right on that line of questioning that Mr.
Miller actually began. As you may know, both the House and
Senate are actively considering legislative proposals to reform
the GSEs, and I think most of us on both sides of the aisle
realize some reform is necessary.
Now, I won't ask you to comment on any particular
legislative proposal, I am not sure you would anyway, but you
are a scholar of the Great Depression, and, as you know, Fannie
Mae and the FHA are sort of creations of the New Deal, and they
are--I wanted to ask you, historically the 30-year fixed
mortgage, which is really a major innovation, prior to the
government getting in, GSEs getting in and providing that
backstop, was that available and--
Mr. Bernanke. No.
Mr. Lynch. --was the private sector successful in trying to
create that?
Mr. Bernanke. During the Depression and that period of
time, people usually took out 5-year balloon mortgages and
refinanced them sequentially.
Mr. Lynch. In terms of the last 80 years of government
support, and that is really what has created opportunities for
middle-income homeowners--well, middle-income potential
homeowners from getting into the market, and as we are
grappling with this GSE reform, I am very concerned about what
happens to rates. I can't--I do agree with Mr. Miller, there
seems to be some requirement of a backstop at some point, and
obviously you want the taxpayer to be as far back as possible,
and that the initial cushion or the initial loss, if necessary,
would be absorbed by the private sector. And we are trying to
figure out a way of preserving an affordable 30-year fixed
mortgage, keep that market going, without having the taxpayer
take all that risk up front. That is what we are trying to
grapple with, and I am wondering if you can help us with that.
Mr. Bernanke. Earlier, the chairman asked me about passing
on subsidies to the consumer. I don't think that government
backstops are very effective in lowering rates unless they have
a price control on the interest rate that the--
Mr. Lynch. Isn't that a function of risk, though? If the
private sector knows that at a certain point--like with the
terrorist risk insurance that we debated here, because the
industry knew there was a backstop beyond which they would not
be responsible, it did, in fact, result in a lower rate.
Mr. Bernanke. Right, to some extent, but a lot of it
doesn't get passed through.
What I was going to add, though, was that the argument for
thinking about government participation is exactly the
situation like we faced the last few years where there is a big
housing problem, and private sector mortgage providers or
securitizers are, for whatever reason, not willing to act
countercyclically, then is there a role for the government to
support this process? And the question we were just discussing
is if that is going to happen anyway, is there a case for
setting up the rules in advance in some sense and figuring out
what the government ought to charge for whatever protection it
is prepared to provide?
Mr. Lynch. Okay. Sir, I want to thank you for your service.
I have heard stories that this might be your last appearance
before this committee for this purpose, and I think you have
served us very well under very, very difficult circumstances--
Mr. Bernanke. Thank you.
Mr. Lynch. --and I appreciate your service to your country.
Thank you.
I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair recognizes the gentleman from California, Mr.
Royce.
Mr. Royce. Thank you, Mr. Chairman.
Chairman Bernanke, I think the risk weighting at the end of
the day is only as good as the metrics that we develop. I am
thinking back to Basel I, and now we are looking at the final
Basel III.
The Basel III includes a risk weighting of 20 percent for
debt issued by Fannie Mae and Freddie Mac, and the rule
includes a risk weighting of zero for unconditional debt issued
by Ireland, by Portugal, by Spain, and by other OECD countries
with no country risk classification. Both of these risk
weightings are, in my memory, identical to the risk weightings
under the original Basel I.
So my concern is that we should have learned a few things
about those metrics, given the consequences of the clear
failure, and yet here we have the accord of 1988 looking an
awful lot like this particular accord.
Given what we have experienced, the failure of the GSEs,
the propping up of many European economies, do you think these
weightings accurately reflect the actual risk posed by these
exposures?
Mr. Bernanke. Basel III and all Basel agreements are
international agreements. And each country can take that floor
and do whatever it wants above that floor. We would not allow
any U.S. bank to hold Greek debt at zero weight, I assure you.
Mr. Royce. Yes.
Mr. Bernanke. In terms of GSEs, GSE mortgage-backed
securities have not created any loss whatsoever. They have to
the taxpayer, but not to the holders of those securities. So
that, I don't think, has been a problem.
It is not just the risk weights, though, but Basel III also
has significantly increased the amount of high-quality capital
the banks have to hold for a given set of risky assets.
Mr. Royce. But it still seems to me that at the end of the
day, in which--with respect to what you are working out as a
calculation, you have a situation where high-risk countries
like Spain and Portugal, should they receive the same risk
weight as exposures to the United States? And that is the way
that would be handled, I think, in Europe, but it just seems
that should have been addressed in the calculus.
Mr. Bernanke. One way to address it is through stress
testing, where you create a scenario which assumes that certain
sovereign debt bears losses, and then calculate capital into
those scenarios. So, that is a bit of a backstop.
Mr. Royce. Let me ask you another question, which goes to
this issue of the countercyclical role in the housing market
that the government should play. And such a role obviously
would be far better than the role government played during the
last crisis, which was extraordinarily procyclical, if we look
back over the greatly ballooned bubble and subsequent bust that
was developed as a result of housing policy and a lot of the
actions taken.
Title II of the PATH Act has several provisions meant to
allow FHA to play that countercyclical role. The goal obviously
is to greatly expand eligibility, right, during the PATH Act--
if the PATH Act were enacted, and that would get us to the
point of that borrower eligibility in such a circumstance.
Would you agree enabling FHA to play an expanded role in
times of crisis, as suggested under the Act, will help ensure
continued access to the mortgage market for a great majority of
borrowers regardless of the market conditions that we might
face?
Mr. Bernanke. I am not advocating a specific plan. I am
just pointing out that we need to think about the situation
where there is a lot of stress in the market, and then we need
some kind of backstop. I obviously haven't studied this
proposal, but it seems to me that FHA could be structured to
provide such a backstop. It would depend on the details, but
that would be one way to have the government provide a
backstop.
Mr. Royce. I thank you very much, Chairman Bernanke, for
attending the hearing here today and for your answers. And we
will probably be in consultation later with some additional
questions.
Mr. Bernanke. Certainly.
Chairman Hensarling. The gentleman yields back.
The Chair recognizes the gentleman from Texas, Mr. Green.
Mr. Green. Thank you, Mr. Chairman.
And thank you, Mr. Bernanke, for appearing again. And I
trust that this will not be your last visit. I believe that our
country has benefited greatly from your service, and not just
the service itself, but the way you have conducted yourself in
a time of great turmoil, so I am hopeful that you will be back.
I would like to, for just a moment, ask you to visit with
us about the issue of certainty and uncertainty, confidence,
optimism, because while you may do a lot of things, if consumer
confidence or producers don't have confidence, that can have a
significant impact on long-term growth. Confidence is important
to growth.
I read through your paper, by the way, and I am very, very
excited about some of the things that you have said, but I
didn't get quite enough on the question of confidence. Would
you please elaborate a bit?
Mr. Bernanke. I think it is quite true that business
confidence, homebuilder confidence, and consumer confidence are
very important, and good policies promote confidence. The Fed
policy, congressional policy, we want to try to create a
framework where people understand what is happening, and they
believe they have confidence that the basics of macroeconomic
stability will be preserved.
It is a difficult thing. To some extent, it is a political
talent to be able to create confidence in your constituents. So
nobody has a magic formula for that, but clearly the more we
can demonstrate that we are working together to try to solve
these important problems, the more likely we are going to
instill confidence in the public, and that in turn will pay off
in economic terms.
Mr. Green. I compliment you, and I would like to focus on
one aspect of what you said about working together. I contend
that this is an important element in instilling confidence. And
I believe that the American economy is quite resilient. It is
strong, notwithstanding some of the weaknesses that have been
exposed. The reason I know it is strong is because it has
survived Congress. If the economy can survive Congress, I am
confident that it will thrive eventually. But things that we
do, repealing continually, or attempting to repeal some of the
significant aspects of bills that have passed that will impact
the American people, I am not sure how much confidence these
things engender. More than 30, 40 attempts to repeal the
Affordable Care Act, an attempt to repeal Dodd-Frank without
replacement, an attempt to repeal the CFPB without a good sense
of what the replacement will be.
It seems to me that at some point we in Congress have to do
more to engender the confidence that will cause the American
people to want to buy, to want to invest, to want to produce.
And I think that Congress has a significant role it could play,
and unfortunately we have not--we have not been able to work
together to the extent that the American people are confident
that we will do things to help create jobs, to help build a
broader economy. You have been very focused on jobs, very
focused. We have not been as focused on jobs. Legislation that
can produce jobs, much of it has lingered and has not had an
opportunity to move forward.
I just believe that in the final analysis, your good work,
while it is going to be lauded and applauded, still needs some
help from the policymakers in terms of working together to
instill confidence. Confidence is needed. I think this economy
is ready to blossom, but when I talk to business people, they
say to me, we need confidence, we need to know that the rules
are going to be static and not dynamic. Consumers say to me, I
need confidence. I will buy a house when I am confident that
the system is going to remain static and not dynamic.
I thank you for your service, and I trust that we will be
able to help instill the confidence to augment and supplement
the good work that you have done.
Mr. Bernanke. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from Virginia, Mr. Hurt.
Mr. Hurt. Thank you, Mr. Chairman.
And thank you, Chairman Bernanke, for being here today, and
we thank you for your hard work.
I represent a rural district in Virginia, one that has not
seen the same economic growth that other places in this country
have seen. We still have places in our district where we have
jobless rates at double digits. And we certainly look to
Washington to adopt policies that will make it easier for our
businesses to succeed, our families to succeed, as opposed to
making things more difficult.
In listening to your remarks, you talk about systemic--
adopting policies that go to systemic importance. Obviously
Basel III, it seems to me you discussed Basel III in terms of
what is systemically important. You also tip your hat to Main
Street, talking about how the Fed has adopted policies to
support Main Street, jobs, consumers, things that we all care
about.
In the aftermath of the rules that were adopted earlier
this month relating to Basel III, Frank Keating with the
American Bankers Association said that--asked the question, are
we making things easier, or are we making things more
difficult, and essentially said, if we are making them harder,
that is not what we need for our economy. That is not what a
recovering economy needs.
So as I think about what we need in my rural southside
Virginia district, I think about community banks, and I think
about what an important lifeblood they are to our Main Street
economy. And I wonder if you could talk a little bit about the
reasoning behind not just exempting community banks from the
application rule that you all have adopted, and why you did
that.
Mr. Bernanke. And I agree with you about the importance of
community banks, particularly in rural areas which might not be
served by larger institutions. It is also important, of course,
for community banks to be well-capitalized so that they can
continue to lend during difficult periods, they don't fail, so
we want to be sure that they are well-capitalized.
But in terms of the final Basel III rule that we just put
out, we were very responsive to the concerns raised by
community banks. They raised a number of specific issues
relating, for example, to the risk weighting of mortgages,
relating to the treatment of other comprehensive income, trust
preferreds, a variety of things that they were concerned about,
which we responded to. And that is part of our broader attempt
through outreach, through meeting with advisory councils and so
on to understand the needs of community banks and to make sure
that we do everything we can to protect them. The--
Mr. Hurt. Have--go ahead.
Mr. Bernanke. I was going to say that Basel III is
primarily aimed at the largest internationally active firms,
and most of the rule was just not relevant to small firms.
Mr. Hurt. Clearly, you all tried to make some
accommodations for community banks, and I recognize that. I
guess my question is, is there a reason that you all--if you
could talk a little bit about why you all concluded that you
could not exempt them entirely.
And I guess the second question that I have is, do you
think--based on your studies or anybody else's studies--that
these rules will have a disproportionate effect on community
banks? Obviously, that is the heart of the concern, that the
smaller banks have a much more difficult time complying with
regulations than obviously the largest banks.
Mr. Bernanke. Again, I don't think that Basel III is
primarily aimed at community banks. And the amount of
bureaucracy and rules is not significantly different from what
they are doing now. In terms of capital, the community banks
already typically held more capital as a ratio than larger
banks do, and our calculations are that community banks are
already pretty much compliant with the Basel III rules. We
don't expect them to have to raise substantial amounts of new
capital.
Mr. Hurt. So you don't believe there will be a
disproportionate effect on the smaller banks in complying with
these additional regulations?
Mr. Bernanke. Smaller banks are disproportionately affected
by the entire collection of rules that they face, ranging from
bank secrecy to a variety of consumer rules, et cetera, et
cetera. I think that your constituents may not be
distinguishing Basel III specifically from all the other
different rules that they face. And, of course, the small bank
just has fewer resources, fewer people to deal with the range
of regulatory and statutory requirements that the banks have to
deal with.
Mr. Hurt. And just finally, in one of your earlier
appearances here, we talked a little bit about the regulatory
structure, what is perceived among some as a micromanagement by
bank examiners and regulators in the function of the Federal
Reserve as an examiner. Are you able to give us any indication
of what has been done in the last 2 years or so to try to
improve that? I know that you had mentioned that there were
some things that the Federal Reserve had in mind and was trying
to work with our smaller banks.
Mr. Bernanke. Yes. I am not going to have time to go
through the whole list, but we have a Community Depository
Institution Advisory Council that meets with the Board, and
gives us their perspective. We have a special subcommittee.
Mr. Hurt. My time has expired, but do you believe that
these efforts have been successful?
Mr. Bernanke. I think we have made definite progress, yes.
Mr. Hurt. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Cleaver.
Mr. Cleaver. Thank you, Mr. Bernanke, for being here. You
have had a lot of compliments today. In my business, it is
called a eulogy, but that is--I am not trying to frighten you.
Even the Twinkie came back. But I also want to thank you for
your service.
The stimulus, the Fed stimulus, has been roundly criticized
by many. Can you in a short time express what you believe would
be the consequences of easing quantitative easing prematurely?
Mr. Bernanke. Again, it is important to talk about our
overall monetary policy stance. Our intention is to keep
monetary policy highly accommodative for the foreseeable
future, and the reason that is necessary is because inflation
is below our target, and unemployment is still quite high.
In terms of asset purchases, though, I have been very clear
that we are going to be responding to the data, and if the data
are stronger than we expect, we will move more quickly, at the
same time maintaining the accommodation-to-rate policy. If the
data are less strong, if they don't meet the kinds of
expectations we have about where the economy is going, then we
would delay that process or even potentially increase purchases
for a time.
So we intend to be very responsive to incoming data both in
terms of our asset purchase program, but it is also very
important to understand that our overall policy, including our
rate policy, is going to remain highly accommodative.
Mr. Cleaver. Thank you.
One of your former colleagues, Tom Hunting, from my
hometown, has repeatedly warned in papers that he has written
that too-big-to-fail is still a major threat to the U.S.
economy. He suggests that in many instances, many of the huge
financial institutions have gotten even larger. Do you think
that if we went through again what we went through a few years
ago, that we would be in a situation where we would almost be
required to save the U.S. economy and perhaps even the world
economy from a depression because those--or we would have to
step in again to bail out these major corporations, AIG and--
Mr. Bernanke. I think there is more work to be done before
we feel completely comfortable about systemic firms. The Dodd-
Frank Act and Basel III and other international agreements
provide a framework for working towards the day, which is not
here yet, where we can declare too-big-to-fail a thing of the
past, but we do have some tools now that we didn't have in
2008, 2009.
Very importantly, we have the Orderly Liquidation Authority
of the FDIC--the Federal Reserve supports the FDIC in that--
which would allow us to do a much more orderly resolution of a
failing firm that would take into account the impact on
financial market stability, unlike 2008, 2009, when we had no
such tools and were looking for ad hoc ways to try to prevent
these firms from failing. In addition, these firms are now much
better capitalized than they were. And we are making other
reforms that will make it much less likely that this situation
will arise.
But I wouldn't be saying the truth if I said the problem is
gone. It is not gone. We need to keep following through on the
various programs here, and I think we need to keep doing what
is necessary to make sure that this problem is solved for good.
Mr. Cleaver. But the question is--and I was here as we went
through all of this. We didn't have the time, we were told, and
actually I believe, to rationally and thoughtfully consider all
the options. And my fear is that if something happened even--I
agree with you. In Dodd-Frank, we tried to reduce the
likelihood that this was going to happen, but what assurance do
we have that we would have time for action by the Fed, by
Congress? Thank you.
Mr. Bernanke. We have the framework now. We have the
Orderly Liquidation Authority.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from Ohio, Mr. Stivers.
Mr. Stivers. Thank you, Mr. Chairman. And Chairman
Bernanke, thank you for being here today. I really appreciate
your willingness to come and answer all our questions. I am
going to try to get through Basel III as well as some QE
questions, and we will see how my time goes.
The first thing I want to talk about is following up on the
questions Mr. Hurt asked. And you--I will try to quote. You
said that Basel III was not primarily aimed at community banks,
and it is clear that it is aimed at the larger financial
institutions which helped create the financial crisis. And I
agree with you that it won't result in most community banks
having to raise capital, because their capital is normally
higher, but for a few community banks that don't have capital
right now, where they have not as much access to the capital
markets, it actually could harm them. And none of these banks
are going to be too-big-to-fail; nobody is going to come in and
bail them out. They also aren't so interconnected. And I am
just curious why, given that Basel III is voluntarily compliant
internationally, we didn't just exempt out the community banks?
Mr. Bernanke. I think it is important that they be well-
capitalized, both to protect the deposit insurance fund, to
protect their local communities and the borrowers that depend
on them. And we have seen--in the past we have seen financial
crises that were small firms, like in the Depression and in the
savings and loan crisis, so I think they do need to have
capital.
But on this issue that you mentioned, we are giving really
long transitions. We aren't saying, you have to have this level
of capital tomorrow. And so banks can raise capital through
retained earnings and through other mechanisms as well.
Mr. Stivers. Right. And I appreciate that. I don't think it
is a burden on most community banks, but I do worry about a few
of them, and I think it could result in consolidation in the
industry and less community banks that serve some of our rural
areas, and that troubles me a little bit.
Mr. Bernanke. No. I agree with that concern.
Mr. Stivers. The second thing I want to recognize in your
Basel III is that you, I think appropriately, recognize that
activity, for example, international activity, increases
systemic risk, but I was a little troubled that you continue to
use artificial asset numbers.
I am from Ohio. We have a lot of regional banks that serve
the middle market that are either based in Ohio or have a major
presence in Ohio. And, you use the $10 billion number at very
bottom for the smallest banks; the $50 billion up to $250
billion. And if you look at sort of the size of all the 50
largest banks in America, there is really--there are kind of
some tiers. There are the top banks above $2 trillion, and
there are 3 of those, I think--I'm sorry--2 of those--there are
2 more above $1 trillion, between $1 trillion and $2 trillion,
and then there are 3 more above half a trillion dollars, but
then it falls way off to 350. And you set that top limit for
regional banks at 250. And there are banks that are regional
banks that are essentially super community banks that are above
that 250 to 350. A couple of them have a major presence in Ohio
and serve our middle market.
And I guess I would ask where you picked that artificial
number of 250, because most people would recognize both PNC and
U.S. Bank as regional banks.
Mr. Bernanke. We have met with middle-market banks and
tried to understand their concerns. The basic philosophy here
is that both the capital requirements and the supervisory
requirements are gradated with size. So, for example, the
largest banks will have capital surcharges. Where we have
failed to gradate appropriately, of course, we can go back and
try to figure out how to get it right.
Mr. Stivers. I appreciate that. And I would really urge you
to take a look at the major cliffs in our asset sizes, because
they really do--that spell themselves out. And I think the big
jump between, say--there are no banks between $350 million and
$500 million. There are 2 at just above $350 million, and then
there is nobody until you get to almost $550 million. So, that
is a big jump, and I think--I would urge you to take a look at
that.
And the last question I would like to quickly ask is
about--you talked about stress testing a lot for the banks. And
in your QE and the way you judge QE portfolio, would you be
willing to submit the Federal Reserve's QE to the same kind of
stress testing under the same kind of provisions you provide
for these banks of potential interest rate spikes and
inflation?
Mr. Bernanke. The stress test has a different purpose for
the Fed, which is to effect how much remittances we send to the
Treasury. And we have done various stress tests in that
respect, and many of them are publicly available. We have a
number of research papers. And there are also outside
researchers, the IMF and others, who have done these tests. And
the bottom line is that for any reasonable interest rate path,
this is going to end up being a profitable policy for the
taxpayer.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from Michigan, Mr.
Peters.
Mr. Peters. Thank you, Mr. Chairman.
And, Chairman Bernanke, thank you for being here today and
for your service.
Last week, the Bank of Japan announced that they were going
to maintain their current monetary policy, which, as you know,
includes significant devaluation of the yen for the purposes of
improving the competitiveness of Japanese exports. The yen has
fallen in value almost 30 percent compared to the dollar since
last year. And Japan, as you also know, is joining the U.S.-led
Trans-Pacific Partnership trade talks.
I have raised a number of concerns about Japan's entry into
the trade talks until they open their markets, particularly to
U.S. autos. And while they continue to manipulate their
currency, this increases my concerns, and it could make our
trade deficit even worse.
I know in 2011 you expressed concern with China's
devaluation of their currency. I am quoting you saying, ``Right
now our concern is that the Chinese currency policy is blocking
what might be a more normal recovery process in the global
economy, and it is to an extent hurting our recovery.''
Could you please discuss your views on Japan's currency
policy, its impact on the economy, and do you believe that
their currency policy is hurting the economic recovery in the
globe right now?
Mr. Bernanke. Yes. There are some fundamental differences
between China's policy and Japan's policy. China has managed
its exchange rate and kept it for many years below its
equilibrium level in order to increase its exports. That is
what economists call a zero sum game: What they gain we lose,
basically.
The Japanese approach is different. They are not
manipulating their exchange rate. They are not directly trying
to set their exchange right at a given level. What they are
doing is engaging in strong domestic monetary policy measures,
trying to break the deflation that they have had for about 15
years, and a side effect of that is that the yen has weakened.
The G20 and the G7 have discussed these matters, and the
international consensus is that as long as a country is using
domestic policy tools for domestic purposes, that would be an
acceptable approach.
Now, I recognize that movements in exchange rates do affect
competition. You said you are from Michigan, right? Yes. So I
can see where your concern would come from. I think that it is
in our interest, though, to see Japan strengthened, to see
their economy grow faster. It will increase our market there as
well as the competitive supply. And over time, if they do, in
fact, achieve positive inflation, that increase in prices there
will partially offset the exchange rate movement.
So, I recognize the concern. I don't know how big an effect
it has had so far. I have actually talked to a couple of people
in the auto industry at some of the companies to try and get
their sense. But, again, there is a difference, which is that
Japan is trying to expand its overall economy, and therefore,
there is a benefit as well as a cost, and that benefit is a
stronger Japanese economy and a stronger Asian market.
Mr. Peters. To pick up from that point, so if you could
kind of give me some sense, as you wind down your quantitative
easing activities while Japan maintains this current policy
which is driving down the yen, do you believe it is going to
have an impact on American manufacturing and exports as you
wind down as they continue that policy?
Mr. Bernanke. It could. It could to some extent, but, of
course, as you know, for example, many Japanese producers
produce in the United States, and there is a sense that for a
number of reasons, including productivity and others, that U.S.
manufacturing is actually generally becoming more competitive
globally than it has been in some time. So I don't think that
this change in the value of the yen would offset that
underlying trend.
Mr. Peters. If I could just switch briefly, this is another
big topic, but if you could touch on it. There have been some
recent reports, in fact, a recent IMF report came out to talk
about monetary policy and its impact on inequality in the
United States. As you know, inequality has expanded
dramatically, particularly in the last 20, 30 years. And in the
report they talk about monetary policies having a much more
significant role in driving historical inequality patterns in
the United States than has been expected in--or that has been
anticipated and certainly written about in the economic
literature. Would you comment briefly? Do you believe that
monetary policy has a significant impact on inequality as we
are seeing it and--
Mr. Bernanke. No, I don't think so. The purpose of monetary
policy is, first of all, to keep inflation low, and everybody
is affected by inflation, and to maintain employment at the
highest level that the economy can sustain. And, of course,
jobs are critical to the welfare of the broad middle class of
Americans. So I really don't understand that.
It is true that in the short run, some of the tools that we
have involve changing asset prices, so higher stock prices and
things of that sort, but we can't affect those things in the
long run. It is only a short-run transmission mechanism that is
involved there.
Mr. Peters. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from Tennessee, Mr.
Fincher.
Mr. Fincher. Thank you, Mr. Chairman.
And, Chairman Bernanke, thank you for your service and for
being here today.
I am going to read a paragraph, for my benefit probably
more than yours, to get started, and then I have a couple of
questions.
``The Federal Reserve was intended to be a fully
independent central bank and monetary authority. The authors of
the original Federal Reserve Act did not want to subject the
institution to the whims of politicians, but, rather, set clear
objectives for the institution in the interests of fostering
the macroeconomic stability. That independence has eroded
significantly since the 2008 financial crisis, when the Federal
Reserve and the Treasury Department initially took coordinated
steps to stabilize the economy. One persistent concern--that
is, if the central bank's independence is infringed upon by the
government, fiscal authorities can compel the Fed to monetize
sovereign debt.''
A couple of questions. With what has happened with
quantitative easing, I was looking at the Dow a few minutes
ago, 15,400; Nasdaq, 3,604; and 1,680 for the S&P. To Chairman
Hensarling's comments earlier, I think the private sector is
addicted to the government money. And anytime you talk about
cutting the money off, there is a panic.
Because we have our own currency and we can manipulate that
currency, unemployment where it is, inflation where it is, with
the entitlements in this country where they are--I am saying a
lot here, but will we ever get to back to that place of
unemployment at 5 percent?
I live in a part of the country, in a rural part of the
country with a lot of farmers, a lot of agricultural real
estate. We have seen land prices go through the roof, and one
reason I think we have is interest rates are so low that people
can borrow money. It is just--it is there. But that causes
problems, also, because if this thing ever does turn around,
how do you stop it? And interest rates are how you stop it. But
the country also is in debt up to their eyeballs, which creates
another problem. High interest rates breaks the back of the
country.
So I said a lot, but are you concerned that pumping the
money into the economy, when we stop that, can the country take
it? Can the private sector react? And how do we do that?
Mr. Bernanke. The reason for the low interest rates is
because the economy is weak and inflation is low. And even if
the Fed wasn't engaging in asset purchases, interest rates
would still be quite low, as they are in other countries, for
example.
One reason that asset markets react to what the Fed says is
that they are trying to determine whether the Fed will provide
sufficient support for the economy to get back to full
employment. That is our job, that is our mandate, when the
economy is away from full employment, to try to provide the
financial support that will move the economy in that direction.
Mr. Fincher. Do you not think the politics over the past 4,
5, 6 years are playing more of a role than they did 6, 7 years
ago?
Mr. Bernanke. No, I don't. Your earlier point about
collaborating with the Treasury in the financial crisis, that
had nothing to do with monetary policy. That had to do with the
two main financial institutions in the government working
together to prevent a big financial collapse. And I think the
collaboration was needed there.
But at no time during the crisis or at any point did the
Administration, the Congress, or the Treasury Department ever
tell the Fed, we need monetary policy of ``X.'' We have always
maintained that independence, and we think it is critically
important that we maintain it.
Mr. Fincher. I just have about a minute left. I fear that
the government's intervention into trying to make sure the
private sector is running at full capacity creates all sorts of
problems.
Now that I am up here and I see how big this is--I had a
constituent the other day who brought this point up, and he
said, with the regulatory policies that we have, with the
choking effect that some say, the big government is really good
for big business, the unintended consequences, because the big
businesses can react to big government. The smaller businesses
have a harder time doing that with the resources they have. And
I thought about it a minute, and it is a great point.
Again, I am fearful that we are out of control, pumping the
money in. The private sector is addicted to the pumping of the
money. And when we ever shut that off, there is going to be a
reaction. The reaction now that the stock market is 15,000, if
we drop back to 12,000, again you are going to see a panic.
What do we do then?
So many people, Chairman Bernanke, think now that the
government's role is to step in and save the day. And this is
taxpayer money. This is very, very dangerous.
Mr. Bernanke. There is sort of an idea going around that
the Fed can step away and not do anything. We have to do
something. We have to have interest rates somewhere. The Fed
does control our money supply. So we have to do something, and
I think that we are better off trying to get the economy moving
than not.
Mr. Fincher. Thank you.
Chairman Hensarling. The time of the gentlemen has expired.
The Chair recognizes the gentleman from Illinois, Mr.
Foster.
Mr. Foster. Thank you.
Chairman Bernanke, I think when it is time for the T-shirts
to be passed out at your retirement party, a very good
candidate for that would be the $34 trillion swing in household
net worth.
When we have seen in the last several years the $16
trillion drop in household net worth caused by a complete
failure of the Republican fiscal, regulatory, and monetary
policy replaced by an $18 trillion recovery, it is one of the
most impressive achievements. And there is no doubt that, of
the three legs of financial policy--monetary, fiscal, and
regulatory--monetary policy deserves a lot of credit. So I
just--you deserve the compliments you have been getting.
The question I would like to pursue is, it is my
understanding that the Fed and the CBO maintain roughly
comparable macroeconomic models. And in the last few weeks, the
CBO has analyzed two different macroeconomic scenarios: one in
which Congress has passed the Senate proposal for comprehensive
immigration reform and a path to citizenship, which they found
resulted in about a $1.5 trillion increase in economic activity
over the next 10 years and about a $200 billion reduction in
the Federal debt; and the second scenario, in which the
Republicans succeed in blocking comprehensive immigration
reform, resulting in a $200 billion larger level of Federal
debt and a $1.5 trillion decrease in economic activity compared
to the other scenario.
And so my question is, do you anticipate, given this policy
uncertainty, that you are going to have to separately consider
both of those scenarios, both the high-debt, low-growth
scenario caused by Republican obstruction and the high-growth,
low-debt scenario that would follow congressional passage of
the Senate comprehensive immigration reform bill?
Mr. Bernanke. To begin with, we haven't done any comparable
analysis of the economic implications of immigration. I think,
in general, a growing population, more talented people, all
those things do help the economy grow. A younger population
will also help us deal with our aging situation. To use a
cliche, we are a Nation of immigrants.
All that being said, there are a lot of details in setting
up a program in terms of how it should be monitored and managed
and so on that I really think are the province of Congress. And
I don't really want to try to set immigration policy. I really
think that the details there have to be worked out in Congress.
Mr. Foster. I guess my question is, how do you deal with,
when there are policy choices being made by Congress with
fairly large macroeconomic effects, this in your forward
planning?
Mr. Bernanke. Generally, we take those decisions as given,
and we try to figure out what the best thing we can do is given
the economic environment we find ourselves in. So, with respect
to fiscal policy and the restraint this year from fiscal
policy, we sort of take that as given, again, and try to figure
out how much monetary accommodation is therefore needed.
And, with respect to immigration, I think these are much
longer-term propositions; these are gains and losses over many
years. And the Fed, because it focuses mostly on short-term
cyclical movements in the economy, our focus is typically not
10 or 20 years but, rather, the next few years.
Mr. Foster. Okay.
I would like to follow up on Representative Royce's
questions about the countercyclical element in Federal housing
policies, which are present, as he pointed out, not only in the
Republican PATH Act proposal but also in the Democratic
principles for housing market reform.
There was also a recent front-page article in The Wall
Street Journal that was entitled, ``Central Bankers Hone Tools
to Pop Bubbles.'' Had you seen that?
Mr. Bernanke. ``Central Bankers--
Mr. Foster. ``Hone Tools to Pop Bubbles.'' It discussed the
efforts in various countries to implement countercyclical
housing policies.
Mr. Bernanke. Yes.
Mr. Foster. So you have seen that. The American Enterprise
Institute is also hosting a 2-day workshop on this subject at
the end of this month.
So my question is, do you believe that regulators have
today the tools necessary, as well as the collective will, to
address the development of potential asset bubbles, such as the
housing bubble from which we are still recovering?
Mr. Bernanke. We have some tools. For example, Basel III
included a countercyclical capital requirement. In other words,
if we see the economy growing too fast with too much credit
being extended, we could raise capital requirements.
I think it makes a big difference that the CFPB and other
agencies have done a lot to eliminate the worst kinds of
mortgage abuses that were very important in the housing boom.
The Federal Reserve has recently issued some guidance to banks
on leveraged lending and other kinds of practices that could
contribute to asset bubbles.
All that being said, we want to make the financial system
as fair and transparent as possible, but I don't think we can
guarantee that we can prevent any bubble.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from Indiana, Mr.
Stutzman.
Mr. Stutzman. Thank you, Mr. Chairman.
Thank you, Chairman Bernanke, for being here today.
And I really want to thank you for your comments earlier
about what Congress should be focused on, and that is the long-
term liabilities to our country. I do believe that if we would
address those issues, the trajectory of our economy would
change, instead of being focused on such a near-term rhetoric
and the effects to the economy by short-term policies. So I
appreciate what you mentioned earlier.
I want to talk a little bit about employment. For the
entire U.S. workforce, employers have added far more part-time
employees in 2013, averaging 93,000 a month, seasonally
adjusted, than full-time workers, which have averaged 22,000.
Last year, the reverse was true, with employers adding 31,000
part-time workers monthly compared with 171,000 full-time ones.
Earlier in June, I, along with other colleagues from
Indiana, wrote HHS Secretary Kathleen Sebelius and Treasury
Secretary Jack Lew to find out whether or not they had
forecasted the impact of the Affordable Care Act on part-time
workers who are currently just above the 30-hour threshold.
Does this shift of a lot of workers, many workers, from the
full-time category to part-time status at all affect your
statutory mandate to reach full employment?
Mr. Bernanke. I think it does. As I mentioned in my
testimony, there are a number of problems with the labor
market. Unemployment is one problem, but long-term unemployment
and underemployment--and by ``underemployment,'' I mean people
who are either working fewer hours than they would like or
possibly are working at jobs well below their skill level--are
also indicative of a weak labor market. And a stronger economy
will help, I think, in all those dimensions.
So, yes, that is part of our concern. And as we look at the
unemployment rate and try to determine what it means for the
labor market, we look at these other indicators as well.
Mr. Stutzman. You mentioned earlier that the taxes at the
beginning of the year were affecting the economy. You mentioned
something else, that I can't recall.
Mr. Bernanke. There were spending cuts from before, and
then there were tax increases and then sequestration.
Mr. Stutzman. That is right, sequestration and the tax
increases. Do you believe that the Affordable Care Act is
dragging the economy or slowing the economy down at all with
the transition that we are currently going through and the
effort of implementation?
Mr. Bernanke. It is very hard to make any judgment. One
thing that we hear in the commentary we get at the FOMC is that
some employers are hiring part-time in order to avoid the
mandate there. So, we have heard that.
But, on the other hand, a couple of observations: one, the
very high level of part-time employment has been around since
the beginning of the recovery, and we don't fully understand
it; two, those data come from the household survey, and they
are a little bit inconsistent with some of the data from the
firm survey, which suggests that work weeks haven't really
declined very much.
So I would say at this point that we are withholding
judgment on that question.
Mr. Stutzman. Do you think that a delay in the mandates
would be appropriate?
Mr. Bernanke. That is beyond my pay grade. It would depend
on questions of how much time is needed to fully implement the
bill.
Mr. Stutzman. Okay. Thank you.
With about a minute left, I would like to touch on some of
the global economic concerns and other countries beginning a
trend of currency devaluation in fear of currency wars that
might follow. Could you comment on that at all?
Mr. Bernanke. As I mentioned in an earlier answer, the
international community makes a distinction between attempts to
manipulate an individual exchange rate in order to gain an
unfair advantage in export markets versus using monetary or
fiscal policy to achieve domestic objectives that may have the
side effect of weakening the currency.
So this was the example with Japan. Japan has taken policy
actions that have weakened the yen, but that wasn't the focus
of those actions. Their actions were intended to break the
deflation which they faced for the last 15 years or so to get
their economy growing more quickly and to get back to a 2
percent or so inflation objective.
If they are successful, there may be some exchange rate
effects, as the earlier question raised, but there also will be
the benefit that a stronger Japanese economy and a stronger
Asian economy will increase world growth and be a benefit to
the United States, as well.
So those are the distinctions between those different types
of management of the currency.
Mr. Stutzman. Okay. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from Florida, Mr.
Murphy.
Mr. Murphy. Thank you, Mr. Chairman.
And thank you, Chairman Bernanke, as well. I want to echo
what has been said already in thanking you for your service to
our country.
Mr. Bernanke. Thank you.
Mr. Murphy. There has been a lot of talk already in the
committee about the talk of tapering in the last several weeks.
And the Board of Governors has come out and tried to clarify
some of those comments. It has been turmoil somewhat on Wall
Street, these ups and downs. And this isn't a knock on Wall
Street, but my concern is really Main Street.
What we have seen in the last--I guess since May--is a 40
percent increase in interest rates on mortgage rates. What do
you think we should be doing? What can you do? And what do you
think is the effect of this pretty sudden and sharp rise in
interest rates?
Mr. Bernanke. First of all, we are going to continue to
communicate our policy intentions and to make clear that,
notwithstanding how the mix of policy tools change, we intend
to maintain a highly accommodative monetary policy for the
foreseeable future. I think that message is beginning to get
through, and I think that will be helpful.
More generally, we will be watching to see if the movement
in mortgage rates has any material effect on housing. The main
thing is to see housing continue to grow, more jobs in
construction and the like. And as we have said, if we think
that mortgage rate increases are threatening that progress,
then we would have to take additional action in the monetary
sphere to try to address that.
Of course, there is always hope for Congress to look at
problems that remain in the housing market in terms of people
underwater, in terms of refinancing of underwater mortgages,
and other kinds of issues that Congress could examine. But we
are going to be looking at it from the perspective of whether
or not the housing recovery is continuing to a degree
sufficient to provide the necessary support for the overall
economic recovery.
Mr. Murphy. Thank you.
My background is as a CPA. I worked at Deloitte for a
while, dealing with Sarbanes-Oxley, and as an auditor. So I am
not one to say we need more or less regulation, necessarily,
but that we need smarter regulation.
And, certainly, being here now, trying to understand all
the different regulators, and dealing with a lot of the
institutions in my district, especially the small and medium-
sized banks, what are you doing to work with all the different
regulators to try to streamline and make it easier for these
small institutions?
Mr. Bernanke. One of the vehicles that we have is an
organization called the FFIEC, which is basically the place
where the banking regulators gather and talk to each other
about policy and regulatory decisions. And the FFIEC has a
regular committee which is focused on small community banks and
trying to find ways to reduce the burden of regulation and to
find ways to make it easier for them to deal with the
regulations that do bear on smaller banks.
As far as the Fed itself is concerned, I mentioned earlier
that we have an advisory council of community institutions, we
have a special subcommittee that looks at the effects of our
regulations on smaller institutions. We have had meetings
around the country, outreach, special training sessions for
examiners and the like.
So we do take that very seriously, recognizing that there
is a heavy regulatory burden on community banks, and we want to
do everything we can to mitigate that.
And I would just perhaps add that Congress probably has a
role here, too, since some of the things that community banks
have to deal with come from the statute and not the regulation.
Mr. Murphy. Thank you. I agree with that.
So this kind of leads to my next question about the
systemic importance of banks and determining if the balance
sheet is the best place we should be drawing this line. And if
not, do you have any other thoughts on that? And what would the
difference be in a bank with $55 billion versus say $45
billion, as far as systemic risk to our economy?
Mr. Bernanke. As I have mentioned, Dodd-Frank tells us to
do this in a graduated way, to have capital requirements and
supervisory requirements become tougher as the size and
complexity and systemic importance of the bank increases. And
so there are obviously going to be certain dividing lines to
try to separate banks into these different categories.
But even within the categories, we are trying to
distinguish between the smaller banks in that category and the
larger banks in that category. And as I said earlier to a
questioner on the other side of the aisle, to the extent that
the rules don't provide sufficient smoothness in how they vary
by type of bank, we have plenty of capacity to go back and look
at them.
But the basic idea is that the very largest internationally
active banks should bear the hardest burden of regulation.
Mr. Murphy. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from South Carolina, Mr.
Mulvaney.
Mr. Mulvaney. Thank you.
Chairman Bernanke, I want to begin by going back to some of
the questions that Chairman Hensarling began with at the very
outset of the hearing regarding whether or not the markets were
addicted to easy money.
And I have a graph that I think you have in front of you,
that we would like to put up on the screen. It simply shows the
correlation between the size of your balance sheet and the
performance of the S&P over the course of the last 4 or 5
years. And as you can see, there is a strong argument that the
two things tend to move together.
So my question to you is fairly simple: What can you say to
convince us and to convince the markets that you will be able
to return the balance sheet to its normal size, as I think your
internal study says you want to do by 2018, 2019, Mrs. Yellen
says by 2025? Will you be able to do that without dragging the
markets down at the same time, especially in light of what
happened last month after your comments in the JEC?
Mr. Bernanke. The main thing that supports the stock market
or other markets is the underlying economy. I don't know what
it means to say that markets are addicted. I don't think that
is really a technical term in finance. But the reason, I think,
that markets have improved so much since 2009 is because Fed
policy and other policies have succeeded in providing a
stronger economy with low inflation.
Mr. Mulvaney. If the economy is growing at such a strong
rate as to support some fairly dramatic increases in the stock
markets that we have seen, then why are you continuing your
easy-money policies?
Mr. Bernanke. Profits are actually ahead of jobs. That is
one of the problems. So we continue to provide easy money in
order to get the job situation back to where we need it and
also because inflation is below our target.
I think the kind of scenario you are worried about would be
most likely to happen if the Fed withdrew easy monetary
policies prematurely and the economy relapsed into weakness.
Then, I think you would see asset prices come down.
Mr. Mulvaney. Are you satisfied that if you were called
upon at some point in the future--and I am not trying to rattle
any markets--to begin bringing the balance sheet back to normal
size, and the markets reacted with fairly substantial
reductions, you will have the staying power to keep that exit
strategy despite the fact the markets are going down?
Mr. Bernanke. I think the key is making sure that the
markets, first of all, understand our plan, but, secondly, that
we have done enough that the economy is growing on its own. If
the economy is growing on its own, it won't need the Fed's help
and support. And then the markets, I think, will be just fine.
Mr. Mulvaney. Thank you, sir.
I want to talk about something else that is a little off
the beaten track. You and I have talked about it before; you
mentioned it when you were here earlier this year. I am talking
about remittances to the Fed.
Mrs. Yellen mentioned it in a speech she gave at about the
same time. And I think your written testimony at the time said
they could be quite low for a time in some scenarios,
particularly if interest rates were to rise quickly. Mrs.
Yellen was a little stronger when she spoke to the NABE and
said remittances could cease entirely for some period.
You have an internal study conducted by Mr. Carpenter and
others in January of this year which indicates that having the
Fed generate combined earnings insufficient to cover its
operating costs, dividends, and paid-in capital isn't that much
of a problem, as the Fed can simply carry it on your balance
sheet as a deferred asset. But it goes on to say that whenever
you have done that in the past, when the Fed has done that in
the past, it has been for a very short period of time and that
we have never seen a period where the Fed is not able to make
these remittances over a fairly long period of time.
Given the fact that you have an extraordinarily large
balance sheet, we have gone through this, what I think you
called unprecedented expansion of the balance sheet, and given
the fact that you stand to lose a tremendous amount of money in
a higher-interest-rate environment--I think we had a witness
here testify that a 100-basis-point interest-rate rise in a
short period of time could generate losses to the Fed of in
excess of hundreds of billions of dollars.
If we end up in an environment where remittances from the
Fed go on for an extended period of time, how would that impact
the Fed's operation and especially its independence?
Mr. Bernanke. It won't affect our ability to do monetary
policy. Independence is up to Congress.
In terms of the fiscal impact, we have done many
simulations. There may be a period of regular remittances, but
we have already had a period of very high remittances, almost
$300 billion in the last 4 years.
Mr. Mulvaney. Which you have already remitted, though.
Where does the money come from? If your combined earnings don't
generate enough to cover your operating expenses, your paid-in
capital, and whatever else you need to pay for, where does the
money come from to operate the Federal Reserve?
Mr. Bernanke. From the balance sheet. We have all the
resources we need to do that.
Mr. Mulvaney. But if you have tremendous losses on your
balance sheet because of higher interest rates, you are paying
a lot higher interest to the banks that keep their excess
reserves and you are negative cash, where does the money come
from?
Mr. Bernanke. It comes from the income from our assets. It
is just that, from an accounting perspective, we don't have to
recognize those losses unless we sell them.
Mr. Mulvaney. Is there ever a circumstance where you go to
your shareholders for a capital call?
Mr. Bernanke. No.
Mr. Mulvaney. And I guess that is the end of my time. Thank
you, Mr. Chairman.
Chairman Hensarling. It is the end of the gentleman's time,
although I wish we could carry it out a little further.
The gentlemen from Maryland, Mr. Delaney, is now
recognized.
Mr. Delaney. Thank you, Mr. Chairman.
And thank you, Chairman Bernanke, for your incomparable
service to our country over the last several years of your
tenure.
My first question--I have several questions; I will try to
ask them quickly, and I think they have relatively short
answers--is, there has obviously been recent volatility in the
bond markets, an uptick in rates over the last several months
based on a variety of factors, and it seems to me that the
economy has actually handled that pretty well. Would you agree
with that assessment?
Mr. Bernanke. I think it is a little early to say so far.
But as I said in my remarks, I think we need to monitor
particularly the housing market to see if there is any impact
from higher mortgage rates.
Mr. Delaney. You get a lot of very current micro data. Have
you seen any data to suggest that this uptick in rates has had
a negative effect on what appears to be a reasonably good
housing recovery? I know, again, I understand, it is very
early.
Mr. Bernanke. No, I haven't seen anything that points
strongly to any particular problem, but again, it is very
early.
Mr. Delaney. Is there any kind of second-half economic data
coming out that would lead you to conclude that your original
views about the economy for the second half of the year,
particularly as it relates to your ability to begin to taper,
has changed your views?
Mr. Bernanke. I am sorry, is there any information--
Mr. Delaney. Is there any new kind of second-half economic
data which causes you to think differently about the economy
from what you did a month ago?
Mr. Bernanke. No. Our general, broad outline is that we
expect the economy to pick up probably later this year. The
exact timing depends on the impact of the fiscal restraint. We
should see continued improvement in the labor market,
unemployment continuing to fall, and inflation moving back up
toward 2 percent.
That general scenario still seems to be correct. But it has
not yet, obviously, been confirmed by the data. That is what we
need to see.
Mr. Delaney. And this notion of a highly accommodative
monetary policy, I assume you can taper in the context of that
position, that doesn't imply that you can't begin to taper your
purchases.
Mr. Bernanke. As I described in my testimony, we think of
the two tools we have as having different roles. So the purpose
of the asset purchases was to achieve more near-term momentum,
to achieve a substantial improvement in the outlook for the
labor market. We are making progress on that objective.
But the traditional, most reliable, most powerful tool that
the Fed has is short-term interest rates. And using low short-
term interest rates and guidance about those rates is going to
provide us, ultimately, with sufficient monetary policy
accommodation to achieve what we are trying to get to.
Mr. Delaney. That sounds like you are maintaining the
posture you think is important for the economy using short-term
interest rates. In that context, you should have the
flexibility to potentially taper consistent with what you had
wanted to do.
Mr. Bernanke. If the economy does more or less what I
described. But as I also emphasized, that is contingent. And if
the economy is stronger, we can moderate faster. If it is
weaker, we can moderate more slowly.
Mr. Delaney. And you don't have any data that the economy
has softened or housing has softened based on this interest-
rate volatility that we have seen?
Mr. Bernanke. It is just really too early. We have had some
strong data in some areas. This morning, we had a housing
report that was a little bit weaker. But again, I think given
the amount of noise in every piece of data, I don't think it is
appropriate to take too strong a signal from that.
Mr. Delaney. Switching gears a little bit to banks and
their portfolios, which is obviously part of the responsibility
of the Federal Reserve, how concerned are you about interest-
rate risk that may be accumulating on the balance sheets of the
regulated financial institutions based on the interest-rate
environment we have been in and some of the asset shortages, if
you will, or--it has been hard for banks to originate assets.
How concerned are you that they are building up reasonably
significant interest-rate risks in their business?
Mr. Bernanke. We have been looking at that as regulators,
and we are reasonably comfortable that banks are managing their
interest-rate risk appropriately.
Note that from the banks' perspective, even as higher
interest rates reduce the value of some of their securities
that they hold, higher interest rates also potentially improve
their net interest margins and their profitability. So as
interest rates have gone up, we have actually seen some bank
stocks go up, rather than down.
Mr. Delaney. Great.
Thank you again for your service.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Illinois, Mr.
Hultgren.
Mr. Hultgren. Thank you, Chairman Hensarling.
And thank you, Chairman Bernanke. I very much appreciate
your time today.
If I may, I would like to highlight a Crain's article from
earlier this year that discussed the rash of bank closings and
consolidations in and around Chicago. Certainly, there are many
causes, but the article uses Hyde Park Bank, which is from
President Obama's home neighborhood, to discuss one
contributing cause. They talk about how the near-zero interest
rates, which were set by the Fed, make it nearly impossible for
banks to invest safely and earn a decent yield.
I wonder, for communities banks that rely on net interest
margin, how do you justify the Fed policy? And is the Fed using
the tool to help one section of the economy while hurting
another?
Mr. Bernanke. First, I think that is not accurate. Net
interest margins have come down a little but not all that much.
And profitability in banks in the last few years has been
generally quite good.
Moreover, low interest rates, what is the purpose of low
interest rates? The purpose is to give us a stronger economy.
And a stronger economy means better asset quality, it means
more lending opportunities. So what low interest rates take
away they give on the other hand by giving a better economic
environment for banks to operate in.
Mr. Hultgren. Theoretically, maybe that is true. I just
don't hear that from my community banks. They are struggling,
partially under the regulation I think, the regulatory burden
that they are feeling, but also feeling because of an interest-
rate crunch, is really how they are expressing it to me.
Let me switch gears. Quickly, you have been outspoken on
the negative effects of Section 716 of Dodd-Frank, the swap
push-out/spin-off provision. As some of my colleagues on the
committee have reversed their position from last year, I wonder
if you could quickly restate why Section 716 could have a
negative effect on end users and systemic soundness.
Mr. Bernanke. It creates additional costs, essentially,
because it moves out certain kinds of instruments from the
banks, makes it more difficult for banks to offer a range of
services to their customers, and puts U.S. banks at a potential
cost disadvantage to international competitors.
Mr. Hultgren. So you would still be supportive of changing
this provision in Section 716?
Mr. Bernanke. We have some concerns with that provision. Of
course, everything depends on what the alternative is and how
the Congress makes those changes.
Mr. Hultgren. Let me switch again to something else. Mr.
Chairman, as you know, Dodd-Frank requires the Fed to adopt
procedures to implement the new limitations on the Section 13.3
authority, its 13.3 authority. It is now 3 years later, and the
Fed still has not done so.
How do you justify the Fed's 3-year delay in implementing
these basic restrictions on the Fed's authority to bail out
nonbank firms?
Mr. Bernanke. First of all, I think that the law is very
clear about what we can and cannot do. And I don't think that
the absence of a formal rule would allow us to do something
which the law prohibits. And I mentioned earlier that the law
prohibits us from bailing out individual firms using 13.3, and
there would be no way we could do that.
We have made a lot of progress on that rule, and I
anticipate we will have that out relatively soon.
Mr. Hultgren. You think by the end of the year?
Mr. Bernanke. I will check with staff, but I would hope so.
Mr. Hultgren. Okay. That would be great.
Kind of following up on that, as well, I know there were
some questions asked last time you were here--again, we always
appreciate your willingness to come here and spend time with
us. But I do know, hearing from some colleagues and from myself
that some questions were submitted and we hadn't heard back
from that. I know it has been about 4 months since you were
here last time. So I am just asking again if maybe you could
check on that, as well as letting us know from your staff when
this final rulemaking would be done.
Mr. Bernanke. We will do that.
Mr. Hultgren. One last thing that I will touch on--you know
what? Actually, with 1 minute left, I am going to yield back,
if Chairman Hensarling has any further questions.
You are okay?
Okay. Then, I am going to ask one more question, if I
could. And getting back to banking rules as applied to
insurance companies, it seems that the adoption of GAAP
accounting for mutual insurance companies remains one of the
Federal Reserve's top priorities. However, statutory accounting
is considered superior to GAAP for purposes of ensuring the
sound and prudential regulation of insurance companies.
Wouldn't applying SAP be a more prudent approach as the Fed
develops capital rules for savings and loan holding companies
that are predominantly in the business of insurance?
Mr. Bernanke. We have a lot of issues still. We deferred
the Basel rule for insurance, for savings and loan holding
companies that have more than 25 percent insurance activity. So
we are looking at a range of issues about how we can adapt the
consolidated supervisory rules and the capital rules for
insurance. And we recognize that there are some differences
that we need to look at.
Chairman Hensarling. The time of the gentleman has expired.
Mr. Hultgren. Thank you, Mr. Chairman. I yield back.
Chairman Hensarling. The Chair now recognizes the
gentlelady from Ohio, Ms. Beatty.
Mrs. Beatty. Thank you, Mr. Chairman, and Madam Ranking
Member.
Chairman Bernanke, I certainly join my colleagues in
thanking you for all the work that you have done. We started
the questions today with a series of quotes or statements from
you, so I would like to end it with one and thank you for it.
And that is, ``Our mission as set forth by the Congress is a
critical one: to preserve price stability; to foster maximum
sustainable growth in output and employment; and to promote a
stable and efficient financial system that serves all Americans
well and fairly.''
My question will be centered around that last part of it,
the efficient financial system that will serve ``all
Americans.''
I know you have had a lot of questions related to the
housing market. I want to thank you for opening your testimony
and starting with housing, because I am a long-term housing
advocate. And in reviewing your document this morning, the
multiple pages on housing put in mind this question for you.
Will you speak to what impact maintaining an adequate
supply of affordable housing options for first-time homeowners,
as well as moderate-income buyers, has? And then, conversely,
what will happen to the economy if we only promote a housing
finance system where only the well-off who have the high credit
scores, who have the double-digit dollars to put down, 10, 20
percent, what happens to our market there?
Because when you look at what I believe is more than $10
trillion in economic value, the United States housing market
certainly is inextricably linked to the performance of our
Nation's economy.
Mr. Bernanke. In this recovery, one of the credit areas
which is not normalized is mortgage credit. And we have noted
that people with lower credit scores and first-time home buyers
are not able to get mortgage credit in many cases. And, of
course, that is a problem for them, it is a problem for their
communities, and it is a problem for the overall economy since
we are looking for a stronger housing market as one of the
engines to help the economy recover.
So there are many reasons why mortgage credit is still
tight for those borrowers, but it is definitely a concern and
something we are paying close attention to.
Mrs. Beatty. And let me take this a step further, because
so often--and, certainly, that is the answer we get. And I
think America expects this Congress to advocate for those
folks. Because as soon as you say ``low-income'' and
``moderate-income,'' then someone has to stand up for them. But
let's look at the flip side of this.
In your opinion, let's look at what it does to the market
for credit unions and banks. Because housing is not only being
able to purchase the house, but it deals with construction and
jobs and employment. So what responsibility do you think those
credit unions and banks have to play in this environment that
we are in now?
Mr. Bernanke. We encourage banks to lend to credit-worthy
borrowers. We certainly enforce fair-lending laws. It is
important that first-time home buyers be able to get credit in
order to buy a home. It is important for our economy.
There are some issues still out there, as I mentioned, and
I think regulators have to take responsibility for the fact
that not all the rules for making mortgage loans are finished
and out there. We need more clarity on those things.
There is still a lot of concern among banks about so-called
``put-back risk,'' the notion that the GSEs will put back any
mortgage that goes bad if there is anything, any technical flaw
wrong with it. That makes the banks less likely to lend.
So there are a lot of things to work on to get the mortgage
market in better shape. And we are approaching this both from
the monetary policy point of view, which is trying to keep
mortgage rates low so that housing is of affordable, but also
as regulators and working with other regulators to try to solve
some of the problems that still exist in extending mortgage
credit.
Mrs. Beatty. Thank you.
Chairman Hensarling. The gentlelady yields back.
The Chair now recognizes the gentleman from Florida, Mr.
Ross.
Mr. Ross. Thank you, Chairman Hensarling.
Chairman Bernanke, I wish to begin by addressing one of
your earlier comments in your opening statement, when you said
that the debate concerning other fiscal policy issues, such as
the status of the debt ceiling, will evolve in a way that could
hamper the recovery.
My concern with that is, I believe that at $17 trillion and
counting in debt, as we see on our national debt clock up
there, when 6 percent of our Federal budget is used to pay
interest payments alone on national debt, I firmly believe that
our sovereign debt should not go unpaid, but there is a
tremendous difference between borrowing money to pay for an IRS
``Star Trek'' video and paying our sovereign debt.
You see, I believe that it is disingenuous to say that the
debate on the debt ceiling or the debt limit for this country
will adversely impact us, when, in fact, 2 years ago, the
credit-rating agencies came to us and said that if we don't
have in place a systemic, long-term path to reduce and address
our debt, that we are going to be downgraded in our ratings. It
wasn't so much the debate on the debt that we had; it was the
fact that we failed to take action to reduce in a systemic
fashion, in a long-term fashion, our debt.
Out of the debt-ceiling debates that we have had in the
past, we have come out with things such as Pay-As-You-Go, the
Gramm-Rudman Act. There have been good things to help us with
that. So I think it is important that we acknowledge that
having a healthy debate on the debt ceiling is prudent and
responsible.
With that, I also want to address the second part of your
opening statement, when you addressed the important nonbank
financial institutions, specifically the implementation of the
Collins amendment.
My concern with that--and going back to last week when Fed
Governor Tarullo testified before the Senate Banking Committee,
he told Senator Johnson that, in regard to postponing and
delaying the rules, as you have testified before, on Basel III,
on nonbank financial institutions--however, he said, ``That is
to say that the Collins amendment does require that generally
applicable capital requirements be applied to all of the
holding companies we supervise.''
I look at the Collins amendment, and what concerns me is
that I am afraid your hands may be tied, in that we have two
different types of financial institutions here. We have the
short-term funding and the banks, and we have the long-term--
and insurance companies, and yet we are going to give risk-
based capital requirements, expanded requirements, based on
generally accepted accounting principles, which don't apply to
insurance companies, we are going to increase the cost of
insurance. And I come from Florida, a State where insurance is
very important. And, more importantly, this is probably going
to result in a conflict between the McCarran-Ferguson Act and
the implementation of a Basel III capital requirement for
insurance companies.
How do you feel that we can resolve that? Can we resolve
that?
Mr. Bernanke. So, quickly, on the debt limit, I wasn't
trying to make a policy recommendation other than to say that,
the last time around, we did get a pretty big shock to consumer
sentiment, and it was harmful to the economy. So I just hope
that whatever is done, it is done in a way that is confidence-
inspiring.
On insurance companies, we are going to do our best to
tailor our consolidated supervision to insurance companies. But
I agree with you that the Collins amendment does put some tough
restrictions that--
Mr. Ross. Would you agree that we would have to legislate
in order to give you--in other words--
Mr. Bernanke. Yes.
Mr. Ross. Thank you. Because I think that where we are at
and one of the reasons for the delay is that you can't put the
capital requirements for banks as the minimum-level capital
requirements for insurance companies.
As was pointed out yesterday in a Wall Street Journal
opinion article, you are going to see that the insurance
companies are now going to be held to a higher capital
standard, do more short-term debt. And now, all of a sudden,
they may enter the banking business, which is going to be
counterproductive to where we want to go with the correction
that we are trying do.
So my question to you, I guess, as a result is, if we
impose the bank-centric capital requirements on insurance
companies, would that have done anything to have saved AIG from
its financial collapse of 5 years ago?
Mr. Bernanke. There were a lot of things that AIG was doing
that it couldn't do now. Let me just put it that way.
Mr. Ross. Right.
Mr. Bernanke. On the Collins amendment, it does make it
more difficult for us, because it imposes, as you say, bank-
style capital requirements on insurance companies. There are
some things we can do, but it is providing some--
Mr. Ross. Would it be safe to say, in my last 20 seconds,
that the future is not too bright for the nonbank financial
institutions in terms of having any reduction in their capital
requirements?
Mr. Bernanke. There are some assets that insurance
companies hold that we can differentially weight, for example.
There are some things we can do. But, again, I think this does
pose some difficulty for our oversight.
Mr. Ross. Thank you. And thank you again for your service.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from Washington, Mr.
Heck.
Mr. Heck. Thank you, sir.
Mr. Chairman, given all the eulogies that have been
delivered here today, at least on the Democratic side, I feel a
little bit like Bette Midler, the very last guest on the very
last episode of ``The Tonight Show'' that Johnny Carson hosted.
She famously quipped to Mr. Carson, ``You are the wind beneath
my wings.'' There is some application to you, sir, as it
relates to the economy. And I thank you for your service, as
well.
Mr. Bernanke. Thank you.
Mr. Heck. I also thank Mr. Ross for brilliantly
anticipating where it is I wanted to go. I have to admit that,
every day that goes by, I am increasingly less optimistic that
I am a Member of an institution that can successfully deal with
the debt limit. Sadly, I must admit that.
I am wondering if failure by Congress to deal with it was
one of the ``unanticipated shocks'' that you suggested our
economy might be vulnerable to and, whether it is or not, what
you would suggest about what the economic consequence would be
if Congress does, in fact, fail to lift the debt limit later
this early fall.
Mr. Bernanke. I think it would be quite disruptive.
It is important to understand that passing the extension of
the debt limit is not approving new spending. What it is doing
is approving payment for spending already incurred. So it would
be very concerning for financial markets and, I think, for the
general public if the United States didn't pay its bills. So I
hope very much that particular issue can be resolved smoothly.
I am not claiming in any way that it is not important to
discuss these critical fiscal issues. It is. But to raise the
prospect that the government won't pay its bills, including not
just its interest on debt but even what it owes to seniors or
to veterans or to contractors, is very concerning. And I think
it could provide some shock to the economy if it got severely
out of hand.
Mr. Heck. Is there a material possibility that the shock
would be so great as to be recession-inducing?
Mr. Bernanke. Depending on how it plays out, I think, in
particular, that a default by the U.S. Government would be
extremely disruptive, yes.
Mr. Heck. Secondly, and lastly, over the last couple of
years the Fed has begun targeting interest rates on mortgages,
in addition to your historic focus on baseline interest rate.
Has the Fed considered, is the Fed considering, would the Fed
consider implementing monetary policy through other credit
channels either to minimize the possibility of an asset bubble
or to target job creation, should we not see continued progress
toward that lower unemployment rate that is desired by so many?
Mr. Bernanke. The Federal Reserve actually is quite limited
in what we can buy. We can basically buy Treasurys and
government-guaranteed agency securities--that is, MBS. We are
not allowed to buy corporate debt or other kinds of debt. So we
don't really have the tools to address other types of credit.
Mr. Heck. Setting aside for the moment that, if we fast-
rewound ``X'' number of years, some people would probably have
said the same thing about the activity you are exactly engaged
in today, it was you, sir, who 11 years ago in a speech
indicated that there might be other monetary policy options
available to the Fed.
It just does not seem to me to be much of anything other
than a fairly easily adapted technical fix to allow you, for
example, to engage in credit channels that, for example, back
infrastructure. Infrastructure is something which, of course,
is the gift that keeps on giving. But I don't see a legal
impediment to you being able to venture into that area, as some
would conclude you might have hinted back in 2002 before you
were Chair and some might have suggested is a direct parallel
to what you are doing today.
Mr. Bernanke. I will put you in touch with our General
Counsel. I don't think that is within our legal authorities.
Mr. Heck. You would rule that out altogether?
Mr. Bernanke. I don't see what the legal authority is to do
that.
Mr. Heck. Then I would like to have a conversation with
your General Counsel.
Mr. Bernanke. Okay. We will give you his number.
Mr. Heck. And in the meantime, in 5 seconds, thank you,
sir, very much.
Mr. Bernanke. Thank you.
Chairman Hensarling. The time of the gentleman has now
expired.
The Chair recognizes the gentleman from North Carolina, Mr.
Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman.
And thank you, Chairman Bernanke.
In response to an earlier question by Mr. Stivers regarding
whether the Fed would be willing to conduct the same type of
stress tests of its quantitative easing exit strategy that it
has subjected financial institutions to, you stated that under
a reasonable interest-rate scenario you would not expect any
significant disruptions from the Fed's withdrawal of monetary
stimulus.
But the whole point of the stress test is to position an
extremely adverse scenario, akin, say, to the inflation levels
last seen in the late 1970s and early 1980s, not a reasonable
interest-rate environment.
Mr. Bernanke, has the Fed stress-tested its strategy
according to that more extreme scenario?
Mr. Bernanke. Again, this is not about our strategy; this
is about our remittances to the Treasury. And when we do very
tough interest-rate tests--and again, there are a number of
them that have been published and are publicly available--what
we see is, first, that even though there may be a period where
remittances to the Treasury are low or zero, that over the 15-
year period from 2009 to 2023, the total remittances generally
are higher than they would have been in the case where there
were no asset purchases. But I think you need to look beyond
that, which is that to the extent that our asset purchases are
strengthening the overall economy, that is very beneficial to
the Treasury because of higher tax collections. And so I think
most scholars who have looked at this conclude that the asset
purchases are a winner for the taxpayer under almost all
scenarios.
Mr. Pittenger. Are you concerned by the perception, though,
that the Fed will stress test the banks and other financial
institutions but not review its own policies and strategies by
the same rules?
Mr. Bernanke. It is not comparable. The banks have credit
risk. We have no credit risk. We buy only Treasurys and
government-guaranteed MBS. So in a recession, we make money,
because interest rates go down.
Mr. Pittenger. Chairman Hensarling has shown up on the
board the running debt clocks. Of concern to you, you have
already expressed earlier, my friend for 20 years, Erskine
Bowles, has run around the country, he and Alan Simpson were
here last week, they rang the bell on the concerns relating to
the debt. I want to get your thoughts on the policies that the
Fed could lead to this compounding problem when it comes to the
interest payments on the debt. Do you believe that when
interest rates rise over the coming years, and the spending
trajectory we are on towards the close of the decade, that the
interest rates, along with annual deficits, could push
America's debt to unsustainable levels, perhaps close to what
we are seeing across Europe? That is really the thought that
Erskine left with many of us. He said, ``I used to say this is
for my grandchildren. Then I would say it is for my kids. Now I
would say it is for me.'' And the urgency seems to be gone.
President Obama has never mentioned it in the State of the
Union, in his inauguration. It is the big elephant in the room
that for some reason hasn't been there in terms of the focal
point, and yet the interest rate, the interest requirements are
going to be compounded this entire issue. How would you like to
address that as we look ahead and foresee the outcomes that
might achieve the same results that they have had in Europe?
Mr. Bernanke. The CBO and the OMB, when they do the deficit
projections, they assume that interest rates are going to rise.
And if the economy recovers, interest rates should rise. That
is part of a healthy recovery. So that is taken into account in
their analysis.
What their analysis finds is that, for the next 5 years or
so, the debt-to-GDP ratio is fairly stable. But getting past
into the next decade, then we start to see big imbalances
arising mostly from long-term entitlement programs and a
variety of other things, including interest payments.
And so, as I have said on numerous occasions, I am all in
favor of fiscal responsibility, but I think that in focusing
only on the very near term and not the long term, you are sort
of looking for the quarter where the lamppost is rather than
looking for it where the quarter actually is. So that is my
general view, that you should be looking at the longer-term
fiscal situation.
Mr. Pittenger. Straightening pictures while the house is
burning down. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman is yielded
back.
The Chair now recognizes the gentleman from Michigan, Mr.
Kildee.
Mr. Kildee. Thank you, Mr. Chairman.
And thank you, Chairman Bernanke. I will just echo what
many have said before. We certainly appreciate the great
service that you have provided to this country.
When you were here back in February, I was a mere freshman
with 6 weeks' experience in Congress, and now I am a seasoned
Member of Congress with almost 7 months. So I want to follow up
on a line of questioning that I will take a minute or 2 to
pursue. And I may not take my full 5 minutes; I may leave some
time for others.
But in your prepared remarks, you make some pretty
important references. I think one of many that got my attention
was the reference to improved financial positions of State and
local governments. And while I think we all would acknowledge
that is generally the case, I want to return to what will
likely be my theme here for a long time, which is that there is
great unevenness or inequity in the condition of municipal
governments--State governments for sure, but municipal
governments certainly.
So I ask if you would mind perhaps commenting further. And,
actually, in anticipation of not having time, I prepared a
letter for you that I would like to submit and ask for your
response.
But if you think about it in the context of your dual
mandate, the potential impact on regional economies and
employment as an extension of what seems nearly certain to be
severe financial stress for cities like Detroit--which, in many
ways, is sort of a placeholder for what is a much bigger
problem, and that is the disconnect between the presence of
wealth and economic activity in America's legacy cities, older
industrial cities, and the obligations that those cities have
to sustainable regions.
And so, sort of following on Mr. Heck's--although maybe not
quite as far as Mr. Heck's comment regarding the reach of the
Federal Reserve, I would ask if you would think about how you
would advise Congress or how the Fed itself might pursue policy
that would have the effect of potentially avoiding but
certainly mitigating the economic effect of municipal financial
failure.
The one that always comes to mind first is the potential
for municipal bond default, which could affect not only the
creditworthiness of the municipality but obviously could have
implications for State governments, since virtually all
municipalities are creatures of State government, but, as
importantly, the effect on the economic health of particular
regions.
I say this because, as I said back in February, I think
this potentially is an institutional failure that is
regionalized or localized but, for those places, is every bit
as much and, I would argue, even more a threat than what we
have seen with the financial distress that we faced back in the
last half-decade and in the case of maybe the auto industry,
what it faced. This is a serious pending crisis.
I would just ask for your comments. And I will submit my
letter for further response.
Thank you.
Mr. Bernanke. No. I agree that it is a very serious
problem. If I am not mistaken, we have a Detroit City Manager
on one of our local boards, and she has kept us informed about
some of the projects that are being undertaken razing parts of
the City and working on economic development and the like. So
it is a very serious problem.
I think as far as the Fed is concerned, there are two kinds
of things we can do. First, obviously to solve the problem, you
have to solve the underlying economic problem, and that means
jobs, and that means economic growth, and our monetary policies
are aimed at trying to achieve that. I think that is
fundamental.
Beyond that, we do have community development experts at
the Fed. They work with community development groups, CDFIs and
others, to try to reestablish an economic base in places that
have been hollowed out for various reasons. And I recently--a
few years ago, I guess it was, I went to Detroit and talked to
suppliers, auto suppliers who provide input to the big
companies to try to understand their economy.
So I think that working through community groups, community
organizations, CDFIs and the like to try to restore the
economic base, that is the only long-run solution. You can
provide help through the government in the short run, but
unless the economy comes back, you don't really have a
sustainable situation.
Mr. Kildee. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from Kentucky, Mr. Barr.
Mr. Barr. Thank you, Mr. Chairman.
Chairman Bernanke, thank you for your service and for your
testimony here today.
I have listened to your testimony and I have an
observation, then a couple of questions. The observation is
this: The Fed has held interest rates near zero for 4 years
now. The Fed's balance sheet has more than tripled to $3.5
trillion and continues to grow. Today, you have testified that
a highly accommodative policy will remain appropriate for the
foreseeable future, and yet unemployment remains at 7.6
percent; 54 consecutive weeks of unemployment higher than 7\1/
2\ percent; only 58 percent of the working-age population is
employed; 5 straight years of declining wages; three-quarters
of the American people are living paycheck to paycheck; and GDP
growth remains well below the long-run average of 3 percent.
All of this has happened coincident to a time when the role of
government has grown dramatically as a percentage of our
economy, higher taxes, stimulus spending, government bailouts,
Obamacare, Dodd-Frank, skyrocketing compliance costs on
financial institutions and crushing overregulation of the
energy sector by the EPA.
Given these realities and the Fed's extraordinary
expansionary monetary policy, struggling American families are
asking the following very important question: What is the cause
of weakness and persistent weakness in our labor market? Is it
the relative ineffectiveness of the Fed's monetary policy, or
is it the fiscal policies like higher taxes, Obamacare, Dodd-
Frank and overregulation by the EPA?
My question is related to the exit strategy. During
testimony in front of Congress last month, you refused to rule
out tapering by the fall time period. The Federal Open Market
Committee then released a statement that the Federal Reserve,
``will continue its purchases of Treasury mortgage-backed
securities and employ its other policies as appropriate until
the outlook for the labor market has improved substantially in
the context of price stability.''
You have reiterated that today. These are hardly definitive
statements about reducing the Fed's unprecedented and
aggressive bond purchase program, yet the average 30-year,
fixed-rate mortgage, as we have discussed earlier today, jumped
by 42 basis points, the Dow suffered back-to-back declines of
more than 200 points, and billions of dollars were traded out
of credit funds after you said last month that the Fed could
start winding down bond buying later this year.
Given the sharp reaction of the credit markets to even the
possibility of tapering, how will you prevent a catastrophic
spike in interest rates when you actually do slow bond
purchases?
Mr. Bernanke. By communicating, by not surprising people,
by letting them know what our plan is and how it relates to the
economy. You talked about the weakness of the economy. I think
that is evidence that we need to provide a continued
accommodation, even if we begin to change over time the mix of
tools that we use to provide that accommodation.
You said a lot of correct things about the weakness of our
economy. I agree with a lot of what you said. On the other
hand, it is the case that we have made some progress since
2009, and many people think of the United States as one of the
bright spots in the world. We are doing better than a lot of
other industrial countries. And while we are certainly not
where we want to be, at least we are going in the right
direction, and we hope to support that.
Mr. Barr. Given the persistent high unemployment, it seems
to me that American families who are struggling, many of whom
are in my district in eastern Kentucky, who continue to remain
unemployed, persistently unemployed, and as you testified, the
underemployment problem persists in this country, I think they
justifiably have to ask themselves, given the expansionary
policy that you have pursued quite aggressively, and to your
credit, there has to be a fiscal policy problem here that has
created this uncertainty.
Let me conclude by bringing to your attention a quote that
a commentator recently had to say about Fed policy, and I would
like your reaction to it: ``If the economy begins to improve,
and the Fed does not withdraw the tremendous reserves that it
has created from the banking system, rampant inflation will
follow. If it doesn't withdraw reserves quickly, interest rates
will rise rapidly. This situation makes economic calculations
extremely difficult and makes businesses less willing to
invest, especially for the long term. If business owners could
fully trust the Fed, this would not be an issue, but we have
all been burned too many times to trust the Fed.''
Can you respond to that?
Mr. Bernanke. There have been people saying we are going to
have hyperinflation any day now for quite a while, and
inflation is 1 percent. We know how to exit; we know how to do
it without inflation. Of course, there is always a chance of
going too early or too late and not hitting the sweet spot.
That happens all the time whenever monetary policy tightens.
But we have all the tools we need to exit without any concern
about inflation.
Mr. Barr. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chairman has graciously agreed to stay an extra 10
minutes, whether he knows it or not, notwithstanding the fact
the problem was with our sound system. Without objection, I
would like to recognize the remaining Members who are in the
hearing room at this time for 2 minutes apiece.
The gentleman from Pennsylvania, Mr. Rothfus, is now
recognized.
Mr. Rothfus. Thank you.
Chairman Bernanke, thank you for being here today. A simple
question that I have is, when I have somebody in my district
who is going to go out and buy a Treasury bill, that individual
is looking to make an investment, they go to their bank, they
go to their broker, they have $1,000, $5,000, and they get a
bill. Where does the Fed get its money to buy its Treasury
bills?
Mr. Bernanke. When we buy securities from a private
citizen, we create a deposit in the bank, their bank, and that
shows up as reserves. So if you look at our balance sheet, our
balance sheet balances, we have Treasury securities on the
assets side. And liabilities side, we have either cash or
reserves at banks, and that is what has been--on the margin,
that is what has been building up is the excess reserves and--
Mr. Rothfus. You create the reserves?
Mr. Bernanke. Yes.
Mr. Rothfus. And so, is that printing money?
Mr. Bernanke. Not literally.
Mr. Rothfus. Not literally.
Mr. Bernanke. No.
Mr. Rothfus. It is troubling me, when I look at the balance
sheet that the Fed has, and I look at 4 years ago, it was $800
billion, and now we are up to $3.5 trillion. And I just--I know
you say you are confident that you have the tools available to
do a draw-down when necessary without risking hyperinflation,
yet by your own admission, what you are doing is unprecedented.
What assurance can you give to the American people that we are
not going to have a round of rampant inflation 5 years down the
road?
Mr. Bernanke. It is not unprecedented, because many other
central banks use similar tools to the ones that we plan to
use.
Mr. Rothfus. Currently? Or can you look back in history and
see--
Mr. Bernanke. No.
Mr. Rothfus. --somebody that has brought up its balance
sheet by 311 percent in 4 years without any kind of negative
consequence?
Mr. Bernanke. Absolutely. Japan, Europe, and the U.K. have
all done similar kinds of things with very large balance
sheets.
Mr. Rothfus. I appreciate your feedback on that, and we may
reach out to you and get that information. Thank you.
Mr. Bernanke. Sure.
Chairman Hensarling. The Chair recognizes the gentleman
from New Jersey, Mr. Garrett.
Mr. Garrett. I thank the chairman.
I thank Chairman Bernanke for our back-and-forth, what we
have had over the years. So in 2 minutes, let me just run
through a couple of questions, if I may.
Right now with the balance sheet, as everyone has pointed
out, at $3 trillion, I guess you stand as the world's largest
bond fund manager. We have seen recently, since early May, a 1
percentage point spike in long-term Treasurys, right? If the
Fed were to mark to market, can you tell us what the change in
value of that fund is?
Mr. Bernanke. It takes us from an $150 billion unrealized
capital gain close to even.
Mr. Garrett. One hundred fifty to eight hundred. Can you
also then give us a rule of thumb going forward, because we
have already heard progressions as to increases potentially
today, tomorrow, or someday in the future as far as inflation.
But if you do see further increases in that, maybe as a rule of
thumb, illustrate the relationship between yields and the 10-
year Treasury rates and the values of the bond fund. For
example, what would the magnitude of losses be for every
percentage point increase in long-term yields?
Mr. Bernanke. I don't have a rule of thumb. I would refer
you to the analyses that we published on this. It depends on
the mix of maturities that we have and also the mix of
Treasurys and MBS.
Mr. Garrett. And do you compute that regularly to do--
Mr. Bernanke. Yes.
Mr. Garrett. --to do that?
Mr. Bernanke. Yes. And we publish it.
Mr. Garrett. And so if we see a 2 or 3 percent, then what
would that result in?
Mr. Bernanke. I don't have a number for you.
Mr. Garrett. All right. And in 20 seconds, right now during
the week of September 13th, Fannie Mae and Freddie Mac and
Ginnie Mae have been originating around $12.5 billion in debt.
You have been purchasing around--or no, they have been
generating about 11.4-. You have been purchasing around 12.5-
in agency debt, which means a result of about 109 percent ratio
there. Is there a problem there, and do you look at their
originations going forward in your bond purchases?
Mr. Bernanke. We are not seeing any problems in the MBS
market, because we are not just buying new stuff, but old stuff
as well.
Mr. Garrett. Right. And I guess that is the point. Do you
consider that when you do go forward or--
Chairman Hensarling. Time--
Mr. Garrett. Okay.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentlelady from Minnesota, Mrs.
Bachmann.
Mrs. Bachmann. Thank you, Mr. Chairman.
And thank you, Chairman Bernanke, for being here today.
I note that in the daily Treasury statement for July 12th,
the Fed debt subject to the legal limit was
$16,699,000,000,000. It stood at exactly $16,699,396,000,000
for 56 straight days, defying all forces of nature, when we
were accumulating about $4 billion a day in additional debt.
And I note that just during part of the questioning, we have
added over $400 million in debt, just in the time that you have
talked to us today.
So how could this freak of nature occur that the U.S.
Treasury would report for 56 straight days that the debt stayed
at $16,699,000,000,000? Has the Federal Government been cooking
the books for these 56 days in a row, or what happened?
Mr. Bernanke. That is not the Federal Reserve. You would
have to ask the Secretary of the Treasury.
Mrs. Bachmann. Could you comment on that?
Mr. Bernanke. I don't know what the issue is. I would have
to look at the numbers and what they refer to.
Mrs. Bachmann. This was reported at CNS.com, but it is on
the Treasury statement for July 12th. Were you aware of this--
Mr. Bernanke. No.
Mrs. Bachmann. --that the debt stayed, by some freak
coincidence, at this level?
Mr. Bernanke. Maybe it has to do with the use of unusual
special measures to deal with the debt limit. There are various
things they can do, to give some extra space. Maybe that is
what is happening, so it is not being counted in the debt.
Ms. Bachmann. That is what was reported in the news, that
this is an extraordinary action, but to the common American
citizen this clearly looks like the Federal Government is
cooking the books.
Mr. Bernanke. They are using--as you know, whenever the
debt limit comes close, Treasury Departments under both parties
have used a variety of different accounting devices to give
some extra headroom, some extra space.
Mrs. Bachmann. Have we exceeded our debt limit?
Mr. Bernanke. I don't think so.
Mrs. Bachmann. Thank you. I yield back.
Chairman Hensarling. The time of the gentlelady has
expired.
The last questioner will be the gentleman from New Mexico,
Mr. Pearce. You are recognized.
Mr. Pearce. Thank you, Mr. Chairman. You almost beat the
clock. I appreciate you staying around.
As you remember, last time you were here I gave you an
invitation to come to New Mexico and explain to seniors about
your policy. And we have also talked a couple of times. The
group is still gathering out there, we are trucking them in for
lunches, so if you ever decide to come to New Mexico to have
that meeting--
Mr. Perlmutter actually headed down this direction. You
continue to take advantage of seniors because they don't have
access to sophisticated instruments, so a lot of them have
their money in cash or near cash equivalents.
Now, Mr. Perlmutter noted that the home financing has
increased by from 3.3 to 4.5. We have a whole sheaf of Wall
Street profit reports. Those are growing extraordinarily high.
Did the seniors even get kind of a mention, an honorable
mention, in the question about who is going to pay the bill for
this? When are you going to start going up on the interest rate
just a little bit? Because right now you are taking from
seniors, and you are giving to Wall Street, basically. In my
district we are, like, 43rd per capita income, $14,000 to
$18,000 per year. Seniors live their life right. They paid off
their bills, and they are being punished for this economy.
Mr. Bernanke. Again, I don't think the Fed can get interest
rates up very much, because the economy is weak, inflation
rates are low. If we were to tighten policy, the economy would
tank, and interest rates would be low.
Mr. Pearce. These guys are making record rates. They just
went up a percent and a half. Their costs are not going up.
One last question, as we run out of time. I was interested
in the Republican obstructionism comments earlier. I am
wondering why the Democrats didn't do anything from 2009 to
2010 on immigration. Considering the multipliers that came in
1986, they thought it was 1 million, they legalized 3.3
million--3.5 million, they brought 5- with them. That is 16
million. If we get that multiple, 150 million people could be
here. Is there a number at which the economy is adversely
affected?
Mr. Bernanke. I don't know.
Mr. Pearce. Thank you, sir. I will yield back.
Chairman Hensarling. All time has expired.
I want to thank Chairman Bernanke again 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. Also,
without objection, Members will have 5 legislative days to
submit extraneous materials to the Chair for inclusion in the
record.
This hearing is now adjourned.
[Whereupon, at 1:15 p.m., the hearing was adjourned.]
A P P E N D I X
July 17, 2013
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