[House Hearing, 111 Congress]
[From the U.S. Government Printing Office]

                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY



                               BEFORE THE


                     U.S. HOUSE OF REPRESENTATIVES


                             FIRST SESSION


                             JULY 21, 2009


       Printed for the use of the Committee on Financial Services

                           Serial No. 111-64

53-244 PDF                WASHINGTON : 2010
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                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
WM. LACY CLAY, Missouri                  Virginia
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
JOHN ADLER, New Jersey
JIM HIMES, Connecticut

        Jeanne M. Roslanowick, Staff Director and Chief Counsel

                            C O N T E N T S

Hearing held on:
    July 21, 2009................................................     1
    July 21, 2009................................................    61

                         Tuesday, July 21, 2009

Bernanke, Hon. Ben S., Chairman, Board of Governors of the 
  Federal Reserve System.........................................     7


Prepared statements:
    Bachmann, Hon. Michele.......................................    62
    McCarthy, Hon. Carolyn.......................................    63
    Paul, Hon. Ron...............................................    64
    Watt, Hon. Melvin............................................    65
    Bernanke, Hon. Ben S.........................................    68

              Additional Material Submitted for the Record

Bachus, Hon. Spencer:
    ``Consensus Principle-Based Policy Statement''...............    79
Bernanke, Hon. Ben S.:
    Monetary Policy Report to the Congress, dated July 21, 2009..    82
    Written responses to questions submitted by Representative 
      Green......................................................   135

                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY


                         Tuesday, July 21, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Maloney, Watt, Meeks, Moore of Kansas, Baca, Lynch, Scott, 
Green, Cleaver, Moore of Wisconsin, Hodes, Ellison, Klein, 
Wilson, Perlmutter, Donnelly, Foster, Carson, Speier, Minnick, 
Adler, Kilroy, Kosmas, Grayson, Himes, Maffei; Bachus, Castle, 
Royce, Lucas, Paul, Biggert, Miller of California, Capito, 
Hensarling, Garrett, Barrett, Neugebauer, Price, McHenry, 
Campbell, Putnam, Bachmann, Marchant, McCotter, McCarthy, 
Posey, Jenkins, Lee, Paulsen, and Lance.
    The Chairman. The hearing will come to order.
    This is the second semiannual hearing that the Financial 
Services Committee holds according to the Humphrey Hawkins Act. 
We alternate with the Senate committee as to which committee 
goes first. This time, it is this committee's responsibility to 
lead off, and we will be doing that.
    I just want to announce to my Democratic members as a 
housekeeping matter that given the large size of this 
committee, we have a problem with who gets to ask questions. 
Those members who asked questions of Mr. Bernanke at the first 
hearing, with the exception of the subcommittee chairman, Mr. 
Watt, will not be called on today until we have gone to others 
who did not get a chance to ask questions. We hope to go--well, 
we may have some votes.
    A very important event will take place at 2:00 p.m.; 
America is waiting for it; Internet sites throughout the 
country are on edge, for the congressional class picture that 
will be taken at 2:00 p.m. and instantly distributed across the 
country. So we do know we will be breaking then, and they want 
to have votes before that on the assumption that not everybody 
is dying to be in that picture and votes are needed to get 
people there. So we will go until sometime after 1:00 with the 
Chairman, and then we will have votes and we will break. We 
have another hearing at 2:00 p.m.
    One other announcement--I received a letter from the 
Republican side asking for a postponement of the markup on 
executive compensation. They make the valid point that we have 
a very heavy schedule of hearings this week. And, for a variety 
of reasons, I put aside several markup days for the end of this 
year. We will not be needing all of them. So we are going to 
postpone that markup. Maybe it will be next Tuesday or next 
Thursday, but we will at least have a few more days for members 
to--really, it is not a long bill, and some of it is familiar, 
but it is still a reasonable point with all the hearings.
    With that--
    Mr. Bachus. Mr. Chairman, you are not delivering your 
opening statement?
    The Chairman. No.
    Mr. Bachus. Let me say this in response. I want to express 
my appreciation to you for postponing that markup. We have 
simply been overwhelmed with the health care matters, with just 
literally such substantial issues under consideration. I think 
the membership is simply overwhelmed. Because many of these are 
unprecedented, and there are proposals, they are complex, the 
ramifications are hard to gauge. And I believe that slowing 
this whole process down would be in the best interest of not 
only this committee but also our country as we consider these 
very weighty matters.
    The Chairman. I appreciate it. And I will acknowledge that 
when I set the schedule, I was aware that it was on the heavy 
side. It did seem to me that the aspiration of moving was going 
to help us move more quickly. But there is no harm if we delay.
    It has also been the case that when I was originally 
talking about this, I was anticipating we might be on the Floor 
with some issues, but the appropriations bills are taking up 
the Floor time.
    I was told by my leadership a couple of weeks ago that none 
of what we are talking about in the financial regulatory 
restructuring would hit the Floor before September, and I have 
taken that into account.
    And let me, while we are at it, also announce, for that 
reason, at the request of a lot of members, the markup for this 
will occupy the day that the consumer agency would have taken. 
I was informed that we weren't going to go to the Floor, 
anyway. And, given that, we will be having hearings on the 
consumer agency, but the markup on that will wait until 
    We still have to finish the markup on the voucher bill, and 
we will have that markup to conclude, although I think we are 
in a fairly well-structured situation where one major vote will 
decide a set of issues outstanding. And then, among other 
things, we will have the hearings. We will continue, I think, 
at a pretty heavy pace, and we definitely will be marking up 
the exec comp bill before we leave.
    With that, I will now begin the hearing on substance.
    I welcome the Chairman, and I think it is very important 
and I was pleased to see his article in the Wall Street Journal 
about a question that is very much on people's minds. The 
United States Government, including the Federal Reserve, 
indeed, with the Federal Reserve in the lead for a variety of 
reasons, mostly not of its choosing, the Federal Government is 
deeply engaged in increasing liquidity, i.e., putting money out 
into the economy particularly to replace a constriction of 
credit. And there are people who are concerned that this will 
be inflationary.
    I think the Chairman has shown consistently, as have 
Secretaries of the Treasury Paulson and Geithner, an awareness 
of this; and they are prepared to deal with it. But it is an 
important question, because when you are talking about 
inflation, you are talking not just about a reality, but about 
perception. If people think there is going to be inflation, 
that is inflationary; and it is very important that the 
Chairman address, as he has been doing in a very 
straightforward way, these concerns.
    I am persuaded by the Chairman and others that we are able 
in an orderly way to undo what we had to do so that there will 
not be that inflationary impact. I also believe that the 
inflation danger is not the current most important one, but it 
is I think a very good opportunity for the Chairman to address 
    But I also want to talk about another matter here, and I 
want to make a confession apparently of the ravages of age. 
Apparently, my vision is deteriorating more rapidly than I 
hoped it would be. I have looked carefully at the deliberations 
we have seen about the Bank of America-Merrill Lynch issue, and 
our colleagues on the Government Reform Committee have had a 
number of hearings on that. I must say, one of the most 
interesting and potentially instructive things that came out of 
it was Secretary Paulson's explaining that he could not produce 
e-mails because he has never sent them. That is a practice I 
recommend to many others, along with myself.
    But as I studied all of this, here is my problem. I cannot 
find a villain. Now, many of my colleagues have found various 
villains. They tend to be private sector or public sector, 
depending on the ideology of the finder. But as I look at what 
happened, what I see is a very difficult situation that 
threatens further severe damage to an economy already damaged, 
a repetition of the attack on the credit system which is so 
central to the functioning of our economy which we had seen in 
earlier failures, and I believe we had people faced with a 
difficult situation.
    I have to say to some of my Democratic friends who have 
been very critical of Bank of America, as I have been in other 
areas, they have not done what they should in modifying 
mortgages. I will have plenty of criticism to make of our 
friends in the financial industry and the rest of them as well.
    But people have said, well, why was he not focused entirely 
on the shareholders? Many of my colleagues who have made that 
criticism have also said they don't want private-sector people 
looking only at the narrowest interests of the shareholders, 
but they do want to take into account the broader impact of 
what they do, probably on the grounds that a terrible credit 
crunch would hurt their shareholders.
    As to the Chairman of the Federal Reserve and the Secretary 
of the Treasury, I think they had a very important 
responsibility not to see a repetition of what happened when 
Lehman Brothers failed, and the collapse of Merrill Lynch by 
Bank of America walking away I think would have had very 
negative consequence.
    I think there is one thing that people need to remember: 
Solutions cannot be qualitatively more elegant than the 
problems they seek to resolve. When you have a terrible mess, 
it is unlikely that those who try to alleviate the danger of 
that mess will come out looking clean.
    Not for the first time as an elected official, I envy 
economists. Economists have available to them in an analytical 
approach the counterfactual. Economists can explain that a 
given decision was the best one that could be made, because 
they can show what would have happened in the counterfactual 
situation. They can contrast what happened to what would have 
happened. No one has ever gotten re-elected with a bumper 
sticker that said, ``It Would Have Been Worse Without Me.'' You 
probably get tenure with that, but you can't win office.
    I understand that reality, but we should not let it distort 
us. And it would not I think hurt us every so often to admit 
that not every action by every public official was a bad thing, 
and sometimes we should give people credit for trying to cope 
with an unpleasant reality the best they can.
    The gentleman from Alabama.
    Mr. Bachus. I thank the chairman.
    Chairman Bernanke, thank you for appearing before the 
committee today, for your professionalism, and your service to 
our country. All of us in Congress appreciate your willingness 
to make yourself available on countless numbers of occasions, 
both to congressional committees and the individual members, as 
we have confronted this crisis. So I thank you.
    Over the past year, we have witnessed unprecedented 
government involvement in the financial markets, for sometimes 
Republicans on this committee have expressed a growing unease 
over the magnitude of Federal Government involvement and 
manipulations of our economy. Trillions of dollars of capital 
commitments, guarantees, loans have been extended. What started 
out last year as a large but temporary stabilization effort to 
prevent a financial collapse has evolved month by month into 
seemingly a permanent government intervention regime. This 
included ad hoc bailouts of institutions deemed too-big-to-
fail. Many of the competitors of those too-big-to-fail 
corporations deemed too-small-to-save are no longer in 
    Today, I read with interest your op-ed in the Wall Street 
Journal acknowledging the need for an exit strategy, something 
Republicans have called for since last fall.
    Simultaneously, the Obama Administration has been spending 
a staggering amount of money to fund an economic recovery and 
stimulus that is slow in coming. It has been almost half a year 
since Congress passed a $787 billion so-called stimulus bill, 
and yet we continue to see record job losses. Unemployment has 
spiked at 9.5 percent and seems headed higher. Your testimony 
predicts that the elevated unemployment will last through not 
only this year but next year, confirming that; and that is 
despite the Administration's assurances that if we passed a 
stimulus package, unemployment would peak at 8 percent.
    Other Federal Government interventions have failed as well. 
The Administration's $75 billion foreclosure prevention 
initiative, intended to keep 3 to 4 million homeowners in their 
homes, has so far offered only 220 trial loan modifications. At 
the same time, the private sector and private efforts have 
resulted in millions of homeowners staying in their homes. The 
American people can be forgiven for increasingly asking tough 
questions about these enormous government outlays and 
interventions because so far, Mr. Chairman, there has been very 
little bang for the taxpayers' buck.
    It is not only these past expenditures that give us pause, 
but it is the multitude of new proposals coming from the Obama 
Administration and their allies in Congress calling for more 
government control and management from health care to energy to 
financial services. One of the central questions the committee 
needs to answer as it considers reforms to our financial 
regulatory system is whether regulatory powers should be 
centralized in the Federal Reserve at a time when our country 
is facing unparalleled fiscal and monetary challenges.
    The Fed made some big mistakes, and historically the Board 
has done a poor job of identifying and addressing systemic 
risks before they become crises. A prime example of this is 
troubled lender CIT, which was allowed to convert to a bank 
holding company last December and was placed under the Fed's 
supervision only after the Fed declared it was adequately 
capitalized. This inability to assess risk once again threatens 
to undermine our fragile economy and erase the $2.5 billion in 
taxpayer funds provided CIT under TARP.
    The Obama Administration has proposed a regulatory 
restructuring plan that would make the Fed responsible for 
first identifying and then regulating those financial firms 
that, in the Fed's view, are systemically significant and for 
preventing systemic shocks. Republicans believe that the Fed's 
core mission, the conduct of monetary policy, will be seriously 
undermined if its regulatory responsibilities are expanded in 
this way.
    Let me conclude by saying, at a time when our economy faces 
serious structural problems and the threat of inflation if we 
maintain our current fiscal course and spending patterns, a 
distracted and overextended central bank subject to potential 
political interference is a luxury we cannot afford. 
Republicans believe that relieving the Federal Reserve of its 
current regulatory responsibilities and focusing it on the core 
monetary policy mission would enhance the Fed's ability to 
execute an effective exit strategy and ensure it sets interest 
rates that greatly affect both individuals and small businesses 
with a single goal in mind: sound monetary policy. With the 
proper conduct, the monetary policy is the best way the Fed can 
serve the American people. Asking the Fed to serve as a 
systemic regulator is just inviting a false sense of security 
that inevitably will be shattered at the expense of the 
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from North Carolina is 
recognized for 3 minutes.
    Mr. Watt. Chairman Bernanke, I look forward to your 
discussion of the status of monetary policy and the economy.
    It is good news that many experts are saying that the 
economy has improved since the last time you were before this 
committee in February. To the extent that is true, the Federal 
Reserve certainly deserves some of the credit.
    Unfortunately, my constituents are not yet feeling it. 
Growing unemployment, foreclosures all around, and the lack of 
much, if any, rebound in the value of their investments 
continue to feed their sense of anxiety and uncertainty about 
whether we have in fact turned the corner.
    But the Fed has been a sturdy, methodical hand. More public 
exposure of what the Fed does has also stimulated discussions 
about some other things that a lot of people had taken for 
granted: the level of independence from political influence by 
the Legislative and the Executive Branches of government that 
is appropriate for the Fed to have in order to achieve its 
long-term policy goals; the extent to which the Fed's 
operation, even its monetary policy discussions and decisions, 
should be subject to regular audit; the extent to which the 
various parts of an operation of the Fed should be subject to 
more transparency; whether the Fed, having failed, along with 
other financial regulators, to pay equivalent attention to its 
consumer protection responsibilities as it did to other 
responsibilities, should be stripped of these responsibilities 
in favor of a new consumer protection agency focused solely on 
consumer protection; and, whether, as proposed by the Obama 
Administration, the Fed should be delegated even more powers 
and responsibilities for systemic risk regulation.
    This certainly is a critical juncture for the Fed, and I 
want to assure my colleagues on the full committee that our 
Subcommittee on Domestic Monetary Policy, which I chair, with 
the knowledgeable input of Ranking Member Ron Paul, has been 
grappling seriously and consistently with all of these issues. 
For a change, we have even had some members who are not on our 
subcommittee showing up at our subcommittee hearings. Imagine 
    In the wake of the Great Depression, Congress drafted rules 
that served us well for 75 years. We are facing another once-
in-a-generation opportunity to fashion rules that should serve 
us well for the next 75 years, and Chairman Bernanke's 
testimony today is yet another step in arming us with the 
knowledge and information we need to address these important 
    I welcome the Chairman, and I yield back the balance of my 
    The Chairman. The gentleman from Texas.
    There are 2 minutes remaining on the Republican side. We 
will make it 2\1/2\ minutes.
    Dr. Paul. Thank you, Mr. Chairman.
    Good morning, Chairman Bernanke.
    The Federal Reserve, in collaboration with the giant banks, 
has created the greatest financial crisis the world has ever 
seen. The foolish notion that unlimited amounts of money and 
credit created out of thin air can provide sustained economic 
growth has delivered this crisis to us. Instead of economic 
growth and stable prices, it has given us a system of 
government and finance that now threatens the world's financial 
and political institutions.
    Real unemployment is now 20 percent, and there has not been 
any economic growth since the onset of the crisis in the year 
2000, according to nongovernment statistics. Pyramiding debt 
and credit expansion over the past 38 years has come to an 
abrupt end, as predicted by free market economists. Pursuing 
the same policy of excessive spending, debt expansion, and 
monetary inflation can only compound the problems and prevent 
the required corrections. Doubling the money supply didn't 
work. Quadrupling it won't work either.
    The problem with debt must be addressed. Expanding debt 
when it was a principal cause of the crisis is foolhardy. 
Excessive government and private debt is a consequence of loose 
Federal Reserve monetary policy.
    Once a debt crisis hits, the solution must be paying it off 
or liquidating it. We are doing neither. Net U.S. debt is now 
372 percent of GDP, and in the crisis of the 1930's, it peaked 
at 301 percent. Household debt services require 14 percent of 
disposable income, at an historic high. Between 2000 and 2007, 
credit debt expanded 5 times as fast as GDP.
    With no restraint on spending, and revenues dropping due to 
the weak economy, raising taxes will be poison to the economy. 
Buying up the bad debt of privileged institutions and dumping 
worthless assets on the American people is morally wrong and 
economically futile. Monetizing government debt, as the Fed is 
currently doing, is destined to do great harm.
    In the past 12 months, the national debt has risen over $2 
trillion. Future entitlement obligations are now reaching $100 
trillion. U.S. foreign indebtedness is $6 trillion. Foreign 
purchase of U.S. securities in May were $7.4 billion, down from 
a monthly peak of $95 billion in 2006. The fact that the Fed 
had to buy $38 billion worth of government securities last week 
indicates that it will continue its complicity with Congress to 
monetize the rapidly expanding deficit. The policy is used to 
pay for the socialization of America and for the maintenance of 
an unwise American foreign policy and to make up for the 
diminished appetite of foreigners for our debt.
    Since the attack on the dollar will continue, I would 
suggest that the problems we have faced so far are nothing 
compared to what it will be like when the world not only 
rejects our debt but our dollar as well. That is when we will 
witness political turmoil, which will be to no one's benefit.
    The Chairman. The time for opening statements has expired 
and, for once, I think not before the patience of the audience.
    The Chairman of the Federal Reserve is now recognized for 
his statement.


    Mr. Bernanke. Thank you, Mr. Chairman.
    Chairman Frank, Ranking Member Bachus, and other members of 
the committee, I am pleased to present the Federal Reserve's 
semiannual Monetary Policy Report to the Congress.
    Aggressive policy actions taken around the world last fall 
may well have averted the collapse of the global financial 
system, an event that would have had extremely adverse and 
protracted consequences for the world economy. Even so, the 
financial shocks that hit the global economy in September and 
October were the worst since the 1930's; and they helped push 
the global economy into the deepest recession since World War 
    The U.S. economy contracted sharply in the fourth quarter 
of last year and the first quarter of this year. More recently, 
the pace of decline appears to have slowed significantly; and 
final demand and production have shown tentative signs of 
stabilization. The labor market, however, has continued to 
weaken. Consumer price inflation, which fell to low levels late 
last year, remain subdued in the first 6 months of 2009.
    To promote economic recovery and foster price stability, 
the Federal Open Market Committee last year brought its target 
for the Federal funds rate to a historically low range of zero 
to one-quarter percent, where it remains today. The FOMC 
anticipates that economic conditions are likely to warrant 
maintaining the Federal funds rate at exceptionally low levels 
for an extended period.
    At the time of our February report, financial markets at 
home and abroad were under intense strains, with equity prices 
at multiyear lows, risk spreads for private borrowers at very 
elevated levels, and some important financial markets 
essentially shut. Today, financial conditions remain stressed, 
and many households and businesses are finding credit difficult 
to obtain.
    Nonetheless, on net, the past few months have seen some 
notable improvements. For example, interest rate spreads and 
short-term money markets, such as the interbank market and the 
commercial paper market, have continued to narrow. The extreme 
risk aversion of last fall has eased somewhat, and investors 
are returning to private credit markets.
    Reflecting this greater investor receptivity, corporate 
bond issuance has been strong. Many markets are functioning 
more normally, with increased liquidity and lower bid-asked 
spreads. Equity prices, which hit a low point in March, have 
recovered to roughly their levels at the end of last year; and 
banks have raised significant amounts of new capital.
    Many of the improvements in financial conditions can be 
traced in part to policy actions taken by the Federal Reserve 
to encourage the flow of credit. For example, the decline in 
interbank lending rates and spreads was facilitated by the 
actions of the Federal Reserve and other central banks to 
ensure that financial institutions have adequate access to 
short-term liquidity, which in turn has increased the stability 
of the banking system and the ability of banks to lend.
    Interest rates and spreads on commercial paper dropped 
significantly as a result of the backstop liquidity facilities 
that the Federal Reserve introduced last fall for that market. 
Our purchases of agency mortgage-backed securities and other 
longer-term assets have helped to lower conforming fixed 
mortgage rates. And the Term Asset-Backed Securities Loan 
Facility, or TALF, which was implemented this year, has helped 
to restart the securitization markets for various classes of 
consumer and small business credit.
    Earlier this year, the Federal Reserve and other Federal 
banking regulatory agencies undertook the Supervisory Capital 
Assessment Program (SCARP), popularly known as the stress test, 
to determine the capital needs of our largest financial 
institutions. The results of the SCAP were reported in May, and 
they appear to increase investor confidence in the U.S. banking 
system. Subsequently, the great majority of institutions that 
underwent the assessment have raised equity in public markets; 
and, on June 17th, 10 of the largest U.S. bank holding 
companies, all but one of which participated in the SCAP, 
repaid a total of nearly $70 billion to the Treasury.
    Better conditions in financial markets have been 
accompanied by some improvements in economic prospects. 
Consumer spending has been relatively stable so far this year, 
and the decline in housing activity appears to have moderated. 
Businesses have continued to cut capital spending and liquidate 
inventories, but the likely slowdown in the pace of inventory 
liquidation in coming quarters represents another factor that 
may support a turnaround in activity. Although the recession in 
the rest of the world led to a steep drop in the demand for 
U.S. exports, this drag on our economy also appears to be 
waning as many of our trading partners are also seeing signs of 
    Despite these positive signs, the rate of job loss remains 
high, and the unemployment rate has continued its steep rise. 
Job insecurity, together with declines in home values and tight 
credit, is likely to limit gains in consumer spending. The 
possibility that the recent stabilization in household spending 
will prove transient is an important downside risk to the 
    In conjunction with the June FOMC meeting, Board members 
and Reserve Bank presidents prepared economic projections 
covering the years 2009 through 2011. FOMC participants 
generally expect that, after declining in the first half of 
this year, output will increase slightly over the remainder of 
2009. The recovery is expected to be gradual in 2010, with some 
acceleration in activity in 2011. Although the unemployment 
rate is projected to peak at the end of this year, the 
projected declines in 2010 and 2011 would still leave 
unemployment well above FOMC participants' views of the longer-
run sustainable rate. All participants expect that inflation 
will be somewhat lower than recent years, and most expect it to 
remain subdued over the next 2 years.
    In light of the substantial economic slack and limited 
inflation pressures, monetary policy remains focused on 
fostering economic recovery. Accordingly, as I mentioned 
earlier, the FOMC believes that a highly accommodative stance 
of monetary policy will be appropriate for an extended period.
    However, we also believe that it is important to assure the 
public and the markets that the extraordinary policy measures 
we have taken in response to the financial crisis and the 
recession can be withdrawn in a smooth and timely manner as 
needed, thereby avoiding the risk that policy stimulus could 
lead to a future rise in inflation. The FOMC has been devoting 
considerable attention to issues relating to its exit strategy, 
and we are confident that we have the necessary tools to 
implement that strategy when appropriate.
    To some extent, our policy measures will unwind 
automatically as the economy recovers and financial strains 
ease, because most of our extraordinary liquidity facilities 
are priced at a premium over normal interest rate spreads. 
Indeed, total Federal Reserve credit extended to banks and 
other market participants has declined from roughly $1.5 
trillion at the end of 2008 to less than $600 billion, 
reflecting the improvement in financial conditions that has 
already occurred. In addition, bank reserves held at the Fed 
will decline as the longer-term assets that we own mature or 
are prepaid.
    Nevertheless, should economic conditions warrant a 
tightening of monetary policy before this process of unwinding 
is complete, we have a number of tools that will enable us to 
raise market interest rates as needed.
    Perhaps the most important such tool is the authority that 
the Congress granted the Federal Reserve last fall to pay 
interest on balances held at the Fed by depository 
institutions. Raising the rate of interest paid on reserve 
balances will give us substantial leverage over the Federal 
funds rate and other short-term market interest rates, because 
banks generally will not supply funds to the market at an 
interest rate significantly lower than they can earn risk-free 
by holding balances at the Federal Reserve. Indeed, many 
foreign central banks use the ability to pay interest on 
reserves to help set a floor on market interest rates. The 
attraction of this to banks of leaving their excess reserve 
balances with the Federal Reserve can be further increased by 
offering banks a choice of maturities for their deposits.
    But interest on reserves is by no means the only tool we 
have to influence market rates. For example, we can drain 
liquidity from the system by conducting reverse repurchase 
agreements, in which we sell securities from our portfolio with 
an agreement to buy them back at later dates. Reverse 
repurchase agreements, which can be executed with primary 
dealers, Government-Sponsored Enterprises, and a range of other 
counterparties, are a traditional and well-understood method of 
managing the level of bank reserves.
    If necessary, another means of tightening policy is 
outright sales of our holdings of longer term securities. Not 
only would such sales drain reserves and raise short-term 
interest rates, but they could also put upward pressure on 
longer-term rates by expanding the supply of longer-term 
    In sum, we are confident that we have the tools to raise 
interest rates when that becomes necessary to achieve our 
objectives of maximum employment and price stability. Our 
economy and financial markets have faced extraordinary near-
term challenges, and strong and timely actions to respond to 
those challenges have been necessary and appropriate.
    I have discussed some of the measures taken by the Federal 
Reserve to promote economic growth and financial stability. The 
Congress also has taken substantial actions, including the 
passage of a fiscal stimulus package. Nevertheless, even as 
important steps have been taken to address the recession and 
the intense threats to financial stability, maintaining the 
confidence of the public and financial markets requires that 
policymakers begin planning now for the restoration of fiscal 
balance. Prompt attention to questions of fiscal sustainability 
is particularly critical because of the coming budgetary and 
economic challenges associated with the retirement of the baby 
boom generation and the continued increases in the costs of 
Medicare and Medicaid.
    Addressing the country's fiscal problems will require 
difficult choices, but postponing those choices will only make 
them more difficult. Moreover, agreeing on a sustainable long-
run fiscal path now could yield considerable near-term economic 
benefits in the form of lower long-term interest rates and 
increased consumer and business confidence. Unless we 
demonstrate a strong commitment to fiscal sustainability, we 
risk having neither financial stability nor durable economic 
    A clear lesson of the recent financial turmoil is that we 
must make our system of financial supervision and regulation 
more effective, both in the United States and abroad.
    In my view, comprehensive reform should include at least 
the following key elements: a prudential approach that focuses 
on the stability of the financial system as a whole and not 
just the safety and soundness of individual institutions, and 
that includes formal mechanisms for identifying and dealing 
with emerging systemic risks; stronger capital and liquidity 
standards for financial firms, with more stringent standards 
for large, complex, and financially interconnected firms; the 
extension and enhancement of supervisory oversight, including 
effective consolidated supervision to all financial 
organizations that could pose a significant risk to the overall 
financial system; an enhanced bankruptcy or resolution regime, 
modeled on the current system for depository institutions, that 
would allow financially troubled, systemically important 
nonbank financial institutions to be wound down without broad 
disruption to the financial institution's system and to the 
economy; enhanced protections for consumers and investors in 
their financial dealings; measures to ensure that critical 
payment, clearing, and settlement arrangements are resilient to 
financial shocks, and that practices related to the trading and 
clearing of derivatives and other financial instruments do not 
pose risk to the financial system as a whole; and, finally, 
improved coordination across countries in the development of 
regulations and in the supervision of internationally active 
    The Federal Reserve has taken and will continue to take 
important steps to strengthen supervision, improve the 
resiliency of the financial system, and to increase the 
macroprudential orientation of our oversight. For example, we 
are expanding our use of horizontal reviews of financial firms 
to provide more comprehensive understanding of practices and 
risks in the financial system.
    The Federal Reserve also remains strongly committed to 
effectively carrying out our responsibilities for consumer 
protection. Over the past 3 years, the Federal Reserve has 
written rules providing strong protections for mortgage 
borrowers and credit card users, among many other substantive 
actions. Later this week, the Board will issue a proposal using 
our authority under the Truth in Lending Act, which will 
include new, consumer-tested disclosures as well as rule 
changes applying to mortgages and home equity lines of credit. 
In addition, the proposal includes new rules governing the 
compensation of mortgage originators.
    We are expanding our supervisory activities to include 
risk-focused reviews of consumer compliance in nonbank 
subsidiaries of holding companies. Our community affairs and 
research areas have provided support and assistance for 
organizations specializing in foreclosure mitigation, and we 
have worked with nonprofit groups on strategies for 
neighborhood stabilization. The Federal Reserve's combination 
of expertise in financial markets, payment systems, and 
supervision positions us well to protect the interests of 
consumers and their financial transactions. We look forward to 
discussing with the Congress ways to formalize our 
institution's strong commitment to consumer protection.
    The Congress and the American people have a right to know 
how the Federal Reserve is carrying out its responsibilities 
and how we are using taxpayer resources. The Federal Reserve is 
committed to transparency and accountability in its operations. 
We report on our activities in a variety of ways, including 
reports like the one I am presenting to Congress today, other 
testimonies, and speeches. The FOMC releases a statement 
immediately after each regularly scheduled meeting and detailed 
minutes of each meeting on a timely basis. We have increased 
the frequency and scope of the published economic forecast of 
FOMC participants. We provide the public with detailed annual 
reports on the financial activities of the Federal Reserve 
System that are audited by an independent public accounting 
firm. We also publish a complete balance sheet each week.
    We have recently taken additional steps to better inform 
the public about the programs we have instituted to combat the 
financial crisis. We expanded our Web site this year to bring 
together already available information as well as considerable 
new information on our policy programs and financial 
activities. In June, we initiated a monthly report to the 
Congress that provides even more information on Federal Reserve 
liquidity programs, including breakdowns of our lending, the 
associated collateral, and other facets of programs established 
to address the financial crisis. These steps should help the 
public understand the efforts that we have taken to protect the 
taxpayer as we supply liquidity to the financial system and 
support the functioning of key credit markets.
    The Congress has recently discussed proposals to expand the 
audit authority of the GAO over the Federal Reserve. As you 
know, the Federal Reserve is already subject to frequent 
reviews by the GAO. The GAO has broad authority to audit our 
operations and functions. The Congress recently granted the GAO 
new authority to conduct audits of the credit facilities 
extended by the Federal Reserve to ``single and specific'' 
companies under the authority provided by section 13(3) of the 
Federal Reserve Act, including the loan facilities provided to, 
or created for, AIG or Bear Stearns. The GAO and the Special 
Inspector General have the right to audit our TALF program, 
which uses funds from the Troubled Asset Relief Program.
    The Congress, however, purposefully--and for good reason--
excluded from the scope of potential GAO reviews some highly 
sensitive areas, notably monetary policy deliberations and 
operations, including open market and discount window 
operations. In doing so, the Congress carefully balanced the 
need for public accountability with the strong public policy 
benefits that flow from maintaining an appropriate degree of 
independence for the central bank in the making and execution 
of monetary policy. Financial markets, in particular, likely 
would see a grant of review authority in these areas to the GAO 
as a serious weakening of monetary policy independence. Because 
GAO reviews may be initiated at the request of Members of 
Congress, reviews or the threat of reviews in these areas could 
be seen as efforts to try to influence monetary policy 
decisions. A perceived loss of monetary policy independence 
could raise fears about future inflation and lead to higher 
long-term interest rates and reduced economic and financial 
stability. We will continue to work with the Congress to 
provide the information it needs to oversee our activities 
effectively, yet in a way that does not compromise monetary 
policy independence.
    Thank you, Mr. Chairman.
    [The prepared statement of Chairman Bernanke can be found 
on page 68 of the appendix.]
    The Chairman. Thank you, Mr. Chairman.
    Let me begin with one question, because I am pleased that 
you, as I said, responded to the fears of inflation, because I 
think you are well capable of holding them under control. And I 
also think it is important that they not be invoked prematurely 
when the greater problem I believe the Federal Reserve 
economists think is still further on the negative side, and one 
looming threat which we hear about a lot is the commercial real 
estate issue.
    There is a great deal of fear that there will be in 
commercial real estate a series of failures, that some of the 
economic problems of the home mortgage will be reproduced. I 
know we have discussed this. What is your current posture? Do 
you expect there to be problems? And how are you and other 
elements of the government ready to respond to them?
    Mr. Bernanke. Mr. Chairman, we are watching that situation 
very carefully. There are a lot of CRE loans which are coming 
up for refinance, and the capacity to refinance them is 
limited, which poses the possibility of foreclosures in the 
commercial space, much as in the residential situation. We are 
urging banks to continue to make loans to credit-worthy 
borrowers, and our examiners are presenting a balanced view in 
their discussions with banks.
    The other step we have taken to try to address this 
problem, Mr. Chairman, is that we have recently added to our 
TALF program both new and legacy commercial mortgage-backed 
securities. By doing that, we hope to open up the mortgage-
backed securities market, which is an important source of 
funding and finance for the CRE market.
    The Chairman. I am pleased with that, because I know there 
are some who have been critical that you have been doing too 
much. I don't share that. On the other hand, in some cases even 
some of those same people have said, yes, but what about 
commercial real estate? And the fact is that you are ready 
there to do some more.
    Let me ask you now--I was interested in reading the report. 
On page 1, you note that consumer spending has been supported 
recently by the boost of disposable income from the tax cuts 
and increases in benefit payments that were part of the 2009 
stimulus package. In regard to State and local borrowing, you 
note: ``Interest rates on long-term municipal bonds declined in 
April, as investors concerned about the credit quality appeared 
to ease somewhat with the passage of the fiscal stimulus plan, 
which included a substantial increase in the amount of Federal 
grants to States and localities.''
    Then in the discussion of the labor market there was 
reference to the fact that, ironically, one of the things that 
makes the rate go higher is that the participation rate has 
gotten higher. And that is a good thing, in part, because you 
note, the emergency unemployment insurance program introduced 
last July has contributed to the higher participation rate.
    I am pleased that these are three references by you to the 
positive impact in reference to intervening in the economy, in 
terms of boosting consumer spending and helping State and local 
governments, both directly by revenue and then by that keeping 
down their interest costs.
    So I do want to ask you one of those counterfactuals that 
you get to have fun with and I want to share a little of it.
    We have problems--and I think, as I said, it is good to 
know that you can unwind. I think a premature unwinding would 
be a great mistake. But the counterfactual is, had we not 
passed the economic recovery plan in February of this year, 
would the economy be better or worse?
    Mr. Bernanke. Mr. Chairman, as you described, we think that 
income has affected consumer sums, and that the revenues to 
State and local authorities may improve their situations 
somewhat. So, in that respect, there has been some positive 
impact. But I would withhold an overall judgment since we have 
only seen a quarter or less of the money being disbursed. I 
think there is still some time to wait and see how significant 
the impact will be.
    The Chairman. But the expectation would be then that the 
disbursement would have a positive effect in this current 
    Mr. Bernanke. You would expect that higher income would 
tend to raise consumption. Yes.
    The Chairman. I appreciate those two points that you have 
    Let me just ask one last question. If the resolving 
authority--strange semantically. Resolve does appear to mean 
dissolve. If that authority were vested in the appropriate 
agencies of the Federal Government, would the AIG and Lehman 
Brothers and Merrill Lynch situations have come out 
    Mr. Bernanke. Would they have--
    The Chairman. Come out differently.
    Mr. Bernanke. Yes. Of course.
    The Chairman. Would the financial authorities have 
responded differently?
    Mr. Bernanke. It would not have been necessary for the Fed 
or even the Treasury and the TARP to intervene in those 
situations. With a good resolution authority, we could have 
wound down those companies, had the creditors take losses to 
eliminate or reduce the too-big-to-fail problem, while at the 
same time avoiding the very destructive effects, particularly 
in the case of Lehman, on the broader financial system.
    The Chairman. Thank you.
    The gentleman from Alabama.
    Mr. Bachus. Thank you.
    Chairman Bernanke, Chairman Frank asked you about the 
commercial real estate market. You mentioned the TALF programs 
for the new and legacy program. The new program has been in 
operation about a month, is that right, taking loans?
    Mr. Bernanke. Yes. That is right.
    Mr. Bachus. And the legacy just about a week. Is that 
    Mr. Bernanke. Yes, sir.
    Mr. Bachus. I notice you are going to cut those off 
December 31st?
    Mr. Bernanke. The program, as of right now, is slated to 
end at the end of the year, but we will be reviewing those 
programs and others to assess whether or not they are needed 
beyond that time.
    Mr. Bachus. I noticed several others run through the end of 
2010. So it is sort of--
    Mr. Bernanke. We extended several, sir, to I think 
February, 2010, not to the end of 2010.
    Mr. Bachus. Okay. What is the state of the commercial real 
estate market?
    Mr. Bernanke. Well, for a good bit of the recent years the 
commercial real estate market was actually pretty strong even 
as the residential market was weakening. But as the recession 
has gotten worse in the last 6 months or so, we are seeing 
increased vacancy, declining rents, falling prices, and so more 
pressure on commercial real estate which is raising the risk of 
lending to commercial real estate. So that is certainly a 
    As I was mentioning to the chairman, the facilities for 
refinancing commercial real estate, either through banks or 
through the commercial mortgage-backed securities market, seem 
more limited; and so we are somewhat concerned about that 
sector and paying close attention to it. We are taking the 
steps that we can through the banking system and through the 
securitization markets to try to address it.
    Mr. Bachus. I definitely think that may be the wild card. I 
know Deutsche Bank this week came out with a report and Smith 
Barney last week that obviously raised concerns.
    You have talked about a resolution authority for nonbank 
financial institutions, and you have referred to that as 
expedited bankruptcy. Would it be within the Bankruptcy Code? 
Would it be part of the bankruptcy regime?
    Mr. Bernanke. It would be a special regime that would be 
invoked only under circumstances of financial stress and would 
be analogous to the laws we currently have for resolving 
failing banks, which allow the regulators to intervene before 
the actual bankruptcy occurs to avoid the negative impact of a 
disorderly bankruptcy on the market. So, yes, it could be in 
the broader bankruptcy regime, but it would be a special 
category of bankruptcy that would be invoked only during 
financial crisis.
    Mr. Bachus. You know, Enron, WorldCom, Drexell worked very 
well, the bankruptcy regime. Do you agree that it is very 
important that you force creditors to internalize the cost of 
their credit decisions?
    Mr. Bernanke. Absolutely. Otherwise, you have a too-big-to-
fail institution, which doesn't have any discipline other than 
the regulatory oversight.
    Mr. Bachus. So this regime would totally reject the too-
big-to-fail? I mean, you would not be asking taxpayers to 
guarantee or backstop losses?
    Mr. Bernanke. Absolutely. I think too-big-to-fail is an 
enormous problem. If we don't do anything else, we need to 
solve that problem. This is a critical element in solving it, 
because it would mean that creditors would take losses. If 
there are resolution costs, the presumption is that they would 
be paid by assessments on other financial companies.
    Mr. Bachus. The Republicans have proposed--our financial 
services regulatory reform proposal includes an expedited 
bankruptcy within the Bankruptcy Code, and I would ask you to 
pay particular attention to that.
    One thing that I am also concerned about is even having the 
financial system take those losses, or the taxpayers, and would 
hope that we would preserve a true--if we call it expedited 
bankruptcy, it in fact is expedited bankruptcy.
    I think the Chairman for his testimony.
    The Chairman. The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman.
    Chairman Bernanke, let me inquire into two areas that I 
just need a little more clarification on. On page 8 of your 
testimony this morning, you say that you are expanding our 
supervisory activities to include risk-focused reviews of 
consumer compliance in nonbank subsidiaries of holding 
    What is the authority for that? I had been under the 
impression that one of the reasons that was not done previously 
is that the Fed didn't have that authority. Is there new 
authority? Or under what authority are you acting there?
    Mr. Bernanke. Well, the Gramm-Leach-Bliley law is a bit 
vague. There is a presumption that you will defer to the 
functional regulator in dealing with nonbank subs. In many 
cases, the functional regulator would be either a State 
regulator or the FTC, and we have done this in collaboration 
with those bodies, particularly the State regulators.
    The pilot program we ran to do examinations of nonbank subs 
was done in collaboration with these other bodies, and we 
believe that in the cooperative spirit and in looking at our 
responsibilities to enforce these consumer laws, we believe a 
somewhat proactive stance is justified.
    That being said, I think that Congress ought to clarify the 
presumption of the ability of the consolidated supervisor to 
look into these subs.
    Mr. Watt. But it is clear that the Fed had not been real 
proactive in that area prior to this crisis. Is that right?
    Mr. Bernanke. For nonbank subs, that is right.
    Mr. Watt. All right, on page 5 of your testimony, you talk 
about the payment of interest on reserve balances, which we 
authorized last fall. Had the Fed not had that authority prior 
to last fall at all?
    Mr. Bernanke. No, we did not.
    Mr. Watt. That seems to me to be a perhaps even more 
powerful tool than the adjustment of the Fed fund interest 
rates, and I guess I am a little surprised at why some central 
banks had that authority previously and the Fed did not. Can 
you just give us a little history lesson on that?
    Mr. Bernanke. Certainly. Most central banks do have this 
authority, and they set a Fed funds equivalent rate in the open 
market, but they use the interest on reserves rate as sort of a 
floor or backstop. The Fed's authorities go back to the 1930's, 
and we are actually somewhat more limited on a number of these 
areas than other central banks. Other central banks have 
somewhat broader power to buy assets, to pay interest on 
reserves, and to lend to financial institutions. For example, 
we had to invoke the 13.3 authority to lend to the primary 
dealers and the investment banks. Whereas in Europe, for 
example, any financial institution can borrow from the central 
    Mr. Watt. Am I overstating the power of that as a potential 
tool for the Fed to use, or do you perceive it in much the same 
    Mr. Bernanke. Many central banks around the world use what 
is called a corridor system, where they have an interest rate 
on reserves as the floor and then a lending rate like the 
discount window rate as the ceiling, and that keeps the market 
interest rate between those two levels. A lot of banks use 
    So, yes, it is a very powerful tool; and we would not have 
been able to expand our balance sheet as we have if we had not 
had that tool to help us with the exit.
    Mr. Watt. So you are saying, until last fall, actually, the 
Fed--the extent of the Fed's power before we granted this 
authority was actually substantially less than a lot of Federal 
banks--a lot of central banks around the world?
    Mr. Bernanke. Yes, that is right.
    Mr. Watt. Well, I guess that is a double-edged sword from 
some of my colleagues on--that it gives the Fed more authority 
that they would likely fear. Your assessment is that, as we 
wind down these positions, that would be as important or more 
important than the Fed fund rate?
    Mr. Bernanke. Well, that interest on reserves rate will 
help us control the Fed funds rate. They should be very closely 
together. So they should be closely tied, and they should 
affect longer-term interest rates. So they will be working 
    Mr. Watt. Thank you, Mr. Chairman.
    The Chairman. Let me just say--if I can have unanimous 
consent for 30 seconds. The gentleman from Alabama reminded me 
that the decision to grant the Fed power was wholly bipartisan; 
and, in fact, it first passed the House when the Republicans 
were in the majority. The gentleman from Alabama was the 
chairman of the Appropriations Subcommittee. It did not pass 
the Senate. There is a lot of that going around. And it then 
came up again, and it was again passed. So that has been 
broadly supported in this committee, although not unanimously.
    Which brings me to the gentleman from Texas, Mr. Paul.
    Dr. Paul. Thank you, Mr. Chairman.
    In the past, most members of the Federal Reserve Board, 
including your predecessor, when they come before the committee 
they endorse in general the idea of transparency. They don't 
just say we are against transparency. It is the definition that 
really counts. Most members then would also argue for 
independence, which generally means that they don't want the 
Congress to know it is actually what they are doing.
    But I saw the article today in the Wall Street Journal, not 
your editorial but an article, and there were a few quotes 
there that I wanted to ask you about. I do know that all of us 
can get misquoted in the newspaper, but I want to clarify this, 
because it is either misleading or somebody is confused, and I 
want to see if I can figure this out.
    The first one has to do with you saying that Mr. Paul's 
bill, which is 1207, the transparency bill, would interfere 
with the Fed's interest rate decision.
    And since I wrote the bill, I know what the intentions are. 
It has nothing to do with monetary policy or interest rate 
manipulation. There is nobody in the Congress who is going to 
be monitoring the Federal Open Market Committee. It is after 
the fact that an audit can occur and find out what transpired. 
There is no management.
    So is that your position that this bill, if it were to be 
passed, would interfere directly with interest rates, setting 
interest rates?
    Mr. Bernanke. Well, Congressman Paul, at some point, as you 
know, we are going to have to start raising interest rates to 
avoid inflation. And people have talked about the politics of 
that and whether the Fed will be able to do that without 
intervention or interference.
    If we were to raise interest rates at a meeting and someone 
in the Congress didn't like it and said, I want the GAO to 
audit that decision, wouldn't that be viewed as an interference 
or at least an ex post--
    Dr. Paul. I wouldn't think so. This is just reviewing it. 
And you can do what you want.
    What about today? Interest rates are artificially low. 
Could there be any political pressure to keep interest rates 
artificially low?
    Historically, that has been well known. It has been 
documented and written about how other Federal Reserve 
chairmen, you know, they are on the verge of reappointment, and 
they know the President, and all of a sudden--so it is not like 
it is not politicized now. Just the fact that they can issue a 
lot of loans and special privileges to banks and corporations, 
that is political. But this idea that it would be political 
because we know what happened afterwards just doesn't seem to 
add up.
    Since time is short, I want to go on to the next quote, 
which I find fascinating, because hopefully I can agree with 
you on this one. This is an actual quote. It says, ``We 
absolutely will not monetize the debt.'' Well, that is one of 
the major reforms sometime in the distant future that would be 
beautiful, because that would stop all this chaotic monetary 
policy, inflations and depressions and recessions and all the 
mess that we have. But you say you will not.
    At the same time, you know, I quoted the $38 billion that 
was bought last week and the plan to buy $300 billion of U.S. 
securities. These securities are bought by dollars you create. 
And if you are buying U.S. securities, what is that if it is 
not--and besides, if the markets really believed that, that you 
would absolutely not monetize debt, I think the markets would 
get hysterical.
    So it seems to me like--I would like to understand exactly 
what you mean by that.
    Mr. Bernanke. Well, the purpose of our limited program was 
to address private credit markets, Congressman. When we 
complete the $300 billion program that we announced, we will 
have less treasuries on our balance sheet than we did 2 years 
ago, because we sold off a lot of treasuries in order to make 
room for these other things we were doing.
    Secondly, after we complete that $300 billion, our share of 
outstanding treasuries will be at one of the lowest points in 
the post-war period. So we are not taking a significant portion 
of U.S. Treasuries. And we are not actively intervening or 
actively trying to make it easier for the government to issue 
    Dr. Paul. So you are saying, if you buy $300 billion worth 
of U.S. Government debt, that is not inflationary. The true 
definition of ``inflation'' is when you increase the money 
supply. And the immediate consequence is it sends out false, 
bad information to the marketplace. So whether it is when the 
bubble is being formed or afterwards, all you are doing is 
inflating constantly. You have doubled the money supply; 
interest rates are artificial. People make mistakes.
    So it seems to me that you are in the midst of massive 
inflation. But I guess you have a different definition. When 
you double the money supply, that is not inflation itself? Or 
are you looking at only prices?
    Mr. Bernanke. May I respond?
    The Chairman. Briefly.
    Mr. Bernanke. Inflation is the change in the consumer price 
level, which is very stable right now. And there are various 
measures of money, as you know. And the broad measures of 
money, the measures of money in circulation like M1 and M2, are 
not growing quickly.
    The Chairman. The gentleman from California, Mr. Baca.
    Mr. Baca. Thank you very much, Mr. Chairman.
    First of all, I want to thank you and I want to thank the 
ranking member for convening this hearing.
    And I want to thank Chairman Bernanke for taking the time 
to be here once again.
    My first question is in reference to the regulatory reform 
plan put forth by the Obama Administration. It puts a lot of 
faith in the Federal Reserve's ability to oversee the largest, 
most interconnected firm in the marketplace to prevent against 
systemic failures.
    I have a question related to the Financial Oversight 
Council that will aid in this task. How do you envision the 
role of the Financial Oversight Council taking shape? That is 
one of the questions.
    And then it is my understanding that the council will play 
a purely advisory role, having no real power or weight in our 
regulatory issues. And can you describe how the Federal Reserve 
would work with the council under this proposed plan?
    Mr. Bernanke. Yes, sir. There is, I think, a 
misapprehension that somehow this plan makes the Federal 
Reserve a super-regulator with untrammeled powers to go 
wherever it likes. In fact, there are multiple components, as 
you point out.
    A critical component is the council, which will oversee the 
overall strategy. It will look for emerging risks and advise 
regulators on what steps to take. And so, in particular, this 
issue about which large institutions the Fed would oversee, I 
think that would be appropriate for the council to make that 
determination, and not the Federal Reserve, for example.
    So the Federal Reserve will work closely with this council, 
which, again, would have broad-based ability to gather 
information, identify emerging risks, and look for gaps and 
problems in the regulatory system.
    Another major portion, by the way, of course, would be this 
resolution regime, which would not be administered by the Fed 
either. That would be the Treasury, the FDIC. That is very 
critical to winding down systemically relevant firms.
    The Fed's role, as envisioned by the Administration, is a 
modest reorientation of our current system. Under our current 
system, the Federal Reserve is the umbrella supervisor of all 
bank holding companies and financial holding companies. So we 
are already the umbrella supervisor of essentially all the 
firms that would likely be identified as Tier 1 firms under the 
Administration's proposal.
    So the main differences would be that we would have some 
additional authorities to add capital and liquidity 
requirements based on the systemic relevance of those firms and 
perhaps some stronger ability to look at nonbank subs, as we 
were discussing before, vis-a-vis Gramm-Leach-Bliley.
    The biggest challenge would be on our part, which would be 
to take a more macro-prudential approach. Rather than looking 
at each firm individually, the intellectual challenge for us 
would be to ask the question, not only is this firm safe in its 
own situation, but does its failure threaten other firms and 
other markets? And, if so, how should you adjust capital and 
other requirements to accommodate that?
    So it would be a challenging thing for us to do, but it 
does not radically reorient our set of powers.
    Mr. Baca. As a follow-up question, would you then be in 
favor of increasing the authority of the council? Or are you 
confident that the collaboration of the Fed and the council 
would work as stated in the white paper?
    Mr. Bernanke. I am very open to discussing the role of the 
council. I think a very important role is to coordinate 
regulators, to oversee the system, to identify risks and so on. 
But there may be situations where the council can have 
authority to harmonize different practices or to identify 
problems and to take action. So I think the Congress should 
discuss what powers the council should have.
    Mr. Baca. Well, I hope we do in Congress here.
    But let me refer back to an article that appeared in the 
Wall Street Journal. This is July 20th. In here, you start out, 
``The depth of the global recession has required highly 
accommodative monetary policies,'' and you go on and go on. And 
then it says, ``We have greatly expanded the size of the Fed 
balance sheet through the purchase of long-term security 
through targeted lending programs aimed at restarting the flow 
of credit.''
    What do you mean by this?
    Mr. Bernanke. Congressman, our policies, using our balance 
sheet, have been to try to improve the functioning of credit 
markets, which have been disrupted by the financial crisis. So, 
for example, we have been purchasing mortgage-backed 
securities, which has lowered mortgage rates for everyday 
Americans down to about 5 percent. We have opened up a program 
that is called the TALF, which has helped increase funding and 
reduce rates on consumer loans like auto loans, student loans, 
and small business loans. We have taken actions to improve the 
function of the commercial paper market.
    So all these various steps have tried to address the fact 
that, during the crisis, many markets have become disrupted, 
and our actions have been ways of trying to stimulate 
improvements. And we have been fairly successful in doing that.
    Mr. Baca. Okay. In the second paragraph, you state that, 
``These actions have softened the economic impact of the 
financial crisis. They have also improved the functioning of 
key credits, including the market for interbank lending, 
commercial papers, consumer, small lot, business credit, 
residential mortgages.''
    How does that impact, then, those whoe in foreclosure right 
    The Chairman. Let me caution the members again. Your time 
expiring is not a good time to ask your big question. The 
chairman will have a few seconds to answer. But we can't just 
extend it that way, in fairness to the other members.
    Mr. Chairman?
    Mr. Bernanke. I just want to say that, in those markets, 
such as the mortgage market, consumer markets, interbank 
markets, we have brought down interest rates, increased 
availability, and improved the functioning of the markets in 
those areas.
    Mr. Baca. But how will it help those--
    The Chairman. No, the gentleman's time has expired.
    The gentleman from Texas?
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Chairman Bernanke, way over here on the far right, your 
left. There you go. Thank you.
    One of the things that you mentioned in your testimony was 
about regulatory reform. You had bullet points there, and one 
of those bullet points was ``enhanced protection for consumers 
and investors in financial dealings.''
    And then on page 8, you said, ``We are expanding our 
supervisory activities to include risk-focused reviews of 
consumer compliance in non-bank subsidiaries of holding 
    As you are aware, the Administration has laid out a 
Blueprint for Regulatory Reform. The chairman also has a bill. 
And one of the pieces of that is an interesting concept of 
separating the consumer compliance from the primary regulators 
and having a separate entity.
    The first question I would have is, what do you think about 
that structure?
    Mr. Bernanke. Well, I understand the rationale and why 
people would like to have that, and I am not going to criticize 
it. But I just want to say that in my remarks, the point was 
that the Fed has been doing a good job for the past 3 years or 
so, and we are committed to doing it. And if you allow us to 
continue to work in that area, we would be interested in doing 
    Mr. Neugebauer. Are there some dangers of bifurcating the 
regulatory process, where you have one entity looking at 
consumer products and determining what products financial 
institutions can offer and endorsing those and then having 
another regulatory agency looking at safety and soundness? And 
how does that work?
    Mr. Bernanke. Well, there are some costs to it, in that you 
would have double the exams. And there wouldn't be as much 
coordination between the safety and soundness and consumer 
protection issues. So there would be some issues related to 
that separation.
    Mr. Neugebauer. And so, at a time when I guess we are all 
feeling like it is time to, kind of, tighten up the regulatory 
structure, make sure we plug the holes, and, moving forward, 
that if we had some places where we weren't actually able to 
have the ability to or, in fact, doing our jobs, does 
separating those make sense?
    Mr. Bernanke. Well, the argument for doing it, I think, is 
that those who believe that you need a separate agency that 
will be committed to consumer protection will have the 
institutional commitment outweigh some of these other costs. 
And I simply am noting that the Federal Reserve is also 
committed and wants to be committed to that goal.
    Mr. Neugebauer. If you were writing the regulatory reform, 
would you keep them the same and not separate them?
    Mr. Bernanke. If I were writing it, I would keep the 
consumer protection with the Federal banking agencies, with 
additional measures to ensure a strong commitment.
    Mr. Neugebauer. Thank you for that.
    The second thing is, in some of your projections of looking 
forward, what you think the economy is going to be like in 2009 
and 2010 in relationship to jobs, for example, when you were 
using the numbers and assumptions you were using, did you 
assume that Congress would not continue this huge deficit 
spending where we are on track to literally double the national 
debt? Are your assumptions based on employment is going to get 
better if Congress has better fiscal policy? Or are your job 
assumptions based on continuing to spend money like drunken 
    Mr. Bernanke. Our forecasts are based on our best 
projections of what government spending is likely to be. And, 
in particular, it includes the fiscal stimulus package.
    Mr. Neugebauer. And were your assumptions, then, that this 
would be the job situation assuming that Congress does not then 
do something about the current level of spending?
    Mr. Bernanke. If the fiscal stimulus package didn't exist, 
for example, we would anticipate there would be higher 
    Mr. Neugebauer. We are not on the same page. I am not 
talking--the stimulus package is already done. I am talking 
about the fact that, for every dollar that this Congress is 
spending right now, we are borrowing 50 cents.
    If that trend continues in future appropriations, and some 
people are talking Stimulus 2, would that alter your job 
prediction down the road?
    Mr. Bernanke. Down the road, it might. As I talked about in 
my testimony, I do think it is very important that we look at 
medium-term fiscal sustainability, that we have a plan for 
getting back to reasonably low deficits and a sustainable debt-
to-GDP ratio. Otherwise, we might see interest rates rise, 
which would be negative for the economy.
    Mr. Neugebauer. So what you are saying is $2 trillion 
deficits a year for the next 4 or 5 years is not a 
    Mr. Bernanke. No, sir, it is not.
    Mr. Neugebauer. Thank you.
    The Chairman. The gentleman from Missouri, Mr. Cleaver.
    Mr. Cleaver. Mr. Chairman, thank you very much for being 
    I read over the weekend that the unemployment rate in 
California is above 11 percent. And The Hill reported last week 
that the Federal Reserve reported that unemployment was between 
9 and 10 percent and would continue to rise.
    If this is, in fact, going to happen--and you look at 
California, Ohio, Michigan, with already double digits--should 
we expect another round of foreclosures? The chairman asked you 
earlier about commercial. I mean, doesn't all of this almost 
make for a perfect storm for another avalanche of foreclosures?
    Mr. Bernanke. The combination of unemployment and falling 
house prices, the double trigger does create a very high rate 
of foreclosures.
    Our assessment of the foreclosures is that it is likely to 
be--it is likely to peak in the second half of 2009, 
corresponding with the peak in the unemployment rate, and 
perhaps be somewhat less in 2010. But, clearly, we are going to 
have very high levels of foreclosures, and the unemployment 
rate is a big reason for that.
    Mr. Cleaver. This may be more theological or philosophical, 
but if you look at--I mean, you and others in the Federal 
Reserve and even in the Administration are saying that things 
are stabilizing, we are making progress. That is not quite 
compatible with what you hear with the talking heads on 
television. And nobody can control those.
    But our attitude toward the trouble may be more 
problematical than the trouble. And I am wondering, you know, 
what can we do to change the atmosphere in the country? 
Consumers are loathe to go out and buy. Employers, even if they 
are seeing things stabilize, are not inclined to go out and 
begin to hire or rehire.
    What can Congress do? What can be done to not just 
stabilize the economy but to stabilize our attitudes?
    Mr. Bernanke. I am not sure what to suggest there, except, 
obviously, good leadership and good explanations help. But the 
public has been responding to some signs, some glimmers, if you 
will, of improvement. So consumer sentiment, for example, has 
improved somewhat as the stock market has gone up and as the 
outlook has looked better and as the job situation has at least 
stopped deteriorating quite as quickly as it was.
    But I want to be clear that we have a very long haul here, 
because even if the economy begins to turn up in terms of 
production, unemployment is going to stay high for quite a 
while, and so it is not going to feel like a really strong 
    Mr. Cleaver. Thank you.
    I yield back the balance of my time, Mr. Chairman.
    The Chairman. The gentleman from Indiana. Oh, I am sorry, 
Mr. Cleaver just finished.
    Mr. Castle, I apologize, the gentleman from Delaware is 
    Mr. Castle. Thank you, Mr. Chairman.
    Chairman Bernanke, let me just say in praise of you, 
because my questions may imply some negatives, I think you are 
doing a good job on monetary policy. And I think that meets one 
of the goals of the Humphrey-Hawkins Act. Just looking at that 
Act, it outlines four goals for a strong economy: full 
employment; growth in production; price stability; and balance 
of trade and budget, of which I think price stability is the 
one that sort of stands out now. And I think that has a lot to 
do with what you do.
    And maybe this is Government 101, but I am not 100 percent 
sure what your role is with the Administration. We are watching 
a circumstance in which we have deficits creating greatly. Debt 
will go up over $10 trillion, according to the budget, in the 
next 10 years or so. Appropriations are up dramatically, for 
this year at least and the ones we have passed in the House so 
far. The health care legislation that is being considered in 
the House and the Senate doesn't seem to have any real cost 
controls in it, some maybe passing wave at that, but that is 
about the extent of it, and are probably in trouble because of 
    My question to you is, does the Executive Branch of 
government, the White House, consult with you about any of 
these broader economic issues?
    I mean, part of your responsibility under Humphrey-Hawkins 
is to try to make progress towards these goals. And it seems to 
me just setting monetary policy won't necessarily solve the 
problems of the full employment, the growth of production, and 
the balance of trade and budget. And I didn't know if that is 
just off-bounds for you and for them or if there is any 
consultation going on.
    And, obviously, if you have any comments about your point 
of view on some of these expenditures which are going on, I 
would be interested in hearing them, as well.
    Mr. Bernanke. Well, of course, the Federal Reserve is 
nonpartisan and independent. I do speak to the President's 
advisors periodically, as I speak to Members of Congress and 
their staff.
    In terms of my policy positions, because I am nonpartisan I 
try not to get involved in the details of specific programs, 
fiscal programs in particular. But I have spoken to the issue 
of fiscal sustainability, which I did again today, and the 
importance of when thinking about the programs that one is 
undertaking, the time frames, the costs and so on, to think 
about the implications for the Federal budget, to make sure 
that we have a trajectory that will be sustainable in the 
medium term.
    And I have made that point several times, and I am sure 
that the Administration, as well as the Congress, are quite 
aware of that point. But achieving it, of course, requires some 
    Mr. Castle. Maybe we would be better served to let you go 
right now and run back over to the White House and keep making 
that point, based on what we have seen.
    Following up on something the gentleman from Texas, Mr. 
Neugebauer, asked on the financial protection agency that is 
being proposed, did I hear you say--did I hear correctly, 
perhaps, you saying that you would keep the consumer protection 
functions that you have at the Federal Reserve there at the 
Federal Reserve if you had your preference in that area?
    Mr. Bernanke. As I have said, I am proud of the work we 
have done. I think we are well-placed to do it. We have a lot 
of talent. We have a wide range of people, in terms of 
economists, financial specialists, payment specialists, as well 
as lawyers and consumer specialists. There are some 
complementarities with our supervisory activities.
    So if the Congress decides to consider that option, we are 
very interested in pursuing it ourselves.
    Mr. Castle. And you indicated that--you said several new 
rules you are working on, including rules on mortgage 
originators and that area. Can you go through that list again 
    Mr. Bernanke. We are having a meeting on Thursday where we 
will announce some new rules that are being circulated for 
comment. And they are primarily disclosure changes, consumer 
tests and disclosure changes for mortgages, mortgage 
originations, and for home equity lines of credit.
    And we are also going to address in that rulemaking Yield 
Spread Premiums, which is how brokers and other lenders are 
paid for making mortgages. So that is an issue we will be 
addressing as well.
    Mr. Castle. Thank you.
    At the governors conference which just took place, which is 
Republicans and Democrats, down in Alabama, I believe--
Mississippi, I guess it was, actually--they indicated they were 
not interested in a second stimulus. That is obviously 
something that is a little bit hypothetical at this point.
    Would you agree with that? I mean, I have heard your 
reference to the fact that the first stimulus is still being 
spent out there and has a long ways to go.
    Mr. Bernanke. Yes, I think it is very early. Less than a 
quarter of the first stimulus has been spent. We will have to 
see how the economy evolves. So I think it is premature to make 
any judgments about that.
    Mr. Castle. And they also indicated that they were 
concerned about a rush to a health care plan. They have 
Medicaid costs and other things they are concerned about.
    Do you have any--I am sorry, my time is up. I may submit a 
question in writing to you. Thank you.
    The Chairman. The gentleman from Indiana is next of those 
who haven't questioned.
    Is the gentleman ready?
    Mr. Donnelly. Thank you, Mr. Chairman.
    The Chairman. And we will then be going on the Democratic 
side in seniority from then on, everybody who has questions.
    Mr. Donnelly. Fed Chairman Bernanke, thank you for being 
    Let me ask you a question. I come from an area that does a 
lot of manufacturing and is reliant on credit. What would have 
happened last fall if we had just walked away and had not 
passed the program?
    Mr. Bernanke. I think you would have had a very good chance 
of a collapse of the credit system. Even what we did see after 
the failure of Lehman was, for example, commercial paper rates 
shot up and availability declined. Many other markets were 
severely disrupted, including corporate bond markets. So even 
with the rescue and even with the stabilization that we 
achieved in October, there was a severe increase in stress in 
financial markets.
    My belief is that, if we had not had the money to address 
the global banking crisis in October, we might very well have 
had a collapse of the global banking system that would have 
created a huge problem in financial markets and in the broad 
economy that might have lasted many years.
    Mr. Donnelly. And have we lost any of the funds that the 
Fed has lent?
    Mr. Bernanke. The Fed on book value is a little bit 
underwater on the AIG, Bear Stearns interventions, which we 
would very much not liked to have done, but we didn't have the 
resolution regime.
    On all other lending and all other programs, which is more 
than 95 percent of our balance sheet, we are making a nice 
profit, which we are sharing with the Treasury.
    Mr. Donnelly. In regards to the TALF program, which is an 
area that we had hoped for some help on and that we had 
discussed before, at the present time none of it has gone to 
floor plan lending, as we discussed.
    What other areas do you think can help open up floor plan 
lending? We know the SBA has helped a little bit. What other 
avenues, if any, are being explored or do you think are 
available out there?
    Mr. Bernanke. We are continuing to look at floor plan 
lending, and there are several possibilities.
    One in particular is we are doing a review right now of the 
credit rating agencies, the nationally recognized rating 
agencies, whose ratings we will accept and the criteria on 
which we will accept those ratings. Depending on what that list 
is and what views they have about floor plan lending, it may be 
that some floor plan deals can get the AAA rating that they 
need to be eligible for the TALF.
    But we will be putting out rules very soon on the criteria 
for choosing the rating agencies.
    Mr. Donnelly. One of the other areas of concern on the TALF 
for us is what is called the haircut rate. And on floor plan, 
that is the highest of all. The reason for that? And is there a 
review of that, that might come down the road?
    Mr. Bernanke. The haircuts are set based upon evaluations 
of the riskiness of the various assets.
    I think there is a lot of uncertainty right now about floor 
plans given the state of the industry and what is happening 
with GM and Chrysler and so on. And my hope is that, in the 
next few months, as the situation becomes somewhat clearer, it 
could be that ratings will be upgraded and that we will see a 
somewhat better situation.
    But right now there is just a lot of murkiness, in terms of 
the credit quality of the floor plan loans.
    Mr. Donnelly. And we are looking at a December 31st 
termination date as of now. But I think approximately $27 
billion out of a potential $1 trillion has been lent out. Has 
there been any look into extending that termination date?
    Mr. Bernanke. We will extend it if conditions warrant. And 
we will try to give the markets plenty of advance notice. We 
are not going to necessarily try to hit any particular number. 
We are going to have to make a judgment whether the conditions 
in markets are still sufficiently disrupted that such an 
intervention is necessary.
    Remember, this is based on a determination that conditions 
are unusual and exigent. And if markets normalize, we should no 
longer be using that kind of program.
    Mr. Donnelly. And one last question: The small businesses 
in our area, they come up and say, ``You know, we just can't 
get the credit we need. We can't get the help we need.'' And I 
am not talking about the loans that shouldn't have been made, 
but the loans to good businesses that aren't being made.
    Approximately what timeframe do you think these small-
business owners will be able to see the same kind of credit 
availability they had before?
    We have had so many credit organizations just walk away, 
can't make loans anymore, don't want to.
    Mr. Bernanke. In terms of having the same terms and 
conditions that they had before the crisis, maybe that will 
never come back, because credit is sort of permanently 
tightened up in that respect.
    I am hopeful that as banks stabilize--and we are seeing 
some improvements in the banking system--and as the economy 
stabilizes to give more confidence to lenders, that we will see 
better credit flows.
    Mr. Donnelly. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Florida, Mr. Putnam.
    Mr. Putnam. Thank you, Mr. Chairman.
    I want to thank Chairman Bernanke for his leadership. For 
all the criticisms about transparency and the Fed, many of 
which I share, you have always been a very plainspoken 
representative of the Fed, certainly much more clear and candid 
than your predecessor, who made the Oracle of Delphi seem 
downright verbose.
    To that end, in listening to the previous questions, you 
have referred to my friend, Mr. Cleaver, that it is not going 
to feel like a recovery. And we have talked about some of these 
issues, which begs the question: The last two recoveries, which 
admittedly were much more minor, more shallow recessions than 
what we are in now, they were characterized as jobless.
    Do you believe that this will be a jobless recovery, as 
well? And given the answer either way, what shape do you 
believe that recovery will take?
    Mr. Bernanke. We expect a gradual recovery--I don't know 
what letter that corresponds to--which will be picking up steam 
over time, perhaps well above the potential rate of growth by 
    We do expect to see positive job creation near the end of 
this year, early next year. But it is going to take a while, 
given the pace of growth, for the unemployment rate to come 
back down to levels that, you know, we would be more 
comfortable with. So, in that respect, it should take some time 
for the labor market to return to normal.
    Mr. Putnam. In your op-ed in today's Journal and in your 
testimony, you spend a great deal of time talking about the 
preparations that the Fed is making in terms of the exit 
strategy. What metric or metrics are most compelling that allow 
you to read a recovery?
    And, in your testimony, there is a correlation between 
inflationary fears and your prediction of when the recovery 
begins; essentially, when that velocity kicks in in the money 
supply, that the recovery and the inflationary pressure are 
concurrent. So what metrics do you evaluate that allow you to 
get ahead of that curve when the knock on the Fed has always 
been that they are too late reading the trends?
    Mr. Bernanke. It is a very difficult problem. And even 
though we have these unusual circumstances, it is really the 
same problem we always face, which you just pointed out, which 
is picking the right moment to begin to tighten and picking the 
appropriate pace of tightening.
    Since monetary policy takes time to work, the only way we 
can do that is by trying to make a forecast, make a projection. 
And we use large amounts of information, including qualitative 
information, anecdotes we receive, formal models, a whole range 
of techniques, to try to estimate where the economy is likely 
to be a year or a year and a half from now. It is a very 
uncertain business, but it is really all we can do. And based 
on that, we try to judge the right moment to begin to raise 
    So we will be looking to see more evidence of a sustained 
recovery that will begin to close the output gap and begin to 
improve labor markets. And we will be looking for signs of 
inflation or inflation expectations that would cause us to 
respond, as well.
    Mr. Putnam. Given the debate about overhauling regulatory 
reform structures and the role that you have played in that, as 
well as others, you are having to carve out a separate approach 
to these new non-bank financial institutions, which, to me, 
sort of raises the question, which is probably going to be one 
for historians to resolve: Should the barriers between banking 
and investments have ever been torn down?
    In other words, was Glass-Steagall the right approach after 
the Depression? Was Gramm-Leach-Bliley the wrong approach? Has 
enough time elapsed to have a good answer to that question, as 
we move forward with setting up an entirely new regime?
    Mr. Bernanke. I don't think that Glass-Steagall, if it had 
been enforced, would have prevented the crisis. We saw plenty 
of situations where a commercial bank on its own or an 
investment bank on its own got into significant problems 
without cross-effects between those two categories.
    On the other hand, I think that we do need to be looking at 
the complexity and scale of these firms and asking whether they 
pose a risk to the overall system? And if that risk is too 
great, is there reason or scope to limit certain activities? 
And I think that might be something we should look at.
    But I think the investment banking versus commercial 
banking distinction probably would not have been that helpful 
in this particular crisis.
    Mr. Putnam. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Colorado?
    Mr. Perlmutter. Thanks.
    And I appreciate Mr. Putnam's question, because that is 
exactly what I was going to ask, you know, whether or not we 
can unring the bell, whether or not we should unring the bell 
of mixing trading and banking and whether that was, you know, 
part of what caused that--you know, I have been looking at all 
your charts in this, and some of them are really pretty 
shocking as to what happened in the fall and has occurred.
    But I guess what you are saying is, no, we have to look at 
it as a whole in terms of the financial industry and just try 
to increase their margins or their capital when we see them in 
riskier products or getting very big. Is that sort of the 
bottom line for you?
    Mr. Bernanke. That is generally right. But it could be that 
a company has too many lines of business that it can't manage 
properly, that it can't manage the risk appropriately. And, in 
that case, I think the supervisors would be justified in 
saying, ``You have to get rid of this,'' or ``You have to cut 
that back.'' Capital is not the only thing. You also have to 
have management and risk controls, as well as a buffer of 
    Mr. Perlmutter. Okay.
    Some of my friends on the other side of the aisle have sort 
of been questioning the value of the stimulus and what is 
happening, but, in looking through your report, I mean, I see 
some things that really look pretty positive.
    First of all, in 2005, we had a negative savings rate; now 
we have a very positive savings rate. Now, it happened almost 
overnight. But, at some point, how do you gauge the savings 
that is going on in the country right now? Is it positive or 
too much?
    Mr. Bernanke. Well, families are, with good reason, saving 
more. They have lost wealth. Their house value is down, and so 
they can't use the house as an ATM, as people did. They are 
more concerned about the future, and so they are putting more 
money aside in a precautionary way.
    Interestingly, the private saving has increased so much in 
this country that, despite the big increase in the government 
deficit, total national borrowing from abroad is actually lower 
now than it was the last few years.
    So there has been a big change in behavior in the private 
sector. And that is fine. It creates problems in the macro 
economy because, without consumer spending, the economy doesn't 
grow as fast. But I wouldn't advise families to worry about 
that. I think people need to get their balance sheets in order 
and their budgets in order. And that is a positive that will 
come out of this whole crisis.
    Mr. Perlmutter. And going along with that savings, there 
was a statement in your report at page 7, ``The recent 
stimulus-induced jump in real disposable income and the 
improvement in equity wealth since this spring apparently has 
helped lift consumer sentiment somewhat from its very low 
levels at the end of the year.''
    And I am looking at today's Wall Street Journal. Everybody 
keeps talking about the Wall Street Journal. They are showing 
the vital signs and a marked increase in 10 economic and 
financial indicators over the course of the last 2 or 3 months, 
showing real positive signs within the economy.
    And I appreciate you sitting there as the Chairman of the 
Federal Reserve, having to temper statements that you might 
make. But, within your report, we see the savings rate 
improved. There was really a sharp increase or--your chart 
number 25, on page 15, shows unemployment just falling off a 
cliff and then really a dramatic bounce back in the right 
direction beginning in April and May of this year. So, again, 
another positive sign.
    The charts also show that the gap that we have had in terms 
of our trade balances has really shrunk. I mean, part of what 
has been going on here is we sent so much money overseas that 
we haven't been a real productive society. But you can see 
production personally and as a Nation improving.
    Am I misreading your reports?
    Mr. Bernanke. No. The economy has improved--the outlook has 
certainly improved since March, and we can see it--the stock 
market is up considerably since March. And, as I was mentioning 
before, the fact that we are saving more means we can borrow 
less from abroad. And that is exactly the decline in the 
current account that you were noticing.
    Mr. Perlmutter. My last question is on section 13(3) of the 
Act, which was used, I think, in a pretty dramatic way with 
Bear Stearns and then again in September.
    I mean, is there any--have you all talked about whether 
there should be some limitation on that, or is that mostly 
coming from us?
    And, with that, I would yield back and just ask him to 
answer the question.
    Mr. Bernanke. First, I would say that in every usage of 
13(3), we have consulted closely with the Treasury, and we have 
also apprised Congress whenever possible.
    I think if a resolution regime is created that would allow 
an orderly wind-down of a Bear Stearns or an AIG, our 13(3) 
authority ought to be subordinated to that and only used if the 
wind-down authority requests that the Fed participate in some 
    Mr. Perlmutter. Okay. Thank you.
    The Chairman. The gentleman from New Jersey, Mr. Lance.
    Mr. Lance. Thank you very much, Mr. Chairman.
    Thank you, Chairman Bernanke.
    On page 6 of your testimony, you have indicated that we do 
have to worry about fiscal balance. And Mr. Neugebauer and Mr. 
Castle have asked you questions, and I would like to follow up, 
if I might.
    You indicate, ``Maintaining the confidence of the public 
and financial markets requires that policymakers begin planning 
now for the restoration of fiscal balance.''
    Given the fact that we have, I would imagine, an almost $2 
trillion deficit this year--I think the projection at the 
moment is $1.8 trillion, and we are in the last quarter of the 
fiscal year; my own judgment is that it may be as high as $2 
trillion--and my own judgment is that next year's annual 
deficit may be as high as $1.5 trillion, what would you suggest 
that we do now regarding trying to achieve a restoration of 
fiscal balance?
    Mr. Bernanke. Well, I don't think there is much that can be 
done about this year's deficit and probably not too much about 
next year's deficit. But the Congress needs to develop a broad 
plan, which encompasses all the spending plans and taxation 
plans, that shows a moderation of the deficit over time to 
something sustainable, which I would guess would be something 
on the order of 2 or 3 percent of GDP.
    Mr. Lance. Two or 3 percent of GDP. And, of course, we are 
well, well above that at the moment.
    Mr. Bernanke. That is right.
    Mr. Lance. And I concede the point that we will be unable 
to do anything for this fiscal year, obviously, since it ends 
in fewer than 3 months.
    I am not trying yet to completely throw in the towel 
regarding next year. Obviously, if unemployment remains high--
and your testimony is that, while it may get better, it is 
certainly not going to be where we are--that would further 
depress tax revenues, I presume. I see nothing that the 
Administration has done so far regarding restoration of fiscal 
    What would your view be after next year? You would like to 
get back to 2 to 3 percent by the fiscal year after next year, 
Mr. Chairman?
    Mr. Bernanke. I don't have an exact number. I think 
``medium-term'' means sort of 3 to 5 years, something in that 
range. But we need to show that we have a plan for getting back 
to a more sustainable level.
    Mr. Lance. Thank you. My view is that the Administration 
ought to work with us in Congress on trying to show greater 
progress next year, beginning on the 1st of October.
    You have indicated that your purchase of T bills is a plan 
that will end, I believe, in this fiscal year, the $300 billion 
purchase. The completion of that will be at the end of 
September? Is that accurate, Mr. Chairman?
    Mr. Bernanke. That is right.
    Mr. Lance. And do you currently anticipate that you will be 
continuing to purchase at this level beginning in the new 
fiscal year?
    Mr. Bernanke. That is really a decision that the FOMC, the 
Federal Open Market Committee, needs to make, because it has 
implications for monetary policy in general. But we will be 
talking about that as we go forward.
    Mr. Lance. And, obviously, we do not favor monetizing the 
debt. I understand your point that you do not believe you are 
doing that. But we do have concerns in that regard; I have 
concerns in that regard. And I certainly look forward to 
working with you in that area.
    And, finally, Mr. Chairman--and then I will yield back the 
balance of my time after your response--how much, at the 
moment, are we in the hole regarding AIG and what you have done 
regarding AIG?
    Mr. Bernanke. We have currently about $45 billion that we 
have lent directly to AIG, which I believe is well-secured. And 
we have less than $40 billion that has been lent to two Maiden 
Lane facilities which are holding securities which are 
underwater. And I don't know the exact number, but it is 
several billion dollars.
    Mr. Lance. Thank you. If you could get back to us through 
the chairman, I would appreciate it.
    Mr. Bernanke. Certainly.
    Mr. Lance. Thank you, Mr. Chairman. I yield back the 
balance of my time.
    The Chairman. Next--I have to apologize, I forgot that the 
seniority system here was designed by the choreographer of the 
Bunny Hop, and it goes this way. And I made a mistake. I told 
you I was getting old. So I am now at the gentlewoman from 
    Ms. Moore of Wisconsin. Thank you, Mr. Chairman.
    And thank you.
    I was really pleased to see in your testimony, under the 
regulatory reform section, that you realize that systemic risk 
is not just too-big-to-fail institutions, but activities and 
practices that provide systemic risk.
    Many of us--and, certainly, this article was given to me by 
Congresswoman Maxine Waters--have been reading the recent 
Rolling Stone article by Matt Taibbi, ``The Great American 
Bubble Machine.'' And while it is very critical of a particular 
firm, I think there are things that we all notice with respect 
to the housing bubble and the dot-com bubble and the oil bubble 
that all seem to be activities that seem to be systemic risks. 
For example, allowing an entity to sort of manipulate the price 
of an entity, of the housing prices, to ratchet the prices up 
and then just sort of hedge against their own products.
    So I guess I would like to ask your opinion about credit 
default swaps and also the practice of spinning, where 
executive compensation seems to be a systemic risk factor, as 
well. So can you tell us what we can do in our regulatory 
reform to prevent the creation of these bubbles?
    Mr. Bernanke. Well, on the credit default swaps, there are 
a number of measures that have been proposed. One important 
step would be to get the majority of them standardized and 
traded on a central counterparty or an exchange, which would 
eliminate the risk that the seller of the CDS would not be able 
to make good, which is what happened with AIG, for example. So 
that is an example there.
    On executive compensation, I should let you know that the 
Federal Reserve is going to be proposing later this year 
guidance on executive compensation which will attempt to 
clarify that compensation packages should be structured in such 
a way as to tie reward to performance and to be such that they 
don't create excessive amounts of risk for the firm.
    Ms. Moore of Wisconsin. Thank you.
    With respect to standardizing, we are told by the smartest 
of these people that we just have to have customized the 
products, that it is just really going to be harmful in the 
marketplace if everything has to be standardized. What would be 
your advice on that criticism?
    Mr. Bernanke. There are probably some products that, to be 
useful, need to be customized. But we should make sure that 
dealers or banks hold sufficient capital against them to make 
it attractive to move them onto exchanges and to standardize 
them whenever possible.
    Ms. Moore of Wisconsin. Okay. Thank you.
    With respect to what we can't unscramble, many of my 
colleagues have already talked about Gramm-Leach-Bliley and the 
CFTC reform. And here we are talking about too-big-to-fail, all 
these institutions that are allowed to perform several 
    What, in your opinion, can we not unscramble in order to 
continue to be innovative and profitable? What cannot be 
    Mr. Bernanke. Well, I don't think I would break firms down 
to their elementary components; you know, commercial banks can 
only loan and take deposits, for example. There are lots of 
benefits to having multiple services provided by one 
institution, or global services provided by one institution. 
But I do think we need to take considerable care that we are 
not creating institutions which are imposing risks on the broad 
financial system.
    Ms. Moore of Wisconsin. Okay. So I have just one more 
question. Many of my Republican colleagues are critical and 
concerned about the Fed taking on the role of the systemic risk 
regulator, and then there are people like me who are undecided.
    And when I looked at the last page of your testimony and 
you say that you don't want as much auditing of the Fed because 
it may interfere with your independence, I have to ask you why 
you think, then, that you should be able to perform the tasks 
of monetary policy and how that will not compromise your policy 
independence. I mean, you know--
    The Chairman. If the gentlewoman wants an answer--
    Mr. Bernanke. Yes, independence varies. We have been 
supervisors for a long time, and we have all the same 
examinations, all the same oversight that the other supervisors 
    Monetary policy is a special area which I would just put on 
the side here. But in terms of our systemic oversight and 
supervision, we would have exactly the same oversight that any 
other supervisor would have.
    The Chairman. The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    Chairman Bernanke, the last time that you appeared we had 
an opportunity to talk about the budget deficit. And one of the 
things you said, which I think was very impactful to me, you 
said in response to a question I asked, ``Certainly, trillion-
dollar deficits as far as the eye can see would not be 
    And we had the CBO Director, Mr. Elmendorf, he came out 
with his own analysis, which you are familiar with, sort of 
sounding the alarm. And he had a couple of observations. One, 
he said with respect to the growing expanse of the government 
at the expense of the private sector, he made some observations 
in terms of squeezing out in the future economic growth on the 
private-sector side.
    And then he said about the costs--for example, the health 
care bill that is moving, he said that legislation 
significantly expands the Federal responsibility for health 
care costs. He said, ``The way I would put it is that the cost 
curve is being raised.'' And he went on to express his 
    I think one of them is, in the middle of a recession, we 
see the government shifting. We have a government-run economy, 
basically, or we are beginning to move in that direction, and 
the deficits are appreciably higher. You know, perhaps the 
deficits could reach as high as $2 trillion for the short term.
    Earlier this year, the CBO projected that the Federal 
Government would need to go out with $2 trillion in treasuries 
in order to fund the deficit. And that was the short run. If 
you combine short and long term, they were talking $4.5 
trillion over the next 2 years.
    The bond market has never seen such a large bond issuance 
in such a short period of time. So I was going to ask you about 
your perception on the ability of the bond market. Can we float 
that much, $4.5 trillion over the next 2 years? What will the 
results be on that?
    And do you have a concern with the pace at which government 
is growing relative to the private sector here and the added 
responsibilities on the public purse that Congress is in the 
process of enacting?
    Mr. Bernanke. I think the ability to float large amounts in 
the short to medium term depends on the credibility of a 
longer-term plan that brings the deficits down. If the markets 
don't think that you are on a sustainable path, then they will 
bring forward in time their concern about future deficits. So 
it is important to have, as I said before, a medium-term 
sustainability plan.
    I must say one thing about health care costs, which is that 
is the most important determinant right now of our long-run 
fiscal situation. And even under the status quo, we have a very 
serious problem, and so, we do need to address that problem in 
some way. Because, given the aging of our population, the 
increases in medical costs are going to be a huge burden on our 
fiscal balance.
    Mr. Royce. Well, on that very subject, here is what the 
head of the CBO said about that. He said, ``As a result of 
those deficits, Federal debt held by the public is going to 
soar from 41 percent of GDP to 60 percent at the end of the 
fiscal year 2010. This higher debt results in permanently 
higher spending to pay interest on that debt. Federal interest 
payments already amount to more than 1 percent of GDP. Unless 
current law changes, that share will rise to 2.5 percent by 
    And he says, ``The Federal budget is on an unsustainable 
path because Federal debt is going to continue to grow much 
faster than the economy over the long run, and large budget 
deficits would reduce national saving, leading to more 
borrowing from abroad and less domestic investment, which, in 
turn, would depress economic growth in the United States. Over 
time, accumulating debt would cause substantial harm to the 
    ``Substantial harm.'' Do you agree with the CBO's estimate 
on that subject of accumulating that amount of debt?
    Mr. Bernanke. If fiscal policy stays on an unsustainable 
path, I do agree with it, yes.
    Mr. Royce. Thank you very much, Chairman Bernanke. I 
appreciate your testimony here today.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from Florida.
    Mr. Klein. Thank you, Mr. Chairman.
    And thank you, Mr. Chairman, for being with us today.
    I am going to bring the conversation back to what I 
continue to believe are the most current issues, and that is 
home foreclosures and lending to businesses.
    I have been a believer from the beginning that, when we 
started this process on dealing with the recession and dealing 
with the banking crisis, I think you and others said we need to 
deal with both, you can't do one without the other, can't make 
the investment in the recovery without making liquidity 
available to businesses, and you can't fix the banks without 
stimulating and getting things moving on the private side.
    What I also believe, and I support your position, is that 
we are going to have a slow, maybe a little bumpy recovery, but 
it is probably moving in the right direction. And what our 
goal, of course, as people in the public and private side, is 
to mitigate or reduce the amount of time it takes for the 
natural cycles to work their way through.
    That being said, I am from Florida, as you and I have 
talked about, and we are in a very precarious time. The banks 
are overexposed, in many ways. The residential markets are 
overexposed. And we do not see enough activity, movement. And 
that is speaking to Realtors on short sales and workouts and 
things like that on the residential side; and on the business 
side, real estate and/or business, the lending practices.
    And there is a lot of frustration out there, maybe 
justified, maybe not justified, but certainly intuitively 
justified, that banks that received Federal assistance--and 
maybe they are in a separate category--but that they have a 
higher responsibility to work out this scenario. Nobody is 
pushing them to make unreasonable and unjustified underwriting 
decisions. But they really are not part of the process of 
solving the problem.
    Specifically on the foreclosure area, I think it was the 
Federal Reserve of Boston, did a paper that talked about 3 
percent of the serious delinquent loans have been resolved 
since the 2007 period of time. That obviously is not working in 
any successful way.
    Can you share with us, whether it is the Federal Reserve or 
whether just your general experience, what we can do to deal 
with the foreclosure--what can we do to stimulate the banks to 
help work this out on a much more efficient, much more quick 
    Mr. Bernanke. Well, we have a couple of government programs 
in place, as you know, the Making Homes Affordable Program 
using the TARP money, and the HOPE for Homeowners Program, 
which are different principles. One reduces payments; the other 
addresses the principal. Those programs are slowly ramping up. 
So I think it would be important to try to get that moving as 
quickly as possible.
    The bank regulators have been pushing the banks to expand 
their staffs and to be more responsive. We have heard from many 
consumer groups, for example, that banks are sometimes very 
slow in responding to requests for short sales or requests for 
    So I think it is very important that the banks increase 
their capacity and move as quickly as possible to take 
advantage of these programs or other ways of working out 
borrowers and avoiding preventable foreclosures.
    Mr. Klein. I agree. But what can the Federal Reserve do, if 
anything, or through your relationships with FDIC or others?
    Mr. Bernanke. Well, the Federal Reserve doesn't oversee 
many of the big servicers who have large numbers of these 
mortgages. But we are working with our fellow bank regulators. 
We issued a statement in November, and we are working with the 
Federal bank regulators to try to push the banks to move more 
quickly and expand their capacity to work out loans. So I think 
that is very important.
    The Fed is also working with communities. We have some 
projects to try to stabilize neighborhoods that are suffering 
from large numbers of foreclosures. But I think it is very 
important that the banks which are the servicers get involved 
as quickly as possible to work with these borrowers.
    Mr. Klein. You know, on the short sale issue, that is 
something that we had been told a while back there was going to 
be a streamlined process, which, you know, banks would have a 
uniform process, uniform documentation, could move a lot 
quicker. And I just wrote a letter to follow up on this. It 
doesn't seem to be happening.
    So I guess I would just ask, as we move forward--and I 
understand we have programs out there, and they are working 
marginally. We just have to ramp this up in terms of voice, 
substance, and effort, and do that.
    Secondly, in the small business area, again, small 
businesses, particularly in my area and south Florida and other 
parts of the country, drive the train. And they will be 
probably the quickest ones to be able to respond.
    We understand unemployment lags, but there is this 
timeframe which is a cash-flow issue to work through a slow 
period. In Florida, we have a non-season point in time, where 
businesses need that ability to get through. And, again, they 
are having a difficult time, even what I would consider 
creditworthy people. Their ability to pay is there and 
    So if you could just quickly comment on that.
    Mr. Bernanke. No, I agree. And we are working on that. We 
have in our TALF program a Small Business Administration loan 
program which is trying to provide funding for those loans, 
trying to help in that way.
    The Chairman. The gentleman's time has expired.
    The gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Chairman Bernanke, welcome.
    In Chairman Frank's questioning of you earlier, he asked 
about the positive aspects of the stimulus bill that was passed 
early in February. I believe what I heard you say is that you 
believed it had some marginal improvement on State and local 
tax revenues and some marginal improvement on consumer 
spending, but you were reserving judgment.
    Is that a fair assessment of what you told this committee?
    Mr. Bernanke. We are still pretty early in the execution of 
this program.
    The Chairman. Would the gentleman yield?
    Mr. Hensarling. I would be happy to yield to the gentleman.
    The Chairman. The word ``marginal'' was never uttered. He 
didn't say ``marginal.'' The gentleman can read the report. It 
doesn't say ``marginal.''
    Mr. Bernanke. It has had some effect, we believe.
    Mr. Hensarling. Okay. It has had some effect. Okay. Well, 
the chairman has said ``some.'' So I appreciate the chairman's 
    Clearly, what you didn't mention, as far as positive 
impacts, was employment. We know that, since this legislation 
has passed, that unemployment is now at a quarter-of-a-century 
high, that 2 million jobs have been lost. Some believe that 
there is cause and effect on adding $1.1 trillion to the 
national debt.
    And on page 6 of your testimony, again you state, ``Unless 
we demonstrate a strong commitment to fiscal sustainability, we 
risk having neither financial stability nor durable economic 
    I have noticed, and please tell me if I am incorrect, the 
latest FOMC report indicates or estimates that we are looking 
at 9 to 10 percent unemployment not only for the rest of this 
year, but for the rest of next year, as well.
    Did I read that report correctly?
    Mr. Bernanke. That is right.
    Mr. Hensarling. Okay. So, 9 to 10 percent unemployment. And 
this estimate is up from your earlier report. Is that also 
    Mr. Bernanke. That is right, the one that was made in 
    Mr. Hensarling. Okay. I guess, Mr. Chairman, then the 
question is, yes, I would hope that if one committed $1.1 
trillion, when you add in debt service, some good would come 
from it. Now, clearly, it hasn't happened on the employment 
    But I am also concerned that, no matter what the positive 
aspects are, without the strong commitment to fiscal 
sustainability, might it be possible that whatever short-term 
good comes out of that legislation is going to be outweighed by 
long-term damage, as many economists believe?
    Mr. Bernanke. The deficit is obviously an issue. We have to 
worry about the long-term debt ratio, certainly.
    Mr. Hensarling. In that regard, Mr. Chairman, as you know, 
Capitol Hill, Congress is considering health care legislation. 
Clearly, I think all Americans agree that the status quo is 
unsustainable over the long term.
    The legislation that is presently before Congress, CBO 
Director Elmendorf has said, ``We do not see the sort of 
fundamental changes that would be necessary to reduce the 
trajectory of Federal health spending by a significant amount. 
And, on the contrary, the legislation significantly expands the 
Federal responsibility for health care costs.'' He goes on to 
estimate essentially the table stakes cost of the program, if 
you will, at $1 trillion.
    Now, again, I would hope that some benefit would come from 
that program. But, one, do you agree with Director Elmendorf's 
assessment, if you have looked at the cost of that legislation? 
If you haven't, assuming he is correct, would you be concerned 
about the impact that this would have on our Nation's 
commitment to fiscal sustainability?
    Mr. Bernanke. I have not done an independent evaluation of 
the cost. I think, as I said earlier, that a critical element 
of fiscal sustainability in the long term is the cost of health 
care and the fiscal share in health care costs. So whether we 
adopt a new program of reform or whether we stick with the 
status quo, I do think we need to address that 2.5 percent 
faster than per capita income growth and per capita health care 
    Mr. Hensarling. Mr. Chairman, in your most recent survey of 
small businesses finances, I believe the Federal Reserve 
indicated that approximately 77 percent of small business 
owners use credit cards. A recent report in USA Today has 
indicated that in the first 4 months of this year alone, we 
have seen a 38 percent drop in the issuance of new credit 
cards. Now, presently Congress is considering legislation aimed 
at consumer financial products. But given that a large number 
of small business owners use credit cards for business 
purposes, might an unintended consequence of the wrong 
legislation lead to a further contraction of credit to small 
    Mr. Bernanke. Well, I hope that small business can move to 
somewhat less costly forms of credit over time.
    The Chairman. The gentleman from Illinois.
    Mr. Foster. The title of this hearing involves monetary 
policy, but the subject seems to be the overall health of the 
economy. And I am struck by the underemphasis in this 
discussion of the importance of the real estate market, which I 
believe was the dominant driving force in this economic 
downturn. Much more wealth has been destroyed by the drop in 
real estate values than in the stock market or the near 
collapse of our banking system. And the same was also true of 
the Great Depression, where more wealth was destroyed in the 
real estate bust following the stock market crash than the 
stock market crash itself. And so I have sort of two questions 
along these lines.
    First, do you think it might be appropriate to have more 
information in future releases of this about the real estate 
market and projections? And also, if you could say a little bit 
about what the Fed does in terms of projecting. How much 
manpower do you put into looking forward projections of the 
real estate market, given what I believe is of extreme 
importance to future economic conditions.
    Mr. Bernanke. No. I agree it is very important, and I am 
surprised that we don't have much coverage. I think we 
certainly do put a lot of resources into projecting 
construction, house prices, land prices, and the like. And I 
agree, it is very important.
    Mr. Foster. And the second point is, do you think that the 
Fed is necessarily helpless to mitigate future real estate 
bubbles? For example, in this week's Economist Magazine, they 
discuss China's response. And of course, as you know, they are 
pushing very heavily on monetary policy and credit availability 
and so on, but at the same time, to avoid reinflating a real 
estate bubble they are turning up the mortgage origination 
requirements. You now have to put 40 percent down and so on, 
and so that they are independently operating both of those.
    Do you think that actually there is a reasonable role for 
the Fed or some other regulator to try to make this happen?
    Mr. Bernanke. I think that could be addressed under the 
systemic risk regulation rubric that we have been discussing 
with the Council or with the Fed overseeing large financial 
institutions, that when you have an asset whose prices is 
rising quickly, you could require greater capital against it, 
for example, or greater downpayments. So even if you don't know 
there is a bubble or not, that still might be a prudent thing 
to do. So I do think that looking at asset price fluctuations 
in a supervisory context could be very helpful.
    Mr. Foster. Thank you. I yield back.
    The Chairman. If the gentleman would yield to me, I did 
want to then continue a couple of points.
    One, I would ask you, Mr. Chairman, on page 16 you 
mentioned that the emergency unemployment that we adopted last 
year has ironically contributed to a higher unemployment number 
in terms of the rate because it has increased the participation 
rate. I think people ought to be clear about that. The 
unemployment rate goes up when more people are trying to find 
jobs. Would it be possible to get an estimate of the extent to 
which that was statistically a factor?
    Mr. Bernanke. We can send it to you. My recollection is 
about a half a percentage point.
    The Chairman. That is interesting, a half percent of the 
9.5 percent.
    Secondly, I did just want to reiterate. Our friend from 
Texas said in two cases, said there were marginal improvements. 
The word ``marginal'' doesn't appear even in the margins here. 
It is certainly not in the text.
    So on page 1 of the first column there is an unqualified 
statement that consumer spending has been supported by the 2009 
stimulus. On page 13 it says interest rates have declined 
because investors concerned about credit quality eased with the 
passage of the stimulus plan. It then did say that, in addition 
to that, it aided the finances somewhat. So, or it is somewhat.
    If the gentleman wants the time of the gentleman from 
    Mr. Bachus. Oh.
    The Chairman. The gentleman from Illinois yielded me his 
    So those are both cases. I also remember in response to a 
question of the gentleman from Texas, sometimes you get answers 
you don't want. The Chairman said that the passage of the 
stimulus bill had reduced unemployment. So obviously it is not 
totally the answer, but I don't think it is trivial to object 
to the insertion of ``marginal'' when it was never there in the 
entry point.
    The other point I want to make is this. The Chairman talked 
about the recommendations they are preparing on executive 
compensation. I would just note that those will dovetail with 
the legislation I hope this committee will be adopting next 
week, because we will be empowering the SEC statutorily to 
enact certain rules. And so the information and the 
recommendation of the Federal Reserve, frankly my sense is that 
absent our statute there wouldn't be the statutory authority to 
put all those in effect. So these work very well together. We 
will be giving the SEC the statutory authority, I hope, before 
the end of the year to incorporate those recommendations.
    The gentleman from New Jersey.
    Mr. Garrett. Before I begin, let the record therefore 
reflect that there is a significant difference between the 
definition of ``marginal'' and ``somewhat.'' I take away from 
    Thank you, Mr. Chairman. We have some charts which sort of 
go to this point as far as looking at the economic issues and 
the stimulus issues and how you sort of judge these things. As 
you know, the President's Economic Policy Advisor has suggested 
that, as soon as this passed, that, quote, it will start adding 
jobs rather than losing them. Majority Leader Hoyer said there 
will be an immediate jolt.
    And so if you look up, I know it is hard from where you are 
sitting--great. It is even easier then. This is what the 
original projections were. With the recovery plan is the dark 
line on the bottom. But if you don't do anything, things would 
be worse, the top line above there. And that is why, of course, 
we borrowed $800-plus billion to try to fix it.
    Now, the next slide, slide two, shows what really happened. 
The two other lines are still there, but now you see where the 
unemployment numbers actually were in March of 2009 and April 
of 2009. And we don't have this on the little screen but we do 
have it on a board to show where it went after March, April. I 
guess it goes up to May and June, if I am not mistaken. I don't 
seen it here. Basically, what that tells me, not as an 
economist, just as a layman, that they, as the Vice President 
said, misread the economy and their projections in regard to 
where things would happen if we did nothing or if we had spent 
$800 billion. And things are actually worse than they 
projected, and we would have been better off, if their original 
charts were right, to have done absolutely nothing.
    So your comment on that--and also, I understand your 
earlier comment when I stepped out of the room was that it is 
too early to tell. When will we be able to tell? And if their 
focus was on job creation, and that was the entire focus in all 
their comments on this was job creation, isn't that an 
indicator that we should be able to look at here approximately 
a half a dozen months later?
    Mr. Bernanke. Well, as Chairman Frank mentioned earlier, 
the economist's fallback is always the counterfactual: Where 
would we be without the program? And it is difficult to know.
    Clearly, the forecast that was made in January of this year 
was too optimistic. And then the question is, where would we be 
without the program? And it is very hard to know. Some sense of 
the uncertainty is given by the CBO's estimate, which has at 
the end of 2010 the impact of the program being anywhere 
between .6 of 1 percent unemployment to 1.9 percentage point of 
unemployment. So it is likely that it would reduce 
unemployment, but the scale is very hard to know. And we should 
know better next year, but it is very early at this point.
    Mr. Garrett. I fear then that the argument on the 
counterfactual will always be the argument that will always be 
thrown up to us to suggest that maybe there was a better way. 
And even a year from now, or a year-and-a-half from now, when 
we get into the last dollar going out the door, they will 
always say it could have been worse. So how would you retort to 
that argument?
    Mr. Bernanke. You have to use the best analysis that you 
can get. To the extent that you are seeing outcomes unrelated 
to unemployment that are worse that you expected, that is 
indicative that the whole economy is worse than you expected. 
But I am sympathetic to the fact that it is very hard to know 
what the impact is.
    Mr. Garrett. And so any discussion right now as far as 
going forward with additional spending or additional stimulus 
would also therefore be too early to make those suggestions as 
    Mr. Bernanke. That is right.
    Mr. Garrett. Let's change subjects and go to the issue of 
monetary policy. I know in your report today and in your op ed 
as well, and you have previously stated that you have concerns 
about the independence of the Fed both on monetary policy and 
your other regulatory roles as well; therefore, you do not like 
the idea of audits and what have you, intrusive audits on 
various other aspects of the Fed than it has right now. I would 
just suggest that, in two areas, that maybe the Fed over its 
history has not been as independent as some would suggest. In 
the area of monetary policy, I know we have had this chairman 
on at least a half a dozen occasions encourage that the Fed, 
both the current Fed and the previous Chair, lower interest 
rates to keep the economy going, what have you. And of course 
you have heard a number of economists who make the argument 
that it was the low interest rates that helped either cause or 
at least exacerbate the problem. So there is one area where 
Congress and at least the chairman is trying to weigh in and 
influence the Fed. And certainly the other areas on the 
regulatory role and the consumer protection area, for about 8 
years under Republican leadership we took a position that was 
not the appropriate position to try to better the economy. 
Then, under 2 years of Democrat leadership and what some would 
say is a pounding on the Fed in this area to go in that 
direction, suddenly the Fed goes in that area.
    So is it fair to say that the Fed may not be, even under 
current constrictors, as totally independent that some would 
suggest that it is? And do you think that it is helpful for the 
Congress to weigh in on setting monetary policy and setting 
consumer policy as well?
    Mr. Bernanke. On monetary policy, we do not take political 
considerations into account. We look only to the economy. You 
have the transcripts 5 years later. You won't see any 
discussion of politics. And I assure you that we make those 
decisions based on the long run health of the economy.
    On regulation, I think the rules are somewhat different in 
the sense that Congress sets statutes, and those statutes 
create presumptions for what the regulators are going to do. 
With respect to regulatory policy, our independence is 
important, but it is not to the extent that monetary policy 
independence is. We have a similar relationship as other 
supervisors and regulators do to the Congress.
    The Chairman. The gentleman from Minnesota.
    Mr. Ellison. Thank you, Mr. Chairman.
    Thank you, Chairman Bernanke. I appreciate you being here 
and your work.
    If the Federal Reserve is given the authority to oversee 
systemically significant firms, what additional powers would it 
need to completely and successfully carry out those duties? For 
example, what about the authority to review accounting 
policies, particularly those who direct and potentially 
procyclical implications on banks? And what about enhanced 
authority to examine the safety and soundness of nonbank 
subsidiaries within bank holding companies? And what about 
oversight of credit rating agencies?
    Mr. Bernanke. The Fed would need some authority perhaps in 
conjunction with the council to add capital liquidity and other 
requirements to make sure that the institutions were not only 
safe and sound but did not pose a risk to the broader financial 
system. As part of that, the Fed would need some enhanced 
authority to look at nonbank subs, as you mentioned.
    The other things that you mentioned, like accounting policy 
and credit rating agencies, would not be part of this. Those 
are the kind of things that the council would be responsible 
for looking at.
    Mr. Ellison. I introduced a bill that would give the 
Federal Reserve oversight over credit rating agencies when they 
analyzed the rating structure of financial products. This 
authority would build upon powers that the Fed has already 
assumed as part of the administration of the TALF program. Do 
you have any reaction to that?
    Mr. Bernanke. Well, currently the SEC has those 
authorities, and I guess I would like to get your judgment 
about why you would want to transfer them.
    Mr. Ellison. Well, because they have an important--the Fed 
does have, is looking to, perhaps would take on some 
responsibility of systemic risk, and clearly credit rating 
agencies have an important role to play in that regard. So my 
thought would be if we are going to address, if we are going to 
confer this authority with the Fed, don't they need all the 
tools that would be necessary to achieve their ends?
    Mr. Bernanke. As I indicated earlier, we are not asking 
for, the Administration is not asking for, broad-based 
authority over the entire system. It is a very specific limited 
set of authorities over the systemically critical firms, which 
is similar to our current umbrella supervision authority. So 
the broad issues that you are referring to I think would be 
better served by being looked at by a council of regulators.
    Mr. Ellison. Do you believe that inflation concerns are 
misguided, given the large quantity of excess reserves in the 
banking industry?
    Mr. Bernanke. I think they are misguided in the sense that 
we, as I have described today and in various other contexts, 
the Federal Reserve is able to draw those reserves out and 
raise interest rates at an appropriate time to make sure that 
we don't have an inflation problem.
    Mr. Ellison. Should Congress consider setting a leverage 
    Mr. Bernanke. That is something we should look at. I think 
there is room here for the regulators, the Treasury and others, 
the Congress, to think about our capital regulation plan and 
see what changes might be made. But I wouldn't want to give an 
offhand comment on that. Of course we already have a leverage 
ratio, but the question is whether to raise it or change its 
format in some way.
    Mr. Ellison. I would like to ask you about consumer 
protection issues. Ed Yingling of the American Bankers 
Association indicated that consumer protection in the financial 
system, safety and soundness are two sides of the same coin. 
But I wonder sometimes if that coin sometimes is at odds within 
itself, because it seems to me that if you take, for example--
and I used this example before--overdraft fees. I think a 
safety and soundness regulator might not be distressed about 
what I would call excessive overdraft fees, because that means 
profitability and a stream of income for the bank, which would 
make the bank more safe and sound. But from a consumer 
standpoint, it could present some real issues. You know, $35 
for a bounced check might--I think some consumer advocates 
might find that excessive.
    So then, and this is an example and I know that there are 
many others in which the consumer, a consumer advocate and a 
prudential regulator might see things very differently. Do you 
see a conflict between, say, what a consumer advocate, a 
consumer advocate might look at and feel is important and that 
of a safety and soundness regulator?
    Mr. Bernanke. On that particular example, the Fed has taken 
a number of actions about overdraft fees, even though we are 
also a safety and soundness regulator. I think there are also 
examples where consumer protection and safety and soundness are 
complementary. An example would be underwriting standards. Good 
underwriting standards, well documented, making sure there is 
enough income, those sorts of things, that is good for safety 
and soundness and it is also good for the consumer. So there is 
also situations where there they are complementary.
    Mr. Ellison. And--
    The Chairman. The red light means time is up. The 
gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Thank you for being here, Mr. Chairman. You talked a little 
bit about the TALF program and said that it was off to a slow 
start. What are the expectations and the benchmarks with the 
TALF facility? Will it be sufficient and timely enough to 
facilitating private investing and lending? Or are you 
considering other programs?
    Mr. Bernanke. The amount loaned is lower than we expected, 
but I wouldn't say it is off to a slow start because it has 
been very effective. We have consumer asset-backed 
securitizations at almost the same levels they were before the 
crisis and considerable improvement in the spreads in those 
securities. We have just begun the commercial mortgage-backed 
security program, so it is a little early to judge there. But 
we have seen even in that category, we have seen the spreads 
come in, the rates come down. So I do think that even though 
the amounts loaned are not that enormous, there have been 
benefits in the market. So I think we will continue to focus on 
that instrument.
    Mrs. Biggert. I think that with the securitized lending, 
how do you plan to address the reality? I think that there have 
been some that have flagged that the market experts and some of 
the participants that the markets need to know now and not at 
year's end whether the programs will be extended in order to 
see any usefulness in the next several months. Would you agree 
with that statement?
    Mr. Bernanke. We will certainly want to give the markets 
plenty of advanced warning. You are absolutely right there. And 
we are looking at that and making a judgment.
    Mrs. Biggert. And how do you address the commercial real 
estate? You talked about that as being--
    Mr. Bernanke. Well, one of the main problems with 
commercial real estate finance is that commercial mortgage-
backed securitization was an important source of funding for 
that commercial real estate, and that has completely shut down. 
Our TALF program is now accepting both new and legacy CMBS. It 
takes a bit of time to put those deals together, and so we 
haven't quite yet seen the scale that we anticipate, but we are 
hopeful that that will be at least one contributing factor to 
improving the commercial real estate market.
    Mrs. Biggert. So have you contemplated extending the TALF 
    Mr. Bernanke. We are looking at some alternative assets, 
but they are very complex, many of them, once you get beyond 
the categories we have already included.
    Mrs. Biggert. So if you go to that, then will you not 
extend the TALF program, if you go to these others?
    Mr. Bernanke. We may not. It depends on our judgment on 
some of the alternative asset classes that we are currently 
    Mrs. Biggert. Thank you. Then it is my understanding that 
we talk so much about small businesses as being the basis of 
jobs and about 60 to 80 percent of the net new jobs according 
to the CBA's Web site. If this is the case, what is going to be 
the effect of requiring small businesses to pay for the health 
care program? In other words, if they pay as individuals the 
rates, how is this going to affect the health care for small 
businesses? And shouldn't we be providing incentives for small 
businesses to grow rather than to have to have a tax increase 
in effect?
    Mr. Bernanke. All else equal, if you raise taxes on a 
particular kind of firm, that will be detrimental to the firm. 
But I think, in fairness, you have to look at the overall 
issue, which is how to provide broad-based health care. And 
there is a problem, which is that a lot of small firms don't 
offer health care. And then the question is, how do you provide 
that? So there is an issue of financing that, and maybe there 
are alternative ways to do that.
    Mrs. Biggert. But isn't it going to be that the small 
businesses would actually have much less chance to do it if 
they are having to have increased taxes to pay, the amount of 
money if they are making over--I don't know what it is now, 
between $250,000 or $1 million, whatever is going to be the 
    Mr. Bernanke. If there are extra costs, that would be 
obviously a cut into profits.
    Mrs. Biggert. Thank you. Thank you for being here. I yield 
    The Chairman. The gentlewoman from California, Ms. Speier.
    Ms. Speier. Thank you, Mr. Chairman.
    Mr. Chairman, thank you for your service. I know you have 
spent a lot of time up here in a number of hearings in 
Government Oversight among others, and we have been tough on 
you. And I want you to know that even though we have been 
tough, I truly respect what you have done over the last 12 
months. I think you are a man of good will and good faith, and 
we are indebted to you as the American people.
    Let me ask you this question. Are we enduring the greatest 
world depression right now?
    Mr. Bernanke. This is the worst global recession in the 
postwar period. It is not as great as the 1930's, but since 
World War II, yes.
    Ms. Speier. The $700 billion of TARP money, you indicated 
that we are underwater with AIG and Bear Stearns. How much can 
the taxpayers expect to have returned to them of the $700 
    Mr. Bernanke. I was referring to the Fed loans and not to 
the TARP. But TARP is also underwater, probably, in AIG.
    I don't know the answer. We have of course $70 billion just 
paid back. It is much more complicated now because, as you 
know, the TARP money is being used for a number of different 
purposes, including foreclosure avoidance and the auto 
companies and so on. So it is hard for me to make a judgment. I 
would say that of the money put into, as capital into banks, 
particularly through the capital purchase program, which is 
money given out to healthy banks, I would say that virtually 
all of that money will come back. For troubled firms like AIG, 
it depends on how markets evolve and how the firm does going 
    Ms. Speier. You said earlier that you didn't really think 
Glass-Steagall, if it were in place, would have protected us 
from all that took place. However, it would have protected us 
from the debacle at AIG, and the taxpayers would not have had 
to put up $200 billion. That is true, is it not?
    Mr. Bernanke. I don't think so. Glass-Steagall separates 
commercial banking and investment banking. I don't think it 
would have prevented AIG from--
    Ms. Speier. Well, AIG is an insurance company. And the only 
way it was able to then move into credit default swaps was by 
purchasing a thrift in Delaware that then gave it the 
opportunity to play in that marketplace.
    Mr. Bernanke. I would have to check on the legalities. They 
were treating, they were calling credit default swaps a form of 
insurance. So maybe they would have argued it was a type of 
insurance and therefore fell under their purview.
    Ms. Speier. It wasn't regulated by insurance commissioners 
around the country. It was really regulated through the Office 
of Thrift Supervision, was thrift supervision, so therefore it 
was the banking entity that was really the regulator for it.
    There is a hearing we are going to have this afternoon on 
what is too-big-to-fail, and one of the individuals who is 
going to testify makes the statement that for companies that 
are under $100 billion as a rough threshold, that we can allow 
them to fail without it creating havoc in our financial 
services industry. Would you agree with that?
    Mr. Bernanke. I wouldn't want to give a single number. I 
think it depends also on the complexity and interconnectedness 
of the firm, and it also depends on what is happening in the 
broader markets. There may be be times of stability when a firm 
can fail and wouldn't cause broad problems, but during a period 
of intense instability letting the firm fail would be a 
problem. So I hesitate to give a single number.
    Ms. Speier. But is that around the threshold, would you 
    Mr. Bernanke. Again, I don't want to give a single number. 
I think it is a multi-dimensional question. It depends on a 
number of different things.
    Ms. Speier. Now, Bank of America is $2.3 trillion in assets 
now. It is too-big-to-fail, isn't it?
    Mr. Bernanke. The government intervened, provided TARP 
money in January.
    Ms. Speier. Well, it is a definition of a company that is 
too-big-to-fail, because we have injected much money into it. 
    Mr. Bernanke. Yes. And, again, I think it is very important 
for us to have a resolution regime that will avoid that problem 
in the future.
    Ms. Speier. So how do we make these financial institutions, 
because there is a handful of them now because there has been 
concentration in the marketplace because of the failures. How 
do we make these companies smaller?
    Mr. Bernanke. If you impose both the consolidated 
supervision of the Fed or another authority over these firms 
and make them bear the cost of their size through extra capital 
liquidity and risk management requirements, first, and 
secondly, if you have a resolution regime which allows the 
possibility that creditors could lose money if the company 
failed, then both of those things would tend to make being big 
less attractive because, on the one hand, you have to bear more 
capital requirements, and on the other hand, you don't get the 
cheap financing that you get from being too-big-to-fail.
    So those things would tend to make firms choose to be 
smaller. And in addition, supervisors could choose to tell 
firms that they needed to limit certain activities if they 
thought it was a danger to the broad system.
    Ms. Speier. My time has expired.
    The Chairman. The gentleman from Texas, Mr. Marchant.
    Mr. Marchant. Thank you, Mr. Chairman.
    We have had an interesting phenomena where we had several 
investment banks and broker-dealers that decided to become bank 
holding companies and banks. Is there a possibility that these 
bank holding companies and banks can make another decision to 
go back to be only broker-dealers and investment banks? And 
does the Fed have any control over their decision to do that? 
And what would be the implications of that?
    Mr. Bernanke. They could do that. And if they did, the Fed 
would no longer be their supervisor. One of the benefits of the 
idea of determining that a certain set of firms are so-called 
Tier 1 firms is that if you were one of those firms you 
couldn't escape. You would still be supervised by the Fed no 
matter what your charter was.
    Mr. Marchant. So that would be a very important part of the 
reform package?
    Mr. Bernanke. That is right, to avoid that problem. Yes.
    Mr. Marchant. With the savings rate at 8 percent and going 
possibly to 10 and the strong demand for treasuries, is it 
possible that the Fed could make the decision to divest itself 
of the treasuries and the government securities that it has 
been buying as long as that savings rate and that demand for 
treasuries remains high?
    Mr. Bernanke. We don't have any near-term plans to divest 
ourselves. The Fed normally has on its balance sheet a 
considerable amount of treasuries. And, as I mentioned, the 
purchases we are making right now will only bring us back to 
somewhere where we were a few years ago.
    Mr. Marchant. Is it possible that we would have treasury 
rates low and interest rates low, and inflation raise its head, 
and we could actually be in the place of having to raise 
interest rates without there being any employment gains?
    Mr. Bernanke. Well, one concern that we always have to pay 
attention to is if there were for some reason a loss of 
credibility, which might come about because of loss of 
independence of the Fed, and inflation expectations rose for no 
reason connected to the economy but just because of investors 
thinking that inflation is going to be higher. That would pose 
a serious problem for the Fed because it would require us to 
respond to that to avoid its being transmitted into actual 
inflation. And that could be happening at a time when the 
economy had not yet recovered. So inflation expectations and 
the credibility of the Fed are actually very important.
    Mr. Marchant. Is there a time in financial history since 
the Great Depression where you actually had consumer spending 
and the savings rate go up simultaneously?
    Mr. Bernanke. That is unusual but it is not impossible. If 
income is rising fast enough, then you can both save more and 
consume more. But normally when savings rates go up, people are 
obviously cutting back on their spending.
    Mr. Marchant. Thank you.
    The Chairman. The gentleman from Idaho, Mr. Minnick.
    Mr. Minnick. Mr. Chairman, I wanted to return to the next 
shoe to drop and the chairman's concern about commercial real 
estate. Would it be possible to provide a new assist providing 
liquidity for lenders and a floor to deteriorating market 
values by giving authority, statutory authority to Freddie Mac, 
Fannie Mae, or perhaps a new agency to guarantee loans of 
developed property, perhaps at 75 percent of the lower of 
today's active market fair market value, or today's replacement 
value using today's real estate and construction costs, and 
perhaps a similar guarantee for yet to be developed property at 
perhaps 50 percent of the lower of those two values? The 
advantage of this would be to prevent bankruptcy of commercial 
developers and commercial property owners who are unable to 
secure, take out financing, or to get development loan 
renewals, to reduce the downward pressure on rental rates of 
commercial property by reducing the number and price of 
distressed property sales, and to reduce failure rates of banks 
and commercial lenders by reducing the size and number of 
problem nonperforming commercial loans?
    I would like your opinion with respect to whether this is 
something we in the Congress should pursue.
    Mr. Bernanke. I think you would have to make the balance 
between helping out this market and the fact that would 
probably involve some financial risk on the part of the Federal 
Government/taxpayer. But you might make the determination that 
it was beneficial on that, so you would have to balance those 
two things off.
    Mr. Minnick. But you would not as a matter of sound fiscal 
and monetary policy think that an inappropriate step to take if 
that were to be our judgment in the legislature?
    Mr. Bernanke. I think it is really Congress' choice.
    Mr. Minnick. Thank you, sir. I yield back.
    The Chairman. The gentleman from California, Mr. Miller.
    Mr. Miller of California. Thank you, Mr. Chairman.
    Welcome, Mr. Chairman. I can't see you right now, but I 
know you are behind the gentleman standing in the front row. I 
wouldn't want your job for anything in the world right now. I 
think, and I know what you have to say you have to be very 
cautious about because anything you say could be misread or 
applied inappropriately to the economy. But oftentimes we tend 
to gloss over I think the real situation we are in today. I 
hear some say that the economy seems to be improving. I think 
we are in far worse shape than people want to recognize and 
understand truly. I heard people say there are signs of 
stabilization. You didn't mention that you think there has been 
a peak in unemployment. I guess a peak that has gone from 
680,000 a month down to 500,000 a month, we are losing jobs. 
That is still significant. And I think as time goes on you are 
going to lose fewer and fewer jobs each month because fewer 
people are going to be able to be laid off.
    But we have gone from the subprime debacle, and it seems 
like now we are going through a second round in the 
residential, and that is individuals who have had good loans. 
They are losing their jobs or business. People are basically 
running down their reserves and they are losing their homes 
also. But it is an unusual situation. Banks aren't making 
loans. And we can say, well, some are. But when you talk to 
people in the private sector, they are having a very difficult 
time getting loans. And I see a different situation in banks 
also don't want deposits. You go to them with large CDs, and 
they really don't want to take them. I think they generally 
accept the liability.
    Savings have increased. I think just because people realize 
they can't replace the money today if they spend it. I think 
there is a very cautious economy going on out there, and people 
look at that and they are afraid to basically spend their 
money, and I think a certain amount of money are being forced 
in the stock market because you can't go to the bank and get 
anything for your savings.
    But there has been a comment about a perfect storm, and 
there has been some mention about what the commercial real 
estate market is going to be doing. I think I started saying 
that about a year ago. You are looking at about a $6 trillion 
market out there with loans in the commercial sector, and 
default rates beginning this year were about a quarter of 1 
percent. Today they are about 2 percent. I think in the next 30 
days, and I know you probably don't want to talk about this, 
there is going to be a spike in the next 3 years. It can go 
between 12 and 15 percent. I don't know any lenders out there 
today who want to make loans on commercial real estate.
    Now, commercial mortgage-backed securities were about $240 
billion in 2007 sold, last year was about $12 billion, and I 
think you know today they are flat. There are zero mortgage-
backed securities and there isn't a credit flow.
    This year there is about $400 billion worth of commercial 
real estate that is due. By 2012, that increases to about $1 
trillion. What honest projection do you see for this commercial 
real estate market? Now, the economy has really been hit hard 
with the residential, especially on the subprime. The second 
round I think is hitting and you can see it now. Now, this is 
going to be dumped on the back of the economy. And we have kind 
of glossed over, but I think this is more severe than most 
people are giving credibility to.
    Could you address that a little?
    Mr. Bernanke. No, I agree; it is a sector we are paying a 
lot of attention to. The fundamentals are weakening and the 
financing situation is very tough. So we will see some problems 
there, I am sure. We are seeing some banks, if not making new 
loans, working out old ones and trying to extend, for example, 
the terms of those loans. And we also, as I mentioned, have 
added the commercial mortgage-backed securities to our TALF 
program. And it is too early to say how effective that will be, 
but we have had some success in other types of securitizations.
    So we are making some efforts in that direction, but, 
again, I think that is a scenario we need to play close 
attention to.
    Mr. Miller of California. And what you said there is very 
important, we are trying to work out loans. In February of last 
year, I introduced an amendment on the bill to require the 
Federal Reserve and the SEC to revise mark-to-market to try to 
deal with that. The problem I think we are going to see in the 
banking industry today, especially with regulators, is the cap 
rate has gone from 7 percent in 2006 to about 10 percent today. 
How are you going to deal with a builder or an individual who 
owns a commercial center and owes $14 million on his first? All 
of a sudden, based on mark-to-market, it is worth 7 and they 
only will lend 5. How do you deal with that?
    Mr. Bernanke. It is the same principle as with a borrower. 
If it is cheaper to reduce the payments and to keep the money 
coming in as opposed to getting a foreclosure, then it might be 
worth working it out. So it really depends. If the borrower can 
maintain a lower level of payments, then it might be in the 
bank's interest to do it.
    Mr. Miller of California. Are the regulators going to allow 
that bank to extend the 5-year call when that note is due, to 
extend that loan when the loan is 14 million, based on current 
value the loan should be 5?
    Mr. Bernanke. You take a loss on it. But we are working 
with banks in the residential context to try not to create 
accounting incentives to foreclose as opposed to work out. The 
same principle ought to apply in commercial real estate.
    Mr. Miller of California. But we are not starting where we 
did with the banks where they had adequate liquidity 
originally, when they got started to get hit with defaults. We 
are talking about banks today that don't want to lend money. 
They are trying to keep the reserves and they don't want 
deposits. They don't have the reserves.
    Mr. Bernanke. I agree, it is a problem.
    Mr. Miller of California. Thank you.
    The Chairman. The gentleman from New Jersey.
    Mr. Adler. Thank you, Mr. Chairman.
    Mr. Chairman, welcome back.
    The Chairman. Let me just say, we will be able to 
accommodate everybody who is here, and the staff is encouraged 
to bar any member who tries to come in besides those who are 
    The gentleman from New Jersey.
    Mr. Adler. Thank you, Mr. Chairman.
    First, I want to commend you. I think your work with TALF 
in particular has been ingenious, I think very, very helpful in 
creating markets where there was an absence of credit. So I 
really give you enormous credit for trying to provide credit 
through the Federal Government.
    I know you have spoken with a couple of members this 
morning about Federal spending and the potential looming threat 
it poses to our economy longer term. I am hearing from many of 
my constituents in Ocean County, New Jersey, that they are very 
greatly concerned about that spending pattern, the trajectory 
of spending we are on as a country, and that it may create 
deficits and Federal debt that is sustainable long term, that 
raises interest rates inevitably as the cost of government 
financing becomes unbearable.
    Can you revisit this topic with me? I know you have talked 
to some other people about it, but maybe you could allay my 
concerns that it is not a looming crisis facing our country.
    Mr. Bernanke. I don't think I can allay your concerns. We 
are going from about a 40 percent debt to GDP ratio before the 
crisis to somewhere 60 or above by next year, and it will 
probably continue to rise further.
    Putting aside all the issues being discussed now about 
health care reform and so on, just on the prior scenario the 
Congressional Budget Office shows an unsustainable fiscal path 
going out because under current law, there is something on the 
order of $40 trillion of unfunded health care liabilities for 
the U.S. Government and a significant amount also for pensions.
    So, as I was saying earlier, reform is important. We need 
to think about different ways to deliver health care and so on. 
But we do need to think hard about finding ways to control the 
costs, because the cost of health care is the single most 
important determinant of the long-term fiscal situation and we 
really need to address that. Otherwise, we are already in an 
unsustainable situation. Forget about additional things we 
might want to do.
    Mr. Adler. Would you agree that cost containment concept 
applies not just but in health care context but in the overall 
government spending context, that we have to at some point 
level off our amount of Federal spending to manage our Federal 
debt and not have it balloon beyond what we can sustain?
    Mr. Bernanke. Certainly. But health care is particularly 
problematic because it is 15 percent of the economy, it is a 
big portion of government spending, and because health care 
costs have been rising now for many years at a very rapid rate, 
much faster than the average income.
    Mr. Adler. Frankly, I very deeply share your concern about 
cost containment being the single most important feature of 
health care reform. So I thank you for that.
    You spoke with the gentleman from California a moment ago 
about liquidity issues. I am aware from studies that we have 
maybe as much as $1.2 trillion of private earnings sitting in 
banks overseas, principally in Europe. I am wondering, knowing 
that there are difficult political questions involving having 
that money coming back in this country, what would you 
recommend? And wouldn't you agree that having some of that 
money come back in would improve balance sheets for banking 
institutions in our own country and allow them to lend more 
fully than they have been doing over the last number of months?
    Mr. Bernanke. I would have to know more about the specific 
proposal. I do know that there was a proposal, it was a law 
passed recently that allowed for a period of time repatriation 
at a tax favored rate, and a good bit of money was repatriated 
under that rule.
    Mr. Adler. Do you have any sense of how much money might be 
out there that we could bring back in?
    Mr. Bernanke. I don't have a number. I am sorry.
    Mr. Adler. I thank you for your testimony. I yield back the 
balance of my time.
    The Chairman. The gentleman from Florida.
    Mr. Posey. Thank you very much, Mr. Chairman.
    Mr. Chairman, of all the testimony we hear in this 
committee, I enjoy yours the most. You are always very 
interesting. We have an awful lot of academics who come in here 
and try to convince us that a circle is a square and vice 
versa, and I appreciate your forthrightness.
    I was a little bit perplexed today by your answers to the 
first gentleman from Texas' questions. First, about inflation. 
I heard you talk about how you use pricing as a reference, and 
that purely printing more money doesn't cause inflation, which 
was really new news to me. And I wonder if you would tell me 
what you think causes inflation?
    Mr. Bernanke. Well, let's be clear what is going on. The 
Federal Reserve is not putting money out into the economy. What 
we are doing is creating bank reserves. That is money that the 
banks hold with the Fed. So it is just sitting there idly. It 
is not chasing any goods. So as long as those bank reserves are 
sitting idly, broader measures of money that measure the 
circulation of money--
    Mr. Posey. But it won't sit there idly forever.
    Mr. Bernanke. Right.
    Mr. Posey. The purpose is not to sit there idly forever.
    Mr. Bernanke. Right.
    Mr. Posey. And while there may be a time lapse, certainly 
unless that money gets sucked back in and out of circulation, 
it is going to cause inflation. There is no denying it.
    Mr. Bernanke. If it is not sucked back in. But as I was 
describing, we have ways of sucking it back in.
    Mr. Posey. How?
    Mr. Bernanke. Well, one way to do it is by raising the 
interest rate we pay on those reserves, which induces banks to 
keep the money with us instead of lending it out or circulating 
it through the economy. Another way to do it is through various 
open market operations that we can do that essentially pull 
those reserves out and bring them back into the Fed. So we do 
have a number of tools to do it. And we are quite aware of this 
issue, and we will not allow the broad measures of money 
circulating in the economy to rise at a rate rapid enough that 
would cause inflation eventually.
    Mr. Posey. I would appreciate if you could maybe give the 
members of this committee a little memo and more extensive 
explanation on how you plan to do that without damaging the 
economy that we are trying to fix now.
    Mr. Bernanke. There is a chapter in the policy report that 
covers it.
    Mr. Posey. Thank you. The second question was in response 
to the audit of the Fed. As you well know, the statutes are 
this thick of exemptions to Federal audit, of audit to the Fed. 
Just about every agency can be audited. I think I heard the 
gentleman from Texas say, if it wants, a citizen can find out 
more about the operations of the CIA than it can the Fed. And I 
don't know that I am denying that, or that you would really 
want to deny that. But he is talking about post facto audit, 
not interfering with daily decisionmaking, much like we do with 
many confidentiality exemptions where you say, no. What they do 
now, when they negotiate this contract it is secret, but when 
the contract is over it should be opened up to public scrutiny. 
And I think really the public does have a right to know 
historically how we determined the monetary policy of this 
country, for better or for worse. I mean, I don't expect it to 
be 100 percent on target all the time, but I think it is a 
matter of transparency. I think it is a matter of 
accountability. And I would like your thoughts on that.
    Mr. Bernanke. Well, first of all, on things outside 
monetary policy, we are open and very willing to work with you. 
The GAO right now is doing an audit of our annual financial 
statement, it is doing an audit of our information security 
controls, it is doing an audit of our assistance to AIG and 
many other things. So let me answer your question.
    Mr. Posey. These are the policymaking decisions. The 
minutes of the meetings that any government body might want to 
have off the record while they are having critical decisions, 
but eventually should be put open to the public.
    Mr. Bernanke. Eventually. Well, we put out a whole 
transcript in 5 years. I think that is fine. But if it is done 
within days or even weeks of the decision, it is going to look 
like Congress is saying we disagree with that decision.
    Mr. Posey. I agree with that. It shouldn't interfere with 
daily decisionmaking, but I don't know how after the fact 
auditing and all the exemptions that are there being eliminated 
for a period of time, and it could say 6 months, a year 
afterwards, I just don't see why there shouldn't be 100 percent 
crystal clear transparency of every single function of the Fed 
after the fact.
    Mr. Bernanke. Because we have to be extraordinarily careful 
that the markets and the public don't think that Congress is 
trying to influence monetary policy decisions.
    Mr. Posey. If we do it a year, if we do it in a year in 
arrears, we don't know really whether the best decisions made a 
year ago or 2 years ago or 5 years ago or 20 years ago, we 
don't know if they are the best decisions. We don't know who 
the Fed picked to be winners and losers. And I think the public 
really has a right to know that some day.
    Mr. Bernanke. On issues relating to our 13(3) authority, 
those sorts of things, where we are putting out money and 
lending money and so on, we can work that out. I agree with you 
that where we are putting out taxpayer money, there should be 
ways for the Congress to be assured that we are doing it in a 
safe way that has appropriate financial controls and so on and 
so on. So I agree with that. Monetary policy is a very specific 
element, though, of that.
    The Chairman. The gentleman's time has expired. The 
gentlewoman from Ohio.
    Ms. Kilroy. Thank you, Mr. Chairman.
    And thank you, Chairman Bernanke, for being here. I had 
questions for you as well about the Federal Reserve's role and 
the need for accountability and transparency versus the 
conflicting need for independence and to be free of political 
pressures. And it seems to me what the public is more concerned 
about is not the Federal Reserve's role on monetary policy but 
the Federal Reserve's role in bailing out certain entities like 
AIG and Bear Stearns, and questions about how decisions get 
made about who is saved or who is allowed to fail. So maybe you 
could help me with what kind of transparency and 
accountability, the maximum that we can give our taxpayers that 
would still leave the Federal Reserve with the appropriate 
amount of insulation from political pressure and the 
appropriate independence that you need to carry out your 
essential mission.
    Mr. Bernanke. On the issue you mentioned, Congress has 
already acted. Congress passed and the President signed a law 
which allows the GAO to audit all loans made to specific 
companies in rescue operations, including AIG and Bear Stearns. 
That has been done. And we are quite open to discussing any 
kind of extraordinary lending that we do in terms of making 
sure that Congress is comfortable that we are taking all the 
steps necessary to protect the taxpayer and to do the 
appropriate thing with those loans.
    So that one area, and to go back to our previous 
conversation, the one area where it is particularly sensitive 
is about the Congress second-guessing in the very short period 
of time the monetary policy decisions being made by the Federal 
Reserve with the sense that displeasure from the Congress would 
put pressure on the Fed to try to anticipate the political 
preferences of the Congress.
    Ms. Kilroy. There was other discussion this morning about 
when inflation might begin to rear its head and some concerns 
about that. As I understand the answer, inflation is not 
presently a worry that you are concerned about. But--and 
certainly I think housing and unemployment are much bigger 
worries for the greater economy right now than concern about 
inflation. But I was wondering what your judgment--whether fear 
of inflation is holding back banks, some of which have seem to 
be recovered. They want to give their TARP money back. Goldman 
Sachs is showing profits, and bonuses are being offered to some 
players in the financial services markets. But whether the fear 
of inflation is keeping banks from making the kind of loans 
that are needed for small business and others to help us 
restore the economy, particularly out on Main Street, so to 
    Mr. Bernanke. I don't think that is a major factor. For one 
thing, if you look in the financial markets, interest rates 
like long-term government interest rates are still quite low. 
If the financial markets were really worried about inflation, 
those rates would be much higher. So I don't think that the 
financial markets are indicating a great deal of concern about 
inflation. And from the banks' perspective, they are much more 
concerned about credit worthiness, the state of the economy, 
and losses they have already taken than they are about 
inflation, I think.
    Ms. Kilroy. In terms of the state of the economy, what 
steps can the Fed take to address the unemployment rates that 
we are seeing going up? I certainly share your view that the 
recovery money has not fully had its impact in the greater 
economy and we will see some gains there. But still, we want to 
see some places where Americans can actually make things in 
this country and that we can generate those kind of jobs in our 
economy as well.
    Mr. Bernanke. Well, the Fed is being very aggressive. We 
are trying very hard to support the economy. We have lowered 
interest rates almost to zero, and we have a whole set of other 
programs to try and get credit markets working. So we are doing 
our best to provide support to this economy.
    Ms. Kilroy. Do you think we have sufficiently addressed the 
issue of certain risky behaviors that help do damage to the 
economy, like the credit default swap, naked default swaps?
    Mr. Bernanke. No. Not yet. We have to do I think a very 
substantial reform of the financial regulatory system to 
address all the problems that were revealed by the crisis.
    Ms. Kilroy. Thank you. I yield back.
    The Chairman. The gentlewoman from Florida.
    Ms. Kosmas. Thank you, Mr. Chairman. And thank you for 
being here. As the chairman said, I represent the Central 
Florida area, and have been sort of raising the flag for quite 
a few months since Florida is one of the highest in mortgage 
foreclosures and also one of the highest now in unemployment. 
But I have been concerned about what I saw as a deeper problem 
in the economy looming over Florida as well as the Nation with 
regard to commercial lending and the renewing or rolling over 
of commercial loans for larger businesses. Some are smaller 
businesses. But when we look at our economy in Florida and we 
recognize that it is a $70 billion tourism trade, and we have 
situations where resorts, hotels, timeshares, cruise ships, and 
even our leisure parks are relying of course on commercial 
credit lines in order to function, and the numbers of people 
that they employ and the factor of the potential for them to be 
in jeopardy is quite frightening to me.
    So I have been trying to raise that red flag for several 
months here and talking to people about it, while at the same 
time people are dealing with other issues.
    I know that the TALF program was intended to provide an 
opportunity for increased securitized debt in those markets. 
And I was wondering whether you might be--and some of this I 
think was addressed by an earlier question but I will ask mine 
anyway. Do you feel that the TALF program is large enough and 
sufficient enough? Is it working? And is it working quickly 
enough, that we could consider that it might alleviate some of 
these looming credit problems for commercial real estate?
    Mr. Bernanke. It is a bit early to say on commercial real 
estate, because we have just opened up the program to that, and 
we have not yet seen a number of deals coming through. So ask 
me again in another month or two.
    But I do think that what we have seen in the consumer ABS 
area is it doesn't take an enormous amount of capacity to 
actually have a difference, because it is really a question of 
breaking the ice. Right now, nobody is bringing commercial 
mortgage-backed securities to market. If this creates more 
activity in the market, then it creates more interest and you 
can get things going again. So I don't think we need to have an 
enormous program to stimulate the improvement in the CMBS 
market. But exactly how effective our program will be, I think 
we need to wait just a bit longer. But a number of your 
colleagues have raised this issue, and it is certainly a very 
important one.
    Ms. Kosmas. And I apologize if I am repeating a question 
that was asked by someone else. But I think it was mentioned 
that up to $400 billion of CRE loans are coming due in this 
year to mature and over $1 trillion by 2012. That represents a 
very huge potential, as I say, for--and I am talking 
specifically to business people who are having trouble with 
perfectly performing lines of credit that have met all their 
terms and obligations, and their lenders are refusing that 
rollover, if you will, or renegotiation of the mortgage, and 
that is a very serious problem that I see looming.
    So I am hoping that you are going to be taking a very, very 
close look at it. Are you considering other problems beyond 
what is currently on the plate for TALF? That will be one 
question. And then with the lag time in getting things going in 
that marketplace, would you expect that that might be extended 
beyond year's end?
    Mr. Bernanke. We have already included both new CMBS and 
legacy CMBS in the TALF. We are looking at some other asset 
classes, but as I mentioned, they are more complex than the 
ones we have already included. We will give the markets plenty 
of notice about the extent of the program. We have to make 
judgments about whether markets are normalizing. If things 
return to normal, which I don't expect in the very near term, 
then we would have to think about scaling it down. But, 
otherwise, we will try to give plenty of notice to the markets 
about the time frame for these programs.
    Ms. Kosmas. Okay. I appreciate it. Thank you very much.
    The Chairman. The gentleman from Florida.
    Mr. Grayson. Thank you, Mr. Chairman.
    Chairman Bernanke, I am looking at the report that you 
handed out this morning. And I was wondering if you could take 
your copy and turn to page 26.
    Mr. Bernanke. Okay.
    Mr. Grayson. There is a table on page 26 which consists of 
your balance sheet. And one of the entries on the balance sheet 
is, under assets, ``central bank liquidity swaps,'' which shows 
an increase from the end of 2007 from $24 billion to $553 
billion and change at the end of 2008.
    What is that?
    Mr. Bernanke. Those are swaps that were done with foreign 
central banks. Many foreign banks are short dollars. And so 
they come into our markets looking for dollars and drive up 
interest rates and create volatility in our markets.
    What we have done with a number of major central banks like 
the European Central Bank, for example, is swap our currency, 
dollars, for their currency, euros. They take the dollars, lend 
it out to the banks in their jurisdiction. That helps bring 
down interest rates in the global market for dollars. And, 
meanwhile, we are not lending to those banks; we are lending to 
the central bank. The central bank is responsible for repaying 
    Mr. Grayson. So who got the money?
    Mr. Bernanke. Financial institutions in Europe and other 
    Mr. Grayson. Which ones?
    Mr. Bernanke. I don't know.
    Mr. Grayson. Half a trillion dollars and you don't know who 
got the money?
    Mr. Bernanke. The loans go to the central banks, and they 
then put them out to their institutions to try to bring down 
short-term interest rates in dollar markets around the world.
    Mr. Grayson. Well, let's start with which central banks got 
the money?
    Mr. Bernanke. There are 14 of them, which are listed in our 
    Mr. Grayson. All right. So who actually made that decision 
to hand out a half a trillion dollars that way? Who made that 
    Mr. Bernanke. The Federal Open Market Committee.
    Mr. Grayson. Okay. And was it done at one time or in a 
series of meetings?
    Mr. Bernanke. Series of meetings.
    Mr. Grayson. And under what legal authority?
    Mr. Bernanke. We have a longstanding legal authority to do 
swaps with other central banks. It is not an emergency 
authority of any kind.
    Mr. Grayson. Do you happen to know anything specific about 
    Mr. Bernanke. My counsel says section 14 of the Federal 
Reserve Act.
    Mr. Grayson. All right. We actually looked at one of the 
arrangements, and one of the arrangements is $9 billion for New 
Zealand. That works out to $3,000 for every single person who 
lives in New Zealand.
    Seriously, wouldn't it have been better to extend that kind 
of credit to Americans rather than New Zealanders?
    Mr. Bernanke. It is not costing Americans anything. We are 
getting interest back--it is not at the cost of any American 
credit. We are extending credit to Americans.
    Mr. Grayson. Well, wouldn't it necessarily affect the 
credit markets if you extend half a trillion dollars in credit 
to anybody?
    Mr. Bernanke. We are lending to all U.S. financial 
institutions in exactly the same way.
    Mr. Grayson. Well, look at the next page. The very next 
page has the U.S. dollar nominal exchange rate, which shows a 
20 percent increase in the U.S. dollar nominal exchange rate at 
exactly the same time that you were handing out half a trillion 
dollars to foreigners.
    Do you think that is a coincidence?
    Mr. Bernanke. Yes.
    Mr. Grayson. All right. Well, the Constitution says, ``No 
money shall be drawn from the Treasury but in consequence of 
appropriations made by law.''
    Mr. Bernanke. This money was not drawn from the Treasury.
    Mr. Grayson. Well, let's talk about that. Do you think it 
is consistent with the spirit of that provision in the 
Constitution for a group like the FMOC to hand out half a 
trillion dollars to foreigners without any action by this 
    Mr. Bernanke. Congress approved it in the Federal Reserve 
    Mr. Grayson. When was that?
    Mr. Bernanke. Quite a long time ago. I don't know the exact 
    Mr. Grayson. A hundred years ago?
    The Chairman. The original Act is 1914, I believe.
    Mr. Bernanke. I don't know whether this provision was in 
1914 or not, but the Federal Reserve Act was in 1913.
    Mr. Grayson. All right. And at that time the entire gross 
national product of this country was well under half a trillion 
dollars, wasn't it?
    Mr. Bernanke. I don't know.
    Mr. Grayson. Is it safe to say that nobody in 1913 
contemplated that your small little group of people would 
decide to hand out half a trillion dollars to foreigners?
    Mr. Bernanke. This particular authority has been used 
numerous times over the years.
    Mr. Grayson. Well, actually, according to the chart on page 
28, virtually the entire amount that is reflected in your 
current balance sheet went out starting in the last quarter of 
2007. And before that, going back to the beginning of this 
chart, the amount of lending was zero to foreigners. Is that--
    Mr. Bernanke. It was zero before the crisis, yes. This was 
part of the process, working with other central banks, again, 
to try to get dollar money markets working normally in the 
global economy.
    Mr. Grayson. All right. My time is very limited.
    The Chairman. The gentleman's time has expired.
    The gentleman from New York.
    Mr. Maffei. Thank you very much, Mr. Chairman.
    And thank you, Chairman Bernanke, for being here and for 
indulging all of the members. I am the most junior member, so I 
presume I am the last to question.
    I am sure that you have seen some of the reports about 
credit card companies increasing their rates and charges in 
anticipation of the upcoming new credit card laws and Federal 
Reserve regulations taking effect. This seems to me to run 
counter to, certainly, the intent, if not the letter of the 
recently enacted regulations by your group and laws.
    We have heard that the credit card companies have asked--
they asked us when we were putting the bill together, as they 
asked you, for a delay so that they could implement these sort 
of things. And instead, they seem to be using these delays to 
generate more profits on the backs of the consumers.
    Is there anything that you can do, from your perspective at 
the Federal Reserve, to speed up the regulations to try to take 
care of these people?
    Mr. Bernanke. Yes. We just announced the first tranche of 
regulations under the credit card act that was passed by 
Congress and signed by the President. And it sets, as required 
by law, a deadline of August 20th. After August 20th, in order 
to raise interest rates on a customer, the company has to give 
the customer 45 days' notice. And then the customer has the 
right to opt out of that increase by paying back his balance. 
So that first step has been taken for August.
    Mr. Maffei. Is there anything you can do to communicate to 
these companies that it would not be in their best interests to 
try to, you know, raise these rates and charges right up to the 
    Mr. Bernanke. There is another provision in the law passed 
by Congress that requires revisiting interest rate increases 
back to the 1st of January of 2009. So, at some point, there 
will have to be some looking again at those rates.
    Mr. Maffei. Thank you.
    I have one quick question about the TALF. I have heard 
reports in my congressional district about the smaller 
investment firms, more locally owned investment firms that 
don't have a preexisting relationship with any sort of 
``primary dealer'' having difficulty getting access to the 
program, which of course would give the larger firms a market 
advantage, if that were true.
    Has anything been done or could anything be done to 
increase the access to the TALF for these smaller investment 
firms, say, you know, 10 to 30 employees?
    Mr. Bernanke. Yes, and we have done so in two ways. First, 
we have encouraged more investors. And the minimum investment 
is half a million dollars, which is within the scope of many 
investment firms.
    Secondly, working with Congresswoman Waters, we have 
expanded our set of agents who are putting together the deals, 
to include six to eight smaller firms, many of which are 
minority- or women-owned.
    So we are trying to expand both the investors and the 
agents in this program.
    Mr. Maffei. And how can local firms apply for this? Is 
there a Web site or a procedure?
    Mr. Bernanke. Yes, there are Web sites.
    Mr. Maffei. All right. So they should just get on the Web 
site. Well, could your staff communicate with us and let us 
    Mr. Bernanke. We will do that.
    Mr. Maffei. Because I know a lot of firms in my district 
who have felt that they have gotten no advantage to any of 
these bailouts would very much appreciate access to these 
funds, and particularly given that they now have to compete 
with other firms that have gotten other advantages from the 
TARP and TALF programs.
    Mr. Bernanke. Okay.
    Mr. Maffei. Thank you very much, Mr. Chairman.
    The Chairman. Thank you.
    Any further comments in closing?
    If not, I thank the chairman for his indulgence.
    Does the gentleman from Alabama have a--
    Mr. Bachus. I would just like to say something.
    The Chairman. Sure.
    Mr. Bachus. Chairman Bernanke, I think I speak for others 
as well as myself. It is not, I know, my nature to criticize, 
because I think you have done an exemplary job, and I admire 
your abilities and your intellect. But it is time, it is 
necessary as part of our job to--because we all, in the future, 
we want to try to avoid these things. And so I think, you know, 
that is simply a part of trying to make sure that we build the 
best system we can.
    The Chairman. I thank the gentleman.
    I thank the Chairman.
    And the hearing is adjourned.
    Mr. Bachus. Mr. Chairman, if I could ask unanimous consent 
to introduce a document?
    The Chairman. Without objection, all members will have the 
right to submit any further documentation of any sort that they 
wish, and to submit further questions to the Chairman to be 
answered in writing.
    Mr. Bachus. Mr. Chairman, if I could, just because this is 
a little unusual, I think you and I, we were both shared a copy 
of this document from 16 different real estate groups, 
concerning--it is a consensus principle-based policy statement 
on the commercial real estate market.
    The Chairman. Fine. We will enter it into the record.
    Mr. Bachus. Thank you.
    [Whereupon, at 1:06 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             July 21, 2009