[Senate Hearing 111-195]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-195
 
                          THE ECONOMIC OUTLOOK 

=======================================================================

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 5, 2009

                               __________

          Printed for the use of the Joint Economic Committee

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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

HOUSE OF REPRESENTATIVES             SENATE
Carolyn B. Maloney, New York, Chair  Charles E. Schumer, New York, Vice 
Maurice D. Hinchey, New York             Chairman
Baron P. Hill, Indiana               Edward M. Kennedy, Massachusetts
Loretta Sanchez, California          Jeff Bingaman, New Mexico
Elijah E. Cummings, Maryland         Amy Klobuchar, Minnesota
Vic Snyder, Arkansas                 Robert P. Casey, Jr., Pennsylvania
Kevin Brady, Texas                   Jim Webb, Virginia
Ron Paul, Texas                      Sam Brownback, Kansas, Ranking 
Michael Burgess, M.D., Texas             Minority
John Campbell, California            Jim DeMint, South Carolina
                                     James E. Risch, Idaho
                                     Robert F. Bennett, Utah

                     Nan Gibson, Executive Director
               Jeff Schlagenhauf, Minority Staff Director
          Christopher Frenze, House Republican Staff Director















                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New 
  York...........................................................     1
Hon. Sam Brownback, Ranking Minority, a U.S. Senator from Kansas.     1
Hon. Kevin Brady, a U.S. Representative from Texas...............     2
Hon. Charles E. Schumer, Vice Chairman, a U.S. Senator from New 
  York...........................................................    16

                               Witnesses

Statement of Hon. Ben Bernanke, Chairman, Board of Governors, 
  Federal Reserve System.........................................     3

                       Submissions for the Record

Prepared statement of Representative Carolyn B. Maloney..........    44
Prepared statement of Senator Sam Brownback......................    44
Prepared statement of Representative Kevin Brady.................    46
Prepared statement of Ben Bernanke...............................    47
Press release titled ``Schumer Demands Answers From Bernanke at 
  Hearing After Fed Rejects Push to Freeze Rates on Existing 
  Credit Card Balances''.........................................    50


                          THE ECONOMIC OUTLOOK

                              ----------                              


                          TUESDAY, MAY 5, 2009

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met at 10:02 a.m., in Room 216, Hart Senate 
Office Building, Hon. Carolyn B. Maloney (Chair), presiding.
    Senators present: Schumer, Casey, Brownback, and Risch.
    Representatives present: Maloney, Hinchey, Sanchez, 
Cummings, Snyder, Brady, Paul, Burgess, and Campbell.
    Staff present: Gail Cohen, Stacy Ettinger, Nan Gibson, 
Colleen Healy, Marc Jarsulic, Linda Jeng, Andrew Wilson, Chris 
Frenze, Bob Keleher, Robert O'Quinn, Jim Gilroy, Lydia 
Mashburn, Jeff Schlagenhauf, and Jeff Wrase.

  OPENING STATEMENT OF HON. CAROLYN B. MALONEY, CHAIR, A U.S. 
                  REPRESENTATIVE FROM NEW YORK

    Chair Maloney. The meeting will come to order. I want to 
welcome Dr. Ben Bernanke, the Chairman of the Federal Reserve 
and thank him very much for his testimony today.
    And in appreciation of his time, I would like to put my 
opening statement in the record so that we have more time for 
questions with the members.
    [The prepared statement of Representative Maloney appears 
in the Submissions for the Record on page 44.]
    Chair Maloney. I recognize the Ranking Minority Member, for 
two minutes.

 OPENING STATEMENT OF HON. SAM BROWNBACK, RANKING MINORITY, A 
                    U.S. SENATOR FROM KANSAS

    Senator Brownback. Thank you very much, Madam Chairman. 
Welcome, Chairman Bernanke. We are delighted to have you here, 
and very pleased that you could join us in reporting to 
Congress.
    You have got a lot to report on. As I mentioned to you in 
the anteroom, I appreciated very much, your presentation on 60 
Minutes recently and the assuring sense that you put in front 
of the public. I think the public needs to hear you and needs 
to hear you in a reassuring sense.
    I do have a quick statement that I wanted to make, and I 
will have my full statement put into the record. But there are 
two points that I have deep concern about.
    One is your thoughts about the projected tax increases into 
the economy, and its impact, or the discussion of that and its 
impact now, of what that is and its impact overall.
    And the second--and this one is one that we talk about 
amongst the members, and the public certainly is a great deal 
right now, is that the possibility of looking at the bottom of 
this recession towards the end of the year, as you and many 
other economists are talking about, that we are creating a 
government debt bubble that we are going to have to deal with 
in a massive way, the way we have had to deal with the housing 
debt bubble.
    And I have got the numbers here that I have been looking at 
and am deeply concerned about. We had the head of the 
President's Council of Economic Advisors in last week, and we 
were talking about that very issue. And both--well, certainly 
in our fiscal policy, but also with the monetary policy, with 
the amount of funds that have been put forward, are we creating 
a government debt bubble?
    And, finally, one other thought that I am going to be 
asking you about is: Chairman Hoenig out of Kansas City, has 
been putting forward the concept that ``too big has failed,'' 
the policy of ``too big to fail,'' has failed and that we need 
to get in a regularized system for our big banks; that if they 
are insufficiently capitalized, if they cannot continue, that 
they should be allowed to fail in an orderly fashion. And I 
really do and will be seeking your thoughts and comments on 
that.
    Welcome to the Committee, delighted you're here. Thank you, 
Chairman.
    [The prepared statement of Senator Brownback appears in the 
Submissions for the Record on page 44.]
    Chair Maloney. And the Chair recognizes Vice Chairman 
Schumer, who is on his way, for two minutes, and Mr. Brady.

 OPENING STATEMENT OF HON. KEVIN BRADY, A U.S. REPRESENTATIVE 
                           FROM TEXAS

    Representative Brady. Thank you, Madam Chairman. I am 
pleased to join in welcoming Chairman Bernanke today.
    There are a lot of questions related to the financial 
rescue plan, and to America's perilous budget situation.
    Recently released minutes of the Federal Open Market 
Committee indicates that Fed staff has reduced its projections 
for economic growth for the second half of 2009 to 2010. I 
think that underscores the concerns that this Committee has 
raised that the Administration's optimistic economic 
projections may truly hide the deficit and understate its true 
cost.
    One question: When is the Congress going to acknowledge 
that the current fiscal trends are simply unsustainable?
    Last week, the Financial Times reported that the IMF now 
estimates the U.S. losses on toxic assets will be $1.9 trillion 
over the next five years.
    The recently adopted Congressional Budget Resolution 
ignores these costs entirely in setting budget policy for this 
year. How expensive will the bank cleanup be, and will its 
costs be hidden from taxpayers?
    There is widespread agreement that sustained economic 
recovery can't occur without an effective bank cleanup in 
place. The Administration has put forward a financial rescue 
plan, but many of its components are troubling.
    The Special Inspector General, Neil Brofsky, last week, 
testified before this Committee that many of the safeguards on 
accountability, on protecting the new Public-Private Investment 
Program against vulnerabilities and conflicts of interest, 
collusion, money laundering, so far have been ignored by 
Treasury.
    Will the Treasury recognize these problems and move quickly 
to correct them?
    There are a number of actions that the Fed has taken that 
frankly has bewildered many of my constituents and left them 
wondering how the policies will affect their economic well 
being.
    Small businesses in Texas report that many are having a 
tough time finding affordable credit because regulators are 
pressing banks to avoid risk, in fact creating a downward 
spiral. Has the pendulum swung too far in this direction?
    Now we are looking at a number of actions, including the 
downward debt deflation default spiral. The Federal Reserve has 
expanded its balance sheet by 127 percent, from $946 billion 
last September to over $2 trillion last week. While this 
explosive growth does not pose an immediate inflationary 
danger, the Fed will need to begin contracting its balance 
sheet when the economy begins to recover.
    What is the Federal Reserve's exit strategy to wind down 
its emergency credit facilities and reduce excess bank reserves 
to prevent higher inflation?
    There are a number of questions to be asked and answered 
today. I look forward to visiting with the Chairman. These are 
important times. Thank you.
    Chair Maloney. Thank you very much.
    [The prepared statement of Representative Brady appears in 
the Submissions for the Record on page 46.]
    Chair Maloney. Dr. Ben Bernanke is the Chairman and member 
of the Board of Governors of the Federal Reserve. Dr. Bernanke 
also serves as Chairman of the Federal Open Market Committee, 
the System's principal monetary policymaking body.
    Before his appointment as Chairman, Dr. Bernanke was 
Chairman of the President's Council of Economic Advisors from 
June in 2005 to January in 2006. From 1994 to 1996, Dr. 
Bernanke was the Class of 1926 Professor of Economics and 
Public Affairs at Princeton University.
    He was the Howard Harrison and Gabriele Sneider Beck 
Professor of Economics and Public Affairs, and Chair of the 
Economics Department at the University from 1996 to 2002.
    Dr. Bernanke had been a Professor of Economics and Public 
Affairs at Princeton since 1985. He has published many articles 
on a variety of economic issues, including monetary policy and 
macroeconomics, and he is the author of several books and two 
textbooks.
    He received a B.A. in Economics in 1975 from Harvard 
University, and a Ph.D. in Economics in 1979 from MIT.
    Thank you very much, and we recognize you for as much time 
as you may consume. Thank you.

    STATEMENT OF THE HON. BEN BERNANKE, CHAIRMAN, BOARD OF 
               GOVERNORS, FEDERAL RESERVE SYSTEM

    Chairman Bernanke. Thank you, thank you very much.
    Chair Maloney, Vice Chairman Schumer, Ranking Members 
Brownback and Brady, and other Members of the Committee, I am 
pleased to be here today to offer my views on recent economic 
developments, the outlook for the economy, and current 
conditions in financial markets.
    The U.S. economy has contracted sharply since last autumn, 
with real gross domestic product having dropped at an annual 
rate of more than six percent in the fourth quarter of 2008, 
and in the first quarter of this year.
    Among the enormous costs of this downturn is the loss of 
some five million payroll jobs over the past 15 months. The 
most recent information on the labor market, the number of new 
and continuing claims for unemployment insurance, through late 
April, suggest that we are likely to see further sizable job 
losses and increased unemployment in coming months.
    However, the recent data also suggests that the pace of 
contraction may be slowing, and they include some tentative 
signs that final demand, especially demand by households, may 
be stabilizing.
    Consumer spending, which dropped sharply in the second half 
of last year, grew in the first quarter.
    In coming months, household spending power will be boosted 
by the fiscal stimulus program, and we have seen some 
improvement in consumer sentiment.
    Nonetheless, a number of factors are likely to continue to 
weigh on consumer spending, among them the weak labor market 
and the declines in equity and housing wealth that households 
have experienced over the past two years.
    In addition, credit conditions for consumers remain tight. 
The housing market, which has been in decline for three years, 
has also shown some signs of bottoming.
    Sales of existing homes have been fairly stable since late 
last year, and sales of new homes have firmed a bit recently, 
though both remain at depressed levels.
    Although some of the boost of sales in the market for 
existing homes is likely coming from foreclosure-related 
transactions, the increased affordability of homes appears to 
be contributing more broadly to the steadying in the demand for 
housing.
    In particular, the average interest rate on conforming 30-
year fixed rate mortgages has dropped almost one and three-
quarters percentage points since August to about 4.8 percent.
    With sales of new homes up a bit and starts of single-
family homes little changed from January through March, 
builders are seeing the backlog of unsold new homes decline, a 
precondition for any recovery in home building.
    In contrast to the somewhat better news in the household 
sector, the available indicators of business investment remain 
extremely weak.
    Spending for equipment and software fell at an annual rate 
of about 30 percent in both the fourth and first quarters, and 
the level of new orders remains below the level of shipments, 
suggesting further near-term softness in business equipment 
spending.
    Recent business surveys have been a bit more positive, but 
surveyed firms are still reporting net declines in new orders 
and restrained capital spending plans.
    Our recent survey of bank loan officers reported further 
weakening of demand for commercial and industrial loans. The 
survey also showed that the net fraction of banks that 
tightened their business lending policies stayed elevated, 
although it has come down in the past two surveys.
    Conditions in the commercial real estate sector are poor. 
Vacancy rates for existing office, industrial, and retail 
properties have been rising. Prices of these properties had 
been falling and, consequently, the number of new projects in 
the pipeline has been shrinking.
    Credit conditions in the commercial real estate sector are 
still severely strained, with no commercial mortgage-based 
securities having been issued in almost a year.
    To try to help restart the CMBS market, the Federal Reserve 
announced last Friday that recently issued CMBS, will in June 
be eligible collateral for our term asset-backed securities 
loan facility or TALF.
    An important influence on the near-term economic outlook is 
the extent to which businesses have been able to shed the 
unwanted inventories that they accumulated as sales turned down 
sharply last year.
    Some progress has been made. The Bureau of Economic 
Analysis estimates that an acceleration in inventory 
liquidation accounted for almost one-half of the reported 
decline in real GDP in the first quarter.
    As stocks move into better alignment with sales, a 
reduction in the pace of inventory liquidation should provide 
some support to production later this year.
    The outlook for economic activity abroad is also an 
important consideration. The steep drop in U.S. exports that 
began last fall has been a significant drag on domestic 
production, and any improvement on that front would be helpful.
    A few indicators suggest, again quite tentatively, that the 
decline in foreign economic activity may also be moderating 
and, as has been the case in the United States, investor 
sentiment and the functioning of financial markets abroad have 
improved somewhat.
    As economic activity weakened during the second half of 
2008 and prices of energy and other commodities began to fall 
rapidly, inflationary pressures diminished appreciably. 
Weakness in demand and reduced cost pressures have continued to 
keep inflation low so far this year.
    Although energy prices have recently risen some, the 
personal consumption expenditure price index for energy goods 
and services in March remained more than 20 percent below its 
level a year earlier.
    Food price inflation has also continued to slow as the 
moderation in crop and livestock prices has been passing 
through to the retail level.
    Core PCE inflation, which excludes food and energy prices, 
dropped below an annual rate of one percent in the final 
quarter of 2008 when retailers and auto dealers marked down 
their prices significantly.
    In the first quarter of this year, core consumer price 
inflation moved back up but to a still low annual rate of 1.5 
percent.
    We continue to expect economic activity to bottom out, then 
to turn up later this year. Key elements of this forecast are 
assessments that the housing market is beginning to stabilize, 
and that the sharp inventory liquidation that has been in 
progress will slow over the next few quarters. Final demand 
should also be supported by fiscal and monetary stimulus.
    An important caveat is that our forecast assumes continuing 
gradual repair of the financial system. A relapse in financial 
conditions would be a significant drag on economic activity and 
could cause the incipient recovery to stall. I will provide a 
brief update on financial markets in a moment.
    Even after a recovery gets underway, the rate of growth of 
real economic activity is likely to remain below its longer-run 
potential for awhile, implying that the current slack in 
resource utilization will increase further.
    We expect that the recovery will only gradually gain 
momentum and that economic slack will diminish slowly. In 
particular businesses are likely to be cautious about hiring, 
implying that the unemployment rate could remain high for a 
time even after economic growth resumes.
    In this environment, we anticipate that inflation will 
remain low. Indeed, given the sizable margin of slack in 
resource utilization and diminished cost pressures from oil and 
other commodities, inflation is likely to move down some over 
the next year relative to its pace in 2008.
    However inflation expectations, as measured by various 
household and business surveys, appeared to have remained 
relatively stable which should limit further declines in 
inflation.
    As I noted, a sustained recovery in economic activity 
depends critically on restoring stability to the financial 
system. Conditions in a number of financial markets have 
improved in recent weeks, reflecting in part the somewhat more 
encouraging economic data.
    However, financial markets and financial institutions 
remain under considerable stress and cumulative declines in 
asset prices, tight credit conditions, and high levels of risk 
aversion, continue to weigh on the economy.
    Among the markets that have recently begun to function a 
bit better are the markets for short-term funding, including 
the interbank markets and the commercial paper market.
    In particular, concerns about credit risk in those markets 
appear to have receded somewhat. There is more lending at 
longer maturities and interest rates have declined.
    The modest improvement in funding conditions has 
contributed to diminished use of the Federal Reserve's 
liquidity facilities for financial institutions and of our 
commercial paper facility.
    The volume of foreign central bank liquidity swaps has also 
declined as dollar funding conditions have eased. The issuance 
of asset-backed securities or ABS, backed by credit card, auto, 
and student loans, all picked up in March and April and ABS 
funding rates have declined, perhaps reflecting the 
availability of the Federal Reserve's TALF facility as a market 
backstop.
    Some of the recent issuance made use of TALF lending, but 
lower rates and spreads have facilitated issuance outside the 
TALF, as well.
    Mortgage markets have responded to the Federal Reserve's 
purchases of agency debt and agency mortgage-backed securities, 
with mortgage rates having fallen sharply since last fall as I 
noted earlier.
    The decline in mortgage rates has spurred a pick up in 
refinancing as well as providing some support for housing 
demand. However, the supply of mortgage credit is still 
relatively tight and mortgage activity remains heavily 
dependent on the support of government programs for the 
government sponsored enterprises.
    The combination of a broad rally in equity prices and a 
sizable reduction in risk spreads in corporate debt markets 
reflects a somewhat more optimistic view of the corporate 
sector on the part of investors and perhaps some decrease in 
risk aversion.
    Bond issuance by nonfinancial firms has been relatively 
strong recently, but still, spreads over Treasury rates, paid 
by both investment-grade and speculative-grade corporate 
borrowers remain quite elevated.
    Investors seemed to adopt a more positive outlook on the 
condition of financial institutions, after several large banks 
reported profits in the first quarter, but readings from the 
credit default swap market and other indicators show that 
substantial concerns about the banking industry remain.
    As you know, the federal bank regulatory agencies began 
conducting the Supervisory Capital Assessment Program in late 
February. The program is a forward-looking exercise intended to 
help supervisors gauge the potential losses, revenues, and 
reserve needs for the 19 largest bank holding companies in a 
scenario in which the economy declines more steeply than is 
generally anticipated.
    The simultaneous comprehensive assessment of the financial 
conditions of the 19 companies, over a relatively short period 
of time, required an extraordinary coordinated effort among the 
agencies.
    The purpose of the exercise is to ensure that banks will 
have sufficient capital buffer to remain strongly capitalized 
and able to lend to creditworthy borrowers, even if economic 
conditions are worse than expected.
    Following the announcement of the results, bank holding 
companies will be required to develop comprehensive capital 
plans for establishing the required buffers. They will then 
have six months to execute those plans, with the assurance that 
equity capital from the Treasury under the Capital Assistance 
Program will be available as needed.
    I will conclude with just a few comments on Federal Reserve 
transparency. The Federal Reserve remains committed to 
transparency and openness, and in particular to keeping the 
Congress and the public informed about its lending programs and 
balance sheet.
    As you may know, we have created a separate section of our 
website devoted to providing data, explanations, and analyses 
bearing on these topics and related issues.
    Recent postings include the annual financial statements of 
the 12 Federal Reserve Banks, the Board of Governors, and the 
limited liability companies created in 2008, in response to 
risks to the financial system, as well as the most recent 
reports to the Congress on our emergency lending programs.
    Earlier this year, I asked Vice Chairman Kohn to lead a 
review of our disclosure policies, with the goal of increasing 
the range of information that we make available to the public. 
The group has been making substantial progress, and I am 
pleased to say that we will soon be adding to the website, 
material that provides the information requested in the Dodge-
Shelby Amendment to the recent Budget Resolution.
    Specifically, we will be adding new tables that provide 
information on the number of borrowers under each program, and 
more information on the details of the credit extended, 
including measures of the concentration of credit among 
borrowers.
    In addition, we will be providing monthly information on 
the collateral that is being taken under our various lending 
programs, including breakouts by type of collateral and by 
ratings categories, and we will be supplementing information 
provided on the valuation of collateral for the Maiden Lane 
facilities and the commercial paper credit facility.
    Finally, we will be providing additional information on the 
extent of our contracting with private firms with respect to 
our lending programs, as well as on the terms and natures of 
such contracts.
    Over time, we expect to continue to expand the range of 
information on our website, as our review of disclosure 
practices proceeds.
    Thank you. I would be pleased to respond to your questions.
    [The prepared statement of Hon. Ben S. Bernanke appears in 
the Submissions for the Record on page 47.]
    Chair Maloney. Thank you very much for your testimony. My 
basic question is: Is there any good news? Can you elaborate 
more?
    You mentioned in some interviews that you were seeing green 
shoots for recovery in the economy. And has the recent report 
on real GDP for the first quarter of 2009 changed your views on 
the economy?
    Chairman Bernanke. Chair Maloney, as you know the numbers, 
the headline numbers for GDP growth in the fourth and first 
quarter, were very negative, both minus-six percent at an 
annual rate.
    But I think a bit of good news was in the composition of 
growth in the first quarter. As I mentioned in my testimony, 
about half of the decline in GDP in the first quarter 
represented the liquidation of excess inventories.
    And as inventories are worked down, firms will be able to 
increase their production to meet what looks to be some 
stabilization in final demand.
    And so we are hopeful that the very sharp decline we saw 
beginning last fall through early this year will moderate 
considerably in the near term and that we will see positive 
growth by the end of the year.
    Chair Maloney. Can you explain why the results of the 
stress tests were delayed?
    Chairman Bernanke. Yes. This was a very comprehensive 
exercise, unprecedented in its scale and scope. The three 
federal oversight agencies collaborated very closely, working 
through the entire portfolios, the reserving practices, and the 
earnings of the 19 largest banks in the country, so it was a 
very expensive and detailed exercise.
    After we completed our first set of data, we took the data 
back to the banks and we gave them an opportunity not to 
negotiate but to point out where there were misunderstandings, 
communications problems, data issues, and so on, which we, as 
an appropriate measure, agreed to look at.
    We have reviewed those data. We have looked at the numbers. 
We have looked at the assumptions. And we have now satisfied 
ourselves that the data we have are accurate reflections of the 
financial conditions of those banks.
    Chair Maloney. The IMF estimates that U.S. banks will 
require between $275 billion and $500 billion in additional 
capital, depending on the leverage requirements from the 
regulators. Do you agree with these IMF estimates?
    There are several independent rating organizations, 
financial organizations that have come up with large amounts, 
$500, $700 billion. Do you agree with these numbers?
    Chairman Bernanke. Well, I am not ready to pre-disclose the 
results of the tests that will come out on Thursday afternoon, 
but I would point out that while banks have certainly sustained 
substantial losses both in the last few years and going 
forward, they have also taken significant writedowns, they have 
reserved, and there is substantial earning capacity, so there 
are a number of offsets that will help to make up those losses.
    And, finally, of course to the extent that there are banks 
that need capital our hope is that many of them will be able to 
raise that capital through either private equity offers or 
through conversions and exchanges of existing liabilities to 
strengthen their capital bases.
    So I would say that number overestimates the call on the 
government going forward.
    Chair Maloney. And do you think the amount of capital will 
be available from the private sector to shore up these banks 
and to----
    Chairman Bernanke. I have looked at many of the banks and I 
believe that many of them will be able to meet their capital 
needs without further government capital through either 
issuance of new capital or through conversions and exchanges, 
or through sale of assets and other measures that would raise 
capital.
    Chair Maloney. Well, as a last resort, the Federal 
Government could provide access to capital. We have roughly I 
believe $110 billion left from the $700 billion TARP Program. 
Do you estimate that we might need more than what is remaining 
in the TARP Program, the $110 billion?
    Chairman Bernanke. Well, I would leave that to the
    Administration. I think they just recently indicated that 
they don't think there is a near-term need.
    Chair Maloney. That would be terrific. My time has expired.
    Senator Brownback. Thank you, Chair. Welcome.
    I want to talk about a couple of areas and ask you, in the 
fields that we had mentioned, the Administration is likely to 
need to borrow around $2 trillion this year just for this 
year's operating.
    I mentioned to you about a government debt bubble that we 
are looking at. I am sure you have concerns about that. Are 
there signals that you are looking at and considering as to 
whether or not this is occurring or is not occurring on a 
government debt bubble?
    Chairman Bernanke. Senator, the U.S. Government debt is 
bearing yields, which are, I think, indicative of confidence. 
The relatively low yields that we see on ten-year and even 30-
year debt suggests that investors in those securities, first of 
all, appreciate the liquidity and safety of those securities, 
and, secondly, that they are confident that the U.S. will have 
low inflation and fiscal stability in the long term.
    Having said that, it is imperative on all of us as the 
policymakers, particularly the Congress which is responsible 
for fiscal policy, to make sure that we do achieve the 
necessary stabilization that will allow deficits to come down, 
that will allow us to deal with those issues.
    So, there is confidence in the market that we will deal 
with these problems, and we must fulfill that confidence and 
address those issues.
    Senator Brownback. Well, maybe--what sort of signals will 
you be looking for from the marketplace to start unwinding the 
Fed position that you are in, perhaps to guide us a little bit 
of what signals we should be looking for from the marketplace, 
for us to start unwinding this debt position?
    Chairman Bernanke. Certainly. Well, first, many of the 
programs, particularly the short-term lending programs that we 
have, have been priced in such a way that they are not 
particularly attractive when markets are closer to normal.
    In fact, we have already seen that a number of our 
liquidity programs like the Term Securities Lending Facility, 
the Commercial Paper Facility, and others, are just seeing 
reductions in demand from the private sector, and so those 
short-term facilities are shrinking on their own. And that is a 
good sign that demand for that short-term liquidity is either 
diminishing or is being replaced by private-sector liquidity.
    Otherwise, the task for us is very similar to any recovery, 
which is to try to address as best we can where we think the 
economy is going over the next few quarters, and to try to 
achieve a balance in financial conditions that will be 
consistent with our mandate to achieve both price stability and 
maximum employment.
    So we will have to continue to make our forecasts the best 
we can and we will certainly be withdrawing liquidity and 
financial accommodation in an appropriate way to make sure that 
we both achieve recovery, that we don't snuff our recovery too 
early, but on the other hand that we don't deal with inflation 
in the longer term.
    Senator Brownback. You mentioned on us being responsible to 
maintain the market confidence. Do you have a thought on 
considering tax increases at the present time by the Congress?
    Chairman Bernanke. Well, in the near term we have to worry 
about spending power certainly. In the longer term I think it 
is very important that Congress make sure that the deficits are 
not excessively large.
    Different Members of Congress will have different views. I 
think the main thing is that you be consistent. If you want to 
increase spending, then you have to be willing to accept the 
tax increases and the consequences that that may have for 
growth and efficiency.
    If you want to have low taxes, then you have to be willing 
to accept and find program cuts that will match the two. So, 
the main thing is that people will understand that they need to 
be consistent between their preferences on revenues and 
spending.
    Senator Brownback. ``Too big to fail,'' has been challenged 
by some Fed Chairmen, one in Kansas City and other places. Do 
you think we need to amend that, or allow some of the big 
financial institutions to go through an orderly restructuring 
process?
    Chairman Bernanke. Well, Senator, ``too big to fail,'' has 
been sometimes called a policy or a doctrine. It is not a 
policy; it is a problem. It is a huge problem. It has arisen 
because we do not have adequate legal powers to safely wind 
down a large financial holding company or a bank holding 
company with many divisions, many companies, subsidiaries, many 
complex interactions with the financial markets.
    There is a very strong contrast between the powers we have 
for, say, a small bank--where the FDIC can come in and wind it 
down in an orderly way--versus the lack of powers we have for 
dealing with non-banks, including holding companies, insurance 
companies like AIG, or investment banks like Lehman Brothers.
    So, for about a year I have been asking Congress to come up 
with a resolution regime that would allow us to address the 
safe and sound unwinding of a troubled large financial 
institution.
    Under current law, to allow one of these companies to go 
into a disorderly bankruptcy is enormously disruptive and would 
damage not only the company itself of course but also the whole 
financial system and the economy.
    So I am very much in favor of taking strong steps to end 
``too big to fail,'' and I have given a number of speeches on 
that subject. But certainly one prerequisite for doing that is 
having a resolution regime that will allow us, in a way 
analogous to what the FDIC does, to come in and safely wind 
down a large company.
    Senator Brownback. Thank you very much. Thank you, Chair.
    Chair Maloney. Thank you very much. I just want to add that 
the Financial Services Committee is working on legislation such 
as the Chairman described, for legal powers to wind down large 
holding companies.
    Representative Cummings is recognized for five minutes.
    Representative Cummings. Thank you very much, Madam Chair, 
and thank you, Mr. Bernanke, for your testimony and for your 
service.
    If the Federal Reserve or the Department of the Treasury, 
or both, are directing firms to acquire other firms or to take 
other specific actions, how can we avoid concluding that the 
firms are at least to some degree, nationalized?
    What was the involvement of the Federal Reserve with Bank 
of America's acquisition of Merrill Lynch? And did you or, to 
your knowledge, did Henry Paulson push the Bank of America CEO, 
Ken Lewis, not to discuss the details of the merger?
    Chairman Bernanke. Let me address your question about Bank 
of America and Merrill Lynch because it is very important.
    I received a letter from Chairman Kucinich and Chairman 
Towns of the House Oversight and Government Reform Committee 
asking exactly the question you asked, and I replied to them in 
a letter last week where I stated that absolutely not, that I 
absolutely did not in any way ask Mr. Lewis to obscure any 
disclosures or to fail to report information that he should be 
reporting.
    In that letter, I offered to that Committee, and I have 
subsequently offered both to the House Financial Services 
Committee and the Senate Banking Committee, full access to all 
papers, documents, notes, related to those meetings and to the 
Bank of America-Merrill Lynch transaction that will support my 
unconditional assertion that in no way did I ever ask Mr. Lewis 
to fail to disclose necessary information.
    I would add, finally, on that subject, that the meeting 
where we met with Mr. Lewis was attended by quite a few 
supervisory and legal staff, including the General Counsel of 
the Federal Reserve, and he was, of course, very alert to make 
sure that everything that happened in the meeting met all of 
the necessary legal requirements.
    Representative Cummings. Well as a member of the Oversight 
and Government Reform Committee, we will follow up on that, and 
I appreciate your answer.
    Now can you get to the first part of my question?
    Chairman Bernanke. The first part of the question had to do 
with nationalization.
    Representative Cummings. Yes.
    Chairman Bernanke. Yes. So, it is the case that the 
government obviously has some ownership of a number of 
financial institutions. I don't know, but ``nationalization'' 
means different things to different people.
    I think our view is that we don't want substantial 
government ownership to be a long-term situation, and what we 
want is the firms to take actions that are necessary so that 
they no longer rely on government support.
    Now we have a number of tools to do that. One is a 
supervisory tool. The supervisors have considerable latitude to 
take steps to require changes in management, to require sales 
of assets, restructuring of businesses, or other steps as 
needed to raise capital and to strengthen their business plans.
    Likewise the Treasury, through its ownership rights, can 
also establish policies and make requirements.
    So we have plenty of tools. We would not have really 
substantially greater tools under a different legal regime, I 
think. The issue here though is to find ways to get firms out 
of a situation where they are dependent on government capital. 
And we are hopeful that that can be done over the next few 
years.
    Representative Cummings. The New York Times Editorial Page 
ran two very interesting columns yesterday. First, Paul 
Krugman, one of my favorites, argued that defensive actions by 
families and businesses, like increased household savings and 
wage cuts to prevent job losses, put downward pressure on 
consumer spending and keep the economy depressed. Only 
continued drastic stimulus actions, he argued, can break this 
cycle.
    Second, Alan Meltzer wrote that the Federal Reserve had 
sacrificed its independence by subordinating concerns over 
inflation and engaging in fiscal policy normally left to the 
Legislative Branch and becoming, quote, ``the monetary arm of 
the Treasury,'' unquote.
    Do you agree with Mr. Krugman? And if so, what measures are 
most important moving forward?
    And as far as Dr. Meltzer is concerned, Dr. Meltzer clearly 
evaluates the Federal Reserve from an historical perspective. 
How do you respond to his claim about the Fed's independence? 
Is there historical precedent for the current level of 
outstanding Federal Reserve credit?
    Chairman Bernanke. Well, Congressman Cummings, I hope you 
appreciate the irony of on the same page two distinguished 
economists, one worried about inflation, the other one worried 
about deflation.
    Representative Cummings. I found that very interesting.
    Chairman Bernanke. I think that suggests the difficulty of 
the situation we are in, to try to navigate between the Scylla 
and Charybdis of these two risks.
    We are very committed to price stability. We have recently 
provided projections which suggest how we plan to approach 
medium-term price stability and give information about what we 
think inflation ought to be in the medium term.
    We firmly believe that we will be able, after stimulating 
the economy, to help it recover from this very difficult 
financial and economic situation we are in, to come to a 
situation where we emerge with sustainable growth and price 
stability. We are spending enormous amounts of time planning 
that, thinking about our exit strategy, and so on.
    I would also take great exception to the notion that the 
Fed has sacrificed its independence. I would make two comments 
on that.
    The first is that the critical element of Fed independence 
is monetary policy. Monetary policy has remained completely 
independent of all other government institutions. We have not 
sought advice or input on any aspect of monetary policy. It 
remains completely independent and it will remain independent.
    On other aspects, I think it is important during a period 
of crisis for the major parts of the government to work 
together. I think the American people would like to see the 
Federal Reserve and the Treasury working together.
    In past financial crises there has been a good bit of 
cooperation. At the same time, the Fed and the Treasury 
recently issued a joint statement clarifying that there are 
distinct and different roles for the Fed and the Treasury, and 
in particular the taking of credit risk.
    The making of credit decisions are the Treasury's province, 
and importantly we talked also about the need for a resolution 
regime once again so that the Fed would not get stuck into 
these situations like we are with AIG, which was a really 
undesirable outcome, I am the first to admit, but was necessary 
because we had no well-structured resolution regime.
    So we have tried to put out a clear statement of where we 
think the line is, and we continue to maintain our 
independence, particularly in the area of monetary policy where 
it's particularly important.
    Representative Cummings. Thank you, very much.
    Chair Maloney. Mr. Brady is recognized for five minutes.
    Representative Brady. Thank you, Mr. Chairman. A lot of 
private capital is sitting on the sidelines. Neither 
Administration has yet successfully removed the toxic assets 
from bank balance sheets.
    Given that, how do you expect these stress-tested banks to 
recapitalize? How much do you think is a fair ratio between 
private capital and government sources?
    Chairman Bernanke. Well, our approach will be to ask the 
banks to go first to private sources. And as I said before, I 
think that many of them will be able either to raise new equity 
capital to convert existing forms of capital into common 
equity, or to sell assets or take other measures that will 
allow them to recapitalize themselves without any, or without 
substantial, Treasury capital. So that will be our first 
priority.
    It remains to be seen how receptive the markets will be, 
and what they will be able to accomplish. But I do think that 
there will be significant opportunities for capital-raising 
outside the government's programs.
    Representative Brady. Do you think it will be a majority 
from private sources?
    Chairman Bernanke. I think it will be significant. It is 
hard for me really to say at this point, because it depends on 
the market's reception of what the banks propose to do.
    Representative Brady. Removing those toxic assets is real 
key to the economy; as in new proposal for a Public-Private 
Investment Program. Last week the Special Inspector General for 
TARP and those programs identified a number of vulnerabilities 
and recommended both transparency, as you do, in the current 
bailout dollars but also putting in place ahead of time some 
basic safeguards to deal with collusion, conflict-of-interest, 
money laundering, just basically again to build consumer 
confidence and also investor confidence in those measures.
    Are you aware of the Inspector General's recommendations? 
And do you support them?
    Chairman Bernanke. Yes, I am quite aware and I think they 
are very constructive. The place that they are most relevant to 
the Federal Reserve is in the TALF program that I mentioned, 
because it uses TARP capital. And the Special Inspector General 
for TARP had a number of suggestions.
    We have worked with his office. Nothing is perfect; there 
is always a possibility of some problem. But we believe that we 
have taken substantial steps both to protect the taxpayer from 
credit loss, and to protect the system from any kind of abuse 
or illegal activity.
    We will continue to work with the Special Inspector General 
and make sure that we are, in all of our programs, protecting 
the taxpayer.
    Representative Brady. Treasury has not yet adopted many of 
those recommendations. Would you urge them to move quickly on 
that?
    Chairman Bernanke. I would leave it to them to discuss what 
their concerns are. I don't really know what the issues are 
that they are raising. But obviously we are all interested in 
making sure that the appropriate safeguards are in place.
    Representative Brady. With the cost of the deficits running 
unprecedently high in this country, there is some concern about 
what additional costs would come about because of the whole 
financial rescue efforts.
    Last week the International Monetary Fund estimated that 
those costs to U.S. Taxpayers over the next five years will be 
$1.9 trillion. Do you see that estimate as too high, or too 
low?
    Chairman Bernanke. I don't know what that includes. If it 
means to include financial----
    Representative Brady. It included all the Fed actions from 
the loan guarantees, to the nonstandard capitalization----
    Chairman Bernanke. From the Fed, we don't expect to lose 
any money. From the Treasury there's some risk in their 
investments, but those numbers are--I have no idea what they 
refer to.
    Representative Brady. Okay. As we move forward, what do you 
see as the Federal Reserve's exit strategy to wind down its 
emergency credit facilities and reduce the excess bank reserves 
to prevent higher inflation?
    Chairman Bernanke. Congressman, we have spent a lot of time 
on this. I just want to assure you that we made all our 
meetings into two-day meetings, and we spend the whole first 
day reviewing our balance sheet, our programs, and thinking 
very heavily and extensively about exit strategy.
    We have a plan in place. We are trying to strengthen and 
improve it. Some of the components are, first, that many of the 
short-term programs will either wind down naturally or can be 
wound down. That is about up to a trillion dollars of balance 
sheet that can be wound down through that process.
    Secondly, very importantly, Congress gave us last year the 
ability to pay interest on reserves. By paying interest on 
excess reserves, banks will hold their reserves with the Fed. 
That will allow us to raise interest rates, even if excess 
reserves remain very substantial in the system. So that tool in 
itself will be a very powerful tool.
    Third, we are looking at what is called reverse-repurchase 
agreements, which essentially would allow us to finance on a 
short-term basis some of our asset holdings with nonbank 
investors, such as securities dealers or others. That would 
drain excess reserves from the system, and also have the same 
effect.
    Fourth, Treasury deposits at the Fed drain reserves from 
the excess reserves from the system, as they have done last 
year for example.
    And finally, if necessary, we can always sell some of our 
assets into the market.
    So we have a number of options. The exact timing and 
sequencing remains to be seen. We are looking at that. We hope 
to release more information about that, but we do believe that 
we have all the tools that we need to exit, to help this 
economy get back to a sustainable growth path, but also to 
ensure that we come out of this with price stability.
    Representative Brady. All right. Thank you, Chairman.
    Chair Maloney. Thank you. And the Chair recognizes the Vice 
Chair for five minutes.

 OPENING STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR 
                         FROM NEW YORK

    Vice Chair Schumer. Thank you, Madam Chairperson. I want to 
thank you for the outstanding way that you have conducted not 
only this hearing, but your tenure thus far as Chairman of the 
JEC, and I look forward to working together on many more 
issues.
    Today I want to focus on one of the issues that affect the 
economic well being of American families, and an issue I worry 
has been overlooked in our focus, understandably, on 
persevering the health of global credit markets and large 
financial institutions.
    I am talking about consumer credit. I am very concerned we 
have not done enough to stop some of the same predatory 
behaviors that got us into this mess in the first place.
    American families should not suddenly find their economic 
well being threatened by capricious and indefensible decisions 
of their credit card companies.
    Originally, as you know Mr. Chairman, even before you were 
Chairman, I used to think disclosure was enough. Now even the 
Fed agrees that disclosure is no longer enough because the 
credit card companies always find ways around it and engage in 
awful practices.
    I have heard from an increasing number of my constituents 
that interest rates on their accounts have doubled or tripled 
overnight, without any misconduct on their part. Now is not the 
time for credit card companies to arbitrarily turn American 
families into a cash spigot.
    So two weeks ago Senator Dodd and I wrote to you to urge 
you to use your emergency authority to put the Federal 
Reserve's new credit card rules into place immediately.
    In a letter that you sent me yesterday--right here 
[indicating]--you declined to do so. I believe that the Federal 
Reserve's failure to protect consumers from these outrageous 
rate increases is unconscionable.
    And, Mr. Chairman, while I have applauded you for some of 
the actions you have taken in this area, I have to tell you 
that the decision does a disservice to you and the Federal 
Reserve. Consumer protection, in my judgment, long before you 
were there, has been a weak point in the Federal Reserve.
    You have acted swiftly to use your emergency powers to 
steady teetering financial institutions. It is fair to ask why 
you won't use the same powers to aid American families who are 
at just as great a risk.
    So I have three--well, two questions, but just one other 
comment. What about the family that has a $10,000 balance--that 
is the average balance--and has had its rate go from 7 to 23 
percent? We have heard of that. Every one of us has heard of 
that kind of jump.
    That would mean that a family's monthly payment would go 
from $58 a month to $192 a month, not even accounting for 
compounding the interest over the course of a year. That is 
just outrageous. From a family that would have a rough time 
affording it.
    So I would ask you how you answer that family.
    Two other questions, and then I will finish and let you 
conclude. By all accounts, arbitrary credit rate increases are 
on the rise. In other words, the companies are doing more of 
this now. And the feeling is they are doing more of it because 
they know your rules will go into effect in a year-and-a-half.
    So that does not seem right. And isn't this the same 
problem at the heart of our economic crisis--the regulatory 
system putting financial institutions ahead of consumers that 
is allowing this to happen for the next year-and-a-half?
    And finally, and maybe most importantly, the original 
purpose of the Fed's 18-month delay in the effective date of 
the new credit card rules was to give the banks time to, quote, 
``redesign their systems, make changes to their operations.'' 
This strikes me as nonsense.
    If the banks needed to redesign their systems to make more 
profit, it would not take them a year-and-a-half. You know 
that, and I know that. They are very capable of moving up their 
timetables when they need to.
    I have asked a few people, why would it take a year-and-a-
half? And nobody can figure that out. So how do the benefits of 
prolonging the suffering of consumers outweigh the costs of 
forcing these banks to immediately improve predatory credit 
card practices?
    Those are my three questions. And I say that as somebody 
who respects you and admires you, but is very frustrated about 
this issue and was disappointed in your answer to Senator Dodd 
and me.
    Chairman Bernanke. Well, Senator, I am frustrated as well. 
And I do not think our positions are as far apart as you seem 
to think.
    First of all, we did pass of course very extensive changes 
in disclosures and regulation which included among them a 
virtual ban on the issue we are talking about, which is 
retroactive interest rate increases on existing balances. We 
can question the exact amount of time we left for them to 
restructure their business plans and so on, but that was the 
intention. And I note that Congress is also putting delays into 
their proposed credit programs.
    I am very concerned----
    Vice Chair Schumer. Excuse me, but the Congressional delays 
are not close to as long as yours.
    Chairman Bernanke. Let me come back to that.
    I am very concerned, as you are, about the reports that you 
are hearing about increases in rates, on retroactive ones, 
particularly when they are not associated with some credit 
event, some action taken by the consumer. And we are, I assure 
you, looking carefully into that to try to understand how 
extensive it is and how important it is.
    Now we have here a quandary, though, which is the 
following: We could move up the date on which this prohibition 
is effective. One question that I think we need to think 
through is would that be good for consumers?
    If we moved up the date, the obvious response of the 
companies would be first to raise the rate preemptively, so 
that would happen faster. And secondly--because I do believe 
they do need some time to think through how to restructure 
their business model so they can put out credit to riskier 
consumers in a way that they find profitable--I think that 
their short-term response would be just to cut a lot of people 
off.
    So from the perspective of consumers, my real quandary is 
how can we best help consumers in a way that doesn't just 
create worse problems in the market? And that is the issue that 
I am still grappling with.
    Vice Chair Schumer. My time is up, but I think you could 
figure out a better way than the one you have chosen.
    [Press release titled ``Schumer Demands Answers From 
Bernanke at Hearing After Fed Rejects Push to Freeze Rates on 
Existing Credit Card Balances'' appears in the Submissions for 
the Record on page 50.]
    Chair Maloney. Okay, Representative Campbell.
    Representative Campbell. Thank you, Madam Chairwoman, and 
Mr. Chairman.
    If you determine in the stress test that will be released 
later this week that a bank needs additional capital, and if 
its plan that you describe in your opening statement is either 
determined not to be workable or in that six-month period a 
bank is unable to execute their plan, unable to raise the 
capital they thought from the sources they thought, what then?
    Chairman Bernanke. Then they would have to avail themselves 
of the Treasury's backstop, terms and conditions have been put 
on the Treasury's web site, a so-called Mandatory Convertible 
Preferred type of equity, which is initially preferred equity 
but can be converted to common as needed to meet common ratios.
    Representative Campbell. So they would be required to get 
that additional capital through that venue if they were unable 
to raise it from----
    Chairman Bernanke. Yes. This is a supervisory exercise, and 
supervisors have the right to require that banks meet certain 
capital standards. If the banks cannot meet those standards in 
the private market, which is our strong preference, then they 
have to take government capital to meet those standards.
    Representative Campbell. Okay. You are doing a stress test 
on the 19 largest banks. What about banks 20 through 50, or 20 
through 60, or whatever?
    Chairman Bernanke. It is not our intention to do stress 
tests on additional banks. Those banks, however, will have 
access, as I understand it--and of course I have to defer to 
the Treasury on all details--but my understanding is that those 
banks will have access to all the same capital programs that 
are available to the top 19.
    Representative Campbell. So it will not necessarily be a 
case where bank 22 would fail under a scenario where bank 18 
would not, because it would have access to----
    Chairman Bernanke. I do not know all the details of the 
Treasury's plan. And of course there are issues related to the 
smallest banks which are not publicly traded, and so on, which 
we already saw with the Capital Purchase Program, the first 
round of capital. But the intention of the Treasury, as I 
understand it, is to make capital available to all banks.
    Representative Campbell. Okay. I want to switch to talking 
about the program under which the Federal Reserve is buying 
Treasury Bills now, which I believe is $300 billion. I don't 
know how much you have bought so far, or what is going on, but 
I wanted to ask you about that program which I think is akin to 
a company buying back its own stock.
    You talked about the interest rates on longer term. Is that 
your plan? Is that your objective, to try and keep the longer 
term Treasury Bill interest rates down? How would you get out 
of this program?
    I do not think it has been done since the 1960s, I believe, 
so can you talk a little bit about that?
    Chairman Bernanke. No, the Federal Reserve and other 
Central Banks regularly buy and sell government debt in open 
market operations, and we have been doing that for many years.
    We announced a plan to purchase $300 billion in order to 
try to provide broader liquidity and to help private credit 
markets. That is our objective. And we think it has been 
beneficial because we have seen improvements in mortgage 
markets and corporate bond markets and so on.
    We are not trying to target a particular interest rate. 
Again, our objective is to provide more liquidity to the system 
and to help private credit markets. And I think that it has had 
some benefit.
    Representative Campbell. It is not something, though, you 
have done to this kind of degree for a long time, correct?
    Chairman Bernanke. That's true. But again, we routinely 
transact in Treasuries. That is our primary asset that we buy 
and sell. And we have added to that of course GSE securities, 
as well.
    Representative Campbell. Is this something you would expect 
to continue at a larger volume as was mentioned by some of my 
colleagues here, as the government sells more and more debt, as 
the deficits increase?
    Chairman Bernanke. Well again, our objectives have nothing 
to do with the government's debt, per se. Our objectives have 
to do with strengthening private credit markets, and those 
decisions will have to be made by the FOMC as we look at the 
state of the economy and try to judge the efficacy of the 
various steps that we have taken.
    Representative Campbell. Okay. A quick question about AIG 
in my remaining moments. I believe a few months ago there was 
about $1.6 trillion of assets left in the Financial Products 
Division, which were trying to be wound down. Are you aware of, 
or can you report on the process of winding that down?
    Chairman Bernanke. I don't have precise numbers for you, 
but we understand that it is imperative to wind that Financial 
Products Division down as quickly as possible, and we have 
looked into a number of alternatives including using outside 
consultants and so on to wind that down as quickly as we can.
    Representative Campbell. Is AIG going to need more capital 
from the government because of losses on that portfolio?
    Chairman Bernanke. I do not know. They have not yet, as far 
as I understand they have not yet taken up the $30 billion 
backstop line that the U.S. Treasury provided in March.
    Representative Campbell. Okay, and the final question: In 
September-October we, many of us--I believe you and I--believe 
that we were near, I will use the term, collapse of the 
financial system. Have we dodged that bullet? Are we past that? 
Or is there a scenario under which that fear and panic could 
return?
    Chairman Bernanke. Well one can never predict anything with 
certainty, but I think we are in far better shape today than we 
were in September and October. And while I know there are many 
critics of the TARP, and I understand the criticisms, and there 
are many issues, I do believe the availability of that capital 
helped us dodge what would have been a truly cataclysmic 
collapse of the global banking system, which would have had 
terrifically bad effects on the U.S. economy.
    So it was very important at that time. I think we have made 
a lot of progress. The financial markets are still fragile. We 
do not want to take anything for granted, but we have I think 
come a long way since last fall.
    Representative Campbell. Thank you, Mr. Chairman.
    Chair Maloney. Representative Sanchez.
    Representative Sanchez. Thank you, Madam Chair, and thank 
you Chairman Bernanke for being before us again today.
    My questions are intertwined. I was one of those that did 
not vote for the TARP for all, the reasons that we have seen 
come to bear, but I did vote for the stimulus package. A lot of 
us took a deep breath as we voted for $800 billion to be put 
into the market so that people would keep their jobs and maybe 
we would create some new jobs.
    Then we passed the fiscal year 2009 Omnibus bill which was 
an increase over the previous year's spending. President 
Obama's new budget that has come to the Congress has been 
criticized for being such a large number. Part of it of course 
was that we put the true war spending into it which increased 
it, but the Congress has been looked at like we are spending a 
lot of money.
    But when I turn around and I look at what the Treasury and 
what the Fed has been doing with policy, with I think the 28 
programs between the two of you, many of them under your 
jurisdiction, I count almost about $3 trillion worth of money 
hanging out there being moved around, et cetera.
    Some of that I think is sitting in banks as reserves maybe 
against a commercial real estate problem that I want to ask you 
about, too, but a lot of these banks have been sitting on money 
and the criticism has been that money is not getting out, and 
the small and medium-sized businesses are having that credit 
crunch.
    But if that money comes flooding out, we have the problem 
of possible inflation shooting up. So there is a lot of money 
out there, much of it put out--and I understand why--by you in 
trying to manage the situation.
    I guess my question comes back to what was alluded to by 
two or three of the Members who have already asked questions. 
How do we manage that investment? How do we rein that in? How 
do we make sure that the banks do not all of a sudden open up 
the lending spout, which we have all wanted to happen, and yet 
at the same time avoid it having an inflationary impact?
    I think it is important for Americans to try to understand 
this large chunk of money, or monetary policy out there that is 
creating possibly even more money than the Congress 
appropriated.
    Chairman Bernanke. Thank you for the question. I would 
first like to draw a very strong distinction between the fiscal 
spending and the Fed's lending programs.
    Our lending programs are just that. They are lending 
programs. And they are, with the exception of some of the 
things involved with AIG and that kind of thing--which is less 
than 5 percent of our balance sheet--the whole bulk of all 
those programs are very safe. They will be repaid, with 
interest. We are making money for the Treasury.
    Representative Sanchez. I am not worried about that 
repayment, per se.
    Chairman Bernanke. Okay, so----
    Representative Sanchez. I am more worried about----
    Chairman Bernanke. There is a difference between spending 
money and then lending it out and getting it back with 
interest.
    Representative Sanchez. Right. But if it all floods at the 
same time----
    Chairman Bernanke. That is the question Mr. Campbell asked 
me about, I believe, which is how do we make sure that the 
monetary base contracts at an appropriate time to make sure 
that there is no inflation after the recovery begins.
    And as I indicated, we have a whole set of tools that we 
will use. Those include winding down short-term lending 
programs, which happen automatically to some extent and which 
we can do any time we choose; none of them is longer than three 
months in duration.
    Secondly, we do have this very important power of being 
able to pay interest on reserves. If we want to raise the 
Federal Funds Rate to say 2 percent, just to make up an 
example, and we pay 2 percent on Reserves to banks, why would 
they lend it out at less than 2 percent? So that would allow us 
basically to raise interest rates to 2 percent.
    Beyond that, we have a whole set of other tools that we can 
use. And I just want to assure the American people that we are 
very focused--like a laser beam, if I may--on this issue of the 
exit and making sure that we have price stability in the medium 
term. We are working very hard to make sure that, while on the 
one hand it is very important for us to provide a lot of 
support for this economy right now because it needs support, at 
the same time we understand the necessity of winding this down 
in an orderly way at the appropriate moment so that we will not 
have inflation problems on the other side.
    It was also mentioned that The New York Times had one 
article about inflation and one about deflation. There are 
risks on both sides and we are trying to manage this as well as 
we can.
    Representative Sanchez. The commercial real estate market, 
have you been watching that? And do you see the same impact as 
we did in residential real estate? And I will end with that. 
Thank you, Madam Chairwoman.
    Chairman Bernanke. I don't think the commercial real estate 
market got as out of line in terms of prices and so on as the 
housing market did, but it is currently weakening. As I 
mentioned in my testimony, rents are down. Vacancies are up. 
And a lot of commercial real estate owners are having 
difficulty refinancing their debt, or obtaining new financing 
for new projects.
    In particular, one of the main sources of commercial real 
estate financing is the CMBS, Commercial Mortgage Backed 
Securities Market, where lenders can securitize those loans 
into the secondary market.
    So among those programs which you mentioned, the Fed is 
trying to get the financial system working again. And we have 
included just now Commercial Mortgage Backed Securities in our 
so-called TALF Program, which we hope will get investors 
interested back into this market and get it going again.
    I think that is very important to address the fact that 
there is a large amount of CRE refinancing coming due in the 
next year or two, and we need to have that market functioning 
so that that can happen smoothly.
    So there is a problem there, both from the bank's 
perspective and from the economy's perspective, and we are 
doing what we can to try to address it.
    Representative Sanchez. Thank you, Madam Chairwoman.
    Chair Maloney. Representative Paul.
    Representative Paul. Thank you, Madam Chair, and welcome, 
Chairman Bernanke.
    I have a couple of questions, but first I want to mention 
that I find it awfully frustrating at times when we always talk 
about inflation and we only talk about prices. We have prices 
under control, and there is no inflation.
    We have to realize that the monetary base, the liquidity, 
was doubled in a few short months. To me there is a lot of 
inflation out there. It is already inflated. We are in the 
midst of inflation. Because the prices have not gone up does 
not mean we do not have the distortion.
    It was that system that gave us the financial bubble: the 
artificially low interest rates, the malinvestment, and all the 
mistakes made. And now we are trying to correct all that by 
doing the very same thing.
    So I think some day we are going to have to address this 
somewhat differently, because I am not very optimistic that we 
can solve our problems with more spending and more borrowing 
and more inflation in order to solve those problems.
    But you answered this question several times and I want to 
bring it up again, and that has to do with when will some of 
this liquidity be drained?
    I do not think the answer you have given is very specific, 
and I do not expect that I will get a more specific answer, but 
I am going to try. What if we have a situation where prices 
are--which is not the best measure of inflation--but let us say 
the Consumer Price Index and the PPI is going up 8 to 10 
percent, and there is no economic growth. Where are you then? 
Because that is not impossible. It has happened. It has 
happened in our history; it happens throughout the world; it is 
a common thing. It has put you between a rock and a hard place. 
If you drain, interest rates go up and the economy further 
crashes; if you don't, you have the explosion.
    Can you give me an idea what you precisely would do if you 
faced the situation where prices were going up 10 percent with 
no economic growth?
    Chairman Bernanke. Well, I think that is an unlikely 
scenario, but we certainly would have to take steps to ensure 
price stability. If inflation gets out of control, we know that 
has very adverse effects on the economy both in the medium and 
long term, and so we would obviously have to address that.
    Representative Paul. Which means you would have to raise 
interest rates.
    Chairman Bernanke. That's exactly the same problem that is 
always faced by monetary policy--which is, in a recovery when 
the economy is starting to grow but has not yet gotten very 
far, perhaps, and unemployment is still above where you would 
like it to be--you have to take away the punch bowl, as someone 
once said, in order to avoid the inflation risk.
    Representative Paul. See, I see this as the real problem. 
Because we practice economic planning through manipulation of 
money and credit. Socialism always fails because they don't 
have a pricing structure.
    Interventionism and inflationism fail because we don't have 
a free market pricing system of money, the--interest rates. 
Therefore it fails. It comes to a conclusion. And inevitably it 
leads to a more socialized economy.
    Just witness what we are talking about: taking over 
companies; taking over insurance companies; taking over banks. 
This has been the prediction of the free market economists, and 
yet we continue down this path of socializing our entire 
economy.
    But I do want to address one other subject that has to do 
with transparency. You said you have made a commitment to 
transparency and openness, which is very good; there's a lot of 
us that want that, and I have dealt with that and have 
legislation, HR 1207, dealing with that. But in a real sense, I 
know what you are doing here, but, you know, the Code really 
protects you from telling us some of the things we would like 
to know.
    For instance, in 1978 when the GAO was given the authority 
to audit the Fed, it put exclusions in there, but you can't ask 
these questions. Precisely, if I wanted to know about all your 
agreements and discussions with foreign central banks, with 
foreign governments, with international financial 
organizations, you have no obligation, and you haven't 
volunteered to do this, so is there a way that you would--since 
you are moving in this direction--move and consider supporting 
a position where Congress has the right to know these very, 
very crucial, vital issues dealing with their money?
    I mean, everything you do deals with their value of their 
money. Would you ever be open to repeal of some of those 
provisions?
    Chairman Bernanke. Yes, I would.
    Now let me be specific. We have many programs where we lend 
money. We take collateral, and we are repaid. I just want to 
assure you, first of all, that we have very substantial 
oversight and controls.
    We have, besides internal divisions which monitor these 
programs, we have an independent IG, and we have an external 
auditing company, a private company, which provides audits 
every year and has given us a clean bill of health on all our 
financial controls, all the level of Sarbanes-Oxley 
requirements.
    That being said, if Congress needs more information about 
the operations that we are doing, exactly how we manage our 
collateral, how we manage our lending, those sorts of things, I 
think we can talk to you about providing more information about 
that. And, if necessary, working with the GAO.
    Where I would be very careful and would like to be very 
clear, there has been some discussion of the GAO, quote, 
``auditing monetary policy.'' I don't know what that means, but 
I certainly would resist any attempt to dictate to the Federal 
Reserve how to make monetary policy.
    It is the independence of monetary policy which is crucial 
to the maintenance of price stability and economic growth in 
this country. And interference would not be acceptable. But if 
it is an issue of making sure that we are appropriately 
managing our systems and doing what we say we are doing in 
terms of our lending, we want to be open. We want you to 
understand that we are taking every precaution to protect the 
Taxpayer.
    Representative Paul. Of course it's the policy that's the 
only thing that really counts.
    Chair Maloney. The gentleman's time has expired.
    Congressman Snyder.
    Representative Snyder. Thank you, Madam Chair. Welcome, Mr. 
Chairman.
    When Senator Schumer brought up his issues about credit 
cards, there are probably not too many advantages of the mail 
stacking up at home when we are up here this week for a week at 
a time, but a couple of weeks ago I went home and I had one of 
these announcements from my bank that my credit card percentage 
was going up, but delightfully what also arrived a day or two 
later was from the same bank, because of my high credit score, 
an opportunity to get a credit card, which I thought was kind 
of an indication of where these banks were at. But it does not 
mean anything except that it enabled me to go down with 
righteous indignation to my bank.
    Mr. Chairman, in your written statement you say the 
following, quote: ``The steep drop in U.S. exports that began 
last fall has been a significant drag on domestic production 
and any improvement on that front would be helpful.''
    I know it is not in your lane of activity, but some of us, 
particularly from agricultural states, just do not understand 
why the new Administration has not changed the restrictions on 
agricultural sales financing to Cuba.
    I mean, it is now legal to sell agricultural products to 
Cuba. If there was a modernization of the financing transaction 
rules which the Bush Administration put in, it would be several 
hundred billions--millions a year to American exporters, which 
I think is your goal to be helpful right now and a good signal 
on trade.
    I wanted to ask you, you had mentioned several times in the 
discussion about institutions that are too big to fail, they 
are only too big to fail if they cannot be in their failure an 
orderly--in an orderly fashion taken care of. And you referred 
to your suggestions for a Resolution regime.
    Have you put out something written? I was with a group of 
folks that met with you some weeks ago when we thought you were 
going to forward to us some written proposal. Is there a 
written proposal that you have put out?
    Chairman Bernanke. There is proposed legislation, yes.
    Representative Snyder. Proposed legislation that you have 
put out, from you? Is there something you have put out?
    Chairman Bernanke. Yes.
    Representative Snyder. The Chairwoman has made mention of 
it.
    Chairman Bernanke. Yes. And the Treasury also has put out 
proposals that are very similar.
    Representative Snyder. I suspect you saw this. As I was 
looking through last night your impressive bio, I saw the April 
27th Business Week. It says: What good are economists anyway? 
And then the answer came out, was brought home in morning's 
Washington Post in which it talks about the Fed's $1.17 
trillion and what they referred to as unprecedented 
intervention.
    Continue the discussion you had with Representative Paul. 
If you were sitting on this side, looking at you--because none 
of us up here understand your business. I mean, that's the 
answer to ``what good are economists, anyway?'' I can't talk 
about economists in general, but we have put tremendous value 
on you and on your skills.
    Should we be concerned about this dramatic increase that 
has occurred as part of what you refer to as helping us avoid 
a, quote, truly cataclysmic collapse? Should we be concerned 
that one person has that kind of power?
    Chairman Bernanke. Well you certainly should take a strong 
interest in it, and I certainly don't blame you for that. After 
this testimony I am going to lunch to meet with a group of 
Senators to go through our balance sheet and our programs and 
try to answer all their questions. So we owe it to you to make 
sure you understand what we are doing and why we are doing it 
and what the results are.
    But our sense is that this is an unusual, extraordinary 
time. We have used powers we have not invoked since the 1930s. 
We have done that because we thought it was necessary to help 
protect the U.S. economy in a time of extraordinary financial 
crisis. We have done so in a responsible way using powers that 
the Congress gave us in the pursuit of the Congressional 
mandate for full employment and price stability.
    I am happy to meet with you individually and go through 
with you every program, and talk to you about what the purposes 
are. I fully understand your interest, and you should be 
interested, and I am more than happy to make myself available 
to help you understand what we are doing and if you have 
concerns to try to address them.
    Representative Snyder. I went on your web site this morning 
and just looked over one of the descriptions of one of the 
agreements you have with a financial institution.
    It seems like you apparently have an executive pay 
provision with all, or most of these deals? Is that correct? At 
least the ones that I looked at did, said it had to be approved 
by, apparently by you.
    My question is: As you have heard these debates over the 
last several months about executive pay--and I have voted 
against several of these in the House--do you have any concerns 
that, as our populous spirit takes over in terms of sending a 
signal we don't like some of these bonuses, that in fact we may 
be driving some of these institutions from participating in a 
process which in your words we are trying to avoid the truly 
cataclysmic collapse?
    Chairman Bernanke. I don't think the American People object 
to high pay, per se. I think they object to high pay which is 
not tied to performance.
    Representative Snyder. Right.
    Chairman Bernanke. So that is the question. And I think 
that is the concern people have about some of the pay that has 
been given out on Wall Street recently, obviously given the 
many failures that we have seen there.
    My perspective, and I think the perspective of the 
financial regulatory community towards executive compensation 
is that it should be structured in such a way first that it 
ties closely remuneration to actual, measurable performance, 
number one; and secondly, that it is not structured in a way 
that induces unnecessary or excessive risk-taking.
    So we are working in the Federal Reserve on supervisory 
guidance, or other types of rules, that will tell banks to 
structure their compensation not just at the very top level but 
down much further in a way that is consistent with safety and 
soundness. Which means that payments, bonuses and so on, should 
be tied to performance and should not induce excessive risk. I 
think that is the important thing.
    Now, of course, we are required by Congress to follow 
through on certain executive compensation restrictions for 13.3 
recipients and for TARP recipients, and we obey those rules. 
But my philosophy on this is that we should think about the 
structure of compensation and make sure that it is achieving 
its appropriate objective.
    Representative Snyder. All right, thank you, Mr. Chairman. 
Thank you, Madam Chair.
    Chair Maloney. Thank you, Mr. Snyder. Congressman Burgess.
    Representative Burgess. Thank you, Madam Chair.
    Thank you, Chairman, for being here with us this morning. 
In your testimony--and I apologize for being late--``As 
economic activity weakened during the second half of 2008, 
prices of energy and other commodities began to fall rapidly, 
inflationary pressures diminished appreciably.''
    If indeed the green-shoot theory is correct and we are 
beginning to emerge into a period of recovery, what do you see 
as the effect of rising prices during that recovery?
    Chairman Bernanke. Well, if----
    Representative Burgess. What do we do when prices begin to 
rise?
    Chairman Bernanke. If our forecast is correct, then we will 
start to see some economic growth, but it will be slow at first 
and there will still be a lot of unemployment and slack in the 
economy. We don't expect, therefore, commodity prices to rise 
very much and we don't expect to see much inflation.
    So our forecast, despite the green shoots theory, is still 
for inflation to be quite contained for the next couple of 
years.
    Representative Burgess. Well you referenced yesterday's New 
York Times, and I wasn't going to bring it up, but since you 
did----
    Chairman Bernanke. Someone on the panel did.
    Representative Burgess [continuing]. Let's look at a couple 
of the things that were talked about. I mean, you made the 
point I think to Representative Snyder, or maybe it was 
Representative Paul, that independence--that it is critical to 
have the independence of the monetary policy, but the question 
was raised in The New York Times yesterday, not doubting the 
knowledge or technical ability of the Federal Reserve, the 
writer doubted the commitment of the Administration and the 
autonomy of the Federal Reserve, thinking that the Fed has 
sacrificed its independence to become the monetary arm of the 
Treasury.
    And then further quoting from the article by Alan Meltzer: 
Independent Central Banks do not do what this Fed has done. 
They leave such fiscal actions to the Legislative Branch--that 
would be us--they leave such fiscal actions to the Legislative 
Branch. By that same token--well, let me move on. The Central 
Bank was made independent, expressly so. It could refuse to 
finance deficits. Is there a political consensus that the much 
larger Obama deficits will not pressure the Fed to expand 
reserves to buy Treasury Bonds?
    How would you respond to Alan's writing?
    Chairman Bernanke. Well, I will recap a few points I made 
earlier, which is that I think close cooperation of the 
authorities, the Fed and the Treasury in particular, in a 
situation of extreme financial crisis and risk to the system is 
necessary, and that the American People would want to see their 
government working collaboratively to try to solve those 
problems.
    And so we have done that both with the previous 
Administration and with this Administration. So there is no 
political aspect to it.
    That being said, we understand there are important lines of 
distinction between what the Fed does and what the Treasury 
does, and the Treasury understands that as well. We issued 
recently a joint statement which tried to delineate those 
lines.
    And in particular one of the key principles is that nothing 
that we do to support the financial markets or work with the 
Treasury must in any way compromise the independence of 
monetary policy, which is the critical element and which is 
what is going to allow us to make sure we have price stability 
and will allow us not to monetize deficits but only to take 
policy actions needed to achieve sustainable employment and 
price stability, which is our objective.
    Representative Burgess. Well the--and I think 
Representative Snyder brought up the point from the article 
this morning. And then that separation of fiscal policy and 
monetary policy, when he says ``Who Needs Economists?'' Well, 
we do because we don't understand that distinction. But it does 
seem as if we are getting to a point where the Fed is 
monetizing the debt.
    Let me just move on to another aspect. It came out earlier, 
and I think you just reaffirmed that there was activity last 
fall, that in your opinion was necessary. In the interest of 
full disclosure, I voted against that both times.
    I also voted against the stimulus package in February. Now 
I had a lot of people back home ask me--they didn't think it 
was right what we did in October, but if you want to stipulate 
that that was necessary because of an unprecedented occurrence 
in our credit markets, why was it not necessary to give that 
time to work before then adding a like amount of money to that 
in the stimulus package?
    Was there a disconnect on the part of Congress with 
reality? Were we just spending money to spend money at that 
point?
    Chairman Bernanke. Well those two packages have very 
different purposes. I think to achieve the successful recovery 
we have to do two things. One is to get the economy going 
again. I am not going to get into the details of the fiscal 
policy, and I am sure people can differ on various aspects of 
it, but the objective of the fiscal policy was to get economic 
activity and jobs going again.
    The purpose of the Stabilization Act last fall that you 
mentioned was specifically to stabilize the financial system, 
which is the other critical element of recovery. So they had 
very different purposes and different structures.
    Again, the program from last fall is made up of asset 
purchases and loans, and I think a very substantial part of 
that will be recovered, perhaps even all of it. So they are 
very different programs with different objectives.
    Chair Maloney. The gentleman's time has expired.
    Congressman Hinchey is recognized for five minutes.
    Representative Hinchey. Thank you, Madam Chairman, and 
thank you, Chairman Bernanke for your statement today and the 
very firm answers to the questions that you've received.
    I would like to just emphasize something that Senator 
Schumer said about the interest rates on credit cards and what 
a big problem that is causing and increasing for low- and 
middle-income working Americans.
    The credit card interest rates are going up for a lot of 
people in the range of 30 percent and higher, and in come cases 
even 41 percent. But I would like to emphasize in that context 
that we have introduced legislation here, myself and others, in 
the House and in the Senate which would put a cap on interest 
rates on credit cards. I think that is something that is very 
important.
    If you would like to comment on that, I would appreciate 
it. The main problem that we are facing I think in this economy 
is the downturn in the gross domestic product. Just from the 
recent information we have, the GDP has gone down 6.1 percent 
in the first quarter of this year and 6.3 percent in the last 
three months of last year. And one of the reasons for that is 
because the GDP is driven by low- and middle-income working 
Americans, more than 70 percent of it driven by working 
Americans and whether they spend and how they spend, but what 
we have seen is employee wages in the private sector increase 
only two-tenths of one percent in the first quarter of this 
year. That is a record low. We have never seen anything like 
that before.
    At the same time, household debt as a percentage of income 
is the highest it has been since the 1930s.
    This is just another way in which the economic conditions 
we are facing now are so similar to the conditions of that 
Depression back then in the 1930s.
    One of the things that we did with the stimulus bill, in 
addition to putting money back into this economy to generate 
jobs and to address the needs that have been so neglected for 
decades, one of the other things that we did in that so-called 
stimulus bill, that investment program, was to provide tax 
relief for 95 percent of Americans by a $400 rebate in the 
context of that stimulus bill. And also an adjustment in the 
Alternative Minimum Tax.
    I wonder if you have any thoughts about what the Federal 
Reserve could be doing and what we should be doing here, in 
addition to this so-called stimulus bill that we have passed 
and which is now having significantly positive effects, which 
will increase over time. What else is it that we should be 
doing here in this Congress to invigorate this economy, rather?
    Chairman Bernanke. Well there are a lot of things you might 
consider, but personally I think it would be very important for 
the Congress to focus on getting the financial system fixed. 
And there are two elements to that.
    One is, as I have already mentioned, this resolution regime 
that we can find a way to address too-big-to-fail, to deal with 
companies that are, on the one hand, in danger of failing but 
are so large and interconnected that their failure would 
endanger the entire financial system in the economy.
    And the second is closely related to that, which is part of 
the deal I think, is to look again at financial regulation to 
make sure that our financial system is better regulated and we 
can avoid problems like this in the future.
    On fiscal policy, you have taken some strong actions, and 
they are just beginning to kick in. I am eager to see what 
effects they will have.
    Representative Hinchey. Okay, well let me then ask you just 
one other question. One of the things that we are facing is the 
significance of the TARP bill, which was very questionable when 
it was presented by Secretary Paulson back when it came 
through.
    Now we have SIGTARP, which is overseeing the way in which 
that TARP bill is being handled, which, I think is absolutely 
necessary because of the huge amount of money that is being 
pushed out there, instead of some of that money being put into 
the hands of working Americans, stimulating their economy, 
which would drive the gross domestic product up more 
effectively.
    Nevertheless, this TARP Program is continuing. So I would 
wonder if you could answer one or more of these questions:
    The requirements:
    That we would require the Treasury to account for all 
taxpayer funds that are used in the TARP program;
    To require recipients of funds under the Capital Assistance 
Program to report how they use those funds;
    And require strong oversight, accountability, and conflict-
of-interest provisions for the Public-Private Investment 
Program.
    Chairman Bernanke. First, on the Treasury having to account 
for its use of funds, of course they should do that. They do 
provide detailed information on all the loans and investments 
that they make on their web site, as far as I understand it. If 
there are other things they should do, again they should be 
providing as much information as possible about how they are 
using the money to the American people.
    I think in principle it is good to ask banks to account for 
how they use the money, but there are some problems in 
practice, which of course is that money is fungible. If I may 
use an analogy, if a taxpayer called you up and said I don't 
want my money being used for, say, defense, how would you say 
that all the money goes into one big pot. It is kind of hard to 
exactly explain to that person where their money is really 
going in some sense.
    The purpose of the TARP money is to create capital which is 
then supporting other activities, lending and other activities.
    On oversight and conflict-of-interest, I could hardly 
disagree with you on that. Clearly, we want to make sure there 
is no fraud or other problems related to any of these programs.
    I would mention that the Federal Reserve has had a lot of 
contact with SIGTARP over the TALF, which uses TARP capital, 
and we are working hard to make sure that they are comfortable 
with all the safeguards that we are taking to avoid any such 
conflicts of interest or fraud.
    Representative Hinchey. Thank you.
    Chair Maloney. Thank you. The gentleman's time has expired.
    Senator Casey.
    Senator Casey. Madam Chair, thank you very much for this 
hearing. And Chairman Bernanke, thank you for your testimony, 
your presence here, and your public service.
    I wanted to focus on two areas. One is on jobs and the job 
picture, meaning the unemployment rate, and the data that we 
see and try to, as best we can, make sense of.
    And then secondly, a question about the perception that the 
American People have as to where our economy is now and where 
it will go.
    First with regard to the unemployment numbers, we have 
heard that more than 5 million jobs have been lost. The rate, 
as you know, nationally in February was 8.1, March 8.5, one 
projection in April of 8.9.
    In Pennsylvania we have been behind, fortunately unlike in 
our past where we would run ahead of the national rate, thank 
goodness, but it is far too high. We have gone from a rate of 
7.5 in February to 7.8 in March, and we do not yet know what 
April will bring. The March number in Pennsylvania translates 
into just a couple of hundred jobs under 500,000 unemployed. So 
even in a state where the rate seems relatively low, it is a 
huge number of people unemployed.
    There have been a number of projections about the rate for 
2009 and 2010. In fact, even for 2010 the blue chip number I 
guess is 9.4, and; the CBO projects at 9. I guess all of that 
is a predicate for--the question--where do you think the rate 
is going? Do you have a sense of where it could go in 2009 and 
2010?
    Maybe the simplest way to ask is: Will it go to 10 in 2010? 
What is your sense of that?
    Chairman Bernanke. As I mentioned in my testimony, the loss 
of jobs and the deterioration of the labor market is one of the 
most distressing aspects of this whole episode. We have already 
seen about 5 million jobs lost.
    The forecast we have is for the economy in terms of growth 
to begin to turn up later this year, but initially not to grow 
at the rate of potential. Which means that unemployment and 
resource slack will continue to rise into 2010.
    We think that the unemployment rate will probably peak 
early in 2010 and then come down relatively slowly after that. 
Currently we do not think it is going to get to 10 percent. We 
are somewhere in the 9s, but clearly that is way too high.
    The issue of re-employment is complicated by the fact that 
part of what is happening, besides having the recession, of 
course, is that our economy is adjusting to the changes in 
sectoral composition. We are going to have fewer investment 
bankers and fewer construction workers probably in the future 
because those sectors got very large, and those people will 
find work in new areas.
    So there is going to be some reallocation of labor among 
different sectors, which is going to affect the rate of re-
employment, as well.
    I would just make the comment that several people have 
expressed concern about inflation. It is very hard for serious 
inflation to take off when you have this kind of slack in the 
economy. Rep. Hinchey mentioned wages. Wages are growing even 
more slowly, which is also not suggestive of inflation 
certainly.
    So it is these slack conditions projected for a period 
which has allowed us, or I think required us, to take the 
aggressive approach that we have to try to get this economy 
moving again. But I agree with you--it is a serious problem. 
And even when the economy begins to grow, it will take awhile 
for unemployment to come back to an acceptable level.
    Senator Casey. And I guess that assessment--a lot of your 
testimony this morning--is consistent with what I have heard in 
Pennsylvania, sometimes directly from employers, but also 
people who interact with employers.
    For example, on page 4 you say, in the middle of the second 
full paragraph, ``We expect that the recovery will only 
gradually gain momentum and that economic slack will diminish 
slowly.''
    In other words, it will not be a spike, nor a turning point 
that will lead to a dramatic change. That seems very 
consistent. And also the caveat that you note on page 4, where 
recovery assumes the continuing gradual repair of the financial 
system.
    I guess all of it--and I know I am just about out of time--
provides a backdrop for a question--the American People, 
whether they are stressed immediately with the loss of a job or 
a house, or whether they are simply observing and nervous and 
concerned about the future--they have been hit with a torrent, 
or an avalanche, of data. I guess in light of all that data, 
yes, we see signs of recovery, maybe just flickers here and 
there. However, the job numbers and the unemployment rate lag, 
so what do you tell people?
    In other words, do you say don't get too focused on the 
unemployment rate, that that will not tell the whole picture? 
Or what else do you say to people who are looking for signs of 
hope but do not want to be overly optimistic when the signs of 
hope are juxtaposed with high unemployment numbers? I mean, I 
know it is a tough question to answer in terms of advice or 
guidance for people.
    Chairman Bernanke. I have two very different comments. One 
has to do with the nature of our labor market, which is 
extraordinarily dynamic. So when you see 1000 jobs lost in an 
area, it could well be the result of 4000 being created and 
5000 being terminated.
    So even in a period like this, there are many, many new 
jobs being created in new industries, new businesses, and so 
on. So there are opportunities for people, and particularly 
during periods like this you sometimes see remarkable 
innovations in business models and technology and so on.
    So it is not the case that there are no opportunities. 
There are opportunities.
    The second thing I would say is that Americans are very 
good at being adaptable. We have in particular, for example, a 
very diverse educational system that includes not just K-12 and 
college, but also junior colleges, community colleges, 
technical schools, adult education, apprenticeship programs, 
all kinds of things. So there are lots of opportunities for 
people to retool as necessary if they think their job is not 
coming back in that particular area.
    So building that human capital is something that people 
should do and can do, knowing that if they have the skills they 
will find opportunities.
    Senator Casey. I am out of time. Thank you, very much.
    Chair Maloney. The Chairman has indicated he has to leave 
at 12:00, so we have time for a few additional questions for 
another round.
    First of all I want to publicly acknowledge and thank you 
for your leadership in coming forward with rules to crack down 
on abusive, unfair, deceptive, anti-competitive practices by 
the credit card industry.
    This was an area I had been working on for years. I had a 
bill that cracked down on the most abusive practices, like 
retroactive interest rate increases. Going forward, this bill 
will give notice so consumers can get out of abusive credit 
cards and go to another card, putting competition in the 
system. It was not until you came out with similar rules, that 
greatly reflected the bill that I had authored, that the 
momentum gathered in Congress to pass it last year. The rule 
change you put in place in December gave us the additional 
momentum to pass a very strong bill last week.
    Originally I had an enforcement 30 days after passage. It 
went to the committee and the committee voted to keep with the 
July 2010 date of the Federal Reserve. That can be changed in 
the Senate. We did accept an amendment of mine to put into 
effect immediately, or within 30 days after the rules are put 
into effect. The 45-day notice allows consumers to move to 
another card and get out of an abusive system that is unfairly 
jacking the interest rate.
    But I truly believe that you played a very brave and 
important role in helping this adjustment in our economy. It 
was a very, very difficult bill to pass, and your leadership is 
greatly appreciated by me, and I am sure the consumers in our 
country.
    I want to talk to you about one of the options for banks to 
convert the TARP shares into common equity, boosting government 
ownership in those companies. How much influence will the 
government seek in the day-to-day operations of such decisions 
as credit allocation management, the governance, board seats, 
mergers, acquisitions, asset sales? Do you see government being 
dominant, or passive, in this transformation?
    Chairman Bernanke. First, it is obviously not our intention 
or desire to have long-term government ownership of banks. That 
is not desirable. It is not efficient. It is not good for the 
economy.
    So the top priority will be to get banks on a path where 
they can pay back and get out of the situation where they are 
partially owned by the government. So whatever actions are 
needed to achieve that, the supervisors, with the support of 
the Treasury, will work with the banks to raise capital, to 
sell assets, to do whatever they need to do. So that is the top 
priority.
    In that respect, it is not a hands-off policy because we 
want to make sure they are taking the steps necessary to emerge 
from this situation.
    In terms of day-to-day management, I think the Treasury may 
well want to set broad policies, for example, on lobbying, 
dividend payments, or things of that sort, which is 
appropriate. But it is not really a good idea for the 
government to try to manage day-to-day business decisions, and 
for that purpose we have to have management there that we think 
is effective and let them make those decisions.
    So again the bottom line is, yes, we have to be active in 
the sense of making sure that banks are working towards 
strengthening themselves and have appropriate broad policies, 
but we certainly do not want to be involved in day-to-day 
operations.
    Chair Maloney. How concerned should common stockholders be 
that the stress test results will require fresh capital 
infusions for some of the banks? It has been preliminarily 
reported that 10 banks will need cash infusions.
    What impact is that going to have on stockholders? How 
concerned should they be?
    Chairman Bernanke. Well I can't preview the results, which 
will come out on Thursday afternoon. Our hope is that this 
program will, on the one hand, provide a lot of information to 
the markets and will restore confidence in the banks. That is a 
very important part of this whole process, just letting people 
see what is on the banks' balance sheets. And that will be part 
of the healing process that will make these banks able to be 
more profitable and more effective in the future.
    So I am hopeful that in the medium-term at least that both 
investors and borrowers will benefit from this.
    Chair Maloney. Well the transparency definitely builds more 
confidence, and with confidence comes more capital. What 
additional steps do you see the Federal Government taking?
    For example, if the IMF numbers are higher than the TARP 
money that we have and the access to capital, do you see any 
other initiative to raise government money, if it is so needed? 
What other steps do you see, if any? Let me say, you have 
definitely not been boring during this crisis. You have been 
incredibly innovative coming up with many other ideas of how to 
approach challenges.
    So what's next, if we needed the help?
    Chairman Bernanke. I look forward to a long period of 
boredom. [Laughter.]
    Chair Maloney. I think the country would like a little 
boredom, too.
    Chairman Bernanke. Yes, we all would.
    On the bank situation, it should be very clear that the 
assessment is to make sure that banks have not just minimal 
capital but more than minimal capital; that they are strongly 
capitalized, and that they are strongly capitalized even if the 
economy gets worse than we currently think it will.
    So our hope and expectation is that this will provide 
enough capital for the banks to be healthy and to provide the 
important support to the economy they need to provide. So I do 
not have at this moment any future plans I can share with you, 
or that I know.
    Chair Maloney. My time has expired. Ranking Minority Member 
Senator Brownback.
    Senator Brownback. Thanks, Chairman.
    I get from my banks all the time that the regulators are on 
them way too much with the capital that they have--and I am 
talking here about these are local banks, regional banks really 
throughout the state. They really feel like that they are under 
the gun, and that it is harming the overall economy, what is 
taking place, particularly if they are involved in any sort of 
real estate investment, whether it is home loans or commercial 
properties, that they are being hammered.
    They believe it is unfairly so, and they believe it is also 
very harmful on the economy of what's taking place. I know you 
have heard this from some other members, but I want to really 
drive this point, because what I have seen taking place in 
these downturns before is that the regulators, maybe they get 
overly blamed for it, but it certainly seems like they have a 
big impact on when the recovery happens by what they will allow 
on credit standards and by what the banks believe they will 
allow on credit standards.
    And I think they are harming the length or the viability of 
the recovery right now from what I am hearing across the state 
from both bankers and from what I'm hearing from anybody 
associated with any real estate business.
    I don't know if you have a response to that, but I would 
really hope you watch that very carefully, because I think it 
is going to hurt us from recovering strong.
    Chairman Bernanke. Senator, I do have a response, which is 
that there is always this tension between making sure the banks 
are making safe and sound loans--because we do not want to have 
them lose money--versus making sure that credit is sufficient.
    We just want to call your attention, the regulators put out 
a joint statement in November called ``Lending To Credit Worthy 
Borrowers,'' which had a number of components, but the thrust 
was that it is very important for examiners when they are in 
the bank to, on the one hand, make sure that the loans are safe 
and sound and appropriately underwritten and so on, and on the 
other hand, that banks make loans to credit-worthy borrowers to 
maintain their customer relationships and so on. And excessive 
conservatism by the examiners can be destructive, as you 
comment.
    So we issued that statement, and at least in the Federal 
Reserve we have made efforts through training programs and 
examination manuals and so on to try to communicate to our 
examiners in the field that we really need them to take that 
more balanced approach.
    Now I hear from bankers exactly what you are saying, so I 
am sure we are not always successful, although in some cases 
maybe they are underestimating the risk of some of the things 
they want to do. But it clearly is an issue and we are very 
much attentive to it.
    Senator Brownback. They are saying it is particularly 
harmful on commercial real estate, and that is the very weak 
part that you were noting in the economy now anyway. I don't 
know if everybody just didn't quite get the memo across the 
country or what the case is.
    Another question that I get from a number of people is how 
do we get the private capital back out into the market and 
working?
    It just seems like it has really been scared and it is on 
the sidelines, so that you are putting a lot of money into the 
system but there is not as much velocity that needs to take 
place with the money.
    Do you see things that need to be done there? Or do you 
have questions about what it is going to take to get the 
private capital back working into the marketplace?
    Chairman Bernanke. Well we, and the Treasury, and others 
have taken steps to try to get these markets going again, and I 
think we are seeing some fruits now, as I talked about in my 
testimony. We have seen some issuance of asset-backed 
securities, which was not there for a long time.
    We are seeing a pretty healthy corporate bond market. We 
are expecting that with our Banking Assessment Program that we 
will see some equity coming into the banking sector. So clearly 
we are not normal yet, but we are seeing some improvement in 
terms of money coming off the sideline.
    Senator Brownback. One of the things I get asked by a 
number of people is concern about foreign purchases of our 
debt, and that we are very dependent upon that particularly 
from the Chinese.
    If that something that you are concerned about, about the 
level of U.S. Government debt being purchased by foreign 
borrowers, particularly by the Chinese, and whether or not they 
will back off from purchasing of our foreign debt at some time 
here in the near future?
    Chairman Bernanke. Well I don't think there is any prospect 
of any big shift in the portfolio preferences of foreign 
investors. Right now the U.S. debt is very liquid, very safe, 
and there is a big demand for it, frankly.
    In fact, during the crisis there were a lot of purchases of 
debt by foreigners because they thought that was the safest 
asset around. I do think there are two issues.
    One is that the acquisition of U.S. debt by foreigners does 
affect our Current Account Deficit, which I have argued is part 
of the reason for this whole crisis, because all the money 
flowing in at relatively low interest rates stimulated a lot of 
lending, some of which did not turn out to work out so well. So 
that is part of the problem.
    Then of course we have issues related to the fiscal outlook 
where we need to make sure that we keep the confidence of not 
just foreign investors but domestic investors as well by 
providing a fiscal plan for stabilizing our debt level going 
forward.
    So I think we will be fine, but we do need to address both 
the Current Account and the Fiscal Deficits as part of our 
overall macro policies.
    Senator Brownback. Thank you.
    Chair Maloney. The gentleman's time has expired. The
    Chair recognizes herself for 30 seconds.
    Following up on the Ranking Member's question, what would 
happen if some of our foreign partners failed to buy our debt, 
as some have threatened? What would happen to our economy if we 
were not able to sell that debt?
    Chairman Bernanke. Well it would cause interest rates to go 
up, for example. So it would have effects on our economy. But 
again, I do not foresee this as being a likely near-term 
situation because the demand for our debt remains strong, so 
long as people have confidence in the policies of the U.S. 
Government, and that is the key issue.
    Chair Maloney. The Chair recognizes Mr. Cummings for five 
minutes.
    Representative Cummings. Mr. Bernanke, Chairman, I have 
listened to you, every syllable, and I have sat here and 
listened very carefully, and I think about all of my 
constituents, many of whom have lost their savings, which they 
are never going to get back by the way, their homes, their 
health care, their jobs, and I am wondering what can you say to 
them?
    Because, what is happening--I want to follow up on some of 
the things that Senator Casey said--people are feeling like 
everybody is running to the rescue of Wall Street with a fire 
engine and hoses and making sure that the fire is put out, but 
they see themselves being consumed by the fire and people 
saying, well, wait a minute, we'll take care of Wall Street and 
we'll get to you later on.
    And we I think fully understand that there are certain 
things that have to be done so that we see the connection 
between making sure Wall Street is safe and sound, but at the 
same time those folks are looking at you right now saying--I 
mean, probably almost on the edge of their seats, saying: Tell 
me something so that I can continue to have some hope.
    I mean, what do you have to say to them?
    Chairman Bernanke. Well an analogy I have used before which 
your fire metaphor suggested is:
    Suppose you have a neighbor who smokes in bed in the house 
next door and sets fire to his house. You could punish him by 
not calling the fire department, I suppose, but if your house 
is next door you are going to catch fire, too. So you are 
better off calling the fire department, putting out the fire, 
and then later on fixing the fire code to make sure it doesn't 
happen again.
    That is what is happening with Wall Street. If Wall Street 
burns, it is going to--we have already seen the effect it has 
on the economy.
    Representative Cummings. Yes. Well you are going right 
where I want you to go. [Laughter.]
    Chairman Bernanke. Uh-oh. [Laughter.]
    Representative Cummings. No. In other words, the American 
people want the--I mean many of them want the fire put out. But 
they are saying: Hey, we are on fire, too. What about us?
    Are you following what I'm saying?
    Chairman Bernanke. I do.
    Representative Cummings. It is not that they--that is why I 
said we all understand that we have got to deal with Wall 
Street. But when it came to the issue like with what Mr. 
Schumer mentioned, the whole credit card issue and the 
Chairwoman mentioned, they are looking at these things and 
saying: Well, Mr. Chairman Bernanke, we see you racing over 
there, but, hey, hey, what about us?
    Chairman Bernanke. Well on credit cards I think we could 
have a legitimate discussion about the right tactics. I raised 
some issues about the problems it might cause if we moved that 
interest rate rule up to the near term.
    Representative Cummings. But I am talking about in general 
can we do more for them?
    Chairman Bernanke. But in general, as you know--and Chair 
Maloney was just kind enough to mention it--we have taken very 
strong actions on credit cards. We have eliminated a lot of the 
worst practices and we hope to make a much better credit market 
going forward.
    We have taken similar actions on mortgages, as well. So 
consumer protection is critically important. We are committed 
to it. It makes for better markets.
    Problems in consumer protection are part of the reason we 
are in this mess in the first place--like in the subprime 
market, for example--and going forward we need to pay a lot of 
attention to that. So I am a hundred percent with you on that.
    Representative Cummings. One of the things that you said, 
which I thoroughly agree with, is that there are some instances 
where jobs are being eliminated but jobs are being created.
    There is a company in my District called Well Doc that I 
visited just about two weeks ago basically which has become 
very innovative by using cell phones to help people control 
their blood pressure medication regimen.
    I mean, they are booming with contractual opportunities. 
And I am wondering, is there anything that you see that the 
Obama Administration might be able to do, or we may be able to 
do, to encourage innovation?
    Because the President has often talked about innovation and 
how that would lead to more jobs, but it sounds like that is 
one of the things that we almost have to do. Because, like you 
said, we are losing jobs in some areas that will probably never 
come back, some of them.
    So are you satisfied with all the things that the President 
is doing? And I think he is doing his very, very best, but I 
mean are you satisfied that he is using all the tools that he 
might have available, and do you suggest anything else?
    Chairman Bernanke. Well I mean there are a number of ways 
to approach this, some of which are addressed. Education is 
obviously critical. We want to train more students with science 
and math capability. That's obviously very important. There are 
reviews and thinking about the patent laws and those sorts of 
things that make those more effective.
    One issue that comes up--and I know is not a very popular 
one, but I'll raise it anyway--which is that I think our 
immigration laws discriminate pretty heavily against highly 
talented scientists and engineers who want to come to this 
country and be part of our technological establishment.
    I think that if you allowed more people with high skills, 
high technical skills, to come here, you would keep companies 
here, you would have more innovation here, and you would have 
more growth here. Although I know that is controversial, I 
think that is something to think about.
    An area which has been hurt somewhat by the financial 
crisis is venture capital. That is important. That is still 
operating, but I hope as the financial sector recovers we will 
see more venture capital money available for new startups and 
support technology.
    So there are a lot of different things that Congress and 
the Administration can do. I know the President has addressed, 
certainly, some of these issues.
    Representative Cummings. Thank you very much.
    Chair Maloney. Mr. Brady, Congressman Brady.
    Representative Brady. Thank you, Madam Chairman, thank you 
for holding this hearing.
    You note in your testimony, there has been an impact from a 
decrease in export sales on the U.S. economy. There is I think 
a growing knowledge that it is no longer enough just to buy 
American; we have to sell American products and services 
throughout the world, and that is playing an increasingly 
important part of our economy.
    Some of our U.S. companies can access those markets from 
here. Many find, to be competitive and to meet the consumer 
demand, they have to engage in other countries.
    When they do, they discover that the U.S. is one of a very 
few nations that has a worldwide taxing system versus a 
territorial local taxing system, and so we have put in place 
over the years a number of elements to try to keep businesses 
competitive. For example, allowing them to deduct the foreign 
taxes that they pay in that country, or not taxing them until 
they repatriate, bring back those dollars or dividends here to 
the United States.
    Yesterday, the President unveiled an international tax 
reform package that severely limits those deductions on double 
taxation, and would tax immediately much of that income. It is 
under the claim of closing corporate loopholes and tax evasion, 
all of which we support, but I believe there are significant 
unintended consequences to that type of effort.
    There is a distinction between tax evasion and tax 
competitiveness. I don't want you to weigh in on tax policy. I 
have learned you are not going to anyway, but there are some I 
think who want to rush this legislation through. And given the 
embarrassment of the AIG bonus legislation and other examples 
where Congress has rushed to a judgment, given the complexity 
of the international tax code, given the competitiveness 
issues, is it important for Congress to thoroughly examine all 
of these international tax proposals, to make sure that we 
thoroughly understand what the impact could be, both on jobs 
here at home, and our ability to compete overseas?
    Chairman Bernanke. Well, Congressman, it is hard to 
disagree that any complex bill should receive thorough 
consideration. The tax law is very complex, certainly, and I 
hope that the appropriate Committees will look at this very 
carefully.
    Representative Brady. Do you see the way we tax 
internationally on a global system as a challenge, as we 
compete internationally?
    Chairman Bernanke. As a general rule, I think we need to 
think about international competitiveness as we look at our 
corporate tax policies, but I don't have any comment on the 
specific proposals from yesterday.
    As you say, I don't want to comment on tax policy, anyway, 
and I really haven't had a chance to review it, in any case.
    Representative Brady. Well, I'm not asking you to but I'm 
just trying to get your advice on how Congress ought to look at 
a very complicated system, one that probably rivals our 
financial system in its complexity, but has huge impacts on our 
jobs here at home.
    Thank you, Mr. Chairman, thank you, Madam Chairman.
    Chairman Bernanke. Certainly.
    Chair Maloney. Thank you. Congressman Snyder, for five 
minutes.
    Representative Snyder. Thank you, Madam Chair. Mr. 
Chairman, thank you for staying close to the noon hour here.
    I appreciate your comments, by the way, that you said 
earlier in response to a question about the fungibility of 
money. I think that just because a Special Inspector General 
makes a recommendation doesn't necessarily mean that it is the 
best way to go about ensuring the success of some of these 
institutions.
    I would think that we would want all of their products to 
be doing well, not just the ones that they would say 
specifically to put TARP funds into it. And that is, I think, 
the bigger issue, because money is fungible.
    I wanted to ask, so much of your activity has been with an 
eye to of course the international markets, there was some 
apprehension, perhaps not as great now, that protectionism may 
rear its head as we are going through this.
    What is your view on what you are seeing or hearing from 
around the world?
    Chairman Bernanke. Well, I am heartened by the 
international commitment to avoid protectionism. It was a big 
element of the G-20 meetings in London for example, and in the 
G-7 meetings and G-20 meetings we just had in Washington.
    So it is very, very important to avoid protectionism. It is 
important, if possible, to make continued progress on the World 
Trade Organization talks, but it is going to be a concern 
because people are going to be looking for scapegoats, and 
sometimes imports are part of that.
    So I think it is very important for all of us. We learn 
from history that if we start to block imports, others will do 
the same, and we will just all be poorer as a result. And so 
maintaining a free and flexible trade system is very important.
    Representative Snyder. You have talked about the need for 
us to repair our financial system regulation, regulatory 
system. You are always very precise in your words, as anyone in 
your job would be, but you referred to--you called for the 
``gradual repair.'' Why do you use the words, ``gradual 
repair'' of the financial system?
    Chairman Bernanke. That is referring to the healing taking 
place in markets and to our expectation that there won't be an 
overnight recovery; it is going to take time for markets to 
return to normal. We want to see, perhaps, that there will be 
restructuring of securitization instruments and so on; banks to 
rebuild their capital; investors to regain confidence, and so 
on.
    So we expect it to take some time. We hope to see continued 
progress. If it is faster, that is great, but we expect it to 
be gradual.
    Representative Snyder. So your expectation is that there 
would not be some grand golden tablets coming from on high that 
says this is the regulatory system for the future, let's all 
adopt it? It will be more improvements, legislation here, 
regulation there, more legislation as months and years go by?
    Chairman Bernanke. My use of the word, ``repair,'' was 
referring to the conditions in the markets, not so much the 
regulation, per se.
    Representative Snyder. All right.
    Chairman Bernanke. But I do think that good new regulation 
will be helpful, but it is so complex and there are so many 
issues to be decided, I don't expect that will happen in the 
next few months. I am sure it is going to take awhile for the 
Congress to come to a satisfactory agreement on this.
    Representative Snyder. You, in response to another question 
earlier, you talked about your independence and who you get 
advice from or don't seek advice from.
    There is no legal obstruction, is there, from you seeking 
advice from anyone that you want to? I mean, I would assume 
that you can pick up the paper and read Federal Reports, and 
hear what Secretary Geithner is thinking, and hear what 
financial ministers around the world are thinking. There are no 
restrictions on who you can pick up the phone and call and say 
what do you think about such and such?
    Chairman Bernanke. I continually talk to people in 
Washington and around the world about how they see the economy 
and what their concerns are. Obviously, we want to learn as 
much as possible.
    But I want to be very clear that we make the decision based 
on our own assessment, our own information, and without 
recourse or concern about political considerations.
    Representative Snyder. Thank you, Mr. Chairman. Thank you, 
Madam Chair.
    Chair Maloney. Congressman Burgess.
    Representative Burgess. Thank you, Mr. Chairman, for 
staying with us.
    Just one follow up from a hearing we had a couple of weeks 
ago with Thomas Hoenig, the president of the Federal Reserve, 
who came in and testified and raised some important questions 
regarding banks that are Too Big to Fail. He highlighted the 
fact that some of the institutions that are Too Big to Fail are 
in fact now blocking our path to recovery, and yet we continue 
to try to pump funds in to try to turn them around.
    In fact, at that hearing we discussed the need to allow the 
failure to occur to remove the blockage that is caused by these 
institutions.
    We are going to have the results of the stress test 
revealed at some point, I presume, this week. Just the stress 
tests themselves have the potential to adversely affect the 
banks involved, and we all recognize that and recognize why you 
have been so careful with the release of that information. But 
providing an additional six months' time to recapitalize 
stressed institutions seems to ignore the points raised by the 
president of the Kansas Federal Reserve, President Hoenig, and 
potentially we are just moving this problem further down the 
road. What if six months is not enough time for them to 
recapitalize? Do we then just postpone having to deal with the 
problem of having these banks that need to fail still being 
propped up?
    Chairman Bernanke. Again, the first recourse that they will 
have over the six months is private sector capital, and that is 
going to be an interesting test to see what they can do with 
the government capital as a backstop.
    I do not disagree at all with President Hoenig's basic 
premise, which is that too-big-to-fail is a big problem, and 
that companies that fail should be allowed to go bankrupt. I 
agree with that in principle.
    The problem is that, as I tried to explain, our current 
laws do not allow a safe and sound unwinding of one of these 
companies, which is something we have learned to our great 
regret and chagrin in this episode. I do not think we have the 
tools to do it today, or tomorrow, but I do think that going 
forward there are a number of steps we can take. Not just a 
resolution regime, but other things we can do to strengthen our 
system so that if a firm does fail, the system as a whole will 
still remain resilient.
    So I agree one hundred percent, we have to solve this 
problem. I do not think that means that we can start letting 
firms fail tomorrow, but we have to take a number of important 
steps so that in the future, whenever you come to this kind of 
situation, there will be a safe and sound way to unwind a 
failing firm that does not bring down big parts of the 
financial system with it.
    Representative Burgess. Let me ask you a question. The only 
experience that I can draw on is that that I endured back in 
the late 1980s in the State of Texas. We lost all the savings 
and loans overnight. Our oil prices collapsed overnight. Real 
estate prices followed them down. Loans were suddenly 
undercapitalized. Loans that our businesses had were 
undercapitalized and we either had to come up with a lot of 
capital or we failed. Families had to tighten belts and do 
without.
    I just do not see that occurring to that degree currently. 
And I guess my question is: Contractions occur as a part of the 
normal course of an economy. And if we have a contraction in 
the economy that we do not allow to occur, like these banks 
that are Too Big to Fail that we are propping up, and we do not 
allow the contraction in the economy to occur, are we in fact 
setting ourselves up for buying more pain later down the road 
by not allowing the economy the opportunity to right itself?
    It was very painful what we went through in Texas, and I 
would not minimize that. I would not wish that on anyone. But 
we got through it and we had 25 or 30 years of sustained 
economic growth in the area, and really we were about a year 
behind the rest of the country on the advent of this recession 
because of some of what the effect of the energy prices last 
summer were.
    So just that as a general question to close us out.
    Chairman Bernanke. Certainly. I understand your point very 
well, but there is a critical difference between the bank or 
savings and loans in Texas and a multi-national holding 
company, or insurance holding company today. Congress put 
together in 1991 the FIDICA Act, with prompt corrective action 
and other rules which allow the FDIC, or in the old days, the 
Savings & Loan Corporation, to come in and, in a well-designed 
way, seize the bank, pay off the depositors, sell the assets, 
and do that all in a way which is understood, orderly and does 
not create a broader crisis.
    And of course I should say that the FDIC is only applied to 
relatively smaller firms in most case. The trouble is we do not 
have a comparable system for dealing with these very complex, 
large, multi-dimensional financial holding companies, and it is 
exactly that kind of system that I am asking for.
    If we could get a system like that, then we can address the 
problem exactly the way you would like us to address it.
    Representative Burgess. And again, as you point out, that 
is an enormously complex undertaking. I was a little taken 
aback in President Obama's speech a week ago when he said we 
would have that, he would sign that bill before the end of the 
year. To the best of my knowledge, no one is actually working 
on that yet. So that is one of those things like you told 
Congressman Brady, that requires an enormous amount of thought 
and careful evaluation throughout the process.
    So I hope with some of the things we will do in this 
committee that we can shed some light on that process, as well. 
Thank you, Mr. Chairman.
    Chair Maloney. Thank you. The gentleman's time has expired.
    I would like to thank Chairman Bernanke for testifying 
today and giving us a stronger understanding of the economic 
outlook. The meeting is adjourned.
    Chairman Bernanke. Thank you.
    Chair Maloney. Thank you.
    [Whereupon, at 12:08 p.m., Tuesday, May 5, 2009, the 
hearing was adjourned.]
                       SUBMISSIONS FOR THE RECORD

     Prepared Statement of Representative Carolyn B. Maloney, Chair
    I want to welcome Dr. Ben Bernanke, the Chairman of the Federal 
Reserve, and thank you for your testimony here today.
    I cannot think of a person better able to help us understand what 
is happening in the real economy and in the financial sector.
    Our hearing today on the economic outlook is timely for many 
reasons. It is no secret that the real economy still faces substantial 
headwinds.
    The recession that began in December 2007 has still not run its 
course. Real GDP contracted at a 6.1 percent annual rate in the first 
quarter of this year and it is widely expected that the BLS will report 
large monthly job losses again this Friday.
    In testimony before this committee last week, Dr. Christina Romer, 
the Chair of the President's Council of Economic Advisers, said that 
she expects GDP to contract during the second quarter.
    But there are some indications of potential improvement in the 
economy. Consumer confidence is up, and the decline in house prices has 
moderated slightly.
    Nonetheless, the dismal GDP and job loss numbers underscore the 
wisdom of the American Recovery and Reinvestment Act (ARRA) that 
Congress passed and President Obama signed into law in his first 30 
days in office.
    The recovery measures are just starting to work their way into the 
economy, and will provide a much needed boost to demand. Without these 
measures the depth of the contraction would be much deeper, and the 
recovery would take far longer.
    We will be very interested to hear the Federal Reserve's view about 
the near term prospects for economic growth and job creation.
    Developments in the real economy are of course strongly affected by 
conditions in the financial sector.
    The failure of major financial institutions and the disruption of 
credit markets has taken a toll on business and consumer confidence, 
and made it difficult for businesses and households to fund everyday 
economic activity.
    The Federal Reserve--in collaboration with the Treasury and the 
FDIC--has taken an extraordinary series of measures to preserve 
financial stability and to restore the proper functioning of key credit 
markets.
    These measures have prevented a financial crisis from becoming 
something far worse, and we are grateful for your leadership.
    How far we have come in restoring normal functioning to the 
financial system, and what remains to be done are key questions.
    We all understand that a successful recovery in the real economy 
requires healthy banks and credit markets.
    Not surprisingly, we are all eagerly awaiting the final results of 
the ``stress tests'' on the nation's 19 biggest banks, which have been 
postponed until Thursday.
    The diagnosis delivered by regulators will provide a road map for 
restoring confidence in these institutions. Determining the capital 
needs of our largest banks is a critical step toward restoring 
financial stability that I hope will bring us closer to turning the 
corner on this crisis.
    Additionally, Chairman Bernanke, I am grateful for your leadership 
in ushering in new rules to prevent unfair or deceptive practices with 
respect to credit card accounts. The relevant agencies received a 
tremendous response of more than 66,000 comments on the rules, 
including written comments from tens of thousands of individual 
consumers.
    These rules are very similar to the bill we passed in the House 
last year and last week. Your support for doing away with these 
deceptive practices has provided momentum that I hope will push the 
legislation through the Senate and on to the President's desk.
    Lastly, I want to commend you for establishing greater transparency 
at the Fed. To be sure, there are fewer ``secrets of the temple'' 
today, but I know you will appreciate that we must continue to work to 
strike a better balance between institutional interests and the 
public's right to know how their money is being spent.
    Chairman Bernanke, we thank you for your testimony and I look 
forward to working with you as the committee continues our focus on 
fixing the economy, putting people back to work, and helping struggling 
families.
                               __________
     Prepared Statement of Senator Sam Brownback, Ranking Minority
    Thank you Chairwoman Maloney for arranging today's hearing and 
thank you Chairman Bernanke for testifying today about the economic 
outlook.
    Our economy is in the midst of a serious recession and many 
Americans are suffering from job losses, home losses, and uncertainty 
about their retirement savings, their jobs, and their children's 
future. Unfortunately, in addition, our financial system remains a 
problem.
    Just last week, we learned that the economy contracted at a 6.1% 
annualized rate in the first quarter, on the heels of a 6.3% rate of 
decline in the fourth quarter of last year. Since the beginning of the 
recession in December 2007, job losses have totaled 5.1 million, with 
3.3 million of those losses having occurred in just the past five 
months. We are poised for the longest recession in the post-World War 
II period, and we are by no means out of the woods yet.
    Given the severity of the economic downturn that we face, and 
efforts already under way to try to offset the downturn, I believe that 
the last things we want to do is raise taxes and add uncertainty to the 
economic and financial environments. Unfortunately, that is happening.
    Taxes on small business will go up. Taxes on capital income will go 
up. Many Americans, including retirees living partly on dividend 
income, will see their taxes go up and values of their portfolios hurt. 
Under a cap-and-trade scheme to generate higher prices on anything 
produced using carbon, taxes will go up for everyone. And we are 
learning this week of the administration's plans to limit the ability 
of companies to defer tax payments on overseas earnings, which will 
limit the ability of U.S. companies to compete and will likely lead to 
job losses here in the U.S.
    In addition to the prospect of higher taxes, many businesses are in 
a precautionary mode, fearful of expanding their operations once the 
economy recovers and fearful of adding jobs to their payrolls. Some of 
that fear comes because they are uncertain about what will be the cost 
of carbon under a cap-and-trade scheme and what will be the cost of 
providing health care benefits given the administration's intentions to 
move toward greater government control of the health-care system.
    With the administration's budget outline, we are adding trillions 
of deficit-financed Federal government spending, which adds trillions 
to our Nation's debt. The Congressional Budget Office (CBO) estimates 
that in the first six months of this fiscal year, the Federal deficit 
is running at over $950 billion. For all of 2009, the Administration 
will likely need to borrow around $2 trillion. And debt held by the 
public is projected by the CBO to rise from 41 percent of the gross 
domestic product in 2008 to around 54 percent in 2011. These are 
staggering sums and staggering amounts as a share of our total economy; 
we have not seen such a run-up in deficits and debt since World War II. 
Eventually, of course, the debt has to be paid off, meaning higher 
taxes for our children and grandchildren.
    I am concerned about overreach by the administration on expanding 
the size of government and setting up costly and most likely 
inefficient programs that will stay with us forever and be paid for by 
hard working Americans. I am concerned about years and years of 
trillion dollar deficits and a piling up of our debt, pushing us to a 
tipping point where our international creditors lose confidence in 
investing in the United States. I am concerned that we are moving from 
a housing bubble to a government-debt bubble. And, I am concerned that 
we do not have a concrete plan for addressing losses in the financial 
system and confronting and resolving the problem of ``too big to 
fail.''
    Kansas City Fed President Hoenig testified before this committee 
that, in his words, too big to fail has failed. He has advocated that 
we stare losses in the financial system in the face and take decisive 
action on big financial institutions that are in trouble. In his view, 
we have the tools to resolve and break up large, overleveraged, 
insolvent banks and we should get to work using them. I am interested 
in your thoughts on Mr. Hoenig's perspective.
    I am also concerned about increasing inter-linkages between the 
Federal Reserve and Treasury. I compliment you, Chairman Bernanke, for 
your creativity in helping to thaw frozen credit channels by creating a 
number of innovative lending and asset-purchase programs to help steer 
credit to where it is needed the most. However, I have a concern about 
the increasing alliance of the Fed and Treasury.
    As examples, I note that: Treasury deposited around $500 billion 
into a ``supplementary financing account'' at the Fed; Treasury and the 
Fed have combined forces to set up the Term Asset-Backed Securities 
Loan Facility, or TALF, to ``leverage'' TARP funds through the Fed; and 
the Fed is now purchasing longer-term Treasury securities in attempts 
to bring long-term interest rates down.
    My concern is that the increasing alliance between the fairly 
independent Federal Reserve and the Treasury risks the injection of 
politics into decisions about how credit is allocated by the Federal 
Reserve and risks political influence in money growth and inflation. 
Ultimately, such an alliance risks the independence of the Federal 
Reserve. And, historically, we have seen instances in which Fed and 
Treasury alliances did not work out well, such as the period beginning 
in World War II and until March 1951 when the Treasury compelled the 
Fed to essentially peg Treasury security yields. That alliance required 
that the Fed and Treasury strike an ``Accord'' to strengthen the Fed's 
independence. It is essential that the Fed's lending and asset 
acquisitions respect the integrity and isolation of fiscal policy and 
minimize risks of political entanglements involving Fed credit 
allocations.
                               __________
    Prepared Statement of Representative Kevin Brady, Senior House 
                               Republican
    I am pleased to join in welcoming Chairman Bernanke before the 
Committee this morning.
    The bursting of the credit and housing bubbles has thrown the 
economy into a severe recession, destroyed millions of jobs, and wiped 
out the savings of many Americans. Government policy mistakes, 
excessive leverage, and weak underwriting standards by financial 
institutions contributed to the current downturn.
    The recently released minutes of the March 17-18 Federal Open 
Market Committee (FOMC) indicate that the Fed staff has reduced its 
projections for economic growth for the second half of 2009 and for 
2010. This underscores the fact that economic reality is inconsistent 
with the relatively optimistic economic projections the Administration 
used in its budget and that understate its true cost. Deficit spending 
and federal debt are out of control. When is the Congress going to 
acknowledge that current fiscal trends are unsustainable?
    Last week, the Financial Times reported that the IMF now estimates 
that U.S. losses on toxic assets will be $1.9 trillion over the next 
five years. The recently adopted Congressional budget resolution 
ignored these costs entirely in setting budget policy for 2010. How 
expensive will the bank cleanup be, and will its costs be hidden from 
the taxpayers?
    There is widespread agreement that a sustained economic recovery 
cannot occur without an effective bank cleanup in place. The 
Administration has put forth a financial rescue plan, but many of its 
components are very troubling. Serious problems with the Public-Private 
Investment Program (PPIP) were identified by Special Inspector General 
Neil Barofsky in testimony before this committee on April 23.
    According to his quarterly report, ``Many aspects of PPIP could 
make it inherently vulnerable to fraud, waste, and abuse.'' The 
vulnerabilities identified in his report include conflicts of interest, 
collusion, and money laundering. He also noted as problematic the 
enormous size of the program and the degree of leverage so ``that the 
taxpayer risk is many times that of the private parties, thereby 
potentially skewing the economic incentives.'' Will the Treasury 
recognize these problems and move quickly to correct them?
    The extraordinary actions taken by the Federal Reserve during the 
financial crisis have bewildered many of my constituents and left them 
wondering how the Federal Reserve's policies will affect their economic 
well-being. Small businesses in Texas report that they are having a 
tough time finding affordable credit because regulators are pressing 
banks to avoid risk. Has the pendulum swung too far in this direction?
    To prevent a downward debt-deflation-default spiral, the Federal 
Reserve has expanded its balance sheet from $946 billion in September 
2008 to $2.1 trillion last week. While this explosive growth does not 
pose an immediate inflationary danger, the Federal Reserve will need to 
begin contracting its balance sheet when the economy begins to recover. 
What is the Federal Reserve's exit strategy to wind down its emergency 
credit facilities and reduce excess bank reserves to prevent higher 
inflation? And have these extraordinary credit facilities diminished 
the Federal Reserve's autonomy in setting monetary policy?
    Many experts have suggested that the Federal Reserve should become 
the systemic risk regulator for all U.S. financial institutions, not 
just banks and their holding companies. Is the Federal Reserve capable 
and ready to perform this function?
    The decisions made during the current turmoil will affect financial 
institutions and markets for decades. Yet, there has been little 
discussion among policymakers about how the financial system should 
function after the crisis abates. What changes in laws or regulations 
should be made to optimize the future performance of our financial 
system? Should securitization and the shadow banking system play as 
large of a role in financial intermediation as they did prior to the 
crisis? What should be the role, if any, for Fannie Mae and Freddie 
Mac?
    Mr. Chairman, I look forward to your testimony and answers to some 
of these important questions.
                               __________
 Prepared Statement of Ben S. Bernanke, Chairman, Board of Governors, 
                         Federal Reserve System
    Chair Maloney, Vice Chairman Schumer, Ranking Members Brownback and 
Brady, and other members of the Committee, I am pleased to be here 
today to offer my views on recent economic developments, the outlook 
for the economy, and current conditions in financial markets.
                      recent economic developments
    The U.S. economy has contracted sharply since last autumn, with 
real gross domestic product (GDP) having dropped at an annual rate of 
more than 6 percent in the fourth quarter of 2008 and the first quarter 
of this year. Among the enormous costs of the downturn is the loss of 
some 5 million payroll jobs over the past 15 months. The most recent 
information on the labor market--the number of new and continuing 
claims for unemployment insurance through late April--suggests that we 
are likely to see further sizable job losses and increased unemployment 
in coming months.
    However, the recent data also suggest that the pace of contraction 
may be slowing, and they include some tentative signs that final 
demand, especially demand by households, may be stabilizing. Consumer 
spending, which dropped sharply in the second half of last year, grew 
in the first quarter. In coming months, households' spending power will 
be boosted by the fiscal stimulus program, and we have seen some 
improvement in consumer sentiment. Nonetheless, a number of factors are 
likely to continue to weigh on consumer spending, among them the weak 
labor market and the declines in equity and housing wealth that 
households have experienced over the past two years. In addition, 
credit conditions for consumers remain tight.
    The housing market, which has been in decline for three years, has 
also shown some signs of bottoming. Sales of existing homes have been 
fairly stable since late last year, and sales of new homes have firmed 
a bit recently, though both remain at depressed levels. Although some 
of the boost to sales in the market for existing homes is likely coming 
from foreclosure-related transactions, the increased affordability of 
homes appears to be contributing more broadly to the steadying in the 
demand for housing. In particular, the average interest rate on 
conforming 30-year fixed-rate mortgages has dropped almost 1\3/4\ 
percentage points since August, to about 4.8 percent. With sales of new 
homes up a bit and starts of single-family homes little changed from 
January through March, builders are seeing the backlog of unsold new 
homes decline--a precondition for any recovery in homebuilding.
    In contrast to the somewhat better news in the household sector, 
the available indicators of business investment remain extremely weak. 
Spending for equipment and software fell at an annual rate of about 30 
percent in both the fourth and first quarters, and the level of new 
orders remains below the level of shipments, suggesting further near-
term softness in business equipment spending. Recent business surveys 
have been a bit more positive, but surveyed firms are still reporting 
net declines in new orders and restrained capital spending plans. Our 
recent survey of bank loan officers reported further weakening of 
demand for commercial and industrial loans.\1\ The survey also showed 
that the net fraction of banks that tightened their business lending 
policies stayed elevated, although it has come down in the past two 
surveys.
---------------------------------------------------------------------------
    \1\ Board of Governors of the Federal Reserve System (2009), The 
April 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices 
(Washington: Board of Governors, May 4), www.federalreserve.gov/
boarddocs/SnLoanSurvey/200905.
---------------------------------------------------------------------------
    Conditions in the commercial real estate sector are poor. Vacancy 
rates for existing office, industrial, and retail properties have been 
rising, prices of these properties have been falling, and, 
consequently, the number of new projects in the pipeline has been 
shrinking. Credit conditions in the commercial real estate sector are 
still severely strained, with no commercial mortgage-backed securities 
(CMBS) having been issued in almost a year. To try to help restart the 
CMBS market, the Federal Reserve announced last Friday that recently 
issued CMBS will in June be eligible collateral for our Term Asset-
Backed Securities Loan Facility (TALF).\2\
---------------------------------------------------------------------------
    \2\ Board of Governors of the Federal Reserve System (2009), 
``Federal Reserve Announces Expansion of Eligible Collateral under Term 
Asset-Backed Securities Loan Facility (TALF),'' press release, May 1, 
www.federalreserve.gov/newsevents/press/monetary/20090501a.htm.
---------------------------------------------------------------------------
    An important influence on the near-term economic outlook is the 
extent to which businesses have been able to shed the unwanted 
inventories that they accumulated as sales turned down sharply last 
year. Some progress has been made; the Bureau of Economic Analysis 
estimates that an acceleration in inventory liquidation accounted for 
almost one-half of the reported decline in real GDP in the first 
quarter. As stocks move into better alignment with sales, a reduction 
in the pace of inventory liquidation should provide some support to 
production later this year.
    The outlook for economic activity abroad is also an important 
consideration. The steep drop in U.S. exports that began last fall has 
been a significant drag on domestic production, and any improvement on 
that front would be helpful. A few indicators suggest, again quite 
tentatively, that the decline in foreign economic activity may also be 
moderating. And, as has been the case in the United States, investor 
sentiment and the functioning of financial markets abroad have improved 
somewhat.
    As economic activity weakened during the second half of 2008 and 
prices of energy and other commodities began to fall rapidly, 
inflationary pressures diminished appreciably. Weakness in demand and 
reduced cost pressures have continued to keep inflation low so far this 
year. Although energy prices have recently risen some, the personal 
consumption expenditure (PCE) price index for energy goods and services 
in March remained more than 20 percent below its level a year earlier. 
Food price inflation has also continued to slow, as the moderation in 
crop and livestock prices has been passing through to the retail level. 
Core PCE inflation (prices excluding food and energy) dropped below an 
annual rate of 1 percent in the final quarter of 2008, when retailers 
and auto dealers marked down their prices significantly. In the first 
quarter of this year, core consumer price inflation moved back up, but 
to a still-low annual rate of 1.5 percent.
                          the economic outlook
    We continue to expect economic activity to bottom out, then to turn 
up later this year. Key elements of this forecast are our assessments 
that the housing market is beginning to stabilize and that the sharp 
inventory liquidation that has been in progress will slow over the next 
few quarters. Final demand should also be supported by fiscal and 
monetary stimulus. An important caveat is that our forecast assumes 
continuing gradual repair of the financial system; a relapse in 
financial conditions would be a significant drag on economic activity 
and could cause the incipient recovery to stall. I will provide a brief 
update on financial markets in a moment.
    Even after a recovery gets under way, the rate of growth of real 
economic activity is likely to remain below its longer-run potential 
for a while, implying that the current slack in resource utilization 
will increase further. We expect that the recovery will only gradually 
gain momentum and that economic slack will diminish slowly. In 
particular, businesses are likely to be cautious about hiring, implying 
that the unemployment rate could remain high for a time, even after 
economic growth resumes.
    In this environment, we anticipate that inflation will remain low. 
Indeed, given the sizable margin of slack in resource utilization and 
diminished cost pressures from oil and other commodities, inflation is 
likely to move down some over the next year relative to its pace in 
2008. However, inflation expectations, as measured by various household 
and business surveys, appear to have remained relatively stable, which 
should limit further declines in inflation.
                    conditions in financial markets
    As I noted, a sustained recovery in economic activity depends 
critically on restoring stability to the financial system. Conditions 
in a number of financial markets have improved in recent weeks, 
reflecting in part the somewhat more encouraging economic data. 
However, financial markets and financial institutions remain under 
considerable stress, and cumulative declines in asset prices, tight 
credit conditions, and high levels of risk aversion continue to weigh 
on the economy.
    Among the markets that have recently begun to function a bit better 
are the markets for short-term funding, including the interbank markets 
and the commercial paper market. In particular, concerns about credit 
risk in those markets appear to have receded somewhat, there is more 
lending at longer maturities, and interest rates have declined. The 
modest improvement in funding conditions has contributed to diminished 
use of the Federal Reserve's liquidity facilities for financial 
institutions and of our commercial paper facility. The volume of 
foreign central bank liquidity swaps has also declined as dollar 
funding conditions have eased.
    The issuance of asset-backed securities (ABS) backed by credit 
card, auto, and student loans all picked up in March and April, and ABS 
funding rates have declined, perhaps reflecting the availability of the 
Federal Reserve's TALF facility as a market backstop. Some of the 
recent issuance made use of TALF lending, but lower rates and spreads 
have facilitated issuance outside the TALF as well.
    Mortgage markets have responded to the Federal Reserve's purchases 
of agency debt and agency mortgage-backed securities, with mortgage 
rates having fallen sharply since last fall, as I noted earlier. The 
decline in mortgage rates has spurred a pickup in refinancing as well 
as providing some support for housing demand. However, the supply of 
mortgage credit is still relatively tight, and mortgage activity 
remains heavily dependent on the support of government programs or the 
government-sponsored enterprises.
    The combination of a broad rally in equity prices and a sizable 
reduction in risk spreads in corporate debt markets reflects a somewhat 
more optimistic view of the corporate sector on the part of investors, 
and perhaps some decrease in risk aversion. Bond issuance by 
nonfinancial firms has been relatively strong recently. Still, spreads 
over Treasury rates paid by both investment-grade and speculative-grade 
corporate borrowers remain quite elevated. Investors seemed to adopt a 
more positive outlook on the condition of financial institutions after 
several large banks reported profits in the first quarter, but readings 
from the credit default swap market and other indicators show that 
substantial concerns about the banking industry remain.
    As you know, the federal bank regulatory agencies began conducting 
the Supervisory Capital Assessment Program in late February. The 
program is a forward-looking exercise intended to help supervisors 
gauge the potential losses, revenues, and reserve needs for the 19 
largest bank holding companies in a scenario in which the economy 
declines more steeply than is generally anticipated. The simultaneous 
comprehensive assessment of the financial conditions of the 19 
companies over a relatively short period of time required an 
extraordinary coordinated effort among the agencies.
    The purpose of the exercise is to ensure that banks will have a 
sufficient capital buffer to remain strongly capitalized and able to 
lend to creditworthy borrowers even if economic conditions are worse 
than expected. Following the announcement of the results, bank holding 
companies will be required to develop comprehensive capital plans for 
establishing the required buffers. They will then have six months to 
execute those plans, with the assurance that equity capital from the 
Treasury under the Capital Assistance Program will be available as 
needed.
                      federal reserve transparency
    I will conclude with a few comments on Federal Reserve 
transparency. The Federal Reserve remains committed to transparency and 
openness and, in particular, to keeping the Congress and the public 
informed about its lending programs and balance sheet. As you may know, 
we have created a separate section of our website devoted to providing 
data, explanations, and analyses bearing on these topics and related 
issues.\3\ Recent postings include the annual financial statements of 
the 12 Federal Reserve Banks, the Board of Governors, and the limited 
liability companies created in 2008 in response to risks to the 
financial system, as well as the most recent reports to the Congress on 
our emergency lending programs.
    Earlier this year I asked Vice Chairman Kohn to lead a review of 
our disclosure policies, with the goal of increasing the range of 
information that we make available to the public. The group has been 
making substantial progress, and I am pleased to say that we will soon 
be adding to the website material that provides the information 
requested in the Dodd-Shelby amendment to the recent budget resolution. 
Specifically, we will be adding new tables that provide information on 
the number of borrowers under each program and more information on the 
details of the credit extended, including measures of the 
concentrations of credit among borrowers. In addition, we will be 
providing monthly information on the collateral that is being taken 
under our various lending programs, including breakouts by types of 
collateral and by ratings categories. And we will be supplementing 
information provided on the valuation of collateral for the Maiden Lane 
facilities and the Commercial Paper Credit Facility. Finally, we will 
be providing additional information on the extent of our contracting 
with private firms with respect to our lending programs as well as on 
the terms and nature of such contracts. Over time, we expect to 
continue to expand the range of information on our website as our 
review of disclosure practices proceeds.
---------------------------------------------------------------------------
    \3\ ``Credit and Liquidity Programs and the Balance Sheet,'' a 
section of the Board's website, is available at www.federalreserve.gov/
monetarypolicy/bst.htm.
---------------------------------------------------------------------------
    Thank you. I will be pleased to respond to your questions.
                               __________
FOR IMMEDIATE RELEASE
May 5, 2009
Contact: Brian Fallon (Schumer)
202-224-7433
SCHUMER DEMANDS ANSWERS FROM BERNANKE AT HEARING AFTER FED REJECTS PUSH 
            TO FREEZE RATES ON EXISTING CREDIT CARD BALANCES
 schumer, dodd had written to bernanke last month urging rule banning 
            retroactive rate hikes to be enacted immediately
senator calls decision ``unconscionable''; calls excuse for not acting 
                              ``nonsense''
    WASHINGTON, DC--U.S. Senator Charles E. Schumer (D-NY) planned to 
fiercely quiz Federal Reserve Chairman Ben Bernanke at a Joint Economic 
Committee hearing Tuesday morning after the Fed rejected a proposal by 
Schumer and Senate Banking Chairman Christopher Dodd to immediately 
stop credit card issuers from slapping customers with rate increases on 
existing balances.
    ``The Federal Reserve's failure to protect consumers from these 
outrageous rate increases is unconscionable,'' Schumer said. ``The Fed 
has acted swiftly to use its emergency powers to steady teetering 
financial institutions. It is fair to ask why they won't use the same 
powers to aid American families who are at just as great a risk.''
    In a letter to Bernanke and other regulators last month, Schumer 
and Dodd proposed that the Fed speed up implementation of a rule that 
would ban retroactive rate hikes on existing balances. That rule, 
already approved by the Fed, is not slated to take effect until July 
2010, giving companies more than a year to raise rates on consumers 
preemptively to get under the deadline. Schumer and Dodd said the Fed 
should invoke its emergency powers to make the rule effective 
immediately. Both Senators said they had heard complaints from 
constituents who have seen their rates double or even triple almost 
overnight and without explanation.
    But in a letter Schumer received late yesterday, the Fed announced 
it would not speed up the rule's enactment. The Fed stated it was 
unclear if the rate hikes were in anticipation of the upcoming 
implementation of these rules or if they were due to bank losses in the 
current economy. Schumer blasted that logic on Tuesday, noting ``under 
either scenario, the Fed has given the green light to banks to take 
advantage of American families.''
    The Senate will be considering a major credit card reform bill 
later this month. Schumer is a co-sponsor of the legislation.