The House Holds a Hearing on the Semi-Annual Report of The Fed on Monetary Policy

CQ Transcriptions
Tuesday, July 21, 2009; 12:14 PM

REP BARNEY FRANK: The hearing will come to order.

This is the second semi-annual hearing that the Financial Services Committee holds according to the Humphrey-Hawkins Act. We alternate with the Senate Committee as to which committee goes first. This time, it is this committee's responsibility to lead off. And we will be doing that.

I just want to announce to my Democratic members, as a house- keeping matter, given the large size of this committee, we have problems with who gets to ask questions. Those members who asked questions of Mr. Bernanke at the first hearing, with the exception of the subcommittee chairman, Watt, will not be called on today until we have gone to others who did not question. We hope to go -- we may have some votes.

A very important event will take place at 2:00 p.m. America is waiting for it. Internet sites throughout the country are on edge for the congressional class picture that will be taken at 2:00 p.m. and instantly distributed across the country. So we do know we will be breaking then. And they want to have votes before that. The assumption that not everybody is dying to be in that picture, and votes are needed to get people there.

So, we will go until sometime after 1 o'clock with the chairman. And then we will have votes and we will break. We have another hearing at 2:00 p.m.

One other announcement: I received a letter from the Republican side asking for a postponement of the markup on the executive compensation. They make the valid point that we have a very heavy schedule of hearings this week. And, for a variety of reasons, we -- I serve -- I put aside several markup days for the end of this year. We will not be needing all of them.

So, we are going to postpone that markup. Maybe it will be next Tuesday or next Thursday. But we will at least have a few more days for members to -- it's not a long bill. And some of it's familiar. But it's still a reasonable point with all the -- with all the hearings.

With that, I will...

BACHUS (?): Mr. Chairman, you're -- you're not to your opening statement, right?


BACHUS (?): And -- and let me say this in response. I -- I want to express my appreciation to you for postponing that hearing. We -- we've simply been overwhelmed with the health care matters, with just literally such substantial issues under consideration. I think the membership is simply overwhelmed, because many of these are unprecedented. And their proposals are -- they're complex. The ramifications are hard to gauge. And I -- I believe that slowing this whole process down would be in the best interest of...

FRANK: Well, let me say to the gentleman...

BACHUS (?): ... of not only this committee, but also our country, as we...

FRANK: Well, I...

BACHUS (?): ... consider these very weighty matters.

FRANK: I (inaudible), and I will acknowledge that, when I set the schedule, I was aware that it was on the heavy side. It did seem to me that the aspiration of moving was going to help us move more quickly. But there's no harm if we delay.

It's also been the case that, when I was originally talking about this, I was anticipating we might be on the floor with some issues. But the appropriations bills are taking up the floor time. And I was told by my leadership a couple weeks ago that none of what we are talking about in the financial regulatory restructuring would hit the floor before September. And I've taken that into -- into account.

And let me, while we're at it, also announce, for that reason, at the request of other members, the -- the markup for this will occupy the day that the consumer agency would have taken. I -- today (inaudible) we weren't going to go to the floor anyway, I was informed. And given that, we will be having hearings on the consumer agency. But the markup on that will wait until September.

We still have to finish the markup on the voucher bill. And we will have that markup to conclude. Although I think we're on a fairly well-structured situation, where one major vote will decide a set of issues outstanding. And then, we will move on the other things. We will have the hearings. We will continue, I think, a pretty heavy pace. And we definitely will be marking up the exec comp bill before we leave.

With that, I will now begin the hearing on substance. I welcome the chairman. And I think it's very important that I was pleased to see his article in the Wall Street Journal about a question that's very much on people's minds. The United States government, including the Federal Reserve -- indeed, with the Federal Reserve in the lead for a variety of reasons, mostly not of its choosing. The federal government was deeply engaged in increasing liquidity, i.e., putting money out into the economy, particularly to replace a constriction of credit.

And there are people who are concerned that this will be inflationary. I think the chairman has shown consistently, as have Secretaries to the Treasury Paulson and Geithner, their awareness of this, and that they are prepared to deal with it. But it is an important question, because when you are talking about inflation, you are talking not just about a reality, but about perception. If people think there is going to be inflation, that's inflationary. And it is very important that the chairman address, as he has been doing, in a very straightforward, way these concerns.

I am persuaded by the chairman and others that we are able, in an orderly way, to undo what we had to do, so that there will not be that inflationary impact. I also believe that inflation danger is not the current most important one. But it is, I think, a very good opportunity for the chairman to address it.

But I also want to talk about another matter here. And I want to make a confession, apparently, of the ravages of age. Apparently, my vision is deteriorating more rapidly than I had hoped it would be. I have looked carefully at the deliberations we have seen about the Bank of America-Merrill Lynch issue. And our colleagues on the Government Reform Committee have had a number of hearings on that.

I must say one of the most interesting and potentially instructive things that came out it was Secretary Paulson's explaining that he could not produce e-mails, because he has never sent them. That is a practice I recommend to many others. I follow it myself.

But, as I studied all of this, here is my problem. I cannot find a villain. Now, many of my colleagues have found various villains. They tend to be private-sector or public-sector, depending on the ideology of the finder.

But, as I look at what happened, what I see is a very difficult situation that threatened further severe damage to an economy already damaged; a repetition of the attack on the credit system, which is so central to the functioning of our economy, which we had seen in earlier failures. And I believe we had people faced with a difficult situation.

I have to say to some of my Democratic friends, who have been very critical of the Bank of America, as I have been in other areas, they have not done what they should in -- in -- in modifying mortgages. I will have plenty criticism to make of our friends in the financial industry and the rest of them as well. But people have said, "Well, why was he not focused entirely on the shareholders?"

Well, many of my colleagues who've made that criticism have also said they don't want private-sector people looking only at the narrowest interests of the shareholders. But they do want them to take into account the broader impact of what they do, probably on the grounds that a terrible credit crunch would hurt their shareholders.

As to the chairman of the Federal Reserve, and the secretary of the treasury, I think they had a very important responsibility not to see a repetition of what happened when Lehman Brothers failed. And the collapse of Merrill Lynch by Bank of America walking away, I think, would have had very negative consequences.

I think there is one thing that people need to remember. Solutions cannot be qualitatively more elegant than the problems they seek to resolve. When you have a terrible mess, it is unlikely that those who try to alleviate the danger of that mess will come out looking clean.

Not for the first time, as a -- a -- an elected official, I envy economists. Economists have available to them, in an analytical approach, the counterfactual. Economists can explain that a given decision was the best one that could be made, because they can show what would have happened in the counterfactual situation. They can contrast what happened to what would have happened.

No one has ever gotten reelected where the bumper sticker said, "It would have been worse without me." You probably can get tenure with that. But you can't win office.

I understand that reality. But we should not let it distort us. And it would not, I think, hurt us every so often to admit that not every action by every public official was a bad thing. And sometimes we should give people credit for trying to cope with an unpleasant reality the best they can.

The gentleman from Alabama.

BACHUS: Thank the chairman.

Chairman Bernanke, thank you for appearing before the committee today, for your professionalism and your service to our country. All of us in the Congress appreciate your willingness to make yourself available on countless numbers of occasions, both to congressional committees and to individual members as we've confronted this crisis. So, I -- I thank you.

Over the past year, we witnessed unprecedented government involvement in the financial markets. For some time, Republicans on this committee have expressed a growing unease over the magnitude of federal government involvement and manipulations of our economy. Trillions of dollars of capital commitments, guarantees, loans have been extended.

What started out last year as a large, but temporary, stabilization effort to prevent a financial collapse has evolved, month by month, into seemingly a permanent government intervention regime. This included ad hoc bailouts of institutions deemed too big to fail. Many of the competitors of those too-big-to-fail corporations deemed too small to save are no longer in business.

Today, I read with interest your op-ed in the Wall Street Journal acknowledging the need for an exit strategy, something Republicans have called on since -- for since last fall. Simultaneously, the Obama administration has been spending a staggering amount of money to fund an economic recovery and stimulus that is slow in coming.

It's been almost half a year since Congress passed a $787 billion so-called stimulus bill. And yet, we continue to see record job losses. Unemployment has spiked to 9.5 percent and seems headed higher.

Your testimony predicts that the elevated unemployment will last for, not only this year, but next year, confirming that. And that's despite the administration's assurances that, if we passed a stimulus package, unemployment would peak at 8 percent.

Other federal government interventions have failed as well. The administration's $75 billion foreclosure prevention initiative, intended to keep 3 million to 4 million homeowners in their home, has so far offered only 220 trial loan modifications. At the same time, the private sector, in private efforts have -- have -- their efforts have resulted in millions of homeowners staying in their home.

The American people can be forgiven for increasingly asking tough questions about these enormous government outlays and interventions, because so far, Mr. Chairman, there has been very little bang for the taxpayer's buck. It's not only these past expenditures that give us pause, but it's the multitude of new proposals coming from the Obama administration and their allies in Congress, calling for more government control and management, from health care to energy, to financial services.

One of the central questions the committee needs to answer, as it considers reforms to our financial regulatory system, is whether regulatory powers should be centralized in the Federal Reserve at a time when our country is facing unparalleled fiscal and monetary policy challenges. The Fed has made some big mistake. And historically, the board has done a poor job of identifying and addressing systemic risk before they become crises.

A prime example of this is troubled lender CIT, which was allowed to convert to a bank holding company last December and was placed under the Fed's supervision, only after the Fed declared it was adequately capitalized. This inability to access (ph) risk once again threatens to undermine a fragile economy and erase the $2.5 billion taxpayer funds provided CIT under TARP.

BACHUS: The Obama administration has proposed a regulatory restructuring plan that would make the Fed responsible for first identifying and then regulating those financial firms that, in the Fed's view, are systemically significant and preventing systemic shock. Republicans believe that the Fed's core mission, the conduct of monetary policy, will be seriously undermined if its regulatory responsibilities are expanded in this way.

Let me conclude by saying, at a time when our economic -- economy faces serious structural problems and the threat of inflation if we maintain our current physical (sic) course and spending pattern, a distracted and over-extended central bank subject to potential political interference is a luxury we cannot afford. Republicans believe that relieving the Federal Reserve of its current regulatory responsibility and focusing it on the core monetary policy mission would enhance the Fed's ability to execute an effective exit strategy and ensure it sets interest rates that are greatly -- affect both individuals and small businesses with a single goal in mind - sound monetary policy.

The proper conduct of monetary policy is the best way the Fed can serve the American people. Asking the Fed to serve as a systemic regulator is just inviting a false sense of security that inevitably will be shattered at the expense of the taxpayer.

Thank you, Mr. Chairman.

FRANK: The gentleman from North Carolina is recognized for three minutes.

WATT (?): Chairman Bernanke, look forward to your discussion of the status of monetary policy and the economy.

It's good news that many experts are saying that the economy has improved since the last time you were before this committee in February. To the extent that's true, the Federal Reserve certainly deserves some of the credit.

Unfortunately, my constituents are not yet feeling it. Growing unemployment, foreclosures all around, and the like (ph) of much, if any, rebound in the value of their investments continue to feed their sense of anxiety and uncertainty about whether we've, in fact, turned the corner.

But the Fed has been a sturdy, methodical hand. More public exposure of what the Fed does has also stimulated discussions about some other things that a lot of people had taken for granted - the level of independence from political influence by the legislative and executive branches of government that is appropriate for the Fed to have in order to achieve its long-term policy goals.

The extent to which the Fed's operation, even if monetary policy discussions and decisions should be subject to regular audit, the extent to which the various parts of an operation of the Fed should be subject to more transparency, whether the Fed, having failed, along with other financial regulators, to pay equivalent attention to its consumer protection responsibilities as it did to other responsibilities should be stripped of these responsibilities in favor of a new consumer protection agency focused solely on consumer protection, and, whether as proposed by the Obama administration, the Fed should be delegated even more powers and responsibilities for systemic risk regulation.

This certainly is a critical juncture for the Fed, and I want to assure my colleagues on the full committee that our subcommittee on Domestic Monetary Policy, which I chair with the knowledgeable input of Ranking Member Ron Paul, has been grappling seriously and consistently with all of these issues. For a change, we've even had some members who are not on our subcommittee showing up at our subcommittee hearings. Imagine that.

In the wake of the Great Depression, Congress drafted rules that served us well for 75 years. We are facing another once-in-a- generation opportunity to fashion rules that should serve us well for the next 75 years. And Chairman Bernanke's testimony today is yet another step in arming us with the knowledge and information we need to address these important issues.

I welcome the chairman and yield back the balance of my time.

FRANK: The gentleman from Texas. There are two minutes remaining on the Republican side. We'll make it two and a half.

PAUL (?): Thank you, Mr. Chairman.

And good morning, Chairman Bernanke.

The Federal Reserve, in collaboration with the giant banks, has created the greatest financial crisis the world has ever seen. The foolish notion that unlimited amounts of money and credit, created out of thin air, can provide sustained economic growth has delivered this crisis to us.

Instead of economic growth and stable prices, it has given us a system of government and finance that now threatens the world financial and political institutions. Real unemployment is now 20 percent, and there has not been any economic growth since the onset of the crisis in the year 2000, according to non-government statistics.

Pyramiding debt and credit expansion over the past 38 years has come to an abrupt end as predicted by free market economists. Pursuing the same policy of excessive spending, debt expansion and monetary inflation can only compound the problems and prevent the required correction. Doubling the money supply didn't work. Quadrupling it won't work, either.

The problem of debt must be addressed. Expanding debt when it was a principal cause of the crisis is foolhardy. Excessive government and private debt is a consequence of loose Federal Reserve monetary policy.

Once a debt crisis hits, the solution must be paying it off or liquidating it. We are doing neither. Net U.S. debt is now 372 percent of GDP. In the crisis of the 1930s, it peaked at 301 percent. Household debt services require 14 percent of disposable income, an historic high.

Between 2000 and 2007, credit debt expanded five times as fast as GDP. With no restraint on spending and revenues dropping due to the weak economy, raising taxes will be poison to the economy. Buying up the bad debt of privileged institutions and dumping worthless assets on the American people is morally wrong and economically futile.

Monetizing government debt, as the Fed is currently doing (inaudible), is destined to do great harm. The 12th -- in the past 12 months, the national debt has risen over $2 trillion. Future entitlement obligations are now reaching $100 trillion. U.S. foreign indebtedness is $6 trillion. Foreign purchase of U.S. securities in May were $7.4 billion, down from a monthly peak of $95 billion in 2006.

The fact that the Fed had to buy $38 billion worth of government securities last week indicates that it will continue its complicity with Congress to monetize the rapidly expanding deficit. The policy is used to pay for the socialization of America and for the maintenance of an unwise American foreign policy and to make up for the diminished appetite of foreigners for our debt.

Since the attack on the dollar will continue, I would suggest the problems we have faced so far are nothing compared to what it will be like when the world not only rejects our debt, but our dollar as well. That's when we'll witness political turmoil, which will be to no one's benefit.

FRANK: The time for opening statements has expired, and for once I think not before the patience of the audience.

The chairman of the Federal Reserve is now recognized for his statement.

BERNANKE: Thank you, Mr. Chairman.

Chairman Frank, Ranking Member Bachus and other members of the committee, I'm pleased to present the Federal Reserve's semi-annual monetary policy report to the Congress.

Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system, an event that would have extreme -- had had extremely adverse and protracted consequences to the world economy. Even so, the financial shocks that hit the global economy in September and October were the worst since the 1930s, and they helped push the global economy into the deepest recession since World War II.

The U.S. economy contracted sharply in the fourth quarter of last year and the first quarter of this year. More recently, the pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization.

The labor market, however, has continued to weaken. Consumer price inflation, which fell to low levels late last year, remain subdued in the first six months of 2009.

To promote economic recovery and foster price stability, the Federal Open Market Committee last year brought its target to the federal funds rate to a historically low range of zero to one-quarter percent, where it remains today. The FOMC anticipates that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extended period.

At the time of our February report, financial markets at home and abroad were under intense strain, with equity prices at multi-year lows, risk spreads for private borrowers at very elevated levels, and some important financial markets essentially shut. Today, financial conditions remain stressed, and many households and businesses are finding credit difficult to obtain.

Nevertheless, on that, the past few months have seen some notable improvements. For example, interest rate spreads in short-term money markets, such as the interbank market and the commercial paper market, have continued to narrow. The extreme risk aversion of last fall has eased somewhat, and investors are returning to private credit markets.

Reflecting this greater investor receptivity, corporate bond issuance has been strong. Many markets are functioning more normally, with increased liquidity and lower bid-as (ph) spreads. Equity prices, which hit a low point in March, have recovered to roughly their levels at the end of last year, and banks have raised significant amounts of new capital.

Many of the improvements in financial conditions can be traced in part to policy actions taken by the Federal Reserve to encourage the flow of credit. For example, the decline in interbank lending rates and spreads was facilitated by the actions of the Federal Reserve and other central banks to ensure that financial institutions have adequate access to short-term liquidity, which in turn has increased the stability of the banking system and the ability of banks to lend.

Interest rates and spreads on commercial paper dropped significantly as a result of the backstop liquidity facilities that the Federal Reserve introduced last fall for that market. Our purchases of agency mortgage-backed securities and other longer-term assets have helped to lower conforming fixed mortgage rates. And the Term Asset-Backed Securities Loan Facility, or TALF, which was implemented this year, has helped restart securitization markets for various classes of consumer and small business credit.

Earlier this year, the Federal Reserve and other federal banking regulatory agencies undertook the Supervisory Capital Assessment Program, popularly known as the Stress Test, to determine the capital needs of our largest financial institutions. Results of the SCAP were reported in May, and they appear to increase investor confidence in the U.S. banking system.

Subsequently, the great majority of institutions that underwent the assessment have raised equity in public markets. And on June 17th, 10 of the largest U.S. bank holding companies, all but one of which participated in the SCAP, repaid a total of nearly $70 billion to the Treasury.

Better conditions of financial markets have been accompanied by some improvements in economic prospects. Consumer spending has been relatively stable so far this year, and the decline in housing activity appears to have moderated. Businesses have continued to cut capital spending and liquidate inventories, but the likely slowdown in the pace of inventory liquidation in coming quarters represents another factor that may support a turnaround in activity.

Although the recession in the rest of the world led to a steep drop in demand for U.S. exports, this drag in our economy also appears to be waning, as many of our trading partners are also seeing signs of stabilization.

Despite these positive signs, the rate of job loss remains high, and the unemployment rate has continued its steep rise. Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. Possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.

In conjunction with the June FOMC meeting, Board members and Reserve Bank presidents prepared economic projections covering the years 2009 to -- through 2011. FOMC participants general expect that, after declining in the first half of this year, output will increase slightly over the remainder of 2009. The recovery is expected to be gradual in 2010, with some acceleration in activity in 2011.

Although the unemployment rate is projected to peak at the end of this year, the projected declines in 2010 and 2011 would still leave unemployment well above FOMC participants' views of the longer-run sustainable rate. All participants expect that inflation will be somewhat lower this year than in recent years, and most expect it to remain subdued over the next two years.

In light of the substantial economic slack and limited inflation pressures, monetary policy remains focused on fostering economic recovery. Accordingly, as I mentioned earlier, the FOMC believes that a highly accommodative stance on monetary policy will be appropriate for an extended period.

However, we also believe that it important to assure the public and the markets that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation. The FOMC has been devoting considerable attention to issues relating to its exit strategy, and we are confident that we have the necessary tools to implement that strategy when appropriate.

To some extent, our policy measures will unwind automatically as the economy recovers and financial strains ease, because most of our extraordinary liquidity facilities are priced at a premium over normal interest rate spreads. Indeed, total Federal Reserve credit extended to banks and other market participants has declined from roughly $1.5 trillion at the end of 2008 to less than $600 billion, reflecting the improvement in financial conditions that has already occurred.

BERNANKE: In addition, bank reserves held at the Fed will decline as the longer-term assets that we own mature or are prepaid. Nevertheless, should economic conditions warrant a tightening of monetary policy before this process of unwinding is complete, we have a number of tools that will enable us to raise market interest rates as needed.

Perhaps the most important such tool is the authority that the Congress granted the Federal Reserve last fall to pay interest on balances held at the Fed by depository institutions. Raising the rate of interest paid on reserve balances will give us substantial leverage over the federal funds rate and other short-term market interest rates because banks generally will not supply funds to the market at an interest rate significantly lower than they can earn risk free by holding balances at the Federal Reserve.

Indeed, many foreign central banks use the ability to pay interest on reserves to help set a floor on market interest rates. The attractiveness to banks of leaving their excess reserve balances with the Federal Reserve can be further increased by offering banks a choice of maturities for their deposits.

But interest on reserves is by no means the only tool we have to influence market interest rates. For example, we can drain liquidity from the system by conducting reverse repurchase agreements in which we sell securities from our portfolio with an agreement to buy them back at later dates.

Reverse repurchase agreements, which can be executed with primary dealers, government-sponsored enterprises and a range of other counterparties, are a traditional and well-understood method of managing the level of bank reserves. If necessary, another means of tightening policy is outright sales of our holdings of longer-term securities.

Not only would such sales drain reserves and raise short-term interest rates but they also could put upward pressure on longer-term interest rates by expanding the supply of longer-term assets.

In sum, we are confident that we have the tools to raise interest rates when that becomes necessary to achieve our objectives of maximum employment and price stability.

Our economy and financial markets have faced extraordinary near- term challenges and strong and timely actions to respond to those challenges have been necessary and appropriate. I've discussed some of the measures taken by the Federal Reserve to promote economic growth and financial stability.

The Congress also has taken substantial actions including the passage of a fiscal stimulus package. Nevertheless, even as important steps have been taken to address the recession and the intense threats to financial stability, maintaining the confidence of the public and financial markets requires that policy-makers begin planning now for the restoration of fiscal balance.

Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in the costs of Medicare and Medicaid. Addressing the country's fiscal problems will require difficult choices but postponing those choices will only make them more difficult.

Moreover, agreeing on a sustainable long-run fiscal path now could yield considerable near-term economic benefits in the form of lower long-term interest rates and increased consumer and business confidence. Unless we demonstrate a strong commitment to fiscal sustainability, we risk having neither financial stability nor durable economic growth.

A clear lesson of the recent financial turmoil is that we must make our system of financial supervision and regulation more effective, both in the United States and abroad. In my view, comprehensive reform should include at least the following key elements: a prudential approach that focuses on the stability of the financial system as a whole and not just the safety and soundness of individual institutions and that includes formal mechanisms for identifying and dealing with emerging systemic risks; stronger capital and liquidity standards for financial firms with more stringent standards for large, complex, and financially interconnected firms; the extension and enhancement of supervisory oversight, including effective consolidated supervision to all financial organizations that could pose a significant risk to the overall financial system; an enhanced bankruptcy or resolution regime, modeled on the current system for depository institutions that would allow financially troubled, systemically important non-bank financial institutions to be wound down without broad disruption to the financial institution's system and the economy; enhanced protections for consumers and investors in their financial dealings; measures to ensure that critical payment, clearing and settlement arrangements are resilient to financial shocks and that practices related to the trading and clearing of derivatives and other financial instruments do not pose risks to the financial system as a whole; and finally, improved coordination across countries in the development of regulations and in the supervision of internationally active firms.

The Federal Reserve has taken and will continue to take important steps to strengthen supervision, improve the resiliency of the financial system and to increase the macro-prudential orientation of our oversight. For example, we are expanding our use of horizontal reviews of financial firms to provide a more comprehensive understanding of practices and risks in the financial system. The Federal Reserve also remains strongly committed to effectively carrying out our responsibilities for consumer protection. Over the past three years, the Federal Reserve has written rules providing strong protections for mortgage borrowers and credit card users among many other substantive actions.

Later this week, the Board will issue a proposal using our authority under the Truth in Lending Act, which will include new, consumer-tested disclosures as well as rule changes applying to mortgages and home equity lines of credit. In addition, the proposal includes new rules governing the compensation of mortgage originators.

We are expanding our supervisory activities to include risk- focused reviews of consumer compliance in non-bank subsidiaries of holding companies. Our community affairs and research areas have provided support and assistance for organizations specializing in foreclosure mitigation and we have worked with nonprofit groups on strategies for neighborhood stabilization.

The Federal Reserve's combination of expertise in financial markets, payment systems and supervision positions us well to protect the interests of consumers in their financial transactions. We look forward to discussing with the Congress ways to further formalize our institution's strong commitment to consumer protection.

The Congress and the American people have a right to know how the Federal Reserve is carrying out its responsibilities and how we are using taxpayer resources. The Federal Reserve is committed to transparency and accountability in its operations. We report on our activities in a variety of ways, including reports like the one I am presenting to the Congress today, other testimonies and speeches.

The FOMC releases a statement immediately after each regularly scheduled meeting and detailed minutes of each meeting on a timely basis. We have increased the frequency and scope of the published economic forecasts of FOMC participants. We provide the public with detailed annual reports on the financial activities of the Federal Reserve System that are audited by an independent public accounting firm. We also publish a complete balance sheet each week.

We have recently taken additional steps to better inform the public about the programs we have instituted to combat the financial crisis. We expanded our Web site this year to bring together already available information as well as considerable new information on our policy programs and financial activities. In June, we initiated a monthly report to the Congress that provides even more information on Federal Reserve liquidity programs, including breakdowns of our lending, the associated collateral and other facets of programs established to address the financial crisis.

These steps should help the public understand the efforts that we have taken to protect the taxpayer as we supply liquidity to the financial system and support the functioning of key credit markets.

The Congress has recently discussed proposals to expand the audit authority of the GAO over the Federal Reserve. As you know, the Federal Reserve is already subject to frequent reviews by the GAO. The GAO has broad authority to audit our operations and functions.

The Congress recently granted the GAO new authority to conduct audits of the credit facilities extended by the Federal Reserve to single and specific companies under the authority provided by section 13(3) of the Federal Reserve Act including the loan facilities provided to, or created for, AIG or Bear Stearns.

The GAO and the special inspector general have the right to audit our TALF program which uses funds from the Troubled Assets Relief Program.

The Congress, however, purposefully and for good reason, excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations including open market and discount window operations. In doing so, the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy.

Financial markets, in particular, likely would see a grant of review authority in these areas to the GAO as a serious weakening of monetary policy independence. Because GAO reviews may be initiated at the request of members of Congress, reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions.

A perceived loss of monetary policy independence could raise fears about future inflation and lead to higher long-term interest rates and reduced economic and financial stability. We will continue to work with the Congress to provide the information it needs to oversee our activities effectively yet in a way that does not compromise monetary policy independence.

Thank you, Mr. Chairman.

FRANK: Thank you, Mr. Chairman. Let me begin with one question because I am pleased that you have, as I said, responded to the fears of inflation because I think you are well-capable of holding them under control. And I also think it's important that they not be invoked prematurely when the greater problem, I believe the Federal Reserve economists think is still further on the negative side.

And one looming threat which we hear about a lot is the commercial real estate issue. There was a great deal of fear that there will be in commercial real estate a series of failures that some of the economic problems of the home mortgage will be reproduced. And though we've discussed this, what's your current posture? Do you expect there to be problems and how are you and other elements of the government ready to respond to them?

BERNANKE: Mr. Chairman, we -- we -- we are watching that situation very carefully. There are a lot of CRE loans which are coming up for refinance. And the capacity to refinance them is limited which poses the possibility of foreclosures in the commercial space much as in the residential situation. We are urging banks to continue to make loans to creditworthy borrowers and our examiners are presenting a balanced view in their discussions with banks.

The other step we've taken to try to address this problem, Mr. Chairman, is that we have recently added to our TALF program both new and legacy commercial mortgage-backed securities. By doing that we hope to open up the mortgage-backed security market which is an important source of funding and finance for the CRE market.

FRANK: Well, I'm pleased with that because I know there are some who've been critical that you've been doing too much. I don't share that. On the other hand, in some cases, even some of those same people have said, "Yes, but what about commercial real estate"? And the fact is you drew (ph) already there to do some work.

Let me ask you now, I was interested in reading the report. On page one, you note that consumer spending has been supported recently by the boost to disposal income from the tax cuts and increases in benefit payments that were part of the 2009 fiscal stimulus package. With regard to state and local borrowing, you note interest rates on long-term municipal bonds declined in April as investors concerned by the credit quality appear to ease somewhat with the passage of the fiscal stimulus plan which included a substantial increase in the amount of federal grants to states and localities.

And then in the discussion of the labor market, there was reference to the fact that ironically one of the things that makes the rate look higher is that the participation rate has gotten higher and that's a good thing, in part, because you note the emergency unemployment insurance program introduced last July have contributed to the higher participation rates.

I'm pleased that these are three references by you to the positive impact of efforts to intervene in the economy in terms of boosting consumer spending and helping state and local governments that are both directly by revenue and then by that, keeping down their interest costs. So I do want to ask you one of those counter-factuals that you get to have fun with and I want to share a little bit of it. We have problems and I think as I said, it's good to know that you can unwind.

I think a premature unwinding would be a -- a great mistake. But a counter-factual is had we not passed the economic recovery plan in February of this year, would the economy be better or worse?

BERNANKE: Mr. Chairman, as you described, we think that income has affected consumers some and that the revenues to state and local authorities may have improved their situations somewhat. So in that respect, there's been some positive impact. But I would withhold a overall judgment since we've only seen about a quarter or less of the money being dispersed. And I think there's still some time to wait and see how significant the impact will be.

FRANK: But the expectation would be then that disbursement would be a -- would have a positive effect in the -- in this current atmosphere?

BERNANKE: You would expect that higher income would -- would tend to raise consumption, yes.

FRANK: And so I appreciate those two points that you have mentioned. Let me just ask one last question. If the resolving authority -- strange (inaudible), resolve does appear to mean dissolve -- if that authority were vested in the appropriate agency to the federal government, would the AIG and Lehman Brothers and Merrill Lynch situations have come out differently?

BERNANKE: Would they have...

FRANK: Come out differently?

BERNANKE: Yes, of course.

FRANK: Would the financial authorities responded differently?

BERNANKE: It would not have been necessary for the Fed or -- or even the Treasury and the TARP to intervene in those situations. With a -- with a good resolution authority we could have wound down those companies, had the creditors take losses to eliminate or reduce the too-big-to-fail problem while at the same time avoiding the very destructive effects particularly in the case of Lehman on the broader financial system.

FRANK: Thank you. The gentleman from Alabama.

BACHUS: Thank you. Chairman Bernanke, the Chairman Frank asked you about the commercial real estate market. And you mentioned the TALF programs for the new and legacy program. The -- the new program has been in -- been in operation about a month, is that right? Taking loans and...

BERNANKE: Yes. Yes, that's right.

BACHUS: And the legacy just about a week, is that right?

BERNANKE: Yes, sir.

BACHUS: I notice you're going to cut those off December 31st?

BERNANKE: The -- the program as of right now is slated to end at the end of the year. But we will -- we will be reviewing those programs and others to assess whether or not they're needed beyond that time.

BACHUS: Yes, I noticed several others run through the end of 2010. So it -- it sort of...

BERNANKE: We extended several, sir, to, I think February 2010.

BACHUS: All right.

BERNANKE: Not until the end of 2010.

BACHUS: OK. What is the state of the commercial real estate market?

BERNANKE: Well, the -- for -- for a good bit of the recent years, the commercial real estate market was actually pretty strong, as -- even as the residential market was -- was weakening. But in -- as the recession's gotten worse in the last six months or so, we're seeing increased vacancy, declining rents, falling prices. And so, more pressure on commercial real estate, which is raising the risk of lending to commercial real estate. So that -- that is certainly a negative.

And as I was mentioning to the chairman, the -- the facilities for refinancing commercial real estate, either through banks or through the commercial mortgage-backed securities market, seem more limited. And so, we are somewhat concerned about that sector and are paying very close attention to it. We're taking the steps that we can through the banking system and through the securitization markets to try to address it.

BACHUS: I definitely think that may be the wild card. I know Deutsche Bank this week came out with a report and Smith Barney last week that obviously raised concern.

You have talked about a resolution authority for non-bank financial institutions. You know, and you've referred to that as expedited bankruptcy. Would it be within the bankruptcy code? Would it be part of the bankruptcy regime? BERNANKE: It would be especially -- a special regime that would be invoked only under circumstances of financial stress. And it would be analogous to the laws we currently have for resolving failing banks, which allow the regulators to intervene before the actual bankruptcy occurs to avoid the negative impact of a disorderly bankruptcy on the market.


BERNANKE: So, yes, it could be in a broader bankruptcy regime. But it would be a special -- a special category of bankruptcy that would be invoked only during financial crises.

BACHUS: Yes. You know, Enron, WorldCom, Drexel worked very well -- the bankruptcy regime. And I -- do you agree that it's very important that you-- you force creditors to -- to internalize the cost of their credit decisions?

BERNANKE: Absolutely, otherwise you'd have a too big to fail institution, which doesn't have any discipline, other than the regulatory oversight.

BACHUS: Right. So this regime would totally reject the too big to fail? I mean, you would not be asking taxpayers to guarantee or back stop losses?

BERNANKE: Absolutely. I think too big to fail is an enormous problem. If we don't do anything else, we need to solve that problem. This is a critical element in solving it because it would mean that creditors would take losses. If there are resolution costs, the presumption is that they would be paid by assessments on other financial companies.

BACHUS: Right. You know, the Republicans have proposed -- our -- our financial services regulatory reform proposal includes an expedited bankruptcy within the bankruptcy code. And I would ask you to pay particular attention to that.

One thing that I'm also concerned about is even having the financial system take those losses or the taxpayers and would hope that -- that we would preserve a true -- if we call it expedited bankruptcy, it, in fact, is expedited bankruptcy.

I thank the -- I thank the chairman for his testimony.

FRANK: The gentleman from North Carolina?

WATT (?): Thank you, Mr. Chairman.

Chairman Bernanke, let me inquire into two areas that I just need a little clarification on. On page eight of your testimony this morning, you say that we are expanding our supervisory activities to include risk focus reviews of consumer compliance in non-bank subsidiaries of holding companies. What's the authority for that? And I -- I have been under the impression that one of the reasons that was not done previously is that the Fed didn't have that authority, that -- is there a new authority? Or what -- under -- under what authority are you acting there?

BERNANKE: Well, the -- the Gramm-Leach-Bliley law is a bit vague. There is a presumption that you will defer to the functional regulator in dealing with -- with non-bank subs. In many cases, the functional regulator would be either a state regulator or the FTC. And we have done this in collaboration with those bodies, particularly the state regulators. The -- the pilot program we ran to do examinations of non-bank subs was done in collaboration with these other bodies.

And we believe that in that cooperative spirit and in looking at our responsibility to enforce these consumer laws we believe a somewhat more proactive stance is justified. That being said, I think that Congress ought to clarify the presumption of the ability of the consolidated supervisor to -- to look into these subs.

WATT (?): But -- but it's clear that -- that the Fed had not been real proactive in that area prior to this -- this crisis. Is that right?

BERNANKE: For non-bank subs, yes, that's right.

WATT (?): Yes. OK. All right, on page five of your testimony, you talk about the -- the payment of interest on reserve balances, which we authorized last fall. Had the Fed not had that authority prior to last fall at all?

BERNANKE: No, we did not.

WATT (?): OK. That seems to me to be a perhaps even more powerful tool than the adjustment of -- of the Fed fund interest rates. And to -- I -- I guess I'm a little surprised at why some central banks that had that authority previously and the Fed had not. Can you just give us a little history lesson on that?

BERNANKE: Certainly, most central banks do have this authority. And they -- they -- they set a Fed funds equivalent rate in the open market, but they use the interest on reserves rate as sort of a floor or backstop.

The Fed's authorities go back to the '30s. And we are actually somewhat more limited on a number of these areas than other central banks. Other central banks have somewhat broader powers to buy assets, to pay interest in reserves and to lend to financial institutions.

For example, we had to invoke the 13(3) authority to lend to the primary dealers and the investment banks. Whereas in Europe, for example, any financial institution can borrow from the central bank.

WATT (?): Am I overstating the power of that as a potential tool for the Fed to use? Or do you perceive it in much the same way?

BERNANKE: Many central banks around the world use what's called a corridor system where they have an interest rate on reserves as the floor and then a -- a lending rate like the discount window rate as the ceiling. And that keeps the interest rate -- the market interest rate between those two level. A lot of banks use that. So, yes, it is a very powerful tool. And we would not have been able to expand our balance as we have if we had not had that tool to help us with the exit.

WATT (?): So you're saying until last fall actually the Fed -- the extent of the Fed's power before we granted this authority was actually substantially less than a lot of federal banks -- a lot of central banks around the -- the world?

BERNANKE: Yes, that's right.

WATT (?): Well, I guess that's a double-edged sword from -- from some of my colleagues on the -- the -- the -- it gives the Fed more authority that they would likely fear. Your assessment is that as we wind down these positions, that would be as important or more important than the Fed fund rate.

BERNANKE: Well, the -- that interest on reserves rate will help us control the Fed's funds rate. They should be very closely together. So they should both -- they should be closely tied. And they should both affect longer term interest rates. So they'll be working together.

WATT (?): Thank you, Mr. Chairman.

FRANK: Let me say -- if I (inaudible) for 30 seconds. The gentleman from Alabama reminded me that decision to grant the Fed that power was wholly bipartisan. And, in fact, it first passed the House when the Republicans were in the majority. The gentleman from Alabama was chairman of the appropriate subcommittee. It did not pass the Senate. There's a lot of that going around. And it then came up again, and it was again passed. So that has been broadly supported on this committee, although not unanimously.

Which brings me to the gentleman from Texas, Mr. Paul.

PAUL: Thank you, Mr. Chairman.

In the past, most members of the Federal Reserve Board, including your predecessor, when they come before the committee, they endorse in general, you know, the idea of transparency. They don't just say we're against transparency. It's the definition that really counts.

Most members then would also argue for independence, which generally means that they -- they don't want the Congress to know exactly what they're -- they're doing. But I -- I saw the article today in the Wall Street Journal, not -- not your editorial, but an article. And there are a few quotes there that I wanted to ask you about. And I do know that all of us can get misquoted in the newspaper.

But I want to clarify this because it's either misleading or -- or somebody is confused. And I want to see if I can figure this out.

And -- and the -- the first one had to do with you saying that Mr. Paul's bill, which is 1207, the transparency bill, would interfere with the Fed's interest rates decision. And since I wrote the bill and the intention -- and I know what the intentions are -- has nothing to do with interference with monetary policy or interest rates manipulation. There's nobody in the Congress going to be monitoring the federal open market committee. It's -- it's after the fact that an audit can occur and find out what -- what transpired.

It -- there's -- there's no management. So is that your position, that this bill, if it were to be passed, would interfere directly with interest rates -- setting interest rates?

BERNANKE: Well, Congressman Paul, at -- at -- at some point, as you know, we're going to have to start raising interest rates to avoid inflation. And people have talked about the politics of that and how -- whether the Fed will be able to do that without intervention or interference. If we were to raise interest rates at a meeting and someone in the Congress didn't like that and said I want the GAO to audit that decision, wouldn't that be viewed as an interference or at least an (inaudible)...

PAUL: No, I wouldn't -- I wouldn't -- I wouldn't think so. This is just reviewing it. And you can do what you want. What about today? Interest rates are artificially low. Could there be any political pressure to keep interest rates artificially low?

Historically that's been well-known. It's been documented and written about how other Federal Reserve chairmen, you know, they're on the verge of reappointment and -- and they know the president. And all of a sudden -- so there's -- it's -- it's not like it's not politicized now. Just the fact that they can issue a lot of loans and special privileges to banks and corporations. That's political. This idea that it would be political because we know what happened afterwards just -- just doesn't seem to add up.

Since time is short, I want to go on to the next quote, which I find it fascinating because hopefully I can agree with you on this one. Because you -- if this is an actual quote -- it says, "We absolutely will not monetize the debt." Well, that's one of the major reforms sometime in the distant future that would be beautiful because that would stop all this chaotic monetary policy, inflations and depressions and recessions and all the mess that we have.

But you say you will not. At the same time, you know, I quoted the $38 billion that was bought last week and the plan to buy $300 billion of U.S. securities. These securities are bought by dollars you create. And if you're buying U.S. securities, what is that if it's not -- and besides, if the markets really believe that, that you would absolutely not monetize debt, I think the markets would get hysterical. So it seems to me like I'd like to understand exactly what you mean by that.

BERNANKE: Well, the purpose of our limited program was to address private credit markets, Congressman. When we complete the $300 billion program that we announced, we will have less treasuries on our balance sheet than we did two years ago because we sold off a lot of treasuries in order to make room for these other things we were doing.

Secondly, after we complete that $300 billion, our share of outstanding treasuries will be at one of the lowest points in the post-war period. So we are not taking a significant portion of U.S. treasuries. And we are not actively intervening or actively trying to make it easier for the government to issue debt.

PAUL: So you're saying if you buy $300 billion worth of U.S. government debt, that is not inflationary? The true definition of inflation is when you increase the money supply. And the immediate consequence is it sends out false, bad information to the marketplace. So whether it's when the bubble is being formed or afterwards, all you're doing is inflating constantly. You've doubled the money supply. Interest rates are artificial. People make mistakes.

So it -- it seems to me that you're in the midst of massive inflation. But I guess you have a different definition. When you double the money supply, that's not inflation itself. Or are you looking at only prices?

BERNANKE: May I respond?

FRANK: Briefly.

BERNANKE: Inflation is the change in the price -- the consumer price level, which is very -- is very stable right now. And -- and there are various measures of money, as you know. In the broad measures of money, the measures that cut -- the measures of money in circulation like M-1 and M-2 are not growing quickly.

FRANK: The gentleman from California, Mr. Baca?

BACA: Thank you very much, Mr. Chairman.

First of all, I want to thank you and I want to thank the ranking member for convening this hearing.

And I want thank, you know, Chairman Bernanke for taking the time to be here once again. My first question is in reference to the regulatory reform plan put forth by the Obama administration -- puts a lot of faith in the Federal Reserve's ability to oversee the largest, most interconnected firm in the marketplace to prevent against systematic failures. I have a question related to the financial oversight council that laid (ph) in this task.

How do you envision the role of the financial oversight council taking shape? That's one of the questions. And then, it's my understanding that the council will play a purely advisory role, having no real power or weight in our regulatory issues. And can you describe how the Federal Reserve would work with the federal council under this proposed plan?

BERNANKE: Yes, sir. There's -- there's, I think, a misapprehension that somehow this plan make the Federal Reserve a super-regulator with, sort of, untrammeled powers to go wherever it -- it likes. In fact, there's a multiple-part plan -- multiple components, as you point out. A critical component is the council, which will oversee the overall strategy, will look for emerging risks, will advise regulators on what steps to take.

And so, in particular, this issue about which large institutions the Fed would oversee, I think that would be appropriate for the council to make that determination and not the Federal Reserve, for example. So, the Federal Reserve will work closely with this council, which again would have broad-based ability to gather information, identify emerging risks and look for gaps and problems in the regulatory system.

Another major portion, by the way, of course, would be this resolution regime, which would be not the Fed either. That would be the treasury or the FDIC, that's very critical to winding down systemically relevant firms.

The Fed's role, as envisioned by the administration is a modest reorientation of our current system. Under our current system, the Federal Reserve is the umbrella supervisor of all bank holding companies and financial holding companies. So, we are already the umbrella supervisor of essentially all of the firms that would like to be identified as Tier 1 firms under the administration's proposal.

So, the main differences would be that we would have some additional authorities to add capital and liquidity requirements, based on the systemic relevance of those firms, and perhaps some stronger ability to look at non-bank subs, as we were discussing before vis-a-vis Gramm-Leach-Bliley.

The biggest challenge would be on our part, which would be to take a more macro-prudential approach. Rather than looking at each firm individually, the intellectual challenge for us would be to ask the questions, is this -- not only is this firm safe in its own -- in its own situation. But does its failure threaten other firms and other markets? And if so, how should you adjust capital and other requirements to accommodate that.

So it would be a challenging thing for us to do. But it does not radically reorient our set of powers.

BACA: As a follow-up question, would you then be in favor of increasing the authority of the council? Or are you confident that the collaboration of the Fed and the council would work, as stated in the white paper?

BERNANKE: I'm -- I'm very open to discussing the role of the council. I think it's -- a very important role is to coordinate regulators, to oversee the system, to identify risk and so on. But there may be situations where the council can have authority to harmonize different practices, or to identify problems and to take action. So, I think we should discuss -- you, the Congress, should discuss how the council should -- what powers it should have.

BACA: I hope -- I hope we do in Congress here. But let me refer back to an article that appeared in the Wall Street Journal. This is July 20. In here, you start out: The death of the global recession has required a highly accommodative monetary policies, and you go on and go on. And then it says: We have greatly expanded the size of the Fed balance sheet for the purchase of long-term security through targeted lending programs aimed at restarting the flow of credit.

What do you mean by this? BERNANKE: Congressman, our -- our policies using our balance sheet have been to try to improve the functioning of credit markets, which have been disrupted by the financial crisis. So, for example, we've been purchasing mortgage-backed securities, which has lowered mortgage rates for everyday Americans down to about 5 percent. We have opened up a program that -- called the TALF, which has helped increase funding and reduce rates on consumer loans, like auto loans, student loans and small business loans.

We have actions to improve the functioning of the commercial paper market. So, all these various steps have tried to address the fact that, during the crisis, many markets have become disrupted. And our actions have been ways we're trying to stimulate improvements. And then we've been fairly successful in doing that.

BACA: OK. In the second paragraph, you state that: These actions have softened the economic impact of the financial crisis. They have also improved the functioning key credits, including the market for interbank lending, commercial papers, consumers, small business credit, residential mortgages. How does that impact, then, those that are...

BERNANKE: Oh, we -- we don't...

BACA: ... in foreclosure right now.

FRANK: Let me caution members again. Your time expiring is not a good time to ask a big question. The chairman will have a few seconds to answer. But we -- we can't just extend it that way in fairness to the other members.

BERNANKE: I understand. I want to say that, in those markets -- that's the mortgage market, consumer markets, interbank markets -- we have brought down interest rates, increased availability and improved the functioning of the markets in those areas.

BACA: But how will it help those (inaudible) for foreclosure?


FRANK: The gentleman's time has expired.

The gentleman from Texas.

(UNKNOWN): Thank you, Mr. Chairman.

Mr. -- Chairman Bernanke, way over here on the far right, your left. There you go. Thank you.

One of the things that you mentioned in your testimony was that -- about regulatory reform. And you had a bullet point there. And -- and one of those bullet points was enhanced protection for consumers and investors in financial dealings. And then on page 8, you said: We are expanding our supervisory activities to include risk-focused reviews of consumer compliance and non-bank subsidiaries of holding companies.

As you are aware, the administration has laid out a blueprint for regulatory reform. And the chairman also has a bill. And one of the pieces of that is an interesting concept of separating the consumer compliance from the regulatory -- primary regulators and having a separate entity.

The first question I would have is what do you think about that structure?

BERNANKE: Well, I understand the rationale and why people would like to have that. And I'm not going to criticize it. But I want to say, in my remarks, the point was that the Fed has been doing a good job for the past three years or so. And we are committed to doing it. And if you allow us to continue to work in that area, we would be interested in doing so.

(UNKNOWN): Are there some dangers of bifurcating the regulatory process, where you've got a -- a -- one entity looking at consumer products and determining what products financial institutions can offer and endorsing those. Or -- and -- and then having another regulatory agency looking at safety and soundness. And -- and how -- how does that work?

BERNANKE: Well, there are some costs to it, in that you would have double the exams. And there wouldn't be as much coordination between the safety and soundness and consumer protection issues. So, there would be some issues related to that separation.

(UNKNOWN): And so, at a time when, I guess, we are all feeling like it's time to kind of tighten up the regulatory structure, make sure we plug the holes and -- and that, moving forward, that if we had some places where we weren't actually able to, have the ability to or in fact doing our jobs, does -- does separating those make sense?

BERNANKE: Well, the argument for doing it, I think, is that those who believe that you need a separate agency that will be committed to consumer protection will have the institutional commitment outweigh some of these other costs. And I simply am noting that the Federal Reserve is also committed and wants to be committed to that -- to that goal.

(UNKNOWN): If you were writing the regulatory reform, would you keep them the same and not separate them?

BERNANKE: If I were writing it, I would keep the -- the consumer protection with the federal banking agencies, with additional measures to ensure a strong commitment.

(UNKNOWN): Thank you for that. The second thing is -- is the -- in -- in some of your projections of looking forward, what you think the economy is going to be like in 2009 and 2010 in relationship to jobs, for example, when you're -- when you were using the numbers and assumptions you were using, did you assume that Congress would not continue this huge deficit spending, where we are on track to literally double the national debt?

Did you -- are your assumptions based on employment is going to get better if Congress has better fiscal policy? Or does -- are your job assumptions based on continuing to spend money like drunken sailors? BERNANKE: Our -- our -- our forecasts were based on our best projections of what government spending is likely to be. And in particular, it includes the fiscal stimulus package.

(UNKNOWN): And -- and did -- is -- were your assumptions, then, that these -- this would be the job situation, assuming that the Congress does not, then, do something about the current level of spending?

BERNANKE: If the -- if the fiscal stimulus package didn't exist, for example, we would anticipate there would be higher unemployment.

(UNKNOWN): You're -- you're -- you're -- we are not on the same page. I'm not talking -- the stimulus package is already done. I'm talking about the -- the fact that, for every dollar that this Congress is spending right now, we're borrowing 50 cents. If that trend continues and future appropriations and -- and -- and some people talking Stimulus II, would that alter your job prediction down the road?

BERNANKE: Down the road, it might. As I talked about in my -- in my testimony, I do think it's very important that we look at medium-term fiscal sustainability, that we have a plan for getting back to reasonably low deficits and a sustainable debt-to-GDP ratio. Otherwise, we might see interest rates rise, which would be a negative for the economy.

(UNKNOWN): So, what you're saying is two -- two billion -- $2 trillion deficits a year for the next four, five years is -- is not a sustainable...

BERNANKE: No, sir. It's not.

(UNKNOWN): Thank you.

FRANK: Gentleman from Missouri, Mr. Cleaver.

CLEAVER: Mr. Chairman, thank you very much for being -- being here. I -- I read over the weekend that the unemployment rate in California is above 11 percent. And the Hill reported last week that the Federal Reserve reported that unemployment was between 9 percent and 10 percent and would continue to rise.

If -- if this is, in fact, going to happen, and you look at California, Ohio and Michigan, with already double digits, should we expect another round of foreclosures? The chairman asked you earlier about commercial. I mean, doesn't all of this almost make for a perfect storm for another avalanche of foreclosures?

BERNANKE: The combination of unemployment and falling house prices, the double trigger, does create a very high rate of foreclosures. Our assessment of the foreclosures is that it's likely to be -- it's likely to peak in the second half of 2009, corresponding with the peak in the unemployment rate and, perhaps, be somewhat less in 2010. But clearly, we are going to have very high levels of foreclosures. And unemployment rate's a big reason for that. This may be more -- may be theological or -- or philosophical. But if you look at -- I mean, you and -- and -- and others in the Federal Reserve, and even in the administration, are saying that things are stabilizing. We're -- we're -- we're making progress. That's not quite compatible with what you hear with the talking heads on -- on television. And we can't -- nobody can control those.

But our -- our attitude toward the trouble may be more problematical than the trouble. And I'm wondering, you know, what -- what can we do to -- to -- to change the atmosphere in the country. Maybe, you know, consumers are loathe to go out and -- and buy. Employers, even -- even if they are seeing things stabilized or not, inclined to go out and begin to -- to hire or rehire.

What -- what can Congress do? What -- what can be done to -- to -- not to stabilize the economy, but to stabilize our attitudes?

BERNANKE: I'm not sure what to suggest there, except obviously good leadership and -- and good explanations help. But the -- the public has been responding to some signs, some glimmers, if you will, of improvement. So, consumer sentiment, for example, has improved somewhat as the stock market has gone up, and as the outlook has looked better, and as the job situation has, at least, stopped deteriorating quite as quickly as it was.

But, you know, I want to be clear that we're -- we have a very long haul here, because even though -- if the economy begins to turn up in terms of production, unemployment is going to stay high for quite a while. And so, it's not going to feel like a really strong economy.

CLEAVER: Thank you.

I yield back the balance of my time, Mr. Chairman.

FRANK: The gentleman from Indiana. Oh, I'm sorry. We just finished -- we just finished with this gentleman.

Well, who just -- oh, Mr. Cleaver just went.

Mr. Castle. I apologize. The gentleman from Delaware is recognized.

CASTLE: Thank you, Mr. Chairman.

Chairman Bernanke, let me just say in -- in -- in praise of you, because my questions may imply some negatives. I think you're doing a good job on monetary policy. And I -- I think that meets one of the goals of Humphrey-Hawkins Act.

Just looking at that act, it -- it outlines four goals for a strong economy: full employment, growth and production, price stability and balance of trade and budget, of which I think price stability is the one that sort of stands out now. And I think that has a lot to do with what -- what you do.

CASTLE: And maybe this is Government 101, but I'm not 100 percent sure what your role is with the administration. We are watching a circumstance in which we have deficits creating greatly -- debt will go up over $10 trillion in -- according to the budget in the next 10 years or so. Appropriations are up dramatically for this year, at least the ones we passed in the House so far.

The health care legislation that is being considered in the House and the Senate doesn't seem to have any real cost controls in it. Some maybe passing wave at that, but that's about the extent of it, and are probably in trouble because of that.

My question to you is, does the executive branch of government, the White House, consult with you about any of these broader economic issues? I mean, part of your responsibility under Humphrey-Hawkins is to try to make progress towards these goals. And it seems to me just setting monetary policy won't necessarily solve the problems of the full employment, the growth in production and the balance of trade and budget.

And I didn't know if that is just off-bounds for you and for them, or if there is any consultation going on. And obviously, if you have any comments about your point of view on some of these expenditures which are going on, I'd be interested in hearing them, as well.

BERNANKE: Well, of course, the Federal Reserve is non-partisan and independent. I do speak to the president's advisers periodically, as I speak to members of Congress and their staff.

In terms of my policy positions, I -- because I'm non-partisan, I don't -- I try not to get involved in the details of specific programs, fiscal programs in particular, but I have spoken to the issue of fiscal sustainability, as -- which I did again today, and the importance of, when thinking about the programs that one is undertaking, time frames, the cost and so on, to think about the implications for the federal budget to make sure that we have a trajectory that will be sustainable in the medium-term.

And I've made that point several times, and I'm sure that the administration, as well as the Congress, are quite aware of that point. And -- but achieving it, of course, requires some effort.

CASTLE: Maybe we'd be better served to let you go right now and run back over to the White House and keep making that point, based on what we've seen. Following up on something the gentleman from Texas, Mr. Neugebauer, asked on the financial protection agency that's being proposed, did I hear you say -- did I hear correctly, perhaps, you saying that you would keep the consumer protection functions that you have at the Federal Reserve there at the Federal Reserve if you had your preference in that area?

BERNANKE: I -- as I said, I'm proud of the work we've done. I think we're well placed to do it. We have a lot of talent. We have a wide range of people in terms of economists, financial specialists, payment specialists, as well as lawyers and consumer specialists.

There are some complementarities with our supervisory activities. So if the Congress decides to consider that option, we are very interested in pursuing it ourselves.

CASTLE: And you indicated that -- you said several new rules you're working on, including rules on mortgage originators and that area. Can you go through that list again quickly?

BERNANKE: We are having a meeting on Thursday where we will announce some new rules that are being circulated for comment, and they are primarily disclosure changes, consumer-tested disclosure changes for mortgages and mortgage originations and for home equity lines of credit. And we also are going to address in that rulemaking yield spread premiums, which is how brokers and other lenders are paid for making mortgages. So that's an issue we'll be addressing, as well.

CASTLE: Thank you.

At the Governor's Conference, which just took place, which is Republicans and Democrats down in Alabama, I believe -- Mississippi I guess it was, actually -- they indicated they were not interested in a second stimulus. That is obviously something that's a little bit hypothetical at this point.

Would you agree with that? I mean, I've heard your reference to the fact that the first stimulus is still being spent out there and has a long ways to go.

BERNANKE: Yes. I think it's very early. Less than a quarter of the first stimulus has been spent. We will have to see how the economy evolves. So I think it's premature to make any judgments about that.

CASTLE: And they also indicated that they were concerned about a rush to a health care plan. They have Medicaid costs and other things they are concerned about. Do you have any -- I'm sorry, my time is up. I may submit a question in writing to you.

Thank you.

FRANK: The gentleman from Indiana is next (inaudible) questioned. Gentleman ready?

(UNKNOWN): Yes, sir.

FRANK: And we will then be going on the Democratic side in seniority from then on.

(UNKNOWN): Thank you, Mr. Chairman.

FRANK: (Inaudible) everybody who has questions.

(UNKNOWN): Fed Chairman Bernanke, thank you for being here.

Let me ask you a question. I come from an area that does a lot of manufacturing and is reliant on credit. What would have happened last fall if we had just walked away and had not passed the program?

BERNANKE: I think you would have had a very good chance at the collapse of the credit system.

Even what we did see with the -- after the failure of Lehman was, for example, commercial paper rates shot up and availability declined. Many other markets were severely disrupted, including corporate bond markets. So even with the rescue and even with the stabilization that we achieved in October, there was severe increase in stress in financial markets.

My belief is that, if we had not had the money to address the global banking crisis in October, we might very well have had a collapse of the global banking system that would have created a huge problem in financial markets and in the broad economy that might have lasted many years.

(UNKNOWN): And have we lost any of the funds that the Fed has lent?

BERNANKE: The Fed is -- on book value is a little bit under water on the AIG-Bear Stearns interventions, which we would very much not like to have done, but we didn't have the resolution regime. On all other lending and all other programs, which is more than 95 percent of our balance sheet, we are making a nice profit, which we are sharing with the Treasury.

(UNKNOWN): In regards to the TALF program, which is an area that we had hoped for some help on and that we had discussed before, at the present time, none of it has gone to floor plan lending, as we discussed. What other areas do you think can help open up floor plan lending? We know the SBA has helped a little bit. What other avenues, if any, are being explored, or do you think are available out there?

BERNANKE: We're continuing to look at floor plan lending, and there's several possibilities. One in particular is we're doing a review right now of the credit rating agencies, the nationally recognized rating agencies, that we -- whose ratings we will accept and the criteria in which we will accept those ratings.

Depending on what that list is and what views they have about floor plan lending, it may be that some floor plan deals can get the triple-A rating that they need to be eligible for the TALF. But we'll be putting out rules very soon on the criteria for choosing the rating agencies.

(UNKNOWN): One of the other areas of concern on the TALF for us is the -- what's called the "haircut rate." And on floor plan, that's the highest of all. Reason for that, and is there a review of that that might come down the road?

BERNANKE: The haircuts are set based on evaluations of the riskiness of the various assets. I think there's a lot of uncertainty right now about floor plan, given the state of the industry and what's happening with the GM and Chrysler and so on.

And my hope is that in the next few months, as the situation becomes somewhat clearer, it could be that ratings will be upgraded and that we'll see a somewhat better situation. But, right now, there's just a lot of murkiness in terms of the credit quality of the floor plan loans.

(UNKNOWN): And we're looking at a December 31 termination date as of now, but I think approximately $27 billion out of a potential $1 trillion has been lent out. Has there been any look into extending that termination date?

BERNANKE: We will extend it if conditions warrant, and we will try to give the markets plenty of advance notice. We're not going to necessarily try to hit any particular number. We're going to have to make a judgment whether or not the conditions and markets are still sufficiently disrupted that such an intervention is necessary. Remember, this is based on a determination that conditions are unusual and exigent, and if markets normalize, we are no longer -- we should no longer be using that kind of program.

(UNKNOWN): And one last question is, the small businesses in our area, they come up and say, you know, "We just can't get the credit we need. We can't get the help we need." And I'm not talking about the loans that shouldn't have made, but the loans to good businesses that aren't being made.

Approximately what time frame do you think these small business owners will be able to see the same kind of credit availability they had before? We've had so many credit organizations just walk away, can't make loans anymore, don't want to.

BERNANKE: The -- in terms of having the exact same terms and conditions that they had before the crisis, maybe that will never come back because its credit has sort of permanently tightened up in that respect. I'm hopeful that as banks stabilize and we're seeing some improvements to the banking system, and as the economy stabilizes to give more confidence to lenders, that we'll see better credit flows.

(UNKNOWN): Thank you, Mr. Chairman.

FRANK: Gentleman from Florida, Mr. Putnam.

PUTNAM: Thank you, Mr. Chairman. And I want to thank Chairman Bernanke for his leadership. For all the criticisms about transparency in the Fed, many of which I share, you have always been a very plain-spoken representative of the Fed, certainly much more clear and candid than your predecessor who made the Oracle at Delphi seem downright verbose.

To that end, you -- in listening to the previous questions you've referred to, (inaudible) friend, Mr. Cleaver, that it's not going to feel like a recovery. And we've talked about some of these issues, which begs the question, the last two recoveries, which admittedly were much more minor, more shallow recessions than what we're in now, they were characterized as jobless.

Do you believe that this will be a jobless recovery as well? And given the answer either way, what shape do you believe that recovery will take?

BERNANKE: We expect a gradual recovery -- I don't know what letter that corresponds to -- which will be picking up steam over time, perhaps well above the potential rate of growth by 2011.

We do expect to see positive job creation near the end of this year, early next year, but it's going to take a while, given the pace of growth, for the unemployment rate to come back down to levels that we would be more comfortable with. So, in that respect, it should take some time for the labor market to return to normal.

PUTNAM: In your op-ed in today's Journal and in your testimony, you spend a great deal of time talking about the preparations that the Fed is making in terms of the exit strategy. What metric or metrics are most compelling, that allow you to read a recovery?

And given that -- in your testimony, there's a correlation between inflationary fears and your prediction of when the recovery begins, essentially when that velocity kicks in and the money supply that the recovery and the inflationary pressure are concurrent.

So what metrics do you evaluate that allow you to get ahead of that curve when the knock on the Fed has always been that they're too late reading the trends?

BERNANKE: It's a very difficult problem. And even though, you know, we have these unusual circumstances, it's really the same problem we always face, which you just pointed out, is picking the right moment to begin to tighten and picking the appropriate pace of tightening.

Since monetary policy had -- takes time to work, the only way we can do that is by trying to make a forecast, make a projection. And we use large amounts of information, including qualitative information, anecdotes we receive, formal models, a whole range of techniques to try to estimate where the economy's likely to be a year or a year and a half from now.

It's a very uncertain business, but it's really all we can do. And based on that, we try to judge the right moment to being to raise rates. So we will be looking to see more evidence of a sustained recovery that will begin to close the output gap and begin to improve labor markets. And we'll be looking for signs of inflation and reflation (ph) expectations that would cause us to respond, as well.

PUTNAM: Given the debate about overhauling regulatory reform structures and the role that you've played in that, as well as others, you're having to carve out a separate approach to these new non-bank financial institutions, which to me sort of raises the question, and -- which is probably going to be one for historians to resolve -- should the barriers between banking and investments have ever been torn down?

In other words, was Glass-Steagall the right approach after the Depression? Was Gramm-Leach-Bliley the wrong approach? It -- has enough time elapsed to have a good answer to that question as we move forward with setting up an entirely new regime?

BERNANKE: I don't think that Glass-Steagall, if it had been in force, would have prevented the crisis. We saw plenty of situations where a commercial bank on its own, or an investment bank on its own, got into significant problems without cross effects between those two categories.

On the other hand, I think that we do need to be looking at the complexity and scale of these firms and asking what -- do they pose a risk to the overall system?

BERNANKE: And if -- if that risk is too great, is there reason or scope to limit certain activities? And I think that might be something we should look at. But I think the investment banking versus commercial banking distinction probably would not have been that helpful in this particular crisis.

PUTNAM: Thank you, Mr. Chairman.

FRANK: The gentleman from Colorado?


And I appreciate Mr. Putnam's question, because that's exactly what I was going to ask, you know, whether or not we can unring the bell, whether or not we should unring the bell, mixing trading and banking and whether that was, you know, part of -- of what caused that -- you know, I mean, I -- I've been looking at all your charts in this, and some of them are really pretty shocking as to what happened in the fall and -- and has occurred.

But I guess what you're saying is, no, we've got to look at it as a whole in terms of the financial industry and just try to increase their margins or their capital when we see them in riskier products or getting very big. Is that sort of a bottom line for you?

BERNANKE: That's -- that's -- that's generally right. But it could be that a company has too many lines of business that it can't manage properly, that it can't manage the risk appropriately. And in that case, I think the supervisors would be -- would be justified in saying you can't -- you've got to get rid of this or you got to cut that back.

Capital is not the only thing. You also have to have management and risk controls, as well as -- as well as a buffer of capital.

PERLMUTTER: In just looking at it, some of my friends on the other side of the aisle have sort of been questioning the -- the value of the stimulus and -- and what's happening, but in looking through your report, I mean, I see some things that really look pretty positive.

First of all, in 2005, we had a negative savings rate. Now we have a very positive savings rate. Now, it happened almost overnight, but at some point, how do you -- how do you gauge the savings that's going on in the country right now? Is it positive or too much? BERNANKE: Well, families are -- are -- with good reason are -- are saving more. They've -- they've lost wealth. Their -- their house value is down and so they can't use the house as an ATM as people did. They're more concerned about the future, and so they're putting more money aside in a precautionary way.

Interestingly, the private saving has increased so much in this country that, despite the big increase in the government deficit, total national borrowing from abroad is actually lower now than it was the last few years. So there has been a big change in behavior in the private sector. And that's -- that's fine.

It creates problems in the macroeconomy because, without consumer spending, the economy doesn't grow as fast. But I wouldn't advise families to worry about that. I think people need to get their balance sheets in order and -- and their budgets in order. And that's -- that's a positive that will come out of this whole -- this whole crisis.

PERLMUTTER: And going along with that savings, there was a statement in your report on page seven, "The recent stimulus-induced jump in real disposable income and the improvement in equity wealth since this spring apparently has helped lift consumer sentiment somewhat from its very low levels at the end of the year."

And I'm looking at today's Wall Street Journal. Everybody keeps talking about the Wall Street Journal. They're showing the vital signs and a marked increase in 10 economic and financial indicators over the course of the last two or three months showing positive -- real positive signs within the economy so that things -- you know, and I appreciate you sitting there as the chairman of the Federal Reserve having to temper statements that you might make.

But within your report, you know, we see the savings rate improve. There was really a sharp increase or -- in your chart number 25 on page 15 shows unemployment just falling off a cliff. And then, really, a dramatic bounce back in the right direction beginning in April and May of this year, so, again, another positive sign.

The charts also show that the gap that we've had in terms of our trade balances has really shrunk. I mean, part of what's been going on here is we sent so much money overseas that we haven't been a real productive society, but you can see production personally and as a nation improving. Is that -- am I misreading your -- your reports?

BERNANKE: No, the economy has improved -- the outlook has certainly improved since March. And we can see the stock market is up considerably since March.

And as I was mentioning before, the fact that we're saving more means we have to -- we can borrow less from abroad. And that's exactly the decline in the current account that you were -- that you were noticing.

PERLMUTTER: My last question is on section 13(3) of the act, which was used, I think, in a pretty dramatic way with Bear Stearns and then again in September. Is there any -- have you all talked about whether there should be some limitation on that or is that mostly coming from us?

And with that, I'd yield back and just ask him to answer.

BERNANKE: First -- first, I would -- I would say that in every usage of 13(3) we have consulted closely with the Treasury, and we've also apprised Congress whenever possible.

I think if a -- a resolution regime is created that would allow an orderly wind-down of a Bear Stearns or an AIG, I think that, you know, our 13(3) authority ought to be subordinated to that and only used if the -- if the wind-down authority request, you know, that the Fed participates in some way.

PERLMUTTER: OK. Thank you.

FRANK: From New Jersey, Mr. Lance?

LANCE: Thank you very much, Mr. Chairman.

Thank you, Chairman Bernanke.

On page six of your testimony, you've indicated that we do have to worry about fiscal balance. And Mr. Neugebauer and Mr. Castle have asked you questions, and I'd like to follow up, if I might.

You indicate maintaining the confidence of the public in financial markets requires that policy-makers begin planning now for the restoration of fiscal balance. Given the fact that we have I would imagine an almost $2 trillion deficit this year -- I think the projection at the moment is $1.8 trillion, and we're in the last quarter of the -- of the fiscal year -- my own judgment is that it may be as high as $2 trillion.

And my own judgment is that next year's annual deficit may be as high as $1.5 trillion dollars. What would you suggest that we do now regarding trying to achieve a restoration of -- of fiscal balance?

BERNANKE: Well, I don't think there's much that can be done about this year's deficit and probably not too much about next year's deficit, but you need -- the Congress needs to develop a broad plan which encompasses all the spending plans and taxation plans that shows a moderation of the deficit over time to something sustainable, which I would guess would be something on the order of 2 percent or 3 percent of GDP would be...

LANCE: Two percent or three percent of GDP. And, of course, we're well, well above that at the moment.

BERNANKE: That's right.

LANCE: And I concede the point that we'll be unable to do anything for -- for this fiscal year, obviously, since it ends in fewer than three months. I'm not trying yet to completely throw in the towel regarding next year. Obviously, if unemployment remains high -- and your testimony is that, while it may get better, it's certainly not going to be where we are -- that would further depress tax revenues, I presume. I see nothing that the administration has done so far regarding restoration of fiscal balance.

What would your view be after next year? You would like to get back to 2 percent to 3 percent by -- by the fiscal year after next year, Mr. Chairman?

BERNANKE: I don't have an exact number. I think medium term means sort of three to five years, something in that range, but we need -- we need to show that we have a plan for getting back to a more sustainable level.

LANCE: Thank you. My view is that -- that -- that the administration ought to work with -- with us in Congress on trying to -- to show greater progress next year beginning on the 1st of October.

You've indicated that your purchase of T-bills is a plan that will end, I believe, in this fiscal year at the $300 billion purchase. The -- the completion of that will be at the end of September. Is that -- is that accurate, Mr. Chairman?

BERNANKE: That's right.

LANCE: And do you currently anticipate that you will be continuing to purchase at this level beginning in the new fiscal year?

BERNANKE: That's really a decision that the FOMC, the Federal Open Market Committee, needs to make, because it has implications for monetary policy in general. But we will be talking about that as we go forward.

LANCE: And, obviously, we do not favor monetizing the debt. I understand your point that you do not believe you're doing that, but we do have concerns in that regard. I have concerns in that regard. And I certainly look forward to working with you in that area.

And finally, Mr. Chairman -- and then I will yield back the balance of my time after your response -- how much at the moment are we in the hole regarding AIG and what you've done regarding AIG?

BERNANKE: We have currently about $45 billion that we've lent directly to AIG which I believe is well secured, and we have less than $40 billion that's been lent to Maiden Lane facilities...

LANCE: Yes, Maiden Lane, yes.

BERNANKE: ... which are holding securities which are underwater. And I'm -- I don't know the exact number, but it's several billion dollars.

LANCE: Thank you. If you could get back to us through -- through the chairman, I would appreciate it.

BERNANKE: Certainly.

LANCE: Thank you, Mr. Chairman. I yield back the balance of my time.

FRANK: And next -- I have to apologize. I forgot that the seniority system here was designed by the choreographer of the bunny hop, and it goes this way, and I made a mistake. Told you I was getting old.

So I'm now at the gentlewoman from Wisconsin.

G. MOORE: Thank you, Mr. Chairman. And thank you.

I was really pleased to see in your testimony, under the regulatory reform section, that you realize that systemic risk is not just too-big-to-fail institutions but activities and practices that provide systemic risk.

Many of us -- and certainly this article was given to me by Congresswoman Maxine Waters -- have been reading the recent Rolling Stone article by Matt Taibbi, "The Great American Bubble Machine." And while it's very critical of a particular firm, I think there are things that we all notice with respect to the -- the housing bubble and the dot-com bubble and the oil bubble that all seem to be activities that seem to be systemic risk.

For example, allowing an entity to sort of manipulate the price of -- of -- of an entity of the housing prices to ratchet the prices up and then just sort of hedge against their -- their own products.

So I guess I would like to -- to ask your opinion about credit default swaps and also the practice of spinning (ph), where executive compensation seems to be a systemic risk factor, as well.

So can you tell us what we can do in our regulatory reform to prevent the creation of these bubbles?

BERNANKE: Well, on the credit default swaps, there's a number of measures that have been proposed. One important step would be to get the majority of them standardized and traded on a central counterparty or an exchange, which would eliminate the risk that the seller of the CDS would not be able to make good, which is what happened with AIG, for example. So that's -- that's -- that's an example there.

On executive compensation, I should let you know that the Federal Reserve is going to be proposing later this year guidance on executive compensation which will attempt to clarify that compensation packages should be structured in such a way as to tie reward to performance and to be such that they don't create excessive amounts of risk for the firm.

G. MOORE: OK. Thank you. With respect to standardizing, as far as -- we are told by the smartest of these people that we just have got to have customized the products, that it's just really going to be harmful in the marketplace if everything has to be standardized. What would be your advice on -- on that criticism? BERNANKE: There are probably some -- some products that -- that to be useful need to be non-customized -- I'm sorry, which need to be customized. But we should make sure that dealers or banks hold sufficient capital against them to make it attractive to move them on to exchanges and to standardize them when possible.

G. MOORE: OK. Thank you. Thank you. With respect to what we can't unscramble, many of my colleagues have already talked about Gramm-Leach-Bliley and the CFTC reforms. And here we're talking about too big to fail, all these institutions that are allowed to perform several functions.

What, in your opinion, can we not unscramble in order to continue to be innovative and profitable? What cannot be unscrambled?

BERNANKE: Well, I don't think I would break firms down to their elementary components. You know, commercial banks can only loan and take deposits, for example.

But there -- there are lots of benefits to having multiple services provided by one institution or global services provided by one institution. But I do think we need to take considerable care that we're not creating institutions which are imposing risks on the broad financial system.

G. MOORE: OK, so just one more question. Many of my Republicans colleague are critical and concerned about the Fed taking on the role of the systemic risk regulator. And then there are people like me who are undecided.

And when I look at the last page of your testimony and you say that you -- you don't want as much auditing of the -- of the Fed, because it -- it may -- it may interfere with your independence, I have to ask you why you think, then, that -- that you should be able to perform the task of -- of monetary policy and how that will not compromise your policy independence. I mean, you know...

BERNANKE: Independence...


FRANK: (inaudible) can answer (inaudible).

BERNANKE: ... you know, independence varies. We've been supervisors for a long time and we have all the same examinations, all the same oversight that the other supervisors have. Monetary policy is a special area which I would just put on the side here. But in terms of our systemic (ph) oversight and supervision, we would have exactly the same oversight that any other supervisor would have.

FRANK: Gentleman from California, Mr. Royce?

ROYCE: Thank you, Mr. Chairman.

Chairman Bernanke, the last time that you appeared we had an opportunity to talk about the budget deficit. And one of the things you said which I think was very impactful to me, you said in response to a question I asked, "Certainly, trillion dollar deficits as far as the eye can see would not be sustainable."

And we had the CBO Director Elmendorf, he came out with his own analysis which you're -- you're familiar with, sort of a "sounding the alarm" and he had a couple of observations. One, he said, with respect to the -- the growing expanse of the government at the expense of the private sector, he made some observations in terms of squeezing out in the future economic growth on the private sector side. And then he said about the costs, for example, the health care bill that's moving.

He said that legislation significantly expands the federal responsibility for health care costs. He said, "The way I would put it is that the cost-curve is being raised." And he went on to express his concerns. I think one of them is in the middle of a recession, we see the government shifting. We have a government-run economy, basically, or we're beginning to move in that direction. And the deficits are appreciably higher.

You know, perhaps -- perhaps the deficits could reach as high as $2 trillion for the short term. Earlier this year, the CBO projected that the federal government would need to go out with $2 trillion in treasuries in order to fund the deficit. And that was the short run. If you combine short and long-term, they were talking $4.5 trillion over the next two years.

The bond market has never seen such a large bond issuance in such a short period of time. So I was going to ask you about your perception on the ability to bond market, can we float that much, $4.5 trillion over the next two years? What will the results be on that and -- and do you have a concern with the -- the pace at which government is growing relative to the private sector here and the added responsibilities on the public purse that we're -- that Congress is in the process of enacting?

BERNANKE: I think the ability to float large amounts in the short to near -- to medium-term depends on the credibility of a longer term plan that brings the deficits down. If the markets don't think that you're on a sustainable path, then they will bring forward in time their concern about the future deficits. So it's important to have, as I said before, a medium-term sustainability plan.

I want to say one thing about health care costs which is that that's the most important determinant right now of our long-run fiscal situation. And even under the status quo, we have a very serious problem and so we do need to address that problem in some way because given the aging of our population, the increases in medical costs are going to be a huge burden on our fiscal balance.

ROYCE: Well, on that very subject, here's what the head of the CBO said about that. He said, "As a result of those deficits, federal debt held by the public is going to soar from 41 percent of GDP to 60 percent at the end of the fiscal year 2010." This higher debt results in permanently higher spending to pay interest on that debt. Federal interest payments already amount to more than 1 percent of GDP. Unless current law changes, that share will rise to 2.5 percent by 2020.

And he says the federal budget is on an unsustainable path because federal debt's going to continue to grow much faster than the economy over the long run and a large budget deficits would reduce national saving leading to more borrowing from abroad and less domestic investment which in turn would depress economic growth in the United States.

Over time, accumulating debt would cause substantial harm to the economy -- substantial harm. Do you agree with the CBO's estimate about -- on that subject of accumulating that amount of debt?

BERNANKE: If -- if fiscal policy stays on an unsustainable path, I do agree with it. Yes.

ROYCE: Thank you very much, Chairman Bernanke. I appreciate your testimony here today.

Thank you, Mr. Chairman.

FRANK: The gentleman from Florida?

(UNKNOWN): Thank you, Mr. Chairman.

And thank you, Mr. Chairman, for being with us today.

I'm going to bring the conversation back to what I continue to believe are the most current issues and that is home foreclosures and -- and lending to businesses. I -- I have been a believer from the beginning that when we started this process on dealing with the recession and dealing with banking crisis, I think you and others said we need to deal with both. We can't do one without the other. Can't make the investment in the recovery without making liquidity available to businesses and you can't fix the banks without simulating and getting things moving on the private side.

What I also believe and I support your position that we're going to have a slow maybe a little bumpy recovery but it's probably moving in the right direction. And what our goal, of course, as people in the public and private side is to mitigate or reduce the amount of time it takes to for the natural cycles to work their way through.

That being said, I'm from Florida as you and I've talked about, and we are in a very precarious time. The banks are overexposed in many ways. The residential markets are overexposed and we do not see enough activity -- movement and that is speaking to realtors on short sales and workouts and things like that on the residential side and on the business side, real estate and/or business, the lending practices.

And there's a lot of frustration out there, maybe justified, maybe not justified but certainly intuitively justified that banks that received federal assistance that -- and maybe they're in a separate category but that they have a higher responsibility to work out this -- this scenario. Not to -- nobody's pushing them to make unreasonable and unjustified underwriting decisions but they really are not part of the process of solving the problem.

Specifically in the foreclosure area, I think it was the Federal Reserve of Boston did a paper that talked about 3 percent of the serious delinquent loans had been resolved over -- since the 2007 period of time. That obviously is not working in any successful way.

Can you share with us whether it's Federal Reserve or whether just your general experience, what we can do to deal with the foreclosure -- what can we do to stimulate the banks to -- to help work this out in a much more efficient, much more quick basis?

BERNANKE: Well, we have a couple of government programs in place. As you know, the Making Homes Affordable with -- using the TARP money and the Hope for Homeowners which have different principles. One is a income -- one reduces payments, the other address the principle. Those things are slowly ramping up.

So I think it'd be important to try to get that moving as quickly as possible. The bank regulators have been pushing the banks to expand their staffs since it'd be more responsive. We've heard from many consumer groups, for example, that banks are sometimes very slow in responding to requests for short sales or requests for modifications.

So I think it's very important that the banks increase their capacity and move as quickly as possible to take advantage of these programs or other ways of working out borrowers and avoiding preventable foreclosures.

(UNKNOWN): I agree but what can the Federal Reserve do, if anything, or through your relationships with FDIC or others...

BERNANKE: Well, we -- the Federal Reserve doesn't oversee too many of the big servicers who have large numbers of these mortgages but we are working with our fellow bank regulators. We had the statement we put out in November and we're working with the federal bank regulators to try to push the banks to move more quickly and expand their capacity to -- to work out loans.

So I think that -- that is very important. The Fed is also, you know, working with communities. We have some projects to try to stabilize neighborhoods that are suffering from large numbers of foreclosures. But I think it's very important that the banks which are the servicers, get involved as quickly as possible to -- to work with these borrowers.

(UNKNOWN): You know, on the short sale issue, that is something that, you know, we had been told a while back there was going to be a streamline process which, you know, banks would have a uniform process, uniform documentation, could move a lot quicker. And I just wrote a letter to follow up on this, it doesn't seem to be happening. So I guess I would just ask as we move forward, I understand we have programs out there and they're working marginally. We just have got to ramp this up in terms of voice, substance and effort and do that.

Secondly, in the small business area, again, small businesses particularly in my area in South Florida and other parts of the country, drive the train. And they will be probably the quickest ones to be able to respond. We understand unemployment lags but there's this timeframe which is a cash flow issue to work through a slow period.

In Florida, we have a non-season point in time where businesses need that ability to get through. And again, they're having a difficult time even what I would consider creditworthy people. Their ability to pay is there and otherwise. So if you could just quickly comment on that?

BERNANKE: No. I agree and we're working on that. We have in our TALF program, we have a small business administration loan program which is trying to provide funding for those -- for those loans, trying to help in that way. FRANK: Gentleman's time has expired.

The gentleman from Texas, Mr. Hensarling?

HENSARLING: Thank you, Mr. Chairman.

Chairman Bernanke, welcome.

In Chairman Frank's questioning of you earlier, he asked about the positive aspects of the stimulus bill that was passed early in February.

I believe what I heard you say is that you believed it had some marginal improvement on state and local tax revenues and some marginal improvement on consumer spending but you were reserving judgment. Is that a fair assessment of what you told this committee?

BERNANKE: We're still pretty early in the execution of this program.

FRANK: Will the gentleman yield?

HENSARLING: I'd be happy to yield to the gentleman.

FRANK: The word "marginal" was never uttered. He didn't say "marginal." It doesn't say -- I said, the gentleman can read the report, it doesn't say "marginal."


HENSARLING: I -- I appreciate the chairman's (inaudible). It has -- it's had some affectability (ph). OK. It has had some affect. OK. Well, the chairman has said some. I -- I appreciate the chairman's distinction.

Clearly, what you didn't mention as far as positive impacts was employment. We know that since this legislation has passed that unemployment is now at a quarter-of-a-century high, that 2 million jobs have been lost. Some believe that there is cause and effect on adding $1.1 trillion to the national debt.

And on page six of your testimony, again, you state, quote, "Unless we demonstrate a strong commitment to fiscal sustainability, we risk having neither financial stability nor durable economic growth" unquote. I've noticed, and please tell me if I'm incorrect, the latest FMOC report indicates or estimates that we are looking at 9 to 10 percent unemployment not only for the rest of this year but for the rest of next year as well. Did I read that report correctly?

BERNANKE: That's right.

HENSARLING: OK. So 9 to 10 percent unemployment. And this estimate is up from your earlier report. Is that also correct?

BERNANKE: That's right. The one -- one that was made in January. HENSARLING: OK. I -- I guess, Mr. Chairman, then the question is yes, I would hope that if one committed $1.1 trillion when you add in debt service, some good would come from it. And clearly, it hasn't happened on the employment front. But I'm also concerned that no matter what the positive aspects are, without the strong commitment to fiscal sustainability, might it be possible that whatever short-term good comes out of that legislation is going to be outweighed by long- term damage as many economists believe?

BERNANKE: The deficit is obviously an issue. We have to worry about the long-term debt ratio certainly.

HENSARLING: In that regard, Mr. Chairman, as you know, Capitol Hill, Congress is considering health care legislation. Clearly, we -- I think all Americans agree that the status quo is unsustainable over the long term. The legislation that is presently before Congress, CBO Director Elmendorf has said, quote, "We do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for health care costs" unquote.

He goes on to estimate essentially the -- the table stake's cost of the program, if you will, at $1 trillion. Now again, I would hope that some benefit would come from that program. But if -- one, do you agree with Director Elmendorf's assessment if you have looked at the cost of that legislation? If you haven't, assuming he is correct, would you be concerned about the impact that this would have on our nation's commitment to fiscal sustainability?

BERNANKE: I have not done an independent evaluation of the cost. I think, as I said earlier, that a critical element of fiscal sustainability in the long-term is the cost of health care and the fiscal share in health care costs. So whether we adopt a new program or reform or whether we stick with the status quo, I do think we need to address that 2.5 percent faster than per capita income growth and per capita health care costs.

HENSARLING: Mr. Chairman, in your most recent survey of small business finances, I believe the Federal Reserve indicated that approximately 77 percent of small business owners use credit cards. A recent report in USA Today has indicated that in the first four months of this year alone, we've seen a 38 percent drop in the issuance of new credit cards.

Presently, Congress is considering legislation aimed at consumer financial products. But given that a large number of small business owners use credit cards for business purposes, might an unintended consequence of the long legislation lead to a further contraction of credit to small business?

FRANK: A quick answer, please, Mr. Chairman.

BERNANKE: Well, I -- I hope the small business can move to somewhat less costly forms of credit over time.

FRANK: The gentleman from Illinois?

MANZULLO (?): Thank you. Yes, down here, downstage, left, as they say.

The title of this hearing involves monetary policy, but the subject seems to be the overall health of the economy. And I'm struck by the under-emphasis in this discussion of the importance of the real estate market, which, I believe, was the dominant driving force in this economic downturn.

Much more wealth has been destroyed by the drop in real estate values than in the stock market or the near collapse of our banking system. And the same was also true of the Great Depression, where more wealth was destroyed in the real estate bust following the stock market crash than in the stock market crash itself.

And so, I have sort of two questions along these lines. Firstly, do you think it would -- might be appropriate to have more information and future releases of this about the real estate market and projections? And also if you could say a little bit about what the Fed does in terms of -- of projecting. You know, how much manpower do you put in to looking forward projections of the real estate market, given what I believe is its extreme importance to future economic conditions?

BERNANKE: No, I agree it's very important. And I'm surprised that we don't have much coverage. I think we -- we -- we certainly do put a lot of resources into projecting construction and house prices, land prices and the like. And I -- I agree. It's -- it's very important.

MANZULLO (?): OK. And the second point is do you think that the Fed is necessarily helpless to mitigate future real estate bubbles. And in this week's -- for example, in this week's Economist magazine, they discuss China's response. And, of course, there, as you know, they're pushing very heavily on monetary policy and credit availability and so on. But at the same time, to avoid reinflating a real estate bubble, they are turning up the mortgage origination requirements.

You now have to put 40 percent down and so on. And so, that they are independently operating both of those. And do you think that -- that actually there is a reasonable role for the Fed or -- or some other regulator to try to -- to make this happen?

BERNANKE: I -- I think that could be addressed under the systemic risk regulation rubric that we've been discussing with a council or with the Fed overseeing large financial institutions. That when you have an asset whose price is rising quickly, you could require a greater capital against it, for example, or greater downpayments. So even -- and even if you don't know there's a bubble or not, that still might be a prudent thing to do. So I do think that looking at asset price fluctuations in a supervisory context could be very helpful.

MANZULLO (?): All right, thank you.

Yield back.

FRANK: If the gentleman would yield to me, I did want to then continue.

A couple of points -- one, I would ask you, Mr. Chairman, on page 16, you mentioned that the emergency unemployment that we adopted last year has ironically contributed to a higher unemployment number in terms of the rate because it's increased the participation rate. I think people want to be clear about that. The unemployment rate is -- goes up when more people are trying to find jobs. Would it be possible to get an estimate of the extent to which that was statistically a factor?

BERNANKE: We can send it to you. My -- my recollection is about a half a percentage point.

FRANK: Right. So -- well, that's interesting. A half a percent of the 9.5.

Secondly, I did just want to reiterate that our friend from Texas said that in two cases there were marginal improvements. The word marginal doesn't appear even in the margins here. It's certainly not in the text.

So on page one in the first column, there's an unqualified statement that consumer spending has been supported by the 2009 stimulus. On page 13, it says, "Interest rates have declined because investors concerned about credit quality fees with the passage of the stimulus plan." It then did say that in addition to that, it aided the finances somewhat or (inaudible) somewhat.

So would the gentleman -- well, if he is done, the time of the gentleman from Illinois...

BACHUS (?): You -- he yielded to you.

FRANK: No, no, no, he yielded me his time.

So those are both cases. I also remember that in response to a question from the gentleman from Texas, sometimes you get answers you don't want. The chairman said that the passage of the stimulus bill had reduced unemployment. So obviously it's not totally the answer. But I -- I -- I don't think it's trivial to object to the insertion of marginal when it was never there in the issue point (ph).

The other point I would want to make is this: The chairman talked about the recommendations they are preparing on executive compensation. I would just note that those would dovetail with the legislation I hope this committee will be adopting next week because we will be empowering the SEC statutorily to enact certain rules.

And so, the information and the recommendations of the Federal Reserve -- frankly, my sense is that absent our statute, there wouldn't be the statutory authority to put all those into effect. So these work very well together.

We will be giving the SEC the statutory authority, I hope, before the end of the year to incorporate those recommendations.

The gentleman from New Jersey?

(UNKNOWN): Before I begin, let the record, therefore, reflect that there is a significant difference between the definition of marginal and somewhat is my takeaway from that. Thank you, Mr. Chairman.

We have some charts which sort of go to this point as far as looking at the economic issues and the stimulus issues and how you sort of judge these things. As you know, the president's economic policy adviser suggested that as soon as this passed that, quote, "we'll start adding jobs rather than losing them." Majority Leader Hoyer said there will be an immediate jolt.

So if you look up -- and I know it's hard from where you're sitting, Mr. Chairman.

FRANK: I've got it.

(UNKNOWN): You've got one. Great. That's even easier then.

This was what they original projections were with the recovery plan -- is the dark line on the bottom. But if you don't do anything, things would be worse. That's the top line above there. And that's why, of course, we borrowed $800 plus billion to try to fix it.

Now, the next slide, slide two, shows what really happened. The two other lines are still there, but now you see where the unemployment numbers actually were in March of '09 and April of '09. And we don't have this on a little screen, but we do have it on a board to show where it went after March, April. I guess this goes up to May and June, if I'm not mistaken. I don't see it here.

Basically, what that tells me, not as an economist, just as a layman -- that they -- well, as the vice president said, misread the economy and their projections with regard to where things would happen if we did nothing or if we did spend $800 billion. And things were actually worse than they projected. And we would have been better off, if the original charts were right, to have that -- done absolutely nothing.

So your comment on that. And also I understand your earlier comment when I just stepped out of the room was that it's too early to tell. When will we be able to tell? And isn't the -- if their focus wasn't on job creation and that was the entire focus in all of their comments on -- this was job creation -- isn't that an indicator that we can be -- should be able to look at here approximately a half a dozen months later?

BERNANKE: Well, as Chairman Frank mentioned earlier, that the economists' fallback is always the counterfactual, where would we be without the program. And it's difficult to know.

Clearly, the -- the -- the forecast that was made in January of this year was too optimistic. And then the question is where will we be without the program. And it's very hard to know.

Some sense of the uncertainty is given by the CBO's estimate, which has at the end of 2010 the impact of the program being anywhere between .6 of 1 percent and unemployment to 1.9 percentage points of unemployment. So there's -- you know, it's -- it's likely that it will reduce unemployment. But the scale is -- is very hard to know.

And we -- we -- we should know better next year. But it's very early at this point.

(UNKNOWN): Yes. I fear then that that argument of the counterfactual will always be the argument that'll be thrown up at us -- to us to suggest that maybe there was a better way. And even a year from now or a year and-a-half from now when we get into the last dollar going out the door, they'll always say it could have been worse. So how -- how would you retort to that argument?

BERNANKE: You have to use the best analysis that you -- that you can get. To the extent that you're seeing outcomes unrelated to unemployment that are worse than you expected, that's indicative of the whole economy is worse than you expected. But I -- I'm -- I'm sympathetic to the fact that it's very hard to know what the impact is.

(UNKNOWN): Right. And so, any discussion right now as far as going forward with additional spending or additional stimuluses (sic) would also, therefore, be too early to make those suggestions as well?

BERNANKE: That's right.

(UNKNOWN): Right, right. Let's change subjects and go to the issue of monetary policy. I know in your report today and your op-ed as well and you've previously stated that you have concerns about independence of the Fed, both on monetary policy and other regulatory roles as well, therefore, you do not like the idea of audits and what have you, intrusive audits on various other aspects of the Fed than it has right now.

I would just suggest that in two areas that maybe the Fed over its history has not been as independent as some would suggest. In the area of monetary policy, I know we've had this chairman on at least a half a dozen occasions encourage that the Fed, both the current Fed and the previous chair, lower interest rates to keep the economy going and what have you. And, of course, you've heard a number of economists who make the argument that it was the low interest rates that helped either cause or exacerbate the problem. So there is one area where Congress and at least the chairman is trying to weigh in and influence the Fed.

And certainly, the other area is in -- on the regulatory role and the consumer protection area. For about eight years under Republican leadership, we took a position that that was not the appropriate direction to try to better the economy. Then under two years of Democrat leadership and what some would say is a pounding on the Fed in this area to go into that direction, suddenly the Fed goes in the area.

So is it fair to say that the Fed may not be, even under current constrictures (ph), as totally independent as we would -- some would suggest that it is? And do you think it is helpful for the Congress to weigh in on setting monetary policy and in setting consumer policy as well?

BERNANKE: On -- on monetary policy, we do not take political considerations into account. We look only at the economy. You have the transcripts five years later. You won't see any discussion of politics. And I assure you that we -- we make our decisions based on the long-run health of the economy.

On regulation, I think the -- the rules were somewhat different in the sense that Congress set statutes and those statutes create presumptions for what the regulators are going to do. With respect to regulatory policy, our independence is important. But it's -- it's not to the extent that monetary policy independence is. We have a similar relationship as other -- as other supervisors and regulators do to the Congress.

(UNKNOWN): Thank you.

FRANK: The gentleman from Minnesota?

ELLISON (?): Thank you, Mr. Chairman.

Thank you, Mr. Chairman Bernanke. I appreciate you being here and your -- your -- your work.

If the Federal Reserve is given the authority to oversee systemically significant firms, what additional powers would it need to completely and successfully carry out those duties? For example, what about the authority to review accounting policies, particularly those that have direct and potentially pro-cyclical implications on banks? And what about enhanced authority to examine the safety and soundness of non-bank subsidiaries within bank holding company? And what about oversight of credit rating agencies?

BERNANKE: The -- the Fed would need some authority, perhaps, in conjunction with the council to add capital liquidity and other requirements to make sure that the institutions were -- were, not only safe and sound, but did not pose a risk to the broader financial system. As part of that, the Fed would need some enhanced authority to look at non-bank subs, as you mentioned.

The other things you mentioned, like accounting policy and credit rating agencies, would not be part of this. Those are the kind of things that the council would be responsible for looking at.

ELLISON (?): OK. I introduced a bill that would give the Federal Reserve oversight over credit rating agencies when they analyze the rate and structured financial products. This authority would build upon powers that the Fed has already assumed as part of the administration of the TALF program. Do you have any reaction to that?

BERNANKE: Well, currently the SEC has those authorities. And I guess I'd like to get your judgment about why you would want to transfer them.

ELLISON (?): Well, because they have an important -- the Fed does have -- is looking to or perhaps would take on some responsibility of systemic risk. And clearly, credit rating agencies have an important role to play in that regard.

So my thought would be if we're going to address -- if we're going to confer this authority with the -- with the Fed, don't they need all the tools that would be -- that would be necessary to achieve the end?

BERNANKE: Well, as I indicated earlier, we are not asking for it. The administration is not asking for broad-based, you know, authority over the entire system. It's a very specific and limited set of authorities over the systemically critical firms, which is similar to our current umbrella supervision authority.

ELLISON (?): Yes.

BERNANKE: So the broad issues that you're referring to, I think, would be better served by being looked at by -- by a council of regulators.

ELLISON (?): All right. Well, do you believe that inflation concerns are misguided, given the large quantity of excess reserves in the banking industry?

BERNANKE: I think they're misguided in the sense that we, as I have described today and -- and in -- in various other contexts -- the Federal Reserve is able to draw those reserves out and raise interest rates in an appropriate time to make sure that we don't have an inflation problem.

ELLISON (?): Should Congress consider setting a leverage ratio?

BERNANKE: That's something that we should look at. I think there's -- there's room here for the -- the regulators, the Treasury and others, the Congress to think about our capital regulation plan and see what changes might be made. But I wouldn't want to give an offhand comment on that. Of course, we already have a leverage ratio. But the question is whether to raise it or to change its format in some way.

ELLISON (?): Now I'd like to ask you about consumer protection issues. Ed Yingling of the American Bankers Association indicated that consumer protection in the financial system and safety and soundness are two sides of the same coin. But I wonder sometimes if that coin sometimes is at -- at odds within itself because, you know, it seems to me that if you would take, for example -- and I used this example before -- overdraft fees. I think a safety and soundness regulator might not be distressed about what I would call excessive overdraft fees, because that means profitability and a stream of income for the bank, which would make the bank more safe and sound.

But, from a consumer standpoint, it would -- it could present some real issues. You know, $35 for a bounced check might -- I think some consumer advocates might find that excessive.

So, and that -- this is an example -- and I know that there are many others -- in which the consumer -- the consumer advocate and a -- and a prudential regulator might -- might see things very differently. In your -- do -- do you see a conflict between, say, a -- what a consumer advocate -- consumer advocate might look at and feel is important and that of a safety and soundness regulator?

BERNANKE: On that particular example, the fed has taken a number of actions about overdraft fees. Even though we're also a safety and soundness regulator. I think there are also examples where consumer protection and safety and soundness are complementary. An example would be underwriting standards.

Good underwriting standards, well-documented, making sure there's enough income, those sort of things, that's good for safety and soundness, but also good for the consumer. So, there are also situations where they're complementary.

(UNKNOWN): Yes, and the...

FRANK: Excuse me. The red light means time's up.

The gentleman from Illinois?

(UNKNOWN): Thank you, Mr. Chairman.

Thank you for being here, Mr. Chairman. You -- you talked a little bit about the TALF program and said that it was off to a slow start. What -- what are your -- what are the expectations and the benchmarks with the TALF facility? Will it be sufficient and timely enough to, you know, facilitate in private investing and lending? Or are you considering other programs?

BERNANKE: The -- the amount loaned is -- is lower than we expected. But I wouldn't say it's off to a slow start, because it has been very effective. We've got consumer asset-backed securitizations at almost the same level as they were before the crisis and considerable improvement in the spreads in those securities. We've just begun the commercial mortgage-backed security program. So, it's a little early to judge there. But we have seen -- even in that category, we've seen the spreads come in, the rates come down.

So, I -- I do think that, even though the amounts loaned are not that enormous, there have been benefits in the market. So, I think we'll continue to focus on that -- on that instrument.

(UNKNOWN): I think that, with the -- the securitized lending, how do you plan to address the -- the reality? I think that there have been some that have flagged that the -- the market experts and some of the participants = that the market -- markets need to know now and not at year's end, whether the programs will be extended in order to see any usefulness in the next several months. Would -- would you agree with that statement, or...

BERNANKE: Well, we'll certainly want to give the markets plenty of advance warning. You're absolutely right there. And we'll be -- we're looking at that and making a judgment.

(UNKNOWN): OK. And -- and how do you address the -- the commercial real estate? You talked about that as being the...


BERNANKE: Well, one of the main problems with the commercial real finance is that the commercial mortgage-backed securities, securitizations, was an important source of funding for that commercial real estate. And that has completely shut down. Our -- our TALF program is now accepting both new and legacy CMBS. It takes a bit of time to put those deals together. And so we haven't quite yet seen the scale that we anticipate. But we are hopeful that that will be at least one contributing factor to improving the commercial real estate market.

(UNKNOWN): So, have you contemplated extending the TALF program?

BERNANKE: We are looking at some alternative assets. But they are very complex, many of them once you get beyond the categories we've already included.

(UNKNOWN): So, if you -- if you go to that, then will you not extend the TALF program, if you go to these other programs?

BERNANKE: We may not. It depends on our judgments on some of the alternative asset classes that we're currently reviewing.

(UNKNOWN): OK. Thank you. Then, it's my understanding that, you know, we -- we talk so much about small businesses as being the -- the basis of -- of jobs and about 60 percent to 80 percent of the -- of the net new jobs according to the CBA's Web site.

If -- if this is the case, what -- what's going to be the effect of requiring small businesses to pay for this -- the health care program? In other words, if -- if -- if they -- if they pay as individuals, the rates, how is this going to -- to affect the health care for -- for small businesses? And shouldn't we be providing incentives for small businesses to grow rather than to -- to have to be -- have a tax increase in effect.

BERNANKE: All else equal, if you raise taxes on a particular kind of firm, that will be detrimental to the firm. But, I think in fairness, you have to look at the overall issue, which is how to provide broad-based health care. And there's a problem, which is that a lot of small firms don't offer health care. And then the question is how do you provide that?

So, there is an issue of financing that. And maybe there are alternative ways to do it.

(UNKNOWN): But isn't it going to be that the -- the small businesses would actually have much less chance to do it, if they're having to have increased taxes to pay, if they're -- you know, the -- the amount of money, if they're making over -- I don't know what it is now. It's -- it's either between $250,000 or $1 million, whatever is going to be the -- the amount.

BERNANKE: If -- if there's extra cost, that would be -- obviously it would cut into profits.

(UNKNOWN): Thank you. Thank you for being here.

I yield back.

FRANK: The gentlewoman from California, Ms. Speier.

SPEIER: Thank you, Mr. Chairman.

Mr. Chairman, thank you for your service. I know you have spent a lot of time up here in a number of hearings and government oversight, among others. And we've been tough on you. And I want you to know that, even though we've been tough, I truly respect what you have done over the last 12 months. I think you're a man of good will and good faith. And we are indebted to you as the American people.

Let me ask you this question. Are we enduring the greatest world depression right now?

BERNANKE: This is the worst global recession in the post-war period. It's not as great as the '30s. But since World War II, yes.

SPEIER: The $700 billion of TARP money, you indicated that we're underwater with AIG and Bear Stearns. How much can the taxpayers expect to have returned to them of the $700 billion?

BERNANKE: I was referring to the Fed loans and not to the TARP.


BERNANKE: But TARP is also underwater probably in AIG. I don't know the answer. We've got, of course, $70 billion just paid back. It's much more complicated now, because, as you know, the TARP money is being used for a number of different purposes, including foreclosure avoidance and the auto companies and so on. So, it's hard for me to make the judgment.

I will say that, of the money put into -- as capital, into banks, typically through the capital purchase program, which is money given out to healthy banks, I would -- I would say that virtually all of that money will come back. For troubled firms, like AIG, it depends on how markets evolve and how the firm does going forward.

SPEIER: You said earlier that you didn't really think the Glass- Steagall, if it were in place, would have protected us from all that took place. However, it would have protected us from the debacle at AIG and the taxpayers would not have had to have put up $200 billion. That's true, is it not?

BERNANKE: I -- I -- I don't think so. The -- Glass-Steagall separates commercial banking and investment banking. I don't think it would have prevented AIG from doing what...

SPEIER: Well, AIG is an insurance company. And the only way it was able to then move into credit default swaps was by purchasing a thrift in Delaware that, then, gave it the opportunity to play in that marketplace. So...

BERNANKE: I'd have to -- I'd have to check on the legalities. They -- they were treating -- they were calling credit default swaps a form of insurance. So, maybe they would have argued that it was a type of insurance and, therefore, fell under their purview.

SPEIER: But it wasn't regulated in insurance commissioners around the country. It was really...


SPEIER: ... regulated through the Office of Thrift Supervision -- was thrift supervision.

BERNANKE: Correct.

SPEIER: So, therefore, it was the banking entity that -- that was really the -- the regulator for it.

There's a hearing we're going to have this afternoon on what's too big to fail. And one of the individuals who's going to testify makes the statement that, for companies that are under $100 billion, as a rough threshold, that we can allow them to fail without it creating havoc in our financial services industry. Would you agree with that?

BERNANKE: I wouldn't want to give a -- a single number. I think it depends also on the complexity and interconnectedness of the firm. And it also depends on what's happening in the -- in the broader market. There may be times of stability when a firm can fail and -- and it wouldn't cause broad problems. But during a period of intense, you know, instability, letting the firm fail would be a problem.

So, I -- I -- I'd hesitate to give a single number.

SPEIER: But is that around the threshold, would you say?

BERNANKE: Again, I -- I don't want to give a single number. I think it's a multidimensional question. It depends on a number of different things.

SPEIER: Now, Bank of America's $2.3 trillion in assets now. It's a (inaudible). It is too big to fail. Isn't it?

BERNANKE: Well, we -- the government intervened to provide TARP money in January...


SPEIER: But the definition of a company that's too big to fail, because we have injected so much money into it. Correct?

BERNANKE: Yes. And again, I think it's very important for us to have a resolution regime that will avoid that problem in the future.

SPEIER: So, how do we make these financial institutions -- because there's a handful of them now, because there's been concentration in the marketplace because of the failures -- how do we make these companies smaller?

BERNANKE: If you impose both the consolidated supervision of the Fed or another authority over these firms and make them bear the cost of their size through extra capital liquidity and risk management requirements first, and secondly, if you have a resolution regime which -- which allows for the possibility that creditors could lose money if the company failed. And both of those things would tend to make it -- being big less attractive; because, on the one hand, you have to bear more capital requirements.

On the other hand, you don't get the chief financing that you get from being too big to fail. So those things would tend to make firms choose to be smaller. And, in addition, supervisors could choose to help firms that they needed to limit certain activities, if they thought it was a danger to the -- to the broad system.

SPEIER: My time's expired.

FRANK: Gentleman from Texas, Mr. Marchant?

MARCHANT: Thank you, Mr. Chairman.

We have had an interesting phenomenon where we had several investment banks and broker-dealers that decided to become bank holding companies and banks. Is there a possibility that these bank holding companies and banks can make another decision to go back to be only broker-dealers and investment banks? And does the Fed have any control over their decision to do that? And would be the implications of that?

BERNANKE: They could do that. And if they did, the Fed would no longer be their supervisor. One of the benefits of the idea of determining that a certain set of firms are so-called Tier 1 firms is that, if you were one of those firms, you couldn't escape. You would still be supervised by the Fed, no matter what your charter was.

MARCHANT: So, that would be a very important part of the reform package.

BERNANKE: That's right.

MARCHANT: That we...


BERNANKE: To avoid that problem, yes.

MARCHANT: With the savings rate at 8 percent and going possibly to 10, and the strong demand for treasuries, is it possible that the Fed can make the decision to divest itself of the treasuries and the government securities that it's been buying, as long as that savings rate and that demand for treasuries remains high?

BERNANKE: We don't have any near-term -- we don't have any near- term plans to divest ourselves. The -- the -- the Fed normally has, on its balance sheet, a considerable amount of treasuries. And, as I mentioned, the purchases we're making right now will only bring us back to somewhere where we were a few years ago.

MARCHANT: But is -- is it possible that we would have a treasury rates low, and interest rates low, and inflation raise its head, and we could actually be in the place of having to raise interest rates without there being any employment -- any employment gains?

BERNANKE: Well, one concern that we always have to pay attention to is that, if there were for some reason a -- a loss of credibility, which might come about because of loss of independence of the Fed, and inflation expectations rose for no reason connected to the economy, but just because of investors thinking that inflation is going to be higher, that would pose a serious problem for the Fed, because it would require us to respond to that to avoid it being transmitted into actual inflation. And that could be happening at a time when the economy was not yet recovered.

So, inflation expectations and the credibility of the Fed are actually very important.

MARCHANT: Is there a time in financial history, since the Great Depression, where you actually had consumer spending and the savings rate go up simultaneously?

BERNANKE: That's unusual. But it's not impossible. If income is rising fast enough, then you can both save more and consume more. But normally, when savings rates go up, people are obviously cutting back on their spending.

MARCHANT: Thank you.

FRANK: The gentleman from Idaho, Mr. Minnick?

MINNICK: Mr. Chairman, I wanted to return to the next shoe to drop and the chairman's concern about commercial real estate.

Would it be possible to provide a new -- assist providing liquidity for lenders and a floor to deteriorating market values by having -- giving authority, statutory authority to Freddie, Fannie or perhaps the new agency to guarantee loans of developed property perhaps at 75 percent of the lower of today's active market, fair market value, or today's replacement value using today's real estate and construction costs, and perhaps a similar guarantee for yet-to-be developed property at perhaps 50 percent of the lower of those two values?

The advantage of this would be to prevent bankruptcy of commercial developers and commercial property owners who are unable to secure take-out financing or to get development loan renewals, to reduce the downward pressure on rental rates of commercial property by reducing the number and -- of price of distressed property sales, and reduce failure rates of banks and commercial lenders by reducing the size and number of problem non-performing commercial loans.

I'd like your opinion with respect to whether this is something we in the Congress should pursue.

BERNANKE: Well, the Congress could certainly do that, and I think you'd have to make the balance between helping out this market and the fact that that would probably involve some financial risk on the part of the federal government, taxpayer. But you might make the determination that it was beneficial on net, so you'd have to balance those two things off.

MINNICK: But you would not, as a matter of sound fiscal and monetary policy, think that an inappropriate step to take if that were to be our judgment in the legislature?

BERNANKE: I think it's really Congress's choice, yes.

MINNICK: Thank you, sir.

I yield back.

FRANK: The gentleman from California, Mr. Miller.

MILLER: Thank you, Mr. Chairman.

Welcome, Mr. Chairman. I can't see you right now, but I know you're behind the gentleman standing in the front row. Wouldn't want your job for anything in the world right now.

I think -- and I know what you have to say, you have to be very cautious about, because anything you say could be misread or applied inappropriately to the economy. But it -- oftentimes, we tend to gloss over, I think, the real situation we're in today.

I hear some say that the economy seems to be improving. I think we're in far worse shape than people want to recognize and understand, truly. I've heard people say there's signs of stabilization. You did mention that you think there's been a peak in unemployment. I guess a peak is it's gone from 680,000 a month down to 500,000 a month we're losing jobs.

That's still significant, and I think as time goes on, you're going to lose fewer and fewer jobs each month because fewer people are able to be laid off. But we've gone from the subprime debacle, and it seems like now we're going through a second round in the residential, and that's individuals who've had good loans. They're losing their jobs, or businesspeople are basically just running out of reserves, and they're losing their homes, also.

But it's an unusual situation. Banks aren't making loans, and I -- we can say, well, some are, but when you talk to people in the private sector, they're having a very difficult time getting loans. And I've seen a different situation in banks also don't want deposits. You go to them with large CDs, and they really -- don't really want to take them. I think they don't want to accept the liability.

Savings have increased, and I think that's because people realize they can't replace the money today if they spend it. I think there's a very cautious economy going up, and people look at that and they're afraid to basically spend their money. And I think a certain amount of money are being forced in the stock market because you can't go to the bank and get anything for your savings.

But there's been a comment about a perfect storm, and there's been some mention about what the commercial real estate market is going to be doing. I think I started saying that about a year ago. I mean, you're looking at about a $6 trillion market out there with loans in the commercial sector.

And default rates the beginning of this year were about a quarter of 1 percent. Today they're about 2 percent. I think in the next 30 days -- I know you don't probably want to talk about this -- there's going to be a spike in the next three years that could go between 12 and 15 percent. I don't know any lenders out there today who want to make loans on commercial real estate.

Now, commercial mortgage-backed securities were about $240 billion in 2007 sold. Last year it was about $12 billion. As I think you know, today they're flat. There's zero mortgage-backed securities, and there isn't a credit flow.

This year there's about $400 billion worth of commercial real estate that is due. And by 2012, that increased to about $1 trillion. What honest projection do you see for this commercial real estate market? Now, the economy's really been hit hard with the residential, especially on the subprime. The second round I think is hitting -- you can see it right now. Now, this is going to be dumped on the back of the economy.

And we've kind of glossed over it, but I think this is more severe than most people are giving credibility to. Could you address that a little?

BERNANKE: No, I agree. It's a sector we're paying a lot of attention to. The fundamentals are weakening, and the financing situation is very tough. So we'll see some problems there, I'm sure.

We are seeing some banks, if not making new loans, working out old ones, trying to extend, for example, the terms of those loans. And we also, as I've mentioned, have added the commercial mortgage- backed securities to our TALF program.

And it's too early to say how effective that will be, but we have had some success in other types of securitizations. So we're making some efforts in that direction, but, again, I think that's an area we need to pay close attention to.

MILLER: Well -- and what you said there is very important. They're trying to work out loans. February of last year, I introduced a amendment on the bill on -- to require the Federal Reserve and the SEC to revise mark-to-market, try to deal with that.

The problem I think you're -- we're going to see in the banking industry today, especially with regulators, is the cap rate's gone from 7 percent in 2006 to about 10 today. How are you going to deal with a builder or an individual who owns a commercial (inaudible), he owes $14 million on his first? All of a sudden, based on mark-to- market, it's worth seven, and they only want to loan him five? How do you deal with that?

BERNANKE: It's the same principle as with a borrower. If it's cheaper to reduce the payments and to keep the money coming in as opposed to getting a foreclosure, then it might be worth working it out. So it really depends if the borrower can maintain a lower level of payments, then it might be in the bank's interest to do it.

MILLER: Are the regulators going to allow that bank to extend a five-year call when that note is due, to extend a loan when it's -- the loan is $14 million, based on current value, the loan should be five?

BERNANKE: Well, you'd take a loss on it, but we're working with the banks in the residential context to try to not create accounting incentives to foreclose as oppose to work out. The same principle ought to apply in commercial real estate.

MILLER: But we're not starting where we did with the banks, where they had adequate liquidity originally. When they started, they'd get hit with defaults.

We're talking about banks today that don't want to lend money. They're trying to keep the reserves, and they don't want to deposit. They don't have the reserves.

BERNANKE: I agree it's a problem.

MILLER: Thank you.

FRANK: The gentleman from New Jersey?

(UNKNOWN): Thank you, Mr. Chairman.

Chairman, welcome back.

FRANK: Let me just say, we will (ph) be able to accommodate everybody who is here, and the staff is encouraged to bar any member who tries to come in besides those who are here.

Gentleman from New Jersey?

(UNKNOWN): Thank you, Mr. Chairman.

First, I want to commend you. I think your work with TALF in particular has been ingenious, and I think very, very helpful in creating markets where there was an absence of credit. So I really give you enormous credit for trying to provide credit to the federal government.

I know you've spoken with a couple members this morning about federal spending and the potential looming threat it poses to our economy in longer term. I'm hearing from many of my constituents in Ocean County, New Jersey, that they're very greatly concerned about that spending pattern, the trajectory of spending we're on as a country, and it may create deficits and federal debt that's unsustainable long-term, that raises interest rates inevitably as the cost of government financing becomes unbearable.

Can you revisit this topic with me? I know you've talked to some other people about it, but maybe you could allay my concerns that that's not a looming crisis facing our country.

BERNANKE: I don't think I can allay your concerns. We are going from about a 40 percent debt to GDP ratio before the crisis to somewhere 60 or above by next year, and it'll continue to rise probably further.

Putting aside all the issues being discussed now about health care reform and so on, just on the prior scenario, the Congressional Budget Office shows an unsustainable fiscal path going out because there are -- under current law, there is something on the order of $40 trillion of unfunded health care liabilities for the U.S. government and significant amount also for pensions.

So as I was saying earlier, reform is important. We need to think about different ways we want to deliver health care and so on, but we do need to think hard about finding ways to control the costs, because the cost of health care is the single most determinant of the long-term fiscal situation, and we need -- really need to address that. Otherwise, we're already in an unsustainable situation. Forget about additional things we might want to do.

(UNKNOWN): Would you agree that cost containment concept applies not just in the health care context but in the overall government spending context, that we have to, at some point, level off our amount of federal spending to manage our federal debt and not have it balloon beyond what we can sustain?

BERNANKE: Certainly, but health care is particularly problematic because it's 15 percent of the economy. It's a big portion of government spending, and because health care costs have been rising now for many years at a very rapid rate, much faster than the average income.

(UNKNOWN): Frankly, I very deeply share your concern about cost containment being the single most important feature of health care reform, so I thank you for that.

You spoke with the gentleman from California a moment ago about liquidity issues. I'm aware, from the studies that we have, that maybe as much as $1.2 trillion of private earnings sitting in banks overseas, principally in Europe.

I'm wondering, knowing that there are difficult political questions involving having that money come back in this country, what would you recommend, and wouldn't you agree that having some of that money come back in would improve balance sheets for banking institutions in our own country and allow them to lend more fully than they've been doing over the last number of months?

BERNANKE: I'd have to know more about the specific proposal. I do know that there was a proposal -- there was a law passed recently that allowed for a period of time repatriation at a tax-favored rate, and a good bit of money was repatriated under that rule.

(UNKNOWN): And do you have any sense of how much money might be out there that we could bring back in?

BERNANKE: I don't have a number. I'm sorry.

(UNKNOWN): All right. I thank you for your testimony.

I yield back the balance of my time.

FRANK: Gentleman from Florida?

(UNKNOWN): Thank you much -- very much, Mr. Chairman.

Mr. Chairman, of all the testimony we hear in this committee, I enjoy yours the most. You're always very interesting. We have an awful lot of academics that come in here and try and convince us that a circle is square and vice-versa, and I appreciate your forthrightness.

I was a little bit perplexed today by your answers to the first gentleman from Texas's questions, first about inflation. I heard you talk about you use pricing as a reference, and that purely printing more money doesn't cause inflation, which was really new news to me. And I wonder if you'd tell me what you think causes inflation.

BERNANKE: Well, let's be clear what's going on. The Federal Reserve is not putting money out into the economy. What we're doing is we're creating bank reserves. That's money that the banks hold with the Fed, so it's just sitting there idly. It's not chasing any goods, OK? So as long as those bank reserves are sitting idly, broader measures of money that measure the circulation of money...

(UNKNOWN): But it won't sit there idly forever. The purpose...

BERNANKE: Right, exactly.

(UNKNOWN): ... of that (ph) is not to sit there idly forever.


(UNKNOWN): And while there may be a time lapse, certainly, unless that money gets sucked back in and out of circulation, it's going to cause inflation. There's no denying it.

BERNANKE: If it's not sucked back in. But as I was describing, we have ways of sucking it back in. We...


BERNANKE: Well, one way to do it is by raising interest -- we're raising the interest rate we pay on those reserves, which induces banks to keep the money with us instead of lending it out or circulating it through the economy. Another way to do it is through various open market operations that we can do that essentially pull those reserves out and bring them back into the Fed.

So we do have a number of tools to do it, and we are quite -- we're quite aware of this issue. And we will not allow the broad measures of money circulating in the economy to rise at a rate rapid enough that would cause inflation eventually.

(UNKNOWN): I'd appreciate it if you could maybe give the members of this committee a little memo on how -- a more extensive explanation of how you plan to do that without damaging the economy that we're trying to fix now.

BERNANKE: There's a chapter in the Monetary Policy Report that covers it.

(UNKNOWN): Thank you.

The second question was in response to the audit of the Fed. As you well know, the statutes are this thick of exemptions to federal audit -- of audits of the Fed. Every agency just about can be audited. I think I heard the gentleman from Texas say once a citizen can find out more about the operations of the CIA than it can the Fed. And I don't know that I'm denying that, or that you would really want to deny that.

But he's talking about post-facto audit, not interfering with daily decision-making, much like we do with many confidentiality exemptions where you say, "No. What'd they do now?" Well, they negotiated this contract in secret, but, when the contract is over, it should be opened up to public scrutiny.

And I think, really, the public does have a right to know, historically, how we determined the monetary policy of this country, for better or for worse. I mean, don't expect it to be 100 percent on target all the time. And I think it's a matter of transparency. I think it's a matter of accountability. And like your thoughts on that.

BERNANKE: Well, first of all, on things outside of monetary policy, we're open and very willing to work with you. The GAO right now is doing an audit of our annual financial statement. It's doing an audit of our information security controls. It's doing an audit of our assistance to AIG and many other things.

So, let me turn to your question...

(UNKNOWN): Well, I understand. This is the policy-making decisions, the minutes of the meetings that any government body might want to have off the record while they're making critical decisions, but eventually should be open to the public.

BERNANKE: Eventually -- well, we put out a whole transcript in five years, but -- I think that's fine. But if it's done within days or even weeks of the decision, it's going to look like the Congress is saying, "We disagree with that decision."

(UNKNOWN): I agree with that. It shouldn't interfere with daily decision-making. But I don't know how after-the-fact auditing and all the exemptions that are there being eliminated for a period of time, and it could say six months, a year afterwards, I just don't see why there shouldn't be 100 percent crystal-clear transparency of every single function of the Fed after the fact.

BERNANKE: Because we have to be extraordinarily careful that the markets and the public don't think that Congress is trying to influence monetary policy decisions...


(UNKNOWN): If we do it in a year -- if we do in a year, we don't know really whether the best decisions made a year ago or two years ago or five years ago or 20 years ago. We don't know if they're the best decisions. We don't know who the Fed picked to be winners and losers. And I -- I think the public really has a right to know that -- some day.

BERNANKE: On issues relating to our 13(3) authority, those sorts of things, I -- you know, where we're putting out money and lending money and so on, we can work that out. I agree with you that -- that where we're putting out taxpayer money, there should be ways for the government to be -- the Congress to be assured that we're doing it in a safe way, that is -- has appropriate financial controls and so on and so on. So I agree with that part.

Monetary policy's a very specific element though of that.

(UNKNOWN): Well, but that's the most critical.

FRANK: Gentleman's time has expired.

The gentlewoman from Ohio?

KILROY: Thank you, Mr. Chairman.

And thank you, Chairman Bernanke, for being here.

I have questions for you as well about the Federal Reserve's role and the need for accountability and transparency versus the conflicting need for independence and to be free of political pressures. And it seems to me what the public is more concerned about is not the Federal Reserve's role in monetary policy but the Federal Reserves' role in bailing out certain entities like AIG and Bear Stearns and questions about how decisions get made about who is saved or who is allowed to fail.

So maybe you could help me with what kind of transparency and accountability are the maximum that we can give our taxpayers that would still leave the Federal Reserve with appropriate amount of insulation from political pressure and the appropriate independence that you need to carry out your essential mission?

BERNANKE: On the issue you mentioned, Congress has already acted. Congress passed and the president signed a law which allows the GAO to audit all loans made to specific companies in -- in rescue operations including AIG and Bear Stearns. That has been done.

And we are quite open to discussing any kind of extraordinary lending that we do in terms of making sure the Congress is comfortable that we are taking all the steps necessary to protect to taxpayer and to do the appropriate thing with, you know, with those loans. So the one area and to go back to our previous conversation -- the one area where I'm particularly sensitive is about the Congress second-guessing in the very short period of time, the monetary policy decisions being made by the Federal Reserve with the sense that displeasure from the Congress would, you know, put pressure on the Fed, you know, to try to anticipate the political preferences of the Congress.

KILROY: There's other discussion this morning about when inflation might begin to rear its head and some concerns about that. As I understand the answer, inflation is not presently worried that -- that -- that you're concerned about. But -- and certainly, I think housing and unemployment are much bigger worries for the greater economy right now than concern about inflation.

But I was wondering what your judgment, whether fear of inflation is holding back banks some of which have seemed to be recovered. They want to give their TARP money back. Goldman Sachs is showing profits and bonuses are being offered to some players in the financial service market.

But what'll serve inflation is keeping banks from making the kind of loans that are needed for small business and others to help us restore the economy which (inaudible) on Main Street, so to speak.

BERNANKE: I don't think that's a major factor. For one thing, if you look in the financial markets, interest rates like long-term government interest rates are still quite low. If the financial markets were really worried about inflation, those rates would be much higher. So I don't think the financial markets are indicating a great deal of concern about inflation.

And from the bank's perspective, they're much more concerned about creditworthiness, the state of the economy and losses they've already taken than they are about inflation, I think.

KILROY: In terms of the state of the economy, what steps can the Fed take to address the unemployment rates that we are seeing going up? I certainly share your view that the -- the recovery money has not fully had its impact in the greater economy and we will see some gains there. But still, we want to see some places where Americans can actually make things in this country and that we can generate those kind of jobs in our economy as well.

BERNANKE: Well, the Fed is being very aggressive. We're, you know, we're trying very hard to support the economy. We've lowered interest rates almost to zero and we have a whole set of other programs to try and get credit markets working. So we are doing our best to provide support to this economy.

KILROY: Do you think we have sufficiently addressed the issue of certain risky behaviors that helped to damage the economy -- credit default swap, naked default swaps?

BERNANKE: No, not yet. We have to do, I think, a very substantial reform of the financial regulatory system to address all the problems that were revealed by the crisis.

KILROY: Thank you. Yield back.

FRANK: The gentlewoman from Florida.

KOSMAS: Thank you, Mr. Chairman. And thank you, Chairman Bernanke, for being here.

I, as the chairman said, I represent the central Florida area and have been sort of raising the flag for quite a few months that Florida is one of the highest in mortgage foreclosures and also one of the highest now in unemployment. But I have been concerned about what I saw as a deeper problem in the economy looming over Florida as well as the nation with regard to commercial lending and the renewing or rolling over commercial loans for larger businesses -- some are smaller businesses.

But -- but when we look at our economy in Florida and we recognize that it's a $70 billion tourism trade and we have situations where resorts, hotels, timeshare, cruise ships and even our leisure parks are relying, of course, on commercial credit lines in order to function. And the numbers of people that they employ and the factor of the potential for them to be in jeopardy is quite frightening to me.

So I've been trying to raise that red flag for several months here and talking to people about it while at the same time people are dealing with other issues. I know that the TALF program was intended to provide an opportunity for increased securitized debt and those markets. And I was wondering whether you might be able -- and some of this I think was addressed by an earlier question but I'll ask mine anyway -- do you feel that the TALF program is large enough and sufficient enough? Is it working and is it working quickly enough that we should consider that it might alleviate some of these looming credit problems for commercial real estate?

BERNANKE: It's a bit early to say on commercial real estate because we've just opened up the program to that and we have not yet seen a number of, you know, deals coming through. So ask me again in another month or two.

But I do think that what we've seen in the consumer ABS area is it doesn't take an enormous amount of capacity to actually have a difference because it's really a question of breaking the ice. Right now, nobody's bringing commercial mortgage-backed securities to market. If this creates more activity in the market, then it creates more interest and you can get things going again.

So, you know, I don't think we need to have an enormous program to stimulate the improvement in the CMBS market. But exactly how effective our program will be, I think we need to wait just a bit longer. But a number of your colleagues have raised this issue and it's certainly a very important one.

KOSMAS: Yes. And I apologize if I'm repeating a question that was asked by someone else. But I think it was mentioned that up to $400 billion of CRE loans are coming due in -- in this year to mature and over $1 trillion by 2012. That represents a very huge potential, as I say, for -- and I'm talking specifically to business people who are having trouble with perfectly performing lines of credit that have met all their terms and obligations and their lenders are refusing that -- that rollover, if you will, or renegotiation of -- of the mortgage. And that is a very serious problem that I see looming.

So I'm hoping that you're going to be taking a very, very close look at it. Are you considering other problems beyond what is currently on the plate for TALF for one -- one question? And then, with the lag time in getting things going in that marketplace, would you expect that that might be extended beyond year's end?

BERNANKE: So we've already included both new CMBS and legacy CMBS in the TALF. We're looking at some other asset classes but as I mentioned, they are more complex than the ones we already have included.

We'll give the markets plenty of notice about the extent of the program. We have to make judgments about whether or not markets are normalizing or not. If things return to normal which I don't expect in the very near term, then we would have to think about scaling it down. But otherwise, we'll try to give plenty of notice to the markets about the timeframe for these programs.

KOSMAS: OK. I appreciate it. Thank you very much.

FRANK: Gentleman from Florida?

(UNKNOWN): Thank you, Mr. Chairman.

Chairman Bernanke, I'm looking at the report that you handed out this morning. And I was wondering if you could take your copy and turn to page 26?


(UNKNOWN): There's a table on page 26 which consists of your balance sheet. And one of the entries on the balance sheet is under Assets - central bank liquidity swaps, which shows an increase from the end of 2007 from $24 billion to $553 billion and change at the end of 2008. What's that?

BERNANKE: Those are swaps that were done with foreign central banks. Many -- many foreign banks are short dollars. And so they come into our markets looking for dollars and drive up interest rates and create volatility in our markets.

What we have done is with a number of major central banks like the European Central Bank, for example, we swap our currency, dollars, for their currency, euros. They take the dollars, lend it out to the banks in their -- in their jurisdiction. That helps bring down interest rates in the global market for dollars. And meanwhile, we're not lending to those banks, we're lending to the central bank. The central bank is responsible for repaying us.

(UNKNOWN): So who got the money?

BERNANKE: Two financial institutions in Europe in other countries.

(UNKNOWN): Which ones?

BERNANKE: I don't know.

(UNKNOWN): Half a trillion dollars and you don't know who got the money?

BERNANKE: The loan went to the -- the loans go to the central banks and they -- they then put them out to their -- to their institutions to try to bring down short-term interest rates and dollar markets around the world.

(UNKNOWN): Well, let's start with which central banks got the money?

BERNANKE: There are 14 of them which are listed in our -- I'm sure they're listed in here somewhere.

(UNKNOWN): All right. So who actually made that decision to hand out a trillion dollars that way -- half a trillion dollars? Who made that decision?

BERNANKE: The Federal Open Market Committee.

(UNKNOWN): OK. And was it done at one time or in a series of meetings?

BERNANKE: A series of meetings.

(UNKNOWN): And under what legal authority?

BERNANKE: We have a longstanding legal authority to do swaps with other central banks...

(CROSSTALK) BERNANKE: It's not an emergency authority of any kind.

(UNKNOWN): Anything specific about it?

BERNANKE: Do you know the...


BERNANKE: My counsel says section 14 of the Federal Reserve Act.

(UNKNOWN): All right. We actually looked at one of the arrangements and one of the arrangements is $9 billion for New Zealand. That works out to $3,000 for every single person who lives in New Zealand.

Seriously, wouldn't it have been better to extend that kind of credit to Americans rather than New Zealanders?

BERNANKE: It's not costing Americans anything. We're getting interest back and it comes back -- it's not at the cost of any American credit. We are extending credit to Americans.

(UNKNOWN): Well, wouldn't it necessarily affect the credit markets it you extend half a trillion dollars in credit to anybody?

BERNANKE: We are lending to all U.S. financial institutions in exactly the same way.

(UNKNOWN): Well, look at the next page. The very next page has the U.S. dollar nominal exchange rate which shows a 20 percent increase in the U.S. dollar nominal exchange rate at exactly the same time that you were handing out half a trillion dollars to foreigners. Do you think that's a coincidence?


(UNKNOWN): All right. Well, the Constitution says no money shall be drawn from the Treasury but in consequence of appropriations made by law. Do you think...

BERNANKE: But it's not drawn from the Treasury.

(UNKNOWN): Well, let's talk about that. Do you think it's consistent with the spirit of that provision of the Constitution for a group like the FMOC to hand out a half a trillion dollars to foreigners without any action by this Congress?

BERNANKE: Congress approved it in the Federal Reserve Act.

(UNKNOWN): When was that?

BERNANKE: Quite a long time ago. I don't know the exact date.

(UNKNOWN): A hundred years ago?

FRANK: The original act is 1914, I believe. BERNANKE: I don't know whether this provision was in 1914 or not but the Federal Reserve Act was in 1913.

(UNKNOWN): All right. And at that time, the entire gross national product of this country was well under half a trillion dollars, wasn't it?

BERNANKE: I don't know.

(UNKNOWN): Is it safe to say that nobody in 1913 contemplated that your small little group of people would decide to hand out half a trillion dollars to foreigners?

BERNANKE: This -- this -- this particular authority has been used numerous times over the years.

(UNKNOWN): Well, actually, according to the chart on page 28, the -- virtually the entire amount that's reflected in your current balance sheet went out starting in the last quarter of 2007. And before that going back to the beginning of this chart, the amount of lending was zero to foreigners (ph). Is that (inaudible)...

BERNANKE: It was zero before the crisis, yes. But this was -- was a part of the process working with other central banks to -- again, to try to get dollar money markets working normally in the global economy.

(UNKNOWN): All right, my time is very limited.

FRANK: The gentleman's time is -- the gentleman's time is expired.

(UNKNOWN): More limited than I thought.

FRANK: The gentleman from New York?

(UNKNOWN): Thank you, Mr. Chairman.

(UNKNOWN): Thank you very much, Mr. Chairman.

And thank you, Chairman Bernanke, for being here and for indulging every -- all of the members. I am the most junior member, so I presume I am the last to question.

I'm sure that you have seen some of the reports about credit card companies increasing their rates and charges in anticipation of the upcoming new credit card laws and regulation -- and Federal Reserve regulations taking affect. This seems to me to run counter to certainly the intent, if not the letter of the recently-enacted regulations by your group and laws.

We have heard that the credit card companies have asked -- they asked us when we were putting the bill together, as they asked you, for a delay so that they could implement these sort of things. And instead, they seem to be using these delays to generate more profits on the backs of the consumers. Is -- is there anything that you can do from your perspective at the Federal Reserve to speed up the regulations to try to take care of these people?

BERNANKE: Yes, we just announced the first tranche of regulations under the Credit Card Act that was passed by Congress and signed by the president. And it sets, as required by law, a deadline of August 20th. After August 20th in order to raise interest rates on a customer, the company has to give the customer 45 days notice. And then the customer has the right to opt out of that -- of that increase by -- by paying back his balance. So that first step has been taken for -- for August.

(UNKNOWN): Is there anything you can do to communicate to these companies that it would not be in their best interest to try to, you know, raise these rates and charges right up to the deadline?

BERNANKE: There's -- there's -- there's another provision that's in the law passed by Congress that requires revisiting interest rate increases back to the first of January of '09. So at some point there'll have to be some looking again at those -- at those rates.

(UNKNOWN): Thank you. I have one quick question about the TALF. I've heard reports in my congressional districts about the smaller investment firms, more locally owned investment firms that don't have a preexisting relationship with any sort of quote, unquote, "primary dealer" having difficulty gaining access to the program, which, of course, would give the larger firms a marked advantage if that were true. Has anything been done or could anything be done to increase access to the TALF for these smaller investment firms, say, you know, 10 to 30 employees?

BERNANKE: Yes, and we've done so in two ways. First, we've encouraged more investors. And the minimum investment is half a million dollars, which is within the scope of many -- many investment firms. Secondly, working with Congresswoman Waters, we have expanded our set of agents who are putting together the deals to include six to eight smaller firms, many of which are minority or women-owned. So we are trying to expand both the investors and the agents in this program.

(UNKNOWN): And -- and how can local firms apply for this? Is there a -- a Web site or a procedure for (inaudible)?

BERNANKE: Yes, there are Web sites, yes.

(UNKNOWN): All right, so they should just get on the Web site? Well, can your staff communicate with us then?

BERNANKE: We'll do that.

(UNKNOWN): Let us know because I know a lot of the firms in my district who have felt that they've got no advantage to any of these bailouts would very much appreciate access to -- to these funds and particularly given that they have now to compete with other firms that have gotten other advantages from the TARP and TALF programs.


(UNKNOWN): Thank you very much, Mr. Chairman.

FRANK: Thank you.

Any further comments in closing?

If not, I thank the chairman for his diligence.

Did you, the gentleman from Alabama, have a...


FRANK: Sure.

BACHUS: Chairman -- Chairman Bernanke, I think I speak for others as well as myself. It's not, I know, my nature to criticize or to -- because I think you've done an exemplary job. And I -- I admire your -- your abilities and your intellect. But it is time -- it is necessary -- it's part of our job to -- because we all in the future we want to try to avoid these things. And so, I think, you know, that is simply a part of trying to make sure that -- that we build the best system we can.

FRANK: I thank the gentleman.

I thank the chairman. And the hearing is adjourned.


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