Transcript: Bernanke Speaks to House Committee

House Committee on Financial Services Holds Hearing on Monetary Policy and the State of the Economy

Feb. 27, 2008

SPEAKERS:

Rep. Barney Frank, D-Mass. Chairman, Rep. Paul E. Kanjorski, D-Pa., Rep. Maxine Waters, D-Calif., Rep. Carolyn B. Maloney, D-N.Y., Rep. Luis V. Gutierrez, D-Ill., Rep. Nydia M. Velazquez, D-N.Y., Rep. Melvin Watt, D-N.C., Rep. Gary L. Ackerman, D-N.Y., Rep. Brad Sherman, D-Calif., Rep. Gregory W. Meeks, D-N.Y., Rep. Dennis Moore, D-Kan., Rep. Michael E. Capuano, D-Mass., Rep. Ruben Hinojosa, D-Texas, Rep. William Lacy Clay, D-Mo., Rep. Carolyn Mccarthy, D-N.Y., Rep. Joe Baca, D-Calif., Rep. Stephen F. Lynch, D-Mass., Rep. Brad Miller, D-N.C., Rep. David Scott, D-Ga., Rep. Al Green, D-Texas, Rep. Emanuel Cleaver Ii, D-Mo., Rep. Melissa Bean, D-Ill., Rep. Gwen Moore, D-Wisc., Rep. Lincoln Davis, D-Tenn., Rep. Albio Sires, D-N.J., Rep. Paul W. Hodes, D-N.H., Rep. Keith Ellison, D-Minn., Rep. Ron Klein, D-Fla., Rep. Tim Mahoney, D-Fla., Rep. Charlie Wilson, D-Ohio, Rep. Ed Perlmutter, D-Colo., Rep. Christopher S. Murphy, D-Conn., Rep. Joe Donnelly, D-Ind., Rep. Robert Wexler, D-Fla., Rep. Jim Marshall, D-Ga., Rep. Dan Boren, D-Okla., Rep. Spencer Bachus, R-Ala. Ranking Member, Rep. Richard H. Baker, R-La., Rep. Deborah Pryce, R-Ohio, Rep. Michael N. Castle, R-Del., Rep. Peter T. King, R-N.Y., Rep. Ed Royce, R-Calif., Rep. Frank D. Lucas, R-Okla., Rep. Ron Paul, R-Texas, Rep. Steven C. Latourette, R-Ohio, Rep. Donald Manzullo, R-Ill., Rep. Walter B. Jones, R-N.C., Rep. Judy Biggert, R-Ill., Rep. Christopher Shays, R-Conn., Rep. Gary G. Miller, R-Calif., Rep. Shelley Moore Capito, R-W.Va., Rep. Tom Feeney, R-Fla., Rep. Jeb Hensarling, R-Texas, Rep. Scott Garrett, R-N.J., Rep. Ginny Brown-Waite, R-Fla., Rep. J. Gresham Barrett, R-S.C., Rep. Rick Renzi, R-Ariz., Rep. Jim Gerlach, R-Pa., Rep. Steve Pearce, R-N.M., Rep. Randy Neugebauer, R-Texas, Rep. Tom Price, R-Ga., Rep. Geoff Davis, R-Ky., Rep. Patrick T. Mchenry, R-N.C., Rep. John Campbell, R-Calif., Rep. Adam H. Putnam, R-Fla., Rep. Michele Bachmann, R-Minn., Rep. Peter Roskam, R-Ill., Rep. Kenny Marchant, R-Texas

WITNESSES:

Federal Reserve System Board of Governors

Chairman Ben Bernanke

[*]

FRANK: The hearing will come to order.

I forget whether I have had a chance to note -- I don't remember whether we did last time, but last summer we saw the passing of the co-author of the Humphrey-Hawkins bill, Congressman Gus Hawkins, who was a member of the House who was a cosponsor of the bill and had a very distinguished career. He was the predecessor of our colleague from California, Ms. Waters.

But the significance of his achievement in structuring that bill and in particular giving equal weight to two very important mandates -- the need to combat inflation and the need to maintain adequate employment -- I think recent events have shown that to be quite wise.

I contrast what I think has been the good performance of our Federal Reserve in meeting our needs with a performance that I think has caused more difficulty in Europe with the European Central Bank, where they have only the single mandate.

So I want to pay, again, tribute to the wisdom of Gus Hawkins and to the fidelity with which the Federal Reserve under this chairman has carried out what can be a complicated and sometimes -- it's a relationship with some tension.

We meet today under unusual circumstances. For many years past, I have focused on the problems of income inequality in our society and the question about how we promoted growth without it adding to inequality.

Both the current chairman and his predecessor acknowledged that those were issues and expressed views about how to deal with them.

We have from time to time convened when we were in the midst of a downturn. Whether or not as a recession is a somewhat academic discussion, that we are in a significant downturn with a very chancy near-term future is indisputable.

What's interesting is the extent to which this is a very different kind of downturn. We don't have the classic cycle where there were excesses, too much inventory, et cetera.

FRANK: We are in a downturn, maybe a recession, maybe about to get one, in which the single biggest cause was excessive deregulation: the failure to understand that a vibrant, free enterprise system needs as a partner a public sector that understands how the market works, supports it, helps create the conditions in which the free market can then flourish, but also provide a set of rules that diminish abuses.

That this current downturn was caused by abuses in the loan market for residences is fairly clear. In the report -- the monetary report that the chairman presents, on page three, part two: "The economic landscape after the first half of 2007 was subsequently reshaped by the emergence of substantial strains in financial markets in the United States and abroad, the intensifying downturn in the housing market and higher prices for crude oil.

"Rising delinquencies in subprime mortgages led to large losses on related structured credit products."

Skipping over -- "Consequently, in the fourth quarter, economic activity accelerated significantly and the economy seemed to have entered 2008 with little forward momentum."

This is relevant to a number of factors. Yesterday in the hearing we had preparatory to this one the very distinguished economist Alice Rivlin, a former vice chair of the Board of Governors, said, "This year in your hearing, monetary policy will not be as important. It'll be somewhat down on the list." And I think that is accurate.

In the classical we've had, the role of monetary policy is fairly clear.

Here we have this problem that the normal tools we use, including a stimulus package, which in its details pleased no one and was therefore able to pass, and I think will on balance be constructive in helping deal with the shortfall. And we have seen a reduction in interest rates. That is, monetary and fiscal policy have been a stimulative as you can expect in this time. And I support both of those directions, but they're not enough.

We dealt with the need to deal with a very serious structural problem: the continuing flood of foreclosures. This committee will be considering measures to deal with that.

In the absence of the subcommittee chairman, I'm giving the significance (ph) here. I'm going to take the eight minutes that we have, and I apologize to my colleagues, but not so much.

We have a structural set of issues to deal with.

FRANK: And in this case, relying on fiscal and monetary policy alone won't be enough. Because unless we can deal with the specific structural problems caused by the deregulation, more than anything else, caused by excesses in the private sector, we will not be able, effectively, to deal with this situation.

And, in fact, if we were not to deal with this in a structural manner, by trying to deal with foreclosures and with property on which there have been foreclosures, we would put too much of a strain on fiscal and monetary policy. It would not be appropriate to rely only on fiscal and monetary policy.

So we will be playing in a variety of ways. And we've been talking to regulators. And I appreciate the cooperation we've gotten from staff at the Federal Reserve and the other federal regulatory agencies. We may in the end have some differences, but there's been a cooperative effort to try and figure out how to deal with that.

But what is clear is that the ideology of deregulation is a large part of the cause of the problems we are in today.

Indeed, in the mortgage market, it is clear. If you look at mortgages originated by the regulated entities, the deposit-taking institutions subject to bank regulation, they have performed much better than those that came with very little regulation.

And it wasn't simply that. What basically happened was that securitization, which has been a great blessing a great multiplier of our ability to do things, replaced the lender-borrower discipline.

We were told by the private sector that they had ways of replacing that so that we would have a good deal of responsibility. We had risk management and quantitative models and a whole range of other things.

It turns out, when enough bad loans are put into the system because of the absence of the lender-borrower discipline, i.e., "I'm not lending you the money unless I know you're going to pay me back," that some of these techniques did not contain the damage, they spread it.

FRANK: And the consequence has been a very serious, worldwide problem.

We are in the most significant economic trouble since at least 1998. In America, it's probably going to have more of a negative impact than then. And the single biggest cause was a failure for regulation to keep up with innovation.

And it's, of course, had international consequences as well. We have a new export in America that had a big impact on the rest of the world: bad mortgages, which we exported and which caused economic problems elsewhere.

So as we deal with this situation, it is important for us to continue to monitor monetary policy. We've already acted in the fiscal area. I believe that the chairman and the Federal Reserve has acted appropriately with regard to monetary policy. But that could not be enough, given the cause of this.

And what we need, first of all, is to deal with the problems that we have seen because of the failure to regulate. And we have got to do something about the cascade of foreclosures that we still face, for we do not easily pull out of this problem.

And we have to, once we have dealt with that -- this committee will begin to work on that -- think in cooperation with the regulators and the financial community and others what we do going forward so that we do not lose the virtues of securitization, but we are able to diminish some retribution (ph).

The gentleman from Alabama?

BACHUS: Thank the chairman.

And, Chairman Frank, I appreciate you holding this hearing on monetary policy and the state of the economy.

And I thank you, Chairman Bernanke, for being here today and for your service to the country.

You testified last July concerning the state of the economy and monetary policy. And at that time, we had a problem in one segment of our economy, and that was subprime lending.

And, as we all know, since that time, because of what we sometimes refer as interconnectedness of the market, it has mushroomed into a full-blown credit crisis. We have unemployment inching up, although it still is historic lows -- it's still very good. We have factory orders and durable goods showing weaknesses, and some weaknesses in retail sales.

And, obviously, we're concerned about our credit card and auto lending markets, because of the credit crunch.

BACHUS: While economic activity and growth has clearly slowed, and any threats to our economy should not be minimized, I don't believe anything has transpired over the past seven months that distracts from the competitive strength of U.S. businesses and their innovativeness.

The innovativeness and productivity of American workers still remains very high. I think our workers are unrivaled in the world as far as their abilities and their productivity.

Moreover, productive steps by the Federal Reserve and other regulators, combined with responses from the private sector and the natural operation of the business cycle, I believe will help ensure that the current economic downturn is limited in both duration and severity.

I believe your aggressive cuts -- the Fed's aggressive cut in the fed funds rate and the recently enacted stimulus package, although I believe it does not have the effect that many claim -- I do believe that it does serve as a tax cut for millions of hardworking Americans and it, too, will help.

And all of those should begin to have a positive effect on our economy, I believe, by this summer -- I'd be interested in your views -- laying the groundwork for a much stronger second half of 2008 and sustainable growth in 2009.

At that point, I believe the Fed's primary challenge -- and we saw it, I think, last week and this week with the CPI and the PPI numbers -- your challenge is going to be -- will shift from avoiding a significant economic downturn to containing inflationary pressure in our economy.

Particularly, when I go home, people talk to me about the hardship of high gas prices. That's something that I'm not sure any of us have much control over short term. Long term, there are obviously things, including nuclear power, that I've said many times we need to take full advantage of.

One lesson we've learned from the subprime contagion is just how highly interconnected our financial markets are.

The chairman, in his opening statement, mentioned a lack of regulation. We have a system of functional regulation, where different regulators function on different parts of the market.

BACHUS: I'm not sure that part of our problem is not, I think, that sometimes almost causes overregulation, but there may be gaps in the regulation.

And I wonder if that is in fact the case. There may be areas where the regulation needs to be strengthened, or regulation needs to be coordinated better between different regulators, both state and federal.

As painful as the process and the challenges we have, I think it's pretty evident that we've faced our problems and that we're solving them.

I think what we've done is far preferable to the kind of decay and denial that marked the Japanese response to their financial turmoil in the 1990s. And it's the reason I continue to have great confidence in the resilience of the American economy.

Chairman Bernanke, in closing, let me say, there's perhaps no other public figure in America who's been subjected to as much Monday morning quarterbacking as you have over the last seven months.

But I believe, on balance, any objective evaluation of your record would conclude that you've dealt with an exceedingly difficult set of economic circumstances with a steady hand and sound judgment.

BACHUS: With that, Mr. Chairman, I yield back the balance of my time.

FRANK: And next the ranking member of the subcommittee, the gentleman from Texas, Mr. Paul, for three minutes.

PAUL: Thank you, Mr. Chairman.

I ask unanimous consent to submit a written statement.

FRANK: Without objection, the gentleman and any other members of the committee who wish to submit written statements will be allowed -- so there will be no need for further request; we'll have (inaudible) for everybody.

And the chairman's full remarks will be submitted, as well.

PAUL: And welcome to the hearing this morning, Chairman Bernanke.

Obviously, the world, and especially we in this country, have come to realize that we're facing a financial crisis. And I think very clearly it is worldwide. That, of course, is the first step in looking toward a solution.

But I would like to remind the committee and others that there were many who anticipated this not a year or two ago when the crisis became apparent, but actually 10 years-plus ago when this was building.

But a problem, obviously, is in -- the major problem is obviously in the subprime market. But, you know, in the last -- in one particular decade, there was actually an increase in $8 trillion worth of value in our home. And people interpreted this as real value and $3 trillion was taken out and spent.

So we do live in an age which is pushed by excessive credit. And I think that is where our real culprit is.

But traditionally when an economy gets into trouble and they have inflation or an inflationary recession, the interpretation is always "There's not enough money. We can't afford this. We can't afford that."

PAUL: And the politics and the emotion are designed to continue to do the same thing that was wrong, that caused our problem in the first place. That is, it looks like we don't have enough money.

So what does the Congress do? They appropriate $170 billion and they push it out in the economy and think that's going to solve the problem. We don't have $170 billion, but that doesn't matter, we can borrow it or we can print it if we need be.

But then again, the financial sector puts pressure on the Fed (inaudible) "Well, there's not enough credit. What we need to do is expand the credit."

But what have we been doing for the past two years? You know, it used to be that we had a measurement of the total money supply, which I found rather fascinating, and still a lot of people believe it's a worthwhile figure to look at, and that is the M3.

Two years ago, the M3 number was $10.3 trillion. Today it's $14.6 trillion. Just in two years there's been an increase in the total money supply of $4.3 trillion.

Well, obviously, if you pump that much money into the economy and we're not producing, but the money we spend comes out of borrowed money (inaudible) the housing prices are going down, and that's (inaudible) increasing our GDP, I mean, it just doesn't make any sense to come back and put more pressure on the Congress and on the Fed to say what we need is more inflation.

Inflation is the problem. That is the cause of the distortion. That has caused the mal-investment. And that is why the market is demanding the correction in the mal-investment in the excessive debt, which is not market driven.

FRANK: The chair will now announce the procedure for questions.

FRANK: There's obviously a great deal of interest in questioning the chairman -- or making speeches to him. And what we will do, since we have a larger committee than many of us wanted, except perhaps for the most junior members, we'll begin the questioning of the chairman...

(CROSSTALK)

FRANK: Yes, but I'm going to just announce the procedures (inaudible).

We are going to have the members question after the statement in order of seniority on our side. We will pick up at the next hearing, later in the year, where we left off. The minority is apparently also going to be doing that.

So we're going to begin with some members who weren't able on their side to talk later and then we will go in that order.

The chairman has given us three hours, and we appreciate it. I am going to have to hold members pretty closely to the five minutes. Any last thought when the five-minute bell hits can be completed, but fairly quickly, because we do have all this interest.

And, with that, Mr. Chairman, please?

BERNANKE: Chairman Frank, Ranking Member Bachus and other members of the committee, I am pleased to present the Federal Reserve's monetary policy report to the Congress.

(UNKNOWN): Mr. Chairman, we're having a little trouble hearing.

FRANK: Pull the mike closer.

BERNANKE: How's that?

In my testimony this morning I will briefly review the economic situation -- is that OK, Mr. Chairman?

(CROSSTALK)

(LAUGHTER)

BERNANKE: OK. In my testimony this morning, I will briefly review the economic situation and outlook, beginning with developments in real activity and inflation, and then turn to monetary policy.

I will conclude with a quick update on the Federal Reserve's recent actions to help protect consumers in their financial dealings.

BERNANKE: The economic situation has become distinctly less favorable since the time of our July report. Strains in financial markets which first became evident late last summer have persisted. And pressures on bank capital and the continued poor functioning of markets for securitized credit have led to tighter credit conditions for many households and businesses.

The growth of real gross domestic product held up well through the third quarter, despite the financial turmoil, but it has since slowed sharply. Labor market conditions have similarly softened, as job creation has slowed and the unemployment rate -- at 4.9 percent in January -- has moved up somewhat.

Many of the challenges now facing our economy stem from the continuing contraction of the U.S. housing market.

In 2006, after a multiyear boom in residential construction and house prices, the housing market reversed course. Housing starts and sales of new homes are now less than half of their respective peaks, and house prices have flattened or declined in most areas.

Changes in the availability of mortgage credit amplified the swings in the housing market.

During the housing sector's expansion phase, increasingly lax lending standards, particularly in the subprime market, raised the effective demand for housing, pushing up prices and stimulating construction activity.

As the housing market began to turn down, however, the slump in subprime mortgage originations, together with a more general tightening of credit conditions, has served to increase the severity of the downturn. Weaker house prices, in turn, have contributed to the deterioration in the performance of mortgage-related securities and reduced the availability of mortgage credit.

The housing market is expected to continue to weigh on economic activity in coming quarters. Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries.

BERNANKE: Consumer spending continued to increase at a solid pace through much of the second half of 2007, despite the problems in the housing market, but it appears to have slowed significantly toward the end of the year.

The jump in the price of imported energy, which eroded real incomes and wages, likely contributed to the slowdown in spending, as did the declines in household wealth associated with the weakness in house prices and equity prices.

Slowing job creation is yet another potential drag on household spending, as gains in payroll employment averaged little more than 40,000 per month during the three months ending in January, compared with an average increase of almost 100,000 per month over the previous three months.

However, the recently enacted fiscal stimulus package should provide some support for household spending during the second half of this year and into next year.

The business sector has also displayed signs of being affected by the difficulties in the housing and credit markets. Reflecting a downshift in the growth of final demand and tighter credit conditions for some firms, available indicators suggest that investment in equipment and software will be subdued during the first half of 2008.

Likewise, after growing robustly through much of 2007, nonresidential construction is likely to decelerate sharply in coming quarters as business activity slows and funding becomes harder to obtain, especially for more speculative projects.

On a more encouraging note, we see few signs of any serious imbalances in business inventories aside from the overhang of unsold homes. And, as a whole, the nonfinancial business sector remains in good financial condition, with strong profits, liquid balance sheets and corporate leverage near historical lows.

In addition, the vigor of the global economy has offset some of the weakening of domestic demand. U.S. real exports of goods and services increased at an annual rate of about 11 percent in the second half of last year, boosted by continuing economic growth abroad and the lower foreign exchange value of the dollar.

Strengthening exports, together with moderating imports, have in turn led to some improvement in the U.S. current account deficit, which likely narrowed in 2007 on an annual basis for the first time since 2001.

Although recent indicators point to some slowing of foreign growth, U.S. exports should continue to expand at a healthy pace in coming quarters, providing some impetus to domestic economic activity and employment.

As I have mentioned, financial markets continue to be under considerable stress. Heightened investor concerns about the credit quality of mortgages, especially subprime mortgages with adjustable interest rates, triggered the financial turmoil.

However, other factors, including a broader retrenchment in the willingness of investors to bear risk, difficulties in valuing complex or illiquid financial products, uncertainties about the exposures of major financial institutions to credit losses and concerns about the weaker outlook for economic growth, have also roiled the financial markets in recent months.

BERNANKE: To help relieve the pressures in the market for interbank lending, the Federal Reserve -- among other actions -- recently introduced a term auction facility, through which prespecified amounts of discount window credit are auctioned to eligible borrowers, and we have been working with other central banks to address market strains that could hamper the achievement of our broader economic objectives.

These efforts appear to have contributed to some improvement in short-term funding markets. We will continue to monitor financial developments closely.

As part of its ongoing commitment to improving the accountability and public understanding of monetary policy-making, the Federal Open Market Committee, or FOMC, recently increased the frequency and expanded the content of the economic projections made by Federal Reserve Board members and Reserve Bank presidents and released to the public.

The latest economic projections, which were submitted in conjunction with the FOMC meeting at the end of January, and which are based on each participant's assessment of appropriate monetary policy, show that real GDP was expected to grow only sluggishly in the next few quarters and that the unemployment rate was seen as likely to increase somewhat.

In particular, the central tendency of the projections was for real GDP to grow between 1.3 percent and 2.0 percent in 2008, down from 2.5 percent to 2.75 percent as projected in our report last July.

BERNANKE: FOMC participants' projections for the unemployment rate in the fourth quarter of 2008 have a central tendency of 5.2 percent to 5.3 percent, up from the level of about 4.75 percent projected last July for the same period.

The downgrade in our projections for economic activity in 2008 since our report last July reflects the effects of the financial turmoil on real activity and a housing contraction that has been more severe than previously expected.

By 2010, our most recent projections show output growth picking up to rates close to or a little above its longer-term trend and the unemployment rate edging lower. The improvement reflects the effects of policy stimulus and an anticipated moderation of the contraction in housing and the strains in financial and credit markets.

The incoming information since our January meeting continues to suggest sluggish economic activity in the near term.

The risks to this outlook remain to the downside. Those risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.

Consumer price inflation has increased since our previous report, in substantial part because of the steep run-up in the price of oil. Last year, food prices also increased significantly, and the dollar depreciated.

Reflecting these influences, the price index for personal consumption expenditures increased 3.4 percent over the four quarters of 2007, up from 1.9 percent in 2006. Core price inflation -- that is, inflation excluding food and energy prices -- also firmed toward the end of the year.

The higher recent readings likely reflected some pass-through of energy costs to the prices of consumer goods and services as well as the effect of the depreciation of the dollar on import prices.

BERNANKE: Moreover, core inflation in the first half of 2007 was damped by a number of transitory factors -- notably, unusually soft prices for apparel and for financial services -- which subsequently reversed. For the year as a whole, however, core PCE prices increased by 2.1 percent, down slightly from 2006.

The projections recently submitted by FOMC participants indicate that overall PCE inflation was expected to moderate significantly in 2008, to between 2.1 percent and 2.4 percent, the central tendency of the projections.

A key assumption underlying those projections was that energy and food prices would begin to flatten out, as was implied by quotes on futures markets. In addition, diminishing pressure on resources is also consistent with the projected slowing in inflation.

The central tendency of the projections for core PCE inflation in 2008, at 2.0 percent to 2.2 percent, was a bit higher than in our July report, largely because of some higher-than-expected recent readings on prices.

Beyond 2008, both overall and core inflation were projected to edge lower, as participants expected inflation expectations to remain reasonably well-anchored and pressures on resource utilization to be muted.

The inflation projections submitted by FOMC participants for 2010 -- which ranged from 1.5 percent to 2.0 percent for overall PCE inflation -- were importantly influenced by participants' judgments about the measured rates of inflation consistent with the Federal Reserve's dual mandate and about the time frame over which policy should aim to attain those rates.

The rate of inflation that is actually realized will of course depend on a variety of factors.

Inflation could be lower than we anticipate if slower-than- expected global growth moderates the pressure on the prices of energy and other commodities or if rates of domestic resource utilization fall more than we currently expect.

Upside risks to the inflation projection are also present, however, including the possibilities that energy and food prices do not flatten out or that the pass-through to core prices from higher commodity prices and from the weaker dollar may be greater than we anticipate.

Indeed, the further increases in prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggest slightly greater upside risks to the projections of both overall and core inflation than we saw last month.

Should high rates of overall inflation persist, the possibility also exists that inflation expectations could become less well anchored.

Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and could reduce the flexibility of the FOMC to counter shortfalls in growth in the future. Accordingly, in the months ahead, the Federal Reserve will continue to monitor closely inflation and inflation expectations.

BERNANKE: Let me turn, now, to the implications of these developments for monetary policy.

The FOMC has responded aggressively to the weaker outlook for economic activity, having reduced its target for the federal funds rate by 225 basis points since last summer.

As the committee noted in its most recent post-meeting statement, the intent of those actions has been to help promote moderate growth over time and to mitigate the risks to economic activity.

A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives of maximum employment and price stability in an environment of downside risks to growth, stressed financial conditions, and inflation pressures.

In particular, the FOMC will need to judge whether the policy actions taken thus far are having their intended effects.

Monetary policy works with a lag. Therefore, our policy stance must be determined in light of the medium-term forecast for real activity and inflation, as well as the risks to that forecast.

Although the FOMC participants' economic projections envision an improving economic picture, it is important to recognize that downside risks to growth remain.

The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner, as needed, to support growth and to provide adequate insurance against downside risks.

Finally, I would like to say a few words about the Federal Reserve's recent actions to protect consumers in their financial transactions.

In December, following up on a commitment I made at the time of our report last July, the board issued for public comment a comprehensive set of new regulations to prohibit unfair or deceptive practices in the mortgage market, under the authority granted us by the Home Ownership and Equity Protection Act of 1994.

BERNANKE: The proposed rules would apply to all mortgage lenders and would establish lending standards to help ensure that consumers who seek mortgage credit receive loans through terms that are clearly disclosed and that can reasonably be expected to be repaid.

Accordingly, the rules would prohibit lenders from engaging in a pattern or practice of making higher-priced mortgage loans without due regard to a consumer's ability to make scheduled payments.

In each case, a lender making a higher-priced loan would have to use third-party documents to verify the income relied on to make the credit decision.

For higher-priced loans, the proposed rules would require the lender to establish an escrow account for the payment of property taxes and homeowners' insurance, and would prevent the use of prepayment penalties in circumstances where they might trap borrowers in unaffordable loans.

In addition, for all mortgage loans, our proposal addresses misleading and deceptive advertising practices, requires borrowers and brokers to agree in advance on the maximum fee that the broker may receive, bans certain practices by servicers that harm borrowers, and prohibits coercion of appraisers by lenders.

We expect substantial public comment on our proposal, and we will carefully consider all information and viewpoints while moving expeditiously to adopt final rules.

The effectiveness of the new regulations, however, will depend critically on strong enforcement. To that end, in conjunction with other federal and state agencies, we are conducting compliance reviews of a range of mortgage lenders, including non-depository lenders.

The agencies will collaborate in determining the lessons learned and in seeking ways to better cooperate in ensuring effective and consistent examinations of and improved enforcement for all categories of mortgage lenders.

The Federal Reserve continues to work with financial institutions, public officials and community groups around the country to help homeowners avoid foreclosures.

We have called on mortgage lenders and servicers to pursue prudent loan workouts and have supported the development of streamlined, systematic approaches to expedite the loan modification process.

BERNANKE: We have also been providing community groups, counseling agencies, regulators and others with detailed analyses to help identify neighborhoods at high risk from foreclosures so that local outreach efforts to help troubled borrowers can be as focused and as effective as possible.

We are actively pursuing other ways to leverage the Federal Reserve's analytical resources, regional presence and community connections to address this critical issue.

In addition to our consumer protection efforts in the mortgage area, we are working toward finalizing rules under the Truth in Lending Act that will require new, more informative and consumer- tested disclosures by credit card issuers. Separately, we are actively reviewing potentially unfair and deceptive practices by issuers of credit cards.

Using the board's authority under the Federal Trade Commission Act, we expect to issue proposed rules regarding these practices this spring.

Thank you. I would be very pleased to take your questions.

FRANK: Thank you, Mr. Chairman.

Let me just announce to members, we have one vote, apparently, on a particular matter. We will break for that vote.

Some members want to start going back -- leaving now and coming back. We want to minimize the disruption. We're going to ask the chairman to give us a few more minutes. But we're going to move promptly.

I'm going to ask my questions and then we may get in one more set.

Members who want to can go and come back, and we may preserve continuity.

Mr. Chairman, (inaudible), I've been here -- this is my 28th year. And it's taken me that long to hear the following words, "I think, " from a Federal Reserve chairman.

Finally, I would like to say a few words about the Federal Reserve's recent actions to protect consumers in their financial transactions. That is a very significant change for the better. And it's particularly relevant, because it is the absence of this kind of approach that brought us to where we are.

You outlined things that you were doing under the Home Ownership and Equity Protection Act. And you correctly noted it was passed in 1994 and it has taken until your chairmanship for this to be done.

And I think we are seeing -- and I won't ask you to comment on this -- a reversal. And I found Mr. Greenspan's response in the '90s on monetary policy to be a very thoughtful one. When he resisted those who said, as unemployment dropped below 5 percent and down into 3.9, that somehow that automatically meant inflation. He resisted that. He was quite correct.

FRANK: But in another area, I think he erred, his view that regulation was almost never required. And when you have no regulation whatsoever, what the chairman, your predecessor often told us was that "I have two options," whether it was the stock market effervescence or exuberance, whether it was the subprime; "I can either deflate the entire economy or I can let the problems continue."

I appreciate that, in two areas you've mentioned today -- and we aren't, obviously, going to agree on all the specifics -- you have gone beyond that. And I think, as I said, that is essential.

I know you say, to reinforce the point about this being a very different kind of a recession -- or whatever may be (inaudible) a recession. I don't want to impute to you the view that we're in a recession, because I'm not going to be responsible for the nervous people at the stock market who overreact when you twitch your nose.

So the -- but the problems we now have are different. And as you note, there's no inventory overhang.

What's interesting, as you note, the extent to which the rest of the economy's in pretty good shape, but the regulatory failures and the consequent abuses have caused this very broad-scale problem.

As you say at the bottom of page two, "We see very few signs of any serious imbalances in business inventories, aside from houses. As a whole, the nonfinancial business sector remains in good financial condition."

This makes this an unusual economic problem. It puts constraints on your ability to deal with it. And it makes it clear, we cannot either deal with the current problem or deal with a potential repetition without getting into sensible regulation.

So we look forward to working with you in that regard.

I also appreciate your reiterating the importance of worrying about the down side in unemployment.

FRANK: As you note, the central tendency is 5.2 to 5.3 percent, and you were then talking sensibly about downside risks be more likely to that.

In other words, we're talking about edging back up close to 6 percent unemployment.

If 5.3 is a central tendency and the downside risks in employment are the greater ones, then we have to be very careful.

So let me now just finally say -- and I don't ask you to comment on what I said. But going forward, what is your view -- you have talked about the problems with what you call the originate-to- distribute model. Is that an area in which working together you think that regulators, the Congress need to adopt? And is it possible for us to come up with rules that can preserve the great benefits of securitization and give us a better chance of diminishing the abuses?

BERNANKE: Yes, Mr. Chairman. I think the originate-distribute model and the securitization has a lot of value. It allows borrowers to have, essentially, direct access to capital markets.

But the recent experience shows we need to do some work on it, both the private sector and in collaboration with supervisors and regulators. We need to have more responsibility and accountability at the point of origination. We need to have better information and clarity about what securitized products contain.

If we do those things, I think we can restore this market. But at the moment, as you know, it's very dysfunctional.

FRANK: Well, I appreciate that. Because one of the points you mentioned and one of the problems we have now is the lack of confidence on the part of investors.

And I think this is a case, as I think was the case with much of Sarbanes-Oxley -- everybody agrees on, and I think almost all of it -- appropriate rules can be pro-market because they can instill in investors a confidence that they otherwise didn't have.

We've got, kind of, an investors strike now. We have, as we're going to talk about next week, municipalities offering 100 percent guarantees -- in my judgment -- full faith and credit general obligation bonds, paying an unfair risk premium.

So it does seem to me that if we work together we can give the investors more confidence. And that's part of getting us back into the operation.

Would you comment on that?

BERNANKE: Well, I certainly agree that we need to work together, that regulators are trying to valuate what we've learned from this experience and trying to see what we can do better in the future. The industry is doing the same thing.

BERNANKE: We want to make sure that any rules and regulations we adopt are wise and achieve their objectives and don't impose excessive costs. But, clearly, we want to look back at this experience and try to learn, you know, what the lessons are.

FRANK: Thank you, Mr. Chairman.

The gentlewoman from Illinois?

BIGGERT: Thank you, Mr. Chairman.

And thank you, Chairman Bernanke, for your continued efforts to keep our economy growing.

And I'd like to thank you for the Federal Reserve's thorough analysis of the debt level of the American families and for promulgating rules related to high-cost mortgages and credit cards.

As you know, this committee continues to address issues related to the mortgages and to the credit cards. And I have concerns about some of the legislation before this committee that may cause a further tightening in the credit market. So I'd like to just ask you a couple questions on -- based on credit cards.

And based on your -- on the Fed's recent surveys and studies, what do consumers need to know to make informed decisions about their credit cards? And could you just describe briefly the Regulation Z and what you believe it will do to make -- to help consumers better understand the terms of their credit cards agreements?

And when do you anticipate -- I think you said this spring -- that the regulation will be finalized?

And, finally, can you discuss actions that the Fed plans to take, and when, to crack down on unfair and deceptive practices of bad actors in the credit card industry?

In two minutes, probably.

BERNANKE: I will.

(LAUGHTER)

The Reg Z regulations are still out for comment. We're receiving comments, which we're going to review very carefully. But the intent of Reg Z was to provide clear disclosure so people could understand what their credit card account involved.

In particular, we have created a new Schumer box, as it's called. It has new information about fees and penalties, and provides more information to the consumer about the terms and conditions of their account.

In addition, we proposed to lengthen the period of time over which a consumer must receive notice before there's a change in terms of their credit card.

We think these disclosures have been consumer-tested. We have used companies to go out and use actual consumers to see, you know, what works, how much they recall, how much they understand.

And we think there will be a substantial improvement, in terms of allowing people to understand what is involved in their credit card accounts.

We are looking to -- as I mentioned, to look at some practices under the unfair and deceptive acts and practices rules. We anticipate sending out a proposal for comments, within a couple of months, this spring, to address some issues that the disclosure rules themselves cannot address.

The final release of both sets of rules will probably take place later this year. I think what we would like to do, if possible, to minimize burden on the industry, would be to release the Reg Z disclosures and the new rules on unfair and deceptive practices at about the same time, if possible.

So I don't have a specific date yet for that release.

BIGGERT: My concern is always that sometimes what we do would restrict credit, or make it impossible for consumers to have the credit if it is limited, so that it would make all consumers, not the ones that are having the credit problems, but have to take responsibility for the payments.

BIGGERT: So it would -- in that effect, would restrict credit.

Do you think that the things that you're doing will have any effect on that?

BERNANKE: We are very sensitive, both in the credit card rules and also in the mortgage rules, that these markets are important, we don't want to credit a chilling effect, we don't want to shut down these markets; we just want them to work better.

And in particular we think it's important for consumers to have a better understanding of what it is that they're buying when they purchase products in these markets.

BIGGERT: If you had to say two things, what would be the -- what consumers need to know to make informed decisions would be the most important?

BERNANKE: Well, they certainly need to know the interest rate and how it varies over time and what that means to them in terms of payments. And they also need to understand other kinds of penalties or other fees that might occur if they violate certain conditions or other things occur.

So they need to have a good understanding not only of how they use a credit card, for example, but of also what the cost might be so they can make an informed judgment.

BIGGERT: Thank you.

I yield back.

FRANK: Mr. Kanjorski's gone to vote and is on his way back. I'm going to go vote now. So we may have a break of less than three or four minutes. As soon as he comes back, he'll resume the questions.

And I am assured this is the only vote till 4:00. So you'll be out of here before this happens again.

(RECESS)

(UNKNOWN): The committee will come to order.

Mr. Chairman, we now have the opportunity to seize control of this committee and do as we will.

(LAUGHTER)

So we should get started on all the serious problems that face us.

Now, I'm going to take my questions now so that we can save your time and the committee's time to get to the precious facts.

Mr. Chairman, I listened to your statement in regard to your plans to correct some of the foibles within the subprime and mortgage market; how we deal with reservations of money for taxes, et cetera.

And as you know, this committee has sent and passed through the House a subprime bill which contains a portion of my bill, or all of my bill, which deals with appraisals, deals with reserve accounts, et cetera, and greater powers for lenders.

And yesterday -- I think it was yesterday -- I had the opportunity to talk with Attorney General Cuomo in New York who has apparently entered into an agreement with Fannie Mae and Freddie Mac not quite to the level of our legislation but in tightening up the rules and regulations on appraisals, et cetera. And he tells me that he couldn't -- that they were, sort of, inhibited from moving through with the agreement because some of the regulators have not given their approval.

And they particularly cited, of course, the regulators for Fannie Mae and Freddie Mac, who I then proceeded to call and (inaudible) so I don't understand. He said he's going to look into it within the next week; get back to me with a response. And I think he intended to talk to you, as a principal regulator of the banks, and others.

I would appreciate if you'd really look at that. I think your regulations are very good. Our bill is very good.

But if in the meantime we can get an agreement with the people who write 83 percent of the mortgages in this country, Fannie Mae and Freddie Mac, it would seem to me we go a long way in stemming some of the problems that we're having in the marketplace.

And even though that agreement would fast be surpassed by your regulations or our legislation, I don't think we should be particularly egotistic about whose idea is implemented or put forth. I think we ought to just try and work surgically to stop this problem.

Do you agree?

BERNANKE: Well, you know, I hope that our regulations are going to take a good positive step.

I'm not familiar with all the details of the Cuomo-Fannie agreement. I am in close communication with Mr. Lockhart, the regulator and I continue to discuss issues with him.

But I can't really comment on a specific proposal.

(UNKNOWN): Well, of course, I'm interested -- your regulations will take months to clear all the barriers, get all the comments, won't it?

BERNANKE: No, sir, I think we will have those out before I appear before you again, in July.

(UNKNOWN): Before July. I think July is months away, is that right?

BERNANKE: Yes, sir.

(UNKNOWN): OK.

Now, the other thing that I'm a little disturbed about, to be honest with you -- and I haven't totally lost faith in the regulators, but I'm starting to. As Mr. Frank indicated, it seems to me all of us should look at some introspection here and maybe take some -- I don't want to say blame or fault -- for the problem we're in right now, but certainly we didn't quite fulfill our functions.

In August, when there was a break in the securitized market on subprime loans, I was led to believe by regulators at the executive branch that they thought everything was pretty much tightened up and it wouldn't occur, but most of all that we wouldn't have a cross- contamination into other securities markets and other problems, and that it was going to be put together and we wouldn't see that.

Then, in December, of course, other thunderous shocks hit us, and in January. And now it seems weekly that some financial entity that we've all relied on that would not be subjected to these crash problems -- just two weeks ago, it was the student loan bonds that weren't selling. Last week, it was the auction rate securities that failed and jumped from 4 percent to 20 percent. And this week, it's the variable rate demand notes that are failing to have a market because the banks won't come in and play their role as specialists and provide that market.

I think, would you say that this may represent in the credit market a metastacization of the problem, that it's spread, and it's spreading rather wildly and quickly, and that we should come up with some game plans to do something other than the stimulus demand that we had out there two or three weeks ago?

BERNANKE: Well, Congressman, as I mentioned in my testimony, the subprime problem was a trigger for all this, but there were other things that then began to kick in, including a pullback from risk taking, concerns about valuation of these complex products, issues about liquidity and so on, which, as you say, caused the problems to spread throughout the system.

Right now, we are looking at solutions. We are -- the Federal Reserve, for example, is engaging in this lending process, trying to reduce the pressure in the short-term money markets.

BERNANKE: I think, very importantly, the private sector has an important role to play.

I would encourage, for example, banks to continue to raise capital so that they would be well able to continue to lend. And they need also to increase transparency, to provide more information to the market so the market can begin to understand what these assets are and what the balance sheets look like.

(UNKNOWN): On that point, Mr. Chairman, wasn't it quite clear to the Federal Reserve that maybe we didn't have the transparency in all these securities that were broken into various ranks?

I mean, it seems to me six months later and most banks still don't know what their exposures are. Wasn't that apparent to the regulators and maybe we should have come forth with some regulatory authority to require these things to be broken out in inventories?

I have to tell you, I'm astounded that major banks in this country and around the world are still saying, "We don't know what our exposure is." That's sort of scary to me. And they back that up with periodically, on a month-to-month basis, coming out and announcing more failures on their part and more losses than they had anticipated.

When will we get to the point -- what do we have to do? Doesn't the Federal Reserve, the present regulators, have enough authority to demand that nothing be done that's so clouded that you can't understand what your obligation would be or quickly come up with what your exposure would be? Don't we have the capacity to do that?

BERNANKE: Well, there were two sets of issues in this case.

The first was that many investors took the credit rating agencies' ratings as all the information they needed. They didn't do additional analysis. So they just looked at the rating, they didn't look at what was in these structured credit products.

We're now looking at that situation much more carefully. The credit rating agencies are reviewing their own procedures. And clearly investors now understand they need to look at a lot more details than just what the credit rating is.

Another issue is that with the markets being relatively illiquid, in many cases quite illiquid, it can be very hard to evaluate what even a straightforward mortgage is worth. With the economy changing, with mortgages and other assets not trading on a liquid market, it makes it more difficult for the banks to evaluate what their holdings are. And that's a problem going forward.

Going forward, the approaches, I think, involve working with the SEC and the accounting authorities and so on to try to find better ways of disclosure, more transparent approaches to disclosure, and also to make sure that -- take measures to ensure that this drying up of liquidity doesn't happen again; there's enough liquidity in markets so that price discovery can take place and we can value what these assets are worth.

(UNKNOWN): Thank you very much, Mr. Chairman. I know I've run way over my time. The chairman's about to come and remove me physically from the chair.

But let me recognize Mr. Miller on our...

G. MILLER (?): Thank you very much.

It's good to have you here again. If you'd like to say something really good about the economy, I know stockholders would really love it.

But short of that, I remember the first time you testified, my questions were associated with the housing market, and there wasn't -- tend to be that big a concern back then, and I think things have changed. And we've tried to do a lot from our side, raising conforming and high-cost areas on GSEs and FHA, and you've lowered the basis points about 225 basis points to try to stimulate the economy.

It has done a good job at lowering cost of funds to lenders, but from mid-January we're looking at the opposite when it comes to mortgage rate to people who want to buy a house. They tend to be going up.

Could you address that?

BERNANKE: Well, mortgage rates are down some from before this whole thing began.

But we have a problem, which is that the spreads between, say, treasury rates and lending rates are widening, and our policy is essentially, in some cases, just offsetting the widening of the spreads, which are associated with various kinds of illiquidity or credit issues.

So in that particular area, you're right that it's been more difficult to lower long-term mortgage rates through Fed action.

We are able, of course, to lower short-term rates, and they do have implications for, for example, resets of existing mortgages, and they affect the ability of banks and others to finance their holdings of assets. So I think that we still have power to influence the housing market and the broader economy.

But your points are well taken. A lot of what we've done has been mostly just to offset the tightening of credit that has arisen because of the financial situation.

G. MILLER (?): I'm looking at lending since about January 24th has raised about 56 basis points to the consumer.

G. MILLER (?): Yet your costs to the lenders are down considerably, based on what C.D.s are being, you know, sold out today and such.

BERNANKE: That's true for even the conforming mortgages like Fannie and Freddie Mac mortgages.

G. MILLER (?): Do you see a benefit in a help to the industry -- I do -- in what we've done in raising conforming in high-cost areas, there, where people can get lower-rated GSEs, when they sell their home, or they're buying a home, than they could for? What impact do you see that having in the long term?

BERNANKE: In the jumbo...

G. MILLER (?): Yes, us being able to get a Freddie/Fannie at the $700,000 range (inaudible) an FHA?

BERNANKE: Well, I think we're going to have to see. It's going to take a bit of time for them to get geared up to accept those kinds of mortgages. And there has been a ruling by the bond association that they can only securitize those jumbo mortgages in separate instruments, not mix them in with the conforming mortgages. And that will perhaps reduce the liquidity.

So it remains unclear how much benefit will come from this. However, my understanding is that Fannie and Freddie are committed to doing a significant amount of securitization of these jumbo mortgages.

And we would certainly encourage them to raise capital, to allow them to do more, and to securitize more of both conforming and jumbo securities.

Of course, at the same time, I hope that Congress will continue to push forward on getting a comprehensive reform that will make these entities safe and sound for the future.

G. MILLER (?): Yes.

On January 17th, you presented your near-term economic outlook to the House Budget Committee. In that outlook, you indicated the future market suggests (inaudible) prices will decelerate over the coming year. However, since then, oil prices have reached record highs in nominal terms.

If oil continues to remain at its current levels, thereby adding further pressure on the overall inflation, it may be more difficult for the Fed to cut interest rates. And if that were the case, what option do you have, beyond cutting interest rates, are you considering to help spur the economic growth?

BERNANKE: Well, the oil prices rose in 2007 by almost two- thirds. It was an enormous increase. And it put a lot of pressure, obviously, directly on energy products, and also feeding through into airfares and other energy-intensive good and services.

Oil prices are very volatile. They've moved around a lot in the last month or so. But the end-of-the-year futures markets have oil prices at about $95.

Oil prices don't have to come down to reduce inflation pressure. They just have to flatten out. And if they...

G. MILLER (?): But if they don't flatten out?

BERNANKE: Well, if they continue to rise at this pace, it's going to be a -- create a very difficult problem for our economy. Because, on the one hand, it's going to generate more inflation, as you described. But it's also going to, you know, create more weakness because it's going to be like a tax that's extracting income from American consumers.

So we're just going to have to -- if that happens, it will be a very tough situation. We're going to have to make judgments, looking at the risks to both sides of our mandate -- and, you know, make those judgments at that time.

But I think it's relatively unlikely that we'll see the same kinds of enormous increases in energy prices this year that we've seen in 2007.

G. MILLER (?): So you feel confident your projection of a decrease in the long-term (inaudible) will come true? That's your prediction at this point?

(CROSSTALK)

G. MILLER (?): That you see oil decreasing as the year progresses.

BERNANKE: Well, we don't know what oil prices are going to do. It depends a lot on global conditions, on demand around the world.

BERNANKE: It also depends on suppliers, many of which are politically unstable or politically unstable regions or have other factors that affect their willingness and ability to supply oil. So, there's a lot of uncertainty about it.

But our analysis, combined with what we can learn from the futures market, suggests that we should certainly have much more moderate behavior this year than we have. But, again, there's a lot of uncertainty around that estimate.

FRANK: The gentleman from New York, the chair of the Financial Institutions Subcommittee?

(CROSSTALK)

FRANK: We're going to (inaudible).

Gentlewoman from New York?

MALONEY: It's my turn?

FRANK: Gentleman from Illinois -- we'll get back. Sorry.

GUTIERREZ (?): I knew there's no...

FRANK: Let's keep going.

(LAUGHTER)

GUTIERREZ (?): Thank you.

Let me just follow up. So, over the last six months, you have taken actions to reduce the cost of money. And in January, I called my daughter and said, "Go and get around the 15th." I think I gave her good advice, Mr. Chairman.

I said, "Go and lock it in for as long as you can." She's going to buy her first her home. Because it was, like, 5.5 percent. I said, "It's the time, honey."

And then I checked the Wall Street Journal and it's like 6.38. What happened?

I'm sorry, I didn't quite -- if we're -- if money costs less, if the money is cheaper, why are the -- why are mortgages increasing over the last, I don't know, 45 days?

BERNANKE: Well, again, I don't necessarily want to try to explain fluctuations over short periods of time. You know, financial markets move back and forth.

But a couple of things have happened. There's been some back up in longer-term Treasury rates -- the safe long-term rates.

But, again, I think a big part of the story is that even as the Fed has lowered interest rates and as the general pattern of interest rates has declined, the pressures in the credit markets have caused greater and greater spreads, particularly for risky borrowers like risky firms, for example.

And that has to some extent -- I would say not entirely, by any means -- but has to some extent offset the effects of our easing.

Our easing is intended to, in some sense, you know, respond to this tightening in credit conditions, and I believe we've succeeded in doing that, but there certainly is some offset that comes from widening spreads, and this is what's happening in the mortgage market.

GUTIERREZ (?): I'm not the economist that you and others are, but I just found it so surprising to watch, because it hasn't had the same kind of relationship in the past, as I've seen what the Fed does and then I see what the market does. There seems to be some -- because it's very substantial, a 30-year mortgage.

I mean, between 5.5 and 6.5, it's huge. I mean, a lot bigger than 4.5 to 5.5. I mean, the amount of money you pay on a 30-year mortgage really is substantial.

GUTIERREZ (?): So we'll talk some more about how we continue to deal with that.

I want to take a step back from the macro-economic discussions for a moment and discuss a regulatory issue. As you know, under our current regulatory scheme, there is no lead federal regulator to oversee money remitters or money service business industry. What we have is kind of a patchwork of state and federal regulations.

At the federal level, we have FinCen monitoring money laundering reporting requirements and the Federal Trade Commission with jurisdiction over consumer issues.

Last year I held a couple of hearings in my subcommittee with consumer groups and others to weigh in on the issue. The consumer groups were unanimous in support for a strong federal regulatory scheme with a lead regulator. Because of the account discontinuance problem, the industry sees the benefit of having a single lead regulator.

Where the stakeholders differ is which regulator should take the lead. Most agree the Federal Reserve will play a substantial role, if not a lead role, because of the Federal Reserve's ACH system and its experience with Directo a Mexico program. But some have advocated creating a new federal agency for this purpose.

Do you believe the Federal Reserve would be the appropriate lead regulator for the remittance industry? If not, why not?

And is there an agency that is better positioned to monitor the industry? And should we be looking at creating a -- or should we be looking at creating entirely (inaudible)?

So, do you think you should lead, do you think there's a better, or do you think we should create something new?

Because in the hearings, it seems quite clear that financial institutions are going to keep backing away. And as they do, it's going to get harder to get money to people who earn less here back to the very needy ones that really need -- every nickel counts.

What do you think, Mr. Chairman?

BERNANKE: Well, as you point out, the money remittances are currently regulated by states, by the FTC, and so on. And I think, as in some other areas, the state regulation varies in terms of its aggressiveness and quality and so on.

I'm not sure the Federal Reserve is the right agency. Our expertise is in banking. This is quite a different industry, many small operators.

We've taken a somewhat different approach, which is to encourage banks and other federally regulated institutions to offer remittance services and to try to attract people interested in that to come in to the banking system.

The advantage of doing that is, first, that often the banks can offer better, cheaper services. But in addition, people who are, quote, "unbanked," that is, they're not part of the regular banking system, through this particular service may become more comfortable with banks and may begin to have a checking account, a savings account, you know, credit and so on.

So that's been our approach, is to, sort of, encourage banks in their own interest, and also through CRA motivation and other ways, to try to reach out and bring in remittances into their operations.

GUTIERREZ (?): Well, let me just -- let me just suggest that...

FRANK: (OFF-MIKE)

GUTIERREZ (?): Thank you very much.

Let me just suggest that because the MoneyGrams and the Western Unions and the large ones, which has many facilities -- I agree they should be banked, but in the interim period, they have all these facilities throughout the neighborhoods and they have facilities in the nations which receive the money, that is they have a disbursement level in the nations where -- we should have more conversation about how we take that private sector so that they're not so fearful anymore as to large financial institutions won't back them up and are backing away.

BERNANKE: Congressman, it's worth discussion, and Congress really needs to think about this.

FRANK: The gentleman from Texas, Mr. Neugebauer?

NEUGEBAUER: Thank you.

Mr. Chairman, I want to turn my attention a little bit.

You mentioned in your testimony a little bit about the dollar and the fact that it has increased our exports -- because American goods are more competitive. But at the same time, it's created -- it swings the other way and the fact that it raises price -- it has an inflationary impact on the American consumer.

I believe one of the reasons that oil is $100 a barrel today is because of our declining dollar. People settle oil in dollars, and I think a lot of them have, obviously, just increased the price of the commodity.

And so I really have two questions.

One is, what do you believe the continuing decline of the dollar is -- what kind of inflationary impact do you think that is going to have?

And then, secondly, as this dollar declines, one of the things that I begin to get concerned with is all of these people that have all of these dollars have taken a pretty big hickey over the last year or so and continue to do that.

At what point in time do people say, you know, "We want to stop trading in dollars and trade in other currencies"? And what implication do you think then that has on the capital markets in U.S.?

BERNANKE: Well, Congressman, I always need to start this off by saying that treasury is the spokesman for the dollar. So let me just make that disclaimer.

We, obviously, watch the dollar very carefully. It's a very important economic variable.

As you point out, it does increase U.S. export competitiveness, and in that respect it's expansionary but it also has inflationary consequences.

And I agree with you that it does affect the price of oil. It has probably less effect on the price of consumer goods or finished goods that come in from out of the country, but it does have an inflationary effect.

Our mandate, of course, is to try to achieve full employment and price stability here in the United States, and so we look at what the dollar's doing. And we think about that in the context of all the forces that are affecting the economy, and we try to set monetary policy appropriately.

So we don't try to -- we don't have a target for the dollar or anything like that. What we're trying to do is, given what the dollar's doing, we try to figure out where we need to be to keep the economy on a stable path.

With respect to your other question, there is not much evidence that investors or holders of foreign reserves have shifted in any serious way out of the dollar to this point. And, indeed, we've seen a lot of flows into U.S. treasuries, which is one of the reasons why the rates of short-term U.S. treasuries are so low, reflecting their safety, liquidity and general attractiveness to international investors.

So we've not yet seen the issue that you're raising.

NEUGEBAUER: One of the other questions that I have -- and just your thoughts -- is the U.S. economy is based on encouraging the consumer to consume as much as he possibly can. And, in fact, the stimulus package that we just passed the other day, $160 billion, was really, by and large, saying to the American people, "Go out and spend."

And this consumption mentality away from any kind of a savings mentality concerns me that makes the economy always going to be a lot more volatile because there's not much margin.

And now -- a year ago, people were testifying before this -- "Don't worry about the low savings rates," because people had these huge equities in their homes, and so that was compensating for the lack of savings in the U.S.

That now, we see, as some reports, devaluation of real estate, 10, 12, 15 percent, and the savings rates at zero and negative rate.

Does that concern you long term that we're trying to build an economy on people to use up every resource that they have?

BERNANKE: Yes, Congressman.

I think we -- in the long term, we need to have higher saving, and we need to devote our economy more toward investment and more to foreign exports than to domestic consumption. And that's a transition we're going to have to make in order to get our current account deficit down, in order to have enough capital in foreign income to support an aging population as we go forward the next few decades.

BERNANKE: The stimulus package, which is going to support consumption in the very near term, there's a difference between the very short run and the long run.

In the very short run, if we could substitute more investment, more exports, that would be great. But if we -- since we can't in the short run, a decline in total demand will just mean that less of our capacity's being utilized, we'll just have a weaker economy.

So that's the rationale for the short-term measure. But I agree with you that over the medium and long term we should be taking measures to try to move our economy away from consumption dependence, more toward investment, more toward net exports.

FRANK: Gentlewoman from New York, Ms. Maloney?

MALONEY: Thank you very much.

And welcome, Mr. Bernanke.

New problems in the economy are popping up like a not-very-funny version of whack-a-mole, as Alan Blinder, a former vice chair of the Fed, recently observed. And yesterday's news was no exception, with the wholesale inflation soaring, consumer confidence falling, and home foreclosures are spiking and falling sharply.

Added to this, many people believe that the next shoe to fall will be credit card debt, which is securitized in a very similar way as the subprime debt. And as you know, the Fed has a statutory mandate to protect consumers from unfair lending practices, but there is a widespread perception that the Federal Reserve and Congress did not do enough or act quickly enough to correct dangerous and abusive practices in the subprime mortgage market.

Many commentators are now saying that the credit cards will be the next area of consumer credit where overburdened borrowers will no longer be able to pay their bills.

MALONEY: We see a situation in our -- with our constituents where many responsible cardholders, folks who pay their bills on time, do not go over their limit, are sinking further and further into a quicksand of debt because card companies are raising interest rates any time, any reason, retroactively, in some cases quite dramatically, 30 percent, on existing balances.

And there are very, I'd say, scary parallels between the subprime mortgage situation and what is now happening with credit cards.

In your response to Chairwoman Biggert's question on what the most important thing a consumer needs to know about their credit card, you responded, and I quote, "Consumers need to know their interest rate and how it varies over time," end quote. You also mentioned that it's important for consumers to know how their interest rate works.

I have introduced legislation with Chairman Frank and 62 of our colleagues that would track your proposed changes to Regulation Z to always give consumers 45-days' notice before any rate increase, but it would also give consumers the ability to opt out of the new terms by closing their account and paying off their balance at existing terms.

Would you agree that this notice and consumer choice would allow consumers to know their interest rate and how it varies over time and how it works?

BERNANKE: Congresswoman, first of all, I agree, it's very important to protect consumers in their dealings with -- in credit cards.

As you mention, we've put out Reg Z revisions for comment. It includes this 45-day period. Within the Reg Z authority, we couldn't take that second step that you mention.

But as I mention in my testimony, we are currently looking under a different authority, which is the FTC Unfair Deceptive Acts and Practices authority, at a range of practices, including billing practices. And we will hope to come up with some rules for a comment within the next few months.

So, we are looking at all those issues and we will be providing some proposed rules.

MALONEY: Well, I congratulate you on your efforts in this area. It's very important.

Would you agree that regulation of credit cards and credit card practices beyond disclosure, beyond Reg Z is necessary?

BERNANKE: If there are circumstances in which the actions of the credit card issuer are essentially impenetrable by the consumer, the consumer doesn't understand and can't be expected to understand the action; or if the actions of the credit card issuer are, in fact, literally different from what was promised, that is they're essentially taking different actions than specified in the contract, certainly both of those cases, one would surely say that further action, other than just pure disclosure, would be needed.

MALONEY: And as you said to Ms. Biggert, you believe substantive corrections of credit card practices can be done without restricting access to credit or restricting consumer spending?

BERNANKE: Again, I think it's important for people who have credit card accounts or any other form of credit to understand what it is that they're buying. So that, like buying any other product, if you're buying a credit card account, you should know what it is, how it works, and then you can make a reasoned choice.

MALONEY: Well, thank you for your...

(CROSSTALK)

FRANK: The gentleman from Georgia?

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

Mr. Chairman, I appreciate you being here again today. And we know that monetary policy certainly is a balancing act, and you have a difficult challenge balancing things.

I find it interesting today that we have some members who are now upset with the current situation were those that were most clamoring in years past for an expansion of credit. And so, I think that it may be that those individuals, as we clamp down on credit, are those that will then be clamoring for us to open it up again in the relatively near future.

So it is, indeed, a balancing act.

The federal government has come under significant indictment by some for its lack of regulation. And I'm interested in what degree you believe there is responsibility for our current situation that is due to the lack of regulation.

BERNANKE: Well, as I mentioned to the chairman earlier, I think that regulation -- appropriate regulation combined with market forces can provide the best results.

I think regulation can often be helpful in situations where there's an asymmetry of information or knowledge; where one side of the transaction is far more informed than the other side of the transaction.

So, for example, if you have two investment banks doing an over- the-counter derivatives transaction, presumably they both are well- informed and they can perform that transaction without necessarily any government intervention.

If there are -- in the case of consumer credit, though, I think there can be circumstances when the products are very complicated, that it's important to help make sure that there are disclosures and practices so that the consumer can understand properly, you know, what it is that they're buying.

As I said to Congresswoman Maloney, the market works better is the people understand what the product is. So I think there are circumstances when regulation can be helpful.

We also, of course, supervise banks, because the government deposit -- insures deposits, and, therefore, we want to make sure that they are acting in a safe and sound way as well.

SCOTT (?): Is over-regulation possible or harmful?

BERNANKE: Of course, it's possible. As I said in a recent speech, whenever we do regulation we need to think about costs and benefits of that regulation, make sure that there is an appropriate balance between those things.

And as we've done regulations, for example, on mortgage lending, I believe, for example, that subprime mortgage lending, if done responsibly, is a very positive thing. It can allow people to get homeownership that otherwise could not. And there's evidence, there's plenty of evidence, that people can do subprime lending in a responsible way.

So in doing our regulations, we wanted to be sure that we didn't put a heavy hand on the market that would just shut it down and make it uneconomic. We want to help consumers understand the product, but we don't want to shut down the market.

SCOTT (?): Sure.

Would you agree with the statement that excessive deregulation is the single greatest cause of the challenge that we currently find ourselves in?

BERNANKE: Well, I think there were mistakes in terms of regulation and oversight, but I think there also were private sector...

SCOTT (?): A lot of other situations going on.

BERNANKE: ... mistakes as well. There were a lot of factors involved.

SCOTT (?): The stimulus package that Congress recently passed, many of us were concerned about it being temporary and having questionable effect truly to stimulate the market, the economy, in the long run.

And if we think about the housing situation currently, I think there are two basic options available. One is to try to stimulate housing purchase through some tax policy, and the other is to increase the liability of the taxpayer for becoming the nation's mortgage banker.

Do you have a sense about which road down which we ought head?

BERNANKE: Well, I don't generally comment on specific tax or spending programs.

I think what the Fed is trying to do right now is encourage the private sector, the servicers and the lenders, to scale up their efforts to address this tidal wave of foreclosures that otherwise would occur.

BERNANKE: And I also have discussed the modernization of FHA to provide a vehicle for refinancing of some of these mortgages, and supported reform of GSE oversight as another mechanism.

So those are the things that currently the Federal Reserve has been talking about.

SCOTT (?): Having the taxpayer be the sole holder of the nation's mortgages, though, is probably not a wise idea.

I want to get to my last question, final question, about oil prices and oil and crude.

It's been suggested that increasing domestic production is not necessarily helpful in decreasing the cost of oil to our nation. But wouldn't you say that in fact increasing domestic production or increasing refining capacity, all of that helps decrease, puts downward pressure on the cost of gas at the pump and would be helpful?

BERNANKE: Increasing supply generally lowers the price, so I think that's correct. But in these circumstances Congress has to weigh the benefits of more oil supply against other considerations, including environmental issues and the like.

SCOTT (?): Thank you.

FRANK: The gentlewoman from California?

WATERS: Thank you very much, Mr. Chairman, for holding this hearing.

And I thank Chairman Bernanke for once again being here and helping us to understand his vision for how we deal with our economy.

And of course we're all pretty much focused on the subprime crisis, because I think we all understand the role that it is playing in our economy -- the negative role that it is playing in our economy at this time.

I am -- we had -- yesterday, Mr. Bernanke, we had some economist here testifying before this committee. And there was some discussion about the role of regulatory agencies, and some discussion about public policy-makers and whether or not we were going to overdo it and come up with new laws that may prove to be harmful to the overall industry and thus the economy.

WATERS: And let me just say that I think that you have been forthcoming in talking about some missed opportunities, maybe, early on, you know, with, maybe, what could have been done based on information that regulatory agencies should have known about, should have had access to, should have acted on.

And so that's behind us.

But I am concerned about voluntary efforts by the financial institutions, who have some role and responsibility in the subprime crisis.

For example, I held a hearing where Countrywide said that it had made 18 million contacts, had done 60,000 workouts. And out of that, there were 40,000 loan modifications.

This other coalition, called Hope Now, said they had done 545,000 workouts, 150 loan modifications, and 72 percent of these were -- we found that 72 percent of these were, kind of, repayment plans and they were not real modifications.

Now, we're trying to act on the best information. And here we have these voluntary efforts that are representing to us that they are making these contacts, they are doing these workouts.

And we look at this -- we don't feel it. We don't have people who are saying that they got a workout that made good sense and that they had been contacted.

How can you help us -- if we're to have any faith in voluntary efforts at all, and not get so focused on trying to produce laws that will do some corrections, how can you help us with determining whether or not this information we are getting is true, whether or not they're doing these workouts, whether or not they're doing this outreach.

What do you do to track this voluntary effort?

BERNANKE: Well, Congresswoman, you're quite right that the information has been very mixed. They did a whole bunch of different surveys. They haven't been comparable. We don't necessarily know exactly what's going on.

I think one of the benefits of the Hope Now alliance is that they are trying to get a more comprehensive and more systematic data collection, so we will know better how many people are being helped, how many are not being helped, what the form of the help is, and so on.

So I do think that the first requirement for good policy here is to know exactly what's happening. And I agree with you, absolutely, on that.

BERNANKE: I also have some sympathy for your point that many of the actions being taken are very temporary, like a temporary payment plan or, perhaps, a forgiveness of a couple of payments and that kind of thing.

In many cases, the only solution that's going to be enduring is a more sustainable mortgage or some kind of restructuring or modification. And I do think that we need to encourage the private sector to look to a greater share of modifications and restructurings in order to solve the problem, rather than just to put it off for a few months. And I think that's very important.

In addition, I believe the Federal Housing Administration, the FHA, could be helpful in that respect if it had more flexible products and more flexibility to refinance mortgages coming from the private sector to create, again, a sustainable solution for people in difficulty.

WATERS: We're willing and prepared to do the legislative work.

Again, we have relied on a lot of voluntary efforts. And I guess my question to you is, are we going to rely on these voluntary efforts to continue to strengthen their product, their work? Or are you -- is there some way that you can have, in your office, someone or someones who can trace, follow and dissect and determine whether or not these voluntary efforts are real?

BERNANKE: Well, again, Congresswoman, I think the lead on the data collection is coming from Hope Now. But we also get our own data from some of the private suppliers of loan information, for example.

So, we're doing a good bit of analysis at the Fed and we're looking for alternative solutions. But, quite frankly, finding solutions that will be focused and help the right people at a reasonable cost is very difficult -- just very difficult.

FRANK: The gentleman from Delaware?

CASTLE: Thank you, Mr. Chairman.

Chairman Bernanke, in recent testimony over in the Senate, in responding to a senator from my state, Senator Carper, you indicated that Regulation Z might be out by opening day of baseball season.

It was unclear to me as to whether everybody understood what opening day of baseball season is. I believe it's March 30th, which is about a month away.

But this is not unimportant. What's in it is obviously very important, but it's not unimportant to have it out in terms of what we're doing here.

CASTLE: Congresswoman Maloney has indicated already she's introduced legislation which is very extensive, which may go substantially beyond where Regulation Z may be with respect to credit cards and the issuance thereof and what can be done under those contracts. And some of her points may be well taken, some may not be well taken.

And I think until we see and compare it to Regulation Z, we're not going to really be able to make that decision.

My question to you is, can you be more specific or can you reaffirm, or do you know for sure what the date of opening season of baseball is, or whatever?

(CROSSTALK)

CASTLE: I'd just like to get some sense of where this is coming from.

BERNANKE: ... season, I'm sorry.

I'm sorry. I did misspeak in that answer. And we corrected the answer with Senator Carper.

The reason for the delay is that, as I mentioned, we are going to be doing another set of rules related to the unfair, deceptive acts and practices under the FTC Act.

Those should be out, I hope, in the spring. I don't have an exact date, but not too far in the future.

And that would give the public a chance to look at and comment on these rules that relate to some of the issues that Congresswoman Maloney was talking about.

We would then do a comment period, a review of those comments. And it's our belief that because they're be some interaction between the Reg Z rules and the UDAP rules and in order to minimize the cost for the industry, we'd probably be better off releasing both of them somewhat later this year.

So the opening day is probably closer to where we would be releasing the proposed UDAP rules rather than when we will be having the final Reg Z rule. So I apologize for that.

CASTLE: So Reg Z may be closer to the World Series or something of that nature...

(CROSSTALK)

CASTLE: ... would that be a correct statement?

Well, I think it's a matter of some concern to us. I hope you understand as your people go about their work, and they have to do their work correctly, how important that is that we have that in order to formulate legislation or determine where we are on legislation.

CASTLE: Along those lines, let me ask you another question.

July of 2003, your predecessor, Chairman Greenspan, let me a letter, which I will submit for the record, expressing deep skepticism about legislators' attempts to limit creditors' use of information regarding borrowers' payment performance with other creditors when risk price -- when pricing risk. Risk-based pricing, as this practice is commonly called, lowers the price of credit for some and provides access to otherwise unavailable credit to many.

Mr. Chairman, do you share Mr. Greenspan's view that -- and I quote from the letter -- "Restrictions on the use of information about certain increase or restrictions on considering the experience of consumers in using their credit accounts will likely increase overall risk in the credit system, potentially leading to higher levels of default and higher prices for consumers"?

BERNANKE: Well, as a general rule, in the same way that riskier credit leads to higher interest rates in the mortgage market, you would expect the same thing to happen in the credit card market. And so reasonable attempts to measure the risk of the borrower, I think, are appropriate and could be reflected in interest rates.

We will be looking at the specific measures taken and the specific approaches taken when we look at these practices under the UDAP authority.

But as a general measure, general matter, one would expect a higher rate to be charged to a riskier borrower.

CASTLE: Thank you, Mr. Chairman.

Let me ask a question on a different subject, and I'm going to ask it very broadly. We don't have time to go into a lot of details.

But we have seen both in the House of Representatives and the United States Senate a series of proposals in terms of the mortgage problems which are out there, one of which is the proposal in the Senate that the bankruptcy courts be able to revise mortgage terms over here. We've had a suggestion, which actually I have in the form of legislation, to suspend litigation for a period of time after we pass legislation to allow the banks to reform mortgages.

CASTLE: There's other suggestions of having lump sums of money go to the various states, who could then use it to help alleviate the problems of the mortgage companies.

Some of this may be beyond your typical perspective, but do you have any thoughts or ideas on any of that kind of legislation, either good or bad, that you can share with us?

BERNANKE: Well, I certainly welcome and I commend you and Chairman Frank and others for thinking about these issues. They're very, very difficult ones.

As I said, we've been thinking about them a lot at the Federal Reserve and discussing them with Congress, with the Treasury and others.

At the moment, I don't see a clear an obvious additional set of steps that can be taken beyond what's happening now, other than, as I mentioned, FHA modernization, GSE reform.

But we are certainly open, you know, to the possibility and continue to look at alternatives. But I don't have an additional one to recommend at this point.

CASTLE: Thank you, Mr. Chairman.

ACTING CHAIR: Thank you very much.

I'll recognize Mr. Meeks for five minutes, please.

MEEKS: Thank you, Madam Chair.

Good to be with you, Mr. Chairman.

You know, you get some of these conditions, and you do one thing and it helps or you do something else and it hurts. And such is the situation that I think that we're currently in.

It seems to me that if you move aggressively to cut interest rates and stimulate the economy, then you risk fueling inflation, on top of the fact that we've got a weak dollar and a trade deficit. You know, you've got to go into one direction or another.

Which direction do you think -- are you looking at focusing on first?

BERNANKE: Congressman, I think I'll let my testimony speak for itself in terms of the monetary policy.

I just would say that, you know, we do face a difficult situation. We have -- inflation has been high. And oil prices and food prices have been rising rapidly.

We also have a weakening economy, as I discussed. And we have difficulties in the financial market and the credit markets.

So that's three different areas where the Fed has to, you know, worry about -- three different fronts, so to speak. So the challenge for us, as I mentioned in my testimony, is for us to try to balance those risks and decide at a given point in time which is more serious, which has to be addressed first, which has to be addressed later.

That's the kind of balancing that we just have to do going forward.

MEEKS: So you just move back and forth as you see and try to see if you can just have a level...

BERNANKE: Well, the policy is forward looking. We have to deal with what our forecast is. So we have to ask the question where will the economy be six months or a year down the road? And that's part of our process for thinking about where monetary policy should be.

MEEKS: Well, let me also ask you this: The United States has been heavily financed by foreign purchasers of our debt, including China, and there has been a concern that they will begin to sell our debt to other nations because of the falling dollar and the concerns about our growing budget deficits.

Will the decrease in short-term interest rates counterbalance other reasons for the weakening dollar enough to maintain demand for our debt? And, if that happens, what kind of damage does it do to our exports?

MEEKS: And I'd throw into that, because of this whole debate currently going on about sovereign wealth funds, and some say that these sovereign wealth funds are bailing out a lot of our American companies. So, is the use of sovereign wealth funds good or bad?

BERNANKE: Well, to address the question on sovereign wealth funds, as you know, a good bit of money has come in from them recently to invest in some of our major financial institutions.

I think, on the whole, that it's been quite constructive. The capitalization -- extra capital in the banks is helpful because it makes them more able to lend and to extend credit to the U.S. economy.

The money that's flowed in has been a relatively small share of the ownership or equity in these individual institutions and, in general, has not involved significant ownership or control rights.

So, I think that's been actually quite constructive. And, again, I urge banks and financial institutions to look wherever they may find additional capitalization that allow them to continue normal business.

More broadly, we have a process in place called the CFIUS process, as you know, where we can address any potential risks to our national security created by foreign investment. And that process is -- I think is a good process.

Otherwise, to the extent that we are confident that sovereign wealth funds are making investments on economic basis for returns, as opposed to for some other political or other purpose, I think that's -- it's quite constructive and we should be open to allowing that kind of investment.

Part of the reciprocity of that is to allow American firms to invest abroad, as well. And so, there's a quid pro quo for that, as well.

MEEKS: What about the first part of my question?

BERNANKE: I don't see any evidence at this point that there's been any major shift in the portfolios of foreign holders of dollars. So, I -- you know, we do monitor that to the extent we can, and so far, I have not seen any significant shift in those portfolios.

FRANK: The gentleman from Alabama?

BACHUS: Thank you.

Chairman Bernanke, have the markets repriced risk? Where do we stand there?

You know, we talked about the complex financial instruments, and...

BERNANKE: That's an excellent question.

Part of what's been happening, Congressman, is that risk perhaps got underpriced over the last few years. And we've seen a reaction, where, you know, risk is being, now, priced at a high price.

It's hard to say, you know, whether the change is fully appropriated or not. Certainly, part of it, at least -- certainly, part of the recent change we've seen is a movement toward a more appropriate, more sustainable pricing of risk.

But in addition, we are now also seeing additional concerns about liquidity, about valuation, about the state of the economy, which are raising credit spreads above, sort of, the normal longer-term level. And those increased spreads and the potential restraint on credit is a concern for economic growth. And we're looking at that very carefully.

BACHUS: Are investors going toward more, say, a flight to simplicity, or are they getting better disclosures?

Or is there a role that, say, the Federal Reserve plays, on seeing that those disclosures are there, or other regulators?

BERNANKE: Well, we do work with the SEC and the accounting board and FASB and others to, you know, make sure that the accounting rules are followed. And I know they're being looked and revised to try to increase disclosure. The Basel II capital court also has a pillar, pillar three, which is about disclosure.

So more disclosure is on the way and is a good thing. And we continue to encourage banks and other institutions to provide as much information as they can to investors.

I think that's a very constructive step to take.

It's not the whole answer, though, at this point. Relative simple instruments like prime mortgages, for example, are not selling on secondary markets, less because of complexity and more just because of uncertainty about their value in an uncertain economy.

BACHUS: I see.

One thing you didn't mention in your testimony is the municipal bond market and the problems with the bond insurers. Would you comment on its affect on the economy and where you see the situation?

BERNANKE: Yes, Congressman.

The problems -- the concerns about the insurers led to the breakdown of these auction rate securities mechanism which were a way of using short-term financing to finance longer-term municipal securities.

And a lot of those auctions have failed, and some municipal borrowers have been forced into, at least for a short period, have been forced to pay the penalty rates.

So there may be some restructuring that's going to have to take place to get the financing for those municipal borrowers.

But as a general matter, municipal borrowers are very good credit quality. And so my expectation is that within a relatively short period of time we'll see adjustments in the market to allow municipal borrowers to finance reasonable interest rates.

BACHUS: In my opening statement, I mentioned that we're a functional regulator -- we have a functional regulator system where we have different regulators regulating different parts of a market which we now know is very interconnected.

Do you think there are gaps in the regulatory scheme today that need to be addressed?

(CROSSTALK)

BACHUS: And maybe the bond marketing -- I mean, the bond insurers may be an example where we did have state regulation but it didn't appear that they were up to the task.

BERNANKE: The bond insurers problem was a difficult one to foresee. I mean, they -- you know, first of all, they were buying what were thought to be high-quality credits. And, secondly, they do have some sophistication of their own -- doing some evaluation. So that was a difficult one to anticipate.

In general, I think, even though we have many regulators, there's a very extended attempt of regulators to work together in a collegial and cooperative way. And we certainly -- and the Federal Reserve, we certainly try to do that. As I mentioned, we worked with the SEC and the OCC and FDIC and the like, and will continue to do that.

One area where sometimes there have been, I think, some coordination problems is between the federal and the state regulators. And we saw some of that in the mortgage lending issues that we've seen over the last couple of years.

We have undertaken a pilot program of joint examination working with state regulators. The idea is to try to improve even beyond where we are now in terms of our information sharing and coordination with those state regulators. And that's what we're trying to do. But that is sometimes an area where the communication may not be as good as in some other areas.

BACHUS: Let me ask one final question.

You're a former professor, and I think the word is "financial accelerator process." What we mean there is problems in the economy cause sentiment problems; a lack of confidence.

Where do you see -- is negative sentiment a part of what we're seeing now?

I know I was in New York, and bankers there said there were a lot of industries making a lot of money who were just waiting, because of what they were reading in the papers as much as anything else, to invest.

BERNANKE: Well, there's an interaction between the economy and the financial system, and perhaps even more enhanced now than usual, in that the credit conditions in the financial market are creating some restraint on growth. And slower growth, in turn, is concerning the financial markets because it may mean that credit quality is declining.

BERNANKE: And so that's part of this financial accelerator or adverse feedback loop is one of the concerns that we have, and one of the reasons why we have been trying to address those issues.

BACHUS: Thank you.

FRANK: The gentleman from North Carolina and then the gentleman from Texas?

WATT: Thank you, Mr. Chairman.

Welcome, Chairman Bernanke.

In the 108th Congress, Congressman Brad Miller and I introduced the first predatory lending bill as H.R. 3974. In the 109th Congress, we introduced it in 2005 as H.R. 1182. The regulators weren't paying much attention to this, minimizing the significance of it, and it took a crisis to finally get a bill passed.

My concern is that, looking finally at the last page of your testimony, you finally reached the credit card part of the equation. One paragraph.

And my concern is that a lot of people who are seeing their credit dry up on the mortgage side are just getting more and more and more credit on the credit card side.

And that could portend, potentially, a similar kind of effect in the credit card market as we've seen in the mortgage market.

Now, I haven't yet signed on to Ms. Maloney's bill because we're still looking at it. But I've been meeting with industry participants, and one of the things that they've said is that we should give them more time for the regulator to do more. That's the same argument that we were hearing back in 2004 and 2005 and 2006: "Give the regulators more time."

And I asked them, "Does the regulator have enough authority to really do anything if they were inclined to do something?"

And it appears to me, from page nine of your testimony, the one paragraph we have, the only authority you appear to have is the Federal Trade Commission Act or the Truth in Lending Act, which is a disclosure act -- actually, the Truth in Lending Act is the one that's under your authority -- which is a disclosure statute.

If -- I'm not even going to get into the issue that Ms. Maloney raised: Do you think we need to do something? -- but tell me what authority the regulators would need, what authority would you need to be more aggressive in this area as we were trying to get the Fed to be in 2004 and 2005 in the mortgage area. Even if you were inclined to be more aggressive, if you didn't have the authority, you really couldn't do it.

And one of the concerns I'm seeing is that disclosure won't do everything. Unfair and deceptive trade practices won't do anything if both of those things are required. Some things are unfair that are not necessarily deceptive.

What kind of additional authority should we be considering giving to the Fed or to somebody, some regulator, if it's not the Fed, and to whom, in this area?

BERNANKE: Well, Congressman, as you point out, we have two different authorities. We have the Reg Z Truth in Lending authority, which is disclosure authorities, and we've already put out a rule for comment, which is out for comment now. It was a very extensive rule, involved consumer testing and several years of efforts to put that together. I think that's going to improve disclosures a lot.

But we also have this Unfair or Deceptive Acts and Practices authority which allows us to ban not just failure to disclose, but allows us to ban specific practices which are unfair or deceptive for the consumer. And I think...

WATT: So you're interpreting that "or" to be...

BERNANKE: Yes.

WATT: ... rather than an "and." That's a good...

(CROSSTALK)

BERNANKE: ... yes.

WATT: OK.

BERNANKE: So we are able to address certain practices -- billing and other -- and rate setting and rate changing and so on.

And in terms of the delay issue, as I mentioned earlier, we will have some rules under this authority out for your examination and for public comment sometime this spring, just a few months from now. So you'll see what we're able to do with that and you'll have to make your own decision whether or not more action by Congress is needed.

WATT: Thank you, Mr. Chairman. My time has expired.

FRANK: Thank you.

The gentleman from Texas, the ranking member of the subcommittee, Mr. Paul?

PAUL: Thank you, Mr. Chairman.

Chairman Bernanke, earlier you were asked a question about the value of the dollar, and you, sort of, deferred and said, you know, "That's the Treasury's responsibility."

PAUL: I always find it so fascinating, because it's been going on for years, your predecessor would always use that as an excuse to not talk about the value of the dollar.

But here I find a chairman of the Federal Reserve, who's in charge of the dollar, in charge of the money, in charge of what the money supply is going to be, but we don't deal with the value of the dollar.

But you do admit you have a responsibility for prices. But how can you separate the two?

Prices are a mere reflection of the value of the dollar. If you want to control prices, then you have to know the value of the dollar.

But if you're going to avoid talking about the dollar, then all you can do then is deal with central economic planning. You know, if we stimulate the economy, maybe there'll be production and prices will go down.

And if prices are going up too fast, you have to bring on a recession; you have to try to balance these things, which I think is a totally impossible task. And it really doesn't make any sense.

Because in a free market, if you had good economic growth, you never want to turn it off, because good economic growth brings prices down, just like we see the prices of computers and cell phones, those prices come down where there's less government interference.

But, you know, the hard-money economists, who have been around for a while, they have always argued that this would be the case. Those who want to continue to inflate will never talk about the money, because it isn't the money supply that is the problem, it's always the prices.

And that is why the conventional wisdom is everybody refers to inflation as rising prices instead of saying inflation comes from the unwise increase in the supply of money and credit.

And when you look at it -- and I mentioned in my opening statement that M3, now, measured by private sources, is growing by leaps and bounds. In the last two years, it increased by 40, 42 percent. Currently, it's rising at a rate of 16 percent.

That is inflation. That will lead to higher prices.

So to argue that we can continue to do this, continue to debase the currency, which is really the policy that we are following is purposely debasing, devaluing a currency, which, to me, seems so destructive. It destroys the incentives to save. It destroys -- and if you don't save, you don't have capital.

Then it just puts more pressure on the Federal Reserve to create capital out of thin air in order to stimulate the economy. And usually that just goes into malinvestment and misdirected investment -- into the housing bubbles or the Nasdaq bubble.

And then the effort is, once the market demands the correction, what tool do you have left? You have to keep pumping, pump, pump, pump. And it just is an endless task. And history is against you.

I mean, history is on the side of hard money. If you look at stable prices, you have to look to the only historic sound money that's lasted more than a few years.

Fiat money always ends. Gold is the only thing where you can get stable prices.

For instance, in the last three to four years the price of oil has tripled: a barrel of oil, from $20 to $30 up to $100 a barrel. And yet if you look at the price of oil in terms of gold, it's absolutely flat; it's absolutely stable.

So if we want stable prices, we have to have stable money. But I cannot see how we can continue to accept the policy of deliberately destroying the value of money as an economic value. It destroys -- it's so immoral in the sense that, what about somebody who's saved for their retirement and they have C.D.s, and we're inflating the money at a 10 percent rate? Their standard of living is going down.

And that's what's happening today.

PAUL: The middle class is being wiped out and nobody is understanding that it has to do with the value of money. Prices are going up.

So, how are you able to defend this policy of deliberate depreciation of our money?

BERNANKE: Congressman, the Federal Reserve Act tells me that I have to look to price stability -- price stability, which I believe is defined as the domestic prices -- the consumer price index, for example -- and that's what we aim to do. We look for low domestic inflation.

Now, you're correct that there are relationships, obviously, between the dollar and domestic inflation and the relationships between the money supply and domestic inflation. But those are not perfect relationships. They're not exact relationships.

And, given a choice, we have to look at the inflation rate -- the domestic inflation rate.

Now, I understand that you would like to see a gold standard, for example, but that it is really something for Congress. That's not my decision.

PAUL: But your achievement -- we have now PPI going up at a 12 percent rate. I would say that doesn't get a very good grade for price stability, wouldn't you agree?

BERNANKE: No, I agree. It's not -- the more relevant one, I think, is the consumer price index, which measures the price consumers have to pay, and that was, last year, between 3.5 and 4 percent. And I agree, that's not a good record.

PAUL: And the PPI is going to move over into the consumer index, as well.

BERNANKE: We're looking forward this year and we're trying to estimate what's going to happen this year. And a lot of it depends on what happens to the price of oil.

And if oil flattens out, we'll do better. But if it continues at the rate in 2007, it'll be hard to maintain low inflation. I agree.

PAUL: Thank you.

FRANK: The gentleman from Kansas?

MOORE: Thank you, Mr. Chairman.

We face significant challenges in the housing market that have led, in part, to serious problems in the credit markets and our larger economy.

Some of these problems began as a result of predatory lending practices, which reached epidemic proportions in recent years and took millions of dollars from American households of the equity in their homes and undermining the economic vitality of our neighborhoods.

Approximately 1.8 million subprime borrowers will be facing resetting adjustable rate mortgages over the next couple of years, unless the government or the lending industry helps them modify the terms of their loan in some other form.

I don't support a government bailout for all these homeowners, particularly for wealthy investors and speculators who borrowed against the equity in their homes, betting on profits from a soaring housing market. But I do believe we need to make a strong effort to help lower-income homeowners who are the victims of predatory lenders refinance in order to stay in their homes.

If foreclosures, Mr. Chairman, continue to rise, what impact do you believe this will have or could have on the economy in the next couple of years?

BERNANKE: A high rate of foreclosures would be adverse to the economy. Obviously, it hurts the borrowers, but it also hurts their communities if there are clusters of foreclosures, and it hurts the broader economy because it brings down -- you know, makes the housing market weaker, and that's been having effects on the whole economy.

So, clearly, if we can take actions to mitigate the rate of foreclosure, through workouts and otherwise modify loans or find ways to help people avoid foreclosure, I think that's certainly positive.

MOORE: Thank you, sir.

Some believe that we should enact legislation that would amend the bankruptcy code to allow judges to modify the terms of a loan on a debtor's principal residence in chapter 13 in order to provide relief to these homeowners.

This would essentially treat primary residences in a similar way to credit cards under the bankruptcy code.

In 1978, Congress created this exemption in the bankruptcy code with the intent of encouraging homeownership by providing certainty to mortgage lenders that terms and conditions in the loan were secure.

Do you believe that changes in the bankruptcy code to make primary residents lending more akin to credit cards will place upper pressure on mortgage interest rates? And what effect could this have on investor confidence in mortgage-backed securities market in the broader economy?

BERNANKE: Well, I think the proposed changes to the bankruptcy code have some conflicting effects.

On the one hand, I think they might help some people who could appeal to the bankruptcy code in order to...

MOORE: Could you get a little closer to the microphone, sir, please?

BERNANKE: The proposed changes to the bankruptcy code would have conflicting effects.

BERNANKE: I think it would help some people. On the other hand, it would probably lead to concern about the value of existing mortgages and, probably, higher interest rates for mortgages in the future. And so it's a very difficult trade-off.

The Federal Reserve did not take a position...

MOORE: I understand.

BERNANKE: ... on the previous bankruptcy code changes. And I think we're going to leave this one to Congress to figure out the appropriate trade-off.

MOORE: Thank you, Mr. Chairman.

FRANK: The -- who do we have next? Oh, the gentleman from California.

(UNKNOWN): Thank you, Mr. Chairman.

I wanted to ask Chairman Bernanke a question.

You know, to date, the U.S. banking system, I think, has handled the stress originated in the housing sector, but I think this is a result of these institutions being adequately capitalized prior to the turmoil that we found ourselves into.

And, given the ability of these institutions now to adequately handle that stress with existing leverage ratio requirements, I wondered if it caused you to rethink your attitude toward implementation of Basel II.

BERNANKE: No, Congressman. I still think Basel II is the right way to go, because Basel II relates the amount of capital that banks have to hold to the riskiness of their portfolio.