Transcript: Federal Reserve Chairman Ben Bernanke

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

CQ Transcripts Wire
Wednesday, July 18, 2007

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. JULIA CARSON, D-IND.

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. PAUL E. GILLMOR, R-OHIO

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: This is the semi-annual Humphrey-Hawkins hearing. 

I do want to mention before the time starts -- let me tell the timekeeper there's one, sort of, general thing I want to take note of.

This is, as people know, the Humphrey-Hawkins bill, named for its authors, Senators Hubert Humphrey and Gus Hawkins. A month from today will be Gus Hawkins' 100th birthday. And he couldn't be with us today, but we know he's aware of the hearing.

His successor in Congress will be with us, the gentlewoman from California, Ms. Waters. 

But we did want to take note of this very significant accomplishment, and wish Gus a very happy birthday, as we observe his birthday one month in advance with this very important part of his legacy.

Now, beginning my statement, I want to express my appreciation for the part of the statement that deals with consumer problems. This is a very important step forward.

And I want to say that I think there have been some partially inaccurate stories in the press impugning to me and some others some unhappiness with the chairman over consumer inactivity.

In fact, I have historically been concerned about the Fed's failure to do that, and particularly their failure to use the authority they've had under the Federal Trade Act to spell out unfair, deceptive practices.

But this is something that long predated the chairman and that he is in fact addressing. So I do not think it is appropriate for people to impute this unhappiness to him. 

And as I read the report and saw the last -- what? -- three or four pages of the report were about this consumer issue, it just became very clear to me this is not Uncle Alan's semi-annual report. And we think we are moving forward on this.

I do, however, want to, in my statement, address the economic issue -- the macroeconomic issue. Obviously, the subprime and consumer issues are economic.

I appreciate the chairman's reemphasis in his opening remarks of the Fed's commitment to the dual mandate, to dealing both with inflation and -- the need to restrain inflation and to maximize employment.

But, Mr. Chairman, we have an honest intellectual difference here. And I must say, I think there's a -- this is an instance of cultural lag.

That is, I believe that the single most pressing economic issue facing the country today is the excessive and growing inequality. 

And I want to read from a report issued under the auspices of Don Evans, President Bush's first secretary of commerce and a close friend to the president, the head of the Financial Services Forum, a three- member panel that he commissioned, including Grant Aldonas, who was a high-ranking Commerce Department with trade responsibilities under President Bush, and Matthew Slaughter, an immediate past member of the Council of Economic Advisers.

And here it is, on page seven.

FRANK: And we have copies of this report available. And I think this is essential. This is a report put out by Secretary of Commerce Evans. Two of the three authors were high-ranking economic officials of the Bush administration -- this Bush administration.

"From the mid- to late 1970s to the mid- to late 1990s, the real and relative earnings of less-skilled Americans was poor relative to both economy-wide average productivity gains and the earnings of their more-skilled counterparts. And since around 2000, the large majority of American workers has seen poor income growth. 

"Only a small share of workers at the very high end has enjoyed strong growth in incomes. The strong U.S. productivity growth of the past several years has not been reflected in broad growth in wage and salary earnings."

That's a fact that we need to accept. It's reinforced -- and some statistics can be used in other ways, and people sometimes do averages -- do I would call people's attention to the footnote on page six of the monetary policy report that Chairman Bernanke has submitted. Let me read the footnote.

"According to the published data, real disposable (inaudible) income rose at an annual rate of 4.75 percent in the first quarter. 

"However -- of this year -- a substantial part of the increase occurred because the Bureau of Economic Analysis added $50 billion at an annual rate to its estimate of first quarter wages and salaries in response to information that bonus payments and stock option exercises around the turn of the year were unusually large. Because the BEA did not assume that these payments carried forward into April, real disposable personal income fell sharply in that month."

Now the -- by the way, the figure that is given by that largely Republican panel on economic growth which I talked about is that about 3.8 percent of the population has seen real growth in income in these past six years and the rest have not. And some have seen a real erosion. 

And that includes, by the way, people with college educations. Education does not appear to be the talisman that dissolves this.

Here is our problem: The resentment that is generated by that is a significant problem in America today. 

A couple weeks ago, the immigration bill blew up noisily. Trade promotion authority expired very un-noisily, not only not with a bang, not even with a whimper. Just went away.

In neither case, in my view, were the defeat of those two measures, whether people liked them or not, due to problems and issues intrinsic to those measures.

The key factor was the anger on the part of that large percentage of Americans who are not seeing any of the increase in wealth being distributed to them, who say, "No, we're not going forward." I think in some cases the anger was displaced at the wrong enemy, but the anger is there.

My problem, Mr. Chairman, is that the report and the proposal in some ways will make this worse.

FRANK: Here's where we are. 

The report and your statement say that you expect us to grow slightly below trend for the rest of this year and next year, trend being 3 percent of growth and we're in the 2-plus percent. 

I do note, as I must say, semantically that when we are projected to be somewhat below growth, the answer is near trend. When we're above it, it says above, while near trend means below trend.

At the same time you predict an increase in unemployment -- not a huge one, but up into the 4.75 range. You note that softness in the labor market is one of the things that will erode real wages. So the only time we got real increases in real wages for the large number of people in the population was in the late '90s, when unemployment went to 3.9 percent, when we hit a very tight labor market. Because we've had an erosion of institutions that help labor in this country, as Peter Temin and Frank Levy have pointed out in their MIT paper, which we have available. So we are really dependent on a high level of overall growth. 

You also predict, so you say, growth below trend, a slight increase in unemployment and you expect inflation to moderate, but in, frankly, an odd phrase, you say the real danger is that inflation will fail to moderate as you expect it to. So your lack of confidence in your expectation says that the likeliest thing you ought to do is to raise interest rates and slow things down. That is (inaudible) you see the major danger as inflation. 

Well, if you see the major danger as inflation at a time when inflation appears to be stable, and inflation expectations in the concept (ph) important to you appear to be fairly well anchored for the long term, and we appear to be growing at somewhat below trend -- not huge amount, but below trend -- and unemployment's going to go up, at best we're going to continue this problem. 

And you do note, too, the credit of -- and I appreciate that -- that historically profits greatly increase -- greatly exceed wages. Let me read the exact -- and I'll give myself an extra minute just to read this. I'll make up for it in my questioning.

But there is a specific reference to the fact that given historic trends, there's room for wages to go up and profits still to be in very good shape, without it having an inflationary impact. 

And so with that, with wages having lagged significantly for years, with a very small percentage of the population having gotten any real increase in the last five years, with inflation projected to be stable, with growth projected to be below trend by a little bit, unemployment projected to rise even as the labor force drops -- which means slower job growth -- you say the main concern is inflation.

I think that is cultural lag. I would have understood that better some time ago. 

But given the social -- and, by the way, I would throw in here the savings rate. People lament the absence of a savings rate. When only 3.8 percent of the population has gotten any real increase in their wages, in their take-home pay in the last five years, what is it people expect them to save? Canceled stamps? People can't save money if at the end of the month they don't have any, if their wages have not come up. 

So with all that, the conclusion that the main danger facing us now, or the more important one, is inflation troubles me. Because I think at best this current situation of increasing inequality, with all of its negative social and economic and political consequences, stays as is, and could get worse.

And I now recognize the gentleman from Alabama.

BACHUS: I thank the chairman.

And, Chairman Bernanke, thank you for your report and your continued strong and wise stewardship of our nation's monetary policy.

As I said when you appeared before this committee in February, there is a difference of opinion on the economy -- on the strength of the economy. And I'd like to review some of the facts, which I think are hard to argue with.

First of all, economic growth is robust, as illustrated by 132,000 new jobs created in June alone and, as you say in your testimony, 850,000 since the start of the year. Over 8 million new jobs created since August of 2003. Unemployment remains low. Despite higher oil prices -- and really something I'm going to mention later in my remarks, oil's gone from $50 to $75 a barrel just since the middle of January, and despite the rise in energy costs, inflation is under control, falling to 2.4 percent in February 2007 and 1.9 percent in May.

While it has slowed recently, productivity has averaged 2.8 percent of growth since 2001; well above the average productivity growth experienced in the '70s, '80s or '90s. 

BACHUS: Real wages have shown a healthy increase over the past year and are supporting continued strong consumer spending, even in the face of declines in real estate values in many areas of the country. The stock market continues to deliver superior returns to investors. 

This economic success story is a result of sound economic policies pursued, I believe, by this Republican administration, by our Treasury Department and by the Federal Reserve. They're also a testament to the hard work and innovation of American businesses and workers who comprise the American economy.

Chairman Bernanke, I believe you deserve a great deal of credit for the performance of the economy as well. Instead of micromanaging monetary policy, you have held an absolutely steady hand for a year now, balancing the tension between modest upside inflation risk and modestly slower growth. 

No one has summarized your tenure at the Fed better than the New York Times. In a June 25th story, less than a month ago, they said this: "Could an Ivy League academic like this ever have street credibility? The answer is clear: Yes, yes and yes again."

The same article also observed, "The economy today is pretty much exactly where Mr. Bernanke hoped it would be one year ago. Economic growth has slowed slightly, gradually reducing inflationary pressures. And while job creation has slowed, unemployment remains low at 4.5 percent." That's the New York Times.

Before I conclude my remarks, Chairman, I would like to bring your attention to two topics of particular interest to members of this committee. 

First, as you know, Chairman Frank and I are both concerned over the recent turmoil in the subprime lending market. Just last week, Representatives Gillmor, Pryce, Miller, LaTourette, Capito and I introduced legislation on this subject. Developing a consensus solution to this problem while determining the Fed's proper role in regulating the mortgage industry are priorities for members of both sides -- or priorities for members on both sides of the aisle.

BACHUS: The committee would benefit from your thoughts on the current state of the subprime mortgage market and its potential impact in the larger economy. 

And second, Mr. Chairman, the Fed, it's often been said, has a dual mandate, and that's price stability and full employment. While that mandate has certain factors that are more subject to management and control than others, there is one wildcard and possibly two. And I knew you talk about core inflation and then backing out energy and food. 

The wildcard to me and the disturbing factor in our economy is energy cost, over which the Federal Reserve has very little short-term or long-term influence.

As I said earlier, the price of oil, if you go back to July last year, it was $75, where it is today, but we've gone down to $50 a barrel and back up to $75.

Some people say we will get relief because there may be an economic slowdown in China or India or Europe, and that may bring us relief, but that would not be good for the economy.

So we get in a situation where China's growing at 11 percent, their energy demands are growing, and U.S. manufacturing -- in fact, the largest contributor to job loss in this country over the last 10 years is the high cost of energy. And yet this Congress for 10 years -- for a year or two we've talked about the subprime situation. I would tell colleagues on both sides of the aisle, for 10 years we've been talking about our dependency on foreign oil, we've been talking about the high cost of energy, we've talked about its devastating impact on employment and on manufacturing, but yet we've done nothing.

China is building a new nuclear power plant every week. With every plant they bring on-line, they reduce the cost of energy and increase their competitiveness over us.

BACHUS: Mr. Chairman, I believe that Congress's failure over many years to address this energy cost has created and will continue to create real problems for the Federal Reserve as you try to cope with both price stability and full employment. Because I think the high cost of energy is a wildcard over which you have no control. And it is my greatest concern, and I'm sure it is of great concern to you moving forward.

Let me conclude by saying that members, both Republican and Democrats, on this committee respect your experience, your judgment and your obvious commitment to keeping America's economy strong and competitive. We appreciate you being here and look forward to your comments.

FRANK: The gentleman from Illinois, the chair of the Domestic and International Monetary Policy Subcommittee, is recognized for three minutes.

GUTIERREZ: Thank you, Chairman Frank. 

And good morning, Chairman Bernanke. And welcome back.

I think you'll hear some of the same major themes from this side of the aisle that you heard in February. There's good reason for this, I believe. I can tell you that when I go back to my district and meet with middle-class and lower middle-class working Americans, they just aren't feeling the benefits of a growing economy. Jobs can be found but they aren't necessarily steady, well-paying jobs. And those without steady work are facing stagnant wages. 

So much of the discussion I'm hearing from economists about inflationary concerns caused by rising labor costs just don't ring true with many workers, at least not in my district.

More than tangible concerns, many of my constituents just feel uneasy about their economic security. Of course, these are the same families are feeling the crunch of rising health care costs and increasing cost of education, all the while trying to save for retirement.

It is not just that these families are living paycheck to paycheck. It's that they have little or no savings, in some cases no bank accounts at all. And so they pay higher interest rates and more fees for basic financial services than they should.

I raise the issue of inequality, Chairman Bernanke, because I believe economic inequality is a product of monetary policy choices. And I believe that inequality is inside the scope of the Federal Reserve's, quote, "dual mandate."

Yesterday, Chairman Frank assembled an excellent panel of economists that he referred to earlier, in a hearing held before the committee, on the dual mandate. 

One of the economists who testified, James Galbraith, recently completed a study on whether the Federal Reserve has observed the dual mandate. One of the findings of his study is that inequality in pay or earnings, especially in the manufacturing sector, does react to rate-setting decisions of the Federal Reserve and that, in the statistical sense, monetary policy causes inequality.

I would like you to respond to Mr. Galbraith's assertions and discuss whether or not the Federal Open Market Committee considers economic inequality issues as a factor in setting our monetary policy.

GUTIERREZ: I thank you. And I yield back the balance of my time.

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

PAUL: Thank you, Mr. Chairman. 

And welcome, Chairman Bernanke.

I share the concern for the inequality that has developed in our country. I think it's very real. I think it's a source of great resentment. And, unfortunately, I think it's one of those things that puts a lot of pressure on the Congress to increase the amount of government programs and government spending, which I do not think is the answer.

I believe the inequality comes specifically from the type of currency we have. When there is a deliberate debasement of a currency, it is predictable that the middle class is injured, the poor are hurt, and there's a transfer of wealth to the wealthy.

And until we understand that, I do not believe we can solve this problem. And if we resort to continued monetary inflation and more government programs, we will only make this inequality worse.

This is exactly opposite of what happens when you have a sound currency and free markets, because it is the sound currency and free markets which creates the middle class and creates prosperity and allows the best distribution of this wealth.

Inflation is a monetary phenomenon. It comes from the Federal Reserve system. The Federal Reserve has tremendous pressure put on them because almost everybody wants low interest rates, except if you happen to be a saver. Then you might not like artificially low interest rates. But, of course, that contributes to the lack of savings, which is another problem that we have in this country. 

We concentrate on inflation by implying -- and everybody casually accepts that inflation is a price problem. But the prices that go up is one of the consequences of inflation. Inflation causes a malinvestment. It causes excessive debt. And it causes financial bubbles that we have to deal with.

But we have a lot of information today available to us to show that there's a lot of monetary inflation going on. For instance, if you look at MZM, it's growing at almost a 9 percent rate. M3, no longer available to us from the official sources, but private sources tell us it's growing at a 13 percent rate.

Of course we can reassure ourselves and say the CPI is growing at a 2.6 percent rate. But if you go back to the old method of calculating the CPI, closer to what the average person is suffering and one of the reasons why there's an inequality going on, is it's growing at over a 10 percent rate.

The fact that the dollar is weak on the international exchange markets cannot be ignored. 

For instance, just in six months, the Canadian dollar increased 11 percent against our dollar. This should stir up some concern.

One concern that I have that I think is causing more problems and keeps us from coming to a solution is the divorce between the exchange value of the dollar on the international exchange markets and the effort to lower the value of the dollar in order to increase exports, which can only be done through inflation, at the same time believing that we can have stability of prices at home, because that is a disconnect that is not possible.

If we strive for a lower dollar in the exchange markets, we will have price increases here at home, at we have to deal with it.

And I yield back.

FRANK: Thank you.

Mr. Chairman, I appreciate, as I said, the comments and the efforts you are now undertaking regarding subprime and consumer protection generally. And we will work more with those. We've had some hearings on those. I will be talking not much about those this morning, but I do want to acknowledge that's a significant advance. And we look forward to working together.

I also want to comment -- I'm just reading my clips as they come in, and I had one commentator saying that the difference between us was that I continued to believe in the Phillips curve and you do not. And I don't. 

In fact, one of the things that I have credited Chairman Greenspan for was in the '90s ignoring those who told him that if unemployment dropped below first 6 percent and then 5.5 percent and then 5 percent and then 4.5 percent, it would be inevitably inflationary. 

It seemed to me this whole notion of a -- of non-accelerating inflation rate of unemployment turned out only to be a lagging indicator of unemployment. As unemployment dropped, people dropped that rate. But it never had that prediction.

FRANK: But I think we were dealing with the real economy and here are the issues. But here's my concern.

It is on the inequality issue, which I think has become a significant, certainly, political problem. And I assume you were not happy to see trade promotion authority die. My guess is you thought we should have some form of an immigration bill.

And again, I would stress, I don't think that the solution to either of those problems is intrinsic to those problems. It is the sea in which they have to survive that has turned against them.

You know what the numbers are in inequality. I guess one of the things that troubles me a little bit is that, in the report -- and I do remember in previous reports references to wages. 

There are no wage indexes in here. There are compensation indexes, which, as you acknowledge, as we know, include pensions and include health care.

But what's your -- given what you expect to go forward, let me ask you for what I think is one of the most important predictions, going forward, do you see any alleviation of this trend of the distribution of wealth being as concentrated as it now is?

It's documented in the report that I assume you're familiar with that Don Evans put forward where 3.8 percent of the population has gotten real wage increases in the last five years. Do you see any alleviation of that trend, going forward?

BERNANKE: Well, as I've discussed this issue in a number of contexts, I think that, in order to alleviate...

FRANK: I apologize. You hadn't given your opening statement yet.

(LAUGHTER)

My over-eagerness.

(LAUGHTER)

I apologize. And you can comment now, if you want to, or -- I was wondering why the time hadn't started yet.

(LAUGHTER)

If this had been my first hearing, I could explain that mistake a little bit easier.

(LAUGHTER)

No good explanation comes to mind.

You can comment now, or just do your opening statement and come back to it.

BERNANKE: (inaudible) my statement.

FRANK: Why don't you do your statement?

BACHUS: There might be some in the opening statement that would address it.

FRANK: No, I already read it.

BACHUS: Oh.

(LAUGHTER)

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

As you know, this occasion marks the 30th year of semi-annual testimony on the economy and monetary policy for the Federal Reserve. 

In establishing these hearings -- Mr. Hawkins and Humphrey were mentioned -- the Congress proved prescient in anticipating the worldwide trend toward greater transparency and accountability of central banks in making monetary policy. 

Over the years, these testimonies and the associated reports have proved an invaluable vehicle for the Federal Reserve's communication with the public about monetary policy, even as they have served to enhance the Federal Reserve's accountability for achieving the dual objectives of maximum employment and price stability set for it by the Congress. 

I take this opportunity to reiterate the Federal Reserve's strong support of the dual mandate. In pursuing maximum employment and price stability, monetary policy makes its greatest possible contribution to the general economic welfare. 

Let me now review the current economic situation and the outlook, beginning with developments in the real economy and the situation regarding inflation, before turning to monetary policy. 

BERNANKE: I will conclude with comments on issues related to lending to households and consumer protection, topics not normally addressed in monetary policy testimony but, in light of recent developments, deserving of our attention today. 

After having run at an above-trend rate earlier in the current economic recovery, U.S. economic growth has proceeded during the past year at a pace more consistent with sustainable expansion. 

Despite the downshift in growth, the demand for labor has remained solid, with more than 850,000 jobs having been added to payrolls thus far in 2007 and the unemployment rate having remained at 4.5 percent.

The combination of moderate gains in output and solid advances in employment implies that recent increases in labor productivity have been modest by the standards of the last decade. 

The cooling of productivity growth in recent quarters is likely the result of cyclical or other temporary factors. But the underlying pace of productivity gains may also have slowed somewhat.

To a considerable degree, the slower pace of economic growth in recent quarters reflects the ongoing adjustment in the housing sector. Over the past year, home sales and construction have slowed substantially and house prices have decelerated. 

Although a leveling off of home sales in the second half of 2006 suggested some tentative stabilization of housing demand, sales have softened further this year, leading the number of unsold homes in builders' inventories to rise further relative to the pace of new home sales. Accordingly, construction of new homes have sunk further, with starts of new single-family houses thus far this year running 10 percent below the pace in the second half of last year. 

The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards and the recent increase in mortgage interest rates. Sales should ultimately be supported by growth in income and employment, as well as by mortgage rates that, despite the recent increase, remain fairly low relative to historical norms.

However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further as builders work down the stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time.

Real consumption expenditures appear to have slowed last quarter following two quarters of rapid expansion. Consumption outlays are likely to continue growing at a moderate pace, aided by a strong labor market. Employment should continue to expand, though possibly at a somewhat slower pace than in recent years as a result of the recent moderation in the growth of output and ongoing demographic shifts that are expected to lead to a gradual decline in labor force participation.

Real compensation appears to have risen over the past year and, barring further sharp increases in consumer energy costs, it should rise further as labor demand remains strong and productivity increases. 

In the business sector, investment in equipment and software showed a modest gain in the first quarter. A similar outcome is likely for the second quarter, as weakness in the volatile transportation equipment category appears to have been offset by solid gains in other categories.

Investment in non-residential structures, after slowing sharply late last year, seems to have grown fairly vigorously in the first half of 2007. 

Like consumption spending, business fixed investment overall seems poised to rise at a moderate pace, bolstered by gains in sales and generally favorable financial conditions.

Late last year and early this year, motor vehicle manufacturers and firms in several other industries found themselves with elevated inventories, which led them to reduce production to better align inventories with sales. Excess inventories now appear to have been substantially eliminated and should not prove a further restraint on growth. 

BERNANKE: The global economy continues to be strong. Supported by solid economic growth abroad, U.S. exports should expand further in coming quarters. 

Nonetheless, our trade deficit -- which was about 5.25 percent of nominal gross domestic product in the first quarter -- is likely to remain high.

For the most part, financial markets have remained supportive of economic growth. However, conditions in the subprime mortgage sector have deteriorated significantly, reflecting mounting delinquency rates on adjustable-rate loans. 

In recent weeks, we have also seen increased concerns among investors about credit risk on some other types of financial instruments. 

Credit spreads on lower-quality corporate debt have widened somewhat, and terms for some leveraged business loans have tightened. 

Even after their recent rise, however, credit spreads remain near the low end of their historical ranges, and financing activity in the bond and business loan markets has remained fairly brisk. 

Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trends. 

Such an assessment was made around the time of the June meeting of the Federal Open Market Committee by the members of the Board of Governors and the presidents of the Reserve Banks, all of whom participate in deliberations on monetary policy. 

The central tendency of the growth forecasts, which are conditioned on the assumption of appropriate monetary policy, is for real GDP to expand roughly 2.25 to 2.5 percent this year and 2.5 to 2.75 percent in 2008. 

The forecasted performance for this year is about one-quarter percentage point below that projected in February, the difference being largely the result of weaker-than-expected residential construction activity this year. 

The unemployment rate is anticipated to edge up to between 4.5 and 4.75 percent over the balance of this year and about 4.75 percent in 2008, a trajectory about the same as the one expected in February. 

I turn now to the inflation situation. 

Sizable increases in food and energy prices have boosted overall inflation and eroded real incomes in recent months; both unwelcome developments. 

As measured by changes in the price index for personal consumption expenditures -- PCE inflation -- inflation ran at an annual rate of 4.4 percent over the first five months of this year, a rate that, if maintained, would clearly be inconsistent with the objective of price stability. 

Because monetary policy works with a lag, however, policy-makers must focus on the economic outlook. Food and energy prices tend to be quite volatile, so that, looking forward, core inflation, which excludes food and energy prices, may be a better gauge than overall inflation of underlying inflation trends. 

Core inflation has moderated slightly over the past few months, with core PCE inflation coming in at an annual rate of about 2 percent so far this year. 

Although the most recent readings on core inflation have been favorable, month-to-month movements in inflation are subject to considerable noise, and some of the recent improvement could also be the result of transitory influences. 

However, with long-term inflation expectations contained, futures prices suggesting that investors expect energy and other commodity prices to flatten out, and pressures in both labor and product markets likely to ease modestly, core inflation should edge a bit lower, on net, over the remainder of this year and next year. 

BERNANKE: The central tendency of FOMC participants' forecasts for core PCE inflation -- 2 to 2.25 percent for 2007 and 1.75 to 2 percent in 2008 -- is unchanged from February. If energy prices level off as currently anticipated, overall inflation should slow to a pace close to that of core inflation in coming quarters.

At each of its four meetings so far this year, the FOMC has maintained its target for the federal funds rate at 5.25 percent, judging that the existing stance of policy was likely to be consistent with growth running near trend and inflation staying on a moderating path. 

As always, in determining the appropriate stance of policy, we will be alert to the possibility that the economy is not evolving in the way we currently judge to be the most likely. 

One risk to the outlook is that the ongoing housing correction might prove larger than anticipated, with possible spillovers onto consumer spending. 

Alternatively, consumer spending, which has advanced relatively vigorously, on balance, in recent quarters, might expand more quickly than expected. In that case, economic growth could rebound to a pace above its trend. 

With the level of resource utilization already elevated, the resulting pressures in labor and product markets could lead to increased inflation over time. 

Yet another risk is that energy and commodity prices could continue to rise sharply, leading to further increases in headline inflation and, if those costs pass through to the prices of non-energy goods and services, to higher core inflation as well. 

Moreover, if inflation were to move higher for an extended period and the increase became embedded in longer-term inflation expectations, the reestablishment of price stability would become more difficult and costly to achieve. 

With the level of resource utilization relatively high and with a sustained moderation in inflation pressures yet to be convincingly demonstrated, the FOMC has consistently stated that upside risks to inflation are its predominant policy concern. 

In addition to its dual mandate to promote maximum employment and price stability, the Federal Reserve has an important responsibility to help protect consumers in financial services transactions. 

For nearly 40 years, the Federal Reserve has been active in implementing, interpreting and enforcing consumer protection laws. I would like to discuss with you this morning some of our recent initiatives and actions, particularly those related to subprime mortgage lending. 

Promoting access to credit and to home ownership are important objectives, and responsible subprime mortgage lending can help to advance both goals. In designing regulations, policy-makers should seek to preserve those benefits. 

BERNANKE: That said, the recent rapid expansion of the subprime market was clearly accompanied by deterioration in underwriting standards and, in some cases, by abusive lending practices and outright fraud. 

In addition, some households took on mortgage obligations they could not meet, perhaps in some cases because they did not fully understand the terms. 

Financial losses have subsequently induced lenders to tighten their underwriting standards. 

Nevertheless, rising delinquencies and foreclosures are creating personal, economic and social distress for many homeowners and communities; problems that likely will get worse before they get better. 

The Federal Reserve is responding to these difficulties at both the national and the local levels. 

In coordination with other federal supervisory agencies, we are encouraging the financial industry to work with borrowers to arrange prudent loan modifications to avoid unnecessary foreclosures. Federal Reserve banks around the country are cooperating with community and industry groups that work directly with borrowers who are having trouble meeting their mortgage obligations. 

We continue to work with organizations that provide counseling about mortgage products to current and potential homeowners. We are also meeting with market participants -- including lenders, investors, servicers and community groups -- to discuss their concerns and to gain information about market developments. 

We are conducting a top-to-bottom review of possible actions we might take to help prevent recurrence of these problems. 

First, we are committed to providing more-effective disclosures to help consumers defend against improper lending. 

Three years ago, the board began a comprehensive review of Regulation Z, which implements the Truth in Lending Act, or TILA. The initial focus of our review was on disclosures related to credit cards and other revolving credit accounts. 

After conducting extensive consumer testing, we issued a proposal in May that would require credit card issuers to provide clearer and easier-to-understand disclosures to customers. 

In particular, the new disclosures would highlight applicable rates and fees, particularly penalties that might be imposed. 

The proposed rules would also require card issuers to provide 45 days' advance notice of a rate increase or any other change in account terms so that consumers will not be surprised by unexpected charges and will have time to explore alternatives. 

BERNANKE: We are now engaged in a similar review of the TILA rules for mortgage loans. We began this review last year by holding four public hearings across the country, during which we gathered information on the adequacy of disclosures for mortgages, particularly for non-traditional and adjustable rate products. As we did with credit card lending, we will conduct extensive consumer testing of proposed disclosures.

Because the process of designing and testing disclosures involves many trial runs, especially given today's diverse and sometimes complex credit products, it may take some time to complete our review and propose new disclosures. However, some other actions can be implemented more quickly. 

By the end of this year, we will propose changes to TILA rules to address concerns about mortgage loan advertisements and solicitations that may be incomplete or misleading, and to require lenders to provide mortgage disclosures more quickly so that consumers can get the information they need when it is most useful to them.

We already have improved the disclosure that creditors must provide to every applicant for an adjustable rate mortgage to explain better the features and risks of these products, such as payment shock and rising loan balances. 

We are certainly aware, however, that disclosure alone may not be sufficient to protect consumers. Accordingly, we plan to exercise our authority under the Home Ownership and Equity Protection Act, HOEPA, to address specific practices that are unfair or deceptive.

We held a public hearing on June 14th to discuss industry practices, including those pertaining to pre-payment penalties, the use of escrow accounts for taxes and insurance, stated income and low- documentation lending, and the evaluation of a borrower's ability to repay. The discussion and ideas we heard were extremely useful, and we look forward to receiving additional public comments in coming weeks. 

Based on the information we are gathering, I expect that the board will propose additional rules under HOEPA later this year. 

In coordination with the other federal supervisory agencies, last year we issued principles-based guidance on non-traditional mortgages, and in June of this year, we issued supervisory guidance on subprime lending. These statements emphasize the fundamental consumer protection principles of sound underwriting and effective disclosures. 

In addition, we reviewed our policies related to the examination of non-bank subsidiaries of bank and financial holding companies for compliance with consumer protection laws and guidance.

As a result of that review, and following discussions with the Office of Thrift Supervision, the Federal Trade Commission and state regulators, as represented by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, we are launching a cooperative pilot project aimed at expanding consumer protection compliance reviews at selected non-depository lenders with significant subprime mortgage operation. 

These reviews will begin in the fourth quarter of this year and will include independent state-licensed mortgage lenders, non- depository mortgage lending subsidiaries of bank and thrift holding companies, and mortgage brokers doing business with or serving as agents of those entities. 

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

Working together to address jurisdictional issues and to improve information-sharing among agencies, we will seek to prevent abusive and fraudulent lending while ensuring that consumers retain access to beneficial credit. 

I believe that the actions I have described today will help address the current problems. 

The Federal Reserve looks forward to working with the Congress on these important issues.

Thank you, Mr. Chairman.

FRANK: Thank you, Mr. Chairman.

And sometimes you do get a second chance not to screw up, which I apparently have. 

FRANK: And now I can ask my question at the appropriate time, with apologies. 

I've laid it out. Let me just -- two quotes. 

And I found the quote I was looking for, from the monetary report, on page two: "Although unit labor costs in the non-farm business sector have been rising, the average mark-up of prices over unit labor costs is still high by historical standards, an indication that firms could potentially absorb higher costs, at least for a time, through a narrowing of profit margins." That is, that's where wages have gone, to some extent, into higher profit margins.

And then in the Don Evans, Grant Aldonas, Matthew Slaughter, Robert Lawrence report, here's their summary, on page 36 in the Financial Services Forum: "During this period, 2000-2005, an astonishingly small fraction of workers, just 3.4 percent, was in educational groups that enjoyed any increase at all in mean, inflation-adjusted, money earnings: Those with doctorates and J.D.s, MBAs and M.D.s. 

"In contrast to earlier decades, even college graduates and those with non-professional master's degrees, 29 percent of workers, suffered declines in mean real earnings."

So the question is: Is there anything in sight that would alleviate this situation?

BERNANKE: First, we have seen some recent increases in real wages. Over the last year, average hourly earnings are up more than a percentage point.

Secondly, I think that part of what's happened in the last two years has been the effect of energy prices, which have risen, obviously, very rapidly and have absorbed a good bit of buying power of consumers.

Over the longer period of time, people with greater education, college education and so on, have been seeing real increases in their incomes, and I expect that to continue.

The many other points you raised on inequality, I'd be happy to address, but I do think that we'll see improvement.

FRANK: Well, I'm troubled by a kind of complacency there, Mr. Chairman. 

First of all, you -- yes, they went up some in the first quarter, they went down in the second quarter, according to your report, real wages. 

Second, you said, "Well, it's fuel." Well, 3.4 percent of the people, what are they, flying around on broomsticks? I mean, the fact is, it's not everybody. There's a real inequality here. And it includes -- the 29 percent that had college degrees and master's degrees have suffered real declines in the mean there over the last five years.

And I have to say that I know education is always the answer. I'm struck again -- and this is a report put forward by some very thoughtful Republican members of the Bush administration in which they essentially say that education is greatly exaggerated as a near-term improvement. 

And they point out this is a generational issue. And we're talking about people -- by the way, part of the problem with education is that some people who were educated 10 to 15 years ago, and they were told, "Well, learn these software skills, learn these other skills," and many of those jobs are now either outsourced directly or, because of the threat of outsourcing, they're subject to competitive pressures that hold it down.

So there's -- and then it does seem to me what you talk about going forward is inflation is a greater danger to you than a continuation of this trend. I just predict to you, you're going to see this continued gridlock. 

Are there no things you think we should be able to do to try and reduce this trend toward inequality? We just sit and hope?

BERNANKE: No, Mr. Chairman. I've discussed some of these issues.

First, the trend to inequality is not something over the last five years. We've seen this for at least 30 years, if not more.

FRANK: But it's gotten worse in the last five years.

BERNANKE: Well, again, I think that part of what you're seeing, just in the last two years, is the effect -- the disproportionate effects on lower-income people...

FRANK: Well, no, no. Mr. Bernanke, that's simply not true. 

We're talking about the 29 percent in the last five years -- the 29 percent of the population with college graduates and masters. You can't -- I think there's a cultural lag here. 

This is -- this is Don Evans' report: 29 percent of the population in those groups, of college degrees and masters, have suffered real declines in the last five years. They're not lower- income people.

BERNANKE: I would like to look at those data. 

But the fact is that over the last few decades -- and these are the kinds of things you need to look at over a long period of time -- we have seen a substantial spreading apart of incomes which is keyed, in part, to education, not entirely, but is keyed in part to education...

FRANK: Well, what do we do about it?

BERNANKE: There are several things we can do about it. 

First of all, the Federal Reserve can maintain a strong and stable economy, which we intend to do, and that will be helpful, I hope.

But secondly, and I think more importantly, there are several elements. First, I think the reference to education is a little bit too pessimistic, because it refers, I believe, to, sort of, K-12-type education, which takes a very long time to work...

FRANK: No. They're talking about higher education.

BERNANKE: And higher education. 

But there are many other forms of skill acquisition. There's short-term job training, there's vocational schools and so on.

We're hearing in the field that acquiring someone with plumbing skills or welding skills or who can put lines on a telephone pole are very difficult to find, and they command high wages. So I do believe that there are things...

FRANK: OK, well, I'm going to -- my time has expired. I just want to say this. 

And I would urge people to read this report and the, I think, thoughtful debunking by Mr. Slaughter, who served on the Council of Economic Advisers, I believe under your chairmanship or along with you as a colleague, Grant Aldonas. They say that education has been -- it's a good thing, but been being made to tow (ph) too much weight. 

But here's the problem, even with education, getting people that education requires, to a great extent, some public participation. We can't expect the private sector to pay for this out of what it does.

And this is another factor: As long as we have the current situation in which government is considered to be a bad thing, et cetera -- well, let me put it this way: The way in which we finance education in the country today, particularly beyond K-12, reinforces inequality. It doesn't alleviate it.

So I -- yes, education, properly done, could do this. But a kind of, "Oh, well, that's the way the world is, and we'll just have to hope for the better," is a problem. 

And the notion that a stable economy -- and this is where I think, again, we have a fundamental difference. Yes, I'd like to see a strong, stable economy. That's a necessary condition for diminishing inequality.

FRANK: But it is clearly, clearly an insufficient condition. And in the absence of any recognition of that, you're going to continue to see the kind of gridlock in which trade promotion and immigration and other issues don't go anywhere.

And I just urge people who want to see us move in this direction, help us diminish inequality or you will have continued economic gridlock.

The gentleman from Alabama?

BERNANKE: Mr. Chairman, if I could just, very quickly...

FRANK: I'm sorry.

BERNANKE: In my remarks, in March, on inequality, I talked a little bit about education and training. I talked about other policies as well, such as helping people move between jobs, you know, trade adjustment assistance...

FRANK: Right.

BERNANKE: ... and other types of policies that could -- more portability of health insurance, many things that could help.

FRANK: Well, I appreciate that. In fairness, could we have a hearing, perhaps, in which you might come and talk about this?

BERNANKE: Certainly.

FRANK: Thank you.

BACHUS: I thank the chairman. 

The chairman of the committee talked about he was troubled by complacency. I am also troubled by complacency. And every member of this committee ought to be troubled by complacency.

But it's not in the Federal Reserve. The chairman of the Federal Reserve has come in here this morning, as many other people have said to us, that the rise in energy and food costs are impacting the poor and middle class, and it is one of the chief reasons for income inequality. The National Association of Manufacturers recently said that the high cost of energy is a cap on the wages of blue-collar workers. 

And yet this Congress for 10 years has failed to turn to the cheapest form of energy, which would give relief for every American's electric bill, heating oil bill and everything, and that's nuclear energy.

Eighty-six percent of the energy produced in France, at a much lower cost than most of our electricity, is nuclear. France has done it. India and China are building a nuclear power plant every year -- I mean, every week, I think it is, or every month one comes on-line.

And we can reduce the cost of not only energy cost, which the chairman has said is -- he says, right here, "Food and energy costs have eroded real incomes." And it hits us, he said, the poor and the middle class the worst. 

And the biggest component -- and the biggest contributor to the rise in food costs is the cost of energy.

And one of the things we're doing, which does give us some relief --we're taking corn and turning it into ethanol, and you're rising -- so, whether that's good or bad, it's resulting in an increase in the cost of food.

Fertilizer -- the biggest component of fertilizer is energy, and it's the biggest component in producing food.

So if any of us are concerned about -- and I am, and I think we all are concerned about the poor and the high cost of their gas bills, their electric, their heating oil bills.

BACHUS: We'll pass a bill next month, if not this month, and we'll do away with all these regulatory and legal burdens that have prevented us for decades from building a nuclear power plant and have cost millions of American jobs, mostly blue-collar workers -- their ability to exist and stay in their communities. 

Visit some of the communities in Pennsylvania and Ohio, and you'll see the result of us standing and not doing anything about nuclear power. 

Mr. Chairman, I'm going to change subjects. But, you know, as I said in my opening statement, one of your biggest challenges, has been created by the government's inability to address energy concerns. And you said, you know, the wildcards are energy and food, and the biggest wildcard in food is energy.

This committee and this Congress has within its bullseye, as you probably read, private pools of capital: hedge funds and venture capital, private-equity funds.

Would you like to address some of the benefits of private pools of capital and if we do drive those private pools of capital offshore, what detrimental effects it may have on us?

BERNANKE: Certainly, Congressman.

Private pools of capital and hedge funds raise a whole range of issues, and I'm not going to address them. But they certainly do provide some important benefits. And these include providing some ability to share risks -- we take risks and we share them, just cut them up and spread them around, held by lots of different people. It's no longer held just by the banking system, for example.

They provide a good deal of liquidity in the markets and help the markets work more efficiently. 

And in private equity in particular, they play an important role in the market for corporate control. We need to have a mechanism whereby poorly run companies, weak managements are subject to being taken over, replaced and their companies improved. And when it's working right, at least, private equity -- as LBOs in the past -- helps to serve that function. So they do serve some positive functions. 

They raise many issues of financial stability and the like, you know, making sure that their counterparties are taking appropriate attention to their risks and the like. And we've discussed those some in the president's working groups' principles. But they certainly are a benefit to the economy.

BACHUS: Thank you.

My last question is this. 

BACHUS: When we looked at the subprime lending problem last year, we found that probably about 3 percent of the brokers -- and actually also not only brokers, but mortgage bankers, people that work for nationally regulated bankers -- about 3 percent of them caused about 90 percent of the mischief and the fraud.

And they'll lose their license in one state; they go to another state and they set up shop. And they're really creating havoc. And these are basically -- to me, they're criminals. And they're inflicting a tremendous amount of pain.

Would you like to comment -- I introduced a bill, along with several of my colleagues, which called for a national registration and licensing standard for all mortgage originators. Would you like to comment on that, the legislation we introduced?

BERNANKE: Yes, sir. I'll talk about registration. 

I do think there is an issue about brokers who are -- you know, who lose their licenses, perform badly in one area, then just simply move to a new state.

The Conference of State Bank Supervisors has been trying to develop a database essentially so that they can provide information to each other. But I think that we should certainly seriously consider some federal licensing or federal -- at least some kind of federal database that will allow states to know if a new broker that's coming into the state has some kind of previous problems in another location.

BACHUS: Would you look at the national registration and licensing provisions that we've introduced and maybe get back with us on a recommendation?

FRANK: Thank you. 

Now, to explain the order here, this being a very large committee, not everybody gets to ask questions, especially if they wait until opening statements have been given. So I am going to go to the list of people who did not on our side get to ask a question the last time, in seniority, and then get back to the others. 

And the first of those is the gentleman from Texas, Mr. Green.

GREEN: Thank you, Mr. Chairman. I thank you for your judicious approach to managing the committee. And I'm honored to associate myself with your comments.

And I also thank the ranking member.

Mr. Chairman, thank you for visiting with us today. 

I'd like to visit with you very briefly about a crisis that continues, and it seems to go unabated, notwithstanding cyclical and temporary factors; notwithstanding excess inventories and the lack thereof; notwithstanding core inflation, commodity prices, whether they increase or flatten; notwithstanding energy prices and how they impact the economy, headline inflation, core inflation.

We have a crisis, in my opinion, when we consistently find that one segment of our society has an unemployment rate that is always twice that of another segment of our society.

White unemployment is, as of June 2007, 4.0 percent. Black unemployment is 8.5 percent. Poverty among whites is 10.4 percent. Poverty among blacks is 25.6 percent. 

And this is not something that is anomalous. It occurs consistently. There is a trend that is easy to track, and we consistently find that black unemployment it always twice that of white unemployment and is likely to be twice that of the national unemployment. 

The trend is there. The poverty trend is there. 

The question that I have for you is similar to the one that the chair posed, but it relates to this segment of society. And the question is, do you see a change in this trend? Is it possible for us to have African-American unemployment to achieve parity -- or employment to achieve parity with white employment? Is this trend going to continue?

BERNANKE: Well, I'm hopeful to see improvement over time. There have been some improvements in terms of average family income, in terms of the share of minorities who are -- in what would be called the middle class.

GREEN: Because my time is limited, what must we do to change this trend so that we can achieve the parity that we really want in this country?

BERNANKE: You're a bit beyond my area of specialization, Congressman. 

But, again...

(CROSSTALK)

GREEN: Well, let me -- if I may, though, Mr. Chairman, let me just say this now. You have talked about how we can impact employment, generally speaking.

GREEN: And you've talked about how we could impact poverty, generally speaking. But we have this one segment of society that is consistently -- consistently higher than all other segments of society.

Surely there must be some intellectual thought that you have to help us with this segment of society as well.

BERNANKE: Well, certainly, I was going to, at the risk of repeating myself, talk about the importance of training and skills, making sure young people have the opportunity to learn job-qualifying skills, finish school.

A lot of young minority teenagers are out of school and have very unemployment rates. We need to make sure that there's plenty -- that there's equal opportunity for both young people...

GREEN: Let's focus on the equal opportunity, because I think that you and I may find some agreement here, Mr. Chairman.

And by the way, I admire you and respect you greatly.

But the equal opportunity aspect of it, as the chairman has so eloquently put it, the way we fund higher education, beyond 12th grade, promotes unequal opportunity in education because those who have the ability to acquire the education can achieve educational parity. Those who do not will not.

So there are still some system things that have to be addressed when we talk about achieving this parity in education.

So how do we do this, is becoming a part of the debate that we have to contend with.

BERNANKE: Congressman, my wife is a high school teacher. She teaches in the D.C. public school system. She has been working for some time with minority students. Her objective is to work with students to get them into college. Many of them have parents who are single parents who have never been to college.

GREEN: Mr. Chairman, if I may, listen, I hope to meet your wife. I'm sure she's a lovely lady. But that won't help me with where I'm trying to go.

BERNANKE: Well, I was trying to explain that there are -- there's a whole mix of educational issues, social issues, opportunity, making sure that opportunities that exist are open to everybody in a free way, that don't discriminate, making sure that everybody has an opportunity to gain skills in education.

That's the kind of society we want. I recognize we don't have it yet. I think we need to work in that direction. Monetary policy can try to...

GREEN: One other question, quickly. 

Would you be amenable to attending an event -- I won't say "hearing" -- but an event, wherein you talk about how -- just as you talk about how you impact poverty and unemployment in society in the main, how we can deal with this one segment of society that for 300 years has consistently been at this level of inequality, as it relates to employment, as it relates to poverty, as it relates to opportunity?

Would you be amenable to such a thing?

BERNANKE: Yes, sir. I've been consistently available to talk about community development issues, about minority issues. And I think this is extremely important for our society.

GREEN: Thank you, Mr. Chairman. I yield back.

FRANK: The ranking member told me he is going to also follow the policy of giving preference to the people who did not get to ask, this being a larger than it needs to be committee.

And so we now recognize the gentleman from North Carolina, Mr. McHenry, for five minutes.

MCHENRY: Well, I thank the chairman.

Chairman Bernanke, I'm certainly glad to have you here. 

It seems your presentation today is largely about residential real estate. You mention that, "Declines in residential construction will continue to weigh on economic growth over the coming quarters."

Do you have any words for Congress -- with a time when lending standards have been tightened, do you have any words for us on whether or not we should further tighten lending, with additional rules and regulations on the mortgage marketplace?

BERNANKE: Well, I think there's a balance, as I've discussed this in a number of speeches, that I do believe that legitimate subprime lending in particular helps expand home ownership, helps expand access to credit.

At the same time, it's very important that we protect those who are possibly subject to abuse of or fraudulent lending. 

So we have to draw a fine line. We have to make sure we find ways to prevent the bad actors, the abusive lending, while preserving this market, which is an important market, both for the sake of those people who would like to borrow and become homeowners and also for the broad sake of our economy, in maintaining the demand for housing.

So it's really a case-by-case issue, but it is very important to try to walk that fine line between protecting consumers adequately but making sure that we don't shut down what is, I think, essentially a valuable market.

MCHENRY: Can the Federal Reserve and the regulatory bodies within the federal government adequately address those concerns?

BERNANKE: Congressman, I think I really need to leave that to the Congress to determine. 

We hope that we are taking steps -- the steps I have outlined today -- and we are prepared to take additional steps if necessary -- I believe will go some distance toward resolving some of these concerns. 

However, Congress may feel they need to take additional steps, and I think that's really up to the Congress to decide.

MCHENRY: Last month, the Federal Trade Commission had a very interesting new study on mortgage disclosures, which you mentioned mortgage disclosures in your presentation.

And it concluded in the study that current disclosures fail to convey key mortgage costs to many consumers.

In their study, they found about a third could not identify the interest rate, whether it's prime, whether it's the prime and subprime marketplace.

Half could not correctly identify the loan amount. Two-thirds could not recognize that they would be charged a pre-payment penalty. Further, nearly nine-tenths could not identify the total amount of up- front charges.

Do you believe that changes in mortgage disclosures can help the marketplace so that individuals can decide for themselves; if they have those clear and up-front pieces of information, that they can better decide for themselves?

BERNANKE: We think good disclosures are a critical part of a well-functioning market. 

We've had a series of hearings, and we had exactly the same comment that you were just saying, which is that many borrowers simply don't understand all the details of their mortgage. They don't get the information in a timely way. They don't understand the basics of what they need to know.

So, as I mentioned, we are currently doing a complete overhaul of regulations, the disclosures for mortgages.

BERNANKE: And in particular, one thing we found is that it's really essential to have real consumers look at these disclosures. Because lawyers can write down these disclosures and say, "This looks fine to me." You give it to a real consumer and they don't know what to do with it.

So one of the things we consider to be very important, and we found this to be very helpful in our credit card disclosure work, is to do focus groups, consumer testing, make sure -- then test people afterwards to see what they remember, what they understand, make sure those disclosures are effective. 

And so I don't think there's any shortcuts to getting good disclosures. You really have to make sure that the people can understand them.

MCHENRY: Can that largely be done through the regulatory structure?

BERNANKE: Yes. As I said, we are currently undertaking that. And I hope that we'll produce a good result. And you'll see and make your own judgment. 

MCHENRY: Well, Congress is targeting policy pursuits when it comes to equality of outcome, as opposed to really the equality of opportunity in this country. 

You speak of ensuring that we have solid employment, as well as low inflation. Now, Congress has actually had a great focus on income inequality and the disparities in income in this country. And should the focus be more on eliminating poverty and offering opportunities to move up the income ladder, or should it be focused on the top and ensuring that we pull down those top income numbers to ensure greater equality?

BERNANKE: The fact that there are some very wealthy people doesn't necessarily make me or you worse off if they're creating value. You know, I'm a baseball fan. I like to watch Alex Rodriguez. And I don't particularly care that he earns a lot more money than I do.

But we do need to make sure that people throughout the income scale have opportunities to raise their own standards of living and make progress in our society. 

And that's why I've advocated the principle of trying to give people opportunity through education, through skills, through support during periods of transition between jobs to make them more productive and more able to deal with the disruptions that come with a globalized economy.

MCHENRY: Touching on that, expanding on that, in my final question here, the taxation of capital gains and the Congress' discussion now on taxing partnerships: Do you believe that a lower capital gains tax that is lower than income rates is good for investment and strengthens our economy and growth in this country and helps lead to lower unemployment rates?

BERNANKE: Congressman, I think I could talk about the pros and the cons, on the one hand, the other hand on this. But, as you know, I'm trying to avoid taking positions on specific tax and spending measures on the grounds that the Federal Reserve needs to maintain its nonpartisan status.

So I'm sorry that I really can't give you a good answer on that one.

FRANK: The gentleman from Illinois -- and I'd ask the gentleman just for 15 seconds, if I could, of it to say, when energy costs are blamed for the fact that real incomes are going down, I do want to congratulate the corporate sector. They've apparently found a way to insulate profits from the impact of energy costs. Because profits -- as noted in the report here, as we've seen, profits have gone way up. So while energy costs appear to have this terrible impact on college graduates' real incomes, somehow the corporate sector has managed to avoid that.

I think in fact energy costs are being given much more blame and credit, and there are institutional other factors. And the soaring profit sector is a bigger, I think, explanation of the stalled wages.

The gentleman from Illinois...

BACHUS: (OFF-MIKE)

FRANK: It's the gentleman from Illinois' time.

BACHUS: Would the gentleman yield for -- just to respond?

FRANK: Well, (inaudible) the gentleman from Illinois' time.

BACHUS: OK.

FRANK: The gentleman from Illinois?

GUTIERREZ: Thank you very much.

Well, welcome back, Chairman Bernanke. 

Just a side note: As the chairman, when you get together with the governors, you might want to take a look at what I feel is going to be a real looming crisis, and that's for our generation of college kids today. Because there isn't a week that goes by my daughter doesn't get another credit card. And worse yet, now she's getting loans -- take a vacation, get a laptop. You should see this stuff that's coming in the mail. Fortunately, she has a very fiscally responsible dad that's taught her about money and monetary policy and -- at least I hope so, until I get the credit card bill in the mail. 

But very seriously, I really fear this can get out of hand, especially with the rising cost of how young people are going to manage their college. I'd hate to see the next generation just such in debt that no matter what monetary policy you come up, we're not going to be able to very helpful to them. 

Chairman Bernanke, at the February hearing, in response to a question from my good friend Congressman Cleaver regarding the positive role that immigrants have played and continue to play in our economy, you commented briefly on immigration reform. 

You stated, "So I certainly agree that immigrants have played a big role, they continue to play a big role and we need to have a national policy on that. This is a very tough issue and I think Congress really has to take the lead about how many people and under what conditions we admit. But it certainly is the case today that immigrants are playing a major role in our economy. There's no question about that," end quote.

I appreciated your response and agree with you in many respects. And I'm not trying to play gotcha here by asking you to endorse any particular panacea. You just answered the last question in that regard. 

But I would like for you to expand a little bit on the part of your answer from February. Specifically, do you think that the uncertainty with respect to the availability of a vibrant workforce created by Congress's failure to act on immigration reform has a negative impact or could have a negative impact on our economy?

BERNANKE: Well, as you know, the immigrant workforce is very important in some industries: construction, agriculture and others. Some of them are seasonal. And I think if -- you know, I think the employers in those industries are interested in knowing where the workforce is coming from and in that respect, I think they would like to have some clarity.

But I understand that they're -- you know, one of the key issues here is that the concerns -- many of the concerns about immigration go beyond purely economic considerations, and I understand that. 

So I -- within the economic sphere, as I said in February, immigrants do play a very substantial role in our workforce and they represent a significant portion of the growth of our workforce. They are very important in some industries. And, you know, from an economic point of view, we need to recognize that, that role they play.

GUTIERREZ: We deported 160,000 undocumented workers from the United States last year -- in the last 12 months. At that rate, it would take us about 65 years to, quote, "rid" ourselves of the 12 million undocumented, as some would wish to do.

But let's just say that we could do a better job, and we could do it in five years. What do you think the economic impact would be on our economy if we just all of a sudden "rid" ourselves, quote/unquote, of 12 million workers in our economy?

BERNANKE: Well, I don't think it's very surprising to say that that would be a fairly disruptive event if it happened very quickly. 

But as I said in February, you know, I do think it's important for Congress to think through how many immigrants they would like to have and under what conditions. Because it's important to try to create some certainty and some ability to forecast what workforces are going to look like.

GUTIERREZ: Mr. Bernanke, I want to focus us a minute on what I believe is an ongoing currency misalignment or manipulation by China and the effect of this practice on the American economy.

The American worker's currency undervaluation by China is reaching critical mass. Over 10 years, China's fixed its exchange rate by intervening in currency markets. Economist estimate that the yuan is undervalued by at least 9.5 percent, and as much as 54. In the past, even you, Mr. Bernanke, have characterized this undervaluation as a subsidy for exports from China. Suffice to say, we cannot compete with this ongoing government subsidy, especially with our largest trading partner. 

In 2006, U.S. goods trade deficit with China rose almost 15 percent, nearly $233 billion; a record high. Meanwhile, because China government must buy U.S. dollars to keep the value of the yuan low, China holds more in foreign exchange reserves than any country in history. 

The latest tactic used by U.S. and third-party officials trying to convince China to allow its currency to fluctuate is to explain to the Chinese that doing so will benefit their own economy; that is, the Chinese economy.

If you were to have a one-on-one meeting with your counterpart at the People's Bank of China, what arguments would you use to convince he or she that it is in the best interests of China and makes good economic policy for China to allow their currency to fluctuate?

BERNANKE: Congressman, I've had that meeting on a couple of occasions. 

I do think that it is in China's interest to allow their currency to float, to appreciate. 

There are two principal reasons why it's in their own interest. 

The first is that, without a flexible exchange rate, they're unable to run an independent monetary policy. And they are having some issues right now with a bit of inflation and some asset price changes that may reflect excess liquidity in their system, and that's a potential problem down the road. 

The other reason it's in their interest to adjust the currency, you already alluded to, is that the level of the currency essentially distorts the economy and puts more resources into the export sector. 

In China right now, less than 40 percent of total GDP goes to domestic household consumption. They need to reorient their economy toward producing more for the domestic market and being less oriented to the external market, and changing the value of the currency is one step to doing that.

I think that, in addition to currency change, though, that they ought to take additional structural measures to try to encourage domestic consumption so that even at a given value of the exchange rate the economy will be more focused on domestic demand rather than on the global market.

FRANK: Gentleman from New Mexico?

PEARCE: Thank you, Mr. Chairman.

Thank you, Chairman Bernanke. And it's a positive report of our economy and the world economy in general.

On page five you refer to if -- you make a statement that if energy prices level off, if anticipated. I would ask you what would cause you to anticipate the prices to level, what factors.

BERNANKE: Well, we approach this at the Federal Reserve on essentially two levels. 

First, we try to do a fundamental supply-and-demand analysis, try to look at how we expect demand to grow both not only in the United States, of course, but in emerging markets and around the world and where we see supply emerging in OPEC and outside of OPEC, and try to make some sense of where that market is going.

But another very important piece of information is futures markets. Investors in -- dealing in NYMEX and other futures markets put their money, essentially making bets where they think the price of oil is going to be at various horizons going out to six or more years. 

Those futures markets have been wrong in the past. They have underestimated the increase in oil prices that we've seen, which is one reason why we're very cautious about it. But over long periods of time they're probably about the best source of information we have about where the markets see energy prices going. 

And so the markets -- those energy markets currently see oil prices remaining high, but leveling off over the next couple of years, to the point where, if that actually happens, overall headline inflation would be about the same as core inflation.

PEARCE: I would note that the National Petroleum Council met just yesterday; this is inside industry experts. And they forecast that supply would be very tight and that prices would be high -- trending higher.

And then I think that we're doing things -- I've seen the bill that we've marked up in Resources that would begin to limit access internally to federal lands and also slow the process down so that our supplies internally are beginning -- will collapse.

I will tell you that as a lifelong member of the oil industry and growing up in an oil town, that already, because of the things that we're doing here, that the remedial work on the wells that keeps the production curve steady instead of declining is beginning to shut down, that utilization of equipment is beginning to lag nationwide, but also specifically in the remedial area. And so you have to anticipate that there might be some clouds on the horizon in that forecast and then the effect.

Now, about three pages of your report, from about the bottom of page six on, we're dealing with the subprime market, and some portion of that is a difficult market.

My question is, worst-case scenario, I'm wondering why we got so much attention to the subprime market. If the entire market collapsed -- let's take the worst, worst, worst-case scenario -- how much effect would that have on our economy? 

And I would like that answer in kind of the context that recently Dow Chemical announced, because of high energy prices, they're building a $22 billion facility in Saudi Arabia, another $8 billion facility in China, and together 10,000 jobs are going to those places. Those would be high six-figure jobs here. And yet they're building.

So my question is, 30 percent of your report is about subprime and the addressing of things that we should be addressing, but I'm not sure 30 percent of our time should be addressed versus the effect of high energy prices. 

Could you, kind of, give me some understanding of those two factors?

BERNANKE: Well, the Federal Reserve has multiple roles, and the primary purpose of this hearing is to talk about monetary policy and the economy, and that's normally the only topic I would cover.

In this case, though, the Federal Reserve also has some regulatory roles in reference to subprime mortgage markets in particular. And I thought this would be a useful opportunity to update this committee on some of the actions we're taking specifically in this particular market.

BERNANKE: The concerns are there are some macroeconomic issues there in terms of what the effects of tightened lending standards might be on housing demands, for example, which is part of the -- one of the factors affecting the growth of the overall economy.

But the main concerns I was addressing in the latter part of my testimony was really the maintenance of legitimate subprime lending and the protection of consumers from abusive practices.

PEARCE: And I appreciate and hope that we do more of that. It just -- I think there are factors that are going to have potential upset to our economy that it would be important to get your perspective of, and that is the cost of energy long term seems to me to be the greatest threat to our economy, and with the national council saying supply is limited, price is high, I would hope that we'd get input on that also.

But I appreciate your work. And, again, a good report. Appreciate that.

Thank you, Mr. Chairman.

FRANK: Thank you.

The gentleman from Texas?

HINOJOSA: Thank you, Mr. Chairman. 

Chairman Bernanke, thank you for giving us an update on the economy in the United States and abroad, and giving us an opportunity also to ask some questions that are of concern to us.

I hope that in this brief time that we have that I can address housing, the nat bank (ph), immigration and possibly the college student loan industry, as it refers to the for-profit group.

This week the House of Representatives passed two of my rural housing bills authorizing funding for the Housing Assistance Council and the Rural Housing and Economic Development Program. I introduced those two bills, in my capacity as chairman of the Congressional Rural Housing Caucus, to improve the affordability and availability and quality of housing in rural America.

What data can you share with us as to the economic well-being of rural America? And what types of federal policy changes do you recommend to improve their livelihood?

BERNANKE: Well, one suggestion I would make that I just put out for consideration, I know that the Congress is looking at farm support bills and the payments that are made to individual farmers on different crops. 

BERNANKE: Certainly one way to think about supporting the farm economy is less through direct payments to individual farmers and more supporting the broader infrastructure of the rural economy -- irrigation, land preservation, erosion, roads, some of the things you've been talking about -- to make the rural economy healthier and stronger more generally. And I think that would be one thing to consider under the general rubric of the agricultural bill.

HINOJOSA: I agree with you. Because in my district I have seen that we give out about 7,500 checks a year as subsidies, and 10 percent of the biggest farms in our district receive 80 percent of the total amount of money given by the federal government. So I agree with you.

Second question refers to Mexico and the fact that it is the United States's second leading trade partner. This is especially visible on the border in my congressional district in South Texas. The communities along the Mexico-U.S. border have faced great burdens on their infrastructure due to such trade growth.

Do you support an increase in resources for the Nat Bank (ph) to support local projects such as wastewater treatment facilities, roadways and bridges to address this regional challenge?

BERNANKE: Congressman, I'm afraid I haven't really had a chance to evaluate that particular issue. 

I do know that there's an awful lot of economic activity along the border there. And my very first trip as a member of the Board of Governors some years ago was to Brownsville. I saw the building there of some new colonias and the cooperation between Mexicans and U.S. citizens. 

So, you know, I think that's a very vibrant area. And I hope that its infrastructure is well served. But I'm afraid I don't know enough about your specific proposal.

HINOJOSA: I might want to point out to you that the administration zeroed out the amount of money for the BET (ph) board, which is the one that receives the applications for those entities that are asking for assistance, even though the North American Free Trade Agreement has caused us to increase our trade with Mexico so much. And yet this administration failed to allow some money so that the Nat Bank (ph) could continue to do what it was intended to.

The third question is on immigration. And I want to say that since immigration reform appears to be set aside by the Senate, at least for now, what strategies for increasing the labor force must be pursued to meet the future needs of United States businesses if immigrants are not encouraged to be employees as legal workers, are not brought in as temporary employees? 

What alternatives must we pursue to make sure we have enough workers for all of our industries, especially agriculture, construction, manufacturing, the hotels, restaurants and landscaping? Those are areas that we are hurting by not having enough employees.

BERNANKE: Well, there's two ways essentially to increase the effectiveness of our labor force. 

One, of course, is to improve skills and training of U.S. citizens and bring more people into the labor force here.

The issues concerning the immigration bill notwithstanding, I don't think anyone is arguing that we shouldn't have a legal immigration policy. And, you know, bringing in people with the appropriate mix of skills, I think, can be productive and useful for the economy. 

In particular, I believe currently that there is something of an imbalance between low-skilled and high-skilled workers, and I would like to see -- I think it would be beneficial to our economy to allow for additional high-skilled workers, as well as some of the workers that you're alluding to, working in agriculture and the like. 

HINOJOSA: I agree with you, that we ought to spend more money in retraining and helping our own folks here in the United States be able to fill those jobs and possibly increase the amount. But when the government and the administration took 10 years to raise the minimum wage, you can see why it is difficult to get people to take those jobs.

So, again, I thank you for coming to speak to us. 

I yield back.

FRANK: The gentleman from California, Mr. Campbell?

CAMPBELL: Thank you, Mr. Chairman. 

And oddly enough, Chairman Bernanke, I have a series of economic questions for you. I believe I'm correct in characterizing that, about six months ago, you said that you thought one of the greatest risks to economic growth would be a hard fall in the residential housing market.

You've said today that some of our slow-down in growth is largely attributable to that sector.

To what degree -- how would you assess the risk of a hard fall in that market at this point?

And what are the risks to that happening, or the opportunities for it not happening?

BERNANKE: Well, we think it remains a risk. It's important to understand that, even should demand begin to stabilize -- and it has shown signs, at times, of stabilizing -- that we have what you might call an inventory problem. That is, home builders have a large number of unsold homes; so, even if demand were to stabilize, that home builders would have to continue to cut back on the construction in order to eventually bring those inventories into line.

So that would, of course, reduce economic activity. It might have some impact on the construction employment and so on.

The related concern, in terms of the downside risk, is that, in order to clear out those inventories, we might start seeing falls in prices. And for many people, the equity in their home is their major financial asset.

So the question is, would price declines, moderate price declines, have any significant impact on consumer spending?

The evidence, so far, is that there really has been no spillover that we can see. But certainly, watching for any potential impact of changes in housing values on consumers, and on their mood, attitude, sentiment, is part of what we're doing. And we're following that market very closely.

CAMPBELL: Are there any policy actions we should be considering in that regard, or is the best policy action to do no harm?

BERNANKE: I think that there's an adjustment, a correction, going on. The housing market expanded to very high levels of production, despite the fact that we're off 30 percent in terms of construction this year, from the peak.

We're at levels that were reached in the late 90s, for example. So the housing market is still producing more than a million homes a year. So I think, you know, we have to watch very carefully what's happening. And we need to make sure our mortgage markets are functioning well and so on.

But I think this is a process that's going to have to work its way out. And it has been working its way out. And we'll be watching it as it does.

CAMPBELL: OK. The dollar has been falling on currency markets, of late, but our trade deficit has not. Why is that occurring? 

And are you concerned about either trend?

BERNANKE: Well, the dollar is the responsibility of the Treasury. We don't comment on the dollar. We simply take the dollar as given and make monetary policy the best we can, given the performance of the dollar.

The trade deficit actually has shown some signs of looking a bit better. That's been disguised, to some extent, by the fact that oil prices have gone up so much and so the oil import bill has risen.

But other components of our net trade balance do seem to have stabilized somewhat. And there are some encouraging signs in that direction.

As I alluded to in my earlier comment about the Chinese currency, I think that relying entirely on exchange rates changes to improve the trade balance is a mistake, that it's important that there be structural changes that affect the ratio of domestic and foreign demands that different economies are relying on.

BERNANKE: So in particular that in China, that they make changes that will allow a greater portion of their output to be devoted to domestic consumption, domestic demand, whereas here in the United States we save more in order to rely less on imported capital.

So exchange rates notwithstanding, I think some changes in the balance of saving and investment, changes in the balance of domestic versus foreign production, need to take place in order to move us in the direction toward a better balance.

CAMPBELL: And on the inflation front, you talked about the energy versus the core inflation rate and that you expect, based on futures contracts, energy and food price increases to soften to some degree.

If that did not occur, at what point does that become a concern for you and the Federal Reserve?

BERNANKE: Well, first of all, we're unhappy with inflation running, you know -- including energy and food prices -- running higher than we would like. So it's already a concern in that respect.

But looking forward, I think the real issue for us if there are temporary bursts in prices of food and energy, will those prices, higher prices somehow get embedded in the long-run underlying trend of inflation?

And there's a couple of ways in which that could happen. One would be -- and they're related. One would be if higher, say, food costs, materials costs were passed through by producers into higher prices of other consumer goods, for example.

The other possibility would be that consumers, having seen for many years very high increases in their food and energy costs, would begin to lose confidence in the Federal Reserve and begin to worry that inflation will be higher in the future. Their expectations of inflation would begin to move upward. 

Once that happens, it's much more difficult to keep inflation low because people are building into their wage and price decisions higher expectations of inflation.

So there are some concerns there. That's part of the reason why I think we do have to be quite vigilant on inflation at this juncture.

CAMPBELL: Thank you.

I am not out of questions, but I am out of time.

FRANK: The gentleman from New Jersey?

SIRES: Thank you.

Thank you, Mr. Bernanke, for being here with us today. 

I just want to follow up on the housing issue. I represent a district -- it's across from New York, the northern part, Jersey City area, which has seen a boon of housing over the last few years. 

With that, the prices really went up high. A lot of people had to resort to subprime lending to get housing. And it created a lot of jobs, a lot of good-paying construction jobs. 

SIRES: I don't know whether this is regional, but I've seen the prices of the houses now really going down and we're losing a lot of those jobs that were created.

I'd just like to know the impact on these construction jobs. Do you see this -- I know that there -- approximately 10 percent of the jobs created in this country were construction.

What impact is this going to have on the economy? Do you see it as a regional? Because I know they're going -- I have friends in Florida and they're going through the same process, the same things, where good-paying jobs are being lost.

Do you see this trend changing? I know mortgages are getting tighter, subprime is very difficult to get. Home equity loans to create these jobs are impossible in some cases.

Do you see this trend changing any time soon?

BERNANKE: Congressman, first of all, you're quite right that there's a very strong regional component in the housing market. Florida is an example where there's quite a bit of weakness. There's other parts of the country that are doing better, where prices are still rising and the real estate markets are pretty healthy. So it does depend a lot on where you are.

We would expect, as the residential real estate market adjusts toward a more sustainable level, that there would be some loss of residential construction jobs. But there are some offsets.

In particular, the nonresidential construction -- offices, commercial real estate, factories -- are growing at a very rapid pace, and a lot of the labor that has left residential construction has been absorbed by nonresidential construction.

In addition, we are seeing increases, for example, in home improvement, people say, "Well, we can't move because of the housing market, we're just going to redo our kitchen." And that has also proved a source of employment.

BERNANKE: So although these official statistics have some puzzles, frankly, they so far do not show a significant decline in construction employment, and partly for those reasons I've just described.

SIRES: But these other jobs that people are taking, they're not as good a job, obviously, as they were in the construction field...

BERNANKE: Many of the construction workers are finding construction work, but in non-residential or home improvement type sectors.

SIRES: Not as well-paying as those jobs.

BERNANKE: I think it varies. Some of the specialty contractors in, you know, building apartment buildings or building office buildings and the like are pretty well paid, pretty productive jobs.

SIRES: I know the lending rate seems to have stabled.

Do you see any changes downward in the future?

BERNANKE: Well, in terms of the mortgage rate, a lot depends on what the, you know, what the bond market does. And, as you know, the Federal Reserve does not have perfect control over the bond market.

SIRES: Thank you very much.

FRANK: The gentleman from Texas.

PAUL: Thank you, Mr. Chairman.

I find it rather ironic that the Federal Reserve has complete control of the money supply, and yet it's the Treasury that's supposed to protect the value of the dollar. It seems like you have a little bit of responsibility for the value of the dollar as well.

I have a question about the GDP in the first quarter. Our GDP didn't do so well, with less than 1 percent. Our population growth averages about 1.5 percent. So if we have total wealth divided, you know, by the population, we actually have negative growth.

Could this not be a part of the explanation on why some people feel inequality, that they're not doing as well in the economy? Wouldn't this explain some of the concerns that we have?

BERNANKE: Well, Congressman, that was, of course, a single quarter. And there were a number of temporary factors that held down GDP growth in the first quarter, including the liquidation of the inventory overhang, which I mentioned before, a swing in our trade balance, a temporary swing and a temporary decline in federal defense spending. All of those things have been reversing now. And so I think we'll be seeing in the second quarter something closer to 3 percent growth. Between the two, the first half of the year, overall it would be a more healthy rate of growth.

PAUL: We have a savings rate which is negative. And if we had true capitalism, this would be very, very serious. Because we'd have no savings and no capital to invest. 

Today with our monetary system, we resort to other means. We can create credit and money out of thin air, and it acts as capital by stealing value from the existing currency. And we've been doing that for a long time. So the process can continue, but it -- and it literally is the inflation.

Also, we can resort to borrowing overseas. And we are permitted because we have the reserve currency of the world to export our inflation. 

PAUL: And that seems to be a free ride for us, as well.

But how long can we fool the world? How long can we continue with a current account deficit of 6 percent if we're not -- if our productive jobs are going overseas and like the gentleman mentioned earlier about these -- more jobs going overseas, eventually this is going to catch up with us.

Is it conceivable that we could live on capital formation, by creation of money and credit out of thin air? If that's the case, we wouldn't ever have to go to work again, if that's true.

It seems like we really have to go to work. We really have to save. And we really have to invest. And we really have to get these jobs back.

But I see so many of our problems as a consequence of a monetary system that discourages savings, encourages a free ride for us because there is still a lot of trust for the dollar, although that trust is going down every day.

And I think we have to face up to the consequences of what this might mean to us.

BERNANKE: Well, first, our national saving includes corporate savings as well as household savings. You put those together, and you get a positive number, so there is some net saving going on in the United States.

But, Congressman, you're absolutely right that we're also relying pretty heavily on borrowing from abroad, which is our current account deficit. I think that's sustainable for a while, because foreigners seem quite interested in acquiring U.S. assets. We have very deep and liquid financial markets.

However, I also agree with you that that's not a long-term, sustainable situation by any means and we need to be working to try to bring that current account deficit down over time. 

And in answer to a previous question, I talked a bit about the importance of structural change, increasing savings here in the United States, increasing attention to domestic demand with our trading partners.

PAUL: You did say in your talk that the predominant policy concern was inflation, which is encouraging that there is a concern. Of course, once again, inflation is a monetary phenomenon and we have to deal with it. War sometimes is not healthy for a currency or for keeping prices down, at least inflation.

It's hard to find throughout all of history when war didn't create price inflation. Because even in ancient times, countries resorted to clipping coins and diluting values or whatever. They inflated the currency because people generally don't like to pay for the war.

And yet, in the '70s, we had consequences of guns and butter. Now we're having guns and butter again, and we're having consequences. And it just looks like we may well come to a '79-'80. Do you anticipate that there's a possibility that we'll face a crisis of the dollar, such as we had in '79 and 1980?

BERNANKE: The Federal Reserve is committed to maintaining low and stable inflation, and I'm very confident we'll be able to do that.

PAUL: You're not answering whether or not you anticipate the problem.

BERNANKE: I'm not anticipating a problem like '79-80. No.

PAUL: With your fingers crossed, I guess.

OK. Thank you.

FRANK: The gentleman from New Hampshire, Mr. Hodes?

HODES: Thank you, Mr. Chairman.

Chairman Bernanke, I'm glad to see you here. 

Chairman Frank and the staff made available to us the Financial Services Forum report which he referred to, and I want to follow up on some of the question that arise from reading that report and reading the monetary policy report.

HODES: The Financial Services Forum report talks about -- and you'll have to pardon me for the English, this is their word -- the astonishing skewness of U.S. income growth. 

They point out that since the year 2000 U.S. corporate profits have nearly doubled and say that in recent years the large majority of American workers has seen poor income growth. Indeed, 96.6 percent of Americans are in educational groups whose mean total money earnings have been falling, not rising, since 2000. 

Only a small share of workers at the very high end has enjoyed strong growth in incomes. The strong U.S. productivity growth of the past several years has not been reflected in wage and salary earnings and instead has accrued largely to the earnings of very high-end Americans and to corporate profits.

The New York Times reported the other day that 5 percent of the wealth of this country is concentrated in the hands of 15,000 families.

In a large sense, given that productivity is up, and you talk about the continuing expansion of the economy, and you predict at least moderate growth in the economy, we are seeing the rich get richer, the poor get poorer, the middle class squeezed.

How can productivity and expansion serve as accurate measures of the true strength of an economy where what the Financial Services Forum reports happening is happening?

BERNANKE: Well, in the past I've taken a view which is very similar to what Chairman Frank advanced, which is that I do believe that globalization, technological change, those factors do make our country richer, but there is essentially a political problem if the majority of the population doesn't feel that they personally are benefiting from that, that we need to pay attention to how...

HODES: Can I just stop you for a moment? 

It's not about what people feel. If these statistics are correct, almost 97 percent of Americans are going backwards in terms of their real wage income growth while at the very top things are getting better and corporate profits are up. So it's more than a feeling, isn't it?

BERNANKE: I don't want to dispute the study. I'm sure they picked some period of time and looked at it. I don't think that's a good characterization of the last few decades, for example.

If you take, for example, if you take the families with children and look at the middle quintile, that's sort of a typical middle class family, the real income of that family is about 30 percent higher today than it was in 1980 and about 15 percent higher than it was in 1995 and about 5 percent higher than it was in 2000.

There are many different ways to cut these data, and I absolutely agree that there's increased inequality and that we're not seeing as big a gains as we would like in the middle. I agree with that. 

But I think characterizing 97 percent as falling backward, I don't think that's really a fair representation of the trends in the U.S. over the past decade or two.

HODES: Assuming that these figures are accurate and that since the year 2000 there has been this astonishing skewing of growth for those at the very top as compared to those in the middle or in the lower rungs, what role do you think that tax policy since the year 2000 has played in the skewing of that picture?

BERNANKE: I think tax policy is not the major factor. I think empirically the major factors are technological change, which particularly favors people with high sets of skills, and to a lesser extent globalization. I think most of the research points to that.

Over time, of course, the tax system is progressive, but it has not been, you know, it has not offset these other factors which have made incomes, you know, more unequal.

HODES: What are the long-term implications for an economy where, if this trend continues, the rich get richer, corporate profits go up but real incomes for the rest fall?

BERNANKE: Well, even putting aside the inequality issue -- as I was indicating before, you know, what a superstar baseball player makes doesn't necessarily affect me.

But even putting that aside, it's important that the mass of people be seeing improvements in their living standards. I absolutely agree with that. That's very important.

And I know of no other approach other than trying to make our economy more productive for a broad swath of society, and that involves research and development; it involves education; it involves doing -- saving; it involves doing all those things that make an economy strong. 

And Congress has a tremendous role here, in making good economic policies that will strengthen our economy and allow the benefits of that economic growth to be spread more widely.

HODES: Thank you very much. Thank you, Mr. Chairman.

FRANK: The gentlewoman from Ohio?

PRYCE: Thank you, Mr. Chairman. 

And thank you, Mr. Chairman, for the time you take with us, these Humphrey-Hawkins marathons, twice a year. You're very gracious. I know you're required to do it, but thank you for doing it so graciously.

I also want to thank you for the initiatives the Fed has taken in terms of consumer protections, as we -- officially, in my state of Ohio, with the mortgage problems that we're having, your attention to that is critical and very, very much appreciated. So thank you for that.

I'd like you to talk a little bit, today, to us about the extent and the impact of use of credit, or the overuse of credit, as Mr. Paul (ph) might refer to it, in our country.

And how -- I'm particularly interested in credit card debt. But you can go beyond that if you'd like.

PRYCE: Because I think that this committee will be addressing some of those issues in the fall. We'd love to have some of your guidance in terms of consumer protections when it comes to things like data breaches. In my home state of Ohio, we have had major financial institutions, universities, retailers, even my own -- even our own state government has had just a series of just terrible breaches in data and the identity theft issues that go along with those things. 

Do you see that -- credit is a wonderful convenience, and credit is one thing that's keeping our economy healthy -- or unhealthy, as the case may be and your perspective.

But how can we better address the issue of data breaches and securing people's information when the use of credit is so -- Internet, every way we use it?

BERNANKE: Thank you.

On the general issue of credit, there is sort of a paradox that on one hand, we want people to have access to credit. Credit allows you to buy a home much earlier than you otherwise could, for example.

But as I was discussing with Congressman Paul, there's a very low saving rate. And we would like people to save more and to build more wealth, in particular. The discussion we were having of inequality, the inequality in wealth-holding is much more severe than the inequality of income because many people just simply don't build wealth in terms of acquiring financial and real assets. So that's very important.

Specifically on the two things you mentioned, on the credit cards, as I said, we have just put out a very extensive set of new disclosures. We believe that will help considerably in terms of helping people understand the terms of their card, not being surprised by unexpected fees and penalties. 

And we're prepared to take additional steps. Congress has given us and other regulators a good bit of power to try to make sure that credit cards are marketed in an honest way and that people understand what their accounts are about. And so we want to proceed along those lines. And Congress will have to judge whether they need to take additional steps.

On the issue of data breaches, we have a model that you might want to look at. The Gramm-Leach-Bliley law of 1999 instructed the federal regulators to develop a set of data breach policies for depository institutions -- banks, essentially -- which we have done. 

BERNANKE: And so we have a set of rules, a set of principles which of course promote safeguarding of information, methods of doing that and also give some advice on what circumstances you need to notify. You know, if there's a trivial problem, maybe it's not necessary to notify the public. If there's a serious breach of security, then obviously the public needs to know about it.

So that exists, and I might suggest to you that in drawing up legislation for the broader market, you might take a look at some of the things we've learned in the banking agencies.

PRYCE: Let me ask you one specific question that seems to be the subject of some controversy.

How do you feel about the consumers' ability to freeze their credit? Do you think that that will have any impact on our economy? Do you think technology is at a place where that can be turned off and on at will? Do you have any opinion at all on freezing?

BERNANKE: If a consumer wishes to either prevent access to their credit records or prevent additional credit charges being made, that seems perfectly reasonable to me. 

I'm not aware of any particular technological problems, but I could be unaware of something. I'm not sure. But certainly the consumer should have some control, significant control over their credit records and preventing unwanted access is certainly part of that.

PRYCE: All right.

Thank you very much.

FRANK: The gentleman from Florida?

(UNKNOWN): Thank you, Mr. Chairman.

Thank you, Mr. Chairman, for being here today. Appreciate you coming before us before.

I've got a general question and then a couple of specific questions on debt. 

Yesterday the Dow hit a milestone mark of 14,000, which is not a question of benefit to the haves and the have-nots, is a good thing. We appreciate the fact that the market has hit this high. For those investors in this country, it's a very positive statement. 

(UNKNOWN): But, at the same time, we know that there are many people in the country that are still struggling. They may be investors; they may not be investors. 

There's still a big portion of our country that is not invested in the market or, even if they are, it's a small amount. And whether it's relating to energy goes or food costs or the staples that impact people's day-to-day lives, we know that these are things that are at the gut level impacting them.

And, you know, I think one of the questions that we keep looking at is, why is it that some of these gains in large business sectors or the market side are not translating into the middle class, if you will. 

And I know that we look at unemployment being low -- I'm from Florida, and in Florida we do, as you mentioned, a softening of our real estate sector, which has had a big impact. We also have a lot of hospitality jobs, which are traditionally relatively low wage jobs in large quantities. 

So even unemployment figures don't always tell the whole tale when people are getting paid minimum wage or relatively small numbers.

How is it? And what can be done in terms of monetary policy, if there is anything, to help middle class or people who are in small business or trying to get an upper hand in trying to benefit from an economy that through the Wall Street public security side is doing very well, but maybe in the small business, private, closely held businesses or people that are workers are just not accomplishing as much?

BERNANKE: Well, in terms of monetary policy, I'd react to a comment that Chairman Frank made earlier, which is I think that on the margin good monetary policy can do a bit about inequality.

I notice that when the poverty reports are issued periodically they show the recession periods and the expansion periods of the economy, because poverty tends to rise during recessions, as you might not be surprised. And therefore, to the extent that the Fed can maintain a stable economy, low inflation, sustainable expansion, there's a modest benefit in terms of income for the poor and for the middle class.

BERNANKE: But I think that to make real changes, real differences in terms of the across groups differences, you need to have structural changes, changes in behavior. 

We note, for example, the Federal Reserve manages a survey called the survey of consumer finances, which is the leading source of information about wealth holdings -- you mentioned stocks before -- across the population.

And what we find there is that a very large fraction of the population really had almost no savings. You know, it's a paycheck to paycheck type of situation.

Now obviously, it's hard to save when your income is low and your income is irregular, but there certainly should be opportunities for low- to moderate-income people to try to build some wealth, to gain financial literacy, to learn how to get a checking and savings account. And helping people do that kind of thing I think could be one way of improving their situation.

I've referred many times to skills. And I do believe that it does not require a Ph.D. to get a good paying job. There are a lot of what we used to think of and still think of as blue-collar-type jobs that are now paying pretty good salaries, given the supply and demand. So that's another important, I think, dimension of this.

But from a monetary policy perspective, I think our main goal is trying to maintain maximum employment and price stability and a stable economy as best we can.

(UNKNOWN): And as we go through this, we may want to, you know, continue to have these discussions with your board and Congress as far as what policies we can promote. Some of it's communication and promotion of educational understanding of savings.

It's a segue to a second question, in that in your speech today you talked about consumer spending has advanced vigorously over the last number of quarters. Sort of looking at the trend over the last number of years, savings has been going down, as you have said. 

Many people during this boom of real estate started with a lot of home equity loans taking equity out of their home to support consumer spending, building up more debt that way. And now, with the market, real estate market, in many parts of the country very, very flat, interest rates having gone up, adjustable rates, that's not available for people, so they have debt on top of that, and then a lot of the consumer spending is on the backs of more consumer debt, in terms of credit cards. And Congresswoman Pryce has mentioned that as well.

Again, what impact do you see that having on the long-term basis of the stability of the economy, when people are borrowing more and more and more, not saving? And, again, what can we do, through your offices or through the Congress?

BERNANKE: Well, one of the reasons that the saving rate declined and went -- actually has gone negative -- is that capital gains in your house, in your stocks, in any other assets you own are not counted as part of saving. It's only the part of your income that you set aside out of your current income that's counted as saving.

And part of the reason that people saved less over the last decade or so is precisely because home values and stock values went up. They felt wealthier. They didn't feel -- they didn't have to put aside part of their income. And therefore, you know, and they spent out of their wealth.

BERNANKE: And therefore you got negative saving rates.

As you point out, the stock market has still gone up this year, but housing prices are flattening out. To the extent that house prices no longer generate the home equity gains that they have in previous years, consumers won't be able to tap that source of spending power.

(UNKNOWN): And the costs have gone -- I know in many parts of the country, between insurance and mortgage rates and everything else, then that amount is...

BERNANKE: So they will have to begin to save more out of their current income. And that might lead us to see some increase in the household saving rate, which is -- in the short run, we don't want consumption to drop too quickly, because it's a huge part of the demand that drives our economy. But over a medium-term horizon, we do want to see more saving. And that would be a positive thing.

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

We've discussed that since 2000 we've seen stagnant wages for low-skilled workers. Well, supply and demand are a reality. And certain business interests on the right want low-skilled labor because it'll drive down wages. They want more low-skilled labor in the country. And on the other end of the spectrum, there are those who believe in open borders for the disadvantaged. 

But the result -- the result of the policy is that until we have enforcement against illegal immigration, wages will lag. They're going to lag if you have massive illegal immigration of low-skilled wages into the United States. You can't expect anything else to happen, if you have 20 million people here illegally, other than to have the pressures of supply and demand force down wage rates. And indeed, that has happened since -- well, for the last decade.

To encourage monetary inflation -- shifting to that subject -- is to encourage a return of the boom and bust in the business cycle and to abandon a stable monetary unit. That is what I think the effect would be if we moved toward the direction which didn't attempt to really control inflation. 

Now, Chairman Bernanke, as you know, over the past decade we've also seen unprecedented growth in the mortgage industry. 

(UNKNOWN): If you went back to the 1960s, there was very little movement back then in home ownership rates, until the development of technology, until the development of tools such as risk-based pricing, which allowed lending institutions to more accurately calculate the risk associated with potential borrowers.

As a consequence of that, partially, in 2004, the home ownership rate went up to just under 70 percent. It hit record highs. 

And much of this growth which we had not seen in the decades prior was in a sector of the population which was previously locked out from obtaining mortgages, and therefore they rented instead of having homes.

They had blemished credit, by and large. And they benefited greatly from the transformation in the industry, as a result. 

And as you know, the subprime lending market has come under tremendous scrutiny. Some believe we should rush to legislate. And I believe we should approach this topic with tremendous cautious.

While deceptive lending practices should be prevented, I believe effective disclosure is the proper antidote there.

I believe expanding liability, to include secondary market participants for abuse of loan originations, would be a misguided policy. Because my fear is that, if we overlegislate, which we've been known to do, it will prompt a credit crunch for Americans.

I believe the availability of credit has been good for consumers, by and large. And the economy has benefited as a result. And any potential solution to concerns which have arisen should be very closely scrutinized.

So, Chairman Bernanke, I would like to get your thoughts on this issue, and whether you believe an ill-conceived legislative fix will have any potential unintended consequences.

And lastly, as you know, the outflow of capital from our markets has been discussed at length over the last few months. Much of the debate is centered around two major burdens faced by our public companies. 

One is cumbersome regulation and the prevalence of securities class action lawsuits.

The threat of over-regulation and over-litigation has caused many companies to reconsider listing on our public markets. And this has resulted in a growth in the amount of capital in our private equity and hedge fund industry.

So my second question, Chairman, is, if our private equity and hedge fund industries are subjected to a sharp increase in regulation and taxation, what do you believe will be the end result?

Thank you.

BERNANKE: I mentioned -- well, we all mentioned earlier the 30th anniversary of Humphrey-Hawkins. Thirty years ago was also the creation of the Community Reinvestment Act, the CRA, the premise of which was that banks were not lending in certain neighborhoods, that there was redlining, and that it was important and try and induce the extension of credit to low and moderate-income people.

The development of the subprime market made that feasible, to a significant extent. 

And I agree with you that legitimate, well-underwritten, well- managed subprime lending has been constructive, does give people better access to credit and better access to home ownership, and that regulations should take care not to destroy the legitimate part of this market, even as we do what we can to make sure that the bad actors are not taking unfair advantage or confusing or misrepresenting their product to people who are essentially being victimized by them. 

So it's our challenge, and we take it very, very seriously, to provide regulations disclosures that will allow this market to continue to function but to eliminate some of the bad aspects of it that we have seen in the last couple years.

(UNKNOWN): Thank you, Mr. Chairman.

And thank you, Mr. Chairman, for coming here today.

I want to spend just a few minutes on a subject that within we think the next five or 10 years is going to account for about one out of every five dollars spent in this economy, and that's health care spending. You know, we talked a lot about food and energy costs today, and that's probably in part because they tend to rise and fall with some degree of drama and they tend to get some headlines in the newspapers.

But the fact is, what we've seen in health care spending is a very slow but steady growth in the rate of our GDP that's dedicated to health care spending, going from about 8 percent in 1980 up to bordering on 16 to 17 percent today. 

And there seems to be schools of thought, and I probably fall into the first one, but I'd like to get your thoughts on this, Mr. Chairman.

First is that this is a very dangerous trend, that with one out of every five dollars nearly being spent on health care spending, that that's less money available to our economic sector for growth, less money available to consumers for discretionary spending.

On the other hand, as opposed to the increases in spending in energy and food costs, that money is generally almost completely being recycled back into our own economy, rather than with energy costs and food costs, much of that money is going outside of the United States economy.

So it's a very broad way of asking what your thoughts are and how troubling you believe the trend is toward more of our GDP and more of our economy being dedicated to health care spending.

BERNANKE: Well, there have been some interesting studies about the cost-benefits of this extra spending we've been doing. And the general view is that the money we have spent on things like improving recovery from heart attack, on mental illness, on some other major categories of disease has been worthwhile in the sense that the benefits in terms of life expectancy, productivity and so on does exceed the cost. 

That being said, it also is not inconsistent with that statement to say that we probably could achieve the same health outcomes at a lot less cost if we had a more efficient system. And, of course, this is a huge issue about how to achieve greater efficiency. 

But I would just -- I guess I'd just like to point out that this has become extremely important not just to the share of GDP issue, as you mentioned, but as a fiscal matter, as Medicare and Medicaid become huge portions of federal spending, and also as a generational matter as we become an increasingly older society and young people are responsible for the maintenance of the retired. 

To the extent that older people require additional medical care and that care is becoming more and more expensive, it puts a heavy burden on the younger generation. 

BERNANKE: So there are some important reasons, while health care is a wonderful thing and it's certainly, you know, worthwhile on average, there are very good reasons to try and improve the efficiency of the system.

(UNKNOWN): And I certainly appreciate your thoughts on that. I share your view that we can very similar, or if not better outcomes for less money spent within the system.

The last, related, question is in regard to global competitiveness in relation to the cost being borne by American businesses on health care costs versus competitors.

In other countries, who simply aren't required to bear the burden of providing health care for their employees, do you, as you look at the future outlook of American competitiveness worry about the burden that American businesses have to bear regarding health care costs?

BERNANKE: Well, there's some complexity to that issue, because even in a society where the government provides health care, the corporations still have to pay taxes to support that, and so it isn't free.

That being said, the more resources are unnecessarily consumed by health care, as opposed to the part which is valuable, clearly it lowers the overall productivity of our society and the lower our living standards will be in the long run.

So it's a first order issue to try to make sure that our health care system is delivering good outcomes, but at a reasonable cost.

(UNKNOWN): Thank you very much.

Thank you, Mr. Chairman.

FRANK: (OFF-MIKE)

(UNKNOWN): Thank you, Mr. Chairman.

And thank you, Chairman Bernanke.

I'd like to go to something that you have in your written comments and you also spoke about orally when you spoke, and that is inflation. I'm afraid that maybe I didn't understand inflation as well as perhaps I thought I did coming in here.

But you talk about core inflation here, which apparently excludes food and energy prices. And there's also a reference to an annual inflation rate of 4.4 percent in the first five months of this year. I don't know if that does include the food and energy.

BERNANKE: Yes.

(UNKNOWN): Apparently it does.

Why are food and energy excluded from core inflation? And when you speak generally about inflation or giving the rate, such as 4.4 percent, are you generally giving a noncore inflation and giving the inflation including energy and food? 

I mean, energy is a major component of virtually every household in this country, but also of a lot of major businesses in the country as well. And I realize it's subject to short-term happenings and obviously food prices are also subject to short-term weather events and other things, and there may be some logistical problems in terms of inflation.

(UNKNOWN): But it just seems to me to exclude them from any form of inflation measurement would not be correct. 

And my follow-up to that question, if you can answer at the same time, is: Should we be concerned that persistently elevated food and energy inflation might presage an increase in that core inflation, since it's already not included there?

BERNANKE: The dual mandate says price stability. It doesn't say price stability without energy and food. The Federal Reserve is concerned about the overall inflation rate. That is our long-term objective in the sense of maintaining price stability.

But there are some technical issues involved in achieving that. In particular, when oil prices rise sharply, as they have in the last few months, there's really not much that the Federal Reserve can do in a short period of time to reverse that.

Rather, what we have to do is look forward a year to two years, which is the horizon over which monetary policy has its effect. And so we really have to ask ourselves what's the underlying trend of inflation going forward, what's the best forecast of inflation going forward?

Because energy and food prices have been so volatile, up and down, historically, the core portion, which excludes energy and food, is sometimes a better indicator of where sort of the trend of inflation is going to be a year or two from now.

So it's not that we think core inflation is more important in itself, but rather we think it's an important indicator of the underlying inflation trend.

So by paying attention to core inflation, we are in a way saying that this is how we hope to maintain stability in overall inflation over the horizon at which the monetary policy can be effective.

It is a concern, as I mention in my remarks, if energy and food prices rise a lot and you have very high overall inflation, it is a concern that the public will begin to expect higher inflation. That will perhaps then creep into core inflation and raise the inflation trend, which we don't want to happen.

So we pay attention not only to core inflation, we also look at inflation expectations as an indicator of what people think is the longer-term behavior of inflation.

QUESTION: I want to change subjects here, but I hope that because something has volatility, it wouldn't necessarily be excluded from the inflationary rates, as far as I'm concerned.

I want to ask you about where you are with Regulation Z. I don't know if Regulation Z is going to be the answer as far as credit card plans are concerned. This obviously is what you at the Fed are looking at in terms of the disclosures of what should be in there. It's the first comprehensive review of Regulation Z since I think 1980, '81, something like that. We've had a hearing on that here, and I know that you've issued your initial statement and comments are being made.

What have you learned in the comments? When do you expect to finalize the rule? Are you at a comfort level this will resolve some of the concerns that I think most of us on this committee have with the credit card industry.

BERNANKE: We issues the Regulation Z rules on credit cards in May for comments. It was a very comprehensive review of all the regulations applying both to credit cards and to other revolving credit.

The comment period is open until October, and after that we will move as expeditiously as possible to issue a final rule, you know, that will apply to credit card issuers.

We are also, as you know, doing a complete rehash -- overhaul, I should say -- of the Regulation Z as it applies to mortgage lending. We have had a series of hearings on that. 

We are also, as we did with credit cards, we're going to do consumer testing to make sure that people can understand the disclosures.

That's going to take a while. It'll be probably next year, in '08, I think, as we come to some conclusions on that.

BERNANKE: But in the nearer term, we -- in order to address some of the current issues in the subprime mortgage market, we have taken off a few elements that we think we can move on more quickly relating to solicitation and advertising of mortgages, and also in terms of the rules for when you have to give information to consumers, how quickly you have to make those disclosures. 

So there's some elements of that that we think we can move up. The full Regulation Z on mortgage lending, however, is going to still take awhile because of the need to do consumer testing.

(UNKNOWN): Thank you, Mr. Chairman.

FRANK: (OFF-MIKE)

I unplugged my mike. The gentleman from Massachusetts?

(UNKNOWN): Thank you, Mr. Chairman.

FRANK: I very much appreciate the chairman's staying with us. After two and a half hours, you're entitled to call something a rehash when it is. 

But we have, I think, one, two, three, four members left who haven't asked questions. That should take us about 20, 25 minutes and that will give us time to finish the hearing.

So if you can accommodate that, we appreciate it and we'll do that with Mr. Meeks, Ms. Waters and Mr. Miller. 

And I very much appreciate your accommodating us.

The gentleman from Massachusetts?

(UNKNOWN): Thank you, Mr. Chairman. And I'll try to be brief.

I do want to go back to an issue that Mr. Royce and others have talked about, the subprime mortgage problems that we've been having. 

In your own remarks, Mr. Chairman, you mentioned that the subprime mortgage sector has deteriorated significantly, those conditions there -- and that reflecting mounting delinquency rates on adjustable rate loans continue to be a growing problem.

You also note that one risk to the economic outlook is that the ongoing housing correction might indeed prove larger than originally anticipated, with possible spillovers into the consumer spending area. 

And in addition, you made remarks that the recent rapid expansion of the subprime market was clearly accompanied by deterioration of underwriting standards and in some cases by abuse of lending practices and outright fraud.

And while we all agree that promoting access, as you've noted, to credit and to home ownership are important objectives, we do in my opinion need to do something more concrete.

(UNKNOWN): Not only going forward -- and I appreciate that, I know you work with some other federal supervisory agencies to issue a principles-based (ph) guidance in nontraditional mortgage regulation and that in June there's a -- you issued a supervisory guidance on subprime lending, going forward.

But I do want to note that in Massachusetts -- this is just one example that I throw out there -- Governor Deval Patrick instituted a moratorium, working with mortgage lenders in Massachusetts, instituted a moratorium on foreclosures and a coordinated workout process for some of those folks that were harmed because of the, as you've noted, abusive lending practices and in some cases outright fraud.

And I was wondering, is there anything -- this is sort of a two- part question. One, are we doing anything going forward more significantly and more specific than described in your general guidance? 

And are we looking at all the possibilities working -- I know you're working with the states. Are we looking at any ways to maybe hold those people harmless or to mitigate the damage that might have been done because of abusive lending practices or that fraud?

BERNANKE: Well, in terms of getting workouts, our supervisory letter emphasized to the banks and other lenders that we encourage them to look for loan modifications. You know, foreclosure involves a considerable financial loss to the lender as well as to the borrower. In many cases, it's economically beneficial to both sides to try and do a loan modification. And we encourage -- we encourage firms to do that.

We've also been looking at whether there may not be some artificial barriers to doing modifications. For example, we've looked at some of the accounting rules that may serve effectively to make it more difficult to do modifications. We've also looked at some of the agreements, the legal agreements involved in the securitization of mortgages, the service agreements, pooled service agreements.

BERNANKE: So I think there are ways to try to facilitate this modification process by looking at some of the legal and accounting barriers that might otherwise stand in the way.

I think one thing that we should be real careful about is that we don't want to reward lenders for making bad loans. And so we don't want to get -- I hope -- we don't want to get into sort of a bail-out situation where essentially lenders made bad loans and find themselves, you know, getting paid off. So what we need to do is work with borrowers to try and get these loans changed.

A couple of things we've observed -- we've had many conversations with the industry, with consumer groups and the like -- is, first, that one of the most basic things that a borrower can do is to call their lender. Lenders often find that the borrower will not get in touch with them until it's well into the delinquency situation. 

If you see your rate about to reset, you know, several hundred basis points in the next six months, you should -- and you think that's going to be a serious problem -- you probably should talk to your lender in advance, get more time to work that out.

The other thing is that, unfortunately, lenders are very reluctant to do sort of mass, you know, restructuring. It's a very much labor-intensive kind of loan-by-loan kind of process. And we don't really see a way around that, except to try to provide support and encouragement, counseling and the like to facilitate this process. 

(UNKNOWN): Actually, jumping to another issue, we talked a lot this morning about the deplorable savings rate here in the United States. And, from our own example here in the Congress, we have a thrift savings plan where there's a match. I know a lot of employers have incentivized savings among their employees. 

Is there not some model out there that we could use to expand that across the nation, to incentivize people to save with that match, maybe? It certainly is doable. 

I think if we created incentives for employers in the tax code, treated them more favorably if they set up these matched savings plans within their companies, I think that we could do great things for the United States and reduce our reliance on foreign investment and, you know, reduce our foreign borrowing. We could do a lot more for our citizens if we just induced that behavior. 

(UNKNOWN): And I'm wondering if you had any thoughts on that. 

And I yield back.

BERNANKE: Just a couple.

The pension bill that was passed by Congress recently had a provision in it that allows employers to create savings plans with an opt-out provision. That is, an employee is put into the savings plan unless they explicitly request to be let off.

There's a lot of research which suggests that that opt-out type approach, that most people will stay in the saving plan, and you get very significantly effects that way.

The -- sorry. Oh, the other thought -- there are a couple other thoughts.

One, one might consider, I suppose, using the existing Social Security system. There was a big debate here in Congress, of course, about so-called carve-out accounts, et cetera. Something that might be less controversial possibly would be an add-on account, whereby individuals had a chance through their payroll saving -- through their payroll taxes to contribute to an independent account that would be in their name.

Finally, I think that it's probably worth taking a look at the long list of savings programs and incentives that now exist in our tax code and in our government policy. They are quite confusing and sometimes somewhat contradictory. So there might be some benefit to trying to simplify our savings programs in a way that people can understand better and that provide more explicit incentives for saving.

So I think there are some things to do. But the truth is we never have found sort of the magic bullet to induce public to save a good deal more.

FRANK: The gentleman from New York?

MEEKS: Thank you, Mr. Chairman.

Chairman Bernanke, thank you. 

I first want to make sure that I associate myself with many of the comments of my colleagues concerned about the growing disparities that are taking place here between those who have and who have not and the middle class and the pains that they are feeling. 

And as a result, folks are trying -- you know, everybody trying to figure out what's the best way to do it. And some have suggested that maybe we should take a pause in pursuing trade and investment liberalization with some of our trade partners.

So my first question -- I want to go in two areas, and this area is would there be any economic benefits or losses to the United States if, in fact, we did take a short pause in pursuing trade liberalization and investment with some of our trading partners?

BERNANKE: I think it would be very costly economically to do that, both because there are many benefits to expanding trade and investment and because if you interfered with existing trade and investment relationships that could be very disruptive.

I think a better approach is to -- I mean, the main concern about trade is that even if it provides general benefits to the economy, that there's some people who are made worse off because their company, you know, their plant, you know, shuts down because of foreign competition.

I think a better approach, rather than blocking trade, would be to try to assist those who are displaced to find new work, to get retraining, and to help them overcome the problems -- and this could apply to communities as well as individuals -- help them overcome the problems created by this dynamic change in the economy.

So that would be my preferred approach, rather than just shutting down what has been for the economy as a whole a very beneficial direction.

MEEKS: And I heard the chairman earlier talk about the trade assistance program currently. As we know it, it doesn't work, and it hasn't been working.

MEEKS: So I think that, to the degree that we could use all of the minds possible to come up with something that does in fact work, because clearly what we have in place now -- and it goes for bigger than trade, I think, because also people are losing jobs because of efficiency and technology. 

In fact, we probably lose a lot of jobs in regard to the technology that's being created today. And so, it's broad. We need something for the displacement of all workers. And what we have today is not working, and we've got to figure out something better.

Otherwise, the anxiety that individuals have will roll over to trying to do something that could be, you know, what you described, a disastrous situation. But that's why I think that we need to all focus on all levels in that regard.

My other question in that particular area is foreign investment in the United States, it seems that it's growing. And my question to you: Do you think that it will continue to grow? And home important is foreign direct investment of the United States economy?

BERNANKE: It will continue to grow. We have, as you know, a very large current account deficit, which means that our investment here in the United States greatly exceeds our own saving. And so we are borrowing a great deal of money from foreigners.

A lot of that borrowing has taken the form, so far, of selling treasury bills and other kinds of fixed income instruments. But in the future I think it quite likely that we'll see more and more foreign direct investment coming from abroad.

Generally speaking, I think foreign direct investment is positive for the economy. We are, already, the major recipient -- the largest recipient of FDI in the world. Transplants that come, like the automobile transplants, provide jobs. They bring mew technologies. They bring managerial talent. And so I think they're also investments that don't move quickly in a financial sense. I mean, they're very permanent kinds of investments.

So I think they're beneficial.

The Congress has recently, of course, just revised the CFIUS program, you know, to address whatever issues there may be of national security.

BERNANKE: And that's really up to Congress, to make sure that you are satisfied with the provisions to ensure that you are satisfied with the provisions to ensure that acquisitions of U.S. assets by foreigners doesn't interfere in any way with national security.

But putting aside that issue, I think there's substantial benefits to be had by having foreigners invest in our country, provide jobs here, provide capital, provide technologies to the United States.

MEEKS: Let me ask -- I know my time is about out, and I wanted to go in one other area, but I only have time for one question, although I had many.

You know, now, with it becoming known, issues of managed funds, hedge funds, private equity, my question is related to, for example, the collapse of the long-term capital management, where there was -- and there's concern about how exposed the banking system was to LTCM.

And so my question is, do you feel that, currently, we have adequate regulatory safeguards in place to make certain that, say, for example, the collapse of a few major hedge funds, that it won't create a systematic risk for all of the banking industry?

Do we have enough in place, currently?

BERNANKE: Well, you can never be too careful. We always have to keep alert and on top of a situation. But the president's working group on financial markets recently issued a set of principles which argues that the best way to discipline hedge funds and other pools of capital is through market discipline.

And what that means is that it's incumbent on the investors and on the counterparties and on the creditors who work with those hedge funds to ensure, themselves, that the risks, the leverage associated with the funds is not excessive.

And from the supervisor's or the regulators' point of view, it's our job to make sure that the banks, the investment banks who are dealing with the hedge funds are in fact managing their risks adequately, are getting sufficient information to protect themselves in case there are problems in a hedge fund.

BERNANKE: So I think that's the right approach. It's not a laissez-faire approach. It does require that the supervisors, the regulators look very carefully to make sure that the banks, the investment banks are doing due diligence in their dealings with these pools of capital. But it seems to be the best approach that preserves financial stability while allowing these pools of capital to perform the positive functions that they do perform in the economy.

FRANK: Thank you.

Let me just take 10 seconds. And I appreciate that answer, Mr. Chairman. It just occurred to me -- it's one of the questions that we'd ask and we did have (inaudible). 

Are all of the counterparties subject to some regulation? That would be the question. Obviously, many are. But your question would then lead to the...

BERNANKE: Not private investors, but...

FRANK: And should there then be something -- I mean, if the main protection is to ensure that the counterparties, et cetera, are under this supervision, is there a problem with unsupervised counterparties? Do they reach a level where that could be a problem?

BERNANKE: Well, it's less a question of making sure the hedge funds don't fail -- I mean, some of them are going to fail and that's not necessarily a bad thing -- it's a question of making sure that the major institutions which are...

(CROSSTALK)

BERNANKE: ... are secure in case there are problems.

FRANK: All right.

The gentlewoman from California, and then the gentleman from North Carolina and that will finish it.

WATERS: Thank you very much, Mr. Chairman. I'd like to thank you again for this hearing.

And I'd like to thank you for all of the work that you have put into getting the chairman over here today to make sure that we honor the work of Gus Hawkins, my predecessor, who's responsible basically for, as was described at the 30th year semiannual testimony on the economy and monetary policy by the Federal Reserve. 

This was established by him. And the goals, as I understand it, that had been established the year before Humphrey-Hawkins is what Mr. Hawkins focused on that should be a part of these kinds of hearings that take place semiannually. 

WATERS: So thank you for recognizing that in your testimony. 

And let me just say that I have been very pleased about some of the speeches that you have made and the focus that you have put on income equality. And I would like to note that, that you certainly have been interested in and you've been talking about this issue.

But I really want to gear in on several things today. I found myself feeling a little bit uncomfortable because as we talk about income equality -- and we all know and feel that something is going on here and that the gap is growing, what I don't find is any real steps or answers to deal with it.

I was talking with my colleagues here a little bit earlier about the ways in which the income of the average person is just going out the window. We have all this new technology and new kind of products in our lives that -- and all kind of fees, you know. What an average family is paying for telephone service now probably has been quadrupled, based on the home that we used to know that had one, maybe, telephone with an extension.

Now everybody's got a cell phone. And you've got to pay Internet charges. And you've got late fees. And you've got to pay all these extraordinary banking fees if you don't use a teller. On and on and on. But I hear no discussion of that. 

And someone brought up, even, the amount of money that we're paying for health care, et cetera.

You kind of talk about it in the traditional way. And you talk about the increased costs of energy and food. But what about all of the new expenditures that the average family is confronted with?

WATERS: I want you to talk about that.

Secondly, on subprime mortgages, why is it that it has taken us so long to know what was happening? So many people have been hurt. And even the answers that you're talking about, disclosure, yes, well, yes. And then you're talking about going about and taking a look at pre-payment penalties and some of these loans that are being given, the use of escrow accounts for taxes and insurance and stated income, low documentation, no documentation. The advocacy groups have been talking about this for years now.

What's taken us so long to be of real assistance to the average citizen out there? It's not enough, I think, to just talk about, you know, disclosure.

First of all, why did it take us so long to find out what was going on in the subprime market?

And why can't you just come forward and say that there really should never be no documentation loans, that that's a problem, and even take a look at interest-only loans and the resetting of the loans? 

Those are some problems that it shouldn't take us another two years, while people continue to be hurt. Why can't we speed up the process and know in advance what is -- not in advance, but at the time -- that these practices are being put into play? Why can't we see it sooner?

With that, I'll just give you an opportunity to comment on it.

BERNANKE: Well, on the first part of your comments, there are just many issues that affect the consumer budget -- you know, energy, health care, a whole variety of them. 

And I think each one of these things is a big and complex problem. And I think there's not just a single solution. We're just going to have to address them piece by piece. 

So, you know, we talked about energy, we talked about health care, we talked about other aspects of the cost of living. 

Let me turn, though, to your very good question about subprime. First, there always have been some concerns about these practices. You're correct about that. But there was a period -- it appears to be -- have been a period now that lasted perhaps less than a year -- late '05, early '06 -- when there was just a tremendous sea change, a deterioration in underwriting and in standards. 

And that came about because of the confluence of a number of different events. And that included this huge demand for high-yield mortgage securities from Wall Street, the expansion of lenders outside of the banking system, where they're closely regulated, financial innovation, new kinds of products. And also an important factor was the fact that with high house prices, people were stretching for affordability. 

All those things came together at the same time, and underwriting standards really deteriorated pretty quickly. And we've seen that because mortgages written in 2006, many of them don't even -- the first payment doesn't get made. It gets returned within a few months.

So there really seems -- something seems to have changed in late '05 and early '06. We were very active early on in providing guidance on best practices, on doing disclosure work, on doing fair lending reviews and so on. 

But it's clear, having seen some of these recent developments and asking my staff to do a top-to-down review, it does seem clear we need to do additional steps, which I've talked about today. And they include not just disclosure, but the rules. And among the rules we're considering are low-doc loans, escrow, some of these other pre-payment penalties, some of these other things you've mentioned. 

BERNANKE: Several of these things have already appeared in our subprime mortgage guidance, which a lot of the states have adopted for their own. So a lot of these things are going to be put in place more quickly. 

But in terms of the rule-making process, you know, there are some, you know, obviously some procedural steps that we have to take. We have to go through a full process of getting commentary and the like. And, you know, we can't go faster...

WATERS: Do you have any suggestions for legislation for us. We'll move it a little bit faster if we understood it a little bit better and knew what to do.

BERNANKE: I'd be happy to talk to you about it, Congresswoman. There's a whole bunch of different bills that have been already put out, as you know, with lots of different aspects.

I mentioned earlier the point about federal registration of mortgage lenders that are not bank lenders. You could, of course, if you wished, you know, achieve some of the rules that we're trying to do to the rule-making process more quickly, potentially, through legislation. That's something that you might want to consider.

A very, very tough issue is the enforcement issue, because, you know, most of the lenders outside of the banking system are state licensed. Some of the states are very good at enforcement. Others have less resources. The question is what to do about that, whether to approach that, whether to approach that, whether to just -- our approach has been to work more closely with the states and hope we can get everybody working effectively together.

So that's another question that you might want to be thinking about.

FRANK: Thank the gentlelady.

WATERS: Thank you very much.

FRANK: One of the things you said to me, you just said, Mr. Chairman, it was very striking when you said that one of the causes of this phenomenon was the money looking for a high yield, that there was this demand -- sort of interesting thing where the need for the high- yield created the product. 

I mean, it goes counter to being told, "Oh, we needed to do this to meet the housing need." There's almost a perversion of what ought to be the way the system works...

BERNANKE: That's how markets work: People look for profit opportunities.

FRANK: Right, but when that leads to the creation of -- it undercuts the justification, or the argument has been, oh no, this is just a response to the demand for housing.

And you are now talking about a somewhat different approach, which doesn't mean you do away with it altogether, but it affects how we deal with it, if there's a certain artificiality in the product, driven by the demand for it.

The gentleman from North Carolina?

B. MILLER: Thank you, Chairman Bernanke.

There have been -- several members have asked about income inequality. Mr. Hodes asked a series of questions that were very like the questions I've asked of you in your previous appearances before this committee.

You said that, in the last five years, the middle quintile of American families, in answer to Mr. Hodes, had increased -- I think real income had increased by 5 percent. Is that right?

BERNANKE: The data I have is -- I believe I recollect it correctly -- is the middle quintile of families with children.

B. MILLER: Right. The middlest class?

BERNANKE: So, of the five quintiles, the third one, the one in the very middle.

B. MILLER: Right, the middlest.

BERNANKE: Yes.

B. MILLER: Now, Mr. Castle asked you questions about core inflation versus total inflation. Are you backing out of income growth core inflation or total inflation?

BERNANKE: Total inflation.

B. MILLER: Total inflation?

BERNANKE: Yes.

B. MILLER: OK. The information that I have is that, from November of 2001 until May of 2007, the wages of production workers, which is about 80 percent of all workers, had increased 17.28 percent, and total inflation had increased 17.22 percent, which is barely treading water.

Is that an incorrect number?

BERNANKE: That could be correct. I don't know the exact number, but the real wages have not grown very much in the last five or six years. That's true.

B. MILLER: But that's -- OK, that total inflation?

BERNANKE: Yes.

B. MILLER: What are you backing out?

And when you said there was a 5 percent real...

(CROSSTALK)

B. MILLER: ... or total inflation?

BERNANKE: If you have multiple family workers, for example, the changed number of hours they work; if they have some kind of investment income of some kind...

B. MILLER: But what are you backing out, that's the inflation rate?

BERNANKE: The total CPI inflation rate.

B. MILLER: Total inflation, including...

(CROSSTALK)

BERNANKE: Yes.

B. MILLER: OK. Then I'm looking at very different numbers, because...

FRANK: Will the gentleman yield?

I think the chairman -- you're talking about wages...

BERNANKE: (OFF-MIKE)

FRANK: You're talking about income. So if a second member of the family goes to work, it's going up.

B. MILLER: Oh, I see. OK.

FRANK: So I think that's the explanation.

B. MILLER: That may be the explanation, then.

With income -- wages are not keeping up with inflation, or barely keeping up.

BERNANKE: That's true.

B. MILLER: OK. In your discussion with Mr. Castle and in your testimony, you gave the explanation for why core inflation doesn't really include energy costs and food costs, as traditionally, those are the most volatile costs, and that you would see more fluctuation than you would long-term trend.

Is that generally the explanation for not so much -- not including energy costs and food costs?

BERNANKE: Again, the -- it's not that we don't care about -- we drive; we eat; we understand that inflation involves all prices, not just those that are not volatile.

But the nature of monetary policy is, if we want to address inflation, there's nothing we can do today that's going to affect today's oil price. We have to affect inflation over a period of one to two years. And therefore we have to ask ourselves, where is inflation going?

B. MILLER: But my question is: Do you really believe the increases we've seen in energy costs is simply a fluctuation and not long-term?

Aren't the pressures that have pushed gasoline prices to $3 a gallon or more at the pump a long-term -- here to stay; they're permanent, not a fluctuation?

B. MILLER: Don't you really believe -- and in your testimony, you gave the reason for the increase in food costs as being the cost of grains because grains are now being used for fuel production. Isn't that permanent? Is that really a fluctuation?

BERNANKE: The best guess is that food and energy prices, or at least energy prices, will stay high. The question, though, is whether they'll keep rising at the pace that they have been rising. 

And at least as best we can tell, as best the futures market suggests, while they will remain high, they will not continue to rise at the same pace.

Now, that is a very uncertain judgment. And I've discussed in my testimony that this is one of the risks that we're looking at, this is one of the things that could happen to make inflation more of a problem, would be if energy prices in fact did continue to rise at the pace they have in recent years.

B. MILLER: I have more questions about this. I want to move on to subprime lending. And many people have asked about subprime lending. 

When I've asked in the past about subprime lending, it's been a pretty lonely effort. The concerns about subprime lending are not new for many of us. I introduced a predatory mortgage lending bill four years ago, four and a half years ago, when I first got to Congress -- and I dearly wish that Congress had enacted that legislation because we would not have seen the spike, the disastrous spike, in foreclosure rates and in default rates that we have.

There has been more discussion in the press about how the spike in foreclosures and the subprime market has affected the stability -- of what it's done to hedge funds that hold portfolios than there has to how it affects the families that have lost their homes.

You have talked some about the importance of home ownership, equity in home, to the wealth of middle-class families.

The information I have, foreclosures were about 900,000 -- residential foreclosures -- in 2005; 1.2 million last year. It will be 1.5 million this year.

And as you have said, based upon the change in underwriting last year, it is going to explode the year after that and the year after that.

What is that doing to the wealth, to the life savings of families that are now facing foreclosure?

BERNANKE: We have numbers which are a bit lower than yours, but I agree that the number is high and rising. And it depends very much on individual circumstances. Frankly, there are a few cases of investors who, you know, just walked away from a condo which they no longer think is worth, you know, worth holding on to.

But there are cases, also, of families who have refinanced, had taken equity out of their home, and now, given the situation, they'll lose their home and some of the accumulated equity.

So certainly for some families there's going to be an adverse financial impact.

BERNANKE: There's also a concern, which I'm very aware of, that there are certain communities and neighborhoods where if you have a lot of foreclosures within a square mile, the values of the other homes go down. And so there's kind of a neighborhood effect as well.

So, yes, there are implications of this for financial markets because there are significant financial losses. But there are obviously also very important implications for household wealth building and for communities.

B. MILLER: The adverse financial consequence you refer to for a middle-class family that loses their home is that -- to foreclosure -- they fall out of the middle class and into poverty and probably will never climb out for the rest of their lives.

FRANK: I thank the gentleman.

I thank the chairman. This has been very useful for us, and I appreciate his endurance. 

And we will continue all these conversations.

BERNANKE: Thank you.

END

.ETX

Jul 18, 2007 16:52 ET .EOF 

Source: CQ Transcriptions
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