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+
+ - THE STATE OF THE U.S. ECONOMY
+
+[House Hearing, 112 Congress]
+[From the U.S. Government Publishing Office]
+
+
+
+ THE STATE OF THE U.S. ECONOMY
+
+=======================================================================
+
+ HEARING
+
+ before the
+
+ COMMITTEE ON THE BUDGET
+ HOUSE OF REPRESENTATIVES
+
+ ONE HUNDRED TWELFTH CONGRESS
+
+ FIRST SESSION
+
+ __________
+
+ HEARING HELD IN WASHINGTON, DC, FEBRUARY 9, 2011
+
+ __________
+
+ Serial No. 112-2
+
+ __________
+
+ Printed for the use of the Committee on the Budget
+
+
+ Available on the Internet:
+ http://www.gpoaccess.gov/congress/house/budget/index.html
+
+
+
+ U.S. GOVERNMENT PRINTING OFFICE
+64-726 WASHINGTON : 2011
+-----------------------------------------------------------------------
+For sale by the Superintendent of Documents, U.S. Government Printing Office,
+http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected].
+
+ COMMITTEE ON THE BUDGET
+
+ PAUL RYAN, Wisconsin, Chairman
+SCOTT GARRETT, New Jersey CHRIS VAN HOLLEN, Maryland,
+MICHAEL K. SIMPSON, Idaho Ranking Minority Member
+JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
+KEN CALVERT, California MARCY KAPTUR, Ohio
+W. TODD AKIN, Missouri LLOYD DOGGETT, Texas
+TOM COLE, Oklahoma EARL BLUMENAUER, Oregon
+TOM PRICE, Georgia BETTY McCOLLUM, Minnesota
+TOM McCLINTOCK, California JOHN A. YARMUTH, Kentucky
+JASON CHAFFETZ, Utah BILL PASCRELL, Jr., New Jersey
+MARLIN A. STUTZMAN, Indiana MICHAEL M. HONDA, California
+JAMES LANKFORD, Oklahoma TIM RYAN, Ohio
+DIANE BLACK, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
+REID J. RIBBLE, Wisconsin GWEN MOORE, Wisconsin
+BILL FLORES, Texas KATHY CASTOR, Florida
+MICK MULVANEY, South Carolina HEATH SHULER, North Carolina
+TIM HUELSKAMP, Kansas PAUL TONKO, New York
+TODD C. YOUNG, Indiana KAREN BASS, California
+JUSTIN AMASH, Michigan
+TODD ROKITA, Indiana
+FRANK C. GUINTA, New Hampshire
+ROB WOODALL, Georgia
+
+ Professional Staff
+
+ Austin Smythe, Staff Director
+ Thomas S. Kahn, Minority Staff Director
+
+
+
+ C O N T E N T S
+
+ Page
+Hearing held in Washington, DC, February 9, 2011................. 1
+
+ Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
+ Prepared statement of.................................... 3
+ Hon. Chris Van Hollen, ranking minority member, Committee on
+ the Budget................................................. 4
+ Prepared statement of.................................... 5
+ Hon. Ben S. Bernanke, Chairman, Board of Governors of the
+ Federal Reserve System..................................... 6
+ Prepared statement of.................................... 11
+ Responses to questions submitted by:
+ Mr. Honda............................................ 62
+ Mr. Calvert.......................................... 65
+ Hon. Michael M. Honda, a Representative in Congress from the
+ State of California, questions submitted for the record.... 61
+ Hon. Ken Calvert, a Representative in Congress from the State
+ of California, questions submitted for the record.......... 64
+
+
+ THE STATE OF THE U.S. ECONOMY
+
+ ----------
+
+
+ WEDNESDAY, FEBRUARY 9, 2011
+
+ House of Representatives,
+ Committee on the Budget,
+ Washington, DC.
+ The Committee met, pursuant to call, at 10:00 a.m., in room
+210, Cannon House Office Building, Hon. Paul Ryan, [Chairman of
+the Committee] presiding.
+ Members present: Representatives Ryan, Garrett, Campbell,
+Akin, Cole, Price, McClintock, Chaffetz, Stutzman, Lankford,
+Black, Ribble, Flores, Mulvaney, Huelskamp, Young, Amash,
+Rokita, Guinta, Woodall, Van Hollen, Schwartz, Kaptur, Doggett,
+Blumenauer, McCollum, Yarmouth, Pascrell, Honda, Ryan of Ohio,
+Wasserman Schultz, Moore, Castor, Shuler, Tonko, Bass
+ Chairman Ryan. Before we begin I want to welcome
+Representative Rob Woodall from Georgia, to the House Budget
+Committee. We have a number of caucus and conferences ending
+right now, so a number of members are going to be coming in.
+But Mr. Woodall will be officially on board this afternoon with
+the adoption of the House Resolution. I ask unanimous consent
+that Representative Woodall be permitted to participate in this
+morning's important hearing. He is our new Rules Committee
+Member. Without objection, it shall be done.
+ Thank you, Chairman Bernanke, for coming to our committee
+today to talk about the state of our economy. The U.S. economy
+continues to suffer from slow growth, and unemployment remains
+unacceptably high. Continued uncertainty about our economic
+future is hindering job creation today. Washington is creating
+much of this uncertainty. All one has to do is go home and talk
+to a businessman, a businesswoman, and that is exactly what you
+will hear. The explosive growth in our federal debt is by far
+the biggest source of this uncertainty. By sowing doubt about
+future taxes, interest rates, and price stability, government
+is hindering business' ability to plan and invest, creating a
+drag on economic growth today.
+ The purpose of today's hearing is to discuss the fiscal and
+monetary policies that have led us here. On the fiscal side,
+CBO projects a $1.5 trillion deficit this year with publicly
+held debt raising to 69 percent of GDP by the end of the year:
+that is up from 40 percent in 2008. In a few short years, the
+CBO projects government spending to drive our debt to crisis
+levels, overwhelming the entire economy and drowning the next
+generation in red ink. Endless borrowing is not a strategy. We
+must restore the foundations of economic growth: low taxes,
+spending restraint, reasonable regulations, and sound money. To
+help restart the engines of economic growth and job creation,
+that is so essential. We must not neglect the sound money part
+of the equation.
+ The Federal Reserve is undertaking another round of
+quantitative easing, purchasing Treasury bonds in an attempt to
+lower borrowing costs and stimulate the economy. My concern is
+that the cost of the Fed's current monetary policy, the money
+creation and massive balance sheet expansion, will come to
+outweigh the perceived short-term benefits. I hope that is not
+the case. These costs may come in the form of asset bubble and
+price pressures. We are already witnessing a sharp rise in a
+variety of key global commodity and basic material prices, and
+we know that some producers and manufacturers here in the
+United States are starting to feel the cost pressure as a
+result.
+ According to the Core Price Indexes the Fed closely
+watches, these cost pressures have not been yet passed along to
+consumers, but the inflation dynamic can be quick to
+materialize and painful to eradicate once it takes hold. The
+steepening of the yield curve this week adds to these concerns
+and fuels some of this speculation.
+ I'm concerned that normalizing monetary policy, when the
+time comes, may be difficult, not only for the pure technical
+challenges of shrinking the Fed's substantial balance sheet or
+correctly judging economic turning points, but also for
+political reasons. It's hard to overstate the consequences of
+getting this wrong. The dollar is the world's reserve currency
+and this has given us tremendous benefits in the global
+economy. For the sake of our economy in particular, and the
+global recovery as a whole, it is vital that we focus on dollar
+stability if we are to prevent the kind of beggar-thy-neighbor
+currency conflicts that can ultimately destroy a worldwide
+economic recovery. Our currency should provide a reliable store
+of value. It should be guided by the rule of law, not the rule
+of men. There is nothing more insidious that a country can do
+to its people than to debase its currency.
+ Chairman Bernanke, we know that you know this. We know that
+you are focused and concerned about this. The Fed's exit
+strategy and its future policy will determine how all of this
+ends. Many of us fear that our monetary policy is on a
+difficult track. We are very concerned about our fiscal policy
+here, and we know that it is on a very, very dangerous track,
+that is a very, very well-established fact.
+ I firmly believe that a course correction here in
+Washington is sorely needed to help us get back on the right
+path. While it won't be easy, Americans have risen to the
+challenge, and we have prevailed in the past.
+ Thank you for your indulgence, thank you for your time in
+coming here, we understand that you have to be out firm by
+about 12:30, so we will ask our members to stick within the
+time limit, and at this time I'd like to yield to our Ranking
+Member, Mr. Van Hollen.
+ [The statement of Mr. Ryan follows:]
+
+Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget
+
+ Before we begin, I want to welcome Rep. Bob Woodall from Georgia to
+the House Budget Committee. He will be officially on board this
+afternoon after the adoption of the House resolution. I ask unanimous
+consent that Rep. Woodall be permitted to participate in this morning's
+important hearing. Without objection.
+ Thank you, Chairman Bernanke, for coming before our Committee today
+to talk about the state of the economy.
+ The U.S. economy continues to suffer from slow growth and
+unemployment remains unacceptably high.
+ Continued uncertainty about our economic future is hindering job
+creation today.
+ Washington is creating much of this uncertainty, and the explosive
+growth of our federal debt is by far the biggest source of this
+uncertainty.
+ By sowing doubt about future tax rates, interest rates, and price
+stability, government is hindering businesses' ability to plan and
+invest, creating a drag on economic growth today.
+ The purpose of today's hearing is to discuss the fiscal and
+monetary policies that have led us here.
+ On the fiscal side, the CBO projects a $1.5 trillion deficit this
+year with publicly-held debt rising to 69 percent of GDP by the end of
+the year--up from 40 percent at the end of 2008.
+ In a few short years, the CBO projects government spending to drive
+our debt to crisis levels, overwhelming the entire economy and drowning
+the next generation in red ink.
+ Endless borrowing is not a strategy. We must restore the
+foundations of economic growth--low taxes, spending restraint,
+reasonable regulations, and sound money--to help restart the engines of
+economic growth and job creation.
+ We must not neglect the ``sound money'' part of the equation. The
+Federal Reserve has undertaken another round of quantitative easing--
+purchasing Treasury bonds in an attempt to lower borrowing costs and
+stimulate the economy.
+ My concern is that the costs of the Fed's current monetary policy--
+the money creation and massive balance sheet expansion--will come to
+outweigh the perceived short-term benefits.
+ These costs may come in the form of asset bubbles and price
+pressures. We are already witnessing a sharp rise in a variety of key
+global commodity and basic material prices, and we know that some
+producers and manufacturers here in the United States are starting to
+feel cost pressures as a result.
+ According to the core price indexes that the Fed watches closely,
+these cost pressures have not yet been passed along to consumers--but
+the inflation dynamic can be quick to materialize and painful to
+eradicate once it takes hold. The steepening of the yield curve this
+week certainly adds to these worries.
+ I'm concerned that normalizing monetary policy when the time comes
+may be difficult--not only for the pure technical challenges of
+shrinking the Fed's substantial balance sheet or correctly judging
+economic turning points, but also for political reasons.
+ It is hard to overstate the consequences of getting this wrong. The
+dollar is the world's reserve currency and this has given us tremendous
+benefits.
+ For the sake of our economy in particular and the global recovery
+as a whole, it is vital that we focus on dollar stability if we are to
+prevent the kind of beggar-thy-neighbor currency conflicts that can
+destroy economic recoveries.
+ Our currency should provide a reliable store of value--it should be
+guided by the rule of law, not the rule of men.
+ There is nothing more insidious that a country can do to its
+citizens than debase its currency.
+ Chairman Bernanke: We know you know this. The Fed's exit strategy
+and future policy--it will determine how this ends.
+ We know you are concerned about this nation's fiscal trajectory. We
+have asked you to come here today because our fiscal policy is on a
+dangerous track. That is well established.
+ But, many of us fear our monetary policy is on a similar track as
+well.
+ I firmly believe that a course correction here in Washington is
+sorely needed to help get us back on the right track. While it won't be
+easy, Americans have risen to greater challenges and prevailed in the
+past.Thank you for your indulgence and at this time, I would like to
+yield to the Ranking Member, Mr. Van Hollen.
+
+ Mr. Van Hollen. Thank you very much, Chairman Ryan, and
+welcome, Chairman Bernanke. I want to thank you for your
+service to our country during a period of great economic
+turmoil. And I think we have been fortunate as a nation to have
+a student of the Great Depression to help us avoid a second
+Great Depression.
+ When you appeared before this committee two years ago,
+President Obama had just recently been sworn in. He inherited a
+terrible situation: the economy was in free-fall, spiraling
+downward at a negative growth rate of six percent; Americans
+were losing their jobs at the rate of 700,000 every month.
+ Two years later, things have improved substantially. The
+economy grew at an annual rate of 3.2 percent in the last
+quarter, and more than 1.3 million private sector jobs have
+been created since the start of 2010. As you indicated in
+testimony before this committee last year, the measures taken
+by the Federal Reserve, the TARP solicitation by the Bush
+Administration, and the Recovery Act by the Obama
+Administration, averted, and I quote, ``An extraordinarily
+severe downturn, perhaps a great depression.''
+ But we know that, while the economy has improved, millions
+of Americans are still out of work, and the unemployment rate,
+while coming down slightly, remains stubbornly and unacceptably
+high. We must use all the tools at our disposal to help
+businesses put people back to work, and I hope at some point
+this Congress, through its legislative agenda, will stop re-
+litigating Health Care Reform and start focusing on jobs. I
+commend you and your colleagues at the Fed for using various
+forms of monetary policy to promote maximum employment and
+stable prices.
+ I find it astounding that at a time when millions of
+Americans are out of work, some of our Republican colleagues
+have introduced legislation to strip the Federal Reserve of
+that part of its mandate that focuses on full employment and
+putting people back to work.
+ Obviously the Fed must not waver in its commitment to price
+stability, but to deprive you of the tools necessary to grow
+the economy would be a huge mistake. People need to pay
+attention to these proposals, and people need to know, at a
+time when millions of Americans are out of work, some are
+proposing that the Fed ignore the unemployment rate part of its
+mandate. That would be taking us backwards, not forwards, on a
+jobs agenda.
+ I also commend you for speaking out about the need to put
+our country on a fiscally sustainable path. The President's
+bipartisan Fiscal Commission and the Bipartisan Rivlin-Domenici
+Commission have demonstrated that such plans are difficult, but
+achievable. In his State of the Union Address, the President
+indicated that his budget would include cuts of $400 billion in
+non-security discretionary spending as a down-payment on that
+effort. Clearly, other measures must be taken, including, I
+believe, comprehensive tax reform.
+ But both bipartisan commissions also indicated that it
+would be a big mistake to put our fragile recovery at risk by
+slashing outlays too early in the short-term when millions of
+Americans are still out of work, and the demand for goods and
+services is still relatively weak. That commission indicated,
+and I quote, ``In order to avoid shocking the fragile economy,
+the commission recommends waiting until 2012 to begin enacting
+programmatic spending cuts.'' The Rivlin-Domenici Commission
+gave us the same advice.
+ Mr. Bernanke, this Congress will have to make difficult
+decisions to put our nation on a fiscally sustainable path. We
+must make those decisions in a responsible manner. One upcoming
+decision involves dealing with the nation's debt ceiling.
+Nobody in this Congress should be playing political games when
+it comes to the full faith and credit of the United States. As
+Speaker Boehner observed recently, the debt ceiling vote
+requires an ``adult moment.''
+ Chairman Bernanke, you stated last week that the
+implications of not raising the debt limit would be
+``catastrophic'' for our financial system and our economy. You
+urged the Congress, and I quote, Not to focus on the debt limit
+as being a bargaining chip in this discussion, unquote. I hope
+our colleagues heed your advice and don't engage in reckless
+conduct that puts the entire economy at risk. I have been
+surprised by the number of proposals put forward by some in the
+House and the Senate that would not only jeopardize the credit-
+worthiness of the United States, but would extend the full
+faith and credit of the United States Government to China and
+other foreign countries, but not to American businesses and our
+servicemen and women.
+ Let's not gamble with the full faith and credit of our
+nation; that would be a recipe for financial and economic chaos
+and would destroy any hope of putting Americans back to work.
+Thank you, Mr. Chairman, and thank you, Chairman Bernanke.
+ [The statement of Mr. Van Hollen follows:]
+
+ Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member,
+ House Committee on the Budget
+
+ Thank you Chairman Ryan and welcome Chairman Bernanke.
+ Thank you, Chairman Bernanke, for your service to our country
+during a time of great economic turmoil. We have been fortunate to have
+a student of the Great Depression at the helm of the Federal Reserve to
+help prevent a second great depression.
+ When you appeared before this Committee two years ago, President
+Obama had just recently been sworn in. He inherited a terrible
+situation. The economy was in freefall, spiraling downwards at a
+negative growth rate of 6 percent. Americans were losing jobs at the
+rate of over 700,000 every month. Two years later, things have improved
+substantially. The economy grew at an annual rate of 3.2 percent last
+quarter and more than 1.3 million private sector jobs have been created
+since the start of 2010.
+ As you indicated in testimony last year before this Committee, the
+measures taken by the Federal Reserve, the TARP solicitation by the
+Bush Administration, and the Recovery Act by the Obama Administration,
+averted 'an extraordinarily severe downturn, perhaps a great
+depression.'
+ But while the economy has improved, millions of Americans are still
+out of work and the unemployment rate--while coming down--remains
+stubbornly high. We must use all the tools at our disposal to help
+businesses put people back to work. I hope at some point this new
+Congress will stop re-litigating the health reform law and start
+focusing on jobs.
+ I commend you and your colleagues at the Fed for using various
+forms of monetary policy to promote maximum employment and stable
+prices. I find it astounding that, at a time that millions of Americans
+are out of work, a number of our Republican colleagues have introduced
+legislation to strip the Federal Reserve of that part of its mandate
+that focuses on full employment and putting people back to work.
+Obviously, the Fed must not waver in its commitment to price stability,
+but to deprive you of the tools necessary to grow the economy would be
+a huge mistake. People need to pay attention to these proposals. The
+American people need to know that, at a time that millions of Americans
+are out of work, these proposals say that Fed policies should ignore
+the unemployment rate. That would be going backwards, not forwards, on
+a jobs agenda.
+ I also commend you, Chairman Bernanke, for speaking out about the
+need to put our country on a fiscally sustainable path. We must put in
+place a responsible plan to bring down and then eliminate the primary
+budget deficit. The President's Bipartisan Fiscal Commission and the
+bipartisan Rivlin-Domenici Commission have demonstrated that such plans
+are difficult but achievable. In his State of the Union address, the
+President indicated that his budget would include cuts of $400 billion
+in non-security discretionary spending as a down payment on that
+effort. Clearly, other measures must also be taken, including
+comprehensive tax reform. But both bipartisan commissions also
+indicated that it would be a big mistake to put our fragile economic
+recovery at risk by slashing outlays too deeply in the short-term when
+millions of Americans are still out of work and the demand for goods
+and services remains weak. The President's Bipartisan Commission stated
+that 'in order to avoid shocking the fragile economy, the Commission
+recommends waiting until 2012 to begin enacting programmatic spending
+cuts.' The Rivlin-Domenici Commission rendered the same advice. Deep
+cuts now will not create a single job; in fact, Mark Zandi and other
+economists have indicated that they will put thousands of American jobs
+at risk.
+ I am also pleased that your testimony today calls upon the Congress
+to promote research and development, provide necessary public
+infrastructure, and invest in the skills of our workforce. Some of our
+Republican colleagues have tried to make 'investment' a dirty word,
+but, as you indicate, such investments can help build a more productive
+economy.
+ This Congress will have to make difficult decisions to put our
+nation on a fiscally sustainable path. We must make those decisions in
+a responsible manner. One upcoming decision involves dealing with the
+nation's debt ceiling. Nobody in this Congress should be playing
+political games when it comes to the full faith and credit of the
+United States. As Speaker Boehner observed recently, the debt ceiling
+vote requires an 'adult moment.' Chairman Bernanke, you stated last
+week that the implications of not raising the debt limit would be
+'catastrophic' for our financial system and our economy. You urged the
+Congress 'not to focus on the debt limit as being the bargaining chip
+in this discussion.' I hope our colleagues heed your advice and don't
+engage in reckless conduct that puts the entire economy at risk. I have
+been amazed at a number of proposals put forward by Republicans in the
+Senate and the House that would not only jeopardize the
+creditworthiness of the United State, but would extend the full faith
+and credit of the United States government to China and other foreign
+governments, but not to American businesses and our service men and
+women. Let's not gamble with the full faith and credit of our nation.
+That is a recipe for financial and economic chaos that would destroy
+any hope of putting America back to work.
+ Chairman Bernanke, I look forward to your testimony of these and
+other pressing issues.
+
+ Chairman Ryan. Chairman Bernanke.
+
+ STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF
+ THE FEDERAL RESERVE SYSTEM
+
+ Mr. Bernanke. Thank you very much. Chairman Ryan, Ranking
+Member Van Hollen, and other members of the Committee, thank
+you for inviting me. I am pleased to have this opportunity to
+offer my views on the economic outlook, on monetary policy, and
+on issues pertaining to the federal budget.
+ The economic recovery that began in the middle of 2009
+appears to have strengthened in the past few months, although
+the unemployment rate remains high. The initial phase of the
+recovery, which occurred in the second half of 2009 and in
+early 2010, was in large part attributable to the stabilization
+of the financial system, the effects of expansionary monetary
+and fiscal policies, and the strong boost to production from
+businesses rebuilding their depleted inventories.
+ But economic growth slowed significantly last spring, and
+concerns about the durability of the recovery intensified as
+the impetus from inventory building and fiscal stimulus
+diminished, and as Europe's fiscal and banking problems roiled
+global financial markets. More recently, however, we have seen
+increased evidence that a self-sustaining recovery in consumer
+and business spending may be taking hold. Notably, real
+consumer spending rose at an annual rate of more than four
+percent in the fourth quarter. Although strong sales of motor
+vehicles accounted for a significant portion of this pick-up,
+the recent gains in consumer spending appear reasonably broad-
+based.
+ Business investment in new equipment and software increased
+robustly throughout much of last year, as firms replaced aging
+equipment and as the demand for their products and services
+expanded. Construction remains weak, though, reflecting an
+overhang of vacant and foreclosed homes, and continued poor
+fundamentals from most types of commercial real estate.
+ Overall, improving household and business confidence,
+accommodative monetary policy, and more supportive financial
+conditions, including an apparently increasing willingness of
+banks to lend, seem likely to result in a more rapid pace of
+economic recovery in 2011 than we saw last year.
+ While indicators of spending and production have been
+encouraging on balance, the job market has improved only
+slowly. Following the loss of about eight and three-quarter
+million jobs from 2008 through 2009, private sector employment
+expanded by little more than one million in 2010. However, this
+gain was barely sufficient to accommodate the inflow of recent
+graduates and other new entrants to the labor force, and
+therefore not enough to significantly erode the wide margin of
+slack that remains in the labor market.
+ Notable declines in the unemployment rate in December and
+January, together with improvement in indicators of job
+openings and firms' hiring plans, do provide some grounds for
+optimism on the employment front. Even so, with output growth
+likely to be moderate for a while, and with employers
+reportedly still reluctant to add to payrolls, it will be
+several years before the unemployment rate has returned to a
+more normal level. Until we see a sustained period of stronger
+job creation, we cannot consider the recovery to be truly
+established.
+ On the inflation front, we have recently seen increases in
+some highly visible prices, notably gasoline. Indeed, prices of
+many industrial and agricultural commodities have risen lately,
+largely as a result of the very strong demand from fast-growing
+emerging market economies, coupled in some cases with
+constraints on supply. Nonetheless, overall inflation is still
+quite low, and longer-term inflation expectations have remained
+stable. Over the 12 months ending in December, prices for all
+the goods and services consumed by households increased by only
+1.2 percent, down from 2.4 percent over the previous 12 months.
+ To assess underlying trends in inflation economists also
+follow several alternative measures of inflation. One such
+measure is so-called core inflation, which excludes the more
+volatile food and energy components, and therefore can be a
+better predictor of where overall inflation is headed. Core
+inflation was only 0.7 percent in 2010, compared with about two
+and a half percent in 2007, the year before the recession
+began. Wage growth has slowed as well, with average hourly
+earnings increasing only 1.7 percent last year. These downward
+trends in wage and price inflation are not surprising given the
+substantial slack in the economy.
+ Although the growth rate of economic activity appears
+likely to pick up this year, the unemployment rate probably
+will remain elevated for some time. In addition, inflation is
+expected to persist below the levels that the Federal Reserve
+policy makers have judged to be consistent over the longer term
+with our statutory mandate to foster maximum employment and
+price stability. Under such conditions, the Federal Reserve
+would typically ease monetary policy by reducing its target for
+the Federal Funds Rate; however, the target range for the
+Federal Funds rate has been near zero since December 2008,
+leaving essentially no room for further reductions. As a
+consequence, since then we have been using alternative tools to
+provide additional monetary accommodation. In particular, over
+the past two years, the Federal Reserve has further eased
+monetary conditions by purchasing longer-term securities,
+specifically Treasury Agency and agency mortgage-backed
+securities on the open market. These purchases are settled
+through the banking system, with the result that depository
+institutions now hold a very high level of reserve balances
+with the Federal Reserve.
+ Although large-scale purchases of longer-term securities
+are a different monetary policy tool than the more familiar
+approach of targeting the Federal Funds Rate, the two types of
+policies affect the economy in similar ways. Conventional
+monetary policy easing works by lowering market expectations
+for the future path of short-term interest rates, which in turn
+reduces the current level of longer-term interest rates and
+contributes to an easing in broader financial conditions. These
+changes, by reducing borrowing costs and raising asset prices,
+bolster household and business spending and thus increase
+economic activity.
+ By comparison, the Federal Reserve's purchases of longer-
+term securities do not affect very short-term interest rates,
+which remain close to zero, but instead put downward pressure
+directly on longer-term interest rates. By easing conditions in
+credit and financial markets, these actions encourage spending
+by households and businesses through essentially the same
+channels as conventional monetary policy, thereby strengthening
+the economic recovery.
+ Indeed a wide range of market indicators suggest that the
+Federal Reserve securities purchases have been effective at
+easing financial conditions, lending credence to the view that
+these actions are providing significant support to job creation
+and economic growth.
+ My colleagues and I have said that we will review the asset
+purchase program regularly in light of incoming information and
+will adjust it as needed to promote maximum employment and
+stable prices. In particular, we remain unwaveringly committed
+to price stability, and we are confident that we have the tools
+to be able to smoothly and effectively exit from the current,
+highly accommodative policy stance at the appropriate time.
+ Our ability to pay interest on reserve balances held at
+Federal Reserve Banks will allow us to put upward pressure on
+short-term market rates, and thus to tighten monetary policy
+when needed, even if bank reserves remain high. Moreover, we
+have developed additional tools that will allow us to drain or
+immobilize bank reserves as needed to facilitate the smooth
+withdrawal of policy accommodation when conditions warrant. If
+necessary, we could also tighten policy by redeeming or selling
+securities.
+ As I am appearing before the Budget Committee, it is worth
+emphasizing that the Fed's purchases of longer-term securities
+are not comparable to ordinary government spending. In
+executing these transactions, the Federal Reserve acquires
+financial assets, not goods and services; thus these purchases
+do not add to the government's deficit or debt. Ultimately at
+the appropriate time, the Federal Reserve will normalize its
+balance sheet by selling these assets back into the market or
+allowing them to run off. In the interim, the interest that the
+Federal Reserve earns through its securities holdings adds to
+the Fed's remittances to the Treasury. In 2009 and 2010, those
+remittances totaled about $125 billion.
+ Fiscal policymakers also face significant challenges. Our
+nation's fiscal position has deteriorated appreciatively since
+the onset of the financial crisis and the recession. To a
+significant extent, this deterioration is the result of the
+effects of the weak economy on revenues and outlays, along with
+the actions that the administration and the Congress took to
+ease the recession and steady financial markets. However, even
+after economic and financial conditions return to normal, the
+federal budget will remain on an unsustainable path, with the
+budget gap becoming increasingly large over time unless the
+Congress enacts significant changes in fiscal programs.
+ For example, under plausible assumptions about how fiscal
+policies might evolve in the absence of major legislative
+changes, the CBO projects the deficit to fall from its current
+level of about nine percent of GDP to five percent of GDP by
+2015, but then to rise to about six and a half percent of GDP
+by the end of the decade. In subsequent years, the budget
+situation is projected to deteriorate even more rapidly, with
+federal debt held by the public reaching almost 90 percent of
+GDP by 2020 and 150 percent by 2030, up from about 60 percent
+at the end of fiscal year 2010.
+ The long-term fiscal challenges confronting the nation are
+especially daunting because they are mostly the product of
+powerful underlying trends, not short-term or temporary
+factors. The two most important driving forces behind the
+budget deficit are the aging of the population and rapidly
+rising health care costs. Indeed the CBO projects that federal
+health spending will roughly double as a percentage of GDP over
+the next 25 years. The ability to control health care spending
+while still providing high quality care to those who need it
+will be critical for bringing the federal budget onto a
+sustainable path.
+ The CBO's long-term budget projections, by design, do not
+account for the likely adverse economic effects of such high
+debt and deficits, but if government debt and deficits were
+actually to grow at the pace envisioned, the economic and
+financial effects would be severe. Sustained high rates of
+government borrowing would both drain funds away from private
+investment and increase our debt to foreigners, with adverse
+long-run effects on U.S. output, incomes, and standards of
+living.
+ Moreover, diminishing investor confidence that deficits
+will be brought under control will ultimately lead to sharply
+rising interest rates and government debt and, potentially, to
+broader financial turmoil. In a vicious circle, high and rising
+interest rates would cause debt service payments and the
+federal debt to grow even faster, resulting in further
+increases in the debt-to-GDP ratio, and making fiscal
+adjustment all the more difficult.
+ In thinking about achieving fiscal sustainability, it is
+useful to apply the concept of the primary budget deficit,
+which is the government budget deficit excluding interest
+payments on the national debt. To stabilize the ratio of
+federal debt to the GDP, a useful benchmark for assessing
+fiscal sustainability, the primary budget deficit must be
+reduced to zero. Under the CBO projection that I noted earlier,
+the primary budget deficit is expected to be two percent of GDP
+in 2015, and then rise to almost three percent of GDP in 2020,
+and six percent in 2030. These projections provide a gauge of
+the adjustments that will be necessary to attain fiscal
+sustainability.
+ To put the budget on a sustainable trajectory, policy
+actions, either reductions in spending, increases in revenues,
+or some combination of the two, will have to be taken to
+eventually close these primary budget gaps.
+ By definition, the unsustainable trajectories of deficits
+and debt that the CBO outlines cannot actually happen, because
+creditors would never be willing to lend to a government with
+debt relative to national income that is rising without limit.
+One way or the other, fiscal adjustments sufficient to
+stabilize the federal budget must occur at some point. The
+question is whether these adjustments will take place through a
+careful and deliberative process that weighs priorities and
+gives people adequate time to adjust to changes in government
+programs or tax policies, or whether the needed fiscal
+adjustments will come instead as a rapid and painful response
+to a looming or actual fiscal crisis.
+ Acting now to develop a credible program to reduce future
+deficits would not only enhance economic growth and stability
+in the long run, but could also yield substantial near-term
+benefits, in terms of lower long-term interest rates and
+increased consumer and business confidence.
+ Plans recently put forward by the President's National
+Commission on Fiscal Responsibility and Reform and other
+prominent groups provide useful starting points for a much
+needed national conversation. Although these proposals differ
+in many details, they demonstrate that realistic solutions to
+our fiscal problems do exist.
+ Of course, economic growth is affected not only by the
+levels of taxes and spending but also by their composition and
+structure. I hope that in addressing our long-term fiscal
+challenges, the Congress and the Administration will undertake
+reforms to the Government's tax policies and spending
+priorities that serve not only to reduce the deficit, but also
+to enhance the long-term growth potential of our economy: For
+example, by reducing disincentives to work and to save, by
+encouraging investment in the skills of our workforce as well
+as new machinery and equipment, by promoting research and
+development, and by providing necessary public infrastructure.
+ Our nation cannot reasonably expect to grow its way out of
+our fiscal imbalances, but a more productive economy will ease
+the trade-offs that we face.
+ Thank you, Mr. Chairman, Ranking Member. I'd be very
+pleased to take your questions.
+ [The prepared statement of Ben S. Bernanke follows:]
+
+ Prepared Statement of Hon. Ben S. Bernanke, Chairman,
+ Board of Governors of the Federal Reserve System
+
+ Chairman Ryan, Ranking Member Van Hollen, and other members of the
+Committee, I am pleased to have this opportunity to offer my views on
+the economic outlook, monetary policy, and issues pertaining to the
+federal budget.
+
+ THE ECONOMIC OUTLOOK
+
+ The economic recovery that began in the middle of 2009 appears to
+have strengthened in the past few months, although the unemployment
+rate remains high. The initial phase of the recovery, which occurred in
+the second half of 2009 and in early 2010, was in large part
+attributable to the stabilization of the financial system, the effects
+of expansionary monetary and fiscal policies, and the strong boost to
+production from businesses rebuilding their depleted inventories. But
+economic growth slowed significantly last spring and concerns about the
+durability of the recovery intensified as the impetus from inventory
+building and fiscal stimulus diminished and as Europe's fiscal and
+banking problems roiled global financial markets.
+ More recently, however, we have seen increased evidence that a
+self-sustaining recovery in consumer and business spending may be
+taking hold. Notably, real consumer spending rose at an annual rate of
+more than 4 percent in the fourth quarter. Although strong sales of
+motor vehicles accounted for a significant portion of this pickup, the
+recent gains in consumer spending appear reasonably broad based.
+Business investment in new equipment and software increased robustly
+throughout much of last year, as firms replaced aging equipment and as
+the demand for their products and services expanded. Construction
+remains weak, though, reflecting an overhang of vacant and foreclosed
+homes and continued poor fundamentals for most types of commercial real
+estate. Overall, improving household and business confidence,
+accommodative monetary policy, and more-supportive financial
+conditions, including an apparently increasing willingness of banks to
+lend, seem likely to result in a more rapid pace of economic recovery
+in 2011 than we saw last year.
+ While indicators of spending and production have been encouraging
+on balance, the job market has improved only slowly. Following the loss
+of about 8\3/4\ million jobs from 2008 through 2009, private-sector
+employment expanded by a little more than 1 million in 2010. However,
+this gain was barely sufficient to accommodate the inflow of recent
+graduates and other new entrants to the labor force and, therefore, not
+enough to significantly erode the wide margin of slack that remains in
+our labor market. Notable declines in the unemployment rate in December
+and January, together with improvement in indicators of job openings
+and firms' hiring plans, do provide some grounds for optimism on the
+employment front. Even so, with output growth likely to be moderate for
+a while and with employers reportedly still reluctant to add to their
+payrolls, it will be several years before the unemployment rate has
+returned to a more normal level. Until we see a sustained period of
+stronger job creation, we cannot consider the recovery to be truly
+established.
+ On the inflation front, we have recently seen increases in some
+highly visible prices, notably for gasoline. Indeed, prices of many
+industrial and agricultural commodities have risen lately, largely as a
+result of the very strong demand from fast-growing emerging market
+economies, coupled, in some cases, with constraints on supply.
+Nonetheless, overall inflation is still quite low and longer-term
+inflation expectations have remained stable. Over the 12 months ending
+in December, prices for all the goods and services consumed by
+households (as measured by the price index for personal consumption
+expenditures) increased by only 1.2 percent, down from 2.4 percent over
+the prior 12 months. To assess underlying trends in inflation,
+economists also follow several alternative measures of inflation; one
+such measure is so-called core inflation, which excludes the more
+volatile food and energy components and therefore can be a better
+predictor of where overall inflation is headed. Core inflation was only
+0.7 percent in 2010, compared with around 2\1/2\ percent in 2007, the
+year before the recession began. Wage growth has slowed as well, with
+average hourly earnings increasing only 1.7 percent last year. These
+downward trends in wage and price inflation are not surprising, given
+the substantial slack in the economy.
+
+ MONETARY POLICY
+
+ Although the growth rate of economic activity appears likely to
+pick up this year, the unemployment rate probably will remain elevated
+for some time. In addition, inflation is expected to persist below the
+levels that Federal Reserve policymakers have judged to be consistent
+over the longer term with our statutory mandate to foster maximum
+employment and price stability. Under such conditions, the Federal
+Reserve would typically ease monetary policy by reducing its target for
+the federal funds rate. However, the target range for the federal funds
+rate has been near zero since December 2008, leaving essentially no
+room for further reductions. As a consequence, since then we have been
+using alternative tools to provide additional monetary accommodation.
+In particular, over the past two years the Federal Reserve has further
+eased monetary conditions by purchasing longer-term securities--
+specifically, Treasury, agency, and agency mortgage-backed securities--
+on the open market. These purchases are settled through the banking
+system, with the result that depository institutions now hold a very
+high level of reserve balances with the Federal Reserve.
+ Although large-scale purchases of longer-term securities are a
+different monetary policy tool than the more familiar approach of
+targeting the federal funds rate, the two types of policies affect the
+economy in similar ways. Conventional monetary policy easing works by
+lowering market expectations for the future path of short-term interest
+rates, which, in turn, reduces the current level of longer-term
+interest rates and contributes to an easing in broader financial
+conditions. These changes, by reducing borrowing costs and raising
+asset prices, bolster household and business spending and thus increase
+economic activity. By comparison, the Federal Reserve's purchases of
+longer-term securities do not affect very short-term interest rates,
+which remain close to zero, but instead put downward pressure directly
+on longer-term interest rates. By easing conditions in credit and
+financial markets, these actions encourage spending by households and
+businesses through essentially the same channels as conventional
+monetary policy, thereby strengthening the economic recovery. Indeed, a
+wide range of market indicators suggest that the Federal Reserve's
+securities purchases have been effective at easing financial
+conditions, lending credence to the view that these actions are
+providing significant support to job creation and economic
+growth.market expectations for the future path of short-term interest
+rates, which, in turn, reduces the current level of longer-term
+interest rates and contributes to an easing in broader financial
+conditions. These changes, by reducing borrowing costs and raising
+asset prices, bolster household and business spending and thus increase
+economic activity. By comparison, the Federal Reserve's purchases of
+longer-term securities do not affect very short-term interest rates,
+which remain close to zero, but instead put downward pressure directly
+on longer-term interest rates. By easing conditions in credit and
+financial markets, these actions encourage spending by households and
+businesses through essentially the same channels as conventional
+monetary policy, thereby strengthening the economic recovery. Indeed, a
+wide range of market indicators suggest that the Federal Reserve's
+securities purchases have been effective at easing financial
+conditions, lending credence to the view that these actions are
+providing significant support to job creation and economic
+growth.market expectations for the future path of short-term interest
+rates, which, in turn, reduces the current level of longer-term
+interest rates and contributes to an easing in broader financial
+conditions. These changes, by reducing borrowing costs and raising
+asset prices, bolster household and business spending and thus increase
+economic activity. By comparison, the Federal Reserve's purchases of
+longer-term securities do not affect very short-term interest rates,
+which remain close to zero, but instead put downward pressure directly
+on longer-term interest rates. By easing conditions in credit and
+financial markets, these actions encourage spending by households and
+businesses through essentially the same channels as conventional
+monetary policy, thereby strengthening the economic recovery. Indeed, a
+wide range of market indicators suggest that the Federal Reserve's
+securities purchases have been effective at easing financial
+conditions, lending credence to the view that these actions are
+providing significant support to job creation and economic growth.\1\
+---------------------------------------------------------------------------
+ \1\ For example, in August 2010 we announced our policy of
+reinvesting principal payments on agency debt and agency-guaranteed
+mortgage-backed securities in longer-term Treasury securities and
+signaled that we were considering additional purchases of longer-term
+Treasury securities. Since then, equity prices have risen
+significantly, volatility in the equity market has fallen, corporate
+bond spreads have narrowed, and inflation compensation as measured in
+the market for inflation-indexed securities has risen from low to more
+normal levels. Yields on 5- to 10-year Treasury securities initially
+declined markedly as markets priced in prospective Fed purchases; these
+yields subsequently rose, however, as investors became more optimistic
+about economic growth and as traders scaled back their expectations of
+future securities purchases. All of these developments are what one
+would expect to see when monetary policy becomes more accommodative,
+whether through conventional or less conventional means. Interestingly,
+these developments are also remarkably similar to those that occurred
+during the earlier episode of policy easing, notably in the months
+following our March 2009 announcement of a significant expansion in
+securities purchases.
+---------------------------------------------------------------------------
+ My colleagues and I have said that we will review the asset
+purchase program regularly in light of incoming information and will
+adjust it as needed to promote maximum employment and stable prices. In
+particular, we remain unwaveringly committed to price stability, and we
+are confident that we have the tools to be able to smoothly and
+effectively exit from the current highly accommodative policy stance at
+the appropriate time. Our ability to pay interest on reserve balances
+held at the Federal Reserve Banks will allow us to put upward pressure
+on short-term market interest rates and thus to tighten monetary policy
+when needed, even if bank reserves remain high. Moreover, we have
+developed additional tools that will allow us to drain or immobilize
+bank reserves as needed to facilitate the smooth withdrawal of policy
+accommodation when conditions warrant. If necessary, we could also
+tighten policy by redeeming or selling securities.
+ As I am appearing before the Budget Committee, it is worth
+emphasizing that the Fed's purchases of longer-term securities are not
+comparable to ordinary government spending. In executing these
+transactions, the Federal Reserve acquires financial assets, not goods
+and services; thus, these purchases do not add to the government's
+deficit or debt. Ultimately, at the appropriate time, the Federal
+Reserve will normalize its balance sheet by selling these assets back
+into the market or by allowing them to run off. In the interim, the
+interest that the Federal Reserve earns from its securities holdings
+adds to the Fed's remittances to the Treasury; in 2009 and 2010, those
+remittances totaled about $125 billion.
+
+ FISCAL POLICY
+
+ Fiscal policymakers also face significant challenges. Our nation's
+fiscal position has deteriorated appreciably since the onset of the
+financial crisis and the recession. To a significant extent, this
+deterioration is the result of the effects of the weak economy on
+revenues and outlays, along with the actions that the Administration
+and the Congress took to ease the recession and steady financial
+markets. However, even after economic and financial conditions return
+to normal, the federal budget will remain on an unsustainable path,
+with the budget gap becoming increasingly large over time, unless the
+Congress enacts significant changes in fiscal programs.
+ For example, under plausible assumptions about how fiscal policies
+might evolve in the absence of major legislative changes, the
+Congressional Budget Office (CBO) projects the deficit to fall from its
+current level of about 9 percent of gross domestic product (GDP) to 5
+percent of GDP by 2015, but then to rise to about 6\1/2\ percent of GDP
+by the end of the decade.\2\ In subsequent years, the budget situation
+is projected to deteriorate even more rapidly, with federal debt held
+by the public reaching almost 90 percent of GDP by 2020 and 150 percent
+by 2030, up from about 60 percent at the end of fiscal year 2010.
+---------------------------------------------------------------------------
+ \2\ This alternative fiscal policy scenario, which assumes, among
+other things, that most of the tax cuts enacted in 2001 and 2003 are
+made permanent and that discretionary fiscal outlays rise at the same
+rate as gross domestic product, is presented in Congressional Budget
+Office (2010), The Long-Term Budget Outlook (Washington: CBO, June
+(revised August)), available at www.cbo.gov/
+doc.cfm?index=11579&zzz=40884.
+---------------------------------------------------------------------------
+ The long-term fiscal challenges confronting the nation are
+especially daunting because they are mostly the product of powerful
+underlying trends, not short-term or temporary factors. The two most
+important driving forces behind the budget deficit are the aging of the
+population and rapidly rising health-care costs. Indeed, the CBO
+projects that federal spending for health-care programs will roughly
+double as a percentage of GDP over the next 25 years.\3\ The ability to
+control health-care spending, while still providing high-quality care
+to those who need it, will be critical for bringing the federal budget
+onto a sustainable path.
+---------------------------------------------------------------------------
+ \3\ See the two long-term scenarios for mandatory federal spending
+on health care shown in figure 2-3, p. 39, in CBO, The Long-Term Budget
+Outlook, in note 2.
+---------------------------------------------------------------------------
+ The CBO's long-term budget projections, by design, do not account
+for the likely adverse economic effects of such high debt and deficits.
+But if government debt and deficits were actually to grow at the pace
+envisioned, the economic and financial effects would be severe.
+Sustained high rates of government borrowing would both drain funds
+away from private investment and increase our debt to foreigners, with
+adverse long-run effects on U.S. output, incomes, and standards of
+living. Moreover, diminishing investor confidence that deficits will be
+brought under control would ultimately lead to sharply rising interest
+rates on government debt and, potentially, to broader financial
+turmoil. In a vicious circle, high and rising interest rates would
+cause debt-service payments on the federal debt to grow even faster,
+resulting in further increases in the debt-to-GDP ratio and making
+fiscal adjustment all the more difficult.
+ In thinking about achieving fiscal sustainability, it is useful to
+apply the concept of the primary budget deficit, which is the
+government budget deficit excluding interest payments on the national
+debt. To stabilize the ratio of federal debt to the GDP--a useful
+benchmark for assessing fiscal sustainability--the primary budget
+deficit must be reduced to zero.\4\ Under the CBO projection that I
+noted earlier, the primary budget deficit is expected to be 2 percent
+of GDP in 2015 and then rise to almost 3 percent of GDP in 2020 and 6
+percent of GDP in 2030. These projections provide a gauge of the
+adjustments that will be necessary to attain fiscal sustainability. To
+put the budget on a sustainable trajectory, policy actions--either
+reductions in spending, increases in revenues, or some combination of
+the two--will have to be taken to eventually close these primary budget
+gaps.
+---------------------------------------------------------------------------
+ \4\ This result requires that the nominal rate of interest paid on
+government debt equals the rate of growth of nominal GDP, a condition
+that might plausibly be expected to hold over time. If the interest
+rate on government debt is higher than the growth rate of nominal GDP,
+as might happen if creditors become wary of lending, then a primary
+budget surplus rather than primary balance would be needed to stabilize
+the ratio of debt to GDP.
+---------------------------------------------------------------------------
+ By definition, the unsustainable trajectories of deficits and debt
+that the CBO outlines cannot actually happen, because creditors would
+never be willing to lend to a government with debt, relative to
+national income, that is rising without limit. One way or the other,
+fiscal adjustments sufficient to stabilize the federal budget must
+occur at some point. The question is whether these adjustments will
+take place through a careful and deliberative process that weighs
+priorities and gives people adequate time to adjust to changes in
+government programs or tax policies, or whether the needed fiscal
+adjustments will come as a rapid and painful response to a looming or
+actual fiscal crisis. Acting now to develop a credible program to
+reduce future deficits would not only enhance economic growth and
+stability in the long run, but could also yield substantial near-term
+benefits in terms of lower long-term interest rates and increased
+consumer and business confidence. Plans recently put forward by the
+President's National Commission on Fiscal Responsibility and Reform and
+other prominent groups provide useful starting points for a much-needed
+national conversation. Although these proposals differ on many details,
+they demonstrate that realistic solutions to our fiscal problems do
+exist.
+ Of course, economic growth is affected not only by the levels of
+taxes and spending, but also by their composition and structure. I hope
+that, in addressing our long-term fiscal challenges, the Congress and
+the Administration will undertake reforms to the government's tax
+policies and spending priorities that serve not only to reduce the
+deficit, but also to enhance the long-term growth potential of our
+economy--for example, by reducing disincentives to work and to save, by
+encouraging investment in the skills of our workforce as well as new
+machinery and equipment, by promoting research and development, and by
+providing necessary public infrastructure. Our nation cannot reasonably
+expect to grow its way out of our fiscal imbalances, but a more
+productive economy will ease the tradeoffs that we face.
+ Thank you. I would be pleased to take your questions.
+
+ Chairman Ryan. Thank you, Mr. Chairman. First, let me lead
+off with what you have concluded. Just to summarize, you do
+believe that one of the best things we can do for short-term
+economic growth is to put out a plan that actually stabilizes
+our fiscal picture, that actually gets our liabilities under
+control, and shows with confidence that we have a right
+trajectory because we've addressed the programs, which are the
+spending programs that are getting us out of control. Is that
+the case?
+ Mr. Bernanke. That's correct.
+ Chairman Ryan. Okay. I want to talk to you about QE2. Last
+time you came to the Committee to testify, you said that QE2 is
+not an exercise in monetizing the debt. Now, the question
+basically is this. I understand from your perspective you can
+say that QE2 is not monetizing the debt because it is not
+causing runaway inflation because the money you are creating is
+not yet circulating in the broader economy, it is being held as
+excess bank reserves. But isn't this sort of a distinction
+without a difference? It seems to me that the argument here is
+that the intention of QE2 is what we ought to be focusing on,
+because the intention is to bring rates down to promote
+economic growth, and therefore the intention is what should
+matter here, but this is debt monetization, so isn't that
+really a distinction without a difference?
+ Mr. Bernanke. No, sir. Monetization would involve a
+permanent increase in the money supply to basically pay the
+government's bills through money creation. What we are doing
+here is a temporary measure which will be reversed so that at
+the end of this process, the money supply will be normalized,
+the amount of the Fed's balance sheet will be normalized, and
+there will be no permanent increase, either in money
+outstanding, in the Fed's balance sheet, or in inflation.
+ Chairman Ryan. So if we get this wrong, and if credibility
+is diminished because of these moves, and if expectations form
+around price increases, then we do have a big interest rate
+problem. And if you look through our fiscal side of it, just
+raising interest rates under normal, average predictions would
+just be vicious to our balance sheet. The interest payments
+alone in the current budget window, which assumes extremely low
+interest rates for the decade, go from $200 billion this year
+to a trillion at the end of the budget window. If interest
+rates move up from their current projections, which I think
+long bonds are about four to five percent throughout the budget
+window, that is about one to anywhere from $6 trillion in extra
+interest payments. So basically, this is all based on
+confidence that what you are doing and saying will actually be
+done, and confidence and credibility is just critical in all of
+this.
+ What I'm trying to get at is, and just take a look at
+today's Wall Street Journal: Inflation Worries Spread. You've
+got, basically, inflation jitters spread through emerging
+markets. In Brazil, Latin America's largest economy, the
+government reported Tuesday that inflation is accelerating. You
+know, we've got inflation popping up in other parts of the
+world, after all, many countries peg their currencies to the
+U.S. dollar, and my basic question is, to what extent do you
+think the Fed's monetary policy stance has contributed to these
+global inflationary pressures? Has this contributed to the hot
+money flows abroad that have led to some of these global
+imbalances that are not fully appreciating when we examine the
+costs and benefits of your current QE2 monetary policy stance?
+ Mr. Bernanke. Mr. Chairman, your first sentence under the
+headline was very revealing. The inflation is taking place in
+emerging markets because that is where the growth is, that is
+where the demand is, and that is where, in some cases, the
+economy is overheating. It's the responsibility of the emerging
+markets to set their monetary and exchange rate policies in a
+way that will keep their economies on a stable path. The
+increases in oil prices, for example, are entirely due,
+according to the International Energy Agency, to increases in
+demand coming from emerging markets; they are not coming from
+the United States. So the bulk of the increase in commodity
+crisis is a global phenomenon.
+ In the United States, inflation made here in the U.S. is
+very, very low. Now, of course, that is a serious problem, but
+monetary policy can't do anything about, for example, bad
+weather in Russia, or increases in demand for oil in Brazil and
+China. What we can do is try to get stable prices and growth
+here in the United States.
+ Chairman Ryan. So, as you look at some of the leading
+indicators: the yield curve, for instance, commodity prices, do
+those not send you a warning that inflation is building in
+America? Or are you still looking at core inflation as your
+main guidepost measuring whether or not our monetary policy is
+keeping prices in check? My basic question is, and my concern
+is, using your output gap model, my fear is that you are going
+to catch it before the cow is out of the barn. You are going to
+see inflation after it has already been launched. And given
+that you have a huge balance sheet, given that we are basically
+in uncharted territory with respect to the Great Recession and
+the responses that you put out there, that we are going to
+catch this after it is too late.
+ Could you please give us a sense of what else you are
+looking at to gauge inflation in America, other than core
+inflation, which, as you know, there's a big debate as to
+whether or not that is the proper tool we use or not. Even the
+ECB uses broader definitions of inflation. So where are you
+looking, outside of your core deflation, to give you a gauge as
+to how to set monetary policy to prevent inflation from
+actually getting unhinged here in America?
+ Mr. Bernanke. Mr. Chairman, let me say first, that there be
+no doubt that we are unwaveringly committed to maintaining
+price stability; that is a very, very strong goal and
+objective, we will do so. In terms of what we are looking at,
+first of all, overall inflation, including food and energy is
+still very low, about one percent. But looking forward, you
+asked about credibility and the yield curve, if you look, for
+example, at inflation breakevens, which are a measure in the
+inflation index bond market of what the markets think inflation
+is going to be. The five year breakeven is about two percent,
+2.1 percent last I looked. So there is not really any
+indication in our financial markets that in the United States
+there's an expectation of inflation.
+ That being said, we will look very carefully not only at
+output gaps and those things that you mention, but also at
+commodity prices, at interest rates, and all the other
+indicators that will help us assess when inflation is becoming
+a problem. It is always an issue, as you know, Mr. Chairman,
+that in the recovery period you have to pick the right moment
+to begin removing accommodation, taking away the punch bowl,
+and we, of course, face that problem, as the Central Bank
+always does, but we are committed to making sure that we do it
+at the right time.
+ Chairman Ryan. So when you see the steepening of the yield
+curve that has taken place recently, do you see that as market
+participants showing some concerns about future inflation, or
+do you see that as signs that an economic recovery is beginning
+to take root?
+ Mr. Bernanke. The inflation breakevens have risen since we
+began the QE2 program in August, but they have moved from very
+low levels to about normal levels. The bulk of the increase in
+interest rates has been, in the real side of the interest rate,
+which means that, like the stock market, the bond market is
+expecting greater future growth and is more optimistic about
+the U.S. economy, and I think that is a good thing, obviously,
+and I think our policies have contributed to that.
+ Chairman Ryan. So we obviously have a bigger punch bowl
+than we normally have in these times, and if we were in a
+cyclical situation, I don't think concerns would be as great as
+they are right now. But I think part of our problem, as you
+mentioned, on the fiscal policy side, is structural. We have a
+tidal wave of debt we are running into. If interest rates begin
+to leave the current projections, we have a serious problem on
+our hands. And it just gets to a vicious cycle, like you have
+described.
+ The punch bowl, your asset, your balance sheets: Have you
+done a stress test on the Fed's balance sheet assets as an exit
+strategy occurs with higher interest rates that perhaps result
+from what has been going on? So, have you done a stress test on
+your balance sheet? And what level of losses do you think are
+acceptable as you withdraw?
+ Mr. Bernanke. We have done multiple stress tests. Under
+most likely scenarios, the fiscal implications of the balance
+sheet are positive. We've already turned in, in the last two
+years, $125 billion to the Treasury, and given our low level of
+cost, our low cost of financing, under most plausible scenarios
+this policy will continue to be profitable. Of course, that is
+not the main objective of it; the objective is to strengthen
+the economy.
+ If short-term interest rates were to rise exceptionally
+high, much more than we anticipate, then it could be that the
+remittances to the Treasury would go down for a time, but in
+that case, it would probably also be the case that the economy
+was much stronger than expected, and tax revenues would more
+than compensate for that loss. So our sense is that the net
+expectation from a fiscal side is that this will actually be
+constructive and reduce the federal deficit.
+ Chairman Ryan. I'd go on for a long time, but I want to be
+fair to my colleagues. Mr. Van Hollen.
+ Mr. Van Hollen. Thank you, Mr. Chairman, and again,
+Chairman Bernanke, thank you for your testimony. Now, obviously
+the United States as part of a global marketplace, but your
+job, your mandate at the Fed is to watch out for the American
+economy, is that right?
+ Mr. Bernanke. Yes, sir.
+ Mr. Van Hollen. And your testimony, as I understand it, is
+that you are vigilant about looking out for inflation pressures
+but your assessment right now is that we do not have an
+inflation problem in the United States, is that correct?
+ Mr. Bernanke. We do not now have a problem, but I do want
+to repeat that we are extremely vigilant, we will be very
+careful to make sure that we don't wait too long.
+ Mr. Van Hollen. Right. And your policy known as QE2, you
+had QE1, and QE2 was referenced, by your assessment how many
+American jobs has that saved or created?
+ Mr. Bernanke. It is obviously very difficult to know
+precisely. There have been a number of studies which have tried
+to assess, using macroeconomic models and so on. A very careful
+study done by Federal Reserve System economists suggests that
+the total job impact of all of the QE programs, including QE1,
+including the reinvestment, including QE2, could be up to three
+million jobs. It could be less, it could be more, but the
+important thing to understand is that it is not insignificant;
+it is an important contribution to growth and to job creation.
+And we are in a situation where we have almost half of the
+unemployed being out of work for more than six months. And the
+longer that people stay out of work, the more difficult it is
+going to be for them to come back and rejoin the labor force at
+a decent wage, and to return to their previous employment.
+ Mr. Van Hollen. Right. So as I understand you, that was a
+credible study in your view, was it not?
+ Mr. Bernanke. It is, and there have been other studies as
+well, which are comparable.
+ Mr. Van Hollen. Okay. And just focusing on QE2, my
+understanding is that, just with respect to that, those
+monetary decisions that created or saved between 600,000 and
+700,000 jobs, is that correct?
+ Mr. Bernanke. The same study attributed, again
+perspectively, in part, to the $600 billion QE2 about 700,000
+jobs. Again, let me just emphasize that these are simulation
+studies, but they do indicate that the potential impact is
+significant.
+ Mr. Van Hollen. Right, but Mr. Chairman, simulation studies
+are what the Feds, the OMB, the CBO, we all do, right?
+ Mr. Bernanke. Correct.
+ Mr. Van Hollen. Okay. With respect to that policy, if you
+did not have those tools at your disposal and you were not able
+to use them, I assume that would mean that you would not be
+able to take action to save or create three million jobs, is
+that correct?
+ Mr. Bernanke. That's correct because our interest rate is
+essentially down to zero.
+ Mr. Van Hollen. Thank you. Now, I want to turn briefly to
+the question of debt ceiling because this Congress is going to
+face a very important decision coming up, and last week at the
+National Press Club, you indicated that failure to raise the
+debt ceiling would be, quote, Catastrophic for our economy and
+financial system. I assume you have the same opinion today.
+ Mr. Bernanke. Yes, sir.
+ Mr. Van Hollen. Okay. You also indicated at the National
+Press Club that it would be a mistake for, in your view, for
+the Congress to use the debt ceiling as a, quote, Bargaining
+chip, with respect to decisions on spending and tax, that we
+should address those as part of our normal discussion but not
+hold the debt ceiling hostage to that. I assume you still have
+that view today.
+ Mr. Bernanke. To be clear, it is very important to address
+these issues, but the risk of not raising the debt ceiling is
+that interest would not be paid on outstanding government debt,
+and if the United States defaulted it would have
+extraordinarily bad consequences for our financial system, and
+it would mean that we would face higher interest rates
+essentially indefinitely because creditors wouldn't trust us to
+make our interest payments.
+ Mr. Van Hollen. I mean it would be reckless from an
+economic and financial perspective to allow, to essentially
+default on our debts and question the creditworthiness and full
+faith credit of the United States, correct?
+ Mr. Bernanke. We do not want to default on our debts; it
+would be very destructive.
+ Mr. Van Hollen. Have you had an opportunity to look at some
+of the legislative proposals that have been introduced on the
+Senate and the House side that would purport to try and delay
+those payments, and have you seen Secretary Geithner's comments
+in a response?
+ Mr. Bernanke. We have just begun to look at the issue of
+whether or not you could reorder, re-prioritize payments so
+that the debt interest would be paid, but other things not
+paid. This has not been done before and our early assessment is
+that there would be some difficulties from just a purely
+operational point of view. For example, you would have to
+differentiate between Social Security payments, which
+presumably would not be going out, versus interest payments to
+individuals holding savings bonds, which would be going out,
+and that might cause some operational issues, so we do have
+some concerns on that score.
+ Mr. Van Hollen. Some of these proposals would actually
+allow the full faith and credit of the United States to extend
+to some of our foreign creditors, like China and other
+governments, but not to U.S. businesses and American citizens.
+Let me ask you a quick question on the fiscal policy, because I
+think we all agree that the Congress should act now to put in
+place a plan to get our deficit and debt under control. We need
+to come up with a plan to put this country on a sustainable,
+fiscal path.
+ And, as you indicated, you referenced the bipartisan
+commission, the President's Commission, in your remarks. The
+authors of that plan observed, and I quote, In order to avoid
+shocking the fragile economy, the Commission recommends waiting
+until 2012 to begin enacting programmatic spending cuts. Let me
+just ask you this, Mr. Chairman: If you were to take a lot of
+investment out of the economy at this particular point, when it
+is fragile, could that create a drag on the economy and have a
+impact on jobs?
+ Mr. Bernanke. If it were large enough, it could, but on the
+other side, I just want to emphasize that the deficit-reduction
+approach should be one that takes a long-term perspective, that
+you are looking at a long-term window and addressing the whole
+trajectory of spending, rather than looking only at the very
+short-term.
+ Mr. Van Hollen. Okay. And I agree with that, Mr. Chairman.
+Last question is I was pleased to see in your testimony that
+you believe that certain investments, national investments in
+our economy, can in fact lead to productivity and growth. There
+are some who are trying to turn investment into a dirty word,
+but as you indicate here, investments in our public
+infrastructure, investments in education, and investments in
+science and research can in fact have a positive, productive
+impact on economic growth. Is that correct?
+ Mr. Bernanke. If they are well done, yes.
+ Mr. Van Hollen. Thank you, Mr. Chairman.
+ Chairman Ryan. Something tells me we are going to have a
+big debate over the definition of investment over the next two
+years. Mr. Garrett.
+ Mr. Garrett. There we go. And thank you, Mr. Chairman.
+Following up on a couple of those questions, before I get to
+some other ones. So, Mr. Ryan was asking an initial question to
+your response back, with regard to monetary policy, whether
+monetizing the debt and the like. You said your actions right
+now have been short-term in nature, as opposed to permanent
+actions, which, if I understand you, would be effectively
+monetizing the debt. I guess, then, the question becomes, if
+you had implemented permanent, there's nothing that would have
+precluded the Fed, somewhere down the road, undo their actions
+later on. You're not bound by your decisions today. So,
+anything that is actually permanent is also changeable by the
+Fed. Correct? There's nothing permanent that you would do
+today, that you couldn't undo.
+ Mr. Bernanke. What's key here is expectations. And the
+markets don't expect inflation, which means they expect us to
+undo this process at the appropriate time.
+ Mr. Garrett. Right. And effectively what you have is a
+difference between one's interpretation of what is permanent
+and what is temporary. And I imagine that no Fed Chairman would
+ever come to this witness table, and say, I am engaging in
+permanent monetizing of the debt. That no matter how they would
+describe it to us, they would describe it as, I'm only taking a
+temporary action to get over this period that we are in right
+now. Isn't that correct?
+ Mr. Bernanke. That's what we are doing. It's a temporary
+action. But, of course, the Fed always buys securities for
+various reasons. For example, that is how we create the
+currency that Americans use every day.
+ Mr. Garrett. But this is obviously outside the norm as far
+as your balance sheet.
+ Mr. Bernanke. That's right.
+ Mr. Garrett. And part of your opening comments was the fact
+that one of the good signs we are in right now is that consumer
+spending is going along, which is sort of pulling the economy
+going forward, right?
+ Mr. Bernanke. Yeah.
+ Mr. Garrett. Is that in part because of exactly what you
+are doing, whether we call it permanent or temporary, it is
+because of that, basically, cheap money that is out there that
+is encouraging all of us to say that, Hey, it is cheaper to
+borrow right now, so I can actually increase my consumer
+spending?
+ Mr. Bernanke. That's how monetary policy works all the
+time. Not just now.
+ Mr. Garrett. Right. But in the area of housing, however,
+you had said, not just last year with regard to housing policy
+and the age old question of what caused us to get into this
+situation. And you said, Well, I don't think it was really
+monetary policy, I'm paraphrasing, here, that got us into this
+situation. And I know the old line, that if you get three
+economists in a room, you will come up with four different
+definitions on what economic policy should be. When you were
+saying that, about three-quarters of business economists were
+just saying the opposite of that. They said that it was a cheap
+monetary policy that was bringing us into this situation. So
+you disagree on that point with a number of other economists,
+as whether it was the low cost of money that actually
+exacerbated the housing problem. Right?
+ Mr. Bernanke. Right.
+ Mr. Garrett. But now, you are basically, on the other hand,
+saying, We're going to use that exact same policy, of basically
+cheap money, to do what? To try to drive up the cost of the
+housing, in order to pull us out of this economic morass.
+Right?
+ Mr. Bernanke. The price of housing isn't responding at all
+to the policy. It's going----
+ Mr. Garrett. But that is your ultimate goal here, isn't it?
+Basically, if we have the cheap money, that people will be able
+to start buying houses again, that it'll hit the bottom and the
+housing prices will go back up again. Right?
+ Mr. Bernanke. Again, that is the way the monetary policy
+works: by lowering rates of returns, so people will be more
+willing to spend.
+ Mr. Garrett. I'm in this quandary here. On the one hand,
+you are saying that, in the past when you had, not you but your
+predecessor, had a cheap monetary policy, that really didn't
+cause the problem because monetary policy really wasn't driving
+the cost of the housing and causing the problems that we have
+here. Now, however, you are going to use that exact same
+formula to say, Yeah, well, actually it does have as
+significant impact, or we should hope it has a significant
+impact on the monetary policy. So I am at a quandary as to
+which is it from the Fed: whether it had an impact in the past,
+or will it have an impact in the future? If you don't think it
+had an impact in the past, why do you think it is going to have
+an impact now on housing?
+ Mr. Bernanke. It should have an effect that is
+proportionate to the interest rate change. Now, the housing
+bubble we saw earlier in this decade was far greater than can
+be explained by the monetary policies of that time, which is
+one of the reasons why I don't think that the monetary policy
+was a major source of that bubble.
+ Mr. Garrett. Okay. Very quickly, last minute and 15
+seconds, with regards to spending. Wouldn't significant
+reductions, or addressing the short-term spending aspects, be
+good for the market and the economy, despite some of the
+critics on the other side that say this might be detrimental to
+overall growth?
+ Mr. Bernanke. Well, again, I think it is really a question
+of convincing the market that there's a long-term plan here,
+and to the extent that that was part of a long-term plan, it
+could be helpful, yes.
+ Mr. Garrett. Okay. Well, Moody's looking at what we are
+doing in Washington. I guess they're optimistic about what we
+will do, because they came out a month ago with their report
+looking at the fiscal health, looking at three categories: the
+debt to GDP, the debt to revenue, and the interest payment
+revenue, and they said that the U.S. exceeds the median level
+of AAA rated nations for all these other categories, and
+concludes that it would expect to see, quote, Constructive
+efforts to reduce the current deficits, as well as constructive
+efforts to control long-term growth of entitlement spendings. I
+guess they're optimistic as to what Washington does, making
+those statements. Are you optimistic that we are going to be
+able to make those hard choices, even if they make some
+significant cuts in spending right now?
+ Mr. Bernanke. Well, I'm not certain. And that is why I'm
+making this case. I hope that people will listen and take
+seriously the responsibility to address this problem.
+ Mr. Garrett. I appreciate that. Thank you.
+ Chairman Ryan. Mr. Doggett.
+ Mr. Doggett. Thank you very much for your service, Mr.
+Chairman. While it may be true that there are only two
+certainties in life, death and taxes, I would think that a
+close third would be gigantic bonuses for many at gigantic
+Wall-Street financial enterprises. When you were here to
+testify last, you responded to my question about that by
+indicating that the Federal Reserve, under your direction, was
+preparing a public report to the American people on bank
+compensation structures that would be available at the end of
+last year or early this year. About four months ago, your
+general counsel testified here in the House, also, about the
+importance of making that report public to the American people.
+When can we expect to see the report?
+ Mr. Bernanke. I believe that will be soon. We certainly are
+working in that direction. As you know, we put guidance out in
+June 2010, and we are working to follow the requirements of the
+Dodd-Frank Act to put out additional restrictions.
+ Mr. Doggett. I know there's been some discussion that the
+public report that you testified to us about, and that your
+general counsel testified about, would now be kept secret. But
+it is your intent to make it fully public to the American
+people.
+ Mr. Bernanke. That's my understanding, yes.
+ Mr. Doggett. And you think that will happen very soon.
+ Mr. Bernanke. I believe so, but I'd like to get back to
+you, if I might, on the exact date.
+ Mr. Doggett. Please do, especially if any part of it will
+be kept secret, as some have suggested. I think that kind of
+reversal would be very troubling. Thank you, though.
+ Moving to the issue of the Consumer Financial Protection
+Bureau, created in the Wall Street Reform Law, you are very
+familiar with it, to arm the American people with information
+that they need to make informed financial decisions. Many
+question whether that Bureau should be located within the
+Federal Reserve, given its traditional mission, and given
+concern about the independence of the Bureau and the ability to
+fulfill its mandate. With it set to begin full operations
+shortly, in July, and with no Consumer Financial Protection
+Bureau Director yet nominated, can you provide us assurances
+that it will be sufficiently strong and independent to fulfill
+its mandate, to offer consumer protection to the American
+people, from the many credit abuses that they have faced in the
+past?
+ Mr. Bernanke. Congressman, the CFPB is located in the
+Federal Reserve, only in the narrow sense that the Federal
+Reserve pays the bills. But we have no oversight or control.
+The control really is coming from the Treasury, and I think
+they are the ones who would be most appropriate to respond to
+you about the nature of the Bureau.
+ Mr. Doggett. You and the Fed have no involvement in the
+operation of the Bureau? You're just kind of the landlord and
+the paymaster?
+ Mr. Bernanke. We're doing our best to help them get set up.
+Obviously, there's a lot to be done, in terms of just hiring
+people and setting up an IT system, and so on, but in terms of
+policymaking, they are completely independent of the Federal
+Reserve. We have no say whatsoever.
+ Mr. Doggett. And you are making no recommendations about
+who the director should be, or how the Bureau will operate in
+any way from a policy standpoint?
+ Mr. Bernanke. No sir, that is not part of our
+responsibility under Dodd-Frank.
+ Mr. Doggett. Another major issue that perhaps involves the
+Treasury some, and it involves you some, is the future of
+Freddie Mac and Fannie Mae. Some are concerned that perhaps
+most, if not all, of their functions would, again, be turned
+over to a few large financial enterprises. What is your general
+approach to the future of these two institutions?
+ Mr. Bernanke. Well, as you know, the Treasury is promising
+us a set of proposals very soon, and it will be interesting to
+see what they provide. There are various possibilities that we
+could do, including making them a government utility, or
+privatizing them, which would be two alternatives. One
+suggestion, which I have made in previous remarks, is that if
+the government is involved in providing credit guarantees, it
+should do so only as a deep backstop. That is, the first losses
+should be borne by the originators of the mortgages, or by the
+securitizers. The government, if it does provide backstop
+insurance, should do so for an actuarially fair premium, and
+that would essentially allow the government to provide a
+backstop in situations like we had in the last few years, where
+the housing market came under enormous stress.
+ Mr. Doggett. Thank you. Thank you, Mr. Chairman.
+ Chairman Ryan. Mr. Campbell.
+ Mr. Campbell. Thank you Chairman Ryan and Chairman
+Bernanke. Some things in economics are cyclical and others are
+structural. You mentioned earlier today that you feared that
+unemployment would remain elevated for an extended period of
+time. How much of our current high unemployment, in your view,
+is cyclical, and how much is structural?
+ Mr. Bernanke. I don't have a precise number, but we have
+done a lot of work looking at this. And I would say that the
+bulk of it is still cyclical. The risk is that if it goes on
+long enough, it will start becoming structural as people lose
+their skills and their connection to the labor force.
+ Mr. Campbell. Is it fair to say that you have control only
+over monetary policy, not fiscal policy and government policy,
+and that to the extent that unemployment is structural, that
+that is something that is really out of your purview to deal
+with, be it QE2, or any other form of monetary policy?
+ Mr. Bernanke. That's correct.
+ Mr. Campbell. I'd like to talk about what Mr. Ryan referred
+to a minute ago, about this thing of spending and investment.
+There's a lot of talk these days that what we need to grow the
+economy is spending: government spending, spending by
+individuals, spending by consumers. To me, there's a great
+distinction. And the term investment is thrown around a great
+deal, but investment means that someone puts money to work,
+expecting a monetary return. And that is very different from
+spending. In order to achieve long-term growth, stable
+employment growth, isn't investment, from a true definition,
+and savings where we should be trying to head, rather than just
+focusing on consumer spending or government spending? You
+mentioned earlier today that we should remove the disincentives
+to saving and would. Shouldn't we be removing disincentives to
+saving and investment, to get this long-term growth, rather
+than all this focus on spending in both the public and private
+sector?
+ Mr. Bernanke. Congressman, I mentioned, improving the tax
+code to reduce disincentives for productive activity. I think
+it is very important, for individuals and for businesses and
+for investment. The government does have some role in providing
+infrastructure and education and so on, obviously, but the way
+that is done and the level which it is done is a matter for
+Congress to decide.
+ Mr. Campbell. Do you believe that we currently, since you
+mentioned disincentives to saving, have disincentives in place,
+that block savings or investment from the private sector that
+could add to growth?
+ Mr. Bernanke. I think there would be a lot of agreement
+that our tax code is very complex, and is not conducive to the
+most productive activities in many cases.
+ Mr. Campbell. Switching to QE2, the flavor of the day, as
+it were, have you fully implemented QE2 yet?
+ Mr. Bernanke. No sir. We announced an intention to purchase
+six-hundred-billion, between November and June, and so we are
+about halfway through.
+ Mr. Campbell. About halfway through. When QE2 finishes,
+presumably in June, and you mentioned that you could reverse it
+or whatever, what are the metrics that you are following that
+would lead you either to believe that you should have QE3 or
+that you should reverse QE2?
+ Mr. Bernanke. Well, first, there's the question of
+efficacy, and we are seeing the intended results in terms of
+financial markets and in terms of financial conditions. So, in
+that respect, we think that it is being successful. In terms of
+looking forward, we will be trying to assess whether the
+recovery is on a sustainable track. And things have moved in
+that direction, which is encouraging. And we will be trying to
+assess whether inflation is low and stable, at around two
+percent or a bit less, which we think is about the right level,
+and most other central banks think is about the right level.
+And looking forward, if that appears to be the trajectory we
+are on, then additional action would not be necessary. If we
+are still in a situation where the recovery does not seem
+established, and deflation risk remains a concern, then we
+would have to think about additional measures.
+ Mr. Campbell. What's the trigger that causes reversal?
+ Mr. Bernanke. If the economy begins to grow very quickly
+and inflation risk begins to rise, then we would reverse it.
+ Mr. Campbell. Okay. Final question. I think Mr. Ryan
+alluded to this earlier. There's been fairly significant moves
+in the 10-year and 30-year Treasury yields, just recently. What
+do you think's causing that? And are you concerned? Or, what is
+your opinion?
+ Mr. Bernanke. No, I'm not concerned. I think it reflects,
+primarily, increasing optimism about the U.S. economy, and it
+is natural for the term structure to move in that way when
+investors become more optimistic about growth.
+ Mr. Campbell. Thank you.
+ Chairman Ryan. Mr. Blumenauer.
+ Mr. Blumenauer. Thank you, Mr. Chairman. Thank you for
+joining us again. You come at a time when there are lots of
+people, including in Congress, who are very interested in
+helping you do your job better: critiquing it, maybe
+undertaking some things that would constrain direct control.
+But I got from your message that there are a couple of things
+that Congress should be focusing on, and our primary job. One,
+I guess we are all in the business of making sure there is
+confidence in the United States Government, meeting its
+obligations, not putting an undue cloud over it. Then you
+referenced the aging population and health care, which, again,
+is within our purview. There have been, it is no secret, a lot
+of suggestions as we approach the debt ceiling and it is widely
+acknowledged, no one disputes the need to extend it. There are
+discussions about conditions and terms, under which some of it
+might happen where we will change the scheduled debt repayment.
+Has this been, in your experiences, both as head of the Federal
+Reserve and as an economist and a scholar, has this been the
+routine? Has Congress done this regularly in the past?
+ Mr. Bernanke. Well, there have been, in the past, political
+battles, and both parties have done this, over whether or not
+to raise the debt limit.
+ Mr. Blumenauer. Excuse me. I'm talking about, has Congress
+ever, in the past, established conditions on limitations on the
+debt ceiling, or the sequencing, changing the order of business
+so we do not just honor our obligations and make sure that
+there's adequate head room?
+ Mr. Bernanke. If you are talking about the prioritization
+of payments, no, that is not happened, to my knowledge.
+ Mr. Blumenauer. Or have there been conditions attached to
+debt ceiling increases in the past?
+ Mr. Bernanke. I don't know if there have been direct
+conditions. Obviously, there have been negotiations about
+budgetary matters which have preceded those decisions.
+ Mr. Blumenauer. Setting that aside. We will always do that.
+That's our job. I think that is appropriate. And we will get
+down into cases, in terms of cutting, and I think there may be
+actually some bipartisan initiatives that would implement some
+of the recommendations, for example, that came from the
+President's Debt Commission. I'm just very interested in the
+perception. If we are going to do something for the first time
+that changes the repayment, or we are going to have some sort
+of onerous conditions, or we are actually seriously threatening
+not to raise the debt ceiling, to what extent does that impact
+global perception, market confidence in the United States as
+being a good repository for their investments?
+ Mr. Bernanke. We want to address our fiscal issues, but my
+argument is that we don't want to cast any doubt or uncertainty
+on the fact that the United States will make good its
+obligations. I think that is critical.
+ Mr. Blumenauer. And I think it is clear if, well, I will
+just say, I appreciate you have some limitations in terms of
+what you say, but I think it is obvious that if we are going to
+start playing games with something as routine as this, holding
+out the prospect that we are not going to actually meet our
+obligations, and even if it is seriously considered, not
+negotiations, not disagreeing about some elements, but
+considering that as the nuclear weapon. That has got to shake
+that confidence.
+ You mentioned health care. And that is something that is
+within our purview. There are some differences of opinion, some
+are not interested particularly in advancing the reforms that
+are in place as opposed to, perhaps an opportunity to
+accelerate, to actually put teeth into what we are doing and
+get down to cases to actually change that health care curve.
+ From your perspective, are we better off actually following
+through on the commitment to deal with health care reform and
+dealing with long-term costs or making this just one of these
+areas that we continually talk about, push back and forth, and
+make no progress?
+ Mr. Bernanke. It's out of my purview to support or not
+support a specific plan, but I do think it is very important
+and essential to the long-term fiscal situation that we address
+the costs, both for the private economy, but also for the
+federal budget, which are going to be increasingly a dominant
+part of our spending.
+ Mr. Blumenauer. Thank you, sir.
+ Chairman Ryan. Mr. Chaffetz.
+ Mr. Chaffetz. Thank you, Mr. Chairman. Mr. Chairman, thank
+you for being here. In January, you said that the Federal
+Reserve would not bail out state and local governments. Is that
+because you have no intention of bailing out the local
+governments or that you physically can't do it because the law
+precludes you from doing that?
+ Mr. Bernanke. I would say both.
+ Mr. Chaffetz. You mentioned that in page 8, at the very end
+of your testimony here, you said you mentioned that enhancing
+long-term growth potential of our economy, quote, by reducing
+disincentives to work. What are the disincentives that you see
+to work? What are the disincentives to work that you mentioned?
+ Mr. Bernanke. Well, I'm speaking generally about the tax
+code and also transfer programs that create, essentially, a
+very high marginal tax rate on earned income. And to the extent
+that we can simplify our tax code, reduce rates, broaden the
+base, eliminate the complexity, et cetera, in ways that would
+make it more financially attractive for people to work, save,
+invest, and so on; it is obviously good for our economy.
+ Mr. Chaffetz. Anything above and beyond the tax treatment
+that you have looked at that fall into that category from your
+perspective?
+ Mr. Bernanke. Again, tax and transfer policies would be the
+ones. I don't know what else are you thinking of, but those are
+the two that I would focus on.
+ Mr. Chaffetz. Thank you. The CBO records Fannie, and
+Freddie, and Budget, and uses fair-value accounting to measure
+the financial impact of the two GSEs. Moreover, not only does
+the CBO consider Fannie and Freddie as federal government
+entities, but it also treats the mortgages they guarantee as
+obligations of the government, scoring them on a market-risk
+adjusted present value basis. Do you agree with this budgetary
+treatment?
+ Mr. Bernanke. It's important that we take into account, in
+our budgetary planning, the cost and the prospective costs of
+Fannie and Freddie. Now, there are different ways to do that.
+As I understand it, the Fannie and Freddie are not fully
+consolidated with the federal budget and that is a decision
+that is been made to try to keep some separation between the
+government and those two institutions. But clearly, as we think
+about our budgetary situation, the costs that have already been
+incurred and may still be incurred for Fannie and Freddie are
+obviously something important to keep in mind.
+ Mr. Chaffetz. The Fed's been the biggest buyer of
+treasuries over the last several months. And the reports are
+that the Fed is now past China as the biggest owner of
+treasuries. Does that distort the bond markets and create
+dependency, and is this something that the Fed should be
+worried about?
+ Mr. Bernanke. We've been very careful to not distort the
+bond market. We've paid a lot of attention to that issue. We've
+monitored the market function. We've made sure that we don't
+own too high a fraction of any particular issue of government
+bonds, and our clear sense is that the treasury markets are
+functioning very normally, very liquid, and we don't see our
+policy, which again, is a temporary policy, as creating any
+particular problems for the market itself.
+ Mr. Chaffetz. There have, Mr. Chairman, there have been
+discussions out there in the newspapers and whatnot, other
+countries talking about pegging oil and whatnot to something
+other than the dollar. What type of concern do you have about
+this? Do you see this as a reality?
+ Mr. Bernanke. The currency in which goods are invoiced is
+really of not much consequence. Another question, though, a
+broader question is what currency is the reserve currency? The
+currency that countries hold their international reserves in?
+And the fact is that the U.S. dollar share of 60 percent plus
+has been pretty stable, and I really don't see much likely
+change in that. In fact, lately, given the problems of the
+Euro, et cetera, the dollar and the perspective growth in the
+U.S. economy, the dollar has actually been looking a little bit
+more attractive relative to some of the other currencies in the
+world.
+ Mr. Chaffetz. Thank you, Mr. Chairman. I yield back.
+ Chairman Ryan. Ms. McCollum.
+ Ms. McCollum. Thank you, Mr. Chairman. Chairman Bernanke,
+thank you for being here. I believe that we have a lot of work
+ahead of us, and I want to thank you for the work that you did
+in stabilizing our economy in the past, and I look forward to
+hearing some of your advice, suggestions, and ideas on how we
+move forward with getting out of the Great Recession. And I
+want to be part of the solution, and we hear a lot of talk here
+in Congress about spending, but I'm also concerned about a lot
+of the tax perks that lobbyists have been very successful in
+getting for special interests in our tax code, and I think that
+we need to put everything on the table.
+ But having said that, today, we've focused on spending
+quite a bit, as some of the questions have come through. And in
+fact, I'm going to paraphrase a popular Tea Party slogan; it
+goes something like, quote, The federal government doesn't have
+a revenue problem, it has a spending problem.
+ Now last week, Chairman Ryan put forward his best effort to
+reduce the deficit with spending target cuts, that is $41
+billion from the fiscal year 2011 budget. The Republican target
+reduces the fiscal year 2011 projected deficit by about 2.5
+percent. That leaves 97.5 percent of the deficit intact.
+ Now, in an extreme scenario, if all 176 Republican Study
+Committee members were able to have their way and take control,
+they would be allowed to cut four times what Chairman Ryan's
+best effort is. But that would only then still only represent
+10 percent of the federal budget deficit for fiscal year 2011,
+still leaving more than 1.3 trillion.
+ Chairman Bernanke, it seems clear to me that the deficit is
+not just a spending problem. Is it possible to reduce the
+federal deficit to responsible levels without capping or
+cutting defense spending and without looking at the tax perks
+that many corporations and lobbyists have been successful in
+getting?
+ And my second question is: With the type of cuts that are
+being discussed, do you think that we need to be insightful
+when making these spending decisions on what to cut, on the
+impact of jobs as well as U.S. competitiveness, and the global
+economy? I think we need to be careful of gutting domestic
+investments in education, infrastructure, and R&D in the next
+decade, because we might see reverses that would put us at a
+competitive disadvantage.
+ Mr. Bernanke. Well, on your second question, I'm hoping to,
+obviously, it is very important that the deficits be brought
+under control, but it is not just a matter of total spending
+and total revenues, it is also how smart is the spending and
+how are we using it? And the tax code, are we doing it in a way
+that is constructive for growth and for competitiveness?
+ So, I would urge the Congress not only to talk about total
+budget numbers, but also to think hard about the various
+programs and tax provisions to make sure that they are growth
+friendly, and that is a very important part of your job.
+ In particular, you mentioned perks, et cetera. I think one
+direction that at least should be considered would be, in the
+corporate tax code, for example, to reduce a lot of loopholes,
+to broaden the base, and therefore be able to lower the tax
+rate, which is now soon going to be the highest in the
+industrial world so that the decisions made by corporations are
+based, you know, not on tax distortions, but rather on the
+economics of where, for example, they should locate their
+plants, and so on.
+ So, I do think that growth friendliness is a very important
+part of this and that lower rates and broader base is something
+that most economists would agree is a good direction to go in
+the tax code.
+ On short-run versus long-run, I, again, I understand
+there's a lot of focus on this year's budget. Without
+commenting directly on that, I do think that in order to be
+credible, given that the budgetary problems get worse over
+time, that is as the baby boomers retire, as health care costs
+rise, and so on, given that the prospective deficits are rising
+over a long period of time, I would hope that a good bit of
+your discussion will be about the long-term over the 10, 15, 20
+year horizon and to the extent that you can change programs
+that will have long-term effects on spending and revenues. That
+will be a more effective and credible program than one that
+focuses only on the current fiscal year.
+ Ms. McCollum. Thank you, Mr. Chairman. As you know, we are
+setting the budget. We're setting the spending and Ways and
+Means does its issues with the tax code and addressing what I
+hope will be any tax perks. But I can't make a decision in
+isolation, so I look to all of us to put everything on the
+table so that we make a well-rounded decision as we move
+forward with the budget. So, Mr. Chairman, I'll be looking to
+see what your comment is.
+ Chairman Ryan. Thank you, Ms. McCollum, and I can only say
+what we are doing right now is our best; it is our first effort
+at getting fiscal control under this place. Mr. Ribble.
+ Mr. Ribble. Thank you, thank you, Chairman Ryan, and thank
+you, Chairman Bernanke, for coming in today. I'm one of the new
+freshman members. I have spent the last 30 years working in the
+private sector owning my own business. My questions today are
+going to relate around kind of two central areas. One is the
+debt ceiling that will hopefully get some understanding there,
+and then also, your take on lending a small business and inside
+businesses. But first of all, and I understand it too, that it
+might be reckless for the U.S. government to default on this
+debt. Would you agree that that is a true statement?
+ Mr. Bernanke. Certainly.
+ Mr. Ribble. Okay. Is it not also reckless to have the level
+of uncontrolled spending that the American people are
+witnessing by this Congress in the last 20 years or so?
+ Mr. Bernanke. Absolutely, and I don't mean to imply you
+shouldn't be addressing that, I just think you should do it as
+a separate measure.
+ Mr. Ribble. Yeah, okay. Understood. As a business owner,
+often, the lenders would impose their own debt limit on many
+companies. If we were reckless in our spending and our balance
+sheets didn't look very good, at some point they impose their
+own debt limits. Is it not likely at some point that the
+lenders to the U.S. Government are going to impose a debt
+ceiling of their own?
+ Mr. Bernanke. The bankers' debt limit is really a spending
+limit, it says you can't spend any more.
+ Mr. Ribble. Correct.
+ Mr. Bernanke. And you have already made decisions about
+what the government is going to spend and what revenues it is
+going to collect. That implies a deficit, and that has to be
+financed. If you set a limit that is too low, that just means
+basically that you can't borrow money that you have already
+spent. So, it is really an extraneous thing, once you set
+spending and once you set taxes, you essentially are, by
+definition, defining how much you have to borrow. And if you
+don't allow the government to borrow that, then, again, the
+only way to do that is not to make the required interest
+payments, which, your banker wouldn't like that, I'm sure.
+ Mr. Ribble. Correct, sure. Or the other alternative would
+be to either increase revenue or decrease spending so that you
+didn't exceed the debt. Correct?
+ Mr. Bernanke. If that can be done before the debt limit.
+ Mr. Ribble. Sure, sure. And my point is going back to the
+discussion of long-term because you just mentioned moments ago
+that it is important for us to look at a 10 or 20 year horizon.
+The American people are cynical that we are able to actually do
+that in such a way that in 20 years from now, we are still
+having this same discussion over again. And I think the fear
+that the American people have is that at some point, lenders
+are going to say to us, That's all we are going to lend, or
+We're going to price this at such a place that would be
+catastrophic to the economy.
+ Mr. Bernanke. That's a risk, yes.
+ Mr. Ribble. Do you see that as a legitimate risk over the
+next decade?
+ Mr. Bernanke. Yes.
+ Mr. Ribble. Okay. Thank you for that comment. There is
+almost a constant stream of constituents coming into my office
+since I have arrived here in Washington, D.C., discussing the
+difficulty that they're having finding, financing, and lending;
+their ability to borrow has been greatly restricted in the last
+24 months.
+ Can you talk to us a little bit about what it might take
+for local, medium, and national banks to begin to, once again,
+to loan money? What's causing the restriction?
+ Mr. Bernanke. Well, first, part of it came from the fact
+that banks, after the crisis, were deleveraging and cutting
+back themselves. Part of it came from the fact that the economy
+was very weak, and therefore, borrowers didn't look as
+attractive in their cash flows, their collateral values were
+less attractive than they were before the crisis.
+ So, there's both a supply and demand element to that. Now,
+I think that both of those things are looking better. Banks
+have increased their capital. They're feeling much more stable;
+they're much more liquid. And our sense, and we do surveys, is
+that banks, while they still have quite tight standards, are at
+least beginning to ease those standards and beginning to look
+more actively to find good borrowers. And so I think that is
+improving somewhat.
+ And likewise, as the economy strengthens, and we are seeing
+for example, increases in the prices of commercial real estate,
+which is what many small businesses use as collateral, that
+there'll be more small businesses that can qualify for credit.
+So we think things will be getting better slowly. The Federal
+Reserve is working very hard with both banks and small
+businesses to try to make sure that, at least from a regulatory
+point of view, that we are not preventing banks from making
+loans that they should make. We want them to make good loans.
+And we have been very clear about that in our instructions to
+banks and our training of our examiners.
+ Mr. Ribble. Okay. Thank you very much. Thank you, Chairman
+Ryan.
+ Chairman Ryan. Mr. Honda.
+ Mr. Ribble. Thank you, Mr. Chairman.
+ Mr. Honda. Thank you, Mr. Chairman. Welcome, Mr. Chairman.
+In your speech to the National Press Club on February 3, you
+noted that unemployment, which is, to me, the key economic
+indicator for the well-being of American people, will remains
+stubbornly high and that these conditions will improve
+gradually.
+ You also noted that the trajectories of our national
+deficit and debt are unsustainable. You went on to state that
+among the course of corrections needed to address these
+problems are investments in the skills of the workforce, which
+I am going to simply call education, and policy changes to
+reduce our deficits and debt.
+ I have two questions. My first question is in regard to the
+latter. The current rules of the House have taken the War on
+Terror off-budget, meaning that the costs of our conflict in
+Iraq and Afghanistan and other actions associated with the so-
+called War on Terror can be financed with debt.
+ Afghanistan alone represents the costs of approximately $10
+million per hour, 325 million per day, and $150 billion per
+year. Disturbingly, this is our country's largest long-term
+investment. So my question is will the savings that resulted
+from ending combat operations associated with the War on Terror
+reduce projected deficits?
+ Mr. Bernanke. If those expenditures were not necessary, of
+course they would reduce deficits, but I'm not qualified to
+comment on whether or not we should be engaging in that
+conflict.
+ Mr. Honda. But the budgetary action that we've taken, that
+we put it aside as, in the past we call supplements. What
+impact does that have on our debt and our deficits?
+ Mr. Bernanke. Well, clearly, additional spending for
+military or any other purpose, all else equal will add to the
+deficit.
+ Mr. Honda. So, if there's no revenue with sustaining that,
+and we take it off budget, we are essentially creating an
+automatic deficit and then a debt.
+ Mr. Bernanke. That's right.
+ Mr. Honda. Thank you. My second question, Mr. Chairman, is
+that I think it is very important to note that among other
+investments, including encouraging the scaling up of U.S.
+manufacturing by incentivizing purchasing new machinery and
+investment, promoting R&D, rebuilding public infrastructure,
+you single out education as an area of public investment that
+will promote economic growth. Would you explain to this
+Committee how public investment in education promotes economic
+growth?
+ Mr. Bernanke. Well, one of the key elements in economic
+growth that a lot of economists have identified is the skills
+of the workforce. And I would like to say that there are a lot
+of ways to impart skills. There is K though 12 education and
+college, certainly, but there's also junior colleges, community
+colleges, technical schools, on the job training, a variety of
+different ways, and that is always been a strength of the
+United States, that we have a diverse set of ways to help
+people get training. But I think that should be something we
+should be at least paying some close attention to.
+ It may or may not be a matter of money. It may or may be a
+matter of spending more wisely, but clearly, one of the
+concerns we have about our society is the increase in
+inequality between the richest and the poorest. There are many
+reasons for that, but no doubt the largest reason is that
+there's a part of our society which is not receiving the
+training that they need to get good paying jobs, and that is
+going to be a problem for us and it is a problem for our
+economy.
+ Mr. Honda. With the education, I would probably call that
+an investment. And, making that investment into education would
+be something that we can count upon as far as a return on our
+investments. And if we have an education system that is been
+completely decimated, what kind of impact do you think it would
+have on our investments, relative to the entire picture that we
+have before us today?
+ Mr. Bernanke. Well, it is very important to have a good
+education system, and we are not doing well on that count, and
+to help people get skills, there's a lot of dispute about
+exactly how to accomplish that, and you know, we could talk
+about that for quite a long time. So, I think we need to think,
+as a country, about how we can both increase the quality of our
+training and also make sure that it is broadly spread, so that
+everyone has a chance to get the skills they need.
+ Mr. Honda. Okay, and I understand that. Education comes in
+a lot of forms. In our investment in R&D, and investment in the
+other kinds of programs that we have, but the system of
+education and the Department of Education would seem to be one
+place where we can focus on this very complex problem of equity
+and equal distribution resources. Would you agree on that or do
+you have other comments on that?
+ Mr. Bernanke. Well, the Department of Education is
+certainly one place that can help review, and understand, you
+know, what's working, what's not working. I think, as a
+country, we are having a sort of a crisis of confidence, so we
+know how to provide broad based skills. So, I think that is
+really part of the problem; it is not just resources, it is
+also, you know, how do we do this better? And it is not clear
+that our models are working very well right now.
+ Mr. Honda. I appreciate your response. Thank you, Mr.
+Chairman.
+ Chairman Ryan. Mr. Huelskamp is next.
+ Mr. Huelskamp. Thank you, Mr. Chairman; I appreciate Mr.
+Chairman being here today. And I had a couple questions,
+particularly on the issue of job creation, and I'm a little
+confused from the testimony. On one hand, you do indicate, in
+your opinion, we are in a period of economic recovery. Is that
+correct?
+ Mr. Bernanke. Yes.
+ Mr. Huelskamp. On the other hand, you do indicate that the
+unemployment rate is apparently not where you would like it to
+be. A couple questions on that. What is the targeted
+unemployment rate that you would be comfortable with?
+ Mr. Bernanke. Well, the FOMC, the Federal Open Market
+Committee, makes projections on what the long run sustainable
+unemployment rate is, and currently those projections are
+between five and six percent of the labor force. That would be
+a more or less, a more normal level. That being said, I want to
+be clear that that doesn't mean that we would maintain maximum
+monetary policy accommodation until we reach that level. We
+have to withdraw that accommodation at some point before we get
+there, but that would be the area where we hope we could get
+back to.
+ Mr. Huelskamp. So, five to six percent. Is there a
+projected time period where that might occur?
+ Mr. Bernanke. At the rate we are going, it takes about two
+and a half percent real growth just to keep even because you
+need about that much growth just to make jobs for the new
+entrants to the labor force. So, if we were to average, just
+thinking hypothetically, four and a half percent growth, which
+is quite ambitious, it would still take us another four years
+or so to get down to the five to six percent range, so it could
+take quite a long time.
+ Mr. Huelskamp. And at the two and a half percent level, how
+many years would it take to reach?
+ Mr. Bernanke. It would take, essentially, I don't want to
+say infinite, but it would be very, very slow.
+ Mr. Huelskamp. Okay. And our current rate of growth is what
+for the last quarter?
+ Mr. Bernanke. In the last quarter, it was 3.2 percent, and
+we are looking for 2011 to be somewhere between three percent
+and four percent, so that should bring unemployment down over
+the year, but not very quickly.
+ Mr. Huelskamp. And at 3.2 percent, how long would it take
+to reach the five to six percent goal?
+ Mr. Bernanke. Well, that would lower unemployment by about
+three to four tenths a year. So that would be about 10 years.
+ Mr. Huelskamp. Ten years, but you still think your policies
+are promoting success if we are still projecting 10 years until
+we reach a decent unemployment level.
+ Mr. Bernanke. I am not projecting them. You asked about the
+fourth quarter, and that was 3.2 percent. We think that it is
+going to pick up in 2011 and possibly even further in 2012,
+depending on a variety of circumstances.
+ Mr. Huelskamp. And Mr. Chairman, I appreciate that. And we
+are all hopeful it does that, but one thing you do note is that
+you said, ultimately, at the appropriate time, the Federal
+Reserve will normalize its balance sheets by selling these
+assets back into the market.
+ A couple questions about that. If you believe it is a
+thriving economic recovery, can you provide information why you
+apparently believe that a sell-off would not have the opposite
+effect?
+ Mr. Bernanke. Well, it is the same pattern that we always
+see with monetary policy, which is that low interest rates help
+stimulate the economy. Once the economy has a self-sustaining,
+you know, once it sort of reached escape velocity, so to speak,
+then that monetary fuel can be withdrawn. And usually, with
+raising short-term interest rates, in this case it would
+involve both raising short-term interest rates and reducing the
+size of the balance sheets. So yes, as the economy begins to
+get stronger and develops its own momentum, then it needs less
+monetary policy support, and we have to begin to withdraw it,
+otherwise we would risk inflation, as Chairman Ryan was
+concerned about.
+ Mr. Huelskamp. So, even though we are kind of looking at
+four percent growth, maybe three, and you are comfortable that
+it won't take 10 years to return to normal employment levels;
+you are not certain. Is it more like five years we might have
+those normal employment levels?
+ Mr. Bernanke. It could be four or five years. I hope it is
+less than that.
+ Mr. Huelskamp. Yeah, I do too, and so do my constituents,
+Mr. Chairman, and my concern that if on one hand, you claim the
+policy is driving economic growth, even though it is very, very
+slow, from what would be the target, my fear would be that the
+reverse policy would potentially have that other effect.
+ Last thing, a quick question. I know you picked $600
+billion. Can you tell us again why you picked $600 billion
+versus $500 billion or say, $750 billion for the target?
+ Mr. Bernanke. We tried to make an assessment. We asked a
+hypothetical question: If we could lower this federal funds
+rate, how much would we lower it? And a powerful monetary
+policy action at normal times would be about a 75 basis point
+cut in the federal funds rate. We estimate that the impact on
+the whole structure of interest rates, from $600 billion, is
+roughly equivalent to $75 basis point cut, so on that
+criterion, it seemed that that was about enough to be a
+significant boost, but not one that was excessive.
+ Mr. Huelskamp. Thank you, Mr. Chairman.
+ Chairman Ryan. Ms. Moore is next.
+ Ms. Moore. Thank you so much, Mr. Bernanke. I have seen you
+many times on the Financial Services Committee, but I have had
+such a low ranking that it is been such a hard time getting an
+opportunity to actually ask you a question.
+ I do want to thank Mr. Huelskamp for his last question,
+because I was very curious about how you say in your testimony
+on page four that exit from the current, highly accommodative
+policy, at an appropriate time, would be very easy, and I think
+you may have answered my question when you spoke with him.
+ QE1 and QE2 have been very important, I think, in terms of
+preventing a financial catastrophe, and QE2 has been supported
+by a lot of economists. The Chamber of Commerce has endorsed
+it, American manufacturing is grateful for it. As a matter of
+fact, the manufacturer in my district, Harley Davidson, is
+really grateful for a QE2 in terms of boosting their exports.
+ But, you have been accused of everything from creating an
+environment for inflation with this QE2 policy. Everything from
+that to causing the riots in Tunisia and Egypt, so I guess I
+would like for you, because commodities are traded on dollars,
+and they say that food prices, commodities have gone up and the
+speculation on commodities have risen. So this QE2 policy
+really has been very inflammatory with respect to destabilizing
+the region. Can you please respond to that?
+ Mr. Bernanke. I'll be glad to. First of all, it doesn't
+matter what commodities are priced in; what matters is the
+currency of the country that is making the purchases, and they
+don't use dollars in Egypt. They use Egyptian pounds, and when
+the dollar weakens, which it has done very slightly, that would
+make the pound stronger, make them better able to buy
+commodities.
+ But I think the real issue in Egypt, for example, is the
+fact that Egypt is the world's leading importer of wheat, and
+we've just seen very bad harvests in Russia and Eastern Europe,
+which are their primary sources of wheat. And that is what's
+really happening, is that there are, on the agricultural side
+there have been droughts and other problems around the world
+that have affected crops.
+ Monetary policy can't add one bushel of corn to the world.
+I mean, basically, that is determined by agricultural
+productivity, and by the weather, and those factors. And we've
+just seen on the agricultural side that a combination of supply
+issues, like weather, crops, and increased demand from the
+rapidly growing emerging markets has put pressure on those
+supplies, and that is where that is coming from. I think
+monetary policy in the United States has really very little to
+do with the price of wheat in Egypt.
+ Ms. Moore. Good. And with respect to your creating an
+environment for increased inflation with QE2 and creating an
+inflation bubble here in the United States and traders being
+leery over these inflation threats. I am wondering what your
+response is to QE2. Because you say that you can exit this
+monetary accommodation; because eventually you are going to
+have to raise interest rates. Walk us through how you will exit
+this without creating inflation.
+ Mr. Bernanke. Well first, both actual inflation and
+expected inflation currently are low in the United States.
+Markets are not expecting high rates of inflation. Like I said
+before, the five year tips break even, which is a measure of
+market expectations of inflation: it is a little bit over two
+percent, which is about where we'd like it to be.
+ Obviously, we can't continue this level of monetary
+accommodation indefinitely because at some point, it would
+begin to create inflation concerns. And so, at some point, we
+do have to unwind some of this stimulus. In terms of how we
+would do it, of course, the usual question, the difficult
+question is choosing the right moment. But once we've decided
+when to do that, we can raise short-term interest rates as
+normal. We would do that by raising the interest rate paid on
+excess reserves to banks, which in turn would make them
+unwilling to lend in short-term money markets below that rate,
+so we can raise the short-term interest rate pretty much as we
+always do when we tighten monetary policy.
+ In addition, we have a number of tools, which I have talked
+about in great detail before the House Financial Services
+Committee that can help us drain bank reserves out of the
+system and reduce the liquidity in the system. For example, we
+had just recently been testing a time deposit program, whereby
+banks lock up their reserves with the Fed for a period of time
+instead of having them liquid and available whenever they want
+them.
+ So we do have the tools to do it. As always, we have to
+make the right call about when, you know, when the balance of
+risk is starting to shift, and we think the economy is strong
+enough and inflation has risen, and it is time to take action
+to avoid problems down the road, but it is really not all that
+different from normal monetary policy, in that respect.
+ Ms. Moore. Thank you very much, sir.
+ Mr. Bernanke. Thank you.
+ Mr. McClintock. Turns out I'm next. Mr. Chairman, thank you
+for being here. Earlier today, you testified before the
+Committee that not raising the debt ceiling would be a very bad
+thing because, and you specifically singled out, it would mean
+that interest would not be paid on the debt. In January, you
+told the Senate Budget Committee that we are not seeing
+extraordinary stress in the municipal markets, which suggests
+that investors still are reasonably confident that there won't
+be any default among major borrowers. One reason they might
+believe that is because most states have rules, which put debt
+repayment and interest payment at a very high priority above
+many other obligations of the state and locality. Wouldn't it
+be a good idea if the federal government did the same thing?
+ Mr. Bernanke. Well, it would reduce the risk with the debt
+limit, that is for sure. We haven't done that yet, of course.
+This comment that it would take some time to change our systems
+and computers, and so on, to make sure that we could change
+that prioritization in an appropriate way, but doing that
+would, I think, reduce some of the risks associated with the
+debt limit. But again, let me just be clear that we would need
+some notice to make that practical.
+ Mr. McClintock. But would you recommend it as a long-term
+reform?
+ Mr. Bernanke. Frankly, I, again, I would just prefer that
+you put the debt limit issue aside and just address directly
+the long-term fiscal problems, which I admit, and I agree, and
+in fact, I have been emphasizing, are very serious and need to
+be addressed. I'm not in any way saying that you don't need to
+address these problems; what I'm just saying is that that
+particular device, you know, at least under current law, has
+some risks in terms of the possibility that we would default on
+debt.
+ Mr. McClintock. What is the percentage of U.S. debt held by
+the public, that is held by American investors?
+ Mr. Bernanke. Less than half, I think.
+ Mr. McClintock. Roughly half.
+ Mr. Bernanke. Yeah.
+ Mr. McClintock. And what's the percentage of U.S. debt held
+by China?
+ Mr. Bernanke. About a quarter.
+ Mr. McClintock. A quarter of the total debt held by the
+public, my understanding is about 9.5 percent.
+ Mr. Bernanke. If you have the numbers there, you may be
+right. But I think they hold more than two trillion of U.S.
+Treasury, and that would be closer to 20, 25 percent.
+ Mr. McClintock. Okay. Well, nevertheless, giving priority
+to debt repayment, we are still, apparently, overwhelmingly
+favor American investors to Chinese, would it not?
+ Mr. Bernanke. Well, certainly. But, more importantly, the
+financial markets globally are where we borrow and if investors
+lose confidence in us, they won't lend to us in the future,
+which means that we will have a fiscal crisis almost
+immediately.
+ Mr. McClintock. Right, which means guaranteeing our debt
+service would provide greater confidence to those investors,
+would it not?
+ Mr. Bernanke. It would, again, subject to technical ability
+to make that reprioritization effective in a short-time.
+ Mr. McClintock. Mr. Chairman, you also testified today that
+as the economy begins to grow rapidly and inflation begins to
+rise, the Federal Reserve would then reverse the qualitative
+easing. And I'm just wondering how does the Fed intend to drain
+$1 trillion in excess reserves.
+ Mr. Bernanke. Well first, we can raise interest rates
+without even draining reserves, as I mentioned, by raising the
+interest rate paid on excess reserves to banks. But we have
+released three other tools for draining reserves.
+ Mr. McClintock. If I could just pause right there. How much
+would you have to increase?
+ Mr. Bernanke. What we would do is we want to raise the,
+say, we wanted to raise the short-term interest rate to one
+percent. Then if we paid one percent on excess reserves to
+banks, they would not be willing to lend money to the money
+market at less than one percent, and that would essentially
+achieve our objective right there. But there are other tools we
+have to drain reserves, including time deposits, reverse repos,
+asset sales, and perhaps others.
+ Mr. McClintock. As you do that, what's the impact on the
+economy?
+ Mr. Bernanke. Well, it'll be a tightening monetary policy,
+again, as interest rates will go up. And that will slow the
+economy, but that is what taking away the punch bowl always
+does. It means that the accommodation is no longer needed, the
+economy can move forward on its own, and so the point there is
+to try to normalize interest rates, normalize financial
+conditions so that you can get back to a healthy growth path
+without inflation.
+ Mr. McClintock. There are some of us long enough of tooth
+to remember a day when we had, not only double digit
+unemployment, but double digit inflation and interest rates at
+21 percent. What can you tell us to allay our fears?
+ Mr. Bernanke. Well, I can also mention that since the early
+1980s, between the early 1980s and 2007, when central banks
+began to understand the critical importance of keeping
+inflation low and stable, that the U.S. economy not only had
+low inflation, but it also had a much more stable economy, and
+that was a 25 year experience. So the difference is that we
+have no illusions about it being not so bad to let inflation
+rise. We are strongly committed to keeping inflation low and
+stable, and we will do so.
+ Mr. McClintock. Next is Ms. Castor.
+ Ms. Castor. Thank you very much, and welcome, Chairman
+Bernanke. Not unlike many places in the country, my home state
+of Florida was hit particularly hard by the Great Recession. It
+seemed like it started earlier in Florida, in 2007, because the
+housing bubble burst, and we were so tied to real estate
+development. And the job losses happened so quickly, at the end
+of 2008 and early 2009, and we are still in the double digits
+in Florida. You say in your testimony that there is some
+optimism for on the unemployment front, but we need more.
+ I think folks at home look at the economic indicators, and
+they see there is plenty of hope out there; corporate profits
+are way up, consumer spending is up, we've had six straight
+quarters of economic growth, but the bottom line for families,
+it is that job. And they need the swifter job growth.
+ The economic drivers in my area, the port, the airport, the
+universities, and research centers, the public schools, and
+small businesses, and tourism, and businesses; and all of them
+benefited by the Recovery Act investments. The Recovery Act
+investments are coming to an end now and business owners and
+others in the community are torn; they're hearing this
+schizophrenic message from Washington.
+ They understand that we've all got to live within our
+means, and they do it every day. But they also understand that
+those infrastructure investments and keeping the colleges and
+universities healthy and able to do the research, simply
+attracts private investment and allows them to hire, in the
+long run. So they're hearing a lot of talk about, We've got to
+cut spending, cut spending, cut spending, but they are also, at
+the same time, clamoring for additional public investment. It
+is only government that can dredge the ports so that the oil
+tankers can come in, the cruise ships can come in, all the
+private businesses can continue there.
+ What can you share with them on this schizophrenia between
+investment and living within our means and where we should be
+headed here in future budget years?
+ Mr. Bernanke. Well, it is not an easy problem. Of course,
+you know, the reason that the Federal Reserve is doing what we
+are doing is to try to promote job creation, which we think is
+a very serious concern. But Florida, like California, Nevada,
+and a few other kind of States, were particularly hard hit
+because of the real estate decline.
+ We do have to live within our means. The Congress needs to
+try to find ways to make sure that, over the longer term, that
+our revenues and our expenditures are close enough that debt
+does not grow without limit. You know, we just really don't
+have any choice about that; that is just something we have to
+do. But as I tried to indicate in my remarks, at the end, that
+doesn't mean we can't think about the money that we are
+spending. Can we do it better? Can we use the money more
+effectively? Can we do it in ways that will be more growth
+promoting? And, you know, one way to do that, for example, is
+to think hard about health care costs, which are so very high,
+and see whether there are savings there that could be, for
+example, that could be put into, sort of more growth friendly
+types of investments.
+ But I appreciate your quandary. You know, we'd like to be
+able to undertake all these different projects, but we have to,
+at least in the longer term, we have to have a budget that will
+be reasonably in balance.
+ Ms. Castor. So, it would be helpful for me and others to
+explain back home what you have said in your testimony
+regarding the long-term fiscal challenges confronting the
+nation. The two most important driving forces behind the budget
+deficit are the aging of the population; they'll like that in
+Florida. And rapidly rising health care costs. And the CBO
+projections of federal spending for health care programs will
+roughly double as a percentage of GDP over the next 25 years,
+and may be explained to business owners there that rely on
+certain infrastructure investments, investments in education,
+and innovation that the strategy is working together to
+continue to make those strategic investments, but look at the
+long-term issues, especially surrounding health care and the
+aging population.
+ Mr. Bernanke. Yes.
+ Ms. Castor. Thank you very much. I yield back.
+ Chairman Ryan. Mr. Flores.
+ Mr. Flores. Thank you, Chairman. Mr. Chairman. Chairman
+Bernanke, thank you for joining us today. I appreciate your
+service to the country and to the Federal Reserve.
+ My first question starts with two principles. The first
+principle is there's a natural debt level for any organization,
+be it a country, a company, a family, whatever. They cannot be
+exceeded without substantial turmoil, and I think you talked
+about that in the past, about the turmoil our country will face
+if we continue to live beyond our means.
+ The second principle is that interest rates are made up of
+two components. The first component is expected inflation; the
+second component is a risk premium, which investors in that
+instrument want to receive for the perceived risk, the
+instrument.
+ Treasury rates have gone up quite a bit in the last few
+months. Your testimony today says that expected inflation is
+going to be low, so that implies a substantial increase in risk
+premium, which further implies that we are getting close to a
+natural debt limit. So my question for you is: What is the
+natural debt limit of the United States government? And you can
+answer it in one of a couple forms, either an absolute number,
+which would mean you ought to be in Las Vegas gambling, or as a
+percentage of GDP. So, I'd like some help with that, please.
+ Mr. Bernanke. Well first, on interest rates, there is a
+third component also, which is the expectation of future short
+rates, which in turn, is tied to growth. So, one important
+reason that rates have gone up so much, and stock market had
+also gone up so much, is that markets are becoming more
+optimistic about growth in the U.S. economy, so that is a good
+thing.
+ Now, there may be part of the increase, I don't know how
+much, maybe a little bit, that is related to concerns about
+government fiscal policy, which is the other part of your
+question. There's no magic number for what ratio of debt to GDP
+is the limit. If we look around the world, we see that
+countries in the 60, 70 range, which is where we are now, are
+generally pretty comfortable.
+ If you look at Greece, which is 120 or Japan, which just
+got downgraded, because it is at 200, you know, numbers above
+100 then are certainly very concerning. Of course, you always
+want to leave some space for a recession, or a war, or some
+other kind of emergency. So, I hope that we can stabilize the
+debt-to-GDP-ratio somewhere not too much higher than we are
+now, would be the ideal thing. But, I don't think there's a
+magic number, but the higher it gets, the more of your annual
+appropriations are going to pay the interest on the debt. And
+that is in a way, a drain on what the government could
+otherwise be doing.
+ Mr. Flores. Thank you. Question number two is: You said
+today that we are on an unsustainable path, but in testimony,
+or in interviews you gave back in June of last year, you
+indicated that you felt like it was inappropriate to reduce
+spending or to increase taxes at that point in time.
+ But still, on the deficit, you said we need to reduce the
+deficit. So, you put us, let me rephrase that. If you are in
+our seat, there are not many tools left. So, which direction do
+you go first? Do you reduce spending? Do you raise taxes?
+What's the recommended approach?
+ Mr. Bernanke. Well, the spending versus taxes or the
+composition of spending and taxes is a congressional
+prerogative, a congressional responsibility. But what I think
+is the right way to do this, which on the one hand, doesn't put
+too much pressure on the recovery, which is still ongoing, but
+at the same time, makes credible progress towards a balanced
+budget and a sustainable fiscal trajectory, is to talk about
+longer term windows and look at the 10 year window, for
+example, and take actions which are credible, that will cut
+spending, perhaps in the near term, but will cut spending more
+as you go forward in time, or raise taxes, if that is the
+decision that Congress makes.
+ So, this is a long-term problem. The numbers that we are
+looking at go out to 2035, 2050, that is when the problem
+really gets, basically, just unbearable. So anything that can
+be done now to change that path, change that trajectory going
+forward over the next decade or two decades, those are the
+kinds of things that will be effective and will have good
+impact on the current economy and current interest rates, as
+well as restore confidence in our fiscal policy.
+ Mr. Flores. Thank you.
+ Chairman Ryan. Mr. Tonko.
+ Mr. Tonko. Thank you, Mr. Chair. Dr. Bernanke, thank you
+for your expertise that you lend to this economic recovery.
+When you came before this Committee last June, you predicted
+that the economic growth rate, our GDP, would rise to an annual
+rate of just over three percent for the last month of 2010, and
+that it very well could increase over the course of 2011.
+That's nearly a double digit turnaround from the six percent
+downturn that we witnessed under the end of President Bush's
+administration. Has your forecast, in your opinion, proven
+accurate in terms of how you calculated it and its bottom line
+result?
+ Mr. Bernanke. Well, we were disappointed over last summer,
+as the economy slowed down, and that is why in August,
+essentially, we basically began to take the steps towards this
+second round of so-called quantitative easing. Since we've done
+that, the markets have strengthened again and the outlook has
+improved, and so the numbers you gave, the fourth quarter was
+3.2 percent, and now, looking forward into 2011, you know, most
+forecasters think between 3 and 4 percent is about right. And
+of course, these things are very uncertain, but that does seem
+to be about where we, at this point, were predicting.
+ Mr. Tonko. We hear on the Hill here in Washington, in
+Congress, and certainly within the microcosm of the Budget
+Committee in the House, different philosophical approaches or
+programmatic responses to best grow the recovery of our
+economy. That being said, some of our colleagues, from friends
+across the aisle, have been very enthusiastic about these
+numbers, claiming that the growth that we've seen in the last
+three months is related to the outcome of the November
+elections.
+ I would ask, is there, within your calculus for these
+projections, was there a result in the November elections that
+guided whatever your forecast would be? In other words, did you
+need to know who would win the elections?
+ Mr. Bernanke. We don't take election results into account
+in our forecasting, but I couldn't really make a judgment on
+that.
+ Mr. Tonko. I agree with you, that it is more policy-driven
+than politics. And so, can you cite for us, what did go into
+your calculation, your forecast, on growth and employment? And
+specifically, can you emphasize the main elements that we need
+to focus on in order to best drive numbers to help the economy
+improve and become more stable?
+ Mr. Bernanke. Well, in terms of what happened since the
+late summer, there have been two policy initiatives at the
+Federal Reserve, QE2, which really came into effect in August,
+because that is when we began to re-invest our maturing
+securities and we announced, at least we indicated that we were
+seriously considering additional securities purchases. The
+other step that is been taken, of course, is the agreement that
+took place during the lame duck session about extending tax
+cuts and creating a payroll rebate, tax rebate, and so on.
+ So those two things have, I think, been positive in terms
+of near-term growth. Going forward, it is much more difficult
+because the fiscal space and the monetary space, and both sets
+of policies have much less room to operate than they would have
+under normal circumstances. So, as I was saying before to Ms.
+Castor, I think it is very important to think about the
+composition of what you are doing. Is it growth friendly? Is it
+going to increase confidence? And look for things that will,
+you know, increase productivity, for example.
+ Mr. Tonko. Thank you. I appreciate your expertise and would
+hope that, within the spirit of bi-partisanship and the growth
+of consumer investor confidence, we can move forward with a
+progressive bit of policy that will bolster this economic
+recovery and lead to the best way to move forward.
+ Just a final question out of the median annual wage for
+American workers, fall into some $26,000, means that just about
+that half of our workforce is making less than that $26,000
+figure. And at the end of 2010, we okayed a tax plan that
+actually raised taxes on those individuals who make under
+$20,000 per year, while relieving the tax burden on our
+wealthiest families. Since those first payments came home in
+mid-January, I have been hearing from dismayed and outraged
+constituents on that outcome. If we continue to finance tax
+breaks for the top 1 percent, at the expense of our bottom 50
+percent of wage earners, how would that impact on the consumer
+spending out there, that you noted is necessary to help lead us
+out of the economic woes?
+ Mr. Bernanke. The distributional aspects of taxes are very
+contentious. I am sorry I'm not going to be able to really give
+you the answer you want, because I think, ultimately, there is
+both decisions about equity and decisions about efficiency that
+go into those tax code decisions.
+ So, I am going to leave that particular decision to the
+Congress, only note that you have to pay attention to the
+overall revenue collection as part of the plan for restoring
+budget balance over time.
+ Mr. Tonko. Why, thank you very much.
+ Chairman Ryan. Mr. Lankford.
+ Mr. Lankford. Thank you, Mr. Chairman. Chairman Bernanke
+thank you for coming. I'm sure it is your favorite day of the
+week, every time that you come up to the Hill and get a chance
+to spend the morning with us, so thank you for doing this.
+ In Oklahoma, where I represent, there have been a very
+large community banks that I have chatted with, that are very
+frustrated with the regulatory environment that is coming down.
+They feel like some of the largest banks in America made some
+mistakes, and they're being punished for it. Lending has slowed
+down dramatically, and they look at a single element for that.
+They look at the regulatory environment that is surrounding
+them.
+ Personal perspective from you: Where do you think the
+community banks stand, as far as any need to circle around in
+capital requirements and change the rules from discretionary to
+now? That is really what the rule is on areas. How do we free
+up the flow of money and the lending in smaller community banks
+in rural communities?
+ Mr. Bernanke. Well, first, community banks have really
+shown their worth in this lending crisis. As many larger banks
+withdrew from small communities or from small business lending.
+A lot of community banks stepped up and began to make more
+loans, and that just shows the value of their personal
+connections and their knowledge of the local community, and so
+on.
+ I absolutely agree with you that small banks should not
+bear, and cannot bear, the same burden of regulation that the
+largest banks bear. They certainly don't pose the same risk to
+the financial system, for example. So what the Federal Reserve
+is doing there is several parts. I mean, first, we have added
+new committees and advisory groups to our regular routine,
+where the board meets with outside committees to create special
+roles for community banks. So, we have a new subcommittee on
+community banking; we have a counsel of community bankers that
+comes three times a year to meet with the board and talk about
+their issues; and we want to make particularly sure that as we
+implement the Dodd-Frank regulations, for example, which are
+mostly aimed at large, systemically critical banks, that we are
+very attentive to the possible implications for small banks.
+And we do want to do that.
+ The other thing that we've tried to do, and this is for all
+banks, is that we recognize that in some cases after a crisis,
+that bank examiners can become very conservative, because they
+don't want to see their bank, you know, fail, and be
+responsible for that. And as a result, they may put pressure on
+banks not to make, what would otherwise be potentially good
+loans.
+ We've done all we can to fight against that by issuing
+guidance to our examiners and to the banks, that we want loans
+to be made to credit-worthy borrowers by training our
+examiners, by having meetings all across the country with small
+businesses and small banks. So we are very focused on that
+issue, and I think we've made some progress and what I'm
+hearing and what we are seeing from surveys is some modest
+improvement now, in terms of the lending environment for small
+business, and some growth among community banks.
+ Mr. Lankford. Well, let me just say to you, from the
+Oklahoma perspective, there has been growth in that area. It
+has been very modest, because there's continued frustration
+with individuals that are saying, I need to lend and have
+plenty of folks that want to be able to borrow, but I'm tapped
+out in all these areas and my regulators are telling me this,
+and I'm stuck. And companies in the local areas are saying, I'd
+like to borrow, I'd like to expand, I'd like to hire more
+people, but currently the bank is hiring more compliance
+officers and we are doing less lending. And that is a very bad
+formula for what is actually functional for us.
+ Mr. Bernanke. I agree with you.
+ Mr. Lankford. Let me mention a couple things. Right now,
+you mentioned the high priority for you is dealing with
+unemployment, which great on that. Then I'm sure there are
+times in different quarters you deal with inflation. How do you
+balance out what formula do you work through to say, I am going
+to balance, this quarter is going to be more on inflation, this
+quarter is going to be more on unemployment numbers. How do you
+all make that decision?
+ Mr. Bernanke. We do it based on a variety of models and
+other things that help us project forward, where we think the
+economy is going to go. And right now, our models are showing
+that unemployment is likely to stay high for some time, as I
+was discussing earlier, and inflation, notwithstanding, we know
+about the commodity price increases, of course we are paying
+close attention to that, but notwithstanding that, underlying
+inflation looks to be still pretty low. And so, based on that,
+we think accommodative policies are still warranted.
+ We are very committed to price stability. We are not buying
+into any idea that we can get some more employment by letting
+inflation get higher than normal. We're not going to do that.
+We want inflation to be somewhere around 2 percent, or a bit
+less. So, as our models begin to suggest that the economy is
+moving towards those desired levels, then, you know, just like
+a quarterback has to lead a receiver, we have to begin to move
+before the economy gets there because we've got to withdraw
+that stimulus in advance of the point to where we get to where
+we want to be. So, even though models, and projections, and
+forecasts are obviously not always accurate, they are really
+our best tool to try to analyze at what point we need to begin
+to pull back on that support and begin to worry more about the
+inflation side and less about the employment side.
+ Mr. Lankford. Okay, thank you, Mr. Chairman, I yeild back.
+ Chairman Ryan. Mr. Ryan.
+ Mr. Ryan of Ohio. Thank you, Chairman Ryan. I appreciate
+it. Thank you, Dr. Bernanke. One of the mandates for the Fed is
+to keep unemployment low. There are some folks in town who
+think that that should no longer be the role of the Fed. How
+would you have negotiated this crisis, and where would we be
+today if you didn't have that mandate?
+ Mr. Bernanke. Well, our policies would probably have been
+somewhat similar, because from both sides, I mean, we had both
+high unemployment and low inflation, so both of those things
+have moved us to be accommodative. That being said, in
+situations like this, where unemployment is very high, and
+inflation is low, I think that monetary policy does have some
+scope to support recovery, and therefore, to help on the
+employment side. So, I say that, but again, re-emphasizing that
+just like other central banks, the Federal Reserve is very
+committed to price stability, and we will make sure that that
+happens as well.
+ Mr. Ryan of Ohio. Would we have the unemployment numbers
+today if you didn't have the ability, or the mandate to look
+out for unemployment and try to keep it low?
+ Mr. Bernanke. It is really very hard to tell, because
+again, inflation is also very low, so we might have been, we
+certainly would have had very easy policies anyway because of
+the need to keep inflation away from the deflation zone, to
+keep inflation away from zero. That being said, maybe it would
+have been somewhat less accommodative.
+ Mr. Ryan of Ohio. Well I'm just concerned that if we get in
+this situation again and the Fed doesn't have that ability,
+that we could be in a worse scenario to recover and come out of
+this stuff. One of the things that struck me, one of the
+gentlemen from the other side asked you about, you said
+ambitiously four and a half percent growth, and if we had that
+ambitious growth, it would still take five years, and if we had
+three-plus growth percent a year, we would take 10 years to get
+out of here. That's a lost decade, as far as I can tell. We're
+in the same position Japan was in during the 1980s. I mean,
+that is unacceptable to me. I'm from Ohio; we have cities in my
+district that are 10, 15 percent unemployment. Crime is going
+up; we have all these social problems that are happening
+because people are out of work. What else could we do here,
+from the legislative side that could help drive that number
+down quicker?
+ Mr. Bernanke. It's very difficult and no easy answers given
+where we are. The one suggestion I have, and I have been trying
+to reiterate this, is that even as you are looking at budget
+cuts and balancing the budget, all of which is very important,
+it is also important to be thinking about the composition. Can
+you, for example, can you make the tax code more growth-
+friendly? Can you improve the way your spending is allocated?
+ Mr. Ryan of Ohio. Put additional investments in
+infrastructure, like you mentioned, you know, $50 billion, $100
+billion in the next year or two for infrastructure that needs
+to get done anyway in education, in job retraining that would
+put people directly back to work. Is that something that would
+help drive down this unemployment rate quicker?
+ Mr. Bernanke. What I would like to see it combined with a
+longer-term perspective that maintains budget discipline over
+the next few years. Otherwise, a risk might be that interest
+rates would go up and that would undo some of the benefits.
+ Mr. Ryan of Ohio. I think we are all in agreement that the
+long-term demographics and health care costs, and that is what
+we tried to deal with the Health Care Reform Bill, which CBO
+says will save us a $1 trillion in the second decade and almost
+$200 billion in the first decade, that is what CBO is saying.
+And also some disincentives to work that were mentioned
+earlier. One of the disincentives to work I experience with
+folks in my district is, they're better off being on Medicaid
+because they have health care for their kids. Health care
+reform is now an incentive to go back to work, because you will
+be rewarded with health care. So I think those are two things
+that need to be addressed. So I think we need additional fiscal
+stimulus to drive unemployment down, we shouldn't be so worried
+about inflation in places outside of our country so much, and I
+think we've got to worry about jobs here at home.
+ One final question on Chinese currency, do you still
+believe that the Chinese are manipulating their currency, and
+if they are, is that fueling the inflation in China? And how is
+the manipulation of Chinese currency affecting our ability to
+recover here in the United States? So I just wrapped three into
+one there.
+ Mr. Bernanke. Their currency, the renminbi is undervalued;
+it would be both in our interest and in Chinese interest for
+them to raise the value of their currency, and it would help
+them with their inflation problem. One of the things that is
+happening, which is a little surprising in a way, is that they
+have an inflation problem and the way they are addressing it is
+not by raising their currency value, which would reduce the
+demand for their exports. Rather, they are leaving it where it
+is, and they are instead trying to reduce domestic demand
+through higher interest rates. And it would seem like a better
+strategy would be to let domestic demand be what it is, and let
+people enjoy a higher standard of living in China, and reduce
+their exports via a higher exchange rate. So yes, it is a
+counterproductive policy both for them and for us, and it is
+contributing to the still-large global imbalances in terms of
+current accounts that we see around the world. Thank you.
+ Mr. Ryan of Ohio. Thank you, Dr. Bernanke.
+ Chairman Ryan. Mr. Mulvaney.
+ Mr. Mulvaney. Thank you, Mr. Chairman. Dr. Bernanke, it is
+a privilege to be here and to bring you greetings from Dillon,
+South Carolina, which I have the honor to represent. Thanks for
+doing this. Very quickly, I'm going to try and bring us back to
+the budget process because we are getting ready to start that
+here right away. And one of the things that obviously we look
+at, I know you have looked at, is the CBO baseline projections,
+which were made available to us, I think, last week. And I'm
+comparing it to what I'm seeing happen in the bond market, we
+saw I think the 10-year Treasury go through 3.5 percent on
+Monday, 3.7 yesterday, I understand as recently as 11:30 it was
+still trading above 3.7. When you look at the CBO's projections
+for what the interest rates will be over the course of this
+year, they assume a 3.4 percent rate for the 10-year Treasury
+for the balance of this year. Is it fair to say, sir, that the
+CBO may have underestimated the interest-rate environment that
+we are going to see for the balance of 2011?
+ Mr. Bernanke. I would say that since we are at 3.7 now,
+that reflects anticipation of higher growth. Of course, as you
+know, the rates change pretty radically. I don't happen to know
+what the CBO expects for next year. I think for the longer-term
+horizon, it is the whole path that matters. But as the economy
+recovers and normalizes, you would expect interest rates to go
+up.
+ Mr. Mulvaney. It's 3.8 percent for next year and roughly
+3.5 percent over the course of the next several years. My
+concern, obviously, is something that you referred to earlier,
+which is that we are so exposed on our debt at roughly $14
+trillion that they even admit, by the way, the CBO does, that
+if they are off by just 1 percent on their estimates for
+interest rates, it translates into an additional 1.3 trillion
+dollars worth of debt over the next decade.
+ Brings me to the next issue which you have heard discussed
+a couple times, which is the debt ceiling. And I have heard the
+back-and-forth, and you said something that caught my
+attention, which is that you were concerned, obviously, that
+some of the proposals that may have been offered, including
+Senator Toomey's, you had some questions about the workability
+of that. About trying to prioritize spending amongst debt
+repayment, interest repayment, and various benefit programs.
+Given our fiscal situation, if we were able to figure out a way
+to work through those workability problems, if we were able to
+figure out a way to prioritize, would that assuage your
+concerns about using the debt ceiling as an environment to have
+some discussions about changing our fiscal policy?
+ Mr. Bernanke. Well, my concern, since I'm mostly involved
+in the financial side, my concern is about, you know, not
+defaulting on the debt, and I think that for me is a very high
+priority. So that would help, on that count, very much. You
+still would be in a position, of course, where you would be not
+paying contractors, for example, you would be not putting out
+Social Security and Medicare checks and those things, and if
+you think that is something you are willing to do, that is
+really up to Congress to decide.
+ Mr. Mulvaney. That's fair enough. Last question, we have
+talked about your plans to exit this expansionary policy when
+you see the need to do so, and you have talked about raising
+rates, talked about redeeming some of the securities that you
+hold. Are you satisfied that you will be able to do that
+quickly enough to react to inflationary concerns?
+ Mr. Bernanke. Yes, we can raise short-term interest rates,
+which are the main tool we have, essentially as quickly as we
+like. Because we can raise the interest rate we pay on excess
+reserves to banks. So yes, we don't have to sell off all our
+assets to tighten policy. We can do it via our control over
+short-term interest rates.
+ Mr. Mulvaney. Have you given serious consideration to not
+completing the QE2 program?
+ Mr. Bernanke. We review that program at every meeting. We
+have another meeting coming up in the middle of March. And we
+will, as we always do, we are going to look at the outlook for
+both employment and inflation, and it is certainly possible. We
+take very seriously that this is a program that needs to be
+looked at every meeting, and in light of however the economic
+news comes in.
+ Mr. Mulvaney. Given that QE2 is more of the unusual and
+extreme, extreme is not the right word, but the more unusual
+tool that you are using this period. Would it be fair to say
+that you would consider ending QE2 before raising short-term
+rates?
+ Mr. Bernanke. Yes, I think that will be the most likely
+outcome, yes.
+ Mr. Mulvaney. And the last question I have got; maybe it is
+not a question, it is a point. There's another $1.4, $1.5-
+trillion gorilla in the room, isn't there, in terms of the
+amount that gets dumped in the system, the expansionary
+policies that we are talking about, which is our fiscal policy.
+ You have no control over our fiscal policy and you could do
+everything possible to tamp that inflation, to restrict
+monetary expansion policy, and if we continue to spend a bunch
+of money we don't have, we will be contributing to the
+inflationary pressures, won't we?
+ Mr. Bernanke. Yes, but I think even more severely, you will
+be contributing to financial problems, stress in the financial
+markets.
+ Mr. Mulvaney. Thank you, sir.
+ Mr. Bernanke. And say hello to my friends in Dillon for me.
+ Mr. Mulvaney. I'd be happy to. Thank you.
+ Mr. McClintock. Mr. Pascrell is next.
+ Mr. Pascrell. Thank you Mr. Chairman, Dr. Bernanke, thank
+you for laying bare some of the myths for us on both sides of
+the aisle, about the financial situation that we face today and
+the financial situation we actually faced a few years ago, and
+hopefully, we will learn and move on.
+ I want to thank both Chairman Ryan and Ranking Member Van
+Hollen because of this civil tone that the questions have
+taken. I think it is struck me, maybe it is normal for all of
+you. So, I will try to continue on that avenue. I will try my
+best.
+ For the past several months, some folks have been promoting
+the myth of a Europe, with an overrun health care system,
+overbearing government, and economic stagnation. But not long
+ago, some of these same people had nothing but praise for the
+same country's low taxes, low spending economies. So, the
+problem of this theory is that it is incorrect, I think.
+ Ireland ranked near the top of the Heritage Foundation's
+so-called Economic Freedom Index, while sitting on a property
+bubble, fueled by banks that had run wild. Then the bubble
+burst, and the revenue dropped, and the public debt exploded.
+ We need to remember, my good friend, the mayor of New York,
+who said a year and a half ago when he was running, that what
+we need to do, it won't be too long before a return, it'll take
+us four or five years before we return to where we were in
+2006.
+ The point is, we don't want to return to what it was in
+2006, because that is the problems that we did not address, and
+we see the systemic and we see the results of not addressing
+them. So, these countries are relying on the same theories of
+slash-and-burn budgeting that is being talked about here, not
+just today. The problem is it doesn't work.
+ For instance, Britain: its gross domestic product fell 0.5
+percent in the last quarter of 2010, widespread losses in
+construction, widespread losses in transportation, and in
+services rendered to the public. So, I think we are all here to
+roll up our sleeves, with your direction and advice, address
+our long-term deficit. But we cannot pull the legs out from
+under the recovery, and I think this is your message. Correct
+me if I'm wrong. By taking a slash-and-burn approach to
+government operations, or hold the full-faith credit of the
+country hostage.
+ Mr. Chairman, what do you see as the results of the
+immediate and drastic cuts to the federal budget? What would be
+the result, in your view?
+ Mr. Bernanke. Well, I think if that is all that was done,
+that the costs to the recovery would outweigh the benefits, in
+terms of fiscal discipline. I think we really need to take a
+long-term view. Now, maybe a little bit of a down payment is
+needed, but we need to show that we have a plan that will carry
+us forward for the next decade at least, that will produce
+consistent reductions in that deficit over time, and it has the
+benefit of allowing us to think it through, and to take the
+time needed to change programs, et cetera. So, again, my
+message is that, I think, that the best approach is to take a
+longer term perspective.
+ Mr. Pascrell. This is not just the one or two year
+solution.
+ Mr. Bernanke. It is not a one or two year thing. Nothing we
+can do this year will serve this long-term problem.
+ Mr. Pascrell. I think folks on both sides of the aisle have
+to understand that. On our side of the aisle as well. So, there
+has to be cuts to the budget; there's no two ways about it. We
+cannot continue, and we cannot continue to have tax cuts that
+are not paid for, where we have no offsets, like we did in
+2001, 2003. We were warned in those years; we were warned in
+1999, before those things ever happened.
+ And obviously, we did not heed them. My last question is:
+Is it your opinion that whatever deficit savings, we would find
+an immediate and drastic slash approach to the budget, would be
+lost to an economic downturn or stagnation? Do you agree with
+that?
+ Mr. Bernanke. I don't know quantitatively, but I do think
+there is a concern about only focusing on short-term cuts,
+because of the recovery, which is, obviously, still not
+complete. I think cuts, combined with a long-term perspective,
+will be both less painful for the current recovery and also
+more credible in the bond markets.
+ Mr. Pascrell. Thank you, I do appreciate it. Thank you,
+Chairman.
+ Mr. McClintock. Our time is fleeting and the staff has
+suggested and the minority has agreed that we go to three
+minutes, if there's no objection, on the remaining questions.
+So, without objection, we will next go to Mr. Akin.
+ Mr. Akin. Thank you, Mr. Chairman. It seems like when we
+talk about dealing with the budget deficit, it reminds me a
+little bit about these all kinds of imaginative weight-loss
+programs, you know? It seems like when you get down to the
+bottom line, you can either eat less or you can exercise more.
+You're only given two alternatives. It seems like we are in the
+same way, we can try and sugar-coat it, but the problem is that
+either we are spending too much or we've got to tax a whole lot
+more. The comment was made earlier, which I thought was an
+amazing quotation from Ms. McCollum, The budget deficit is not
+a spending problem. I found that amazing, because it seemed
+like to me it sure is a big spending problems. We're just on
+different planets, I suppose, but let's just assume, instead of
+you are going to cut spending, that you are going to try to
+increase taxes.
+ Now, my understanding is, I take a look at historic data,
+our tax revenues run somewhere in that 18 percent range. My
+understanding is if we were to double the tax rate on
+everything across the board, we couldn't assume that we are
+going to get double in revenue, federal revenue.
+ In fact, we may well do what you are saying, crash the
+economy and get even less. I do recall, we did dividends,
+capital gains, and death text in May 2003, and the
+Congressional Budget Office said, Well, now you are going to
+have less revenue, but in fact, there was more revenue because
+the economy kind of got going.
+ So, my question is, when I take a look at this overall
+problem that we are, you know, too heavy, in terms of like a
+weight loss thing, it is pretty spooky to me because you add
+all of the entitlements, the main ones, Medicare, Medicaid,
+Social Security, and then the other kinds of entitlements, and
+add debt service to that, and it seems, when I looked at the
+numbers, it was looking like about 2.3, roughly, trillion. And
+our revenue is about the same thing. So that says you get zero
+defense, zero discretionary non-defense, and you are right now
+just a parody. So, I don't understand. I guess my question to
+you is, first of all, don't we have to, essentially, deal with
+the entitlements, just by definition, or can you actually make
+it up by just doubling taxes and hope there's going to be a ton
+more revenue?
+ Mr. Bernanke. Well, I think that, as you point out, I mean,
+that in the long run, the way we are going, entitlements plus
+interest would basically be the entire government budget, and
+so, unless you raise taxes considerably. Now it is up to
+Congress to find the right balance between taxes, and cuts, and
+so on, of course. But I think you need to look seriously,
+particularly at the health care costs, which is of course, part
+of what has been going on the last couple of years here in
+Congress, but I think a focus on the cost side is important.
+ And, it would be difficult, I think. I'm very loath to
+prescribe exactly how to address these issues; I do think that
+it would be very difficult to leave health care programs
+untouched and still achieve budgetary balance in the next 15
+years.
+ Mr. Akin. Thank you. I think what I heard you saying is, is
+you really got a deal with that rate of spending, and
+particularly, in the entitlement, the health care piece is such
+a big part of that, that has to be dealt with. And that raising
+taxes, just to finish the question.
+ Mr. McClintock. I am sorry, we are out of time.
+ Mr. Akin. Thank you.
+ Mr. McClintock. Ms. Schwartz is next.
+ Ms. Schwartz. Thank you, and thank you, Chairman Bernanke,
+for your good work over the last few years in helping the
+economy begin to grow and to do your part; not easy decisions
+on any of our parts, so, I appreciate what you have done.
+ And, some of your comments this morning were really very
+important to us as we see this beginning of a recovery. And
+some of your comments about your optimism may be too strong,
+but your sense that we are growing and growing out of this.
+ You also made some comments I want to follow up on, which
+was really about the debt ceiling and the recklessness of there
+being politics played with raising the debt ceiling. None of us
+want to raise the debt ceiling, I mean, we would much rather
+not have be in this situation, but the two consequences of not
+raising the debt ceiling, as you have pointed out, and I want
+to confirm, the harm it would do to the United States and our
+ability to borrow in the future, interest rates, and really,
+defaulting on our not paying. It is just a huge consequence to
+our economy, so I did want you to talk about that again, if you
+would.
+ And secondly, as I think it is been pointed out and
+President of the Chair, Mr. McClintock and Senator from
+Pennsylvania, our new senator, Senator Toomey, have proposed
+legislation that would make debt payment to our creditors, our
+foreign creditors, the priority over paying, instead of paying,
+our Social Security beneficiaries possibly not getting checks,
+or our veterans not getting payments, U.S. contractors not
+getting payments, so it would put the U.S. in a different
+position of no longer having faith with American seniors,
+American veterans, and of course, U.S. companies or creditors.
+ So, could you comment on both of those, and I think you
+have commented very much on the first piece about how reckless
+it would be. But of course the second one, to put us in a
+position of losing faith with the American people who have
+counted on us do that and leaving that prioritization, making a
+statement very clearly that we would rather pay our foreign
+creditors than actually pat the American people.
+ Mr. Bernanke. On the first, defaulting on the debt would
+create probably an immediate financial crisis, a very severe
+one, and would have very deep consequences for our economy.
+And, even assuming that we were able to get through that, it
+would probably lead to much higher interest rates for the
+United States for many years to come, and that is been pointed
+out by a couple of folks, that applying a higher interest rate
+to our existing debt means that will be a very big step
+backward, in terms of trying to balance our budget.
+ On the prioritization, that might help address the default
+problem, which is very important. It is up to Congress, I
+suppose, whether you think it is worth doing what you say,
+which is you would be stopping Social Security checks and those
+sorts of things. I just wanted to make the very narrow point,
+but still important point, that there are operational problems
+as well.
+ I mean, even if we were instructed, the Federal Reserve is
+the agent of the Treasury. We make a lot of the payments on
+behalf of the Treasury, and we would have to figure out how to
+tell that this check is Mr. Jones is a payment on his interest,
+and this check is the Social Security check. There would be
+some practical, operational problems that we would like to
+bring up, if we move in this direction.
+ Ms. Schwartz. So, you were saying, it is reckless. Thank
+you very much. I appreciate your comments.
+ Mr. McClintock. Mr. Woodall is next.
+ Mr. Woodall. Mr. Chairman, hi.
+ Mr. Bernanke. Hi.
+ Mr. Woodall. I appreciate you are willing to spend this two
+and a half hours, with us as a junior member and a tardy
+member, I am the real beneficiary of your commitment to give us
+that time. So, I'm grateful.
+ I have appreciated your comments about the economic impacts
+of simplifying the tax codes, lowering rates, eliminating those
+distortions that are there. I wanted to talk specifically about
+those dollars that are overseas. I think back to the Wall
+Street Editorial that the Cisco President and Oracle CEO put
+together $1 trillion overseas that want to come back home, for
+whatever odd reason. I'm new to this body: We'll tax you if you
+try to bring that money and invest it in America but we will
+let you invest it overseas for free. What do you think the
+economic impact would be of having that tax holiday, to allow
+those American companies who want to bring invest those dollars
+in America?
+ Mr. Bernanke. Well, we've done that before, a few years
+ago. And a lot of money did come back. Some of it went to
+dividends and that sort of thing. Some of it probably went to
+investment; it is a little hard to tell how much would go in
+each direction. I think if you were going to do that, you might
+want to consider the sort of more permanent alternative, which
+is to do what other countries do, most other countries, and tax
+on a territorial basis in the first place. But you certainly
+would get a lot of repatriation if you did a holiday, no
+question.
+ Mr. Woodall. And you have talked a lot about low long-term
+bond rates. I think, when we did it back in 2003, the rate was
+five and a quarter that you could repatriate it. Would we see a
+substantial difference if that rate was zero and without those
+limitations that we placed on that repatriation back in 2003,
+or would it be substantially the same?
+ Mr. Bernanke. Either one is probably a good bit less than
+the normal rate, so I think any low rate would create a lot of
+repatriation. I don't really have more to add on that.
+ Mr. Woodall. There was a lot of discussion, back at that
+time, about how many of those dollars went to dividends. Now,
+you have talked a lot about the importance of consumer
+spending, in terms of getting us out of our current situation.
+Having those dollars go to dividends, is that a bad thing? Is
+that just different from investment, but it is still going to
+contribute.
+ Mr. Bernanke. Yes, dividends can be spent by consumers,
+that is right.
+ Mr. Woodall. You also have talked about the importance of
+asking the question of how smart is the spending. Is there any
+spending out there that you would say is sacrosanct and should
+not be examined? Or should we be looking at everything as we
+are asking the question about how smart is the spending?
+ Mr. Bernanke. I hope you will look at everything.
+ Mr. Woodall. Thank you very much.
+ Mr. McClintock. Ms. Wasserman Schultz is next.
+ Ms. Wasserman Schultz. Thank you. Chairman Bernanke, it is
+good to be with you. When you testified before the Senate
+Budget Committee last month, you observed that the Recovery Act
+funds will run out in 2011, and you acknowledged at that time,
+that the expiration of those stimulus fund would worsen the
+fiscal outlook of States and localities, and in your words,
+present a headwind for the overall economy.
+ In addition, with the announcement of Chairman Ryan's
+spending caps for Fiscal Year 2011, our colleagues on the other
+side of the aisle are intending to further cut some types of
+discretionary spending, that was such a critical component in
+the Recovery Act. And so essentially, that is like an anti-
+Recovery Act.
+ Given this headwind, what would you say the impact would
+be, coupled with the inevitable cuts in state and local budgets
+because of the deficits that they are now going to face,
+because of the Recovery Act hole, combined with the draconian
+spending cuts proposed by our Republican colleagues, is there
+any way that solely cutting discretionary funding spending in
+2011, which is Mr. Ryan's plan, is going to create jobs on its
+own? And what impact is that going to have?
+ Mr. Bernanke. For state and local governments specifically,
+their tax revenues have improved somewhat as the economy's
+gotten better, which is obviously a help, but they are still
+under considerable strain, and that reduction in employment and
+spending at that level is going to be a negative for growth.
+ I can only come back to the point I have made a couple of
+times, which is that I think it is very important to address
+the deficit, but I hope that rather than doing a one-off kind
+of thing, that you will look at a longer term window, a longer
+term horizon, and in thinking about it, and keep in mind that
+we are still coming out of the very deep recession right now,
+but that doesn't, in any way, reduce the need to address these
+long-term structural budget problems, and I hope that you will
+do that in a very serious way.
+ Ms. Wasserman Schultz. Acknowledging that we do need to
+address the deficit, but taking, by themselves, which is what
+is proposed, draconian cuts from the Chairman of the Budget
+Committee, combined with the impact of the Recovery Act funds
+being phased out and no longer being available, what is that
+likely to do to the jobs, our potential for creating jobs, and
+the continued pace of the recovery?
+ Mr. Bernanke. Well, it would depend on the details, but
+again, I just would like to re-iterate that it is better, I
+think, to think about this in the context of a longer term
+plan, a longer term trajectory for fiscal spending.
+ Ms. Wasserman Schultz. And, on health care, the Affordable
+Care Act included numerous provisions to contain costs by
+moving from a payment system that rewards quantity to one
+rewards quality, and value and efficiency. Would you agree that
+by giving providers incentives to coordinate care and reduce
+wasteful spending, that we have the potential to generate real
+savings there?
+ Mr. Bernanke. I'm not really able to make estimates. I know
+there are some measures in the health care plan that are
+intended to reduce costs. I don't know how effective they are
+going to be. I think that is something that the Congress ought
+to monitor very closely, and look for any additional ways that
+you can find to control wasteful spending, which, of course,
+there is a great deal, I think, in the health care industry.
+ So, since, as we were discussing earlier, since health care
+spending is going to be an enormous part of the federal budget
+in coming decades, finding anything you can do to reduce
+unnecessary spending will be very, very helpful.
+ Chairman Ryan. Thank you, Chairman. Mr. Rokita.
+ Mr. Rokita. Thank you. I love it, how in Washington, D.C.,
+cutting 2.5 percent of a budget deficit is draconian. I also
+appreciate your thoughts about long-term reform, because it is
+just the beginning, and I can't wait to get to some long-term
+reforms. When you say you are going to be vigilant about
+watching for inflation, can you name one time in your agency's
+history where you got it right? Where you got on the brakes in
+time to correct runaway inflation, do you have any track record
+at all?
+ Mr. Bernanke. Absolutely. Ever since Paul Volcker conquered
+inflation in the early 1980s, inflation has come down very
+steadily.
+ Mr. Rokita. I feared that you were going to mention Paul
+Volcker. I don't think you got to it in time.
+ Mr. Bernanke. Well, I'm saying after.
+ Mr. Rokita. Your goal is two percent or less.
+ Mr. Bernanke. By the time Chairman Volcker left office, he
+came in with a 13 percent inflation rate. He left office with a
+four percent inflation rate.
+ Mr. Rokita. After it went to
+ Mr. Bernanke. Thirteen percent was the highest. Then it
+came down, over about eight years, under his stewardship, to
+about four percent. Then, from there, under Chairman Greenspan,
+until the late 1990s, it came down gradually, to about two
+percent, and it is been there ever since.
+ Mr. Rokita. I don't think the agency got to inflation on
+time, as you are proposing.
+ Mr. Bernanke. It has. It has, except in the 1970s, which,
+of course, we've learned from.
+ Mr. Rokita. Okay, well, maybe we will beg to differ there.
+The banks: there's a lot of government products on the street
+to support this borrowing that we are doing. Doesn't it make
+sense, at least, it does to me, that when banks have one of
+your products to invest in on their balance sheets, versus the
+small business down the street, they're going to go to your
+product. And, so, couldn't you argue, then, to Mr. Lankford's
+point that, my Lord, if we just stop these products from being
+offered and let banks invest in the private sector, where you
+get a better return on your money, that that could be a
+solution? At least to Mr. Lankford's question?
+ Mr. Bernanke. No, I don't think so. First of all, we pay 25
+basis points, one fourth of one percent. So, if there's any
+attractive lending opportunity out there, banks would certainly
+prefer to do that than put money with us.
+ Secondly, the existence of those reserves is the
+counterpart to the purchase of securities that we are doing,
+which, in turn, is lowering rates, and making it easier for
+borrowers to get credit. So, you can't look at one side, and
+not look at the other side. So, I think that is not correct. I
+think it does help credit extension.
+ Mr. Rokita. Okay, thank you. Over the last three years, you
+advocate over $1 trillion in government spending. Considering,
+when government gets a dollar, we make 60 cents I think the
+private sector record is for every dollar the private sector
+makes $1.20 or $1.30. Can't you at least argue that taxing and
+borrowing, and bigger government is not the most effective way
+to grow the economy?
+ Mr. Bernanke. It's certainly true that taxation, in
+particular, has what's called a dead-weight loss. And, so the
+loss to the private sector is greater than the taxes actually
+paid because of the distortions that are caused. And, as I have
+said, I think anything that can be done to make the tax code
+more efficient, fairer, lower rates, and so on, would be good
+for the economy.
+ Mr. Rokita. I agree with you there. Thank you, sir.
+ Chairman Ryan. Commissioner Yarmuth?
+ Mr. Yarmuth. Thank you, Mr. Chairman. Chairman Bernanke,
+thank you very much for your testimony. I want to return to
+this issue of the possibility of not extending, or raising, the
+debt ceiling, and focus on the economic consequences. The
+American people, I think, would be repulsed by the idea that we
+would default on our debt, just as a concept, and you have
+called it catastrophic, we call it reckless, all in all, not a
+good idea. But, the idea of prioritizing payments is
+frightening to me, because wouldn't this essentially have the
+effect of we would be paying China before we would be paying
+our troops in Afghanistan?
+ Mr. Bernanke. Yes.
+ Mr. Yarmuth. It's a pretty scary concept. Talking about,
+again, the impact on the economy, if we were to not raise the
+debt ceiling, and we didn't do it for six months, in that
+period of time, absent that, we would be spending about a $1.8,
+$1.9 trillion, in the current levels, something like that,
+during that six months. Wouldn't that be about right? Just
+short of $4 trillion, overall, we'd be spending close to $2
+trillion. And we are now borrowing 40 to 50 cents of every
+dollar we spend. So, essentially, wouldn't we be taking
+somewhere close to a trillion dollars out of the economy during
+that six-month period? Which, essentially, is more than the
+entire Recovery and Reinvestment Act?
+ Mr. Bernanke. Well, first of all, as you point out, some of
+that money would be going overseas, and so on, but, I think
+that effect would be just dwarfed by the financial crisis that
+you would be engendering.
+ Mr. Yarmuth. All in all, pretty, draconian, is the word
+that is been thrown around here, pretty draconian, and negative
+impacts all around.
+ I wanted to clarify one thing that Mr. Akin raised about my
+colleague, Ms. McCollum's, statement. I don't think she said
+that it was not a spending problem. She said it is not solely a
+spending problem. And, just recently, there was a report out
+that we are at the lowest tax rate in this country in 60 years,
+could you square the concept that we don't have at least
+somewhat of a revenue problem, in terms of the budget deficit?
+ Mr. Bernanke. Well, we have a revenue problem right now, in
+part, because we haven't recovered. And, so, the share of GDP
+that were getting revenues is way below the historical average.
+So, that is a temporary situation, we hope. And, we hope that
+we will go back more towards the sort of 19 percent GDP that is
+been normal. But, in the longer term, basically, Congress is
+just going to have to decide where its values are, whether it
+wants to raise taxes, whether it wants to cut spending, or
+wants to make a combination. I hope you look at the whole set
+of options, and try to think about what's best for the economy.
+ Mr. Yarmuth. I just want to make one comment, because you
+referenced taxes that are growth-friendly. My brother is in the
+barbecue business. He's done extremely well, paid a lot of
+taxes. And, he said, when we were talking about whether to
+extend the tax rate for the people making over a quarter of a
+million dollars, which certainly includes him, he said, ``I
+don't care what my tax rate is. I care that people can afford
+barbecue. Because, if they can't afford barbecue, it doesn't
+matter what my tax rate is.'' Thank you very much.
+ Chairman Ryan. Mr. Guinta.
+ Mr. Guinta. Thank you very much, Mr. Chairman. And, thank
+you, Dr. Bernanke, for being here. I want to stay a little bit
+on the subject matter of debt ceiling, and then I want to move
+into state pension reform and state debt and deficit, and how
+that may impact the decisions that Congress has to make.
+ Earlier, during the hearing, someone had referred to our
+debt ceiling vote as quote ``routine.'' I happen to be one of
+the people that believes that is part of the problem that we
+are having. This notion that we are going to continue, as the
+federal government, to borrow beyond our means, I think has a
+direct impact to the global markets, to our markets here, and
+to the consumers and employers and small business owners, that
+are trying to have some predictability, who are the ones who
+are going to really help us emerge stronger as a nation, and as
+an economy. I also was concerned about some of the comments you
+had made, or phrases that you had used; some, I appreciated and
+agree with, and some concern me.
+ One was unwind some of this stimulus. I agree with that. I
+think what you are saying is we should be stopping the use of
+stimulus, and returning some of those dollars. But, you also
+said, future spending must be quote ``smart'' spending. When
+you say, future spending must be smart spending, how would you
+categorize the spending up to this point, in the last two
+years?
+ Mr. Bernanke. I was only making a point. What I'm afraid of
+is that Congress will look only at the total spending, the
+total revenue numbers, and then try to worry about how to make
+those equal, which is important. But, it is also important to
+look at the programs, look at the tax code, and make sure that
+it is as effective as possible. I wasn't claiming that I could
+identify waste, fraud, and abuse. But, clearly, whatever
+changes you can make.
+ Mr. Guinta. It's a multi-pronged approach, then.
+ Mr. Bernanke. Yes.
+ Mr. Guinta. We have got to reduce our spending. We've got
+to simplify the tax code, which I think I had heard you said
+earlier. And we've got to sort of restore, or I would argue,
+reduce some of the regulatory environment that is going to get
+some of that private sector money, that is on the sideline,
+back into the economy, which I think would replace the federal
+spending that is being suggested as required for this economy
+to move forward.
+ The second question I have, or concern I have, is according
+to Census Bureau data, this is fiscal year 2008, we have four
+percent of interest on debt as the share of state and local
+expenditures, and we have fiscal year 2008 debt outstanding as
+a share of GSP 18.2 percent. Can you comment briefly on those
+levels? If they're appropriate, if they're high, if they're
+low, and then compare it to our levels at the federal level?
+ Mr. Bernanke. Well, they're clearly lower than the federal.
+I mean, it 18 percent versus 69 percent, and most of that debt
+is associated with capital projects as well. So, in that
+respect, the states are not as bad off, in some sense, as the
+federal government.
+ On the other hand, they have a very difficult short-term
+situation, because they do have balanced budget amendments, and
+with the fallen tax revenues, they're having some very
+difficult cuts they've had to make on spending and employment.
+ But, I would say, also, that 18 percent number doesn't take
+into account some long-term issues, I think you have referred
+to already, with pensions and health care; unfunded
+liabilities, which are potentially much more significant.
+ Chairman Ryan. Thank you, sir. Ms. Kaptur?
+ Ms. Kaptur. Thank you, Mr. Chairman, very much. And, thank
+you, Chairman Bernanke, for your long suffering today. I
+apologize. I had to leave for another hearing. I have three
+simple questions, that are probably just one-word answers, and
+then a little bit longer one. Have you ever seen a recovery in
+modern history that has not been led forward by housing and
+construction?
+ Mr. Bernanke. It is normal for housing and construction to
+be an important part of the recovery.
+ Ms. Kaptur. Thank you very much. Its absence is
+particularly troubling to this member.
+ Number Two. With the instability in the Middle East, and
+rising gas prices, could I ask you, at what level of gas prices
+in our nation would we trigger a deep recession again? I put
+that number about $4 a gallon. Where would you put it?
+ Mr. Bernanke. I don't think there's a single number. But,
+it is absolutely true that as we move up above four that you
+are beginning to take a significant amount of disposable income
+away from people, and that acts like a tax, essentially, and
+makes it more difficult for the economy to grow.
+ Ms. Kaptur. Thank you. I don't know if you have any ideas
+about helping to put to work the unemployed you so aptly
+identified in your opening statement; those who've been out of
+work for more than six months. Thank you for recognizing that.
+That lost productivity is of deep concern.
+ What, in your opinion, would be the most effective means to
+re-employ them in the short-term, and to gain productivity in
+this economy?
+ Mr. Bernanke. I don't have any good answers. As you know,
+the Fed is trying to do our best to help improve the employment
+situation. I guess one area to look at would be the
+unemployment insurance system. Maybe there might be ways to use
+some of the money to give training, for example, rather than
+just simple income support.
+ Ms. Kaptur. Thank you very much for that. Longest question,
+last December, Congress and the courts forced the Federal
+Reserve to release its report on what it had done during the
+financial crisis, and which financial institutions received
+money through the Federal Reserve. You had opposed compiling
+and releasing that report, claiming that making Federal Reserve
+activities public would disturb the financial markets.
+ What we have learned is that the Federal Reserve really
+wanted to keep secret that it had bought back, from German and
+Swiss banks, more than a half of a trillion dollars of bad
+mortgage-backed securities that Wall Street's megabanks had
+pawned off to those banks. Clearly, this was something that the
+Fed apparently didn't want the Congress and the public to know.
+We now also know that private gains provided to Wall Street and
+foreign banks were at the expense of massive social costs,
+forced on our public in the form of growing debt from historic
+levels of unemployment. Why shouldn't Congress and the public
+know what the Fed is doing, especially when it puts onto the
+U.S. financial system, and public system, such burdens as
+buying back bad bonds from foreign banks?
+ And my questions are: Did you defend secrecy for the sake
+of secrecy? Or, did you defend secrecy to protect the Fed from
+the public's view of mistakes made by the Fed and its member
+institutions?
+ Mr. Bernanke. There is no longer any secrecy. The discount
+window, where there is some case to have secrecy during the
+period of the crisis, all that information is now revealed,
+with a two-year lag, under the Dodd-Frank Act. So, there is no
+aspect of the Fed's operations now, which is permanently
+secret. I have no idea what you are talking about with the
+Swiss. We have not purchased mortgage bonds from anybody, other
+than Fannie and Freddie, and we lent money to only banks that
+had, through their U.S. operations, which is required by law,
+that we treat all domestically operating banks the same. And
+we'd lent against collateral, and we were paid in every single
+case.
+ Ms. Kaptur. Thank You.
+ Chairman Ryan. I ask unanimous consent that all members
+questions be included in the record and that the chairman
+respond to them. Mr. Young.
+ Mr. Young. Mr. Chairman, thank you for visiting with us.
+It's my privilege to be with you on behalf of my Southern
+Indiana constituents. As you know, Japan recently had its
+credit rating downgraded, in light of its fiscal situation.
+Part of the justification for Standard & Poor's downgrade was
+the fact that Japan has no coherent plan to deal with its
+unsustainable fiscal situation.
+ Here in this country, like Japan, we have very low interest
+rates, as compared to recent history. Our own deficits are
+adding to our national debt at a remarkable rate. And, we too,
+have no coherent plan to deal with this; at least in the long
+term.
+ You have indicated that there is no magic number. I think
+that is fair. I think history proves it out. There's no magic
+debt to GDP number. That said, you no doubt, have some sense of
+when we are getting close to unsustainable debt dynamics.
+ When are we getting close, and what are the main indicators
+that we need to monitor, we, as members of Congress, you as the
+Federal Reserve, to avoid a crisis?
+ Mr. Bernanke. We already have a considerable increase in
+our debt-to-GDP-ratio, and we are heading towards ninety
+percent by the end of 2020, I believe. I'm not sure. So, as we
+move up beyond 90, as we move to a hundred, we are approaching
+the levels of where some of the countries in Europe are now
+that are having very serious problems. So, again there's not a
+magic number. And problem is that you can't tell in advance
+when the bond markets might begin to become worried.
+ I think the bond markets are looking not only, anyway, at
+the debt to GDP number. They are looking, as you mentioned, at
+the plan. Does the country have a plan? Does it have the
+political will, and so on? I think if we demonstrate that we
+have the political will, I think the markets will be quite
+forgiving.
+ Mr. Young. I suspected that you would say that. So, it is
+the very fact that this Congress does not implement a
+bipartisan, coherent plan, to deal with that situation. To that
+end, one of the things that is, no doubt, driving our debt to
+GDP is our federal spending. Things like Medicare. And, I was
+encouraged to hear my friend on the other side of the isle
+indicate earlier, she wants to put everything on the table, as
+we deal with this.
+ Medicare, why don't we take that, and put that on the table
+as one example? Because you have recently indicated that we
+have a choice. In your National Press Club comments, you said
+we can either make adjustments, through a careful and
+deliberative process, or, when this crisis hits, we are going
+to have to do things very quickly, in a hasty way that maybe
+most of our country is uncomfortable with. Do you agree that
+Medicare is on an unsustainable path, and that it must be
+addressed fairly quickly here?
+ Mr. Bernanke. It's going to be a very, very big share.
+Medicare, Medicaid, all health care spending programs will be a
+very big share of government spending, and of GDP over the next
+10, 15, 20 years. And I think long-term budgetary stability,
+and economic health of the United States in general, requires
+us to look very, very hard at ways to save costs on health
+care.
+ Mr. Young. Thanks so much. I regret my time is up.
+ Chairman Ryan. Ms. Bass.
+ Ms. Bass of California. Thank you. Thank you, Mr. Chairman.
+I'd like to ask you questions about the consequences of not
+lifting the debt ceiling I wanted to know if you could paint a
+picture of the consequences?
+ Coming from the State of California, and in the State
+Legislature, we were having to manage our budget crisis. When I
+was first there a couple of years ago, our budget was a hundred
+and $10 billion dollars. We cut it to $83 billion. And, now my
+colleagues, that are still there, are left with a $23 billion
+deficit. And, so, if we didn't lift the debt ceiling, what
+would that do to the States? Would States be able to refinance
+their debt?
+ Mr. Bernanke. Well, I think it is important to note that
+California always paid its interest. I mean, it used Scrip, and
+so on, for some employees, and for some payments, but it is
+paid its interest. Even so, I think the risk premium on
+California debt went up for a while; at least following that.
+ It's clear that the failure to pay interest on U.S. debt
+would just create enormous crises of confidence in the
+financial markets, and in the bond markets. It would, as a
+practical matter, cascade through the system because banks and
+other institutions who are counting on receiving the interest
+in order to make their payments would not be able to make their
+payments, and so you have a seizing up of the financial system
+that could be quite detrimental to our economy. Even if that
+was worked through somehow, and say for example, the debt
+ceiling was raised for a few hours, the long-term consequences
+in terms of the interest rate that the United States Government
+would have to pay could be quite serious, which in turn would
+make our debt payments, interest payments much higher, and make
+the deficit all that much worse. On the States, I think there
+will be some indirect effects because, after all, the Federal
+Government does provide a good bit of income, revenue sharing,
+et cetera, to the states, would make this situation worse as
+well.
+ Ms. Bass of California. Would they have access to
+alternative funding sources if it wasn't raised?
+ Mr. Bernanke. No doubt the bond markets would be very
+disrupted, so if they were able to borrow at, very possible,
+they would be at much higher rates than they are borrowing
+today. But whether they would have access, I don't know.
+ Ms. Bass of California. What about intergovernmental
+transfers from the Federal to the State Government, you might
+have, you were addressing that a couple of seconds ago, but
+could you elaborate?
+ Mr. Bernanke. Well, it depends on the prioritization. If
+all payments are shut down other than interest payments on the
+debt, which again, I think, has some serious technical concerns
+associated with it, but then that would mean, presumably, that
+payments to Social Security, Medicare recipients, contractors,
+and to the States, would all be interrupted until such time as
+the limit was raised.
+ Chairman Ryan. All right, thank you, just in the interest
+of the Chairman's time, we have two more. Mr. Stutzman.
+ Mr. Stutzman. Thank you. Thank you, Mr. Bernanke, for being
+here as well. I have really enjoyed the discussion and the
+dialogue today. As a small business owner from back in northern
+Indiana, for the last 15 years I have seen a lot of
+fluctuations in several different sectors that we've been
+involved in. And I guess I want to touch on just one thing,
+real quick, because as a business owner, kind of going back to
+what Ms. Bass was talking about with the debt.
+ Currently we do not prioritize debt, is that correct? Why
+can't we change that, why can't we focus on making sure that
+our current debt, our primary obligations be taken care of, and
+then start, you know, basically by process of elimination,
+moving down that ladder and saying, We're going to make sure
+that we don't default, because I don't believe that we should
+default either. Even though I'm a freshman Congressman, I think
+that we do have an obligation for doing that.
+ Mr. Bernanke. The only point I make there is that there are
+some technical difficulties. Because the Federal Reserve, as
+the agent of the Federal Government, makes many of these
+payments, including interest payments and other kinds of
+payments as well. And we would have to find ways to make sure
+that we were making the interest payments and not other kinds
+of payments. So I think there would be some serious operational
+concerns, particularly if this came with very short notice. So
+I do raise that point for your attention. Beyond that, Congress
+again has to make the determination whether you are willing to
+stop Social Security payments and the like, as a temporary
+measure.
+ Mr. Stutzman. But I think if we make that one of our
+priorities, because people have paid into that for years,
+making sure that is a priority, making sure military's a
+priority, making sure that our interest is a priority. Can't we
+then say to those that carry our debt, that we are going to
+make sure that they're taken care of in moving down the ladder
+and making sure our priorities are first and foremost at the
+top of the list? It seems like, coming to Washington so far, it
+is just a foregone conclusion that, well we've got to raise the
+debt ceiling. Well, are we taking measures and steps to say
+long-term, not just with a short-term notification that you all
+would have to change operational infrastructure and things, but
+long-term, wouldn't we be better off having some flexibility
+like that?
+ Mr. Bernanke. Well, first, the amount of borrowing the
+government has to do was already determined when you agreed on
+how much you were going to spend and how much you were going to
+tax. So it is like this debt was incurred already. The question
+is, are we just going to make the payments that we owe or not.
+That's what this is about. In terms of the prioritization,
+given enough time I'm sure that that could be worked out, but I
+really do want to make sure people understand that, if this is
+a short-term thing, it might not be technically possible to
+carry out.
+ Mr. Stutzman. Right. But long-term, you think it would be a
+good thing?
+ Mr. Bernanke. I would just prefer, instead, that, again,
+I'm sorry, I mean I think that this whole issue is very, very
+important, but I think the best way to do it is to just sit
+down and look at the long-term situation, look at each part of
+the budget, and try to come to some decisions about how you are
+going to address these imbalances.
+ Chairman Ryan. Ms. Black.
+ Ms. Black. Thank you. Thank you. And Mr. Bernanke, I
+apologize for not being here during the entire hearing, but I
+had another meeting, so, it seems to me that I continue to hear
+over and over since I have come in, that you do agree that
+there needs to be a long-term plan. And certainly looking at
+more than half of our budget is not subject to the annual
+approval by Congress, and it is on automatic pilot. As you talk
+about there needs to be an overall plan, do you have an idea
+about how we might reform the budget process to help us to
+consider all of the expenses on a yearly basis?
+ Mr. Bernanke. Well, I think it is sensible to, and
+particularly over a long-term plan, to drop the somewhat
+artificial distinction between discretionary and mandatory
+spending. You want to look at everything on the budget over a
+longer term. In a speech I gave a few months ago, I talked
+about fiscal rules. And a lot of countries around the world
+have set up fiscal rules which describe, and this goes back to
+Mr. Stutzman's question a little bit, that these rules, some of
+them for example, would impound or sequester part of the
+government's spending if the deficit exceeded a certain level,
+for example.
+ So there are ways to set up rules that would force
+Congress, essentially, to meet certain targets. Something
+similar to that was the Gramm-Rudman-Hollings approach that was
+used some time ago. So I don't have real specific suggestions
+here, but I do think that thinking hard about your framework
+and recognizing that the current approach, when you try to find
+an offset, that is basically saying we are satisfied with the
+deficit where it is. You need to have something that is better
+than an offset. You need something that is going to allow for
+the deficit actually to shrink over time relative to where the
+current projections are, so it is very challenging to do that,
+I understand. But, again, creating some kind of long-term
+overall plan and then, within the context of that plan, fitting
+in various programs, that is essentially what has to be done in
+order to get us back on stable path.
+ Ms. Black. I know there has been a lot of talk about us
+having a Balanced Budget Amendment, and of course that takes a
+very long time to get there. What would you think, in the
+meantime, about having a spending cap that we could only spend
+to a certain level?
+ Mr. Bernanke. Well, that is up to Congress to do that, if
+you want. I assume that that would be just a legislative action
+as opposed to a Constitutional action. You could do that, but
+then you would have to have a mechanism. This is similar to a
+fiscal rule; I mean basically it says that you'd have to not be
+allowed to appropriate more than a certain level. If more was
+spent because, say, Medicare payments were higher than
+anticipated, you'd have to find a way to deal with that. But
+that is a form of rule that you could apply. And along with
+consideration of how revenues are going to evolve, that could
+help you structure the plan for reducing the deficit over time.
+ Ms. Black. Thank you, thank you, Mr. Chairman, I yield back
+my time.
+ Chairman Ryan. Chairman, you have been very generous, we've
+gone over your time, we know you are running late, and we
+appreciate your indulgence. This hearing is adjourned.
+ Mr. Bernanke. Thank you, Mr. Chairman.
+ [Questions submitted for the record by Mr. Honda follow:]
+
+ Questions Submitted for the Record by Hon. Michael M. Honda, a
+ Representative in Congress From the State of California
+
+ In your speech to the National Press Club on February 3, you noted
+that unemployment, which is to me the key economic indicator for the
+well being of the American people, will remain stubbornly high and that
+these conditions will only improve gradually.
+ You also noted that the trajectories of our national deficit and
+debt are unsustainable.
+ You went on to state that among the course corrections needed to
+address these problems are investments in the skills of the workforce,
+which I am going to simply call education, and policy changes to reduce
+our deficits and debt.
+
+ 1. AFGHANISTAN
+
+ My first question is in regards to the latter. The current rules of
+the House have taken the ``War on Terror'' off-budget, meaning that the
+costs of our conflicts in Iraq and Afghanistan and other actions
+associated with the so called ``War on Terror'' can be financed with
+debt. Afghanistan alone represents a cost of approx. 10 million dollars
+per hour, 325 million dollars per day and 150 billion dollars per year.
+Disturbingly, this is our country's largest long-term investment. So my
+question is:
+ Would the savings that resulted from ending combat operations
+associated with the ``War on Terror'' reduce projected deficits?
+
+ 2. EDUCATION
+
+ I think it was very important to note that among other investments
+including encouraging the scaling up of US manufacturing by
+incentivizing purchasing new machinery and investment, promoting R&D,
+and rebuilding public infrastructure, you singled out education as an
+area for public investment that would promote economic growth.
+ Can you explain to the Committee how public investment in education
+promotes economic growth?
+
+ [Responses to Mr. Honda's questions follow:]
+
+
+
+
+
+
+
+ [Questions submitted for the record by Mr. Calvert follow:]
+
+ Questions Submitted for the Record by Hon. Ken Calvert, a
+ Representative in Congress From the State of California
+
+ Question #1: One area that I believe has a major impact on our
+nation's economic recovery is the stability of the commercial real
+estate industry. A healthy commercial real estate market provides more
+than 9 million jobs and generates billions of dollars in federal, state
+and local tax revenue. However our commercial real estate market
+continues to suffer and this has a direct and lasting impact on the
+stability of tens of thousands of small businesses and small and mid-
+size banks.
+ Despite the October 2009 interagency guidance on Prudent Commercial
+Real Estate Loan Workouts, anecdotal evidence shows that bank
+regulators/examiners are still being inconsistent with regards to
+commercial real estate workouts. Regions such as my area of southern
+California continue to suffer as property owners seeking to refinance
+existing loans find access to credit nearly nonexistent. I continue to
+hear stories where capital calls on loans are occurring on property
+that is near full capacity and where owners are paying their bills.
+ What else can be done to ensure that creditworthy borrowers, who
+have the willingness and capacity to repay their debts, obtain the
+necessary refinancing or term extension to stay afloat?
+
+ Question #2: The Financial Accounting Standards Board and
+International Accounting Standards Board have proposed new accounting
+rules that would force companies of all sizes to capitalize commercial
+real estate leases onto their balance sheets, which could significantly
+reduce the credit capacity of many borrowers. Are you concerned with
+this proposal, especially in light of the current commercial real
+estate credit crisis?
+
+ [Responses to Mr. Calvert's questions follow:]
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+ [Whereupon, at 1:03 p.m., the committee adjourned subject
+to the call of the Chair]
+
+
+
+